UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
COMMISSION FILE NUMBER 1-8383
Mission West Properties, Inc.
(Exact name of registrant as specified in its charter)
Maryland 95-2635431
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
10050 Bandley Drive
Cupertino, California 95014-2188
(Address of principal executive offices)
Registrant's telephone number, including area code is (408) 725-0700
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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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
17,086,276 shares outstanding as of May 14, 2001
- 1 -
Mission West Properties, Inc.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2001
INDEX
Page
Part I Financial Information
Item 1 Financial Statements (unaudited):
Consolidated Balance Sheets as of March 31, 2001 (unaudited)
and December 31, 2000...................................................................................3
Consolidated Statements of Operations for the three
months ended March 31, 2001 and 2000 (unaudited)........................................................4
Consolidated Statements of Cash Flows for the
three months ended March 31, 2001 and 2000 (unaudited)..................................................5
Notes to Consolidated Financial Statements..............................................................6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................................................................9
Item 3 Quantitative and Qualitative Disclosures About Market Risk.............................................17
Part II Other Information
Item 6 Exhibits and Reports on Form 8-K.......................................................................17
Signatures...........................................................................................................17
- 2 -
Part I - Financial Information
ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS
MISSION WEST PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
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March 31, 2001 December 31, 2000
---------------------- ----------------------
(Unaudited)
ASSETS
Real estate assets, at cost
Land $193,045 $187,219
Buildings 660,729 654,259
---------------------- ----------------------
853,774 841,478
Less accumulated depreciation (37,924) (34,022)
---------------------- ----------------------
Net real estate assets 815,850 807,456
Cash and cash equivalents 51 4,691
Restricted cash 23,361 -
Deferred rent 12,959 10,869
Other assets 7,704 3,894
---------------------- ----------------------
Total assets $859,925 $826,910
====================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Line of credit (related parties) $ 64,149 $ 50,886
Mortgage notes payable 131,560 132,055
Mortgage notes payable (related parties) 11,577 11,643
Interest payable 347 347
Security deposits 5,095 4,801
Prepaid rental income 12,950 11,298
Dividends/distributions payable 19,304 19,115
Refundable option payment 20,335 20,835
Accounts payable and accrued expenses 4,556 4,525
---------------------- ----------------------
Total liabilities 269,873 255,505
Commitments and contingencies (Note 9)
Minority interest 486,852 469,332
Stockholders' equity:
Preferred stock, $.001 par value, 20,000,000 shares
authorized, none issued and outstanding - -
Common stock, $.001 par value, 200,000,000 shares
authorized, 17,049,953 and 17,025,365 shares issued and
outstanding at March 31, 2001 and December 31, 2000,
respectively 17 17
Paid-in-capital 123,284 123,136
Accumulated (deficit) (20,101) (21,080)
---------------------- ----------------------
Total stockholders' equity 103,200 102,073
---------------------- ----------------------
Total liabilities and stockholders' equity $859,925 $826,910
====================== ======================
The accompanying notes are an integral part of these consolidated
financial statements.
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MISSION WEST PROPERTIES, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(unaudited)
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Three months ended March 31,
2001 2000
------------------- --------------------
Revenues:
Rental revenues from real estate $ 29,679 $ 21,235
Tenant reimbursements 3,488 3,513
Other income, including interest and
gain on sale of real estate 3,617 186
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Total revenues 36,784 24,934
------------------- --------------------
Expenses:
Operating expenses 1,225 1,093
Real estate taxes 2,321 2,374
Depreciation of real estate 4,102 3,633
General and administrative 318 363
Interest 2,209 2,257
Interest (related parties) 1,300 751
------------------- --------------------
Total expenses 11,475 10,471
------------------- --------------------
Income before minority interest 25,309 14,463
Minority interest 21,090 11,832
------------------- --------------------
Net income to common stockholders $ 4,219 $ 2,631
=================== ====================
Basic net income per share $ 0.25 $ 0.15
=================== ====================
Diluted net income per share $ 0.24 $ 0.15
=================== ====================
Weighted average number of
common shares outstanding (basic) 17,037,201 16,990,353
=================== ====================
Weighted average number of
common shares outstanding (diluted) 17,242,821 17,389,409
=================== ====================
The accompanying notes are an integral part of these consolidated
financial statements.
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MISSION WEST PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share amounts)
(unaudited)
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Three months ended March 31,
-------------------------------------
2001 2000
------------------ ------------------
Cash flows from operating activities:
Net income $ 4,219 $ 2,631
Adjustments to reconcile net income to net cash provided by
operating activities:
Minority interest 21,090 11,832
Depreciation 4,102 3,633
Gain on sale of real estate (3,101) -
Other (95) 17
Changes in assets and liabilities:
Deferred rent (2,089) (969)
Other assets (3,674) (2,705)
Security deposits 294 419
Prepaid rental income 1,652 (1,707)
Accounts payable and accrued expenses (90) 774
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Net cash provided by operating activities 22,308 13,925
------------------ ------------------
Cash flows from investing activities:
Improvements to real estate assets (154) (900)
Refundable option payment (500) -
Proceeds from sale of real estate 23,130 -
Restricted cash (23,130) -
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Net cash used in investing activities (654) (900)
------------------ ------------------
Cash flows from financing activities:
Principal payments on mortgage notes payable (495) (461)
Principal payments on mortgage notes payable (related parties) (66) (16,441)
Net payments under line of credit (related parties) (21,796) -
Proceeds from stock options exercised 148 290
Minority interest distributions (849) (408)
Dividends paid (3,236) (2,545)
------------------ ------------------
Net cash used in financing activities (26,294) (19,565)
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Net decrease in cash and cash equivalents (4,640) (6,540)
Cash and cash equivalents, beginning 4,691 6,553
------------------ ------------------
Cash and cash equivalents, ending $ 51 $ 13
================== ==================
Supplemental information:
Cash paid for interest $ 3,488 $ 2,997
================== ==================
Supplemental schedule of non-cash investing and financing activities:
Interest earned on restricted cash $ 231 $ -
================== ==================
Advances under line of credit (related parties) $ 15,059 $ 10,783
================== ==================
Debt incurred in connection with property acquisitions $ 20,000 $ 10,000
================== ==================
Assumption of other liabilities in connection with property acquisitions $ - $ 1,431
================== ==================
Issuance of limited partnership units in connection with property acquisitions $ 13,281 $ 21,637
================== ==================
The accompanying notes are an integral part of these consolidated
financial statements.
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MISSION WEST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share, square footage and limited
partnership unit amounts)
(unaudited)
---------
1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Mission West Properties, Inc. and its controlled subsidiaries including the
operating partnerships (the "Company"). All significant intercompany
balances have been eliminated in consolidation.
Minority interest represents the separate private ownership of the
operating partnerships by the Berg Group (defined as Carl E. Berg, his
brother Clyde J. Berg, members of their respective immediate families, and
certain entities they control) and other non-affiliate interests. In total,
these interests account for approximately 83% of the ownership interests in
the real estate operations of the Company as of March 31, 2001. Minority
interest in earnings has been calculated by taking the net income of the
operating partnerships (on a stand-alone basis) multiplied by the
respective minority interest ownership percentage.
The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP")
applicable to interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, certain
information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been condensed or omitted
pursuant to such rules and regulations. However, in the opinion of
management, all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation have been included. The
Company presumes that users of the interim financial information herein
have read or have access to the audited financial statements for the
preceding fiscal year and that the adequacy of additional disclosure needed
for a fair presentation may be determined in that context. The results of
operations for the three months ended March 31, 2001 are not necessarily
indicative of the results to be expected for the entire year.
The Company has elected to be taxed as a real estate investment trust under
the Internal Revenue Code of 1986, as amended. Accordingly, no provision
has been made for income taxes for the three months ended March 31, 2001.
2. REAL ESTATE
BERG LAND HOLDINGS OPTION AGREEMENT
Under the terms of the Berg land holdings option agreement, the Company,
through the operating partnerships, has the option to acquire any future
R&D, office and industrial buildings developed by the Berg Group on land
currently owned or optioned, or acquired for these purposes in the future,
directly or indirectly by certain members of the Berg Group. At present,
there are approximately 355 acres of Silicon Valley land, including land
under development, owned directly or under 50% joint venture by certain
members of the Berg Group that are subject to the terms of the Berg land
holdings option agreement. The owners of the future R&D property
developments may obtain cash or, at their option, O.P. Units valued at the
average closing price of shares of common stock over the 30-trading-day
period preceding the acquisition date. As of March 31, 2001, the Company
had completed ten acquisitions under the Berg land holdings option
agreement representing approximately 1,076,000 rentable square feet. Upon
the Company's exercise of an option to purchase any of the future R&D
property developments under the terms of the Berg land holdings option
agreement, the acquisition price will equal the sum of (a) the full
construction cost of the building; (b) 10% of the full construction cost of
the building; (c) the acquisition value of the parcel as defined in the
agreement upon which the improvements are constructed (currently ranging
from $8.50 to $20.00 per square foot); (d) 10% per annum of the acquisition
value of the parcel for the period from January 1, 1998 to the close of
escrow; and (e) interest at LIBOR (London Interbank Offer Rate) plus 1.65%
per annum on the full construction costs of the building for the period
from the date funds were disbursed by the developer to the close of escrow;
less (f) any debt encumbering the property, or a lesser amount as approved
by the independent directors committee.
- 6 -
No estimate can be given at this time as to the total cost to the Company
to acquire projects under the Berg land holdings option agreement, or the
timing of the Company's acquisition of any of such projects. However, the
Berg Group currently has 19 properties under development with a total of
approximately 1,560,000 rentable square feet of R&D properties that the
Company has the right to acquire under this agreement. Of the 19
properties, six are joint ventures in which the Company holds a 50%
interest. The joint venture properties represent a total of approximately
471,000 rentable square feet. As of March 31, 2001, the estimated
acquisition price to the operating partnerships for these 19 projects would
be approximately $186,000. The final acquisition price of these 19
properties could differ significantly from this estimate. In addition to
projects currently under development, the Company has the right to acquire
future developments by the Berg Group on up to 257 additional acres of land
currently controlled by the Berg Group, which could support approximately
4.06 million square feet of new developments. Under the Berg land holdings
option agreement, as long as the Berg Group ownership in the Company and
the operating partnerships taken as a whole is at least 65%, the Company
also has an option to purchase all land acquired, directly or indirectly,
by Carl E. Berg or Clyde J. Berg in the future which has not been improved
with completed buildings and which is zoned for, intended for or
appropriate for research and development, office and/or industrial
development or use in the states of California, Oregon, and Washington.
PROPERTY ACQUISITIONS
Effective January 1, 2001, the Company acquired an approximately 131,500
rentable square foot newly constructed R&D building located at 5325 Hellyer
Avenue in San Jose, California from the Berg Group under the Berg land
holdings option agreement. The total acquisition price for this property
was $15,472. The Company acquired this property by borrowing $9,000 under
its line of credit from the Berg Group, and issuing 464,452 O.P. Units to
various members of the Berg Group.
Effective February 1, 2001, the Company acquired an approximately 117,740
rentable square foot newly constructed R&D building located at 5500 Hellyer
Avenue in San Jose, California from the Berg Group under the Berg land
holdings option agreement. The total acquisition price for this property
was $17,809. The Company acquired this property by borrowing $11,000 under
its line of credit from the Berg Group, and issuing 506,599 O.P. Units to
various members of the Berg Group.
PROPERTY DISPOSITION
In January 2001, the Company completed the sale of 200,484 rentable square
feet of the R&D property at 4949 Hellyer Avenue, San Jose, California to
Cisco Systems, Inc., which exercised its purchase option in November 2000.
The Company realized a gain of $3,101, which is included in other income,
on the total sale price of $23,130.
3. Restricted Cash
The balance represents proceeds from a property sale and interest income
being held in a separate cash account at a trust company in order to
preserve the Company's option of reinvesting the proceeds on a tax-deferred
basis.
4. Stock Transactions
During the three months ended March 31, 2001, stock options to purchase
14,588 shares of common stock were exercised at $4.50 per share, and
options to purchase 10,000 shares of common stock were exercised at $8.25
per share. Total proceeds to the Company were $148.
5. Other Income
As explained in Note 2 "Property Disposition" above, the Company realized a
gain of $3,101 on the total sale price of $23,130.
6. Net Income Per Share
Basic net income per share is computed by dividing net income by the
weighted-average number of common shares outstanding for the period.
Diluted net income per share is computed by dividing net income by the sum
of the weighted-average number of common shares outstanding for the period
plus the assumed exercise of all dilutive securities.
- 7 -
The computation for weighted average shares is detailed below:
Three Months Ended March 31,
-------------------------------
2001 2000
-------------- -------------
Weighted average shares outstanding (basic) 17,037,201 16,990,353
Incremental shares from assumed option exercise 205,620 399,056
-------------- -------------
Weighted average shares outstanding (diluted) 17,242,821 17,389,409
============== =============
The outstanding O.P. Units, which are exchangeable at the unit holder's
option, subject to certain conditions, for shares of common stock on a
one-for-one basis, have been excluded from the diluted net income per share
calculation, as there would be no effect on the amounts because the
minority interests' share of income would also be added back to net income.
The total number of O.P. Units outstanding at March 31, 2001 was
84,547,078.
7. Related Party Transactions
As of March 31, 2001, the Berg Group owned 80,226,476 O.P. Units. Along
with the Company's common shares owned by the Berg Group, the Berg Group's
ownership as of March 31, 2001 represented approximately 79% of the equity
interests of the Company, assuming conversion of the 84,547,078 O.P. Units
outstanding into the common stock of the Company.
As of March 31, 2001, debt in the amount of $64,149 was due the Berg Group
under the line of credit established March 1, 2000. The $50,000 line of
credit from the Berg Group was increased to $75,000 effective April 1,
2000. The Berg Group line of credit is currently collateralized by seven
properties, bears interest at LIBOR plus 1.30 percent, and matures in March
2002. The Company believes that the terms of the Berg Group line of credit
are more favorable than those available from commercial lenders. As of
March 31, 2001, debt in the amount of $11,577 was due the Berg Group under
a mortgage note established May 15, 2000 in connection with the acquisition
of a 50% interest in Hellyer Avenue Limited Partnership, the obligor under
the mortgage note. The mortgage note bears interest at 7.65%, and is due in
10 years with principal payments amortized over 20 years.
Carl E. Berg has a substantial financial interest in one company that
leases space from the operating partnerships. This company occupies 5,862
square feet at $0.93 per square foot per month. This lease was in effect
prior to the Company's acquisition of its general partnership interests in
July 1998. The lease expires in 2003.
The Company currently leases office space owned by Berg & Berg Enterprises,
Inc., an affiliate of Carl E. Berg and Clyde J. Berg. Rental amounts and
overhead reimbursements paid to Berg & Berg Enterprises, Inc. were $20 for
each of the three-month periods ended March 31, 2001 and 2000.
8. Subsequent Events
On April 10, 2001 the Company paid $0.19 per share dividend on its common
stock to all common stockholders of record as of March 30, 2001. On the
same date, the operating partnerships paid a distribution of $0.19 per O.P.
Unit.
9. Commitments and Contingencies
The Company and the operating partnerships are or may become, from time to
time, parties to litigation arising out of the normal course of business.
Management does not expect that such matters would have a material adverse
effect on the consolidated financial position, results of operations or
cash flows of the Company.
Insurance policies currently maintained by the Company do not cover seismic
activity, although they do cover losses from fires after an earthquake.
- 8 -
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the accompanying consolidated
financial statements and notes thereto contained herein and the Company's
consolidated financial statements and notes thereto contained in the Company's
Annual Report on Form 10-K as of and for the year ended December 31, 2000. The
results for the three months ended March 31, 2001 are not necessarily indicative
of the results to be expected for the entire fiscal year ending December 31,
2001. The following discussion includes forward-looking statements, including
but not limited to statements with respect to the Company's future financial
performance, operating results, plans and objectives. Actual results may differ
materially from those currently anticipated depending upon a variety of factors,
including those described below under the sub-heading, "Forward-Looking
Information."
OVERVIEW
Mission West Properties, Inc. (the "Company") acquires, markets, leases, and
manages R&D properties, primarily located in the Silicon Valley portion of the
San Francisco Bay Area. As of March 31, 2001, the Company owned and managed 90
properties totaling approximately 6.2 million rentable square feet of R&D
properties through four limited partnerships, or operating partnerships, for
which it is the sole general partner. This class of property is designed for
research and development and office uses and, in some cases, includes space for
light manufacturing operations with loading docks. The Company believes that it
has one of the largest portfolios of R&D properties in the Silicon Valley. The
four tenants who lease the most square footage from us are Microsoft
Corporation, Amdahl Corporation (a subsidiary of Fujitsu Limited), Apple
Computer, Inc. and JDS Uniphase Corporation. For federal income tax purposes the
Company has operated as a self-managed, self-administered and fully integrated
real estate investment trust ("REIT") since 1999.
Our acquisition and growth strategy incorporates the following elements:
- working with the Berg Group to take advantage of their abilities and
resources to pursue development opportunities which we have an option to
acquire, on pre-negotiated terms, upon completion and leasing;
- capitalizing on opportunistic acquisitions from third parties of
high-quality R&D properties that provide attractive initial yields and
significant potential for growth in cash-flow;
- focusing on general purpose, single-tenant Silicon Valley R&D properties
for information technology companies in order to maintain low operating
costs, reduce tenant turnover and capitalize on our relationships with
these companies and our extensive knowledge of their real estate needs; and
- maintaining prudent financial management principles that emphasize current
cash flow while building long-term value, the acquisition of pre-leased
properties to reduce development and leasing risks and the maintenance of
sufficient liquidity to acquire and finance properties on desirable terms.
The Company has elected, under the Internal Revenue Code of 1986, as amended
(the "Code"), to be taxed as a REIT commencing with the taxable year ended
December 31, 1999.
The Company has two wholly owned subsidiaries, MIT Realty, Inc. and Mission West
Executive Aircraft Center. Both corporations are inactive.
- 9 -
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2001 TO THE THREE MONTHS ENDED
MARCH 31, 2000.
As of March 31, 2001, the Company, through its controlling interests in the
operating partnerships, owned 90 properties totaling approximately 6.2 million
square feet compared to 82 properties totaling approximately 5.6 million square
feet owned by the Company as of March 31, 2000. This represents an increase of
approximately 11% in total rentable square footage from one year ago. The
increase resulted from the following acquisitions less the disposition of
200,484 rentable square feet at 4949 Hellyer Avenue as discussed under "Property
Disposition":
Date of Rentable Square
Acquisition Address Footage
------------------- ---------------------------------- ------------------
04/00 1762 Automation Parkway 61,100
04/00 255 Caspian Way 98,500
05/00 5300 & 5350 Hellyer Avenue 160,000
07/00 5400 Hellyer Avenue 77,184
10/00 45365 Northport Loop 64,218
12/00 1768 Automation Parkway 110,592
01/01 5325 Hellyer Avenue 131,500
02/01 5500 Hellyer Avenue 117,740
------------------
820,834
==================
The following tables reflect the increase in the Company's rental revenues for
the three months ended March 31, 2001 over rental revenues for the comparable
three months in 2000:
Three months ended March 31,
-----------------------------------------------------------------------
2001 2000 $ Change Annual % Change
------------- ------------- ------------- -------------------
(Dollars in thousands)
Same Property (1) $16,053 $13,509 $ 2,544 18.8%
1998 Acquisitions 583 583 - -
1999 Acquisitions 6,524 6,373 151 2.4%
2000 Acquisitions 5,089 770 4,319 560.9%
2001 Acquisitions 1,436 - 1,436 100.0%
------------- ------------- -------------
$29,685 $21,235 $ 8,450 39.8%
============= ============= =============
(1) "Same Property" is defined as properties owned as of July 1, 1998 and still
owned as of March 31, 2001.
For the quarter ended March 31, 2001, rental revenues increased by $8.45 million
from $21.23 million for the three months ended March 31, 2000 to $29.68 million
for the same period of 2001. Of the $8.45 million increase in rental revenues,
$2.54 million resulted from the Company's "Same Property" portfolio, $0.15
million resulted from properties acquired in 1999, $4.32 million resulted from
properties acquired in 2000, and $1.44 million resulted from properties acquired
in 2001.
Tenant reimbursements decreased by $25, from $3.51 million for the three months
ended March 31, 2000 to $3.49 million for the three months ended March 31, 2001.
Operating expenses and real estate taxes, on a combined basis, increased by $79,
or 2%, from $3.47 million to $3.55 million for the three months ended March 31,
2000 and 2001, respectively. The increase resulted from a vacant property during
the period presented.
Depreciation expense increased by $469 for the three-month period ended March
31, 2001 over the same period a year ago. The increase was attributable to the
acquisitions of nine properties since March 31, 2000.
Interest expense decreased by $48, or 2%, from $2.26 million for the three
months ended March 31, 2000 to $2.21 million for the three months ended March
31, 2001 due to debt repayment. Interest expense (related parties) increased by
$549, or 73%, from $751 for the three months ended March 31, 2000 to $1.3
million for the three months ended March 31, 2001 from increased borrowing under
the Berg Group line of credit for property acquisitions. As a result, overall
interest expense (including amounts to related parties) increased by $501
compared to the first quarter ended March 31, 2000. The nine R&D property
acquisitions increased total debt outstanding, including amounts due related
parties, by $37.8 million, or 22%, from $169.5 million as of March 31, 2000 to
$207.3 million as of March 31, 2001. Management
- 10 -
expects interest expense to increase as new debt is incurred in connection with
property acquisitions and as it seeks alternative sources of credit.
The minority interest portion of income was $21.1 million, resulting in net
income to stockholders of $4.2 million for the three months ended March 31,
2001. Minority interest represents the ownership interest of all limited
partners in the operating partnerships taken as a whole, which was 83% as of
March 31, 2001.
CHANGES IN FINANCIAL CONDITION
During the first three months of 2001, the Company acquired two additional
properties representing 249,240 rentable square feet of R&D properties located
in Silicon Valley. These properties were acquired from the Berg Group under the
Berg land holdings option agreement. The aggregate acquisition price for these
properties was approximately $33.3 million. The Company financed these
acquisitions by a) borrowing $20 million under the Berg Group line of credit;
and b) the issuance of 971,051 O.P. Units.
During the three months ended March 31, 2001, stock options to purchase 14,588
shares of common stock were exercised at $4.50 per share, and options to
purchase 10,000 shares of common stock were exercised at $8.25 per share. Total
proceeds to the Company were approximately $148.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects its principal sources of liquidity for distributions to
stockholders, debt service, leasing commissions and recurring capital
expenditures to come from Funds from Operations ("FFO") and/or the Berg Group
line of credit. The Company expects these sources of liquidity to be adequate to
meet projected distributions to stockholders and other presently anticipated
liquidity requirements in 2001. The Company expects to meet its long-term
liquidity requirements for the funding of property development, property
acquisitions and other material non-recurring capital improvements through
long-term secured and unsecured indebtedness and the issuance of additional
equity securities by the Company. The Company has the ability to meet any
short-term obligations or other liquidity needs based on the line of credit
(related parties).
The Company's $50 million line of credit with Wells Fargo Bank expired on
February 29, 2000 and was repaid with proceeds from and replaced by a $50
million line of credit from the Berg Group. On April 1, 2000, the $50 million
credit line with the Berg Group was increased to $75 million with all other
terms remaining the same. The Berg Group line of credit is currently
collateralized by seven properties, bears interest at LIBOR plus 1.30 percent,
and matures in March 2002. The Company is continually evaluating alternative
sources of credit. There can be no assurance that the Company will be able to
obtain a line of credit with terms similar to the Berg Group line of credit, and
the Company's its cost of borrowing could increase substantially. The Company
believes that the terms of the Berg Group line of credit are more favorable than
those available from Wells Fargo or similar lenders.
At March 31, 2001, the Company had total indebtedness of $207.3 million,
including $131.6 million of fixed rate mortgage debt, $11.6 million under the
Berg Group mortgage note (related parties), and $64.1 million under the Berg
Group line of credit (related parties).
As of March 31, 2001, the Company's Debt to Total Market Capitalization ratio
was approximately 13.82%. The Company computed this ratio by dividing the
Company's total debt outstanding by the sum of this debt plus the market value
of common stock (based upon the closing price of $12.70 per share on March 30,
2001) on a fully diluted basis, taking into account the conversion of all O.P.
Units into common stock. On March 30, 2001, the last trading day during the
period, Total Market Capitalization was approximately $1.5 billion.
- 11 -
Mortgage Debt
The following table sets forth certain information regarding debt outstanding as
of March 31, 2001:
Maturity Interest
Debt Description Collateral Properties Balance Date Rate
----------------------------------------------- ----------------------------------------- --------------- ----------- ----------
($ in thousands)
Line of Credit:
Berg Group (related parties) 2033-2043 Samaritan Drive, San Jose, CA $64,149 3/02 (1)
2133 Samaritan Drive, San Jose, CA ---------------
2233-2243 Samaritan Drive, San Jose, CA
1310-1450 McCandless Drive, Milpitas, CA
1315-1375 McCandless Drive, Milpitas, CA
1650-1690 McCandless Drive, Milpitas, CA
1650-1690 McCandless Drive, Milpitas, CA
Mortgage Notes Payable (related parties): 5300 & 5350 Hellyer Avenue, San Jose, CA 11,577 6/10 7.65%
---------------
Mortgage Notes Payable:
Prudential Capital Group 20400 Mariani Avenue, Cupertino, CA 1,718 4/09 8.75%
New York Life Insurance Company 10440 Bubb Road, Cupertino, CA 370 9/09 9.625%
Home Savings & Loan Association 10460 Bubb Road, Cupertino, CA 408 12/06 9.50%
Mellon Mortgage Company 3530 Bassett Street, Santa Clara, CA 2,703 6/01 8.125%
Prudential Insurance Company of America 10300 Bubb Road, Cupertino, CA 126,361(2) 10/08 6.56%
10500 N. DeAnza Blvd, Cupertino, CA
4050 Starboard Drive, Fremont, CA
45700 Northport Loop, Fremont, CA
45738 Northport Loop, Fremont, CA
450-460 National Avenue, Mountain View, CA
6311 San Ignacio Avenue, San Jose, CA
6321 San Ignacio Avenue, San Jose, CA
6325 San Ignacio Avenue, San Jose, CA
6331 San Ignacio Avenue, San Jose, CA
6341 San Ignacio Avenue, San Jose, CA
6351 San Ignacio Avenue, San Jose, CA
3236 Scott Blvd, Santa Clara, CA
3560 Bassett Street, Santa Clara, CA
3570 Bassett Street, Santa Clara, CA
3580 Bassett Street, Santa Clara, CA
1135 Kern Avenue, Sunnyvale, CA
1212 Bordeaux Lane, Sunnyvale, CA
1230 E. Arques, Sunnyvale, CA
1250 E. Arques, Sunnyvale, CA
1170 Morse Avenue, Sunnyvale, CA
3540 Bassett Street, Santa Clara, CA
3542 Bassett Street, Santa Clara, CA
3544 Bassett Street, Santa Clara, CA
3550Bassett Street, Santa Clara, CA
---------------
Mortgage Notes Payable Subtotal 131,560
---------------
TOTAL
$207,286
===============
(1) The debt owed to the Berg Group under the line of credit carries a variable
interest rate equal to LIBOR plus 1.30 percent and is payable in full in
March 2002.
(2) John Kontrabecki, one of the limited partners, has guaranteed approximately
$12.0 million of this debt.
- 12 -
CURRENT PROPERTIES SUBJECT TO OUR ACQUISITION AGREEMENT WITH THE BERG GROUP
The following table presents certain projected information at March 31, 2001
concerning projects for which the Company, through its interests in the
operating partnerships, has the right to acquire under the Berg land holdings
option agreement.
Approximate
Rentable Area Total Estimated
Property Building (Square Feet) Anticipated Acquisition Date Acquisition Value (1)
------------------------------ ------------ -------------------- ----------------------------- ---------------------
BERG LAND HOLDINGS OPTION
UNDER DEVELOPMENT (dollars in thousands)
Creekside 1 65,000 2nd Quarter 2001 $ 9,000
Caspian (Phase II) 1 100,000 2nd Quarter 2001 14,900
Morgan Hill (JV I) (2) 2 211,000 2nd Quarter 2001 22,000
5550 Hellyer 1 79,800 2nd Quarter 2001 10,200
Silver Creek 4 346,000 3rd Quarter 2001 40,500
5750 Hellyer 1 73,312 3rd Quarter 2001 10,100
5535 Hellyer 1 125,000 4th Quarter 2001 15,400
Morgan Hill (JV II) (2) 1 60,000 4th Quarter 2001 5,700
Morgan Hill (JV III) (2) 1 40,000 4th Quarter 2001 4,000
Morgan Hill (JV IV) (2) 2 160,000 4th Quarter 2001 17,500
Piercy & Hellyer 2 130,000 4th Quarter 2001 14,900
Piercy & Hellyer 1 65,000 4th Quarter 2001 8,700
Piercy & Hellyer 1 105,000 4th Quarter 2001 13,200
-- --------- --------
Subtotal 19 1,560,112 $186,100
AVAILABLE LAND
Morgan Hill (2) 490,000
King Ranch 248,500
Piercy & Hellyer 458,000
Fremont & Cushing 387,000
Evergreen 2,480,000
---------
Subtotal 4,063,500
TOTAL 19 5,623,612 $186,100
== ========= ========
(1) The Estimated Acquisition Value represents the estimated cash price for
acquiring the projects under the terms of the Berg land holdings option
agreement, which may differ from the actual acquisition cost as determined
under GAAP, if O.P Units or any other securities based on the market value
of our common stock are issued in the transaction.
(2) The Company expects to own an approximate 50% interest in the partnership
through one of its operating partnerships. The property will be operated
and managed by the other partner in the entity. The rentable area and
estimated acquisition value shown above reflect both the Company's and the
other partner's combined interest in these properties.
Pursuant to the Berg land holdings option agreement between the Company and the
Berg Group, the Company currently has the option to acquire any future R&D,
office and industrial property developed by the Berg Group on land it currently
owns or has under option, or acquires for these purposes in the future, directly
or indirectly by certain members of the Berg Group.
The time required to complete the leasing of developments varies from project to
project. The acquisition dates and acquisition costs set forth in the table are
only estimates by management. Generally, the Company will not acquire any of the
above projects until they are fully completed and leased. There can be no
assurance that the acquisition date and final cost to the Company as indicated
above would be realized. No estimate can be given at this time as to our total
cost to acquire projects under the Berg land holdings option agreement, nor can
we be certain of the period in which we will acquire any of the projects.
- 13 -
Although the Company expects to acquire the new properties available to it under
the terms of the Berg land holdings option agreement, subsequent to the approval
by the independent directors committee, there can be no assurance that the
Company actually will consummate any intended transactions, including all of
those discussed above. Furthermore, the Company has not yet determined the means
by which it would acquire and pay for any such properties or the impact of any
of the acquisitions on its business, results of operations, financial condition,
FFO or available cash for distribution.
HISTORICAL CASH FLOWS
Net cash provided by operating activities for the three months ended March 31,
2001 was $22.3 million compared to $13.9 million for the same period in 2000, a
60% increase. The change was a direct result of rent increases and newly
acquired properties.
Net cash used in investing activities was approximately $654 and $900 for the
three months ended March 31, 2001 and 2000, respectively, a 27% decrease. Of the
$654 net cash used in investing activities, $154 were related to tenant
improvements and $500 from the Xilinx agreement.
Net cash used in financing activities was $26.3 million for the three months
ended March 31, 2001 compared to $19.6 million for the same period in 2000, a
34% increase. During the three months ended March 31, 2001, the Company paid its
debt outstanding and made distributions to holders of its common stock and the
O.P. Units by utilizing cash generated from operating activities.
CAPITAL EXPENDITURES
The properties require periodic investments of capital for tenant-related
capital expenditures and for general capital improvements. For the years ended
December 31, 1995 through December 31, 2000, the recurring tenant improvement
costs and leasing commissions incurred with respect to new leases and lease
renewals of the properties that were owned or controlled by members of the Berg
Group prior to July 1, 1998 averaged approximately $1.75 million annually. The
Company expects that the average annual cost of recurring tenant improvements
and leasing commissions, related to the properties, will be approximately $3.0
million during 2001. The Company believes it will recover substantially all of
these sums from the tenants under the new or renewed leases through increases in
rental rates. The Company expects to meet its long-term liquidity requirements
for the funding of property development, property acquisitions and other
material non-recurring capital improvements through long-term secured and
unsecured indebtedness and the issuance of additional equity securities by the
Company.
FUNDS FROM OPERATIONS
As defined by the National Association of Real Estate Investment Trusts
("NAREIT"), FFO represents net income (loss) before minority interest of unit
holders (computed in accordance with GAAP), excluding gains (or losses) from
debt restructuring and sales of property, plus real estate related depreciation
and amortization (excluding amortization of deferred financing costs and
depreciation of non-real estate assets) and after adjustments for unconsolidated
partnerships and joint ventures. Management considers FFO an appropriate measure
of performance of an equity REIT because, along with cash flows from operating
activities, financing activities and investing activities, it provides investors
with an understanding of the Company's ability to incur and service debt, and
make capital expenditures. FFO should not be considered as an alternative for
net income as a measure of profitability and it is not comparable to cash flows
provided by operating activities determined in accordance with GAAP, nor is FFO
necessarily indicative of funds available to meet the Company's cash needs,
including its need to make cash distributions to satisfy REIT requirements.
The Company's definition of FFO also assumes conversion at the beginning of the
period of all convertible securities, including minority interests that might be
exchanged for common stock. FFO does not represent the amount available for
management's discretionary use as such funds may be needed for capital
replacement or expansion, debt service obligations or other commitments and
uncertainties.
The minority interest in earnings for unrelated parties are deducted from total
minority interest in earnings in calculating FFO.
- 14 -
Furthermore, FFO is not comparable to similarly entitled items reported by other
REITs that do not define them exactly as the Company defines FFO. FFO for the
three months ended March 31, 2001 and 2000 are summarized in the table below:
Three Months Ended March 31,
------------------------------------------
2001 2000
------------------- ------------------
(Dollars in thousands)
Net income $4,219 $2,631
Add:
Minority interest (1) 20,916 11,832
Depreciation 4,102 3,633
Less:
Gain on sale of real estate 3,101 -
------------------- ------------------
FFO $26,136 $18,096
=================== ==================
(1) The minority interest for unrelated parties was deducted from total
minority interest in calculating FFO.
DISTRIBUTION POLICY
The Company intends to pay distributions to stockholders and O.P. Unit holders
based upon total funds available for distribution ("FAD"), which is calculated
as FFO less straight-lined rents, leasing commissions paid and capital
expenditures made during the respective period. The calculations of FAD for the
three months ended March 31, 2001 and 2000 are as follows:
Three Months Ended March 31,
-------------------------------------------
2001 2000
-------------------- -------------------
(Dollars in thousands)
FFO $26,136 $18,096
Less:
Straight-line rents 2,089 969
Leasing commissions 163 150
Capital expenditures 154 900
-------------------- -------------------
FAD $23,730 $16,077
==================== ===================
The Company intends to make regular quarterly distributions to holders of common
stock and O.P. Units based on its FAD. The Company's ability to make such
distributions will be affected by numerous factors, including, most importantly,
the receipt of distributions from rental operations payable to the Company as
the sole general partner of the operating partnerships.
FAD 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. The actual return that the Company will
realize and the amount available for distributions to its stockholders will be
affected by a number of factors, including the revenues received from its
properties, its operating expenses, the interest expense incurred on borrowings
and planned and unanticipated capital expenditures.
The Company anticipates that FAD will exceed earnings and profits for federal
income tax purposes, as the latter figure is reduced by non-cash expenses, such
as depreciation and amortization, that the Company will incur. Distributions,
other than capital gain distributions, by the Company to the extent of its
current and accumulated earnings and profits for federal income tax purposes
most likely will be taxable to U.S. stockholders as ordinary dividend income
unless a stockholder is a tax-exempt entity. Distributions in excess of earnings
and profits generally will be treated as a non-taxable reduction of the U.S.
stockholder's basis in the common stock to the extent of such basis, and
thereafter as a taxable gain. The percentage of such distributions in excess of
earnings and profits, if any, may vary from period to period. The Company
anticipates that a substantial percentage of the distributions to stockholders
for the year ending December 31, 2001 will constitute taxable ordinary dividend
income to its shareholders.
Distributions will be determined by the Company's board of directors and will
depend on actual FAD, the Company's financial condition, capital requirements,
the annual distribution requirements under the REIT provisions of the Code and
such other factors as the board of directors deems relevant.
- 15 -
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company does not believe recently issued accounting standards will
materially impact the Company's financial statements.
FORWARD LOOKING INFORMATION
This quarterly report contains forward-looking statements within the meaning of
the federal securities laws. The Company intends such forward-looking statements
to be covered by the safe harbor provisions for forward-looking statements
contained in the Private Securities Reform Act of 1995, and is including this
statement for purposes of complying with these safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies and expectations of the Company, are generally
identifiable by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project" or similar expressions. The Company's ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse effect on the operations
and future prospects of the Company include, but are not limited to, changes in:
economic conditions generally and the real estate market specifically,
legislative or regulatory provisions affecting the Company (including changes to
laws governing the taxation of REITs), availability of capital, interest rates,
competition, supply of and demand for office and industrial properties in the
Company's current and proposed market areas, and general accounting principles,
policies and guidelines applicable to REITs. In addition, the actual timing of
development, construction, and leasing on the projects that the Company believes
it may acquire in the future under the Berg land holdings option agreement is
unknown presently, and reliance should not be placed on the estimates concerning
these projects set forth under the caption, "Acquiring Properties Developed by
the Berg Group," above. These risks and uncertainties, together with the other
risks described from time to time in the Company's reports and other documents
filed with the Securities and Exchange Commission, should be considered in
evaluating forward-looking statements and undue reliance should not be placed on
such statements.
- 16 -
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes have occurred since the Annual Report on Form 10-K for the
year ended December 31, 2000.
================================================================================
PART II - OTHER INFORMATION
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27.1 Financial Data Schedule
b. Reports on Form 8-K
None
================================================================================
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
Mission West Properties, Inc.
(Registrant)
Date: May 14, 2001 By: /s/ Wayne N. Pham
------------------------------------------
Wayne N. Pham
Vice President of Finance and Controller
(Principal Accounting Officer and Duly
Authorized Officer)