AMB PROPERTY CORP - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(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, 2003

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 001-13545
AMB PROPERTY CORPORATION
((Exact name of Registrant as specified in its charter)

MARYLAND 94-3281941
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
PIER 1, BAY 1, 94111
SAN FRANCISCO, CALIFORNIA (Zip Code)
(Address of Principal Executive Offices)

(415) 394-9000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

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. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]

The aggregate market value of common shares held by non-affiliates of the
registrant (based upon the closing sale price on the New York Stock Exchange) on
June 30, 2003, was $2,196,704,854.

As of March 1, 2004, there were 81,849,795 shares of the Registrant's
common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates by reference the registrant's Proxy Statement for its
Annual Meeting of Stockholders which the registrant anticipates will be filed no
later than 120 days after the end of its fiscal year pursuant to Regulation 14A.

PART I

ITEM 1. BUSINESS

GENERAL

AMB Property Corporation, a Maryland corporation, acquires, owns, operates,
manages, renovates, expands and develops primarily industrial properties in key
distribution markets throughout North America, Europe and Asia. We commenced
operations as a fully integrated real estate company effective with the
completion of our initial public offering on November 26, 1997. Increasingly,
our properties are designed for customers who value the efficient movement of
goods in the world's busiest distribution markets: large, supply-constrained
locations with close proximity to airports, seaports and major freeway systems.
As of December 31, 2003, we owned, managed and had renovation and development
projects totaling 101.5 million square feet (9.4 million square meters) and
1,057 buildings in 36 markets within seven countries.

We operate our business through our subsidiary, AMB Property, L.P., a
Delaware limited partnership. We refer to AMB Property, L.P. as the "operating
partnership." As of December 31, 2003, we owned an approximate 94.5% general
partnership interest in the operating partnership, excluding preferred units. As
the sole general partner of the operating partnership, we have the full,
exclusive and complete responsibility for and discretion in its day-to-day
management and control.

Our investment strategy targets customers whose businesses are tied to
global trade, which, according to the World Trade Organization, has grown at
approximately 2.5 times the world gross domestic product (GDP) growth rate
during the last 20 years. To serve the facilities needs of these customers, we
invest in major distribution markets, transportation hubs and gateways in both
the U.S. and internationally. Our target markets are characterized by large
population densities and typically offer substantial consumer bases, proximity
to large clusters of distribution-facility users and significant labor pools.
When measured by annualized base rents, 67.4% of our assets are concentrated in
eight U.S. hub and gateway distribution markets: Atlanta, Chicago, Dallas/Fort
Worth, Los Angeles, Northern New Jersey/New York City, the San Francisco Bay
Area, Miami and Seattle. Our on-tarmac assets account for 8.9% of our annualized
base rents.

By focusing on an investment strategy that targets areas of high customer
demand and limited competition from new supply, we believe that over time our
net operating income (rental revenues less property operating expenses and real
estate taxes) will grow and our property values will increase. Much of our
portfolio is comprised of strategically located industrial buildings in in-fill
submarkets; in-fill locations are characterized by supply constraints on the
availability of land for competing projects as well as physical, political or
economic barriers to new development.

We focus our investment strategy on High Throughput Distribution(R), or
HTD(R) facilities, which are buildings designed to quickly distribute our
customers' products, rather than store them. Our investment focus on HTD assets
is based on the global trend toward lower inventory levels and expedited supply
chains. HTD facilities generally have a variety of characteristics that allow
the rapid transport of goods from point-to-point. Examples of these physical
characteristics include numerous dock doors, shallower building depths, fewer
columns, large truck courts and more space for trailer parking. We believe that
these building characteristics represent an important success factor for
time-sensitive customers such as air express, logistics and freight forwarding
companies and that these facilities function best when located in convenient
proximity to transportation infrastructure such as major airports and seaports.

As of December 31, 2003, we owned and operated (exclusive of properties
that we managed for third parties) 948 industrial buildings and six retail and
other properties, totaling approximately 87.6 million rentable square feet,
located in 34 markets throughout North America and in France, Germany and Japan.
As of December 31, 2003, through our subsidiary, AMB Capital Partners, LLC, we
also managed, but did not have an ownership interest in, industrial buildings
and retail centers, totaling approximately 0.5 million rentable square feet. In
addition, as of December 31, 2003, we had investments in operating industrial
buildings, totaling approximately 7.9 million rentable square feet, through
investments in unconsolidated joint ventures. As of December 31, 2003, we also
had investments in industrial development projects, some of which are part of
our development-for-sale program, totaling approximately 5.5 million square
feet.

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As of December 31, 2003, we had one retail land parcel and one industrial
building held for divestiture. During 2003, our dispositions and contributions
totaled $366.3 million, including assets in markets that no longer fit our
investment strategy and properties at valuations that we considered to be at
premium levels. While we will continue to sell assets on an opportunistic basis,
we believe that we have substantially achieved our near-term strategic
disposition goals.

We are self-administered and self-managed and expect that we have qualified
and will continue to qualify as a real estate investment trust for federal
income tax purposes beginning with the year ended December 31, 1997. As a
self-administered and self-managed real estate investment trust, our own
employees perform our corporate administrative and management functions, rather
than our relying on an outside manager for these services. Through our Strategic
Alliance Program(R), we have established relationships with third-party real
estate management firms, brokers and developers that provide property-level
administrative and management services under our direction.

Our principal executive office is located at Pier 1, Bay 1, San Francisco,
California 94111; our telephone number is (415) 394-9000. We also maintain
regional offices in Boston, Massachusetts, Chicago, Illinois, Amsterdam, the
Netherlands and Tokyo, Japan. As of December 31, 2003, we employed 175
individuals, 126 at our San Francisco headquarters, 45 in our Boston office and
the remainder in our other regional offices. Our website address is www.amb.com.
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and any amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available on
our website free of charge as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the U.S. Securities
and Exchange Commission. Information contained on our website is not and should
not be deemed a part of this annual report.

Unless the context otherwise requires, the terms "we," "us" and "our" refer
to AMB Property Corporation, AMB Property, L.P. and their other controlled
subsidiaries, and the references to AMB Property Corporation include AMB
Property, L.P. and their other controlled subsidiaries. The following marks are
our registered trademarks: AMB(R); Development Alliance Partners(R); HTD(R);
High Throughput Distribution(R); Management Alliance Program(R); Strategic
Alliance Partners(R); Strategic Alliance Programs(R); and UPREIT Alliance
Program(R).

OPERATING STRATEGY

We base our operating strategy on extensive operational and service
offerings, including in-house acquisitions, development, redevelopment, asset
management, leasing, finance, accounting and market research. We leverage our
expertise across a large customer base and have long-standing relationships with
entrepreneurial real estate management and development firms in our target
markets, which we refer to as our Strategic Alliance Partners(R).

We believe that real estate is fundamentally a local business and best
operated by forging alliances with service providers in each target market. We
believe that this strategy results in a mutually beneficial relationship as
these alliance partners provide us with high-quality, local market expertise and
intelligence. We believe that we, in turn, contribute value to the alliances
through our national and global customer relationships, industry knowledge,
perspective and financial strength. We actively manage our portfolio, including
the establishment of leasing strategies, negotiation of lease terms, pricing,
and level and timing of property improvements.

We believe our alliances give us both local market benefits and flexibility
to focus on our core competencies, which are developing and executing our
strategic approach to real estate investment and management and raising private
capital to finance growth.

GROWTH STRATEGIES

Growth Through Operations

We seek to generate long-term internal growth through rent increases on
existing space and renewals on rollover space, by seeking to: maintain a high
occupancy rate at our properties; and control expenses by capitalizing on the
economies of owning, operating and growing a large, global portfolio. However,
during
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2003, our average industrial base rental rates decreased by 10.1%, from the
expiring rent for that space, on leases entered into or renewed during the
period. This amount excludes expense reimbursements, rental abatements,
percentage rents and straight-line rents. Since 2001, as the industrial market
weakened, we have focused on maintaining occupancy. During 2003, cash-basis
same-store net operating income (rental revenues less property operating
expenses and real estate taxes) decreased by 5.6% on our industrial properties.
Since our initial public offering in November 1997, we have experienced average
annual increases in industrial base rental rates of 10.4% and maintained an
average occupancy of 95.0%. While we believe that it is important to view real
estate as a long-term investment, past results are not necessarily an indication
of future performance. See Part IV. "Item 15: Note 17 of the Notes to
Consolidated Financial Statements" for detailed segment information, including
revenue attributable to each segment, gross investment in each segment and total
assets.

Growth Through Acquisitions and Capital Redeployment

We believe that our significant acquisition experience, our alliance-based
operating strategy and our extensive network of property acquisition sources
will continue to provide opportunities for external growth. We have forged
relationships with third-party local property management firms through our
Management Alliance Program(R). We believe that these alliances will create
additional acquisition opportunities, as such managers frequently market
properties on behalf of sellers. Our operating structure also enables us to
acquire properties through our UPREIT Alliance Program(R) in exchange for
limited partnership units in the operating partnership, thereby enhancing our
attractiveness to owners and developers seeking to transfer properties on a
tax-deferred basis. In addition, we seek to redeploy capital from non-strategic
assets into properties that better fit our current investment focus.

We are generally in various stages of negotiations for a number of
acquisitions and dispositions that may include acquisitions and dispositions of
individual properties, acquisitions of large multi-property portfolios and
acquisitions of other real estate companies. There can be no assurance that we
will consummate any of these transactions. Such transactions, if we consummate
them, may be material individually or in the aggregate. Sources of capital for
acquisitions may include retained cash flow from operations, borrowings under
our unsecured credit facility, other forms of secured or unsecured debt
financing, issuances of debt or preferred or common equity securities by us or
the operating partnership (including issuances of units in the operating
partnership or its subsidiaries), proceeds from divestitures of properties,
assumption of debt related to the acquired properties and private capital from
our co-investment partners. See Part II. "Item 7: Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a summary of key
transactions in 2003.

Growth Through Development

We believe that development, renovation and expansion of well-located,
high-quality industrial properties should continue to provide us with attractive
investment opportunities at a higher rate of return than we may obtain from the
purchase of existing properties. We believe we have the in-house expertise to
create value both through new construction and through acquisition and
management of value-added properties. Value-added properties are typically
characterized as properties with available space or near-term leasing exposure,
undeveloped land acquired in connection with other property that provides an
opportunity for development or properties that are well-located but require
redevelopment or renovation. Both new development and value-added properties
require significant management attention and capital investment to maximize
their return. In addition to our in-house development staff, we have established
strategic alliances with global and regional developers that we expect to
enhance our development capabilities. We believe our global market presence and
expertise will enable us to continue to generate and capitalize on a diverse
range of development opportunities.

The multidisciplinary backgrounds of our employees should provide us with
the skills and experience to capitalize on strategic renovation, expansion and
development opportunities. Several of our officers have specific experience in
real estate development, both with us and with national development firms, and
over the past year we have expanded our development staff. We pursue development
projects directly and in joint ventures with our Development Alliance
Partners(R), which provides us with the flexibility to pursue development
projects independently or in partnerships, depending on market conditions,
submarkets or
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building sites. Under a typical joint venture agreement with a Development
Alliance Partner, we would fund 95% of the construction costs and our partner
would fund 5%; however, in certain cases we may own as little as 50% or as much
as 98% of the joint venture. Upon completion, we generally would purchase our
partner's interest in the joint venture. We may also structure developments such
that we would own 100% of the asset with an incentive development fee to be paid
upon completion to our development partner.

Growth Through Developments for Sale

The operating partnership, through its taxable REIT subsidiaries, conducts
a variety of businesses that include incremental income programs, such as our
development projects available for sale to third parties. Such development
properties include value-added conversion projects and build-to-sell projects.

Growth Through Global Expansion

Over the next three-to-four years, we expect to have approximately 15% of
our portfolio (based on consolidated annualized base rent) invested in
international markets. As of December 31, 2003, our international operating
properties comprised 3.0% of our total annualized industrial base rent. Our
Mexican target markets currently include Mexico City, Guadalajara and Monterrey.
Our European target markets currently include Paris, Amsterdam, Frankfurt,
Madrid and London. Our Asian target markets currently include Singapore, Hong
Kong and Tokyo. There are many factors that could cause our entry into target
markets and future capital allocation to differ from our current expectations,
which are discussed under the subheading "Our International Growth is Subject to
Special Political and Monetary Risks" and elsewhere under the heading "Business
Risks" in this report. Further, it is possible that our target markets will
change over time to reflect experience, market opportunities, customer needs and
changes in global distribution patterns. For a breakout of the amount of our
revenues attributable to the United States and to foreign countries in total,
please see Part IV. "Item 15: Note 17 of the Notes to Consolidated Financial
Statements".

We believe that expansion into target international markets represents a
natural extension of our strategy to invest in industrial markets with high
population densities, close proximity to large customer clusters and available
labor pools, and major distribution centers serving global trade. Our
international expansion strategy mirrors our domestic focus on
supply-constrained submarkets with political, economic or physical constraints
to new development. Our international investments will extend our offering of
High Throughput Distribution facilities for customers who value speed-to-market
over storage. Specifically, we are focused on customers whose business is
derived from global trade. In addition, our investments target major consumer
distribution markets and customers.

We believe that our established customer relationships, our contacts in the
air cargo and logistics industries, our underwriting of markets and investment
considerations and our Strategic Alliance Programs with knowledgeable developers
and managers will assist us in competing internationally.

Growth Through Co-Investments

We co-invest in properties with private-capital investors through
partnerships, limited liability companies or joint ventures. Our co-investment
joint ventures typically operate under the same investment strategy that we
apply to our other operations. Typically we will own a 20-50% interest in our
co-investment ventures. In general, we control all significant operating and
investment decisions of our co-investment entities. We believe that our
co-investment program will continue to serve as a source of capital for
acquisitions and developments; however, there can be no assurance that it will
continue to do so. In addition, our co-investment joint ventures are a
significant source of revenues as we earn acquisition and development fees,
asset management fees and priority distributions as well as promoted interests
and incentive fees based on the performance of the co-investment joint ventures.

BUSINESS RISKS

See Part II. "Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Business Risks" for a complete discussion
of the various risks that could adversely affect us, including risks related to
our international operations.

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ITEM 2. PROPERTIES

INDUSTRIAL PROPERTIES

As of December 31, 2003, we owned 948 industrial buildings aggregating
approximately 87.1 million rentable square feet, located in 34 markets
throughout North America and in France, Germany and Japan. Our industrial
properties accounted for $518.1 million, or 98.9%, of our total annualized base
rent as of December 31, 2003. Our industrial properties were 93.1% leased to
over 2,500 customers, the largest of which accounted for no more than 3.1% of
our annualized base rent from our industrial properties. See "Item 15: Note 17
of Notes to Consolidated Financial Statements" for segment information related
to our operations.

Property Characteristics. Our industrial properties, which consist
primarily of warehouse distribution facilities suitable for single or multiple
customers, are typically comprised of multiple buildings. The following table
identifies type and characteristics of our industrial buildings and each type's
percentage of our total portfolio based on square footage at December 31:

Lease Terms. Our industrial properties are typically subject to lease on a
"triple net basis," in which customers pay their proportionate share of real
estate taxes, insurance and operating costs, or are subject to leases on a
"modified gross basis," in which customers pay expenses over certain threshold
levels. In addition, most of our leases include fixed rental increases or
Consumer Price Index rental increases. Lease terms typically range from three to
ten years, with an average of six years, excluding renewal options. However, the
majority of our industrial leases do not include renewal options.

Overview of Major Target Markets. Our industrial properties are typically
located near major airports, key interstate highways, and seaports in major
domestic metropolitan areas, such as Atlanta, Chicago, Dallas/ Fort Worth, Los
Angeles, Northern New Jersey/New York City, the San Francisco Bay Area, Miami
and Seattle. Our international industrial facilities are located in major
distribution markets, including Mexico City, Guadalajara, Paris, Frankfurt and
Tokyo.

Within these metropolitan areas, our industrial properties are generally
concentrated in locations with limited new construction opportunities within
established, relatively large submarkets, which we believe should provide a
higher rate of occupancy and rent growth than properties located elsewhere.
These in-fill locations are typically near major airports, seaports or
convenient to major highways and rail lines, and are proximate to large and
diverse labor pools. There is typically broad demand for industrial space in
these centrally located submarkets typically due to a diverse mix of industries
and types of industrial uses, including warehouse distribution, light assembly
and manufacturing. We generally avoid locations at the periphery of metropolitan
areas where there are fewer constraints to the supply of additional industrial
properties.

INDUSTRIAL MARKET OPERATING STATISTICS(1)

As of December 31, 2003, we operated in 34 markets throughout North America
and in France, Germany and Japan. The following table represents properties in
which we own a 100% interest or a

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controlling interest (consolidated), and excludes properties in which we only
own a non-controlling interest (unconsolidated) and properties under
development:

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(1) Includes all industrial consolidated operating properties and excludes
industrial developments and renovation projects.

(2) We also have a 19.9 acre parking lot with 2,720 parking spaces and 12
billboard signs in the Los Angeles market immediately adjacent to the Los
Angeles International Airport.

(3) Includes on-tarmac air cargo facilities at 14 airports.

(4) Annualized base rent is calculated as monthly base rent (cash basis) per the
terms of the lease, as of December 31, 2003, multiplied by 12.

(5) Same store pool excludes properties purchased or developments stabilized
after December 31, 2001. Stabilized properties are generally defined as
properties that are 90% leased or properties for which we have held a
certificate of occupancy or where building has been substantially complete
for at least 12 months.

(6) Total market square footage includes industrial and retail operating
properties, development properties, unconsolidated properties (100% of the
square footage), properties managed for third parties and reallocation of
on-tarmac properties into metro markets.

6

INDUSTRIAL OPERATING PORTFOLIO OVERVIEW

As of December 31, 2003, our 948 industrial buildings were diversified
across 34 markets throughout North America and in France, Germany and Japan. The
average age of our industrial properties is 19 years (since the property was
built or substantially renovated). The following table represents properties in
which we own a fee simple interest or a controlling interest (consolidated), and
excludes properties in which we only own a non-controlling interest
(unconsolidated):

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(1) Annualized base rent for leases denominated in foreign currencies is
translated using the currency exchange rate at December 31, 2003.

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INDUSTRIAL LEASE EXPIRATIONS

The following table summarizes the lease expirations for our industrial
properties for leases in place as of December 31, 2003, without giving effect to
the exercise of renewal options or termination rights, if any, at or prior to
the scheduled expirations:

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(1) Schedule includes in-place leases and leases with future commencement dates.
The schedule also includes month-to-month leases totaling 0.2 million square
feet and leases in hold-over status totaling 1.9 million square feet.

(2) Calculated as monthly base rent at expiration multiplied by 12.

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CUSTOMER INFORMATION

Largest Property Customers. As of December 31, 2003, our 25 largest
industrial property customers by annualized base rent are set forth in the table
below:

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(1) Customer(s) may be a subsidiary of or an entity affiliated with the named
customer. We also have a lease at our Park One property adjacent to the Los
Angeles International Airport with an annualized base rent of $6.1 million,
which is not included.

(2) Computed as aggregate leased square feet divided by the aggregate leased
square feet of the industrial and retail properties.

(3) Annualized base rent is calculated as monthly base rent (cash basis) per the
lease, as of December 31, 2003, multiplied by 12.

(4) Computed as aggregate annualized base rent divided by the aggregate
annualized base rent of the industrial and retail and other properties.

(5) Apron rental amounts (but not square footage) are included.

(6) United States Government includes the United States Postal Service, United
States Customs and the United Stated Department of Agriculture.

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(7) County of Los Angeles includes Child Support Service's Department, the Fire
Department, the District Attorney, the Sheriff's Department, and the Unified
School District.

OPERATING AND LEASING STATISTICS

INDUSTRIAL OPERATING AND LEASING STATISTICS

The following table summarizes key operating and leasing statistics for all
of our industrial properties as of and for the years ended December 31, 2003,
2002 and 2001:

- ---------------

(1) Includes all consolidated industrial operating properties and excludes
industrial development and renovation projects. Excludes retail and other
properties' square footage of 0.5 million with occupancy of 75.2% and
annualized base rents of $5.5 million as of December 31, 2003.

(2) In addition to owned square feet as of December 31, 2003, we managed,
through our subsidiary, AMB Capital Partners, LLC, 0.5 million additional
square feet of industrial, retail and other properties. As of December 31,
2003, we also had investments in 7.9 million square feet of industrial
operating properties through our investments in unconsolidated joint
ventures.

(3) Consists of second-generation leases renewing or re-tenanting with current
and prior lease terms greater than one year.

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INDUSTRIAL SAME STORE OPERATING STATISTICS

The following table summarizes key operating and leasing statistics for our
same store properties as of and for the years ended December 31, 2003, 2002 and
2001:

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(1) Same store properties are those properties that we owned during both the
current and prior year reporting periods, excluding development properties
prior to being stabilized (generally defined as properties that are 90%
leased or properties for which we have held a certificate of occupancy or
building has been substantially complete for at least 12 months).

RETAIL AND OTHER PROPERTY SUMMARY

Our remaining retail and other properties, aggregating approximately 0.5
million square feet, were 75.2% leased and had an annualized base rent of $5.5
million at December 31, 2003.

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DEVELOPMENT PROPERTIES

DEVELOPMENT PIPELINE

The following table sets forth the properties owned by us as of December
31, 2003, which were undergoing renovation, expansion or development. No
assurance can be given that any of these projects will be completed on schedule
or within budgeted amounts.

INDUSTRIAL DEVELOPMENT AND RENOVATION DELIVERIES

- ---------------

(1) Represents total estimated cost of renovation, expansion or development,
including initial acquisition costs, Development Alliance Partner earnouts
and associated carry costs. The estimates are based on our current estimates
and forecasts and are subject to change. Excludes 349 acres of land held for
future development (representing a potential 5.9 million square feet) and
other acquisition-related costs totaling $49.8 million. Non-U.S. dollar
investments are translated to U.S. dollars using the exchange rate at
December 31, 2003.

(2) Our share of amounts funded to date for 2004, 2005 and 2006 deliveries was
$21.8 million, $29.1 million and $0.7 million, respectively, for a total of
$51.6 million.

(3) Represents a renovation project.

(4) The yields on international projects are on an after-tax basis.

The following table sets forth value-added conversion projects and
development projects that we intended to sell as of December 31, 2003:

DEVELOPMENT PROJECTS AVAILABLE FOR SALE

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(1) Represents build-to-suit and speculative development or redevelopment.
Excludes 267 acres of land held for future development or sale and other
acquisition-related costs totaling $47.0 million.

(2) We intend to sell these properties within two years of completion.

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(3) Represents total estimated cost of renovation, expansion or development,
including initial acquisition costs, carry and partner earnouts. The
estimates are based on our current estimates and forecasts and are subject
to change.

(4) Our share of amounts funded as of December 31, 2003, was $20.8 million.

PROPERTIES HELD THROUGH JOINT VENTURES, LIMITED LIABILITY COMPANIES AND
PARTNERSHIPS

Consolidated:

As of December 31, 2003, we held interests in joint ventures, limited
liability companies and partnerships with institutional investors and other
third parties, which we consolidate in our financial statements. Such
investments are consolidated because we owned a majority interest or, as general
partner, exercise significant control over major operating decisions such as
acquisition or disposition decisions, approval of budgets, selection of property
managers and changes in financing. Under the agreements governing the joint
ventures, we and the other party to the joint venture may be required to make
additional capital contributions and, subject to certain limitations, the joint
ventures may incur additional debt. Such agreements also impose certain
restrictions on the transfer of joint venture interests by us or the other party
to the joint venture and typically provide certain rights to us or the other
party to the joint venture to sell our or their interest in the joint venture to
the joint venture or to the other joint-venture partner on terms specified in
the agreement. In addition, under certain circumstances, many of the joint
ventures include buy/sell provisions. See Part IV. "Item 15: Note 10 of the
Notes to Consolidated Financial Statements" for additional details. The tables
that follow summarize our consolidated joint ventures as of December 31, 2003.

CO-INVESTMENT CONSOLIDATED JOINT VENTURES

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(1) For development properties, this represents estimated square feet at
completion of development for committed phases of development and renovation
projects.

(2) Represents the book value of the property (before accumulated depreciation)
owned by the joint venture entity and excludes net other assets as of
December 31, 2003. Development book values include uncommitted land.

(3) AMB Erie, L.P. is a co-investment partnership formed in 1998 with the Erie
Insurance Company and certain related entities.

(4) AMB Institutional Alliance Fund I, L.P. and AMB Institutional Alliance Fund
II, L.P. are co-investment partnerships with institutional investors, which
invest through private real estate investment trusts.

(5) AMB Partners II, L.P. is a co-investment partnership formed in 2001 with the
City and County of San Francisco Employees' Retirement System.

(6) AMB-SGP, L.P. is a co-investment partnership formed in 2001 with Industrial
JV Pte Ltd, a subsidiary of GIC Real Estate Pte. Ltd, the real estate
investment subsidiary of the government of Singapore Investment Corporation.

(7) AMB-AMS, L.P. is a commitment to form a co-investment partnership with two
Dutch pension funds advised by Mn Services NV.

OTHER CONSOLIDATED JOINT VENTURES

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(1) Represents the book value of the property (before accumulated depreciation)
owned by the joint-venture entity and excludes net other assets as of
December 31, 2003. Development book values include uncommitted land.

Unconsolidated Joint Ventures, Mortgage Investments and Other Investment:

As of December 31, 2003, we held interests in six equity investment joint
ventures that are not consolidated in our financial statements. The management
and control over significant aspects of these investments are held by the
third-party joint-venture partners and the investments do not meet the variable-
interest entity consolidation criteria under FASB Interpretation No. 46R,
Consolidation of Variable Interest Entities. In addition, as of December 31,
2003, we held mortgage investments, from which we receive interest income.

15

UNCONSOLIDATED JOINT VENTURES,
MORTGAGE INVESTMENTS AND OTHER INVESTMENT

- ---------------

(1) Square feet for development alliance joint ventures represents estimated
square feet at completion of development project.

(2) Represents our ownership percentage in the co-investment joint venture that
holds the mortgage investment.

(3) We also have a 0.1% unconsolidated equity interest (with a 33% economic
interest) in this property and an option to purchase the remaining equity
interest that begins January 1, 2007 and expires December 31, 2009.

SECURED DEBT

As of December 31, 2003, we had $1.4 billion of secured indebtedness, net
of unamortized premiums, secured by deeds of trust on 111 properties. As of
December 31, 2003, the total gross consolidated investment value of those
properties secured by debt was $2.6 billion. Of the $1.4 billion of secured
indebtedness,

16

$1.1 billion was joint venture debt secured by properties with a gross
investment value of $1.8 billion. For additional details, see "Item 7:
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Item 15: Note 7 of Notes to
Consolidated Financial Statements" included in this report. We believe that as
of December 31, 2003, the fair value of the properties securing the respective
obligations in each case exceeded the principal amount of the outstanding
obligations.

ITEM 3. LEGAL PROCEEDINGS

As of December 31, 2003, there were no pending legal proceedings to which
we were a party or of which any of our properties was the subject, the adverse
determination of which we anticipate would have a material adverse effect upon
our financial condition, results of operations and cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

17

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Our common stock began trading on the New York Stock Exchange on November
21, 1997, under the symbol "AMB." As of March 1, 2004, there were approximately
371 holders of record of our common stock (excluding shares held through The
Depository Trust Company, as nominee). Set forth below are the high and low
sales prices per share of our common stock, as reported on the NYSE composite
tape, and the distribution per share paid or payable by us during the period
from January 1, 2002, through December 31, 2003:

In November 2003, AMB Property II, L.P., one of our subsidiaries, also
issued 145,548 of its class B common limited partnership units, with an
aggregate value of $4.5 million, to four individual investors in connection with
the contribution of a property. The class B common limited partnership units,
upon redemption, are exchangeable for cash or, at the option of AMB Property II,
L.P., for shares of our common stock on a one-for-one basis.

18

ITEM 6. SELECTED FINANCIAL DATA

SELECTED COMPANY FINANCIAL AND OTHER DATA(1)

The following table sets forth selected consolidated historical financial
and other data for AMB Property Corporation on an historical basis as of and for
the years ended December 31:

- ---------------

(1) Certain items in the consolidated financial statements for prior periods
have been reclassified to conform with current classifications with no
effect on net income or stockholders' equity.

19

(2) In July 2003, the U.S. Securities and Exchange Commission announced that it
had revised its position relating to the application of Emerging Issues Task
Force Topic No. D-42, The Effect on the Calculation of Earnings per Share
for the Redemption or Induced Conversion of Preferred Stock, ("Topic D-42").
As a result of this announcement, original issuance costs related to
preferred equity are to be reflected as a reduction of net income available
to common stockholders in determining earnings per share for the period in
which the preferred equity is redeemed. The announcement requires
retroactive application of the revised position in previously issued
financial statements. As a result, our financial statements for the year
ending December 31, 2001, are restated to reflect a reduction in net income
available to common stockholders of $3.2 million, representing the original
issuance costs of AMB Property II, L.P.'s series C preferred units, which
were redeemed in December 2001. Diluted earnings per share for the year
ended December 31, 2001 was $1.43 compared to $1.47 as previously reported.
The U.S. Securities and Exchange Commission's revised position on Topic D-42
did not require us to file amendments to previously filed reports and will
not impact any other previously reported periods.

(3) Basic and diluted net income per weighted average share equals the net
income available to common stockholders divided by 81,096,062 and 82,852,528
shares, respectively, for 2003; 83,310,885 and 84,795,987 shares,
respectively, for 2002; 84,174,644 and 85,214,066 shares, respectively, for
2001; 83,697,170 and 84,155,306 shares, respectively, for 2000; and
86,271,862 and 86,347,487 shares, respectively, for 1999.

(4) In 2003, we discontinued our practice of deducting amortization of
investments in leasehold interests from funds from operations ("FFO") as
such an adjustment is not provided for in NAREIT's FFO definition. In 2003,
we also modified our FFO reporting to no longer add back impairment losses
when computing FFO in accordance with NAREIT's FFO definition. Additionally,
we adopted Topic D-42 and began including preferred stock and unit
redemption discounts and issuance cost write-offs in FFO. As a result, FFO
for the periods presented has been adjusted to reflect the changes. For an
explanation of funds from operations and a discussion of why management
believes that FFO is a meaningful supplemental measure of our operating
performance, please see "Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Supplemental Earnings
Measures".

(5) For an explanation of earnings before interest, tax, depreciation and
amortization, or EBITDA, and a discussion of why management believes that
EBITDA is a meaningful supplemental measure of our operating performance,
please see "Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Supplemental Earnings Measures".

(6) Our share of total debt is the pro rata portion of the total debt based on
our percentage of equity interest in each of the consolidated ventures
holding the debt. We believe that our share of total debt is a meaningful
supplemental measure, which enables both management and investors to analyze
our leverage and to compare our leverage to that of other companies. In
addition, it allows for a more meaningful comparison of our debt to that of
other companies that do not consolidate their joint ventures. Our share of
total debt is not intended to reflect our actual liability should there be a
default under any or all of such loans or a liquidation of the joint
ventures. For a reconciliation of our share of total debt to total
consolidated debt, a GAAP financial measure, please see the table of debt
maturities and capitalization in Part II. "Item 7. Liquidity and Capital
Resources -- Capital Resources".

20

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

You should read the following discussion and analysis of our consolidated
financial condition and results of operations in conjunction with the notes to
consolidated financial statements. Statements contained in this discussion that
are not historical facts may be forward-looking statements. Such statements
relate to our future performance and plans, results of operations, capital
expenditures, acquisitions, and operating improvements and costs. You can
identify forward-looking statements by the use of forward-looking terminology
such as "believes," "expects," "may," "will," "should," "seeks,"
"approximately," "intends," "plans," "pro forma," "estimates" or "anticipates,"
or the negative of these words and phrases, or similar words or phrases. You can
also identify forward-looking statements by discussions of strategy, plans or
intentions. Forward-looking statements involve numerous risks and uncertainties
and you should not rely upon them as predictions of future events. There is no
assurance that the events or circumstances reflected in forward-looking
statements will occur or be achieved. Forward-looking statements are necessarily
dependent on assumptions, data or methods that may be incorrect or imprecise and
we may not be able to realize them.

The following factors, among others, could cause actual results and future
events to differ materially from those set forth or contemplated in the
forward-looking statements:

- changes in general economic conditions or in the real estate sector;

- non-renewal of leases by customers or renewal at lower than expected
rent;

- difficulties in identifying properties to acquire and in effecting
acquisitions on advantageous terms and the failure of acquisitions to
perform as we expect;

- risks and uncertainties affecting property development and renovation
(including construction delays, cost overruns, our inability to obtain
necessary permits and financing);

- a downturn in California's economy or real estate conditions;

- losses in excess of our insurance coverage;

- our failure to divest of properties on advantageous terms or to timely
reinvest proceeds from any such divestitures;

- unknown liabilities acquired from our predecessors or in connection with
acquired properties;

- risks of doing business internationally, including unfamiliarity with new
markets and currency risks;

- risks associated with using debt to fund acquisitions and development,
including re-financing risks;

- our failure to obtain necessary financing;

- changes in local, state and federal regulatory requirements;

- environmental uncertainties; and

- our failure to qualify and maintain our status as a real estate
investment trust under the Internal Revenue Code of 1986.

Our success also depends upon economic trends generally, various market
conditions and fluctuations and those other risk factors discussed in the
section entitled "Business Risks" in this report. We caution you not to place
undue reliance on forward-looking statements, which reflect our analysis only
and speak as of the date of this report or as of the dates indicated in the
statements. We assume no obligation to update or supplement forward-looking
statements.

GENERAL

We commenced operations as a fully integrated real estate company effective
with the completion of our initial public offering on November 26, 1997, and
elected to be taxed as a real estate investment trust under Sections 856 through
860 of the Internal Revenue Code of 1986 with our initial tax return for the
year ended December 31, 1997. AMB Property Corporation and AMB Property, L.P.
were formed shortly before the consummation of our initial public offering. We
refer to AMB Property, L.P. as the "operating partnership."

21

MANAGEMENT'S OVERVIEW

We generate revenue and earnings primarily from rent received from
customers under long-term (generally three to ten years) operating leases at our
properties, including reimbursements from customers for certain operating costs,
and from partnership distributions and fees from our private capital business.
We also derive earnings from the strategic disposition of assets and from the
disposition of projects under our development-for-sale program. Our long-term
growth is dependent on our ability to maintain and increase occupancy rates or
increase rental rates at our properties and our ability to continue to acquire
and develop new properties.

Although the weak economy over the past three years has decreased customer
demand for space and has limited or in most cases lowered rental rates, many
types of investors are acquiring industrial real estate. We believe that we have
capitalized on this opportunity by accelerating the repositioning of our
portfolio through the disposition of properties. While property dispositions
result in reinvestment capacity and trigger gain/loss recognition, they also
create near-term earnings dilution. However, we believe that, in the long-term,
the repositioning of our portfolio will benefit our stockholders.

The table below summarizes our leasing activity for 2003 and 2002:

- ---------------

(1) Our U.S. hub and gateway markets include on-tarmac and Atlanta, Chicago,
Dallas/Fort Worth, Los Angeles, Northern New Jersey/New York City, the San
Francisco Bay Area, Miami and Seattle.

Occupancy levels in our industrial portfolio and rents on lease renewals
and rollovers were lower in 2003 as the general contraction in business
activity, which began in 2001, reduced demand for industrial warehouse
facilities. According to Torto Wheaton Research, the overall industrial market
deteriorated rapidly from its peak levels at the end of 2000, when availability
was 6.6%, through the second quarter of 2002, when availability reached 10.8%.
Subsequently, national industrial availability has deteriorated at a more modest
rate, declining an average of 13 basis points per quarter to reach 11.6% at
December 31, 2003. As a result of the increase in availability, market rents for
industrial properties in most markets decreased between 10% and 20% from their
peak levels in 2001. Over the same three-year period, our portfolio vacancy
increased from 3.6% at December 31, 2000 to 6.9% at December 31, 2003, which we
consider consistent with market trends, but still outperforming the national
industrial average. While the level of rental rate reduction varied by market,
we maintained high occupancy by pricing lease renewals and new leases with
sensitivity to local market conditions. In periods of decreasing rental rates,
we strive to sign leases with shorter terms to prevent locking-in lower rent
levels for long periods and to be prepared to sign new, longer-term leases
during periods of growing rental rates. When we sign leases of shorter duration,
we attempt to limit overall leasing costs and capital expenditures by offering
modest tenant improvement packages, appropriate to the lease term. We generally
followed this practice during 2003. Through the first half of 2003, we
experienced declining occupancy in our industrial operating portfolio; at June
30, 2003, occupancy in our operating industrial portfolio was 91.5%. However,
during the last half of 2003, we have increased occupancy in our operating
industrial portfolio by 160 basis points to 93.1% at December 31, 2003, 470
basis points greater than the
22

overall industrial market, according to Torto Wheaton Research. Rents on
industrial renewals and rollovers in our portfolio decreased 1.0% during 2002
and 10.1% during 2003.

During 2003, our dispositions and contributions (to a joint venture in
which we retained a 15% ownership interest in exchange for cash) totaled $366.3
million, including assets in markets that no longer fit our investment strategy
and properties at valuations that we considered to be at premium levels. Because
we did not immediately reinvest sales proceeds into attractively priced
industrial assets, these sales and contributions have diluted our near-term
operating results. However, we believe they help position us for long-term
growth and higher returns on invested capital by increasing the strategic fit of
our portfolio with our investment and private capital models. Further, proceeds
from these sales, along with our balance sheet and private capital sources,
create significant capacity for future deployment. While we will continue to
sell assets on an opportunistic basis, we believe that we have substantially
achieved our near-term strategic disposition goals.

During 2003, we also expanded our development staff and capabilities,
because we believe that development, renovation and expansion of well-located,
high-quality industrial properties should generally continue to provide us with
attractive investment opportunities at a higher rate of return than we may
obtain from the purchase of existing properties. In 2003, Eugene F. Reilly
joined us as Executive Vice President of North American Development, adding to
our in-house development team. We have increased our development pipeline from a
low of $107.0 million at the end of 2002 to $233.0 million at the end of 2003.
In addition to our committed development pipeline, we hold over 600 acres of
land, which could support approximately 10.0 million square feet of additional
development.

Going forward, we believe that our co-investment program with
private-capital investors will continue to serve as a significant source of
revenues and capital for acquisitions and developments. Through these co-
investment joint ventures we earn acquisition and development fees, asset
management fees and priority distributions as well as promoted interests and
incentive fees based on the performance of the co-investment joint ventures;
however, there can be no assurance that we will continue to do so. As of
December 31, 2003, we owned approximately 32.1 million square feet of our
properties (34.7% of the total consolidated operating and development portfolio)
through our co-investment joint ventures. We may make additional investments
through these joint ventures or new joint ventures in the future and presently
plan to do so.

Over the next three-to-four years, we expect to have approximately 15% of
our portfolio (based on consolidated annualized base rent) invested in
international markets. Our Mexican target markets currently include Mexico City,
Guadalajara and Monterrey. Our European target markets currently include Paris,
Amsterdam, Frankfurt, Madrid and London. Our Asian target markets currently
include Singapore, Hong Kong and Tokyo. It is possible that our target markets
will change over time to reflect experience, market opportunities, customer
needs and changes in global distribution patterns. As of December 31, 2003, our
international operating properties comprised 3.0% of our total annualized base
rent.

To maintain our qualification as a real estate investment trust, we must
pay dividends to our stockholders aggregating annually at least 90% of our
taxable income. As a result, we cannot rely on retained earnings to fund our
on-going operations to the same extent that other corporations that are not real
estate investment trusts can. We must continue to raise capital in both the debt
and equity markets to fund our working capital needs, acquisitions and
developments. See "Liquidity and Capital Resources" for a complete discussion of
the sources of our capital.

SUMMARY OF KEY TRANSACTIONS IN 2003

During the year ended December 31, 2003, we completed the following capital
deployment transactions:

- Acquired 82 buildings in the U.S., Mexico, Europe and Asia, aggregating
approximately 6.5 million square feet, for $533.9 million, including
$238.3 million invested through two of our co-investment joint ventures;

- Completed industrial development projects in the U.S., Mexico and Europe,
comprising 1.6 million square feet, for a total investment of $105.7
million;

- Expanded our development pipeline, which at December 31, 2003, included
projects in the U.S., Mexico, Singapore and Spain totaling 5.0 million
square feet with an expected total investment of

23

$233.0 million, of which $91.2 million was invested as of December 31,
2003 and of which 34% was pre-leased;

- Divested ourselves of 24 industrial buildings and two retail centers,
aggregating approximately 2.8 million square feet, for an aggregate price
of $272.3 million; and

- Contributed $94.0 million in operating properties to our newly formed
unconsolidated joint venture, in which we retained a 15% interest.

See Part IV. "Item 15: Notes 4 and 5 of the Notes to Consolidated Financial
Statements" for a more detailed discussion of our acquisition, development and
disposition activity.

During the year ended December 31, 2003, we completed the following capital
markets transactions:

- Raised $103.4 million, net of costs, from the issuances of $50.0 million
of our 6.5% Series L Cumulative Redeemable Preferred Stock and $57.5
million of our 6.75% Series M Cumulative Redeemable Preferred Stock;

- Raised $125.0 million from the issuance by the operating partnership of
$75.0 million of 5.53%, 10-year, unsecured fixed-rate notes and $50.0
million of floating rate unsecured notes at a rate of three month-LIBOR
telerate plus 40 basis points;

- Redeemed all of our outstanding 8.5% Series A Cumulative Redeemable
Preferred Stock and all of the operating partnership's outstanding 8 5/8%
Series B Cumulative Redeemable Preferred Units for an aggregate of $165.8
million;

- Repurchased 812,900 shares of our common stock for $21.2 million;

- Obtained long-term secured debt financing for our co-investment joint
ventures totaling $177.0 million at an average rate of 4.3%; and

- Repaid the $45.5 million outstanding balance on the AMB Institutional
Alliance Fund II, L.P. credit facility with capital contributions and
secured debt financing proceeds.

See Part IV. "Item 15: Notes 7, 10 and 12 of the Notes to Consolidated
Financial Statements" for a more detailed discussion of our capital markets
transactions.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of financial condition and results of
operations is based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the U.S.
("GAAP"). The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities
and contingencies as of the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. We evaluate our
assumptions and estimates on an on-going basis. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. We believe the following
critical accounting policies affect our more significant judgments and estimates
used in the preparation of our consolidated financial statements:

Investments in Real Estate. Investments in real estate are stated at cost
unless circumstances indicate that cost cannot be recovered, in which case, the
carrying value of the property is reduced to estimated fair value. We also
record at acquisition an intangible asset or liability for the value
attributable to above or below-market leases, in-place leases and lease
origination costs for all acquisitions subsequent to July 1, 2001. Carrying
values for financial reporting purposes are reviewed for impairment on a
property-by-property basis whenever events or changes in circumstances indicate
that the carrying value of a property may not be recoverable. Impairment is
recognized when estimated expected future cash flows (undiscounted and without
interest charges) are less than the carrying amount of the property. The
estimation of expected future net cash flows is inherently uncertain and relies
on assumptions regarding current and future market conditions and the
availability of capital. Examples of certain situations that could affect future
cash flows of a property may

24

include, but are not limited to: significant decreases in occupancy; unforeseen
bankruptcy, lease termination and move-out of a major customer; or a significant
decrease in annual base rents of that property. If impairment analysis
assumptions change, then an adjustment to the carrying amount of our long-lived
assets could occur in the future period in which the assumptions change. To the
extent that a property is impaired, the excess of the carrying amount of the
property over its estimated fair value is charged to earnings.

Revenue Recognition. We record rental revenue from operating leases on a
straight-line basis over the term of the leases and maintain an allowance for
estimated losses that may result from the inability of our customers to make
required payments. If customers fail to make contractual lease payments that are
greater than our allowance for doubtful accounts, security deposits and letters
of credit, then we may have to recognize additional doubtful account charges in
future periods. We monitor the liquidity and creditworthiness of our customers
on an on-going basis. Each period we review our outstanding accounts receivable,
including straight-line rents, for doubtful accounts and provide allowances as
needed. We also record lease termination fees when a customer has executed a
definitive termination agreement with us and the payment of the termination fee
is not subject to any conditions that must be met or waived before the fee is
due to us.

Property Dispositions. We report real estate dispositions in three
separate categories on our consolidated statements of operations. First, when we
contribute properties to our joint ventures, we recognize gains representing the
portion of the contributed properties acquired by the third-party investors to
the extent of cash proceeds received. We also dispose of value-added conversion
projects and build-to-suit and speculative development projects that we have
held as development projects available for sale. The gain or loss recognized
from the disposition of these projects is reported net of estimated taxes, when
applicable. Lastly, beginning in 2002, SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, required us to separately report as
discontinued operations the historical operating results attributable to
operating properties sold and the applicable gain or loss on the disposition of
the properties. The consolidated statements of operations for prior periods are
also adjusted to conform with this classification. There is no impact on our
previously reported consolidated financial position, net income or cash flows.

Joint Ventures. We hold interests in both consolidated and unconsolidated
joint ventures. Our joint venture investments do not meet the variable interest
entity criteria under FASB Interpretation No. 46R, Consolidation of Variable
Interest Entities. Therefore, we determine consolidation based on standards set
forth in EITF 96-16, Investor's Accounting for an Investee When the Investor Has
a Majority of the Voting Interest but the Minority Shareholder or Shareholders
Have Certain Approval or Veto Rights, and Statement of Position 78-9, Accounting
for Investments in Real Estate Ventures. Based on the guidance set forth in
these pronouncements, we consolidate certain joint venture investments because
we own a majority interest or exercise significant control over major operating
decisions, such as approval of budgets, selection of property managers, asset
management, investment activity and changes in financing. For joint ventures
where we do not own a majority interest or do not exercise significant control
over major operating and management decisions, we use the equity method of
accounting and do not consolidate the joint venture for financial reporting
purposes.

Real Estate Investment Trust. As a real estate investment trust, we
generally will not be subject to corporate level federal income taxes if minimum
distribution, income, asset and shareholder tests are met. However, not all of
our underlying entities are qualified REIT subsidiaries and may be subject to
federal and state taxes, when applicable. In addition, foreign entities may also
be subject to the taxes of the host country. An income tax allocation is
required to be estimated on our taxable income arising from our taxable REIT
subsidiaries and foreign entities. A deferred tax component could arise based
upon the differences in GAAP versus tax income for items such as depreciation
and gain recognition. However, deferred tax is an immaterial component of our
consolidated balance sheet.

RESULTS OF OPERATIONS

The analysis below includes changes attributable to same store growth,
acquisitions, development activity and divestitures. Same store properties are
those that we owned during both the current and prior year reporting periods,
excluding development properties prior to being stabilized subsequent to
December 31, 2001 (generally defined as properties that are 90% leased or
properties for which we have held a certificate of occupancy or where building
has been substantially complete for at least 12 months). As of December 31,
25

2003, same store industrial properties consisted of properties aggregating
approximately 72.0 million square feet. The properties acquired during 2003,
consisted of 82 buildings, aggregating approximately 6.5 million square feet.
The properties acquired during 2002 consisted of 43 buildings, aggregating
approximately 5.4 million square feet. During 2003, property divestitures and
contributions consisted of 48 industrial buildings and two retail centers,
aggregating approximately 5.3 million square feet. In 2002, property
divestitures consisted of 58 industrial and two retail buildings, aggregating
approximately 5.7 million square feet. Our future financial condition and
results of operations, including rental revenues, may be impacted by the
acquisition of additional properties and dispositions. Our future revenues and
expenses may vary materially from historical results.

FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 (DOLLARS IN MILLIONS)

The decrease in U.S. industrial same store rental revenues resulted
primarily from lower average occupancies, rental revenue decreases in our San
Francisco Bay Area sub-market totaling $14.9 million, increased allowances for
doubtful accounts of $3.3 million, and decreased straight-line rents of $1.3
million, partially offset by an increase in lease termination fees and
miscellaneous income of $0.9 million and fixed rent increases on existing
leases. Industrial same store occupancy was 93.0% at December 31, 2003, and
95.0% at December 31, 2002. For the year ended December 31, 2003, rents in the
same store portfolio decreased 10.6% on industrial renewals and rollovers (cash
basis) on 16.2 million square feet leased. The properties acquired during 2002
consisted of 43 buildings, aggregating approximately 5.4 million square feet.
The properties acquired during 2003 consisted of 82 buildings, aggregating
approximately 6.5 million square feet. Other industrial includes rental revenues
from divested properties not classified as discontinued operations. In 2003, we
acquired properties in Mexico and France, resulting in increased international
industrial revenues. The

26

increase in private capital income was primarily due to incentive distributions
earned from AMB Partners II, L.P.

The $3.4 million increase in same store properties' operating expenses was
primarily due to increases in common area maintenance expenses of $3.4 million,
including snow removal, and real estate taxes of $0.9 million, partially offset
by a decrease in insurance expenses of $1.2 million. The 2002 acquisitions
consisted of 43 buildings, aggregating approximately 5.4 million square feet.
The 2003 acquisitions consist of 82 buildings, aggregating approximately 6.5
million square feet. Other industrial includes expenses from divested properties
not classified as discontinued operations. The increase in depreciation and
amortization expense was due to the increase in our net investment in real
estate, partially offset by a reduction of $2.1 million for the recovery,
through the settlement of a lawsuit, of capital expenditures paid in prior
years. The 2003 impairment loss was on investments in real estate and leasehold
interests that we continue to hold for long-term investment. The 2002 impairment
included losses for lease cost write-offs of $1.7 million and an impairment on a
portion of our planned property contributions of $1.2 million. The increase in
general and administrative expenses was primarily due to increased stock-based
compensation expense of $2.8 million resulting from our decision to expense
stock options under SFAS No. 123 prospectively and the issuance of additional
restricted stock, partially offset by decreased personnel costs and taxes.

The decrease in interest and other income was primarily due to the
repayment in full of a $74.0 million 9.5% mortgage note receivable in July 2002.
The increase in gains from dispositions of real estate (not classified as
discontinued operations) resulted from our contribution of $94.0 million in
operating properties to our newly formed co-investment joint venture, Industrial
Fund I, LLC, in February 2003. We recognized a gain of $7.4 million on the
contribution, representing the portion of the contributed properties acquired by
the

27

third-party investors. During 2002, we sold two industrial buildings and one
retail center, aggregating approximately 0.8 million square feet, for an
aggregate price of $50.6 million, with a resulting loss of $0.8 million. In June
2002, we also contributed $76.9 million in operating properties to our
consolidated co-investment joint venture, AMB-SGP, LP. We recognized a gain of
$3.3 million on the contribution, representing the portion of the contributed
properties acquired by the third-party investors. The property contributions and
2002 divestitures o