Why did AMB Property restate its financial statements?

Management determined that buildings on land subject to ground leases should have been depreciated over the remaining ground lease terms rather than the 40-year life used for fee-simple buildings. The company had not segregated these assets into a separate depreciation category, so depreciation was understated for 2001 through 2003.

Does the restatement change the company's cash flow or dividend?

No. Depreciation is a non-cash charge, so operating cash flow ($271.5 million in 2003) is unaffected. The restatement does not change the dividend, which remained $1.66 per share for 2003, although it reduces reported earnings and book equity.

What does the material weakness mean for investors?

A material weakness means there was a reasonable possibility that a material misstatement would not be prevented or detected in time. Management says it has implemented remediation, including new general ledger accounts, a separate depreciation policy category, and added finance review of depreciable lives. Investors should watch future filings for evidence that these controls are working.

How large is the impact on reported earnings and equity?

Diluted EPS for 2003 decreased by $0.06 to $1.41, and net income available to common stockholders fell by about $4.9 million. Total stockholders' equity at December 31, 2003 decreased to $1,657.1 million from $1,666.9 million as previously reported.

PLD/PLDGP 10-K Filed Nov 9, 2004

01—Abstract

Summary

Summary of the 10-K/A filed November 9, 2004. Cited figures are marked; the original filing is the authoritative source.

AMB Property Corporation's Amendment No. 2 on Form 10-K/A (filed November 9, 2004) for fiscal 2003 restates prior results to correct depreciation on buildings located on ground-leased land.

Management determined these buildings should have been depreciated over the remaining ground lease terms rather than the 40-year fee-simple life. The error understated depreciation for 2001 through 2003, and the restated figures show depreciation and amortization rising by roughly $5.5 million^a in 2001, $3.5 million in 2002 and $5.5 million in 2003. Diluted EPS for 2003 falls from $1.47 to $1.41, and net income available to common stockholders drops from $121.6 million to $116.7 million.

The restatement affects 39 buildings, 38 of them on-tarmac at airports. Management classified the control failure as a material weakness in internal control over financial reporting, and concluded that disclosure controls were not effective as of December 31, 2003. Remediation measures include new general ledger accounts for ground-lease assets, a separate depreciation category, and added finance-team review of depreciable lives.

The restatement is non-cash and does not change cash flows, total assets in substance, or the dividend, though it reduces reported stockholders' equity by about $9.8 million^b and raises minority interest figures slightly. Operating fundamentals remain weak: 2003 same-store industrial NOI fell 5.6%, renewal rents dropped 10.1%, and portfolio occupancy was 93.1%. Total debt was $2.57 billion, and the company paid a $1.66 per-share dividend.

For investors, the central issue is governance and reporting reliability rather than a change in economics. The restatement shows a control gap that the company says it has remediated, but the filing itself documents a prior material weakness and a need to re-verify earlier reported results.

02—Key points

Key Highlights

Restatement of 2001-2003 depreciation: ground-lease building depreciation was corrected from 40 years to the remaining lease term, affecting 39 buildings (38 on-tarmac at airports).
2003 diluted EPS restated to $1.41 from $1.47 (down $0.06); 2002 restated to $1.33 from $1.37; 2001 restated to $1.41 from $1.43.
2003 net income available to common stockholders restated to $116.7 million from $121.6 million; depreciation and amortization increased to $139.0 million from $133.5 million.
Management identified a material weakness in internal control over financial reporting; disclosure controls were concluded not effective as of December 31, 2003.
Underlying operations remained weak: 2003 same-store industrial NOI fell 5.6%, renewal and rollover rents declined 10.1%, and occupancy ended at 93.1%.
Balance sheet: total consolidated debt of $2.57 billion, stockholders' equity restated to $1.66 billion, and a 2003 dividend of $1.66 per common share (about 81.8 million shares outstanding).

03—Questions

Frequently Asked Questions

Why did AMB Property restate its financial statements?
Management determined that buildings on land subject to ground leases should have been depreciated over the remaining ground lease terms rather than the 40-year life used for fee-simple buildings. The company had not segregated these assets into a separate depreciation category, so depreciation was understated for 2001 through 2003.
Does the restatement change the company's cash flow or dividend?
No. Depreciation is a non-cash charge, so operating cash flow ($271.5 million in 2003) is unaffected. The restatement does not change the dividend, which remained $1.66 per share for 2003, although it reduces reported earnings and book equity.
What does the material weakness mean for investors?
A material weakness means there was a reasonable possibility that a material misstatement would not be prevented or detected in time. Management says it has implemented remediation, including new general ledger accounts, a separate depreciation policy category, and added finance review of depreciable lives. Investors should watch future filings for evidence that these controls are working.
How large is the impact on reported earnings and equity?
Diluted EPS for 2003 decreased by $0.06 to $1.41, and net income available to common stockholders fell by about $4.9 million. Total stockholders' equity at December 31, 2003 decreased to $1,657.1 million from $1,666.9 million as previously reported.

04—Continue

← View all 10-K filings