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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2001.
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD
FROM TO
COMMISSION FILE NUMBER 1-12514
KEYSTONE PROPERTY TRUST
(Name of registrant as specified in its declaration of trust)
MARYLAND 84-1246586
(State or other jurisdiction (IRS Employer Identification
of incorporation or organization) Number)
200 FOUR FALLS CORPORATE CENTER, SUITE 208 19428
WEST CONSHOHOCKEN, PENNSYLVANIA (Zip Code)
(Address of principal
executive offices)
REGISTRANT'S TELEPHONE NUMBER (INCLUDING AREA CODE): (484) 530-1800
Securities registered under Section 12(b) of the
Securities Exchange Act of 1934:
Title of each Class:
Common Shares, $.001 Par Value
Name of each Exchange on which Registered: New York Stock Exchange
Securities registered under Section 12(g) of the Securities Exchange Act of
1934: NONE
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 / /
Indicate by check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained in this form, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the voting and non-voting common shares held by
non-affiliates of the Registrant (based upon the closing price on the New York
Stock Exchange) on March 28, 2002 was approximately $237.7 million. As of March
28, 2002, there were 18,439,926 Common Shares, $.001 par value, outstanding.
Portions of the proxy statement for the annual meeting of the shareholders of
Keystone Property Trust to be held in 2002 are incorporated by reference into
Part III of this Form 10-K.
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TABLE OF CONTENTS
FORM 10-K
PAGE
PART I
Item 1. Business.........................................................................3
Item 2. Properties .....................................................................16
Item 3. Legal Proceedings ..............................................................19
Item 4. Submission of Matters to a Vote of Security Holders ............................19
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters ..........20
Item 6. Selected and Summary Financial Data ............................................21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of 22
Operations........................................................................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .....................34
Item 8. Financial Statements and Supplementary Data ....................................34
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure .....................................................................34
PART III.
Item 10. Trustees and Executive Officers of the Registrant ..............................35
Item 11. Executive Compensation .........................................................35
Item 12. Security Ownership of Certain Beneficial Owners and Management .................35
Item 13. Certain Relationships and Related Transactions .................................35
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................35
Signatures..............................................................................II-1
2
PART I.
ITEM 1. BUSINESS.
Keystone Property Trust (together with its subsidiaries, the "Company") is
a fully integrated, self-administered, self-managed real estate investment trust
("REIT") engaged in the ownership, acquisition, development and management of
industrial properties principally in the eastern portion of the United States.
The Company also owns office properties located in Pennsylvania and New York
State. At December 31, 2001, the Company owned interests in a portfolio of 125
properties (the "Properties") comprised of 102 industrial properties, 22 office
properties, and an investment in a direct financing lease which aggregated
approximately 21.8 million square feet. The Properties were 93.9% leased under
262 leases at December 31, 2001.
The Company's strategic focus continues to be the acquisition, development
and management of institutional quality, state-of-the-art "big box" distribution
facilities located in proximity to skilled labor pools, interstate and regional
road systems, airports (primarily those containing major freight and express
package delivery hubs) and ports. The Company currently operates in six
industrial markets: Central/North New Jersey, Central Pennsylvania,
Indianapolis, Indiana, Ohio, New York State and Greenville, South Carolina. In
the future, the Company intends to focus on three core markets: Central/Northern
New Jersey, Central Pennsylvania and Indianapolis, Indiana. The Company also
intends to re-deploy capital currently invested in its office portfolio and
certain other non-core industrial assets into larger, bulk warehouse
properties.. The Company believes state-of-the-art distribution facilities have
the following characteristics: at least 300,000 square feet; 24 foot and greater
clear ceiling heights; 50 by 50 foot column spacing; ESFR (early suppression,
fast response) sprinkler systems; flow through loading dock configurations; 150
foot minimum truck courts; and drop-lot trailer parking. At December 31, 2001,
approximately 58% of the Company's industrial portfolio contained buildings with
square footage in excess of 300,000 square feet and 41% were in excess of
500,000 square feet. Approximately 90% of these industrial facilities have in
excess of 24 foot clear ceiling heights. The weighted average age of the
Company's industrial portfolio is 10.1 years, the average tenant size is 150,000
square feet and the average lease term of its industrial leases is 4.7 years.
The Company believes its core markets exhibit very favorable distribution
characteristics. The New York/Northern New Jersey region is one of the busiest
cargo areas in the United States. The developed highway and rail infrastructure,
combination of JFK, LaGuardia and Newark Airports, the Port of Newark and the
Port of Elizabeth places this region among the most active and advanced
transportation hubs. Central Pennsylvania is the central hub of the northeast
corridor serving both New England and the Mid-Atlantic region. Its highway and
rail systems and strong labor pool make Central Pennsylvania an increasingly
popular location for lower cost super-regional operations. Indianapolis has one
of the fastest growing cargo airports in the world and has a strong rail system
and network of highways as well. By virtue of this infrastructure, Indianapolis
serves as a national distribution hub.
The Company's office properties aggregate approximately 1.5 million square
feet and consist principally of modern mid-rise and single-story suburban
buildings, primarily located in office parks in the Albany and Syracuse regions
of New York State. Substantially all of the office buildings are located within
established business communities with convenient access to regional and
interstate road systems and highways. The weighted average age of the Company's
office portfolio is 13.9 years and the average lease term is 3.7 years.
3
During the year ended December 31, 2001, the Company increased its
industrial real estate portfolio in its core markets by approximately 19%, from
approximately 12.0 million square feet as of December 31, 2000, to 14.3 million
square feet at December 31, 2001 and decreased the square footage of office
properties owned by 38%, from 2.4 million square feet to 1.5 million square feet
through the sale of 13 office properties for an aggregate selling price of
approximately $93 million. In addition, the Company also disposed of 3.5 million
square feet or 14 industrial assets, including the assets sold to the Company's
joint venture with CalEast Industrial Investors, LLC ("CalEast"), hereafter
referred to as the "CalEast Joint Venture", for an aggregate sales price of $195
million. The Company acquired 3.7 million square feet or $134 million of
industrial assets during 2001 including 812,739 square feet or $32 million
acquired through the CalEast Joint Venture. The focus of the CalEast Joint
Venture is the acquisition of bulk warehouse and distribution facilities in New
Jersey. The expected size of this joint venture is $300 million and it currently
owns approximately $135 million of industrial assets located in New Jersey. The
Company intends to pursue additional joint venture opportunities with large
institutional investors. The Company anticipates that it will continue to sell
certain office and industrial properties which do not meet the Company's ongoing
investment strategy or where opportunities exist to realize imbedded value that
has been created in the Properties.
DEVELOPMENT ACTIVITIES
The Company believes it can create value in its three core markets where it
has an established presence by building out the Company's development pipeline,
completing value-added acquisitions and enhancing the operating performance of
its existing properties. In these core markets, the Company currently controls
land that will support the development of approximately 12.1 million square feet
of industrial properties that we estimate would represent a total investment in
excess of approximately $400 million. The Company intends to prudently develop
these assets on a speculative basis as market conditions warrant and also take
advantage of build-to-suit opportunities.
In December 2000, the Company, through a joint venture with Browning
Investments, Inc. ("Browning"), substantially completed the construction of a
798,096 square foot distribution facility at a cost of approximately $19
million, which is the second building completed at Airtech Park ("Airtech"),
a master planned industrial park of approximately 500 acres which is adjacent
to the Indianapolis International Airport. The facility was leased to Belkin
Components, Inc. in January 2001 under a ten year lease. In November 2001,
the Company acquired its joint venture partner's interest in this facility
for $11.5 million. The Company, through another joint venture with Browning,
started the construction of a speculative 796,000 square foot distribution
facility in 2001 which was completed in the first quarter of 2002. Airtech
may accommodate an additional 5.0 million square feet of industrial
development. These joint ventures were part of a strategic alliance that the
Company formed with Browning, a developer located in Indianapolis, Indiana,
in December 1998. The terms of this alliance give the Company an option until
December 31, 2003 and right of first offer until December 31, 2008 to develop
distinct land parcels in Airtech through joint ventures in which the Company
will have a 50% non-controlling ownership interest.
The Company also owns interests in or controls approximately 299 acres of
land in Central New Jersey of which 68 acres were built out in 2001 into
approximately 1.0 million square feet of distribution facilities located
adjacent to Exit 8A of the New Jersey Turnpike in Middlesex County, New Jersey.
The Company also owns several industrial facilities located in Pennsylvania
which have adjacent land parcels that allow for the expansion of the existing
facilities and controls another 276 acres of land in Central Pennsylvania.
During 2001, the Company completed a speculative 150,000 square foot expansion
of a 407,100 square foot distribution facility in Harrisburg, Pennsylvania.
4
STRUCTURE
The Company conducts substantially all of its activities through, and
substantially all of the Properties are held directly or indirectly by, Keystone
Operating Partnership, L.P. (the "Operating Partnership"). The Company is the
sole general partner of the Operating Partnership and owned, at December 31,
2001, approximately 69.5% of the limited partnership interests (the "OP Units")
in the Operating Partnership as compared to 52.0% at December 31, 2000. The
remaining OP Units are owned by limited partners of the Operating Partnership.
The officers and the trustees of the Company currently own approximately 14.9%
of the outstanding OP Units assuming the conversion of all outstanding
convertible preferred units of limited partnership of the Operating Partnership
("Convertible Preferred Units") into OP Units. The officers and the trustees of
the Company currently own approximately 10.0% of the outstanding Common Shares
of Beneficial Interest of the Company ("Common Shares"), assuming the conversion
to Common Shares of all outstanding OP Units and shares of convertible preferred
stock ("Convertible Preferred Stock") and Convertible Preferred Units. Each OP
Unit may be redeemed by the holder for one Common Share or, at the Company's
option, the cash value of one Common Share. With each such exchange, the
Company's ownership interest in the Operating Partnership will increase.
The Company was originally incorporated in Delaware in 1993 and was
re-incorporated in Maryland in 1994. In October 1999, the Company reorganized
from a Maryland corporation to a Maryland real estate investment trust ("REIT")
and changed its name from American Real Estate Investment Corporation to
Keystone Property Trust. Simultaneously, the name of the Operating Partnership
was changed from American Real Estate Investment, L.P. to Keystone Operating
Partnership, L.P. The Company's executive offices are located at 200 Four Falls
Corporate Center, Suite 208, West Conshohocken, Pennsylvania 19428 and its
telephone number is 484-530-1800. The Company also maintains regional offices in
Allentown and Harrisburg, Pennsylvania; New York City, Albany, and Syracuse, New
York; Indianapolis, Indiana; and Greenville, South Carolina.
MANAGEMENT AND EMPLOYEES
The Company conducts real estate management activities through the
Operating Partnership and Keystone Realty Services, Inc. (the "Management
Company"). The Company also manages, through the Management Company, other
properties on behalf of third parties. At December 31, 2001, the Management
Company was managing industrial and office properties containing an aggregate of
approximately 4.0 million square feet which includes 2.9 million square feet
owned by the CalEast Joint Venture. Approximately 458,000 square feet was
managed for a market rate management fee, for a limited partnership in which the
Company's Chief Executive Officer is a general partner. Through its ownership of
100% of the nonvoting preferred stock of the Management Company, the Operating
Partnership is entitled to receive 95% of amounts paid as dividends by the
Management Company. The Management Company's voting stock is owned by two
executives of the Company, certain family members of one of those executives and
another investor in the Company.
At December 31, 2001, the Operating Partnership and the Management Company
had, in aggregate, 90 full-time employees, including the Company's executive
officers.
5
BUSINESS STRATEGY AND OPERATING PLAN
The Company's primary business objective is to maximize return on invested
capital, thereby generating growth in cash flow per share and net asset value
per share. The Company believes that this will enable the Company to maximize
its total return to its common shareholders over the long term. The Company is
primarily focused on the industrial real estate business as the Company believes
it offers the opportunity to generate excellent current returns on invested
capital through a stable cash flow and attractive total returns on a
risk-adjusted basis through the preservation of capital. In order to accomplish
this objective, the Company is executing the following strategy:
- Focus on a few selected markets serving primarily the population
concentrated in the northeastern metropolitan corridor of the United
States and be recognized as one of the leading owners and developers
in those markets.
- Choose submarkets within those markets where there are barriers to
the creation of new supply as a result of difficult zoning and/or
other regulatory requirements, topographical constraints, and a lack
of developable land.
- Maintain a stable platform of operating cash flow through pro-active
portfolio management that emphasizes the on-going mitigation of
exposure to expiring leases, maintenance of tenant diversification,
and minimizing requirements for recurring investments in repairs and
maintenance.
- Opportunistically acquire assets which increases its penetration in
the markets in which it has chosen to concentrate and which exhibit
an opportunity to improve returns through repositioning and
re-leasing as existing leases terminate.
- Concentrate on the development of high-quality, well-located
state-of-the-art distribution centers designed to meet the demands of
today's efficiency-driven tenants.
The Company believes that it is positioned to create value through the
redeployment of capital currently invested in properties that do not fit our
business strategy or from which we can realize embedded value. In 1999, the
Company identified $300 million of office and non-core industrial assets which
would be subject to its capital redeployment plan. Since 2000 an aggregate of
approximately $230 million of these assets were sold and the capital in these
assets was redeployed into bulk warehouse properties in the Company's core
markets of Central/Northern New Jersey, Central Pennsylvania and Indianapolis,
Indiana where it has focused its primary investment activities. The Company
believes each of these markets exhibits the unique characteristics of
distribution hubs--access to highways, airports, railways and seaports as well
as proximity to major population centers. The Company believes these
characteristics will continue to drive demand for the most efficient
state-of-the-art properties.
DEVELOPMENT. The Company's development pipeline is a key element creating
value under its operating plan. The Company has projects in various stages of
development totaling approximately 2.0 million square feet and representing over
$74 million in invested capital. This development strategy calls for the prudent
delivery of state-of-the-art products, built to the highest user specifications.
The Company is primarily constructing distribution facilities with large
footprints (in excess of 500,000 square feet) that are designed to capitalize on
national distribution trends, which are moving away from smaller warehouse
facilities toward larger regional facilities. Due to land constraints in its
core markets, these big-box properties are often unique in their size and
therefore the Company believes they are impacted less by competition from more
conventional industrial buildings. This development activity may involve joint
venture partners similar to the Company's Indianapolis development activity.
6
ACQUISITIONS. As a complement to its development activities, the Company
intends to acquire select properties in New Jersey and Central Pennsylvania. In
New Jersey, the Company's acquisition activity will be primarily conducted
through the CalEast Joint Venture. The Company is targeting value-added
acquisition opportunities, which are total return oriented and offer additional
upside potential through leasing rollover or property repositioning. In Central
Pennsylvania, the Company intends to acquire properties that complement its
dominant market position and increases the overall value and desirability of its
industrial portfolio.
ASSET MANAGEMENT. The Company believes that opportunities exist to increase
cash flow from its existing properties because they are generally newer (average
age of approximately ten years), high quality and in desirable locations in
markets that, in general, continue to experience rising rents, low vacancy rates
and stable demand. The Company continually evaluates leasing strategies in light
of changing market conditions in order to maximize its long-term return on
invested capital. The Company intends to increase the value of its portfolio
through the disposition of properties that do not fit the business strategy
outlined above and the reallocation of capital to investments that allow it to
maximize risk adjusted returns.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the Company's current investment and
financing policies. The Company's policies with respect to these activities have
been determined by the Company's Board of Trustees and may be amended or revised
from time to time at the discretion of the Trustees without a vote of the
shareholders of the Company.
INVESTMENT POLICIES
The Company has not adopted any policy as to the amount or percentage of
its assets that can be invested in a single property. The key criterion for new
investments is that they offer total returns likely to enhance shareholder value
and the opportunity for growth in cash flow and net asset value.
The Company may purchase or develop properties for long-term investment,
expand, renovate and improve its Properties or sell any of its existing or
acquired Properties, in whole or in part, when circumstances warrant. The
Company has contractual commitments, with expiration dates ranging from December
2004 to September 2007, with certain limited partners of the Operating
Partnership not to sell certain real estate assets, which aggregated
approximately $243 million of gross book value at December 31, 2001, $57 million
of which was related to properties in non-core markets, in taxable transactions.
Accordingly, if sold, the proceeds from the sales of the assets subject to these
commitments will need to be reinvested by the Company in other real estate
assets through the utilization of Section 1031 exchange transactions in
accordance with the Internal Revenue Code, as amended. The Company may also
participate with other entities in property ownership through joint ventures or
other types of shared ownership. Equity investments may be subject to existing
mortgage financing and other indebtedness which have priority over the equity
interest of the Company. Future investments are not limited (as to percentage of
assets or otherwise) to any geographic area or any specified type of property,
however, the Company intends to maintain its primary focus on industrial assets
in its core markets.
7
While the Company intends to emphasize equity real estate investments, it
may, in its discretion, invest in mortgages and other real estate interests.
Mortgage investments may include participating or convertible mortgages. The
Company's investment in mortgages may include investments as a strategy for
ultimately acquiring a property, and might also include the purchase of
non-performing loans at a discounted price. Subject to the percentage of
ownership limitations and gross income and asset tests necessary for REIT
qualification, the Company may also invest in securities of entities engaged in
real estate activities or securities of other issuers. In the future, the
Company may acquire all or substantially all of the securities or assets of
other REITs or similar entities where such investments are consistent with the
Company's investment policies. In any event, the Company does not intend that
its investments in securities will require the Company to register as an
"investment company" under the Investment Company Act of 1940, as amended, and
the Company intends to divest securities before any such registration would be
required.
FINANCING POLICIES
The Company has not adopted any policy to limit the amount or percentage of
debt the Company may incur or to maintain any maximum debt-to-Total Market
Capitalization ratio or debt to undepreciated assets ratio. At December 31,
2001, the Company had a debt-to-Total Market Capitalization ratio of
approximately 50.6% (based on the closing price of $13.09 per Common Share on
December 31, 2001) and a debt to undepreciated assets ratio of 49.7%. "Total
Market Capitalization" means the sum of the aggregate market value of the
Company's outstanding Common Shares and OP Units, the total debt of the Company
and the liquidation value of the Convertible Preferred Stock and Convertible
Preferred Units on the date thereof. The debt-to-Total Market Capitalization
ratio, which is based upon the market value of the Company's equity and,
accordingly, fluctuates with changes in the price of the Common Shares, differs
from a debt-to-book capitalization ratio. To the extent the Company incurs or
assumes indebtedness with respect to properties in connection with pending or
future acquisitions or development, the Company's debt-to-Total Market
Capitalization and debt to undepreciated assets ratios may change. The Company
believes that debt-to-Total Market Capitalization and debt to undepreciated
assets ratios provide a more appropriate indication of leverage for a company
whose assets are primarily operating real estate. The Company also considers its
interest coverage and fixed charge coverage ratios to be indicative of its level
of leverage and ability to service its debt and fixed charges. For the quarters
ended December 31, 2001 and 2000, the Company's interest coverage ratio and
fixed charge coverage ratios were 2.8 and 2.1, and 2.0 and 1.5, respectively.
The Company may in the future adopt a debt policy in light of then current
economic conditions, relative costs of debt and equity capital, market values of
properties, growth and acquisition opportunities and other factors, and may
modify any debt financing policy from time to time. If the Board of Trustees
determines that additional funding is required, the Company may raise such funds
through additional equity offerings (including offers of senior securities),
debt financing or retention of cash flow (subject to provisions in the Internal
Revenue Code of 1986, as amended (the "Code") concerning taxability of
undistributed REIT income), or a combination of these methods. The Company has
agreed as a result of certain acquisitions closed since December 1997 to use all
commercially reasonable efforts to maintain a certain level of indebtedness and
to permit certain limited partners in the Operating Partnership to guarantee
such level of indebtedness. At December 31, 2001, approximately $30 million, in
the aggregate, of the Company's outstanding indebtedness is guaranteed by these
limited partners under these agreements.
8
In the event the Board of Trustees determines to raise additional equity
capital, the Board of Trustees has the authority, without shareholder approval,
to issue additional Common Shares up to the maximum number authorized, or other
capital stock, on such terms and for such consideration it deems appropriate,
including in exchange for property. Any such offerings might cause a dilution of
a shareholder's investment in the Company.
To the extent that the Board of Trustees determines to obtain additional
debt financing, the Company intends to do so generally through loans secured by
mortgages on its Properties and lines of credit. These mortgage loans may be
recourse, non-recourse or cross-collateralized and may contain cross-default
provisions. The Company does not have a policy limiting the number of mortgages
that may be placed on any particular property or the amount of the loans secured
by such mortgages, but mortgage financing instruments usually limit additional
indebtedness on such properties. Indebtedness incurred by the Company may be in
the form of bank borrowings, secured and unsecured, and publicly and privately
placed debt instruments. Such indebtedness may be with recourse to all or any
part of the property of the Company, or may be limited to the particular
property to which the indebtedness relates. The proceeds from any borrowings by
the Company may be used for the payment of distributions, for working capital,
to refinance existing indebtedness or to finance acquisitions of new properties
or expansions of existing or new properties.
The Company will acquire additional real estate assets using Common Shares
or OP Units to pay all or a portion of the purchase price when the Company
believes that such issuance would be additive to its intrinsic value on a per
share basis. The Company may also issue senior equity securities or shares of
preferred stock for this purpose. There can be no assurance that such issuances
will not be dilutive to the Company's existing shareholders. In addition, Common
Shares may be issued on terms which grant the recipient the right to require the
Company to register the shares under the Securities Act of 1933, as amended
("the "Securities Act"). Sales of those shares may adversely affect the market
price of the Company's outstanding Common Shares.
9
SUMMARY OF INDEBTEDNESS
The following table sets forth the Company's indebtedness outstanding,
excluding debt premiums, at December 31, 2001.
AMOR-
BALANCE AT TIZATION
DECEMBER 31, MATURITY PERIOD ANNUAL
2001 INTEREST DATE (IN PAYMENTS
LENDER (IN 000'S) RATE (MONTH/YEAR) YEARS) (IN 000'S) COLLATERAL
--------------------------------- ------------ -------- ------------ -------- ----------- ---------------------------------
AEGON USA Realty Advisors $ 5,734 6.92% 07/13 15 $ 724 4400 West 96th Street
American States Insurance Company 8,643 8.75% 09/09 15 1,540 One Park Place
Column Financial, Inc. 7,209 7.03% 02/08 30 601 One Philips Drive
DLJ Commercial Mortgage Trust (1) 63,724 7.50% 10/08 30 5,496 Various
DLJ Commercial Mortgage Trust (1) 28,612 7.55% 10/08 30 2,479 Various
First Union National Bank (2) 6,466 3.88% 01/03 N/A 234 Various
Guardian Life Insurance Company 2,910 9.68% 02/07 20 453 1045 James Street
Key Commercial Mortgage(3) 8,371 4.39% 12/02 N/A 367 Keystone Cranbury West - Phase II
Key Commercial Mortgage(3) 3,561 4.39% 12/02 N/A 156 Keystone Cranbury East - Phase I
Key Commercial Mortgage(4) 8,464 8.22% 06/10 30 769 Various
Key Commercial Mortgage(4) 9,258 8.29% 06/10 30 846 Various
M&T Real Estate, Inc. 5,021 8.33% 11/05 N/A 418 Three Columbia Circle
M&T Real Estate, Inc. 6,809 8.53% 11/06 N/A 581 15 Columbia Circle
Nationwide Life Insurance Company 19,500 6.88% 06/04 N/A 1,341 501 Airtech Park
Nationwide Life Insurance Company 7,105 9.75% 09/02 N/A 693 8677 Logo Court - A
Nationwide Life Insurance Company 1,693 8.25% 09/02 N/A 140 8677 Logo Court - B
Nationwide Life Insurance Company 3,158 7.91% 04/06 N/A 250 6402 Corporate Drive - A
Nationwide Life Insurance Company 2,857 8.41% 04/06 N/A 240 6402 Corporate Drive - B
Nationwide Life Insurance Company 2,300 6.88% 06/04 N/A 158 351 West 10th Street
Prudential Insurance Company(5) 3,976 8.14% 12/05 N/A 382 21 Roadway Drive
Prudential Insurance Company 10,010 6.89% 05/06 25 848 420 Salem Church
Prudential Insurance Company 11,666 7.87% 12/05 25 1,099 21 Roadway Drive
Prudential Insurance Company 18,889 7.66% 10/04 5 1,754 221 South 10th Street
Teachers Annuity and Assurance
Association of America (6) 90,346 7.82% 04/07 28 7,999 Various
Wells Fargo Bank (7) 93,000 3.56% 12/04 N/A 3,966 Various
USG Annuity and Life Company 3,865 8.50% 09/05 20 479 Two Tabas Lane
----------- ---------
TOTAL DEBT(8) $ 433,147 $ 34,013
=========== =========
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(1) Secured by a first lien on 21 properties (see Schedule III - Real
Estate and Accumulated Depreciation) subject to certain permitted
release provisions.
(2) Debt service is interest only which is payable monthly, at LIBOR
plus 1.75% or the prime rate, at the Company's option. The LIBOR
interest rate is based on a sliding scale which is based on the
value of the collateral. The scale ranges from LIBOR plus 1.50% to
LIBOR plus 1.75%. Annual payment is based on annual interest
payments at 3.88%, which was the rate at December 31, 2001.
Secured by a first lien on 4 properties (see Schedule III - Real
Estate and Accumulated Depreciation) and a lease assignment on
another property subject to certain permitted release provisions.
(3) This indebtedness is for a $37.0 million loan, in aggregate, to
construct two industrial facilities in New Jersey aggregating
approximately 1.0 million square feet upon completion. This loan
is collateralized by these properties and requires interest at
LIBOR plus2.25%. Annual payment is based on annual interest
payments at 4.39%, which was the rate as of December 31, 2001.
10
(4) Secured by a first lien on 7 properties (see Schedule III -
Real Estate and Accumulated Depreciation) subject to certain
permitted release provisions. The loan contains covenants and
agreements customary in such borrowings.
(5) This indebtedness is for a $4.0 million recourse construction
loan for a 150,000 square foot expansion of an existing 407,100
square foot industrial facility in Harrisburg, Pennsylvania.
(6) Secured by a first lien on 12 properties (see Schedule III -
Real Estate and Accumulated Depreciation) subject to certain
permitted release provisions.
(7) Debt service is interest only which is payable monthly, at
LIBOR plus 1.625% or the prime rate, at the Company's option. The
LIBOR interest rate is based on a sliding scale which is based on
the Company's leverage. The scale ranges from LIBOR plus 1.35% to
LIBOR plus 1.875%. Annual payment is based on annual interest
payments at 3.56%, which was the rate at December 31, 2001. This
unsecured credit facility contains covenants and agreements
customary in such borrowings.
(8) Excludes unamortized debt premiums of $1,989,000 at December
31, 2001.
COMPETITION
The Properties are primarily located in the Eastern United States. There
are numerous other industrial and office properties and real estate companies
within the market area of each of the Properties which compete with the Company
for tenants and development and acquisition opportunities. The number of
competitive properties and real estate companies in such areas could have a
material adverse effect on the Company's (i) future operations, (ii) ability to
rent its properties and the rents charged, and (iii) development and acquisition
opportunities. The Company will compete for tenants and acquisitions with others
who may have greater resources. The Company's competitive position for tenants
is strongly influenced by economic conditions in its market areas. However, the
Company believes that its responsiveness to tenant needs will enable it to
attract and maintain high quality tenants in the markets in which the properties
are located.
The Company's financial performance and its ability to make distributions
to shareholders continues to be particularly sensitive to the economic
conditions in Northern and Central New Jersey, Central Pennsylvania,
Indianapolis, Indiana, Ohio, the Greenville/Spartanburg region of South Carolina
and New York State. Like other real estate markets, these markets have
experienced economic downturns in the past, and future declines in any of these
economies or real estate markets could adversely affect the Company's operations
or cash available for distribution. The Company's revenues and the value of the
Properties may be affected by a number of factors, including the local economic
climate (which may be adversely impacted by business layoffs or downsizing,
industry slowdowns, changing demographics and other factors) and local real
estate conditions (such as oversupply of or reduced demand for office,
industrial and other competing commercial properties). These factors, when and
if they occur in an area in which any of the Properties are located, could
adversely affect the Company's ability to make distributions to its
shareholders.
11
ENVIRONMENTAL AND OTHER REGULATORY MATTERS
Under various federal, state and local laws and regulations, an owner of
real estate is liable for the costs of removal or remediation of certain
hazardous or toxic substances on such property. Such laws often impose such
liability without regard to whether the owner knew of, or was responsible for,
the presence of such hazardous or toxic substances. The costs of remediation or
removal of such substances may be substantial, and the presence of such
substances, or the failure to promptly remediate such substances, may adversely
affect the owner's ability to sell such real estate or to borrow using such real
estate as collateral. In connection with its ownership and operation of the
Properties, the Company or the Operating Partnership, as the case may be, may be
potentially liable for such costs.
All of the Properties have been subject to Phase I or similar environmental
assessments, which are intended to discover information regarding, and to
evaluate the environmental condition of, the surveyed properties and surrounding
properties. The Phase I assessments included a historical review, a public
records review, a preliminary investigation of the site and surrounding
properties, screening for the presence of asbestos, polychlorinated biphenyls
("PCBs") and underground storage tanks and the preparation and issuance of a
written report, but do not include soil sampling or subsurface investigations.
Where Phase I assessments resulted in specific recommendations for remedial
actions, the recommended action has been taken.
The Phase I assessments have not revealed any environmental liability that
the Company believes would have a material adverse effect on the Company's
business, assets or results of operations, nor is the Company aware of any such
liability. Nevertheless, it is possible that these assessments do not reveal all
environmental liabilities. Moreover, no assurance can be given that (i) future
laws, ordinances or regulations will not impose any material environmental
liability or (ii) the current environmental condition of its properties will not
be affected by tenants and occupants of its properties, by the condition of
properties in the vicinity of the Properties (such as the presence of
underground storage tanks) or by third parties unrelated to the Operating
Partnership or the Company.
Environmental inspections indicate that there are minor amounts of asbestos
containing materials ("ACMs") in certain of the Properties, primarily in the
form of floor tiles and ceiling materials, which are generally in good
condition. The presence of such amounts of ACMs is in compliance with current
law.
The Company believes that the Properties are in compliance, in all material
respects, with all federal, state and local ordinances and regulations regarding
hazardous or toxic substances. Neither the Company nor the Operating Partnership
has been notified by any governmental authority, or is otherwise aware, of any
material noncompliance, liability or claim related to hazardous or toxic
substances in connection with any of its present Properties.
From time to time legislation is proposed which, if enacted, would require
installation of various items of safety equipment, such as smoke alarms and
sprinkler equipment. If such legislation should be enacted and be applicable to
the Properties, the Company could be required to expend material sums in
fulfilling these requirements.
12
See "Schedule III - Real Estate and Accumulated Depreciation" herein.
GENERAL
In the opinion of management, the Properties are adequately covered by
insurance. The Company has no plans to make any material renovations or
improvements to any of the Properties.
EXECUTIVE OFFICERS
The following table sets forth certain information regarding executive
officers of the Company.
NAME AGE POSITION
---- --- --------
Jeffrey E. Kelter * 47 President and Chief Executive Officer
Robert F. Savage 34 Executive Vice President and Chief Operating Officer
John B. Begier 36 Executive Vice President and Chief Investment Officer
Timothy A. Peterson 36 Executive Vice President - Corporate Strategy and New Business
Initiatives
Timothy E. McKenna 38 Senior Vice President - Chief Financial Officer
Saul A. Behar 40 Senior Vice President - General Counsel and Secretary
Stephen J. Butte 41 Senior Vice President - Asset Management
Charles C. Lee, Jr. 38 Senior Vice President - Marketing and Leasing
Francis X. Ryan 42 Senior Vice President - Construction and Property Operations
----------
* This executive is a trustee of the Company.
Mr. Kelter has been President of the Company since December 1997 and was
appointed Chief Executive Officer in December 1998. He has over 20 years of
experience in all phases of commercial real estate including development and
third-party management. Mr. Kelter began his career at Bankers Trust Corporation
where he was an assistant treasurer in the Corporate Finance division. In 1982,
Mr. Kelter was employed by Vector Properties in Tulsa, Oklahoma, where he was in
charge of the development and finance of several downtown Tulsa office building
renovations. In 1982, Mr. Kelter founded Penn Square Properties, Inc. ("Penn
Square") in Philadelphia and served as Chief Executive Officer and President.
Penn Square was a full service real estate development, management, construction
and brokerage firm that merged with the Company at its formation. Penn Square
developed, owned, managed and leased more than 4.5 million square feet of office
and industrial projects throughout the Pennsylvania and New Jersey markets. Mr.
Kelter is a graduate of Trinity College and is a member of the National
Association of Real Estate Investment Trusts and the National Association of
Industrial and Office Properties.
Mr. Savage has been Chief Operating Officer of the Company since December
2000. Prior to joining the Company, he spent three years as a partner at Hudson
Bay Partners, L.P., a private equity firm where he was responsible for the
execution of the Company's formation transactions in December 1997. Prior to Mr.
Savage's position at Hudson Bay, he worked from January 1994 to May 1997 in the
Investment Banking Division at Merrill Lynch & Co. where he specialized in
corporate finance and strategic advisory services for REITs, real estate
investment funds and lodging companies. He started his career at Arthur Andersen
LLP and then worked at Jones Lang LaSalle in a variety of project finance and
portfolio management positions. Mr. Savage received an A.B. in Urban Studies and
Business Economics from Brown University and is a member of the Urban Land
Institute.
13
Mr. Begier has served as Chief Investment Officer of the Company since
February 2001 with primary responsibility for the Company's investment activity.
In January 2000, he was appointed Executive Vice President. In this role he
oversees all acquisitions and development projects as well as dispositions,
including all transactions related to Keystone's capital recycling initiatives.
He served as Senior Vice President from December 1997 until December 1999. Mr.
Begier joined Penn Square in 1995. Prior to working for Penn Square he worked
for eight years as a real estate broker with the Pennsylvania office of Cushman
& Wakefield where he was responsible for leasing, sales and acquisition of
commercial and industrial properties. Mr. Begier received a B.A. from the
University of Virginia and is a member of the Council of Logistics Management.
Mr. Peterson has served as Executive Vice President - Corporate Strategy
and New Business Initiatives since February 2002. In this role he focuses on
creating value through joint venture activities and partner opportunities
designed to capitalize on the Company's existing infrastructure in its core
markets. Previously he was Chief Financial Officer of the Company from August
1998 until February 2002 and was Secretary from December 1998 until September
1999. He was appointed Executive Vice President of the Company in December 1998.
Prior to joining the Company, Mr. Peterson held a variety of positions with Post
Properties, Inc. from 1989 until 1998, including Executive Vice President,
Finance. Mr. Peterson received an undergraduate degree in Accounting and an MBA
in Finance from the University of Florida and is a Certified Public Accountant.
He is a member of the University of Florida Real Estate Advisory Board and
serves on the President's Council of the Real Estate Round Table. He is also a
Director of the Please Touch Museum (the Philadelphia Children's Museum).
Mr. McKenna has served as the Company's Senior Vice President and Chief
Financial Officer since February 2002. He was previously Senior Vice President -
Finance and Chief Accounting Officer since June 1999. Prior to that he was the
Company's Vice President of Finance and Corporate Controller since joining the
Company in January 1998. Mr. McKenna was previously employed as a senior manager
in the Real Estate Services Group of Arthur Andersen LLP's Philadelphia office.
Prior to joining the Company, he worked for over 12 years providing consulting
and accounting services to publicly and privately-owned real estate companies;
over 11 years of his experience was obtained as an employee of Arthur Andersen
LLP. Mr. McKenna is a Certified Public Accountant. Mr. McKenna is a graduate of
the University of Scranton with a B.S. in Accounting.
14
Mr. Behar served as Vice President and Secretary of the Company from May
2000 to December 2000, when he was promoted to Senior Vice President and
Secretary. Prior to joining the Company, Mr. Behar served for seven years as
Senior Counsel at Pep Boys in Philadelphia, where he handled numerous corporate
and real estate matters. Before that, he practiced law at the firm of Dechert in
Philadelphia. Mr. Behar has over 15 years of experience working on corporate and
real estate-related legal matters. He received an A.B. with honors from Cornell
University and a J.D. from The University of Chicago Law School. He is a member
of the American Corporate Counsel Association.
Mr. Butte has served as Senior Vice President of the Company since December
1997. He served as Chief Investment Officer from March 1999 until February 2001
and Secretary from September 1999 until May 2000. In January 2001 he was
appointed Senior Vice President of Asset Management with primary responsibility
for overseeing all portfolio and property level analysis for the Company's
existing properties as well as proposed investments. As head of the Asset
Management Department, Mr. Butte works closely with and supports the functions
of the operating departments including Investments, Marketing and Leasing and
Property Operations and Construction. Prior to joining Penn Square, in 1988 he
spent five years in public accounting as a manager in the audit department of
Asher & Company, specializing in providing financial and accounting services to
companies in the real estate industry. Mr. Butte received a B.S. in Accounting
and a Masters of Taxation from Villanova University and is a Certified Public
Accountant.
Mr. Lee has served as Senior Vice President of the Company since March 1998
with primary responsibility for the Company's leasing and marketing activities.
Mr. Lee joined Penn Square in 1987 where he was responsible for leasing and
marketing activities for various commercial properties. From September 1997
until March 1998, when he re-joined the Company, Mr. Lee was the regional
leasing director for the Philadelphia region of Equity Office Properties. Prior
to working for Penn Square, he was an Assistant Portfolio Manager in the Private
Banking Division of the Boston Safe Deposit and Trust Company. Mr. Lee received
a B.A. from Tufts University and has a Pennsylvania real estate brokerage
license.
Mr. Ryan has served as Senior Vice President of the Company since December
1997 with primary responsibility for the Company's property operations, property
management activities and tenant-related and third-party construction. In
February 2001 he was named head of Property Operations and Construction. In this
expanded role, Mr. Ryan's primary responsibilities include the construction of
the Company's development projects in addition to directing property management.
Mr. Ryan joined Penn Square in 1991 where he was responsible for the management
of various commercial and industrial properties. Prior to working for Penn
Square, Mr. Ryan worked for four years as a senior property manager for Cushman
& Wakefield's Pennsylvania office and as a project manager for American Building
Maintenance from 1984 through 1986. Mr. Ryan is certified as a Real Property
Administrator by the BOMI Institute. He is a member of the Building Owners and
Managers Association and the Institute of Real Estate Management (IREM).
15
ITEM 2. PROPERTIES.
SUMMARY PROPERTY TABLE
The following table sets forth certain information with respect to each
of the Properties at December 31, 2001.
% OF
% OF PORT- ANNUALIZED
PORTFOLIO FOLIO RENT PER
YEAR RENTABLE ANNUAL- ANNUAL- # OF LEASED
# OF BUILT/ SQUARE SQUARE % IZED IZED LEA- SQUARE
BUILDINGS BUILDINGS LOCATION RENOVATED FEET FEET LEASED RENT(1) RENT SES FOOT(2) MAJOR TENANT
------------- --------- -------- --------- ------ -------- ------ ---------- ------ ---- --------- -------------
INDUSTRIAL:
118 Moonachie Avenue (3) 1 Carlstadt, Coca-Cola Bottling
NJ 1989 243,751 1.12% 100.0% $ 1,950,000 2.04% 1 $ 8.00 of NY, Inc.
21 CranburyRoad 1 Cranbury, NJ Cosmetic Essence,
1998 845,835 3.88% 100.0% 3,421,436 3.59% 4 4.05 Inc.
24 Abeel Road 1 Cranbury, NJ 1978 40,000 0.18% 100.0% 220,000 0.23% 1 5.50 KAR Products
34 Englehard Drive 1 Cranbury, NJ 1982 203,404 0.93% 100.0% 986,508 1.03% 1 4.85 SETCO, Inc.
100-400 Nixon Lane (3) 1 Edison, NJ Parcel Direct,
2000 851,907 3.91% 100.0% 4,079,230 4.28% 4 4.79 Inc.
One Nixon Lane (3) 1 Edison, NJ Ultimate
Distribution,
1987 192,829 0.88% 100.0% 839,635 0.88% 1 4.35 Inc.
400 Cabot Drive 1 Hamilton APL Logistics,
Twp, NJ 1990 585,510 2.69% 100.0% 2,576,244 2.70% 1 4.40 Inc.
2 Volvo Drive 1 Rockleigh, 1966/ National Medical
NJ 1995 67,460 0.31% 100.0% 502,572 0.53% 1 7.45
301-321 Herrod Blvd. 1 S. Brunswick, Herrod
NJ 1989 610,949 2.80% 100.0% 2,291,059 2.40% 1 3.75 Distribution
200-250 Kennedy Drive (3) 1 Sayreville, Garden Bolt
NJ International
1988 164,267 0.75% 100.0% 739,202 0.78% 1 4.50 Corp.
300-350 Kennedy Drive (3) 1 Sayreville, Enchante
NJ 1988 161,987 0.74% 73.3% 534,420 0.56% 2 4.50
309 Kennedy Drive (3) 1 Sayreville, Nippon Express
NJ 1996 202,000 0.93% 100.0% 909,000 0.95% 1 4.50
409 Kennedy Drive (3) 1 Sayreville, Guest Supply, Inc.
NJ 1996 225,831 1.04% 100.0% 982,365 1.03% 1 4.35
30 Stults Road 1 S. Medicia
Brunswick, Pharmaceutical
NJ 1974 64,285 0.29% 100.0% 343,282 0.36% 1 5.34 Corp.
Four Applegate Drive 1 Washington, Direct Fulfillment
NJ 1998 265,000 1.22% 100.0% 1,364,750 1.43% 1 5.15 LP
5 Henderson Drive 1 W.Caldwell, 1967/ Vestcom, Inc.
NJ 90 210,530 0.97% 100.0% 1,324,234 1.39% 1 6.29
66 Station Road (3) 1 Cranbury, NJ The Home Depot,
1973 812,739 3.73% 100.0% 3,250,956 3.41% 1 4.00 Inc.
---- --------- ------ ------ ----------- ------ -- ---------
SUBTOTAL/WEIGHTED AVG. 17 5,748,284 26.37% 99.2% $26,314,893 27.59% 24 $ 4.61
NJ INDUSTRIAL ==== ========= ====== ====== =========== ====== == =========
2400, 2404, 2410 3 Camp Hill,PA 1952/ Exel Logistics,
Gettysburg Road 1993 182,770 0.84% 81.6% $ 658,233 0.6 3 $ 4.41 Inc.
1440 Sheffler Drive 1 Chambersburg, Ingram Book
PA 1996 355,200 1.63% 50.0% 715,200 0.75 1 4.03 Company
1465 Nitterhouse Drive 1 Chambersburg, Franklin
PA 1995 420,000 1.93% 100.0% 1,701,000 1.78 1 4.05 Storage, Inc.
2294 Molly Pitcher 1 Chambersburg, 1986 621,400 2.85% 100.0% 2,435,550 2.5 2 3.92 Staples, Inc.
Highway PA
One Tabas Lane 1 Exton, PA 1970 150,027 0.69% 100.0% 517,593 0.5 1 3.45 Alstrip
Two Tabas Lane 1 Exton, PA 1970 150,000 0.69% 100.0% 762,520 0.80 1 5.08 International
/91 Envelope
21 Roadway Drive 1 Harrisburg, 1988 407,100 1.87% 100.0% 1,567,335 1.64% 1 3.85 Engine Controls
PA Distribution
221 South 10th Street 1 Lemoyne, PA 1997 885,802 4.06% 100.0% 3,142,510 3.29% 5 3.55 Cumberland
Distribution
1001, 1011 AIP Drive 2 Middletown, 1991 284,262 1.30% 100.0% 1,104,053 1.16% 6 3.88 Bayard Sales
PA
100 Oakhill Road 1 Mountaintop, 1996 105,000 0.48% 100.0% 385,350 0.40% 1 3.67 Dana Perfumes
PA Corporation
1 Phillips Drive 1 Mountaintop, PA 1991- 400,000 1.83% 100.0% 1,188,000 1.25% 1 2.97 Philips
1993 Lighting
Company
1091 Arnold Road 1 Reading, PA 1996 133,055 0.61% 100.0% 565,250 0.59% 1 4.25 The Glidden
Company
1157 Arnold Road 1 Reading, PA 1995 219,120 1.01% 100.0% 771,364 0.81% 3 3.52 HMG Intermark
Worldwide
420 Salem Church Road 1 Mechanicsburg, 1973/ 504,321 2.31% 100.0% 1,545,766 1.62% 1 3.07 Exel Logistics,
PA 1975 Inc.
75 Pleasant View Drive 1 Mechanicsburg, 1977 132,548 0.61% 100.0% 470,407 0.49% 1 3.55 Exel Logistics,
PA Inc.
811 Spangler Road 1 Mechanicsburg, 1968 145,640 0.67% 100.0% 396,000 0.42% 1 2.72 Exel Logistics,
PA Inc.
6829 Ruppsville Road 1 Allentown, 1988 100,000 0.46% 100.0% 390,000 0.41% 3 3.90 Truserv
PA Corporation
6831 Ruppsville Road 1 Allentown, 1988 80,000 0.37% 100.0% 292,000 0.31% 1 3.65 Vanguard
PA Manufacturing,
Inc.
7663 Industrial Boulevard 1 Allentown, 1988 65,000 0.30% 0.0% -- 0.00% 0 -- Vacant
PA
6813 Ruppsville Road 1 Allentown, 1986 57,600 0.26% 100.0% 228,320 0.24% 3 3.96 Digital-Ink
PA
7520 Morris Court 1 Allentown, 1995 154,156 0.71% 82.5% 536,292 0.56% 3 4.22 J.C. Penney
PA Company, Inc.
7542 Morris Court 1 Allentown, 1997 168,967 0.77% 100.0% 692,765 0.73% 1 4.10 KIA Motors,Inc.
PA
7584 Morris Court 1 Allentown, 1990 53,907 0.25% 90.6% 260,536 0.27% 6 5.34 Omnilift, Inc.
PA
7529 Morris Court 1 Allentown, 1998 250,000 1.15% 100.0% 1,087,500 1.14% 1 4.35 Behr Process
PA Corporation
7220 Schantz Court 1 Allentown, 1995 60,000 0.28% 100.0% 252,000 0.26% 1 4.20 Laminations
PA
7485 Industrial Boulevard 1 Allentown, 1991 203,704 0.93% 100.0% 865,742 0.91% 1 4.25 LMB Distri-
PA bution, Inc.
7566 Morris Court 1 Allentown, 1990 111,300 0.51% 100.0% 496,536 0.52% 4 4.46 G&T Industries,
PA Inc.
---- --------- ------ ------ ----------- ------ ---- ---------
SUBTOTAL/WEIGHTED AVG. 30 6,400,879 29.36% 95.2% $23,027,822 24.14% 54 $ 3.78
PA INDUSTRIAL ==== ========= ====== ====== =========== ====== ==== =========
4400 W. 96th Street 1 Indianapolis, 1998 100,000 0.46% 100.0% $ 930,000 0.98% 1 $ 9.30 Support Net,
IN Inc.
6402 Corporate Drive 1 Indianapolis, 1996 162,608 0.75% 100.0% 292,028 0.31% 1 1.80 Brightpoint,
IN Inc.
501 Airtech Park 1 Indianapolis, 2000 495,740 2.27% 100.0% 2,519,199 2.64% 1 5.08 Brightpoint,
IN Inc.
8677 Logo Court 1 Indianapolis, 1993 599,152 2.75% 100.0% 1,527,838 1.60% 1 2.55 Group Athletica,
IN LLC
351 West 10th Street 1 Indianapolis, 1999 39,252 0.18% 100.0% 368,576 0.39% 1 9.39 Office Works
IN
558 Airtech Park 1 Indianapolis, 2001 798,096 3.66% 100.0% 2,290,536 2.40% 1 2.87 Belkin Components,
IN Inc.
---- --------- ------ -------- ---------- ----- ---- ---------
SUBTOTAL/WEIGHTED AVG. 6 2,194,848 10.07% 100.0% $ 7,928,177 8.31% 6 $ 3.61
IN INDUSTRIAL
==== ========= ====== ======== ========== ===== ==== =========
104 Hidden Lake Circle 1 Duncan, SC 1986/ 142,500 0.65% 100.0% $ 550,960 0.58% 1 $ 3.87 BMG Music
1992
122 Hidden Lake Circle 1 Duncan, SC 1998 303,091 1.39% 100.0% 1,000,178 1.05% 1 3.30 BMG Music
Augusta Road Industrial 2 Greenville, 1996 360,000 1.65% 100.0% 1,026,000 1.08% 2 2.85 Benore
Park SC Logistics
Systems
Outlaw Industrial Park 3 Greenville, SC 1994/ 302,000 1.39% 100.0% 719,500 0.75% 3 2.38 Graco Children's
1997 Products, Inc.
Rocky Creek Business Park 4 Greenville, 1997 99,400 0.46% 100.0% 354,300 0.37% 4 3.56 Sheridan
SC Australia
White Horse Industrial 7 Greenville, 1989/ 390,000 1.79% 53.8% 553,800 0.58% 5 2.64 Cameron &
Park SC 1997 Barkley Co.
1221 South Batesville 1 Greer, SC 1970/ 434,798 1.99% 99.2% 1,257,439 1.32% 3 2.92 BMW
Road 1985
Buncombe Road Industrial 5 Greer, SC 1988/ 350,000 1.61% 91.4% 963,500 1.01% 5 3.01 Springs
Park 1995 Industries
Piedmont Highway 3 Piedmont, SC 1995/ 400,000 1.83% 75.0% 750,000 0.79% 2 2.50 Fabri-Kal
Industrial Park 1997 Corp.
---- --------- ------ -------- ---------- ------- ---- ---------
SUBTOTAL/WEIGHTED AVG. 27 2,781,789 12.76% 88.7% $ 7,175,677 7.52% 26 $ 2.91
SC INDUSTRIAL ==== ========= ====== ======== ========== ======= ==== =========
16
% OF
% OF PORTF- ANNUALIZED
PORTFOLIO OLIO RENT PER
# OF YEAR RENTABLE ANNUAL- # OF LEASED
BUILDI- BUILT/ SQUARE SQUARE % ANNUALIZED IZED LEA- SQUARE
BUILDINGS NGS LOCATION RENOVATED FEET FEET LEASED RENT (1) RENT SES FOOT (2) MAJOR TENANT
------------- ----------- ----------- --------- ------ ----- ------ ---------- ----- ---- --------- -------------
300 Enterprise Drive 1 Bellevue, OH 1998 181,838 0.83% 100.0% $ 551,013 0.58% 2 $ 3.03 American Can
1311 Majestic Drive 1 Fremont, OH 1993 143,400 0.66% 100.0% 394,350 0.41% 1 2.75 Poly-Foam
Interna-
tional,Inc.
1411 Majestic Drive 1 Fremont, OH 1995 181,350 0.83% 100.0% 498,713 0.52% 1 2.75 GMH Enterp-
rises
600 Hagerty Drive 1 Fremont, OH 1980/ 126,250 0.58% 100.0% 347,187 0.36% 1 2.75 Poly-Foam
86/87 Interna-
tional,Inc.
605 Hagerty Drive 1 Fremont, OH 1991 76,464 0.35% 100.0% 210,276 0.22% 1 2.75 Poly-Foam
Interna-
tional, Inc.
670 Hagerty Drive 1 Fremont, OH 1980/ 100,272 0.46% 100.0% 300,816 0.32% 1 3.00 Poly-Foam
88/90 Interna-
tional, Inc.
800 Hagerty Drive 1 Fremont, OH 1987 30,150 0.14% 100.0% 132,000 0.14% 1 4.38 Woodbridge
Corporation
5555 Massillon Road 1 Green, OH 1996 255,000 1.17% 100.0% 923,256 0.97% 2 3.62 General
Electric
16725 Square Drive 1 Marysville, 1987 133,500 0.61% 100.0% 487,275 0.51% 1 3.65 Sumitomo
OH Electrical
Wiring
Systems
1030 South Edgewood
Drive 1 Urbana, OH 1988 200,000 0.92% 100.0% 440,000 0.46% 1 2.20 ODW Logis-
tics, Inc.
3530 East Pike 1 Zanesville, 1991 300,000 1.38% 100.0% 840,000 0.88% 1 2.80 Owens
OH Brockway
Glass
---- ---------- ------ ------- ----------- --------- ----- ---------
SUBTOTAL/WEIGHTED AVG.
OH INDUSTRIAL 11 1,728,224 7.93% 100.0% $ 5,124,886 5.37% 13 $ 2.97
==== ========== ====== ======= =========== ========= ===== =========
Northeastern Industrial 1 Albany, NY 1989 100,000 0.46% 100.0% $ 762,600 0.80% 2 $ 7.63 Distribution
Park, Bldg. 21 Unlimited
Northeastern Industrial 1 Albany, NY 1988 104,000 0.48% 100.0% 530,400 0.56% 1 5.10 Ameriserve
Park, Bldg. 22 Food
Northeastern Industrial 1 Albany, NY 1950/ 192,645 0.88% 100.0% 659,097 0.69% 1 3.42 Moran Foods,
Park, Bldg. 8 1997 Inc.
4 Marway Circle 1 Gates, NY 1976/ 60,000 0.28% 100.0% 228,000 0.24% 1 3.80 Anixter,Inc.
77
5 Marway Circle 1 Gates, NY 1976/ 51,300 0.24% 73.2% 188,420 0.20% 7 5.02 Savory
77 Snacks
Vending,Inc.
8 Marway Circle 1 Gates, NY 1976/ 62,880 0.29% 100.0% 238,944 0.25% 1 3.80 Anixter,Inc.
77
4472 & 4480 Steelway 4 Liverpool, 1977 655,500 3.01% 16.0% 267,453 0.28% 2 2.56 McLane-
Blvd. NY Northeast
Mt. Ebo 1 Mt. Ebo, NY 1998 93,948 0.43% 100.0% 917,744 0.96% 1 9.77 Schien
Pharmaceu-
tical
------- ---------- ------- ------- ----------- -------- ----- --------
SUBTOTAL/WEIGHTED AVG.
NY INDUSTRIAL 11 1,320,273 6.06% 57.2% $ 3,792,658 3.98% 16 $ 5.02
======= ========== ======= ======= =========== ======== ===== ========
TOTAL/WEIGHTED AVG.
INDUSTRIAL PROPERTIES 102 20,174,297 92.53% 93.9% $73,364,113 76.92% 139 $ 3.87
======= =========== ======= ======= =========== ======= ===== ========
OFFICE:
Corporate Center 15 1 Mechanicsburg, 1979 55,574 0.25% 100.0% $ 882,295 0.93% 9 $ 15.88 Acordia
PA Northeast
Treeview Corporate 1 Wyomissing, 1991 64,154 0.29% 83.5% 917,295 0.96% 11 17.12 Carpenter
Center (4) PA Technology
------- ----------- ------ ------ -------- --------- ------ -------
SUBTOTAL/WEIGHTED AVG.
PA OFFICE 2 119,728 0.55% 91.2% $ 1,799,590 1.89% 20 $ 16.49
======= =========== ====== ====== ======= ========= ====== =======
8 Airline Drive 1 Albany, NY 1997 59,295 0.27% 100.0% $ 882,053 0.92% 4 $ 14.88 Homestead
Funding
15 Columbia Circle 1 Albany, NY 1995 82,608 0.38% 100.0% 970,644 1.02% 1 11.75 Prudential
Insurance
Nine Columbia Circle 1 Albany, NY 1992 10,734 0.05% 73.2% 132,346 0.14% 3 16.84 Sterling
Environmen-
tal
One Columbia Circle 1 Albany, NY 1991 68,895 0.32% 100.0% 1,092,547 1.15% 5 15.86 Novalis
17 Columbia Circle 1 Albany, NY 1995 66,000 0.30% 100.0% 786,092 0.82% 1 11.91 CDPHP
13 Columbia Circle 1 Albany, NY 1996 21,468 0.10% 93.5% 272,292 0.29% 3 13.56 Roemer,
Wallens &
Mineaux
Three Columbia Circle 1 Albany, NY 1992 78,971 0.36% 99.3% 1,157,595 1.21% 16 14.76 Thompson
Corp. -
Delmar
5000 Campuswood Drive 1 East 1988 32,636 0.15% 68.7% 369,651 0.39% 5 16.48 Cruise's
Syracuse, NY Inc.
5009 Campuswood Drive 1 East 1989 6,584 0.03% 100.0% 99,726 0.10% 1 15.15 Children's
Syracuse, NY Discovery
Center
5010 Campuswood Drive 1 East National
Syracuse, NY 1989 70,215 0.32% 100.0% 1,194,811 1.25% 9 17.02 Grange
5015 Campuswood Drive 1 East 1991 99,476 0.46% 82.9% 1,494,351 1.57% 8 18.13 Group Health
Syracuse, NY Health, Inc.
125 Indigo Creek Drive 1 Greece, NY 1992 26,700 0.12% 100.0% 346,500 0.36% 1 12.98 Park Ridge
Health
6 British American 1 Latham, NY 1980 70,004 0.32% 82.5% 401,983 0.42% 7 6.96 BOCES
Boulevard
1045 James Street 1 Syracuse, NY 1992 50,000 0.23% 100.0% 825,996 0.87% 1 16.52 Royal Indem-
nity Co.
250 South Clinton Street 1 Syracuse, NY 1991 182,576 0.84% 100.0% 3,079,136 3.23% 12 16.86 AT&T
Communica-
tions
308 Maltbie Street 1 Syracuse, NY 1992 26,221 0.12% 100.0% 338,384 0.35% 3 12.91 First Fortis
Insurance Co
400 West Division Street 1 Syracuse, NY 1992 38,051 0.17% 100.0% 629,504 0.66% 3 16.54 Royal Indem-
nity Co.
507 Franklin Square 1 Syracuse, NY 1991 71,449 0.33% 100.0% 1,240,982 1.30% 2 17.37 Unity Mutual
Life
One Clinton Square 1 Syracuse, NY 1991 39,609 0.18% 82.7% 468,355 0.49% 2 14.30 Fleet Bank
One Park Place 1 Syracuse, NY 1983 293,414 1.35% 86.1% 3,902,143 4.09% 15 15.45 Hartford
Fire
Insurance
------- --------- ------ ------ ----------- ------- ----- --------
SUBTOTAL/WEIGHTED AVG.
NY OFFICE 20 1,394,905 6.40% 93.4% $19,685,091 20.64% 102 $ 15.11
======= ========= ====== ====== =========== ======= ===== ========
TOTAL/WEIGHTED AVG.
OFFICE PROPERTIES 22 1,514,633 6.95% 93.2% $21,484,681 22.53% 122 $ 15.21
======= ========= ====== ===== ========== ========= ====== ========
OTHER:
88 Mary Street 1 Patterson, St. Joseph's
NJ 1976 114,000 0.52% 100.0% $ 525,000 0.55% 1 $ 4.61 Hospital
------- ---------- ------ ------ ----------- ------- ------ --------
GRAND TOTAL/WEIGHTED
AVERAGE 125 21,802,930 100.0% 93.9% $95,373,794 100.0% 262 $ 4.66
======= ========== ====== ====== =========== ======= ====== ========
----------
(1) Annualized rent, as used throughout this report,
represents the total contractual base rent under existing leases for
the month ended December 31, 2001, before any abatements and excluding
any expense reimbursements, multiplied by 12.
(2) Annualized rent per leased square foot, as used throughout this
report, represents annualized rent, as described in footnote (1)
above, divided by the square footage of the property.
(3) These properties are owned by the CalEast Joint Venture.
(4) This property was sold subsequent to December 31, 2001.
17
PRINCIPAL TENANTS
The following table sets forth information regarding the leases with
respect to the current ten (10) largest tenants at the Properties, based on the
Annualized Rent to be received from such tenants as of December 31, 2001.
% OF TOTAL
TERM % OF TOTAL PORTFOLIO
REMAINING SQUARE PORTFOLIO ANNUALIZED RENT ANNUALIZED
TENANT(1) PROPERTY IN MONTHS FEET SQUARE FEET (IN 000'S) RENT
---------- ------------ ---------- ------- ----------- -------------- ------------
The Home Depot, Inc. (2) 66 Station Road 25 812,739 3.7% $ 3,251 3.4%
Brightpoint, Inc. 6402 Corporate Drive
501 Airtech Drive 54-219 658,348 3.0% 2,811 2.9%
Exel Logistics, Inc. 2404 Gettysburg Road
75 Pleasant View
811 Spangler Road
420 Salem Church Road 1-48 855,368 3.9% 2,733 2.9%
Franklin Storage, Inc. 2294 Molly Pitcher
Highway
1465 Nitterhouse
Drive 10-16 690,400 3.2% 2,715 2.8%
APL Logistics, Inc. 400 Cabot Drive 49 585,510 2.7% 2,576 2.7%
Herrod Distribution (3) 301-321 Herrod
Boulevard 14 610,949 2.8% 2,291 2.4%
Belkin Components, Inc. 558 Airtech Park 111 798,096 3.7% 2,291 2.4%
Cosmetic Essence, Inc. 21 Cranbury Road 84 483,507 2.2% 1,987 2.1%
Coca-Cola Bottlers of New 118 Moonachie
Jersey (2) 37 243,751 1.1% 1,950 2.0%
Poly-Foam International, 1311 Majestic Drive
Inc 1411 Majestic Drive
300 Enterprise Drive
600, 605 and 670
Hagerty Drive 83-148 669,871 3.1% 1,861 2.0%
------------ --------- ------------ ----------- ----------
TOTAL/WEIGHTED AVERAGE 62 6,408,539 29.4 $ 24,466 25.7%
============ ========= ============= =========== =========
----------
(1) This list is not intended to be representative of the Company's tenants as a
whole.
(2) These properties are owned by the CalEast Joint Venture.
(3) This lease was renewed in January 2002. The renewal extended the expiration
of this lease from March 2003 to February 2007.
18
LEASE EXPIRATIONS
The following table sets forth the annual lease expirations and certain
other information for leases existing at the Properties as of December 31, 2001
for the industrial and office portfolios (assuming that no tenants exercise
renewal or cancellation options and that there are no tenant bankruptcies or
other tenant defaults):
INDUSTRIAL PORTFOLIO
ANNUALIZED RENT
SQUARE FOOTAGE PERCENTAGE OF ANNUALIZED RENT PER LEASED SQUARE
YEAR OF NUMBER OF OF ANNUALIZED OF FOOT OF EXPIRING
LEASE EXPIRATION LEASES EXPIRING EXPIRING LEASES BASE RENT EXPIRING LEASES LEASES
---------------- --------------- --------------- --------- --------------- -----------------
2002 36 2,969,326 14.24% $ 10,448,629 $ 3.52
2003 22 2,680,084 13.09% 9,604,069 3.58
2004 22 2,644,509 14.21% 10,428,364 3.94
2005 16 1,513,081 9.26% 6,793,138 4.49
2006 9 2,033,841 10.66% 7,817,283 3.84
2007 8 1,870,997 10.56% 7,749,048 4.14
2008 9 1,487,593 8.14% 5,975,408 4.02
2009 6 1,155,595 6.37% 4,676,493 4.05
2010 1 239,718 1.46% 1,070,330 4.46
2011 5 1,301,173 5.40% 3,958,992 3.04
2014 3 413,244 2.56% 1,881,696 4.55
2018 1 139,703 0.60% 441,462 3.16
2019 1 495,740 3.43% 2,519,201 5.08
--------------- --------------- ------------- ----------------- -----------------
Total Industrial 139 18,944,604 100.00% $ 73,364,115 $ 3.87
=============== =============== ============= ================= =================
OFFICE PORTFOLIO
ANNUALIZED RENT
SQUARE FOOTAGE PERCENTAGE OF ANNUALIZED RENT PER LEASED SQUARE
YEAR OF NUMBER OF OF ANNUALIZED OF FOOT OF EXPIRING
LEASE EXPIRATION LEASES EXPIRING EXPIRING LEASES BASE RENT EXPIRING LEASES LEASES
---------------- --------------- --------------- --------- --------------- -----------------
2002 18 147,798 10.09% $ 2,221,341 $ 15.03
2003 23 220,360 15.08% 3,319,293 15.06
2004 23 273,150 14.33% 3,153,261 11.54
2005 21 411,256 26.92% 5,925,201 14.41
2006 22 194,216 13.66% 3,007,265 15.48
2007 4 46,148 3.51% 772,243 16.73
2008 3 122,580 8.20% 1,803,919 14.72
2009 1 1,896 0.13% 28,440 15.00
2010 3 41,594 3.02% 664,731 15.98
2011 3 39,392 3.39% 747,173 18.97
2013 1 1,078 0.09% 20,311 18.84
2014 1 26,700 1.57% 346,503 12.98
--------------- --------------- ------------- --------------- -----------------
Total Office 123 1,526,168 100.00% $ 22,009,679 $ 14.42
=============== =============== ============= =============== =================
ITEM 3. LEGAL PROCEEDINGS.
Neither the Company nor the Properties are presently subject to any
litigation, nor is the Company aware of any threatened 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
19
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Shares were traded on the American Stock Exchange
("AMEX") under the symbol "KTR" until May 9, 2001 when the Company become a
registrant on the New York Stock Exchange ("NYSE") under the symbol "KTR". The
high and low last sale prices as reported by the AMEX or the NYSE for each
calendar quarter from January 1, 2000 to December 31, 2001 and the dividends
with respect to the Company's operations for each such calendar quarter were as
follows:
SALES PRICE
----------------------------------
DIVIDENDS
PER
YEAR/QUARTER HIGH LOW COMMON SHARE
------------ ---- --- ------------
2001:
1st Quarter ......................................... $ 14.12 $ 12.75 $ 0.3100
2nd Quarter ......................................... $ 13.60 $ 11.77 $ 0.3100
3rd Quarter ......................................... $ 14.24 $ 11.01 $ 0.3200
4th Quarter ......................................... $ 13.25 $ 11.78 $ 0.3200
2000:
1st Quarter ......................................... $ 15.38 $ 12.38 $ 0.2950
2nd Quarter ......................................... $ 13.75 $ 12.50 $ 0.2950
3rd Quarter ......................................... $ 14.44 $ 12.00 $ 0.3100
4th Quarter ......................................... $ 13.06 $ 12.31 $ 0.3100
As of December 31, 2001, the Company had 163 shareholders of record and
believes that it has in excess of 4,800 beneficial shareholders.
The Company currently anticipates that comparable cash dividends will
continue to be paid in the future; however, the payment and the amount of the
dividends is at the discretion of the Board of Trustees and will depend on
numerous factors including the Company's cash flow and its capital and annual
distribution requirements under the REIT provisions of the Internal Revenue Code
of 1986, as amended, and other factors that the Board of Trustees deems
relevant.
The Company issued 18,364 Common Shares during 2001 and 17,172 Common
Shares during 2002, in aggregate, to its trustees as compensation for services
provided to the Company in their capacity as members of the Board of Trustees
during the period from the fourth quarter of 1999 through the fourth quarter of
2001.
20
ITEM 6. SELECTED AND SUMMARY FINANCIAL DATA.
The following table sets forth selected financial data for the Company for
each of the five years in the period ended December 31, 2001. The information
set forth below should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations and the consolidated
financial statements and notes thereto appearing elsewhere in this annual
report.
(IN 000'S, EXCEPT FOR PER SHARE DATA)
YEARS ENDED DECEMBER 31,
2001 2000 1999 1998 1997
----------- ------------ ----------- ----------- ------------
OPERATING DATA
Total revenue $ 109,784 $ 123,101 $ 84,526 $ 41,028 $ 8,197
Property operating expenses 8,923 10,696 8,580 5,111 2,736
Real estate taxes 9,894 11,109 6,516 2,582 376
General and administrative expenses 7,983 7,523 6,698 1,880 732
Depreciation and amortization 24,520 21,128 16,359 6,911 909
Interest expense 34,187 46,566 30,307 14,539 3,134
Provision for asset valuation -- 11,300 -- -- --
Buy out of employment agreements,
options and warrants -- -- -- -- 3,203
----------- ------------ ----------- ----------- ------------
Total operating expenses 85,507 108,322 68,460 31,023 11,090
Equity in income/(losses) from
equity method investments 1,123 (73) (62) (1,167) 404
Gains on sales of assets 9,142 87 1,284 11,952 4,608
----------- ------------ ----------- ----------- ------------
Income before minority interest,
extraordinary item and distributions
to preferred unitholders and net
income allocated to preferred
shareholders 34,542 14,793 17,288 20,790 2,119
Minority interest (5,650) (649) (5,592) (9,342) (876)
Extraordinary item-loss from debt
extinguishment (2,466) -- -- (220) --
Distributions to preferred
unitholders and net income allocated
to preferred shareholders (12,092) (13,248) (5,368) (55) --
----------- ------------ ----------- ----------- ------------
Net income allocated to common
shareholders $ 14,334 $ 896 $ 6,328 $ 11,173 $ 1,243
=========== ============ =========== =========== ============
Distributions paid on Common Shares $ 16,781 $ 14,345 $ 8,375 $ 6,308 $ 985
=========== ============ =========== =========== ============
PER SHARE DATA
Net income per Common Share before
extraordinary item - basic $ 1.10 $ 0.10 $ 0.83 $ 1.79 $ 0.92
Net income per Common Share - basic $ 0.99 $ 0.10 $ 0.83 $ 1.77 $ 0.92
Net income per Common Share before
extraordinary item - diluted $ 1.05 $ 0.09 $ 0.80 $ 1.75 $ 0.88
Net income per Common Share - diluted $ 0.93 $ 0.09 $ 0.80 $ 1.73 $ 0.88
Distributions paid per Common Share $ 1.26 $ 1.21 $ 1.12 $ 0.97 $ 0.87
Weighted average number of shares
outstanding - basic EPS (1) 14,518,099 9,239,591 7,622,010 6,299,281 1,347,297
Weighted average number of shares
outstanding - diluted EPS 21,410,023 16,898,872 14,810,817 11,908,761 2,404,004
21
(IN 000'S, EXCEPT FOR PER SHARE DATA)
YEARS ENDED DECEMBER 31,
2001 2000 1999 1998 1997
----------- ------------ ----------- ----------- ------------
OTHER DATA
Funds from Operations (2) $ 50,821 $ 47,304 $ 32,533 $ 15,919 $ 1,849
Cash flow provided from (used in):
Operating activities 45,788 43,305 35,902 16,020 2,098
Investing activities 16,755 (62,864) (200,444) (260,733) (3,145)
Financing activities (64,236) 19,083 165,439 230,288 17,377
BALANCE SHEET DATA
Undepreciated book value of real
estate $ 817,977 $ 957,598 $ 860,336 $ 542,869 $ 155,063
Net investment in real estate 770,785 917,040 837,940 536,002 152,108
Total assets 827,513 962,687 875,076 558,974 180,955
Total liabilities 455,591 638,753 543,415 356,225 89,662
Total minority interest 109,090 157,005 145,931 95,705 39,364
Total shareholders' equity 262,832 166,929 185,730 107,044 51,929
OTHER DATA
Total leaseable square footage of
properties at end of year 21,802,930 20,397,410 18,652,284 11,928,620 2,418,590
Number of properties at the end of year 125 129 133 99 21
Percentage leased at end of year 94% 95% 99% 98% 95%
----------
(1) Basic weighted average number of shares includes only Common Shares
outstanding during the year and the effect of any options outstanding
which were dilutive and excludes OP Units.
(2) 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 restructuring and
sales of property, plus depreciation and amortization, and after
adjustments for unconsolidated partnerships and joint ventures.
Adjustments for unconsolidated partnerships and joint ventures are
calculated to reflect FFO on the same basis. Effective January 1, 2000,
NAREIT issued certain clarifications to its definition of FFO. The
Company has adopted these clarifications as of January 1, 2000 and has
retroactively restated FFO for all years presented in the table above
in order to present FFO in accordance with these clarifications.
Management believes the presentation of FFO is a useful disclosure as a
general measure 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. FFO does not represent cash
generated from operating 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
the consolidated financial statements appearing elsewhere herein. This annual
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 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 which do not relate to historical matters identify
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, there can be no assurance that these expectations will be realized.
As a result, the Company's actual results
22
could materially differ 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 of
economic and other conditions in the market area on cash flows and values; the
need to renew leases or relet space upon the expiration of current leases; the
risks associated with the construction and development of properties; the
ability of a property to generate revenues sufficient 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
Company's $125,000,000 senior unsecured revolving credit facility (the "Credit
Facility") may increase.
OVERVIEW
The Company has achieved significant growth since the transactions that
occurred in December 1997, which resulted in the reorganization of the
Company as a real estate investment trust ("REIT") focused primarily on the
acquisition and development of industrial properties and to a lesser extent
office properties. In 2001, the Company continued on its strategic plan to
expand its industrial "big-box" warehouse portfolio in its core markets of
Central/Northern New Jersey, Central Pennsylvania and Indianapolis, Indiana
while selling non-core industrial and office properties. At December 31,
2001, the Company owned interests in 125 properties which aggregated 21.8
million square feet consisting of 102 or 20.2 million square feet of
industrial properties, 22 or 1.5 million square feet of office properties and
an investment in a direct financing lease.
2001 HIGHLIGHTS
The significant highlights of 2001 were as follows:
- Completed the sale of 3.5 million square feet or $195 million of
industrial properties, including the $104 million of properties sold to
the CalEast Joint Venture, and 853,823 square feet or $93 million of
office properties at a net aggregate gain of $9.1 million. This resulted
in the Company's owned office square footage decreasing by 38% from 2.4
million square feet at December 31, 2000 to 1.5 million at December 31,
2001.
- In March 2001, completed the formation of the CalEast Joint Venture and
seeded the venture with $104 million of industrial assets. The purpose of
this venture is to acquire $300 million of industrial assets in New
Jersey.
- Acquired 3.7 million square feet or $134 million of industrial
properties in its core markets, including 812,739 square feet or $32
million acquired by the CalEast Joint Venture, thereby increasing the
square footage of industrial assets owned in its core markets by
approximately 19% from 12.0 million square feet at December 31, 2000 to
14.3 million square feet at December 31, 2001.
- Completed the construction of approximately 1.4 million square feet of
big box, industrial facilities at an aggregate cost of approximately $47
million and leased approximately 56% of this space.
- Raised $124 million of common equity through the sale of an aggregate of
10.4 million shares in two offerings in April and August of 2001. The net
proceeds of these offerings were used to repurchase $40 million of
preferred equity and 2.9 million Common Shares and OP Units and to repay
approximately $56 million of debt.
- Reduced the Company's debt to undepreciated assets and debt to market
capitalization ratios from 61.5% and 63.3% at December 31, 2000,
respectively, to 49.7 % and 50.6% at December 31, 2001.
- Reduced the Convertible Preferred Stock and Convertible Preferred Units
component of the Company's equity from $140 million to $100 million or by
29% during 2001. Improved interest and fixed charge coverage ratios from
2.0 and 1.5 for the fourth quarter of December 31, 2000, respectively, to
2.8 and 2.1 for the quarter ended December 31, 2001, respectively.
- In December 2001, replaced the Company's $150 million secured revolving
credit facility with the $125 million unsecured Credit Facility, which
matures in December 2004.
23
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 AS COMPARED TO YEAR ENDED DECEMBER 31, 2000
Net income for the year ended December 31, 2001 was $14.3 million or $.93
per diluted share compared to net income of $896,000 or $.09 per diluted share
for 2000. The increase in net income was attributed to the $11.3 million asset
valuation provision recorded in 2000 for certain properties which the Company
sold in January 2001 and the $9.1 million in gains recorded in 2001 from other
property sales. Excluding the impact of the asset valuation provision recorded
in 2000, asset sales in both 2001 and 2000, the extraordinary item recorded in
2001 and the $2.7 million catch-up depreciation adjustment, discussed below, net
income for the year ended December 31, 2001 would have been $11.5 million or
$.75 per diluted share as compared to net income of $7.4 million or $.76 per
diluted share for 2000.
Revenues decreased by $13.3 million, or 10.8%, to $109.8 million from
$123.1 million for the year ended December 31, 2001 as compared to 2000,
primarily as a result of $288 million of property dispositions in 2001.
Property operating expenses and real estate tax expense in aggregate
decreased by $3.0 million or 13.7% as compared to 2000 primarily as a result
of property dispositions. Operating margins (revenue less property operating
expenses and real estate tax expenses) for 2001 were 82.9% and were slightly
higher than 2000's operating margins of 82.3% primarily as a result of the
Company's increased ownership of industrial properties which carry a higher
operating margin.
General and administrative expenses increased by approximately $500,000 or
6.7%, to $8.0 million in 2001 from $7.5 million in 2000. This increase was
primarily a result of the Company's writeoff of approximately $300,000 of costs
for development projects and other transactions in which the Company decided not
to proceed.
Depreciation and amortization increased by $3.4 million or 16%, to $24.5
million in 2001 as compared to $21.1 million in 2000, primarily as a result of a
cumulative catch up depreciation adjustment of $2.7 million recorded in the
first quarter of 2001 for assets held for sale which were placed back in service
as operating assets in the first quarter of 2001. Increases in the amortization
of tenant improvements and deferred leasing costs in 2001 were generally offset
by decreased depreciation charges as a result of property dispositions in 2001.
Interest expense decreased to $34.2 million in 2001 from $46.6 million in
2000, a decrease of $12.4 million or 27%. This decrease is primarily the result
of asset sales, the decrease in the variable interest rate for the Credit
Facility which accounted for approximately $2.1 million of this decrease, and
the Company's April 30, 2001 Common Share offering which resulted in the
repayment of approximately $56 million in Credit Facility and other mortgage
debt.
Equity in income from the Company's joint venture investments was $1.1
million in 2001 as compared to a loss of $73,000 in 2000. This increase in
earnings from equity method investments is a result of the 3 Points Joint
Venture in Airtech Park which was completed and occupied in the first quarter of
2001, in addition to the CalEast Joint Venture which began in March 2001.
Gains on sales of assets increased to approximately $9.1 million in 2001
from $87,000 in 2000. This increase is a result of 27 properties that were sold
in 2001 at aggregate selling price of $288 million compared to the sales of 12
properties for an aggregate selling price of $50 million in 2000. The majority
of the gain recorded in 2001 is the result of the sale of the 200 Industrial
facility located in Teterboro, New Jersey in September 2001 which resulted in a
gain of $9.6 million.
24
SEGMENTS
Revenue and property level operating income in the industrial and office
segments declined by $7.9 million and $6.7 million, or 9.7% and 16.4%,
respectively, from 2000. These decreases were offset by an increase of $1.4
million in other income as a result of increases in interest income from
uninvested proceeds from asset sales, fees from the CalEast Joint Venture and
reimbursements from the Management Company.
The decrease in revenue and property net operating income in the industrial
segment during 2001 in comparison to 2000 is a result of the Company's asset
sales in 2001 and in the latter half of 2000 and decreased occupancy in certain
markets. The primary reason for the decrease in revenue and property level net
operating income in the industrial segment was a result of the sale of assets in
New Jersey to the CalEast Joint Venture in March 2001. The Indiana industrial
segment realized a 27% increase in net operating income for 2001 as compared to
2000 primarily as a result of lease termination income. Decreases in revenue and
property level operating income in 2001 in the Ohio, Pennsylvania, New York and
South Carolina industrial markets are primarily the result of decreased
occupancy in 2001. Property level operating margins in the industrial segment
(excluding interest expense, general and administrative expense, and
depreciation expense), were 88.5% for 2001 and 87.7% in 2000.
The decrease in revenue and property level net operating income in the
office segment is primarily the result of sales of four of the Properties in the
Pennsylvania office segment in January 2001 along with the sale of the New
Jersey office assets in November 2001. Revenues and property level net operating
income decreased in the New York office segment as a result of a decrease in
economic occupancy to 95.4% from 96.9% in 2000.
SAME STORE PROPERTIES
The Same Store Properties, which are properties owned since September 30,
2000, consist of 85 industrial and 22 office properties aggregating
approximately 18.0 million square feet. The property level operating income from
the Same Store Properties represented approximately 83.0% of the Company's
overall property level net operating income for the year ended December 31,
2001. The Company considers its Core Same Store Properties to be its same store
industrial properties located within the New Jersey, Pennsylvania and Indiana
markets. The Company considers all other same store properties to be Non-Core
Same Store Properties. The Company has 36 Core Same Store Properties which
aggregate approximately 10.6 million square feet and represent approximately
42.2% of the Company's property level net operating income for the year ended
December 31, 2001.
25
Set forth below is a schedule comparing the cash basis property level
net operating income (without straight line rental income) for the Same Store
Properties for the years ended December 31, 2001 and 2000 (Dollars in 000's).
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------------------
2001 2000 % CHANGE
----------- -------------- --------------
ALL SAME STORE PROPERTIES
Revenue
Rental revenue $ 81,637 $ 82,550 (1.1%)
Tenant reimbursements 11,877 11,593 2.4%
----------- ----------- -----------
Total rental revenue $ 93,514 $ 94,143 (0.7%)
=========== =========== ===========
Operating Expenses
Property operating expenses $ 8,774 $ 8,291 5.8%
Real estate taxes 9,212 8,770 5.0%
----------- ----------- -----------
Total operating expenses $ 17,986 $ 17,061 5.4%
----------- ----------- -----------
Net operating income $ 75,528 $ 77,082 (2.0%)
=========== =========== ===========
Physical occupancy at year end 93.1% 95.0% (1.9%)
=========== =========== ===========
Economic occupancy 94.2% 97.0% (2.8%)
=========== =========== ===========
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------------------
2001 2000 % CHANGE
---------------------------- --------------
CORE SAME STORE PROPERTIES
Revenue
Rental revenue $ 38,551 $ 37,600 2.5%
Tenant reimbursements 5,230 4,959 5.5%
----------- ----------- -----------
Total rental revenue $ 43,781 $ 42,559 2.9%
=========== =========== ===========
Operating Expenses
Property operating expenses $ 1,254 $ 1,135 10.5%
Real estate taxes 4,112 3,923 4.8%
----------- ----------- -----------
Total operating Expenses $ 5,366 $ 5,058 6.1%
----------- ----------- -----------
Net operating income $ 38,415 $ 37,501 2.4%
=========== =========== ===========
Physical occupancy at year end 97.1% 98.0% (0.9%)
=========== =========== ===========
Economic occupancy 98.1% 99.6% (1.5%)
=========== =========== ===========
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------------------
2001 2000 % CHANGE
----------- -------------- --------------
NON-CORE SAME STORE PROPERTIES
Revenue
Rental revenue $ 43,086 $ 44,950 (4.1%)
Tenant reimbursements 6,647 6,634 0.2%
----------- ----------- -----------
Total rental revenue $ 49,733 $ 51,584 (3.6%)
=========== =========== ===========
Operating Expenses
Property operating expenses $ 7,520 $ 7,156 5.1%
Real estate taxes 5,100 4,847 5.2%
----------- ----------- -----------
Total operating expenses $ 12,620 $ 12,003 5.2%
----------- ----------- -----------
Net operating income $ 37,113 $ 39,581 (6.2%)
=========== =========== ===========
Physical occupancy at year end 86.6% 89.1% (2.5%)
=========== =========== ===========
Economic occupancy 91.0% 95.0% (4.0%)
=========== =========== ===========
26
Property level net operating income for the year ended December 31, 2001
for the Same Store Properties decreased to approximately $75.5 million from
$77.1 million at December 31, 2000. This overall decrease of approximately $1.6
million or 2.0% is primarily due to a decrease in rental revenue of
approximately 0.7% and an increase in operating expenses of 5.4%. Rent revenue,
before reimbursement revenue, decreased by $913,000 or 1.1% during the period,
as a result of a 2.8% decrease in economic occupancy, from 97.0% in 2000 to
94.2% in 2001. This decrease in economic occupancy is primarily related to the
South Carolina, Ohio, Pennsylvania and New York industrial properties and two
New York office properties. Operating expenses for the Same Store Properties
increased by approximately $925,000 or 5.4%. This increase was primarily related
to increases in repair and maintenance expenses, increased utility costs due to
the expiration of certain abatements in the New York office properties, and
costs associated with increased vacancy. Certain of these cost increases in
operating expenses were 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 net operating income in the Core Same Store Properties increased by
approximately $914,000 or 2.4% as a result of a $1.2 million or 2.9% increase in
rental revenue which was offset by a 6.1% increase in operating expenses. The
increase in rent revenue was net of a 1.5% decrease in economic occupancy in
these properties. If occupancy for these properties was consistent with 2000,
the Same Store results for the Core Same Store Properties would have increased
by 4.0%. The increase in rental revenue was primarily related to properties in
the New Jersey market and the decrease in occupancy was primarily related to
1440 Sheffler Drive, which is located in the Pennsylvania market, which has been
only 50% occupied since April 2001. The increase in operating expenses is
primarily the result of increased vacancy which accounted for 18% of the total
increase in operating expenses over 2000.
The net operating income in the Non-Core Same Store Properties decreased by
approximately $2.5 million or 6.2% as a result of a $1.9 million or 3.6%
decrease in rental revenue and a $617,000 or 5.2% increase in property operating
expenses. The decrease in rental revenue was a result of a 4.0% decrease in
economic occupancy as a result of vacancy in the South Carolina properties, the
Square Drive property in Ohio, the Steelway Boulevard industrial property in New
York and two New York office properties. If economic occupancy for these
properties was consistent with 2000, Same Store results for the Non-Core Same
Store Properties would have decreased by 1.4%. The 5.1% increase in operating
expenses was a result of increases in repair and maintenance expenses and
utility costs, as a result of the expiration of abatements, in the New York
office properties. A portion of these increases in operating expenses was
reimbursed by tenants.
27
YEAR ENDED DECEMBER 31, 2000 AS COMPARED TO YEAR ENDED DECEMBER 31, 1999
Net income for the year ended December 31, 2000 was $896,000 or $.09 per
diluted share compared with net income of $6.3 million or $.80 per diluted share
for 1999. The decrease in net income was attributed to the $11.3 million asset
valuation provision recorded in the third quarter of 2000 related to certain
properties which the Company was marketing for sale. During 1999 the Company
recorded a gain from an asset sale of $1.3 million as compared to gains on asset
sales of $87,000 in 2000. Excluding the impact of asset sales and the asset
valuation provision recorded in 2000, net income for the year ended December 31,
2000 would have been $7.4 million or $.76 per diluted share as compared to net
income of $5.6 million or $.72 per diluted share for 1999. This increase in
income before asset sales and the asset valuation provision is a result of
acquisition activity in the third quarter of 1999 and during 2000 which
primarily consisted of the RMIT portfolio.
Revenues increased to $123.1 million from $84.5 million, or by $38.6
million, or 45.7% for the year ended December 31, 2000 as compared to 1999 as a
result of property acquisitions in 2000 and the third quarter of 1999. In
addition, straight line rental income increased by approximately $1.9 million,
from $1.9 million in 1999 to $3.8 million in 2000.
Property operating expenses, real estate tax expense and management fee
expense in aggregate increased by $6.9 million or 38.1% over 1999 primarily as a
result of property acquisitions in 2000 and the third quarter of 1999. Operating
margins (revenue less property operating expenses and real estate tax expenses)
for 2000 were 82.3% and were consistent with 1999 operating margins of 82.1%.
General and administrative expenses increased by approximately $600,000, to
$4.3 million in 2000 from $3.7 million in 1999. This increase was a result of
the Company's recording a bad debt provision of $250,000 in 2000 along with
increases in professional fees and other costs associated with the growth of the
Company. General and administrative expenses as a percentage of revenue
decreased in 2000 to 3.5% as compared to 4.3% in 1999.
Depreciation and amortization increased by $4.7 million or 29%, to $21.1
million in 2000 as compared to $16.4 million in 1999, as a result of property
acquisitions in 2000 and the third quarter of 1999.
Interest expense increased to $46.6 million in 2000 from $30.3 million in
1999, an increase of $16.3 million or 53.8%, primarily as a result of additional
indebtedness incurred to finance the Company's acquisitions in 2000 and the
third quarter of 1999. In addition, a 1.50% increase in the average interest
rate for the Company's Credit Facility during 2000, as compared to 1999,
resulted in an increase in interest expense of approximately $2.0 million during
2000 as the average interest rate under the Credit Facility was 8.7% in 2000 and
7.2% in 1999. This increase was offset by increased capitalization of interest
expense of approximately $1.9 million, from $513,000 in 1999 to $2.4 million in
2000, due to increased investments in development projects.
Equity in losses from the Company's equity method investment in the
Management Company was a loss of $73,000 in 2000 as compared to a loss of
$62,000 in 1999.
Gains on sales of assets decreased by approximately $1.2 million to $87,000
in 2000 from $1.3 million in 1999.
28
SEGMENTS
Revenues and property net operating income increased over 70% in the
industrial segment during 2000 in comparison to 1999 as a result of the
Company's acquisition activity in 2000 and in the third quarter of 1999. The
square footage owned in the industrial segment increased by approximately 68.9%
since June 30, 1999 (from 10.6 million square feet at June 30, 1999 to 17.9
million square feet at December 31, 2000). The largest portion of this increase
in revenues and net operating income was related to the New Jersey industrial
segment as a result of the RMIT acquisition in September 1999 and the second
phase of this transaction which was completed in May 2000. Operating margins,
after operating expenses, real estate tax expense, and depreciation expense,
were 65.2% for 2000 and were consistent with 1999 during which operating margins
were also 65.2%.
Revenue and net operating income in the office segment increased by
approximately $4.6 million in 2000 as compared to 1999. The most significant
increases were in the Pennsylvania and New York office segments. These increases
were a result of an 80,000 square foot office building in Allentown,
Pennsylvania which was completed and occupied in the second quarter of 2000 and
the Company's acquisition of a 293,413 square foot building in Syracuse, New
York in July 1999. In addition, depreciation expense decreased in 2000 as
compared to 1999 as a result of certain office assets being designated effective
January 2000 as held for sale, accordingly, depreciation was not recorded on
these assets in 2000.
Revenue and property net operating income in the other properties segment
decreased as a result of the sale of the Company's only retail asset, Urban
Farms Shopping Center, in March 1999.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Net cash provided by operating activities was $45.8 million in 2001 as
compared to $43.3 million in 2000, an increase of 5.7%. This represents the
Company's primary source of liquidity to fund distributions to shareholders and
unitholders in the Operating Partnership and to a certain extent, recurring
costs associated with the re-leasing and renovation of the Company's properties.
Net cash provided by investing activities was $16.8 million in 2001 as
compared to net cash used in 2000 of $62.9 million. The increase in cash
provided is primarily the result of increased sales of assets in 2001 as
compared to 2000. The net proceeds from asset sales in 2001 and 2000 were
$157.8 million and $49.4 million, respectively.
Net cash used in financing activities in 2001 was $64.2 million as
compared to net cash provided by financing activities in 2000 of $19.1
million. The increase in net cash used in 2001 as compared to 2000 is a
result of increased debt repayments as a result of the increase in asset
sales.
29
CAPITALIZATION
STOCK AND OP UNIT ISSUANCES
In 2001, the Company issued $126 million, in aggregate, for Common Share
offerings and OP Unit issuances which were used to fund repurchases of
outstanding equity securities of the Company and to reduce outstanding debt.
These proceeds were generated from the following offerings:
- In April 2001, the Company issued 7.5 million Common Shares priced at
$12.20 per share. The $86 million in net proceeds from this offering
were used to pay down the Credit Facility and other debt by $56 million,
and to repurchase 1.7 million Common Shares and 765,807 OP Units from
Crescent Real Estate Equities, Inc.
- In June 2001, the Operating Partnership issued $650,000 in OP Units at
$15.45 per OP Unit, as consideration for a 50% interest in a joint
venture which constructed an 800,000 square foot distribution facility
at Airtech Park in Indianapolis, Indiana.
- In August 2001, the Company issued 2.5 million Common Shares at a price
of $13.65 per share. The net proceeds of $32.2 million were used to
repurchase all of its Series B convertible preferred shares and all of
the Series C preferred units owned by affiliates of Reckson Associates
Realty Corp. ("Reckson"). Scott Rechler, a trustee of the Company, is
Co-Chief Executive Officer of Reckson. In September 2001 the underwriter
exercised the overallotment option on this offering for an additional
375,000 Common Shares at $13.65 per share. The net proceeds from the
overallotment were used to repurchase 375,000 Common Shares from
affiliates of Francesco Galesi, a trustee of the Company, at a price of
$12.75 per share.
CREDIT FACILITY AND OTHER DEBT
In December 2001, the Company entered into a three-year $125 million
unsecured credit facility (the "Credit Facility") with a group of commercial
lenders led by Wells Fargo Bank, N.A. This facility replaced the $150 million
secured facility which was scheduled to mature in April 2002. This Credit
Facility can be used to fund acquisitions, capital improvements, development
activities and working capital needs. The Credit Facility bears interest at a
variable rate at the Company's option of either LIBOR plus 1.625% or the prime
rate. The LIBOR interest rate is based on a sliding scale based on the Company's
leverage. The scale ranges from LIBOR + 1.35% to LIBOR + 1.875%. The Company's
outstanding borrowings under this Credit Facility were $93.0 million at December
31, 2001 at an interest rate of 3.56%. The Company may also issue letters of
credit under the Credit Facility for up to 10% of the total facility amount.
As of December 31, 2001, the Company had approximately $321.7 million of
fixed rate mortgage notes outstanding, at a weighted average interest rate of
7.8% and at a weighted average maturity of 5.4 years. Approximately $20.7
million of this mortgage debt is scheduled to mature in 2002. At December 31,
2001, the Company's Total Market Capitalization was approximately $859.6 million
and the Company's consolidated debt to undepreciated assets ratio was 49.7%, as
compared to a market capitalization of $973.6 million and a consolidated debt to
undepreciated assets ratio of 61.5% at December 31, 2000.
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 also has a commitment to fund
30
approximately $12 million of additional equity to the CalEast Joint Venture.
This equity will be funded as the joint venture acquires additional
properties. The Company jointly and severally guaranteed a $15.5 million
recourse contruction loan of 4 Points Associates, LLC, a joint venture with
Browning Investments, Inc., which is constructing an 800,000 square foot
distribution facility in Airtech Park in Indianapolis, Indiana. In connection
with the development of Airtech Park, the Company has also guaranteed a $3.0
million land development loan of a Browning affiliate for certain site
improvements to Airtech Park. The Company does not anticipate that any
amounts will need to be funded by the Company as a result of these loan
guarantees. The Company expects to meet its short-term (one year or less)
liquidity requirements generally through working capital, net cash provided
by operating activities, availability under the Credit Facility and through
proceeds from future asset sales. In 2001, the Company consummated sales of
27 properties for $288.0 million. The Company believes all of the sources
discussed above will be available in 2002 in order to fund short-term
liquidity needs.
During 2001 and 2000, the Company paid recurring distributions to common
shareholders and unitholders totaling $1.26 and $1.21 per Common Share or OP
Unit, respectively, which aggregated $25.6 million and $20.3 million,
respectively.
The Company's 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 its office and certain
non-core industrial assets, and (iii) the sale or contribution of certain of its
wholly-owned 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 regarding 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 depository shares representing preferred
stock, with an aggregate value of up to $500 million. As of December 31, 2001,
the Company has issued approximately $150.5 million of securities under this
Registration Statement.
The Company believes that its available cash and cash equivalents and cash
flows from operating activities together with cash available from borrowings and
ability to access other sources of capital, will be adequate to meet its capital
and liquidity needs in both the short and the long-term.
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 restructuring and sales of property, plus depreciation and amortization,
and after adjustments for unconsolidated partnerships and joint ventures.
Adjustments for unconsolidated partnerships and joint ventures are calculated to
reflect FFO on the same basis. Effective January 1, 2001, NAREIT issued certain
clarifications to its definition of FFO. The Company has adopted these
clarifications as of January 1, 2000 and has retroactively restated FFO for 1999
as presented in the tables below.
Management believes the presentation of FFO and Funds Available for
Distribution ("FAD") are useful disclosures as general measures of its
performance in the real estate industry, although the Company's FFO and FAD may
not necessarily be comparable to similarly titled measures of performance for
other REITs. FFO and FAD do not represent cash generated from operating
activities in accordance with generally accepted accounting principles and are
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. FAD is defined as FFO less non-revenue producing capital
expenditures, tenant improvements, leasing commissions and straight-line rent
adjustments plus amortization of deferred financing costs and non-cash
compensation charges.
31
FFO, FAD and cash flow information for each of the three years in the
period ended December 31, 2001, are summarized in the following tables (in
000's):
2001 2000 1999(1)
---- ---- -------
FUNDS FROM OPERATIONS: (UNAUDITED)
----------------------------------------------
Income before distributions to preferred
unitholders, minority interest of unitholders in
Operating Partnership, extraordinary item and
income allocated to preferred shareholders.... $ 34,542 $ 14,793 $ 17,288
(Less) Plus:
Provision for asset revaluation .............. -- 11,300 --
Gains on sales of real estate................. (9,142) (87) (1,284)
Depreciation and amortization related to
real estate............................... 24,520 21,128 16,359
Depreciation and amortization related to Joint
Ventures and Equity method Investments. 901 170 170
------------ ------------ ------------
Funds from Operations $ 50,821 $ 47,304 $ 32,533
============ ============ ============
(1) FFO was restated in accordance with NAREIT's clarification of the FFO
definition which was effective January 1, 2000.
2001 2000 1999
---- ---- ----
FUNDS AVAILABLE FOR DISTRIBUTION: (UNAUDITED)
Funds from Operations......................... $ 50,821 $ 47,304 $ 32,533
Capitalized expenditures...................... (1,670) (981) (1,074)
Tenant improvements........................... (2,037) (2,888) (2,070)
Leasing commissions........................... (2,289) (3,127) (2,097)
Amortization of deferred financing costs...... 1,789 1,798 1,473
Amortization of restricted stock awards....... -- 261 274
Straight line rent adjustments................ (2,960) (3,828) (1,866)
------------ ----------- ------------
Funds Available for Distribution.............. $ 43,654 $ 38,539 $ 27,173
============ ============ ============
CASH FLOW INFORMATION:
Cash flow provided by operating activities... $ 45,788 $ 43,305 $ 35,902
Cash flow provided by investing activities... 16,755 (62,864) (200,444)
Cash flow used in financing activities....... (64,236) 19,083 165,439
------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents............................... $ (1,693) $ (476) $ 897
============ ============= ============
Weighted average number of Common Shares and
Units and Preferred Shares and Units -
diluted(1) 29,261,054 25,495,601 18,363,330
============ ============ ============
----------
(1) For 2001, 2000 and 1999, this diluted share amount differs from the amount
used for earnings per share ("EPS") as it includes the Common Share
equivalents issuable upon conversion of Convertible Preferred Units and
Convertible Preferred Stock which are anti-dilutive for EPS reporting and
dilutive for FFO reporting.
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.
32
CRITICAL ACCOUNTING POLICIES
In the ordinary course of business, the Company has made a number of
estimates and assumptions relating to the reporting of results of operations
and financial condition in the preparation of its financial statements in
conformity with accounting principles generally accepted in the United
States. Actual results could differ significantly from those estimates under
different assumptions and conditions. The Company believes that the following
discussion addresses the Company's most critical accounting policies, which
are those that are most important to the portrayal of the Company's financial
condition and operating results and require management's most difficult and
subjective judgments, often as a result of the need to make estimates about
the effect of matters that are inherently uncertain.
LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," the Company assesses its assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of a respective
asset that the Company expects to hold and use may not be recoverable. In
performing the review for recoverability, the Company estimates the future cash
flows expected to result from the use of the asset and its eventual disposition
to determine if an impairment loss should be recognized. While the Company
believes that its estimates of future cash flows are reasonable, different
assumptions regarding such cash flows could materially affect its evaluations.
Estimates of fair value are based on quoted market prices in active markets or,
if quoted market prices are not available, the best information available in the
circumstances, such as the present value of estimated expected future cash
flows. If these estimates or their related assumptions change in the future, the
Company may be required to record impairment charges for these assets that were
not previously recorded.
REVENUE RECOGNITION
The Company's revenue is derived from rental income under leases that are
classified as operating leases. Revenue is recognized on the accrual basis of
accounting in accordance with Statement of Financial Accounting Standards No.
13, "Accounting for Leases." If the rental income under the lease is in excess
of one year in length, it is recognized using the straight-line method under
which contractual rent increases are recognized evenly over the lease term.
Reimbursements from tenants for expenses are accrued as revenue in the same
period the related expenses are incurred by the Company. Deferred rent revenue
represents rent collected from tenants in advance, which is generally for
periods not longer than one year. Deferred revenue is recognized as revenue when
amounts are earned under the terms of the Company's leases with its tenants.
IMPACT OF RECENT ACCOUNTING STANDARDS
See Note 2 to the 2001 consolidated financial statements.
33
ITEM 7A. 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 its Credit Facility and
other variable rate debt obligations as interest on these obligations is subject
to fluctuations in the market. The amount outstanding under the Credit Facility
and other variable rate debt obligations represented approximately 26% of debt
outstanding as of December 31, 2001. The Company also utilizes mortgage debt
with fixed rates as a source of capital. The weighted average interest rate and
maturity for fixed rate debt was 7.8% and 5.4 years, respectively, at December
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. The following table summarizes the
Company's five-year debt maturities at December 31, 2001 and the weighted
average interest rates associated with the maturing debt in each respective
year, excluding the impact of any debt premiums which were initially recorded.
2002 2003 2004 2005 2006
---- ---- ---- ---- ----
Maturing Debt (in 000's) $ 20,730 $ 6,466 $132,722(1) $ 22,791 $ 22,018
Weighted Average Interest Rate 9.46% 8.50% 7.24% 8.10% 7.71%
----------
(1) Includes the Credit Facility which had an outstanding balance of $93.0
million at December 31, 2001 and matures December 21, 2004.
If the interest rate for the Credit Facility and other variable rate debt
was 100 basis points higher or lower during 2001, the Company's interest expense
would have been increased or decreased by approximately $900,000. Approximately
$20.7 million of the Company's debt, including approximately $8.8 million of
fixed rate debt which has a weighted average interest rate of 9.5%, matures in
2002. The Company currently intends to refinance these maturing obligations in
2002. If interest rates for this $8.8 million of fixed rate debt maturing and to
be refinanced in 2002 are 100 basis points higher or lower than the current rate
of 9.5%, the Company's interest expense would be increased or decreased by
approximately $88,000.
Due to the uncertainty of fluctuations in interest rates, 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. As of December 31, 2001, the
Company does not have any derivative investments related to interest rate
management.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this Item 8 is included as a separate section of this
Annual Report on Form 10-K. See pages F-1 through F-29.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
34
PART III.
ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE REGISTRANT.
This item is incorporated by reference from the proxy statement for the
2002 Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION.
This item is incorporated by reference from the proxy statement for the
2002 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
This item is incorporated by reference from the proxy statement for the
2002 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This item is incorporated by reference from the proxy statement for the
2002 Annual Meeting of Shareholders.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
The following consolidated financial statements of Keystone Property Trust
are included in Item 8.
(a) 1. REPORT OF ARTHUR ANDERSEN LLP, INDEPENDENT PUBLIC ACCOUNTANTS AND
CONSOLIDATED FINANCIAL STATEMENTS.
Consolidated Balance Sheets as of December 31, 2001 and 2000.
Consolidated Statements of Operations for the years ended December 31,
2001, 2000, and 1999.
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2001, 2000, and 1999.
Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000, and 1999.
Notes to Consolidated Financial Statements.
35
2. FINANCIAL STATEMENT SCHEDULES.
- Schedule II - Valuation and Qualifying Accounts as of December
31, 2001 for Keystone Property Trust.
- Schedule III - Real Estate and Accumulated Depreciation for the
three years in the period ended December 31, 2001 for Keystone
Property Trust.
(b) Reports on Form 8-K:
- A Current Report on Form 8-K dated October 30, 2001 was filed
on October 30, 2001 (reporting under Items 7 and 9) regarding
the Company's third quarter 2001 supplemental information.
- A Current Report on Form 8-K dated December 20, 2001 was filed
on January 4, 2002 including financial statements (reporting
under Items 2, 5 and 7) regarding the acquisition of a
portfolio of 11 warehouse buildings in Allentown, Pennsylvania
and the refinancing of a new unsecured $125 million credit
facility.
- A Current Report on Form 8-K dated February 5, 2002 was filed
on February 5, 2002 (reporting under Items 7 and 9) regarding
the Company's fourth quarter 2001 supplemental information.
- A Current Report on Form 8-K/A dated March 5, 2002 was filed on
March 5, 2002 (reporting under Item 7) related to the Company's
acquisition of the Westpark Portfolio in December 2001.
(c) Exhibits.
3 (a) Declaration of Trust of the Registrant. (Incorporated by
reference to Exhibit 3(a) filed with the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999.)
(b) Certificate of Correction to Declaration of Trust (Incorporated
by reference to Exhibit 3(k) filed with the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 2000).
(c) Articles Supplementary Reclassifying Series A Convertible
Preferred Stock and Fixing Distribution and Other Preferences and
Rights of Such Series.(Incorporated by reference 3(l) filed with
the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000).
(d) Articles Supplementary Classifying and Designating a Series of
Preferred Shares as Series B Convertible Preferred Stock and
Fixing Distribution and Other Preferences and Right of Such
Series.
(e) Articles Supplementary Classifying and Designating a Series of
Preferred Shares as Series C Convertible Preferred Stock and
Fixing Distribution and Other Preferences and Right of Such
Series. (Incorporated by reference 3(f) filed with the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.)
(f) Partnership Unit Designation of Series A Convertible Preferred
Units. (Incorporated by reference to Exhibit 3(i) filed with the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999.)
36
(g) Partnership Unit Designation of Series B Convertible Preferred
Units. (Incorporated by reference to Exhibit 3(j) filed with the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999.)
(h) Partnership Unit Designation of Series C Convertible Preferred
Units. (Incorporated by reference to Exhibit 10.4 filed with the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1999.)
(i) Partnership Unit Designation of Series D Convertible Preferred
Units. (Incorporated by reference to Exhibit 3(k) filed with the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999.)
(j) Partnership Unit Designation of Series E Convertible Preferred
Units. (Incorporated by reference to Exhibit 10.5 filed with the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1999.)
(k) Partnership Unit Designation of Series F Convertible Preferred
Units. (Incorporated by reference to Exhibit 10.13 filed with the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1999.)
(l) By-laws of the Registrant. (Incorporated by reference to Exhibit
3(b) filed with the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999.)
4 (a) Specimen Certificate for Common Shares. (Incorporated by
reference to Exhibit 4(a) filed with the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999.)
(b) Specimen Certificate for Convertible Preferred Stock.
(Incorporated by reference to Exhibit 4(b) filed with the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999.)
10 (a) Amended and Restated Agreement of Limited Partnership of
Keystone Operating Partnership, L. P. (Incorporated by reference
to Exhibit 10(a) filed with the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.)
(b) McBride Contribution Agreement between American Real Estate
Investment Corporation, American Real Estate Investment, L.P, and
The Other Parties Listed on the Signature Pages of the Agreement.
(Incorporated by reference to Exhibit 10.4 filed with the
Registrant's Current Report on Form 8-K/A filed with the
Commission on August 20, 1997.)
(c) Registration Rights Agreement between American Real Estate
Investment Corporation and Morgan Stanley Asset Management, Inc.
(as attorney-in-fact for the purchasers named therein).
(Incorporated by reference to Exhibit 10.6 filed with the
Registrant's Current Report on Form 8-K/A filed with the
Commission on July 14, 1998.)
(d) Contribution Agreement between American Real Estate Investment,
L.P., American Real Estate Investment Corporation and Pioneer
Properties Company of Clinton Square, Waterfront Associates,
Pioneer Indigo One Company, Pioneer Franklin Square Company, 1045
James Street Company, Pioneer Apollo Drive Company, Pioneer Park
One Company, Pioneer Clinton Street Company, Pioneer Maltbie
Company, 5010 Campuswood Company, 5015 Campuswood Company, 400
West Division Company, Pioneer Day Care Company, and Pioneer
Management Services Company, LLC. (Incorporated by reference to
Exhibit 10.3 filed with the Registrant's Current Report on Form
8-K filed with the Commission on August 13, 1998.)
(e) Promissory Note between American DE/SPE, LLC Virginia Street
Associates Limited Partnership and Column Financial, Inc. for
$65,500,000. (Incorporated by reference to Exhibit 10.1 filed
with the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 1998.)
37
(f) Amended and Restated Promissory Note between American DE/SPE2,
LLC, American DE/SPE4, L.P., and Column Financial, Inc. for
$29,400,000. (Incorporated by reference to Exhibit 10.2 filed
with the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 1998.)
(g) Registration Rights Agreement between Keystone Property Trust
and AEW Targeted Securities Fund, L.P. (Incorporated by
reference to Exhibit 10.9 filed with the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1999.)
(h) Keystone Property Trust Amended and Restated 1993 Omnibus
Incentive Plan. (Incorporated by reference to Exhibit A of our
Proxy Statement filed with the Commission on November 24, 1999.)
(i) Registration Rights Agreement dated September 27, 1999, by and
between Reckson Morris Industrial Trust and Keystone Property
Trust. (Incorporated by reference to Exhibit 10.1 filed with the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1999.)
(j) Registration Rights Agreement, dated September 27, 1999, by and
between Robert Morris, Joseph D. Morris, Ronald Schram,
Mark M. Bava, The Drew Morris Trust, The Justin Morris Trust,
The Keith Morris Trust, Joseph D. Morris Family Limited
Partnership, Robert Morris Family Limited Partnership and
Keystone Property Trust. (Incorporated by reference to
Exhibit 10.2 filed with the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30, 1999.)
(k) Contribution and Exchange Agreement, dated as of
August 6, 1999 by and between Reckson Operating Partnership L.P.,
Reckson Morris Industrial Trust, Reckson Morris Industrial
Interim GP, LLC, Robert Morris, Joseph D. Morris, Ronald Schram,
Mark M. Bava, The Drew Morris Trust, The Justin Morris Trust, The
Keith Morris Trust, The Joseph D. Morris Family Limited
Partnership, and The Robert Morris Family Limited Partnership and
Keystone Operating Partnership L.P., and Keystone Property Trust.
(Incorporated by reference to Exhibit 10.1 filed with the
Registrant's Current Report on Form 8-K filed with the Commission
on August 20, 1999.)
(l) Agreement of Transfer and Contribution of Partnership Interest
in 21 Roadway, L.P. by and among PSPI, Inc. and Jeffrey E.
Kelter, John B. Begier, Charles C. Lee, J. Harold Shannon, and
Stephen J. Butte and Keystone Operating Partnership, L.P.
(Incorporated by reference to Exhibit 10.1 filed with the
Registrant's Current Report on Form 8-K filed with the Commission
on December 20, 1999.)
(m) Employment Agreement dated as of July 1, 2000 between Keystone
Property Trust and Jeffrey E. Kelter. (Incorporated by reference
to Exhibit 10 (aa) filed with the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000.)
(n) Employment Agreement dated as of July 1, 2000 between Keystone
Property Trust and Stephen J. Butte. (Incorporated by reference
to Exhibit 10 (bb) filed with the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000.)
(o) Employment Agreement dated as of July 1, 2000 between Keystone
Property Trust and Charles C. Lee, Jr. (Incorporated by reference
to Exhibit 10 (cc) filed with the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000.)
(p) Employment Agreement dated as of December 1, 2000 between
Keystone Property Trust and Robert F. Savage, Jr. (Incorporated
by reference to Exhibit 10 (dd) filed with the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
2000.)
(q) Limited Liability Company Agreement of Keystone New Jersey
Associates, LLC dated as of January 31, 2001, by and between
Keystone Operating Partnership, L.P. and CalEast Industrial
Investors, LLC. (Incorporated by reference to Exhibit 10.1 filed
with the Registrant's Current Report on Form 8-K filed with the
Commission on April 5, 2001.)
(r) Stock Purchase Agreement, dated as of April 16, 2001 by and
between Crescent Real Estate Equities Limited Partnership, a
Delaware limited partnership, and Keystone Property Trust, a
Maryland real estate investment trust. (Incorporated by reference
to Exhibit 10.1 filed with the Registrant's Current Report on
Form 8-K filed with the Commission on April 19, 2001.)
38
(s) Employment Agreement dated July 1, 2000 between Keystone
Property Trust and John B. Begier (Incorporated by reference to
Exhibit 10.1 filed with the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 2001.)
(t) Employment Agreement dated October 1, 2001 between Keystone
Property Trust and Timothy A. Peterson. (1)
(u) Keystone Property Trust 1994 Non-Employee Stock Option Plan
(Incorporated by reference to Exhibit 10.2 filed with the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 2001.)
(v) Stock Purchase Agreement, dated as of August 21, 2001, by and
between Keystone Property Trust, a Maryland real estate
investment trust, Reckson Operating Partnership, L.P., a Delaware
limited partnership, and Reckson Construction Group, Inc., a New
York corporation. (Incorporated by reference to Exhibit 10.1
filed with the Registrant's Current Report on Form 8-K filed with
the Commission on August 27, 2001.)
(w) Purchase and Sale Agreement, dated as of September 6, 2001, by
and between Keystone Property Trust, a Maryland real estate
investment trust, Equinox Equities, Inc., a Vermont corporation,
Northeastern Industrial Park, Inc., a New York corporation, and
Eastwick Development Corporation, a New York corporation.
(Incorporated by reference to Exhibit 10.1 filed with the
Registrant's Current Report on Form 8-K filed with the Commission
on September 6, 2001.)
(x) Credit Agreement dated as of December 21, 2001 by and among
Keystone Operating Partnership, L.P., Keystone Property Trust,
Chevy Chase Bank, Key Bank, LaSalle Bank, Mellon Bank, U.S. Bank,
First Union National Bank as syndication agent, The Bank of New
York as documentation agent, and Wells Fargo Bank, National
Association, as agent. 99.1 Press Release dated December 27,
2001. 99.2 Press Release dated December 28, 2001. (Incorporated
by reference to Exhibit 10.1 filed with the Registrant's Current
Report on Form 8-K filed with the Commission on January 4, 2002.)
(y) Agreement of Sale dated December 20, 2001, by and between
Westpark Acquisition Company, Inc. and 6813 Ruppsville Road
Realty Holding Company (collectively, Seller), and Keystone
Operating Partnership, L.P. (Buyer). (Incorporated by
reference to Exhibit 10.1 filed with the Registrant's Current
Report on Form 8-K filed with the Commission on March 5, 2002.)
(z) Agreement of Sale dated April 5, 2001 by and among FLIP/BRE II,
INC., a New Jersey corporation, MBP/BRE, L.L.C., a New Jersey
limited liability company, OIP/BRE, L.L.C., a New Jersey limited
liability company, and NJA/BRE, L.L.C., a New Jersey limited
liability company (Seller), and CK Bergen Associates, L.L.C., a
New Jersey limited liability company (Buyer).(1)
(aa) Agreement of Sale dated April 5, 2001 by and between New Jersey
Associates, a New Jersey General Partnership (Seller) and Fawn
Realty L.L.C., a New Jersey Limited Liability Company (Buyer).
(1)
(bb) Agreement by and among New Jersey Associates, FLIP/BRE II, Inc.,
MBP/BRE, L.L.C., OIP/BRE, L.L.C., and NJA/BRE, L.L.C.,
collectively as Seller, and Fawn Realty L.L.C., and CK Bergen
Associates, L.L.C., collectively as Buyer. (1)
99 Letter to the Commission pursuant to Temporary Note 3T to
Article 3 of Regulation S-X. (1)
(1) Filed herewith.
39
21.1 SUBSIDIARIES OF THE REGISTRANT: The Registrant has subsidiaries carrying on
the same line of business as the Registrant as follows:
STATE OF
INCORPORATION/
NAME ORGANIZATION
---- --------------------------
Keystone Operating Partnership, L.P. Delaware
Virginia Street Associates Limited Partnership Colorado
American Quadrangles Partners, L.P. Delaware
American Sedona Partners, L.P. Colorado
American Quadrangles Corp. Delaware
American Sedona Corp. Colorado
RROP, LLC New Jersey
McBride Properties New Jersey
New Jersey Associates New Jersey
UFSC, LLC New Jersey
OIP/BRE, LLC New Jersey
MBP/BRE, LLC New Jersey
NJA/BRE, LLC New Jersey
FLIP/BRE II, Inc. New Jersey
REA/SPC II, Inc. New Jersey
Keystone Realty Services, Inc. Pennsylvania
Avalanche Investment Corporation Maryland
Winchester Corporate Center GP Corp. Pennsylvania
Winchester Corporate Center, L.P. Pennsylvania
American DE/SPE LLC Delaware
American DE/SPE 2, LLC Delaware
American DE/SPE 1, Inc. Delaware
American DE/SPE 2, Inc. Delaware
American DE/SPE 3, Inc. Delaware
American DE/SPE 4, Inc. Delaware
American DE/SPE 4, L.P. Delaware
21 Roadway, L.P. Pennsylvania
Keystone Roadway Partners GP, LLC Pennsylvania
American DE/SPE 5, Inc. Delaware
American DE/SPE 5, LLC Delaware
RMOP GP, LLC Delaware
Keystone Lemoyne Partners GP, LLC Pennsylvania
Keystone Lemoyne Partners, L.P. Pennsylvania
Keystone New Jersey, L.P. Delaware
400 Cabot Drive, LLC New Jersey
4 Applegate, LLC New Jersey
Henderson Drive, LLC Delaware
Stults, LLC Delaware
Nixon Park, LLC Delaware
PF (OHIO) One, LLC Delaware
PF (OHIO) Two, LLC Delaware
Keystone Cranbury West, LLC Delaware
Keystone Cranbury East, LLC Delaware
First Point Associates, LLC Indiana
40
23.1 CONSENT OF ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated February 1, 2002 included in this Form 10-K, into the Company's
previously filed: Form S-3 Registration Statements File Nos. 333-58971,
333-59251, 333-67637, 333-74277, 333-77627, 333-89095, 333-92741, 333-31504 and
Form S-8 Registration Statement File No. 333-70529.
/s/ Arthur Andersen LLP
Philadelphia, Pennsylvania
April 1, 2002
41
To the Board of Trustees and Shareholders of Keystone Property Trust:
We have audited the accompanying consolidated balance sheets of Keystone
Property Trust (a Maryland real estate investment trust) and subsidiaries as
of December 31, 2001 and 2000 and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years
in the period ended December 31, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Keystone Property
Trust and subsidiaries as of December 31, 2001 and 2000, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedules listed in the
index of financial statement schedules in Item 14 are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not a
required part of the basic financial statements. These schedules have been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly state in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
/s/ Arthur Andersen LLP
Philadelphia, Pennsylvania
February 1, 2002
F-1
KEYSTONE PROPERTY TRUST
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
ASSETS DECEMBER 31,
2001 2000
----------------- -----------------
INVESTMENT IN REAL ESTATE:
Land and land improvements................................... $ 120,369 $ 128,171
Buildings and improvements................................... 634,431 685,774
Assets held for sale......................................... --- 114,073
Development and construction-in-progress..................... 62,337 28,366
Investment in direct financing lease......................... 840 1,214
--------------- ---------------
817,977 957,598
Less - Accumulated depreciation.............................. (47,192) (35,508)
Accumulated depreciation - assets held for sale....... --- (5,050)
--------------- ----------------
Total accumulated depreciation.............. (47,192) (40,558)
---------------- ----------------
Total investment in real estate, net........ 770,785 917,040
--------------- ---------------
CASH AND CASH EQUIVALENTS......................................... 1,975 3,668
RESTRICTED CASH AND CASH ESCROWS.................................. 4,867 6,597
NOTES AND ACCOUNTS RECEIVABLE, including straight-line rent receivable
of $6,719 and $6,759 in 2001 and 2000, respectively, net of allowance
for bad debts of $482 and $250 in 2001 and 2000, respectively...... 11,592 9,446
DEFERRED FINANCING COSTS, net of accumulated amortization of $1,487 and
$3,814 in 2001 and 2000, respectively............................. 4,314 5,775
DEFERRED LEASING COSTS, net of accumulated amortization of $2,855 and
$2,184 in 2001 and 2000, respectively........................ 6,949 7,426
EQUITY METHOD INVESTMENTS......................................... 21,863 6,686
OTHER ASSETS...................................................... 5,168 6,049
--------------- ---------------
Total assets............................................. $ 827,513 $ 962,687
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Mortgage notes payable and revolving credit facility, including
unamortized premiums on assumed indebtedness of $1,989 and $2,854
in 2001 and 2000,respectively............................ $ 435,136 $ 616,569
Accounts payable............................................. 3,076 3,350
Dividends and distributions payable.......................... 1,648 2,299
Accrued interest payable..................................... 1,144 2,274
Accrued expenses and other liabilities....................... 11,265 12,312
Deferred rent revenue........................................ 3,322 1,949
--------------- ---------------
Total liabilities........................................ 455,591 638,753
--------------- ---------------
MINORITY INTEREST, 6,356,885 and 7,675,649 units outstanding in 2001 and
2000, respectively .......................................... 48,698 76,710
CONVERTIBLE PREFERRED UNITS....................................... 60,392 80,295
COMMITMENTS AND CONTINGENCIES..................................... -- --
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; none issued and outstanding in 2001, 803,871 issued
and outstanding in 2000;
liquidation preference of $20,097 in 2000..................... -- 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; 18,397,625 and
9,321,296 shares issued and outstanding in 2001 and 2000,
respectively.................................................. 18 9
Additional paid-in capital................................... 282,503 182,067
Loans to executives and employees to purchase Common Shares..... (6,127) (4,033)
Cumulative net income........................................... 35,850 21,516
Cumulative distributions........................................ (49,414) (32,633)
---------------- ----------------
Total shareholders' equity............................... 262,832 166,929
--------------- ---------------
Total liabilities and shareholders' equity $ 827,513 $ 962,687
=============== ===============
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
KEYSTONE PROPERTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
YEARS ENDED DECEMBER 31,
------------------------
2001 2000 1999
---------------- ---------------- ----------
REVENUE:
Rents................................................. $ 95,077 $ 107,763 $ 75,769
Reimbursement revenue and other income................ 14,707 15,338 8,757
--------------- --------------- ----------------
Total revenue..................................... 109,784 123,101 84,526
=============== =============== ================
OPERATING EXPENSES:
Property operating expenses........................... 8,923 10,696 8,580
Real estate taxes .................................... 9,894 11,109 6,516
General and administrative............................ 7,983 7,523 6,698
Depreciation and amortization......................... 24,520 21,128 16,359
Interest expense...................................... 34,187 46,566 30,307
Provision for asset valuation ........................ --- 11,300 ---
--------------- --------------- ----------------
Total operating expenses.......................... 85,507 108,322 68,460
--------------- --------------- ----------------
Income before equity in income/(losses) from equity method
investments and gains on sales of assets................ 24,277 14,779 16,066
Equity in income/(losses) from equity method investments... 1,123 (73) (62)
Gains on sales of assets................................... 9,142 87 1,284
--------------- --------------- ----------------
Income before distributions to preferred unitholders, minority
interest of unitholders in Operating Partnership,
extraordinary item, and income allocated to preferred
shareholders............................................ 34,542 14,793 17,288
Distributions to preferred unitholders..................... (7,057) (6,875) (2,040)
--------------- --------------- -----------------
Income before minority interest of unitholders in Operating
Partnership, extraordinary item, and income allocated to
preferred shareholders.................................. 27,485 7,918 15,248
Minority interest of unitholders in Operating Partnership.. (5,650) (649) (5,592)
--------------- --------------- -----------------
Income before extraordinary items......................... 21,835 7,269 9,656
Extraordinary item - loss on early retirement of debt ..... (2,466) -- --
--------------- --------------- ----------------
INCOME BEFORE INCOME ALLOCATED TO PREFERRED
SHAREHOLDERS.......................................... 19,369 7,269 9,656
INCOME ALLOCATED TO PREFERRED SHAREHOLDERS................. (5,035) (6,373) (3,328)
--------------- --------------- ----------------
NET INCOME ALLOCATED TO COMMON SHAREHOLDERS $ 14,334 $ 896 $ 6,328
=============== =============== ================
EARNINGS PER COMMON SHARE - BASIC:
Net income per Common Share before extraordinary item. $ 1.10 $ .10 $ .83
Extraordinary item.................................... (.11) -- --
--------------- --------------- ----------------
Net income per Common Share - Basic................... $ .99 $ .10 $ .83
=============== =============== ================
EARNINGS PER COMMON SHARE - DILUTED:
Net income per Common Share before extraordinary item. $ 1.05 $ .09 $ .80
Extraordinary item.................................... (.12) -- --
--------------- --------------- ----------------
Net income per Common Share - Diluted................. $ .93 $ .09 $ .80
=============== =============== ================
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
KEYSTONE PROPERTY TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(dollars in thousands)
ADDITIONAL
PAID-IN
PREFERRED STOCK COMMON SHARES WARRANTS CAPITAL
SHARES AMOUNT SHARES AMOUNT
---------- -------- -------- ------- -------- ----------
BALANCES, JANUARY 1, 1999 800,000 $ 1 7,391,765 $ 7 $ 685 $ 104,864
Net income allocated to common -- -- -- -- -- --
shareholders.........................
Distributions paid ($1.12 per share) -- -- -- -- -- --
Common Shares issued, net of $200 of -- -- 1,380,678 1 -- 19,812
issuance costs.......................
Restricted Common Shares issued to
employees, net of cancellations of
500 Common Share..................... -- -- 1,054 -- -- 22
Common Shares issued as compensation
to trustees.......................... -- -- 11,830 -- -- 177
Common Shares issued for stock
options exercised.................... -- -- 2,200 -- -- 22
Common Shares issued for OP Unit
conversions.......................... -- -- 19,416 -- -- 242
Adjustment for minority interest of
unitholders in Operating Partnership
at date of capital transactions -- -- -- -- -- (733)
Issuance of Convertible Preferred
Stock, net of $625 in issuance costs 2,400,000 2 -- -- -- 59,373
Loan to executive officer to
purchase Common Shares............... -- -- 100,000 1 -- 1,300
Conversion of Warrants to OP Units
in Operating Partnership............. -- -- -- -- (560) --
Amortization of restricted share
grants and forgiveness of
executive loans...................... -- -- -- -- -- --
----------- ------ ----------- ------ ------- ---------
BALANCES, DECEMBER 31, 1999 3,200,000 $ 3 8,906,94 $ 9 $ 125 $ 185,079
=========== ====== =========== ====== ======= =========
Net income allocated to common
shareholders......................... -- -- -- -- -- --
Distributions paid ($1.21 per share) -- -- -- -- -- --
Common Shares issued, net of $125 in
issuance costs ..................... -- -- 102,511 -- -- 1,361
Common Shares issued for OP Unit
conversions ......................... -- -- 101,215 -- -- 1,262
Loans to executive officers and
employees to purchase
Common Shares........................ -- -- 211,660 -- -- 2,717
Restricted Shares forfeited........... -- -- (1,033) -- -- (20)
Adjustment for minority interest of
unitholders in Operating Partnership
at dates of capital transactions..... -- -- -- -- -- 11,571
Conversion of Convertible Preferred
Stock to Redeemable Preferred Stock.. (796,129) -- -- -- -- (19,903)
Amortization of restricted share
grants and forgiveness of executive
loans .............................. -- -- -- -- -- --
Conversion of Warrants to OP Units
in Operating Partnership ............ -- -- -- -- (125) --
----------- ------ ----------- ------ ------- ---------
BALANCES, DECEMBER 31, 2000 2,403,871 $ 3 9,321,29 $ 9 $ -- $ 182,067
=========== ====== =========== ====== ======= =========
Net income allocated to common
shareholders......................... -- -- -- -- -- --
Distributions paid ($1.26 per share) -- -- -- -- -- --
Common Shares issued, net of $7,753
of issuance costs.................... -- -- 10,375,000 10 -- 122,722
Preferred Stock redeemed for Common
Shares .............................. (803,871) (1) 1,256,048 1 -- 4,297
Preferred OP Units redeemed for
Common Shares........................ -- -- 1,243,952 1 -- --
Common Shares issued for OP Unit
conversions -- -- 595,129 1 -- 7,848
Loans to executive officers and
employees to purchase Common Shares.. -- -- 156,256 -- -- 2,004
Adjustment for minority interest of
unitholders in Operating Partnership
at dates of capital transactions -- -- -- -- -- 8,431
Amortization of restricted share
grants and forgiveness of executive
loans................................ -- -- -- -- -- --
Common Shares issued as compensation
to trustees........................... -- -- 18,415 -- -- 230
Repurchase of Common Shares........... -- -- (4,568,471) (4) -- (45,096)
----------- ------ ----------- ------ ------- ---------
BALANCES, DECEMBER 31, 2001 1,600,000 $ 2 18,397,675 $ 18 $ -- $ 282,503
=========== ====== =========== ====== ======= =========
LOANED TO
EXECUTIVES AND
EMPLOYEES TO RETAINED
PURCHASE EARNINGS/ TOTAL
CORPORATION DEFERRED (ACCUMULATED SHAREHOLDERS
SHARES COMPENSATION DEFICIT) EQUITY
--------------- ------------ ------------- -------------
BALANCES, JANUARY 1, 1999 $ (392) $ (540) $ 2,419 $ 107,044
Net income allocated to common
shareholders............................ -- -- 6,328 6,328
Distributions paid ($1.12 per share) -- -- (6,415) (6,415)
Common Shares issued, net of $200 of
issuance costs.......................... -- -- -- 19,813
Restricted Common Shares issued to
employees, net of cancellations of
500 Common Shares -- (22) -- --
Common Shares issued as compensation
to trustees............................. -- -- -- 177
Common Shares issued for stock
options exercised....................... -- -- -- 22
Common Shares issued for OP Unit
conversions............................. -- -- -- 242
Adjustment for minority interest of
unitholders in Operating Partnership at
dates of capital transactions........... -- -- -- (733)
Issuance of Convertible Preferred
Stock, net of $625 in issuance costs -- -- -- 59,375
Loan to executive officer to
purchase Common Shares.................. (1,300) -- -- 1
Conversion of Warrants to OP Units
in Operating Partnership................ -- -- -- (560)
Amortization of restricted share
grants and forgiveness of
executive loans......................... 156 280 -- 436
--------- ---------- --------- ---------
BALANCES, DECEMBER 31, 1999 $ (1,536) $ (282) $ 2,332 $ 185,730
========= ========== ========= =========
Net income allocated to common
shareholders............................ -- -- 896 896
Distributions paid ($1.21 per share) -- -- (14,345) (14,345)
Common Shares issued, net of $125 in
issuance costs ......................... -- -- -- 1,361
Common Shares issued for OP Unit
conversions ............................ -- -- -- 1,262
Loans to executive officers and
employees to purchase Common Shares..... (2,717) -- -- --
Restricted Shares forfeited.............. -- -- -- (20)
Adjustment for minority interest of
unitholders in Operating Partnership
at dates of capital transactions........ -- -- -- 11,571
Conversion of Convertible Preferred
Stock to Redeemable Preferred Stock..... -- -- -- (19,903)
Amortization of restricted share
grants and forgiveness of
executive loans ....................... 220 282 -- 502
Conversion of Warrants to OP Units
in Operating Partnership ............... -- -- -- (125)
--------- ---------- --------- ---------
BALANCES, DECEMBER 31, 2000 $ (4,033) $ -- $ (11,117) $ 166,929
========= ========== ========= =========
Net income allocated to common
shareholders............................ -- -- 14,334 14,334
Distributions paid ($1.26 per share)..... -- -- (16,781) (16,781)
Common Shares issued, net of $7,753
of issuance costs....................... -- -- -- 122,722
Preferred Stock redeemed for Common
Shares ................................. -- -- -- 4,297
Preferred OP Units redeemed for
Common Shares........................... -- -- -- 1
Common Shares issued for OP Unit
conversions............................. -- -- -- 7,849
Loans to executive officers and
employees to purchase Common Shares..... (2,004) -- -- --
Adjustment for minority interest of
unitholders in Operating Partnership
at transactions ....................... -- -- -- 8,431
Amortization of restricted share
grants and forgiveness of executive
loans................................... (90) -- -- (90)
Common Shares issued as compensation
to trustees............................. -- -- -- 230
Repurchase of Common Shares.............. -- -- -- (45,100)
--------- ---------- --------- ---------
BALANCES, DECEMBER 31, 2001 $ (6,127) $ -- $ (13,564) $ 262,832
========= ========== ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
KEYSTONE PROPERTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
YEARS ENDED DECEMBER 31
---------------------------------------------------------
2001 2000 1999
OPERATING ACTIVITIES:
Net income allocated to common shareholders........................... $ 14,334 $ 896 $ 6,328
Adjustments to reconcile net income allocated to common shareholders
to net cash provided by operating activities:
Depreciation and amortization .................................... 24,520 21,128 16,359
Amortization of deferred financing costs ......................... 1,789 1,798 1,462
Amortization of debt premiums..................................... (864) (659) (701)
Amortization of deferred compensation costs and loan forgiveness on
executive stock loans........................................... 33 502 436
Gain on sales of assets........................................... (9,142) (87) (1,284)
Bad debt provision ............................................... 232 250 --
Extraordinary loss on early debt extinguishment................... 1,239 -- --
Provision for asset valuation .................................... -- 11,300 --
Straight-line rental income....................................... (2,960) (3,828) (1,866)
Decrease in investment in direct financing lease.................. 374 246 247
Equity in (income)/losses from equity method investments.......... (1,123) 73 62
Common Shares issued for trustees compensation.................... 230 -- 177
Income allocated to preferred shareholders and preferred unitholders 12,091 13,248 5,368
Minority interest................................................. 5,650 649 5,592
Cash provided by/(used in)
Accounts receivable............................................... (418) -- (1,310)
Other assets.................................................... 881 (2,940) (1,449)
Accounts payable, accrued expenses and other liabilities........ (2,451) 1,488 5,307
Deferred rent revenue........................................... 1,373 (759) 1,174
------------- -------------- --------------
Net cash provided by operating activities 45,788 43,305 35,902
------------- -------------- --------------
INVESTING ACTIVITIES:
Properties and joint venture interests acquired....................... (102,493) (78,329) (198,549)
Restricted cash....................................................... 1,730 (3,127) (1,370)
(Advances and capital contributions to)/repayments of advances from
equity method investments........................................... (8,897) (1,564) 722
Distributions from equity method investments ......................... 1,863 -- --
Development and construction in progress expenditures................. (25,436) (21,839) (4,429)
Capital expenditures and tenant improvements.......................... (3,707) (4,360) (3,479)
Payment of leasing commissions........................................ (4,075) (3,017) (2,877)
Proceeds from sales of assets, net.................................... 157,770 49,372 9,538
------------- -------------- --------------
Net cash provided by/(used in) investing activities........... 16,755 (62,864) (200,444)
------------- -------------- --------------
FINANCING ACTIVITIES:
Issuances of Common Shares for stock options exercised................ -- -- 22
Issuances of Common Shares and Convertible Preferred Stock, net of
issuance costs...................................................... 122,722 1,361 37,689
Dividends paid on Common Shares....................................... (16,781) (14,345) (8,375)
Distributions paid on Convertible Preferred Stock and Convertible
Preferred Units..................................................... (12,742) (13,368) (3,423)
Distributions paid on OP Units........................................ (8,866) (9,190) (7,729)
Proceeds from mortgage notes payable.................................. 34,975 114,498 133,996
Repayment of mortgage notes payable................................... (78,952) (21,651) (3,061)
Redemption of Redeemable Preferred Stock ............................. -- (19,903) --
Payments of deferred financing costs and costs associated with early
debt extinguishment................................................. (2,819) (1,266) (1,830)
Repurchase of Common Shares and OP Units.............................. (69,845) -- --
Net (repayments) borrowings under Credit Facility..................... (31,928) (17,053) 18,150
------------- -------------- --------------
Net cash (used in)/provided by financing activities................. (64,236) 19,083 165,439
------------- -------------- --------------
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS..................... (1,693) (476) 897
CASH AND CASH EQUIVALENTS, beginning of year............................. 3,668 4,144 3,247
------------- -------------- --------------
CASH AND CASH EQUIVALENTS, end of year................................... $ 1,975 $ 3,668 $ 4,144
============= ============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest (net of capitalized interest)............ $ 34,392 $ 48,240 $ 27,508
============= ============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
Keystone Property Trust (the "Company") is a self-administered and
self-managed real estate investment trust ("REIT") which was organized as a
Delaware corporation in 1993 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. 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 was
changed to Keystone Realty Services, Inc. (the "Management Company") from
American Real Estate Management, Inc.
As of December 31, 2001, the Company owned 102 industrial and 22 office
properties aggregating approximately 21.8 million square feet and an investment
in a direct financing lease (the "Properties"). The Properties are located in
Central Pennsylvania, Northern and Central New Jersey, New York State, Ohio,
Indianapolis, Indiana, and Greenville, South Carolina and had an overall
physical occupancy of 93.9% and 95.4% at December 31, 2001 and 2000,
respectively. The Company conducts all of its service operations, 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The Company is the sole general partner of the Operating Partnership with
an ownership interest of approximately 70% and 52% at December 31, 2001 and
2000, respectively. The Company and the Operating Partnership are also the
direct and indirect owners of several other subsidiary entities. The
accompanying consolidated financial statements include the account balances of
the Company, the Operating Partnership and their wholly-owned and majority-owned
and controlled subsidiaries and their operations 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 requires 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.
F-6
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INVESTMENT IN REAL ESTATE
Investment in real estate is recorded at cost and depreciated over the
estimated useful lives of the related assets. Expenditures for additions,
renewals and betterments which extend the useful life of the properties are
capitalized. Routine maintenance and repairs are charged to expense as incurred.
The estimated useful lives of the assets are as follows:
YEARS
Buildings and improvements............................... 10-35
Land improvements........................................ 15
Tenant improvements...................................... Applicable
Lease Term
Depreciation expense for the years ended December 31, 2001, 2000, and 1999
was $22.3 million, $19.7 million, and $15.7 million, respectively.
The Company has an investment in a direct financing lease. The net
investment in this lease was $840,000 and $1.2 million for 2001 and 2000,
respectively, which consists of the gross book value of this investment of $1.0
million and $1.6 million, net of unearned income of $210,000 and $386,000,
respectively. The unearned income is amortized over the lease term as annual
rent payments are collected in order to produce a constant periodic rate of
return on the net investment in this lease.
ASSETS HELD FOR SALE AND ASSET VALUATION WRITEDOWN
In accordance with Statement of Financial Accounting Standards 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
a respective asset that the Company expects to hold and use may not be
recoverable. In performing the review for recoverability, the Company estimates
the future cash flows expected to result from the use of the asset and its
eventual disposition to determine if an impairment loss should be recognized.
The impairment loss is measured as the amount that the carrying value of the
asset exceeds the fair value of the asset. Estimates of fair value are based on
quoted market prices in active markets or, if quoted market prices are not
available, the best information available in the circumstances, such as the
present value of estimated expected future cash flows.
The Company accounts for properties as assets held for sale when a
commitment has been made to a formal plan of distribution. The Company reports
its assets held for sale at the lower of carrying value or fair value less the
cost to sell the related asset. At December 31, 2000, the Company had classified
$114.1 million of net assets, which consisted of 13 office properties and 3
industrial properties, as assets held for sale. During the third quarter of
2000, the Company recorded an $11.3 million asset valuation writedown related to
certain assets which were being marketed for sale. In accordance with SFAS No.
121, the Company suspends depreciation charges on assets held for sale as of the
date disposition plans were adopted. During the fourth quarter of 2000, the
Company suspended the marketing of two office properties previously accounted
for as assets held for sale and placed these assets back into service as assets
held for investment. 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.
F-7
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 assets held for sale. The remaining
assets held for sale at December 31, 2000, which had an aggregate undepreciated
book value of approximately $35 million, were sold in January 2001. At December
31, 2001, no assets were classified as assets held for sale.
CAPITALIZATION POLICY
The Company capitalizes direct and indirect costs, including interest costs
and payroll costs, directly associated with real estate assets under
construction and land under development by the Company or in joint ventures.
During 2001, 2000 and 1999, the Company capitalized $2.5 million, $2.4 million,
and $513,000, respectively, of interest costs for construction and development
in progress. In 2001 and 2000, the Company capitalized $1.4 million and $1.6
million, respectively, of payroll costs for construction and development in
progress. There were no payroll costs capitalized in 1999.
EQUITY METHOD INVESTMENTS
The equity method of accounting is used to account for the Company's
non-controlling interest in 100% of the non-voting preferred stock of the
Management Company, the Company's 50% non-controlling interest in 4 Points
Associates, LLC ("4 Points"), which was formed to develop and own a 796,000
square foot distribution facility in Indianapolis, Indiana, and the Company's
20% non-controlling investment in the CalEast Joint Venture.
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
For purposes of reporting cash flows, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents. Restricted cash represents amounts in escrow for payment
of property taxes, insurance or capital improvements, as required by the
Company's lenders and amounts held in escrow for 1031 exchange transactions not
yet consummated.
DEFERRED FINANCING AND LEASING COSTS
Deferred financing costs are amortized on a straight-line basis over the
life of the related mortgage loans which approximates the effective interest
method. Amortization of deferred financing costs is included in interest expense
in the accompanying statements of operations and was $1.8 million, $1.8 million,
and $1.5 million for the years ended December 31, 2001, 2000, and 1999,
respectively. Deferred leasing costs, which include direct and indirect costs
associated with the rental of the Company's properties, are amortized on a
straight-line basis over the term of the related leases. Amortization expense
for deferred leasing costs was $2.0 million, $1.4 million, and $628,000 for the
years ended December 31, 2001, 2000, and 1999, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of non-real estate assets and payables approximate their
carrying amount due to their short-term nature. The estimated fair value of our
fixed rate mortgages payable, excluding any debt premiums, at December 31, 2001
and 2000 was approximately $332.1 million and $465.5 million, respectively. The
estimated fair value is based on the borrowing rates available to the Company
for fixed rate mortgages payable with similar terms and average maturities.
Although management is not aware of any factors that would significantly affect
the reasonable fair value amounts, such amounts have not been
F-8
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
comprehensively revalued for purposes of these financial statements since that
date and current estimates of fair value may differ significantly from the
amounts presented herein.
ALLOCATIONS OF INCOME AND LOSSES
Net income and losses of the Operating Partnership are allocated to the
Company and limited partners in accordance with their respective ownership
interests in accordance with the terms of the amended and restated limited
partnership agreement. The Company's ownership interest in the Operating
Partnership was approximately 70%, 52%, and 56% and the limited partners'
ownership interest was approximately 30%, 48%, and 44% at December 31, 2001,
2000, and 1999, respectively.
REVENUE RECOGNITION
Revenue is recognized on the accrual basis of accounting. Rental income
under leases in excess of one year in length 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. Deferred rent
revenue represents rent collected from tenants in advance.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company may enter into agreements for derivative financial
instruments in order to mitigate the Company's exposure to fluctuations in
interest rates on existing debt and for anticipated financing transactions.
In accordance with SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended by SFAS No. 137, the Company will recognize
all derivatives on the balance sheet at fair value. Derivatives that do not
qualify as hedges will be adjusted to fair value through earnings. If the
derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the change in fair
value of the hedged asset, liability or firm commitment through earnings or
be recognized in other comprehensive income until the hedged item affects
earnings. If the change in fair value or cash flows of a derivative designed
as a hedge is not effectively offset, as defined, by the change in value or
cash flows of the item it is hedging, this difference will be immediately
recognized in earnings.
INCOME TAXES AND OTHER
The Company elected to be taxed as a REIT under Sections 856 through 860 of
the Internal Revenue Code and applicable Treasury Regulations, commencing with
its taxable year ended December 31, 1993. The Company believes that it is
organized and will continue to operate in such a manner as to qualify for
taxation as a REIT under the Internal Revenue Code.
A REIT is generally not subject to federal income taxes on that portion of
its ordinary income or capital gain that is currently distributed to
shareholders as the REIT provisions of the Internal Revenue Code generally allow
a REIT to deduct dividends paid to its shareholders to the extent it distributes
annually at least 90% of its taxable income and satisfies certain other
requirements. Accordingly, no provision has been made for federal income taxes
in the accompanying consolidated financial statements. If the Company fails to
qualify as a REIT in any taxable year, the Company will be subject to federal
income tax at regular corporate rates on its taxable income. The Company and
certain of its subsidiaries are subject to certain state and local taxes. The
provision for these taxes has been reflected in general and administrative
expense in the accompanying financial statements. The Management Company is
subject to federal, state and local taxes on its income as it is organized as a
"C" corporation reporting as a taxable REIT subsidiary.
F-9
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the tax characteristics of the Company's distributions for the
three years ended December 31, 2001, 2000, and 1999 is as follows:
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------
COMMON SHARE DISTRIBUTIONS 2001 2000 1999
-------------------------- ---- ---- ----
Total distributions paid per share $ 1.26 $ 1.21 $ 1.12
Percent taxable as ordinary income(1) 59.21% 79.01% 100.00%
Percent non-taxable return of capital 15.60% 20.99% 0.00%
Percent taxable as long term capital gain(2) 4.41% 0.00% 0.00%
Percent taxable as unrecaptured Section 1250 gain 20.78% 0.00% 0.00%
Classified as ordinary income - per share $ 0.746 $ 0.956 $ 0.950
Classified as return of capital - per share $ 0.196 $ 0.254 $ --
Classified as long term capital gain - per share $ 0.056 $ -- $ --
Classified as unrecaptured Section 1250 gain - per share $ 0.262 $ -- $ --
PREFERRED SHARE AND PREFERRED UNIT DISTRIBUTIONS
Distributions declared (in 000's) $ 12,092 $ 13,248 $ 5,368
The following reconciles net income allocated to common shareholders to
taxable income allocated to common shareholders for the years ended December 31,
2001, 2000 and 1999 (in 000's):
2001(3) 2000 1999
------- ---- ----
Net income allocated to common shareholders $ 14,334 $ 896 $ 6,328
BOOK/TAX INCOME DIFFERENCES
Book depreciation and amortization 16,330 11,620 8,621
Tax depreciation and amortization (13,227) (11,712) (7,357)
Reserve for impairment loss -- 6,215 --
(Income)/Loss from equity method investments (282) 40 33
(Gain)/Loss on asset sales (2,840) 48 (677)
Compensation expense (186) -- 148
Straight line rent income (1,971) (2,105) (983)
Preferred Stock distributions (888) (773) 362
Other (4) 1,562 407 1,278
---------- ---------- -----------
Taxable income allocated to common shareholders $ 12,832 $ 4,636 $ 7,753
========== ========== ===========
----------
(1) The Company reported that approximately $.10 or approximately 36% of the
distribution declared on December 15, 1998 with a record date of December
31, 1998 and a payable date of January 31, 1999, was taxable in 1999 in
accordance with Internal Revenue Code Section 857(b)(8). Approximately $.17
of the remaining distribution was previously reported to shareholders as a
1998 distribution.
(2) The Company reported that 100% of the long-term capital gain for 2001 is a
qualified five year gain.
(3) Amounts are estimated.
(4) Primarily due to differences in rental income.
There are differences in the Company's bases of assets and liabilities,
specifically relating to minority interests, between those used in financial
reporting and the tax basis used for annual federal and state income tax
returns. The net federal tax basis of the Company's real estate investments at
December 31, 2001 and 2000 was approximately $651.9 million and $757.1 million,
respectively.
F-10
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECLASSIFICATIONS
Certain amounts in the 2000 and 1999 consolidated financial statements have
been reclassified in order to conform with the presentation in the 2001
consolidated financial statements.
IMPACT OF ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No.
142") and Statement of Financial Accounting Standards No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 142
which is effective for all fiscal years beginning after December 15, 2001,
changes the accounting for goodwill and some other intangible assets from an
amortization method to an impairment test method which requires impairment to be
evaluated on a periodic basis. SFAS No. 144 addresses the financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement supercedes both Statement of Financial Accounting Standards No. 121
and APB Opinion No. 30, but also retains certain aspects of the two
pronouncements. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. In management's opinion, the adoption of these statements
will not have a material impact on the Company's consolidated financial position
and results of operations.
3. ACQUISITIONS AND DISPOSITIONS OF REAL ESTATE INVESTMENTS
2001 TRANSACTIONS
During 2001, the Company acquired 14 industrial properties in Pennsylvania,
50 acres of land in New Jersey, and a joint venture partner's 50% interest in an
800,000 square foot industrial property in Indianapolis, Indiana (Note 4), which
aggregated 2.9 million square feet, for an aggregate cash purchase price of
$102.5 million, which was funded through $53.6 million of mortgage financing and
$48.9 million of cash generated primarily from property sales.
In 2001, the Company disposed of 27 industrial and office properties
located in New Jersey, Pennsylvania, and South Carolina totaling approximately
4.3 million square feet, including seven industrial properties aggregating 2.1
million square feet sold or contributed to the CalEast Joint Venture (Note 4),
for an aggregate net amount of approximately $269.7 million which resulted in an
aggregate gain of $11.0 million and aggregate losses of $1.9 million and a net
aggregate gain of $9.1 million. The consideration for these dispositions
consisted of $157.8 million in cash payments, $104.6 million in debt which was
assumed by the purchasers and, in connection with one of the dispositions during
2001, the Company received as partial consideration a $2.0 million note which
accrues interest at 10% and matures in 2004.
During 2000, the Company began construction of approximately 1.0 million
square feet of distribution facilities on land parcels in New Jersey and a
150,000 square foot expansion of an existing 407,100 square foot industrial
facility in Pennsylvania. At December 31, 2001, approximately $62.5 million is
included in development and construction-in-progress related to these
construction projects and other development projects.
F-11
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following unaudited pro forma financial information of the Company for
the years ended December 31, 2001 and 2000 gives effect to the properties
acquired and sold and the Common Share, Preferred Stock and OP Unit issuances
and repurchases in 2001 as if the purchases, repurchases, sales, and issuances
had occurred on January 1, 2000.
(IN 000'S, EXCEPT FOR PER SHARE DATA)
UNAUDITED YEARS ENDED DECEMBER 31,
--------- ------------------------
2001 2000
---- ----
Pro forma total revenue.............................................. $ 101,118 $ 99,447
Pro forma net income allocated to Common Shares...................... $ 9,913 $ 1,478
Pro forma net income per Common Share - Basic........................ $ .68 $ .16
Pro forma net income per Common Share - Diluted...................... $ .68 $ .16
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 Indianapolis, Indiana and Central and
Northern New Jersey. 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 proceeds of approximately $49.4 million which resulted in aggregate
gains of $931,000 and aggregate losses of $844,000 and a net gain of $87,000.
The following unaudited pro forma financial information of the Company
for the years ended December 31, 2000 and 1999 gives effect to the properties
acquired and sold in 2000 as if the purchases and sales had occurred on
January 1, 1999.
(IN 000'S, EXCEPT FOR PER SHARE DATA)
UNAUDITED YEARS ENDED DECEMBER 31,
--------- ------------------------
2000 1999
---- ----
Pro forma total revenue.............................................. $ 118,775 $ 107,523
Pro forma net income allocated to Common Shares...................... $ 638 $ 4,140
Pro forma net income per Common Share - Basic........................ $ .07 $ .45
Pro forma net income per Common Share - Diluted...................... $ .07 $ .45
1999 TRANSACTIONS
During 1999, the Company acquired 35 properties (34 industrial properties
and one office property) and 112 acres of land, including the Reckson Morris
Industrial Trust ("RMIT") acquisition discussed in detail below, for an
aggregate purchase price of approximately $322.1 million. These properties
contained an aggregate of approximately 6.8 million square feet consisting of
6.5 million square feet of industrial space and 290,000 square feet of office
space. Consideration for these acquisitions consisted of cash of approximately
$198.5 million, future cash payments of $5.2 million,
F-12
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$27.6 million of debt assumed (including debt premiums of $850,000), $40.0
million of Convertible Preferred Stock with a conversion price of $16.00, $47.1
million of Convertible Preferred Units issued with conversion prices ranging
from $16.00 to $16.50 per unit, $2.2 million of OP Units issued at prices
ranging from $15.26 to $17.50 per unit, and the issuance of $1.5 million of
Common Shares at a price of $14.44 per share. The Convertible Preferred Stock
and Convertible Preferred Units issued as part of these transactions require a
quarterly dividend or guaranteed payment at an annual rate ranging from 9% to
9.75%.
In August 1999, the Company agreed, as part of a phased transaction, to
acquire certain industrial properties from Reckson Morris Operating Partnership,
L.P. ("RMOP") and RMIT. The first phase of this transaction was consummated on
September 27, 1999 and involved the acquisition of RMOP from RMIT. The second
phase of this transaction closed in the second quarter of 2000. Additionally, as
part of the RMIT transaction, the Company acquired options to purchase 259 acres
of land in New Jersey on which the Company can develop 2.8 million square feet
of industrial properties.
In March 1999, the Company sold Urban Farms Shopping Center in Franklin
Lakes, New Jersey for $10.0 million, which resulted in a gain of approximately
$1.3 million. The net proceeds from this asset sale were reinvested in the
acquisition of an industrial property in 1999.
4. EQUITY METHOD INVESTMENTS
KEYSTONE REALTY SERVICES, INC.
The Company accounts for its investments 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.
INDIANAPOLIS JOINT VENTURES
In December 1998, the Company entered into an agreement with Browning
Investments, Inc. ("Browning") 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% non-controlling interest.
In June 2000, the Company acquired a 50% interest in 3 Points Associates,
LLC ("3 Points"), an entity formed to develop and construct a distribution
facility totaling approximately 800,000 square feet 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. 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. In
November 2001, the Company acquired Browning's 50% interest in this facility
from 3 Points for approximately $11.5 million (Note 3).
F-13
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In June 2001, the Company acquired a 50% interest in 4 Points, an entity
formed to develop and construct a speculative distribution facility totaling
approximately 800,000 square feet located in Airtech Park in exchange for the
issuance of 42,172 OP Units valued at an aggregate price of approximately
$652,000 and the contribution of approximately $400,000 in cash. 4 Points has
obtained a $15.6 million construction loan at a rate equal to LIBOR plus 2.0%
which matures in June 2004. The Company commenced the construction of this
facility in June 2001 and construction was completed in the first quarter of
2002.
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 the CalEast Joint Venture at a value of approximately
$103.8 million. This joint venture was formed to own, operate and develop
industrial property in New Jersey and is 80% owned by CalEast Industrial
Investors, LLC (a joint venture between LaSalle Investment Management, Inc. and
California Public Employees Retirement System) and 20% owned by the Company. The
Company has a commitment to fund approximately $24.0 million of equity to this
joint venture of which approximately $11.7 million has been funded as of
December 31, 2001. The funding of the remaining $12.3 million will occur as the
joint venture acquires additional industrial properties. The Management Company
and the Operating Partnership act 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%. In April 2001,
this joint venture acquired an 812,739 square foot industrial property with a
developable pad site for approximately $32.3 million.
F-14
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following tables summarize financial information for the equity method
investments of the Company as of December 31, 2001, 2000 and 1999 (dollars in
thousands):
Keystone New
3 Points 4 Points Keystone Realty Jersey
Associates,LLC(1) Associates, LLC Services, Inc. Associates, LLC Total
----------------- ----------------- ----------------- ------------------ -----------------
2001
BALANCE SHEET
Investment property, net $ -- $ 14,580 $ -- $ 135,298 $ 149,878
Other Assets -- -- 6,718 2,311 9,029
------------ ----------- ------------ ------------ ------------
Total Assets $ -- $ 14,580 $ 6,718 $ 137,609 $ 158,907
Mortgage Debt $ -- $ 12,396(2) $ -- $ 76,871 $ 79,055
Other Liabilities -- -- 806 2,705 15,907
Shareholders and members equity -- 2,184 5,912 58,033 63,945
------------ ----------- ------------ ------------ ------------
Total Liabilities & Equity $ -- $ 14,580 $ 6,718 $ 137,609 $ 158,907
Company's Ownership % -- 50% 95% 20%
============ =========== ============ ============
Company's Investment at December
31, 2001 $ -- $ 1,820 $ 6,153 $ 13,890(3) $ 21,863
============ =========== ============ ============ ============
2001
INCOME STATEMENT
Revenues $ 2,270 $ -- $ 3,561 $ 12,600 $ 18,416
Expenses:
Operating 106 -- 3,197 2,452 5,755
Other Expenses --- -- -- 54 54
Depreciation & Amortization 448 -- 225 2,539 3,212
Interest 700 -- 169 4,319 5,188
------------ ----------- ------------ ------------ ------------
Total Expenses $ 1,254 $ -- $ 3,591 $ 9,364 $ 14,209
------------ ----------- ------------ ------------ ------------
Net Income/(Loss) $ 1,016 $ -- $ (30) $ 3,236 $ 4,207
============ =========== ============ ============ ============
Equity in income/(losses) from
equity method investments $ 508 $ -- $ (29) $ 644 $ 1,123
============ =========== ============ ============ ============
(1) The Company acquired the property owned by this joint venture in November
2001, and accordingly has consolidated the operating results of this asset
since that date.
(2) The Company has a joint and several guarantee of the $15.5 million
recourse, construction loan of this venture which matures in June 2004.
(3) The Company's investment in this venture includes approximately $2.0
million in outside basis which is being amortized over the seven year life
of the venture. As of December 31, 2001 approximately $260,000 has been
amortized related to this outside basis.
F-15
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3 Points Keystone Realty
Associates, LLC Services, Inc. Total
----------------- ----------------- ------------------
2000
BALANCE SHEET
Investment property, net $ 15,057 $ -- $ 15,057
Other Assets 142 6,535 6,677
------------ ------------- ------------
Total Assets $ 15,199 $ 6,535 $ 21,734
Mortgage Debt $ -- $ -- $ --
Other Liabilities 12,859 2,346 15,205
Shareholders and members equity 2,340 4,189 6,529
------------ ------------- ------------
Total Liabilities & Equity $ 15,199 $ 6,535 $ 21,734
Company's Ownership % 50% 95%
============ =============
Company's Investment at
December 31, 2000 $ 2,314 $ 4,372 $ 6,686
============ ============= ============
2000
INCOME STATEMENT
Revenues $ -- $ 10,588 $ 10,588
Expenses:
Operating -- 10,148 10,148
Other Expenses -- -- --
Depreciation & Amortization -- 459 459
Interest -- 58 58
------------ ------------- ------------
Total Expenses $ -- $ 10,665 $ 10,665
------------ ------------- ------------
Net Income/(Loss) $ -- $ (77) $ (77)
============ ============= ============
Equity in loss from equity method
investments $ -- $ (73) $ (73)
============ ============= ============
Keystone Realty
Services, Inc. Total
----------------- -----------------
1999
INCOME STATEMENT
Revenues $ 8,680 $ 8,680
Expenses:
Operating 8,404 8,404
Other Expenses -- --
Depreciation & Amortization 338 338
Interest 8 8
------------ -------------
Total Expenses $ 8,750 $ 8,750
------------ -------------
Net Loss $ (70) $ (70)
============ =============
Company's Ownership % 95%
============
Equity in loss from equity method
investments $ (67) $ (67)
============ =============
F-16
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INDEBTEDNESS
VARIABLE RATE INDEBTEDNESS
In December 2001, the Company refinanced its $150 million secured line of
credit with a new $125 million unsecured revolving credit facility (the "Credit
Facility"). Borrowings under the Credit Facility enable the Company to fund
acquisition and development of real estate, as well as providing working capital
to the Company. The Credit Facility has a term of three years with a one year
extension available at the option of the Company. Interest is calculated on a
grid based on the Company's leverage ranging from LIBOR plus 1.35% to LIBOR plus
1.875%. Based on the Company's current leverage, the facility is priced at LIBOR
plus 1.625%. The Company may also issue letters of credit for up to 10% of the
total Credit Facility amount. The interest rate on the retired $150.0 million
secured line of credit was based on a sliding scale, ranging from LIBOR plus
1.625% to LIBOR plus 2.25%, based on the Company's leverage. This line of credit
was secured by cross-collateralized mortgage loans on 55 properties as of
December 31, 2000. At December 31, 2001 and 2000, the Company had $93.0 million
and $124.9 million, respectively, outstanding on the applicable borrowing
agreements. The weighted average balance outstanding and weighted average
interest rate for 2001 and 2000 were $85.3 million and $136.6 million and 6.27%
and 8.71%, respectively. The Credit Facility requires the Company to meet
certain financial covenants, including certain leverage and coverage ratios, on
a quarterly, annual and ongoing basis. The Company is in compliance with these
debt covenants as of December 31, 2001.
In December 2000, the Company obtained a recourse $37.0 million loan to
construct two industrial facilities in New Jersey. This loan is collateralized
by these Properties, matures in December 2002 and requires interest at LIBOR
plus 2.25% (4.39% at December 31, 2001). The Company had approximately $11.9
million and $5.2 million outstanding on this loan at December 31, 2001 and 2000,
respectively. The Company has an additional $3.9 million in recourse
construction loans outstanding at December 31, 2001.
In May 2000, the Company obtained a $27.8 million three-year recourse term
facility which was prepayable at that time. At December 31, 2000, the Company
had $15.7 million outstanding under this facility. This facility was
collateralized by mortgages on three Properties, a lease assignment on another
Property and required interest on a sliding scale, ranging from LIBOR plus 1.80%
to LIBOR plus 2.25%, based on the amount of borrowings on the facility. This
facility was repaid from the proceeds of the Company's Common Share offering in
April 2001.
In 1999, the Company obtained a $2.0 million working capital facility which
was secured by one of the Properties. In October 2001, this facility was
expanded to $10.0 million and is secured by mortgage loans on four of the
Properties and a lease assignment on another Property. The facility matures in
January 2003 and requires interest only payments at LIBOR plus 1.75%. The LIBOR
interest rate is based on a sliding scale based on the value of the collateral.
Approximately $6.5 million was outstanding under this facility at December 31,
2001 and no amounts were outstanding at December 31, 2000. The weighted average
balance outstanding and weighted average interest rate for 2001 was $2.0 million
and 5.34%, respectively. No amounts were outstanding for this facility in 2000.
F-17
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIXED RATE INDEBTEDNESS
Mortgage notes of $321.7 million and $460.4 million, excluding debt
premiums, encumbered 48 and 69 of the properties at December 31, 2001 and 2000,
respectively. At December 31, 2001, interest rates on the mortgage loans ranged
from fixed rates of 6.88% to 9.75%. Mortgage notes had weighted average interest
rates of 7.75%, 7.71%, and 7.68% at December 31, 2001, 2000, and 1999,
respectively. The maturities for these notes range from September 2002 through
October 2022.
In connection with several acquisitions in 1998 and 1997, the Company
assumed certain mortgage notes with an aggregate principal value of $75.9
million and a fair value of $80.5 million. The difference between the principal
value and the fair value was recorded as a debt premium. These debt premiums are
being amortized into interest expense over the term of the related mortgage
debt. In 2001, 2000, and 1999, $865,000, $659,000, and $701,000, respectively,
was amortized into interest expense related to these debt premiums.
As a condition of certain of the mortgage loans, initial and ongoing cash
reserves are required to be funded for real estate taxes, insurance, tenant
rollover costs and capital reserves. The aggregate balances in these reserve
accounts at December 31, 2001 and 2000 were approximately $4.9 million and $6.6
million, respectively, and are reported as restricted cash.
In 2001, the Company recorded an extraordinary loss of approximately $2.5
million related to the early retirement of the $150 million secured line of
credit and the early retirement of approximately $86 million in other mortgage
debt.
Maturities of mortgage notes payable, excluding debt premiums as of
December 31, 2001, over the next five years are as follows (in 000's):
PRINCIPAL AMOUNT DUE AT
AMORTIZATION MATURITY TOTAL
2002................................. $ 4,290 $ 20,730 $ 25,020
2003................................. 4,741 6,466 11,207
2004................................. 5,042 132,722(1) 137,764
2005................................. 5,052 22,791 27,843
2006................................. 4,892 22,018 26,910
2007 and thereafter ................. 10,987 193,416 204,403
------------
TOTAL................................ $ 433,147
============
(1) Includes the Company's Credit Facility which has an
outstanding balance of approximately $93.0 million at
December 31, 2001, and matures December 21, 2004.
F-18
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDERS' EQUITY
The following table summarizes the Company's Common Share and Convertible
Preferred Stock activity in 2001, 2000, and 1999:
NET CASH
NUMBER OF PROCEEDS/
DATE OF SHARES NUMBER OF EXERCISE OR (REPURCHASE
ISSUANCE/ CONVERTIBLE COMMON CONVERSION COSTS)
TYPE OF ISSUANCE REPURCHASE PREFERRED STOCK SHARES SHARE PRICE PRICE (IN 000'S)
---------------- ---------- --------------- ------ ----------- ----- ----------
2001 ACTIVITY
Common Shares issuance (1) 9/7/01 -- 375,000 $ 13.65 $ -- $ 4,851
Common Shares repurchase (1) 9/7/01 -- (375,000) 12.75 -- (4,781)
Common Shares issuance (2) 8/27/01 -- 2,500,000 13.65 -- 32,161
Series B Convertible
Preferred
Stock converted to Common
Shares (2) 8/27/01 (803,871) 1,256,048 -- 16.00 --
Common Shares repurchase (2) 8/27/01 -- (2,500,000) 14.28 -- (35,700)
Common Shares repurchase (3) 5/1/01 -- (1,693,471) 11.94 -- (20,220)
Common Shares issuance (3) 4/30/01 -- 7,500,000 12.20 -- 85,710
Common Shares issued as Various -- 18,364 13.04-13.29 -- --
compensation (4)
Executive and employee stock
issuance (5) Various -- 156,256 12.83 -- --
OP Unit conversions (6) Various -- 1,839,081 -- -- --
---------- ---------- -----------
(803,871) 9,076,329 $ 62,021
========== ========== ===========
2000 ACTIVITY
Common Shares issuance (7) Various -- 102,511 $ 14.50 $ -- $ 1,361
Conversion of Convertible
Preferred Stock to
Redeemable Preferred
Stock (8) 7/18/00 (796,129) -- -- 16.00 --
Executive and employee stock
issuance (5) Various -- 211,660 12.84 -- --
OP Unit conversions (6) Various -- 101,215 -- -- --
---------- ---------- -----------
(796,129) 415,386 $ 1,361
========== ========== ===========
1999 ACTIVITY
Common Shares issuance (7) Various -- 1,276,800 $ 14.50 $ -- $ 18,314
Convertible Preferred Stock
issuance (9) 9/27/99 1,600,000 -- -- 16.00 --
Convertible Preferred Stock 9/27/99 800,000 -- -- 15.75 19,375
issuance (10)
Common Shares issuance (11) 9/27/99 -- 103,878 14.44 -- --
Common Shares issued as
compensation (4) Various -- 11,830 14.50-15.56 -- --
OP Unit conversions (6) Various -- 19,416 -- -- --
Stock options exercised 4/10/99 -- 2,200 -- 10.00 22
Executive Stock issuance and
Restricted Stock Awards (5) 3/24/99 -- 101,554 13.00-14.50 -- --
---------- ---------- -----------
2,400,000 1,515,678 $ 37,711
========== ========== ===========
F-19
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(1) These Common Shares were issued as the underwriter of the August 27
offering (see (2) below) exercised their overallotment option for 375,000
Common Shares for aggregate net proceeds of $4.9 million. The net proceeds
from this offering were used to repurchase 375,000 Common Shares at a cost
of $12.75 per share from affiliates of Francesco Galesi, a Trustee of the
Company.
(2) These Common Shares were issued in a public offering by the Company for
aggregate net proceeds of $32.2 million. Net proceeds from this offering
were used to repurchase 2,500,000 Common Shares from affiliates of Reckson,
who are affiliated with Scott Rechler, a trustee of the Company, who
converted 803,871 shares of Series B Convertible Preferred Stock into
1,256,048 Common Shares and 796,129 Series C Convertible Preferred Units
into 1,243,952 Common Shares. All these Common Shares were repurchased by
the Company for $35.7 million, a discount of 11% from their liquidation
value.
(3) These Common Shares were issued in a public offering by the Company for
aggregate net proceeds of $85.7 million. Net proceeds from this offering
were used to repurchase 1,693,471 Common Shares and 765,807 OP Units from
Crescent Real Estate Equities, Inc. for an aggregate cost of $29.4 million.
The remaining proceeds of $56 million were used to repay borrowings under
the Company's $150 million secured revolving credit facility and other
debt.
(4) Shares issued to trustees as compensation in lieu of cash for trustee fees.
(5) As part of the Company's Omnibus Incentive Plan (Note 9), during 2001 and
2000 the Company issued Common Shares to certain executives and employees
in consideration for non-interest bearing and interest bearing notes. In
1999, the Company issued Common Shares for restricted stock awards and
non-interest bearing notes (Note 9).
(6) OP Unit redemptions represent Common Shares issued upon conversion of OP
Units at the request of the respective unitholders. In 2001, affiliates of
Reckson converted 796,129 shares of Series C Convertible Preferred Units to
1,243,952 Common Shares which were simultaneously repurchased along with an
additional 1,256,048 Common Shares (as discussed in (2) above).
(7) These Common Shares were issued to certain trustees and executives of the
Company and other investors as part of a $20 million private placement
which was completed in phases between October 12, 1999 and January 18,
2000.
(8) In accordance with the Contribution and Exchange Agreement for the RMIT
transaction, any aggregate amount of Convertible Preferred Stock issued to
Reckson Operating Partnership, L.P. or its affiliates ("ROP") in excess of
$40 million of Convertible Preferred Stock and Convertible Preferred Units
is not convertible into Common Shares, however, it is redeemable at ROP's
option. Upon the closing of the last phase of the RMIT transaction in May
2000, approximately $19.9 million of ROP's Convertible Preferred Stock and
Convertible Preferred Units were in excess of $40.0 million. In July 2000,
ROP redeemed $19.9 million, (796,129 shares at a liquidation preference of
$25 per share) of this Series B Convertible Preferred Stock.
F-20
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(9) Offering, as part of the RMIT transaction, for 1,600,000 shares of
non-voting Series B Convertible Preferred Stock, par value $.001 per share,
with liquidation preference of $25.00 per share. The shares are convertible
into Common Shares at $16.00 per share. Dividends are payable quarterly at
an annual rate of $2.4375 per share of Series B Preferred Stock and are
subject to an increase in the event the annual dividend per share on the
Common Shares exceeds $1.56. The Series B Preferred Stock is redeemable by
the Company at any time for cash payments equal to an amount which produces
a 17% internal rate of return to the preferred shareholder. After the fifth
anniversary of the issuance date through the ninth anniversary thereof the
redemption price is based on a defined premium as specified in the
subscription agreement. As a result of a redemption of 796,129 shares of
this series of Convertible Preferred Stock in 2000 (see (8) above) and the
Company's repurchase of the remaining amount in 2001 (see (2) above), no
shares of Series B Convertible Preferred Stock are outstanding at December
31, 2001.
(10) Offering for 800,000 shares of non-voting Series C Convertible Preferred
Stock, par value $.001 per share, with liquidation preference of $25.00 per
share. The shares are convertible into Common Shares at $15.75 per share.
Dividends are payable quarterly at an annual rate of $2.4375 per share of
Series C Preferred Stock and are subject to an increase in the event the
annual dividend per share on the Common Shares exceeds $1.54. The Series C
Preferred Stock is not redeemable by the Company prior to September 27,
2004. After the fifth anniversary of the issuance date through the ninth
anniversary thereof the redemption price is based on a defined premium as
specified in the subscription agreement.
(11) Shares issued as partial consideration for the RMIT acquisition.
MINORITY INTEREST AND CONVERTIBLE PREFERRED UNITS
Minority interest represents interests in the Operating Partnership owned
by its limited partners. Income allocated to the minority interest is based on
the ownership of the limited partners throughout the year. Pursuant to the
amended and restated limited partnership agreement, the limited partners of the
Operating Partnership have a conversion right, which enables each limited
partner to convert their interests in the Operating Partnership into Common
Shares or cash, at the election of the Company, at any time on a one for one
basis. The number of shares relating to the conversion right remains stable
irrespective of the market price of the Company's Common Shares. The limited
partners, in the aggregate, excluding 2.4 million of Convertible Preferred Units
outstanding, could convert their partnership interests in the Operating
Partnership into 6.4 million, 7.7 million, and 7.3 million Common Shares as of
December 31, 2001, 2000, and 1999, respectively. OP Units totaling 595,129,
101,215, and 19,416, were converted into Common Shares in 2001, 2000, and 1999,
respectively. Series C Convertible Preferred Units totaling 796,129 were
converted into 1,243,945 Common Shares in 2001.
The Company has three series of non-voting Convertible Preferred Units
outstanding all of which have a liquidation value of $25 per unit. The 300,000
Series B Convertible Preferred Units have a conversion price of $16.50 and
require a preferred return of 9.5%. The 1,664,965 Series C Convertible Preferred
Units have a conversion price of $16.00 and require a preferred return of 9.75%.
The 450,700 Series D Convertible Preferred Units have a conversion price of
$16.50 and require a preferred return of 9.0%. The preferential return on the
Series C Convertible Preferred Units is subject to increase in the event that
the annual distribution on common OP Units exceeds $1.56. The Series B
Convertible Preferred Units are redeemable by the Company at any time. The
Series C and Series D Convertible Preferred Units are not redeemable by the
Company prior to September 27, 2004 and July 21, 2004, respectively. The
redemption price for the Series C Convertible Preferred Units subsequent to
F-21
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
September 27, 2004 through September 27, 2009 includes a defined premium as
specified in the amended and restated limited partnership agreement.
7. RELATED PARTY TRANSACTIONS
The Company has leases with companies in which trustees of the Company are
officers and shareholders. The annual aggregate base rental revenue under these
leases was approximately $724,000, $1.1 million, and $1.1 million for each of
the years ended December 31, 2001, 2000 and 1999, respectively.
The Company incurred costs during 2001 and 2000 related to construction,
capital and tenant improvements of approximately $361,000 and $3.5 million,
respectively, leasing commissions of $208,000 and $1.1 million, respectively,
and repairs, maintenance and other costs of $315,000 and $291,000, respectively,
which were earned by companies in which the Company's Chairman and certain of
its trustees are officers and shareholders.
Certain limited partners of the Operating Partnership, which include
certain trustees and entities in which certain trustees have an ownership
interest, have guaranteed mortgage loans aggregating approximately $30.0 million
at December 31, 2001.
Through the Operating Partnership's 100% ownership of the preferred stock
of the Management Company, the Operating Partnership is entitled to receive 95%
of the amounts paid as dividends by the Management Company. The remaining
amounts paid as dividends by the Management Company are paid to the holders of
common stock of the Management Company. The Company's Chief Executive Officer
and President, another investor in the Company, and the Company's Chairman and
certain members of his family, own 40%, 30% and 30%, respectively, of the common
stock of the Management Company. No dividends were paid by the Management
Company in 2001, 2000, or 1999. Management fees paid by the Operating
Partnership's properties to the Management Company are included in the
accompanying statements of operations and amounted to $3.2 million and $3.0
million during 2000 and 1999, respectively. The Management Company also received
reimbursements of certain costs attributable to the operation of the properties.
Such reimbursements are included in property operating expenses and general and
administrative expenses in the accompanying statements of operations and
amounted to $2.6 million and $2.8 million during 2000 and 1999, respectively. No
management fees or cost reimbursements were paid in 2001. 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 the Properties
through the Operating Partnership. As a result, the Management Company no longer
charges the Operating Partnership a management fee.
Certain executive officers of the Company have an aggregate 11% limited
partnership interest in a partnership which is 89% owned by the Company.
In 2001, the Company received approximately $240,000 in fees as a result of
services provided to the CalEast Joint Venture for acquisition services. The
Management Company, an affiliate of the Company, receives management fees and
other fee compensation for services provided to the CalEast Joint Venture.
In connection with the RMIT transaction, during 2000 the Company paid a
monthly construction management fee of $308,000 to an affiliate of Reckson. The
Company capitalized this fee as a cost of the RMIT transaction.
F-22
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
The Company is obligated to pay an affiliate of Joseph Morris, a former
Trustee of the Company, additional purchase price related to the RMIT
transaction in an amount equal to 1.5% of the monthly rent collected from the
tenants in the acquired buildings. These payments are required to be made
monthly during the period from October 1999 until October 2002. The Company has
estimated the amounts due under this obligation and has capitalized this amount
as additional purchase price for the RMIT transaction. In 2001, 2000 and 1999,
the Company incurred approximately $444,000, $455,000 and $68,000, respectively,
related to this obligation. The Company had also loaned an affiliate of Joseph
Morris $787,000 as part of the closing of the RMIT transaction in 1999. This
loan requires monthly interest payments at prime plus 1% and had an original
maturity date of October 2001. In September 2001, the terms of this loan were
amended to provide for forgiveness of a portion of this loan by the Company.
During 2001, Morris Realty, L.P. repaid $287,000 of this loan and the remaining
principal balance of $500,000 will be forgiven and reduced by approximately
$167,000 annually over a three year period.
Certain affiliates of Joseph Morris have received equity interests in
certain entities which are controlled by the Company as consideration for
development fees which the Company is required to pay in accordance with the
terms of the RMIT transaction. In 2001, the Company paid a fee of approximately
$3.0 million to an affiliate of Joseph Morris and certain unitholders of the
Operating Partnership for services provided in connection with the sale of a
property owned by the Company.
The Company's Chief Executive Officer and its Chairman contributed
outstanding Common Share and OP Unit warrants aggregating 675,000 to the
Operating Partnership in exchange for OP Units in 2000 and 1999.
As further discussed in Notes 9 and 11, certain executives and other
employees have recourse loans from the Company related to Common Share issuances
and purchases from the Company.
As discussed in Note 6, in 2001, the Company acquired 375,000 Common Shares
from affiliates of Francesco Galesi, a trustee of the Company, for an aggregate
price of $4.8 million. The Company also repurchased 2.5 million Common Shares
from affiliates of Reckson for an aggregate price of $35.7 million. Scott
Rechler, a trustee of the Company, is Co-Chief Executive Officer of Reckson.
8. OPERATING LEASES AND OTHER TENANT MATTERS
The Company's properties are leased to tenants generally under operating
leases with expiration dates extending through 2019. As of December 31, 2001,
future minimum rentals under 262 noncancellable operating leases, excluding
tenant reimbursements of operating expenses, are as follows:
(IN 000'S)
----------------------
2002.............................................................. $ 100,932
2003.............................................................. $ 85,416
2004.............................................................. $ 69,565
2005.............................................................. $ 60,382
2006.............................................................. $ 47,133
Thereafter........................................................ $ 175,909
The revenue resulting from straight-line rental income adjustments for the
years ended December 31, 2001, 2000, and 1999 was $2.9 million, $3.8 million,
and $1.9 million, respectively. No tenant represented more than 10% of the
minimum rental revenues for 2001, 2000, and 1999. At December 31, 2001, no
single tenant exceeds 3% of the Company's annualized base rent.
F-23
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. BENEFIT PLANS AND STOCK WARRANTS
STOCK OPTIONS, RESTRICTED STOCK AWARDS, AND STOCK LOANS
The Company's Omnibus Incentive Plan (the "Plan"), as amended in 1998,
has authorized the grant of compensatory awards to employees consisting of stock
options, stock awards, stock appreciation rights and other stock-based awards
representing up to 10% of the combined number of Common Shares and OP Units of
the Operating Partnership. Incentive stock options are to be granted at not less
than the fair market value of the Company's stock on the date of the grant and
the term cannot exceed ten years. The vesting period of each grant varies and is
determined at the date of grant. Any award issued under the plans which is
forfeited, expires or terminates prior to vesting or exercise is available for
future award under the plans.
In connection with the Plan, the Company issued 156,250, 211,660 and
100,000 Common Shares to certain executives and employees in consideration for
recourse interest bearing and non-interest bearing notes aggregating $2.0
million, $2.7 million and $1.3 million in 2001, 2000 and 1999, respectively.
These notes mature at various dates ranging from 2009 to 2010. These Common
Shares carry dividend and voting rights and also secure the notes. These notes
will be forgiven annually over a period ranging from five to seven years
beginning in 2004 only in the event the respective individual is still an
employee of the Company at the end of each respective year. In 1998, an officer
of the Company was issued a $392,000 non-interest bearing recourse note which
the executive used to acquire 25,000 Common Shares. Under the terms of his
employment agreement, $33,333 of this note has been forgiven annually over a
three year period. These notes have been reflected in the accompanying financial
statements as a reduction in shareholders' equity.
In 1999 and 1998, the Company granted a total of 38,796 restricted
Common Shares to certain executives and employees under the Plan as
compensation. These shares carry dividend and voting rights and vested over a
two-year period. The shares issued under this Plan were recorded at their fair
market value on the date of grant with a corresponding total charge of $562,000
to shareholders' equity, which was recorded in additional paid-in capital. The
unearned portion was amortized to compensation expense over the two-year vesting
period. During 2000 and 1999, the Company amortized $282,000 and $280,000,
respectively, of compensation expense relating to these restricted shares.
In 1994, the Company adopted and authorized the Non-Employee Stock
Option Plan (the "Non-Employee Plan") and 300,000 shares were authorized
thereunder in the form of non-qualified stock options for issuance to certain
trustees or consultants. The exercise price for each option granted under the
Non-Employee Plan cannot be less than the fair market value of the Company's
Common Shares underlying the option at the date of grant. The term of each
option is ten years and each option is exercisable upon the date of grant,
provided that the option holder remains a trustee, employee or consultant to the
Company during the exercise period.
F-24
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the activity and balance outstanding for
each plan for 2001, 2000, and 1999:
2001 2000 1999
----------------------------- ----------------------------- ------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- ----- ------- ----- ------- -----
OMNIBUS INCENTIVE PLAN
Outstanding, beginning
of year 563,750 $ 15.19 604,750 $ 15.18 602,250 $ 15.18
Granted............... 750,137 12.83 -- -- 18,000 15.24
Exercised............. -- -- -- -- -- --
Forfeited............. (10,500) 14.50 (41,000) 14.99 (15,500) 15.08
--------- ---------- ---------- ---------- --------- ----------
Outstanding, end of
year.................. 1,303,387 $ 13.84 563,750 $ 15.19 604,750 $ 15.18
========= ========== ========== ========== ========= ==========
NON-EMPLOYEE PLAN
Outstanding, beginning
of year............... 15,800 $ 10.00 15,800 $ 10.00 18,000 $ 10.00
Granted............... 20,000 12.54 -- -- -- --
Exercised............. -- -- -- -- (2,200) 10.00
Forfeited............. (10,000) 12.54 -- -- -- --
--------- ---------- ---------- ---------- --------- ----------
Outstanding, end of
year.................. 25,800 $ 10.98 15,800 $ 10.00 15,800 $ 10.00
========= ========== ========== ========== ========= ==========
Total options
outstanding and
weighted average
exercise price for all
plans 1,329,187 $ 13.78 579,550 $ 15.05 620,550 $ 15.05
========= ========== ========== ========== ========= ==========
The following table summarizes information about stock options exercisable
at December 31 for each of the past three years:
NUMBER OF WEIGHTED AVERAGE RANGE OF
YEAR OPTIONS EXERCISE PRICE EXERCISE PRICES
------------------------------ ------------------- -------------------- --------------------
December 31, 1999 181,703 $ 14.43 $14.50-$16.50
December 31, 2000 337,717 $ 14.71 $14.50-$16.50
December 31, 2001 549,883 $ 14.72 $12.83-$16.50
The Company accounts for its stock-based options under Accounting
Principles Board Opinion No. 25, under which no compensation expense related
to options has been recognized, as all options have been granted with an
exercise price equal to or greater than the fair value of the Company's
Common Shares on the date of grant. The Company reports under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), for disclosure purposes. In accordance with
SFAS No. 123, the fair value of each option grant has been estimated as of
the date of grant using an option pricing model with the following
assumptions: dividend yield of 9.00% and 7.00% for 2001 and 1999,
respectively; an expected life of 7 years and 10 years for 2001 and 1999,
respectively; expected volatility of 29% and 31% for 2001 and 1999,
respectively; and a risk free interest rate of 5.8% and 6.1% for 2001 and
1999, respectively. There were no options granted in 2000. The weighted
average fair value of those options granted in 2001 and 1999 was $1.49 and
$2.20, respectively, per option granted. The weighted average remaining
contractual life of the options outstanding is approximately 8.5 years.
F-25
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Using these assumptions, the fair value of the stock options granted in
2001 and 1999 was approximately $364,000 and $45,000, respectively. Had
compensation cost been determined consistent with SFAS No. 123, utilizing the
assumptions detailed above, the Company's net income would have been reduced to
the following pro forma amounts:
(DOLLARS IN 000'S, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
2001 2000 1999
---- ---- ----
Net income:
As reported.................................... $ 14,334 $ 896 $ 6,328
Pro forma (unaudited).......................... $ 14,073 $ 687 $ 6,121
Basic earnings per share:
As reported.................................... $ .99 $ .10 $ .83
Pro forma (unaudited).......................... $ .97 $ .07 $ .80
Diluted earnings per share
As reported.................................... $ .93 $ .09 $ .80
Pro forma (unaudited).......................... $ .92 $ .07 $ .78
10. EARNINGS PER SHARE
The Company discloses earnings per share ("EPS") in accordance with
Statement of Financial Accounting Standards No. 128, Earnings Per Share, ("SFAS
No. 128"). 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.
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations:
(DOLLARS IN 000'S, EXCEPT SHARE AND PER SHARE AMOUNTS)
For the Years Ended December 31,
----------------------------------------------------------------------------------
2001 2000 1999
----------------------------------------------------------------------------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED
----------- ----------- ------------ ------------ ------------ -------------
Net income excluding extraordinary items.. $ 14,334 $ 14,334 $ 896 $ 896 $ 6,328 $ 6,328
Add: Minority interest allocation ....... -- 5,650 -- 649 -- 5,592
----------- ----------- ----------- ------------ ------------ ------------
$ 14,334 $ 19,984 $ 896 $ 1,545 $ 6,328 $ 11,920
=========== =========== =========== ============ ============ ============
Weighted average number of Common Shares
outstanding .......................... 14,518,099 14,518,099 9,239,591 9,239,591 7,622,010 7,622,010
Weighted average Common Share/stock
equivalents .......................... -- 6,891,924 -- 7,659,281 -- 7,188,807
----------- ----------- ----------- ------------ ------------ ------------
14,518,099 21,410,023 9,239,591 16,898,872 7,622,010 14,810,817
=========== =========== =========== ============ ============ ============
Earnings per Common Share ................ $ .99 $ .93 $ .10 $ .09 $ .83 $ .80
=========== =========== =========== ============ ============ ============
F-26
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's weighted average stock equivalents consisted of the
following:
2001 2000 1999
---- ---- ----
Options and warrants.......................................... 3,066 4,765 169,524
OP Units...................................................... 6,888,858 7,654,516 7,019,283
----------- ----------- -----------
6,891,924 7,659,281 7,188,807
=========== =========== ===========
11. COMMITMENTS AND CONTINGENCIES
Six executive officers of the Company have employment agreements which
provide for aggregate initial base compensation of $1.4 million subject to
increases as approved by the Compensation Committee, among other incentive
compensation.
The Company has guaranteed bank loans of approximately $721,000 held by
certain executives with which these executives acquired stock in the Company.
The Company had $2.8 million and $450,000 in outstanding letters of credit
at December 31, 2001 and 2000, respectively. Approximately $2.7 million of the
letters of credit obligations outstanding at December 31, 2001 secure existing
debt obligations of the Company.
As discussed in Note 4, the Company has a joint and several guarantee of
approximately $15.5 million of recourse construction debt, which matures in
June 2004, associated with the 4 Points joint venture. In addition, the
Company has guaranteed a $3.0 million land development loan outstanding by a
Browning affiliate related to the development of Airtech Park, which matures
in August 2002.
F-27
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has leases for office space which require aggregate monthly
payments of approximately $69,000, under leases which expire between April 2002
and April 2007. Additionally, the Company has various ground lease commitments
for certain of the Properties. Future minimum lease payments under these
non-cancelable operating leases are payable as follows:
(IN 000'S)
------------------
2002.............................................................. $ 804
2003.............................................................. 831
2004.............................................................. 669
2005.............................................................. 421
2006.............................................................. 421
Thereafter........................................................ 4,813
-----------
Total $ 7,959
===========
Rental expense for the above operating leases during 2001, 2000, and 1999
was $963,000, $813,000, and $523,000, respectively.
LITIGATION
In the normal course of business, the Company is involved in legal actions
relating to the ownership and operation of its properties. In management's
opinion, the liabilities, if any, that may ultimately result from such legal
actions are not expected to have a materially adverse effect on the consolidated
financial position, results of operations, or cash flows of the Company.
ENVIRONMENTAL MATTERS
All of the Company's Properties have been subject to Phase I environmental
assessments (and, in certain instances, Phase II environmental assessments).
Such assessments have not revealed, nor is management aware of, any
environmental liability that management believes would have a material adverse
effect on the accompanying consolidated financial statements.
12. INTERIM RESULTS (UNAUDITED)
The following presents a summary of the unaudited quarterly financial
information for the years ended December 31, 2001 and 2000 (dollars in 000's,
except per share amounts):
2001
----------------------------------------------------------------------------
THREE MONTH PERIOD ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
Revenue........................................ $ 30,684 $ 26,706 $ 27,470 $ 24,924
Income before gains/(losses) from equity method
investments and gains on sales of assets..... 2,834 6,870 7,243 7,330
Equity in income/(losses) from equity method
investments.................................... (129) 198 386 668
Gains/(losses) on sales of assets.............. 336 -- 10,025 (1,219)
Distributions to preferred unitholders......... (1,931) (1,932) (1,747) (1,447)
Minority interest of unitholders in Operating
Partnership.................................... 585 (1,211) (4,180) (844)
Extraordinary item - loss in early retirement of
debt........................................... (982) (193) (94) (1,197)
--------- --------- --------- ---------
Net income before income allocated to preferred
shareholders................................. 713 3,732 11,633 3,291
Income allocated to preferred shareholders..... (1,427) (1,428) (1,242) (938)
--------- --------- --------- ---------
Net income/(loss) available to common
shareholders................................... $ (714) $ 2,304 $ 10,391 $ 2,353
========= ========= ========= =========
Basic earnings/(loss) per Common Share......... $ (.08) $ .17 $ .63 $ .13
========= ========= ========= =========
Diluted earnings/(loss) per Common Share....... $ (.08) $ .17 $ .55 $ .13
========= ========= ========= =========
F-28
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2000
----------------------------------------------------------------------------
THREE MONTH PERIOD ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
Revenue........................................ $ 28,556 $ 30,229 $ 31,986 $ 32,330
Income before equity in earnings (losses) from
equity method investments and gains (losses)
on sales of assets........................... 6,431 5,323 (4,017) 7,042
Equity in earnings (losses) from equity method
investments.................................. 249 415 (248) (489)
Gains (losses) on sales of assets.............. 140 484 (252) (285)
Distributions to preferred unitholders......... (1,317) (1,702) (1,924) (1,932)
Minority interest of unitholders in Operating
Partnership.................................. (1,628) (1,250) 3,542 (1,313)
---------- ---------- ------------ ----------
Net income before loss/income allocated to
preferred shareholders....................... 3,875 3,270 (2,899) 3,023
Income allocated to preferred shareholders..... (1,930) (1,609) (1,407) (1,427)
---------- ---------- ---------- ----------
Net income available to common shareholders.... $ 1,945 $ 1,661 $ (4,306) $ 1,596
========== ========== ========== ==========
Basic earnings per Common Share................ $ .21 $ .18 $ (.46) $ .17
========== ========== ========== ==========
Diluted earnings per Common Share.............. $ .21 $ .17 $ (.46) $ .17
========== ========== ========== ==========
As discussed in Note 2, in the third quarter of 2000, the Company recorded
an $11.3 million provision for asset valuation on certain assets which were
accounted for as assets held for sale.
As discussed in Note 2, in the first quarter of 2001, the Company recorded
a $2.7 million cumulative adjustment to record depreciation expense on assets
which were previously classified as held for sale.
F-29
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SEGMENTS
The Company reports segment information in accordance with Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information."
The Company's Chief Executive Officer and management assess and measure
operating results based upon property level operating income on an individual
asset basis within each of the Company's business segments. The Company
considers its reportable segments to be office, industrial, multi-family and
other based on geographic regions. Other properties consist of a community
shopping center, which was sold in 1999, and an investment in a direct financing
lease. The accounting policies of the reportable segments are consistent with
those described in Note 2. Summarized financial information concerning the
Company's reportable segments is shown in the following table (in 000's):
REVENUE PROPERTY LEVEL OPERATING INCOME
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
-------------------------------------------------- -------------------------------------------------
2001 2000 1999 2001 2000 1999
-------------------------------------------------- ------------------------------------------------
INDUSTRIAL
New Jersey $ 25,827 $ 32,249 $ 9,278 $ 21,684 $ 26,721 $ 7,697
Pennsylvania 20,452 20,979 16,046 18,591 19,009 14,826
Indiana 9,270 7,560 3,901 9,269 7,291 3,746
Ohio 5,125 5,385 4,273 4,829 5,105 4,070
New York 5,540 7,663 6,627 4,301 6,574 5,889
South Carolina 7,199 7,476 7,071 6,310 6,648 6,280
-------------- -------------- --------------- -------------- -------------- ---------------
$ 73,413 $ 81,312 $ 47,196 $ 64,984 $ 71,348 $ 42,508
============== ============== =============== ============== ============== ===============
OFFICE
New Jersey $ 6,355 $ 7,573 $ 7,219 $ 5,467 $ 6,535 $ 6,212
Pennsylvania 2,140 7,241 6,265 1,279 4,896 4,173
New York 25,868 26,268 23,007 17,232 17,816 15,892
---------------- ---------------- ---------------- - ------------- -------------- --------------
$ 34,363 $ 41,082 $ 36,491 $ 23,978 $ 29,247 $ 26,277
================ ================ ================ =============== ============== ==============
Multi-Family and Other $ 151 $ 272 $ 625 $ 148 $ 266 $ 431
================ ================ ================ =============== =============== ================
Other income (1) $ 1,857 $ 435 $ 214 $ -- $ -- $ --
---------------- ---------------- ---------------- --------------- --------------- --------------
Total $ 109,784 $ 123,101 $ 84,526 $ 89,110 $ 100,861 $ 69,216
================ ================ ================ =============== =============== ==============
INVESTMENT IN REAL ESTATE, AT COST DEPRECIATION AND AMORTIZATION EXPENSE
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
-------------------------------------------------- ----------------------------------------------
2001 2000 1999 2001 2000 1999
-------------------------------------------------- -----------------------------------------------
INDUSTRIAL
New Jersey $ 188,973 $ 310,460 $ 225,603 $ 6,783 $ 6,112 $ 1,894
Pennsylvania 226,151 173,612 175,956 4,240 4,282 3,360
Indiana 88,250 67,920 39,373 1,769 1,629 922
Ohio 42,093 41,754 41,687 1,070 1,018 788
New York 44,807 44,371 56,230 1,093 1,347 1,230
South Carolina 64,793 66,020 65,861 1,883 1,878 1,616
-------------- --------------- --------------- -------------- -------------- --------------
$ 655,067 $ 704,137 $ 604,710 $ 16,838 $ 16,266 $ 9,810
============== ============== =============== ============== ============== ==============
OFFICE
New Jersey $ -- $ 59,688 $ 59,573 $ 2,821 $ 109 $ 1,597
Pennsylvania 11,749 43,087 46,239 410 446 1,082
New York 150,474 149,472 148,354 4,451 4,307 3,870
---------------- ---------------- ---------------- --------------- --------------- --------------
$ 162,223 $ 252,247 $ 254,166 $ 7,682 $ 4,862 $ 6,549
================ ================ ================ =============== =============== ==============
Multi-Family and
Other $ 840 $ 1,214 $ 1,460 $ -- $ -- $ --
================ ================ ================ =============== =============== ==============
Total $ 818,130 $ 957,598 $ 860,336 $ 24,520 $ 21,128 $ 16,359
================ ================ ================ =============== =============== ==============
F-30
KEYSTONE PROPERTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CAPITAL EXPENDITURES PHYSICAL OCCUPANCY
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
-------------------------------------------------- ----------------------------------------------
2001 2000 1999 2001 2000 1999
-------------------------------------------------- ----------------------------------------------
INDUSTRIAL
New Jersey $ 1,002 $ 558 $ 311 99.2% 100.0% 99.8%
Pennsylvania 383 286 159 95.2% 98.3% 100.0%
Indiana -- -- -- 100.0% 100.0% 100.0%
Ohio 318 66 13 100.0% 92.3% 100.0%
New York 426 335 170 57.2% 99.0% 99.3%
South Carolina 298 148 163 88.7% 78.8% 96.0%
-------------- -------------- --------------- -------------- -------------- --------------
$ 2,427 $ 1,393 $ 816 93.9% 95.4% 99.2%
============== ============== =============== ============== ============== ==============
OFFICE
New Jersey $ 89 $ 112 $ 1,024 -- 98.7% 99.5%
Pennsylvania 458 647 578 91.2% 89.7% 92.7%
New York 733 2,208 1,061 93.4% 96.4% 97.1%
-------------- -------------- --------------- -------------- -------------- --------------
$ 1,280 $ 2,967 $ 2,663 93.2% 95.6% 96.9%
============== ============== =============== ============== ============== ==============
Multi-Family and
Other $ -- $ -- $ -- 100.0% 100.0% 100.0%
============== ============== =============== ============== ============== ==============
Total $ 3,707 $ 4,360 $ 3,479 93.9% 95.4% 98.9%
============== ============== =============== ============== ============== ==============
2001 2000 1999
---------------------------------------- -----------------
Segment property operating income as shown above $ 89,110 $ 100,861 $ 69,216
Provision for asset valuation -- (11,300) --
Depreciation and amortization expense (24,520) (21,128) (16,359)
General and administrative expense (7,983) (7,523) (6,698)
Interest expense (34,187) (46,566) (30,307)
Other income (1) 1,857 435 214
---------------- ----------------- -----------------
Income before equity in losses from equity method
investments and gains on sales of assets $ 24,277 $ 14,779 $ 16,066
================ ================ =================
(1) Amount consists of interest and other service income not allocated to a
specific business segment.
(2) Property level Net Operating Income excludes depreciation and amortization
expense.
F-31
SCHEDULE II:
KEYSTONE PROPERTY TRUST
VALUATION AND QUALIFYING ACCOUNTS
AS OF DECEMBER 31, 2001
(IN 000'S)
CHARGES TO
BEGINNING COSTS ENDING
DESCRIPTION BALANCE AND EXPENSES RECOVERIES DEDUCTIONS BALANCE
----------- ------- ------------ ---------- ---------- -------
For year ended December 31, 2001:
Allowance for doubtful accounts ........ $ 250 $ 232 $ -- $ -- $ 482
For year ended December 31, 2000:
Allowance for doubtful accounts......... $ -- $ 250 $ -- $ -- $ 250
For year ended December 31, 1999:
Allowance for doubtful accounts ........ $ -- $ -- $ -- $ -- $ --
S-1
SCHEDULE III:
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2001
(IN 000'S)
COSTS
CAPITALIZED
SUB-SEQUENT
TO
INITIAL COSTS ACQUISITION
LOCATION (a) ------------- OR
BUILDING ADDRESS (CITY/STATE) ENCUMBRANCES LAND BUILDINGS TRANSFERS COMPLETION
---------------- ----------- ------------ ---- --------- --------- ------------------
INDUSTRIAL
PROPERTIES:
6813 Ruppsville Road Allentown, PA -- 286 1,591 -- --
6829 Ruppsville Road Allentown, PA -- 615 3,485 -- --
6831 Ruppsville Road Allentown, AP -- 404 2,289 -- --
7220 Schantz Court Allentown, PA -- 328 1,857 -- --
7485 Industrial Allentown, PA
Boulevard -- 1,109 6,286 -- --
7520 Morris Court Allentown, PA -- 1,005 5,695 -- --
7529 Morris Court Allentown, PA -- 1,960 11,109 -- --
7542 Morris Court Allentown, PA -- 1,004 5,690 -- --
7566 Morris Court Allentown, PA -- 677 3,834 -- --
7584 Morris Court Allentown, PA -- 417 2,363 -- --
7663 Morris Court Allentown, PA -- 271 1,533 -- --
2400, 2404, 2410
Gettysburg Road Camp Hill, PA -- 1,351 4,236 -- 161
811 Spangler Road Camp Hill, PA -- 531 3,026 -- --
1440 Sheffler
Drive Chambersburg, PA -- 2,253 10,116 -- 24
1465 Nitterhouse Drive Chambersburg, PA -- 3,191 11,944 -- 20
2294 Molly
Pitcher Highway Chambersburg, PA 16,739 1,894 19,661 -- 85
One Tabas Lane Exton, PA -- 842 3,552 -- 36
Two Tabas Lane Exton, PA 3,865 1,211 5,342 -- 109
21 Roadway Drive Harrisburg, PA 11,666 2,332 13,217 -- 79
221 South 10th Street Lemoyne, PA 18,889 4,498 25,486 -- 219
420 Salem Church Road Mechanicsburg PA 10,010 1,854 10,537 -- --
75 Pleasant View Drive Mechanicsburg, PA -- 641 3,643 -- --
1001, 1011 AIP
Drive Middletown, PA 7,083 1,539 7,225 -- 221
1 Philips Drive Mountaintop, PA 7,209 2,213 8,855 -- 6
100 Oakhill Road Mountaintop, PA -- 546 2,274 -- --
1091 Arnold Road Reading, PA -- 768 3,206 -- 94
1157 Arnold Road Reading, PA -- 1,152 4,750 -- 17
--------------------------------------------------------------------
SUBTOTAL
PENNSYLVANIA
INDUSTRIAL 75,461 34,886 182,802 -- 1,071
--------------------------------------------------------------------
300 Enterprise Drive Bellevue, OH 3,890 746 4,226 -- 2
1311 Majestic Drive Fremont, OH 2,956 528 2,991 -- --
1411 Majestic Drive Fremont, OH 3,670 671 3,803 -- --
600 Hagerty Drive Fremont, OH 2,621 467 2,648 -- 8
605 Hagerty Drive Fremont, OH 1,634 283 1,604 -- 5
670 Hagerty Drive Fremont, OH 2,173 405 2,294 -- 5
800 Hagerty Drive Fremont, OH 778 128 724 -- 5
5555 Massillon Road Green, OH -- 1,573 6,309 -- (2)
16725 Square Drive Marysville, OH 2,179 564 2,459 -- 51
1030 South
Edgewood Drive Urbana, OH -- 782 2,293 -- 782
3530 East Pike Zanesville, OH 4,475 1,002 4,685 -- 33
--------------------------------------------------------------------
SUBTOTAL OHIO
INDUSTRIAL 24,376 7,149 34,036 -- 889
--------------------------------------------------------------------
21 Cranbury Road Cranbury, NJ 27,700 5,856 31,688 72 298
24 Abeel Road Cranbury, NJ -- 292 1,435 3 9
34 Englehard Drive Cranbury, NJ -- 1,467 8,381 -- 82
400 Cabot Drive Hamilton
Twp., NJ 18,631 3,468 19,653 44 52
2 Volvo Drive Rockleigh, NJ (d) 994 4,192 -- 1
30 Stults Road S.Brunswick, NJ 2,606 395 2,469 7 635
301-321 Herrod
Boulevard S.Brunswick, NJ 16,734 3,777 21,376 47 14
Four Applegate Washington
Twp., NJ 9,727 2,243 12,713 30 7
5 Henderson Drive West
Caldwell,
NJ (d) 1,684 9,545 22 835
--------------------------------------------------------------------
SUBTOTAL NEW
JERSEY INDUSTRIAL 75,398 20,176 111,452 225 1,933
--------------------------------------------------------------------
351 West 10th Street Indianapolis, IN 2,300 547 3,105 -- --
4400 West 96th Street Indianapolis, IN 5,734 1,384 7,845 -- 43
6402 Corporate Drive Indianapolis, IN 6,015 1,250 7,424 -- 39
8677 Logo Court Indianapolis, IN 8,798 2,547 15,109 -- 79
501 Airtech Drive Plainfield, IN 19,500 4,272 24,275 -- --
558 Airtech Drive Plainfield, IN 14,947 1,984 15,040 -- 3,264
--------------------------------------------------------------------
SUBTOTAL INDIANA
INDUSTRIAL 57,294 11,984 72,798 -- 3,425
--------------------------------------------------------------------
104 Hidden Lake Circle Duncan, SC (d) 697 3,947 -- 11
120 Hidden Lake Circle Duncan, SC -- 1,463 8,292 -- --
Augusta Road Greenville, SC
Industrial Park -- 1,129 6,405 -- 45
Rocky Creek
Business Park Greenville, SC -- 617 3,499 (1,539)(e) 69
White Horse Road
Industrial Park Greenville, SC -- 1,272 7,218 -- 175
1221 South
Batesville Road Greer, SC -- 1,497 8,498 -- 450
Buncombe Road
Industrial Park Greer, SC -- 1,010 5,734 -- 132
Outlaw Industrial
Park Greer, SC -- 790 4,483 -- 58
Piedmont Highway
Industrial Park Piedmont, SC -- 1,310 7,433 -- 64
--------------------------------------------------------------------
SUBTOTAL SOUTH
CAROLINA
INDUSTRIAL -- 9,785 55,509 (1,539) 1,004
--------------------------------------------------------------------
Northeast
Industrial Park Albany, NY 3,257 1,340 5,472 -- 134
Bldg. 21
Northeast
Industrial Park Albany, NY 3,388 971 3,964 -- 37
Bldg 22
Northeast
Industrial Park Albany, NY 6,275 1,254 5,124 -- 153
Bldg. 8
4 Marway Circle Gates, NY 1,186 289 1,161 -- 377
5 Marway Circle Gates, NY 1,014 248 995 -- 84
8 Marway Circle Gates, NY 1,243 289 1,161 -- --
4472 & 4480
Steelway Blvd. Liverpool, NY 10,818 2,611 10,375 -- 259
Mount Ebo Mount Ebo, NY (d) 1,495 6,990 -- --
--------------------------------------------------------------------
SUBTOTAL NEW YORK
INDUSTRIAL 27,181 8,497 35,242 -- 1,044
--------------------------------------------------------------------
SUBTOTAL
INDUSTRIAL
PROPERTIES 259,710 92,477 491,839 (1,314) 9,366
--------------------------------------------------------------------
OFFICE:
Corporate Center 15 Mechanicsburg, PA -- 1,226 3,270 -- 728
Treeview
Corporate Center Wyomissing, PA -- 1,412 4,608 -- 499
--------------------------------------------------------------------
SUBTOTAL
PENNSYLVANIA
OFFICE -- 2,638 7,878 -- 1,227
--------------------------------------------------------------------
13 Columbia Circle Albany, NY -- 441 1,883 -- 17
15 Columbia Circle Albany, NY 6,809 1,843 8,076 -- 45
17 Columbia Circle Albany, NY -- 1,330 5,683 -- 17
8 Airline Drive Albany, NY -- 1,298 5,300 -- 17
Nine Columbia Circle Albany, NY -- 218 891 -- 110
One Columbia Circle Albany, NY (d) 1,365 5,822 -- 71
Three Columbia Circle Albany, NY 5,021 1,533 6,522 -- 180
5000 Campuswood Drive East Syracuse, NY (d) 373 2,611 -- 175
5009 Campuswood Drive East Syracuse, NY 503 144 625 -- 5
5010 Campuswood Drive East Syracuse, NY 4,363 767 6,516 -- 425
5015 Campuswood Drive East Syracuse, NY 7,007 876 9,732 -- 608
125 Indigo Creek Drive Greece, NY -- 524 3,012 -- --
6 British Latham, NY -- 780 3,082 -- 135
American Boulevard
1045 James Street Syracuse, NY 2,910 716 4,564 -- 26
250 South Clinton
Street Syracuse, NY 16,111 4,135 23,782 -- 1,076
308 Maltbie Street Syracuse, NY -- 325 1,870 -- 388
400 West Division Syracuse, NY -- 562 3,231 -- 3
Street
507 Franklin Square Syracuse, NY 5,059 1,372 7,890 -- 38
One Clinton Square Syracuse, NY 1,634 371 2,132 -- 109
One Park Place Syracuse, NY 8,642 3,203 20,593 -- 960
--------------------------------------------------------------------
SUBTOTAL NEW YORK
OFFICE 58,059 22,176 123,817 -- 4,405
--------------------------------------------------------------------
SUBTOTAL OFFICE
PROPERTIES 58,059 24,814 131,695 -- 5,632
--------------------------------------------------------------------
TOTAL ALL
PROPERTIES 317,769(b) 117,291 623,534 (1,314) 15,288
====================================================================
GROSS AMOUNT CARRIED AT
CLOSE OF PERIOD
---------------------------
BUILDING ACCUMULATED YEAR
AND DEPRECIATION YEAR BUILT/ DEPRECIABLE
LAND IMPROVEMENTS TOTAL 12/31/01 ACQUIRED RENOVATED YEAR(S)
---- ------------ ----- ------------ -------- --------- ----------
INDUSTRIAL
PROPERTIES:
6813 Ruppsville
Road 295 1,672 1,967 -- 2001 1984 (c)
6829 Ruppsville
Road 492 2,785 3,277 -- 2001 1986 (c)
6831 Ruppsville
Road 393 2,224 2,617 -- 2001 1987 (c)
7220 Schantz Court 335 1,902 2,237 -- 2001 1995 (c)
7485 Industrial
Boulevard 1,127 6,384 7,511 -- 2001 1990 (c)
7520 Morris Court 909 5,155 6,064 -- 2001 1989 (c)
7529 Morris Court 1,946 11,027 12,973 -- 2001 1998 (c)
7542 Morris Court 1,029 5,831 6,860 -- 2001 1997 (c)
7566 Morris Court 812 4,606 5,418 -- 2001 1991 (c)
7584 Morris Court 427 2,419 2,846 -- 2001 1990 (c)
7663 Morris Court 305 1,727 2,032 -- 2001 1988 (c)
2400, 2404, 2410
Gettysburg Road 1,351 4,397 5,748 (470) 1998 1950/60/93 (c)
811 Spangler Road 531 3,026 3,557 (65) 2001 1968 (c)
1440 Sheffler Drive 2,253 10,140 12,393 (922) 1998 1996 (c)
1465 Nitterhouse
Drive 3,191 11,964 15,155 (1,082) 1998 1995 (c)
2294 Molly
Pitcher Highway 1,894 19,746 21,640 (1,786) 1998 1960/85/91 (c)
One Tabas Lane 842 3,588 4,430 (408) 1997 1968 (c)
Two Tabas Lane 1,211 5,451 6,662 (618) 1997 1970 (c)
21 Roadway Drive 2,332 13,296 15,628 (789) 1999 1988 (c)
221 South 10th
Street 4,518 25,685 30,203 (1,584) 1999 1955/96/97 (c)
420 Salem Church
Road 1,854 10,537 12,391 (301) 2001 1973/75 (c)
75 Pleasant View
Drive 641 3,643 4,284 (95) 2001 1977 (c)
1001, 1011 AIP
Drive 1,539 7,446 8,985 (788) 1998 1991/92 (c)
1 Philips Drive 2,213 8,861 11,074 (1,012) 1998 1990/91/94 (c)
100 Oakhill Road 546 2,274 2,820 (245) 1997 1996 (c)
1091 Arnold Road 768 3,300 4,068 (372) 1997 1996 (c)
1157 Arnold Road 1,152 4,767 5,919 (549) 1997 1995 (c)
--------------------------------------------------
SUBTOTAL
PENNSYLVANIA
INDUSTRIAL 34,906 183,853 218,759 (11,086)
--------------------------------------------------
300 Enterprise
Drive 746 4,228 4,974 (272) 1999 1998 (c)
1311 Majestic
Drive 528 2,991 3,519 (192) 1999 1993 (c)
1411 Majestic
Drive 671 3,803 4,474 (299) 1999 1995 (c)
600 Hagerty Drive 467 2,656 3,123 (208) 1999 1980/86/97 (c)
605 Hagerty Drive 283 1,609 1,892 (126) 1999 1991 (c)
670 Hagerty Drive 405 2,299 2,704 (180) 1999 1980/88/90 (c)
800 Hagerty Drive 128 729 857 (57) 1999 1987/88 (c)
5555 Massillon Road 1,567 6,313 7,880 (615) 1998 1996 (c)
16725 Square Drive 564 2,510 3,074 (250) 1998 1988 (c)
1030 South
Edgewood Drive 782 3,075 3,857 (295) 1998 1991 (c)
3530 East Pike 1,002 4,718 5,720 (470) 1998 1991 (c)
--------------------------------------------------
SUBTOTAL OHIO
INDUSTRIAL 7,143 34,931 42,074 (2,964)
--------------------------------------------------
21 Cranbury Road 5,856 32,508 37,914 (2,049) 1999 1998 (c)
24 Abeel Road 292 1,447 1,739 (93) 1999 1979 (c)
34 Englehard Drive 1,467 8,463 9,930 (542) 1999 1979 (c)
400 Cabot Drive 3,468 19,749 23,217 (938) 2000 1989 (c)
2 Volvo Drive 994 4,193 5,187 (479) 1997 1966/92 (c)
30 Stults Road 395 3,111 3,506 (227) 2000 1974 (c)
301-321 Herrod
Boulevard 3,777 21,437 25,214 (1,377) 1999 1988/89 (c)
Four Applegate 2,243 12,750 14,993 (607) 2000 1998 (c)
5 Henderson Drive 1,684 10,402 12,086 (473) 2000 1967/72/80/91 (c)
--------------------------------------------------
SUBTOTAL NEW
JERSEY INDUSTRIAL 20,176 113,610 133,786 (6,785)
--------------------------------------------------
351 West 10th
Street 547 3,105 3,652 (229) 1999 1999 (c)
4400 West 96th
Street 1,391 7,881 9,272 (694) 1998 1998 (c)
6402 Corporate
Drive 1,256 7,457 8,713 (657) 1998 1995/1996 (c)
8677 Logo Court 2,559 15,176 17,735 (1,337) 1998 1991 (c)
501 Airtech Drive 4,272 24,275 28,547 (1,387) 2000 2001 (c)
558 Airtech Drive 5,247 15,041 20,288 (41) 2001 2001 (c)
--------------------------------------------------
SUBTOTAL INDIANA
INDUSTRIAL 15,272 72,935 88,207 (4,345)
--------------------------------------------------
104 Hidden Lake
Circle 697 3,958 4,655 (235) 1999 1986/92 (c)
120 Hidden Lake
Circle 1,463 8,292 9,755 (651) 1999 1998 (c)
Augusta Road
Industrial Park 1,130 6,449 7,579 (552) 1998 1995/1996 (c)
Rocky Creek
Business Park 385 2,261 2,646 (228) 1998 1996 (c)
White Horse Road
Industrial Park 1,273 7,392 8,665 (634) 1998 1987 (c)
1221 South
Batesville Road 1,499 8,946 10,445 (747) 1998 1968/80/84 (c)
Buncombe Road
Industrial Park 1,011 5,865 6,876 (499) 1998 1985 (c)
Outlaw Industrial
Park 791 4,540 5,331 (391) 1998 1970 (c)
Piedmont Highway
Industrial Park 1,311 7,497 8,808 (642) 1998 1994 (c)
--------------------------------------------------
SUBTOTAL SOUTH
CAROLINA
INDUSTRIAL 9,560 55,200 64,760 (4,579)
--------------------------------------------------
Northeast
Industrial Park 1,340 5,606 6,946 (581) 1998 1988-1989 (c)
Bldg. 21
Northeast
Industrial Park 971 4,001 4,972 (417) 1998 1988-1989 (c)
Bldg 22
Northeast
Industrial Park 1,254 5,277 6,531 (548) 1998 1947 (c)
Bldg. 8
4 Marway Circle 289 1,538 1,827 (140) 1998 1976/77 (c)
5 Marway Circle 248 1,079 1,327 (115) 1998 1976/77 (c)
8 Marway Circle 289 1,161 1,450 (116) 1998 1976/77 (c)
4472 & 4480 2,611 10,634 13,245 (1,120) 1998 1972/77/78 (c)
Steelway Blvd.
Mount Ebo 1,495 6,990 8,485 (449) 1999 1992 (c)
--------------------------------------------------
SUBTOTAL NEW YORK
INDUSTRIAL 8,497 36,286 44,783 (3,486)
--------------------------------------------------
SUBTOTAL
INDUSTRIAL
PROPERTIES 95,554 496,815 592,369 (33,245)
--------------------------------------------------
OFFICE:
Corporate Center 15 1,226 3,998 5,224 (552) 1998 1988 (c)
Treeview
Corporate Center 1,412 5,107 6,519 (534) 1998 1989 (c)
--------------------------------------------------
SUBTOTAL
PENNSYLVANIA
OFFICE 2,638 9,105 11,743 (1,086)
--------------------------------------------------
13 Columbia Circle 441 1,900 2,341 (198) 1998 1991/96 (c)
15 Columbia Circle 1,843 8,121 9,964 (851) 1998 1991/96 (c)
17 Columbia Circle 1,330 5,700 7,030 (597) 1998 1991/96 (c)
8 Airline Drive 1,298 5,317 6,615 (557) 1998 1997 (c)
Nine Columbia
Circle 218 1,001 1,219 (155) 1998 1991/96 (c)
One Columbia
Circle 1,365 5,893 7,258 (656) 1998 1991/96 (c)
Three Columbia
Circle 1,533 6,702 8,235 (760) 1998 1991/96 (c)
5000 Campuswood
Drive 373 2,786 3,159 (310) 1998 1988 (c)
5009 Campuswood
Drive 144 630 774 (60) 1998 1989 (c)
5010 Campuswood
Drive 767 6,941 7,708 (796) 1998 1989 (c)
5015 Campuswood
Drive 876 10,340 11,216 (997) 1998 1991 (c)
125 Indigo Creek
Drive 524 3,012 3,536 (287) 1998 1994 (c)
6 British
American Boulevard 780 3,217 3,997 (371) 1998 1981 (c)
1045 James Street 716 4,590 5,306 (436) 1998 1976/80 (c)
250 South Clinton
Street 4,135 24,858 28,993 (2,487) 1998 1990 (c)
308 Maltbie Street 325 2,258 2,583 (293) 1998 1943 (c)
400 West Division
Street 562 3,234 3,796 (308) 1998 1992 (c)
507 Franklin
Square 1,372 7,928 9,300 (778) 1998 1991 (c)
One Clinton Square 371 2,241 2,612 (216) 1998 1975 (c)
One Park Place 3,204 21,552 24,756 (1,695) 1999 1983 (c)
-------------------------------------------------
SUBTOTAL NEW YORK
OFFICE 22,177 128,221 150,398 (12,808)
--------------------------------------------------
SUBTOTAL OFFICE
PROPERTIES 24,815 137,326 162,141 (13,894)
--------------------------------------------------
TOTAL ALL
PROPERTIES 120,369(b)634,431 754,800 (47,192)
=================================================
S-2
SCHEDULE III:
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2001
(IN 000'S)
NOTES:
(a) See description of encumbrances in Item 1 - Summary of Indebtedness
(b) Reconciliation of encumbrances as shown above to total consolidated debt,
excluding unamortized debt premiums of $1.9 million at December 31, 2001 is
as follows:
Amount shown above $ 317,769
Debt related to development or construction in progress 15,912
Working capital facility and unsecured credit facility 99,466
--------------------
Total consolidated debt, excluding debt premiums $ 433,147
====================
(c) Depreciation is computed based on the following estimated lives:
Buildings and Improvements 35 years
Tenant/Leasehold Improvements Life of Lease
Furniture, Fixtures and Equipment 5 to 10 years
(d) These properties collateralize a $10.0 million working capital facility, of
which $6.5 million is outstanding at December 31, 2001.
(e) Reduction in basis due to disposition of one property in this industrial
park in 2001.
At December 31, 2001, the aggregate net carrying amount for land and buildings
and improvements for federal income tax reporting was approximately $651.8
million.
Summary of Real Estate and Accumulated Depreciation Activity:
2001 2000 1999
--------------------------------------------------------------------------------------------
Accumulated Accumulated Accumulated
Cost (1) Depreciation Cost (1) Depreciation Cost (1) Depreciation
--------------------------------------------------------------------------------------------
Balance at beginning of year $ 928,018 $ 40,558 $841,106 $22,396 $541,126 $ 6,867
Property acquisitions 102,493 -- 133,207 -- 304,704 --
Capital improvements 4,341 -- 4,360 -- 3,479 --
Transfers (1,314) -- -- -- -- --
Properties sold (278,738) (15,633) (50,655) (1,528) (8,239) (202)
Depreciation expense -- 22,267 -- 19,690 -- 15,731
--------------------------------------------------------------------------------------------
Balance at end of year $ 754,800 $ 47,192 $928,018 $40,558 $841,106 $22,396
============================================================================================
(1) These balances exclude development and construction-in-progress and the
Company's investment in a direct financing lease.
S-3
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
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
By: /s/ Jeffrey E. Kelter
-------------------------------
Jeffrey E. Kelter
President and Chief Executive Officer
Date: April 1, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/JEFFREY E. KELTER President, Chief Executive April 1, 2002
----------------------------- Officer and Trustee
Jeffrey E. Kelter
/s/DAVID F. MCBRIDE Chairman and Trustee April 1, 2002
-----------------------------
David F. McBride
/s/TIMOTHY E. MCKENNA Senior Vice President April 1, 2002
----------------------------- and Chief Financial Officer
Timothy E. McKenna
/s/J. PETER LLOYD Vice President April 1, 2002
----------------------------- and Corporate Controller
J. Peter Lloyd
/s/DONALD E. CALLAGHAN Trustee April 1, 2002
-----------------------------
Donald E. Callaghan
/s/FRANCESCO GALESI Trustee April 1, 2002
-----------------------------
Francesco Galesi
II-1
/s/MICHAEL J. FALCONE Trustee April 1, 2002
-----------------------------
Michael J. Falcone
/s/JONATHAN D. EILIAN Trustee April 1, 2002
-----------------------------
Jonathan D. Eilian
/s/ SCOTT H. RECHLER Trustee April 1, 2002
-----------------------------
Scott H. Rechler
/s/JOHN S. MOODY Trustee April 1, 2002
-----------------------------
John S. Moody
/s/DAVID M. SHERMAN Trustee April 1, 2002
-----------------------------
David M. Sherman
II-2