UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 8-K

 

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

Date of Report (Date of earliest event reported):  May 24, 2004

 

 

CENTERPOINT PROPERTIES TRUST

(Exact name of registrant as specified in its charter)

 

 

1808 Swift Road, Oak Brook, Illinois  60523

(Address of principal executive offices)

 

(630) 586-8000

(Registrant’s telephone number, including area code)

 

 

Item 5.    Other Events

 

During the period January 1, 2004 to March 31, 2004, the company disposed of six properties aggregating approximately 468,014 square feet.

 

This Form 8-K is being filed to reflect the impact of the classification of the results of operations relating to these properties as discontinued operations in accordance with Statement of Financial Accounting Standards 144, “Accounting for the Impairment or Disposal of Long Lived Assets” (“FAS 144”).

 

In compliance with FAS 144, the Company has reported revenues, expenses and gains/(losses) on the disposition from these properties as income from discontinued operations for each period presented in its quarterly report filed on Form 10-Q for the first quarter ended March 31, 2004.  The Company is filing this Form 8-K to reclassify the results of operations of the disposed properties as discontinued operations in the Company’s historical financial statements for each of the years ended December 31, 2001, 2002 and 2003.  Although these financial statements relate to periods prior to the disposal, the Company is filing reclassified financial statements in order to permit its independent public accountant to reissue its audit report with respect to these periods in connection with the incorporation by reference of these financial statements into a filing by the Company of a registration statement under the Securities Act of 1933, as amended.  This reclassification has no effect on the Company’s reported net income available to common shareholders.

 

This Report on Form 8-K updates Items 6, 7 and 8 of the Company’s 2003 Form 10-K to reflect the reclassification of operations from properties sold from January 1, 2004 through March 31, 2004 as discontinued operations for all periods presented.  All other items of the 2003 Form 10-K remain unchanged.  No attempt has been made to update matters in the Company’s 2003 Form 10-K except to the reflect the requirements of FAS 144.  Readers should refer to the Company’s quarterly report on Form 10-Q and current reports on Form 8-K for periods subsequent to December 31, 2003.

 

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TABLE OF CONTENTS

 

Revised 10-K Items
Selected Financial Data (10-K reference Part II, Item 6)
Management’s Discussion and Analysis of Financial Condition and Results of Operation (10-K reference Part II, Item 7)
Financial Statements and Supplementary Data (10-K reference Part II, Item 8)

 

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Selected Financial Data

(10-K reference Part II, Item 6)

 

The following tables set forth, on a historical basis, Selected Financial Data for the Company.  The following table should be read in conjunction with the historical financial statements of the Company and Item 7, “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION,” both included elsewhere in this Form 10-K.

 

As discussed in Note 2 to the consolidated financial statements, on January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  FAS No. 144 retains the basic provisions of Opinion 30 for the presentation of discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business).  A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity.  For purposes of applying FAS No. 144, the Company considers each operating property to be a component unit.  Accordingly, operations of such properties sold or classified as held for sale after December 31, 2001 are shown as discontinued operations.  In addition, operations for such properties for all prior periods presented are required to be reclassified to discontinued operations.

 

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The Selected Financial Data for the Company is not necessarily indicative of the actual financial position of the Company or results of operations at any future date or for a future period.

 

CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES

SELECTED FINANCIAL DATA

(in thousands, except for per share data, ratios and number of properties)

 

		Year Ended December 31,
		2003			2002			2001			2000			1999
		(Dollars in thousand, except per share and property information)
Operating Data:
Total revenues		$	159,162		$	147,436		$	145,183		$	146,684		$	127,644
Property expenses (1)		(60,016		)	(51,198		)	(48,617		)	(49,071		)	(39,045		)
Depreciation and other amortization		(34,268		)	(31,560		)	(31,985		)	(30,464		)	(25,531		)
General and administrative		(8,681		)	(7,023		)	(5,566		)	(4,812		)	(4,258		)
Interest expense:														0
Interest incurred, net		(23,305		)	(26,880		)	(30,778		)	(30,976		)	(19,954		)
Amortization of deferred financing costs		(3,354		)	(2,918		)	(2,376		)	(2,155		)	(1,905		)
Early extinguishment of debt								(1,616		)	—			(582		)
Impairment of asset (2)(3)(4)		—			(1,228		)	(37,994		)	—			—
Provision for income tax (expense) benefit		(1,111		)	(1,373		)	694			—			—
Equity in net income (loss) of affiliate		2,281			1,994			3,309			(294		)	2,126
Income from continuing operations		30,708			27,250			(9,746		)	28,912			38,495
Discontinued operations:
Gain or (loss) on sale of real estate		36,785			29,899			—			—			—
Income (loss) from operations of sold properties		4,867			5,281			7,590			6,547			5,179
Gain on sale of real estate, net of tax		5,696			12,962			30,153			19,227			5,086
Cumulative effect of change in accounting principle, net of tax		6,528			—			—			—			—
Net income		84,584			75,392			27,997			54,686			48,760
Preferred dividends		(9,599		)	(10,090		)	(10,090		)	(10,105		)	(8,318		)
Net income available to common shareholders		$	74,985		$	65,302		$	17,907		$	44,581		$	40,442
Basic EPS:
Income available to common shareholders from continuing operations		$	1.16		$	1.32		$	0.46		$	1.82		$	1.74
Discontinued operations		1.82			1.55			0.34			0.31			0.25
Cumulative effect of change in accounting principle		0.28			—			—			—			—
Net income available to common shareholders		$	3.26		$	2.87		$	0.80		$	2.13		$	1.99
Diluted EPS:
Income available to common shareholders from continuing operations		1.13			1.29			0.45			$	1.78		$	1.69
Discontinued operations		1.76			1.50			0.33			0.31			0.25
Cumulative effect of change in accounting principle		0.27			—			—			—			—
Net income available to common shareholders		$	3.16		$	2.79		$	0.78		$	2.09		$	1.94
Proforma results of operations assuming new method of accounting for certain developer notes was applied retroactively (5):
Net income		$	78,056		$	81,920		$	27,997		$	54,686		$	48,760
Basic EPS:
Net income available to common shareholders		$	2.98		$	3.16		$	0.80		$	2.13		$	1.99
Diluted EPS:
Net income available to common shareholders		$	2.88		$	3.07		$	0.78		$	2.09		$	1.94

 

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		Year Ended December 31,
		2003			2002			2001			2000			1999
		(Dollars in thousand, except per share and property information)
Balance Sheet Data (End of Period):
Investment in real estate (before accumulated depreciation and amortization)		$	1,342,374		$	1,219,109		$	1,197,900		$	1,084,812		$	971,897
Real estate held for sale, net of depreciation		6,302			48,631			22,555			17,277			—
Net investment in real estate		1,179,289			1,124,153			1,100,232			1,003,133			886,489
Total assets		1,419,242			1,310,742			1,182,671			1,155,235			1,083,427
Total debt		834,865			697,101			586,527			547,744			554,348
Shareholders’ equity		482,501			526,959			513,795			534,386			466,604
Other Data:
EBITDA (6)		$	144,912		$	146,229		$	99,296		$	120,771		$	98,552
Net cash flow:
Operating activities		74,221			59,366			73,229			71,518			75,398
Investing activities		(135,004		)	(112,882		)	(76,502		)	(74,790		)	(272,361		)
Financing activities		59,779			52,900			4,064			827			199,993
Preferred dividends		(6,311		)	(10,090		)	(10,090		)	(10,105		)	(8,318		)
Common dividends		(56,492		)	(53,083		)	(47,423		)	(41,720		)	(38,575		)
Common dividends per share		2.43			2.31			2.10			2.01			1.90
Return of capital portion of distribution		—			(52,876		)	—			(834		)	(8,101		)
Number of properties owned at the end of the year (7)		190			190			178			167			182

 

(1)                                  Property expenses include real estate taxes, repairs and maintenance, insurance and utilities.

(2)                                  At December 31, 2003, the Company had one warehouse and other industrial property and two land parcels held for sale because the properties were under contract for sale.  The expected net sales price of these properties exceeded the carrying amount.  Therefore, no impairment change was necessary.

(3)                                  At December 31, 2002, the Company had its remaining interest in the BNSF leased land and 64 acres of land at Jefferson and Aurora Avenue in Naperville, IL held for sale because the properties were under contract for sale.  The Company recognized an impairment on the Naperville land because the expected proceeds upon sale after costs are lower than the carrying value of the property.

(4)                                  At December 31, 2001, the Company had an office property held for sale.  This property was the former headquarters of HALO Industries, Inc. (“HALO”) and was located at 5800 Touhy Avenue in Niles, Illinois.  The bankruptcy of HALO caused a reduction in the property value and on December 12, 2001 the Company announced its intention to sell the property.  Accordingly, the Company recognized an impairment of this asset based on management’s estimate of the fair value of the asset less costs to dispose in accordance with FAS No. 121.

(5)                                  In 2003, CenterPoint changed its accounting policy when accounting for certain developer notes.  See Note 6 to Company’s Consolidated Financial Statements.

(6)                                  EBITDA represents earnings before interest, income taxes, depreciation and amortization.  Management believes that EBITDA is helpful to investors as an indication of property operations because it excludes costs of financing and non-cash depreciation and amortization amounts.  Additionally, EBITDA is a measure commonly used by financial analysts because of its value in measuring operating performance.  EBITDA does not represent cash flows from operations as defined by GAAP, should not be considered by the reader as an alternative to net income as an indicator of the Company’s operating performance, and is not indicative of cash available to fund all cash flow needs.  Investors are cautioned that EBITDA, as calculated by the Company, may not be comparable to similarly titled but differently calculated measures for other REITs.

 

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RECONCILIATION OF NET INCOMEAVAILABLETO COMMON SHAREHOLDERS TO EBITDA

 

		Year Ended December 31,
		2003			2002			2001			2000			1999
		(Dollars in thousand , except per share information)
Net income available to common shareholders		$	74,985		$	65,302		$	17,907		$	44,581		$	40,442
Add back/(deduct)
Preferred dividends		9,599			10,090			10,090			10,105			8,318
Interest incurred, net		23,305			26,880			30,778			30,976			19,954
Depreciation and amortization		34,268			31,560			31,985			30,464			25,531
Amortization of deferred financing costs		3,354			2,918			2,376			2,155			1,905
Early extinguishment of debt		—			—			1,616			—			582
Provision for income tax expense		1,111			1,373			(694		)	—			—
Provision for income tax expense from gain on sale of real estate		50			1,302			1,861			—			—
Cumulative effect of change in accounting principle		(6,528		)	—			—			—			—
Discontinued Operations
Interest incurred, net		1,861			2,995			—			—			—
Depreciation and amortization		2,043			3,235			3,405			2,490			1,820
Provision for income tax expense from operations		411			282			(28		)	—			—
Provision for income tax expense from gain on sale of real estate		453			292			—			—			—
EBITDA		$	144,912		$	146,229		$	99,296		$	120,771		$	98,552

 

(7)           The number of properties included in operating results reflects the following activity:

 

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operation.

(10-K reference Part II, Item 7)

 

The following is a discussion of the historical operating results of the Company.  This discussion should be read in conjunction with the Financial Statements and the information set forth under Item 6, “SELECTED FINANCIAL DATA,” found in this Form 10-K.

 

CenterPoint Strategy

 

CenterPoint is focused on maximizing total shareholder returns through customer-driven management, investment, development, and redevelopment of warehouse, distribution, light manufacturing, intermodal parks and air freight buildings.  The Company seeks to serve the changing space needs of new and existing customers.  The Company’s operating results primarily include operating income from the Company’s investment portfolio, gains from dispositions and fee income from developments.

 

A cornerstone of this strategy is the consistent redeployment of its capital.  The Company seeks to fund new investment with disposition proceeds from the sale of stabilized assets, or those offering lower potential returns relative to their market value.  Each year the Company expects to sell 10% to 20% of its assets (or more if an attractive opportunity arises).  These dispositions, together with retained cash flow, fund much of the Company’s capital requirements.  CenterPoint believes its capital “recycling” discipline lowers its cost of capital through increased funding flexibility.

 

2003 Investment Activity

 

In 2003, the Company acquired or completed the development of 15 properties, totaling 4.6 million square feet, and acquired 765.0 acres of unimproved land.  To fund a majority of these new investments, as well as construction in progress, aggregating $177.4 million, the Company “recycled” $73.5 million in proceeds from the sale of 15 properties, and 14 land parcels, and the Company generated $56.5 million in proceeds from the sale of a 62.5% interest in the BNSF leased land.  The total net increase in the Company’s owned warehouse and other industrial properties was 3.6 million square feet of buildings or 11.6%.

 

The Company carefully monitors its investment, disposition and other operating activity to ensure its continuing qualification as a REIT under applicable laws.  Intended short term property investments and other activities whose sale may have an adverse impact on the Company’s REIT status are undertaken by the Company’s taxable REIT subsidiary, CRS or other taxable affiliates of the Company.

 

CenterPoint’s Development Pipeline

 

The Company’s financial results include the Company’s property development and redevelopment activities.  These projects require the incurrence of substantial capital costs and related expenses in advance of rental income.  As of December 31, 2003, the Company and its subsidiaries had $150.1 million of development costs invested in projects, including 1,355 acres of owned land for future development at the Company’s current industrial parks (CenterPoint Intermodal Center, Kenney property at Rochelle, Illinois next to the Union Pacific intermodal yard, and McCook Metals at McCook, Illinois), seven buildings totaling 1.7 million square feet and other projects in early stages of development.  At the end of 2003, the Company or its affiliates hold $121.0 million of tax increment financing (“TIF”) developer notes relating to these projects, of which $111.6 million is reserved against due to the uncertainty over collection of the underlying taxes.  These notes, with tax exempt interest rates ranging from 9% to 10% are expected to be reimbursed from new real estate tax revenues resulting from project completion.

 

CenterPoint Venture

 

The Company owns 25% of CenterPoint Venture.  The Company provides property management and administrative services for the Venture, and also earns fees on the acquisitions and dispositions completed by the Venture.  During 2003, the Venture acquired or completed the development of six properties totaling $36.9 million.  The Venture disposed of three properties and one land parcel totaling $24.6 million.  Also in 2003, CalEast, CenterPoint’s partner in the Venture, invested $109.0 million in six properties leased to The Home Depot, Inc., totaling 2.6 million square feet, and the Company advanced $78.2 million of this investment in the form of an unsecured note receivable.  Subsequently, CalEast sold three of the buildings and repaid a portion of the note

 

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receivable.  As of December 31, 2003, CenterPoint Venture owned 17 warehouse and other industrial properties, totaling 2.4 million square feet, which were 76.9% leased.

 

Chicago Manufacturing Campus

 

At December 31, 2003, CMC (a development joint venture between CenterPoint and Ford Land) owned four warehouse and other industrial buildings, totaling 1.6 million square feet, all 100% leased to Ford suppliers.  This supplier park adjacent to the Ford Chicago plant is owned 51% by CenterPoint and 49% by Ford Land, but Ford Land has the option to require CenterPoint to invest as much as 59% of costs.  The Company earns development fees for construction related activities.

 

Critical Accounting Policies and Estimates

 

The consolidated financial statements are prepared in accordance with GAAP, which requires the Company to make certain estimates and assumptions.  A summary of the Company’s significant accounting policies is provided in Note 2 to the consolidated financial statements.  The following section is a summary of certain aspects of those accounting policies that require management estimates and judgment.

 

•                  When real estate properties are acquired, acquisition costs are allocated to components of the property, any in-place leases, and any potential tenant relationships using relative fair values based on historical experience and the Company’s current judgment.  These assumptions and estimates impact the amount of costs allocated between land, different categories of building and land improvements and certain deferred expense related the acquired property.  The allocation assumptions ultimately affect the amount of costs assigned to individual properties in multiple property acquisitions, depreciation and amortization expense, and gains or losses recorded on sales of properties.

 

•                  For industrial park and multi-phased developments, costs are assigned to individual components of the project when those costs benefit certain sites rather than the whole project.  Where specific identification is impractical or costs incurred benefit the project as a whole, capitalized costs are allocated as follows:

 

•                  Site acquisition costs and all other common costs are allocated to each land parcel benefited based on the relative fair market value of each land parcel before construction.

•                  Site improvement and construction costs are allocated to individual parcels based on relative sales value of each unit upon completion.

•                  When allocation based on relative sales value is impractical, capitalized costs are allocated based on acreage.

•                  In the event a parcel within a park development is sold prior to completion of the park, the sales basis of the sold parcel will reflect a pro rata allocation of future common costs.

 

•                  Receivables are reported net of an allowance for doubtful accounts and may be uncollectible in the future.  The Company reviews its receivables regularly for potential collection problems in computing the allowance recorded against its receivables.  The Company adds all specifically identified doubtful accounts as specific additions to the reserve and adds a percentage of other long outstanding items based on historical trends.  This review process requires the Company to make certain judgments regarding collections that are inherently difficult to predict.

 

•                  TIF is a municipal financing and planning technique that is widely used to renovate declining areas or redevelop blighted areas while expanding a municipality’s tax base.  TIFs allow municipalities to make needed public and private improvements by promising to return all or a portion of the real estate tax increase generated by the improvements to the developer for a limited period of time.  This contract to pay the tax increment to the developer is usually documented in a redevelopment agreement between the city and the developer and usually results in the creation of developer notes payable from the city to the developer.

 

The Company accounts for developer notes as either reimbursement of improvement costs incurred or as real estate tax abatement depending on the facts and circumstances of the each redevelopment agreement.  Effective January 1, 2003, the Company changed its accounting policy related to certain developer notes.  The Company has described its accounting for each of its developer note arrangements and has described the financial impact of the change in accounting principle in Note 6 and Note 7, respectively, of the consolidated financial statements.

 

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•                  Effective January 1, 2002, the Company adopted FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” a replacement of FAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of”, and the accounting and reporting provisions of APB No. 30, “Reporting of Operations – Reporting the Effects of Disposal of a Segment of the Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”.  FAS No. 144 retained the basic provisions of FAS No. 121 with respect to asset impairments, but provides more specific guidance related to measuring impairment.  The Company will continue to recognize an impairment loss on real estate assets under the following circumstances:

 

•                  When management has designated the asset to be held for sale and the fair value of the asset less the cost of disposal is less than the asset’s carrying value, or

•                  When market conditions, a contract for sale or some other triggering event has made it certain that the carrying amount of an asset held for use might not be recoverable and the estimated undiscounted cash flows of the asset are insufficient to recover the carrying value of the asset.

 

In cases of impairment, the asset will be reduced to its fair value based on the property’s estimated discounted future cash flows.  The amount of the reduction is recorded as an operating expense, impairment of asset.

 

Results of Operations

 

Adoption of FAS No. 144

 

As mentioned above, in 2002, CenterPoint adopted FAS No. 144.  This standard requires the Company to report the operations from sold properties and properties classified as held for sale after January 1, 2002 as discontinued operations, net of tax for all periods presented.  In addition, all gains or losses on sales of operating properties not identified as held for sale at December 31, 2001 must be shown in discontinued operations, net of tax.

 

Comparison of Year Ended December 31, 2003 to Year Ended December 31, 2002

 

Revenues

 

Total revenues increased $11.7 million or 8.0% over the same period last year due to increased earnings from minimum rents, straight-line rents, expense reimbursements and mortgage interest income (operating and investment revenue) which increased with strengthening market conditions.

 

In the twelve months of 2003, 92.5% of total revenues of the Company were derived primarily from operating and investment revenue, pursuant to the terms of tenant leases and mortgages for occupied space at the warehouse and other industrial properties.  In 2002, operating and investment revenue as a percentage of total revenues was 91.7%.  Operating and investment revenues increased $12.0 million due to increased occupancy and strengthening economic conditions.  The Company’s occupancy rate on in-service properties increased to 93.8%, compared to 91.3% a year ago.  Also, in 2003, the Company leased 65.5% of all 2003 scheduled lease expirations or approximately 2.6 million square feet at an average rental rate increase of 2.9% on a GAAP basis, but a decrease of 4.2% on a cash basis.  In order to capitalize on the strengthening leasing activity, the Company provided early term leasing incentives to certain tenants in order to avoid vacancy.

 

Real estate fee income decreased $0.2 million.  This slight difference was due to a greater number and larger dollar amount of projects earning development fees in 2002 compared to 2003.  In 2003, the Company earned development fees from completing construction of the large rail facility in Rochelle, Illinois for the Union Pacific and completing the four buildings at CMC, in addition to several other fees.

 

Operating and Nonoperating Expenses

 

Real estate tax expense and property operating and leasing (“POL”) expense, combined, increased by $8.8 million from year to year.  Real estate taxes increased by $2.8 million due mainly to taxes on 2003 investments.  The following is a breakdown of the composition of the Company’s property operating and leasing costs.

 

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		Year Ended December 31,
		2003			2002
Property operating includes property repairs & maintenance, utilities, and other property, bad debt and tenant related costs		$	13,383		$	11,134
Property management includes property management and portfolio construction costs		5,472			4,705
Asset management includes the cost of property management executives, accounting, acquisitions, dispositions, development and management information systems		10,962			7,984
Total property operating and leasing		$	29,817		$	23,823

 

POL costs include operating costs for property management, investment and dispositions, accounting and information systems personnel, consistent with the Company’s active portfolio management and investment focus.  Property operating and leasing costs increased in 2003 mainly due to the early vesting of Company stock grants and the resulting recognition of $3.5 million in expense.  In 2002, POL costs included $1.4 million in expense from the vesting of a previous batch of stock grants.  The remainder of the increase in POL was due to increased payroll and related costs and increased costs incurred on the properties, including increased property insurance due to raising rates, increased snow plowing costs due to greater snowfall in 2003 and increased utilities due to natural gas costs.  In connection with development projects and non-operating property acquisitions, the Company capitalized expenses of $2.1 million and $1.7 million in 2003 and 2002, respectively that would normally be included in POL costs.

 

General and administrative expenses increased by $1.7 million due to the early vesting of management stock grants and the corresponding recognition of $0.8 million in expense, increased payroll and related costs and increased legal and corporate compliance costs.  The payroll and related costs increase on current employees was largely due to achieving high performance goals.  The legal costs are attributable to the collection efforts related to certain bankruptcy claims, certain legal defense efforts and the Company’s evaluation and compliance with new laws and regulations governing public companies.  Expenses associated with corporate administration, finance and investor relations are included in the Company’s general and administrative expense.

 

Depreciation and amortization increased $2.7 million or 8.6% when comparing 2003 and 2002 due to depreciation and amortization on 2003 investments.

 

Interest incurred decreased by $3.6 million over the same period last year due to lower interest rates despite higher average debt balances in 2003 when compared to 2002 ($773.6 million in 2003 compared to $667.9 million in 2002).  In 2003, the Company’s weighted average rate including financing costs was 4.5% compared to 6.0% in 2002.  The repayment of $150.0 million in 7.9% unsecured bonds in the January of 2003 contributed to this reduction.  In connection with development projects under construction, the Company capitalized $8.6 million and $8.4 million of interest in 2003 and 2002, respectively.

 

Amortization of deferred financing costs increased slightly when comparing periods due mainly to a full period of amortization costs associated with new debt issued in 2002 and a partial period of amortization on the 2003 debt issuance.  Both of these issuances included interest rate lock settlements of $6.2 million and $1.0 million for 2002 and 2003, respectively.  These costs are amortized over the term of the debt.

 

In 2002, the Company recorded an impairment expense for a 64 acre land parcel located in a retail and commercial district of Naperville, Illinois which went under contract for sale.  Since the carrying value of this land was greater than the expected net sales proceeds, the Company recorded a $1.2 million impairment of this asset.  The decline in value is attributable to weakening market conditions for retail land.  There was no similar impairment recorded in 2003.

 

The provision for income tax expense decreased by $0.3 million when comparing periods due largely to lower development fees which were earned by CRS, the Company’s taxable REIT subsidiary, in 2003 compared to 2002.

 

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Equity in net income of affiliates increased $0.3 million when comparing periods, due to a partial period of income from 2003 investments and development deliveries on the Venture and CMC in 2003 compared to 2002.

 

Due to the implementation of FAS 144, discussed previously, the gain/loss from the sale of operating properties and the net income earned on operating properties sold are classified as discontinued operations.  Gains on the sale of real estate from discontinued operations increased by $6.9 million due to the sale of higher book gain properties in 2003 compared to 2002.  For 2003, this category includes gains on the sale of 15 operating properties sold in 2003 compared to 16 operating properties sold in 2002.  This increase in discontinued operations gains is offset by non-discontinued operations gains mentioned below.  Also, the 2003 and 2002 net income from these sold operating properties and properties sold from January 1, 2004 through March 31, 2004 are classified here, which decreased only slightly.

 

Gains on the sale of real estate from non-operating properties decreased by $7.3 million when comparing periods.  When non-operating gains and operating gains are combined for comparison purposes, gains in total decreased only slightly.

 

As referenced above, in 2003 the Company changed its accounting policy when accounting for the developer notes at properties where the sole source of tax increment is provide by Company owned land parcels.  This change in accounting affected the Company’s accounting for sold CIC properties and CIC properties which had operations in 2002.  Therefore, the Company recorded income from the cumulative effect of the change in accounting principle due to the $5.9 million increased gain relating to sold CIC properties and the $0.6 million real estate tax abatement on operating CIC properties.

 

Preferred dividends decreased $0.5 million due to savings resulting from the 2003 redemption of the Company’s 8.48% Series A Cumulative Redeemable Preferred Shares of Beneficial Interest (“Series A Preferred Shares”).  This savings was partially offset by the application of $3.1 million in original offering costs relating to the Series A Preferred Shares to preferred dividends.

 

Net Income and Other Measures of Operations

 

Net income available to common shareholders increased $9.7 million or 14.8% due to a full period of 2002 investments and a partial period of 2003 investments (which increased operating and investing revenue greater than property operating expenses), interest savings, the cumulative effect of change in accounting principle and the impairment of real estate held for sale in 2002, as mentioned above.

 

Earnings before Interest, Income Taxes Depreciation and Amortization

 

EBITDA remained nearly constant at $144.9 million in 2003, compared to $146.2 million in 2002.  EBITDA was stagnate while net income available to common shareholders increased because interest expense savings were a significant portion of the increase in earnings and interest is excluded from EBITDA.  EBITDA also excludes the $6.5 million cumulative effect of change in accounting principle in 2003.  For a reconciliation of EBITDA to net income available to common shareholders, see Item 6, note 6.

 

Comparison of Year Ended December 31, 2002 to Year Ended December 31, 2001

 

Revenues

 

Total revenues increased $2.3 million or 1.6% over 2001 due to increased fee income from development activities earned in 2002, offsetting a decrease in rental revenues and other investment income attributable to an increase in portfolio vacancy due to weaker market conditions.

 

In the twelve months of 2002, 91.7% of total revenues of the Company were derived primarily from operating and investment revenue, pursuant to the terms of tenant leases and mortgages for occupied space at the warehouse and other industrial properties.  In 2001, operating and investment revenue as a percentage of total revenues was 98.2%.  Operating and investment revenues decreased $7.3 million due to increased vacancies, reduced rental increases attributable to weak economic conditions and the reclassification of income from operating properties disposed.  Due to the soft market, the Company’s occupancy rate on in-service properties dropped to 91.3% in 2002, compared to 92.5% in 2001.

 

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Real estate fee income increased $9.6 million due mainly to increased development activity and related fees earned in 2002 at the Company’s Chicago International Produce Market and CIC.  As a developer, the Company also commenced construction of a large rail facility in Rochelle, Illinois for Union Pacific.

 

Operating and Nonoperating Expenses

 

Real estate tax expense and POL expense increased by $2.6 million from year to year.  The following is a breakdown of the composition of the Company’s POL costs.

 

		Year Ended December 31,
		2002			2001
Property operating includes property repairs & maintenance, utilities, and other property, bad debt and tenant related costs		$	11,134		$	12,019
Property management includes property management and portfolio construction costs		4,705			4,197
Asset management includes the cost of property management executives, accounting, acquisitions, dispositions, development and management information systems		7,984			4,877
Total property operating and leasing		$	23,823		$	21,093

 

POL costs increased mainly due to the early vesting of Company stock grants and the resulting recognition of nearly $1.4 million in expense.  The remainder of the increase between years was due mainly to increased payroll and related costs.  In connection with development projects and non-operating property acquisitions, the Company capitalized expenses of $1.7 million and $1.4 million in 2002 and 2001, respectively that would otherwise be included in POL costs.

 

General and administrative expenses increased by $1.5 million due to the early vesting of management stock grants and the corresponding recognition of $0.3 million in expense and increased legal and corporate compliance costs.  These legal costs are attributable to the collection efforts related to the Company’s claim in the HALO and other bankruptcies and the Company’s evaluation and compliance with new laws and regulations governing public companies.

 

Depreciation and amortization decreased slightly when comparing 2002 and 2001 due mainly to the reclassification of certain operating properties’ depreciation expense to discontinued operations.

 

Interest incurred decreased by $3.9 million over the same period last year due to lower interest rates and lower debt balances in 2002 when compared to 2001 attributable to reduced development activities and due to the reclassification of interest expense to discontinued operations for the BNSF leased land which had debt which was sold with the property.  In connection with development projects under construction, the Company capitalized $8.4 million and $7.4 million of interest in 2002 and 2001, respectively.

 

Amortization of deferred financing costs decreased when comparing periods due mainly to the decrease in amortization expense from debt retired in 2001, associated with the sale of the Company’s residential property, Lake Shore Dunes Apartments.

 

In 2001, the Company incurred a loss from the early extinguishment of debt of $1.6 million upon the early retirement of debt for Lake Shore Dunes mentioned above.  A $21.3 million mortgage note payable that was collateralized by the property was assumed by the new owner and the unamortized financing costs were written off.  This charge was originally recorded as an extraordinary item, but has been reclassified to an operating expense in accordance with FAS No. 145.

 

In 2002, the Company recorded an impairment of $1.2 million, previously mentioned.  In 2001, CenterPoint had a 267,344 square foot office property held for sale.  When the Company announced its intention to sell the

 

12

 

property, the Company recognized a $38.0 million impairment of this asset based on management’s estimate of the fair value of the asset less costs to dispose.

 

The provision for income tax expense increased by $2.1 million when comparing periods due largely to increased development fees which were earned by CRS, the Company’s taxable REIT subsidiary.

 

Equity in net income of affiliates decreased $1.3 million when comparing periods, due to decreased volume of Venture transactions in 2002 when compared to 2001.  In 2002, the Venture acquired five properties, completed three developments and disposed of only three properties.  In 2001, the Venture acquired three properties and disposed of six properties.

 

As mentioned above, discontinued operations includes both the gain or loss from the sale of operating properties and the income or loss from operations of those properties in accordance with FAS No. 144.  This standard was adopted as of January 1, 2002.  Therefore, all gains on the sale of operating properties completed since January 1, 2002 are categorized in discontinued operations for each respective year (with the exception of properties held for sale as of December 31, 2001).  Also, the Company’s results of operations include the operating results of both properties disposed and properties held for future sale.  For the periods presented, the Company included all of the results of operations from the 34 operating properties disposed since January 1, 2002 and all the operating properties sold from January 1, 2004 to March 31, 2004 in discontinued operations, income from discontinued operations, net of tax.

 

Pre-2002, all gains on the sale of real estate are classified separately from discontinued operations.  Starting in 2002, this category includes only gains and losses on the sale of properties that never had operations or identifiable cash flows and assets held for sale prior to 2002.  For 2002, this category decreased by $17.2 million compared to 2001 because 2002 includes the gain associated with the sale of one property held for sale at the end of 2001 and two completed developments compared to the 18 operating properties and three land parcels sold in the 2001.

 

Net Income and Other Measures of Operations

 

Net income available to common shareholders increased $47.4 million or 264.7% mainly due to the large impairment of real estate held for sale in 2001.  Before this charge, net income increased $9.4 million or 16.8 due to the growth of the Company through the net acquisition of warehouse and other industrial real estate and increased gains on the sale of real estate.

 

Earnings before Interest, Income Taxes, Depreciation and Amortization

 

EBITDA increased 47.2% from $99.3 million in 2001 to $146.2 million in 2002 due mainly to the 2001 impairment charge.  Exclusive of the 2001 impairment of $38.0 million, the Company’s EBITDA increased 6.6% due to increased gains and fee income in 2002.

 

Related Party Transactions

 

The Company earned fees from the Venture totaling $2.3 million, $0.5 million and $0.8 million for acquisitions, administrative services and for property management services for the years ended December 31, 2003, 2002 and 2001, respectively.  At December 31, 2003 and 2002, the Company had $0.1 million and $0.1 million, respectively, receivable for these fees.

 

One of the properties disposed of in the first quarter of 2002 was sold to Nicholas C. Babson, a trustee of the Company, for a total sale price of $8.2 million and a gain of $2.9 million.  The sale was approved by a unanimous vote from the remaining trustees based on the advantages of the sale to the Company.  The sale price was greater than the value of the property established by an independent appraisal.

 

15 of the 28 properties acquired in 2002 were purchased for approximately $44.5 million from CalEast.

 

During 2001, the Company sold land to the Venture for a total sale price of $3.7 million.  The total gain on the sale was $0.2 million, of which $41 thousand was deferred due to the Company’s 25% ownership.

 

13

 

During 2001, the Company purchased a property from the Venture for a purchase price of $2.9 million.  The Venture’s gain on this sale was $0.2 million.  The Company eliminated its pro rata portion of the Venture’s gain in the calculation of the Company’s equity in income from the Venture’s activities.

 

Liquidity and Capital Resources

 

Operating Cash Flow and Capital Recycling

 

Cash flow generated from Company operations has historically been utilized for working capital purposes and distributions.  Proceeds from asset dispositions, supplemented by retained cash flows, and from unsecured financings and infrequent capital raises, have been used to fund acquisitions and other capital investments.  Cash flow from operations during 2003 was $74.2 million, which was greater than the $62.8 million in common and preferred distributions.  The Company expects operating cash flow and capital recycling activities to be sufficient to fund distributions and a significant portion of future investment activities.

 

In 2003, the Company’s investment activities included acquisitions of $130.6 million, advances for owned construction in progress of $46.8 million, and improvements and additions to properties of $17.8 million.  These activities were funded with proceeds from the disposition of real estate of $73.5 million, advances on the Company’s lines of credit and a portion of the Company’s retained capital.  Turnover, or the annual volume of sales, is driven by the volume of available higher yielding new investments.  Management believes the systematic redeployment of capital from lower into better yielding assets not only offsets the requirement for external capital, providing improved funding flexibility, but enhances cash flow.

 

Equity and Share Activity

 

During 2003, the Company paid distributions on common shares of $56.5 million or $2.43 per share.  Also, in 2003, the Company paid dividends on the Series A Preferred Shares of $2.2 million or $2.12 per share, $3.7 million for dividends on its 7.5% Series B Convertible Cumulative Preferred Shares or $3.75 per share and $0.4 million or $0.184 per share on its Series C Preferred Shares.  The Series A and C Preferred Shares were redeemed in 2003.  The following factors, among others, will affect the future availability of funds for distribution:  (i) scheduled increases in base rents under existing leases, (ii) changes in minimum base rents attributable to replacement of existing leases with new or replacement leases (iii) restrictions under certain covenants of the Company’s unsecured line of credit (such as the requirement to distribute no more than 90% of the Company’s funds from operations) and (iv) terms of future debt agreements.

 

Debt Capacity

 

The Company seeks to maintain capacity substantially in excess of anticipated requirements, considering all available funding sources.  At December 31, 2003, the Company’s debt constituted approximately 31.46% of its total market capitalization.  Also, the Company’s earnings before interest, taxes, depreciation and amortization, (“EBITDA”) to debt service coverage ratio increased from the prior year to 5.8 to 1, and the Company’s EBITDA to fixed charge coverage ratio was 4.2 to 1 due to preferred dividends.  The Company’s common equity market capitalization was approximately $1.7 billion, and its fully diluted total market capitalization was approximately $2.7 billion.

 

Liquidity

 

The Company believes it has adequate liquidity and capital resources available to meet its current needs.  On June 30, 2003, the Company renewed its $350.0 million unsecured credit facility.  The Company also has access to capital through the Venture that maintains a $120.0 million line of credit subscription facility.  The interest rate on the new facility is LIBOR plus 80 basis points and the new facility expires on June 30, 2006.  The participants in the credit facility include: Bank One Capital Markets, Inc., as sole Lead Arranger/Book Manager, Bank One NA, as Administrative Agent and Lender, Bank of America, N.A. as Syndication Agent and Lender, Wachovia Bank, National Association, as Syndication Agent and Lender, Commerzbank AG, New York Branch, as Documentation Agent and Lender, Suntrust Bank, as Managing Agent and Lender, and several other lenders from time to time parties thereto.

 

In addition to its line of credit, the Company supplements internally generated funds from disposition activities and retained cash flow with proceeds from long term financings.  The following are transactions concluded in 2003 that contributed to the Company’s liquidity:

 

14

 

•                  Upon maturity, on January 15, 2003, the Company paid off its outstanding $150.0 million senior unsecured notes, which were at a rate of 7.9%, with proceeds from its line of credit.

 

•                  On July 24, 2003, the Company issued $150.0 million in unsecured, 7-year notes that bear interest at a face rate of 4.75% with an effective rate of 4.95% and mature in 2010.  The proceeds from the issuance were $148.0 million after issuance costs and the settlement of an interest rate lock.  The Company used the funds to repay a portion of its outstanding balance on the Company’s unsecured line of credit.

 

•                  On January 22, 2004, the Company completed the sale of $48 million of TIF Notes from the Company’s development at CIC.  A portion of these notes appear on the Company’s books as a liability in 2004 relating to the increment providing tax parcels that are still owned by the Company.  This note liability, however, is entirely non-recourse to the Company and is therefore not a legal liability of the Company.  Proceeds from this notes sale were used to repay a portion of the Company’s unsecured line of credit.

 

Risks, Uncertainties and Capital Opportunities

 

The Company has considered its short-term (one year or less) capital needs, in conjunction with its estimated future cash flow from operations and other expected sources.  The Company believes that its ability to fund operating expenses, building improvements, debt service requirements and the minimum distribution required to maintain the Company’s REIT qualification under the Internal Revenue Code, will be met by recurring operating and investment revenue and other real estate income.

 

The Company’s operating cash flows face the following significant risks and uncertainties:

 

•                                          The Company’s ability to re-lease existing or new vacant spaces with favorable lease terms, limiting the Company’s exposure to costs incurred during vacancy.

•                                          The Company’s need to complete tenant related improvements for spaces in order maintain favorable lease terms for which the tenants may not reimburse the Company.

•                                          The Company may incur costs for building-related capital improvements necessary to maintain the useful life and enhance the utility of its properties.

•                                          Tenant financial difficulties including their ability to pay rent.

 

Long-term (greater than one year) capital needs for property acquisitions, scheduled debt maturities, major redevelopment projects, expansions, and construction of build-to-suit properties will be supported, initially by disposition proceeds, supplemented by draws on the Company’s unsecured line of credit, followed by the issuance of long-term unsecured indebtedness and if necessary equity issuance.

 

The Company faces the following significant risks and uncertainties related to its long term liquidity and capital resources:

 

•                                          As part of the Company’s capital recycling strategy, the Company disposes and acquires properties utilizing 1031 tax-free exchanges.  If market conditions make it difficult to complete a 1031 transaction, the sale could become taxable.

•                                          If real estate market or economic conditions in the Chicago region and area decline, this would greatly affect the Company and its tenants.

•                                          The market’s ability to absorb newly constructed space and market vacancies.

•                                          The Company’s ability to refinance its existing indebtedness with favorable terms.  The Company’s risks related to interest rate increases are discussed in Item 7A.

•                                          The Company’s effectiveness at controlling construction costs related to current and future developments in order to meet projected returns and leasing terms.

•                                          As a REIT, the Company must distribute 90% of its annual ordinary taxable income, which limits the amount of cash it has available for other business purposes, including amounts to fund long-term capital needs.

•                                          If needed, the Company’s ability to raise capital through the issuance of preferred shares, common shares or securities that are convertible into common shares at favorable terms.

 

15

 

Inflation

 

Inflation has not had a significant impact on the Company because of the relatively low inflation rates in the Company’s markets of operation.  Most of the Company’s leases require the tenants to pay their share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing the Company’s exposure to increases in costs and operating expenses resulting from inflation.  In addition, many of the leases are for remaining terms less than five years which may enable the Company to replace existing leases with new leases at higher base rental rates if rents of existing leases are below the then-existing market rate.

 

Contractual Obligations

 

The following table discloses aggregate information about the Company’s contractual obligations and the periods in which payments are due.  The Company has excluded information on its purchase of maintenance services for its operating properties.  The maintenance agreements are not long-term in nature.

 

		Payments due by period
		Total			Less than 1 year			1-3 years			3-5 years			more than 5 years
		(dollars in thousands)
Long term debt obligations (1)		$	1,351,471		$	136,916		$	371,694		$	65,830		$	777,030
Operating and lease obligations		—			—			—			—			—
Purchase obligations (2)		40,726			40,726			—			—			—
Long-term liabilities		—			—			—			—			—
Total		$	1,392,197		$	177,642		$	371,694		$	65,830		$	777,030

 

(1)          The long-term debt obligations include both principal and interest amounts which are payable in the specified periods.

(2)          The purchase obligations include property development construction contracts outstanding as of December 31, 2003.

 

Off-Balance Sheet Financings

 

The Company has no material off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Recent Pronouncements

 

On December 24, 2003, FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” – an interpretation of ARB 51 (“FIN 46R”) was issued.  FIN 46R includes modifications that have been incorporated directly into the revised FIN 46, rather than into a new interpretation that amends FIN 46.  FIN 46R incorporated much of the guidance previously issued in the form of FASB Staff Positions (“FSPs”).  The Company is required to apply FIN 46R to all of its investments that are subject to FIN 46R no later than the end of the first reporting period that ends after March 15, 2004.  However,  the Company is required to apply the provisions of FIN 46 or FIN 46R to investments in entities that are considered to be special-purpose entities December 31, 2003.  The Company does not have any investments in entities that are considered special-purpose entities as of December 31, 2003.  The Company does not expect its evaluation of its investments that will be subject to FIN 46R for the quarter ended March 31, 2004 to result in the consolidation of any entities.  FIN 46 and FIN 46R do not have an impact on net income available to common shareholders or the Company’s liquidity.

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.”  SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative discussed in paragraph 6(b) of Statement 133, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an underlying derivative instrument to conform it to language used in FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” and (4) amends certain other existing pronouncements.  SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003.  The

 

16

 

Company has applied the provisions of this pronouncement to all contracts entered into during the second half of 2003 which resulted in no impact on its results of operations, financial position or liquidity.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.”  SFAS No. 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain instruments with characteristics of both liabilities and equity.  SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer.  This pronouncement requires the issuer to mark-to-market certain minority interest liabilities as of the balance sheet date with the adjustment posted to the statement of operations.  SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003.  On October 29, 2003, the FASB elected to defer the provisions of paragraph 9 and 10 of SFAS No. 150 as they apply to mandatorily redeemable non-controlling interests.  The FASB’s decision with respect to the deferral, early adoption, and restatement will likely be issued in conjunction with the finalization of the proposed FASB Staff Position 150-c, “Effective Date and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities of SFAS No. 150.”

 

At the July 31, 2003 Emerging Issues Task Force (“EITF”) meeting, Topic D-42, “The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock,” was clarified for the purposes of applying Topic D-42.  When calculating the excess of (1) fair value of the consideration transferred to the holders of the preferred stock over (2) the carrying amount of the preferred stock in the registrant’s balance sheet, the carrying amount of the preferred stock should be reduced by the issuance costs of the preferred stock, regardless of where in the stockholders’ equity section those costs were initially classified on issuance.  This clarification of Topic D-42 has affected the Company’s accounting for its original offering costs upon the redemption of its 8.48% Series A Cumulative Redeemable Preferred Shares (“Series A Preferred Shares”) which were redeemed May 6, 2003 and its variable rate Series C Cumulative Redeemable Preferred Shares (“Series C Preferred Shares”) which were redeemed on July 7, 2003.  Preferred dividends on the Company’s statement of operations includes $3,101 from the original offering costs on the redeemed Series A Preferred Shares and $187 from the original offering costs of the Series C Preferred Shares.

 

Forward Looking Statements

 

This Annual Report on Form 10-K contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  The Company’s actual results could differ materially from those set forth in the forward looking statements as a result of various factors, including, but not limited to, uncertainties affecting real estate businesses generally (such as entry into new leases, renewals of leases, inflation and dependence on tenants’ business operations and the effects of the state of the economy on tenants and potential tenants), risks relating to acquisition, construction and development activities, including risks relating to 1031 tax-free exchange transaction, possible environmental liabilities, risks relating to leverage, debt service and obligations with respect to the payment of dividends (including availability of financing terms acceptable to the Company and sensitivity of the Company’s operations to fluctuations in interest rates), the potential for the need to use borrowings to make distributions necessary for the Company to qualify as a REIT, dependence on the primary market in which the Company’s properties are located, the existence of complex regulations relating to the Company’s status as a REIT, the potential adverse impact of the market interest rates on the cost of borrowings by the Company and on the market price for the Company’s securities and the other factors discussed above in “Risks, Uncertainties and Capital Opportunities” and below in Item 7A.

 

17

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

(10-K reference Part II, Item 8)

 

CENTERPOINT PROPERTIES TRUST

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND FINANCIAL STATEMENT SCHEDULES

 

Consolidated Financial Statements:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements

 

18

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Trustees and

Shareholders of CenterPoint Properties Trust

 

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of comprehensive income (loss), of shareholders’ equity and of cash flows present fairly, in all material respects, the financial position of CenterPoint Properties Trust and its subsidiaries (the “Company”) at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.  These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

As discussed in Note 6 to the consolidated financial statements, effective January 1, 2003, the Company changed its accounting policy related to certain developer notes receivable.  As discussed in Note 2 to the consolidated financial statements, on January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

 

	/s/ PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
March 8, 2004, except for Note 10 and Note 14, as to which the date is May 20, 2004

 

19

 

CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except for share information)

 

		December 31,
		2003			2002
ASSETS
Assets:
Investment in real estate:
Land		$	194,965		$	179,466
Buildings		824,248			772,722
Building Improvements		148,519			132,274
Furniture, fixtures and equipment		24,516			22,764
Construction in progress		150,126			111,883
		1,342,374			1,219,109
Less accumulated depreciation and amortization		(169,387		)	(143,587		)
Real estate held for sale, net of depreciation		6,302			48,631
Net investment in real estate		1,179,289			1,124,153
Cash and cash equivalents		231			1,235
Restricted cash and cash equivalents		42,520			60,441
Tenant accounts receivable, net		36,891			31,487
Mortgage and other notes receivable		63,084			30,287
Investments in and advances to affiliates		47,139			30,997
Prepaid expenses and other assets		21,799			15,679
Deferred expenses, net		28,289			16,463
		$	1,419,242		$	1,310,742
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Mortgage notes payable and other debt		$	26,955		$	84,681
Senior unsecured debt		500,000			500,000
Tax-exempt debt		94,210			94,420
Line of credit		213,700			18,000
Preferred dividends payable		—			1,060
Accounts payable		19,707			11,942
Accrued expenses		70,275			61,952
Rents received in advance and security deposits		11,894			11,728
		936,741			783,783
Commitments and contingencies
Shareholders’ equity
Series A Preferred shares of beneficial interest, $.001 par value, 10,000,000 shares authorized: 0 and 3,000,000 issued and outstanding, respectively, having a liquidation preference of $25 per share ($75,000)					3
Series B convertible shares, 983,712 and 994,712 issued and outstanding, respectivley, having a liquidation preference of $50 per share ($49,186)		1			1
Common shares of beneficial interest, $.001 par value, 47,727,273 shares authorized; 23,345,877 and 23,067,336 issued and outstanding, respectively		23			23
Additional paid-in-capital		535,072			596,653
Retained earnings (deficit)		(37,253		)	(54,474		)
Accumulated other comprehensive loss		(5,924		)	(5,898		)
Unearned compensation - restricted shares		(9,418		)	(9,349		)
Total shareholders’ equity		482,501			526,959
		$	1,419,242		$	1,310,742

 

The accompanying notes are an integral part of these financial statements.

 

20

 

CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except for share information)

 

		Years Ended December 31,
		2003			2002			2001
Revenues:
Minimum rents		$	109,613		$	102,727		$	105,454
Straight line rents		3,442			2,057			4,444
Expense reimbursements		32,801			29,526			31,608
Mortgage interest income		1,318			896			1,017
Real estate fee income		11,988			12,230			2,660
Total revenue		159,162			147,436			145,183
Expenses:
Real estate taxes		30,199			27,375			27,524
Property operating and leasing		29,817			23,823			21,093
General and administrative		8,681			7,023			5,566
Depreciation and amortization		34,268			31,560			31,985
Interest expense:		—			—			—
Interest incurred, net		23,305			26,880			30,778
Amortization of deferred financing costs		3,354			2,918			2,376
Early extinguishment of debt		—			—			1,616
Impairment of asset		—			1,228			37,994
Total expenses		129,624			120,807			158,932
Income (loss) from continuing operations before income taxes and equity in net income of affiliate		29,538			26,629			(13,749		)
(Provision for) benefit from income tax expense		(1,111		)	(1,373		)	694
Equity in net income of affiliate		2,281			1,994			3,309
Income (loss) from continuing operations		30,708			27,250			(9,746		)
Discontinued operations:
Gain on sale, net of tax		36,785			29,899			—
Income from operations of sold properties, net of tax		4,867			5,281			7,590
Income (loss) before gain on sale of real estate, and cumulative effect of change in accounting principle		72,360			62,430			(2,156		)
Gain on sale of real estate, net of tax		5,696			12,962			30,153
Income before extraordinary item		78,056			75,392			27,997
Extraordinary item, early extinguishment of debt, net of tax		—			—			—
Income before cumulative effect of change in accounting principle		78,056			75,392			27,997
Cumulative effect of change in accounting principle, net of tax		6,528			—			—
Net income		84,584			75,392			27,997
Preferred dividends		(9,599		)	(10,090		)	(10,090		)
Net income available to common shareholders		$	74,985		$	65,302		$	17,907
Basic EPS:
Income available to common shareholders from continuing operations		$	1.16		$	1.32		$	0.46
Discontinued operations		1.82			1.55			0.34
Cumulative effect of change in accounting principle		0.28			—			—
Net income available to common shareholders		$	3.26		$	2.87		$	0.80
Diluted EPS:
Income available to common shareholders from continuing operations		$	1.13		$	1.29		$	0.45
Discontinued operations		1.76			1.50			0.33
Cumulative effect of change in accounting principle		0.27			—			—
Net income available to common shareholders		$	3.16		$	2.79		$	0.78
Distributions per common share		$	2.43		$	2.31		$	2.10
Proforma net income assuming new method of accounting for certain developer notes was applied retroactively (see Note 6)		$	78,056		$	81,920		$	27,997

 

The accompanying notes are an integral part of these financial statements

 

21

 

CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

 

		Years Ended December 31,
		2003			2002			2001
Net income		$	84,584		$	75,392		$	27,997
Other comprehensive income (loss):
Settlement of interest rate protection agreement		(972		)	(6,220		)
Amortization of interest rate protection agreement		946			322			—
Comprehensive income		$	84,558		$	69,494		$	27,997

 

The accompanying notes are an integral part of these financial statements

 

22

 

CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands, except for share information)

 

		Preferred Shares, Series A					Convertible Preferred Shares Series B					Preferred Shares Series C					Class B Common Shares
		Number of Shares		Amount			Number of Shares		Amount			Number of Shares		Amount			Number of Shares		Amount
Balance, December 31, 2000		3,000,000		3			994,712		1			—		—			—		—
Shares issued for share options exercised
Director share awards
Employee share awards
Amortization of unearned compensation
Retirement of employee share awards
Distributions declared on common shares, $2.10 per share
Distributions declared on preferred shares, Series A $2.12 per share
Distributions declared on convertible preferred shares, Series B, $3.75 per share
Net income		—		—			—		—			—		—			—		—
Balance, December 31, 2001		3,000,000		3			994,712		1			—		—			—		—
Issuance of stock for stock options exercised
Employee share awards
Director share awards
Amortization of unearned compensation
Retirement of unearned compensation
Purchase of treasury stock
Retirement of treasury stock
Distribution declared on common shares, $2.31 per share
Distributions declared on preferred shares, Series A $2.12 per share
Distributions declared on convertible preferred shares, Series B, $3.75 per share
Settlement of interest rate protection agreement
Amortization of interest rate protection agreement
Net income		—		—			—		—			—		—			—		—
Balance, December 31, 2002		3,000,000		3			994,712		1			—		—			—		—
Issuance of stock for stock options exercised
Issuance of preferred shares, Series C, net of offering costs of $2,366												3,000,000		3
Employee share awards
Director share awards
Amortization of unearned compensation
Retirement of unearned compensation
Purchase of treasury stock
Retirement of treasury stock
Share conversion preferred Series B							(11,000	)	—
Distribution declared on common shares, $2.43 per share
Distributions declared on preferred shares, Series A $2.12 per share
Distributions declared on convertible preferred shares, Series B, $3.75 per share
Distributions declared on preferred shares, Series C $0.184 per share
Redemptions of preferred Series A		(3,000,000	)	(3		)
Redemptions of preferred Series C												(3,000,000	)	(3		)
Settlement of interest rate protection agreement
Amortization o f interest rate protection agreement
Net income		—		—			—		—			—		—			—		—
Balance, December 31, 2003		—		$	—		983,712		$	1		—		$	—		—		$	—

 

 

		Common Shares					Additional			Retained						Unearned Compensation			Accumulated Other			Total
		Number of Shares		Amount			Paid-In Capital			Earnings (Deficit)			Treasury Stock			Restricted Shares			Comprehensive Loss			Shareholders’ Equity
Balance, December 31, 2000		22,283,930		22			573,430			(36,769		)	—			(2,301		)	—			534,386
Shares issued for share options exercised		324,258		1			7,825															7,826
Director share awards		1,720					80															80
Employee share awards		147,400					6,766									(6,766		)				—
Amortization of unearned compensation																1,019						1,019
Retirement of employee share awards		(3,395	)				(129		)							129						—
Distributions declared on common shares, $2.10 per share										(47,423		)										(47,423		)
Distributions declared on preferred shares, Series A $2.12 per share										(6,360		)										(6,360		)
Distributions declared on convertible preferred shares, Series B, $3.75 per share										(3,730		)										(3,730		)
Net income		—		—			—			27,997			—			—			—			27,997
Balance, December 31, 2001		22,753,913		23			587,972			(66,285		)	—			(7,919		)	—			513,795
Issuance of stock for stock options exercised		235,557		—			4,604															4,604
Employee share awards		105,481		—			5,137									(5,137		)				—
Director share awards		1,797		—			87															87
Amortization of unearned compensation																3,196						3,196
Retirement of unearned compensation		(11,232	)	—			(511		)							511						—
Purchase of treasury stock													(1,044		)							(1,044		)
Retirement of treasury stock		(18,180	)	—			(636		)	(408		)	1,044									—
Distribution declared on common shares, $2.31 per share										(53,083		)										(53,083		)
Distributions declared on preferred shares, Series A $2.12 per share										(6,360		)										(6,360		)
Distributions declared on convertible preferred shares, Series B, $3.75 per share										(3,730		)										(3,730		)
Settlement of interest rate protection agreement																			(6,220		)	(6,220		)
Amortization of interest rate protection agreement																			322			322
Net income		—		—			—			75,392			—			—			—			75,392
Balance, December 31, 2002		23,067,336		23			596,653			(54,474		)	—			(9,349		)	(5,898		)	526,959
Issuance of stock for stock options exercised		198,181		—			6,073															6,073
Issuance of preferred shares, Series C, net of offering costs of $2,366							72,634															72,637
Employee share awards		116,586		—			6,470									(6,470		)				—
Director share awards		1,525		—			92															92
Amortization of unearned compensation																6,312						6,312
Retirement of unearned compensation		(1,776	)	—			(89		)							89						—
Purchase of treasury stock													(3,503		)							(3,503		)
Retirement of treasury stock		(48,618	)	—			(2,231		)	(1,272		)	3,503									—
Share conversion preferred Series B		12,643		—
Distribution declared on common shares, $2.43 per share										(56,491		)										(56,491		)
Distributions declared on preferred shares, Series A $2.12 per share										(2,225		)										(2,225		)
Distributions declared on convertible preferred shares, Series B, $3.75 per share										(3,721		)										(3,721		)
Distributions declared on preferred shares, Series C $0.184 per share										(365		)										(365		)
Redemptions of preferred Series A							(71,896		)	(3,101		)										(75,000		)
Redemptions of preferred Series C							(72,634		)	(187		)										(72,824		)
Settlement of interest rate protection agreement																			946			946
Amortization o f interest rate protection agreement																			(972		)	(972		)
Net income		—		—			—			84,583			—			—			—			84,583
Balance, December 31, 2003		23,345,877		$	23		$	535,072		$	(37,253	)	$	—		$	(9,418	)	$	(5,924	)	$	482,501

 

The accompanying notes are an integral part of these consolidated financial statements.

 

23

 

CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

		Years Ended December 31,
		2003			2002			2001
Cash flows from operating activities:
Net Income		$	84,584		$	75,392		$	27,997
Adjustments to reconcile net income to net cash provided by operating activities
Impairment of asset		—			1,228			37,994
Early extinguishment of debt		—			—			1,616
Bad debts		1,322			1,137			1,439
Depreciation		33,512			31,314			32,470
Amortization of deferred financing costs		3,354			2,918			2,376
Other amortization		2,799			3,481			2,921
Straight-line rents		(3,654		)	(2,161		)	(4,582		)
Incentive stock awards		6,401			3,283			1,099
Equity in net income of affiliates		(2,281		)	(1,993		)	(3,308		)
Gain on disposal of real estate, net of tax		(42,481		)	(44,455		)	(32,014		)
Net changes in:
Tenant accounts receivable		(1,816		)	(68		)	1,197
Prepaid expenses and other assets		(6,096		)	(6,125		)	2,691
Rents received in advance and security deposits		281			1,869			2,098
Accounts payable and accrued expenses		(1,704		)	(6,454		)	(765		)
Net cash provided by operating activities		74,221			59,366			73,229
Cash flows from investing activities
Change in restricted cash and cash equivalents		22,921			(58,660		)	24,268
Acquisition of real estate		(130,595		)	(110,060		)	(66,869		)
Additions to construction in progress		(46,797		)	(73,052		)	(110,670		)
Improvements and additions to properties		(17,832		)	(12,581		)	(17,598		)
Disposition of real estate		73,529			163,200			80,961
Change in deposits on acquisitions		(1,479		)	15			789
Issuance of mortgage and other notes receivable		(82,615		)	(6,553		)	(1,269		)
Repayment of mortgage and other notes receivable		69,523			1,896			15,599
Investment in and advances to affiliate		(13,861		)	(12,369		)	1,411
Acquisition of CRS, net of cash received		—			—			151
Receivables from affiliates and employees		16			15			96
Additions to deferred expenses		(7,814		)	(4,733		)	(3,371		)
Net cash used in investing activities		(135,004		)	(112,882		)	(76,502		)
Cash flows from financing activities
Proceeds from sales of preferred shares		75,003			—			—
Proceeds from sale of common shares		6,073			4,604			7,825
Offering costs paid		(2,366		)	—			—
Proceeds from issuance of unsecured notes payable		—			142,009			—
Proceeds from issuance of senior unsecured debt		147,940			—			—
Proceeds from issuance of mortgage bonds payable		—			88,109			—
Proceeds from issuance of tax exempt bonds		—			45,952			—
Proceeds from line of credit		578,500			147,000			155,500
Redemption of preferred stock		(147,824		)	—			—
Repayment of line of credit		(382,800		)	(260,500		)	(100,333		)
Repayment of revenue bonds payable		(210		)	(210		)	—
Repayments of mortgage notes payable		(1,734		)	(891		)	(1,415		)
Repayments of mortgage bonds payable		—			(50,000		)	—
Repayments of bonds payable - unsecured		(150,000		)	—			—
Distributions - Common		(56,492		)	(53,083		)	(47,423		)
Distributions - Preferred		(6,311		)	(10,090		)	(10,090		)
Net cash provided by financing activities		59,779			52,900			4,064
Net change in cash and cash equivalents		(1,004		)	(616		)	791
Cash and cash equivalents, beginning of period		1,235			1,851			1,060
Cash and cash equivalents, end of period		$	231		$	1,235		$	1,851

 

The accompanying notes are an integral part of these consolidated financial statements

 

24

 

CENTERPOINT PROPERTIES TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except for per share data)

 

1.                                      Organization

 

CenterPoint Properties Trust (the “Company”), a Maryland trust, and its wholly owned subsidiaries, owns and operates primarily warehouse and other industrial properties in the metropolitan Chicago area and operates as a real estate investment trust (“REIT”).

 

2.             Summary of Significant Accounting Policies

 

Lease Revenue

 

Minimum rents are recognized on a straight-line basis over the terms of the respective leases.  Unbilled rents receivable represent the amount that straight-line rental revenue exceeds rents due under the lease agreements.  Unbilled rents receivable, included in tenants accounts receivable, at December 31, 2003 and 2002 were $24,271 and $22,989 respectively.  Recoveries from tenants for taxes, insurance and other property operating expenses are recognized in the period the applicable costs are incurred.

 

The Company provides an allowance for doubtful accounts against the portion of accounts receivable and notes receivable which is estimated to be uncollectible.  Specifically, the Company allows for identified troubled accounts and also provides a general reserve.  Tenant accounts receivable in the consolidated balance sheets is shown net of an allowance for doubtful accounts of $1,705 and $1,318 as of December 31, 2003 and 2002, respectively.

 

Real Estate Fee Income

 

Real estate fee income includes revenues recognized for development services provided by the Company, property management services, assignment fees, and other real estate related transactions.  The Company earns development fees acting as a contractor.  Development fees for third party construction contracts where the Company had guaranteed construction costs are recognized based on percentage of completion.  Percentage of completion is measured as total costs incurred as a percentage of total estimated costs for the project.  The Company earns other development fees where it does not guarantee the cost of construction.  In these cases, the fee is recognized on a straight-line basis over the term of the development agreement, provided a constant level of project management effort is required.

 

Discontinued Operations

 

Effective January 1, 2002, the Company adopted FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” a replacement of FAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of”, and the accounting and reporting provisions of APB No. 30, “Reporting of Operations – Reporting the Effects of Disposal of a Segment of the Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”.  FAS No. 144 retained the basic provisions of Opinion 30 for the presentation of discontinued operations in the income statement but it broadens the requirements to include a component of an entity (rather than a segment of a business).  A component of an entity comprises operations and cash flows that can be clearly distinguished from the entity for financial reporting purposes.  For purposes of applying FAS No. 144, the Company considers each operating property to be an operating component.  Property investments sold before operating activities commence are not considered components, and are therefore not subject to discontinued operations presentation.

 

In summary, the gain or loss upon sale for properties sold that were not classified as held for sale at December 31, 2001 are shown as discontinued operations.  In addition, operating results for such properties for all prior periods presented have been reclassified to net income from discontinued operations.

 

25

 

Deferred Expenses

 

Deferred expenses consist principally of financing fees and leasing commissions.  Leasing commissions are amortized on a straight-line basis over the terms of the respective lease agreements.  Financing costs are amortized over the terms of the respective loan agreements.

 

Properties

 

The Company accounts for all acquisitions closed subsequent to June 30, 2001 in accordance with FAS No. 141, “Business Combinations” (“FAS 141”).  The Company allocates the purchase price of the property based on the fair value of the assets acquired, which may include land, building, tenant improvements and certain intangible assets.  The Company allocates the purchase price to the fair value of the tangible assets of an acquired property determined by valuing the property as if it were vacant.

 

The intangible assets generally include management’s estimate of the value of the remaining cash flows on the in-place lease, leasing costs for the in-place leases as if they were incurred and the value of the customer relationship.  The value of in-place lease and the customer intangibles are amortized to expense over the anticipated term of the lease and tenant relationship.  If a tenant terminates its lease early, the unamortized portion of the tenant improvements, leasing commissions and the in-place lease value is charged to expense.

 

Real estate assets are stated at cost.  Depreciation expense is computed using the straight-line method based upon the following estimated useful lives:

 

		Years
Building and improvements		31.5 and 40
Land improvements		15
Furniture, fixtures and equipment		4 to 15

 

Construction allowances for tenant improvements are capitalized and amortized over the terms of each specific lease.  Repairs and maintenance are charged to expense when incurred.  Expenditures for improvements are capitalized.  When assets are sold or retired, their cost and related accumulated depreciation are removed from the accounts.  The resulting gains or losses from dispositions of properties are reflected in operations.

 

The Company reviews the carrying value of its investments in real estate for impairment in accordance with FAS No. 144, mentioned above.  FAS No. 144 retained the basic provisions of FAS No. 121 with respect to asset impairments, but provides more specific guidance related to measuring impairment.  The Company will continue to recognize an impairment loss on real estate assets under the following circumstances:

 

•                                          When an asset is designated to be held for sale and the fair value of the asset less the cost of disposal is less than the asset’s carrying value, or

•                                          When market conditions or some triggering event has made it certain that the carrying amount of an asset held for use might not be recoverable and the estimated undiscounted cash flows of the asset are insufficient to recover the carrying value of the asset.

 

In cases of impairment, the asset will be reduced to its fair value based on the property’s estimated discounted future cash flows.  The amount of the reduction is recorded as an operating expense, impairment of asset.

 

Preacquisition Costs

 

These costs are capitalized and included in prepaid expenses when incurred if they are directly identifiable with a specific property that the Company is actively seeking to acquire or develop.  If the Company ceases pursuit of the project or the project fails to meet the Company’s investment criteria, the Company will write off the related capitalized preacquisition costs.

 

26

 

Construction in Progress

 

Construction in progress consists of properties currently under development.  Land acquisition costs and direct and indirect construction costs (including costs of the Company’s development department) are included in construction in progress until the property or building is completed.  During the construction period property taxes and insurance associated with the property under construction are capitalized as property cost.  In addition, interest is capitalized monthly based on the average construction balance multiplied by the Company’s weighted average interest on debt outstanding during the month.  Interest and other operating costs incurred for such items after the property is substantially complete and ready for its intended use are charged to expense as incurred.  At the time the project is placed in service, it is reclassified into land and building and depreciated accordingly.

 

For industrial park and multi-phased developments, costs are assigned to individual components of the project when those costs benefit certain sites rather than the whole project.  Where specific identification is impractical or costs incurred benefit the project as a whole, capitalized costs are allocated as follows:

 

•                                          Site acquisition costs and all other common costs are allocated to each land parcel benefited.  Allocation of such costs is based on the relative fair value before construction.

•                                          Site improvement and construction costs are allocated to individual units in the phase on the basis of relative sales value of each unit.

•                                          When allocation based on relative sales value is impracticable, capitalized costs are allocated based on acreage.

 

In the event a parcel within a park development is sold prior to completion of the park, the cost of the sold parcel will reflect a pro rata allocation of future common costs.

 

Real Estate Held for Sale

 

In accordance with FAS No. 144, as mentioned above, the Company classifies properties under contract for sale, or assets otherwise designated for sale by management, which meet the criteria of FAS No. 144, as of the end of the quarter as real estate held for sale.  The assets are stated at the lesser of cost net of accumulated depreciation or fair value less cost to dispose, and depreciation expense ceases until the consummation of the sale.

 

Cash and Cash Equivalents

 

For purposes of the consolidated financial statements, the Company considers all investments purchased with original maturities of three months or less to be cash equivalents.

 

Restricted Cash

 

Restricted cash represents escrow and reserve funds for real estate taxes, capital improvements, and certain security deposits.  The funds in this account are invested in short term investments and valued at cost, which approximates market.

 

Developer Notes (Tax Increment Financing)

 

Tax Increment Financing (“TIF”) is a municipal financing and planning technique that is widely used to renovate declining areas or redevelop blighted areas while expanding a municipality’s tax base.  TIFs allow municipalities to make needed public and private improvements by promising to return all or a portion of the real estate tax increase generated by the improvements to the developer for a limited period of time.  This contract to pay the tax increment to the developer is usually documented in a redevelopment agreement between the city and the developer and, in situations where the developer provides the initial funding of these improvements, a corresponding developer note payable from the municipality to the developer is created in an amount equal to agreed upon eligible construction costs.  In the course of business for certain development projects, the Company has obtained TIFs from

 

27

 

municipalities in order to finance improvements such as streets, curbs, sidewalks, building demolition, land assemblage, site rehabilitation and other eligible items.

 

The Company accounts for developer notes based on the facts and circumstances of the development, the terms of the redevelopment agreement, the source of the real estate taxes funding the TIF district and the deemed collectibility of the underlying TIF.  The Company has described its accounting for each of its TIF arrangements in Note 6 and has described the financial impact of a related change in accounting principle in Note 7.

 

Investment in and Advances to Affiliate

 

The Company accounts for its investments in affiliates using the equity method whereby its cost of investment is adjusted for its share of equity in net income or loss from the date of inception and reduced by distributions received.

 

The equity method is applied to investments when the Company does not have a majority interest in the investee, but does have significant influence over the operating and financial policies of the investee company.  The equity method of accounting is also applied to investees when the Company has a majority ownership but does not have a majority vote or controlling interest.

 

Consolidation

 

The Company’s consolidated financial statements include all of its accounts and other entities in which the Company has control.  Significant intercompany accounts and transactions have been eliminated upon consolidation.  The Company consolidates the operations of CenterPoint Realty Services Corporation (“CRS”), a wholly owned taxable REIT subsidiary.

 

CenterPoint Materials Corporation

 

Pursuant to the redevelopment agreement related to CenterPoint Intermodal Center, the Company has established a procurement company on the site.  The purpose of the procurement company is to capture sales taxes for the benefit of the town of Elwood, Illinois.  In addition, a portion of the sales taxes collected by the town of Elwood will be used to repay the developer notes held by the Company described in Note 6.  The Company accounts for the activities of the procurement company by netting material sales with material purchases and associated costs.

 

Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Factors that may affect CenterPoint’s estimates include:

 

•                                          The Company’s ability to collect on receivables from bankrupt tenants including the Company’s HALO Industries, Incorporated (“HALO”) rents receivable and lease claim.

•                                          The city of Chicago’s ability to collect tax increment proceeds and fund the developer notes according to the Chicago International Produce Market (“CIPM”) development agreement, thereby supporting the value of the TIF notes recorded by the Company.

•                                          The city of Elwood’s ability to collect tax increment proceeds and fund the developer notes according to the CenterPoint Intermodal Center redevelopment agreement.

•                                          The Company’s ability to forecast accurately and control spending on long term development projects where total cost estimates and future left to spend estimates have been accrued in the case of sales of a portion of the entire project.

 

28

 

Income Taxes

 

The Company qualified as a REIT under sections 856-860 of the Internal Revenue Code beginning January 1, 1994.  In order to qualify as a REIT, the Company is required to distribute at least 90% of its taxable ordinary income in 2003, 2002 and 2001 to shareholders and to meet certain asset and income tests as well as certain other requirements.  As a REIT, the Company will generally not be liable for Federal income taxes to the extent that it distributes its ordinary and net capital gain income to its shareholders.

 

CRS is subject to income taxes.  In accordance with FAS No. 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss carry forwards of CRS.  Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.

 

Fair value of Financial Instruments

 

The Company’s financial instruments include cash equivalents, tenant accounts receivable, mortgage and other notes receivable, accounts payable, other accrued expenses, notes payable, and mortgage loans payable.  The Company assesses the fair value of these instruments based on market rates for financial instruments with similar terms.

 

Common Share-Based Compensation

 

The Company has several common share-based employee compensation plans, which are described in detail in Note 12.  The Company accounts for these plans under the recognition and measurement principles of APB No. 25, “Accounting for Stock Issued to Employees” and related interpretations.  The Company records restricted share grants by recognizing the fair value of stock as of the grant date as unearned compensation, a separate component of shareholders’ equity.  Unearned compensation is then amortized to compensation expense over the expected vesting period.  For options granted to employees, no compensation expense is reflected in net income as long as the options granted have exercise prices equal to the market value of underlying common shares on the date of the grant.  The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FAS No. 123, “Accounting for Stock-Based Compensation.”

 

 

29