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 SEPTEMBER 30, 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:
17,120,279 shares outstanding as of November 12, 2001
- 1 -
Mission West Properties, Inc.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets as of September 30, 2001 (unaudited)
and December 31, 2000...................................................................................3
Consolidated Statements of Operations for the three
and nine months ended September 30, 2001 and 2000 (unaudited)...........................................4
Consolidated Statements of Cash Flows for the
nine months ended September 30, 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....................................................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................................19
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................................................................20
SIGNATURES...........................................................................................................21
- 2 -
PART I - FINANCIAL INFORMATION
ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS
MISSION WEST PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
---------
September 30, 2001 December 31, 2000
---------------------- ----------------------
(Unaudited)
ASSETS
Real estate assets, at cost
Land $214,620 $187,219
Buildings 688,634 654,259
---------------------- ----------------------
903,254 841,478
Less accumulated depreciation (46,182) (34,022)
---------------------- ----------------------
Net real estate assets 857,072 807,456
Cash and cash equivalents 5,435 4,691
Restricted cash 15,359 -
Deferred rent 16,222 10,869
Other assets 12,564 3,894
---------------------- ----------------------
Total assets $906,652 $826,910
====================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Line of credit (related parties) $ 81,466 $ 50,886
Mortgage notes payable 127,904 132,055
Mortgage notes payable (related parties) 11,441 11,643
Interest payable 345 347
Security deposits 7,739 4,801
Prepaid rental income 10,283 11,298
Dividends/distributions payable 24,654 19,115
Refundable option payment 19,335 20,835
Accounts payable and accrued expenses 6,399 4,525
---------------------- ----------------------
Total liabilities 289,566 255,505
Commitments and contingencies (Note 9)
Minority interest 511,296 469,332
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, 17,120,279 and 17,025,365 shares issued and
outstanding at September 30, 2001 and December 31, 2000,
respectively 17 17
Paid-in-capital 124,036 123,136
Accumulated deficit (18,263) (21,080)
---------------------- ----------------------
Total stockholders' equity 105,790 102,073
---------------------- ----------------------
Total liabilities and stockholders' equity $906,652 $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 share and per share amounts)
(Unaudited)
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Three months ended September 30, Nine months ended September 30,
2001 2000 2001 2000
------------------- -------------------- -------------------- --------------------
Revenues:
Rental income from real estate $ 33,227 $ 26,822 $ 94,561 $ 71,957
Tenant reimbursements 5,309 3,746 12,553 10,189
Other income, including interest and
gain on sales of assets 9,111 234 13,552 1,062
------------------- -------------------- -------------------- --------------------
Total revenues 47,647 30,802 $120,666 83,208
------------------- -------------------- -------------------- --------------------
Expenses:
Operating expenses 2,470 1,449 5,412 3,944
Real estate taxes 2,494 2,123 7,390 6,562
Depreciation of real estate 4,326 3,950 12,592 11,445
General and administrative 150 363 952 933
Interest 2,144 2,227 6,570 6,730
Interest (related parties) 1,272 1,328 3,735 3,213
------------------- -------------------- -------------------- --------------------
Total expenses 12,856 11,440 36,651 32,827
------------------- -------------------- -------------------- --------------------
Income before minority interest 34,791 19,362 84,015 50,381
Minority interest 29,061 16,005 70,083 41,462
------------------- -------------------- -------------------- --------------------
Net income to common stockholders $ 5,730 $ 3,357 $ 13,932 $ 8,919
=================== ==================== ==================== ====================
Basic net income per share $ 0.33 $ 0.20 $ 0.82 $ 0.52
=================== ==================== ==================== ====================
Diluted net income per share $ 0.33 $ 0.20 $ 0.81 $ 0.52
=================== ==================== ==================== ====================
Weighted average number of
common shares outstanding (basic) 17,120,278 17,025,365 17,084,034 17,013,737
=================== ==================== ==================== ====================
Weighted average number of
common shares outstanding (diluted) 17,320,462 17,191,306 17,302,594 17,129,509
=================== ==================== ==================== ====================
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)
(Unaudited)
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Nine months ended September 30,
-------------------------------------
2001 2000
------------------ ------------------
Cash flows from operating activities:
Net income $ 13,932 $ 8,919
Adjustments to reconcile net income to net cash provided by
operating activities:
Minority interest 70,083 41,462
Depreciation 12,592 11,445
Gain on sales of real estate (11,553) -
Other 92 (364)
Changes in assets and liabilities:
Deferred rent (5,352) (3,274)
Other assets (976) (3,360)
Interest payable (2) -
Security deposits 1,199 1,733
Prepaid rental income (1,015) 4,212
Accounts payable and accrued expenses 2,388 3,010
------------------ ------------------
Net cash provided by operating activities 81,388 63,783
------------------ ------------------
Cash flows from investing activities:
Additions to property - (581)
Improvements to real estate assets (411) (1,371)
Refundable option payment (1,500) -
Proceeds from sales of real estate 38,489 -
Restricted cash (38,489) -
------------------ ------------------
Net cash used in investing activities (1,911) (1,952)
------------------ ------------------
Cash flows from financing activities:
Principal payments on mortgage notes payable (4,151) (1,410)
Principal payments on mortgage notes payable (related parties) (202) (64)
Net payments under line of credit (related parties) (62,057) (53,468)
Proceeds from stock options exercised 457 290
Minority interest distributions (2,538) (1,467)
Dividends paid (10,242) (7,991)
------------------ ------------------
Net cash used in financing activities (78,733) (64,110)
------------------ ------------------
Net increase/(decrease) in cash and cash equivalents 744 (2,279)
Cash and cash equivalents, beginning 4,691 6,553
------------------ ------------------
Cash and cash equivalents, ending $ 5,435 $ 4,274
================== ==================
Supplemental information:
Cash paid for interest $ 10,227 $ 9,876
================== ==================
Supplemental schedule of non-cash investing and financing activities:
Advances under line of credit from O.P. units distributions (related parties) $ 47,500 $ 35,053
================== ==================
Debt incurred in connection with property acquisitions $ 43,884 $ 41,083
================== ==================
Assumption of other liabilities in connection with property acquisitions $ 2,024 $ 2,509
================== ==================
Issuance of operating partnership units in connection with property acquisitions $ 28,118 $ 45,049
================== ==================
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, per share, square footage and
operating 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 September 30, 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 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 and nine months ended September 30, 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 and nine months ended
September 30, 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
Research & Development ("R&D"), office and industrial buildings developed
by the Berg Group on land currently owned, optioned, or acquired for these
purposes in the future, directly or indirectly by certain members of the
Berg Group. At present, there are approximately 297 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, operating
partnership ("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 September 30, 2001, the Company had completed fifteen acquisitions
under the Berg land holdings option agreement representing approximately
1,475,000 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 six properties under development with a total of
approximately 699,000 rentable square feet of R&D properties that the
Company has the right to acquire under this agreement. Of the six
properties, two are joint ventures in which the Berg Group holds an
approximately 50% interest. The joint venture properties represent a total
of approximately 311,000 rentable square feet. As of September 30, 2001,
the estimated acquisition price to the operating partnerships for these six
projects would be approximately $82,100. The final acquisition price of
these six 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 250 additional
acres of land currently controlled by the Berg Group, which could support
approximately 3.9 million square feet of new developments. Under the Berg
land holdings option agreement, as long as the Berg Group's percentage
ownership interest 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
the Berg Group line of credit 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
the Berg Group line of credit and issuing 506,599 O.P. units to various
members of the Berg Group.
Effective April 1, 2001, the Company acquired an approximately 59,400
rentable square foot property located at 245 Caspian Drive in Sunnyvale,
California from the Berg Group in a tax-deferred exchange transaction
involving the Company's former R&D property at 4949 Hellyer Avenue, San
Jose, California. The total acquisition price for this property was
$13,388. The amount of the selling price of the property surrendered in the
exchange disposition was classified as restricted cash at March 31, 2001,
although the Company had no right to retain the cash under the terms of the
contract of exchange. No debt or O.P. units were issued for this
acquisition. This property is subject to a 15-year lease. The lessee is
currently paying rent to the Company under the lease, although the building
constructed on the site has not been completed. The Berg Group is obligated
to complete construction at no cost to the Company upon receipt of the
lessee's request.
Effective May 1, 2001, the Company acquired an approximately 67,912
rentable square foot newly constructed R&D building located at 855 Branham
Lane East in San Jose, California from the Berg Group in a tax-deferred
exchange transaction involving the Company's former R&D property at 4949
Hellyer Avenue, San Jose, California. The total acquisition price for this
property was $9,809. The amount of the selling price of the property
surrendered in the exchange disposition was classified as restricted cash
at March 31, 2001, although the Company had no right to retain the cash
under the terms of the contract of exchange No debt or O.P. units were
issued for this acquisition.
Effective June 1, 2001, the Company acquired an approximately 78,794
rentable square foot newly constructed R&D building located at 5550 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 $7,134. The Company acquired this property by borrowing $2,973 under
the Berg Group line of credit and issuing 314,156 O.P. units to various
members of the Berg Group.
Effective July 1, 2001, the Company acquired three newly constructed R&D
buildings totaling approximately 247,500 rentable square feet located at
5905-5965 Silver Creek Valley Road in San Jose, California from the Berg
Group under the Berg land holdings option agreement. The total acquisition
price for this property was $26,991. The Company acquired this property by
borrowing $16,431 under the Berg Group line of credit, issuing 647,279 O.P.
units to various members of the Berg Group and assuming other liabilities
of $1,602.
- 7 -
Effective August 1, 2001, the Company acquired an approximately 73,312
rentable square foot newly constructed R&D building located at 5750 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 $6,620. The Company acquired this property by borrowing $4,480 under
the Berg Group line of credit, issuing 127,438 O.P. units to various
members of the Berg Group and assuming other liabilities of $422.
PROPERTY DISPOSITIONS
In January 2001, the Company completed the sale of a 200,484 square foot
R&D property located 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 $3,102, which is included in other income, on
the total sale price of $23,130.
In September 2001, the Company completed the sale of a 77,700 square foot
R&D property located at 5713-5729 Fontanoso Way, San Jose, California to
Cisco Systems, Inc., which exercised its purchase option in November 2000.
The Company realized a gain of $8,452, which is included in other income,
on the total sale price of $15,445.
3. RESTRICTED CASH
At March 31, 2001, restricted cash 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. On June 25, 2001, the proceeds were used
in an exchange for two properties as discussed above in Note 2, "Property
Acquisitions."
At September 30, 2001, 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 nine months ended September 30, 2001, stock options to purchase
14,588 shares of common stock were exercised at $4.50 per share, stock
options to purchase 38,000 shares of common stock were exercised at $8.25
per share, and stock options to purchase 6,000 shares of common stock were
exercised at $13.00 per share. Total proceeds to the Company were $457. One
limited partner in an operating partnership exchanged 36,323 O.P. units for
36,323 shares of the Company's common stock under the terms of the exchange
rights agreement.
5. OTHER INCOME
See Note 2 "Property Dispositions." The Company realized a gain of $11,554
on the sale of two properties in the first nine months of 2001. Interest
income generated from the sale proceeds was approximately $487 for the nine
months ended September 30, 2001.
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.
The computation for weighted average shares is detailed below:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- -------------
Weighted average shares outstanding (basic) 17,120,278 17,025,365 17,084,034 17,013,737
Incremental shares from assumed option exercise 200,184 165,941 218,560 115,772
-------------- -------------- -------------- -------------
Weighted average shares outstanding (diluted) 17,320,462 17,191,306 17,302,594 17,129,509
============== ============== ============== =============
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
- 8 -
also be added back to net income. The total number of O.P. units
outstanding at September 30, 2001 and 2000 was 85,599,628 and 81,667,227,
respectively.
7. RELATED PARTY TRANSACTIONS
As of September 30, 2001, the Berg Group owned 78,845,976 O.P. units. Along
with the Company's common shares owned by the Berg Group, the Berg Group's
ownership as of September 30, 2001 represented approximately 77% of the
equity interests of the Company, assuming conversion of the 85,599,628 O.P.
units outstanding into the common stock of the Company.
As of September 30, 2001, debt in the amount of $81,466 was due the Berg
Group under the line of credit established March 1, 2000. The $75,000 line
of credit from the Berg Group was increased to $100,000 effective July 1,
2001. The Berg Group line of credit is currently collateralized by eleven
properties, bears interest at LIBOR plus 1.30%, and matures in July 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
September 30, 2001, debt in the amount of $11,441 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 May 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 $23 and
$20 for the three months ended September 30, 2001 and 2000, respectively,
and $65 and $60 for the nine months ended September 30, 2001 and 2000,
respectively.
8. SUBSEQUENT EVENTS
On October 11, 2001, the Company paid dividends of $0.24 per share of
common stock to all common stockholders of record as of September 28, 2001.
On the same date, the operating partnerships paid a distribution of $0.24
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.
- 9 -
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 and nine months ended September 30, 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 and office properties, primarily located in the Silicon Valley
portion of the San Francisco Bay Area. As of September 30, 2001, the Company
owned and managed 96 properties totaling approximately 6.7 million rentable
square feet 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 the Company are Microsoft
Corporation, JDS Uniphase Corporation, Amdahl Corporation (a subsidiary of
Fujitsu Limited), and Apple Computer, Inc. For federal income tax purposes the
Company operates 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 and office properties that provide attractive initial
yields and significant potential for growth in cash-flow;
- focusing on general purpose, single-tenant Silicon Valley R&D and office
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 two wholly owned subsidiaries, MIT Realty, Inc. and Mission West
Executive Aircraft Center. Both corporations are inactive.
- 10 -
RESULTS OF OPERATIONS
COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 TO THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2000.
As of September 30, 2001, the Company, through its controlling interests in the
operating partnerships, owned 96 properties totaling approximately 6.7 million
square feet compared to 87 properties totaling approximately 6.0 million square
feet owned by the Company as of September 30, 2000. This represents a net
increase of approximately 12% in total rentable square footage from one year
ago. Since September 30, 2000 the Company has acquired the following properties
and disposed of 200,484 rentable square feet at 4949 Hellyer Avenue and 77,700
rentable square feet at 5713-5729 Fontanoso Way.
Date of Rentable Square
Acquisition Address Footage
------------------- ---------------------------------- ------------------
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
04/01 245 Caspian Drive (1) 59,400
05/01 855 Branham Lane East 67,912
06/01 5550 Hellyer Avenue 78,794
07/01 5906-65 Silver Creek Valley Rd. 247,500
08/01 5750 Hellyer Avenue 73,312
------------------
950,968
==================
(1) A lessee currently pays rent for this site under a 15-year lease, although
the building has not been completed for occupancy by this lessee.
The following tables reflect the increase in the Company's rental revenues for
the three and nine months ended September 30, 2001 over rental revenues for the
comparable three and nine months in 2000:
Three months ended September 30,
-----------------------------------------------------------------------
2001 2000 $ Change Percentage Change
------------- ------------- ------------- -------------------
($ in thousands)
Same Property (1) $16,270 $15,789 $ 481 3.0%
1998 Acquisitions 582 582 - -
1999 Acquisitions 6,512 6,295 217 3.4%
2000 Acquisitions (2) 5,153 4,156 997 24.0%
2001 Acquisitions 4,710 - 4,710 100.0%
------------- ------------- -------------
$33,227 $26,822 $ 6,405 23.9%
============= ============= =============
Nine months ended September 30,
-----------------------------------------------------------------------
2001 2000 $ Change Percentage Change
------------- ------------- ------------- -------------------
($ in thousands)
Same Property (1) $49,610 $43,762 $ 5,848 13.4%
1998 Acquisitions 1,748 1,748 - -
1999 Acquisitions 19,549 18,685 864 4.6%
2000 Acquisitions (2) 15,331 7,762 7,569 97.5%
2001 Acquisitions 8,323 - 8,323 100.0%
------------- ------------- -------------
$94,561 $71,957 $22,604 31.4%
============= ============= =============
(1) "Same Property" is defined as properties owned as of July 1, 1998 and still
owned as of September 30, 2001.
(2) The figures for "2000 Acquisitions" in year 2000 for some properties do not
reflect a full three- and nine-months of rent due to the timing of the
acquisition of the properties during the year 2000.
For the quarter ended September 30, 2001, rental revenues increased by $6.41
million from $26.82 million for the three months ended September 30, 2000 to
$33.23 million for the same period of 2001. Approximately 73.5% of the increased
rental revenue came from properties acquired in 2001, 15.6% came from properties
acquired in the second half of 2000 and the remaining balance came from rent
increases or new leases on existing properties at higher rental rates. Rental
revenues increased by $22.60 million from $71.96 million for the nine months
ended September 30, 2000 to $94.56 million for the same period of 2001.
Approximately 36.8% of the increased rental revenue for the first nine months of
2001 was generated by R&D properties acquired by the Company this year, 33.5%
was generated from properties acquired in the second half of 2000, and 25.9% was
attributable to rental rate increases and new leases at market rental
- 11 -
rates on properties originally owned by the Berg Group acquired when the Company
became the sole general partner of the operating partnerships in July 1998.
Tenant reimbursements increased by $1.56 million, or 42%, from $3.75 million for
the three months ended September 30, 2000 to $5.31 million for the three months
ended September 30, 2001. Operating expenses and real estate taxes, on a
combined basis, increased by $1.39 million, or 39%, from $3.57 million to $4.96
million for the three months ended September 30, 2000 and 2001, respectively.
Tenant reimbursements increased by $2.36 million, or 23%, from $10.19 million
for the nine months ended September 30, 2000 to $12.55 million for the nine
months ended September 30, 2001. Operating expenses and real estate taxes, on a
combined basis, increased by $2.30 million, or 22%, from $10.50 million to
$12.80 million for the nine months ended September 30, 2000 and 2001,
respectively. The increases in all categories resulted primarily from the
increase in the total rentable square footage during the periods presented.
Depreciation expense increased by $0.38 million and $1.15 million for the three
and nine-month period ended September 30, 2001, respectively, over the same
period a year ago. The increase was attributable to the acquisition of eleven
R&D properties since September 30, 2000.
Interest expense decreased by $0.09 million, or 4%, from $2.23 million for the
three months ended September 30, 2000 to $2.14 million for the three months
ended September 30, 2001 due to a reduction in scheduled principal debt
repayments. Interest expense (related parties) decreased by $0.06 million, or
4%, from $1.33 million for the three months ended September 30, 2000 to $1.27
million for the three months ended September 30, 2001 due to lower interest
rates and repayments on the Berg Group line of credit. As a result, overall
interest expense (including amounts to related parties) for the quarter ended
September 30, 2001 decreased by $0.15 million compared to the third quarter a
year ago. Interest expense decreased by $0.16 million, or 2%, from $6.73 million
for the nine months ended September 30, 2000 to $6.57 million for the nine
months ended September 30, 2001. Interest expense (related parties) increased by
$0.52 million, or 16%, from $3.21 million for the nine months ended September
30, 2000 to $3.73 million for the nine months ended September 30, 2001. Overall
interest expense for the nine months ended September 30, 2001 increased by $0.36
million compared to the nine months ended September 30, 2000. The eleven R&D
property acquisitions increased total debt outstanding, including amounts due
related parties, by $33.91 million, or 18%, from $186.90 million as of September
30, 2000 to $220.81 million as of September 30, 2001. Management expects
interest expense to increase as new debt is incurred in connection with property
acquisitions, as the Company draws on the Berg Group line of credit, and as it
seeks alternative sources of credit.
The minority interest portion of income was $29.06 million, resulting in net
income to stockholders of $5.73 million for the three months ended September 30,
2001. For the nine months ended September 30, 2001, the minority interest
portion of income was $70.08 million, resulting in net income to stockholders of
$13.93 million. Minority interest represents the ownership interest of all
limited partners in the operating partnerships taken as a whole, which was
approximately 83% as of September 30, 2001 and 2000.
RECENT RENTAL MARKET DEVELOPMENTS
All of the Company's properties are located in the Northern California area
known as Silicon Valley, which generally consists of portions of Santa Clara
County, Southwestern Alameda County, Southeastern San Mateo County and Eastern
Santa Cruz County. The Silicon Valley economy and business activity have slowed
markedly during the first nine months of 2001 after fast-paced growth in 1999
and 2000. In the past several years, the Silicon Valley R&D property market has
fluctuated with the local economy. According to a recent report by BT Commercial
Real Estate, vacancy rates for Silicon Valley R&D property increased from
approximately 3.4% in late 2000 to 12.6% at the end of the third quarter of
2001. Total vacant R&D square footage in Silicon Valley at the end of the third
quarter of 2001 amounted to 19.1 million square feet, of which 49%, or 9.3
million square feet, was sublease space. Total net absorption in 2000 amounted
to approximately 12.8 million square feet. During the first nine months of 2001,
there was a total negative net absorption of approximately (12.2) million square
feet. The impact of this decline has not been uniform throughout the area,
however. The Silicon Valley R&D property market has been characterized by a
substantial number of submarkets, with rent and vacancy rates varying
considerably by submarket and location within each submarket. The Company's
average occupancy rate for the three- and nine-month periods ended September 30,
2001 was 98% and 99%, respectively. The Company does not currently anticipate a
material decline in occupancy or rental rates for its existing R&D properties.
Nonetheless, the Company's operating results and ability to pay dividends at
current levels remain subject to a number of material risks, as indicated under
the caption "Forward-Looking Information" below and in the section entitled
"Risk Factors" in the Company's most recent annual report on Form 10-K.
- 12 -
LEASE EXPIRATIONS
The following table sets forth a schedule of the lease expirations for the
properties beginning with 2001, assuming that none of the tenants exercise
existing renewal options or termination rights, as of September 30, 2001.
Number of Percentage of Total Annual
Year of Lease Leases Rentable Square Footage 2001 Annual Base Rent Base Rent Represented By
Expiration Expiring Subject to Expiring Leases Under Expiring Leases (1) Expiring Leases (2)
--------------------------------------------------------------------------------------------------------------------
2001 6 236,208 $ 3,485,064 2.8%
2002 14 541,046 8,641,395 6.9%
2003 14 487,332 8,407,922 6.7%
2004 21 1,049,926 13,518,995 10.7%
2005 20 884,059 15,303,832 12.2%
2006 16 1,211,185 34,209,949 27.2%
2007 14 986,729 19,865,130 15.8%
2008 3 264,750 2,797,625 2.2%
2009 2 58,783 632,920 0.5%
Thereafter 6 976,309 18,855,327 15.0%
--------------------------------------------------------------------------------------------------
116 6,696,327 $125,718,159 100.0%
==================================================================================================
(1) The base rent for leases expiring is based on January 2001 monthly rents
multiplied by 12.
(2) Based upon 2001 annual rents as discussed in Note (1).
CHANGES IN FINANCIAL CONDITION
In January 2001, the Company completed the sale in a tax-free exchange of a
200,484 square foot R&D property located 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 $3.1 million, which is included in
other income, on the total sale price of $23.1 million. In September 2001, the
Company also completed the sale in a tax-free exchange of a 77,700 square foot
R&D property located at 5713-5729 Fontanoso Way, San Jose, California to Cisco
Systems, Inc., which exercised its purchase option in November 2000. The Company
realized a gain of $8.5 million, which is included in other income, on the total
sale price of $15.4 million. The selling prices of the properties surrendered by
the Company were classified as restricted cash to be used in tax-deferred
property exchanges.
During the first nine months of 2001, the Company acquired seven additional
properties representing approximately 649,000 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 $74 million. The
Company financed these acquisitions by a) borrowing a total of $43.9 million
under the Berg Group line of credit; b) assuming a total of $2 million in other
liabilities and c) issuing 2,059,924 O.P. units. In addition to those seven
property purchases, the Company also acquired two R&D properties representing
approximately 127,312 rentable square feet for approximately $23.2 million in a
tax-deferred exchange. The selling prices of the properties surrendered by the
Company were classified as restricted cash for the use in tax-deferred property
exchanges and was included in restricted cash at March 31, 2001. No debt or O.P.
units were issued for these acquisitions. At September 30, 2001, real estate
assets have increased by approximately $61.8 million from December 31, 2000
because of seven property acquisitions and some tenant improvements.
At September 30, 2001, total liabilities have increased by approximately $34.1
million from December 31, 2000 due to mainly debt incurred in connection with
seven property acquisitions, increase in security deposits and higher dividend
payable.
At September 30, 2001, total stockholders' equity increased by approximately
$3.7 million from December 31, 2000 because of the combination of net earnings,
declared dividends, and option exercises and the exchange of O.P. units for
common stock. During the nine months ended September 30, 2001, stock options to
purchase 14,588 shares of common stock were exercised at $4.50 per share, stock
options to purchase 38,000 shares of common stock were exercised at
- 13 -
$8.25 per share, and stock options to purchase 6,000 shares of common stock were
exercised at $13.00 per share. Total proceeds to the Company were approximately
$0.46 million. One limited partner of an operating partnership exchanged 36,323
O.P. units for 36,323 shares of the Company's common stock under the exchange
rights agreement among the Company and the limited partners in the operating
partnerships.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects its principal sources of liquidity for distributions to
stockholders and unitholders, 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
short-term obligations or other liquidity needs based on the line of credit
(related parties).
On July 1, 2001, our $75 million credit line with the Berg Group was increased
to $100 million with all other terms remaining the same. The Company is
continually evaluating alternative sources of credit to replace the Berg Group
line 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
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 institutional lenders.
On May 17, 2001, the Company obtained a $5 million variable rate revolving line
of credit loan from Cupertino National Bank. The loan, maturing May 17, 2002,
bears an initial interest rate of 7% that is subject to change from time to time
based on the changes in the Prime Rate. The Company paid a loan fee of $10,000
and expects to use the loan for general business purposes. At September 30,
2001, the Cupertino National Bank line of credit had a zero outstanding balance.
At September 30, 2001, the Company had total indebtedness of $220.8 million,
including $127.9 million of fixed rate mortgage debt, $11.4 million under the
Berg Group mortgage note (related parties), and $81.5 million under the Berg
Group line of credit (related parties). In June 2001, the Company paid
approximately $2.7 million to retire a maturing note due Mellon Mortgage
Company.
As of September 30, 2001, the Company's Debt to Total Market Capitalization
ratio was approximately 15.2%, based upon a Total Market Capitalization of
approximately $1.5 billion. 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 $12.00 per share on September
28, 2001) on a fully diluted basis, taking into account the conversion of all
O.P. units into common stock.
- 14 -
Mortgage Debt
The following table sets forth information regarding debt outstanding as of
September 30, 2001:
Maturity Interest
Debt Description Collateral Properties Balance Date Rate
--------------------------------------------- ------------------------------------------ --------------- ----------- -----------
($ in
thousands)
Line of Credit:
Berg Group (related parties) 2033-2043 Samaritan Drive, San Jose, CA $ 81,466 7/02 (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
1795-1845 McCandless Drive, Milpitas, CA
5325 Hellyer Avenue, San Jose, CA
5345 Hellyer Avenue, San Jose, CA
2610 N. First Street, San Jose, CA
75 E. Trimble Road, San Jose, CA
Mortgage Notes Payable (related parties): 5300 & 5350 Hellyer Avenue, San Jose, CA 11,441 6/10 7.650%
---------------
Mortgage Notes Payable:
Prudential Capital Group 20400 Mariani Avenue, Cupertino, CA 1,638 4/09 8.750%
New York Life Insurance Company 10440 Bubb Road, Cupertino, CA 355 9/09 9.625%
Home Savings & Loan Association 10460 Bubb Road, Cupertino, CA 378 12/06 9.500%
Prudential Insurance Company of America 10300 Bubb Road, Cupertino, CA 125,533(2) 10/08 6.560%
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
1600 Memorex Drive, Santa Clara, CA
1688 Richard Avenue, Santa Clara, CA
1700 Richard Avenue, Santa Clara, CA
3540 Bassett Street, Santa Clara, CA
3542 Bassett Street, Santa Clara, CA
3544 Bassett Street, Santa Clara, CA
3550 Bassett Street, Santa Clara, CA
---------------
Mortgage Notes Payable Subtotal 127,904
---------------
Total $220,811
===============
(1) The debt owed to the Berg Group under the line of credit carries a variable
interest rate equal to LIBOR plus 1.30% and is payable in full in July
2002. The interest rate at September 30, 2001 was 3.832%.
(2) John Kontrabecki, one of the limited partners, has guaranteed approximately
$12.0 million of this debt.
- 16 -
CURRENT PROPERTIES SUBJECT TO OUR ACQUISITION AGREEMENT WITH THE BERG GROUP
The following table presents certain projected information at September 30, 2001
concerning projects for which the Company, through its interests in the
operating partnerships, has the right to acquire under the Berg land holdings
option agreement.
Approximate
Number of Rentable Area Total Estimated
Property Buildings (Square Feet) Anticipated Acquisition Date Acquisition Value (1)
------------------------------ ------------ -------------------- ----------------------------- ---------------------
BERG LAND HOLDINGS OPTION
UNDER DEVELOPMENT ($ in thousands)
Silver Creek 1 98,000 4th Quarter 2001 $ 12,500
Morgan Hill (JV I) (2) 2 160,000 4th Quarter 2001 17,500
Morgan Hill (JV II) (2) 1 151,242 1st Quarter 2002 16,200
5345 Hellyer 1 125,000 1st Quarter 2002 15,000
Piercy & Hellyer 1 165,000 3rd Quarter 2002 20,900
- ------- ------
SUBTOTAL 6 699,242 82,100
AVAILABLE LAND
Piercy & Hellyer 490,000
Morgan Hill (2) 368,025
King Ranch 207,000
Fremont & Cushing 387,000
Evergreen 2,480,000
---------
SUBTOTAL 3,932,025
TOTAL 6 4,631,267 $ 82,100
= ========= =========
(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 the
Company's 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.
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.
- 16 -
For example, in July 2001, the Berg Group informed the Company that tenants
under five R&D properties being developed by the Berg Group were unlikely to
perform under their existing leases. The five properties represent a total of
approximately 422,000 rentable square feet that the Company had intended to
purchase for approximately $62.0 million by exercising its option under the Berg
land holdings option agreement. The Company has no obligation to purchase these
properties, however, and failure to acquire them when originally anticipated
will not adversely impact the Company's financial condition or current operating
results. The Company does not expect to acquire any of these properties, if at
all, until each property is fully completed and leased by a tenant capable of
performing its lease obligations. Management considers this unlikely in the near
term and believes the Company will not receive as much as $2.0 million
additional rental revenues that it had projected for the fourth quarter of this
year. If none of these properties are acquired by the Company next year, the
Company will forego as much as $18.0 million of anticipated additional revenues
in 2002. The Berg Group will continue to own and bear the entire risk with
respect to these properties, and will receive any rent that these tenants pay if
their existing obligations under the leases are enforced successfully or settled
by partial payment.
The Company believes that one of its tenants which currently pays rent at two
properties representing approximately 284,000 rentable square feet is likely to
file for protection under the federal bankruptcy laws at the end of the year.
One of the properties, consisting of approximately 239,000 square feet, may take
twelve months or nore to re-lease if vacated. If this tenant declares
bankruptcy, the Company will forego as much as $6.0 million of projected
additional rent revenues in 2002. Another tenant, Exodus Communications, Inc.
("Exodus"), filed a voluntary petition for bankruptcy protection under Chapter
11 of the U.S. Bankruptcy Code on September 26, 2001. Exodus has not disavowed
its lease agreement with the Company and has continued to pay its monthly
obligations under the lease. The Exodus lease has been guaranteed by Citizens
Communications Company in the event of default by Exodus. The Company currently
believes that it will receive the lease payments due under the Exodus lease but
cannot provide assurances that all payments will be timely or that some legal
action to enforce its payments rights will not be necessary.
In addition, leasing activity for new build-to-suit and vacated R&D properties
has slowed considerably during the past nine months. Consequently, the Company
believes that the projected acquisition dates for other development properties
subject to the Berg land holdings option agreement may be delayed for an
indefinite period of time. Such delays could reduce future growth in revenues,
operating income and Funds Available for Distribution ("FAD").
HISTORICAL CASH FLOWS
Net cash provided by operating activities for the nine months ended September
30, 2001 was $81.4 million compared to $63.8 million for the same period in
2000, a 28% increase. The change was a direct result of rent increases and newly
acquired properties.
Net cash used in investing activities was approximately $1.9 million and $2
million for the nine months ended September 30, 2001 and 2000, respectively. Of
the $1.9 million net cash used in investing activities, $0.4 million were
related to tenant improvements and $1.5 million related to the Xilinx purchase
option agreement where Xilinx and the Company agreed to reduce the deposit by
$167 per month commencing August 1, 2000 until the later of: (1) the transfer of
title to the property to Xilinx or (2) December 31, 2002. In the event Xilinx
does not exercise its option, the Company must refund the remaining deposit to
Xilinx, without interest.
Net cash used in financing activities was $78.7 million for the nine months
ended September 30, 2001 compared to $64.1 million for the same period in 2000,
a 23% increase. Of the $78.7 million net cash used in financing activities,
$66.4 million were used to pay outstanding debt, $2.5 million for minority
interest distributions, $10.2 million for dividend payments, and $0.4 million
received from exercised stock options. During the nine months ended September
30, 2001, the Company paid its debt outstanding and made distributions to
holders of its common stock and O.P. units by utilizing cash generated from
operating activities.
CAPITAL EXPENDITURES
The Company's existing R&D 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 $2.0 million during 2001. The Company believes it will recover
substantially all of these sums from the tenants under 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.
- 17 -
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.
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 and nine months ended September 30, 2001 and 2000 are summarized in the
tables below:
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------------- ------------------------------------------
2001 2000 2001 2000
------------------ ------------------ ------------------- -------------------
($ in thousands) ($ in thousands)
Net income $ 5,730 $ 3,357 $13,932 $ 8,919
Add:
Minority interest (1) 28,897 15,894 69,593 41,284
Depreciation 4,326 3,950 12,592 11,445
Less:
Gain on sale of assets 8,452 - 11,553 501
------------------ ------------------ ------------------- -------------------
FFO $30,501 $23,201 $84,564 $61,147
================== ================== =================== ===================
(1) The minority interest for unrelated parties was deducted from total
minority interest in calculating FFO.
DISTRIBUTION POLICY
The Company intends to pay distributions to stockholders and O.P. unit holders
based upon total Funds Available for Distribution ("FAD"), which is calculated
as FFO less adjustment for straight-lined rent included in net income, leasing
commissions paid and capital expenditures made during the respective period. The
calculations of FAD for the three and nine months ended September 30, 2001 and
2000 are as follows:
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------------ ------------------------------------------
2001 2000 2001 2000
------------------- ------------------- ------------------- -------------------
($ in thousands) ($ in thousands)
FFO $30,501 $23,201 $84,564 $61,147
Less:
Straight-line rents 1,025 1,947 5,352 3,274
Leasing commissions 71 436 653 1,338
Capital expenditures 87 223 411 1,371
------------------- ------------------- ------------------- -------------------
FAD $29,318 $20,595 $78,148 $55,164
=================== =================== =================== ===================
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
- 18 -
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 GAAP 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 100% 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.
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 R&D, office and industrial properties in
the Company's current and proposed market areas, tenant defaults and
bankruptcies, 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.
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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
10.27 Revolving Credit - $100,000,000 Secured Promissory Note
b. Reports on Form 8-K
None
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================================================================================
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: November 12, 2001 By:/s/ Wayne N. Pham
--------------------------------------
Wayne N. Pham
Vice President of Finance and Controller
(Principal Accounting Officer and Duly
Authorized Officer)
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EXHIBIT 10.27
REVOLVING CREDIT
SECURED PROMISSORY NOTE
("Note")
$100,000,000.00 July 1, 2001
FOR VALUE RECEIVED, Mission West Properties, L.P., a Delaware limited
partnership, Mission West Properties, L.P. I, a Delaware limited partnership,
Mission West Properties L.P. II, a Delaware limited partnership, and Mission
West Properties, L.P. III, a Delaware limited partnership (collectively
"Borrower"), promises to pay to the order of Berg & Berg Enterprises, LLC, a
California limited liability company ("Lender") or its assigns, at 10050 Bandley
Drive, Cupertino, California 95014, or at such other place as the holder of this
Note may from time to time designate, the principal sum of One Hundred Million
Dollars ($100,000,000.00) (the "Credit Amount") or so much of that sum as may be
advanced under this Note from time to time by any holder, plus interest as
computed herein.
Interest on the principal sum of this Note from time to time outstanding will be
computed from the date of each advance of principal at LIBOR plus 1.30% (the
"Applicable Interest Rate"). Interest will be computed on the basis of a three
hundred sixty (360) day year and the actual number of days elapsed, which will
result in the payment of more interest than if a 365-day year were used.
All accrued and unpaid principal and interest shall be due and payable no later
than July 1, 2002.
Advances under this Note may be drawn by Borrower, up to the Credit Amount, upon
not less than 5 days notice to Lender.
Each payment shall be credited first on the interest then due and the remainder
on the principal sum.
The undersigned agrees that the holder of this Note may, without notice to the
undersigned and without affecting the liability of the undersigned, accept
additional or substitute security for this Note, or release any security or any
party liable for this Note, or extend or renew this Note.
If the undersigned consists of more than one person or entity, their liability
and obligations under this Note will be joint and several. Borrower jointly and
severally waives diligence, presentment, protest and demand, notice of protest,
dishonor and non-payment of this Note, expressly agrees that this Note or any
payment hereunder, may be extended from time to time, and consents to the
acceptance of further security for this Note, including other types of security,
all without in any way affecting the liability of the Borrower. The right to
plead any and all statutes of limitations as a defense to any demand on this
Note, or on any guaranty hereof, or to any agreement to pay the same, or to any
demand secured by the Deed of Trust, or other security, securing this Note,
against Borrower, the holder of any property encumbered by the Deed of Trust or
other instrument securing this Note, and any guarantors or sureties, is
expressly waived by each and all said parties.
All amounts payable under this Note are payable in lawful money of the United
States, free from any offset, deduction or counterclaim. Checks will constitute
payment only when collected.
Upon any default in the payment of any amounts due under this Note or upon any
default under the Deed of Trust, the holder may, at its option and upon ten (10)
days' written notice to the undersigned, declare the entire unpaid principal sum
of this Note together with all accrued interest to be due and payable provided,
however, that if the undersigned should cure such default under this Note or the
Deed of Trust within the time period described above, the right of the holder to
declare the entire unpaid principal sum of this Note together with all accrued
interest immediately due and payable shall terminate as to such default as if no
such default occurred.
The undersigned agrees to pay all costs of collection when incurred, including
but not limited to reasonable attorneys' fees. If any suit or action is
instituted to enforce this Note, the undersigned promises to pay, in addition to
the costs and disbursements otherwise allowed by law, such sum as the court may
adjudge as reasonable attorneys' fees in such suit or action.
This Note may be prepaid in whole or in part at any time without penalty. Until
the maturity date, including all extensions thereof, amounts repaid may be
subsequently advanced under this Note, up to the Credit Amount.
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This Note will be governed by the laws of the State of California.
This Note is a non-recourse loan secured by a Deed of Trust and Assignment of
Rents (the "Deed of Trust") executed by the undersigned in favor of Lender and
covering real property located in San Jose, California. The Deed of Trust
contains provisions for the acceleration of the maturity of this Note.
Mission West Properties, L.P.,
Mission West Properties, L.P. I,
Mission West Properties, L.P. II, and
Mission West Properties, L.P. III
By: Mission West Properties, Inc., their general partner
/s/ Wayne N. Pham
---------------------------------------------
By: Wayne N. Pham, VP of Finance & Controller
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