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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1996.
OR
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
COMMISSION FILE NUMBER 1-12846
SECURITY CAPITAL INDUSTRIAL TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 74-2604728
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
14100 EAST 35TH PLACE
AURORA, COLORADO 80011
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(303) 375-9292
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Common Shares of Beneficial Interest, New York Stock Exchange
par value $0.01 per share
Series A Cumulative Redeemable New York Stock Exchange
Preferred Shares of Beneficial Interest,
par value $0.01 per share
Series B Cumulative Convertible Redeemable New York Stock Exchange
Preferred Shares of Beneficial Interest,
par value $0.01 per share
Preferred Share Purchase Rights New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Series C Cumulative Redeemable
Preferred Shares of Beneficial Interest,
par value $0.01 per share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Based on the closing price of the registrant's shares on February 21, 1997,
the aggregate market value of the voting shares held by non-affiliates of the
registrant was $1,197,963,789.
At February 21, 1997, there were outstanding approximately 97,706,709 common
shares of beneficial interest of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the 1997 annual
meeting of its shareholders are incorporated by reference in Part III of this
report.
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TABLE OF CONTENTS
ITEM DESCRIPTION PAGE
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PART I
1. Business........................................................... 1
Security Capital Industrial Trust.................................. 1
SCI Growth and Operating Strategy.................................. 2
SCI National Operating System(TM).................................. 3
Investment Strategy................................................ 6
Customers.......................................................... 8
Leases............................................................. 10
SCI Client Services Incorporated................................... 10
Capital Markets.................................................... 10
The REIT Manager................................................... 12
Officers of SCI and Directors and Officers of the REIT Manager and
Relevant Affiliates................................................ 14
Employees ......................................................... 24
Competition........................................................ 24
Environmental Matters.............................................. 24
Insurance Coverage................................................. 25
Executive Officers................................................. 25
2. Properties......................................................... 25
The Partnerships................................................... 35
3. Legal Proceedings.................................................. 38
4. Submission of Matters to a Vote of Security Holders................ 38
PART II
5. Market for the Registrant's Common Equity and Related Stockholder
Matters............................................................ 39
Dividend Reinvestment and Share Purchase Plan...................... 40
6. Selected Financial Data............................................ 41
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 42
Overview........................................................... 42
Results of Operations.............................................. 43
Environmental Matters.............................................. 46
Liquidity and Capital Resources.................................... 46
Funds from Operations.............................................. 51
REIT Management Agreement.......................................... 51
8. Financial Statements and Supplementary Data........................ 52
Changes in and Disagreements with Accountants on Accounting and
9. Financial Disclosure Matters....................................... 52
PART III
10. Directors and Executive Officers of the Registrant................. 53
11. Executive Compensation............................................. 53
12. Security Ownership of Certain Beneficial Owners and Management..... 53
13. Certain Relationships and Related Transactions..................... 53
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 53
PART I
ITEM 1. BUSINESS
SECURITY CAPITAL INDUSTRIAL TRUST
Security Capital Industrial Trust ("SCI") is the largest publicly held owner
and operator of distribution properties in the United States based on equity
market capitalization. SCI is a national operating company focused exclusively
on meeting the distribution space needs of national, regional and local
industrial real estate users through the SCI National Operating System(TM). SCI
distinguishes itself from its competition by being the only entity that
combines all of the following:
1. A national operating strategy targeting Fortune 1000 key users of
distribution space;
2. A disciplined investment strategy based on proprietary research that
identifies high growth markets with sustainable demand for SCI's low-finish
distribution space product;
3. An organizational structure and service delivery system built around
the customer; SCI believes its service approach is unique to the real
estate industry as it combines national scope and expertise with strong
local presence; and
4. Over 280 professionals in 29 offices which SCI believes comprise the
deepest and most experienced management team in industrial real estate.
The cornerstone of SCI's operating strategy is the SCI National Operating
System(TM) comprised of the Market Services Group, the National Services Group
and the National Development Group that utilizes SCI's national network of
distribution space to provide an exceptional level of customer service
including development on a national, regional and local basis.
SCI engages in the acquisition, development, marketing, operation and long-
term ownership of distribution facilities, and the development of master-
planned distribution parks and build-to-suit facilities for its customers.
Through its REIT Management Agreement with Security Capital Industrial
Incorporated (the "REIT Manager" or "REIT Management"), SCI has access to the
services provided by the REIT Manager and its specialized service affiliates
which provide SCI with access to the same resources as a fully integrated
operating company. SCI, through the REIT Manager, has a significant level of
expertise in market research; building and land acquisition and due diligence;
master-planned distribution park design and building construction; marketing;
asset and leasing management; capital markets and financial operations. SCI
deploys capital in markets with excellent long-term growth prospects or markets
that are key distribution locations where SCI can achieve a strong market
position through the acquisition and development of generic, flexible
facilities designed for distribution but which can be used for light
manufacturing.
SCI's highlights include:
. As of December 31, 1996, SCI was servicing over 2,400 customers including
296 national customers of which 191 were multiple market customers.
. As of December 31, 1996, SCI's portfolio contained 80.6 million square
feet in 942 buildings and had an additional 5.9 million square feet under
development in 47 buildings for a total of 86.5 million square feet in
989 buildings. The total aggregate cost of the 86.5 million square feet
(including properties under development at total budgeted cost) is $2.6
billion (an average of $30.06 per square foot).
. As of December 31, 1996, SCI's stabilized portfolio of 71.1 million
square feet was 96.84% leased (96.27% occupied), and the total operating
portfolio of 80.6 million square feet, which includes 9.5 million pre-
stabilized square feet, was 93.35% leased (91.21% occupied).
. During 1996, a total of 23.1 million square feet was leased in 1,055
transactions through the operation of the SCI National Operating
System(TM). During 1996, rental rates on new and renewed leases on
previously leased space for the operating portfolio increased an average
of 13.0%.
. In 1996, SCI acquired 11.7 million square feet of distribution space in
111 buildings for a total expected investment cost of $319.1 million in
38 transactions, an average of $27.27 per square foot.
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. During 1996, SCI commenced development of 8.2 million square feet of
distribution space in 25 target market cities, with a total expected
investment of $298.3 million. As of December 31, 1996, SCI had 5.9
million square feet of distribution space under development in 20 target
market cities.
. Inventory building starts totalled 6.2 million square feet of the 8.2
million square feet of development starts during 1996. Build-to-suit
starts totalled 2.0 million square feet during 1996. In addition, as of
December 31, 1996, SCI was in active negotiations for 3.7 million square
feet of additional build-to-suit projects. As of December 31, 1996,
completed buildings totalling 17.1 million square feet were 83.46% leased
and 86.65% leased or committed.
. As of December 31, 1996, SCI owned 1,273 acres of development land, which
forms the basis for the master-planned distribution park development
program in 60 parks, and also had fixed price options and rights of first
refusal to acquire 515.2 acres and 36.9 acres, respectively, which in the
aggregate will permit the development of approximately 31.7 million
square feet of additional distribution space in 29 target market cities.
Also, as of December 31, 1996, SCI had an additional 415.8 acres under
letter of intent or contingent contract, subject to the completion of due
diligence, which, if acquired, would permit the development of
approximately 6.7 million square feet of additional distribution space.
. Security Capital Group Incorporated ("Security Capital Group"), SCI's
largest shareholder, which owned 44.1% of SCI's Common Shares of
Beneficial Interest, par value $0.01 per share (the "Common Shares"), as
of February 26, 1997, owns the REIT Manager and has provided common
equity investment capital to SCI at the same times and on the same terms
made available to public investors and other shareholders.
. SCI's pro forma percentage of total debt to total book capitalization
(including accumulated depreciation) as of December 31, 1996 was 29.3%
after giving effect to SCI's February 7, 1997 Common Share offering (net
proceeds of $80.4 million), and the February 4, 1997 sale of $100 million
of Medium-Term Notes, Series A, due 2015 (the "Series A 2015 Notes") (net
proceeds of $99.1 million) and the use of the proceeds therefrom,
providing significant capacity to prudently add fully amortizing, long-
term, fixed rate, unsecured debt consistent with SCI's balance sheet
strategy. At February 26, 1997, SCI had no outstanding borrowings under
its $350 million unsecured line of credit facility.
On January 22, 1997, SCI announced that it received a proposal from Security
Capital Group to exchange the REIT Manager and SCI Client Services Incorporated
("Client Services"), the REIT Manager's property management affiliate, for
Common Shares. As a result of the transaction, SCI would become an internally
managed REIT, and Security Capital Group would remain SCI's largest
shareholder. SCI's Board of Trustees (the "Board") has formed a special
committee comprised of independent Trustees to review the proposed transaction.
The proposed transaction is subject to approval by the special committee and
the full Board. If the Board approves the proposed transaction, a proxy
statement, subject to review by the Securities and Exchange Commission, will be
mailed to SCI's shareholders prior to a shareholder vote on the proposed
transaction.
SCI's executive offices are located at 14100 East 35th Place, Aurora,
Colorado 80011 and its telephone number is (303) 375-9292. SCI's predecessor
was formed in June 1991 as a Delaware corporation, and SCI was re-formed as a
Maryland real estate investment trust ("REIT") in January 1993.
SCI GROWTH AND OPERATING STRATEGY
Based on thorough research, SCI was created in June 1991 to take advantage of
two strategic opportunities: first, the opportunity to build a national
distribution asset base at prices significantly below replacement cost and a
land inventory at attractive prices that would facilitate the development of
master-planned distribution parks; and second, to create, for the first time, a
national operating company which would differentiate itself from its
competition through its ability to address and service a corporate customer's
distribution space requirements on a national, regional and local basis. SCI's
objective is to achieve long-term sustainable growth in cash flow through:
first, focusing its investments in markets with excellent long-term growth
prospects and markets where SCI can achieve a strong market position through
the acquisition and development of generic, flexible facilities
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designed for distribution uses; second, the SCI National Operating System(TM);
and third, ownership or control of a significant inventory of land to enable
SCI to take advantage of market opportunities and accommodate expansion or
build-to-suit requirements of customers through development of new facilities.
SCI's operating strategy is to achieve significant market presence in each
target market city and selected submarkets in those cities through acquisitions
and master-planned distribution park development. SCI defines market presence
not only in terms of square feet of buildings and acres of development land
owned, but also by the extent of SCI's relationships with customers having
current and expected future space needs in such markets.
SCI's growth and operating strategy is designed not only to meet the needs of
today's distribution space users, which means providing functional, cost-
effective facilities and a comprehensive level of service, but also to shape
the future trends of the industry through innovation, service and product
leadership consistent with SCI's long-term investment horizon.
The SCI National Operating System(TM) is designed to provide substantial
benefits to existing and prospective SCI customers, including:
Relocation Capability. User requirements can change frequently, and SCI's
presence in 36 target market cities and ownership structure of its facilities
permit SCI to accommodate the needs of its customers by moving an existing
customer within a market or between markets both regionally and nationally.
Expansion Capability. SCI, through its development program, land inventory
and existing facilities, works with existing customers who have expansion
requirements to meet their growing business needs. Expansion may result in
relocating a customer to larger SCI spaces in a given market or in developing a
build-to-suit facility for such customer.
Nationally Coordinated Program. SCI provides a single point of contact for
multi-location national users through National Services Group professionals who
are charged with building long-term customer relationships and ensuring that
all SCI services and products are consistent in quality throughout the United
States. SCI's experience to date suggests that many major corporate customers
prefer working with one firm to meet their national distribution space needs.
Development/Build-to-Suit Expertise. SCI's team of development professionals
are focused exclusively on building facilities for SCI customers that
incorporate the latest technology with respect to building design and building
systems. SCI has developed national standards and procedures that it strictly
adheres to in the development of all its facilities throughout the United
States.
SCI NATIONAL OPERATING SYSTEM(TM)
The SCI National Operating System(TM) provides an exceptional level of
customer service including development on a national, regional and local basis
through its 184 professionals, and is a key component of SCI's growth and
operating strategy. The SCI National Operating System(TM) is comprised of the
three groups described below: the Market Services Group, the National Services
Group and the National Development Group.
Market Services Group. This group is comprised of 21 Market Officers, four
regional directors and 102 property management and leasing professionals.
Market Officers have extensive experience (with an average of over 14 years) in
providing service to distribution space users and are responsible for
understanding the needs of existing and prospective customers in their
respective markets. To meet such needs, Market Officers utilize their extensive
knowledge of local market conditions, including the cost and availability of
alternative space, and are supported by property management and leasing
professionals. Additionally, Market Officers have access to information
regarding existing SCI customers who are expanding or relocating to various
markets. A key role of the Market Officers is assisting the National Services
Group in identifying SCI customers with national, multi-market requirements.
SCI believes that the Market Officers' access to national SCI resources
provides significant stature and profile and improves their ability to serve
customers in the local market.
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On a regular basis, the Market Officer communicates with senior management in
charge of that Market Officer's region for guidance on lease terms, as well as
for national and local marketing assistance, and is able to take advantage of
SCI's fully integrated national development and service capabilities. Market
Officers do not develop projects or borrow or commit capital; they focus
strictly on creating and maintaining relationships with distribution space
users and industrial brokers, marketing SCI's products and identifying
potential build-to-suit, acquisition and leasing opportunities in their target
market cities.
National Services Group. The National Services Group, comprised of ten
professionals, is dedicated to providing service to the top 1,000 users of
distribution space and is focused on making SCI the preferred provider of
distribution space to Fortune 1000 companies. The National Services Group is
headquartered in Denver and has regional offices in Atlanta, Chicago, Dallas,
the Los Angeles metropolitan area and the New York metropolitan area. A key
function of this group is identifying companies whose reconfiguration and
expansion of their distribution networks will create multimarket and/or build-
to-suit opportunities and coordinating SCI services to those companies with the
respective Market Officers and the National Development Group. National
Services Group professionals build long-term relationships with SCI national
customers and provide a single point of contact to simplify and streamline the
execution of such customers' national distribution space plans. An ancillary
benefit is research insight into national distribution and logistics trends
gained through continuous interaction with National Services Group clients.
National Development Group. The National Development Group, comprised of 47
professionals, focuses substantial research and development efforts on creating
industry-leading master-planned distribution parks, inventory buildings and
build-to-suit facilities to serve SCI's customers. In addition, SCI will
develop build-to-suit facilities on a fee basis in non-target markets (in which
SCI would not intend to own long-term) in order to better serve both existing
and prospective customers. See "--Investment Strategy--Investment in Generic
Distribution Product."
The National Development Group is comprised principally of architects,
engineers and construction professionals who oversee every aspect of the land
planning and building design processes. This group also monitors the
construction process and oversees the performance of third-party general
contractors. The group's build-to-suit specialists and project managers (with
an average experience level of 16 years) operate regionally to better serve
their markets. The project managers supervise each project with continual
oversight from national headquarters, pursuant to uniform standards, procedures
and specifications which have been carefully designed to achieve consistent
quality.
SCI believes the depth and breadth of the National Development Group enhances
the effectiveness of the National Services Group and gives the Market Officers
a distinct competitive advantage for inventory and build-to-suit opportunities
in their respective markets.
FOCUS ON RESEARCH-BASED GROWTH-ORIENTED MARKETS
Based on its research, the REIT Manager has focused SCI on selected
distribution markets, where supply and demand factors have permitted high
occupancies at increasing rental rates. The research indicates that demand for
distribution and light manufacturing space in SCI's target market cities should
be stable to strong in the near to medium term which should have a positive
effect on leasing rates and cash flow growth. SCI believes that the primary
factors influencing future supply and demand for distribution real estate in
SCI's target market cities will be continued job and population growth, related
regional and local company growth, reconfiguration of distribution networks,
outsourcing of distribution functions and quality and cost of labor. In
addition, SCI believes that short construction cycles targeted for SCI's
distribution facilities, together with fragmented ownership and
undercapitalization of local developers also contribute to the attractive
supply and demand fundamentals in SCI's target markets.
SCI focuses on three types of industrial investment markets:
Export/Import Growth Markets. The dollar volume of U.S. exports increased
from $250.2 billion in 1987 to $609.0 billion for the twelve month period ended
November 30, 1996, an increase of 143.4%, as reported by the U.S. Census
Bureau, Foreign Trade Division. The dollar volume of U.S. imports increased
from $477.4 billion in 1989 to $791.6 billion for the twelve month period ended
November 30, 1996, as reported by the U.S. Census Bureau, Foreign Trade
Division.
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SCI intends to capitalize on this trend by targeting key ports (air, sea and
land) which are well positioned to benefit from continued combined growth in
trade with the Pacific Rim, Mexico and Europe. The total dollar volume of
exports from the states of SCI's target market to these three international
trade areas grew substantially between 1987 and November 30, 1996, as reported
by the U.S. Census Bureau, Foreign Trade Division. SCI believes that the growth
in exports and imports represents favorable growth prospects for related
distribution space.
Low Cost Manufacturing Markets. SCI has targeted markets that possess long-
term cost and quality of labor advantages for domestic and foreign
manufacturers. One important influence on certain of SCI's target market cities
with close proximity to Mexico is the impact of the maquiladora (U.S./Mexico
twin plant) program, which encourages companies to manufacture and assemble
products close to the Mexican border. After paying a nominal value added tax,
companies participating in this program ship finished products into the United
States or to foreign countries for distribution or further processing. Export
and import trade between the U.S. and Mexico, led by the success of the
maquiladora program, exceeded $127.2 billion for the twelve month period ended
November 30, 1996, as reported by the U.S. Census Bureau, and should continue
to be positively affected by the North American Free Trade Agreement. Mexico
ranked as the third largest trading partner with the U.S. for the twelve month
period ended November 30, 1996. SCI believes that the prospects for low cost
manufacturing growth in these target markets are excellent.
Growth Distribution Markets. The distribution markets that SCI targets must
have access to transportation networks, including interstate highways, rail
service, air cargo, internodal facilities and port terminals. They must also
offer cost advantages in terms of transportation rates, rental costs and state
income and inventory taxes. Finally, there must be strong overnight truck
delivery area demographics centered on population growth within a 500 mile
radius. For example, approximately 40 million people live within a 500 mile
radius of Reno. This region's population is projected to increase by 6.0% from
1996 to 2001, according to Urban Decision Systems, providing growth
opportunities for distribution activities.
Future Expansion to Other High-Growth Markets. SCI is currently evaluating
specific customer driven opportunities to expand its geographic scope beyond
the 36 target market cities in which it operated as of December 31, 1996. Any
new markets would have to satisfy SCI's investment criteria for future growth
and also serve its focused existing and prospective national customers. SCI is
also evaluating alternatives to increase the services it provides to its
customers.
MARKET PRESENCE
In each target market city (or in selected submarkets in cities such as
Dallas and Atlanta) in which SCI invests, SCI intends to become one of the
major distribution space owners and operators within a four to seven year
period. SCI believes that significant market presence will provide the
following benefits:
Value Enhancement. The significant local owners and developers in a given
market can usually generate above-market performance as measured by lease rates
and occupancy because of their ability to reduce turnover through meeting their
customers' needs to either expand or contract, by relocating them within an
existing inventory of distribution space or by developing new facilities for
them. SCI believes that providing this flexibility permits it to realize higher
effective lease rates and lower levels of ongoing tenant improvement
investment. Effective implementation of this strategy requires a critical mass
of customers and space and ongoing communication between customers and the
Market Officers. SCI believes it has achieved this critical mass in the
following 26 target market cities: Atlanta, Austin, Birmingham, Charlotte,
Chattanooga, Cincinnati, Columbus, Dallas/Fort Worth, Denver, East Bay Area
(San Francisco), El Paso, Houston, Indianapolis, Kansas City, Las Vegas,
Memphis, Nashville, Orlando, Phoenix, Portland, Reno, Salt Lake City, San
Antonio, South Bay Area (San Francisco), Tampa and Washington, D.C./Baltimore,
and believes that it is close to achieving critical mass in two additional
target market cities.
Maximum Market Exposure. Size and market presence provide visibility and
access to and knowledge of potential leasing and build-to-suit transactions.
The industrial brokerage community and corporate users are often
5
motivated to develop a relationship with the significant owners and developers
in a particular market in order to achieve their respective business
objectives. The opportunity to compete for the majority of customers' space
requirements in each target submarket is a crucial factor in achieving SCI's
operating objectives.
INVESTMENT STRATEGY
SCI's investment strategy is to build a national distribution space network
in its target markets at prices significantly below replacement cost and to
build an inventory of land at attractive prices to support its master-planned
distribution park development program. SCI's investment activities focus on
developing and acquiring generic distribution facilities with prospects for
long-term cash flow growth.
INVESTMENT ANALYSIS
Prospective property investments are analyzed pursuant to several
underwriting criteria, including purchase price, replacement cost, competition
and other market factors, and prospects for long-term growth in cash flow.
SCI's development or acquisition decision is based upon the expected
contribution of the property to long-term cash flow growth. The expected cash
flow contribution is based on an estimate of lease revenues assuming a
stabilized vacancy factor which is generally 7%, less expenses not reimbursable
by customers incurred in operating the property. Future estimates of residual
value and, generally, the effects of debt financing are not considered in the
calculation.
For operating properties which SCI has acquired, stabilized operations
generally have been achieved six to 12 months after acquisition. The
underwriting criteria for development projects allows 12 months from shell
completion for achievement of stabilization; however, on average stabilization
has been achieved in less than 12 months. In 1996, for all development projects
that reached stabilization, the average time from shell completion to
stabilization was 4.15 months. "Stabilized" means that capital improvements,
repositioning, new management and new marketing programs (or development and
marketing, in the case of newly developed properties) have been completed and
in effect for a sufficient period of time (but in no case longer than 12
months) to achieve stabilized occupancy (typically 93%, but ranging from 90% to
95%, depending on the submarket and product type) at market rents. SCI has been
successful in increasing overall occupancies on acquired and developed
properties during their initial months of operations resulting in an occupancy
rate of 96.27% for stabilized properties owned as of December 31, 1996.
The economic contribution of properties cannot be predicted with certainty,
and no assurance can be given that acquired or developed properties will
contribute to increased cash flow, nor that acquisitions and developments will
be available on favorable terms in the future.
INVESTMENT IN GENERIC DISTRIBUTION PRODUCT
SCI has a strong bias toward product which is generic, meaning not highly
specialized, and therefore appealing to a broad base of potential customers and
easily modified for use by different customers at reasonable costs. SCI
believes generic product will generate superior cash flow with low ongoing
capital needs. In addition, SCI believes REIT Management has developed an
industry-leading product design. This product incorporates design guidelines
and construction standards that make usage more convenient for the customers
and also minimizes ongoing maintenance requirements and costs. Over the long
term, SCI expects these characteristics to enhance cash flow.
Development of Master-Planned Distribution Parks. SCI's development
activities concentrate on the development of industry-leading, master-planned,
full service distribution parks in target market cities that demonstrate both
strong demographic growth and excellent industrial real estate fundamentals,
and in which SCI can achieve a significant market presence. SCI also develops
facilities for major corporations and strong regional companies within the
distribution parks, and occasionally on a stand-alone basis, that are designed
as generic distribution buildings. The 47 professionals comprising the National
Development Group focus on creating industry-leading, master-planned
distribution parks. These professionals have extensive experience in
development and construction of such facilities.
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SCI is taking advantage of opportunities to purchase land at attractive
prices in order to provide a land inventory to meet the expansion and
relocation needs of SCI's existing customer base and to further penetrate its
target markets. At December 31, 1996, SCI owned 1,273 acres of development land
in 29 target market cities and had fixed price options and rights of first
refusal to acquire 515.2 acres and 36.9 acres, respectively, which in the
aggregate will permit the development of approximately 31.7 million square feet
of additional distribution space. As of December 31, 1996, SCI had 415.8 acres
under letter of intent or contingent contract, subject to completion of due
diligence, which will permit the development of approximately 6.7 million
square feet of additional distribution space. Master-planned park development
is a key component of SCI's objective of achieving long-term sustainable growth
in cash flow. Since inception, SCI has commenced development of 60 master-
planned parks in 28 target market cities.
SCI's parks provide extensive customer services and typically range in size
from 25 to 150 acres in order to create strong identity and to permit economies
of scale with respect to providing customer services. SCI's master-planned
distribution parks include controls, covenants and regulations intended to
maintain and enhance the long-term desirability of the parks and thereby
attract and retain high quality distribution and light manufacturing customers.
Each park's services personnel coordinate a variety of services such as snow
removal, customer move-ins, landscaping maintenance and air conditioning
repairs.
Inventory Building Program. In SCI's master-planned distribution parks, SCI
commences development of an inventory building when it perceives an emerging
demand in a specific submarket from both existing SCI customers who are
expanding and potential new customers whose leases for their current space are
approaching expiration. By having an appropriate supply of distribution space,
SCI can meet the expansion needs of existing customers and can accommodate new
customers. From inception through December 31, 1996, SCI completed or commenced
development of 16.2 million square feet of inventory buildings with a total
expected investment cost of $557.3 million in 28 target market cities.
Build-to-Suit Program. The build-to-suit program enhances SCI's ability to
meet customers' needs by providing flexible expansion or relocation space.
SCI's build-to-suit program is targeted to distribution customers whose
facility requirements are generic, not special purpose, so as to facilitate the
property's future marketability and functionality. From inception through
December 31, 1996, SCI completed or commenced development of build-to-suit
facilities totalling 7.4 million square feet with a total expected investment
of $250.2 million, including 655,000 square feet that were disposed of in 1995
and 1996. In addition, as of December 31, 1996, SCI was in active negotiations
for 3.7 million square feet of additional build-to-suit projects.
Acquisition of Distribution Space. SCI's acquisition activities focus on
distribution space because of the expected predictability and stability of its
cash flow. Distribution space provides more predictable cash flow because it
requires minimal levels of capital investment in specialized tenant
improvements. Additionally, the initial investment in tenant improvements can
often be utilized by subsequent customers without major renovation or
alteration. In general, only cosmetic repair and replacement is required to re-
tenant vacant spaces. Service center space (see "--Product Classification"
below) is acquired on a more limited basis.
The Acquisitions and Due Diligence Group, comprised of 11 professionals, is
responsible for property and land acquisitions and related due diligence
nationally. SCI's disciplined strategy for distribution space acquisitions has
three principal components.
The first component is market coverage. In addition to the professionals in
the Acquisitions and Due Diligence Group, the 21 local Market Officers also
assist in identifying opportunities in their respective markets. This staffing
commitment permits in-depth acquisitions coverage of SCI's target markets and
thorough due diligence conducted in accordance with uniform procedures.
The second component is the attainment of critical mass within each target
market through acquisitions of distribution space and customers in targeted
submarkets and then opportunistically adding additional assets as attractive
opportunities arise. SCI believes it has achieved critical mass in 26 target
market cities and that it is close to achieving critical mass in two additional
target market cities.
7
The third component of SCI's acquisition strategy is the concentration on
transactions under $5 million. SCI's commitment to identifying and completing
multiple transactions under $5 million results in reduced competition from
institutional buyers due to their size or occupancy level. The local presence
of the Market Services Group also enables the Acquisitions and Due Diligence
Group to pursue under-leased properties which can benefit from intensive local
management and marketing. Between January 1, 1993 and December 31, 1996, SCI
completed 136 acquisitions of $5 million or less.
PRODUCT CLASSIFICATION
The industrial real estate on which SCI focuses is typically used for
storage, packaging, assembly, distribution and light manufacturing of consumer
and industrial products. SCI divides industrial properties into two categories:
distribution (which can also accommodate light manufacturing and assembly
customers), and service center. SCI's objective is to focus its acquisition and
distribution park development activities primarily on generic distribution
facilities with an average office finish level of less than 10%. Due to
typically increased costs of retrofitting customer spaces, service center
product will be acquired only on a very limited basis as part of portfolio
acquisitions in which the majority of product being acquired is bulk
distribution. As of December 31, 1996, the buildings in SCI's operating
portfolio of 80.6 million square feet contained 10.7% office finish.
Distribution. SCI's distribution space is adaptable for both bulk
distribution and light manufacturing uses. SCI's operating portfolio included
97.53% of distribution product at December 31, 1996 by square feet. The
following characteristics define the bulk distribution facilities which SCI
owns and intends to acquire or develop in the future:
TYPICAL RANGE
------------------------ -------------------------
Clear Height............ 22 ft.-24 ft. 18 ft.-30 ft.
Building Depth.......... 180 ft.-240 ft. 140 ft.-300 ft.
Loading................. Dock Dock or Dock and Grade
Parking Ratio........... 0.9 spaces/1,000 sq. ft. 0.5 spaces/1,000 sq. ft.-
2.0 spaces/1,000 sq. ft.
Average Square Footage
Per Customer........... 25,345 sq. ft. 4,500-200,000 sq. ft.
Site Coverage........... 45% 30-50%
Service Center. Under SCI's definition, service centers are multi-customer
buildings that have a higher percentage of office space than distribution
properties and only have grade-level loading as opposed to truck dock loading.
Service center product constituted 2.47% of the square feet in SCI's operating
portfolio as of December 31, 1996.
CUSTOMERS
CUSTOMER BASE OBJECTIVE
SCI's objective is to develop a customer base in each target market city
which is diverse in terms of industry concentration and represents a broad
spectrum of national, regional and local distribution space users who have
potential for growth in demand for space.
SCI had 2,899 customer leases in 73.5 million square feet of occupied space
and 296 national customers of which 191 were multiple market customers at
December 31, 1996. These leases, representing a mix of local, regional and
national customers, can be summarized as follows:
NUMBER PERCENTAGE OF TOTAL
SQUARE FOOTAGE LEASED OF LEASES SQUARE FOOTAGE
--------------------- --------- -------------------
0-10,000.................................... 1,284 8.77%
10,001-25,000............................... 830 18.47
25,001-50,000............................... 424 20.28
50,001-100,000.............................. 234 22.98
100,001 and above........................... 127 29.50
----- ------
Total................................... 2,899 100.00%
===== ======
8
SCI believes that having a large number of customers with generic space
requirements in each submarket will provide the opportunity to maximize cash
flow through intensively managing its customer base. At the same time,
exposure to overall occupancy declines is reduced by achieving a broad
spectrum of customers in each submarket. SCI's largest customer accounted for
less than 1.5% of SCI's 1996 rental income (on an annualized basis), and the
annualized base rent for SCI's 20 largest customers accounted for less than
12.9% of SCI's 1996 rental income (on an annualized basis).
As of December 31, 1996, SCI's 296 national customers leased 35.1% of SCI's
operating portfolio of 80.6 million square feet, as compared to 230 national
customers that leased 30.9% of SCI's operating portfolio of 58.5 million
square feet at December 31, 1995.
DIVERSIFIED CUSTOMER LEASE EXPIRATIONS AND RENEWALS
Between December 31, 1996 and December 31, 1997, approximately 23.2% of the
leased square feet in SCI's portfolio will expire, creating opportunities for
SCI to increase rents upon renewal or replacement of these leases. The
following table shows for SCI's properties as of December 31, 1996 (i) the
aggregate number of leases expiring, (ii) the square footage subject to such
leases, (iii) the percentage of total square footage represented by such
leases, (iv) the annual base rentals represented by such leases and (v) the
percentage of annual base rentals represented by such leases:
NUMBER OF SQUARE PERCENTAGE ANNUAL BASE PERCENTAGE OF
LEASES FOOTAGE OF TOTAL RENT ANNUAL BASE
EXPIRING(1) EXPIRING SQUARE FOOTAGE EXPIRING(2) RENT EXPIRING(2)
----------- ---------- -------------- ------------ ----------------
December 31, 1996....... 138 2,130,094(3) 2.90% $ 7,532,340 2.77%
1997.................... 703 14,898,118 20.28 47,689,920 17.54
1998.................... 632 12,623,157 17.18 44,092,188 16.22
1999.................... 602 12,104,157 16.47 43,438,104 15.98
2000.................... 326 8,999,734 12.25 36,059,760 13.26
2001.................... 318 9,760,483 13.28 39,984,972 14.71
2002.................... 50 2,733,053 3.72 11,660,952 4.29
2003.................... 41 3,740,080 5.09 15,008,772 5.52
2004.................... 22 1,380,342 1.88 4,366,272 1.61
2005.................... 29 1,693,689 2.31 7,587,228 2.79
2006.................... 31 2,639,198 3.59 10,669,848 3.92
Thereafter.............. 7 771,748 1.05 3,812,448 1.39
----- ---------- ------ ------------ ------
Total............... 2,899 73,473,853 100.00% $271,902,804 100.00%
===== ========== ====== ============ ======
- --------
(1) Assumes customers do not exercise renewal options.
(2) Excludes all expenses and common area maintenance charges paid or
reimbursable by customers.
(3) Includes 880,429 square feet of space leased on a month-to-month basis as
of December 31, 1996.
CUSTOMER OCCUPANCY
The following table shows the number of operating properties owned by SCI on
each date reflected, the total square footage of such properties and the
historical percentage physical occupancy of such properties on such date. As
previously indicated, SCI commenced operations in June 1991, has acquired
operating properties from unaffiliated third parties and does not possess what
SCI would deem as reliable occupancy rates of properties prior to their
acquisition by SCI.
OPERATING PORTFOLIO STABILIZED PORTFOLIO
------------------------------- --------------------
NUMBER OF SQUARE SQUARE
DATE PROPERTIES FOOTAGE OCCUPANCY FOOTAGE OCCUPANCY
---- ---------- ---------- --------- ---------- ---------
December 31, 1996... 942 80,556,110 91.21% 71,106,728 96.27%
December 31, 1995... 751 58,493,330 93.48% 49,296,615 96.74%
December 31, 1994... 526 39,053,995 92.40% 34,347,251 96.64%
December 31, 1993... 164 11,393,881 91.22% 8,385,646 99.90%
December 31, 1992... 17 1,911,204 91.18% 1,649,195 100.00%
December 31, 1991... 3 406,000 100.00% 406,000 100.00%
9
Operating properties at December 31, 1996 include recently completed
development properties in initial lease-up (3.7 million square feet completed
in the fourth quarter of 1996) which impacts the overall occupancy percentage
at December 31, 1996.
Based on information compiled by the CB Commercial Property Information
Management System, occupancy rates for industrial properties that can
accommodate a customer requiring 100,000 or more square feet in major U.S.
cities were relatively stable from 1986 through the end of 1996. Properties
covered include both vacant and occupied available space in existing and
under-construction buildings within six months of completion. SCI has not
independently verified the information.
LEASES
Net leases, modified gross leases and gross leases as of December 31, 1996
represented 50.9%, 46.7% and 2.4%, respectively, of the total square footage
under lease by SCI's customers. Under net leases, real estate taxes, insurance
costs and operating expenses are passed through to customers. Under modified
gross leases, real estate taxes and insurance costs in excess of the amounts
of such items for the initial year of the lease and operating expenses are
passed through to customers. Under gross leases, the landlord pays all real
estate taxes, insurance costs and operating expenses.
SCI CLIENT SERVICES INCORPORATED
SCI believes that a successful REIT must have active and effective local
management to increase cash flow and to enhance long-term economic performance
of its properties. In order to provide a higher level of service to its
customers, Client Services, an affiliate of the REIT Manager and a component
of the Market Services Group, began providing property management services for
certain of SCI's properties in January 1994. Client Services seeks to provide
premier customer service and attention to customer needs. Client Services
develops and implements proprietary operating, recruiting and training systems
to achieve consistent levels of performance and professionalism in all target
market cities managed by Client Services. This group has substantially
improved the occupancy and rental income for under-leased properties acquired
by SCI.
As of December 31, 1996, Client Services provided property management
services in 28 target market cities and was actively managing 72.5 million
square feet (90.0%) of SCI's operating portfolio of 80.6 million square feet.
SCI anticipates that Client Services will manage properties in additional
target market cities in the future. Rates for services performed by Client
Services are subject to annual approval by SCI's independent Trustees and are
at or below market rates.
CAPITAL MARKETS
SCI believes that a successful REIT must have the ability to access the
equity and debt markets efficiently and expeditiously. SCI's capital markets
ability permits it to capitalize on the acquisition and development
opportunities which it believes exist in its target market cities. In order to
more efficiently raise capital and enhance relationships with major
institutional sources of capital, the REIT Manager's owner, Security Capital
Group, which is also SCI's largest shareholder, owns Security Capital Markets
Group Incorporated ("Capital Markets Group"), a registered broker-dealer
affiliate. Capital Markets Group's services are included in the REIT Manager's
fee and do not result in a separate charge to SCI. Capital Markets Group has
assisted in or arranged securities offerings for SCI, including:
. In August 1992, SCI received a commitment for a $40 million investment
from Security Capital Group at a price of $10.00 per Common Share;
. In March 1993, SCI received commitments for $200 million of net proceeds,
at a commission cost of less than 0.01% (paid to an unaffiliated third
party), from a private offering of Common Shares to shareholders and
institutions at a price of $11.00 per share;
10
. In December 1993, SCI received commitments for $157.5 million of net
proceeds, with no commission cost, from a private offering of Common
Shares to shareholders, employees and accredited investors at a price of
$11.50 per share;
. In March 1994, SCI completed its $37.5 million initial public offering of
Common Shares at a price of $11.50 per share, with no commission cost,
and began trading on the New York Stock Exchange ("NYSE");
. In June 1994, SCI completed a $100 million public offering of Common
Shares to shareholders and third parties at a price of $15.125 per share,
with no commission cost;
. In October and November 1994, SCI raised $266.9 million of net proceeds
from a public offering of Common Shares at a price of $15.25 per share,
with an average commission cost of 2.39%;
. In March 1995, SCI raised $198.0 million of net proceeds from an
underwritten public offering of fully amortizing, long-term senior
unsecured debt securities;
. In May 1995, SCI raised $123.5 million of net proceeds from an
underwritten public offering of fully amortizing, long-term senior
unsecured debt securities;
. In June 1995, SCI raised $130.4 million of net proceeds from an
underwritten public offering of Series A Cumulative Redeemable Preferred
Shares of Beneficial Interest, par value $0.01 per share (the "Series A
Preferred Shares"), with an average commission cost of 3.15%;
. In September and October 1995, SCI completed a $250.0 million public
offering of Common Shares to shareholders and third parties at a price of
$15.375 per share, with no commission cost;
. In February 1996, SCI raised $192.3 million of net proceeds from an
underwritten public offering of Series B Cumulative Convertible
Redeemable Preferred Shares of Beneficial Interest, par value $0.01 per
share (the "Series B Preferred Shares"), with an average commission cost
of 4.25%;
. In May 1996, SCI raised $197.8 million of net proceeds from an
underwritten public offering of fully amortizing, long-term senior
unsecured debt securities;
. In September and October 1996, SCI completed a $175.6 million public
offering of Common Shares to shareholders and third parties at a price of
$17.25 per common share, with no commission cost;
. In October 1996, SCI completed a $35.1 million public offering of Common
Shares to third parties at a price of $17.25 per common share, with no
commission cost;
. In November 1996, SCI raised $97.1 million of net proceeds from an
underwritten public offering of Series C Cumulative Redeemable Preferred
Shares of Beneficial Interest, par value $0.01 per share (the "Series C
Preferred Shares"), with an average commission cost of 2.50%;
. On February 4, 1997, SCI raised $99.1 million of net proceeds from an
underwritten public offering of the Series A 2015 Notes under its medium-
term note program established in November 1996; and
. On February 7, 1997, SCI raised $80.4 million of net proceeds from an
underwritten public offering of Common Shares, with an average commission
cost of 5.25%. (See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources").
For the public offerings of Common Shares (including the initial public
offering), SCI's underwriting commissions (all of which were paid to
unaffiliated underwriters) have been $11.0 million, representing 1.15% of
gross proceeds of $957.8 million.
In May 1993, the REIT Manager arranged a three-year, $35 million revolving
credit facility for SCI, at an interest rate of prime or, at SCI's option,
LIBOR plus 2%. In November 1993, the REIT Manager arranged an increase in this
line of credit to $115 million. In May 1994, the REIT Manager arranged an
increase in this line of credit to $225 million and an extension of the
maturity to May 1996. In June 1995, the REIT Manager arranged with NationsBank
of Texas N.A. ("NationsBank") to increase SCI's revolving line of credit to
$350
11
million and to convert the line of credit to an unsecured line. The line of
credit, as amended and restated May 2, 1996, bears interest at SCI's option at
either (a) the greater of the federal funds rate plus 0.5% and prime, or (b)
LIBOR plus 1.25%, based upon SCI's current debt ratings, and is scheduled to
mature in May 1998. This line may be extended annually for an additional year
with the approval of NationsBank and the other participating lenders (the
"Bank Group").
If the Bank Group elects not to extend the revolving line of credit, at
SCI's election, the facility will either a) convert to a three year term note,
or b) continue on a revolving basis with a remaining one year maturity. SCI's
increased borrowing capacity enables it to acquire distribution properties
prior to equity and long-term debt offerings and to eliminate or minimize the
amount of cash it must invest in short term investments at low yields. SCI
currently intends to limit long-term debt to approximately 45% of total book
capitalization (including accumulated depreciation) (26.9% at December 31,
1996 on an historical basis and 29.3% at December 31, 1996 on a pro forma
basis, giving effect to the February 7, 1997 Common Share offering (net
proceeds of $80.4 million) and the February 4, 1997 issuance of the $100
million Series A 2015 Notes and the use of the proceeds therefrom). In
addition, SCI intends to limit the ratio of total debt to total book
capitalization (including accumulated depreciation) to 50% ( 28.5% at December
31, 1996 on an historical basis and 29.3% at December 31, 1996 on a pro forma
basis, giving effect to the February 7, 1997 Common Share offering and the
February 4, 1997 issuance of the Series A 2015 Notes). SCI believes its
current balance sheet provides considerable flexibility to prudently leverage
over the long-term. SCI's strategy has been to achieve a substantial equity
base and thereafter incur fully amortizing, fixed rate 10 year to 20 year
debt. (See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources").
THE REIT MANAGER
The REIT Manager provides SCI with strategic and day-to-day management,
research, investment analysis, acquisition and due diligence, development,
marketing, asset management, capital markets, disposition of assets,
management information systems support and legal and accounting services, all
of which are included in the REIT Management fee. Hence, SCI depends upon the
quality of the management provided by the REIT Manager. SCI currently has no
employees. SCI believes that its relationship with the REIT Manager provides
SCI with access to high quality and depth of management personnel and
resources, savings from a dedicated capital markets group, and access to
centralized research, information systems, accounting and legal support.
Security Capital Group, the owner of the REIT Manager, has a substantial
shareholder interest in SCI, creating commonality of interest with SCI's
shareholders, and the REIT Management Agreement requires approval of the
independent Trustees for transactions between SCI and the REIT Manager and its
affiliates. Furthermore, the REIT Manager provides all of its services for one
fee, and an affiliate provides property management services at or below market
rates in a competitive environment. The REIT Manager does not receive
additional fees for investment banking, financing or similar services. See
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--REIT Management Agreement."
Security Capital Group has proposed that SCI become an internally managed
REIT. The Board is currently reviewing the proposal. See "--Security Capital
Industrial Trust."
SCI believes that the quality of management should be assessed in light of
the following factors:
Management Depth/Succession. SCI believes that management should have
several senior executives with the leadership, operational, investment and
financial skills and experience to oversee the entire operations of the REIT.
SCI believes that several of its senior officers could serve as the principal
executive officer and continue SCI's performance. See "--Officers of SCI and
Directors and Officers of the REIT Manager and Relevant Affiliates."
Strategic Vision. SCI believes that management should have the strategic
vision to determine an investment focus which provides favorable initial
yields and long-term growth prospects. The REIT Manager has
12
demonstrated its strategic vision by focusing SCI on building a national
distribution and light manufacturing asset base at prices significantly below
replacement cost and a land inventory at attractive prices. In addition, the
REIT Manager differentiated SCI from its competition by positioning SCI,
through the SCI National Operating System(TM), as the first national operating
company that was able to address and service a corporate customer's
distribution space requirements on a national, regional and local basis. The
REIT Manager also focused SCI on selected distribution markets where
demographic and supply factors have permitted high occupancies at increasing
rents, conditions which are consistent with the long-term demographic forecast
for SCI's target market cities. See "--SCI Growth and Operating Strategy" and
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Research Capability. SCI believes that management should have the means for
researching markets to determine appropriate investment opportunities. SCI
divides its target market cities into numerous submarkets for analysis
purposes. The REIT Manager and its affiliate, Security Capital Investment
Research Incorporated ("Security Capital Investment Research"), devote
substantial time to research, on a submarket-by-submarket basis, under the
supervision of the Managing Directors of the REIT Manager; hence, the REIT
Manager's research has supplemented SCI's strategic focus and investment
program.
Investment Committee Process. SCI believes that investment committees should
provide discipline and guidance to the investment activities of the REIT in
order to achieve its investment goals. The members of the REIT Manager's
investment committee have a combined 164 years of experience in the real
estate industry. See "--Officers of SCI and Directors and Officers of the REIT
Manager and Relevant Affiliates." The investment committee receives detailed
written analyses and research, in a standardized format, from the REIT
Manager's acquisition personnel and evaluates all prospective investments
pursuant to uniform underwriting criteria prior to submission of investment
recommendations to the investment committee of the Board. The quality of the
REIT Manager's investment committee process is evident from the ability of SCI
to achieve its investment goals, generally realizing its projected initial
returns and growth from distribution property investments.
Acquisitions Capability/Due Diligence Process. SCI believes that management
should include experienced senior personnel dedicated to acquiring investments
and performing intelligent and thorough due diligence. The REIT Manager
employs 11 full time acquisition and due diligence professionals and has
developed uniform systems and procedures for due diligence. As described under
"--Investment Strategy--Investment in Generic Distribution Product," the REIT
Manager's acquisition and due diligence group has screened and selected a
large volume of successful investments.
Development Capability. SCI believes that by internally developing projects,
management can capture for the REIT the value which normally escapes through
sales premiums paid to successful developers. The REIT Manager's 47
development professionals have substantial development experience, as
described in "--Officers of SCI and Directors and Officers of the REIT Manager
and Relevant Affiliates." As of December 31, 1996, the REIT Manager had 5.9
million square feet of distribution space under development for SCI, with a
total budgeted cost of $220.9 million. REIT Management has engaged in
substantial development on behalf of SCI at attractive yields which have
exceeded projections and believes that development will provide growth when
the market for acquisitions becomes less favorable. The REIT Manager has
commenced development on behalf of SCI of 60 master-planned parks in 28 target
market cities. As importantly, as of December 31, 1996, SCI owned 1,273 acres
of additional land and had fixed price options and rights of first refusal to
acquire 515.2 acres and 36.9 acres, respectively, which in the aggregate will
permit the development of approximately 31.7 million square feet of additional
distribution space in 29 target market cities. Also, as of December 31, 1996,
SCI had an additional 415.8 acres under letter of intent or contingent
contract, subject to completion of due diligence, which will permit the
development of approximately 6.7 million square feet of additional
distribution space. See "--Investment Strategy--Investment in Generic
Distribution Product."
Operating Capability. SCI believes that management can substantially improve
Funds from Operations (as hereinafter defined) by actively and effectively
managing assets. The REIT Manager conceived of and developed the SCI National
Operating System(TM) to effectively operate SCI's business and provide
customers with an
13
exceptional level of coordinated, comprehensive services. In addition, Client
Services provides a high level of property management services to customers.
Through the SCI National Operating System(TM), the REIT Manager and its
affiliates control and effectively administer the management of SCI's
distribution portfolio.
Capital Markets Capability. SCI believes that management must be able
effectively to raise equity and debt capital in order for the REIT to achieve
superior growth through investment. As set forth under "--Capital Markets,"
REIT Management has successfully assisted in or arranged funding for SCI's
investment program, including SCI's initial public offering in March 1994
which was arranged at no commission cost to SCI, following which SCI commenced
trading on the NYSE.
Communications/Shareholder Relations Capability. SCI believes that a REIT's
success in capital markets and asset acquisition activities can be enhanced by
management's ability to effectively communicate the REIT's strategy and
performance to investors, sellers of property and the financial media. The
REIT Manager provides at its expense full time personnel who prepare
informational materials for and conduct periodic meetings with the investment
community and analysts.
SCI believes that successfully combining the foregoing attributes
significantly enhances a REIT's ability to increase cash flow and its market
valuation. SCI's cash flow from operating activities and market valuation have
increased under the REIT Manager's administration.
REIT Manager Compensation
The REIT Management fee paid by SCI is based on SCI's cash flow (as defined
in the REIT Management Agreement, see "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--REIT Management
Agreement") before the REIT Management fee and therefore increased in 1996 as
compared to 1995 because cash flow increased substantially. As SCI arranges
amortizing, fixed rate, long-term unsecured debt and nonconvertible preferred
share financing as more fully described in "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" below, the REIT Management fee will effectively decline in
proportion to SCI's Funds from Operations because regularly scheduled
principal payments or their imputed equivalent, as defined in such agreement,
associated with the long-term debt and distributions actually paid with
respect to any nonconvertible preferred shares are deducted from the cash flow
amount on which the REIT Management fee is based.
OFFICERS OF SCI AND DIRECTORS AND OFFICERS OF THE REIT MANAGER AND RELEVANT
AFFILIATES
Directors and Senior Officers of the REIT Manager
Members of the REIT Manager's investment committee are designated by an
asterisk (*).
*K. DANE BROOKSHER--58--Mr. Brooksher was elected as a Trustee in October of
1993 and as Co-Chairman and Chief Operating Officer of SCI and the REIT
Manager in November 1993, and is a Director of the REIT Manager. Prior
thereto, Mr. Brooksher was Area Managing Partner and Chicago Office Managing
Partner of KPMG Peat Marwick, independent public accountants, where he served
on the Board of Directors and Management Committee and as International
Development Partner for Belgium and the Netherlands. Mr. Brooksher's term as
Trustee expires in 1999.
*THOMAS G. WATTLES--45--Mr. Wattles was elected as a Trustee in January
1993; he was a Director of SCI's predecessor since its formation in June 1991
and has been Co-Chairman and Chief Investment Officer of SCI and the REIT
Manager since November 1993, Managing Director of SCI and the REIT Manager
from January 1993 to November 1993, and Director of the REIT Manager since
June 1991. From January 1991 to December 1992, Mr. Wattles served as Managing
Director of Security Capital Pacific Incorporated, the REIT Manager for
Security Capital Pacific Trust; from July 1989 to December 1990, Managing
Partner of Stanwich Advisors Incorporated (real estate advisory and
development services); and from July 1985 to June 1989, Senior Vice
President--Property Finance Group of LaSalle Partners Limited (corporate real
estate services). Mr. Wattles' term as Trustee expires in 1999.
14
*IRVING F. LYONS, III--47--Mr. Lyons was elected as a Trustee in March 1996
and as Managing Director of SCI and the REIT Manager in December 1993, where
he has responsibility for the Pacific region of the United States, and is a
Director of the REIT Manager. Prior thereto, Mr. Lyons was the Managing
Partner of King & Lyons (a San Francisco Bay Area industrial real estate
development and management company) since its inception in 1979, where he was
responsible for supervising development, asset management and day-to-day
activities. Mr. Lyons has been involved in the development of over 3.5 million
square feet of industrial space in the San Francisco Bay Area. Prior to
forming King & Lyons, Mr. Lyons spent five years as a Vice President of Wells
Fargo Mortgage Company. Mr. Lyons' term as Trustee expires in 1997.
*JEFFREY H. SCHWARTZ--37--Director of the REIT Manager; Managing Director of
the REIT Manager since October 1994, where he has overall responsibility for
national development activities, and Managing Director of SCI; prior thereto,
Mr. Schwartz was a founder and managing partner of The Krauss/Schwartz
Company, one of the largest industrial real estate developers in Florida; from
April 1986 to October 1988, Mr. Schwartz was a Partner at Anderson Properties
in Atlanta, Georgia.
*ROBERT J. WATSON--47--Director of the REIT Manager; Managing Director of
SCI since January 1993 and of the REIT Manager since November 1992, where he
is Managing Director and Chief Operating Officer of Client Services; from
April 1991 to November 1992, private consultant in the real estate industry;
from June 1977 to April 1991, Area and then Regional Partner for Trammell Crow
Commercial Company, a real estate development and management company, in
Denver, Colorado and a member of that firm's Management Board. As Regional
Partner, Mr. Watson was responsible for Trammell Crow Commercial Company's
commercial/industrial development, leasing and management activities in both
the inter-mountain and the southwestern United States. In his position prior
to affiliation with the REIT Manager, Mr. Watson was responsible for over $1
billion in assets and developed over 3.5 million square feet of industrial and
other commercial space.
Other Officers
ROBERT O. ALTER--37--Vice President of the REIT Manager since August 1995,
where he has responsibility for coordinating build-to-suits in the Southeast
region, and Vice President of SCI; from August 1992 to August 1995, Managing
Director of Faison in Tampa, Florida; from May 1989 to August 1992, Director
with Oxford Properties Florida, Inc., also in Tampa.
ARIEL AMIR--37--Vice President of Security Capital Group since June 1994;
from September 1985 to April 1994, an attorney with the law firm of Weil,
Gotshal & Manges, New York, New York, where he practiced securities and
corporate law. Mr. Amir provides securities offerings and corporate
acquisition services to SCI.
GARY E. ANDERSON--31--Vice President of the REIT Manager since September
1996, where he has been responsible for research on special investment
opportunities since August 1995, and Vice President of SCI; from August 1994
to August 1995, Mr. Anderson was a member of the Management Development
Program; in June 1994, Mr. Anderson received his M.B.A. from the Anderson
Graduate School of Management at UCLA; from October 1988 to June 1992, Project
Manager with Spancrete of California, a construction company in Irwindale,
California.
*NED K. ANDERSON--49--Senior Vice President of the REIT Manager since
December 1993, where he has Market Officer responsibilities for the San
Francisco Bay Area, and Senior Vice President of SCI; since 1985, he was a
partner at King & Lyons, where he directed the development, leasing and
management of the 250 acre Bayside Business Park in Fremont, where King &
Lyons developed approximately 1.5 million square feet of buildings, which are
occupied by approximately 130 tenants. He also helped oversee King & Lyons
East Bay properties, which total 2.5 million square feet of buildings; prior
thereto, Mr. Anderson was a Vice President of Wells Fargo Realty Finance.
15
GREGORY J. ARNOLD--41--Vice President of the REIT Manager since January 1996
where he is a member of the National Services Group and Vice President of SCI;
from January 1995 to September 1995, Project Executive and General Manager for
ROI Realty Services, Inc.; from November 1985 to January 1995, Equity Vice
President and Senior Leasing Specialist at LaSalle Partners in Washington,
D.C., where he was responsible for management and leasing of a 170,000 square
feet office building and redeveloping a Class C property through renovation,
marketing, communication and a tenant retention program.
CLAUDE A. BILLINGS--56--Vice President of the REIT Manager since January
1994, where he is a member of the National Services Group, and Vice President
of SCI; from March 1991 to February 1994, Senior Vice President and Regional
Manager of the Staubach Company, a Dallas, Texas corporate real estate service
firm; from March 1989 to March 1991, Vice President of the Leasing and Equity
Departments for Walker & Dunlop, Inc.; prior thereto, Vice President of the
Investment Properties Division of J.E. Robert Companies; for five years during
the mid-1980s, Mr. Billings was a Vice President with LaSalle Partners
Limited, where he acquired, financed and marketed income-producing real estate
assets.
DARCY B. BORIS--34--Vice President of Security Capital Investment Research
since June 1995, and an associate from December 1994 to June 1995, where she
conducts strategic market analysis for SCI and affiliated companies; from
August 1993 to November 1994, Ms. Boris worked for Capital Markets Group; in
May 1993, she obtained her M.B.A. from the University of California at
Berkeley; from January 1987 to September 1991, she was with Marcus & Millichap
Incorporated, as Project Manager for Summerhill Development Company, the
multifamily development subsidiary of Marcus & Millichap Incorporated, where
she managed the development of multifamily housing, and prior thereto, she was
an analyst for its property investment subsidiary.
ERIC D. BROWN--36--Vice President of the REIT Manager since December 1996,
where he is the Regional Property Manager for the Central region, and Vice
President of SCI; Mr. Brown has been Vice President of Client Services since
January 1995 where he has had property management responsibilities for Austin,
Brownsville, El Paso and San Antonio, Texas since May 1994; prior thereto from
May 1993 to April 1994, Vice President and partner of Crow-Barshop Properties,
Inc., a property management, development and brokerage firm in San Antonio,
Texas, where he was responsible for property management and daily operations
of the firm; from January 1991 to April 1993, Director of Asset Management for
Crow-Barshop Properties, Inc.
MARK R. CASHMAN--36--Vice President of the REIT Manager since November 1995,
where he has Market Officer responsibilities for Dallas, Texas, and Vice
President of SCI; prior thereto, Vice President of Security Capital Pacific
Trust since January 1995, where he was a member of the asset management group;
from September 1992 to January 1995, First Vice President/Portfolio Manager
with First Nationwide Financial Corporation in Los Angeles, California, where
he was responsible for the property management department holdings throughout
the western United States; from May 1990 to September 1992, Vice
President/Senior Asset Manager with American Real Estate Group in Irvine,
California.
LISA M. CERNY--33--Vice President of the REIT Manager since June 1995, where
she is controller for the National Development Group, and Vice President of
SCI; prior thereto, Ms. Cerny provided accounting services for the National
Development Group from October 1993; from January 1988 to June 1993, Director
of Corporate Services and Portfolio Manager with The Koll Company in Newport
Beach, California, where she managed corporate financial services. Ms. Cerny
is a Certified Public Accountant.
MARK J. CHAPMAN--39--Vice President of Security Capital Investment Research
since November 1995, where he is director of the group and conducts strategic
market analyses for affiliates of the firm; from November 1994 to November
1995, Mr. Chapman was a Vice President of Security Capital Pacific Trust with
asset management responsibilities in five major markets; from July 1989 to
November 1994, Vice President with Copley Real Estate Advisors, Inc., where he
directed asset management for Copley assets in its New England, mid-Atlantic
and Texas regions, valued in excess of $1.5 billion.
JAMES D. COCHRAN--36--Vice President of the REIT Manager since March 1994,
where he has Market Officer responsibilities for Denver, Colorado and Kansas
City, Kansas, and Vice President of SCI; from August
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1988 to March 1994, Vice President for TCW Realty Advisors, where he was
responsible for industrial acquisitions in southern California; from September
1984 to August 1987, Associate with Economics Research Associates, where he
performed market and financial feasibility studies for a wide variety of land
use development projects.
PAUL C. CONGLETON--42--Vice President of the REIT Manager since January 1995,
where he has Market Officer responsibilities for Houston and Austin, Texas, and
Vice President of SCI; from October 1990 to December 1994, Principal with
Overland Company, a property management, development and investment services
firm in Tucson, Arizona; from March 1985 to October 1990, Partner with Trammell
Crow Company in Tucson, Arizona.
R. STAN CONWAY, JR.--33--Vice President of the REIT Manager since November
1994, where he has Market Officer responsibilities for Atlanta, Georgia, and
Vice President of SCI; from October 1989 to October 1994, Vice President of
Marketing for Bullock, Terrell and Mannelly; from April 1987 to October 1989,
Vice President of Industrial Sales for Royal LePage.
MICHAEL S. CURLESS--33--Vice President of the REIT Manager since August 1995,
where he has Market Officer responsibilities for Indianapolis, and Vice
President of SCI; from June 1989 to August 1995, Marketing Director with
Trammell Crow Company, where he was responsible for the development and
marketing of industrial projects; from July 1986 to July 1987, Financial
Analyst with General Electric.
DAVID B. DANIEL--30--Vice President of the REIT Manager since June 1996 where
he has been a member of the due diligence team since April 1995, and Vice
President of SCI; prior thereto, a member of due diligence since April 1995;
from February 1994 to April 1995; Senior Underwriter with Remsen Partners Ltd.
in New York, New York, where he was involved in all phases of a loan
origination and securitization program; from May 1992 to February 1994,
Associate Consultant with Kenneth Leventhal & Co. in Houston, Texas and New
York, where he performed due diligence and evaluation on a variety of real
estate transactions.
MARK H. DEGNER--35--Vice President of the REIT Manager since April 1994,
where he is responsible for portfolio acquisitions and dispositions, and Vice
President of SCI; from October 1988 to April 1994, Manager for the Hahn Company
in San Diego, California, where he was Manager of Development and Acquisitions,
Corporate Development and, most recently, Dispositions.
WILLIAM H. EAGER--55--Vice President of the REIT Manager since June 1996
where he is a member of the National Services Group and Vice President of SCI;
from June 1976 to June 1996, Mr. Eager was a First Vice President of CB
Commercial where he was involved in over $350 million of industrial real estate
transactions; prior thereto, Mr. Eager was an account executive and assistant
to the president of Leo Burnett Advertising from September 1968 to June 1976,
where he was active in developing marketing and advertising strategies.
FRANK H. FALLON--35--Vice President of the REIT Manager since January 1995,
where he has Market Officer responsibilities in Memphis, Nashville and
Chattanooga, Tennessee, and Vice President of SCI; prior to joining SCI, Mr.
Fallon was with Trammell Crow Company from March 1987 to December 1994, where
he was responsible for leasing, management, acquisition and disposition of
industrial properties in the Dallas/Fort Worth, Texas area.
GABE L. FINKE--31--Vice President of the REIT Manager since September 1996,
where he has been a member of the land acquisitions group since September 1995,
and Vice President of SCI; prior thereto, Mr. Finke was a member of the
Management Development Program from July 1994 to August 1995; in May of 1994
Mr. Finke received his M.B.A. from the Harvard Graduate School of Business
Administration.
KURT R. FULLER--38--Vice President of the REIT Manager since October 1994,
where he has Project Manager responsibilities for tenant improvement
construction in the San Francisco Bay Area, Reno, Portland, Seattle and Salt
Lake City, and Vice President of SCI; from February 1989 to October 1994,
Project Manager/Estimator for Wentz Builders, Inc. in San Carlos, California,
where he was responsible for managing tenant improvement and special projects.
17
THOMAS P. GARRIGAN--47--Vice President of the REIT Manager since March 1995,
where he is a member of the National Services Group, and Vice President of SCI;
from June 1993 to February 1995, he was Senior Vice President of Security
Capital Group and its affiliates, where he oversaw accounting operations; from
July 1981 to June 1993, Audit Partner with KPMG Peat Marwick in Midland and El
Paso, Texas; from July 1971 to July 1981, on the professional staff of KPMG
Peat Marwick.
JOHN R. HANSON--46--Vice President of the REIT Manager since May 1995, where
he has Project Manager responsibilities for the Pacific region, and Vice
President of SCI; from July 1994 to May 1995, Vice President of Jack & Cohen
Builders, Inc. in Palo Alto, California, where he was responsible for a wide
variety of construction projects; from January 1991 to July 1994, Project
Director of Jack & Cohen; prior thereto, Project Manager of L.E. Wentz Company
in San Carlos, California from April 1987 to January 1991.
LARRY H. HARMSEN--36--Vice President of the REIT Manager since February 1995,
where he has Market Officer responsibilities for San Diego and Orange County,
California, and Vice President of SCI; from January 1988 to February 1995, Vice
President/Managing General Partner with Lincoln Property Company in Southern
California, where he was responsible for all aspects of asset and property
management for a portfolio of office and industrial space containing over 2.5
million square feet; from July 1985 to January 1988, Development/Marketing
Manager with Lincoln Property N.C., Inc.
DONALD L. HARRIER--37--Vice President of the REIT Manager since May 1994,
where he has Project Manager responsibilities for the Pacific region, and Vice
President of SCI; from May 1993 to May 1994, Senior Partner with Donald L.
Harrier, AIA, Architecture; from August 1986 to May 1993, Project Director with
DES Architects & Engineers in Redwood City and Fremont, California, where he
was involved in project management, architecture and marketing.
JAMES JACHETTA--43--Vice President of the REIT Manager since December 1996,
where he has project manager responsibilities for the Pacific region, and Vice
President of SCI; prior thereto, from October 1995 to October 1996, Mr.
Jachetta was a project manager consultant to SCI; from May 1992 to September
1995, mortgage broker with Southern Cal Financial Group in Newport Beach,
California; May 1986 to April 1992, Senior Project Manager of The O'Donnell
Group, a commercial developer in Irvine, California.
*M. MARC JASON--35--Vice President of the REIT Manager since December 1993,
where he is responsible for acquisition due diligence, and Vice President of
SCI; from January 1993 to December 1993, President of Aslan Communications, a
regional telecommunications company; from December 1986 to December 1992,
employed with Trammell Crow Company, most recently as Senior Vice President and
Finance Manager, where he managed the finance and accounting departments for
the company's $1 billion southern California asset base; prior thereto, an
accountant with Price Waterhouse.
KENT W. JOHNSON--43--Senior Vice President of the REIT Manager since July
1995, where he heads the National Services Group, and Senior Vice President of
SCI; from March 1994 to June 1995, National Director for Sequent Computer
Systems, where he was recognized as World-Wide Manager of the Year; from
January 1977 to March 1994, with IBM in various positions, including National
Account Director and Branch Manager.
M. GORDON KEISER--52--Senior Vice President of the REIT Manager since October
1995, where he is Chief Financial Officer and is responsible for accounting,
financial reporting and coordination of financing, and Senior Vice President of
SCI; from August 1988 to October 1995, Senior Vice President of JMB Realty
Corporation, where he was responsible for corporate finance and capital markets
financing. Previously, he was with KPMG Peat Marwick. Mr. Keiser is a Certified
Public Accountant.
DOUGLAS A. KIERSEY, JR.--36--Vice President of the REIT Manager since May
1994, where he has Market Officer responsibilities for Seattle, Washington and
Portland, Oregon, and Vice President of SCI; from September 1983 to May 1994, a
member of the Industrial/Technology Group at Cushman & Wakefield of Oregon,
Inc., where he specialized in the sale and leasing of industrial properties.
18
JEFFREY A. KLOPF--48--Senior Vice President and Secretary of SCI, the REIT
Manager and Security Capital Group since January 1996; from 1988 to December
1995, Partner with Mayer, Brown & Platt, where he practiced corporate and
securities law. Mr. Klopf provides securities offering and corporate
acquisitions services to SCI and its affiliates and oversees the provision of
legal services to SCI and its affiliates.
ROBERT A. KRITT--35--Vice President of the REIT Manager since November 1991,
where he has responsibility for coordinating build-to-suits in the Mid-Atlantic
region, and Vice President of SCI; from January 1991 to December 1992, Vice
President of Security Capital Pacific Incorporated, the REIT Manager for
Security Capital Pacific Trust, where he was responsible for acquisition due
diligence; from 1986 to December 1990, Vice President of Sanders Partners
Incorporated, Chicago, Illinois (multibusiness holding company); prior thereto,
senior tax consultant with Arthur Andersen LLP.
EDWARD F. LONG--40--Vice President and Controller of SCI and the REIT Manager
since January 1996, where he supervises accounting and financial reporting;
from June 1995 to January 1996, Controller for SCI Client Services; from
December 1990 to June 1995, Director of Financial Services for Coopers &
Lybrand in Central Florida and the Carolinas; from November 1984 to December
1990, Chief Financial Officer for a group of privately owned real estate
investment companies. Mr. Long is a Certified Public Accountant.
A. JOHN LOW--43--Vice President of the REIT Manager since December 1996 where
he has Project Manager responsibilities for the Pacific region, and Vice
President of SCI; from July 1994 to October 1996, Director of Architecture,
Design and Construction for Waban, Inc., a national chain of home improvement
centers in Irvine, California, where he was responsible for development and
construction of warehouses; from March 1994 to July 1994, Portfolio Manager for
Insignia O'Donnell Properties, Inc., a development and management company in
Irvine, California; from March 1990 to March 1994, Director of Real Estate for
Catellus Development Corporation in Anaheim, California, where he had marketing
responsibilities for the Southern California region.
DONALD W. MADSEN--53--Senior Vice President of the REIT Manager since July
1993, where he supervises development services related to construction
management and build-to-suit facilities, and Senior Vice President of SCI; from
July 1992 to June 1993, Vice President, Business Development for Windward,
Ltd., a Dallas, Texas-based design/build general construction company; from
December 1990 to July 1992, Managing Director, and from December 1978 to
December 1990, Partner of Construction Management, Dallas Industrial Division
of Trammell Crow Company; prior thereto, Mr. Madsen was an industrial architect
with Trammell Crow Company. In his prior positions, Mr. Madsen supervised the
development of over 38 million square feet of industrial space.
DAVID W. MAJORS--52--Vice President of the REIT Manager since December 1996,
where he has Market Officer responsibilities for Albuquerque, New Mexico and El
Paso, Texas, and Vice President of SCI; from September 1988 to September 1996,
President and Chief Operating Officer of Remington Capital Group in Dallas,
Texas where he was responsible for all aspects of development of build-to-suit
industrial, office and retail facilities.
BRIAN N. MARSH--32--Vice President of the REIT Manager since January 1995,
where he has Market Officer responsibilities for Columbus, Ohio, and Vice
President of SCI; from June 1990 to January 1995, with Pizzuti Realty Inc., in
Columbus, Ohio, where he was responsible for master planning, development and
marketing of a 400-acre-plus, mixed-use development; prior thereto, Marketing
Associate with Wears Kahn McMenamy in Columbus, Ohio.
J. THOMAS MERCER--37--Vice President of the REIT Manager since January 1995,
where he is responsible for coordinating build-to-suits nationwide, and Vice
President of SCI; from September 1987 to January 1995, Senior Marketing
Representative with Friendswood Development Company in Houston, Texas, where he
completed over $15 million in land transactions; prior thereto, Industrial
Leasing Specialist with The Horne Company in Houston, Texas, where he leased
more than 500,000 square feet of industrial space.
19
*STEVEN K. MEYER--48--Senior Vice President of the REIT Manager since
December 1995, where he has responsibility for the Central region of the
United States, and Senior Vice President of SCI; prior thereto, Vice President
of the REIT Manager since September 1994; from 1990 to July 1994, Executive
Vice President with Trammell Crow Company, where he directed leasing and
development activities for the Industrial Division; from 1983 to 1990, Project
Partner with Trammell Crow, where he developed and/or acquired 77 projects
totalling over 7 million square feet; prior thereto, Mr. Meyer was a Leasing
Agent with Trammell Crow.
JOSEPH H. MIKES--36--Vice President of the REIT Manager since August 1995,
where he has Market Officer responsibilities for the Chicago area, and Vice
President of SCI; from March 1988 to August 1995, Senior Director of Opus
North Corporation, where he managed office and industrial real estate
activities; from April 1984 to March 1988, Director of Real Estate for Opus in
Florida.
RON W. MILLS--38--Vice President of the REIT Manager since April 1993, where
he has been a member of the National Services Group since July 1996, and Vice
President of SCI; prior thereto, Mr. Mills had Market Officer responsibilities
for San Antonio, Austin and Rio Grande Valley, Texas; from February 1991 to
May 1992, Vice President of Commercial Operations for SCG Realty Services
Incorporated, a regional real estate services organization; prior thereto,
Vice President of Asset Management and Property Management for Operations for
USAA Real Estate Company.
RICK D. MIRANDA--43--Vice President of the REIT Manager since December 1996
where he has Project Manager responsibilities for the Pacific region, and Vice
President of SCI; from April 1996 to September 1996, President of Realty
Development Management Services, Inc. in Newport Beach, California, where he
was responsible for all aspects of development and construction of office and
industrial facilities; from May 1995 to March 1996, Vice President with Arnel
Development Company in Costa Mesa, California, where he was responsible for
the design and construction of a retail center; from August 1987 to February
1995, Vice President with Bramalea U.S. Properties in Oakland, California,
where he was responsible for development, design and construction management
for the Pacific region.
R.A.D. MORTON, III--39--Vice President of the REIT Manager since July 1993,
where he has Market Officer responsibilities for El Paso, San Antonio and Rio
Grande Valley, Texas and Vice President of SCI; from January 1991 to July
1993, President of The Morton Group, which specialized in corporate industrial
real estate services, asset management and development services; from June
1988 to January 1991, Principal with Trammell Crow Company in its El Paso
Commercial Division, where he was responsible for industrial development.
DAVID S. MORZE--36--Vice President of the REIT Manager since March 1995,
where he has Market Officer responsibilities for Reno, Nevada and Salt Lake
City, Utah, and Vice President of SCI; from May 1993 to March 1995, Director
of Marketing for Northern California for SARES*REGIS; from January 1993 to May
1993, Real Estate Consultant to The Moreno Bavarian Corporation in Portola
Valley, California; from September 1983 to January 1993, Partner with Cabot &
Forbes in Northern California, where he developed and acquired over $140
million of office, research and development and industrial projects.
DONALD E. MYERS--53--Vice President of the REIT Manager since March 1993,
where he is responsible for asset management of SCI's portfolio, and Vice
President of SCI; from July 1988 to March 1993, a Senior Vice President of
Dreyfus Realty Advisors, where he was responsible for asset management; from
March 1984 to June 1988, Senior Vice President with Realco International, a
private real estate investment and development company; and from July 1978 to
February 1984, Vice President of LaSalle Partners Limited in its Land Group,
where he provided acquisition and disposition services for clients of the
firm.
MICHAEL NACHAMKIN--43--Vice President of the REIT Manager since March 1996,
where he has Market Officer responsibilities for New Jersey/I-95 Corridor and
Vice President of SCI; from 1984 to February 1996, Director of Investment
Sales, Leasing, Land, Tenant Representation and Marketing at Cushman &
Wakefield of New Jersey; prior thereto, a salesperson with Coldwell Banker
Real Estate Services from 1983 to 1984.
AUGUST J. NAPOLITANO--49--Vice President of the REIT Manager since May 1995,
where he is a member of the National Services Group, and Vice President of
SCI; from November 1992 to December 1994,
20
Director/Branch Manager of Cushman & Wakefield in Orange County, California,
where he managed all aspects of the Newport Beach and Anaheim Commercial
brokerage offices; from January 1981 to November 1992, Senior Vice
President/Broker with CB Commercial, also in Orange County.
EDWARD S. NEKRITZ--31--Vice President of the REIT Manager since September
1995, where he is responsible for coordinating the national leasing program,
overseeing environmental issues and providing asset management and legal
services, and Vice President of SCI; from October 1990 to September 1995,
attorney with Mayer, Brown & Platt, where he specialized in commercial real
estate transactions, including acquisitions and dispositions, leasing,
development and zoning.
PETER J. NIELSEN--50--Vice President of the REIT Manager since March 1994,
where he has Project Manager responsibility for build-to-suit projects, and
Vice President of SCI; from November 1984 to February 1994, Vice President of
Project Development for Dueck Group of Companies, a development firm in Denver,
Colorado; and from November 1980 to November 1984, Design-Build Project Manager
for Voth Brothers Construction, a contractor/development company in Abbotsford,
British Columbia. Mr. Nielsen has supervised the development of over 4 million
square feet of industrial and commercial space.
WILLIAM D. PETSAS--39--Vice President of the REIT Manager since July 1994,
where he has Market Officer responsibilities for Phoenix, Arizona, and Vice
President of SCI; from June 1993 to June 1994, Mr. Petsas was a consultant to
SCI in the area of due diligence and acquisitions; from May 1992 to May 1993,
Mr. Petsas was a director of business development for residential properties in
the Southwest for Trammell Crow Company; from June 1986 to April 1992, Mr.
Petsas was with the Industrial Division of Trammell Crow Company in Phoenix,
Arizona, where he was a marketing principal beginning in 1989.
*WALTER C. RAKOWICH--39--Senior Vice President of the REIT Manager since
November 1994, where he has responsibility for the Mid-Atlantic region of the
United States, and Senior Vice President of SCI; from July 1994 to November
1994, Vice President of the REIT Manager; from October 1993 to June 1994, Mr.
Rakowich was a consultant to SCI in the area of due diligence and acquisitions;
from 1985 to September 1993, Mr. Rakowich was with Trammell Crow Company, where
he was involved in the acquisition, development, financing, marketing,
management and disposition of property and was a Senior Vice President and
Principal beginning in 1992.
THOMAS M. RAY--34--Vice President of the REIT Manager since March 1996 where
he is responsible for coordinating build-to-suits in the Pacific region, and
Vice President of SCI; prior thereto, a member of the build-to-suit group since
September 1995; from October 1994 to September 1995, Mr. Ray supervised land
acquisitions in due diligence; from August 1994 to October 1994, a member of
the land acquisitions due diligence group; from March 1994 to August 1994, a
member of the management Development Program where he assisted with multifamily
portfolio acquisitions; from February 1991 to August 1992, General Counsel with
Richardson International Corp. in Fort Collins, Colorado.
BETTY J. REMSTEDT--51--Vice President of the REIT Manager since December
1993, where she provides accounting, financial analysis and budgeting services
for the REIT Manager with respect to SCI's Pacific region properties, and Vice
President of SCI; from December 1988 to December 1993, Chief Financial Officer
of King & Lyons; prior thereto, Controller at Barratt Southern California,
Inc., a real estate development company in San Jose, California.
*JOHN W. SEIPLE--38--Senior Vice President of the REIT Manager since November
1994, where he has responsibility for the Southeast region of the United
States, and Senior Vice President of SCI; from October 1993 to November 1994,
Vice President of the REIT Manager; from January 1992 to June 1993, Senior Vice
President, and from June 1988 to December 1991, Partner, with Trammell Crow
Dallas Industrial, Inc., a subsidiary of Trammell Crow Company, where he was
responsible for leasing, development, acquisition, financing, tenant build-out
and property management of 7.5 million square feet of industrial properties;
from June 1987 to May 1988, Marketing Principal, and from May 1985 to May 1987,
Leasing Agent with Trammell Crow Company.
21
STEVEN O. SPAULDING--55--Vice President of the REIT Manager since May 1993,
where he has Market Officer responsibilities for Las Vegas, Nevada, and Vice
President of SCI; from June 1992 to May 1993, Area Manager with Dermody
Properties in Las Vegas, where he was responsible for its management portfolio
and new development activities; from November 1991 to June 1992, independent
consultant; from 1987 to November 1991, Managing Partner of St. Louis division,
and from 1983 to 1987, Industrial Partner of Trammell Crow Company in St.
Louis.
RICHARD H. STRADER--37--Vice President of the REIT Manager since June 1994,
where he has Market Officer responsibilities for Charlotte, Raleigh-Durham and
Winston-Salem, North Carolina, and Vice President of SCI; from October 1987 to
May 1994, Mr. Strader was with the Dallas Industrial Division of Trammell Crow
Company, where he was the Managing Director of the Central and Southwest Dallas
Industrial office since 1990.
CHARLES E. SULLIVAN--39--Vice President of the REIT Manager since October
1994, where he has Market Officer responsibilities for Miami, Orlando and
Tampa, Florida, and Vice President of SCI; from July 1989 to October 1994,
Senior Industrial Broker with Cushman & Wakefield.
STANLEY G. THOMAS--51--Vice President of the REIT Manager since April 1995,
where he has Project Manager responsibilities for the Central Region, and Vice
President of SCI; from January 1990 to March 1995, Project Manager for Cushman
& Wakefield Development Consulting Group in Dallas, Texas, where he was
responsible for the total design and construction process for projects
including build-to-suits and tenant fit-up, ranging from 25,000 to 200,000
square feet; from April 1987 to December 1989, Senior Project Manager with
Neiman Marcus' Planning, Architecture, Construction & Facilities Management
Group in Dallas, Texas; prior thereto, managing principal of Pickle & Thomas,
Inc., Architecture/Interiors.
JEFFREY M. TODD--39--Vice President of the REIT Manager since January 1995,
where he has Project Manager responsibilities for build-to-suit projects, and
Vice President of SCI; from November 1994 to January 1995, Project Manager for
Smallwood, Reynolds, Stewart, Stewart & Associates, Inc., where he was
responsible for managing industrial architecture; from June 1984 to November
1994, Project Architect for Wakefield/Beasley & Associates.
JAMES E. TROUT--33--Vice President of the REIT Manager since June 1995, where
he has Project Manager responsibilities for the Central Region, and Vice
President of SCI; prior thereto, Mr. Trout was a member of the National
Development Group from June 1993; from February 1992 to May 1993, Real Estate
Consultant with Douglas A. Edwards, Incorporated in New York, New York; from
June 1991 to January 1992, Assistant to President of Solow Realty and
Development in New York, New York; prior thereto, Management Associate with
Citicorp in New York, New York.
MARY JANE VIETZE--43--Vice President of the REIT Manager since April 1996,
where she is responsible for accounting and financial reporting and Vice
President of SCI; prior thereto, a member of the accounting group since
September 1993; from July 1990 to September 1993, Senior Accountant for Price
Waterhouse; from October 1983 to July 1990, Controller for a group of privately
owned real estate investment companies. Ms. Vietze is a Certified Public
Accountant.
EDWIN D. WAGERS--53--Vice President of the REIT Manager since January 1995,
where he has Project Manager responsibilities for the Mid-Atlantic region of
the United States, and Vice President of SCI; from April 1991 to December 1994,
Chief Operating Officer of National Real Estate Development at Muirfield
Village Development in Columbus, Ohio; from August 1988 to April 1991, Senior
Vice President of Galbreath Huff Companies in Columbus, Ohio; from May 1977 to
August 1988, Senior Vice President of the Midwest Division with Vantage
Companies.
DAVID L. WELCH--35--Vice President of the REIT Manager since February 1995,
where he has Market Officer responsibilities for Washington, D.C. and
Baltimore, Maryland, and Vice President of SCI; from September 1992 to January
1995, Associate Senior Vice President with Carey Winston Co. in Washington,
D.C., where he managed the leasing and marketing program for over 1.5 million
square feet of industrial space in
22
Northern Virginia; from May 1984 to September 1992, Vice President with CB
Commercial, where he specialized in industrial leasing, land and building sales
in Northern Virginia.
JAMES E. WHITE--40--Vice President of the REIT Manager since July 1995, where
he has Market Officer responsibilities for Cincinnati, Ohio and Louisville,
Kentucky, and Vice President of SCI; from July 1994 to July 1995, Senior
Regional Director with First Industrial Realty Trust, Inc. in Southfield,
Michigan; prior thereto, Chief Financial Officer with Damone/Andrew Enterprises
in Troy, Michigan from August 1989 to July 1994.
JAMES P. WILSON--52--Vice President of the REIT Manager since October 1994,
where he has Project Manager responsibilities for the Southeast region, and
Vice President of SCI; from March 1988 to October 1994, Vice President of
Development and Construction for The Krauss/Schwartz Company; from April 1986
to March 1988, Vice President of Development and Construction for The Hogan
Group, a real estate development and property management company.
Shareholder Relations and Capital Markets
The following persons provide shareholder relations and capital markets
services to SCI:
K. SCOTT CANON--34--President of Capital Markets Group since January 1996,
where he provides capital markets services for affiliates of Security Capital
Group; prior thereto, Vice President of Capital Markets Group since August 1993
and a member of Capital Markets Group since March 1992; from September 1991 to
March 1992, a personal account director for Chase Manhattan Investment
Services; from August 1987 to September 1991, a member of private client
services for Goldman, Sachs & Co. Mr. Canon is registered with the National
Association of Securities Dealers, Inc.
ROBERT H. FIPPINGER--53--Vice President of Capital Markets Group since June
1995, where he directs corporate communications services for affiliates of
Security Capital Group; prior thereto, Mr. Fippinger headed corporate
communications for the firm from October 1994; from November 1991 to October
1994, with Grubb & Ellis in San Francisco, California, where he represented
corporate clients and provided tenant advisory services; from October 1989 to
October 1991, Executive Director with Techmart in Santa Clara, California,
where he was responsible for management, marketing, operations, leasing and
program development of commercial properties.
GERARD DE GUNZBURG--49--Senior Vice President of Capital Markets Group since
January 1997 and Vice President from January 1993 to December 1996 in its New
York office, where he provides capital markets services for affiliates of
Security Capital Group; from June 1988 to December 1992, a consultant to
American and European companies; prior thereto, Director and Partner of Lincoln
Property Company, Europe, where he arranged real estate financing from 1976 to
1988. Mr. de Gunzburg is registered with the National Association of Securities
Dealers, Inc.
ALISON C. HEFELE--37--Vice President of Capital Markets Group since February
1994, where she provides capital markets services for affiliates of Security
Capital Group; from January 1990 to February 1994, Vice President with
Prudential Real Estate Investors (strategic planning and business development
for institutional real estate investment management services); from September
1985 to January 1990, a management consultant with McKinsey & Company; prior
thereto, a financial analyst with Morgan Stanley Realty Inc. Ms. Hefele is
registered with the National Association of Securities Dealers, Inc.
GARRETT C. HOUSE--31--Vice President of Capital Markets Group since September
1996, where he provides capital markets services for affiliates of Security
Capital Group; from May 1994 to August 1996 he assisted with financing
activities of affiliates of Security Capital Group and, prior thereto, Mr.
House was a member of the Management Development Program from May 1993 to May
1994; in May 1993, Mr. House obtained his M.B.A from Harvard Graduate School of
Business Administration; from July 1989 to July 1991, Project Manager for
Nansay Corporation in Los Angeles, California; from July 1987 to July 1989,
Analyst with Merrill Lynch Capital Markets in New York.
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BRADFORD W. HOWE--32--Vice President of Capital Markets Group since January
1996, where he provides capital markets services for affiliates of Security
Capital Group and where he has been an associate from December 1994 to January
1996; from March 1993 to December 1994, Assistant Vice President in the real
estate investment banking group of Kidder Peabody & Co., Incorporated; from
June 1992 to March 1993, Mr. Howe was a real estate consultant at Coopers &
Lybrand. Mr. Howe is registered with the National Association of Securities
Dealers, Inc.
JAMES H. POLK, III--54--Managing Director of Capital Markets Group since
August 1992, where he provides capital markets services for affiliates of
Security Capital Group; Trustee of Security Capital Pacific Trust. Mr. Polk
has been affiliated with the REIT Manager since March 1991; prior thereto, he
was President and Chief Executive Officer of Security Capital Pacific Trust
for sixteen years. Mr. Polk is registered with the National Association of
Securities Dealers, Inc. and is a past President and Trustee of the National
Association of Real Estate Investment Trusts, Inc.
DONALD E. SUTER--40--Senior Vice President of Capital Markets Group since
September 1996, where he provides capital markets services for affiliates of
Security Capital Group; from October 1995 to April 1996, President and Chief
Operating Officer for Cullinan Properties Limited in Peoria, Illinois; from
July 1984 to October 1995 Mr. Suter was with LaSalle Partners in Chicago,
Illinois where his last position held was Senior Vice President, Corporate
Finance Group.
EMPLOYEES
SCI currently has no employees. The REIT Manager, whose sole activity is
advising SCI, together with Client Services, manages the day-to-day operations
of SCI. The REIT Manager and its affiliates have assembled a team of over 280
professionals, collectively possessing extensive experience in industrial real
estate. The majority of these persons are employed directly by and focus
entirely on the services provided by the REIT Manager and Client Services,
with the balance providing centralized research, senior investment committee,
capital markets, legal and accounting services.
COMPETITION
In general, there are numerous other industrial properties located in close
proximity to each of SCI's properties. The amount of rentable space available
in any target market city could have a material effect on SCI's capacity to
rent space and on the rents charged. In addition, in many of SCI's submarkets,
institutional investors and owners and developers of industrial facilities
compete for the acquisition, development and leasing of industrial space. Many
of these persons have substantial resources and experience.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and regulations, a
current or previous owner, developer or operator of real estate may be liable
for the costs of removal or remediation of certain hazardous or toxic
substances at, on, under or in its property. The costs of removal or
remediation of such substances could be substantial. Such laws often impose
such liability without regard to whether the owner or operator knew of, or was
responsible for, the release or presence of such hazardous substances. The
presence of such substances may adversely affect the owner's ability to sell
such real estate or to borrow using such real estate as collateral. SCI has
not been notified by any governmental authority of any non-compliance,
liability or other claim in connection with any of the properties owned or
being acquired at December 31, 1996, and SCI is not aware of any environmental
condition with respect to any of its properties that is likely to be material.
SCI has subjected each of its properties to a Phase I environmental assessment
(which does not involve invasive procedures such as soil sampling or ground
water analysis) by independent consultants. While some of these assessments
have led to further investigation and sampling, none of the environmental
assessments has revealed, nor is SCI aware of, any environmental liability
(including asbestos-related liability) that the REIT Manager believes would
have a material adverse effect on SCI's business, financial condition or
results of operations. No assurance can be given, however, that these
assessments and investigations reveal all potential environmental liabilities,
that no prior owner or operator created any material environmental condition
not known to SCI or the independent consultants or that future uses or
conditions (including, without limitation, customer actions or changes in
applicable environmental laws and regulations) will not result in unreimbursed
costs relating to environmental liabilities.
24
INSURANCE COVERAGE
SCI currently carries comprehensive liability, fire, flood, earthquake,
extended coverage and rental loss insurance with respect to the properties
with policy specifications and insured limits customarily carried for similar
properties; however, an uninsured loss could result in loss of capital
investment and anticipated profits.
EXECUTIVE OFFICERS
All executive functions of SCI are performed by the REIT Manager. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations--REIT Management Agreement." The executive officers of the REIT
Manager are:
NAME AGE TITLE
---- --- -----
K. Dane Brooksher............ 58 Co-Chairman and Chief Operating Officer
Thomas G. Wattles............ 45 Co-Chairman and Chief Investment Officer
Irving F. Lyons, III......... 47 Managing Director
Jeffrey H. Schwartz.......... 37 Managing Director
Robert J. Watson............. 47 Managing Director
Ned K. Anderson.............. 49 Senior Vice President
Kent W. Johnson.............. 43 Senior Vice President
M. Gordon Keiser............. 52 Senior Vice President
Jeffrey A. Klopf............. 48 Senior Vice President and Secretary
Donald W. Madsen............. 53 Senior Vice President
Steven K. Meyer.............. 48 Senior Vice President
Walter C. Rakowich........... 39 Senior Vice President
John W. Seiple............... 38 Senior Vice President
See "--The REIT Manager--Officers of SCI and Directors and Officers of the
REIT Manager and Relevant Affiliates" for descriptions of the REIT Manager's
executive officers.
ITEM 2. PROPERTIES
The following tables set forth certain information as of December 31, 1996
with respect to SCI's properties owned as of December 31, 1996. No individual
property, or group of properties operated as a single business unit, amounts
to 10% or more of SCI's consolidated total assets at December 31, 1996 nor
does the gross revenue from any such properties amount to 10% or more of SCI's
consolidated gross revenues for the fiscal year ended December 31, 1996.
SECURITY CAPITAL INDUSTRIAL TRUST
SCHEDULE OF PROPERTIES
RENTABLE
PERCENTAGE SQUARE ACCUMULATED LONG-TERM
YEAR ACQUIRED NO. OF OCCUPANCY FOOTAGE SCI INVESTMENT DEPRECIATION MORTGAGE
OR COMPLETED BLDGS. (1) (2) (1) (1) DEBT
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