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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997.
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 (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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
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Common Shares of Beneficial Interest, par value New York Stock Exchange
$0.01 per share
Series A Cumulative Redeemable Preferred Shares New York Stock Exchange
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:
None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check 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 March 12, 1998, the
aggregate market value of the voting shares held by non-affiliates of the
registrant was $1,657,026,451.
At March 12, 1998, there were outstanding approximately 117,388,358 common
shares of beneficial interest of the registrant.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the 1998 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.................................. 3
SCI International Operating System(TM)............................. 3
Investment Strategy................................................ 7
Customers.......................................................... 9
Leases............................................................. 11
Property Management................................................ 11
Capital Markets.................................................... 12
SCI Management..................................................... 13
Officers and Trustees of SCI....................................... 15
Employees.......................................................... 25
Competition........................................................ 26
Environmental Matters.............................................. 26
Insurance Coverage................................................. 26
2. Properties......................................................... 26
The Partnerships................................................... 41
SCI Development Services........................................... 44
Unconsolidated Subsidiaries........................................ 44
3. Legal Proceedings.................................................. 45
4. Submission of Matters to a Vote of Security Holders................ 45
PART II
5. Market for the Registrant's Common Equity and Related Stockholder
Matters............................................................ 46
Dividend Reinvestment and Share Purchase Plan...................... 48
6. Selected Financial Data............................................ 49
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 50
Overview........................................................... 50
Results of Operations.............................................. 52
Environmental Matters.............................................. 57
Liquidity and Capital Resources.................................... 57
Funds from Operations.............................................. 61
7A. Quantitative and Qualitative Disclosure About Market Risks......... 62
8. Financial Statements and Supplementary Data........................ 62
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure Matters....................................... 62
PART III
10. Directors and Executive Officers of the Registrant................. 63
11. Executive Compensation............................................. 63
12. Security Ownership of Certain Beneficial Owners and Management..... 63
13. Certain Relationships and Related Transactions..................... 63
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 63
PART I
ITEM 1. BUSINESS
SECURITY CAPITAL INDUSTRIAL TRUST
Security Capital Industrial Trust ("SCI") is the largest publicly held,
U.S.-based global owner and operator of distribution properties based on
equity market capitalization. SCI is an international operating company
focused exclusively on meeting the distribution space needs of international,
national, regional and local industrial real estate users through the SCI
International Operating System(TM). SCI distinguishes itself from its
competition by being the only entity that combines all of the following:
1. An international operating strategy dedicated to providing services to
the 1,000 largest users of distribution facilities worldwide;
2. 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 international scope and expertise with
strong local presence;
3. A disciplined investment strategy based on proprietary research that
identifies high growth markets with sustainable demand for SCI's
distribution facilities;
4. Over 275 professionals in 37 offices in the United States, Mexico and
Europe which SCI believes comprise the deepest and most experienced
management team in industrial real estate; and
5. Over 2,500 customers globally.
The cornerstone of SCI's operating strategy is the SCI International
Operating System(TM) comprised of the Market Services Group, the Global
Services Group and the Global Development Group that utilizes SCI's
international network of corporate distribution facilities to meet customer
expansion and reconfiguration needs globally.
SCI engages in the acquisition, development, marketing, operation and long-
term ownership of distribution facilities. SCI has the resources to provide a
full array of financial, development and operating services, including: (i)
expertise in market research, (ii) building and land acquisition and due
diligence, (iii) master-planned distribution park design and building
construction, (iv) marketing, asset and leasing management and (v) capital
markets and financial operations.
SCI deploys capital in markets with excellent long-term growth prospects and
in markets where SCI can achieve a strong market position through the
acquisition and development of flexible facilities for warehousing,
distribution and light manufacturing uses. SCI expanded its operations into
Mexico and Europe in the first half of 1997 to meet the needs of its targeted
national and international customers as they expand and reconfigure their
distribution facility requirements globally. With six target market cities
identified in Mexico and 20 identified in Europe, SCI believes that there are
significant growth opportunities internationally. SCI is building its
organization in both Mexico and Europe as part of the SCI International
Operating System(TM).
SCI's highlights include:
. As of January 31, 1998, SCI was servicing over 2,500 customers in the
United States, Mexico and Europe, including 336 global customers of which
209 were multiple market customers, and refrigerated warehousing in which
SCI has invested had over 975 customers in the United States and 4,750
customers in eight countries in Europe.
. As of January 31, 1998, SCI's distribution portfolio contained 92.5
million square feet in 1,019 buildings and had an additional 9.3 million
square feet under development in 63 buildings for a total of 101.8
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million square feet in 1,082 buildings. The total aggregate cost of the
101.8 million square feet (including properties under development at total
budgeted cost) is $3.172 billion (an average of $31.16 per square foot).
. As of January 31, 1998, SCI's stabilized portfolio of 86.6 million square
feet was 96.35% leased (95.01% occupied), and the total operating
portfolio of 92.5 million square feet, which includes 5.9 million
pre-stabilized square feet, was 93.60% leased (91.48% occupied).
. During 1997, a total of 28.1 million square feet of distribution space
was leased in 1,017 transactions through the operation of the SCI
International Operating System(TM). During 1997, rental rates on new and
renewed leases on previously leased distribution space for the operating
portfolio increased an average of 19.2%.
. In 1997, SCI acquired 6.35 million square feet of distribution space in
the United States and internationally for a total expected investment of
$207.84 million in 28 transactions, for an average cost of $32.73 per
square foot. In addition, during 1997, SCI invested $85.6 million in
U.S.-based refrigerated warehousing totaling 78.6 million cubic feet
either operating or under development, and in January 1998, invested in
European refrigerated warehousing totaling 180 million cubic feet with a
net cost of $395.0 million.
. During 1997, SCI commenced development of 9.7 million square feet of
distribution space in 31 target market cities in the United States,
Mexico and Europe with a total expected investment of $370.3 million.
Inventory building starts totaled 6.3 million square feet in 1997 and
corporate distribution facility starts totaled 3.4 million square feet
during 1997. In addition, as of January 31, 1998, SCI was in active
negotiations for 6.3 million square feet of additional corporate
distribution facility projects on a global basis. Since inception, SCI
has completed developments totaling 26.0 million square feet (excluding
dispositions of 1.6 million square feet), which were 86.93% leased and
89.50% leased or committed as of January 31, 1998.
. As of January 31, 1998, SCI owned 1,634 acres of development land, and
had fixed price options and rights of first refusal to acquire 505 acres
and 36 acres, respectively, which in the aggregate will permit the
development of approximately 37.2 million square feet of additional
distribution space in 32 target market cities. Also, as of January 31,
1998, SCI had an additional 656 acres under letters of intent or
contingent contracts, subject to the completion of due diligence, which,
if acquired, will permit the development of approximately 12.0 million
square feet of additional distribution space. Of the total acres owned or
controlled through options, rights of first refusal, letters of intent or
contingent contracts at January 31, 1998, 2,567 acres were in the United
States, 231 acres were in Mexico, and 33 acres were in Europe.
. During the third quarter of 1997, SCI became an internally managed REIT
when it acquired the operations of Security Capital Industrial
Incorporated (the "REIT Manager") and SCI Client Services Incorporated
(the "Property Manager") owned by Security Capital Group Incorporated
("Security Capital") in exchange for 3,692,023 Common Shares of
Beneficial Interest, par value $0.01 per share (the "Common Shares") (the
"Merger"). See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview--Consummation of Merger
Transaction."
. Security Capital, SCI's largest shareholder, which owned approximately
42.5% of SCI's Common Shares as of March 12, 1998, 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. On a fully
diluted basis, Security Capital owned 36.8% of SCI's Common Shares as of
March 12, 1998.
. SCI's long-term debt as a percentage of long-term book capitalization
(including accumulated depreciation) was 28.0% at December 31, 1997. At
March 12, 1998, SCI had $275.0 million of borrowings outstanding under
its $350 million unsecured line of credit facility and had $200.0 million
due to NationsBank of Texas, N.A. ("NationsBank") on an unsecured bridge
loan due March 31, 1998.
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SCI GROWTH AND OPERATING STRATEGY
Based on extensive research, SCI was formed in June 1991 to take advantage
of two strategic opportunities: first, the opportunity to build a distribution
and light manufacturing asset base at prices significantly below replacement
cost and a land inventory at attractive prices; 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 facility requirements on a national, regional and
local basis. SCI expanded its operations into Mexico and Europe in the first
half of 1997 to meet the needs of its targeted national and international
customers as they expand and reconfigure their distribution facility
requirements globally. With six target market cities identified in Mexico and
20 identified in Europe, SCI believes that there are significant growth
opportunities internationally. SCI is building its organization in both Mexico
and Europe as part of the SCI International Operating System(TM). Consistent
with SCI's objective of expanding the services platform for its targeted
customer base, in 1997 the SCI International Operating System(TM) expanded to
serve the refrigerated warehousing needs of its customers where it is
efficiently establishing an international refrigerated warehousing network,
positioning SCI to become the global leader in this rapidly consolidating
industry. SCI's objective is to achieve long-term sustainable growth in cash
flow through (i) 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 flexible facilities designed for
warehousing, distribution and light manufacturing uses; (ii) the SCI
International Operating System(TM) comprised of the Market Services Group, the
Global Services Group and the Global Development Group as described below; and
(iii) ownership or control of a significant inventory of land to enable SCI to
take advantage of market opportunities and accommodate expansion or corporate
distribution facility 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 of 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 distribution 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.
SCI INTERNATIONAL OPERATING SYSTEM(TM)
The SCI International Operating System(TM) is designed to provide
substantial benefits to existing and prospective SCI customers, including:
Relocation Capability. User requirements can change frequently. SCI's
presence in 37 U.S. target markets and seven of its 26 targeted international
markets for distribution space permits SCI to accommodate the needs of its
customers by moving an existing customer within a market or between markets
both nationally and globally.
Expansion Capability. SCI, through its development program, land inventory
and existing facilities, works with existing and prospective 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 corporate distribution facility for such customer.
Centrally Coordinated Program. SCI provides a single point of contact for
multi-location global users of distribution facilities through Global Services
Group professionals who are charged with building long-term customer
relationships and ensuring that all SCI services and products are consistent
in quality. SCI's experience
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to date suggests that many major corporate customers prefer working with one
firm to meet their distribution facility requirements.
Corporate Distribution Facilities Services. SCI's team of development
professionals are focused on building facilities that meet SCI customers'
needs and that incorporate the latest technology with respect to building
design and building systems. SCI has developed consistent standards and
procedures that it strictly adheres to in the development of all of its
facilities throughout the United States and internationally.
The SCI International Operating System(TM) provides an exceptional level of
customer service including development on an international, national, regional
and local basis through its 210 professionals, and is a key component of SCI's
growth and operating strategy. The SCI International Operating System(TM) is
comprised of the three groups described below: the Market Services Group, the
Global Services Group and the Global Development Group.
Market Services Group. This group is comprised of 25 market officers
("Market Officers"), a managing director in Europe, four regional directors
and 120 property management and leasing professionals. Market Officers have
extensive experience (with an average of over 14 years) in marketing
distribution space 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
their team of 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 Global Services Group in identifying SCI customers
with international or national, multi-market requirements. SCI believes that
the Market Officers' access to national and international SCI resources
provides significant stature and profile and improves their ability to serve
customers in the local market.
On a regular basis, each Market Officer communicates with senior management
for guidance on lease terms, as well as for international, national and local
marketing assistance, and is able to take advantage of SCI's fully integrated
international 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 corporate
distribution facilities services, acquisition and leasing opportunities in
their target market cities.
Global Services Group. The Global Services Group, comprised of 10
professionals, is dedicated to providing service to the largest 1,000 users of
distribution space and is focused on making SCI the preferred provider of
distribution space to these companies. The Global Services Group is
headquartered in Denver and Amsterdam and has regional offices in Atlanta,
Chicago, Houston, the Los Angeles metropolitan area and the New York City
metropolitan area. A key function of this group is identifying companies whose
reconfiguration and expansion of their distribution networks will create
multi-market and/or corporate distribution facilities services opportunities
and coordinating SCI services to those companies with the respective Market
Officers and the Global Development Group. Global Services Group professionals
build long-term relationships with SCI international and national customers
and provide a single point of contact to simplify and streamline the execution
of such customers' international and national distribution space plans. An
ancillary benefit is research insight into international and national
distribution and logistics trends gained through continuous interaction with
Global Services Group clients.
Global Development Group. The Global Development Group, comprised of 50
professionals, focuses substantial research and development efforts on
creating industry-leading master-planned distribution parks and buildings. Its
members have extensive experience in development and construction of these
facilities.
The Global 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
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corporate distribution facility specialists and project managers (with an
average experience level of over 16 years) operate regionally to better serve
their markets. The project managers supervise each project with continual
oversight from SCI 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 Global Development Group enhance
the effectiveness of the Global Services Group and give the Market Officers a
distinct competitive advantage for development and corporate distribution
facilities services opportunities in their respective markets.
The SCI International Operating System(TM) with its customer focus and
service level, single point of contact and distribution solutions on a global
basis, offers significant potential in building relationships, as well as
additional business, with its global customers in a rapidly consolidating
industry.
FOCUS ON RESEARCH-BASED GROWTH-ORIENTED MARKETS AND CUSTOMER DRIVEN EXPANSION
Based on its proprietary research, SCI focuses on selected distribution
markets in the United States, Mexico and Europe where supply and demand
factors permit high occupancies at increasing rental rates. Management
believes the research indicates that demand for distribution and light
manufacturing space in SCI's target markets 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, and quality and cost
of labor. In addition, SCI believes that the short construction cycles
targeted for SCI's distribution facilities, 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 distribution investment markets: export/import
growth markets, low cost manufacturing markets and growth distribution
markets. As a result of customer demand, SCI expanded its operations into
Mexico and Europe in the first half of 1997 to meet the needs of its targeted
national and international customers as they expand and reconfigure their
distribution facility requirements globally. SCI believes that the investment
opportunities in Mexico and Europe provide significant growth opportunities
for SCI as it expands its service platform.
Additionally, during 1997, SCI expanded into refrigerated warehousing
through an unconsolidated subsidiary's investment in CS Integrated LLC
("CSI"). As of December 31, 1997, SCI's unconsolidated subsidiary owned 77% of
CSI which operated or had under development 78.6 million cubic feet of
refrigerated warehousing facilities in the United States, and SCI's investment
in and advances to its unconsolidated subsidiary totaled $85.6 million. In
January 1998, an unconsolidated subsidiary of SCI acquired Frigoscandia AB
("Frigoscandia"), for a net cost of $395 million. SCI believes that
Frigoscandia is Europe's largest owner of refrigerated warehousing facilities
with 90 facilities in eight European countries totalling over 180 million
cubic feet and over 4,750 customers. SCI believes that the capital-intensive
nature of refrigerated warehousing creates significant barriers to entry,
limiting new competitors. As a result of SCI's ongoing research into key
logistics trends, SCI believes that refrigerated warehousing represents an
important investment opportunity which should create significant shareholder
value. See "Item 2. Properties--Unconsolidated Subsidiaries."
Export/Import Growth Markets. The dollar volume of U.S. exports increased
from $250.2 billion in 1987 to $678.3 billion in 1997, an increase of 171.1%,
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 $877.3 billion
for 1997, as reported by the U.S. Census Bureau, Foreign Trade Division.
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
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volume of exports from the United States to these three international trade
areas grew by approximately $142.2 billion between December 31, 1987 and
December 31, 1997, as reported by the U.S. Census Bureau, Foreign Trade
Division. In line with SCI's strategy to target key ports, SCI entered both
the Rotterdam and Amsterdam markets during 1997. Rotterdam is the largest port
in the world and, in addition to its ability to accommodate all sizes of
ocean-going vessels, its success is linked to its comprehensive infrastructure
that facilitates distribution throughout Europe by air, rail, truck and
waterways. Schiphol Airport in Amsterdam is the thirteenth largest airport in
the world based on passenger and cargo volume. 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 SCI's target market cities in Mexico
and on those 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 United States and
Mexico exceeded $71.3 billion for the twelve month period ended December 31,
1997, 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 second largest trading partner with the United States for the twelve-
month period ended December 31, 1997. 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, intermodal facilities and/or 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 within a 500-mile radius. Examples of these
markets include Amsterdam and Rotterdam in Europe, and Seattle, Dallas,
Columbus and Indianapolis in the United States.
MARKET PRESENCE
In each target market city for which SCI has not yet achieved critical mass
(or in selected submarkets in large distribution markets such as Dallas and
Atlanta), 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 existing inventory of distribution space or by developing new
facilities. 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 27 target markets in the United States: 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, Oklahoma City, Orlando, Phoenix, Portland, Reno,
Salt Lake City, San Antonio, South Bay Area (San Francisco), Tampa and
Washington, D.C./Baltimore.
Maximum Market Exposure. Size and market presence provides visibility and
access to and knowledge of potential leasing and corporate distribution
facilities services transactions. The industrial brokerage community and
corporate users are often 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.
6
INVESTMENT STRATEGY
SCI's investment strategy is to build an international distribution network
in its target markets at prices significantly below replacement cost and to
build an inventory of land at attractive prices to support its corporate
distribution facilities services and master-planned distribution park
development programs. SCI's investment activities focus on developing and
acquiring distribution facilities with prospects for long-term cash flow
growth.
INVESTMENT ANALYSIS
Prospective 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 distribution facilities which SCI has acquired, stabilized operations
generally have been achieved six to 12 months after acquisition. The
underwriting criteria for development projects allow 12 months from shell
completion for achievement of stabilization; however, on average stabilization
has been achieved in less than 12 months. In 1997, for all development
projects that reached stabilization, the average time from shell completion to
stabilization was 7.1 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 95.01% for stabilized properties owned as of January 31, 1998.
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, or that acquisitions and developments will
be available on favorable terms in the future.
INVESTMENT IN GENERIC DISTRIBUTION FACILITIES
SCI has a strong preference toward facilities which are 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 distribution space will generate superior cash
flow with low on-going capital needs. In addition, SCI believes it 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 markets 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 50 professionals comprising the Global
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 or below market
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 January 31, 1998, SCI owned 1,634 acres of development
land, and had fixed price options and rights of first refusal to acquire 505
acres and 36 acres, respectively, which in the aggregate will permit the
development of approximately 37.2 million square feet of additional
distribution space in 32 target market cities. Also, as of January 31, 1998,
SCI had an additional 656 acres under letters of intent or contingent
contracts, subject to the completion of due diligence, which, if acquired,
will permit the development of approximately 12 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.
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 service 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 January 31, 1998, SCI completed or commenced
development of 24.0 million square feet of inventory buildings with a total
expected investment of $858.8 million, including 200,000 square feet disposed
of to date, in 33 target market cities in the United States, Europe and
Mexico.
Corporate Distribution Facilities Services. Building facilities for
customers enhances SCI's ability to meet customers' needs. SCI's corporate
distribution facility 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
January 31, 1998, SCI completed or commenced development of corporate
distribution facilities totaling 11.6 million square feet with a total
expected investment of $410.8 million, including 1.4 million square feet that
have been disposed of through January 1998. In addition, as of January 31,
1998, SCI was in active negotiations for 6.3 million square feet of additional
corporate distribution facility projects globally.
Acquisition of Distribution Space. SCI's acquisition activities focus on
distribution space because of the expected predictability and stability of the
cash flow from such facilities. 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.
The Acquisitions and Due Diligence Group, comprised of 19 professionals, is
responsible for property and land acquisitions and related due diligence
globally. SCI's 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 25 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.
8
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 27 target
market cities in the United States as of January 31, 1998.
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, 1997, SCI
completed 150 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 January 31, 1998, the buildings in SCI's operating
portfolio of 92.5 million square feet contained 9.9% office finish.
Distribution. SCI's distribution space is adaptable for both distribution
and light manufacturing or assembly uses. SCI's operating portfolio included
98.9% of such product at January 31, 1998 based on square feet. The following
characteristics generally define the 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............... 28,687 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 1.1% of the square feet in SCI's operating
portfolio as of January 31, 1998.
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 international, national, regional and local distribution space
users who have potential for growth in demand for space.
9
SCI had over 2,500 customers (2,944 customer leases) in 84.5 million square
feet of occupied space and 336 global customers of which 209 were multiple
market customers at January 31, 1998. Certain square footage characteristics
of these leases, representing a mix of local, regional and global customers,
are summarized as follows:
NUMBER PERCENTAGE
OF OF TOTAL
SQUARE FOOTAGE LEASED LEASES SQUARE FOOTAGE
--------------------- ------ --------------
0--10,000............................................ 1,107 6.90%
10,001--25,000....................................... 903 17.70
25,001--50,000....................................... 499 20.86
50,001--100,000...................................... 280 23.66
100,001 and above.................................... 155 30.88
----- ------
Total................................................ 2,944 100.00%
===== ======
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 1.0% of SCI's 1997 rental income (on an annualized basis), and the
annualized base rent for SCI's 20 largest customers accounted for less than
12.4% of SCI's 1997 rental income (on an annualized basis).
As of January 31, 1998, SCI's 336 global customers leased 38.8% of SCI's
operating distribution space portfolio of 92.5 million square feet, as
compared to 299 global customers that leased 35.6% of SCI's operating
distribution space portfolio of 81.6 million square feet at January 31, 1997.
DIVERSIFIED CUSTOMER LEASE EXPIRATIONS AND RENEWALS
Between January 31, 1998 and December 31, 1998, leases representing
approximately 18.7% of the leased square feet in SCI's portfolio will expire,
creating opportunities for SCI to increase rents upon renewal or replacement
of those leases. The following table shows for SCI's properties as of January
31, 1998: (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 SQUARE PERCENTAGE OF ANNUAL PERCENTAGE OF
OF LEASES FOOTAGE TOTAL SQUARE BASE RENT ANNUAL BASE
EXPIRING(1) EXPIRING FOOTAGE EXPIRING(2) RENT EXPIRING(2)
----------- ---------- ------------- ------------ ---------------
1998.................... 734 15,760,647(3) 18.66% $ 54,090,612 16.38%
1999.................... 672 14,878,338 17.62 53,277,156 16.14
2000.................... 630 15,215,262 18.02 58,740,180 17.79
2001.................... 344 10,794,076 12.78 44,555,268 13.50
2002.................... 356 13,055,779 15.46 53,883,048 16.32
2003.................... 55 4,199,545 4.97 16,772,424 5.08
2004.................... 42 2,155,828 2.55 8,641,224 2.62
2005.................... 33 1,905,189 2.26 8,842,380 2.68
2006.................... 31 2,669,764 3.16 11,875,908 3.60
2007.................... 38 2,885,908 3.42 14,286,618 4.33
Thereafter.............. 9 934,045 1.10 5,136,636 1.56
----- ---------- ------ ------------ ------
Total............... 2,944 84,454,381 100.00% $330,101,454 100.00%
===== ========== ====== ============ ======
- --------
(1) Assumes customers do not exercise renewal options.
(2) Excludes all expenses and common area maintenance charges paid or
reimbursable by customers.
(3) Includes 1,186,994 square feet of space leased on a month-to-month basis
as of January 31, 1998.
10
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, and acquired
operating properties from unaffiliated third parties.
STABILIZED
OPERATING PORTFOLIO PORTFOLIO (1)
------------------------------- --------------------
NUMBER OF SQUARE SQUARE
PROPERTIES FOOTAGE OCCUPANCY FOOTAGE OCCUPANCY
---------- ---------- --------- ---------- ---------
December 31, 1997(2)....... 1,005 90,842,484 92.02% 85,111,069 95.45%
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% 32,409,549 98.36%
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%
- --------
(1) See definition of Stabilized in "--Investment Strategy--Investment
Analysis."
(2) Operating properties at December 31, 1997 include recently completed
development properties in initial lease-up (2.9 million square feet
completed in the fourth quarter of 1997) which impacts the overall
occupancy percentage at December 31, 1997.
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 1992 through the end of 1997. 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 this information.
LEASES
Net leases, modified gross leases and gross leases as of December 31, 1997
represented 55.85%, 41.54% and 2.61%, 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
specified amounts and operating expenses are passed through to customers.
Under gross leases, the landlord pays all real estate taxes, insurance costs
and operating expenses.
PROPERTY MANAGEMENT
SCI provides active and effective local management in order to increase cash
flow and to enhance the long-term economic performance of its properties. In
order to provide a higher level of service to its customers, SCI initiated
direct property management services in January 1994 through the Property
Manager, an affiliate of Security Capital, that provided property management
services exclusively for SCI properties. Effective September 9, 1997, SCI
acquired the Property Manager (see "--SCI Management" below) and merged it
into a subsidiary of SCI. SCI's property management group seeks to provide
exceptional customer service and attention to customer needs. The group
develops and implements proprietary operating, recruiting and training systems
to achieve consistent levels of performance and professionalism in all target
market cities it manages. This group has substantially improved the occupancy
and rental income for under-leased properties acquired by SCI.
As of January 31, 1998, SCI's property management group provided services in
37 target market cities in the United States, Mexico, and Europe and was
actively managing 90.0 million square feet (97.28%) of SCI's operating
portfolio of 92.5 million square feet.
11
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, SCI utilizes Security Capital Markets Group
Incorporated ("Capital Markets Group"), a registered broker-dealer subsidiary
of Security Capital. 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 at a price of $10.00 per Common Share;
. In March 1993, SCI received commitments for $200.0 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;
. 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%;
12
. On February 4, 1997, SCI raised $99.1 million of net proceeds from an
underwritten public offering of fully amortizing, medium-term unsecured
debt securities under its medium-term note program established in
November 1996;
. 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%;
. On July 11, 1997, SCI raised $98.7 million of net proceeds from an
underwritten public offering of long-term senior unsecured notes due
2017;
. On August 6, 1997, in connection with the consummation of the Merger, SCI
commenced a rights offering to sell 4,970,352 Common Shares at $21.00 per
share. On September 9, 1997, SCI offered an additional 994,070 Common
Shares at $21.00 per share to third party subscribers of the rights
offering. Net proceeds from these offerings totaled $124.9 million; and
. On December 22, 1997, SCI raised net proceeds of $200.0 million from a
private placement of 8,416,667 Common Shares at a price of $24.00 per
share. SCI paid Capital Markets Group $2.0 million for their services in
connection with the offering.
. On March 12, 1998, SCI commenced an underwritten public offering of
3,750,000 Common Shares with net proceeds to SCI of $24.045 per share.
The offering provides for a 30-day over-allotment option of up to 562,500
Common Shares. Net proceeds to SCI would be $90.2 million or up to $103.7
million if the over-allotment option is exercised in full. The offering
is expected to close on March 18, 1998.
SCI is contemplating making an offering (the "Contemplated Preferred Share
Offering") of approximately $125 million of preferred shares having terms
substantially similar to SCI's Series C Preferred Shares. There can be no
assurances, however, that the Contemplated Preferred Share Offering will be
consummated on these terms.
SCI has a $350.0 million unsecured revolving line of credit agreement with
NationsBank as agent for a bank group. Borrowings bear interest at SCI's
option, at either an annual rate equal to the lesser of (a) the greater of the
federal funds rate plus 0.5% and the prime rate, or (b) LIBOR plus .95%, based
upon SCI's current senior debt ratings. Additionally, there is a commitment
fee ranging from .125% to .20% per annum of the unused line of credit balance.
The line is scheduled to mature in May 1999 and may be extended for an
additional year with the approval of NationsBank and the other participating
lenders; if not extended, at SCI's election, the line will either (a) convert
to a three year term note, or (b) continue on a revolving basis with the
remaining one year maturity. All debt incurrences are subject to a covenant
that SCI maintain a debt to tangible net worth ratio of not greater than 1 to
1. Additionally, SCI is required to maintain an adjusted net worth (as
defined) of at least $1.25 billion, to maintain interest payment coverage of
not less than 2 to 1, and to maintain a fixed charge coverage ratio (as
defined) of not less than 1.75 to 1. As of December 31, 1997, SCI was in
compliance with all covenants contained in the line of credit, and as of March
12, 1998, $275.0 of borrowings were outstanding on the line of credit. On
October 1, 1997, SCI extended its $15.0 million short-term discretionary
unsecured line of credit with NationsBank through October 1, 1998 and
increased the amount to $25.0 million. The rate of interest and the maturity
date of each advance will be determined by agreement between SCI and
NationsBank at the time of each advance. There were no borrowings outstanding
on this credit line as of March 12, 1998. Additionally, on January 16, 1998,
SCI borrowed $200.0 million from NationsBank in the form of an unsecured
bridge loan due March 31, 1998.
SCI MANAGEMENT
SCI's success depends upon management's ability to provide strategic and
day-to-day management, research, investment analysis, acquisition and due
diligence, development, marketing, asset management, capital markets, asset
disposition, management information systems support and legal and accounting
services. The majority of these services are provided internally by SCI's
management, while certain other services are provided by Security Capital
pursuant to an administrative services agreement ("Administrative Services
Agreement") as discussed below under "--Administrative Services Agreement."
Internalization of Management and Consummation of Merger Transaction. During
the third quarter of 1997, SCI became an internally managed REIT when it
acquired the operations of the REIT Manager and the
13
Property Manager owned by Security Capital in exchange for 3,692,023 SCI
Common Shares (the "Merger). Following the Merger, SCI became an internally
managed REIT and personnel employed by the REIT Manager and the Property
Manager became employees of Security Capital Industrial Management
Incorporated, a wholly owned subsidiary of SCI ("Security Capital Industrial
Management"). SCI believes the internalization of management will have a
positive impact on earnings growth as the company continues to grow. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview--Consummation of Merger Transaction."
Administrative Services Agreement. Upon closing of the Merger, SCI entered
into the Administrative Services Agreement with Security Capital for services
which include, but are not limited to, payroll and human resources, cash
management, accounts payable, MIS support and other computer services,
research, investor relations and insurance, legal and tax administration.
These services are provided in exchange for a fee equal to Security Capital's
direct cost of providing the service plus an overhead factor of 20%, subject
to a maximum of approximately $2.0 million during 1997 and $5.1 million for
1998. In 1997, $1.1 million was paid to Security Capital under the
Administrative Services Agreement. The Administrative Services Agreement,
which expires on December 31, 1998, provides for automatic renewals of
consecutive one-year terms, subject to approval by a majority of the
independent Trustees.
SCI believes that the quality of management should be assessed in light of
the following factors:
Management Depth. 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. See "--Officers
and Trustees of SCI."
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. SCI's management has demonstrated its
strategic vision by focusing on building an international distribution network
at prices below replacement cost and a land inventory at attractive prices.
SCI also focuses 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. In addition, SCI differentiated itself from its competition through
the SCI International Operating System(TM), as the first international
operating company that was able to address and service a corporate customer's
distribution space requirements on an international, national, regional and
local basis. 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. As part of the Administrative Services Agreement, Security Capital
Real Estate Research Group Incorporated ("RERG"), an affiliate of Security
Capital, devotes substantial time to research, on a submarket-by-submarket
basis, under the supervision of the Managing Directors of SCI; hence, RERG
supplements SCI's strategic focus and investment program.
Investment Committee Process. SCI believes that internal investment
committees should provide discipline and guidance to the investment activities
of the REIT in order to achieve its investment goals. The eleven members of
SCI's investment committee have a combined 164 years of experience in the real
estate industry. See "--Officers and Trustees of SCI." The internal investment
committee receives detailed written analyses and research, in a standardized
format, from SCI'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 investment committee process is evident from the ability of SCI
to achieve its investment goals. From inception through December 31, 1997, SCI
has generally realized 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. SCI
14
employs 19 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," SCI'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. SCI's 50 development
professionals have substantial development experience, as described in "--
Officers and Trustees of SCI." SCI has engaged in substantial development of
distribution space at attractive yields and believes that development will
provide growth when the market for acquisitions becomes less favorable. From
inception through January 31, 1998, SCI has commenced or completed development
of 35.6 million square feet of distribution space with a total expected
investment of $1.270 billion, including 1.6 million square feet that has been
disposed of through January 31, 1998. SCI has commenced development of 78
master-planned parks in 33 target market cities in the United States, Mexico
and Europe. As of January 31, 1998, SCI owned 1,634 acres of additional land
and had fixed price options and rights of first refusal to acquire 505 acres
and 36 acres, respectively, which in the aggregate will permit the development
of approximately 37.2 million square feet of additional distribution space in
32 target market cities. Also, as of January 31, 1998, SCI had an additional
656 acres under letters of intent or contingent contracts, subject to
completion of due diligence, which will permit the development of
approximately 12 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, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Funds from Operations," and see
"Item 6. Selected Financial Data," by actively and effectively managing
assets. SCI conceived of and developed the SCI International Operating
System(TM) to effectively operate SCI's business and provide customers with an
exceptional level of coordinated, comprehensive services, including property
management. The management of SCI's distribution facilities is controlled and
effectively administered through the SCI International Operating System(TM).
Capital Markets Capability. SCI believes that management must be able to
effectively raise equity and debt capital in order for SCI to achieve superior
growth through investment. As set forth under "--Capital Markets", Capital
Markets Group, a subsidiary of Security Capital, has successfully assisted in
or arranged funding for SCI's investment program, including SCI's initial
public offering in March 1994 after which SCI commenced trading on the NYSE.
Following the acquisition of the REIT Manager in September 1997 as described
under "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview--Consummation of Merger Transaction," SCI has
the capability in-house to raise debt and equity capital or may use the
services of the Capital Markets Group for a fee to arrange such offerings as
in the December 1997 private equity placement described under "--Capital
Markets."
Communications/Shareholder Relations Capability. SCI's success in capital
markets and asset acquisition activities can be enhanced by management's
ability to effectively communicate SCI's strategy and performance to
investors, sellers of property and the financial media. SCI has 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 current administration.
OFFICERS AND TRUSTEES OF SCI
Trustees and Senior Officers of SCI
Members of SCI's investment committee are designated by an asterisk (*).
*K. DANE BROOKSHER--59--Mr. Brooksher was elected as a Trustee in October of
1993 and as Co-Chairman and Chief Operating Officer of SCI in November 1993,
and is Co-Chairman and Chief Operating
15
Officer and a Director of Security Capital Industrial Management since
September 1997. Mr. Brooksher was Co-Chairman and Chief Operating Officer of
the REIT Manager from January 1994 to September 1997, and a Director of the
REIT Manager from November 1993 to September 1997. 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.
*STEPHEN L. FEINBERG--53--Mr. Feinberg was elected as a Trustee in January
1993. Since 1970, he has been Chairman of the Board and Chief Executive
Officer of Dorsar Investment Co., a diversified holding company with interests
in real estate, manufacturing and venture capital. Mr. Feinberg is also a
Director of Security Capital Preferred Growth, Continental Transmission
Corporation (private investment company), Harvill Press Limited and Feinberg
Foundation, Inc. He was formerly Chairman of the Board of St. John's College
and a member of the Board of Visitors and Governors of St. John's College. He
is a former director of Farrar, Strauss and Giroux, Inc. (private publishing
company), Molecular Informatics, Inc., Border Steel Mills, Inc., Springer
Building Materials Corporation, Circle K Corporation, EnerServ Products, Inc.,
and Texas Commerce Bank-First State. Mr. Feinberg's term as Trustee expires in
1999.
DONALD P. JACOBS--70--Mr. Jacobs was elected as a Trustee in February 1996.
Mr. Jacobs has been a member of the J. L. Kellogg Graduate School of
Management of Northwestern University since 1957, and Dean since 1975. Mr.
Jacobs is a member of the Board of Directors of Commonwealth Edison and its
parent company, Unicom, First National Bank of Chicago, Hartmarx Corporation,
Whitman Industries and Unocal Corporation. He was formerly Chairman of the
Public Review Board of Andersen Worldwide. From 1990 to 1992, Mr. Jacobs was
Chairman of the Advisory Committee of the Oversight Board of the Resolution
Trust Corporation for the third region; from 1975 to 1979, Chairman of the
Board of AMTRAK; from 1970 to 1971, Co-Staff Director of the Presidential
Commission on Financial Structure and Regulation; from 1963 to 1964, Senior
Economist for the Banking and Currency Committee of the U.S. House of
Representatives. Mr. Jacobs' term as Trustee expires in 1998.
JOHN T. KELLEY--57--Mr. Kelley has been an Advisory Trustee of SCI since
January 1993. He is also a Trustee of Security Capital Pacific Trust ("PTR"),
a REIT affiliated with Security Capital and Chairman of Pacific Retail Trust
(ownership and development of infill retail properties in the southwestern
United States). From 1987 to 1991, Mr. Kelley was Chairman of the Board of
Kelley-Harris Company, Inc., El Paso, Texas (real estate investment company);
from 1968 to 1987, he was Managing Director, LaSalle Partners Limited,
Chicago, Illinois (corporate real estate services). Mr. Kelley is also a
director of Security Capital Group and a former director of Tri State Media.
*IRVING F. LYONS, III--48--Mr. Lyons was elected as a Trustee in March 1996
and as Co-Chairman and Chief Investment Officer of SCI in March 1997, and as a
Director and Co-Chairman and Chief Investment Officer of Security Capital
Industrial Management since September 1997. From December 1993 to March 1997,
he was Managing Director of SCI; from December 1993 to September 1997, he was
Managing Director of the REIT Manager and a Director of the REIT Manager from
January 1994 to September 1997. 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. Mr. Lyons' term
as Trustee expires in 1998.
*WILLIAM G. MYERS--70--Mr. Myers was elected as a Trustee in January 1995.
He is also a Trustee of PTR, a REIT affiliated with Security Capital. Mr.
Myers is Chief Executive Officer of Ojai Ranch and Investment Company, Inc.,
Santa Barbara, California, which he founded in 1963 (agri-business and other
investments). Mr. Myers serves as a Director of S.E.E. International; the
Library of Congress, James Madison Council; California Historical Society
Foundation; and St. Joseph's Health & Retirement Foundation. He is also a
Director of the Santa Barbara Botanic Garden, Chalone Wine Group and the
Nature Conservancy. Mr. Myers' term as Trustee expires in 2000.
16
JOHN E. ROBSON--67--Mr. Robson was appointed a Trustee as of April 1, 1994.
Since October 1993, Mr. Robson has served as Senior Advisor of BancAmerica
Robertson Stephens, a San Francisco-based investment banking company. From
1989 to 1992, Mr. Robson served as Deputy Secretary of the United States
Treasury. From 1986 to 1989, Mr. Robson was Dean and Professor of Management,
Emory University School of Business Administration. From 1977 to 1985, he
served as President and Chief Executive Officer and as Executive Vice
President of G.D. Searle & Co. (pharmaceutical and consumer products). Mr.
Robson is currently a director of Calgene Inc. (agricultural products),
Northrop Grumman Corporation (aerospace) and Monsanto Company. Mr. Robson's
term as Trustee expires in 2000.
*THOMAS G. WATTLES--46--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 Non-Executive Chairman since March 1997. He has been Non-
Executive Chairman and a Director of Security Capital Industrial Management
since September 1997. Mr. Wattles was Co-Chairman and Chief Investment Officer
of SCI from November 1993 to March 1997, and Managing Director of SCI and the
REIT Manager from January 1993 to November 1993. From November 1993 to
September 1997, he was Co-Chairman and Chief Investment Officer of the REIT
Manager, and a Director of the REIT Manager from June 1991 to September 1997.
Mr. Wattles' term as Trustee expires in 1999.
*WALTER C. RAKOWICH--40--Managing Director of SCI since December 1997 and
Senior Vice President of Security Capital Industrial Management since
September 1997, where he has responsibility for the Mid-Atlantic region. From
November 1994 to December 1997, Mr. Rakowich was Senior Vice President of SCI;
from November 1994 to September 1997, he was Senior Vice President of the REIT
Manager and Vice President of the REIT Manager from July 1994 to November
1994; from October 1993 to June 1994, a consultant to SCI in the area of due
diligence and acquisitions. Prior thereto, 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.
*JEFFREY H. SCHWARTZ--38--Managing Director of SCI since December 1994,
where he has overall responsibility for all European and Asia-Pacific
investment activities and operations. He has been a Director of Security
Capital Global Realty since November 1997 and Managing Director of Security
Capital Industrial Management since September 1997. Mr. Schwartz was Managing
Director and a Director of the REIT Manager from October 1994 to September
1997. 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.
*JOHN W. SEIPLE--39--Managing Director of SCI since December 1997 and Senior
Vice President of Security Capital Industrial Management since September 1997,
where he has responsibility for the Southeast region. From November 1994 to
December 1997, Mr. Seiple was Senior Vice President of SCI; from November 1994
to September 1997, he was Senior Vice President of the REIT Manager, and Vice
President of the REIT Manager from October 1993 to November 1994. Prior
thereto, from January 1992 to June 1993, Senior Vice President.
*ROBERT J. WATSON--48--Managing Director of SCI since January 1993 and
Managing Director and a Director of Security Capital Industrial Management
since September 1997. From November 1992 to September 1997, Mr. Watson was a
Director and Managing Director of the REIT Manager.
Other Officers
ROBERT O. ALTER--38--Vice President of Security Capital Industrial
Management since September 1997, where he is corporate distribution facilities
officer in the Southeast region, and Vice President of SCI since August 1995;
from August 1995 to September 1997, Vice President of the REIT Manager.
GARY E. ANDERSON--32--Vice President of Security Capital Industrial
Management since September 1997, where he is responsible for marketing in
SCI's Mexico target markets and Vice President of SCI since September 1996;
from September 1996 to September 1997, Vice President of the REIT Manager;
from August 1994 to
17
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.
*NED K. ANDERSON--50--Senior Vice President of Security Capital Industrial
Management since September 1997, where he has responsibility for the Pacific
region; previously he had Market Officer responsibilities for the San
Francisco Bay Area, and Senior Vice President of SCI since December 1993; from
January 1994 to September 1997, Senior Vice President of the REIT Manager.
Prior thereto, from 1985 to December 1993, he was a partner at King & Lyons,
where he directed the development, leasing and management of the 250 acre
Bayside Business Park in Fremont. He also helped oversee King & Lyons East Bay
properties, which total 2.5 million square feet of buildings.
GREGORY J. ARNOLD--42--Vice President of Security Capital Industrial
Management since September 1997 where he is a member of the Global Services
Group with responsibilities for SCI's national clients in the northeast
region, and Vice President of SCI since January 1996; from January 1996 to
September 1997, Vice President of the REIT Manager; 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.
GREGORY A. BAUER--36--Vice President of Security Capital Industrial
Management since December 1997 with Project Manager responsibilities for the
Southeast region, and Vice President of SCI; from July 1996 to December 1997,
he was Project Manager for the Southeast region. Prior thereto, from May 1994
to July 1996, he was Project Manager of the Facility Group; and from July 1992
to May 1994, he was Project Manager of Gibbs & Register, Inc.
LISA M. BENNETT--34--Vice President of Security Capital Industrial
Management since September 1997, where she is controller for the Global
Development Group, and Vice President of SCI since June 1995; from June 1995
to September 1997, Vice President of the REIT Manager. Prior thereto, Ms.
Bennett provided accounting services for the Global Development Group from
October 1993. Ms. Bennett is a Certified Public Accountant.
CLAUDE A. BILLINGS--57--Vice President of Security Capital Industrial
Management since September 1997, where he is a member of the Global Services
Group, and Vice President of SCI since January 1994; from January 1994 to
September 1997, Vice President of the REIT Manager; from March 1991 to
February 1994, Senior Vice President and Regional Manager of the Staubach
Company, a Dallas, Texas corporate real estate service firm.
ERIC D. BROWN--37--Vice President of Security Capital Industrial Management
since September 1997, where he is the Regional Property Manager for the
Central region, and Vice President of SCI since December 1996; from December
1996 to September 1997, Vice President of the REIT Manager; from May 1994 to
September 1997, Vice President of Client Services with property management
responsibilities for Austin, Brownsville, El Paso and San Antonio, Texas.
MARK R. CASHMAN--37--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
for Dallas, Texas, and Vice President of SCI since November 1995. Prior
thereto, from January 1995 to November 1995, Vice President of Security
Capital Pacific Trust 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.
JOHN M. CLINTON--41--Vice President of Security Capital Industrial
Management since December 1997, where he is responsible for the Dallas
Metroplex and San Antonio markets, and Vice President of SCI; he has acted as
Project Manager for SCI since September 1994. Prior thereto, from April 1991
to September 1994, he was Engineering Group Leader for the Superconducting
Super Collider Laboratory.
STEPHEN M. CLOUD--35--Vice President of Security Capital Industrial
Management since December 1997 where he is responsible for marketing
activities and leasing in the Washington, D.C. area, and Vice President of
18
SCI; from November 1995 to December 1997, he was a marketing representative of
SCI. Prior thereto, from August 1988 to October 1995, he was a Senior
Associate with CB Commercial Real Estate.
JAMES D. COCHRAN--37--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
for Denver, Colorado and Kansas City, Kansas, and Vice President of SCI since
March 1994; from August 1988 to March 1994, Vice President for TCW Realty
Advisors, where he was responsible for industrial acquisitions in southern
California.
PAUL C. CONGLETON--43--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
for Houston and Austin, Texas, and Vice President of SCI since January 1995;
from January 1995 to September 1997, Vice President of the REIT Manager; from
October 1990 to December 1994, Principal with Overland Company, a property
management, development and investment services firm in Tucson, Arizona.
R. STAN CONWAY, JR.--34--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
for Atlanta, Georgia, and Vice President of SCI since November 1994; from
November 1994 to September 1997, Vice President of the REIT Manager; from
October 1989 to October 1994, Vice President of Marketing for Bullock, Terrell
and Mannelly.
MICHAEL S. CURLESS--34--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
for Indianapolis, and Vice President of SCI since August 1995; from August
1995 to September 1997, Vice President of the REIT Manager; from June 1989 to
August 1995, Marketing Director with Trammell Crow Company, where he was
responsible for the development and marketing of industrial projects.
DAVID B. DANIEL--31--Vice President of Security Capital Industrial
Management since September 1997, where he has been a member of the due
diligence team since April 1995, and Vice President of SCI since June 1996;
from June 1996 to September 1997, Vice President of the REIT Manager. Prior
thereto, 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--36--Vice President of Security Capital Industrial Management
since September 1997, where he is responsible for portfolio acquisitions and
dispositions, and Vice President of SCI since April 1994; from April 1994 to
September 1997, Vice President of the REIT Manager; 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.
GREGORY S. DELONG--45--Vice President of Security Capital Industrial
Management since September 1997, where he is the corporate distribution
facilities officer for the Pacific Region, and Vice President of SCI; from
August 1995 to August 1997, he was a self-employed consultant for corporate
real estate site acquisition. Prior thereto, from January 1993 to August 1995,
he was Vice President of Acquisitions for Pacwest Development in the western
U.S.
DAVID A. DITZ--43--Vice President of Security Capital Industrial Management
since December 1997 where he is a member of the Global Development Group with
project management responsibilities for the Central Region, and Vice President
of SCI; from August 1995 to December 1997, he had project management
responsibilities for the Pacific Region. Prior thereto, from January 1992 to
August 1995, he was founder and principal of True Adams Company.
WILLIAM H. EAGER--57--Vice President of Security Capital Industrial
Management since September 1997, where he is a member of the Global Services
Group and Vice President of SCI since June 1996; from June 1996 to September
1997, Vice President of the REIT Manager. Prior thereto, from June 1976 to
June 1996, Mr. Eager
19
was a First Vice President of CB Commercial where he was involved in over $350
million of industrial real estate transactions.
FRANK H. FALLON--36--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
in Memphis, Nashville and Chattanooga, Tennessee, and Vice President of SCI
since January 1995; from January 1995 to September 1997, Vice President of the
REIT Manager. Prior thereto, 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--32--Vice President of Security Capital Industrial Management
since September 1997, where he is a member of the European operations group
and Vice President of SCI since September 1996; from September 1996 to
September 1997, Vice President of the REIT Manager. 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--39--Vice President of Security Capital Industrial Management
since September 1997, 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 since October 1994; from
October 1994 to September 1997, Vice President of the REIT Manager; 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.
JOHN R. HANSON--47--Vice President of Security Capital Industrial Management
since September 1997, where he has Project Manager responsibilities for the
Pacific region, and Vice President of SCI since May 1995; from May 1995 to
September 1997, Vice President of the REIT Manager; 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.
LARRY H. HARMSEN--37--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
for San Diego and Orange County, California, and Vice President of SCI since
February 1995; from February 1995 to September 1997, Vice President of the
REIT Manager; 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.
DONALD L. HARRIER--39--Vice President of Security Capital Industrial
Management since September 1997, where he has Project Manager responsibilities
for the Pacific region, and Vice President of SCI since May 1994; from May
1994 to September 1997, Vice President of the REIT Manager; 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--44--Vice President of Security Capital Industrial Management
since September 1997, where he has project manager responsibilities for the
Pacific region, and Vice President of SCI since December 1996; from December
1996 to September 1997, Vice President of the REIT Manager. 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.
KENT W. JOHNSON--44--Senior Vice President of Security Capital Industrial
Management since September 1997, where he heads the Global Services Group, and
Senior Vice President of SCI since July 1995; from July 1995 to September
1997, Vice President of the REIT Manager; 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.
20
M. GORDON KEISER JR.--53--Senior Vice President of Security Capital
Industrial Management since September 1997, where he is Chief Financial
Officer and is responsible for accounting, financial reporting and financing,
and Senior Vice President of SCI since October 1995; from October 1995 to
September 1997, Senior Vice President of the REIT Manager; 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.--37--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
for Seattle, Washington and Portland, Oregon, and Vice President of SCI since
May 1994; from May 1994 to September 1997, Vice President of the REIT Manager;
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.
JEFFREY A. KLOPF--49--Senior Vice President and Secretary of SCI and
Security Capital Group since January 1996 and Security Capital Industrial
Management since September 1997; from January 1996 to September 1997, Senior
Vice President and Secretary of the REIT Manager. Prior thereto, 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.
WAYNE P. KLOTZ--42--Vice President of SCI since December 1997, where he is
responsible for Project Management of Development and Construction in
Washington, D.C., Baltimore, Maryland and Virginia markets; from April 1996 to
December 1997, he was Project Manager for SCI with similar responsibilities.
Prior thereto, from April 1995 to April 1996, he was Senior Project Manager
for R.W. Murray Construction Co.; and Vice President Corporate Services
Group/The Service Company from October 1993 to April 1995.
ROBERT A. KRITT--36--Vice President of Security Capital Industrial
Management since September 1997, where he has responsibility for coordinating
corporate distribution facilities in the Mid-Atlantic region, and Vice
President of SCI since November 1991; from November 1991 to September 1997,
Vice President of the REIT Manager; 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.
EDWARD F. LONG--41--Vice President and Controller of SCI since January 1996,
where he supervises accounting and financial reporting; Vice President of
Security Capital Industrial Management since September 1997; from June 1995 to
January 1996, Controller for SCI Client Services; from January 1996 to
September 1997, Vice President and Controller of the REIT Manager; from
December 1990 to June 1995, Director of Financial Services for Coopers &
Lybrand in Central Florida and the Carolinas. Mr. Long is a Certified Public
Accountant.
DONALD W. MADSEN--54--Senior Vice President of Security Capital Industrial
Management since September 1997, where he supervises development services
related to construction management and corporate distribution facilities, and
Senior Vice President of SCI since July 1993; from July 1993 to September
1997, Senior Vice President of the REIT Manager; from July 1992 to June 1993,
Vice President, Business Development for Windward, Ltd., a Dallas, Texas-based
design/build general construction company.
DAVID W. MAJORS--54--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
for Albuquerque, New Mexico and El Paso, Texas, and Vice President of SCI
since December 1996; from December 1996 to September 1997, Vice President of
the REIT Manager; 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 corporate distribution, office
and retail facilities.
21
CHRISTOPHER R. MANLEY--27--Vice President of Security Capital Industrial
Management since September 1997, with Market Officer responsibilities for
Tampa, Orlando and South Florida, and Vice President of SCI; from September
1993 to September 1997, he was a member of the Security Capital Industrial
Trust Acquisitions/Due Diligence team.
BRIAN N. MARSH--33--Vice President of Security Capital Industrial Management
since September 1997, where he has Market Officer responsibilities for
Columbus, Ohio, and Vice President of SCI since January 1995; from January
1995 to September 1997 Vice President of the REIT Manager; 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.
J. THOMAS MERCER--38--Vice President of Security Capital Industrial
Management since September 1997, where he is corporate distribution facilities
officer in the Central Region, and Vice President of SCI since January 1995;
from January 1995 to September 1997 Vice President of the REIT Manager; 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.
*STEVEN K. MEYER--49--Senior Vice President of Security Capital Industrial
Management since September 1997, where he has responsibility for the Central
region of the United States, and Senior Vice President of SCI since December
1995; from December 1995 to September 1997, Senior Vice President of the REIT
Manager; from September 1994 to December 1995 Vice President of the REIT
Manager; from 1990 to July 1994, Executive Vice President with Trammell Crow
Company, where he directed leasing and development activities for the
Industrial Division.
JOSEPH H. MIKES--37--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
for the Chicago area, and Vice President of SCI since August 1995; from August
1995 to September 1997, Vice President of the REIT Manager; from March 1988 to
August 1995, Senior Director of Opus North Corporation, where he managed
office and industrial real estate activities.
MICHAEL E. MILLER--44--Vice President of SCI since October 1997, where he is
responsible for Security Capital Logistar International operations in Central
Europe, including Poland, the Czech Republic, and Hungary. Prior thereto, from
October 1996 to September 1997, he was an Executive Vice President of CEENIS
Property Fund; from January 1996 to October 1996, he was a Managing Partner of
Belmont Capital; from October 1989 to December 1995, he was Director of
Aetna's Investment Management Group.
RICK D. MIRANDA--44--Vice President of Security Capital Industrial
Management since September 1997, where he has Project Manager responsibilities
for the Pacific region, and Vice President of SCI since December 1996; from
December 1996 to September 1997, Vice President of the REIT Manager. Prior
thereto, 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--40--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
for El Paso, San Antonio and Rio Grande Valley, Texas and Vice President of
SCI since July 1993; from July 1993 to September 1997, Vice President of the
REIT Manager; from January 1991 to July 1993, President of The Morton Group,
which specialized in corporate industrial real estate services, asset
management and development services.
DAVID S. MORZE--37--Vice President of Security Capital Industrial Management
since September 1997, where he has Market Officer responsibilities for Reno,
Nevada and Salt Lake City, Utah, and Vice President of
22
SCI since March 1995; from March 1995 to September 1997, Vice President of the
REIT Manager; 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.
MICHAEL NACHAMKIN--44--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
for New Jersey/I-95 Corridor and Vice President of SCI since March 1996; from
March 1996 to September 1997, Vice President of the REIT Manager; from 1984 to
February 1996; Director of Investment Sales, Leasing, Land, Tenant
Representation and Marketing at Cushman & Wakefield of New Jersey.
AUGUST J. NAPOLITANO--50--Vice President of Security Capital Industrial
Management since September 1997, where he is a member of the Global Services
Group, and Vice President of SCI since May 1995; from May 1995 to September
1997, Vice President of the REIT Manager; from November 1992 to December 1994,
Director/Branch Manager of Cushman & Wakefield in Orange County, California,
where he managed all aspects of the Newport Beach and Anaheim Commercial
brokerage offices.
JAMES R. NASS, III--36--Vice President of Security Capital Industrial
Management since September 1997, where he has had Project Manager
responsibilities for the Mid-Atlantic Region since December 1996 with the
former REIT Manager; from March 1997 to September 1997, he was Vice President
of the former REIT Manager. Prior thereto, from March 1989 to December 1996,
he was a Project Manager for Opus North Corporation.
EDWARD S. NEKRITZ--32--Vice President of Security Capital Industrial
Management since September 1997, 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 since September 1995;
from September 1995 to September 1997, Vice President of the REIT Manager;
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--51--Vice President of Security Capital Industrial
Management from September 1997, where he has Project Manager responsibility
for corporate distribution facility projects, and Vice President of SCI since
March 1994; from March 1994 to September 1997, Vice President of the REIT
Manager; from November 1984 to February 1994, Vice President of Project
Development for Dueck Group of Companies, a development firm in Denver,
Colorado.
WILLIAM D. PETSAS--40--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
for Phoenix, Arizona, and Vice President of SCI since July 1994; from July
1994 to September 1997, Vice President of the REIT Manager; 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.
JOHN R. PICCHIOTTI--37--Vice President of Security Capital Industrial
Management since December 1997, and has had Market Representative
responsibilities in Chicago, Illinois, since joining SCI in March 1996, and
Vice President of SCI. Prior thereto, from September 1994 to March 1996, he
was the Area Director for Southwest Suburban Chicago, Young Life; from July
1989 to September 1994, he was with Grubb and Ellis Company.
THOMAS M. RAY--35--Vice President of Security Capital Industrial Management
since September 1997, where he is responsible for coordinating corporate
distribution facilities in the Pacific region, and Vice President of SCI since
March 1996; from March 1996 to September 1997, Vice President of the REIT
Manager. Prior thereto, a member of the corporate distribution facility 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.
23
BETTY J. REMSTEDT--52--Vice President of Security Capital Industrial
Management since September 1997, where she provides accounting, financial
analysis and budgeting services with respect to SCI's Pacific region
properties, and Vice President of SCI since December 1993; from December 1993
to September 1997, Vice President of the REIT Manager; from December 1988 to
December 1993, Chief Financial Officer of King & Lyons.
GERALD W. RICKER--50--Vice President of Security Capital Industrial
Management since January 1998, where he is a member of the Global Services
Group, and Vice President of SCI. Prior thereto, from March 1993 to January
1998, he was Senior Vice President for Development at Hilton Hotels
Corporation; from March 1991 to February 1993, he was Owners' Representative
for the National Education Association.
MICHAEL J. RUEN--31--Vice President of Security Capital Industrial
Management since December 1997, where he has Market Officer responsibilities
for Birmingham, Alabama, and Chattanooga, Tennessee, and Senior
Leasing/Marketing responsibilities for Atlanta, Georgia, and Vice President of
SCI; from February 1995 to November 1997, he was Senior Leasing Manager for
SCI Client Services. Prior thereto, from January 1992 to January 1995, he was
Senior Associate for Koll Real Estate Services.
CALVIN R. SCHREINER--40--Vice President of Security Capital Industrial
Management since December 1997, where he is responsible for capital
improvements of SCI's portfolio, and Vice President of SCI; from July 1995 to
December 1997, he was Due Diligence Regional Construction Manager for SCI in
the Southeast and Mid-Atlantic regions. Prior thereto, from November 1988 to
July 1995, he was Construction Manager/Estimator in Business Development for
Raytheon Engineers & Constructors.
STEVEN O. SPAULDING--56--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
for Las Vegas, Nevada, and Vice President of SCI since May 1993; from May 1993
to September 1997, Vice President of the REIT Manager; 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.
RICHARD H. STRADER--38--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
for Charlotte, Raleigh-Durham and Winston-Salem, North Carolina, and Vice
President of SCI since June 1994; from June 1994 to September 1997, Vice
President of the REIT Manager; 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--40--Vice President of Security Capital Industrial
Management since September 1997, where he has Market Officer responsibilities
for Mexico and Vice President of SCI since October 1994; from October 1994 to
September 1997, Vice President of the REIT Manager; from July 1989 to October
1994, Senior Industrial Broker with Cushman & Wakefield.
DAVID ANDRE TIRMAN--42--Vice President of SCI since September 1997, where he
is responsible for European project management. Prior thereto, from September
1990 to August 1997, he was Senior Development manager with Euro Disney S.A.
and the Walt Disney Company.
JEFFREY M. TODD--40--Vice President of Security Capital Industrial
Management since September 1997, where he has Project Manager responsibilities
for corporate distribution facility projects, and Vice President of SCI since
January 1995; from January 1995 to September 1997, Vice President of the REIT
Manager; 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--35--Vice President of Security Capital Industrial Management
since September 1997, where he has Project Manager responsibilities for the
Central Region, and Vice President of SCI since June 1995;
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from June 1995 to September 1997, Vice President of the REIT Manager; from
June 1993 to June 1995, a member of the Global Development Group; prior
thereto, from February 1992 to May 1993, Real Estate Consultant with Douglas
A. Edwards, Incorporated in New York, New York.
MARY JANE VIETZE--44--Vice President of Security Capital Industrial
Management since September 1997, where she is responsible for accounting and
financial reporting and Vice President of SCI since April 1996; from April
1996 to September 1997, Vice President of the REIT Manager. Prior thereto, a
member of the accounting group since September 1993; from July 1990 to
September 1993, Senior Accountant for Price Waterhouse. Ms. Vietze is a
Certified Public Accountant.
ROBIN P. R. VON WEILER--41--Senior Vice President of SCI since October 1997,
where he is responsible for Global Customers, Corporate Distribution Facility
Program and Marketing. Prior thereto, from April 1982 to September 1997, he
was Vice Managing Director, Real Estate Agent and Corporate Advisor for DTZ
Zadelhoff V.O.F. in Rotterdam, the Netherlands.
EDWIN D. WAGERS--54--Vice President of Security Capital Industrial
Management since September 1997, where he has Project Manager responsibilities
for the Mid-Atlantic region of the United States, and Vice President of SCI
from January 1995; from January 1995 to September 1997, Vice President of the
REIT Manager; prior thereto from April 1991 to December 1994, Chief Operating
Officer of National Real Estate Development at Muirfield Village Development
in Columbus, Ohio.
DAVID L. WELCH--36--Vice President of Security Capital Industrial Management
since September 1997, where he has Market Officer responsibilities for
Washington, D.C. and Baltimore, Maryland, and Vice President of SCI since
February 1995; from February 1995 to September 1997, Vice President of the
REIT Manager; 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 Northern Virginia.
WILLIAM ROBERT WENDT--39--Vice President of Security Capital Industrial
Management since December 1997, where he has Market Representative
responsibilities for the Austin area, and Vice President of SCI; from
September 1994 to November 1997, he was a Marketing Representative for SCI for
the Austin area. Prior thereto, from May 1993 to September 1994, he was an
industrial broker with Oxford Commercial and Cushman & Wakefield.
JAMES E. WHITE--41--Vice President of Security Capital Industrial Management
since September 1997, where he has Market Officer responsibilities for
Cincinnati, Ohio and Louisville, Kentucky, and Vice President of SCI since
July 1995; from July 1995 to September 1997, Vice President of the REIT
Manager; 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--53--Vice President of Security Capital Industrial
Management since September 1997, where he has Project Manager responsibilities
for the Southeast region, and Vice President of SCI since October 1994; from
October 1994 to September 1997, Vice President of the REIT Manager; from March
1988 to October 1994, Vice President of Development and Construction for The
Krauss/Schwartz Company.
EMPLOYEES
Prior to September 9, 1997, SCI had no employees. In connection with the
internalization of the management functions, all individuals previously
employed by the REIT Manager and the Property Manager became employees of SCI.
SCI has approximately 450 employees and believes its relationship with its
employees to be good. SCI's employees are not represented by a collective
bargaining agreement.
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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
(including other REITs) compete for the acquisition, development and leasing
of industrial space. Many of these persons have substantial resources and
experience.
SCI operates nationally and internationally and has no markets with a
concentration of investment in excess of 10% of its total portfolio
investment. In SCI's major markets, 1997 vacancy rates are below the average
rates for the period from 1991 through 1997. (Source: CB Commercial/Torto
Wheaton Research). Competition for acquisition of existing distribution
facilities from institutional capital sources and other REITs has increased
substantially in the past several years.
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
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, 1997, and SCI is not aware of any environmental
condition with respect to any of its properties that is likely to be materi