-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PxFraim/zGwakUnfF8Xscrr0ec+CLHs9hufnse3aEYsttnnedbtV4sb/dk22T9WR BUlvXxE4skvFoh/2o37MLg== 0000950131-98-001859.txt : 19980323 0000950131-98-001859.hdr.sgml : 19980323 ACCESSION NUMBER: 0000950131-98-001859 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980320 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SECURITY CAPITAL PACIFIC TRUST CENTRAL INDEX KEY: 0000080737 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 746056896 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-10272 FILM NUMBER: 98570288 BUSINESS ADDRESS: STREET 1: 7670 SOUTH CHESTER ST CITY: ENGLEWOOD STATE: CO ZIP: 80112 BUSINESS PHONE: 3037085959 MAIL ADDRESS: STREET 1: 7670 SOUTH CHESTER ST CITY: ENGLEWOOD STATE: CO ZIP: 80112 FORMER COMPANY: FORMER CONFORMED NAME: PROPERTY TRUST OF AMERICA DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: EL PASO REAL ESTATE INVESTMENT TRUST DATE OF NAME CHANGE: 19700108 10-K405 1 FORM 10-K DATED 12/31/1997 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (Mark One) [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 1-10272 SECURITY CAPITAL PACIFIC TRUST (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MARYLAND 74-6056896 (State or other jurisdiction (I.R.S. employer of incorporation or organization) identification no.) 7670 SOUTH CHESTER STREET ENGLEWOOD, COLORADO 80112 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE) (303) 708-5959 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ----------------------- Common Shares of Beneficial Interest, par value $1.00 per share New York Stock Exchange Cumulative Convertible Series A Preferred Shares of Beneficial Interest, par value $1.00 per share New York Stock Exchange Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $1.00 per share New York Stock Exchange 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. [X] Based on the closing price of the registrant's common shares on March 16, 1998, the aggregate market value of the voting common equity held by non- affiliates of the registrant was approximately $1,360,561,303. At March 16, 1998, there were outstanding approximately 92,821,095 of the registrant's Common Shares. 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. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS
ITEM DESCRIPTION PAGE ---- ----------- ---- PART I Glossary........................................................... 1 1. Business........................................................... 5 Security Capital Pacific Trust..................................... 5 Trustees and Officers of PTR....................................... 9 Employees.......................................................... 16 Insurance.......................................................... 16 Competition........................................................ 16 Americans with Disabilities Act.................................... 17 Environmental Matters.............................................. 17 2. Properties......................................................... 17 Geographic Distribution............................................ 17 Real Estate Portfolio.............................................. 18 3. Legal Proceedings.................................................. 26 4. Submission of Matters to a Vote of Security Holders................ 26 PART II 5. Market for the Registrant's Common Equity and Related Stockholder Matters............................................................ 26 6. Selected Financial Data............................................ 29 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................. 31 Overview........................................................... 31 Results of Operations.............................................. 36 Liquidity and Capital Resources.................................... 41 7A. Quantitive and Qualitative Disclosures About Market Risk........... 46 8. Financial Statements and Supplementary Data........................ 46 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Matters...................................... 47 PART III 10. Trustees and Executive Officers of the Registrant.................. 47 11. Executive Compensation............................................. 47 12. Security Ownership of Certain Beneficial Owners and Management..... 47 13. Certain Relationships and Related Transactions..................... 47 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 47
GLOSSARY The following abbreviations, acronyms or defined terms used in this Form 10-K are defined below:
ABBREVIATION, ACRONYM, OR DEFINED TERM DEFINITION/DESCRIPTION ------------------------- ---------------------- 1998 Proxy Statement........... PTR's definitive proxy statement for its 1998 annual meeting of shareholders. 401(k) Plan.................... PTR's 401(k) Plan which was adopted by the Board and became effective on January 1, 1998. ADA............................ Americans with Disabilities Act. APB............................ Accounting Principles Board. ASA............................ Administrative Services Agreement whereby Security Capital Group provides services for PTR which include but are not limited to: research, payroll and human resources, cash management, accounts payable, data processing, investor relations, and insurance, legal and tax administration, in exchange for a fee. ATLANTIC....................... Security Capital Atlantic Incorporated. Average Rental Rate Per Unit... Represents weighted-average monthly "market rents" per unit during each period. Board.......................... Board of Trustees of PTR. Capital Markets Group.......... Security Capital Markets Group Incorporated. Chase.......................... Chase Bank of Texas, National Association. Collections Growth............. Represents percentage growth in actual rental revenues, net of vacancies, bad debts and concessions. Common Share(s)................ PTR common shares of beneficial interest, par value $1.00 per share. Delivery Date For First Units.. Represents the actual or expected date that the first completed Multifamily units were or are expected to be made available for leasing. PTR begins leasing completed units prior to completion of the entire community. DRSP........................... PTR's 1998 Dividend Reinvestment and Share Purchase Plan which became effective in February 1998. EPS............................ Earnings per share. Funds From Operations.......... Net earnings computed in accordance with GAAP, excluding real estate depreciation, gains (or losses) from depreciated real estate, provisions for possible losses, non- cash interest income from Homestead Notes, extraordinary items and significant non- recurring items. The Funds From Operations measure presented by PTR, while consistent with the NAREIT definition, will not be comparable to similarly titled measures of other REITs which do not compute Funds From Operations in a manner consistent with PTR.
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ABBREVIATION, ACRONYM, OR DEFINED TERM DEFINITION/DESCRIPTION - --------------------------------- ---------------------- GAAP............................. Generally accepted accounting principles. Homestead........................ Homestead Village Incorporated, the company to which PTR contributed the Homestead Assets on October 17, 1996. (See "Item 14(a). Financial Statements and Schedule, Note 3, Homestead Transaction and Homestead Notes.") Homestead Assets................. 54 extended-stay lodging facilities known as Homestead Village(R) properties, or the rights to acquire sites for such properties, which were contributed by PTR to Homestead on October 17, 1996 in exchange for Homestead Notes and Homestead common stock. Homestead Distribution........... A special distribution to PTR's holders of Common Shares of 0.125694 shares of Homestead common stock and warrants to purchase 0.084326 shares of Homestead common stock per PTR Common Share, which occurred on November 12, 1996. Homestead Notes.................. Homestead convertible mortgage notes PTR receives from Homestead in exchange for PTR's fundings under a $198.8 million funding commitment agreement. Homestead uses the funds to complete the development and construction of the Homestead Assets. In Planning...................... Parcels of land owned or Under Control upon which Multifamily construction is expected to commence within 36 months. Incentive Plan................... PTR's Long-Term Incentive Plan which was approved by holders of Common Shares on September 8, 1997 and includes an employee stock purchase plan and a stock option plan. Lease-Up......................... The phase during which newly constructed Multifamily units are being leased for the first time, but prior to the community becoming Stabilized. Lenders.......................... Collectively, the group of financial institutions led by Chase which lend to PTR under its $350 million unsecured revolving line of credit. Long-Term Undepreciated Book The sum of Long-Term Debt, mortgages payable Capitalization.................. and shareholders' equity after adding back accumulated depreciation. Long-Term Debt or Notes.......... Collectively, PTR's long-term unsecured senior notes payable. Management Companies............. Collectively, the Property Manager and the REIT Manager. Merger........................... The September 9, 1997 Merger which resulted in PTR's acquisition of the Management Companies from Security Capital Group, at which time PTR became an internally managed REIT. (See "Item 14(a). Financial Statements and Schedule, Note 7, Acquisition of REIT Manager and Property Manager.")
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ABBREVIATION, ACRONYM, OR DEFINED TERM DEFINITION/DESCRIPTION ------------------------- ---------------------- Moderate Income................ Households earning 65% to 90% of the median income in a given submarket. PTR's Moderate Income communities target this segment of the renter market. Multifamily.................... PTR's garden-style apartment units or communities (excludes Homestead Assets, which were contributed to Homestead on October 17, 1996). NAREIT......................... National Association of Real Estate Investment Trusts. Net Operating Income (NOI)..... Rental revenues less Property Operating Expenses. Net Operating Income Growth.... Represents growth in Net Operating Income between comparative periods. NSP............................ PTR's Nonqualified Savings Plan which was adopted by the Board and became effective on January 1, 1998. NYSE........................... New York Stock Exchange. PACIFIC........................ Security Capital Pacific Incorporated, a Maryland corporation, which merged with and into PTR in 1995. PACIFIC Merger................. 1995 merger of PACIFIC with and into PTR. (See "Item 14(a). Financial Statements and Schedule, Note 9, 1995 Pacific Merger and Concurrent Subscription Offerings.") Participating Preferred Shares. PTR Junior Participating Preferred Shares, par value $1.00 per share. Preferred Shares............... Collectively, the PTR Series A Preferred Shares and PTR Series B Preferred Shares. Prestabilized.................. The period prior to a community being Stabilized (see Stabilized). Property Manager............... SCG Realty Services Incorporated, the entity that managed most of PTR's communities prior to September 9, 1997, the Merger date. Property Operating Expenses.... The sum of rental expenses, real estate taxes and property management fees. PTR............................ Security Capital Pacific Trust. ("PTR" is the New York Stock Exchange ticker symbol.) Purchase Rights................ PTR preferred share purchase rights which entitle the holder of each right under certain circumstances to purchase from PTR one one-hundredth of a share of a series of Participating Preferred Shares, at a price of $60.00 per one-hundredth of a Participating Preferred Share, subject to adjustment. REIT........................... Real estate investment trust. REIT Manager................... Security Capital Pacific Incorporated, the entity that served as PTR's REIT Manager prior to September 9, 1997, the Merger date. Same Store Communities......... Communities which were fully operational for comparable periods. SEC............................ Securities and Exchange Commission.
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ABBREVIATION, ACRONYM, OR DEFINED TERM DEFINITION/DESCRIPTION ------------------------- ---------------------- Security Capital Group......... Security Capital Group Incorporated, PTR's largest shareholder and the owner of the Property Manager and REIT Manager until September 9, 1997 (See Merger). Series A Preferred Shares...... PTR Series A Cumulative Convertible Preferred Shares of Beneficial Interest, par value $1.00 per share. Series B Preferred Shares...... PTR Series B Non-Convertible Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $1.00 per share. SFAS........................... Statement of Financial Accounting Standards. Stabilized..................... The classification assigned to a Multifamily community after renovation, repositioning, new management and new marketing programs (or development and marketing in the case of newly developed communities) have been completed for a sufficient period of time (but in no event longer than 12 months, except for major rehabilitations) to achieve 93% occupancy at market rental rates. Total Expected Investment...... For community developments, represents total budgeted land and development costs, capitalizable in accordance with GAAP; for operating communities, represents cost plus budgeted expenditures capitalizable in accordance with GAAP, including planned rehabilitation costs needed to conform to or maintain the community at PTR's standards. Trustee(s)..................... Member(s) of PTR's Board of Trustees. Under Control.................. Land parcels which PTR has an exclusive right (through contingent contract or letter of intent) during a contractually agreed-upon time period to acquire land for future development of Multifamily communities, subject to approval of contingencies during the due diligence process, but does not currently own the land. There can be no assurance that such land will be acquired. West Coast Markets............. California, the Pacific Northwest (Seattle, Washington and Portland, Oregon) and Salt Lake City, Utah.
4 PART I ITEM 1. BUSINESS SECURITY CAPITAL PACIFIC TRUST Security Capital Pacific Trust (NYSE Symbol: "PTR") is an internally managed equity REIT which was formed in 1963. PTR's principal focus is to generate long-term, sustainable growth in per share cash flow while providing outstanding service to its customers. PTR's objective is to be the preeminent real estate operating company focusing on the development, acquisition, operation and long-term ownership of Multifamily communities in the growing markets of the western United States. Proprietary real estate and customer research provides the foundation for PTR's investment and operating strategies. Investment Strategy PTR's research-driven investment strategy is focused on deploying capital in markets and submarkets which have the following characteristics: (i) attractive long-term economic fundamentals, (ii) high barriers to entry against new supply, and (iii) expensive single-family housing. Barriers to entry exist when there is a very limited amount of land zoned for multifamily development, and where local municipalities are reluctant to zone additional land for multifamily communities. Examples include Seattle, Washington, the San Francisco Bay area and San Diego, California. The management of PTR believes that investments in markets and submarkets that have these characteristics will produce superior long-term cash flow growth and, therefore, will create substantial long-term value for PTR's shareholders. PTR's continuing investment in extensive research enables identification of markets and submarkets with strong economic fundamentals and very difficult development environments (high barriers to entry). This combination of consistent demand and limited competition is expected to produce dependable long-term growth in cash flow and value for PTR's shareholders. PTR's research has identified several markets with superior long-term fundamentals for Multifamily investments. During the past three years, the company has taken advantage of an unusually attractive opportunity to acquire existing Multifamily communities in its West Coast Markets very early in their respective recovery cycles, by purchasing $1.1 billion of existing communities at very attractive yields. As of December 31, 1997, 53% of PTR's capital, based on Total Expected Investment, was invested in its West Coast Markets, a significant increase from only 17% invested in these markets as of December 31, 1995. The positive impacts of these acquisitions on PTR's performance have been significant. Recent acquisition and development volume (based on Total Expected Investment) and same store revenue growth during the fourth quarter of 1997 for selected West Coast Markets are listed below. (See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, Results of Operations, Analysis of Same Store Community Results."):
TOTAL ACQUISITIONS AND SAME STORE CONSTRUCTION STARTS REVENUE GROWTH MARKET 12/95-12/97 FOURTH QUARTER 1997 ------ ---------------------- ------------------- (IN THOUSANDS) San Francisco Bay Area......... $406,626 12.70% Seattle, Washington............ $231,626 6.94% San Diego, California.......... $130,716 11.91% Orange County, California...... $106,110 6.70%
In addition to the acquisition of well-located existing communities, PTR believes that substantial long-term shareholder value will be created through the development of carefully planned Multifamily communities in markets and submarkets with high barriers to entry against new development. During the past three years, PTR has assembled a development pipeline of $943 million, based on Total Expected Investment, of new communities that are either under construction or In Planning, in its key West Coast Markets (including $478 million Under Control). This development pipeline creates a significant competitive advantage for PTR in these markets and is 5 expected to provide a tremendous growth opportunity as the communities are completed and Stabilized at very attractive yields during the next four years. The majority of PTR's development efforts emphasize the development of Multifamily communities targeted at Moderate Income households. PTR defines Moderate Income households to be those households earning 65% to 90% of the median income in a given submarket. Moderate Income households represent one of the largest and most underserved segments of the renter population. PTR believes that these households exhibit a number of very important characteristics that make them particularly desirable customers. For example, they are typically longer-term residents, which results in lower resident turnover and, therefore, lower overall costs to refurbish units for re-leasing. In addition, there is relatively limited competition for this segment of the market because most developers target the upper income segment of the market. PTR believes that focusing on the Moderate Income segment will allow it to achieve more consistent rental increases and higher occupancies over the long- term and, thereby, realize sustainable cash flow growth and appreciation in value. The table below illustrates the growth in PTR's Multifamily portfolio, based on Total Expected Investment, resulting from the execution of its investment strategy:
TOTAL EXPECTED INVESTMENT --------------------------------------------------------------- JANUARY 31, DECEMBER 31, ---------- ---------------------------------------------------- 1998 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- -------- (IN THOUSANDS) Operating Communities: Acquired(1)........... $1,687,897 $1,705,544 $1,514,019 $1,270,419 $ 937,683 $666,497 Developed(1).......... 600,175 600,175 377,809 244,848 171,505 66,893 ---------- ---------- ---------- ---------- ---------- -------- Total operating communities........ $2,288,072 $2,305,719 $1,891,828 $1,515,267 $1,109,188 $733,390 Communities under construction........... 418,840 418,840 354,852 297,549 170,017 140,563 Communities In Planning and owned.............. 417,449 369,130 296,956 185,683 194,001 81,455 ---------- ---------- ---------- ---------- ---------- -------- Total owned communities........ $3,124,361 $3,093,689 $2,543,636 $1,998,499 $1,473,206 $955,408 ========== ========== ========== ========== ========== ======== Communities In Planning and Under Control...... $ 491,707 $ 537,736 $ 451,914 $ 146,894 $ 152,313 $136,687 ========== ========== ========== ========== ========== ========
- -------- (1) Net of any dispositions. Customer Research PTR uses its proprietary customer research to continuously refine its product and service offering. For example, in 1991, PTR and Security Capital Group did extensive research on the extended-stay industry, which resulted in the development of the Homestead Assets. These assets were ultimately contributed to Homestead in exchange for Homestead Notes and Homestead common stock in 1996 (see "Item 14(a). Financial Statements and Schedule, Note 3, Homestead Transaction and Homestead Notes"). Similarly, based on its research, PTR has developed "village" communities which are designed to offer customers an extraordinary level of amenities, including sports and recreation areas, theaters and business centers, at a moderate price. PTR believes its "village" communities will generate consistent, long-term growth by providing a large segment of the renter market with amenities beyond those traditionally available in Multifamily communities. The Homestead transaction and PTR's "village" communities demonstrate the value-added results of PTR's continual investment in customer and product research and development. 6 PTR's customer research is also focused on understanding which ancillary products and services add value for customers. PTR's philosophy is to offer products and services to its customers that emphasize increased convenience or lifestyle enhancement, at attractive prices. In 1996, PTR began establishing strategic alliances with a select number of nationally recognized telecommunications providers to offer products and services, including cable, local and long distance telephone, and internet access, to its customers. In 1997, PTR introduced state-of-the-art, high-speed data service in cooperation with Microsoft and GTE, at three of its communities. PTR has plans to offer high-speed data service in connection with several nationally recognized providers at a number of its communities throughout 1998. During 1997, PTR launched a broad, customer-based research program to guide the company in further developing a highly focused, customer-driven approach to its business. Over the past nine months, PTR interviewed more than 430 of its residents in an effort to thoroughly understand their needs, as well as to understand the key variables involved in selecting an apartment community. The results of this research effort will allow PTR to create a comprehensive product offering encompassing all aspects of its business, that should allow PTR to develop a strong long-term brand identity. This innovative approach to its business is expected to create significant incremental value for PTR's shareholders as a result of increasing customer preference for PTR's unique combination of products and services. Customer-Focused Property Management PTR believes that its communities must be actively managed in order to maximize cash flow and enhance long-term economic performance. As of January 31, 1998, approximately 95.4% of PTR's operating Multifamily communities were internally managed, based on Total Expected Investment, with the balance of the communities in various stages of transition from third-party management. PTR emphasizes locally based management as management believes it improves PTR's ability to anticipate and respond to changes in local market conditions and resident needs. PTR believes that it has developed superior operating procedures, financial controls, information systems and training programs, which it expects will positively affect growth in rental and occupancy rates. PTR recognizes that a highly focused customer service approach to day-to-day management is essential to maximize short and long-term cash flow growth from each of its Multifamily communities. As a result, PTR is dedicated to maximizing the performance of each of its communities by providing consistent, high quality residential services to its customers through the development of innovative ideas to enhance customer service and resident satisfaction while maximizing cash flow growth. A few of the programs which PTR has developed recently that are currently in the process of being fully implemented are summarized below: . PTR utilizes a Regional Information Management ("RIM") Center concept which is designed to enable property-level management personnel to focus on PTR's customers, the residents, while moving certain accounting and administrative functions to the regionally located RIM Center. Each RIM Center is designed to carry out these functions for the communities in several cities. PTR believes that the RIM Center approach creates substantial economies of scale, together with better accounting control and enhanced cash management capabilities. . PTR had also initiated resident utility billing programs at approximately 98% of PTR's Multifamily operating communities as of January 31, 1998. Under this arrangement, water and sewer usage are metered and billed to individual residents, thereby enabling PTR to better control operating expenses, while providing residents with the incentive to minimize usage. . PTR has aggressively pursued revenue sharing agreements with certain nationally recognized cable television and telephone service providers. The arrangements require the telecommunication providers to continually upgrade service to ensure state-of-the-art offerings in this rapidly changing industry. The agreements also allow PTR to receive a percentage of the service providers' revenues generated from 7 subscribing residents while increasing the quality and accessibility of these services to residents. PTR currently has signed these types of revenue-sharing agreements for 79% of the Multifamily communities in its portfolio. These creative initiatives coupled with highly focused day-to-day management have contributed and are expected to continue to contribute to the growth in Net Operating Income and cash flow generated by PTR's Multifamily operating communities. Management Depth and Succession Planning PTR 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 company. PTR believes that several of its senior officers could serve as the principal executive officer and continue PTR's strong performance. See "--Trustees and Officers of PTR." PTR's management team emphasizes active training and organizational development initiatives for associates at all levels of the company as critical to building long-term management depth and succession planning. PTR has an organizational development group with nine professionals to focus on this key initiative. Conservative Financial Strategy PTR continues to focus on maintaining a strong balance sheet and has a significant equity base, with a total equity market capitalization of $2.54 billion at December 31, 1997. PTR finances its investment activity primarily through internally generated cash flow from operations, community dispositions, the issuance of Long-Term Debt and strategically accessing the equity markets. Additionally, PTR's $350 million unsecured line of credit and other credit facilities are used for working capital purposes and for short- term borrowings prior to arranging permanent financing. PTR's strong balance sheet and access to capital provide significant financial flexibility that allows PTR to take advantage of attractive investment opportunities in an efficient manner. A key component of PTR's conservative financial strategy is the issuance of fixed rate, unsecured, Long-Term Debt. In order to minimize refinancing risk, PTR's Long-Term Debt offerings are carefully structured to create a relatively level principal maturity schedule, without large repayment obligations in any future year. As of December 31, 1997, PTR's $630 million of unsecured, Long- Term Debt had an effective average fixed interest rate of 7.64% and an original weighted-average life to maturity of 13.4 years. PTR's Long-Term Debt and mortgages payable as a percentage of Long-Term Undepreciated Book Capitalization was 34.91% at December 31, 1997 (37.93% on a pro forma basis giving effect to the $125 million in Long-Term Debt issued on March 6, 1998 and the application of the proceeds therefrom). 1997 Accomplishments . PTR's strong growth in 1997 was driven primarily by the successful implementation of its investment strategy, with development activity generating 53% of the growth in Funds From Operations and acquisition activity generating 38%. The remaining 9% of growth in Funds from Operations was produced by a 2.53% increase in Net Operating Income at PTR's Same Store Communities. . Due to the strength of PTR's financial and business position, Moody's Investors Services, Inc. raised its credit ratings on PTR's Long-Term Debt from Baa2 to Baa1 in the fourth quarter of 1997. Standard & Poor's Ratings Group maintained its A- rating on PTR's Long-Term Debt throughout 1997. . PTR completed the assembly of a substantial pipeline of development communities in its West Coast Markets. As of December 31, 1997, PTR owned or controlled land for the development of $943 million of new communities in these markets that are either under construction or In Planning (including $478 million Under Control). PTR expects to complete and stabilize more than $250 million of development communities annually in its West Coast Markets at very attractive yields during each of the next four years. This development pipeline is expected to contribute substantially to PTR's future cash flow growth. 8 . PTR commenced construction on 12 Multifamily communities, representing 3,423 units and a Total Expected Investment of approximately $265.1 million, during 1997. At December 31, 1997, PTR had 5,545 units under construction, representing a Total Expected Investment of $418.8 million. During 1997, seven communities with a Total Expected Investment of $136.0 million achieved stabilization, adding 2,204 units to PTR's Stabilized portfolio. . In 1997, PTR completed the acquisition of 15 Multifamily communities representing 4,655 operating units and a Total Expected Investment of $399.0 million, all of which were located in targeted submarkets in its West Coast Markets. As of January 31, 1998, PTR had $1.17 billion in operating communities in its West Coast Markets, based on Total Expected Investment. . PTR continued to dispose of existing assets and efficiently redeploy the proceeds through tax-deferred exchanges into Multifamily investments with more attractive long-term growth prospects. In 1997, PTR disposed of 27 Multifamily communities, representing 7,250 operating units, realizing aggregate gains of $48.2 million on aggregate proceeds of $304.6 million, which were redeployed into strategic acquisitions in its West Coast Markets. . During the third quarter of 1997, 99% of voting PTR shareholders voted in favor of the Merger. In the transaction, PTR exchanged 3,295,533 Common Shares for the REIT Manager and Property Manager, previously owned by Security Capital Group. In addition, Security Capital Group issued pro rata directly to holders of PTR's Common Shares and Series A Preferred Shares (other than Security Capital Group), $102 million of warrants to acquire 3,644,430 shares of Class B common stock of Security Capital Group at an exercise price of $28 per share. As a result, PTR became an internally managed REIT with Security Capital Group continuing as its largest shareholder (33.1% ownership at January 31, 1998). Personnel employed by the Management Companies became employees of PTR (see "Item 14(a). Financial Statements and Schedule, Note 7, Acquisition of REIT Manager and Property Manager"). TRUSTEES AND OFFICERS OF PTR Trustees of PTR C. RONALD BLANKENSHIP--48--Non-Executive Chairman of PTR since June 1997, Chairman of PTR from June 1991 to June 1997 and Trustee since June 1991; Advisory Director of Homestead since October 1996; Director, Storage USA, Inc. since December 1997; Managing Director of Security Capital Group since March 1991; from June 1988 to March 1991, Regional Partner, Trammell Crow Residential, Chicago, Illinois (multifamily real estate development and property management); prior thereto, Executive Vice President and Chief Financial Officer, The Mischer Corporation, Houston, Texas (multi-business holding company with investments primarily in real estate). While with Trammell Crow Residential, Mr. Blankenship was on the Management Board for Trammell Crow Residential Services, a property management company that managed approximately 90,000 multifamily units nationwide, and was Chief Executive Officer of Trammell Crow Residential Services--North, which managed 10,000 multifamily units in the Midwest and Northeast. In his various positions prior to his affiliation with Security Capital Group, Mr. Blankenship supervised the development of approximately 9,300 multifamily units. JAMES A. CARDWELL--66--Trustee of PTR since May 1980; since May 1992 Chief Executive Officer of Petro Stopping Centers, L.P., El Paso, Texas (operation of full-service truck stopping centers), the predecessor for which he founded in 1975; Director, El Paso Electric Company. JOHN T. KELLEY, III--57--Trustee of PTR since January 1988; founding officer and Advisory Trustee of Security Capital Industrial Trust, Aurora, Colorado (ownership and development of industrial parks in the United States, Mexico and Europe); from 1987 to 1991, Chairman of the Board, Kelley-Harris Company, Inc., El Paso, Texas (real estate investment company); from 1968 to 1987, Managing Director, LaSalle Partners Limited, Chicago, Illinois (corporate real estate services). Mr. Kelley is also a Director of Security Capital Group and Chairman of Pacific Retail Trust (ownership and development of infill retail properties in the western United States). 9 CALVIN K. KESSLER--66--Trustee of PTR since January 1972; President and principal shareholder, Kessler Industries, Inc., El Paso, Texas (manufacturer of furniture and aluminum castings) since 1960. WILLIAM G. MYERS--70--Trustee of PTR since May 1994; Chief Executive Officer of Ojai Ranch and Investment Company, Inc., Santa Barbara, California, which he founded in 1963 (agribusiness and other investments); Director, Chalone Wine Group, Napa, California. Mr. Myers is also a Trustee of Security Capital Industrial Trust. JAMES H. POLK, III--55--Trustee of PTR since January 1976; Managing Director of Capital Markets Group from August 1992 to June 1997. Mr. Polk was affiliated with PTR from January 1976 to June 1997 in various capacities, including President and Chief Executive Officer. Mr. Polk is registered with the National Association of Securities Dealers, Inc. and is past President and Trustee of the National Association of Real Estate Investment Trusts, Inc. JOHN C. SCHWEITZER--53--Trustee of PTR since April 1976; Director of Homestead since April 1997; Trustee of Pacific Retail Trust since June 1997; Managing Partner, Continental Properties Company, Austin, Texas (real estate and investments) since 1976; General Partner, G.P. Campbell Capital Ltd. (real estate and investments) since 1976; Trustee, Texas Christian University; Director, Austin Smiles, Westgate Corporation, Chase, and Continental Transmissions. R. SCOT SELLERS--41--President and Chief Executive Officer of PTR since June 1997, where he has overall responsibility for PTR's operations and strategic direction; previously, Managing Director of PTR from September 1994 to June 1997, where he was responsible for PTR's Multifamily investment program. From May 1994 to September 1994, Senior Vice President of PTR; from April 1993 to May 1994, Senior Vice President of Security Capital Group, where he was responsible for portfolio acquisitions from institutional sources. From September 1981 to April 1993, Mr. Sellers was an operating partner and Vice President of Lincoln Property Company, where he was responsible for the development of more than 6,500 multifamily units in a number of different markets. Other responsibilities at Lincoln Property Company included asset management of an apartment portfolio valued in excess of $500 million and acquisition activity in the western United States. The Board has nominated Mr. Sellers for election as a Trustee at the 1998 annual shareholders' meeting. Executive Officers of PTR The executive officers of PTR are:
NAME AGE TITLE ---- --- ----- R. Scot Sellers........... 41 President and Chief Executive Officer Patrick R. Whelan......... 41 Managing Director--Operations Richard A. Banks.......... 50 Managing Director--West Region Jay S. Jacobson........... 45 Managing Director--Central/Northwest Region Richard W. Dickason....... 41 Senior Vice President Bryan J. Flanagan......... 45 Senior Vice President John Jordano, III......... 41 Senior Vice President Jeffrey A. Klopf.......... 49 Senior Vice President and Secretary
R. SCOT SELLERS--41--See "Trustees of PTR" above. PATRICK R. WHELAN--41--Managing Director of PTR since December 1996, where he has overall responsibility for PTR's operations; previously, President of the Property Manager, where he had overall responsibility for Multifamily property management nationwide. From February 1994 to October 1994, Mr. Whelan was Senior Vice President and Co-Manager of Multifamily Acquisitions for Security Capital Group; from July 1986 to January 1994, Senior Vice President of Trammell Crow Company (development, acquisition and management of commercial properties). Prior thereto, Mr. Whelan held senior financial and operations positions with General Electric Capital Corporation. 10 RICHARD A. BANKS--50--Managing Director of PTR since December 1997 and Senior Vice President of PTR from August 1997 to December 1997, where he has responsibility for investments and operations in the West Region. From January 1995 to August 1997, Mr. Banks served as President and Chief Executive Officer of Lincoln Residential Services, where he was responsible for all aspects of leading a full service property management company of approximately 40,000 multifamily units in the western United States; from July 1993 to January 1995, Vice President of Lincoln Property Company, Irvine, California, with responsibility for overall management and revenue growth for the region. Prior thereto, Mr. Banks was with American Real Estate Group, where he oversaw the asset management of a $300 million portfolio of real estate assets. JAY S. JACOBSON--45--Managing Director of PTR since December 1997 and Senior Vice President of PTR from June 1996 to December 1997, where he has overall responsibility for investments and operations in the Central/Northwest Region; Vice President of PTR from July 1993 to June 1996. From 1988 to June 1993, Vice President--Residential Development for Michael Swerdlow Companies, Inc. and Hollywood Inc., (South Florida real estate development/management companies under common control), where he was responsible for the planning and development of large scale single family and multifamily developments as well as other development properties. Previously, Mr. Jacobson was a general partner and Chief Executive Officer of Meridian Land Company, a Denver-based residential development firm. RICHARD W. DICKASON--41--Senior Vice President of PTR since October 1997, where he has overall responsibility for investments in the Northwest Region; from March 1995 to October 1997, Vice President of PTR. From December 1993 to March 1995, Vice President of PACIFIC; from July 1992 to September 1993, President of J.M. Peters Company/Capital Pacific Homes, where he acquired property for the development of single-family homes and multifamily communities. From May 1980 to January 1992, Partner and Vice President of Lincoln Property Company N.C. Inc., where he was responsible for the acquisition, development, construction and management of a 4,000 unit multifamily residential portfolio in California. Prior thereto, Mr. Dickason represented private investors in the development of condominiums, townhouses, shopping centers and single-family homes throughout California. BRYAN J. FLANAGAN--45--Senior Vice President of PTR since November 1996, where he is responsible for financial operations. From June 1995 to November 1996, Mr. Flanagan was responsible for the financial operations of Security Capital Group. Prior to joining Security Capital, Mr. Flanagan was Vice President-Financial Analysis for Marriott Hotels, Resorts and Suites from September 1987 to June 1995. JOHN JORDANO, III--41--Senior Vice President of PTR since October 1997, where he has overall responsibility for PTR's investment activity in the West Region; from March 1995 to October 1997, Vice President of PTR and from August 1994 to March 1995, Vice President of PACIFIC. From January 1992 to July 1994, Senior Vice President of Prospect Partners, where he was responsible for identifying and advising individual and corporate clients on financial institution and Resolution Trust Corporation apartment acquisition and investment opportunities in the western United States. Prior thereto, partner with Trammell Crow Residential Company, where he established the Sacramento office and was responsible for the development of multifamily communities. JEFFREY A. KLOPF--49--Senior Vice President and Secretary of PTR and Security Capital Group since January 1996, where he provides securities offerings and corporate acquisitions services and oversees the provision of legal services for affiliates of Security Capital Group. From January 1988 to December 1995, partner of Mayer, Brown & Platt, where he practiced corporate and securities law. Other Officers of PTR FRANK R. ANDERSON--39--Vice President of PTR since June 1995, where he is responsible for development activities in Salt Lake City, Utah and Portland, Oregon, together with capital improvement initiatives throughout the Northwest region; prior thereto, from January 1989 to February 1994, Vice President, Acquisitions and Land Development for Shea Homes, a single-family and multifamily developer in San Diego, 11 California, where he was responsible for all aspects of land acquisition and community development for master-planned residential projects. ASH K. ATWOOD--34--Vice President of PTR since November 1996, Co-Controller since June 1997, where he is responsible for PTR's corporate accounting and external financial reporting. Prior thereto, Senior Manager in the assurance practice of KPMG Peat Marwick LLP, where he had extensive involvement in PTR's annual audit and securities offerings since joining the firm in June 1986. Mr. Atwood is a Certified Public Accountant registered in Texas. G. WILLIAM BAIN--49--Vice President of PTR since October 1997, where he is responsible for major rehabilitation construction projects in northern California. Prior thereto, from July 1983 to October 1996, Mr. Bain was a Vice President with Woodmont Real Estate Services, where he managed construction rehabilitation projects and environmental programs. MICHAEL P. BISSELL--47--Vice President of PTR since February 1997, where he is responsible for community operations in the Northwest Region; from August 1996 to February 1997, Vice President of the Property Manager. From September 1991 to August 1996, President of Michael P. Bissell & Associates, where he was involved in a variety of consulting assignments for clients in the multifamily industry. From March 1990 to July 1991, Mr. Bissell was President of McKinley Properties where he was engaged in the management of multifamily and commercial properties. JAMES C. BORMANN--45--Vice President of PTR since December 1995, where he is responsible for construction and property rehabilitation activities in the Central Region; from August 1992 to May 1995, Vice President of construction with Roseland Property Company (formerly Lincoln Property Company Northeast). Prior thereto, he served as Vice President of Construction with Rosewood Property Company and Property Company of America. MICHAEL A. BRITTI--38--Vice President of PTR since September 1996 and with PTR since September 1995, where he is responsible for new product development and revenue enhancement through portfolio-wide initiatives. From November 1993 to September 1995, Mr. Britti served as Vice President--Asset Management with the National Corporation for Housing Partnerships in Washington, D.C., where he led acquisitions and restructuring of large apartment portfolios. Prior thereto, from July 1987 to November 1993, he was Vice President of Investment Management, with Oxford Realty Services Corporation in Bethesda, Maryland. HENRY J. BUNIS--44--Vice President of PTR since June 1997, where he is responsible for the acquisition of existing communities and land sites for development in the Northwest Region. Previously, Mr. Bunis was with the acquisition group for Security Capital Atlantic Incorporated and with the portfolio acquisition group for Security Capital Group. KERRY E. ENDSLEY--49--Vice President of PTR since May 1996, where he is responsible for construction and rehabilitation activities in Denver, Colorado and Austin, Texas. From January 1994 to July 1995, President of Construction for MFI Construction, Inc. in Houston, Texas, where he managed construction of over 1,100 multifamily units in Texas and Colorado. Prior thereto, from October 1988 to December 1993, Vice President of General Contracting for Bradley Construction, Inc., where he was responsible for over 2,000 multifamily units, schools, dormitories and warehouses, and where he recruited personnel. ELLEN V. FITZPATRICK--45--Vice President of PTR since October 1997 and with PTR since January 1996, where she is responsible for coordinating due diligence on land pursued for Multifamily development. Ms. Fitzpatrick has held various positions with Security Capital Group since joining the company in March 1992. SUE P. FREEDMAN--50--Vice President of PTR since February 1997, where she has overall responsibility for PTR's education and organizational development activities; from November 1996 to February 1997, Vice 12 President of the Property Manager. From August 1995 to October 1996, creator and manager of Knowledge Work Associates, where she worked with clients on organizational improvement. From January 1984 to July 1995, Ms. Freedman held a number of positions focused on organizational effectiveness with Texas Instruments. THOMAS G. GARLOCK--44--Vice President of PTR since August 1997, where he is responsible for supervising production activities throughout Southern California. Prior thereto, Senior Vice President of Construction with Regis Contractors from July 1989 to August 1997. PETER M. GRIMM--55--Vice President of PTR since 1975, where he is a project manager in Texas. From March 1973 to 1975, Mr. Grimm was Administrative Vice President of Property Services of America; prior thereto, Mr. Grimm was a registered professional engineer and certified general contractor in private practice. DANA K. HAMILTON--29--Vice President of PTR since December 1996, where she is responsible for new product development and revenue enhancement through portfolio-wide initiatives; from April 1996 to December 1996, Vice President of the Property Manager, where she focused on national operations; from August 1994 to April 1995, she participated in the Management Development Program of Security Capital Group. CHRISTOPHER C. HARNESS--45--Vice President of PTR since December 1995, where he is responsible for PTR's investment activity in the Central Region; prior thereto, he was responsible for community operations in Dallas and El Paso, Texas and a member of PTR's development group. From August 1993 to June 1994, he was a Senior Analyst for Due Diligence with the Property Manager; prior thereto, Mr. Harness was responsible for development of commercial properties in eight Texas markets for Affiliated Builders. NELSON L. HENRY--62--Vice President of PTR since December 1994, where he has overall responsibility for construction, planning and rehabilitation activity in California, Arizona and Nevada. From January 1983 to September 1993, Mr. Henry served as Construction Vice President for Lincoln Property Company N.C. Inc., where he was responsible for the construction of over 8,000 units in Colorado and California. Prior thereto, he was President of Royal Investment Corporation, a regional multifamily and single family developer. RICK D. JACOBSEN--39--Vice President of PTR since April 1997 and with PTR since January 1996 where he is responsible for corporate budgeting, financial planning, and financial analysis. From July 1983 to January 1996, he was Director of Financial Analysis for Weingarten Realty Investors, Houston, Texas, where he was responsible for budgeting and forecasting, new development underwriting activity and other corporate finance and capital market activities. THOMAS J. KLAESS--37--Vice President of PTR since June 1997, where he is responsible for community operations in Denver, Colorado; prior thereto, from March 1994 to May 1997, Senior Operations Manager for the Property Manager. From January 1992 to February 1994, he was District Manager for National Housing Partnership, Inc.; from January 1990 to January 1992, Mr. Klaess was Regional Director of Hall Financial Group, Inc. DEIRDRE A. KURING--36--Vice President of PTR since June 1997, where she is responsible for community operations in Portland, Oregon; from June 1996 to June 1997, Senior Operations Manager for the Property Manager. From December 1995 to May 1996, she was Vice President of Operations for Lexford Properties, Inc., where she was District Manager from August 1993 to December 1995. From February 1990 to August 1993, Ms. Kuring was District Property Manager and Marketing Director for Polygon Management, Inc. GRETCHEN P. LAMBERSON--33--Vice President of PTR since June 1997 and with PTR since October 1996, where she is responsible for directing and coordinating human resources activities and policies. From May 1995 to October 1996, Ms. Lamberson was Regional Human Resources Manager for the Property Manager. Previously, from January 1987 to February 1995, Ms. Lamberson worked in Human Resources for Walt Disney World Co. LAWRENCE S. LEVITT--41--Vice President of PTR since August 1995, where he has overall responsibility for disposition activity, as well as responsibility for acquisitions in PTR's West Region. From 13 May 1992 to August 1995, he served as Vice President--Director of Residential Acquisitions of Sares-Regis Group, where he managed the residential acquisitions division. From August 1991 to May 1992, Mr. Levitt was Principal of Integrated Mortgage Resources, a commercial and residential mortgage banking firm; prior thereto, he was Vice President of Con Am Management Corporation, San Diego, California, where he managed acquisitions as well as debt and equity transactions. TONI L. LOPEZ--40--Vice President of PTR since February 1997, where she has overall responsibility for community operations in Denver, Colorado and Dallas, Austin and San Antonio, Texas; Vice President of the Property Manager from August 1996 to February 1997 and with the Property Manager since July 1993 where she was responsible for community operations in San Antonio and Austin, Texas. From December 1985 to January 1993, Ms. Lopez was Vice President of Beacon Hill Investments, Inc., where she was responsible for new account generation and property and asset management. GREGORY J. LOZINAK--32--Vice President of PTR since May 1997, where he is responsible for community operations in El Paso and Houston, Texas. From October 1994 to July 1996, he was a Senior Operations Manager for the Property Manager, with responsibility for community operations in Houston, Texas; prior thereto, from June 1994 to October 1994, he was responsible for property operations in Dallas, Texas; from October 1987 to December 1993, Mr. Lozinak was an officer in the United States Army. JOHN W. LUEDTKE--44--Vice President of PTR since October 1997, where he is a project manager for Southern California. Prior to joining PTR, Mr. Luedtke was a Vice President with Continental American Properties, Ltd. (ConAm) from April 1990 to April 1997 where he was responsible for all phases of the development and construction management of approximately 1,500 luxury apartment units. SCOTT V. MONROE--38--Vice President of PTR since February 1997, where he has overall responsibility for community operations in California; from August 1996 to February 1997, Vice President of the Property Manager. From March 1987 to July 1996, Mr. Monroe served as Vice President of Maxim Property Management, where he had direct management responsibility for a residential portfolio consisting of over 11,000 units located throughout California and Arizona. CHARLES E. MUELLER, JR.--34--Vice President of PTR since September 1996, where he is responsible for corporate finance, capital markets activities and investor relations; prior thereto, he was with Capital Markets Group, where he provided financial services to Security Capital Group and its affiliates. From April 1994 to April 1995, he participated in the Management Development Program of Security Capital Group. DANIEL W. OGDEN--37--Vice President of PTR since December 1995, where he is responsible for community operations in New Mexico, Arizona, and Nevada; from March 1995 to December 1995, Vice President of the Property Manager where he had overall responsibility for property management operations in the Central Region. From June 1994 to February 1995, Mr. Ogden was Executive Vice President of Mutual Real Estate Corporation in Dallas, Texas, where he was responsible for the management of a portfolio containing properties in seven states. From September 1990 to May 1994, he served as a Regional Vice President of Lincoln Property Company, where he was responsible for the management of over 16,000 multifamily units located in 12 mid-Atlantic/Midwest states. THOMAS L. POE--40--Vice President of PTR since June 1994; Co-Controller since June 1997, where he is responsible for property-level accounting and financial reporting. Prior to joining PTR in 1992, he was with The Mischer Corporation, Houston, Texas, where he served as Vice President of Finance from 1988 to 1992, and as Real Estate Controller from 1981 to 1988. Prior thereto, Mr. Poe was a staff accountant with Arthur Andersen & Company. Mr. Poe is a Certified Public Accountant registered in Texas. PAMELA D. PORTER--37--Vice President of PTR since September 1996, where she has overall responsibility for the due diligence group, including contract negotiation and implementation, environmental reviews and 14 management and implementation of tax-free exchanges. Ms. Porter was a Vice President of Security Capital Industrial Trust from November 1994 to September 1996 and with the company since November 1993, where she had responsibility for due diligence activities. From May 1992 to November 1993, Ms. Porter was a partner with Lantana Properties, Inc., a commercial real estate brokerage company in San Antonio, Texas; from July 1991 to April 1992, she was a broker and analyst with Wilson Schanzer, Inc., in San Antonio, Texas. HAROLD D. RILEY--61--Vice President of PTR since September 1974, where he provides accounting and financial reporting services. Prior to joining PTR, Mr. Riley was an audit manager for the public accounting firms of Peat, Marwick, Mitchell & Co. and Elmer Fox & Co. Mr. Riley is a Certified Public Accountant registered in Texas. MARY H. ROGERS--44--Vice President of PTR since October 1997, where she is responsible for overall property operations in Phoenix, Arizona. From September 1993 to September 1997, she was a Senior Operations Manager and an Operations Manager with the Property Manager with responsibility for the financial performance and overall operations of seven multifamily communities. Prior thereto, Ms. Rogers was an operations manager for National Realty Management, Inc., a syndicator-developer, from June 1980 to October 1992. SCOTT D. SHAULL--33--Vice President of PTR since October 1997, where he is responsible for PTR's development activity in Seattle. From September 1994 to May 1995 he was a Development Manager for SummerHill Homes and Vice President for Westbrook Housing Group from June 1990 to September 1994; prior thereto, a Project Manager for State Homes Inc., a publicly traded development and construction management firm. W. ROBERT SMITH--38--Vice President of PTR since November 1996, where he is responsible for development project management and community acquisitions in the Central Region; from July 1989 to November 1996, Senior Vice President of IBG Development in Washington, D.C., where he was responsible for the development of high-rise commercial, mixed-use, and residential projects in the central business district. FREDDA C. STEINBERG--41--Vice President of PTR since February 1997, where she is responsible for portfolio-wide marketing activities; from November 1995 to February 1997, Vice President of the Property Manager, where she was responsible for marketing and training activities. From June 1994 to October 1995, she was responsible for the marketing programs for PTR's new development communities. Prior to joining PTR, Ms. Steinberg was National Director of Marketing and Training for Metric Property Management, where she was responsible for developing and implementing marketing and training programs for a nationwide portfolio of 24,000 apartment units. SHYAM R. TAGGARSI--42--Vice President of PTR since June 1996, where he is responsible for all development activity in Northern California; from January 1993 to September 1996, Mr. Taggarsi was a real estate consultant in Foster City, California. From December 1987 to January 1993, he was a development partner with Trammell Crow Residential in Foster City, California, where he was responsible for all aspects of multifamily residential project management and development in the South Bay (San Francisco) area. GARY L. TRUITT--47--Vice President of PTR since December 1995 and with PTR since January 1995, where he is responsible for all construction activity in the Pacific Northwest and Salt Lake City; from July 1994 to January 1995, Project Manager with C.F. Jordan, Inc. From January 1991 to July 1994, Mr. Truitt was Superintendent of Benchmark Contractors, where he was responsible for supervision and code and specification compliance. LOUIS A. VASQUEZ--43--Vice President of PTR since October 1997, where he is responsible for construction activity in Northern California. Prior to joining PTR, from November 1994 to January 1997, Mr. Vasquez was Director of Operations and Senior Project Manager for Avelino Associates, an information integration consulting firm. From July 1990 to November 1994, he was president of Buena Vista Construction and a partner in Buena Vista Development, specializing in new single family construction, urban renovation projects and infill development. 15 DAVID B. WOODWARD--31--Vice President of PTR since November 1993, where he is responsible for new product development and revenue enhancement through portfolio-wide initiatives. Mr. Woodward was Vice President of Operations for the Property Manager from January 1995 through September 1997. From June 1993 to January 1995, he was responsible for various aspects of PTR's property management. From February 1991 to June 1993, he was an Asset Manager with the Real Estate Division of USF&G. K. DOUGLAS WRIGHT--51--Vice President of PTR since July 1995, where he is a project manager in Southern California. From December 1991 to June 1995, Mr. Wright was a real estate consultant, developer and asset manager; prior thereto, President of Summit Development Company. EMPLOYEES Prior to September 9, 1997, PTR 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 PTR. PTR currently employs a total of 1,231 individuals, of which 953 are focused on the site-level management of PTR's Multifamily communities. The balance are professionals who manage corporate level operations, including PTR's investment program, property operations and financial activities. PTR's management considers its relationship with its employees to be good. PTR's employees are not represented by a collective bargaining agreement. INSURANCE PTR carries comprehensive general liability coverage on its owned communities, with limits of liability customary within the industry, to insure against liability claims and related defense costs. Similarly, PTR is insured against the risk of direct physical damage in amounts necessary to reimburse PTR on a replacement cost basis for costs incurred to repair or rebuild each property, including loss of rental income during the reconstruction period. PTR's blanket property policy for all operating and development communities includes coverage for the perils of floods and earthquakes. PTR's earthquake coverage is subject to a deductible equal to 5% of aggregate replacement value of communities affected by any such occurrence, subject to a maximum aggregate recovery of $100 million per occurrence. COMPETITION There are numerous commercial developers, real estate companies and other owners of real estate that compete with PTR in seeking land for development, communities for acquisition and disposition, and residents for communities. All of PTR's Multifamily communities are located in developed areas that include other multifamily communities. The number of competitive multifamily communities in a particular area could have a material adverse effect on PTR's ability to lease units and on the rents charged. In addition, other forms of single family and multifamily residential communities provide housing alternatives to residents and potential residents of PTR's Multifamily communities. PTR has 16.82%, 15.82%, 10.77% and 10.20% of its Multifamily portfolio of communities operating or under construction, based on Total Expected Investment, located in the Southern California, Northern California, Phoenix, Arizona and Seattle, Washington markets, respectively. As a result, PTR is subject to increased exposure (positive or negative) to the economic and other competitive factors specific to these markets. The majority of PTR's development efforts emphasize the development of Multifamily communities targeted at Moderate Income households. PTR defines Moderate Income households to be those households earning 65% to 90% of the median income in a given submarket. Moderate Income households represent one of the largest and most underserved segments of the renter population. PTR believes that these households exhibit a number of very important characteristics that make them particularly desirable customers. For example, they are 16 typically longer-term residents, which results in lower resident turnover and, therefore, lower overall costs to refurbish units for re-leasing. In addition, there is relatively limited competition for this segment of the market because most developers target the upper income segment of the market. PTR believes that focusing on the Moderate Income segment will allow it to achieve more consistent rental increases and higher occupancies over the long-term and, thereby, realize sustainable cash flow growth and appreciation in value. AMERICANS WITH DISABILITIES ACT PTR's communities must comply with Title III of the ADA to the extent that such communities are "public accommodations" and/or "commercial facilities" as defined by the ADA. The ADA does not consider Multifamily communities to be public accommodations or commercial facilities, except portions of such facilities open to the public, such as the leasing office. Noncompliance could result in imposition of fines or an award of damages to private litigants. PTR believes that the mandated portions of its communities comply with all present requirements under the ADA and applicable state laws. ENVIRONMENTAL MATTERS Under various federal, state and local laws, ordinances and regulations, a current or previous owner, developer or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances at, on, under or in its property. The costs of removal or remediation of such substances could be substantial. Such laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the release or presence of such hazardous or toxic substances. The presence of such substances may adversely affect the owner's ability to sell or rent such real estate or to borrow using such real estate as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances also may be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not such facility is owned or operated by such person. Certain environmental laws impose liability for the release of asbestos-containing materials into the air, pursuant to which third parties may seek recovery from owners or operators of real properties for personal injuries associated with such materials, and prescribe specific methods for the removal and disposal of such materials, which may result in increased costs in connection with renovations at PTR's properties. PTR has not been notified by any governmental authority of any non- compliance, liability or other claim in connection with any of its properties owned or being acquired at January 31, 1998, and PTR is not aware of any environmental condition with respect to any of its properties that is likely to have a material adverse effect on PTR's financial position or results of operations. PTR has subjected each of its properties to a Phase I environmental assessment (which does not involve invasive procedures such as soil sampling or ground water analysis) by independent consultants. While some of these assessments have led to further investigation and sampling, none of the environmental assessments has revealed, nor is PTR aware of, any environmental liability (including asbestos-related liability) that it believes would have a material adverse effect on PTR's business, financial condition or results of operations. No assurance can be given, however, that these assessments and investigations reveal all potential environmental liabilities, that no prior owner or operator created any material environmental condition not known to PTR or the independent consultants or that future uses and conditions (including, without limitation, resident actions or changes in applicable environmental laws and regulations) will not result in unreimbursed costs relating to environmental liabilities. ITEM 2. PROPERTIES GEOGRAPHIC DISTRIBUTION To effectively manage its Multifamily communities, PTR has organized its operations into three regions (Central, Northwest and West). Within these regions, PTR's Multifamily communities are located in 23 17 metropolitan areas in 10 states. The table below summarizes the geographic distribution of PTR's Multifamily communities which are operating or under construction, based on Total Expected Investment.
DECEMBER 31, ---------------------- 1997 1996 1995 ------ ------ ------ CENTRAL REGION: Austin, Texas................................... 2.67% 4.65% 7.26% Dallas, Texas................................... 2.81 3.86 5.22 Denver, Colorado................................ 5.01 4.61 5.62 El Paso, Texas.................................. 3.14 4.45 5.68 Houston, Texas.................................. 5.29 7.29 8.65 San Antonio, Texas.............................. 4.98 6.37 9.16 ------ ------ ------ Central Region Total.......................... 23.90% 31.23% 41.59% ------ ------ ------ NORTHWEST REGION: Portland, Oregon................................ 5.10% 6.71% 4.95% Salt Lake City, Utah............................ 4.91 4.94 2.86 Seattle, Washington............................. 10.20 5.82 4.41 ------ ------ ------ Northwest Region Total........................ 20.21% 17.47% 12.22% ------ ------ ------ WEST REGION: Albuquerque, New Mexico......................... 4.92% 5.80% 6.60% Las Vegas, Nevada............................... 3.74 5.34 6.52 Phoenix, Arizona................................ 10.77 12.95 17.70 Northern California............................. 15.82 8.99 2.15 Southern California............................. 16.82 12.82 2.47 Tucson, Arizona................................. 1.49 2.73 6.46 ------ ------ ------ West Region Total............................. 53.56% 48.63% 41.90% ------ ------ ------ Other Markets................................. 2.33% 2.67% 4.29% ------ ------ ------ Total All Markets............................. 100.00% 100.00% 100.00% ====== ====== ======
REAL ESTATE PORTFOLIO The information in the following table is as of December 31, 1997, except as noted below (dollar amounts in thousands). Additional information on PTR's real estate portfolio is contained in "Schedule III, Real Estate and Accumulated Depreciation," and in PTR's financial statements incorporated by reference in "Item 14(a). Financial Statements and Schedule."
YEAR TOTAL ACQUIRED OR NUMBER OF PTR EXPECTED PERCENTAGE COMPLETED (1) UNITS INVESTMENT INVESTMENT (2) LEASED (3) ------------- --------- ---------- -------------- ---------- OPERATING COMMUNITIES: CENTRAL REGION: Austin, Texas: Stabilized: Hunters' Run*...... 1996 400 $ 19,865 $ 19,905 97.5% Monterrey Ranch*... 1996 456 24,064 24,109 96.5 The Ridge.......... 1993 326 11,063 11,189 96.3 Rock Creek......... 1993 314 10,355 10,627 96.2 Shadowood.......... 1993 236 6,744 7,012 98.7 ----- ---------- ---------- ---- Subtotal/Average. 1,732 $ 72,091 $ 72,842 96.9% ----- ---------- ---------- ----
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YEAR TOTAL ACQUIRED OR NUMBER OF PTR EXPECTED PERCENTAGE COMPLETED (1) UNITS INVESTMENT INVESTMENT (2) LEASED (3) ------------- --------- ---------- -------------- ---------- Dallas, Texas: Stabilized: Custer Crossing.... 1993 244 $ 11,412 $ 12,343 98.4% Quail Run.......... 1993 278 12,037 13,100 97.5 Summerstone........ 1993 192 7,603 8,723 95.8 Timber Ridge....... 1994 160 7,506 7,854 98.8 Woodland Park...... 1993 216 7,503 7,798 98.2 Prestabilized: Meadows at Park Boulevard*........ 1997 368 16,846 17,075 94.8 ----- ---------- ---------- ----- Subtotal/Average. 1,458 $ 62,907 $ 66,893 97.0% ----- ---------- ---------- ----- Denver, Colorado: Stabilized: Cambrian........... 1993 383 $ 12,571 $ 13,468 99.5% The Cedars......... 1993 408 19,062 20,978 95.8 Fox Creek I........ 1993 175 6,530 6,864 100.0 Hickory Ridge...... 1992 688 24,738 25,703 98.6 Reflections*....... 1996 416 21,738 22,379 98.6 Silvercliff........ 1994 312 16,535 16,971 97.1 Sunwood............ 1992 156 6,713 7,019 99.4 ----- ---------- ---------- ----- Subtotal/Average. 2,538 $ 107,887 $ 113,382 98.2% ----- ---------- ---------- ----- El Paso, Texas: Stabilized: Acacia Park*....... 1995 336 $ 14,367 $ 14,450 96.7% Cielo Vista........ 1993 378 9,200 9,384 96.6 Double Tree........ 1993 284 6,343 6,435 98.9 Las Flores*#....... 1983 468 8,598 8,785 92.7 Mountain Village... 1992 288 7,566 7,756 93.4 The Patriot*....... 1996 320 12,476 12,637 99.4 The Phoenix*....... 1993 336 10,790 10,852 97.6 Shadow Ridge*...... 1994 352 12,471 12,620 97.2 Tigua Village*..... 1978 184 2,569 2,645 88.6 ----- ---------- ---------- ----- Subtotal/Average. 2,946 $ 84,380 $ 85,564 95.9% ----- ---------- ---------- ----- Houston, Texas: Stabilized: 7100 Almeda........ 1994 348 $ 12,247 $ 12,397 100.0% Beverly Palms...... 1994 362 10,773 11,957 97.8 Braeswood Park..... 1993 240 12,747 12,930 98.8 Brompton Court#.... 1994 794 32,077 33,120 99.5 Memorial Heights I*................ 1996 360 18,975 18,984 97.5 Oaks at Medical Center I*......... 1996 360 18,569 18,611 98.6 ----- ---------- ---------- ----- Subtotal/Average. 2,464 $ 105,388 $ 107,999 98.8% ----- ---------- ---------- ----- Omaha, Nebraska: Stabilized: Apple Creek#....... 1994 384 $ 13,939 $ 14,183 96.4% ----- ---------- ---------- -----
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YEAR TOTAL ACQUIRED OR NUMBER OF PTR EXPECTED PERCENTAGE COMPLETED (1) UNITS INVESTMENT INVESTMENT (2) LEASED (3) ------------- --------- ---------- -------------- ---------- San Antonio, Texas: Stabilized: Applegate........... 1993 344 $ 10,572 $ 10,874 96.5% Austin Point........ 1993 328 12,736 12,906 98.8 Camino Real......... 1993 176 6,662 7,232 99.4 Cobblestone Village. 1992 184 4,651 4,832 95.7 Contour Place....... 1992 126 2,776 2,883 97.6 The Crescent*....... 1994 306 15,945 16,109 99.7 Dymaxion............ 1994 190 4,853 4,921 100.0 Marbach Park........ 1993 304 8,342 8,578 96.7 Palisades Park...... 1993 328 8,303 8,319 98.8 Rancho Mirage....... 1993 254 5,292 5,390 99.2 Stanford Heights*... 1996 276 13,438 13,516 95.3 Sterling Heights*... 1995 224 12,155 12,404 100.0 Villas of Castle Hills.............. 1993 163 6,099 6,248 91.4 Villas of St. Tropez I.................. 1992 273 11,697 11,861 99.3 Waters of Northern Hills.............. 1994 305 9,335 9,731 93.4 ------ ---------- ---------- ----- Subtotal/Average.. 3,781 $ 132,856 $ 135,804 97.5% ------ ---------- ---------- ----- Central Region Subtotal/Average. 15,303 $ 579,448 $ 596,667 97.4% ------ ---------- ---------- ----- NORTHWEST REGION: Portland, Oregon: Stabilized: Brighton............ 1996 233 $ 12,075 $ 12,195 92.7% Meridian at Murrayhill......... 1995 312 17,275 -(4)- -(4)- Preston's Crossing*. 1996 228 12,945 12,951 99.1 Riverwood Heights... 1995 240 10,219 10,524 95.4 Squire's Court...... 1995 235 11,155 11,246 95.7 Timberline.......... 1996 130 7,492 7,718 96.9 ------ ---------- ---------- ----- Subtotal/Average.. 1,378 $ 71,161 $ 54,634 95.9% ------ ---------- ---------- ----- Salt Lake City, Utah: Stabilized: Brighton Place...... 1995 336 $ 15,498 $ 17,179 94.9% Cherry Creek#....... 1995 225 9,049 9,112 98.2 Greenpointe#*....... 1997 224 8,344 8,541 98.2 Mountain Shadow I#.. 1995 174 5,750 6,765 90.8 Remington*.......... 1997 288 17,081 17,155 94.8 Prestabilized: Carrington Place#... 1997 142 7,464 7,743 100.0 Cloverland#......... 1997 186 9,564 10,129 86.6 The Crossroads#..... 1996 240 10,782 10,830 88.8 Fox Creek#.......... 1996 186 8,679 8,863 93.6 Mountain Shadow II*. 1997 88 4,573 4,726 90.9 ------ ---------- ---------- ----- Subtotal/Average.. 2,089 $ 96,784 $ 101,043 93.9% ------ ---------- ---------- -----
20
YEAR TOTAL ACQUIRED OR NUMBER OF PTR EXPECTED PERCENTAGE COMPLETED (1) UNITS INVESTMENT INVESTMENT (2) LEASED (3) ------------- --------- ---------- -------------- ---------- Seattle, Washington: Stabilized: Logan's Ridge....... 1995 258 $ 13,403 $ 14,499 95.0% Matanza Creek....... 1995 152 7,164 7,232 97.4 Millwood Estates.... 1995 300 11,482 11,701 95.0 Pebble Cove*........ 1995 288 17,476 17,500 99.0 Remington Park...... 1995 332 19,193 21,175 95.8 Walden Pond......... 1995 316 13,943 14,233 97.8 Prestabilized: The Cambrian........ 1997 422 42,272 42,698 97.2 Canyon Creek*....... 1997 336 24,892 25,329 93.2 Canyon Pointe....... 1997 250 20,828 21,237 98.0 Fairwood Landing#... 1996 194 8,889 9,000 95.4 Harbour Pointe*..... 1997 230 15,124 15,155 97.8 Newport Crossing.... 1997 192 11,841 12,280 94.8 Waterford Place..... 1997 360 27,897 28,131 95.8 ----- ---------- ---------- ---- Subtotal/Average.. 3,630 $ 234,404 $ 240,170 96.3% ----- ---------- ---------- ---- Northwest Region Subtotal/Average. 7,097 $ 402,349 $ 395,847 95.5% ----- ---------- ---------- ---- WEST REGION: Albuquerque, New Mexico: Stabilized: Commanche Wells..... 1994 179 $ 5,263 $ 5,484 96.1% Entrada Pointe...... 1994 209 7,871 8,224 92.3 La Paloma*.......... 1996 424 23,491 23,876 95.8 La Ventana*......... 1996 232 15,559 15,629 97.8 Pavilions*.......... 1992 240 15,768 15,947 99.6 Sandia Ridge........ 1992 272 7,922 8,298 92.7 Telegraph Hill...... 1996 200 8,691 8,902 96.0 Vista Del Sol....... 1993 168 6,190 6,459 97.0 Vistas at Seven Bar Ranch*............. 1996 572 29,611 30,102 95.8 Wellington Place.... 1993 280 10,705 11,053 98.2 ----- ---------- ---------- ---- Subtotal/Average.. 2,776 $ 131,071 $ 133,974 96.1% ----- ---------- ---------- ---- Inland Empire, California: Stabilized: The Crossing........ 1996 296 $ 16,183 $ 16,469 89.5% Miramonte........... 1995 290 16,647 16,811 93.1 Sierra Hills........ 1997 300 19,816 20,245 92.7 Woodsong Village.... 1996 262 12,894 13,123 96.2 Prestabilized: Terracina........... 1996 736 40,931 41,586 93.1 Westcourt Village... 1996 515 17,019 17,461 95.0 ----- ---------- ---------- ---- Subtotal/Average.. 2,399 $ 123,490 $ 125,695 93.3% ----- ---------- ---------- ----
21
YEAR TOTAL ACQUIRED OR NUMBER OF PTR EXPECTED PERCENTAGE COMPLETED (1) UNITS INVESTMENT INVESTMENT (2) LEASED (3) ------------- --------- ---------- -------------- ---------- Las Vegas, Nevada: Stabilized: Horizons at Peccole Ranch............. 1995 408 $ 21,927 $ 22,233 98.0% King's Crossing.... 1995 440 19,492 -(4)- -(4)- La Tierra at the Lakes#............ 1995 896 43,503 44,782 95.0 Sunterra#.......... 1995 444 14,845 15,282 93.5 ----- ---------- ---------- ----- Subtotal/Average. 2,188 $ 99,767 $ 82,297 95.3% ----- ---------- ---------- ----- Orange County, California: Stabilized: Newpointe.......... 1996 160 $ 9,684 $ 9,933 98.8% Villa Marseilles... 1996 192 13,980 14,231 94.8 Prestabilized: River Meadows#..... 1997 152 14,933 15,182 99.3 ----- ---------- ---------- ----- Subtotal/Average. 504 $ 38,597 $ 39,346 97.4% ----- ---------- ---------- ----- Phoenix, Arizona: Stabilized: Bay Club........... 1993 472 $ 15,755 $ 16,152 98.5% Foxfire............ 1994 188 7,411 7,537 99.5 Moorings at Mesa Cove.............. 1992 406 17,575 17,798 96.8 Peaks at Papago Park *............ 1996 768 36,873 37,260 99.2 The Ridge.......... 1993 380 13,243 13,355 96.1 San Marquis North*. 1995 208 10,900 11,028 98.6 San Marquis South*. 1994 264 13,603 13,665 99.2 San Palmera*....... 1997 412 25,399 25,423 97.3 San Valiente I*.... 1997 376 22,288 22,288 97.1 Scottsdale Greens.. 1994 644 29,156 30,132 99.2 Superstition Park.. 1992 376 12,904 13,100 98.7 Prestabilized: Miralago I*........ 1997 496 24,953 25,026 99.4 ----- ---------- ---------- ----- Subtotal/Average. 4,990 $ 230,060 $ 232,764 98.4% ----- ---------- ---------- ----- Reno, Nevada: Stabilized: Vista Ridge*....... 1997 324 $ 21,079 $ 21,173 92.3% ----- ---------- ---------- ----- Sacramento, California: Stabilized: Folsom Ranch....... 1997 344 $ 23,819 $ 24,333 93.9% ----- ---------- ---------- -----
22
YEAR TOTAL ACQUIRED OR NUMBER OF PTR EXPECTED PERCENTAGE COMPLETED (1) UNITS INVESTMENT INVESTMENT (2) LEASED (3) ------------- --------- ---------- -------------- ---------- San Diego, California: Stabilized: Club Pacifica....... 1996 264 $ 14,836 $ 15,254 93.2% Ocean Crest......... 1996 300 16,712 17,767 98.7 The Palisades....... 1996 296 32,123 32,284 97.6 Scripps Landing..... 1994 160 9,515 10,074 98.8 Tierrasanta Ridge... 1994 340 20,007 20,740 98.2 Prestabilized: El Dorado Hills#.... 1996 448 31,760 32,582 98.7 La Jolla Point#..... 1997 328 32,047 32,828 92.1 ------ ---------- ---------- ---- Subtotal/Average.. 2,136 $ 157,000 $ 161,529 96.8% ------ ---------- ---------- ---- San Francisco (Bay Area), California: Stabilized: Harborside.......... 1996 148 $ 21,569 $ 21,671 93.9% Los Padres.......... 1997 245 30,826 31,344 96.7 Marina Lakes#....... 1997 468 40,107 40,510 98.7 Redwood Shores#..... 1996 304 37,998 39,754 94.4 Treat Commons#...... 1995 510 39,205 39,675 99.8 Prestabilized: Ashton Place#....... 1996 948 73,732 90,973 87.1 Reflections......... 1997 496 53,046 53,404 98.4 Sundance at Vallejo Ranch.............. 1996 396 19,234 19,385 99.5 ------ ---------- ---------- ---- Subtotal/Average.. 3,515 $ 315,717 $ 336,716 95.1% ------ ---------- ---------- ---- Santa Fe, New Mexico: Stabilized: Talavera*........... 1994 296 $ 12,685 $ 12,910 98.0% ------ ---------- ---------- ---- Tucson, Arizona: Stabilized: San Ventana*........ 1997 408 $ 25,020 $ 25,620 97.6% Tierra Antigua...... 1992 147 5,547 5,732 95.9 Villa Caprice....... 1993 268 9,050 9,221 95.5 ------ ---------- ---------- ---- Subtotal/Average.. 823 $ 39,617 $ 40,573 96.6% ------ ---------- ---------- ---- Ventura County, California: Prestabilized: Le Club#............ 1997 370 $ 33,580 $ 34,556 97.0% Pelican Point....... 1997 400 29,510 30,461 96.3 ------ ---------- ---------- ---- Subtotal/Average.. 770 $ 63,090 $ 65,017 96.6% ------ ---------- ---------- ---- West Region Subtotal/Average. 21,065 $1,255,992 $1,276,327 96.2% ------ ---------- ---------- ---- Multifamily Operating Communities Total/Average... 43,465 $2,237,789 $2,268,841 96.5% ------ ---------- ---------- ----
23
YEAR TOTAL ACQUIRED OR NUMBER OF PTR EXPECTED PERCENTAGE COMPLETED (1) UNITS INVESTMENT INVESTMENT (2) LEASED (3) ------------- --------- ---------- -------------- ---------- COMMUNITIES UNDER CONSTRUCTION: CENTRAL REGION: Dallas, Texas: Timber Ridge II..... 1998 192 $ 8,786 $ 9,603 74.0% ----- ---------- ---------- Denver, Colorado: Legacy Heights...... 1998 384 $ 15,185 $ 23,139 N/A ----- ---------- ---------- Houston, Texas: Memorial Heights II. 1998 256 $ 15,002 $ 15,944 60.2% Oaks at Medical Center II.......... 1999 318 6,124 20,229 N/A ----- ---------- ---------- Subtotal........ 574 $ 21,126 $ 36,173 ----- ---------- ---------- Central Region Subtotal...... 1,150 $ 45,097 $ 68,915 ----- ---------- ---------- NORTHWEST REGION: Portland, Oregon: Arbor Heights....... 1998 348 $ 22,740 $ 23,368 48.6% Cambridge Crossing.. 1998 250 15,868 15,870 84.0 Hedges Green........ 1998 408 14,192 27,720 N/A ----- ---------- ---------- Subtotal........ 1,006 $ 52,800 $ 66,958 ----- ---------- ---------- Salt Lake City, Utah: Fairstone at Riverview.......... 1998 492 $ 30,066 $ 32,675 73.6% ----- ---------- ---------- Seattle, Washington: Forestview.......... 1998 192 $ 8,524 $ 15,577 N/A Stonemeadow Farms... 1998 280 10,079 22,111 N/A ----- ---------- ---------- Subtotal........ 472 $ 18,603 $ 37,688 ----- ---------- ---------- Northwest Region Subtotal...... 1,970 $ 101,469 $ 137,321 ----- ---------- ---------- WEST REGION: Orange County, California: Las Flores Apartment Homes.............. 1998 504 $ 25,444 $ 44,767 N/A Sorrento............ 1998 241 10,995 21,997 N/A ----- ---------- ---------- Subtotal........ 745 $ 36,439 $ 66,764 ----- ---------- ---------- Phoenix, Arizona: Arrowhead I......... 1998 272 $ 12,787 $ 18,805 N/A San Marbeya......... 1999 404 6,191 28,246 N/A San Valiente II..... 1999 228 2,998 13,531 N/A ----- ---------- ---------- Subtotal........ 904 $ 21,976 $ 60,582 ----- ---------- ---------- Reno, Nevada: Meadowview I........ 1998 228 $ 11,084 $ 15,347 N/A ----- ---------- ----------
24
YEAR TOTAL ACQUIRED OR NUMBER OF PTR EXPECTED PERCENTAGE COMPLETED (1) UNITS INVESTMENT INVESTMENT (2) LEASED (3) ------------- --------- ---------- -------------- ---------- San Francisco (Bay Area), California: Monterrey Road........... 1999 224 $ 6,134 $ 24,758 N/A Villas at Santa Rita..... 1999 324 10,571 45,153 N/A ------ ---------- ---------- Subtotal............. 548 $ 16,705 $ 69,911 ------ ---------- ---------- West Region Subtotal............ 2,425 $ 86,204 $ 212,604 ------ ---------- ---------- Total Communities Under Construction. 5,545 $ 232,770 $ 418,840 ------ ---------- ---------- COMMUNITIES IN PLANNING AND OWNED: Central Region............. 1,378 $ 28,113 $ 93,781 Northwest Region........... 678 9,939 96,662 West Region................ 2,412 42,729 227,006 ------ ---------- ---------- Total Communities In Planning and Owned............... 4,468 $ 80,781 $ 417,449 ------ ---------- ---------- OTHER LAND HELD.............. -- $ 27,517 $ -- ------ ---------- ---------- Total Multifamily Communities Owned at December 31, 1997.............. 53,478 $2,578,857 $3,105,130 ------ ---------- ---------- NON-MULTIFAMILY: Wharf Holiday Inn Hotel (San Francisco, California)............... 1971 N/A $ 22,870 $ 22,870 100.0% Other...................... N/A 3,192 -(4)- -(4)- ------ ---------- ---------- ----- Non-Multifamily Total/Average..... N/A $ 26,062 $ 22,870 100.0% ------ ---------- ---------- ----- Total Real Estate Owned at December 31, 1997............ 53,478 $2,604,919 $3,127,998 ====== ========== ========== JANUARY 1998 OPERATING COMMUNITY ACQUISITIONS: NORTHWEST REGION: Seattle, Washington: Victorian Village........ 1998 216 $ N/A $ 19,231 N/A ====== ========== ==========
EXPECTED NUMBER TOTAL EXPECTED OF UNITS INVESTMENT (2) -------- -------------- COMMUNITIES IN PLANNING AND UNDER CONTROL: Central Region........................................ 652 $ 45,914 Northwest Region...................................... 2,412 150,587 West Region........................................... 3,026 295,206 ----- -------- Total Communities In Planning and Under Control..... 6,090 $491,707 ===== ========
- -------- *All or a portion of the community was developed by PTR. # Community is encumbered by a mortgage. See PTR's financial statements incorporated by reference in "Item 14(a) Financial Statements and Schedule" for additional information on PTR's mortgages payable. 25 (1) For acquired communities, represents the acquisition date (unless a second phase was added, whereby this represents the date the last phase was completed). With respect to communities under construction, represents expected completion date. (2) For operating communities, communities under construction and communities In Planning, represents Total Expected Investment as of January 31, 1998. (3) Represents percentage leased as of January 31, 1998. For communities in Lease-Up, the percentage leased is based on leased units divided by total number of units in the community (completed and under construction) as of January 31, 1998. An "N/A" indicates communities under construction where Lease-Up has not yet commenced. (4) Property was disposed of in January 1998. (5) As of December 31, 1997, PTR's actual investment in communities In Planning and Under Control was $3.8 million, which is reflected in the "Other assets" caption of PTR's balance sheet. ITEM 3. LEGAL PROCEEDINGS PTR is a party to various claims and routine litigation arising in the ordinary course of business. PTR does not believe that the results of any of such claims and litigation, individually or in the aggregate, will have a material adverse effect on its business, financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Shares are listed on the NYSE under the symbol "PTR." The following table sets forth the high and low sales prices of the Common Shares as reported in the NYSE Composite Tape and cash distributions per Common Share for the periods indicated.
CASH HIGH LOW DISTRIBUTIONS -------- ------- ------------- 1996: First Quarter............................ $22 1/4 $19 1/4 $0.310 Second Quarter........................... 22 3/8 20 1/2 0.310 Third Quarter............................ 22 5/8 20 1/4 0.310 Fourth Quarter........................... 23 5/8 19 0.310 1997: First Quarter............................ $25 1/8 $21 $0.325 Second Quarter........................... 24 1/4 21 1/2 0.325 Third Quarter............................ 24 3/8 21 5/8 0.325 Fourth Quarter........................... 25 1/8 21 7/8 0.325 1998: First Quarter (through March 16, 1998)... $24 5/16 $22 1/8 $0.340
In addition to the quarterly cash distributions shown above, the following distributions were made to PTR's shareholders: (i) PTR made the Homestead Distribution to holders of PTR's Common Shares on November 12, 1996. The securities distributed in the Homestead Distribution had a market value of $3.032 per Common Share based on the closing prices of such securities on the American Stock Exchange on November 11, 1996, the day prior to the distribution date. The Homestead Distribution resulted in an adjustment of $3.125 per Common Share ($21.875 before and $18.750 after) on the NYSE on November 12, 1996. 26 (ii) After the closing of the Merger, Security Capital Group issued pro rata directly to holders of PTR's Common Shares and Series A Preferred Shares (other than Security Capital Group) $102.0 million of warrants to acquire 3,644,430 shares of Class B common stock of Security Capital Group. PTR common shareholders received 0.052646 warrants for each Common Share held and Series A preferred shareholders received 0.070909 warrants for each Series A Preferred Share held. Each warrant can be exercised for one share of Security Capital Group Class B common stock at an exercise price of $28 per share through September 18, 1998. Security Capital Group issued these warrants to PTR shareholders as an incentive to vote in favor of the Merger and to raise additional equity capital at a relatively low cost, in addition to other benefits. The warrants are traded on the NYSE and the March 16, 1998 closing price was $2.94 per warrant. As of March 16, 1998, PTR had approximately 92,821,095 Common Shares outstanding, approximately 3,010 record holders of Common Shares and approximately 22,500 beneficial holders of Common Shares. PTR, in order to qualify as a REIT, is required to make distributions (other than capital gain distributions) to its shareholders in amounts at least equal to (i) the sum of (A) 95% of its "REIT taxable income" (computed without regard to the dividends-paid deduction and its net capital gain) and (B) 95% of the net income (after tax), if any, from foreclosure property, minus (ii) the sum of certain items of non-cash income. Including the February 1998 distribution of $0.34 per Common Share, PTR has paid 88 consecutive quarterly cash distributions on the Common Shares. The payment of distributions is subject to the discretion of the Board and is dependent upon the strategy, financial condition and operating results of PTR. PTR's long-term objective is to reduce its dividend payout ratio to 65-70% of Funds From Operations while increasing annual dividends per Common Share each year. Reducing the dividend payout ratio allows PTR to retain more of its internally generated cash flow from operations to fund future investment opportunities while maintaining compliance with the REIT rules requiring payout of at least 95% of taxable income. PTR announces the following year's projected annual distribution level after the Board's annual budget review and approval in December of each year. At its December 2, 1997 Board meeting, the Board announced an increase in the annual distribution level from $1.30 to $1.36 per Common Share and declared the first quarter 1998 distribution of $0.34 per Common Share. The first quarter distribution was paid on February 25, 1998 to shareholders of record on February 11, 1998. Pursuant to the terms of the Preferred Shares, PTR is restricted from declaring or paying any distribution with respect to its Common Shares unless all cumulative distributions with respect to the Preferred Shares have been paid and sufficient funds have been set aside for Preferred Share distributions that have been declared. For federal income tax purposes, distributions may consist of ordinary income, capital gains, non-taxable return of capital or a combination thereof. Distributions that exceed PTR's current and accumulated earnings and profits (calculated for tax purposes) constitute a return of capital rather than a dividend and reduce the shareholder's basis in the Common Shares. To the extent that a distribution exceeds both current and accumulated earnings and profits and the shareholder's basis in the Common Shares, it will generally be treated as a gain from the sale or exchange of that shareholder's Common Shares. PTR annually notifies shareholders of the taxability of distributions paid during the preceding year. For federal income tax purposes, the following summarizes the taxability of cash distributions paid on the Common Shares in 1996 and 1995 and the estimated taxability for 1997:
1997 1996 1995 ----- ----- ----- Per Common Share: Ordinary income....................................... $1.08 $0.61 $0.92 Capital gains......................................... -- 0.11 -- Return of capital..................................... 0.22 0.52 0.23 ----- ----- ----- Total............................................... $1.30 $1.24 $1.15 ===== ===== =====
27 The Homestead securities distributed by PTR to each holder of Common Shares in the Homestead Distribution were valued at $2.16 per PTR Common Share for federal income tax purposes, of which $1.06 was taxable as ordinary income, $0.19 was taxable as a capital gain and $0.91 was treated as a return of capital. The warrants distributed to holders of PTR's Common Shares and Series A Preferred Shares by Security Capital Group after the closing of the Merger were valued at $6.88 per warrant for federal income tax purposes, all of which was taxable as ordinary income. Under federal income tax rules, PTR's earnings and profits are first allocated to its Series A Preferred Shares and Series B Preferred Shares, which increases the portion of the Common Shares distribution classified as return of capital. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations." For federal income tax purposes, the following summaries reflect the estimated taxability of dividends paid on the Series A Preferred Shares and Series B Preferred Shares, respectively.
1997 1996 1995 ------ ----- ----------- Per Series A Preferred Share: Ordinary income................................ $1.751 $1.47 $ 1.75 Capital gains.................................. -- 0.28 -- ------ ----- ------- Total........................................ $1.751 $1.75 $ 1.75 ====== ===== ======= DATE OF ISSUANCE TO 1997 1996 12/31/95 ------ ----- ----------- Per Series B Preferred Share: Ordinary income................................ $ 2.25 $1.89 $1.3625 Capital gains.................................. -- 0.36 -- ------ ----- ------- Total........................................ $ 2.25 $2.25 $1.3625 ====== ===== =======
Due to the increase in the conversion ratio resulting from the Homestead Distribution to holders of Common Shares, holders of Series A Preferred Shares were deemed to have received a distribution of $2.43 on November 12, 1996 for federal income tax purposes. Of this amount, $1.19 was taxable as ordinary income, $0.22 was taxable as a capital gain and $1.02 was treated as a return of capital. PTR's tax return for the year ended December 31, 1997 has not been filed, and the taxability information for 1997 is based upon the best available data. PTR's tax returns for prior years have not been examined by the Internal Revenue Service and, therefore, the taxability of the dividends is subject to change. 28 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial data relating to the historical financial condition and results of operations of PTR for 1997, 1996, 1995, 1994 and 1993. Such selected financial data is qualified in its entirety by, and should be read in conjunction with, "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation" and the financial statements and notes thereto incorporated by reference herein (amounts in thousands, except per share data).
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- -------- OPERATIONS SUMMARY: Rental revenues........... $ 335,060 $ 322,046 $ 262,473 $ 183,472 $ 76,129 Interest income on Homestead Notes.......... 16,687 2,035 -- -- -- Total revenues............ 355,662 326,246 264,873 186,105 78,418 Property management fees paid to affiliate........ 7,642 11,610 8,912 7,148 3,862 REIT management fee paid to affiliate............. 13,040 22,191 20,354 13,182 7,073 General and administrative expense.................. 4,036 1,077 952 784 660 Administrative services provided by an affiliate. 1,274 -- -- -- -- Costs incurred in acquiring Management Companies from an affiliate (1)............ 71,707 -- -- -- -- Earnings from operations (1) (2).................. 24,686 94,089 81,696 46,719 23,191 Gain on dispositions of investments, net......... 48,232 37,492 2,623 -- 2,302 Preferred Share cash dividends paid........... 19,384 24,167 21,823 16,100 1,341 Net earnings attributable to Common Shares......... 53,534 106,544 62,496 30,619 24,152 Common Share cash distributions paid....... $ 105,547 $ 90,728 $ 76,804 $ 46,121 $ 29,162 PER SHARE DATA: Net earnings attributable to Common Shares: Basic EPS (1) (2)....... $ 0.65 $ 1.46 $ 0.93 $ 0.66 $ 0.66 Diluted EPS(1) (2)...... 0.65 1.44 0.93 0.65 0.66 Common Share cash distributions paid....... 1.30 1.24 1.15 1.00 0.82 Series A Preferred Share cash dividends paid...... 1.751 1.75 1.75 1.75 0.1458 Series B Preferred Share cash dividends paid...... $ 2.25 $ 2.25 $ 1.3625 $ -- $ -- Weighted-average Common Shares outstanding-- basic.................... 81,870 73,057 67,052 46,734 36,549 Weighted-average Common Shares outstanding-- diluted.................. 90,230 84,340 78,315 57,987 37,485 DECEMBER 31, ---------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- -------- FINANCIAL POSITION: Real estate owned, at cost..................... $2,604,919 $2,153,363 $1,855,866 $1,296,288 $872,610 Homestead Notes........... 272,556 176,304 -- -- -- Total assets.............. 2,805,686 2,282,432 1,840,999 1,295,778 890,301 Credit facilities......... 231,500 110,200 129,000 102,000 51,500 Long-Term Debt............ 630,000 580,000 200,000 200,000 -- Mortgages payable......... 265,652 217,188 158,054 93,624 48,872 Total liabilities......... 1,265,250 1,014,924 565,331 455,136 135,284 Shareholders' equity (3).. $1,540,436 $1,267,508 $1,275,668 $ 840,642 $755,017 Number of Common Shares outstanding.............. 92,634 75,511 72,211 50,456 44,645
29
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- OTHER DATA: Net earnings attributable to Common Shares................. $ 53,534 $ 106,544 $ 62,496 $ 30,619 $ 24,152 Add (Deduct): Depreciation on real estate investments..... 52,893 44,887 36,685 24,614 10,509 Provision for possible loss on investments.... 3,000 -- 420 1,600 2,270 Gain on dispositions of investments, net....... (48,232) (37,492) (2,623) -- (2,302) Extraordinary item--loss on early extinguishment of debt, net........... -- 739 -- -- -- Amortization related to Homestead Notes........ (1,281) (141) -- -- -- Costs incurred in acquiring Management Companies from an affiliate (1).......... 71,707 -- -- -- -- Other................... -- -- -- -- 87 --------- --------- --------- --------- --------- Funds From Operations attributable to Common Shares(4) (5).......... $ 131,621 $ 114,537 $ 96,978 $ 56,833 $ 34,716 ========= ========= ========= ========= ========= Net cash provided by operating activities... $ 159,724 $ 143,939 $ 121,795 $ 94,625 $ 49,247 Net cash used by investing activities... $(403,112) $(360,935) $(294,488) $(368,515) $(529,065) Net cash provided by financing activities... $ 242,672 $ 195,720 $ 191,520 $ 276,457 $ 478,345
- -------- (1) 1997 earnings reflect the impact of a one-time non-cash charge of $71.7 million associated with the costs incurred in acquiring the Management Companies from an affiliate. The one-time charge was not deducted for purposes of calculating Funds From Operations, due to the non-recurring and non-cash nature of the expense. (2) Earnings from operations for the years ended December 31, 1997, 1995, 1994 and 1993 reflect a $3.0 million, $0.4 million, $1.6 million and a $2.3 million provision, respectively, for possible losses relating to investments. (3) Includes redeemable Series A Preferred Shares totaling $135.2 million in 1997, $162.4 million in 1996 and $230.0 million in 1993 to 1995 and redeemable Series B Preferred Shares totaling $105.0 million as of December 31, 1997, 1996 and 1995. (4) Funds From Operations is defined as net earnings computed in accordance with GAAP, excluding real estate depreciation, gains (or losses) from depreciated real estate, provisions for possible losses, non-cash interest income from Homestead Notes, extraordinary items, and significant non- recurring items. PTR believes that Funds From Operations is helpful to the reader as a measure of the performance of an equity REIT because, along with cash flow from operating, investing and financing activities, it provides the reader with an indication of the ability of PTR to incur and service debt, to make capital expenditures and to fund other cash needs. The Funds From Operations measure presented by PTR, while consistent with the NAREIT definition, will not be comparable to similarly titled measures of other REIT's which do not compute Funds From Operations in a manner consistent with PTR. Funds From Operations should not be considered as an alternative to net earnings or any other GAAP measurement of performance as an indicator of PTR's operating performance or as an alternative to cash flows from operating, investing, or financing activities as a measure of liquidity. Funds From Operations is not intended to represent cash made available to shareholders. Cash distributions paid to shareholders are summarized above. (5) See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources--Funds From Operations" for pro forma Funds From Operations information giving effect to the Homestead transaction as if it had occurred as of January 1, 1995. 30 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with PTR's financial statements and notes thereto included in Item 14 of this report. The statements contained in this discussion and elsewhere in this report that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based on current expectations, estimates and projections about the industry and markets in which PTR operates, management's beliefs and assumptions made by management. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. PTR undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. PTR's operating results depend primarily on income from Multifamily communities, which is substantially influenced by (i) the demand for and supply of Multifamily units in PTR's primary target market and submarkets, (ii) operating expense levels, (iii) the effectiveness of property-level operations and (iv) the pace and price at which PTR can acquire and develop additional Multifamily communities. Capital and credit market conditions which affect PTR's cost of capital also influence operating results. Other factors which may affect PTR's future performance are discussed below under "Current Development Activity" and "Recent Acquisitions." OVERVIEW General During the last three years, PTR's revenues have grown from $264.9 million in 1995 to $355.7 million in 1997. During this same period, net cash flow provided by operating activities has grown from $121.8 million to $159.7 million. This growth has been fueled primarily by a net increase in the number of Multifamily units in operation, which totaled 30,182 at the beginning of 1995 and 43,465 at the end of 1997. Information regarding Multifamily acquisitions, development completions and dispositions is provided in "-- Multifamily Investments" which outlines the sources of the net increase in Multifamily units. Although Multifamily community acquisitions have been the primary growth driver for PTR since 1991, management anticipates that development will play a more significant role in the foreseeable future as attractive acquisition opportunities in target markets are currently limited. PTR believes that development of Multifamily communities from the ground up, which are built for long-term ownership and designed to meet broad resident preferences and demographic trends, will provide an important source of long- term cash flow growth. PTR also believes its ability to compete is significantly enhanced relative to other companies because of its depth of development and acquisition personnel and presence in local markets combined with its substantial research capabilities and access to investment capital. As of January 31, 1998, PTR had a substantial development pipeline consisting of approximately $1.33 billion in communities under construction or In Planning, based on Total Expected Investment (including $492 million Under Control). Over $943 million of this development pipeline is located in PTR's West Coast Markets (including $478 million Under Control). Management believes that ongoing investment in these key markets will be an important component of PTR's future revenue and cash flow growth due to limited new competition as a result of high barriers to entry against new supply and strong demand fundamentals in these markets. "--Current Development Activity" provides a summary of Multifamily communities under construction as of January 31, 1998 and "--Recent Acquisitions" provides an overview of recent acquisition activity. Since December 1995, PTR has been engaged in an asset optimization program designed to redeploy capital from markets with less attractive long-term growth prospects into the targeted key markets and submarkets described above. As indicated in "--Multifamily Investments", PTR has redeployed gross disposition proceeds 31 of over $616.1 million, representing gains of $88.3 million, which have been a direct result of this strategy. PTR expects more limited disposition activity in the future as it has essentially completed the planned repositioning of its portfolio through asset optimization. Management plans to continue to focus on incremental investments in West Coast Markets occurring principally through PTR's value-added development program. The West Coast Markets represented only 17% of PTR's portfolio of communities operating or under construction at the end of 1995, based on Total Expected Investment, and grew to 53% by the end of 1997. This percentage is expected to increase in future periods as a result of continued investment emphasis in these markets. Management anticipates that future revenue and cash flow growth rates will be positively impacted by this geographic transition in market focus. In addition to proceeds from its asset optimization program, PTR's investment activity over the last three years has been funded primarily from issuances of Long-Term Debt, acquisition-related assumption of mortgages, the sale of Common Shares and Series B Preferred Shares, community dispositions and internally generated cash flow from operations. The Long-Term Debt issuances have been structured in such a manner that the overall principal repayment requirements are relatively level with no significant balloon payments in any given year. See "--Liquidity and Capital Resources--Scheduled Debt Maturities and Interest Payment Requirements." During the last three years, in addition to the investment activity discussed above, PTR's financial results have been impacted by three notable transactions. (1) On March 23, 1995, PTR consummated a merger of PACIFIC with and into PTR. PACIFIC, which was a Multifamily REIT owned almost entirely by Security Capital Group, held a portfolio consisting of 5,579 Multifamily units located primarily in Nevada, Oregon, Utah and Washington. PTR issued 8.5 million Common Shares valued at $138.7 million ($16.375 per share) and assumed $51.9 million of line of credit debt and $54.4 million of mortgage debt in exchange for all of PACIFIC's outstanding common stock. (2) On October 17, 1996, PTR contributed all of its Homestead Assets to Homestead, a newly formed company, in exchange for 9,485,727 shares of Homestead common stock and approximately $84.5 million (face amount) of Homestead Notes. PTR also received 6,363,789 warrants to acquire additional Homestead common stock in exchange for entering into a funding agreement. Under the funding agreement, PTR committed to lend up to $198.8 million in secured financing to complete the development of the contributed properties in exchange for up to $221.3 million in Homestead Notes (including the Homestead Notes received at the transaction date). The Homestead common stock and warrants were distributed to PTR's common shareholders. The Homestead assets constituted 7.1% of PTR's total assets and 8.2% of PTR's total earnings from operations from January 1, 1996 to October 17, 1996. PTR had funded $186.9 million of its $198.8 million funding commitment as of December 31, 1997 and earned $16.7 million and $2.0 million in interest income from the Homestead Notes in 1997 and 1996, respectively. (3) On September 9, 1997, PTR became an internally managed REIT as a result of the acquisition of the REIT Manager and Property Manager from Security Capital Group in exchange for 3,295,533 Common Shares. In addition, Security Capital Group issued pro rata directly to holders of PTR's Common Shares and Series A Preferred Shares (other than Security Capital Group) $102.0 million of warrants to acquire 3,644,430 Shares of Class B common stock of Security Capital Group at an exercise price of $28 per share. Following the transaction, PTR no longer incurs fees for REIT and property management services (except for a small amount of third-party property management services), but instead incurs the actual personnel and other operating costs associated with these management functions. On September 9, 1997, PTR also established the Incentive Plan, which created a better alignment of management and employee interests with those of PTR's shareholders. PTR also entered into the ASA with Security Capital Group for the provision of certain administrative services. 32 A more detailed analysis of PTR's operating performance, liquidity and financial position is provided below under "--Results of Operations" and "-- Liquidity and Capital Resources. " Multifamily Investments The following table provides an overview of PTR's Multifamily portfolio and related investment activity for 1997, 1996 and 1995 (dollar amounts in thousands):
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 ---------- ---------- ---------- OPERATING COMMUNITIES: Communities........................ 137 142 131 Units.............................. 43,465 42,702 38,737 Total Expected Investment.......... $2,305,719 $1,891,828 $1,515,267 COMMUNITIES UNDER CONSTRUCTION: Starts During Year: Communities........................ 12 13 11 Units.............................. 3,423 3,875 3,196 Total Expected Investment.......... $ 265,077 $ 262,547 $ 179,402 Completions During Year: Communities........................ 10 13 5 Units.............................. 3,358 3,820 1,088 Total Expected Investment.......... $ 201,515 $ 208,332 $ 52,560 Stabilizations During Year: Communities........................ 7 12 6 Units.............................. 2,204 3,456 1,690 Total Expected Investment.......... $ 136,019 $ 186,426 $ 73,472 Under Construction at Year-End: Communities........................ 18 17 17 Units.............................. 5,545 5,479 5,424 Total Expected Investment.......... $ 418,840 $ 354,852 $ 297,549 ACQUISITIONS: Communities........................ 15 20 24(1) Units.............................. 4,655 6,448 7,633(1) Total Expected Investment.......... $ 399,049 $ 417,729 $ 361,027(1) DISPOSITIONS: Communities........................ 27 22 1 Units.............................. 7,250 6,303 166 Gross sales proceeds............... $ 304,640 $ 297,623 $ 13,815 Gains (2).......................... $ 48,232 $ 37,492 $ 2,623
- -------- (1) 1995 acquisitions include 17 communities containing 5,579 units with an aggregate purchase price including budgeted renovations of $242.5 million acquired in connection with the PACIFIC Merger. (2) Includes aggregate gains (losses) of $0.4 million, $0.4 million and ($0.6 million) in 1997, 1996 and 1995, respectively, associated with the disposition of certain non-multifamily properties. 33 Current Development Activity The following table summarizes PTR's development communities under construction as of December 31, 1997, except as noted below (dollar amounts in thousands):
DELIVERY DATE EXPECTED NUMBER TOTAL START DATE FOR FIRST STABILIZATION OF PTR EXPECTED (QUARTER/ UNITS DATE PERCENTAGE UNITS INVESTMENT INVESTMENT (1) YEAR) (QUARTER/YEAR) (QUARTER/YEAR) LEASED (2) ------ ---------- -------------- ---------- -------------- -------------- ---------- COMMUNITIES UNDER CONSTRUCTION: CENTRAL REGION: Dallas, Texas: Timber Ridge II..... 192 $ 8,786 $ 9,603 Q1/97 Q4/97 Q2/98 74.0% ----- -------- -------- Denver, Colorado: Legacy Heights...... 384 $ 15,185 $ 23,139 Q2/97 Q1/98 Q2/99 N/A ----- -------- -------- Houston, Texas: Memorial Heights II. 256 $ 15,002 $ 15,944 Q4/96 Q4/97 Q3/98 60.2% Oaks at Medical Center II.......... 318 6,124 20,229 Q4/97 Q4/98 Q3/99 N/A ----- -------- -------- Total Houston..... 574 $ 21,126 $ 36,173 ----- -------- -------- Total Central Region.......... 1,150 $ 45,097 $ 68,915 ----- -------- -------- NORTHWEST REGION: Portland, Oregon: Arbor Heights....... 348 $ 22,740 $ 23,368 Q2/96 Q3/97 Q3/98 48.6% Cambridge Crossing.. 250 15,868 15,870 Q3/96 Q3/97 Q3/98 84.0 Hedges Green........ 408 14,192 27,720 Q2/97 Q2/98 Q2/99 N/A ----- -------- -------- Total Portland.... 1,006 $ 52,800 $ 66,958 ----- -------- -------- Salt Lake City, Utah: Fairstone at Riverview.......... 492 $ 30,066 $ 32,675 Q2/96 Q2/97 Q3/98 73.6% ----- -------- -------- Seattle, Washington: Forestview.......... 192 $ 8,524 $ 15,577 Q2/97 Q2/98 Q1/99 N/A Stonemeadow Farms... 280 10,079 22,111 Q2/97 Q2/98 Q1/99 N/A ----- -------- -------- Total Seattle..... 472 $ 18,603 $ 37,688 ----- -------- -------- Total Northwest Region.......... 1,970 $101,469 $137,321 ----- -------- -------- WEST REGION: Orange County, California: Las Flores Apartment Homes............. 504 $ 25,444 $ 44,767 Q4/96 Q1/98 Q2/99 N/A Sorrento............ 241 10,995 21,997 Q2/97 Q1/98 Q4/98 N/A ----- -------- -------- Total Orange County........... 745 $ 36,439 $ 66,764 ----- -------- -------- Phoenix, Arizona: Arrowhead I......... 272 $ 12,787 $ 18,805 Q3/96 Q1/98 Q4/98 N/A San Marbeya......... 404 6,191 28,246 Q4/97 Q4/98 Q1/00 N/A San Valiente II..... 228 2,998 13,531 Q4/97 Q4/98 Q4/99 N/A ----- -------- -------- Total Phoenix..... 904 $ 21,976 $ 60,582 ----- -------- -------- Reno, Nevada: Meadowview I........ 228 $ 11,084 $ 15,347 Q2/97 Q1/98 Q4/98 N/A ----- -------- -------- San Francisco (Bay Area), California: Monterrey Road...... 224 $ 6,134 $ 24,758 Q4/97 Q4/98 Q4/99 N/A Villas at Santa Rita............... 324 10,571 45,153 Q4/97 Q4/98 Q1/00 N/A ----- -------- -------- Total San Francisco........ 548 $ 16,705 $ 69,911 ----- -------- -------- Total West Region.......... 2,425 $ 86,204 $212,604 ----- -------- -------- Total Communities Under Construction.. 5,545 $232,770 $418,840 ===== ======== ========
- -------- (1) Represents Total Expected Investment as of January 31, 1998. (2) The percentage leased is based on leased units divided by total number of units in the community (completed and under construction) as of January 31, 1998. An "N/A" indicates the communities where lease-up has not yet commenced. 34 There are risks associated with PTR's development and construction activities which include: development opportunities explored may be abandoned; construction costs of a community may exceed original estimates; occupancy rates and rents at a newly completed community are dependent on a number of factors, including market and general economic conditions, and may not meet PTR's original projections; financing may not be available on favorable terms for the development of a community; and construction and lease-up may not be completed on schedule, resulting in increased debt service expense and construction costs. Development activities are also subject to risks relating to the inability to obtain, or delays in obtaining, all necessary land-use, building, occupancy and other required governmental permits and authorizations. The occurrence of any of the events described above could adversely affect PTR's ability to achieve its projected yields on communities under development or redevelopment. To mitigate these risks, PTR obtains zoning and municipal approvals prior to purchasing land. Furthermore, PTR does not take construction risk, but instead uses qualified third-party general contractors to build its communities, using guaranteed maximum price contracts. PTR cannot eliminate all development risk, but believes that the opportunities to better control product and realize higher returns from development communities more than compensate for the limited risk. Recent Acquisitions The following table summarizes acquisitions made during 1997 and through January 31, 1998 (dollar amounts in thousands):
TOTAL EXPECTED ACQUISITION UNITS INVESTMENT (1) DATE ----- -------------- ----------- NORTHWEST REGION: Salt Lake City, Utah: Carrington Place.................... 142 $ 7,743 08/29/97 Cloverland.......................... 186 10,129 09/29/97 Seattle, Washington: The Cambrian........................ 422 42,698 06/03/97 Canyon Pointe....................... 250 21,237 12/29/97 Newport Crossing.................... 192 12,280 01/10/97 Victorian Village................... 216 19,231 01/23/98 Waterford........................... 360 28,131 09/16/97 ----- -------- Total Northwest Region............ 1,768 $141,449 ----- -------- WEST REGION: Inland Empire, California: Sierra Hills........................ 300 $ 20,245 04/17/97 Orange County, California: River Meadows....................... 152 15,182 03/20/97 Sacramento, California: Folsom Ranch........................ 344 24,333 03/31/97 San Diego, California: La Jolla Point...................... 328 32,828 04/24/97 San Francisco (Bay Area), California: Los Padres.......................... 245 31,344 04/23/97 Marina Lakes........................ 468 40,510 02/19/97 Reflections......................... 496 53,404 01/27/97 Ventura County, California: Le Club............................. 370 34,556 06/30/97 Pelican Point....................... 400 30,461 06/26/97 ----- -------- Total West Region................. 3,103 $282,863 ----- -------- Total........................... 4,871 $424,312 ===== ========
- -------- (1) Represents Total Expected Investment, as of January 31, 1998. 35 Acquisitions entail risks that investments will fail to perform in accordance with expectations and that estimates with respect to the cost of improvements to bring an acquired community up to standards established for the market position intended for that community will prove inaccurate. In addition, there are general investment risks associated with any new real estate investment. Although PTR undertakes an evaluation of the physical condition of each new community before it is acquired, certain defects or necessary repairs may not be detected until after the community is acquired, which could significantly increase PTR's total acquisition costs. These risks are partially mitigated and managed by the extensive market research and rigorous due diligence process performed in connection with every community considered. These factors combined with PTR's extensive market experience throughout its target market and methodical approval process have proven PTR's ability to select investments that have a high probability of meeting or exceeding underwritten expectations. RESULTS OF OPERATIONS Multifamily Property Operations At December 31, 1997, Multifamily investments comprised over 99% of PTR's total real estate portfolio, based on Total Expected Investment. The following table summarizes the property operating results from PTR's Multifamily communities for the periods indicated (in thousands):
1997 1996 1995 -------- -------- -------- Rental revenues............................... $331,346 $293,531 $243,796 -------- -------- -------- Property Operating Expenses: Rental expenses............................. $ 87,162 $ 80,216 $ 68,246 Real estate taxes........................... 27,317 24,915 20,457 Property management fees.................... 8,444 11,021 9,269 -------- -------- -------- Total Property Operating Expenses......... $122,923 $116,152 $ 97,972 -------- -------- -------- Net Operating Income.......................... $208,423 $177,379 $145,824 ======== ======== ======== Operating margin (Net Operating Income/Rental revenues).................................... 62.9% 60.4% 59.8% ======== ======== ========
The increases in rental revenues and Property Operating Expenses in each period are primarily a result of net increases in the number of operating units resulting from PTR's substantial acquisition and development activity. Management has focused its investment emphasis primarily on key West Coast Markets which are believed to have higher growth potential, while reducing investments in certain other markets within PTR's geography having less attractive growth prospects. A portion of the increase in revenues and expenses is attributable to the greater emphasis in the West Coast Markets since these markets are generally characterized by higher per unit rental rates and, to a lesser extent, higher per unit operating costs. Net Operating Income has also been positively impacted by an intensive management program focused on maximizing community profitability through revenue growth and expense control. The positive impact of PTR's investment strategy and management program are reflected in an improving operating margin which has steadily grown from 59.8% in 1995 to 62.9% in 1997. Intensive management efforts are expected to continue with a view towards maintaining a high operating margin. The higher profitability in 1997 is partially attributable to PTR's acquisition of the Property Manager on September 9, 1997. After that date, PTR directly incurred personnel and other costs related to property management, in lieu of paying a property management fee to Security Capital Group, which resulted in a reduction of property management fees in 1997, partially offset by a corresponding increase in rental expenses. The full year benefit of the transaction will not be reflected in PTR's operating results until 1998. PTR categorizes operating Multifamily communities (which include all completed revenue-generating communities) as either Stabilized or Prestabilized. Approximately 74.0%, 74.4% and 87.2% of PTR's operating Multifamily portfolio was classified as Stabilized as of December 31, 1997, 1996 and 1995, respectively, based on Total Expected Investment. The percentage has not increased due to PTR's active investment program, which involves the development, acquisition and disposition of Multifamily communities. 36 The full impact of additional Net Operating Income from PTR's Multifamily development activities and, to a lesser extent, acquisition activities, is not reflected until after the communities are Stabilized. During the period that a new building is undergoing construction, no operating income is being generated. Furthermore, Property Operating Expenses generally exceed rental revenues during the early stages of lease-up. As buildings are completed and leased, Net Operating Income becomes positive and the return on investment gradually increases until the overall community is producing a Stabilized yield, which is generally achieved 18 to 24 months after construction commences. Despite the short-term dilutive impact, PTR's operating results demonstrate that its development activities contribute positively to long-term operating performance. Similarly, PTR often acquires a community with the intent of repositioning and/or renovating the property to maximize the opportunity for long-term cash flow growth. This strategy has been particularly beneficial in certain West Coast Markets where it is generally difficult to develop new product due to a shortage of land suitable for Multifamily development, coupled with onerous zoning restrictions. Upon acquisition, PTR will invest the necessary capital to renovate the property, reconfigure the tenant base and establish new management and marketing plans to increase the long-term potential for the community to produce higher yields. When these activities have been carried out and the community is 93% occupied at market rates, the property is classified as Stabilized. As with developments, PTR experiences some short- term dilution during the renovation process. PTR had 11 communities with an aggregate Total Expected Investment of $239.5 million under renovation as of January 31, 1998. Management expects rental revenues and Property Operating Expenses to continue to increase in 1998 as additional acquired and developed units are brought on line and as the full year impact of units which came on line in 1997 are reflected. Analysis of Same Store Community Results PTR's Same Store Community results have been favorably impacted in recent periods primarily by the strategic investments PTR has made in its West Coast Markets. These favorable results are evidenced by the increasing collections and NOI growth in each quarter of 1997 as compared to the comparable period in 1996 for each respective Same Store Community population, as shown below:
1997 COMPARED TO 1996 ------------------------------- FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- Collections Growth....................... 4.27% 3.25% 2.88% 2.19% Property Operating Expense growth........ 4.41% 2.82% 2.64% 2.42% Net Operating Income growth.............. 4.18% 3.55% 3.03% 2.04% Number of units in the Same Store population.............................. 31,092 27,793 23,109 27,607
PTR expects to achieve overall Same Store Community revenue and Net Operating Income growth in the 4.5% to 5% range and Property Operating Expense Growth of less than 4% during 1998 as the Same Store Community portfolio becomes more representative of the overall portfolio. PTR's West Coast Markets comprised only 32% of the Same Store Community portfolio whereas these markets constitute 53% of the portfolio of communities operating or under construction based on Total Expected Investment as of December 31, 1997. Non-multifamily Property Operations From 1992 until October 17, 1996, PTR also developed and operated extended- stay lodging facilities under the Homestead Village(R) name as described above in "--Overview". The Homestead properties contributed Net Operating Income of $13.3 million and $9.3 million in 1996 and 1995, respectively. The year over year growth was primarily attributable to increased properties in operation. Since 1991, PTR's strategy has been to divest itself of non-multifamily properties. As of January 31, 1998, PTR owns only one non-multifamily property, which is a 338-room, five-story Holiday Inn hotel located in the Fisherman's Wharf area of San Francisco, California. The hotel is leased to Bristol Hotel Asset Company and 37 represents less than 1% of PTR's total assets as of December 31, 1997. PTR's non-multifamily properties contributed Net Operating Income of $3.6 million, $3.0 million and $3.4 million in 1997, 1996 and 1995, respectively. Homestead Interest and Homestead Notes Through December 31, 1997, PTR had funded $186.9 million of its $198.8 million funding commitment to Homestead, of which $85.8 million was funded during 1997. The remaining $11.9 million is expected to be provided to Homestead in early 1998 as the development properties contributed by PTR are completed. Under the funding agreement, PTR receives approximately $1.11 in principal amount of Homestead Notes for every $1.00 it funds. PTR receives semi-annual interest-only payments at 9% per annum of the face amount of the Homestead Notes outstanding. During 1997 and 1996, PTR recorded $16.7 million and $2.0 million in interest income, respectively ($15.4 million and $1.9 million, respectively for purposes of calculating Funds From Operations) from the Homestead Notes. PTR deducts from net earnings the interest income related to the amortization of the conversion discount and warrant-related deferred revenue in calculating Funds From Operations. Homestead interest income is expected to increase in 1998 and 1999 as PTR fulfills its funding commitment and as the full impact of 1997 fundings is reflected. The Homestead Notes are callable at the option of Homestead after October 31, 2001 and mature on October 31, 2006. Upon expected full funding, PTR will have funded $198.8 million in exchange for Homestead Notes having a face amount of $221.3 million. The Homestead Notes are convertible into Homestead common stock on the basis of one share of Homestead common stock for every $11.50 of principal face amount outstanding, which would result in the ownership of approximately 19.2 million shares of Homestead common stock at full funding. Under these assumptions and using the trading price of Homestead common stock at December 31, 1997 of $15.063, PTR's ownership would result in the following incremental value per PTR Common Share at December 31, 1997 (in thousands, except per share amounts): Homestead common stock price (at 12/31/97).......................... $15.063 Conversion price.................................................... 11.500 ------- Incremental value per share of Homestead common stock............. $ 3.563 Shares of Homestead common stock issuable upon conversion (at full funding)........................................................... 19,246 ------- Total incremental value from conversion........................... $68,573 ------- PTR Common Shares outstanding (at 12/31/97)......................... 92,634 ------- Assumed incremental value per PTR Common Share at December 31, 1997............................................................. $ 0.74 =======
The difference between the fair value of the Homestead Notes (assuming conversion), based upon the Homestead closing price, and the amortized cost of the Homestead Notes is reflected as an additional component of the balance of the Homestead Notes and as an unrealized holding gain on PTR's balance sheet. The unrealized holding gain as of December 31, 1997 was $83.8 million. Upon full funding, PTR's conversion rights would represent a 29.2% ownership interest in Homestead as of January 31, 1998. This ownership interest assumes no further equity issuances by Homestead and conversion of all outstanding Homestead Notes upon full funding by PTR and ATLANTIC. Depreciation Expense The increases in depreciation expense reflected in each year of the three- year period result primarily from the net increase in the number of Multifamily operating communities partially offset in 1996 by the contribution of PTR's Homestead properties to Homestead. Depreciation will continue to increase as additional operating communities are added to the portfolio. 38 Interest Expense The following table summarizes PTR's interest expense (in thousands):
YEAR ENDED DECEMBER 31, ------------------------- 1997 1996 1995 ------- ------- ------- Credit facilities.............................. $14,347 $ 9,813 $ 5,749 Long-Term Debt................................. 46,311 29,308 14,480 Mortgages payable.............................. 18,101 13,108 11,096 Capitalized interest........................... (17,606) (16,941) (11,741) ------- ------- ------- Total interest expense..................... $61,153 $35,288 $19,584 ======= ======= =======
The increase in interest expense on PTR's credit facilities resulted primarily from higher average outstanding balances. Average borrowings on the line of credit were approximately $121.0 million (with an average effective interest rate of 8.4%) in 1997, as compared to average borrowings of approximately $112.2 million and $51.9 million (with an average effective interest rate of 8.8% and 11.1%) in 1996 and 1995, respectively. Additionally, PTR borrowed $60 million and $40 million under two separate short-term borrowing agreements bearing interest at LIBOR plus 0.60%, on March 10, 1997 and April 4, 1997, respectively. Both borrowing agreements were repaid in full at maturity on September 10, 1997. The average outstanding balance during 1997 and from September 22, 1996 to December 31, 1996 on PTR's short-term, unsecured, borrowing agreement with Chase was $16.4 million and $10.5 million, respectively. Long-Term Debt interest expense increased due primarily to the issuance of $380 million of Long-Term Debt during the year ended December 31, 1996 and $50 million of Long-Term Debt in March 1997. Mortgage interest expense increased as a result of additional weighted- average debt outstanding due to mortgage assumptions related to community acquisitions. These increases were partially offset by prepayments during 1997, 1996 and 1995. The increases in interest costs from year to year were partially offset by increases in capitalized interest, which were primarily attributable to higher levels of Multifamily development activity in each successive year. REIT Management Fee and Acquisition of REIT Manager The REIT management fee paid by PTR decreased by approximately 41.2% during 1997 as compared to 1996 due primarily to the Homestead transaction which occurred on October 17, 1996 and PTR's acquisition of the REIT Manager on September 9, 1997. The increase in 1996 over 1995 is attributable to the fact that the REIT management fee paid by PTR fluctuated with the level of PTR's pre-REIT management cash flow (as defined in the REIT management agreement), which was higher in 1996 than 1995. Upon acquisition of the REIT Manager, PTR became an internally managed REIT. Effective September 9, 1997, the REIT management fee was replaced with the actual personnel and other operating costs associated with the REIT management function. These costs are recorded as general and administrative expenses, and as such, were the primary contributor to the $3.0 million increase in this line item. Direct and incremental costs related to successful development and acquisition activities are capitalized as part of the related real estate basis. Upon closing of the Merger, PTR entered into the ASA with Security Capital Group for the provision of services which include, but are not limited to, research, payroll and human resources, cash management, accounts payable, data processing, investor relations and insurance, legal and tax administration. PTR may purchase all or any combination of these services in exchange for a fee equal to Security Capital Group's direct cost of such service plus 20% (not to exceed market rates), subject to a maximum of approximately $5.5 million for 1998. Cost savings experienced by Security Capital Group under the ASA accrue to PTR and accordingly, management expects actual fees for 1998 to be less than the $5.5 million maximum. ASA fees expensed from the Merger 39 date through December 31, 1997 under this agreement aggregated $1.3 million. ASA costs related to successful development and acquisition activities are capitalized as part of the related real estate basis. The ASA, which expires on December 31, 1998, provides for annual renewals for consecutive one-year terms, subject to approval by a majority of PTR's independent Trustees. Costs Incurred in Acquiring Management Companies from an Affiliate The market value of the 3,295,533 Common Shares issued to Security Capital Group on September 9, 1997 upon PTR's acquisition of the REIT Manager and Property Manager was approximately $73.3 million, based on the $22.25 per share closing price of the Common Shares on September 8, 1997. Of this amount, approximately $1.6 million was allocated to the estimated fair value of the tangible net assets acquired. The $71.7 million difference between the market value of the Common Shares and the estimated fair value of the net tangible assets acquired was recorded as "Costs incurred in acquiring the Management Companies from an affiliate" on PTR's Statement of Earnings. The difference was not recorded as "goodwill" on the balance sheet, since the management companies did not qualify as businesses for purposes of applying APB Opinion No. 16, Business Combinations. This one-time adjustment was recorded as an expense on PTR's Statement of Earnings but was not deducted for purposes of calculating Funds From Operations, due to the non-recurring and non-cash nature of this expense. Gains and Provision for Loss on Real Estate and Investments Since the inception of the asset optimization strategy in December 1995 and through December 31, 1997, PTR has redeployed gross proceeds from dispositions aggregating $616.1 million from markets which management believed had less attractive long-term growth prospects to well-located communities primarily in PTR's West Coast Markets, which have high barriers to entry against new supply and strong economic fundamentals. For federal income tax purposes, the majority of the dispositions were structured as tax-deferred exchanges which deferred gain recognition. However, for financial reporting purposes, the transactions qualified for profit recognition, and aggregate gains of $48.2 million, $37.5 million and $2.6 million, were recorded for 1997, 1996 and 1995, respectively. As part of this ongoing strategy, PTR was committed to the sale of four Multifamily communities, four parcels of land and one non-multifamily property as of December 31, 1997. The aggregate carrying value of these properties held for disposition was $66.3 million at December 31, 1997. Each property's carrying value is less than or equal to its estimated fair market value, net of estimated costs to sell. Subject to normal closing risks, PTR expects to complete these and other dispositions during 1998 and redeploy the proceeds, primarily through tax-deferred exchanges, into the acquisition of Multifamily communities in PTR's West Coast Markets. PTR's real estate investments are periodically evaluated for impairment and provisions for possible losses are made if required. As a result of such evaluation, PTR recorded a provision for possible loss of $3.0 million and $0.4 million during 1997 and 1995, respectively. The recording of a provision for possible loss has no impact on cash flow from operating activities. As of December 31, 1997, PTR's real estate investments were carried at depreciated cost, which is not in excess of the estimated fair market value. Extraordinary Item--Loss on Early Extinguishment of Debt During 1996, PTR prepaid $25.8 million in mortgage notes payable. Such early extinguishment of debt resulted in prepayment penalties and a write-off of unamortized loan costs in the aggregate of $870,000 which was recorded as an extraordinary item for 1996. Preferred Share Dividends The higher level of Preferred Share dividends in 1996 over 1995 is attributable to the issuance of $105 million in Series B Preferred Shares in May 1995. The decrease in 1997 from 1996 levels is due to conversions of Series A Preferred Shares into Common Shares. 40 LIQUIDITY AND CAPITAL RESOURCES PTR considers its liquidity and ability to generate cash from operations and financings to be adequate and expects it to continue to be sufficient to meet all of its cash flow requirements for the foreseeable future. Operating Activities Net cash flow provided by operating activities increased by $15.8 million (11.0%) for 1997 as compared to 1996 and $22.1 million (18.2%) for 1996 as compared to 1995. These increases are due primarily to Multifamily property acquisitions and developments as described under "--Overview" and "--Results of Operations" above and, to a lesser extent, cash flow growth in communities fully operating in both comparative years. Investing and Financing Activities During 1997, 1996 and 1995, PTR invested cash of $616.1 million, $628.6 million and $311.6 million, respectively, in real estate investments relating primarily to the significant acquisition and development activity summarized in "--Overview" above. The $616.1 million invested in real estate and $85.8 million in fundings of Homestead Notes during 1997 were financed primarily from $297.9 million in net proceeds from property dispositions and borrowings under PTR's credit facilities. These credit facilities were partially repaid with proceeds from PTR's $50 million offering of Long-Term Debt issued in March 1997, $54.3 million in net proceeds from the sale of 2.5 million Common Shares in June 1997 and the $194.1 million in net proceeds from rights and oversubscription offerings of approximately 8.9 million Common Shares in September 1997. (See "Item 14(a). Financial Statements and Schedule, Note 6, Shareholders' Equity.") The $628.6 million invested during 1996 was financed primarily from $291.1 million in net proceeds from property dispositions and proceeds from the issuance of $380 million of Long-Term Debt. The $311.6 million invested during 1995 was financed primarily from $216.3 million of net proceeds from the sale of Common Shares and $101.3 million of net proceeds from the sale of Series B Preferred Shares. Other significant financing activity included the payment of $124.9 million, $114.9 million and $98.6 million in Common and Preferred Share distributions in 1997, 1996 and 1995, respectively. The increase is primarily attributable to annual increases in the cash distributions paid per Common Share and an increase in the overall number of Common and Preferred Shares outstanding in 1997, 1996 and 1995. Preferred Share dividends paid decreased approximately $4.8 million in 1997, as a result of conversions of Series A Preferred Shares to Common Shares, which was offset by a corresponding increase in Common Share distributions. Preferred Share dividends increased $2.3 million and $5.7 million in 1996 and 1995, respectively, due to the issuance of the Series B Preferred Shares in 1995. PTR prepaid mortgages due to community dispositions of $49.8 million, $43.0 million and $0.3 million in 1997, 1996 and 1995, respectively. Significant non-cash investing and financing activities included: (i) the 1997 acquisition of the REIT Manager and Property Manager in exchange for Common Shares, (ii) the 1996 contribution of PTR's Homestead Assets to Homestead in exchange for Homestead Notes and Homestead common stock, (iii) the 1995 merger of PACIFIC into PTR whereby PTR Common Shares were issued and PACIFIC debt was assumed in exchange for all of PACIFIC's outstanding common stock and (iv) the assumption of mortgage debt in connection with various Multifamily community acquisitions. 41 Scheduled Debt Maturities and Interest Payment Requirements In order to minimize refinancing risk, PTR's debt obligations are carefully structured to create a relatively level principal maturity schedule without large payments due in any future year. Approximate principal payments due during each of the calendar years in the 20-year period ending December 31, 2017 and thereafter, as of December 31, 1997, are as follows (in thousands):
CREDIT LONG-TERM MORTGAGES FACILITIES DEBT PAYABLE TOTAL ---------- --------- --------- ---------- 1998............................ $ 8,000 $ -- $ 28,993 $ 36,993 1999............................ 223,500 30,000 9,089 262,589 2000............................ -- -- 30,734 30,734 2001............................ -- 12,500 24,559 37,059 2002............................ -- 32,500 18,123 50,623 2003............................ -- 38,750 2,961 41,711 2004............................ -- 38,750 2,798 41,548 2005............................ -- 38,750 13,025 51,775 2006............................ -- 38,750 3,276 42,026 2007............................ -- 38,750 15,164 53,914 2008............................ -- 38,750 20,076 58,826 2009............................ -- 36,250 2,897 39,147 2010............................ -- 38,750 6,298 45,048 2011............................ -- 25,000 3,307 28,307 2012............................ -- 30,000 3,298 33,298 2013............................ -- 35,000 3,349 38,349 2014............................ -- 42,500 16,453 58,953 2015............................ -- 40,000 24,592 64,592 2016............................ -- 45,000 3,106 48,106 2017............................ -- 30,000 3,350 33,350 Thereafter...................... -- -- 30,204 30,204 -------- -------- -------- ---------- Total....................... $231,500 $630,000 $265,652 $1,127,152 ======== ======== ======== ==========
Approximately $145.0 million of borrowings were outstanding on PTR's $350 million line of credit as of March 16, 1998. The line of credit matures August 1999 and may be extended annually for an additional year with the approval of the Lenders. The aggregate amount of borrowings outstanding under all of PTR's credit facilities as of March 16, 1998 was $145.0 million. The LIBOR spread on PTR's $350 million line of credit was reduced from 1.125% to 0.75% effective August 13, 1997. Based upon this spread, the nominal interest rate on the line of credit was 6.75% as of January 31, 1998. The commitment fee on the line of credit was $358,000, $396,000 and $502,000 for 1997, 1996 and 1995, respectively. The floating interest rate on PTR's short term, unsecured, borrowing agreement with Chase was 6.25% at January 31, 1998 and ranged from 5.94% to 7.13% during 1997. At December 31, 1997, the weighted-average effective interest rate was 7.64% on PTR's $630 million of Long-Term Debt and 7.02% on the $265.7 million in mortgages payable. Shareholder Dividend/Distribution Requirements PTR announces the following year's projected annual distribution level after the Board's annual budget review and approval in December of each year. At its December 2, 1997 Board meeting, the Board announced a projected increase in the annual distribution level from $1.30 to $1.36 per Common Share and declared the first quarter 1998 distribution of $0.34 per Common Share. The first quarter distribution was paid on February 25, 1998, to shareholders of record on February 11, 1998. The payment of distributions is subject to the discretion 42 of the Board and is dependent upon the strategy, financial condition and operating performance of PTR. PTR's long-term objective is to reduce its dividend payout ratio to 65-70% of Funds From Operations while increasing annual dividends per Common Share each year. Reducing the dividend payout ratio allows PTR to retain more of its internally generated cash flow from operations to fund future investment opportunities while maintaining compliance with the REIT rules requiring payout of at least 95% of taxable income. There were approximately 92.6 million Common Shares outstanding as of December 31, 1997. The dividend rate on PTR's Series A Preferred Shares for 1998 is $1.832 per share. The rate is determined annually based on the greater of 7% of the $25 per share liquidation preference or the equivalent amount that would be received upon conversion to Common Shares. The conversion rate is currently 1.3469 Common Shares for each Series A Preferred Share. There were approximately 5.4 million Series A Preferred Shares outstanding as of December 31, 1997. PTR's Series B Preferred Shares receive a dividend equal to 9% of the $25 per share liquidation preference or $2.25 per share. As of December 31, 1997, there were 4.2 million Series B Preferred Shares outstanding. The Preferred Shares are cumulative and redeemable under certain circumstances. The Preferred Share dividends do not reduce the amount PTR has budgeted for Common Share distributions but do increase the percentage of the Common Share distribution that constitutes a non-taxable return of capital. See "Item 14(a). Financial Statements and Schedule, Note 4, Borrowings and Note 6, Shareholders' Equity" for further details. Planned Investments Following is a summary of planned investments as of January 31, 1998 (dollar amounts in thousands). The amounts reflected as "Unfunded Total Expected Investment" include future investments that PTR plans to make, although there is not a contractual commitment. The amounts labeled "Unfunded Commitments" represent the approximate amount of the "Unfunded Total Expected Investment" that PTR has committed to fund.
UNFUNDED UNFUNDED UNITS TOTAL EXPECTED INVESTMENT COMMITMENTS ----- ------------------------- ----------- Planned operating community improvements................... -- $ 67,741 $ 16,932 Communities under construction.. 5,545 $ 171,273 $ 171,273 Communities In Planning and owned.......................... 4,992 $ 330,995 $ -- Communities In Planning and Under Control.................. 5,518 $ 488,332 $ -- Operating communities under contract or letter of intent... 792 $ 61,253 $ --
PTR anticipates completion of the communities that are currently under construction and the planned operating community improvements in 1998 and 1999 and expects to start construction of over $420 million, based on Total Expected Investment, in communities that are currently In Planning, during 1998. Acquisition of the operating communities that are currently under contract or letter of intent is expected to occur during 1998. No assurances can be given that communities PTR does not currently own will be acquired or that planned developments will actually occur. In addition, actual costs incurred could be greater or less than PTR's current estimates. PTR's remaining funding commitment to Homestead aggregated $7.9 million as of January 31, 1998, which PTR anticipates funding in early 1998. Funding Sources PTR expects to finance its investment and operating needs, including those outlined above, with cash flow from operating activities, borrowings under its credit facilities and disposition proceeds from its asset optimization strategy, prior to arranging long-term financing. PTR uses its credit facilities to facilitate an efficient 43 response to market opportunities while minimizing the amount of cash invested in short-term investments at lower yields. Other sources of future liquidity and financial flexibility include shelf-registered securities which can be issued on an as-needed basis in the form of Long-Term Debt, Common Shares or preferred shares, subject to PTR's ability to effect offerings on satisfactory terms. After giving effect to the $125 million of Long-Term Debt issued on March 6, 1998, PTR had $445.9 million in shelf-registered securities available for issuance. PTR believes that its current conservative ratio of Long-Term Debt and mortgages payable to Long-Term Undepreciated Book Capitalization of 34.91% at December 31, 1997 (37.93% on a pro forma basis giving effect to the issuance of $125 million of Long-Term Debt on March 6, 1998 and the application of the proceeds therefrom), provides considerable flexibility with respect to its ability to finance its investment activities. PTR's debt instruments generally contain certain covenants common to the type of facility or borrowing, including financial covenants establishing minimum debt service coverage ratios and maximum leverage ratios. PTR was in compliance with all covenants pertaining to its debt instruments at December 31, 1997. Other Contingencies and Hedging Activities PTR is a party to various claims and routine litigation arising in the ordinary course of business. PTR does not believe that the results of any of such claims and litigation, individually or in the aggregate, will have a material adverse effect on its business, financial position or results of operations. From time to time, PTR utilizes derivative financial instruments as hedges in anticipation of future debt offerings in order to manage well-defined interest rate risk. In anticipation of the $125 million Long-Term Debt offering that closed on March 6, 1998, PTR entered into four separate interest rate contracts with notional amounts aggregating $120 million. Upon completion of the offering, PTR terminated the interest rate contracts, realizing a loss of approximately $5.5 million, which has been deferred and is being amortized as an increase to interest expense over the term of the Long-Term Debt that was issued. Similarly, in anticipation of the $50 million Long-Term Debt offering that closed March 31, 1997, PTR entered into interest rate contracts with notional amounts aggregating $50 million in 1996. Upon completion of the offering, PTR terminated the interest rate contracts, realizing a gain of approximately $819,000 which has been deferred and is being amortized as an offset to interest expense over the term of the Long-Term Debt that was issued. Impact of Year 2000 Issue PTR has undertaken a review of all of its computer systems and applications to determine if these programs are Year 2000 compliant and, if not, the efforts that will be necessary to bring the programs into compliance. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Certain computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations. PTR has not identified any computer system or application for which a failure to be Year 2000 compliant would result in a material adverse impact on PTR's business activities or results of operations. However, the preliminary results of this review indicate that certain of PTR's accounting and financial reporting applications are not Year 2000 compliant. In order to enhance operating efficiencies, PTR has already undertaken a project that will replace these core financial systems with computer software that will better serve PTR in the future. This new software, that is expected to be fully operational by the first quarter of 1999, is Year 2000 compliant. PTR is currently evaluating Year 2000 modifications to other existing software programs. The cost of these modifications is not expected to be material and all conversions and modifications are expected to be completed in a timely manner. Capitalization Policy PTR capitalizes direct and incremental costs related to the successful acquisition, development or improvement of real estate, and certain related indirect costs. Direct and incremental costs incurred in connection with the pursuit of unsuccessful acquisitions or developments are expensed at the time the pursuit is abandoned. 44 Repairs and maintenance and make-ready expenditures, including carpet and appliance replacements, are expensed as incurred to the extent they are not acquisition-related renovation costs identified during PTR's pre-acquisition due diligence. Make-ready expenditures are costs incurred in preparing a vacant Multifamily unit for the next resident. Funds From Operations Funds From Operations is defined as net earnings computed in accordance with GAAP, excluding real estate depreciation, gains (or losses) from depreciated real estate, provisions for possible losses, non-cash interest income from Homestead Notes, extraordinary items and significant non-recurring items. PTR believes that Funds From Operations is helpful to the reader as a measure of the performance of an equity REIT because, along with cash flow from operating, investing and financing activities, it provides the reader with an indication of the ability of PTR to incur and service debt, to make capital expenditures and to fund other cash needs. The Funds From Operations measure presented by PTR, while consistent with the NAREIT definition, will not be comparable to similarly titled measures of other REIT's which do not compute Funds From Operations in a manner consistent with PTR. Funds From Operations should not be considered as an alternative to net earnings or any other GAAP measurement of performance as an indicator of PTR's operating performance or as an alternative to cash flows from operating, investing, or financing activities as a measure of liquidity. Funds From Operations is not intended to represent cash made available to shareholders. Cash distributions paid to shareholders are summarized above in "Item 6. Selected Financial Data". In 1996, PTR contributed its Homestead Assets to Homestead. Management believes that Funds From Operations for 1996 and 1995 should be adjusted to reflect the effects of the Homestead transaction to provide a more meaningful comparison to the historical 1997 results. Accordingly, pro forma Funds From Operations for 1996 and 1995 has been calculated as if the Homestead transaction had occurred on January 1, 1995. The Funds From Operations information is unaudited and the pro forma Funds From Operations is not necessarily indicative of what actual Funds From Operations would have been if the Homestead transaction had occurred on January 1, 1995. 45 Funds From Operations and pro forma Funds From Operations were as follows (amounts in thousands):
YEAR ENDED DECEMBER 31, --------------------------- 1997 1996 1995 -------- -------- ------- Net earnings attributable to Common Shares.... $ 53,534 $106,544 $62,496 Add (Deduct): Depreciation on real estate investments..... 52,893 44,887 36,685 Provision for possible loss on investments.. 3,000 -- 420 Gain on disposition of investments, net..... (48,232) (37,492) (2,623) Extraordinary item--loss on early extinguishment of debt, net................ -- 739 -- Amortization related to Homestead Notes..... (1,281) (141) -- Costs incurred in acquiring Management Companies from an affiliate................ 71,707 -- -- -------- -------- ------- Historical Funds From Operations attributable to Common Shares............................. $131,621 $114,537 $96,978 -------- -------- ------- Add (deduct) pro forma adjustments relating to the contribution of Homestead Assets: Reduction in revenues and operating expenses(1)................................ $ -- $(13,294) $(9,314) Increase in interest income(2).............. -- 4,093 446 Increase in interest expense(3)............. -- (460) (778) Reduction in capitalized interest(4)........ -- (2,246) (2,149) REIT management fee effect(5)............... -- 2,757 1,988 Other....................................... -- 35 62 -------- -------- ------- Total pro forma adjustments............... $ -- $ (9,115) $(9,745) -------- -------- ------- Funds From Operations attributable to Common Shares (Pro forma for 1996 and 1995)......... $131,621 $105,422 $87,233 ======== ======== ======= Weighted-average Common Shares outstanding (Basic)...................................... 81,870 73,057 67,052 ======== ======== =======
- -------- (1) Represents the elimination of Homestead's historical revenues and operating expenses. (2) Represents interest income which would have been recognized on the Homestead Notes, assuming that PTR received Homestead common stock in exchange for its contribution first, and then Homestead Notes in exchange for the balance of its contribution over the respective time periods. (3) Represents the assumed amount of incremental interest expense which would have been incurred as a result of higher line of credit balances due to reduced cash flow. (4) Represents the reclassification of historical interest costs capitalized on Homestead developments to interest expense. (5) Represents the decrease in REIT management fee that would have resulted from the pro forma adjustments. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PTR's Balance Sheets as of December 31, 1997 and 1996, its Statements of Earnings, Shareholders' Equity and Cash Flows for each of the years in the three-year period ended December 31, 1997 and Schedule III--Real Estate and Accumulated Depreciation, together with the report of KPMG Peat Marwick LLP, independent auditors, are included under Item 14 of this report and are incorporated herein by reference. Selected quarterly financial data is presented in Note 11 of Notes to Financial Statements. 46 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE MATTERS Not applicable. PART III ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE REGISTRANT For information regarding PTR's executive officers, see "Item 1. Business-- Trustees and Officers of PTR." The other information required by this Item 10 is incorporated herein by reference to the description under the captions "Election of Trustees" and "Section 16(a) Beneficial Ownership Reporting Compliance" in PTR's 1998 Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION Incorporated herein by reference to the description under the captions "Election of Trustees" and "Executive Compensation" in the 1998 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference to the description under the captions "Principal Shareholders" and "Election of Trustees" in the 1998 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference to the description under the caption "Certain Relationships and Transactions" in the 1998 Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The following documents are filed as a part of this report: (a) Financial Statements and Schedule: 1. Financial Statements: See Index to Financial Statements and Schedules on page 48 of this report, which is incorporated herein by reference. 2. Financial Statement Schedule: See Schedule III on page 79 of this report, which is incorporated herein by reference. All other schedules have been omitted since the required information is presented in the financial statements and the related notes or is not applicable. 3. Exhibits See Index to Exhibits on pages 87 of this report, which is incorporated herein by reference. (b) Reports on Form 8-K: The following reports on Form 8-K were filed during the last quarter of the period covered by this report. None filed in last quarter of period covered by this report. (c) Exhibits: The Exhibits required by Item 601 of Regulation S-K are listed in the Index to Exhibits on pages 87 of this report, which is incorporated herein by reference. 47 INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
PAGE ---- SECURITY CAPITAL PACIFIC TRUST: Independent Auditors' Report............................................ 49 Balance Sheets as of December 31, 1997 and 1996......................... 50 Statements of Earnings for the years ended December 31, 1997, 1996 and 1995................................................................... 51 Statements of Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995.................................................... 52 Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995................................................................... 53 Notes to Financial Statements........................................... 54 Schedule III--Real Estate and Accumulated Depreciation as of December 31, 1997............................................................... 79
48 INDEPENDENT AUDITORS' REPORT The Board of Trustees and Shareholders SECURITY CAPITAL PACIFIC TRUST: We have audited the financial statements of SECURITY CAPITAL PACIFIC TRUST as listed in the accompanying index. In connection with our audits of the financial statements, we also have audited the financial statement schedule listed in the accompanying index. These financial statements and financial statement schedule are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SECURITY CAPITAL PACIFIC TRUST as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Chicago, Illinois January 31, 1998, except as to Note 13 which is as of March 6, 1998 49 SECURITY CAPITAL PACIFIC TRUST BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ---------------------- ASSETS 1997 1996 ------ ---------- ---------- Real estate............................................ $2,604,919 $2,153,363 Less accumulated depreciation.......................... 129,718 97,574 ---------- ---------- 2,475,201 2,055,789 Homestead Notes........................................ 272,556 176,304 Other mortgage notes receivable........................ 12,682 13,525 ---------- ---------- Net investments.................................... 2,760,439 2,245,618 Cash and cash equivalents.............................. 4,927 5,643 Accounts receivable and accrued interest............... 11,544 4,157 Other assets........................................... 28,776 27,014 ---------- ---------- Total assets....................................... $2,805,686 $2,282,432 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Liabilities: Credit facilities.................................... $ 231,500 $ 110,200 Long-Term Debt....................................... 630,000 580,000 Mortgages payable.................................... 265,652 217,188 Distributions payable................................ 31,495 24,537 Accounts payable..................................... 35,352 22,782 Accrued expenses and other liabilities............... 71,251 60,217 ---------- ---------- Total liabilities.................................. 1,265,250 1,014,924 ---------- ---------- Shareholders' equity: Series A Preferred Shares (5,408,393 convertible shares in 1997 and 6,494,967 in 1996; stated liquidation preference of $25 per share)............ 135,210 162,374 Series B Preferred Shares (4,200,000 shares issued; stated liquidation preference of $25 per share)..... 105,000 105,000 Common Shares (shares issued-92,633,724 in 1997 and 75,510,986 in 1996)................................. 92,634 75,511 Additional paid-in capital........................... 1,268,741 918,434 Employee share purchase notes........................ (17,238) -- Unrealized holding gain on Homestead Notes........... 83,794 74,923 Distributions in excess of net earnings.............. (127,705) (68,734) ---------- ---------- Total shareholders' equity......................... 1,540,436 1,267,508 ---------- ---------- Total liabilities and shareholders' equity......... $2,805,686 $2,282,432 ========== ==========
The accompanying notes are an integral part of the financial statements. 50 SECURITY CAPITAL PACIFIC TRUST STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, -------------------------- 1997 1996 1995 -------- -------- -------- Revenues: Rental revenues................................... $335,060 $322,046 $262,473 Interest income on Homestead Notes................ 16,687 2,035 -- Other income...................................... 3,915 2,165 2,400 -------- -------- -------- 355,662 326,246 264,873 -------- -------- -------- Expenses: Rental expenses................................... 87,220 88,474 73,061 Real estate taxes................................. 27,386 26,962 21,326 Property management fees: Paid to affiliate............................... 7,642 11,610 8,912 Paid to third parties........................... 803 1,076 747 Depreciation on real estate investments........... 52,893 44,887 36,685 Interest.......................................... 61,153 35,288 19,584 REIT management fee paid to affiliate............. 13,040 22,191 20,354 General and administrative........................ 4,036 1,077 952 Administrative services provided by an affiliate.. 1,274 -- -- Costs incurred in acquiring Management Companies from an affiliate................................ 71,707 -- -- Other............................................. 3,822 592 1,556 -------- -------- -------- 330,976 232,157 183,177 -------- -------- -------- Earnings from operations............................ 24,686 94,089 81,696 Gain on dispositions of investments, net.......... 48,232 37,492 2,623 -------- -------- -------- Net earnings before extraordinary item.............. 72,918 131,581 84,319 Less extraordinary item-loss on early extinguishment of debt........................... -- 870 -- -------- -------- -------- Net earnings........................................ 72,918 130,711 84,319 Less Preferred Share dividends...................... 19,384 24,167 21,823 -------- -------- -------- Net earnings attributable to Common Shares........ $ 53,534 $106,544 $ 62,496 ======== ======== ======== Weighted-average Common Shares outstanding (Basic).. 81,870 73,057 67,052 -------- -------- -------- Weighted-average Common Shares outstanding (Diluted).......................................... 90,230 84,340 78,315 -------- -------- -------- Net earnings and distributions paid per Common Share: Basic............................................. $ 0.65 $ 1.46 $ 0.93 ======== ======== ======== Diluted........................................... $ 0.65 $ 1.44 $ 0.93 ======== ======== ======== Distributions paid................................ $ 1.30 $ 1.24 $ 1.15 ======== ======== ========
The accompanying notes are an integral part of the financial statements. 51 SECURITY CAPITAL PACIFIC TRUST STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (IN THOUSANDS, EXCEPT SHARE DATA)
SERIES A SERIES B UNREALIZED PREFERRED PREFERRED COMMON HOLDING SHARES AT SHARES AT SHARES EMPLOYEE GAINS AGGREGATE AGGREGATE AT ADDITIONAL SHARE ON DISTRIBUTIONS LIQUIDATION LIQUIDATION PAR PAID-IN PURCHASE HOMESTEAD IN EXCESS OF TREASURY PREFERENCE PREFERENCE VALUE CAPITAL NOTES NOTES NET EARNINGS SHARES TOTAL ----------- ----------- -------- ---------- -------- ---------- ------------- -------- ---------- Balances at December 31, 1994............ $230,000 $ -- $ 50,621 $ 622,161 -- -- $ (60,211) $(1,929) $ 840,642 Net earnings........ -- -- -- -- -- -- 84,319 -- 84,319 Preferred Share dividends paid..... -- -- -- -- -- -- (21,823) -- (21,823) Common Share distributions...... -- -- -- -- -- -- (84,735) -- (84,735) Issuance of shares, net of expenses.... -- 105,000 21,694 329,591 -- -- -- -- 456,285 Dividend Reinvestment and Share Purchase Plan, net. -- -- 61 927 -- -- -- -- 988 Cost of treasury shares purchased... -- -- -- -- -- -- -- (8) (8) -------- -------- -------- ---------- -------- ------- --------- ------- ---------- Balances at December 31, 1995............ 230,000 105,000 72,376 952,679 -- -- (82,450) (1,937) 1,275,668 Comprehensive income: Net Earnings........ -- -- -- -- -- -- 130,711 -- 130,711 Preferred Share dividends paid..... -- -- -- -- -- -- (24,167) -- (24,167) Other comprehensive income-- unrealized holding gain on Homestead Notes.... -- -- -- -- -- 74,923 -- -- 74,923 ---------- Comprehensive income attributable to Common Shares... -- -- -- -- -- -- -- -- 181,467 ---------- Common Share distributions...... -- -- -- -- -- -- (92,828) -- (92,828) Distribution of Homestead common stock and warrants at book value, net of transaction expenses........... -- -- -- (96,914) -- -- -- -- (96,914) Conversion of 2,705,033 Series A Preferred Shares into 3,294,124 Common Shares...... (67,626) -- 3,294 64,332 -- -- -- -- -- Cost of treasury shares purchased... -- -- -- -- -- -- -- (1) (1) Retirement of 164,957 treasury shares............. -- -- (165) (1,773) -- -- -- 1,938 -- Exercise of warrants and options, net... -- -- 6 110 -- -- -- -- 116 -------- -------- -------- ---------- -------- ------- --------- ------- ---------- Balances at December 31, 1996............ 162,374 105,000 75,511 918,434 -- 74,923 (68,734) -- 1,267,508 Comprehensive income: Net earnings........ -- -- -- -- -- -- 72,918 -- 72,918 Preferred Share dividends paid..... -- -- -- -- -- -- (19,384) -- (19,384) Other comprehensive income--change in unrealized holding gain on Homestead Notes.............. -- -- -- -- -- 8,871 -- -- 8,871 ---------- Comprehensive income attributable to Common Shares...... -- -- -- -- -- -- -- -- 62,405 ---------- Common Share distributions...... -- -- -- -- -- -- (112,505) -- (112,505) Issuance of shares to affiliate....... -- -- 3,296 68,780 -- -- -- -- 72,076 Sale of shares, net of expenses........ -- -- 11,420 236,956 -- -- -- -- 248,376 Shares issued under Incentive Plan..... -- -- 820 17,241 (17,238) -- -- -- 823 Conversion of 1,086,574 Series A Preferred Shares into 1,463,448 Common Shares...... (27,164) -- 1,463 25,701 -- -- -- -- -- Exercise of warrants and options, net... -- -- 124 1,629 -- -- -- -- 1,753 -------- -------- -------- ---------- -------- ------- --------- ------- ---------- Balances at December 31, 1997............ $135,210 $105,000 $ 92,634 $1,268,741 $(17,238) $83,794 $(127,705) $ -- $1,540,436 ======== ======== ======== ========== ======== ======= ========= ======= ==========
The accompanying notes are an integral part of the financial statements. 52 SECURITY CAPITAL PACIFIC TRUST STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, --------------------------------- 1997 1996 1995 ----------- --------- --------- Operating activities: Net earnings.............................. $ 72,918 $ 130,711 $ 84,319 Adjustments to reconcile net earnings to net cash flow provided by operating activities: Depreciation and amortization........... 54,541 46,911 38,228 Gain on dispositions of investments, net.................................... (48,232) (37,492) (2,623) Provision for possible loss on investments............................ 3,000 -- 420 Costs incurred in acquiring Management Companies from an affiliate............ 71,707 -- -- Change in accounts payable................ 4,000 565 2,719 Change in accrued expenses and other liabilities.............................. 11,034 11,286 7,024 Change in other operating assets.......... (9,244) (8,042) (8,292) ----------- --------- --------- Net cash flow provided by operating activities........................... 159,724 143,939 121,795 ----------- --------- --------- Investing activities: Real estate investments................... (616,100) (628,640) (311,619) Funding of Homestead Notes................ (85,750) (25,242) -- Advances on other mortgage notes receivable............................... (200) -- (1,538) Principal repayments on other mortgage notes receivable......................... 1,043 2,319 7,701 Proceeds from dispositions, net of closing costs.................................... 297,895 291,056 10,968 Operating cash contributed in Homestead transaction.............................. -- (428) -- ----------- --------- --------- Net cash flow used in investing activities........................... (403,112) (360,935) (294,488) ----------- --------- --------- Financing activities: Proceeds from Long-Term Debt.............. 50,000 380,000 -- Debt issuance costs incurred.............. (1,518) (5,659) (1,496) Principal prepayment of mortgages payable. (49,847) (43,005) (303) Regularly scheduled principal payments on mortgages payable........................ (3,284) (2,037) (1,748) Proceeds from credit facilities........... 1,175,609 510,985 278,000 Principal payments on credit facilities... (1,054,309) (529,785) (302,900) Proceeds from sale of shares, net of expenses................................. 249,199 -- 317,614 Cash distributions paid on Common Shares.. (105,547) (90,728) (76,804) Cash dividends paid on Preferred Shares... (19,384) (24,167) (21,823) Proceeds from exercise of warrants and options, net............................. 1,753 116 (8) Proceeds from dividend reinvestment and share purchase plan, net................. -- -- 988 ----------- --------- --------- Net cash flow provided by financing activities........................... 242,672 195,720 191,520 ----------- --------- --------- Net change in cash and cash equivalents..... (716) (21,276) 18,827 Cash and cash equivalents at beginning of year....................................... 5,643 26,919 8,092 ----------- --------- --------- Cash and cash equivalents at end of year.... $ 4,927 $ 5,643 $ 26,919 =========== ========= ========= Non-cash investing and financing activities: Market value of Common Shares issued to affiliate in Merger...................... $ 73,326 $ -- $ -- Market value of tangible net assets acquired from affiliate in Merger........ $ 1,619 $ -- $ -- Notes received for Common Shares issued under Incentive Plan..................... $ 17,238 $ -- $ -- Assumption of mortgages payable upon purchase of Multifamily communities...... $ 101,595 $ 104,176 $ 12,078 Series A Preferred Shares converted to Common Shares............................ $ 27,164 $ 67,626 $ -- Change in unrealized holding gain on Homestead Notes.......................... $ 8,871 $ 74,923 $ -- Other: 1996 Homestead transaction--See description in Note 3. 1995 PACIFIC Merger--See description in Note 9.
The accompanying notes are an integral part of the financial statements. 53 SECURITY CAPITAL PACIFIC TRUST NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Security Capital Pacific Trust ("PTR") is an equity real estate investment trust ("REIT") organized in 1963 under the laws of the state of Maryland, which primarily owns, develops, acquires and operates income-producing Multifamily communities in the western United States. Principles of Financial Presentation The accounts of PTR, its majority-owned subsidiaries and PTR Development Services Incorporated ("PTR Development Services"), are consolidated in the accompanying financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation. The preparation of these financial statements in conformity with generally accepted accounting principles ("GAAP") require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual amounts realized or paid could differ from those estimates. Cash and Cash Equivalents PTR considers all cash on hand, demand deposits with financial institutions and short-term, highly liquid investments with original maturities of three months or less to be cash equivalents. Real Estate and Depreciation Real estate is carried at depreciated cost. PTR capitalizes direct and incremental costs related to the successful acquisition, development or improvement of real estate, and certain related indirect costs. Direct and incremental costs incurred in connection with the pursuit of unsuccessful acquisitions or developments are expensed at the time the pursuit is abandoned. Depreciation is computed over the expected useful lives of depreciable property on a straight-line basis as follows: Buildings and improvements... 20-40 years Furnishings and other........ 2-10 years
Repairs and Maintenance and Make-Ready Repairs and maintenance and make-ready expenditures, including carpet and appliance replacements, are expensed as incurred to the extent they are not acquisition-related renovation costs identified during PTR's pre-acquisition due diligence. Make-ready expenditures are costs incurred in preparing a vacant Multifamily unit for the next resident. Interest During 1997, 1996 and 1995, the total interest paid in cash on all outstanding debt, net of interest capitalized, was $55,505,000, $23,631,000 and $17,674,000 respectively. 54 SECURITY CAPITAL PACIFIC TRUST NOTES TO FINANCIAL STATEMENTS--(CONTINUED) PTR capitalizes interest incurred during the construction period as part of the cost of Multifamily communities under development. Interest capitalized during 1997, 1996 and 1995 aggregated $17,606,000, $16,941,000 and $11,741,000, respectively. Cost of Raising Capital Costs incurred in connection with the issuance of equity securities are deducted from shareholders' equity. Costs incurred in connection with the issuance or renewal of debt are capitalized as other assets and amortized over the term of the related loan or the renewal period. Amortization of loan costs included in interest expense for 1997, 1996 and 1995 was $3,181,000, $2,233,000 and $1,543,000, respectively. Interest Rate Contracts From time to time, PTR utilizes derivative financial instruments as hedges in anticipation of future debt offerings to manage well-defined interest rate risk. Unrealized changes in the market value of interest rate contracts are deferred until the hedged transaction is consummated and realized gains and losses resulting from changes in the market value of these contracts are deferred and amortized into interest expense over the term of the related debt issuance. Revenue and Gain Recognition PTR leases its Multifamily units under operating leases with terms of generally one year or less. Rental income is recognized according to the terms of the underlying leases which approximates the revenue which would be recognized if spread evenly over the lease term. Gains on sales of real estate are recorded when the recognition criteria set forth by GAAP have been met. Rental Expenses Rental expenses shown on the accompanying Statements of Earnings include costs of on-site and property management personnel, utilities, repairs and maintenance, make-ready, property insurance, marketing, landscaping, and other on-site and related administrative costs. Comprehensive Income PTR adopted Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income in the fourth quarter of 1997. SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components. Comprehensive income is the total of net earnings attributable to PTR common shares of beneficial interest, par value $1.00 per share ("Common Share(s)") and other comprehensive income. Other comprehensive income represents revenues, expenses, gains and losses that are included in comprehensive income under GAAP but excluded from net earnings attributable to Common Shares. During 1996 and 1997, PTR had one other comprehensive income component, the unrealized gain on the Homestead convertible mortgage notes ("Homestead Notes"), as discussed in Note 3. PTR had no items of other comprehensive income in 1995. In accordance with SFAS No. 130, PTR's Statements of Shareholders' Equity for 1996 and 1997 displays comprehensive income attributable to Common Shares for each respective year. Federal Income Taxes PTR has made an election to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. PTR believes it qualifies as a REIT and, accordingly, no provisions have been made for federal income taxes in the accompanying financial statements. 55 SECURITY CAPITAL PACIFIC TRUST NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Per Share Data PTR adopted SFAS No. 128, Earnings per Share, in the fourth quarter of 1997, which supersedes Accounting Principles Board ("APB") Opinion No. 15, Earnings per Share. SFAS No. 128 replaces the presentation of primary and fully diluted earnings per share ("EPS") with a presentation of basic and diluted EPS, respectively. EPS for all prior periods presented have been restated as required by SFAS No. 128. Basic EPS has been computed by dividing net earnings available to common shareholders by the weighted-average number of Common Shares outstanding. Diluted EPS has been calculated from the weighted-average Common Shares outstanding plus the Common Shares that would be outstanding assuming conversion of the weighted-average number of outstanding Series A Cumulative Convertible Preferred Shares of Beneficial Interest, par value $1.00 per share ("Series A Preferred Shares") and the assumed exercise of outstanding stock options using the treasury stock method, as defined in SFAS No. 128. For purposes of the diluted EPS calculation, dividends on the Series A Preferred Shares were added back to net earnings attributable to Common Shares. Following is a reconciliation of (i) the numerator used to compute basic EPS to the numerator used to compute diluted EPS, and (ii) the denominator used to compute basic EPS to the denominator used to compute diluted EPS, for the periods indicated (numbers in thousands, except per share amounts):
1997 1996 1995 ------- -------- ------- Reconciliation of numerator between basic EPS and diluted EPS: Basic EPS--Net earnings attributable to Common Shares............................... $53,534 $106,544 $62,496 Dividends on Series A Preferred Shares....... 9,934 14,717 16,100 ------- -------- ------- Diluted EPS--Net earnings attributable to Common Shares............................... $63,468 $121,261 $78,596 ======= ======== ======= Reconciliation of denominator between basic EPS and diluted EPS: Basic EPS--Weighted-average number of Common Shares outstanding.......................... 81,870 73,057 67,052 Assumed conversion of Series A Preferred Shares into Common Shares............................... 8,322 11,197 11,189 Incremental options outstanding.............. 38 86 74 ------- -------- ------- Diluted EPS--Weighted-average number of Common Shares outstanding................... 90,230 84,340 78,315 ======= ======== ======= Basic EPS per Common Share................... $ 0.65 $ 1.46 $ 0.93 ======= ======== ======= Diluted EPS per Common Share................. $ 0.65(1) $ 1.44 $ 0.93(1) ======= ======== =======
- -------- (1) For 1997 and 1995, the Series A Preferred Shares are anti-dilutive and, therefore, the basic and diluted per share amounts are equal. Reclassifications Certain of the 1996 and 1995 amounts have been reclassified to conform to the 1997 presentation. 56 SECURITY CAPITAL PACIFIC TRUST NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (2) REAL ESTATE Investments Equity investments in real estate, at cost, were as follows (dollar amounts in thousands):
DECEMBER 31, ----------------------------------- 1997 1996 ----------------- ----------------- INVESTMENT UNITS INVESTMENT UNITS ---------- ------ ---------- ------ Multifamily: Operating communities................. $2,237,789 43,465 $1,861,561 42,702 Communities under construction (1).... 232,770 5,545 186,710 5,479 Development communities In Planning (1) (2): Owned............................... 80,781 4,468 64,685 4,921 Under Control (2) (3)............... -- 6,090 -- 6,041 ---------- ------ ---------- ------ Total development communities In Planning......................... 80,781 10,558 64,685 10,962 ---------- ------ ---------- ------ Other land held....................... 27,517 -- 13,862 ---------- ------ ---------- ------ Total Multifamily................. 2,578,857 59,568 2,126,818 59,143 ---------- ====== ---------- ====== Non-multifamily....................... 26,062 26,545 ---------- ---------- Total real estate................. $2,604,919 $2,153,363 ========== ==========
(1) Unit information is based on management's estimates and has not been audited by PTR's independent auditors. (2) "In Planning" is defined as parcels of land owned or Under Control upon which Multifamily construction is expected to commence within 36 months. "Under Control" means PTR has an exclusive right (through contingent contract or letter of intent) during a contractually agreed-upon time period to acquire land for future development of Multifamily communities, subject to approval of contingencies during the due diligence process, but does not currently own the land. There can be no assurance that such land will be acquired. (3) PTR's investment as of December 31, 1997 and 1996 for developments Under Control was $3.8 million and $2.0 million, respectively, and is reflected in the "Other assets" caption of PTR's Balance Sheets. 57 SECURITY CAPITAL PACIFIC TRUST NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The change in investments in real estate, at cost, consisted of the following (in thousands):
YEAR ENDED DECEMBER 31, ---------------------------------- 1997 1996 1995 ---------- ---------- ---------- Balance at January 1.................... $2,153,363 $1,855,866 $1,296,288 ---------- ---------- ---------- Multifamily: Acquisitions and renovation expenditures......................... 434,421 463,935 385,356 Development expenditures, excluding land acquisitions.................... 205,619 187,377 117,980 Acquisition and improvement of land for development...................... 75,196 20,880 11,255 Recurring capital expenditures........ 8,762 7,992 5,119 Dispositions.......................... (269,059) (269,693) (6,166) Provisions for possible loss on investments.......................... (2,800) -- -- ---------- ---------- ---------- Net Multifamily activity subtotal....... $ 452,139 $ 410,491 $ 513,544 ---------- ---------- ---------- Non-multifamily: Homestead development expenditures, including land acquisitions.......... $ -- $ 54,883 $ 48,247 Contribution of Homestead Assets (Note 3)................................... -- (161,370) -- Non-multifamily dispositions.......... (383) (6,527) (2,235) Provisions for possible loss on investments.......................... (200) -- (220) Other................................. -- 20 242 ---------- ---------- ---------- Net non-multifamily activity subtotal... $ (583) $ (112,994) $ 46,034 ---------- ---------- ---------- Balance at December 31.................. $2,604,919 $2,153,363 $1,855,866 ========== ========== ==========
At January 31, 1998, PTR had unfunded Multifamily construction and rehabilitation commitments aggregating approximately $188.2 million. Pre-Sale Agreements and Development Subsidiary To enhance its flexibility in developing and acquiring Multifamily communities which meet PTR's investment criteria, PTR has and will enter into presale agreements with third-party owner/developers to acquire communities developed by such owner/developers. PTR has and will fund such developments through mortgage loans on the communities. For financial reporting purposes, these transactions are recorded as real estate developments rather than mortgage loans due to PTR's commitment to acquire these properties upon completion. In addition, to provide greater flexibility for the use of land acquired for development and to facilitate disposition of excess parcels, PTR has and will make mortgage loans to PTR Development Services to purchase land for development. PTR may also fund developments of Multifamily communities by PTR Development Services where the particular community or submarket does not meet PTR's objectives for long-term ownership but presents an attractive investment opportunity. PTR owns all of the preferred stock of PTR Development Services, which entitles PTR to receive 95% of its net operating cash flow. An unaffiliated trust owns all of the common stock of PTR Development Services. The common stock is entitled to receive the remaining 5% of net operating cash flow. As of December 31, 1997, the outstanding balance of development and mortgage loans made by PTR to third-party owner/developers and PTR Development Services, including accrued interest, aggregated $125.7 million and $46.4 million, respectively. The activities of third-party owner/developers and PTR Development Services are consolidated with PTR's activities and all inter- company transactions have been eliminated in consolidation. 58 SECURITY CAPITAL PACIFIC TRUST NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Gains and Provision for Loss on Real Estate and Investments Since the inception of the asset optimization strategy in December 1995 and through December 31, 1997, PTR has redeployed gross proceeds from dispositions aggregating $616.1 million from markets which management believed had less attractive long-term growth prospects to well-located communities primarily in California, Seattle, Washington, Portland, Oregon and Salt Lake City, Utah ("West Coast Markets") which have high barriers to entry against new supply and strong economic fundamentals. For federal income tax purposes, the majority of the dispositions were structured as tax-deferred exchanges which deferred gain recognition. However, for financial reporting purposes, the transactions qualified for profit recognition, and aggregate gains of $48.2 million, $37.5 million and $2.6 million, were recorded for 1997, 1996 and 1995, respectively. As part of this ongoing strategy, PTR was committed to the sale of four Multifamily communities, four parcels of land and one non-multifamily property as of December 31, 1997. The aggregate carrying value of these properties held for disposition was $66.3 million at December 31, 1997. Each property's carrying value is less than or equal to its estimated fair market value, net of estimated costs to sell. Subject to normal closing risks, PTR expects to complete these and other dispositions during 1998 and redeploy the proceeds, primarily through tax-deferred exchanges, into the acquisition of Multifamily communities in PTR's West Coast Markets. The property-level earnings, after interest and depreciation from communities held for disposition at December 31, 1997, which are included in PTR's earnings from operations for 1997, 1996 and 1995 were $4.6 million, $4.5 million and $4.9 million, respectively. PTR's real estate investments are periodically evaluated for impairment and provisions for possible losses are made if required. As a result of such evaluation, PTR recorded a provision for possible loss of $3.0 million and $0.4 million during 1997 and 1995, respectively, which is included as part of other expenses in the accompanying Statements of Earnings. The recording of a provision for loss has no impact on cash flow from operating activities. (3) HOMESTEAD TRANSACTION AND HOMESTEAD NOTES Homestead Transaction On October 17, 1996, PTR consummated a merger agreement under which it contributed its 54 moderate-priced, extended-stay lodging facilities (or the rights to acquire sites for such properties) ("the Homestead Assets"), known as Homestead Village(R) properties, to Homestead Village Incorporated ("Homestead"), a newly formed company. In exchange, PTR received 9,485,727 shares of Homestead common stock and approximately $84.5 million (face amount) in convertible mortgage notes issued by Homestead. In addition, PTR entered into a funding commitment agreement to provide up to $198.8 million in secured financing to Homestead for purposes of completing the development and construction of the properties contributed, in exchange for up to $221.3 million in Homestead Notes (including those received at the merger date). In exchange for entering into the funding commitment agreement, PTR received 6,363,789 warrants to acquire additional shares of Homestead common stock at a price of $10.00 per share. As of October 17, 1996, the Homestead Assets constituted 7.1% of PTR's total assets. PTR's Homestead Village operations accounted for approximately 8.2% of PTR's total earnings from operations from January 1, 1996 to October 17, 1996. 59 SECURITY CAPITAL PACIFIC TRUST NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The Homestead transaction had the following impact on PTR's Balance Sheet as of October 17, 1996, after giving effect to the Homestead Distribution (in thousands):
CONTRIBUTIONS ------------- Real estate contributed, net.................................... $154,731 Other non-cash operating assets and liabilities contributed, net............................................................ 3,001 Operating cash contributed...................................... 428 Deferred revenue (included in accrued expenses) relating to PTR's funding commitment....................................... 14,700 -------- $172,860 ======== RECEIPTS -------- Homestead Notes received (funded amount)........................ $ 75,946 Homestead common stock and warrants distributed to PTR common shareholders (recorded as a reduction of additional paid-in capital)....................................................... 96,914 -------- $172,860 ========
On November 12, 1996, PTR distributed the Homestead common stock and warrants it received in the transaction to common shareholders of record on October 29, 1996 (the "Homestead Distribution"). In the Homestead Distribution, each PTR shareholder received 0.125694 shares of Homestead common stock and 0.084326 warrants per PTR Common Share plus cash for fractional shares and warrants. Homestead Convertible Mortgage Note Terms Under the terms of the funding commitment agreement, PTR receives approximately $1.11 in principal amount of Homestead Notes for every $1.00 funded (i.e., the Homestead Notes are issued at an original issue discount). The Homestead Notes (i) bear interest at 9.0% of face per annum which is received in interest-only payments on a semi-annual basis, (ii) are convertible at PTR's option into one share of Homestead common stock for every $11.50 of principal outstanding (approximately 19.2 million shares upon full funding), (iii) are callable by Homestead after October 31, 2001 and (iv) mature October 31, 2006. The Homestead properties contributed by PTR serve as collateral individually and in the aggregate under cross-collateral provisions. Upon full funding of the Homestead Notes, PTR's conversion rights would represent a 29.2% ownership interest in Homestead, as of January 31, 1998. This ownership interest assumes no further equity issuances by Homestead, and conversion of all outstanding Homestead Notes by PTR and Security Capital Atlantic Incorporated. Carrying Value The original issue discount, which represents the difference between the funded and face amount of the Homestead Notes, is being amortized into interest income over the term of the Homestead Notes. Similarly, the intrinsic value attributed to the conversion feature on the merger date has been recorded as an additional component of the Homestead Notes' balance and the corresponding discount (a deferred credit) is also being amortized into interest income over the term. The difference between the fair value of the Homestead Notes (assuming conversion), as calculated based upon the trading price of Homestead's common stock on the American Stock Exchange at December 31, 1997, ($15.063) and the amortized cost of the Homestead Notes is reflected as an additional component of the Homestead Notes' balance and as an unrealized holding gain in Shareholders' Equity. The unrealized holding gain aggregated $83.8 million and $74.9 million as of December 31, 1997 and 1996, respectively. 60 SECURITY CAPITAL PACIFIC TRUST NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Following is a reconciliation of the Homestead Notes' components described above to the amount reflected in the accompanying 1997 Balance Sheet (in thousands). Face amount..................................................... $208,093 Original issue discount......................................... (21,155) -------- Amount funded................................................... 186,938 Amortization of original issue discount......................... 1,102 Intrinsic value of conversion feature........................... 14,657 Unamortized discount on conversion feature...................... (13,935) Fair value adjustment........................................... 83,794 -------- Carrying value and fair value................................... $272,556 ========
As of December 31, 1997, PTR had funded $186.9 million of its $198.8 million funding commitment. The remaining $11.9 million is expected to be provided to Homestead during 1998. Deferred Revenue As described above, Homestead warrants were received in exchange for entering into the funding commitment agreement. The warrants had an intrinsic value on the merger date of $14.7 million which was deemed to represent the commitment fee. The commitment fee has been recorded as deferred revenue which is part of accrued expenses and other liabilities in the accompanying 1997 Balance Sheet. Interest Income Recognized The aggregate income recognized on the Homestead Notes consists of the sum of the following components: (i) the face rate of 9%, (ii) the amortization of the original issue discount, (iii) the amortization of the discount on the conversion feature, and (iv) the amortization of the deferred revenue representing the commitment fee. PTR uses the effective interest method to calculate the amortization of the components listed in (ii), (iii) and (iv) above over the term of the Homestead Notes. The effective interest rate on the funded amount is in excess of 12.4% per annum (10.7% excluding the components in (iii) and (iv) above). (4) BORROWINGS Credit Facilities PTR has a $350 million unsecured revolving line of credit with a group of financial institutions (the "Lenders") led by Chase Bank of Texas, National Association ("Chase"). The line matures August 1999 and may be extended annually for an additional year with the approval of the Lenders. The line of credit bears interest at the greater of prime (8.50% at December 31, 1997) or the federal funds rate plus 0.50%, or at PTR's option, LIBOR (6.00% at December 31, 1997) plus 0.75%. The spread over LIBOR can vary from LIBOR plus 0.50% to LIBOR plus 1.50% based upon the rating of PTR's long-term unsecured senior notes ("Long-Term Debt" or "Notes"). Additionally, there is a commitment fee on the average unfunded line of credit balance. The commitment fee was $358,000, $396,000 and $502,000 for 1997, 1996 and 1995, respectively. 61 SECURITY CAPITAL PACIFIC TRUST NOTES TO FINANCIAL STATEMENTS--(CONTINUED) A summary of PTR's line of credit borrowings is as follows (dollars in thousands):
YEAR ENDED DECEMBER 31, -------------------------- 1997 1996 1995 -------- -------- -------- Total line of credit.......................... $350,000 $350,000 $350,000 Borrowings outstanding at December 31......... $223,500 $ 99,750 $129,000 Weighted-average daily borrowings............. $121,038 $112,248 $ 51,858 Maximum borrowings outstanding at any month end.......................................... $223,500 $188,750 $138,000 Weighted-average daily nominal interest rate.. 6.7% 7.3% 8.0% Weighted-average daily effective interest rate......................................... 8.4% 8.8% 11.1% Weighted-average nominal interest rate at December 31.................................. 6.9% 6.6% 7.3%
On September 9, 1996, PTR entered into a short-term, unsecured, borrowing agreement with Chase. The loan matures on March 18, 1998 although management intends to extend the agreement to March 19, 1999. The loan bears interest at an overnight rate, which ranged during 1997 from 5.94% to 7.13% (7.13% at December 31, 1997). At December 31, 1997 and 1996, there was $8.0 million and $10.5 million, respectively, of borrowings outstanding under this agreement. 62 SECURITY CAPITAL PACIFIC TRUST NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Long-Term Debt PTR has issued Long-Term Debt which bears interest at fixed rates, payable semi-annually. Funds from such issuances were used primarily for acquisition, development and renovation of Multifamily communities and to repay balances on credit facilities incurred for such purposes. The following table summarizes the Long-Term Debt as of December 31, 1997:
AVERAGE EFFECTIVE INTEREST RATE, ISSUANCE INCLUDING OFFERING ORIGINAL PRINCIPAL AND OUTSTANDING COUPON DISCOUNTS AND MATURITY LIFE PAYMENT DATE OF ISSUANCE PRINCIPAL AMOUNT RATE ISSUANCE COSTS DATE (YEARS) REQUIREMENT - ---------------- ---------------- ------ ------------------ -------- -------- ----------- 03/31/97................ $ 20 million 7.500% 7.443% 04/01/07 10.00 (1) 03/31/97................ 30 million 8.050 8.038 04/01/17 20.00 (1) ------------ ----- ----- ----- Subtotal/Average........ $ 50 million 7.905% 7.850% 16.00 ------------ ----- ----- ----- 10/21/96................ $ 15 million 6.600% 7.030% 10/15/99 3.00 (1) 10/21/96................ 20 million 6.950 7.400 10/15/02 6.00 (1) 10/21/96................ 20 million 7.150 7.500 10/15/03 7.00 (1) 10/21/96................ 20 million 7.250 7.630 10/15/04 8.00 (1) 10/21/96................ 20 million 7.300 7.640 10/15/05 9.00 (1) 10/21/96................ 20 million 7.375 7.685 10/15/06 10.00 (1) 10/21/96................ 15 million 6.500 6.750 10/15/26 30.00 (2) ------------ ----- ----- ----- Subtotal/Average........ $130 million 7.350% 7.500% 6.85 ------------ ----- ----- ----- 08/06/96................ $ 20 million 7.550% 7.680% 08/01/08 12.00 (1) 08/06/96................ 20 million 7.625 7.730 08/01/09 13.00 (1) 08/06/96................ 20 million 7.650 7.770 08/01/10 14.00 (1) 08/06/96................ 20 million 8.100 8.210 08/01/15 19.00 (1) 08/06/96................ 20 million 8.150 8.250 08/01/16 20.00 (1) ------------ ----- ----- ----- Subtotal/Average........ $100 million 7.840% 7.950% 15.60 ------------ ----- ----- ----- 02/23/96................ $ 50 million 7.150% 7.300% 02/15/10 10.50 (3) 02/23/96................ 100 million 7.900 8.030 02/15/16 18.00 (4) ------------ ----- ----- ----- Subtotal/Average........ $150 million 7.710% 7.840% 15.50 ------------ ----- ----- ----- 02/08/94................ $100 million 6.875% 6.978% 02/15/08 10.50 (5) 02/08/94................ 100 million 7.500 7.653 02/15/14 18.00 (6) ------------ ----- ----- ----- Subtotal/Average........ $200 million 7.240% 7.370% 14.25 ------------ ----- ----- ----- Grand Total/Average..... $630 million 7.530% 7.640% 13.37 ============ ===== ===== =====
- -------- (1) Entire principal amount due at maturity. (2) The 6.500% notes may be repaid on October 15, 1999 at the option of the holders at their full principal amount together with accrued interest. (3) These notes require aggregate annual principal payments of $6.25 million commencing in 2003. (4) These notes require aggregate annual principal payments of $10 million in 2011, $12.5 million in 2012, $15 million in 2013, $17.5 million in 2014, $20 million in 2015 and $25 million in 2016. (5) These notes require annual principal payments of $12.5 million commencing in 2001. (6) These notes require aggregate annual principal payments of $10 million in 2009, $12.5 million in 2010, $15 million in 2011, $17.5 million in 2012, $20 million in 2013, and $25 million in 2014. 63 SECURITY CAPITAL PACIFIC TRUST NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The Notes, other than the $15 million of 6.500% Notes issued October 21, 1996 and due 2026, are redeemable any time at the option of PTR, in whole or in part. The redemption price is equal to the sum of the principal amount of the Notes being redeemed plus accrued interest thereon to the redemption date plus an adjustment, if any, based on the yield to maturity relating to market yields available at redemption. The $15 million of 6.500% Notes may be repaid on October 15, 1999 at the option of the holders at their full principal amount together with accrued interest. If the holders do not exercise their right to require PTR to repay the 6.500% Notes on October 15, 1999, they may be repaid at the option of PTR, in whole or in part under the redemption terms described above. The Notes are governed by the terms and provisions of an indenture agreement. 64 SECURITY CAPITAL PACIFIC TRUST NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Mortgages Payable Mortgages payable at December 31, 1997 consisted of the following (dollar amounts in thousands):
BALLOON PRINCIPAL BALANCE EFFECTIVE SCHEDULED PERIODIC PAYMENT AT INTEREST MATURITY PAYMENT DUE AT DECEMBER 31, COMMUNITY RATE (1) DATE TERMS MATURITY 1997 1996 - --------- --------- --------- -------- -------- -------- -------- CONVENTIONAL FIXED RATE: Tigua Village.......... N/A% 05/01/97 (2) $ N/A $ -- $ 683 Silvercliff............ N/A 11/10/97 (2) N/A -- 7,382 Braeswood Park......... N/A 01/01/98 (2) N/A -- 6,761 Seahawk................ N/A 01/10/98 (3) N/A -- 5,427 La Tierra at the Lakes. 7.88 12/01/98 (2) 25,105 25,560 26,019 Windsail............... N/A 02/01/99 (3) N/A -- 4,798 Fairwood Landing....... 8.75 12/21/99 (2) 5,501 5,730 5,831 Greenpointe............ 8.50 03/01/00 (2) 3,416 3,574 3,638 Mountain Shadow........ 8.50 03/01/00 (2) 3,136 3,282 3,340 Sunterra............... 8.25 03/01/00 (2) 7,627 7,991 8,138 Brompton Court......... 8.38 09/01/00 (2) 13,340 14,074 14,318 Marina Lakes........... 7.85 07/19/01 (2) 12,393 13,338 -- Treat Commons.......... 7.50 09/14/01 (2) 6,537 7,070 7,192 El Dorado Hills........ 7.53 10/01/02 (2) 15,548 16,549 16,718 Ashton Place........... 8.24 10/01/23 (4) N/A 46,795 47,342 Double Tree II......... N/A 05/01/33 (3) N/A -- 4,750 -------- -------- $143,963 $162,337 ======== ======== TAX-EXEMPT FIXED RATE (5): Cherry Creek........... 8.41 11/01/01 (2) 2,780 $ 3,750 $ 4,000 Redwood Shores......... 5.68 10/01/08 (2) 16,820 24,770 25,220 Cloverland............. 7.35 03/01/10 (2) 3,273 4,229 -- The Crossroads......... 6.76 12/15/18 (6) 4,435 4,435 4,435 Carrington Place....... 7.94 04/01/19 (4) N/A 3,510 -- Hacienda Business Park. 7.44 Various (7) N/A 5,604 -- -------- -------- $ 46,298 $ 33,655 ======== ======== TAX-EXEMPT FLOATING RATE (5): River Meadows.......... 4.83 10/01/05 (8) 10,000 10,000 -- Apple Creek............ 5.86 09/01/07 (8) 11,100 11,100 11,100 La Jolla Point......... 4.76 08/01/14 (8) 13,232 21,400 -- Le Club................ 4.92 11/01/15 (8) 21,700 21,700 -- Fox Creek.............. 5.00 08/15/27 (9) N/A 4,240 4,236 -------- -------- $ 68,440 $ 15,336 ======== ======== COMBINED (10): Las Flores............. 8.84 06/01/24 (4) N/A $ 5,794 $ 5,860 ---- -------- -------- OTHER: Mello-Roos bonds and other assessments..... 5.05 Various (11) N/A 1,157 -- ---- -------- -------- Total/Average Mortgage Debt................. 7.02% $265,652 $217,188 ==== ======== ========
65 SECURITY CAPITAL PACIFIC TRUST NOTES TO FINANCIAL STATEMENTS--(CONTINUED) - -------- (1) Represents the effective interest rate, including loan cost amortization and other ongoing fees and expenses. (2) Regular amortization with a balloon payment due at maturity. (3) Mortgage was prepaid by PTR or assumed by the buyer upon disposition of the community. (4) Fully amortizing. (5) Tax-exempt effective interest rates include credit enhancement and other bond-related costs, where applicable. (6) Semi-annual payments are interest only until December 2003 at 5.4%, at which time the interest rate is adjusted to the current market rate. (7) Aggregate amount due on four separate notes, with maturity dates ranging from 2004 to 2017 and a weighted-average rate of 7.44%. (8) Payments are interest only until maturity and the interest rate is adjusted weekly or monthly. (9) Payments are interest only until August 2007, at which time monthly principal and interest payments commence in an amount sufficient to amortize the balance over the remaining term. (10) The bonds consist of $4.5 million Series A tax-exempt fixed rate bonds and $1.7 million Series B taxable fixed rate bonds. The bonds are guaranteed by the GNMA mortgage-backed securities program. (11) Primarily represents bonded indebtedness associated with improvements to public facilities and infrastructure in certain California taxing jurisdictions known as "Mello-Roos districts." The bonds have a weighted- average rate of 5.05% and mature at dates ranging from 1999 to 2018. The changes in mortgages payable during the past three years consisted of the following (in thousands):
1997 1996 1995 -------- -------- -------- Balances at January 1....................... $217,188 $158,054 $ 93,624 Notes originated or assumed............... 101,595 104,176 66,481 Principal payments and prepayments........ (53,131) (45,042) (2,051) -------- -------- -------- Balances at December 31..................... $265,652 $217,188 $158,054 ======== ======== ========
66 SECURITY CAPITAL PACIFIC TRUST NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Scheduled Debt Maturities Approximate principal payments due during each of the calendar years in the 20-year period ending December 31, 2017 and thereafter are as follows (in thousands):
CREDIT LONG-TERM MORTGAGES FACILITIES DEBT PAYABLE TOTAL ---------- --------- --------- ---------- 1998............................ $ 8,000 $ -- $ 28,993 $ 36,993 1999............................ 223,500 30,000 9,089 262,589 2000............................ -- -- 30,734 30,734 2001............................ -- 12,500 24,559 37,059 2002............................ -- 32,500 18,123 50,623 2003............................ -- 38,750 2,961 41,711 2004............................ -- 38,750 2,798 41,548 2005............................ -- 38,750 13,025 51,775 2006............................ -- 38,750 3,276 42,026 2007............................ -- 38,750 15,164 53,914 2008............................ -- 38,750 20,076 58,826 2009............................ -- 36,250 2,897 39,147 2010............................ -- 38,750 6,298 45,048 2011............................ -- 25,000 3,307 28,307 2012............................ -- 30,000 3,298 33,298 2013............................ -- 35,000 3,349 38,349 2014............................ -- 42,500 16,453 58,953 2015............................ -- 40,000 24,592 64,592 2016............................ -- 45,000 3,106 48,106 2017............................ -- 30,000 3,350 33,350 Thereafter.................... -- -- 30,204 30,204 -------- -------- -------- ---------- Total......................... $231,500 $630,000 $265,652 $1,127,152 ======== ======== ======== ==========
Covenants PTR's debt instruments generally contain certain covenants common to the type of facility or borrowing, including financial covenants establishing minimum debt service coverage ratios and maximum leverage ratios. PTR was in compliance with all covenants pertaining to its debt instruments at December 31, 1997. (5) DISTRIBUTIONS TO SHAREHOLDERS PTR, to maintain its status as a REIT, is required to distribute at least 95% of PTR's taxable income. PTR announces the following year's projected annual distribution level after the PTR Board of Trustees' ("Board" or "Trustees") annual budget review and approval in December of each year. At its December 2, 1997 Board meeting, the Board announced an increase in the annual distribution level from $1.30 to $1.36 per Common Share and declared the first quarter 1998 distribution of $0.34 per Common Share. The first quarter distribution was paid on February 25, 1998 to shareholders of record on February 11, 1998. The payment of distributions is subject to the discretion of the Board and is dependent upon the strategy, financial condition and operating results of PTR. Pursuant to the terms of the Preferred Shares, PTR is restricted from declaring or paying any distribution with respect to its Common Shares unless all cumulative distributions with respect to the Preferred Shares have been paid and sufficient funds have been set aside for Preferred Share distributions that have been declared. 67 SECURITY CAPITAL PACIFIC TRUST NOTES TO FINANCIAL STATEMENTS--(CONTINUED) PTR made total cash distributions of $1.30 per Common Share in 1997, $1.24 per Common Share in 1996 and $1.15 per Common Share in 1995. In addition, on November 12, 1996, PTR distributed 0.125694 shares of Homestead common stock and warrants to purchase 0.084326 shares of Homestead common stock per Common Share in the Homestead Distribution to each holder of record of Common Shares on October 29, 1996. For federal income tax purposes, the following summarizes the taxability of cash distributions paid on the Common Shares in 1996 and 1995 and the estimated taxability for 1997:
1997 1996 1995 ----- ----- ----- Per Common Share: Ordinary income....................................... $1.08 $0.61 $0.92 Capital gains......................................... -- 0.11 -- Return of capital..................................... 0.22 0.52 0.23 ----- ----- ----- Total............................................... $1.30 $1.24 $1.15 ===== ===== =====
The Homestead securities distributed by PTR to each holder of Common Shares in the Homestead Distribution were valued at $2.16 per PTR Common Share for federal income tax purposes, of which $1.06 was taxable as ordinary income, $0.19 was taxable as a capital gain and $0.91 was treated as a return of capital. The warrants distributed to holders of PTR's Common Shares and Series A Preferred Shares by Security Capital Group after the closing of the Merger (see Note 7), were valued at $6.88 per warrant for federal income tax purposes, all of which was taxable as ordinary income. For federal income tax purposes, the following summaries reflect the taxability of dividends paid on Series A Preferred Shares and Series B Preferred Shares, respectively, for periods prior to 1997 and the estimated taxability for 1997. The Series A and Series B Preferred Shares are discussed in Note 6.
1997 1996 1995 ------ ----- ---- Per Series A Preferred Share: Ordinary income........................... $1.751 $1.47 $ 1.75 Capital gains............................. -- 0.28 -- ------ ----- ------- Total................................... $1.751 $1.75 $ 1.75 ====== ===== ======= DATE OF ISSUANCE 1997 1996 TO 12/31/95 ------ ----- ---------------- Per Series B Preferred Share: Ordinary income........................... $ 2.25 $1.89 $1.3625 Capital gains............................. -- 0.36 -- ------ ----- ------- Total................................... $ 2.25 $2.25 $1.3625 ====== ===== =======
Due to the increase in the conversion ratio (Note 6) resulting from the Homestead Distribution to holders of Common Shares, holders of Series A Preferred Shares were deemed to have received a distribution of $2.43 on November 12, 1996 for federal income tax purposes. Of this amount, $1.19 was taxable as ordinary income, $0.22 was taxable as a capital gain and $1.02 was treated as a return of capital. PTR's tax return for the year ended December 31, 1997 has not been filed, and the taxability information for 1997 is based upon the best available data. PTR's tax returns for prior years have not been examined by the Internal Revenue Service and, therefore, the taxability of the dividends is subject to change. 68 SECURITY CAPITAL PACIFIC TRUST NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (6) SHAREHOLDERS' EQUITY Shares of Beneficial Interest At December 31, 1997, 150,000,000 shares of beneficial interest, par value $1.00 per share, were authorized. The Board is authorized to issue, from the authorized but unissued shares, Common or Preferred Shares. From time to time the Board establishes the number of preferred shares to be included in a series and fixes the designation and any preferences, conversion and other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms and conditions of redemption of the shares of each series. Series A Preferred Shares The Series A Preferred Shares issued in November 1993 have a liquidation preference of $25.00 per share for an aggregate liquidation preference at December 31, 1997 of $135.2 million. Holders of the Series A Preferred Shares are entitled only to limited voting rights under certain conditions. During 1997, 1,086,574 of PTR's Series A Preferred Shares were converted, at the option of the holders, into 1,463,448 Common Shares. As a result of the Homestead Distribution, PTR adjusted the conversion price of its Series A Preferred Shares, effective as of the opening of business on October 30, 1996, from $20.556 to $18.561 per Common Share (a conversion ratio of 1.3469 Common Shares for each Series A Preferred Share), as required by the Articles Supplementary governing the Series A Preferred Shares. Distributions on the Series A Preferred Shares are payable in an amount per share equal to the greater of $1.75 per annum or the annualized quarterly PTR distribution rate on the Common Shares into which the Series A Preferred Shares are convertible. Based on the projected 1998 distribution level of $1.36 per Common Share, the projected 1998 dividend on the Series A Preferred Shares is $1.832 per share. The Series A Preferred Shares are redeemable at the option of PTR after November 30, 2003. Series B Preferred Shares The Series B Non-Convertible Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $1.00 per share ("Series B Preferred Shares") issued in May 1995 have a liquidation preference of $25.00 per share for an aggregate liquidation preference of $105.0 million plus any accrued but unpaid distributions. The net proceeds (after underwriting commissions and other offering costs) to PTR from the sale of the Series B Preferred Shares were $101.3 million. On and after May 24, 2000, the Series B Preferred Shares may be redeemed for cash at the option of PTR, in whole or in part, at a redemption price of $25.00 per share plus any accrued but unpaid distributions, if any, to the redemption date. The redemption price (other than the portion thereof consisting of accrued and unpaid distributions) is payable solely out of the sale proceeds of other capital shares of PTR, which may include shares of other series of preferred shares. The holders of the Series B Preferred Shares have no preemptive rights with respect to any shares of the capital securities of PTR or any other securities of PTR convertible into or carrying rights or options to purchase any such shares. The Series B Preferred Shares have no stated maturity and are not subject to any sinking fund or other obligation of PTR to redeem or retire the Series B Preferred Shares and are not convertible into any other securities of PTR. In addition, holders of the Series B Preferred Shares are entitled to receive, when and as declared by the Board, out of funds legally available for the payment of distributions, cumulative preferential cash distributions at the rate of 9% of the liquidation preference per annum (equivalent to $2.25 per share). The Series A Preferred Shares and Series B Preferred Shares are collectively referred to as "Preferred Shares". Preferred Share distributions are cumulative from the date of original issue and are payable quarterly in arrears on the last day of each March, June, September and December. All dividends due and payable on 69 SECURITY CAPITAL PACIFIC TRUST NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Preferred Shares have been accrued and paid as of the end of each fiscal year. Both series of Preferred Shares rank on a parity as to distributions and liquidation proceeds. The net proceeds from the sale of Preferred Shares were used primarily for the acquisition, development and renovation of Multifamily communities, and to repay revolving credit balances incurred for such purposes. Establishment of 401(k) Plan and Nonqualified Savings Plan At the December 2, 1997 Board meeting, The Board established and approved the adoption of a 401(k) savings plan for the benefit of its employees, effective January 1, 1998 (the "401(k) Plan"). The 401(k) Plan provides for matching employer contributions in Common Shares of 50 cents for every dollar contributed by an employee, up to 6% of the employees' annual compensation. The vesting of contributed Common Shares is based on years of service, with 20% vesting each year of service, over a five-year period. PTR filed a Form S- 8 with the Securities and Exchange Commission (the "SEC") on January 5, 1998, registering 200,000 Common Shares for the issuance of the matching contributions by PTR under the 401(k) Plan. The Board also established and approved the adoption of the Nonqualified Savings Plan ("NSP") to provide benefits for a select group of management or highly compensated employees, effective January 1, 1998. The purpose of the NSP is to allow the employee the opportunity to defer the receipt and income taxation of a portion of compensation in excess of the amount permitted under the 401(k) Plan. Under the NSP, these employees may defer up to 35% of their annual salary and 100% of their annual target bonus. Under the NSP and in coordination with the 401(k) Plan, PTR will match 2% of the employees' annual compensation since highly compensated employees will be limited to a 4% contribution in the 401(k) Plan. The matching account will vest in the same manner as the 401(k) Plan. Establishment of Dividend Reinvestment and Share Purchase Plan At the December 2, 1997 Board meeting, PTR's Board established and approved the adoption of the Dividend Reinvestment and Share Purchase Plan ("DRSP"). Under the DRSP, Common shareholders have the ability to automatically reinvest their cash dividends to purchase additional Common Shares. Additionally, existing and prospective investors have the ability to tender cash payments that will be applied towards the purchase of Common Shares, subject to certain limitations. On January 21, 1998, PTR filed a Form S-3 registering the offering of 2,000,000 Common Shares, which may be issued pursuant to the terms of the DRSP. Ownership Restrictions and Significant Shareholder PTR's Restated Declaration of Trust and the Articles Supplementary governing the Preferred Shares restrict beneficial ownership (or ownership generally attributed to a person under the REIT tax rules) of PTR's outstanding shares by a single person, or persons acting as a group, to 9.8% of the Common Shares and 25% of each series of Preferred Shares. The purpose of these provisions are to assist in protecting and preserving PTR's REIT status and to protect the interests of shareholders in takeover transactions by preventing the acquisition of a substantial block of shares unless the acquiror makes a cash tender offer for all outstanding shares. For PTR to qualify as a REIT under the Internal Revenue Code of 1986, as amended, not more than 50% in value of its outstanding capital shares may be owned by five or fewer individuals at any time during the last half of PTR's taxable year. The provision permits five persons to acquire up to a maximum of 9.8% each of the Common Shares, or an aggregate of 49% of the outstanding Common Shares, and thus assists the Board in protecting and preserving PTR's REIT status for tax purposes. Common Shares owned by a person or group of persons in excess of the 9.8% limit are subject to redemption by PTR. The provision does not apply where a majority of the Board, in its sole and absolute 70 SECURITY CAPITAL PACIFIC TRUST NOTES TO FINANCIAL STATEMENTS--(CONTINUED) discretion, waives such limit after determining that the eligibility of PTR to qualify as a REIT for federal income tax purposes will not be jeopardized or the disqualification of PTR as a REIT is advantageous to the shareholders. The Board has permitted Security Capital Group Incorporated ("Security Capital Group") to acquire up to 49% of PTR's fully converted Common Shares. Security Capital Group's ownership of Common Shares is attributed for tax purposes to its shareholders. Security Capital Group owned 33.1% of PTR's total outstanding Common Shares at December 31, 1997. Pursuant to an agreement between Security Capital Group and PTR, Security Capital Group has agreed to acquire no more than 49% of the fully converted Common Shares except pursuant to an all-cash tender offer for all Common Shares held open for 90 days. Security Capital Group would have no limitation on making a tender offer if an unrelated third party commences such a tender offer. Purchase Rights In 1994, the Board authorized the distribution of one purchase right ("Purchase Right") for each Common Share outstanding at the close of business on July 21, 1994. Holders of additional Common Shares issued after July 21, 1994 and prior to the expiration of the Purchase Rights on July 21, 2004 will be entitled to one Purchase Right for each additional Common Share. Each Purchase Right entitles the holder under certain circumstances to purchase from PTR one one-hundredth of a share of a series of PTR Junior Participating Preferred Shares, par value $1.00 per share ("Participating Preferred Shares"), at a price of $60.00 per one one-hundredth of Participating Preferred Share, subject to adjustment. Purchase Rights are exercisable when a person or group of persons acquires beneficial ownership of 20% or more of the fully converted Common Shares (49% in the case of Security Capital Group and certain defined affiliates), commences or announces a tender offer or exchange offer which would result in the beneficial ownership by a person or group of persons of 25% or more of the outstanding Common Shares (49% in the case of Security Capital Group and certain defined affiliates) or files or announces their intention to file with any regulatory authority an application seeking approval of any transaction which would result in the beneficial ownership by a person of 25% or more of the outstanding Common Shares (49% in the case of Security Capital Group and certain defined affiliates). Under certain circumstances, each Purchase Right entitles the holder to purchase, at the Purchase Right's then current exercise price, a number of Common Shares having a market value of twice the Purchase Right's exercise price. The acquisition of PTR pursuant to certain mergers or other business transactions would entitle each holder to purchase, at the Purchase Right's then current exercise price, a number of the acquiring company's common shares having a market value at that time equal to twice the Purchase Right's exercise price. The Purchase Rights will expire in July 2004 and are subject to redemption in whole, but not in part, at a price of $0.01 per Purchase Right payable in cash, shares of PTR or any other form of consideration determined by the Board. Shelf Registration On December 15, 1997, PTR filed a $400 million shelf registration with the SEC to supplement an existing shelf registration with a balance of $170.9 million. These securities can be issued in the form of Long-Term Debt, Common Shares or Preferred Shares on an as-needed basis, subject to PTR's ability to effect offerings on satisfactory terms. As of December 31, 1997 PTR had approximately $570.9 million in shelf-registered securities available for issuance. See Note 13, "Subsequent Event." Equity Offerings During 1995, PTR sold $105 million of Series B Preferred Shares as described above and received $216.3 million in net proceeds from the Common Share subscription offering described in Note 9. 71 SECURITY CAPITAL PACIFIC TRUST NOTES TO FINANCIAL STATEMENTS--(CONTINUED) On June 4, 1997, PTR sold 2.5 million Common Shares to Goldman, Sachs & Co. for an aggregate purchase price of $54.5 million. The net proceeds of $54.3 million (net of $150,000 of offering costs) were used to repay borrowings under PTR's $350 million unsecured revolving line of credit and its short-term borrowing agreement with Chase. In connection with the Merger described in Note 7, PTR commenced a rights offering on August 6, 1997 pursuant to which it distributed to its shareholders Rights to subscribe for and purchase up to 7,433,433 Common Shares at a subscription price of $21.8125 per Common Share. Simultaneously with the offering of Common Shares to Rights holders, Security Capital Markets Group Incorporated, which is owned by Security Capital Group, sought investors on a best efforts basis, to oversubscribe and acquire unsubscribed shares. Due to strong investor demand, PTR sold and issued an additional 1,486,686 Common Shares for a total of 8,920,119 Common Shares at the subscription price of $21.8125 per share. The net proceeds of $194.1 million (net of $450,000 of offering costs) were used to pay down PTR's $350 million unsecured revolving line of credit. (7) ACQUISITION OF REIT MANAGER AND PROPERTY MANAGER Effective September 9, 1997, PTR terminated its REIT management agreement with Security Capital Pacific Incorporated (the "REIT Manager") and its property management agreement with SCG Realty Services Incorporated (the "Property Manager"), pursuant to a merger (the "Merger") whereby PTR acquired the operations and businesses of the REIT Manager and the Property Manger (the "Management Companies") valued at approximately $75.8 million from Security Capital Group in exchange for 3,295,533 Common Shares. The number of Common Shares issued to Security Capital Group was determined using a per Common Share price of $23.0125 (the average market price of Common Shares over the five-day period prior to the August 6, 1997 record date for determining PTR's shareholders entitled to vote on the Merger). The Board approved the Merger based on the recommendation of a special committee comprised of independent members of the Board who received a fairness opinion on the Merger from a third-party investment bank. The Merger, which required the approval of a two- thirds majority of PTR's outstanding Common Shares, was approved by approximately 99% of the shareholders voting on the transaction on September 8, 1997. As a result of the transaction, PTR became an internally managed REIT and Security Capital Group remains PTR's largest shareholder (33.1% ownership at January 31, 1998). The market value of the 3,295,533 Common Shares issued to Security Capital Group on September 9, 1997 upon PTR's acquisition of the REIT and property managers was approximately $73.3 million, based on the $22.25 per share closing price of the Common Shares on September 8, 1997. Of this amount, approximately $1.6 million was allocated to the estimated fair value of the tangible net assets acquired. The $71.7 million difference between the market value of the Common Shares and the estimated fair value of the net tangible assets acquired was recorded as "costs incurred in acquiring the Management Companies from an affiliate" (a non-cash expense) on PTR's statement of earnings. The difference was not recorded as "goodwill" on the balance sheet, since the Management Companies did not qualify as businesses for purposes of applying APB Opinion No. 16, Business Combinations. As a result of the Merger, PTR no longer pays REIT management and property management fees to Security Capital Group. Instead, PTR directly incurs the personnel and other costs related to these functions. The costs relating to property management are recorded as rental expenses whereas the costs associated with managing the REIT are recorded as general and administrative expenses. Direct and incremental costs related to successful development and acquisition activities are capitalized as part of the related real estate basis in accordance with GAAP. Prior to the Merger, the REIT management agreement required PTR to pay a fee of 16% of cash flow from operations, as defined in the agreement. 72 SECURITY CAPITAL PACIFIC TRUST NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Upon closing of the Merger, PTR entered into an Administrative Services Agreement ("ASA") with Security Capital Group for the provision of services which include, but are not limited to, research, payroll and human resources, cash management, accounts payable, data processing, investor relations, and insurance, legal and tax administration. PTR may purchase all or any combination of these services in exchange for a fee equal to Security Capital Group's direct cost of such services plus 20%. These fees may not exceed market rates and are subject to a maximum of approximately $5.5 million during 1998. Cost savings experienced by Security Capital Group under the ASA accrue to PTR. ASA costs related to successful acquisition and development activities are capitalized as part of the related real estate basis. The ASA, which expires on December 31, 1998, provides for annual renewals of consecutive one- year terms, subject to approval by a majority of the independent members of the Board. In addition, Security Capital Group issued $102.0 million of warrants pro rata directly to holders of PTR's Common Shares and Series A Preferred Shares (other than Security Capital Group), to acquire 3,644,430 shares of Class B common stock of Security Capital Group. Holders of Common Shares received 0.052646 warrants for each Common Share held whereas holders of Series A Preferred Shares received 0.070909 warrants for each preferred share held. Each warrant can be exercised for one share of Security Capital Class B common stock at an exercise price of $28 per share and has a term of one year. Security Capital Group issued these warrants to PTR shareholders as an incentive to vote in favor of the Merger and to raise additional equity capital at a relatively low cost, in addition to other benefits. (8) LONG-TERM INCENTIVE PLAN On September 8, 1997, PTR's common shareholders approved PTR's Long-Term Incentive Plan (the "Incentive Plan"), which includes an employee stock purchase plan and a stock option plan. No more than 5,650,000 Common Shares in the aggregate may be awarded under the Incentive Plan and no individual may be awarded more than 500,000 Common Shares in any one-year period. The Incentive Plan has a 10-year term. Additionally, PTR has authorized 100,000 Common Shares for issuance to outside members of the Board. The exercise price of Outside Trustee options may not be less than the fair market value on the date of grant. Such options have a term of five years and are exercisable in whole or in part. Employee Stock Purchase Plan Under the employee stock purchase plan, certain officers and other employees of PTR purchased 813,430 Common Shares at a price of $22.0625 per share on September 8, 1997. No significant additional employee stock purchase plan awards are currently anticipated. PTR financed 95% of the total purchase price through 10-year, recourse notes from the participants aggregating $17.1 million. The notes, which have been recorded as a deduction in shareholders' equity, bear interest at the lower of 6% per annum or the dividend yield of a Common Share determined based on the initial share purchase price (approximately 5.89% at December 31, 1997). The notes are secured by the Common Shares purchased. For each Common Share purchased, participants were granted two options, each to purchase one Common Share at a price of $22.0625 per share. Proceeds from this sale of Common Shares, net of the notes received, were $0.8 million. The change in the notes from employees during 1997 is summarized as follows (in thousands): Balance at September 8, 1997..... $17,100 Notes issued..................... 209 Principal payments received...... -- Retirements...................... (71) ------- Balance at December 31, 1997... $17,238 =======
73 SECURITY CAPITAL PACIFIC TRUST NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Of the notes outstanding at December 31, 1997, approximately $14.0 million were due from officers of PTR. Stock Options Stock options outstanding at December 31, 1997 are as follows:
WEIGHTED-AVERAGE NUMBER OF EXERCISE REMAINING OPTIONS PRICE(1) EXPIRATION DATE CONTRACTUAL LIFE --------- ------------- ----------------- ---------------- Outside Trustees(2)..... 38,000 $8.46--$21.75 1998--2002 2.8 years Employee stock purchase plan(3)................ 1,627,092 $22.06 September 8, 2007 9.7 years Stock option plan--1997 Awards(4).............. 220,325 $22.06 September 8, 2007 9.7 years --------- Total................... 1,885,417 =========
- -------- (1) Exercise price was equal to market price on the date of grant. (2) Options are fully exercisable. (3) Graded vesting at various rates over periods from two to ten years, subject to certain conditions. (4) The holders under this plan are awarded dividend equivalent units each year of the plan as further described below. The options awarded will vest beginning on September 8, 1999 at a rate of 25% per year through 2002. The weighted-average fair value of options granted during 1997 (excluding Trustee options) was approximately $3.00 per option. A summary of the status of PTR's stock option plans as of December 31, 1997 and 1996, and changes during the years ended on those dates is presented below. All grants prior to 1997 relate to Outside Trustees.
WEIGHTED AVERAGE NUMBER OF NUMBER OF EXERCISE OPTIONS OPTIONS PRICE EXERCISABLE --------- -------- ----------- Balance at December 31, 1994.............. 20,000 $14.91 20,000 Granted................................. 10,000 15.59 10,000 Exercised............................... (2,000) 8.46 (2,000) --------- ------ ------ Balance at December 31, 1995.............. 28,000 $15.61 28,000 --------- ------ ------ Granted................................. 10,000 $19.34 10,000 Exercised............................... (6,000) 17.21 (6,000) --------- ------ ------ Balance at December 31, 1996.............. 32,000 $16.48 32,000 --------- ------ ------ Granted................................. 1,857,417 $22.06 10,000 Exercised............................... (2,000) 16.34 (2,000) Forfeited............................... (2,000) 8.46 (2,000) --------- ------ ------ Balance at December 31, 1997.............. 1,885,417 $21.99 38,000 ========= ====== ======
PTR has adopted SFAS No. 123, Accounting for Stock-Based Compensation, which allows PTR to continue to account for its various stock option plans using APB Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), and related interpretations. Under APB 25, if the exercise price of the stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Accordingly, PTR did not recognize compensation expense related to stock options as the exercise price of all options granted was equal to the market price on the date of grant. Had compensation cost for these plans been determined using the option valuation models prescribed by SFAS No. 123, PTR's net earnings attributable to 74 SECURITY CAPITAL PACIFIC TRUST NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Common Shares and earnings per Common Share for 1997 would change as follows (1995 and 1996 would be the same):
1997 ------- Net earnings attributable to Common Shares (in thousands): As reported.................................................... $53,534 ------- Pro forma...................................................... $53,188 ======= Basic and diluted earnings per Common Share: As reported.................................................... $ 0.65 ------- Pro forma...................................................... $ 0.65 =======
The pro forma amounts above were calculated using the Black-Scholes model and the following assumptions:
1997 ---------- Weighted-average risk-free interest rate....................... 6.08% Weighted-average dividend yield................................ 5.60% Weighted-average volatility.................................... 18.35% Weighted-average expected option life.......................... 6.74 years
Dividend Equivalent Units ("DEU's") On December 31, 1997, PTR awarded 2,196 DEUs to the holders of 220,325 stock options at a rate of one DEU for each Common Share under option. A DEU is equal to the difference between PTR's annual Common Share dividend yield and the S&P 500 average dividend yield times the number of shares under option. Options awarded under the employee stock purchase plan are not eligible for DEU's. The DEU's are awarded on December 31st of each year under the stock option plan and vest under the same terms as the underlying stock options. The awarded DEU's were valued at $54,000 on December 31, 1997 based upon the market price of the Common Shares on that date. PTR recognizes the value of the DEU's awarded as compensation expense over the vesting period. (9) 1995 PACIFIC MERGER AND CONCURRENT SUBSCRIPTION OFFERING On March 23, 1995, PTR consummated a merger with Security Capital Pacific Incorporated (the "PACIFIC Merger"). Security Capital Pacific Incorporated ("PACIFIC") was a private Multifamily REIT controlled by Security Capital Group, PTR's principal shareholder. PACIFIC's portfolio consisted primarily of 17 operating garden-style apartment ("Multifamily") communities aggregating 5,579 units. In the PACIFIC Merger, each outstanding share of PACIFIC common stock was converted into the right to receive 0.611 Common Shares. As a result, 8,468,460 of PTR's Common Shares valued at $138.7 million ($16.375 per share) were issued in the PACIFIC Merger in exchange for all of the outstanding shares of PACIFIC common stock. In addition, PTR assumed $51.9 million on PACIFIC's line of credit and $54.4 million of mortgage debt. The PACIFIC Merger has been accounted for as a purchase and, accordingly, the results of operations of PACIFIC have been included in PTR's financial statements from March 23, 1995. The following summarized pro forma (unaudited) information assumes the PACIFIC Merger occurred on January 1, 1995, and represents the combined historical operating results of PTR and PACIFIC for 1995. No material pro forma adjustments to revenue and expenses were required. The weighted-average Common Shares 75 SECURITY CAPITAL PACIFIC TRUST NOTES TO FINANCIAL STATEMENTS--(CONTINUED) outstanding have been adjusted to reflect the PACIFIC Merger conversion rate (0.611 Common Shares for each share of PACIFIC common stock). The pro forma financial information does not necessarily reflect the results of operations that would have occurred had PACIFIC and PTR constituted a single entity during 1995 (in thousands, except per share amounts).
1995 -------- Rental income.................................................... $271,091 ======== Net earnings attributable to Common Shares....................... $ 64,152 ======== Weighted-average Common Shares outstanding....................... 68,955 ======== Per Common Share amounts: Net earnings attributable to Common Shares..................... $ 0.93 ========
Concurrently with the consummation of the PACIFIC Merger, PTR completed a subscription offering of 13.2 million Common Shares pursuant to which PTR received net proceeds of $216.3 million. The subscription offering was designed to allow shareholders of PTR to purchase Common Shares at the same price at which PACIFIC shareholders acquired Common Shares in the PACIFIC Merger ($16.375 per Common Share). Security Capital Group purchased $50 million (3.1 million Common Shares at $16.375 per Common Share) in the subscription offering pursuant to the oversubscription privilege. (10) FAIR VALUES OF FINANCIAL INSTRUMENTS The following disclosures of estimated fair value of financial instruments were determined by PTR based on available market information and valuation methodologies believed to be appropriate for these purposes. Considerable judgment and a high degree of subjectivity are involved in developing these estimates and accordingly they are not necessarily indicative of amounts that PTR could realize upon disposition. As of December 31, 1997 and 1996, the carrying amount of certain financial instruments employed by PTR, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses were representative of their fair values because of the short-term maturity of these instruments. Similarly, the carrying value of lines of credit balances approximates fair value as of those dates since the interest rate fluctuates based on published market rates. As discussed in Note 3, the Homestead Notes outstanding at December 31, 1997 are reflected at fair value in the accompanying balance sheet. PTR believes the carrying value of the other mortgage notes receivable approximates fair value. As of December 31, 1997 and 1996, based on the terms available to PTR, the carrying value of the Long-Term Debt and mortgages was a reasonable estimation of their fair values. Derivative Financial Instruments PTR has only limited involvement with derivative financial instruments and does not use them for trading purposes. PTR occasionally utilizes derivative financial instruments as hedges in anticipation of future debt transactions to manage well-defined interest rate risk. In anticipation of the March 6, 1998 Long-Term Debt offering discussed in Note 13 "Subsequent Event," PTR entered into four separate interest rate contracts in 1997 with notional amounts aggregating $120 million. As of December 31, 1997, the fair value of these interest rate contracts, based on broker estimates, was an unrealized loss of approximately $6.6 million ($5.5 million realized loss as of March 6, 1998). Similarly in 1996, PTR entered into interest rate contracts with notional amounts aggregating $50 million in anticipation of the $50 million Long-Term Debt offering that closed March 31, 1997. Upon completion of the offering, PTR terminated the interest rate contracts, realizing a gain of approximately $819,000. 76 SECURITY CAPITAL PACIFIC TRUST NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The gain or loss ultimately realized on a hedge is deferred and amortized over the term of the related debt issuance. (11) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Selected quarterly financial data (in thousands except per share amounts) for 1997 and 1996 are as summarized below. Net earnings (loss) per Common Share for each period presented have been restated to conform with the requirements of SFAS No. 128. The sum of the quarterly earnings (loss) per Common Share amounts may not equal the annual earnings per Common Share amounts due to the impact of equity issuances.
YEAR THREE MONTHS ENDED ENDED --------------------------------- 12-31 3-31 6-30 9-30 (1) 12-31 (1) ------- ------- -------- ------- -------- 1997: Rental revenues................... $79,950 $81,412 $ 85,760 $87,938 $335,060 ------- ------- -------- ------- -------- Earnings (loss) from operations... 20,276 23,065 (46,857) 28,202 24,686 Gain on dispositions of investments, net................. 25,335 11,872 10,723 302 48,232 Less: Preferred Share dividends... 5,035 4,805 4,785 4,759 19,384 ------- ------- -------- ------- -------- Net earnings (loss) attributable to Common Shares................. $40,576 $30,132 $(40,919) $23,745 $ 53,534 ======= ======= ======== ======= ======== Net earnings (loss) per Common Share: Basic........................... $ 0.53 $ 0.39 $ ( 0.50) $ 0.26 $ 0.65 ======= ======= ======== ======= ======== Diluted......................... $ 0.51 $ 0.38 $ ( 0.50) $ 0.26 $ 0.65 ======= ======= ======== ======= ======== 1996: Rental revenues................... $75,809 $79,491 $ 84,802 $81,944 $322,046 ------- ------- -------- ------- -------- Earnings from operations.......... 22,920 24,462 24,718 21,989 94,089 Gain on dispositions of investments, net................. 2,923 5,160 25,257 4,152 37,492 Less: extraordinary item-loss on early extinguishment of debt..... -- 870 -- -- 870 Less: Preferred Share dividends... 6,388 6,386 6,182 5,211 24,167 ------- ------- -------- ------- -------- Net earnings attributable to Common Shares.................... $19,455 $22,366 $ 43,793 $20,930 $106,544 ======= ======= ======== ======= ======== Net earnings per Common Share: Basic........................... $ 0.27 $ 0.31 $ 0.60 $ 0.28 $ 1.46 ======= ======= ======== ======= ======== Diluted......................... $ 0.27 $ 0.31 $ 0.57 $ 0.28 $ 1.44 ======= ======= ======== ======= ========
- -------- (1) Reflects the impact of a one-time, non-cash charge of $71.7 million associated with costs incurred in acquiring the Management Companies from an affiliate. See Note 7 for additional information regarding the acquisition of the Management Companies. (12) COMMITMENTS AND CONTINGENCIES PTR is a party to various claims and routine litigation arising in the ordinary course of business. PTR does not believe that the results of any of such claims and litigation, individually or in the aggregate, will have a material adverse effect on its business, financial position or results of operations. PTR is subject to environmental regulations related to the ownership, operation, development and acquisition of real estate. As part of its due diligence investigation procedures, PTR conducts Phase I 77 SECURITY CAPITAL PACIFIC TRUST NOTES TO FINANCIAL STATEMENTS--(CONCLUDED) environmental assessments on each property prior to acquisition. The cost of complying with environmental regulations was not material to PTR's results of operations for any of the years in the three-year period ended December 31, 1997. PTR is not aware of any environmental condition on any of its communities which is likely to have a material adverse effect on PTR's financial condition or results of operations. See Notes 2 and 3 for Multifamily construction, rehabilitation and funding commitments. (13) SUBSEQUENT EVENT On March 6, 1998, PTR issued $125 million in Long-Term Debt. The debt was issued in the form of 7.20% Notes which pay interest semi-annually on March 1 and September 1 of each year through March 1, 2013, the maturity date. Annual principal installments of $25 million commence on March 1, 2009. The 7.20% Notes have an original weighted average life to maturity of 13.0 years. The all-in effective interest rate of the 7.20% Notes, including discounts and issuance costs is approximately 7.86%. PTR used the $118.3 million of net proceeds primarily to pay down PTR's $350 million revolving line of credit, which had an outstanding balance of $145.0 million after the paydown on March 6, 1998. 78 SCHEDULE III SECURITY CAPITAL PACIFIC TRUST REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 (IN THOUSANDS)
COSTS GROSS AMOUNT AT WHICH INITIAL COST TO PTR CAPITALIZED CARRIED AT DECEMBER 31, 1997 --------------------- SUBSE- -------------------------------- ACCUMU- CON- ENCUM- BLDGS AND QUENT TO BLDGS AND LATED DE- STRUCTION YEAR PROPERTIES BRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTALS PRECIATION YEAR ACQUIRED ---------- -------- -------- ------------ ----------- -------- ------------ ---------- ---------- --------- -------- Multifamily: Albuquerque, New Mexico: Commanche Wells. $ -- $ 719 $ 4,072 $ 472 $ 719 $ 4,544 $ 5,263 $ 464 1985 1994 Entrada Pointe.. -- 1,014 5,744 1,113 1,014 6,857 7,871 718 1986 1994 La Paloma....... -- 4,135 -- 19,356 4,135 19,356 23,491 1,935 1996 1993 La Ventana...... -- 2,210 -- 13,349 2,210 13,349 15,559 835 1996 1994 Pavilions....... -- 2,182 7,624 5,962 2,182 13,586 15,768 2,255 (a) (a) Sandia Ridge.... -- 1,339 5,358 1,225 1,339 6,583 7,922 1,121 1986 1992 Telegraph Hill.. -- 1,216 6,889 586 1,216 7,475 8,691 250 1986 1996 Vista Del Sol... -- 1,105 4,419 666 1,105 5,085 6,190 612 1987 1993 Vistas at Seven Bar Ranch...... -- 3,541 5,351 20,719 3,541 26,070 29,611 1,696 (b) (b) Wellington Place.......... -- 1,881 7,523 1,301 1,881 8,824 10,705 939 1981 1993 Austin, Texas: Hunters' Run.... -- 2,197 -- 17,668 2,197 17,668 19,865 1,258 (c) (c) Monterrey Ranch. -- 424 -- 1,972 424 1,972 2,396 (d) (d) 1993 Monterrey Ranch II............. -- 1,151 -- 22,913 1,151 22,913 24,064 1,001 1996 1993 Monterrey Ranch III............ -- 1,131 -- 4,678 1,131 4,678 5,809 (d) (d) 1993 Monterrey Ranch IV............. -- 920 -- 41 920 41 961 (d) (d) 1993 The Ridge....... -- 1,669 6,675 2,719 1,669 9,394 11,063 1,093 1978 1993 Rock Creek...... -- 1,311 7,431 1,613 1,311 9,044 10,355 1,008 1979 1993 Shadowood....... -- 1,197 4,787 760 1,197 5,547 6,744 627 1985 1993 Dallas, Texas: Custer Crossing. -- 1,532 8,683 1,197 1,532 9,880 11,412 1,033 1985 1993 Meadows at Park Boulevard...... -- 1,373 -- 15,473 1,373 15,473 16,846 122 1997 1996 Quail Run....... -- 1,613 9,140 1,284 1,613 10,424 12,037 1,092 1983 1993 Summerstone..... -- 1,028 5,824 751 1,028 6,575 7,603 699 1983 1993 Timber Ridge.... -- 997 5,651 858 997 6,509 7,506 554 1984 1994 Timber Ridge II. -- 675 20 8,091 675 8,111 8,786 11 (d) 1996 Woodland Park... -- 1,386 5,543 574 1,386 6,117 7,503 645 1986 1993 Denver, Colorado: Cambrian........ -- 2,256 9,026 1,289 2,256 10,315 12,571 1,187 1983 1993 The Cedars...... -- 3,128 12,512 3,422 3,128 15,934 19,062 1,779 1984 1993 Fox Creek I..... -- 1,167 4,669 694 1,167 5,363 6,530 568 1984 1993 Fox Creek II.... -- -- -- 366 -- 366 366 (d) (d) 1995 Hickory Ridge... -- 4,402 17,607 2,729 4,402 20,336 24,738 2,647 1984 1992 Legacy Heights.. -- 2,049 4 13,132 2,049 13,136 15,185 (d) (d) 1997 Reflections..... -- 2,396 6,362 12,980 2,396 19,342 21,738 1,608 (e) (e) Silvercliff..... -- 2,410 13,656 469 2,410 14,125 16,535 1,428 1991 1994 Sunwood......... -- 1,030 4,596 1,087 1,030 5,683 6,713 737 1981 1992 El Paso, Texas: Acacia Park..... -- 1,130 -- 13,237 1,130 13,237 14,367 1,213 1995 1993 Cielo Vista..... -- 1,111 4,445 3,644 1,111 8,089 9,200 772 1962 1993 Double Tree..... -- 1,106 4,423 814 1,106 5,237 6,343 628 1980 1993 Las Flores...... 5,794 625 6,624 1,349 625 7,973 8,598 3,570 (f) (f) Mountain Village........ -- 1,203 4,824 1,539 1,203 6,363 7,566 1,237 1982 1992 The Patriot..... -- 1,027 -- 11,449 1,027 11,449 12,476 906 1996 1993 The Phoenix..... -- 454 -- 10,336 454 10,336 10,790 1,474 1993 1993
79
COSTS GROSS AMOUNT AT WHICH INITIAL COST TO PTR CAPITALIZED CARRIED AT DECEMBER 31, 1997 --------------------- SUBSE- -------------------------------- ACCUMU- CON- ENCUM- BLDGS AND QUENT TO BLDGS AND LATED DE- STRUCTION YEAR PROPERTIES BRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTALS PRECIATION YEAR ACQUIRED ---------- -------- -------- ------------ ----------- -------- ------------ ---------- ---------- --------- -------- Shadow Ridge.... $ -- $ 1,524 $ 3,993 $ 6,954 $ 1,524 $ 10,947 $ 12,471 $ 1,546 (g) (g) Tigua Village... -- 161 146 2,262 161 2,408 2,569 1,301 (h) (h) Houston, Texas: 7100 Almeda..... -- 1,713 9,706 828 1,713 10,534 12,247 1,013 1984 1994 American Rice I. -- 13,162 -- 2,071 13,162 2,071 15,233 (d) (d) 1996 Beverly Palms... -- 1,393 7,893 1,487 1,393 9,380 10,773 889 1970 1994 Braeswood Park.. -- 1,861 10,548 338 1,861 10,886 12,747 1,216 1984 1993 Braeswood Park II............. -- 1,125 5 -- 1,125 5 1,130 (d) (d) 1997 Brompton Court.. 14,074 4,058 22,993 5,026 4,058 28,019 32,077 2,730 1972 1994 Memorial Heights I.............. -- 3,169 -- 15,806 3,169 15,806 18,975 914 1996 1996 Memorial Heights II............. -- 9,164 -- 5,838 9,164 5,838 15,002 9 (d) 1996 Oaks at Medical Center I....... -- 4,210 -- 14,359 4,210 14,359 18,569 969 1996 1994 Oaks at Medical Center II...... -- 3,368 -- 2,756 3,368 2,756 6,124 (d) (d) 1994 Inland Empire, California: The Crossing.... -- 2,227 12,622 1,334 2,227 13,956 16,183 615 1989 1996 Miramonte....... -- 2,357 13,364 926 2,357 14,290 16,647 789 1989 1995 Rancho Cucamonga...... -- 2,258 65 320 2,258 385 2,643 (d) (d) 1997 Sierra Hills.... 530 2,810 15,921 1,085 2,810 17,006 19,816 297 1990 1997 Terracina....... -- 5,780 32,757 2,394 5,780 35,151 40,931 1,468 1988 1996 Westcourt Village........ -- 1,909 10,817 4,293 1,909 15,110 17,019 727 1986 1996 Woodsong Village........ -- 1,846 10,469 579 1,846 11,048 12,894 398 1985 1996 Kansas City, Kansas: NEC 119th & Quiviara....... -- 1,540 -- 678 1,540 678 2,218 (d) (d) 1996 Las Vegas, Nevada: Horizons at Peccole Ranch.. -- 3,173 18,048 706 3,173 18,754 21,927 1,364 1990 1995 King's Crossing. -- 2,860 16,272 360 2,860 16,632 19,492 1,219 1991 1995 La Tierra at the Lakes.......... 25,560 5,904 33,561 4,038 5,904 37,599 43,503 2,791 1986 1995 Sunterra........ 7,991 2,086 11,867 892 2,086 12,759 14,845 929 1986 1995 Omaha, Nebraska: Apple Creek..... 11,100 1,953 11,069 917 1,953 11,986 13,939 1,117 1987 1994 Orange County, California: Las Flores Apartment Homes.......... -- 8,900 264 16,280 8,900 16,544 25,444 (d) (d) 1996 Newpointe....... -- 1,403 7,981 300 1,403 8,281 9,684 333 1987 1996 River Meadows... 10,000 2,082 11,797 1,054 2,082 12,851 14,933 256 1986 1997 Sorrento........ -- 4,872 -- 6,123 4,872 6,123 10,995 (d) (d) 1996 Villa Marseilles..... 154 1,970 11,162 848 1,970 12,010 13,980 344 1991 1996 Phoenix, Arizona: 59th and Behrend........ -- 982 -- -- 982 -- 982 (d) (d) 1997 59th and Utopia. -- 2,081 -- -- 2,081 -- 2,081 (d) (d) 1997 Arrowhead I (i). -- 2,019 -- 10,768 2,019 10,768 12,787 (d) (d) 1995 Arrowhead II (i)............ -- 1,601 -- 310 1,601 310 1,911 (d) (d) 1995 Bay Club........ -- 2,797 11,188 1,770 2,797 12,958 15,755 1,387 1985 1993 Foxfire......... -- 1,055 5,976 380 1,055 6,356 7,411 649 1985 1994 Miralago I (i).. -- 2,743 -- 22,210 2,743 22,210 24,953 485 1997 1995 Miralago II..... 1,801 33 56 1,801 89 1,890 (d) (d) 1997 Moorings at Mesa Cove........... -- 3,261 13,045 1,269 3,261 14,314 17,575 1,850 1985 1992 Peaks at Papago Park........... -- 5,131 23,408 8,334 5,131 31,742 36,873 2,931 (j) (j) The Ridge....... -- 1,852 10,492 899 1,852 11,391 13,243 1,234 1987 1993 San Marquis North.......... -- 1,215 -- 9,685 1,215 9,685 10,900 888 1994 1993 San Marquis South.......... -- 2,312 -- 11,291 2,312 11,291 13,603 1,297 1994 1993 San Marbeya..... -- 3,675 93 2,423 3,675 2,516 6,191 (d) (d) 1997 San Palmera (i). -- 3,515 -- 21,884 3,515 21,884 25,399 461 1997 1995 San Valiente I (i)............ -- 3,062 -- 19,226 3,062 19,226 22,288 574 1997 1995 San Valiente II (i)............ -- 1,647 -- 1,351 1,647 1,351 2,998 (d) (d) 1995 Scottsdale Greens......... -- 3,489 19,774 5,893 3,489 25,667 29,156 2,699 1980 1994 Superstition Park........... -- 2,340 9,362 1,202 2,340 10,564 12,904 1,354 1985 1992
80
COSTS GROSS AMOUNT AT WHICH INITIAL COST TO PTR CAPITALIZED CARRIED AT DECEMBER 31, 1997 --------------------- SUBSE- -------------------------------- ACCUMU- CON- ENCUM- BLDGS AND QUENT TO BLDGS AND LATED DE- STRUCTION YEAR PROPERTIES BRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTALS PRECIATION YEAR ACQUIRED ---------- -------- -------- ------------ ----------- -------- ------------ ---------- ---------- --------- -------- Portland, Oregon: Arbor Heights... $ -- $ 2,669 $ -- $ 20,071 $ 2,669 $ 20,071 $ 22,740 $ 51 (d) 1996 Brighton........ -- 1,675 9,532 868 1,675 10,400 12,075 370 1985 1996 Cambridge Crossing....... -- 2,260 -- 13,608 2,260 13,608 15,868 42 (d) 1996 Hedges Green.... -- 3,758 162 10,272 3,758 10,434 14,192 (d) (d) 1997 Meridian at Murrayhill..... -- 2,517 14,320 438 2,517 14,758 17,275 1,093 1990 1995 Preston's Crossing....... -- 851 -- 12,094 851 12,094 12,945 582 1996 1995 Riverwood Heights........ -- 1,479 8,410 330 1,479 8,740 10,219 647 1990 1995 Squire's Court.. -- 1,630 9,249 276 1,630 9,525 11,155 693 1989 1995 Timberline...... -- 1,058 5,995 439 1,058 6,434 7,492 296 1990 1996 Reno, Nevada: Meadowview I.... -- 1,947 -- 9,137 1,947 9,137 11,084 (d) (d) 1996 Meadowview II... -- 1,538 -- 598 1,538 598 2,136 (d) (d) 1996 Vista Ridge..... -- 2,002 -- 19,077 2,002 19,077 21,079 574 1997 1995 Sacramento, California: Folsom Ranch.... -- 3,507 19,876 436 3,507 20,312 23,819 411 1988 1997 Salt Lake City, Utah: Brighton Place.. -- 2,091 11,892 1,515 2,091 13,407 15,498 985 1979 1995 Carrington Place.......... 3,510 1,072 6,072 320 1,072 6,392 7,464 60 1986 1997 Cherry Creek.... 3,750 1,290 7,330 429 1,290 7,759 9,049 573 1986 1995 Cloverland...... 4,229 1,392 7,886 286 1,392 8,172 9,564 58 1985 1997 The Crossroads.. 4,435 1,521 8,619 642 1,521 9,261 10,782 285 1986 1996 Fairstone at Riverview...... -- 4,636 -- 25,430 4,636 25,430 30,066 83 (d) 1996 Fox Creek....... 4,240 1,172 6,641 866 1,172 7,507 8,679 200 1985 1996 Greenpointe..... 3,574 923 5,050 2,371 923 7,421 8,344 407 (k) (k) Mountain Shadow I.............. 3,282 832 4,730 188 832 4,918 5,750 357 1985 1995 Mountain Shadow II............. -- 95 -- 4,478 95 4,478 4,573 24 1996 1996 On the Green at River Oaks..... -- 5,400 213 505 5,400 718 6,118 (d) (d) 1997 Remington....... -- 2,324 -- 14,757 2,324 14,757 17,081 548 1997 1995 San Antonio, Texas: Applegate....... -- 1,455 8,248 869 1,455 9,117 10,572 997 1983 1993 Austin Point.... -- 1,728 9,725 1,283 1,728 11,008 12,736 1,180 1982 1993 Camino Real..... -- 1,084 4,338 1,240 1,084 5,578 6,662 682 1979 1993 Cobblestone Village........ -- 786 3,120 745 786 3,865 4,651 805 1984 1992 Contour Place... -- 456 1,829 491 456 2,320 2,776 528 1984 1992 The Crescent.... -- 1,145 -- 14,800 1,145 14,800 15,945 1,820 1994 1992 Dymaxion........ -- 683 3,740 430 683 4,170 4,853 348 1984 1994 Marbach Park.... -- 1,122 6,361 859 1,122 7,220 8,342 824 1985 1993 Palisades Park.. -- 1,167 6,613 523 1,167 7,136 8,303 806 1983 1993 Rancho Mirage... -- 724 2,971 1,597 724 4,568 5,292 501 1974 1993 Stanford Heights........ -- 1,631 -- 11,807 1,631 11,807 13,438 897 1996 1993 Sterling Heights........ -- 1,644 -- 10,511 1,644 10,511 12,155 899 1995 1993 Villas of Castle Hills.......... -- 1,037 4,148 914 1,037 5,062 6,099 566 1971 1993 Villas of St. Tropez I....... -- 2,013 8,054 1,630 2,013 9,684 11,697 1,239 1982 1992 Waters of Northern Hills. -- 1,251 7,105 979 1,251 8,084 9,335 836 1982 1994 San Diego, California: Club Pacifica... -- 2,141 12,132 563 2,141 12,695 14,836 577 1987 1996 El Dorado Hills. 16,549 4,418 25,084 2,258 4,418 27,342 31,760 972 1983 1996 La Jolla Point.. 21,539 4,616 26,160 1,271 4,616 27,431 32,047 494 1986 1997 Ocean Crest..... -- 2,369 13,427 916 2,369 14,343 16,712 673 1993 1996 The Palisades... 144 4,741 26,866 516 4,741 27,382 32,123 788 1991 1996 Scripps Landing. -- 1,332 7,550 633 1,332 8,183 9,515 877 1985 1994 Tierrasanta Ridge.......... 90 2,859 16,130 1,018 2,859 17,148 20,007 1,670 1994 1994 Torrey Hills.... -- 10,400 659 -- 10,400 659 11,059 (d) (d) 1997 San Francisco (Bay Area), California: Ashton Place.... 46,795 9,782 55,429 8,521 9,782 63,950 73,732 2,042 1970 1996
81
COSTS GROSS AMOUNT AT WHICH INITIAL COST TO PTR CAPITALIZED CARRIED AT DECEMBER 31, 1997 --------------------- SUBSE- -------------------------------- ACCUMU- CON- ENCUM- BLDGS AND QUENT TO BLDGS AND LATED DE- STRUCTION PROPERTIES BRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTALS PRECIATION YEAR ---------- -------- -------- ------------ ----------- -------- ------------ ---------- ---------- --------- Hacienda........ $ 5,604 $ 18,696 $ 668 $ 662 $ 18,696 $ 1,330 $ 20,026 $ (d) (d) Harborside...... -- 3,213 18,210 146 3,213 18,356 21,569 491 1989 Los Padres...... -- 4,579 25,946 301 4,579 26,247 30,826 471 1988 Marina Lakes.... 13,338 5,952 33,728 427 5,952 34,155 40,107 764 1991 Monterrey Road.. -- 4,451 13 1,670 4,451 1,683 6,134 (d) (d) Sundance at Vallejo Ranch.. -- 2,633 14,923 1,678 2,633 16,601 19,234 719 1986 Redwood Shores.. 24,770 5,608 31,778 612 5,608 32,390 37,998 1,084 1986 Reflections..... 66 7,820 44,311 915 7,820 45,226 53,046 1,106 1988 Treat Commons... 7,104 5,788 32,802 615 5,788 33,417 39,205 1,781 1988 Villas at Santa Rita........... -- 8,950 170 1,451 8,950 1,621 10,571 (d) (d) Santa Fe, New Mexico: Talavera........ -- 760 -- 11,925 760 11,925 12,685 1,449 1994 Seattle, Washington: The Cambrian.... -- 6,231 35,309 732 6,231 36,041 42,272 552 1991 Canyon Creek.... -- 5,250 -- 19,642 5,250 19,642 24,892 286 1997 Canyon Pointe... -- 3,121 17,684 23 3,121 17,707 20,828 -- 1990 Fairwood Landing........ 5,730 1,223 6,928 738 1,223 7,666 8,889 200 1982 Forestview...... -- 1,681 -- 6,843 1,681 6,843 8,524 (d) (d) Harbour Pointe.. -- 2,027 -- 13,097 2,027 13,097 15,124 67 1997 Inglewood Hills. -- 2,463 68 1,291 2,463 1,359 3,822 (d) (d) Logan's Ridge... -- 1,950 11,118 335 1,950 11,453 13,403 844 1987 Matanza Creek... -- 1,016 5,814 334 1,016 6,148 7,164 452 1991 Millwood Estates........ -- 1,593 9,200 689 1,593 9,889 11,482 740 1987 Newport Crossing....... -- 1,694 9,602 545 1,694 10,147 11,841 269 1990 Pebble Cove..... -- 1,895 -- 15,581 1,895 15,581 17,476 645 1996 Remington Park.. -- 2,795 15,593 805 2,795 16,398 19,193 1,148 1990 Stonemeadow Farms.......... -- 4,370 -- 5,709 4,370 5,709 10,079 (d) (d) Walden Pond..... -- 2,033 11,535 375 2,033 11,910 13,943 876 1990 Waterford Place. -- 4,131 23,407 359 4,131 23,766 27,897 162 1989 Tucson, Arizona: San Ventana (i). -- 3,177 -- 21,843 3,177 21,843 25,020 972 1997 Tierra Antigua.. -- 992 3,967 588 992 4,555 5,547 836 1979 Villa Caprice... -- 1,279 7,248 523 1,279 7,771 9,050 862 1972 Ventura County, California: Le Club......... 21,700 4,958 28,097 525 4,958 28,622 33,580 447 1987 Pelican Point... -- 4,365 24,735 410 4,365 25,145 29,510 341 1985 -------- -------- ---------- -------- -------- ---------- ---------- -------- Total Multifamily.... 265,652 447,773 1,344,693 758,874 447,773 2,103,567 2,551,340 125,689 -------- -------- ---------- -------- -------- ---------- ---------- -------- Other land held: Austin, Texas: Estates of Gracy Farms.......... -- 788 -- 514 788 514 1,302 -- -- Ridgeline Commercial Land........... -- -- -- 1,860 -- 1,860 1,860 -- -- El Paso, Texas: West Ten........ -- 1,523 -- (854) 1,523 (854) 669 -- -- Dallas, Texas: Cracker Barrel.. -- 245 -- -- 245 -- 245 -- -- Houston, Texas: American Rice II/Memorial Heights III.... -- 2,213 -- 1,666 2,213 1,666 3,879 -- -- Sacks/SPCA...... -- 3,375 -- 120 3,375 120 3,495 -- -- Kansas City, Kansas: SWC 119th & Quiviara....... -- 1,565 -- 548 1,565 548 2,113 -- -- San Antonio, Texas: Dymaxion Phase II............. -- 545 -- 15 545 15 560 -- -- Indian Trails Phase II....... -- 864 -- 35 864 35 899 -- -- Villas of St. Tropez Phase II. -- 605 -- 612 605 612 1,217 -- -- YEAR PROPERTIES ACQUIRED ---------- -------- Hacienda........ 1997 Harborside...... 1996 Los Padres...... 1997 Marina Lakes.... 1997 Monterrey Road.. 1997 Sundance at Vallejo Ranch.. 1996 Redwood Shores.. 1996 Reflections..... 1997 Treat Commons... 1995 Villas at Santa Rita........... 1997 Santa Fe, New Mexico: Talavera........ 1993 Seattle, Washington: The Cambrian.... 1997 Canyon Creek.... 1997 Canyon Pointe... 1997 Fairwood Landing........ 1996 Forestview...... 1996 Harbour Pointe.. 1996 Inglewood Hills. 1997 Logan's Ridge... 1995 Matanza Creek... 1995 Millwood Estates........ 1995 Newport Crossing....... 1997 Pebble Cove..... 1995 Remington Park.. 1995 Stonemeadow Farms.......... 1997 Walden Pond..... 1995 Waterford Place. 1997 Tucson, Arizona: San Ventana (i). 1993 Tierra Antigua.. 1992 Villa Caprice... 1993 Ventura County, California: Le Club......... 1997 Pelican Point... 1997 Total Multifamily.... Other land held: Austin, Texas: Estates of Gracy Farms.......... 1993 Ridgeline Commercial Land........... 1993 El Paso, Texas: West Ten........ 1994 Dallas, Texas: Cracker Barrel.. 1993 Houston, Texas: American Rice II/Memorial Heights III.... 1994 Sacks/SPCA...... 1996 Kansas City, Kansas: SWC 119th & Quiviara....... 1996 San Antonio, Texas: Dymaxion Phase II............. 1994 Indian Trails Phase II....... 1994 Villas of St. Tropez Phase II. 1994
82
COSTS GROSS AMOUNT AT WHICH INITIAL COST TO PTR CAPITALIZED CARRIED AT DECEMBER 31, 1997 --------------------- SUBSE- -------------------------------- ACCUMU- CON- ENCUM- BLDGS AND QUENT TO BLDGS AND LATED DE- STRUCTION YEAR PROPERTIES BRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS TOTALS PRECIATION YEAR ACQUIRED ---------- -------- -------- ------------ ----------- -------- ------------ ---------- ---------- --------- -------- Walker Ranch Phase I......... $ -- $ 2,230 $ -- $ 1,296 $ 2,230 $ 1,296 $ 3,526 $ -- -- 1994 Walker Ranch Phase II........ -- 1,481 -- 589 1,481 589 2,070 -- -- 1994 Walker Ranch Phase III....... -- 555 -- 262 555 262 817 -- -- 1994 Santa Fe, New Mexico: St. Francis...... -- 1,941 -- (913) 1,941 (913) 1,028 -- -- 1994 Foothills of Santa Fe Phase I......... -- 1,396 -- 1,154 1,396 1,154 2,550 -- -- 1995 Foothills of Santa Fe Phase II........ -- 1,115 -- 172 1,115 172 1,287 -- -- 1995 -------- -------- ---------- -------- -------- ---------- ---------- -------- Total other land held............ -- 20,441 -- 7,076 20,441 7,076 27,517 -- -------- -------- ---------- -------- -------- ---------- ---------- -------- Non-multifamily: San Francisco, California: Wharf Holiday Inn Hotel........... -- 12,861 1,935 8,074 12,861 10,009 22,870 3,741 1972 1971 -------- -------- ---------- -------- -------- ---------- ---------- -------- Other............ -- 567 2,504 121 567 2,625 3,192 288 1987 1987 -------- -------- ---------- -------- -------- ---------- ---------- -------- Total non- multifamily.... -- 13,428 4,439 8,195 13,428 12,634 26,062 4,029 -------- -------- ---------- -------- -------- ---------- ---------- -------- Total........... $265,652 $481,642 $1,349,132 $774,145 $481,642 $2,123,277 $2,604,919 $129,718 ======== ======== ========== ======== ======== ========== ========== ========
- ------- (a) Phase I (118 units) was acquired in 1991 and Phase II (122 units) was developed in 1992. (b) Vistas at Seven Bar Ranch (364 units) was developed in 1996 and Corrales Pointe (208 units) was acquired in 1993. (c) Phase I (240 units) was developed in 1995 and Phase II (160 units) was developed in 1996. (d) As of 12/31/97, community was under construction. (e) Phase I (208 units) was acquired in 1993 and Phase II (208 units) was developed in 1996. (f) Phase I (120 units) was developed in 1980, Phase II (60 units) was developed in 1981 and Phase III (288 units) was developed in 1983. (g) Phase I (208 units) was acquired in 1991 and Phase II (144 units) was developed in 1994. (h) Phase I (84 units) was developed in 1970 and Phase II (100 units) was developed in 1978. (i) Represents properties owned by third party developers that are subject to presale agreements to PTR to acquire such properties. PTR's investment as of December 31, 1997 represents development loans made by PTR to such developers. (j) Phase I & II (624 units) were acquired in 1994 and Phase III (144 units) was developed in 1996. (k) Phase I (192 units) was acquired in 1995 and Phase II (32 units) was developed in 1997. 83 The following is a reconciliation of the carrying amount and related accumulated depreciation of PTR's investment in real estate, at cost (in thousands):
DECEMBER 31, ---------------------------------- CARRYING AMOUNTS 1997 1996 1995 ---------------- ---------- ---------- ---------- Balance at January 1....................... $2,153,363 $1,855,866 $1,296,288 ---------- ---------- ---------- Multifamily: Acquisitions and renovation expenditures. 434,421 463,935 385,356 Development expenditures, excluding land acquisitions............................ 205,619 187,377 117,980 Acquisition and improvement of land for development............................. 75,196 20,880 11,255 Recurring capital expenditures........... 8,762 7,992 5,119 Dispositions............................. (269,059) (269,693) (6,166) Provisions for possible loss on investments............................. (2,800) -- -- ---------- ---------- ---------- Net Multifamily activity subtotal........ $ 452,139 $ 410,491 $ 513,544 ---------- ---------- ---------- Non-multifamily: Homestead development expenditures, including land acquisitions............. -- 54,883 48,247 Contribution of Homestead Assets......... -- (161,370) -- Non-multifamily dispositions............. (383) (6,527) (2,235) Provisions for possible loss on investments............................. (200) -- (220) Other.................................... -- 20 242 ---------- ---------- ---------- Net non-multifamily activity subtotal.... $ (583) $ (112,994) $ 46,034 ---------- ---------- ---------- Balance at December 31..................... $2,604,919 $2,153,363 $1,855,866 ========== ========== ========== DECEMBER 31, ---------------------------------- ACCUMULATED DEPRECIATION 1997 1996 1995 ------------------------ ---------- ---------- ---------- Balance at January 1 ...................... $ 97,574 $ 81,979 $ 46,199 Depreciation for the year.................. 52,893 44,887 36,685 Accumulated depreciation of real estate sold...................................... (20,749) (22,653) (646) Contribution of Homestead Assets........... -- (6,639) -- Other...................................... -- -- (259) ---------- ---------- ---------- Balance at December 31..................... $ 129,718 $ 97,574 $ 81,979 ========== ========== ==========
84 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of Security Capital Pacific Trust, a Maryland real estate investment trust, and the undersigned Trustees and officers of Security Capital Pacific Trust, hereby constitutes and appoints R. Scot Sellers, Bryan J. Flanagan, Ash K. Atwood, Jeffrey A Klopf, Mark W. Pearson and Edward J. Schneidman its or his true and lawful attorneys-in-fact and agents, for it or him and in its or his name, place and stead, in any and all capacities, with full power to act alone, to sign any and all amendments to this report, and to file each such amendment to this report, with all exhibits thereto, and any and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in- fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as it or he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them may lawfully do or cause to be done by virtue hereof. 85 SECURITY CAPITAL PACIFIC TRUST SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. Security Capital Pacific Trust /s/ R. Scot Sellers By: _________________________________ R. Scot Sellers President and Chief Executive Officer Date: March 19, 1998 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- /s/ R. Scot Sellers President and Chief March 19, 1998 ____________________________________ Executive Officer R. Scot Sellers /s/ Bryan J. Flanagan Senior Vice President March 19, 1998 ____________________________________ (Principal Financial Bryan J. Flanagan Officer) /s/ Ash K. Atwood Vice President and Co- March 19, 1998 ____________________________________ Controller (Principal Ash K. Atwood Accounting Officer) /s/ James A. Cardwell Trustee March 19, 1998 ____________________________________ James A. Cardwell /s/ John T. Kelley III Trustee March 19, 1998 ____________________________________ John T. Kelley III /s/ Calvin K. Kessler Trustee March 19, 1998 ____________________________________ Calvin K. Kessler /s/ William G. Myers Trustee March 19, 1998 ____________________________________ William G. Myers /s/ James H. Polk III Trustee March 19, 1998 ____________________________________ James H. Polk III /s/ John C. Schweitzer Trustee March 19, 1998 ____________________________________ John C. Schweitzer
86 INDEX TO EXHIBITS Certain of the following documents are filed herewith. Certain other of the following documents have been previously filed with the Securities and Exchange Commission and, pursuant to Rule 12b-32, are incorporated herein by reference.
NUMBER DESCRIPTION ------ ----------- 3.1 Restated Declaration of Trust of PTR (incorporated by ref- erence to Exhibit 4 to PTR's Form 10-Q for the quarter ended June 30, 1991) 3.2 First Certificate of Amendment of Restated Declaration of Trust of PTR (incorporated by reference to Exhibit 4 to PTR's Form 10-Q for the quarter ended June 30, 1992) 3.3 Second Certificate of Amendment of Restated Declaration of Trust of PTR (incorporated by reference to Exhibit 3.1 to PTR's Form 8-K dated May 3, 1994) 3.4 Third Articles of Amendment of Restated Declaration of Trust of PTR (incorporated by reference to Exhibit 4.4 to PTR's Registration Statement No. 33-86444) 3.5 Fifth Articles of Amendment of Restated Declaration of Trust of PTR dated October 1, 1996 (incorporated by refer- ence to Exhibit 4.5 to PTR's Form 10-K for the year ended December 31, 1996) 3.6 Sixth Articles of Amendment of Restated Declaration of Trust dated September 9, 1997 3.7 Articles Supplementary relating to PTR's Cumulative Con- vertible Series A Preferred Shares of Beneficial Interest (incorporated by reference to Exhibit 3.1 to PTR's Form 8-K dated November 22, 1993) 3.8 Articles Supplementary relating to PTR's Series B Cumula- tive Redeemable Preferred Shares of Beneficial Interest (incorporated by reference to Exhibit 99.3 to PTR's Form 8- K dated May 18, 1995) 3.9 First Articles of Amendment to Articles Supplementary re- lating to PTR's Series B Cu-mulative Redeemable Preferred Shares of Beneficial Interest (incorporated by reference to Exhibit 3.1 to PTR's Form 10-Q for the quarter ended Sep- tember 30, 1995) 3.10 Bylaws of PTR (incorporated by reference to Exhibit 4.1 to PTR's Form 8-K dated Novem-ber 22, 1993) 4.1 Indenture, dated as of February 1, 1994, between PTR and Morgan Guaranty Trust Com-pany of New York, as Trustee, re- lating to PTR's unsecured senior debt securities (incorpo- rated by reference to Exhibit 4.2 to PTR's Form 10-K for the year ended December 31, 1993) 4.2 First Supplemental Indenture, dated as of February 2, 1994, among PTR, Morgan Guaranty Trust Company of New York and State Street Bank and Trust Company, as successor Trustee (incorporated by reference to Exhibit 4.3 to PTR's Form 10- K for the year ended December 31, 1993) 4.3 Rights Agreement, dated as of July 21, 1994, between PTR and Chemical Bank, including form of Rights Certificate (incorporated by reference to Exhibit 4.2 to PTR's Form 8-K dated July 19, 1994) 4.4 First Amendment, dated as of February 8, 1995, to the Rights Agreement (incorporated by reference to Exhibit 4.13 to PTR's Form 10-K for the year ended December 31, 1994)
87
NUMBER DESCRIPTION ------ ----------- 10.1 1987 Share Option Plan for Outside Trustees, as amended (incorporated by reference to Exhibit 10.1 to PTR's Form 10-K for the year ended December 31, 1995) 10.2 PTR 1997 Long-Term Incentive Plan (incorporated by refer- ence to Annex II to Security Capital Group's Form S-11 Reg- istration Statement (File No. 333-26267)) 10.3 Form of Indemnification Agreement entered into between PTR and each of its officers and Trustees (incorporated by ref- erence to Exhibit 10.5 to Registration Statement No. 33-43201) 10.4 Third Amended and Restated Investor Agreement, dated as of September 9, 1997, between PTR and Security Capital Group (incorporated by reference to Exhibit 10.2 to Security Cap- ital Group's Form 10-Q for the quarter ended September 30, 1997) 10.5 Amended and Restated Credit Agreement, dated as of August 13, 1997, among PTR, Texas Commerce Bank National Associa- tion and Wells Fargo Bank, National Association, as co- agents, and the lenders named therein (incorporated by ref- erence to Exhibit 10.1 to PTR's Form 8-K dated September 8, 1997) 10.6 Amended and Restated Promissory Note, dated as of May 28, 1996, by Homestead Village Incorporated in favor of PTR (incorporated by reference to Exhibit 4.3 to Homestead's Form S-4 Registration Statement (File No. 333-4455; the "Homestead S-4") 10.7 Amended and Restated Promissory Note, dated as of May 28, 1996, by PTR Homestead Village Limited Partnership in favor of PTR (incorporated by reference to Exhibit 4.4 to the Homestead S-4) 10.8 Protection of Business Agreement, dated as of October 17, 1996, among Security Capital Atlantic Incorporated, PTR, Security Capital Group and Homestead (incorporated by Ref- erence to Exhibit 10.12 to PTR's Form 10-K for the year ended December 31, 1996) 10.9 Investor and Registration Rights Agreement, dated as of Oc- tober 17, 1996, between Home-stead and PTR (incorporated by reference to Exhibit 10.13 to PTR's Form 10-K for the year ended December 31, 1996) 10.10 Funding Commitment Agreement, dated as of October 17, 1996, between Homestead and PTR (incorporated by reference to Ex- hibit 10.14 to PTR's Form 10-K for the year ended December 31, 1996) 10.11 Administrative Services Agreement, dated as of September 9, 1997, between PTR and Security Capital Group (incorporated by reference to Exhibit 10.5 to Security Capital Group's Form 10-Q for the quarter ended September 30, 1997) 10.12 PTR 1998 Dividend Reinvestment and Share Purchase Plan (in- corporated by reference to the prospectus contained in PTR's Form S-3 Registration Statement No. 333-44639) 12.1 Computation of Ratio of Earnings to Fixed Charges 12.2 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Share Dividends 21 Subsidiaries of PTR 23 Consent of KPMG Peat Marwick LLP 24 Power of Attorney (included at page 85) 27 Financial Data Schedule
88 EX-3.6 2 SIXTH AMENDMENT OF RESTATED DECLARATION OF TRUST EXHIBIT 3.6 SIXTH ARTICLES OF AMENDMENT OF RESTATED DECLARATION OF TRUST OF SECURITY CAPITAL PACIFIC TRUST The undersigned, being the President and Chief Executive Officer of Security Capital Pacific Trust, a Maryland real estate investment trust (the "Trust"), does hereby certify pursuant to the provisions of Article 6, Section 2 - ------ of the Trust's Restated Declaration of Trust, dated as of June 18, 1991, as amended and supplemented (the "Declaration of Trust"), and Section 8-501 of the -------------------- Corporations and Associations Article of the Annotated Code of Maryland, that the Board of Trustees of the Trust has adopted a resolution declaring this amendment to the Declaration of Trust as hereinafter set forth to be advisable and that the shareholders of the Trust have approved such amendment by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter. Therefore, the Declaration of Trust is hereby amended by adding the following new Article 10: ARTICLE 10. SECURITY CAPITAL TRANSACTION Notwithstanding anything to the contrary contained herein, including, without limitation, the provisions of Article 1 and Article 4 of this Declaration of Trust, the Trust shall be authorized to perform all of its obligations and exercise all of its rights under the terms of that certain Merger and Issuance Agreement, dated as of March 24, 1997, as amended (the "Merger Agreement"), between the Trust and Security Capital Group Incorporated and each of the other agreements and transactions contemplated thereby, including, without limitation, the following agreements (as each of such agreements are defined in the Merger Agreement) and the transactions contemplated by such agreements: (i) Agreement and Plan of Merger; (ii) Third Amended and Restated Investor Agreement; (iii) Administrative Services Agreement; (iv) Protection of Business Agreement; and (v) License Agreement. The undersigned President and Chief Executive Officer acknowledges these Sixth Articles of Amendment to be the act of the Trust and, as to all other matters or facts required to be verified under oath, that, to the best of his knowledge, information and belief, these matters and facts are true in all material respects, and that this statement is made under the penalties for perjury. IN WITNESS WHEREOF, the undersigned has executed these Sixth Articles of Amendment as of this 9th day of September, 1997. SECURITY CAPITAL PACIFIC TRUST By: /s/ R. Scot Sellers --------------------------------------- R. Scot Sellers President and Chief Executive Officer ATTEST: By: /s/ Jeffrey A. Klopf ------------------------- Jeffrey A. Klopf Secretary [THE REST OF THIS EXHIBIT RESTATES THE REGISTRANT'S CHARTER IN ELECTRONIC FORMAT AS REQUIRED BY RULE 102(c) OF REGULATION S-T.) FIFTH ARTICLES OF AMENDMENT OF RESTATED DECLARATION OF TRUST OF SECURITY CAPITAL PACIFIC TRUST The undersigned, being all the Trustees of Security Capital Pacific Trust, a Maryland real estate investment trust (the "Trust"), do hereby certify ----- pursuant to the provisions of Article 6, Section 2 of the Trust's Restated Declaration of Trust, dated as of June 18, 1991, as amended and supplemented (the "Declaration of Trust"), and Section 8-501 of the Corporations and -------------------- Associations Article of the Annotated Code of Maryland, that the Board of Trustees of the Trust has adopted a resolution declaring this amendment to the Declaration of Trust as hereinafter set forth to be advisable and that the shareholders of the Trust have approved such amendment by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter. Therefore, the Declaration of Trust is hereby amended by adding the following new Article 9: ARTICLE 9. HOMESTEAD TRANSACTION Notwithstanding anything to the contrary contained herein, including, without limitation, the provisions of Article 1 and Article 4 of this Declaration of Trust, the Trust shall be authorized to perform all of its obligations and exercise all of its rights under the terms of that certain Merger and Distribution Agreement, dated as of May 21, 1996 (as such agreement may be amended or supplemented from time to time, the "Merger Agreement"), among the Trust, Security Capital Atlantic Incorporated, Security Capital Group Incorporated and Homestead Village Properties Incorporated and each of the other agreements and transactions contemplated thereby, including, without limitation, the following agreements (as each of such agreements are defined in the Merger Agreement) and the transactions contemplated by such agreements: (i) Articles of Merger; (ii) Warrant Purchase Agreement; (iii) one or more Funding Commitment Agreements (including, without limitation, any notes and mortgages or deeds of trust in connection therewith); (iv) Investor and Registration Rights Agreement; (v) Protection of Business Agreement; and (vi) Distribution Agency Agreement. Each undersigned Trustee acknowledges these Fifth Articles of Amendment to be the act of the Trust and, as to all other matters or facts required to be verified under oath, that, to the best of his knowledge, information and belief, these matters and facts are true in all material respects, and that this statement is made under the penalties for perjury. IN WITNESS WHEREOF, the undersigned have executed these Fifth Articles of Amendment as of this 1st day of October, 1996. /s/ C. Ronald Blankenship -------------------------------- C. Ronald Blankenship /s/ James A. Cardwell -------------------------------- James A. Cardwell /s/ John T. Kelley, III -------------------------------- John T. Kelley, III /s/ Calvin K. Kessler -------------------------------- Calvin K. Kessler /s/ William G. Myers -------------------------------- William G. Myers /s/ James H. Polk, III -------------------------------- James H. Polk, III /s/ John C. Schweitzer -------------------------------- John C. Schweitzer S-1 STATE OF NEW MEXICO ) ) SS. COUNTY OF SANTA FE ) On the 3rd day of October, 1996, before me, the undersigned notary public, personally appeared C. Ronald Blankenship, known to me to be the person who signed the foregoing instrument, and acknowledged that he executed the same for the purposes contained therein. IN WITNESS WHEREOF, I have hereunto signed my name and affixed my official seal. (NOTARY SEAL) /s/ Kim L. Hamilton ------------------------- Notary Public My commission expires: March 30, 2000 ---------------- STATE OF TEXAS ) ) SS. COUNTY OF EL PASO ) On the 2nd day of October, 1996, before me, the undersigned notary public, personally appeared J.A. Cardwell, known to me to be the person who signed the foregoing instrument, and acknowledged that he executed the same for the purposes contained therein. IN WITNESS WHEREOF, I have hereunto signed my name and affixed my official seal. (NOTARY SEAL) /s/ Barbara Evans ---------------------------------- Notary Public My commission expires: 11-15-96 --------- STATE OF TEXAS ) ) SS. COUNTY OF EL PASO ) On the 1st day of October, 1996, before me, the undersigned notary public, personally appeared John T. Kelley, III, known to me to be the person who signed the foregoing instrument, and acknowledged that he executed the same for the purposes contained therein. IN WITNESS WHEREOF, I have hereunto signed my name and affixed my official seal. (NOTARY SEAL) /s/ Tammy Rena Espinosa --------------------------------- Notary Public My commission expires: 5-13-2000 ----------- STATE OF TEXAS ) ) SS. COUNTY OF EL PASO ) On the 1st day of October, 1996, before me, the undersigned notary public, personally appeared Calvin K. Kessler, known to me to be the person who signed the foregoing instrument, and acknowledged that he executed the same for the purposes contained therein. IN WITNESS WHEREOF, I have hereunto signed my name and affixed my official seal. (NOTARY SEAL) /s/ Anita Galvan ------------------------------ Notary Public My commission expires: 07-03-99 --------- STATE OF CALIFORNIA ) ) SS. COUNTY OF SANTA BARBARA ) On October 2, 1996, before me, Gail A. Crivello, Notary Public, personally appeared William G. Myers, personally known to me to be the person whose name is subscribed to the instrument and acknowledged to me that he executed the same in his authorized capacity and that by his signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. (NOTARY SEAL) /s/ Gail A. Crivello ------------------------------- Notary Public My commission expires: 7-15-2000 --------------- STATE OF NEW MEXICO ) ) SS. COUNTY OF SANTA FE ) On the 1st day of October, 1996, before me, the undersigned notary public, personally appeared James H. Polk, III, known to me to be the person who signed the foregoing instrument, and acknowledged that he executed the same for the purposes contained therein. IN WITNESS WHEREOF, I have hereunto signed my name and affixed my official seal. (NOTARY SEAL) /s/ Nancy Ann Cortera ------------------------------ Notary Public My commission expires: 7/26/2000 ------------- STATE OF TEXAS ) ) SS. COUNTY OF TRAVIS ) On the 1st day of October, 1996, before me, the undersigned notary public, personally appeared John C. Schweitzer, known to me to be the person who signed the foregoing instrument, and acknowledged that he executed the same for the purposes contained therein. IN WITNESS WHEREOF, I have hereunto signed my name and affixed my official seal. (NOTARY SEAL) /s/ Brenda Ewers ------------------------------ Notary Public My commission expires: 2-6-2000 ------------- FIRST ARTICLES OF AMENDMENT to Articles Supplementary dated May 17, 1995 of SECURITY CAPITAL PACIFIC TRUST The undersigned, being all of the members of the Board of Trustees of Security Capital Pacific Trust, a Maryland real estate investment trust (the "Trust"), do hereby certify pursuant to the provisions of Section 1 of the Articles Supplementary dated as of May 17, 1995 (the "Articles Supplementary"), and Title 8 of the Corporations and Associations Article of the Annotated Code of Maryland, that the Board of Trustees of the Trust has adopted a resolution to amend the Articles Supplementary as hereafter set forth and that the Trustees have approved such amendments by unanimous written consent. Therefore, the Articles Supplementary are hereby amended by amending and restating Section 1 thereof in its entirety as follows: Section 1. Number of Shares and Designation. This class of Preferred -------------------------------- Shares shall be designated as Series B Cumulative Redeemable Preferred Shares of Beneficial Interest (the "Series B Preferred Shares") and the number of shares which shall constitute such series shall not be more than 4,200,000 shares, par value $1.00 per share, which number may be decreased (but not below the number thereof then outstanding plus the number required to fulfill the Trust's obligations under options, warrants or similar rights issued by the Trust) from time to time by the Board of Trustees. Each undersigned Trustee acknowledges these First Articles of Amendment to be the act of the Trust and further, as to all matters or facts required to be verified under oath, each such Trustee acknowledges that to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties of perjury. IN WITNESS WHEREOF, the undersigned, being all of the members of the Board of Trustees of the Trust, have hereunto set their hand as of this 31st day of July, 1995. /s/ C. Ronald Blankenship ------------------------------ C. Ronald Blankenship, Trustee /s/ Calvin K. Kessler ------------------------------ Calvin K. Kessler, Trustee /s/ James H. Polk, III ------------------------------ James H. Polk, III, Trustee /s/ John C. Schweitzer ------------------------------ John C. Schweitzer, Trustee /s/ William G. Myers ------------------------------ William G. Myers, Trustee /s/ John T. Kelley, III ------------------------------ John T. Kelley, III, Trustee /s/ James A. Cardwell ------------------------------ James A. Cardwell, Trustee Series B Cumulative Redeemable Preferred Shares of Beneficial Interest ARTICLES SUPPLEMENTARY SECURITY CAPITAL PACIFIC TRUST ============================== Articles Supplementary of Board of Trustees Classifying and Designating a Series of Preferred Shares as Series B Cumulative Redeemable Preferred Shares of Beneficial Interest and Fixing Distribution and Other Preferences and Rights of Such Series ============================== Dated as of May 17, 1995 SECURITY CAPITAL PACIFIC TRUST ============================== Articles Supplementary of Board of Trustees Classifying and Designating a Series of Preferred Shares as Series B Cumulative Redeemable Preferred Shares of Beneficial Interest and Fixing Distribution and Other Preferences and Rights of Such Series ============================== The undersigned, being all of the Trustees of Security Capital Pacific Trust, a Maryland real estate investment trust (the "Trust"), hereby certify to the State Department of Assessments and Taxation of Maryland pursuant to section 8-203(b) of the Annotated Code of Maryland that: FIRST: The Board of Trustees has classified 4,600,000 unissued shares of the Trust as Series B Cumulative Redeemable Preferred Shares of Beneficial Interest (the "Series B Preferred Shares"). SECOND: The following is a description of the Series B Preferred Shares, including the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption thereof: Section 1. Number of Shares and Designation. This class of Preferred -------------------------------- Shares shall be designated as Series B Cumulative Redeemable Preferred Shares of Beneficial Interest (the "Series B Preferred Shares") and the number of shares which shall constitute such series shall not be more than 4,600,000 shares, par value $1.00 per share, which number may be decreased (but not below the number thereof then outstanding plus the number required to fulfill the Trust's obligations under options, warrants or similar rights issued by the Trust) from time to time by the Board of Trustees. Section 2. Definitions. For purposes of the Series B Preferred Shares, ----------- the following terms shall have the meanings indicated: "Board of Trustees" shall mean the Board of Trustees of the Trust or ----------------- any committee authorized by such Board of Trustees to perform any of its responsibilities with respect to the Series B Preferred Shares. "Business Day" shall mean any day other than a Saturday, Sunday or a ------------ day on which state or federally chartered banking institutions in New York City, New York are not required to be open. "Call Date" shall mean the date specified in the notice to holders --------- required under subparagraph (e) of Section 5 as the Call Date. "Common Shares" shall mean the common Shares of Beneficial Interest of ------------- the Trust, par value $1.00 per share. "Dividend Payment Date" shall mean the last calendar day of March, --------------------- June, September and December in each year, commencing on June 30, 1995; provided, however, that if any Dividend Payment Date falls on any day other than a Business Day, the dividend payment due on such Dividend Payment Date shall be paid on the Business Day immediately following such Dividend Payment Date. "Dividend Periods" shall mean quarterly dividend periods commencing on ---------------- April 1, July 1, October 1, and January 1 of each year and ending on and including the day preceding the first day of the next succeeding Dividend Period (other than the initial Dividend Period, which shall commence on the Issue Date and end on and include June 30, 1995). "Fully Junior Shares" shall mean the Common Shares and any other class ------------------- or series of shares of the Trust now or hereafter issued and outstanding over which the Series B Preferred Shares have preference or priority in both (i) the payment of dividends and (ii) the distribution of assets on any liquidation, dissolution or winding up of the Trust. "Issue Date" shall mean the first date on which the Series B Preferred ---------- Shares are issued and sold. "Junior Shares" shall mean the Common Shares and any other class or ------------- series of shares of the Trust now or hereafter issued and outstanding over which the Series B Preferred Shares have preference or priority in the payment of dividends or in the distribution of assets on any liquidation, dissolution or winding up of the Trust. "Parity Shares" shall have the meaning set forth in paragraph (b) of ------------- Section 7. "Person" shall mean any individual, firm, partnership, corporation or ------ other entity, and shall include any successor (by merger or otherwise) of such entity. "Series B Preferred Shares" shall have the meaning set forth in ------------------------- Section 1 hereof. "set apart for payment" shall be deemed to include, without any action --------------------- other than the following, the recording by the Trust in its accounting ledgers of any accounting or bookkeeping entry which indicates, pursuant to a declaration of dividends or other distribution by the Board of Trustees, the allocation of funds to be so paid on any series or class of capital stock of the Trust; provided, however, that if any funds for any class or -------- ------- series of Junior Shares or any class or series of stock ranking on a parity with the Series B Preferred Shares as to the payment of dividends are placed in a separate account of the Trust or delivered to a disbursing, paying or other similar agent, then "set apart for payment" with respect to the Series B Preferred Shares shall mean placing such funds in a separate account or delivering such funds to a disbursing, paying or other similar agent. "Transfer Agent" means Chemical Bank, New York City, New York, or such -------------- other agent or agents of the Trust as may be designated by the Board of Trustees or their designee as the transfer agent for the Series B Preferred Shares. "Voting Preferred Shares" shall have the meaning set forth in Section ----------------------- 8 hereof. Section 3. Dividends. --------- (a) The holders of Series B Preferred Shares shall be entitled to receive, when, as and if declared by the Board of Trustees out of funds legally available for that purpose, dividends payable in cash in an amount per share equal to $2.25. Such dividends shall begin to accrue and shall be fully cumulative from the Issue Date, whether or not in any Dividend Period or Periods there shall be funds of the Trust legally available for the payment of such dividends, and shall be payable quarterly, when, as and if declared by the Board of Trustees, in arrears on Dividend Payment Dates, commencing on the first Dividend Payment Date after the Issue Date. Each such dividend shall be payable in arrears to the holders of record of Series B Preferred Shares, as they appear on the stock records of the Trust at the close of business on such record dates, not less than 10 nor more than 50 days preceding such Dividend Payment Dates thereof, as shall be fixed by the Board of Trustees. Accrued and unpaid dividends for any past Dividend Periods may be declared and paid at any time and for such interim periods, without reference to any regular Dividend Payment Date, to holders of record on such date, not less than 10 nor more than 50 days preceding the payment date thereof, as may be fixed by the Board of Trustees. (b) The amount of dividends payable for each full Dividend Period for the Series B Preferred Shares shall be computed by dividing the annual dividend rate by four. The amount of dividends payable for the initial Dividend Period, or any other period shorter or longer than a full Dividend Period, on the Series B Preferred Shares shall be computed on the basis of twelve 30-day months and a 360-day year. Holders of Series B Preferred Shares shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of cumulative dividends, as herein provided, on the Series B Preferred Shares. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on the Series B Preferred Shares that may be in arrears. (c) So long as any Series B Preferred Shares are outstanding, no dividends, except as described in the immediately following sentence, shall be declared or paid or set apart for payment on any class or series of Parity Shares for any period unless full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for such payment on the Series B Preferred Shares for all Dividend Periods terminating on or prior to the Dividend Payment Date on such class or series of Parity Shares. When dividends are not paid in full or a sum sufficient for such payment is not set apart, as aforesaid, all dividends declared upon Series B Preferred Shares and all dividends declared upon any other class or series of Parity Shares shall be declared ratably in proportion to the respective amounts of dividends accumulated and unpaid on the Series B Preferred Shares and accumulated and unpaid on such Parity Shares. (d) So long as any Series B Preferred Shares are outstanding, no dividends (other than dividends or distributions paid solely in shares of, or options, warrants or rights to subscribe for or purchase shares of, Fully Junior Shares) shall be declared or paid or set apart for payment or other distribution declared or made upon Junior Shares, nor shall any Junior Shares be redeemed, purchased or otherwise acquired (other than a redemption, purchase or other acquisition of Common Shares made for purposes of an employee incentive or benefit plan of the Trust or any subsidiary) for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Trust, directly or indirectly (except by conversion into or exchange for Fully Junior Shares), unless in each case (i) the full cumulative dividends on all outstanding Series B Preferred Shares and any other Parity Shares of the Trust shall have been paid or declared and set apart for payment for all past Dividend Periods with respect to the Series B Preferred Shares and all past dividend periods with respect to such Parity Shares and (ii) sufficient funds shall have been paid or declared and set apart for the payment of the dividend for the current Dividend Period with respect to the Series B Preferred Shares and the current dividend period with respect to such Parity Shares. (e) No distributions on Series B Preferred Shares shall be declared by the Board of Trustees of the Trust or paid or set apart for payment by the Trust at such time as the terms and provisions of any agreement of the Trust, including any agreement relating to its indebtedness, prohibits such declaration, payment or setting apart for payment or provides that such declaration, payment or setting apart for payment would constitute a breach thereof or a default thereunder, or if such declaration or payment shall be restricted or prohibited by law. Section 4. Liquidation Preference. ---------------------- (a) In the event of any liquidation, dissolution or winding up of the Trust, whether voluntary or involuntary, before any payment or distribution of the assets of the Trust (whether capital or surplus) shall be made to or set apart for the holders of Junior Shares, the holders of the Series B Preferred Shares shall be entitled to receive Twenty-Five Dollars ($25.00) per Series B Preferred Share plus an amount equal to all dividends (whether or not earned or declared) accrued and unpaid thereon to the date of final distribution to such holders; but such holders shall not be entitled to any further payment. If, upon any liquidation, dissolution or winding up of the Trust, the assets of the Trust, or proceeds thereof, distributable among the holders of the Series B Preferred Shares shall be insufficient to pay in full the preferential amount aforesaid and liquidating payments on any other shares of any class or series of Parity Shares, then such assets, or the proceeds thereof, shall be distributed among the holders of Series B Preferred Shares and any such other Parity Shares ratably in accordance with the respective amounts that would be payable on such Series B Preferred Shares and any such other Parity Shares if all amounts payable thereon were paid in full. For the purposes of this Section 4, (i) a consolidation or merger of the Trust with one or more corporations, (ii) a sale or transfer of all or substantially all of the Trust's assets or (iii) a statutory share exchange shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary, of the Trust. (b) Subject to the rights of the holders of shares of any series or class or classes of stock ranking on a parity with or prior to the Series B Preferred Shares upon liquidation, dissolution or winding up, upon any liquidation, dissolution or winding up of the Trust, after payment shall have been made in full to the holders of the Series B Preferred Shares, as provided in this Section 4, any other series or class or classes of Junior Shares shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the Series B Preferred Shares shall not be entitled to share therein. Section 5. Redemption at the Option of the Trust. ------------------------------------- (a) Subject to Section 9 hereof, the Series B Preferred Shares shall not be redeemable by the Trust prior to the fifth anniversary of the Issue Date. On and after the fifth anniversary of the Issue Date, the Trust, at its option, may redeem the Series B Preferred Shares, in whole at any time or from time to time in part at the option of the Trust at a redemption price of Twenty-Five Dollars ($25.00) per Series B Preferred Share, plus the amounts indicated in Section 5(b). (b) Upon any redemption of Series B Preferred Shares pursuant to this Section 5, the Trust shall pay any accrued and unpaid dividends in arrears for any Dividend Period ending on or prior to the Call Date. If the Call Date falls after a dividend payment record date and prior to the corresponding Dividend Payment Date, then each holder of Series B Preferred Shares at the close of business on such dividend payment record date shall be entitled to the dividend payable on such shares on the corresponding Dividend Payment Date notwithstanding the redemption of such shares before such Dividend Payment Date. Except as provided above, the Trust shall make no payment or allowance for unpaid dividends, whether or not in arrears, on Series B Preferred Shares called for redemption. (c) If full cumulative dividends on the Series B Preferred Shares and any other class or series of Parity Shares of the Trust have not been paid or declared and set apart for payment, the Series B Preferred Shares may not be redeemed under this Section 5 in part and the Trust may not purchase or acquire Series B Preferred Shares, otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of Series B Preferred Shares or pursuant to Section 9 hereof. (d) The redemption price to be paid upon any redemption of the Series B Preferred Shares (other than any amounts indicated in Section 5(b) and other than a redemption pursuant to Section 9) shall be payable solely out of the sale proceeds of other capital shares of the Trust and from no other source. (e) Notice of the redemption of any Series B Preferred Shares under this Section 5 shall be mailed by first-class mail to each holder of record of Series B Preferred Shares to be redeemed at the address of each such holder as shown on the Trust's record, not less than 30 nor more than 90 days prior to the Call Date. Neither the failure to mail any notice required by this paragraph (e), nor any defect therein or in the mailing thereof, to any particular holder, shall affect the sufficiency of the notice or the validity of the proceedings for redemption with respect to the other holders. Any notice which was mailed in the manner herein provided shall be conclusively presumed to have been duly given on the date mailed whether or not the holder receives the notice. Each such mailed notice shall state, as appropriate: (1) the Call Date; (2) the number of Series B Preferred Shares to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (3) the place or places at which certificates for such shares are to be surrendered; and (4) that dividends on the shares to be redeemed shall cease to accrue on such Call Date except as otherwise provided herein. Notice having been mailed as aforesaid, from and after the Call Date (unless the Trust shall fail to make available an amount of cash necessary to effect such redemption), (i) except as otherwise provided herein, dividends on the Series B Preferred Shares so called for redemption shall cease to accrue, (ii) said shares shall no longer be deemed to be outstanding, and (iii) all rights of the holders thereof as holders of Series B Preferred Shares of the Trust shall cease (except the right to receive cash payable upon such redemption, without interest thereon, upon surrender and endorsement of their certificates if so required and to receive any dividends payable thereon). The Trust's obligation to provide cash in accordance with the preceding sentence shall be deemed fulfilled if, on or before the Call Date, the Trust shall deposit with a bank or trust company (which may be an affiliate of the Trust) that has an office in the Borough of Manhattan, City of New York, and that has, or is an affiliate of a bank or trust company that has, capital and surplus of at least $50,000,000, necessary for such redemption, in trust, with irrevocable instructions that such cash be applied to the redemption of the Series B Preferred Shares so called for redemption. No interest shall accrue for the benefit of the holders of Series B Preferred Shares to be redeemed on any cash so set aside by the Trust. Subject to applicable escheat laws, any such cash unclaimed at the end of two years from the Call Date shall revert to the general funds of the Trust, after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Trust for the payment of such cash. As promptly as practicable after the surrender in accordance with said notice of the certificates for any such shares so redeemed (properly endorsed or assigned for transfer, if the Trust shall so require and if the notice shall so state), such shares shall be exchanged for any cash (without interest thereon) for which such shares have been redeemed. If fewer than all the outstanding Series B Preferred Shares are to redeemed, shares to be redeemed shall be selected by the Trust from outstanding Series B Preferred Shares not previously called for redemption by lot or pro rata (as nearly as may be) or by any other method determined by the Trust in its sole discretion to be equitable. If fewer than all the Series B Preferred Shares represented by any certificate are redeemed, then new certificates representing the unredeemed shares shall be issued without cost to the holder thereof. Section 6. Shares To Be Retired. All Series B Preferred Shares which -------------------- shall have been issued and reacquired in any manner by the Trust shall be restored to the status of authorized but unissued Shares of Beneficial Interest of the Trust, without designation as to class or series. Section 7. Ranking. Any class or series of stock of the Trust shall be ------- deemed to rank: (a) prior to the Series B Preferred Shares, as to the payment of dividends and as to distribution of assets upon liquidation, dissolution or winding up, if the holders of such class or series shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Series B Preferred Shares; (b) on a parity with the Series B Preferred Shares, as to the payment of dividends and as to distribution of assets upon liquidation, dissolution or winding up, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share thereof be different from those of the Series B Preferred Shares, if the holders of such class of stock or series and the Series B Preferred Shares shall be entitled to the receipt of dividends and of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accrued and unpaid dividends per share or liquidation preferences, without preference or priority one over the other ("Parity Shares"); ------------- (c) junior to the Series B Preferred Shares, as to the payment of dividends or as to the distribution of assets upon liquidation, dissolution or winding up, if such stock or series shall be Junior Shares; and (d) junior to the Series B Preferred Shares, as to the payment of dividends and as to the distribution of assets upon liquidation, dissolution or winding up, if such stock or series shall be Fully Junior Shares. Section 8. Voting. If and whenever six quarterly dividends (whether or not ------ consecutive) payable on the Series B Preferred Shares or any series or class of Parity Shares shall be in arrears (which shall, with respect to any such quarterly dividend, mean that any such dividend has not been paid in full), whether or not earned or declared, the number of trustees then constituting the Board of Trustees shall be increased by two and the holders of Series B Preferred Shares, together with the holders of shares of every other series of Parity Shares (any such other series, the "Voting Preferred Shares"), voting as ----------------------- a single class regardless of series, shall be entitled to elect two additional trustees to serve on the Board of Trustees at any annual meeting of shareholders or special meeting held in place thereof, or at a special meeting of the holders of the Series B Preferred Shares and the Voting Preferred Shares called as hereinafter provided. Whenever all arrears in dividends on the Series B Preferred Shares and the Voting Preferred Shares then outstanding shall have been paid and dividends thereon for the current quarterly dividend period shall have been paid or declared and set apart for payment, then the right of the holders of the Series B Preferred Shares and the Voting Preferred Shares to elect such additional two trustees shall cease (but subject always to the same provision for the vesting of such voting rights in the case of any similar future arrearages in six quarterly dividends), and the terms of office of all persons elected as trustees by the holders of the Series B Preferred Shares and the Voting Preferred Shares shall forthwith terminate and the number of the Board of Trustees shall be reduced accordingly. At any time after such voting power shall have been so vested in the holders of Series B Preferred Shares and the Voting Preferred Shares, the secretary of the Trust may, and upon the written request of any holder of Series B Preferred Shares (addressed to the secretary at the principal office of the Trust) shall, call a special meeting of the holders of the Series B Preferred Shares and of the Voting Preferred Shares for the election of the two trustees to be elected by them as herein provided, such call to be made by notice similar to that provided in the Bylaws of the Trust for a special meeting of the shareholders or as required by law. If any such special meeting required to be called as above provided shall not be called by the secretary within 20 days after receipt of any such request, then any holder of Series B Preferred Shares may call such meeting, upon the notice above provided, and for that purpose shall have access to the stock records of the Trust. The trustees elected at any such special meeting shall hold office until the next annual meeting of the shareholders or special meeting held in lieu thereof if such office shall not have previously terminated as above provided. If any vacancy shall occur among the trustees elected by the holders of the Series B Preferred Shares and the Voting Preferred Shares, a successor shall be elected by the Board of Trustees, upon the nomination of the then-remaining trustee elected by the holders of the Series B Preferred Shares and the Voting Preferred Shares or the successor of such remaining trustee, to serve until the next annual meeting of the shareholders or special meeting held in place thereof if such office shall not have previously terminated as provided above. Notwithstanding any other provisions of this paragraph, in any vote for the election of additional trustees hereunder, the Series B Preferred Shares and Voting Preferred Shares beneficially owned by Security Capital Group Incorporated, a Maryland corporation, any of its direct or indirect subsidiaries and any of their respective directors, officers or controlling stockholders (together, the "Restricted Parties"), shall be voted in the same respective ------------------ percentages as the Series B Preferred Shares and Voting Preferred Shares that are not beneficially owned by the Restricted Parties. The provisions in the preceding sentence shall cease and be of no further force and effect from and after such time, but only as long as, the Restricted Parties together no longer beneficially own in excess of 10% of the Trust's outstanding Common Shares. So long as any Series B Preferred Shares are outstanding, in addition to any other vote or consent of shareholders required by law or by the Restated Declaration of Trust, as amended, the affirmative vote of at least 66 2/3% of the votes entitled to be cast by the holders of the Series B Preferred Shares and the Voting Preferred Shares, at the time outstanding, acting as a single class regardless of series, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, shall be necessary for effecting or validating: (a) Any amendment, alteration or repeal of any of the provisions of the Restated Declaration of Trust or these Articles Supplementary that materially and adversely affects the voting powers, rights or preferences of the holders of the Series B Preferred Shares or the Voting Preferred Shares; provided, however, that the amendment of the provisions of the -------- ------- Restated Declaration of Trust so as to authorize or create or to increase the authorized amount of, any Fully Junior Shares, Junior Shares that are not senior in any respect to the Series B Preferred Shares, or any shares of any class ranking on a parity with the Series B Preferred Shares or the Voting Preferred Shares shall not be deemed to materially adversely affect the voting powers, rights or preferences of the holders of Series B Preferred Shares, and provided, further, that if any such amendment, -------- ------- alteration or repeal would materially and adversely affect any voting powers, rights or preferences of the Series B Preferred Shares or another series of Voting Preferred Shares that are not enjoyed by some or all of the other series otherwise entitled to vote in accordance herewith, the affirmative vote of at least 66 2/3% of the votes entitled to be cast by the holders of all series similarly affected, similarly given, shall be required in lieu of the affirmative vote of at least 66 2/3% of the votes entitled to be cast by the holders of the Series B Preferred Shares and the Voting Preferred Shares otherwise entitled to vote in accordance herewith; or (b) A share exchange that affects the Series B Preferred Shares, a consolidation with or merger of the Trust into another entity, or a consolidation with or merger of another entity into the Trust, unless in each such case each Series B Preferred Share (i) shall remain outstanding without a material and adverse change to its terms and rights or (ii) shall be converted into or exchanged for convertible preferred stock of the surviving entity having preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms or conditions of redemption thereof identical to that of a Series B Preferred Share (except for changes that do not materially and adversely affect the holders of the Series B Preferred Shares); or (c) The authorization or creation of, or the increase in the authorized amount of, any shares of any class or any security convertible into shares of any class ranking prior to the Series B Preferred Shares in the distribution of assets on any liquidation, dissolution or winding up of the Trust or in the payment of dividends; provided, however, that no such vote of the holders of Series B Preferred Shares - -------- ------- shall be required if, at or prior to the time when such amendment, alteration or repeal is to take effect, or when the issuance of any such prior shares or convertible security is to be made, as the case may be, provision is made for the redemption of all Series B Preferred Shares at the time outstanding. For purposes of the foregoing provisions of this Section 8, each Series B Preferred Share shall have one (1) vote per share, except that when any other series of Preferred Shares shall have the right to vote with the Series B Preferred Shares as a single class on any matter, then the Series B Preferred Shares and such other series shall have with respect to such matters one (1) vote per $25.00 of stated liquidation preference. Except as otherwise required by applicable law or as set forth herein, the Series B Preferred Shares shall not have any relative, participating, optional or other special voting rights and powers other than as set forth herein, and the consent of the holders thereof shall not be required for the taking of any trust action. Section 9. Limitation on Ownership. ----------------------- (a) Limitation. Notwithstanding any other provision of the terms of ---------- the Series B Preferred Shares, except as provided in the next sentence and in Section 9(b), no Person, or Persons acting as a group, shall at any time directly or indirectly acquire ownership of more than 25% of the outstanding Series B Preferred Shares. Any Series B Preferred Shares owned by a Person or Persons acting as a group in excess of such 25% shall be deemed "Excess Preferred Shares," except that any such shares in excess of 25% will not be considered Excess Preferred Shares if the 25% limitation is ----------------------- exceeded solely as a result of the Trust's redemption of Series B Preferred Shares, provided that thereafter any additional Series B Preferred Shares acquired by such Person or Persons acting as a group shall be considered Excess Preferred Shares. Within 10 days of becoming aware of the existence of Excess Preferred Shares (whether by notice on Schedule 13D or otherwise), the Trust shall redeem any and all Excess Preferred Shares by giving notice of redemption to the holder or holders thereof, unless, prior to the giving of such notice the holder shall have disposed of its ownership in the Excess Preferred Shares. Such notice shall set forth the number of Series B Preferred Shares constituting Excess Preferred shares, the redemption price and the place or places at which the certificates representing such Excess Preferred Shares are to be surrendered and such notice shall set forth the matters described in the following sentence. From and after the date of giving such notice of redemption, the Series B Preferred Shares called for redemption shall cease to be outstanding and the holder thereof shall cease to be entitled to dividends (other than dividends declared but unpaid prior to the notice of redemption), voting rights and other benefits with respect to such shares excepting the rights to payment of the redemption price determined and payable as set forth in the next two sentences. Subject to the limitation on payment set forth in the following sentence, the redemption price of each Excess Preferred Share called for redemption shall be the average daily per Series B Preferred Share closing sales price, if the Series B Preferred Shares are listed on a national securities exchange or, if not, are reported on the NASDAQ National Market System, and if the Series B Preferred Shares are not so listed or reported, shall be the mean between the average per Series B Preferred Share closing bid prices and the average per Series B Preferred Share closing asked prices, in each case during the 30 day period ending on the business day prior to the redemption date, or if there have been no sales on a national securities exchange or the NASDAQ National Market System and no published bid quotations and no published asked quotations with respect to Series B Preferred Shares during such 30 day period, the redemption price shall be the price determined by the Trustees in good faith. Unless the Trustees determine that it is in the interest of the Trust to make earlier payment of all of the amount determined as the redemption price per Series B Preferred Share in accordance with the preceding sentence, the redemption price may be payable, at the option of the Trustees, at any time or times up to, but not later than the earlier of (i) five years after the redemption date, or (ii) the liquidation of the Trust, in which latter event the redemption price shall not exceed an amount which is the sum of the per Series B Preferred Share distributions designated as liquidating distributions and return of capital distributions declared with respect to unredeemed Series B Preferred Shares of the Trust of record subsequent to the redemption date; and in any event, no interest shall accrue with respect to the period subsequent to the redemption date to the date of such payment. Nothing in this Section 9(a) shall preclude the settlement of any transaction entered into through the facilities of the New York Stock Exchange. (b) Exemptions. The limitation on ownership set forth in Section ---------- 9(a) shall not apply to the acquisition of Series B Preferred Shares by an underwriter in a public offering of Series B Preferred Shares and shall not apply to the ownership of Series B Preferred Shares by a managing underwriter in the initial public offering of Series B Preferred Shares. The Trustees, in their sole and absolute discretion, may exempt from the ownership limitation set forth in Section 9(a) certain designated Series B Preferred Shares owned by a person (other than any of the Restricted Parties) who has provided the Trustees with evidence and assurances acceptable to the Trustees that the qualification of the Trust as a real estate investment trust would not be jeopardized thereby. Section 10. Record Holders. The Trust and the Transfer Agent may deem and -------------- treat the record holder of any Series B Preferred Shares as the true and lawful owner thereof for all purposes, and neither the Trust nor the Transfer Agent shall be affected by any notice to the contrary. Section 11. Sinking Fund. The Series B Preferred Shares shall not be ------------ entitled to the benefits of any retirement or sinking fund. THIRD: The Series B Preferred Shares have been classified by the Board of Trustees under the authority contained in Article 2, Section 1, of the Restated Declaration of Trust dated June 18, 1991, as amended. FOURTH: Each undersigned Trustee acknowledges these Articles Supplementary to be the act of the Trust and further, as to all matters or facts required to be verified under oath, each such Trustee acknowledges that to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties of perjury. IN WITNESS WHEREOF, these Articles Supplementary have been duly executed by the undersigned Trustees this 17th day of May, 1995. SECURITY CAPITAL PACIFIC TRUST By: /s/ C. Ronald Blankenship -------------------------------- C. Ronald Blankenship, Trustee By: /s/ Calvin K. Kessler -------------------------------- Calvin K. Kessler, Trustee By: /s/ James H. Polk, III -------------------------------- James H. Polk III, Trustee By: /s/ John C. Schweitzer -------------------------------- John C. Schweitzer, Trustee By: /s/ William G. Myers -------------------------------- William G. Myers, Trustee By: /s/ John T. Kelley, III -------------------------------- John T. Kelley, III, Trustee By: /s/ James A. Cardwell -------------------------------- James A. Cardwell, Trustee ARTICLES OF MERGER MERGING SECURITY CAPITAL PACIFIC INCORPORATED (A CORPORATION OF THE STATE OF MARYLAND) INTO PROPERTY TRUST OF AMERICA (A REAL ESTATE INVESTMENT TRUST OF THE STATE OF MARYLAND) Security Capital Pacific Incorporated, a corporation organized and existing under the laws of the State of Maryland ("PACIFIC"), and Property Trust of America, a real estate investment trust organized and existing under the laws of the State of Maryland ("PTR"), agree that PACIFIC shall be merged with and into PTR. The terms and conditions of the merger and the mode of carrying the same into effect are as herein set forth in these Articles of Merger. FIRST: The parties to these Articles of Merger are Property Trust of America, a real estate investment trust organized and existing under the laws of the State of Maryland, and Security Capital Pacific Incorporated, a corporation organized and existing under the laws of the State of Maryland. SECOND: PACIFIC shall be merged with and into PTR in accordance with the Corporations and Associations Article of the Annotated Code of Maryland (the "Maryland Code"), and PTR shall survive the merger and continue under the name "Security Capital Pacific Trust" (the "Surviving Entity"). At the effective time of the merger (the "Effective Time"), the separate existence of PACIFIC shall cease in accordance with the provisions of the Maryland Code. From and after the Effective Time, the Surviving Entity shall continue its existence under the name "Security Capital Pacific Trust," shall succeed to all of the properties, liabilities and other assets and shall be subject to all of the liabilities and obligations of PACIFIC without further action by either of the parties hereto, and will continue to be governed by the laws of the State of Maryland, including the Maryland Code. At the Effective Time, the bylaws of PTR in effect immediately prior to the Effective Time shall become the bylaws of the Surviving Entity and the trustees and officers in office of PTR immediately prior to the Effective Time shall be the trustees and officers of the Surviving Entity, all of whom shall hold their trusteeships and offices until the election and qualification of their respective successors or until their tenure is otherwise terminated in accordance with the declaration of trust and bylaws of the Surviving Entity. THIRD: The resident agent and office of each of PACIFIC and PTR is located at 11 East Chase Street, Baltimore, State of Maryland 21202. The principal office of each of PACIFIC and PTR is located at 7777 Market Center Avenue, City of El Paso, State of Texas 79912. Neither PACIFIC nor PTR owns any interest in land in any county in the State of Maryland. FOURTH: The terms and conditions of the transaction set forth in these Articles of Merger were advised, authorized and approved by each party to these Articles of Merger in the manner and by the vote required by PACIFIC's articles of incorporation or PTR's declaration of trust, as the case may be, and the laws of the State of Maryland. FIFTH: The merger was duly (a) advised by the board of directors of PACIFIC by the adoption of a resolution declaring that the merger set forth in these Articles of Merger was advisable on substantially the terms and conditions set forth or referred to in the resolution and directing that the proposed merger be submitted for consideration at a special meeting of the shareholders of PACIFIC and (b) approved by the shareholders of PACIFIC by the vote required by its articles of incorporation and the Maryland Code. SIXTH: The merger was duly (a) advised by the board of trustees of PTR by the adoption of a resolution declaring that the merger set forth in these Articles of Merger was advisable on substantially the terms and conditions set forth or referred to in the resolution and directing that the proposed merger be submitted for consideration at a special meeting of the shareholders of PTR and (b) approved by the shareholders of PTR by the vote required by its declaration of trust and the Maryland Code. SEVENTH: At the Effective Time, Article 1, Section 1 of the declaration of trust of PTR shall be amended to read in its entirety as follows and such declaration of trust, as so amended, shall become the declaration of trust of the Surviving Entity: " Section 1. Name. The Trust created by this Declaration of Trust is herein referred to as the "Trust" and shall be known by the name "Security Capital Pacific Trust." So far as may be practicable, legal and convenient, the affairs of the Trust shall be conducted and transacted under that name, which name shall not refer to the Trustees individually or personally or to the beneficiaries or Shareholders of the Trust, or to any officers, employees or agents of the Trust. Under circumstances in which the Trustees determine that the use of the name "Security Capital Pacific Trust" is not practicable, legal or convenient, they may as appropriate use their names with suitable reference to their trustee status, or some other suitable designation, or they may adopt another name under which the Trust may hold property or operate in any jurisdiction which name shall not, to the knowledge of the Trustees, refer to beneficiaries or Shareholders of the Trust. Legal title to all the properties subject from time to time to this Declaration of Trust shall be transferred to, vested in, and held by the Trust in its own name or by the Trustees as joint tenants with right of survivorship as Trustees of this Trust, except that the Trustees shall have the power to cause legal title to any property of this Trust to be held by and/or in the name of one or more of the Trustees, or any other person as nominee, on such terms, in such manner, and with such powers as the Trustees may determine, provided that the interest of the Trust therein is appropriately protected. The Trust shall have the authority to operate under an assumed name or names in such state or states or any political subdivision thereof where it would be legal, practical or convenient to operate in the name of the Trust. The Trust shall have the authority to file such assumed name certificates or other instruments in such places as may be required by applicable law to operate under such assumed name or names. If for any reason neither Security Capital (Southwest) Incorporated, a Delaware corporation, nor any affiliate thereof, nor any other affiliate of Security Capital Realty Incorporated, a Maryland corporation, shall any longer be rendering to the Trust the services of Advisor, as defined in Article 4, Section 7, hereof, to be rendered pursuant to the contract referred to in Article 4, Section 7 hereof, and any renewal or extension of such contract, then, if requested in writing by Security Capital Realty Incorporated or its successor to do so, the Trustees shall forthwith and are hereby required and authorized, without further vote or consent of the Shareholders, to (a) cease to use the name "Security Capital") or any name or names similar thereto, (b) amend this Article 1, Section 1 to change the name of the Trust to one which does not include the name "Security Capital" or any name or names similar thereto, and (c) cause to be executed and delivered al instruments necessary to evidence such change of name in each public registry where the name of the Trust shall have been registered and to disclaim any right, title or interest in or to the name "Security Capital."" These amendments do not increase the authorized capital of PTR. EIGHTH: The total number of shares of beneficial interest of all classes which PTR has authority to issue is one hundred fifty million (150,000,000) shares of beneficial interest, of the par value of one dollar ($1.00) each, all such shares having an aggregate par value of one hundred fifty million dollars ($150,000,000). Of such one hundred fifty million shares of beneficial interest, nine million two hundred thousand have been classified as Cumulative Convertible Series A Preferred Shares of Beneficial Interest. The total number of shares of stock of all classes which PACIFIC has authority to issue is two hundred fifty million (250,000,000) shares of common stock, of the par value of one cent ($0.01) each, all such shares having an aggregate par value of two million five hundred thousand dollars ($2,500,000). NINTH: At the Effective Time, each issued share common stock of PACIFIC shall automatically and without further action by either of the parties hereto be converted into 0.611 common shares of beneficial interest of PTR. At the Effective Time, each right, option or warrant to acquire a share of common stock of PACIFIC shall automatically be converted into a right, option or warrant to acquire 0.611 common shares of beneficial interest of PTR. At the Effective Time, each issued share of beneficial interest of PTR issued immediately prior to the Effective Time shall not be converted or exchanged in any manner by shall remain issued. TENTH: The parties hereto intend that the execution of these Articles of Merger constitutes the adoption of a "plan of reorganization" within the meaning of Treasury Regulations (S) 1.368-1(c). IN WITNESS WHEREOF, Security Capital Pacific Incorporated, a Maryland corporation, and Property Trust of America, a Maryland real estate investment trust, the entities parties to the merger, have caused these Articles of Merger to be signed in their respective names and on their behalf and witnessed or attested all as of the 23rd day of March 1995. Each of the individuals signing these Articles of Merger on behalf of Security Capital Pacific Incorporated or Property Trust of America acknowledges these Articles of Merger to be the act of such respective entity and, as to all other matters or facts required to be verified under oath, that to the best of his or her knowledge, information and belief, these matters are true in all material respects, and that this statement is made under the penalties of perjury. SECURITY CAPITAL PACIFIC INCORPORATED, a Maryland corporation By: /s/ David C. Dressler, Jr. -------------------------------- David C. Dressler, Jr. Senior Vice President Attest: /s/ Leanne L. Gallagher - ------------------------------ Leanne L. Gallagher Assistant Secretary PROPERTY TRUST OF AMERICA, a Maryland real estate investment trust By: /s/ C. Ronald Blankenship -------------------------------- C. Ronald Blankenship, Trustee By: /s/ Calvin K. Kessler -------------------------------- Calvin K. Kessler, Trustee By: /s/ James H. Polk, III -------------------------------- James H. Polk, III, Trustee By: /s/ John C. Schweitzer -------------------------------- John C. Schweitzer, Trustee By: /s/ William G. Myers -------------------------------- William G. Myers, Trustee By: /s/ John T. Kelley -------------------------------- John T. Kelley, III, Trustee By: /s/ James A. Cardwell -------------------------------- James A. Cardwell, Trustee THIRD ARTICLES OF AMENDMENT OF RESTATED DECLARATION OF TRUST OF PROPERTY TRUST OF AMERICA The undersigned, being all the Trustees of Property Trust of America, a Maryland real estate investment trust (the "Trust"), do hereby certify pursuant to the provisions of Article 6, Section 2 of the Trust's Restated Declaration of Trust, as amended and supplemented (the "Declaration of Trust"), and Section 8- 501(b) of the Maryland Corporations and Associations Article, that the Board of Trustees of the Trust has adopted a resolution to amend the Declaration of Trust as hereinafter set forth and that the Trustees have approved such amendment by at least a two-thirds vote. Therefore, the Declaration of Trust is hereby amended by amending and restating Article 7, Section 10 thereof in its entirety as follows: SECTION 10. NAMES AND ADDRESSES OF TRUSTEES. The name and address of each current Trustee is set forth below: Name Address ---- ------- C. Ronald Blankenship 125 Lincoln Avenue Santa Fe, New Mexico 87501 James A. Cardwell 6080 Surety Drive El Paso, Texas 79905 John T. Kelley, III 7777 Market Center Avenue El Paso, Texas 79912 Calvin K. Kessler 8600 Gateway Boulevard East El Paso, Texas 79907 William G. Myers 1114 State Street, Suite 232 Santa Barbara, California 93101 James H. Polk, III 125 Lincoln Avenue Santa Fe, New Mexico 87501 John C. Schweitzer 100 Congress Austin, Texas 78701 Each undersigned Trustee acknowledges these Third Articles of Amendment to be the act of the Trust and, as to all other matters or facts required to be verified under oath, that, to the best of his knowledge, information and belief, these matters and facts are true in all material respects, and that this statement is made under the penalties for perjury. IN WITNESS WHEREOF, the undersigned have executed these Third Articles of Amendment as of this 28th day of October, 1994. /s/ C. Ronald Blankenship ------------------------------ C. Ronald Blankenship /s/ James A. Cardwell ------------------------------ James A. Cardwell /s/ John T. Kelley, III ------------------------------ John T. Kelley, III /s/ Calvin K. Kessler ------------------------------ Calvin K. Kessler /s/ William G. Myers ------------------------------ William G. Myers /s/ James H. Polk, III ------------------------------ James H. Polk, III /s/ John C. Schweitzer ------------------------------ John C. Schweitzer STATE OF NEW MEXICO ) ) SS. COUNTY OF SANTE FE ) On the 28th day of October, 1994, before me, the undersigned notary public, personally appeared C. Ronald Blankenship, known to me to be the person who signed the foregoing instrument, and acknowledged that he executed the same for the purposes contained therein. IN WITNESS WHEREOF, I have hereunto signed my name and affixed my official seal. (NOTARY SEAL) /s/ Teresa K. Rosen ---------------------------------- Notary Public My commission expires: 3-1-97 --------- STATE OF TEXAS ) ) SS. COUNTY OF EL PASO ) On the 28th day of October, 1994, before me, the undersigned notary public, personally appeared J.A. Cardwell, known to me to be the person who signed the foregoing instrument, and acknowledged that he executed the same for the purposes contained therein. IN WITNESS WHEREOF, I have hereunto signed my name and affixed my official seal. (NOTARY SEAL) /s/ Barbara Evans ----------------------------------- Notary Public My commission expires: 11-15-96 ----------- STATE OF TEXAS ) ) SS. COUNTY OF EL PASO ) On the 28th day of October, 1994, before me, the undersigned notary public, personally appeared John T. Kelley, III, known to me to be the person who signed the foregoing instrument, and acknowledged that he executed the same for the purposes contained therein. IN WITNESS WHEREOF, I have hereunto signed my name and affixed my official seal. (NOTARY SEAL) /s/ Karen D. Smith ------------------------------------ Notary Public My commission expires: 5-21-98 --------- STATE OF TEXAS ) ) SS. COUNTY OF EL PASO ) On the 28th day of October, 1994, before me, the undersigned notary public, personally appeared Calvin K. Kessler, known to me to be the person who signed the foregoing instrument, and acknowledged that he executed the same for the purposes contained therein. IN WITNESS WHEREOF, I have hereunto signed my name and affixed my official seal. (NOTARY SEAL) /s/ Virginia Gonzalez ------------------------------------ Notary Public My commission expires: 1-08-96 -------- STATE OF CALIFORNIA ) ) SS. COUNTY OF SANTA BARBARA ) On the 31st day of October, 1994, before me, the undersigned notary public, personally appeared William G. Myers, known to me to be the person who signed the foregoing instrument, and acknowledged that he executed the same for the purposes contained therein. IN WITNESS WHEREOF, I have hereunto signed my name and affixed my official seal. (NOTARY SEAL) /s/ Gail A. Crivello ------------------------------------ Notary Public My commission expires: 7-15-96 -------- STATE OF NEW MEXICO ) ) SS. COUNTY OF SANTE FE ) On the 28th day of October, 1994, before me, the undersigned notary public, personally appeared James H. Polk, III, known to me to be the person who signed the foregoing instrument, and acknowledged that he executed the same for the purposes contained therein. IN WITNESS WHEREOF, I have hereunto signed my name and affixed my official seal. (NOTARY SEAL) /s/ Teresa K. Rosen ------------------------------ Notary Public My commission expires: 3-1-97 -------- STATE OF TEXAS ) ) SS. COUNTY OF TRAVIS ) On the 4th day of November, 1994, before me, the undersigned notary public, personally appeared John C. Schweitzer, known to me to be the person who signed the foregoing instrument, and acknowledged that he executed the same for the purposes contained therein. IN WITNESS WHEREOF, I have hereunto signed my name and affixed my official seal. (NOTARY SEAL) /s/ Brenda Ewers ------------------------------ Notary Public My commission expires: 2-16-96 --------- PROPERTY TRUST OF AMERICA Second Certificate of Amendment of Restated Declaration of Trust The undersigned, being all of the Trustees of Property Trust of America, a Maryland real estate investment trust (the "Trust"), do hereby certify pursuant to the provisions of Article 6 of the Trust's Restated Declaration of Trust, as amended (the "Restated Declaration of Trust"), and in accordance with the applicable provisions of Maryland law: 1. That the Board of Trustees has adopted a resolution to amend the Restated Declaration of Trust as hereinafter set forth and has declared that such amendment is advisable. 2. That the amendment to the Declaration of Trust has been presented to the shareholders of the Trust. 3. That the amendment has been approved by the shareholders of the Trust by the affirmative vote of at least two-thirds of the shares entitled to notice of, and to vote at, the annual meeting of shareholders of the Trust held on May 3, 1994. Therefore, the Restated Declaration of Trust is hereby amended as follows: 1. Article 2, Section 7(c) is hereby amended by deleting the words "Section 7(e)" appearing in the first sentence thereof and substituting the words "Sections 7(e) and 7(k)". 2. Article 2, Section 7(f) is hereby amended by inserting the phrase "and subject to Section 7(k)" immediately after the phrase "Restated Declaration of Trust to the contrary" and immediately before the comma. 3. Article 2, Section 7(g) is hereby amended by deleting the word "Nothing" appearing as the first word thereof and inserting the following "Subject to Section 7(k), nothing". 4. Article 2, Section 7 is hereby amended by adding the following as new Section 7(k): "(k) NEW YORK STOCK EXCHANGE TRANSACTIONS. Nothing in this Section 7 shall preclude the settlement of any transaction entered into through the facilities of the New York Stock Exchange." 4. Each undersigned Trustee acknowledges this Second Certificate of Amendment to the be act of the Trust and further, as to all matters or facts required to be verified under oath, each such Trustee acknowledges that, to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties of perjury. IN WITNESS WHEREOF, the undersigned, constituting all of the members of the Board of Trustees of the Trust, have hereunto set their hands as of this 10th day of May, 1994. /s/ Calvin K. Kessler ----------------------------------- Calvin K. Kessler /s/ James H. Polk, III ----------------------------------- James H. Polk, III /s/ John C. Schweitzer ----------------------------------- John C. Schweitzer /s/ James A. Cardwell ----------------------------------- James A. Cardwell /s/ John T. Kelley, III ----------------------------------- John T. Kelley, III /s/ C. Ronald Blankenship ----------------------------------- C. Ronald Blankenship /s/ William G. Myers ----------------------------------- William G. Myers STATE OF TEXAS ) ) SS: COUNTY OF EL PASO ) On the 10th day of May, 1994, before me, the undersigned, a notary public in and for El Paso County, Texas, personally appeared Calvin K. Kessler, known to me to be the persons whose names are subscribed to the foregoing instrument and acknowledged that they executed the same for the purposes therein contained. IN WITNESS WHEREOF, I have hereunto set my hand and official seal. /s/ Virginia Gonzalez -------------------------------------------- Notary Public in and For The State of Texas, County of El Paso My commission expires: 1-8-98 - ------------------------ STATE OF TEXAS ) ) SS: COUNTY OF EL PASO ) On the 9th day of May, 1994, before me, the undersigned, a notary public in and for El Paso County, Texas, personally appeared James H. Polk known to me to be the persons whose names are subscribed to the foregoing instrument and acknowledged that they executed the same for the purposes therein contained. IN WITNESS WHEREOF, I have hereunto set my hand and official seal. /s/ Leanne Gallagher -------------------------------------------- Notary Public in and For The State of Texas, County of El Paso My commission expires: 8-5-96 - ------------------------ STATE OF TEXAS ) ) SS: COUNTY OF EL PASO ) On the 9th day of May, 1994, before me, the undersigned, a notary public in and for El Paso County, Texas, personally appeared John C. Schweitzer known to me to be the persons whose names are subscribed to the foregoing instrument and acknowledged that they executed the same for the purposes therein contained. IN WITNESS WHEREOF, I have hereunto set my hand and official seal. /s/ Brenda Ewers -------------------------------------------- Notary Public in and For The State of Texas, County of El Paso My commission expires: 2-6-96 - -------------------------- STATE OF TEXAS ) ) SS: COUNTY OF EL PASO ) On the 12th day of May, 1994, before me, the undersigned, a notary public in and for El Paso County, Texas, personally appeared James A. Cardwell known to me to be the persons whose names are subscribed to the foregoing instrument and acknowledged that they executed the same for the purposes therein contained. IN WITNESS WHEREOF, I have hereunto set my hand and official seal. /s/ Barbara Evans -------------------------------------------- Notary Public in and For The State of Texas, County of El Paso My commission expires: 11-15-96 - ------------------------ STATE OF TEXAS ) ) SS: COUNTY OF EL PASO ) On the 10th day of May, 1994, before me, the undersigned, a notary public in and for El Paso County, Texas, personally appeared John T. Kelley, III, known to me to be the persons whose names are subscribed to the foregoing instrument and acknowledged that they executed the same for the purposes therein contained. IN WITNESS WHEREOF, I have hereunto set my hand and official seal. /s/ Kim Westbrook -------------------------------------------- Notary Public in and For The State of Texas, County of El Paso My commission expires: 2-19-97 - ------------------------ STATE OF TEXAS ) ) SS: COUNTY OF EL PASO ) On the 10th day of May, 1994, before me, the undersigned, a notary public in and for El Paso County, Texas, personally appeared C. Ronald Blankenship, known to me to be the persons whose names are subscribed to the foregoing instrument and acknowledged that they executed the same for the purposes therein contained. IN WITNESS WHEREOF, I have hereunto set my hand and official seal. /s/ Amy Ferguson -------------------------------------------- Notary Public in and For The State of Texas, County of El Paso My commission expires: 8-23-95 - ------------------------- STATE OF TEXAS ) ) SS: COUNTY OF EL PASO ) On the 16th day of May, 1994, before me, the undersigned, a notary public in and for El Paso County, Texas, personally appeared William G. Myers, known to me to be the persons whose names are subscribed to the foregoing instrument and acknowledged that they executed the same for the purposes therein contained. IN WITNESS WHEREOF, I have hereunto set my hand and official seal. /s/ Gail A. Crivello -------------------------------------------- Notary Public in and For The State of Texas, County of El Paso My commission expires: 7-15-96 - ------------------------- Cumulative Convertible Series A Preferred Shares of Beneficial Interest ARTICLES SUPPLEMENTARY PROPERTY TRUST OF AMERICA ============================== Articles Supplementary of Board of Trustees Classifying and Designating a Series of Preferred Shares as Cumulative Convertible Series A Preferred Shares of Beneficial Interest and Fixing Distribution and Other Preferences and Rights of Such Series ============================== Dated as of November 22, 1993 PROPERTY TRUST OF AMERICA ============================== Articles Supplementary of Board of Trustees Classifying and Designating a Series of Preferred Shares as Cumulative Convertible Series A Preferred Shares of Beneficial Interest and Fixing Distribution and Other Preferences and Rights of Such Series ============================== The undersigned, being all of the Trustees of Property Trust of America, a Maryland real estate investment trust (the "Trust"), hereby certify to the State Department of Assessments and Taxation of Maryland pursuant to section 8-203(b) of the Annotated Code of Maryland that: FIRST: The Board of Trustees has classified 9,200,000 unissued shares of the Trust as Cumulative Convertible Series A Preferred Shares of Beneficial Interest (the "Series A Preferred Shares"). SECOND: The following is a description of the Series A Preferred Shares, including the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption thereof: Section 1. Number of Shares and Designation. This class of Preferred -------------------------------- Shares shall be designated as Cumulative Convertible Series A Preferred Shares of Beneficial Interest (the "Series A Preferred Shares") and the number of shares which shall constitute such series shall not be more than 9,200,000 shares, par value $1.00 per share, which number may be decreased (but not below the number thereof then outstanding plus the number required to fulfill the Trust's obligations under options, warrants or similar rights issued by the Trust) from time to time by the Board of Trustees. Section 2. Definitions. For purposes of the Series A Preferred Shares, the ----------- following terms shall have the meanings indicated: "Board of Trustees" shall mean the Board of Trustees of the Trust or ----------------- any committee authorized by such Board of Trustees to perform any of its responsibilities with respect to the Series A Preferred Shares. "Business Day" shall mean any day other than a Saturday, Sunday or a ------------ day on which state or federally chartered banking institutions in New York City, New York are not required to be open. "Call Date" shall mean the date of the notice to holders required --------- under subparagraph (d) of Section 5. "Common Shares" shall mean the common Shares of Beneficial Interest of ------------- the Trust, par value $1.00 per share. "Constituent Person" shall have the meaning set forth in paragraph (e) ------------------ of Section 6 hereof. "Conversion Price" shall mean the conversion price per Common Share ---------------- for which the Series A Preferred Shares are convertible, as such Conversion Price may be adjusted pursuant to Section 6. The initial conversion price shall be $20.556 (equivalent to a conversion rate of 1.2162 Common Shares for each Series A Preferred Share). "Current Market Price" of publicly traded common shares or any other -------------------- class of capital stock or other security of the Trust or any other issuer for any day shall mean the last reported sales price, regular way on such day, or, if no sale takes place on such day, the average of the reported closing bid and asked prices on such day, regular way, in either case as reported on the New York Stock Exchange ("NYSE") or, if such security is ---- not listed or admitted for trading on the New York Stock Exchange, on the principal national securities exchange on which such security is listed or admitted for trading or, if not listed or admitted for trading on any national securities exchange, on the National Market System of the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ") or, if such security is not quoted on such National Market ------- System, the average of the closing bid and asked prices on such day in the over-the-counter market as reported by NASDAQ or, if bid and asked prices for such security on such day shall not have been reported through NASDAQ, the average of the bid and asked prices on such day as furnished by any NYSE member firm regularly making a market in such security selected for such purpose by the Chairman of the Board or the Board of Trustees. "Dividend Payment Date" shall mean the last calendar day of March, --------------------- June, September and December, in each year, commencing on December 31, 1993; provided, however, that if any Dividend Payment Date falls on any day -------- ------- other than a Business Day, the dividend payment due on such Dividend Payment Date shall be paid on the Business Day immediately following such Dividend Payment Date. "Dividend Periods" shall mean quarterly dividend periods commencing on ---------------- April 1, July 1, October 1 and January 1 of each year and ending on and including the day preceding the first day of the next succeeding Dividend Period (other than the initial Dividend Period, which shall commence on the Issue Date and end on and include December 31, 1994). "Fair Market Value" shall mean the average of the daily Current Market ----------------- Prices of a Common Share during the five (5) consecutive Trading Days selected by the Trust commencing not more than 20 Trading Days before, and ending not later than, the earlier of the day in question and the day before the "ex date" with respect to the issuance or distribution requiring such computation. The term "ex date," when used with respect to any issuance or distribution, means the first day on which the Common Shares trades regular way, without the right to receive such issuance or distribution, on the exchange or in the market, as the case may be, used to determine that day's Current Market Price. "Fully Junior Shares" shall mean the Common Shares and any other class ------------------- or series of shares of the Trust now or hereafter issued and outstanding over which the Series A Preferred Shares have preference or priority in both (i) the payment of dividends and (ii) the distribution of assets on any liquidation, dissolution or winding up of the Trust. "Issue Date" shall mean the first date on which the Series A Preferred ---------- Shares are issued and sold. "Junior Shares" shall mean the Common Shares and any other class or ------------- series of shares of the Trust now or hereafter issued and outstanding over which the Series A Preferred Shares have preference or priority in the payment of dividends or in the distribution of assets on any liquidation, dissolution or winding up of the Trust. "Non-Electing Share" shall have the meaning set forth in paragraph (e) ------------------ of Section 6 hereof. "Parity Shares" shall have the meaning set forth in paragraph (b) of ------------- Section 8. "Person" shall mean any individual, firm, partnership, corporation or ------ other entity, and shall include any successor (by merger or otherwise) of such entity. "Securities" and "Security" shall have the meanings set forth in ---------- -------- paragraph (d)(iii) of Section 6 hereof. "Series A Preferred Shares" shall have the meaning set forth in ------------------------- Section 1 hereof. "set apart for payment" shall be deemed to include, without any action --------------------- other than the following, the recording by the Trust in its accounting ledgers of any accounting or bookkeeping entry which indicates, pursuant to a declaration of dividends or other distribution by the Board of Trustees, the allocation of funds to be so paid on any series or class of capital stock of the Trust; provided, however, that if any funds for any class or series of -------- ------- Junior Shares or any class or series of stock ranking on a parity with the Series A Preferred Shares as to the payment of dividends are placed in a separate account of the Trust or delivered to a disbursing, paying or other similar agent, then "set apart for payment" with respect to the Series A Preferred Shares shall mean placing such funds in a separate account or delivering such funds to a disbursing, paying or other similar agent. "Trading Day" shall mean any day on which the securities in question ----------- are traded on the NYSE, or if such securities are not listed or admitted for trading on the NYSE, on the principal national securities exchange on which such securities are listed or admitted, or if not listed or admitted for trading on any national securities exchange, on the National Market System of NASDAQ, or if such securities are not quoted on such National Market System, in the applicable securities market in which the securities are traded. "Transaction" shall have the meaning set forth in paragraph (e) of ----------- Section 6 hereof. "Transfer Agent" means Chemical Bank, New York City, New York, or such -------------- other agent or agents of the Trust as may be designated by the Board of Trustees or their designee as the transfer agent for the Series A Preferred Shares. "Voting Preferred Shares" shall have the meaning set forth in Section ----------------------- 9 hereof. Section 3. Dividends. --------- (a) The holders of Series A Preferred Shares shall be entitled to receive, when, as and if declared by the Board of Trustees out of funds legally available for that purpose, dividends payable in cash in an amount per share equal to the greater of (i) $1.75 per annum or (ii) the dividends (determined on each Dividend Payment Date) on the Common Shares, or portion thereof, into which a Series A Preferred Share is convertible. Such dividends shall equal the number of Common Shares, or portion thereof, into which a Series A Preferred Share is convertible, multiplied by the most current quarterly dividend on a Common Share on or before the applicable Dividend Payment Date. Such dividends shall begin to accrue and shall be fully cumulative from the Issue Date, whether or not in any Dividend Period or Periods there shall be funds of the Trust legally available for the payment of such dividends, and shall be payable quarterly, when, as and if declared by the Board of Trustees, in arrears on Dividend Payment Dates, commencing on the first Dividend Payment Date after the Issue Date. Each such dividend shall be payable in arrears to the holders of record of Series A Preferred Shares, as they appear on the stock records of the Trust at the close of business on such record dates, not more than 50 days preceding such Dividend Payment Dates thereof, as shall be fixed by the Board of Trustees. Accrued and unpaid dividends for any past Dividend Periods may be declared and paid at any time and for such interim periods, without reference to any regular Dividend Payment Date, to holders of record on such date, not exceeding 50 days preceding the payment date thereof, as may be fixed by the Board of Trustees. (b) The amount of dividends payable for each full Dividend Period for the Series A Preferred Shares shall be computed by dividing the annual dividend rate by four. The amount of dividends payable for the initial Dividend Period, or any other period shorter or longer than a full Dividend Period, on the Series A Preferred Shares shall be computed on the basis of twelve 30-day months and a 360-day year. Holders of Series A Preferred Shares shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of cumulative dividends, as herein provided, on the Series A Preferred Shares. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on the Series A Preferred Shares that may be in arrears. (c) So long as any Series A Preferred Shares are outstanding, no dividends, except as described in the immediately following sentence, shall be declared or paid or set apart for payment on any class or series of Parity Shares for any period unless full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for such payment on the Series A Preferred Shares for all Dividend Periods terminating on or prior to the Dividend Payment Date on such class or series of Parity Shares. When dividends are not paid in full or a sum sufficient for such payment is not set apart, as aforesaid, all dividends declared upon Series A Preferred Shares and all dividends declared upon any other class or series of Parity Shares shall be declared ratably in proportion to the respective amounts of dividends accumulated and unpaid on the Series A Preferred Shares and accumulated and unpaid on such Parity Shares. (d) So long as any Series A Preferred Shares are outstanding, no dividends (other than dividends or distributions paid solely in shares of, or options, warrants or rights to subscribe for or purchase shares of, Fully Junior Shares) shall be declared or paid or set apart for payment or other distribution declared or made upon Junior Shares, nor shall any Junior Shares be redeemed, purchased or otherwise acquired (other than a redemption, purchase or other acquisition of Common Shares made for purposes of an employee incentive or benefit plan of the Trust or any subsidiary) for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Trust, directly or indirectly (except by conversion into or exchange for Fully Junior Shares), unless in each case (i) the full cumulative dividends on all outstanding Series A Preferred Shares and any other Parity Shares of the Trust shall have been paid or declared and set apart for payment for all past Dividend Periods with respect to the Series A Preferred Shares and all past dividend periods with respect to such Parity Shares and (ii) sufficient funds shall have been paid or declared and set apart for the payment of the dividend for the current Dividend Period with respect to the Series A Preferred Shares and the current dividend period with respect to such Parity Shares. Section 4. Liquidation Preference. ---------------------- (a) In the event of any liquidation, dissolution or winding up of the Trust, whether voluntary or involuntary, before any payment or distribution of the assets of the Trust (whether capital or surplus) shall be made to or set apart for the holders of Junior Shares, the holders of the Series A Preferred Shares shall be entitled to receive Twenty-Five Dollars ($25.00) per Series A Preferred Share plus an amount equal to all dividends (whether or not earned or declared) accrued and unpaid thereon to the date of final distribution to such holders; but such holders shall not be entitled to any further payment. If, upon any liquidation, dissolution or winding up of the Trust, the assets of the Trust, or proceeds thereof, distributable among the holders of the Series A Preferred Shares shall be insufficient to pay in full the preferential amount aforesaid and liquidating payments on any other shares of any class or series of Parity Shares, then such assets, or the proceeds thereof, shall be distributed among the holders of Series A Preferred Shares and any such other Parity Shares ratably in accordance with the respective amounts that would be payable on such Series A Preferred Shares and any such other Parity Shares if all amounts payable thereon were paid in full. For the purposes of this Section 4, (i) a consolidation or merger of the Trust with one or more corporations, (ii) a sale or transfer of all or substantially all of the Trust's assets, or (iii) a statutory share exchange shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary, of the Trust. (b) Subject to the rights of the holders of shares of any series or class or classes of stock ranking on a parity with or prior to the Series A Preferred Shares upon liquidation, dissolution or winding up, upon any liquidation, dissolution or winding up of the Trust, after payment shall have been made in full to the holders of the Series A Preferred Shares, as provided in this Section 4, any other series or class or classes of Junior Shares shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the Series A Preferred Shares shall not be entitled to share therein. Section 5. Redemption at the Option of the Trust. ------------------------------------- (a) Subject to Section 10 hereof, the Series A Preferred Shares shall not be redeemable by the Trust prior to the tenth anniversary of the Issue Date. On and after the tenth anniversary of the Issue Date, the Trust, at its option, may redeem the Series A Preferred Shares, in whole at any time or from time to time in part at the option of the Trust at a redemption price of Twenty-Five Dollars ($25.00) per Series A Preferred Share, plus the amounts indicated in Section 5(b). (b) Upon any redemption of Series A Preferred Shares pursuant to this Section 5, the Trust shall pay any accrued and unpaid dividends in arrears for any Dividend Period ending on or prior to the Call Date. If the Call Date falls after a dividend payment record date and prior to the corresponding Dividend Payment Date, then each holder of Series A Preferred Shares at the close of business on such dividend payment record date shall be entitled to the dividend payable on such shares on the corresponding dividend payment date notwithstanding the redemption of such shares before such Dividend Payment Date. Except as provided above, the Trust shall make no payment or allowance for unpaid dividends, whether or not in arrears, on Series A Preferred Shares called for redemption. (c) If full cumulative dividends on the Series A Preferred Shares and any other class or series of Parity Shares of the Trust have not been paid or declared and set apart for payment, the Series A Preferred Shares may not be redeemed under this Section 5 in part and the Trust may not purchase or acquire Series A Preferred Shares, otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of Series A Preferred Shares or pursuant to Section 10 hereof. (d) Notice of the redemption of any Series A Preferred Shares under this Section 5 shall be mailed by first-class mail to each holder of record of Series A Preferred Shares to be redeemed at the address of each such holder as shown on the Trust's record, not less than 30 nor more than 90 days prior to the Call Date. Neither the failure to mail any notice required by this paragraph (d), nor any defect therein or in the mailing thereof, to any particular holder, shall affect the sufficiency of the notice or the validity of the proceedings for redemption with respect to the other holders. Any notice which was mailed in the manner herein provided shall be conclusively presumed to have been duly given on the date mailed whether or not the holder receives the notice. Each such mailed notice shall state, as appropriate: (1) the Call Date; (2) the number of Series A Preferred Shares to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (3) the place or places at which certificates for such shares are to be surrendered; (4) the then-current Conversion Price; and (5) that dividends on the shares to be redeemed shall cease to accrue on such Call Date except as otherwise provided herein. Notice having been mailed as aforesaid, from and after the Call Date (unless the Trust shall fail to make available an amount of cash necessary to effect such redemption), (i) except as otherwise provided herein, dividends on the Series A Preferred Shares so called for redemption shall cease to accrue, (ii) said shares shall no longer be deemed to be outstanding, and (iii) all rights of the holders thereof as holders of Series A Preferred Shares of the Trust shall cease (except the rights to convert and to receive cash payable upon such redemption, without interest thereon, upon surrender and endorsement of their certificates if so required and to receive any dividends payable thereon). The Trust's obligation to provide cash in accordance with the preceding sentence shall be deemed fulfilled if, on or before the Call Date, the Trust shall deposit with a bank or trust company (which may be an affiliate of the Trust) that has an office in the Borough of Manhattan, City of New York, and that has, or is an affiliate of a bank or trust company that has, capital and surplus of at least $50,000,000, necessary for such redemption, in trust, with irrevocable instructions that such cash be applied to the redemption of the Series A Preferred Shares so called for redemption. No interest shall accrue for the benefit of the holders of Series A Preferred Shares to be redeemed on any cash so set aside by the Trust. Subject to applicable escheat laws, any such cash unclaimed at the end of two years from the Call Date shall revert to the general funds of the Trust, after which reversion the holders of such shares so called for redemption shall look only to the general funds of the Trust for the payment of such cash. As promptly as practicable after the surrender in accordance with said notice of the certificates for any such shares so redeemed (properly endorsed or assigned for transfer, if the Trust shall so require and if the notice shall so state), such shares shall be exchanged for any cash (without interest thereon) for which such shares have been redeemed. If fewer than all the outstanding Series A Preferred Shares are to redeemed, shares to be redeemed shall be selected by the Trust from outstanding Series A Preferred Shares not previously called for redemption by lot or pro rata (as nearly as may be) or by any other method determined by the Trust in its sole discretion to be equitable. If fewer than all the Series A Preferred Shares represented by any certificate are redeemed, then new certificates representing the unredeemed shares shall be issued without cost to the holder thereof. Section 6. Conversion. Holders of Series A Preferred Shares shall have the ---------- right to convert all or a portion of such shares into Common Shares, as follows: (a) Subject to and upon compliance with the provisions of this Section 6, a holder of Series A Preferred Shares shall have the right, at his or her option, at any time to convert such shares into the number of fully paid and non-assessable Common Shares obtained by dividing the aggregate liquidation preference of such shares by the Conversion Price (as in effect at the time and on the date provided for in the last paragraph of paragraph (b) of this Section 6) by surrendering such shares to be converted, such surrender to be made in the manner provided in paragraph (b) of this Section 6; provided, however, that the right to convert shares -------- ------- called for redemption pursuant to Section 5 shall terminate at the close of business on the fifth Business Day prior to the Call Date fixed for such redemption, unless the Trust shall default in making payment of the cash payable upon such redemption under Section 5 hereof. (b) In order to exercise the conversion right, the holder of each Series A Preferred Share to be converted shall surrender the certificate representing such share, duly endorsed or assigned to the Trust or in blank, at the office of the Transfer Agent, accompanied by written notice to the Trust that the holder thereof elects to convert such Series A Preferred Shares. Unless the shares issuable on conversion are to be issued in the same name as the name in which such Series A Preferred Share is registered, each share surrendered for conversion shall be accompanied by instruments of transfer, in form satisfactory to the Trust, duly executed by the holder or such holder's duly authorized attorney and an amount sufficient to pay any transfer or similar tax (or evidence reasonably satisfactory to the Trust demonstrating that such taxes have been paid). Holders of Series A Preferred Shares at the close of business on a dividend payment record date shall be entitled to receive the dividend payable on such shares on the corresponding Dividend Payment Date notwithstanding the conversion thereof following such dividend payment record date and prior to such Dividend Payment Date. However, Series A Preferred Shares surrendered for conversion during the period between the close of business on any dividend payment record date and the opening of business on the corresponding Dividend Payment Date (except shares converted after the issuance of notice of redemption with respect to a Call Date during such period, such Series A Preferred Shares being entitled to such dividend on the Dividend Payment Date) must be accompanied by payment of an amount equal to the dividend payable on such shares on such Dividend Payment Date. A holder of Series A Preferred Shares on a dividend payment record date who (or whose transferee) tenders any such shares for conversion into Common Shares on the corresponding Dividend Payment Date will receive the dividend payable by the Trust on such Series A Preferred Shares on such date, and the converting holder need not include payment of the amount of such dividend upon surrender of Series A Preferred Shares for conversion. Except as provided above, the Trust shall make no payment or allowance for unpaid dividends, whether or not in arrears, on converted shares or for dividends on the Common Shares issued upon such conversion. As promptly as practicable after the surrender of certificates for Series A Preferred Shares as aforesaid, the Trust shall issue and shall deliver at such office to such holder, or on his or her written order, a certificate or certificates for the number of full Common Shares issuable upon the conversion of such shares in accordance with provisions of this Section 6, and any fractional interest in respect of a Common Share arising upon such conversion shall be settled as provided in paragraph (c) of this Section 6. Each conversion shall be deemed to have been effected immediately prior to the close of business on the date on which the certificates for Series A Preferred Shares shall have been surrendered and such notice (and if applicable, payment of an amount equal to the dividend payable on such shares) received by the Trust as aforesaid, and the person or persons in whose name or names any certificate or certificates for Common Shares shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares represented thereby at such time on such date and such conversion shall be at the Conversion Price in effect at such time on such date unless the stock transfer books of the Trust shall be closed on that date, in which event such person or persons shall be deemed to have become such holder or holders of record at the close of business on the next succeeding day on which such stock transfer books are open, but such conversion shall be at the Conversion Price in effect on the date on which such shares shall have been surrendered and such notice received by the Trust. (c) No fractional shares or scrip representing fractions of Common Shares shall be issued upon conversion of the Series A Preferred Shares. Instead of any fractional interest in a Common Share that would otherwise be deliverable upon the conversion of a Series A Preferred Share, the Trust shall pay to the holder of such share an amount in cash based upon the Current Market Price of Common Shares on the Trading Day immediately preceding the date of conversion. If more than one share shall be surrendered for conversion at one time by the same holder, the number of full Common Shares issuable upon conversion thereof shall be computed on the basis of the aggregate number of Series A Preferred Shares so surrendered. (d) The Conversion Price shall be adjusted from time to time as follows: (i) If the Trust shall after the Issue Date (A) pay a dividend or make a distribution on its capital shares in Common Shares, (B) subdivide its outstanding Common Shares into a greater number of shares, (C) combine its outstanding Common Shares into a smaller number of shares or (D) issue any shares of capital shares by reclassification of its Common Shares, the Conversion Price in effect at the opening of business on the day following the date fixed for the determination of shareholders entitled to receive such dividend or distribution or at the opening of business on the Business Day next following the day on which such subdivision, combination or reclassification becomes effective, as the case may be, shall be adjusted so that the holder of any Series A Preferred Share thereafter surrendered for conversion shall be entitled to receive the number of Common Shares that such holder would have owned or have been entitled to receive after the happening of any of the events described above as if such Series A Preferred Shares had been converted immediately prior to the record date in the case of a dividend or distribution or the effective date in the case of a subdivision, combination or reclassification. An adjustment made pursuant to this subparagraph (i) shall become effective immediately after the opening of business on the Business Day next following the record date (except as provided in paragraph (h) below) in the case of a dividend or distribution and shall become effective immediately after the opening of business on the Business Day next following the effective date in the case of a subdivision, combination or reclassification. (ii) If the Trust shall issue after the Issue Date rights, options or warrants to all holders of Common Shares entitling them (for a period expiring within 45 days after the record date mentioned below) to subscribe for or purchase Common Shares at a price per share less than 94% (100% if a stand-by underwriter is used and charges the Trust a commission) of the Fair Market Value per Common Share on the record date for the determination of shareholders entitled to receive such rights, option or warrants, then the Conversion Price in effect at the opening of business on the Business Day next following such record date shall be adjusted to equal the price determined by multiplying (I) the Conversion Price in effect immediately prior to the opening of business on the Business Day next following the date fixed for such determination by (II) a fraction, the numerator of which shall be the sum of (A) the number of Common Shares outstanding on the close of business on the date fixed for such determination and (B) the number of shares that the aggregate proceeds to the Trust from the exercise of such rights, option or warrants for Common Shares would purchase at 94% of such Fair Market Value (or 100% in the case of a stand-by underwriting), and the denominator of which shall be the sum of (A) the number of Common Shares outstanding on the close of business on the date fixed for such determination and (B) the number of additional Common Shares offered for subscription or purchase pursuant to such rights, options or warrants. Such adjustment shall become effective immediately after the opening of business on the day next following such record date (except as provided in paragraph (h) below). In determining whether any rights, options or warrants entitle the holders of Common Shares to subscribe for or purchase Common Shares at less than 94% of such Fair Market Value (or 100% in the case of a stand-by underwriting), there shall be taken into account any consideration received by the Trust upon issuance and upon exercise of such rights, options or warrants, the value of such consideration, if other than cash, to be determined by the Chairman of the Board or the Board of Trustees. (iii) If the Trust shall distribute to all holders of its Common Shares any shares of capital stock of the Trust (other than Common Shares) or evidence of its indebtedness or assets (excluding cumulative cash dividends or distributions paid with respect to the Common Shares after September 30, 1993 which are not in excess of the following: the sum of (A) the Trust's cumulative undistributed funds from operations at September 30, 1993, plus (B) the cumulative amount of funds from operations, as determined by the Board of Trustees, after September 30, 1993, minus (C) the cumulative amount of dividends accrued or paid in respect of the Series A Preferred Shares or any other class or series of Preferred Shares of the Trust after the Issue Date) or rights, options or warrants to subscribe for or purchase any of its securities (excluding those rights, options and warrants issued to all holders of Common Shares entitling them for a period expiring within 45 days after the record date referred to in subparagraph (ii) above to subscribe for or purchase Common Shares, which rights and warrants are referred to in and treated under subparagraph (ii) above) (any of the foregoing being hereinafter in this subparagraph (iii) collectively called the "Securities" and ---------- individually a "Security"), then in each such case the Conversion -------- Price shall be adjusted so that it shall equal the price determined by multiplying (I) the Conversion Price in effect immediately prior to the close of business on the date fixed for the determination of shareholders entitled to receive such distribution by (II) a fraction, the numerator of which shall be the Fair Market Value per Common Share on the record date mentioned below less the then fair market value (as determined by the Chairman of the Board or the Board of Trustees, whose determination shall be conclusive), of the portion of the capital shares or assets or evidences of indebtedness so distributed or of such rights or warrants applicable to one Common Share, and the denominator of which shall be the Fair Market Value per Common Share on the record date mentioned below. Such adjustment shall become effective immediately at the opening of business on the Business Day next following (except as provided in paragraph (h) below) the record date for the determination of shareholders entitled to receive such distribution. For the purposes of this clause (iii), the distribution of a Security, which is distributed not only to the holders of the Common Shares on the date fixed for the determination of shareholders entitled to such distribution of such Security, but also is distributed with each Common Share delivered to a Person converting a Series A Preferred Share after such determination date, shall not require an adjustment of the Conversion Price pursuant to this clause (iii); provided that on the date, if any, on which a person converting -------- a Series A Preferred Share would no longer be entitled to receive such Security with a Common Share (other than as a result of the termination of all such Securities), a distribution of such Securities shall be deemed to have occurred and the Conversion Price shall be adjusted as provided in this clause (iii) (and such day shall be deemed to be "the date fixed for the determination of the shareholders entitled to receive such distribution" and "the record date" within the meaning of the two preceding sentences). (iv) In case a tender or exchange offer made by the Trust or any subsidiary of the Trust for all or any portion of the Common Shares shall expire and such tender or exchange offer shall involve the payment by the Trust or such subsidiary of consideration per Common Share having a fair market value (as determined in good faith by the Board of Trustees, whose determination shall be conclusive and described in a resolution of the Board of Trustees), at the last time (the "Expiration Time") tenders or exchanges may --------------- be made pursuant to such tender or exchange offer, that exceeds the Current Market Price per Common Share on the Trading Day next succeeding the Expiration Time, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the effectiveness of the Conversion Price reduction contemplated by this subparagraph, by a fraction of which the numerator shall be the number of Common Shares outstanding (including any tendered or exchanged shares) at the Expiration Time, multiplied by the Current Market Price per Common Share on the Trading Day next succeeding the Expiration Time, and the denominator shall be the sum of (A) the fair market value (determined as aforesaid) of the aggregate consideration payable to shareholders based upon the acceptance (up to any maximum specified in the terms of the tender or exchange offer) of all shares validly tendered or exchanged and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any maximum, being referred to as the "Purchased Shares") and (B) the product of the number of Common Shares ---------------- outstanding (less any Purchased Shares) at the Expiration Time and the Current Market Price per Common Share on the Trading Day next succeeding the Expiration Time, such reduction to become effective immediately prior to the opening of business on the day following the Expiration Time. (v) No adjustment in the Conversion Price shall be required unless such adjustment would require a cumulative increase or decrease of at least 1% in such price; provided, however, that any adjustments -------- ------- that by reason of this subparagraph (v) are not required to be made shall be carried forward and taken into account in any subsequent adjustment until made; and provided, further, that any adjustment -------- ------- shall be required and made in accordance with the provisions of this Section 6 (other than this subparagraph (v)) not later than such time as may be required in order to preserve the tax-free nature of a distribution to the holders of Common Shares. Notwithstanding any other provisions of this Section 6, the Trust shall not be required to make any adjustment of the Conversion Price for the issuance of any Common Shares pursuant to any plan providing for the reinvestment of dividends or interest payable on securities of the Trust and the investment of additional optional amounts in Common Shares under such plan. All calculations under this Section 6 shall be made to the nearest cent (with $.005 being rounded upward) or to the nearest one- tenth of a share (with .05 of a share being rounded upward), as the case may be. Anything in this paragraph (d) to the contrary notwithstanding, the Trust shall be entitled, to the extent permitted by law, to make such reductions in the Conversion Price, in addition to those required by this paragraph (d), as it in its discretion shall determine to be advisable in order that any stock dividends, subdivision of shares, reclassification or combination of shares, distribution of rights or warrants to purchase stock or securities, or a distribution of other assets (other than cash dividends) hereafter made by the Trust to its shareholders shall not be taxable. (e) If the Trust shall be a party to any transaction (including without limitation a merger, consolidation, statutory share exchange, self tender offer for all or substantially all Common Shares, sale of all or substantially all of the Trust's assets or recapitalization of the Common Shares and excluding any transaction as to which subparagraph (d)(i) of this Section 6 applies) (each of the foregoing being referred to herein as a "Transaction"), in each case as a result of which all or substantially ----------- all Common Shares are converted into the right to receive stock, securities or other property (including cash or any combination thereof), each Series A Preferred Share, which is not redeemed or converted into the right to receive stock, securities or other property prior to such Transaction, shall thereafter be convertible into the kind and amount of shares of stock, securities and other property (including cash or any combination thereof) receivable upon the consummation of such Transaction by a holder of that number of Common Shares into which one Series A Preferred Share was convertible immediately prior to such Transaction, assuming such holder of Common Shares (i) is not a Person with which the Trust consolidated or into which the Trust merged or which merged into the Trust or to which such sale or transfer was made, as the case may be ("Constituent Person"), or an ------------------ affiliate of a Constituent Person and (ii) failed to exercise his rights of election, if any, as to the kind or amount of stock, securities and other property (including cash) receivable upon such Transaction (provided that if the kind or amount of stock, securities and other property (including cash) receivable upon such Transaction is not the same for each Common Share held immediately prior to such Transaction by other than a Constituent Person or an affiliate thereof and in respect of which such rights of election shall not have been exercised ("Non-Electing Share"), ------------------ then for the purpose of this paragraph (e) the kind and amount of stock, securities and other property (including cash) receivable upon such Transaction by each Non-Electing Share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares). The Trust shall not be a party to any Transaction unless the terms of such Transaction are consistent with the provisions of this paragraph (e), and it shall not consent or agree to the occurrence of any Transaction until the Trust has entered into an agreement with the successor or purchasing entity, as the case may be, for the benefit of the holders of the Series A Preferred Shares that will contain provisions enabling the holders of the Series A Preferred Shares that remain outstanding after such Transaction to convert into the consideration received by holders of Common Shares at the Conversion Price in effect immediately prior to such Transaction. The provisions of this paragraph (e) shall similarly apply to successive Transactions. (f) If: (i) the Trust shall declare a dividend (or any other distribution) on the Common Shares (other than cash dividends or distributions paid with respect to the Common Shares after September 30, 1993 not in excess of the sum of the Trust's cumulative undistributed funds from operations at September 30, 1993, plus the cumulative amount of funds from operations, as determined by the Board of Trustees, after September 30, 1993, minus the cumulative amount of dividends accrued or paid in respect of the Series A Preferred Shares or any other class or series of Preferred Shares of the Trust after the Issue Date); or (ii) the Trust shall authorize the granting to the holders of Common Shares of rights, options or warrants to subscribe for or purchase any shares of any class or any other rights, options or warrants; or (iii) there shall be any reclassification of the Common Shares (other than an event to which subparagraph (d)(i) of this Section 6 applies) or any consolidation or merger to which the Trust is a party and for which approval of any shareholders of the Trust is required, or a statutory share exchange, or a self tender offer by the Company for all or substantially all of its outstanding Common Shares or the sale or transfer of all or substantially all of the assets of the Trust as an entirety; or (iv) there shall occur the voluntary or involuntary liquidation, dissolution or winding up of the Trust, then the Trust shall cause to be filed with the Transfer Agent and shall cause to be mailed to the holders of Series A Preferred Shares at their addresses as shown on the stock records of the Trust, as promptly as possible, but at least 10 days prior to the applicable date hereinafter specified, a notice stating (A) the date on which a record is to be taken for the purpose of such dividend, distribution or granting of rights, options or warrants, or, if a record is not to be taken, the date as of which the holders of Common Shares of record to be entitled to such dividend, distribution or rights, options or warrants are to be determined or (B) the date on which such reclassification, consolidation, merger, statutory share exchange, sale, transfer, liquidation, dissolution or winding up is expected to become effective, and the date as of which it is expected that holders of Common Shares of record shall be entitled to exchange their Common Shares for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, statutory share exchange, sale, transfer, liquidation, dissolution or winding up. Failure to give or receive such notice or any defect therein shall not affect the legality or validity of the proceedings described in this Section 6. (g) Whenever the Conversion Price is adjusted as herein provided, the Trust shall promptly file with the Transfer Agent an officer's certificate setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment which certificate shall be conclusive evidence of the correctness of such adjustment absent manifest error. Promptly after delivery of such certificate, the Trust shall prepare a notice of such adjustment of the Conversion Price setting forth the adjusted Conversion Price and the effective date of such adjustment becomes effective and shall mail such notice of such adjustment of the Conversion Price to the holder of each Series A Preferred Share at such holder's last address as shown on the stock records of the Trust. (h) In any case in which paragraph (d) of this Section 6 provides that an adjustment shall become effective on the day next following the record date for an event, the Trust may defer until the occurrence of such event (A) issuing to the holder of any Series A Preferred Share converted after such record date and before the occurrence of such event the additional Common Shares issuable upon such conversion by reason of the adjustment required by such event over and above the Common Shares issuable upon such conversion before giving effect to such adjustment and (B) paying to such holder any amount of cash in lieu of any fraction pursuant to paragraph (c) of this Section 6. (i) There shall be no adjustment of the Conversion Price in case of the issuance of any stock of the Trust in a reorganization, acquisition or other similar transaction except as specifically set forth in this Section 6. If any action or transaction would require adjustment of the Conversion Price pursuant to more than one paragraph of this Section 6, only one adjustment shall be made and such adjustment shall be the amount of adjustment that has the highest absolute value. (j) If the Trust shall take any action affecting the Common Shares, other than action described in this Section 6, that in the opinion of the Board of Trustees would materially and adversely affect the conversion rights of the holders of the Series A Preferred Shares, the Conversion Price for the Series A Preferred Shares may be adjusted, to the extent permitted by law, in such manner, if any, and at such time, as the Board of Trustees, in its sole discretion, may determine to be equitable in the circumstances. (k) The Trust covenants that it will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued Common Shares, for the purpose of effecting conversion of the Series A Preferred Shares, the full number of Common Shares deliverable upon the conversion of all outstanding Series A Preferred Shares not theretofore converted. For purposes of this paragraph (k), the number of Common Shares that shall be deliverable upon the conversion of all outstanding Series A Preferred Shares shall be computed as if at the time of computation all such outstanding shares were held by a single holder. The Trust covenants that any Common Shares issued upon conversion of the Series A Preferred Shares shall be validly issued, fully paid and non- assessable. Before taking any action that would cause an adjustment reducing the Conversion Price below the then-par value of the Common Shares deliverable upon conversion of the Series A Preferred Shares, the Trust will take any trust action that, in the opinion of its counsel, may be necessary in order that the Trust may validly and legally issue fully paid and (subject to any customary qualification based upon the nature of a business trust) non-assessable Common Shares at such adjusted Conversion Price. The Trust shall endeavor to list the Common Shares required to be delivered upon conversion of the Series A Preferred Shares, prior to such delivery, upon each national securities exchange, if any, upon which the outstanding Common Shares are listed at the time of such delivery. Prior to the delivery of any securities that the Trust shall be obligated to deliver upon conversion of the Series A Preferred Shares, the Trust shall endeavor to comply with all federal and state laws and regulations thereunder requiring the registration of such securities with, or any approval of or consent to the delivery thereof by, any governmental authority. (l) The Trust will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of Common Shares or other securities or property on conversion of the Series A Preferred Shares pursuant hereto; provided, however, that the Trust shall -------- ------- not be required to pay any tax that may be payable in respect of any transfer involved in the issue or delivery of Common Shares or other securities or property in a name other than that of the holder of the Series A Preferred Shares to be converted, and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Trust the amount of any such tax or established, to the reasonable satisfaction of the Trust, that such tax has been paid. Section 7. Shares To Be Retired. All Series A Preferred Shares which -------------------- shall have been issued and reacquired in any manner by the Trust shall be restored to the status of authorized but unissued Shares of Beneficial Interest of the Trust, without designation as to class or series. Section 8. Ranking. Any class or series of stock of the Trust shall be ------- deemed to rank: (a) prior to the Series A Preferred Shares, as to the payment of dividends and as to distribution of assets upon liquidation, dissolution or winding up, if the holders of such class or series shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of Series A Preferred Shares; (b) on a parity with the Series A Preferred Shares, as to the payment of dividends and as to distribution of assets upon liquidation, dissolution or winding up, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share thereof be different from those of the Series A Preferred Shares, if the holders of such class of stock or series and the Series A Preferred Shares shall be entitled to the receipt of dividends and of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accrued and unpaid dividends per share or liquidation preferences, without preference or priority one over the other ("Parity Shares"); and ------------- (c) junior to the Series A Preferred Shares, as to the payment of dividends or as to the distribution of assets upon liquidation, dissolution or winding up, if such stock or series shall be Junior Shares. (d) junior to the Series A Preferred Shares, as to the payment of dividends and as to the distribution of assets upon liquidation, dissolution or winding up, if such stock or series shall be Fully Junior Shares. Section 9. Voting. If and whenever six quarterly dividends (whether or not ------ consecutive) payable on the Series A Preferred Shares or any series or class of Parity Shares shall be in arrears (which shall, with respect to any such quarterly dividend, mean that any such dividend has not been paid in full), whether or not earned or declared, the number of trustees then constituting the Board of Trustees shall be increased by two and the holders of Series A Preferred Shares, together with the holders of shares of every other series of Parity Shares (any such other series, the "Voting Preferred Shares"), voting as ----------------------- a single class regardless of series, shall be entitled to elect the two additional trustees to serve on the Board of Trustees at any annual meeting of shareholders or special meeting held in place thereof, or at a special meeting of the holders of the Series A Preferred Shares and the Voting Preferred Shares called as hereinafter provided. Whenever all arrears in dividends on the Series A Preferred Shares and the Voting Preferred Shares then outstanding shall have been paid and dividends thereon for the current quarterly dividend period shall have been paid or declared and set apart for payment, then the right of the holders of the Series A Preferred Shares and the Voting Preferred Shares to elect such additional two trustees shall cease (but subject always to the same provision for the vesting of such voting rights in the case of any similar future arrearages in six quarterly dividends), and the terms of office of all persons elected as trustees by the holders of the Series A Preferred Shares and the Voting Preferred Shares shall forthwith terminate and the number of the Board of Trustees shall be reduced accordingly. At any time after such voting power shall have been so vested in the holders of Series A Preferred Shares and the Voting Preferred Shares, the secretary of the Trust may, and upon the written request of any holder of Series A Preferred Shares (addressed to the secretary at the principal office of the Trust) shall, call a special meeting of the holders of the Series A Preferred Shares and of the Voting Preferred Shares for the election of the two trustees to be elected by them as herein provided, such call to be made by notice similar to that provided in the Bylaws of the Trust for a special meeting of the shareholders or as required by law. If any such special meeting required to be called as above provided shall not be called by the secretary within 20 days after receipt of any such request, then any holder of Series A Preferred Shares may call such meeting, upon the notice above provided, and for that purpose shall have access to the stock records of the Trust. The trustees elected at any such special meeting shall hold office until the next annual meeting of the shareholders or special meeting held in lieu thereof if such office shall not have previously terminated as above provided. If any vacancy shall occur among the trustees elected by the holders of the Series A Preferred Shares and the Voting Preferred Shares, a successor shall be elected by the Board of Trustees, upon the nomination of the then-remaining trustee elected by the holders of the Series A Preferred Shares and the Voting Preferred Shares or the successor of such remaining trustee, to serve until the next annual meeting of the shareholders or special meeting held in place thereof if such office shall not have previously terminated as provided above. Notwithstanding any other provisions of this paragraph, in any vote for the election of additional trustees hereunder, the Series A Preferred Shares and Voting Preferred Shares beneficially owned by Security Capital Group Incorporated, a Delaware corporation, Security Capital Realty Incorporated, a Delaware corporation, any of their respective direct or indirect subsidiaries and any of their respective directors, officers or controlling stockholders (together, the "Restricted Parties"), shall be voted in ------------------ the same respective percentages as the Series A Preferred Shares and Voting Preferred Shares that are not beneficially owned by the Restricted Parties. The provisions in the preceding sentence shall cease and be of no further force and effect from and after such time, but only as long as, the Restricted Parties together no longer beneficially own in excess of 10% of the Trust's outstanding Common Shares. So long as any Series A Preferred Shares are outstanding, in addition to any other vote or consent of shareholders required by law or by the Restated Declaration of Trust, as amended, the affirmative vote of at least 66 2/3% of the votes entitled to be cast by the holders of the Series A Preferred Shares and the Voting Preferred Shares, at the time outstanding, acting as a single class regardless of series, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, shall be necessary for effecting or validating: (a) Any amendment, alteration or repeal of any of the provisions of the Restated Declaration of Trust or these Articles Supplementary that materially and adversely affects the voting powers, rights or preferences of the holders of the Series A Preferred Shares or the Voting Preferred Shares; provided, however, that the amendment of the provisions of the -------- ------- Restated Declaration of Trust so as to authorize or create or to increase the authorized amount of, any Fully Junior Shares, Junior Shares that are not senior in any respect to the Series A Preferred Shares, or any shares of any class ranking on a parity with the Series A Preferred Shares or the Voting Preferred Shares shall not be deemed to materially adversely affect the voting powers, rights or preferences of the holders of Series A Preferred Shares, and provided, further, that if any such amendment, -------- ------- alteration or repeal would materially and adversely affect any voting powers, rights or preferences of the Series A Preferred Shares or another series of Voting Preferred Shares that are not enjoyed by some or all of the other series otherwise entitled to vote in accordance herewith, the affirmative vote of at least 66 2/3% of the votes entitled to be cast by the holders of all series similarly affected, similarly given, shall be required in lieu of the affirmative vote of at least 66 2/3% of the votes entitled to be cast by the holders of the Series A Preferred Shares and the Voting Preferred Shares otherwise entitled to vote in accordance herewith; or (b) A share exchange that affects the Series A Preferred Shares, a consolidation with or merger of the Trust into another entity, or a consolidation with or merger of another entity into the Trust, unless in each such case each Series A Preferred Share (i) shall remain outstanding without a material and adverse change to its terms and rights or (ii) shall be converted into or exchanged for convertible preferred stock of the surviving entity having preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms or conditions of redemption thereof identical to that of a Series A Preferred Share (except for changes that do not materially and adversely affect the holders of the Series A Preferred Shares); or (c) The authorization or creation of, or the increase in the authorized amount of, any shares of any class or any security convertible into shares of any class ranking prior to the Series A Preferred Shares in the distribution of assets on any liquidation, dissolution or winding up of the Trust or in the payment of dividends; provided, however, that no such vote of the holders of Series A Preferred Shares - -------- ------- shall be required if, at or prior to the time when such amendment, alteration or repeal is to take effect, or when the issuance of any such prior shares or convertible security is to be made, as the case may be, provision is made for the redemption of all Series A Preferred Shares at the time outstanding. For purposes of the foregoing provisions of this Section 9, each Series A Preferred Share shall have one (1) vote per share, except that when any other series of Preferred Shares shall have the right to vote with the Series A Preferred Shares as a single class on any matter, then the Series A Preferred Shares and such other series shall have with respect to such matters one (1) vote per $25.00 of stated liquidation preference. Except as otherwise required by applicable law or as set forth herein, the Series A Preferred Shares shall not have any relative, participating, optional or other special voting rights and powers other than as set forth herein, and the consent of the holders thereof shall not be required for the taking of any trust action. Section 10. Limitation on Ownership. ----------------------- (a) Limitation. Notwithstanding any other provision of the terms ---------- of the Series A Preferred Shares, except as provided in the next sentence and in Section 10(b), no Person, or Persons acting as a group, shall at any time directly or indirectly acquire ownership of more than 25% of the outstanding Series A Preferred Shares. Any Series A Preferred Shares owned by a Person or Persons acting as a group in excess of such 25% shall be deemed "Excess Preferred Shares," ----------------------- except that any such shares in excess of 25% will not be considered Excess Preferred Shares if the 25% limitation is exceeded solely as a result of the Trust's redemption of Series A Preferred Shares, provided that thereafter any additional Series A Preferred Shares acquired by such Person or Persons acting as a group shall be considered Excess Preferred Shares. Within 10 days of becoming aware of the existence of Excess Preferred Shares (whether by notice on Schedule 13D or otherwise), the Trust shall redeem any and all Excess Preferred Shares by giving notice of redemption to the holder or holders thereof, unless, prior to the giving of such notice the holder shall have disposed of its ownership in the Excess Preferred Shares. Such notice shall set forth the number of Series A Preferred Shares constituting Excess Preferred shares, the redemption price and the place or places at which the certificates representing such Excess Preferred Shares are to be surrendered and such notice shall set forth the matters described in the following sentence. From and after the date of giving such notice of redemption, the Series A Preferred Shares called for redemption shall cease to be outstanding and the holder thereof shall cease to be entitled to dividends (other than dividends declared but unpaid prior to the notice of redemption), voting rights and other benefits with respect to such shares excepting the rights to payment of the redemption price determined and payable as set forth in the next two sentences. Subject to the limitation on payment set forth in the following sentence, the redemption price of each Excess Preferred Share called for redemption shall be the average daily per Series A Preferred Share closing sales price, if the Series A Preferred Shares are listed on a national securities exchange or, if not, are reported on the NASDAQ National Market System, and if the Series A Preferred Shares are not so listed or reported, shall be the mean between the average per Series A Preferred Share closing bid prices and the average per Series A Preferred Share closing asked prices, in each case during the 30 day period ending on the business day prior to the redemption date, or if there have been no sales on a national securities exchange or the NASDAQ National Market System and no published bid quotations and no published asked quotations with respect to Series A Preferred Shares during such 30 day period, the redemption price shall be the price determined by the Trustees in good faith. Unless the Trustees determine that it is in the interest of the Trust to make earlier payment of all of the amount determined as the redemption price per Series A Preferred Share in accordance with the preceding sentence, the redemption price may be payable, at the option of the Trustees, at any time or times up to, but not later than the earlier of (i) five years after the redemption date, or (ii) the liquidation of the Trust, in which latter event the redemption price shall not exceed an amount which is the sum of the per Series A Preferred Share distributions designated as liquidating distributions and return of capital distributions declared with respect to unredeemed Series A Preferred Shares of the Trust of record subsequent to the redemption date; and in any event, no interest shall accrue with respect to the period subsequent to the redemption date to the date of such payment. Nothing in this Section 10(a) shall preclude the settlement of any transaction entered into through the facilities of the New York Stock Exchange. (b) Exemptions. The limitation on ownership set forth in Section ---------- 10(a) shall not apply to the acquisition of Series A Preferred Shares by an underwriter in a public offering of Series A Preferred Shares. The Trustees, in their sole and absolute discretion, may exempt from the ownership limitation set forth in Section 10(a) certain designated Series A Preferred Shares owned by a person (other than any of the Restricted Parties) who has provided the Trustees with evidence and assurances acceptable to the Trustees that the qualification of the Trust as a real estate investment trust would not be jeopardized thereby. Section 11. Record Holders. The Trust and the Transfer Agent may deem and -------------- treat the record holder of any Series A Preferred Shares as the true and lawful owner thereof for all purposes, and neither the Trust nor the Transfer Agent shall be affected by any notice to the contrary. Section 12. Sinking Fund. The Series A Preferred Shares shall not be ------------ entitled to the benefits of any retirement or sinking fund. THIRD: The Series A Preferred Shares have been classified by the Board of Trustees under the authority contained in Article 2, Section 1, of the Restated Declaration of Trust dated June 19, 1991, as amended. FOURTH: Each undersigned Trustee acknowledges these Articles Supplementary to be the act of the Trust and further, as to all matters or facts required to be verified under oath, each such Trustee acknowledges that to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties of perjury. IN WITNESS WHEREOF, these Articles Supplementary have been duly executed by the undersigned Trustees this 22nd day of November, 1993. PROPERTY TRUST OF AMERICA By: /s/ C. Ronald Blankenship ------------------------- C. Ronald Blankenship, Trustee By: /s/ Calvin K. Kessler --------------------- Calvin K. Kessler, Trustee By: /s/ James H. Polk, III ---------------------- James H. Polk, III, Trustee By: /s/ John C. Schweitzer ---------------------- John C. Schweitzer, Trustee By: /s/ Alfredo Martinez-Urdal -------------------------- Alfredo Martinez-Urdal, Trustee By: /s/ John T. Kelley, III ----------------------- John T. Kelley, III, Trustee By: /s/ James A. Cardwell --------------------- James A. Cardwell, Trustee PROPERTY TRUST OF AMERICA First Certificate of Amendment of Restated Declaration of Trust Calvin K. Kessler, James H. Polk, III, John C. Schweitzer, James A Cardwell, John T. Kelley, III, C. Ronald Blankenship and Alfredo Martinez-Urdal, being all the present Trust of Property Trust of America, a Maryland real estate investment trust (the "Trust"), do hereby certify pursuant to the provisions of Article 6 of the Trust's Restated Declaration of Trust dated June 18, 1991, (the "Restated Declaration of Trust"), and in accordance with the applicable provisions of the General Corporation Law of Maryland: FIRST: That the Board of Trustees unanimously recommended that Article 2, Section 1 of the Restated Declaration of Trust be amended to increase the authorized number of Shares of Beneficial Interest, $1.00 par value ("Shares"), issuable by the Trust from 25,000,000 to 150,000,000; that only one class of Shares is issued and outstanding; that the following amendment will increase the aggregate par value of all Shares issuable by the Trust from $25,000,000 to $150,000,000; that the following amendment was duly adopted by the affirmative vote of more than two-thirds of the outstanding Shares entitled to vote at the Annual Meeting of Shareholders of the Trust duly called and held on June 2, 1992; that as of the record date for determination of Shareholders entitled to notice of, and to vote at, such meeting, 13,271,375 Shares were outstanding; that 8,847,584 Shares constitute the requisite two-thirds vote necessary to adopt such amendment; and that the number of Shares voted FOR such amendment was 10,220,917 and AGAINST such amendment was 2,017,443. Therefore, the first paragraph of Article 2, Section 1 of the Restated Declaration of Trust is amended to read as follows: "The units into which the beneficial interests in the Trust shall be divided shall be designated as Shares, with a par value of $1.00 per Share. Ownership of Shares shall be evidenced by certificates in such form as shall be determined by the Trustees from time to time in accordance with the laws of the State of Maryland. The owners of such Shares, who are the beneficiaries of the Trust, shall be designated as Shareholders. The certificates shall be negotiable and title thereto shall be transferred by assignment or delivery in all respects as a stock certificate of a Maryland corporation. The Trust shall have authority to issue an aggregate of 150,000,000 Shares. The consideration paid for the issuance of Shares shall be determined by the Trustees and shall consist of money paid or property actually received. The Trustees shall hold the money or property received for the issuance of Shares for the benefit of the owners of such Shares. Shares shall be issued until the full amount of the consideration has been received by the trust. The Trustees may authorize Share dividends or Share splits. All Shares issued hereunder shall be, when issued, fully paid, and no assessment shall ever be made upon the Shareholders." SECOND: That the Board of Trustees of the Trust have duly adopted the following amendment to the Restated Declaration of Trust pursuant to Section 8- 501 of the General Corporation Law of Maryland and Article 6, Section 2, of the Restated Declaration of Trust. Article 7, Section 10 of the restated Declaration of Trust shall be amended by (i) deleting the address set forth for John T. Kelley, III and inserting in its place 1790 Commerce Park Drive, El Paso, Texas 79912 and (ii) by deleting the name and address of Charles F. Jordan, III, 310 North Mesa, Suite 220, El Paso, Texas 79901 and inserting in its place the name and address of Alfredo Martinez-Urdal, 111 South Oregon, Suite 200, El Paso, Texas 79901. IN WITNESS WHEREOF, the undersigned, constituting all of the Trustees of the Trust, have executed this First Certificate of Amendment this 2nd day of June, 1992. /s/ Calvin K. Kessler --------------------- Calvin K. Kessler /s/ James E. Polk, III ---------------------- James E. Polk, III /s/ John C. Schweitzer ---------------------- John C. Schweitzer /s/ James A. Cardwell --------------------- James A. Cardwell /s/ John T. Kelley, III ----------------------- John T. Kelley, III /s/ C. Ronald Blankenship ------------------------- C. Ronald Blankenship /s/ Alfredo Martinez-Urdal -------------------------- Alfredo Martinez-Urdal STATE OF TEXAS ) ) COUNTY OF EL PASO ) On the 2nd day of June 1992, before me, the undersigned, a notary public in and for El Paso County, Texas, personally appeared Calvin K. Kessler, James H. Polk, III, John C. Schweitzer, James A. Cardwell, John T. Kelley, III, C. Ronald Blankenship and Alfredo Martinez-Urdal, all known to me to be the persons whose names are subscribed to the within instrument and acknowledged that they executed the same for the purpose therein contained. IN WITNESS WHEREOF, I hereunto set my hand and official seal. /s/ Joyce Mowad --------------------------- Notary Public In and For The State of Texas My commission expires: 9-27-93 - ---------- PROPERTY TRUST OF AMERICA RESTATED DECLARATION OF TRUST June 18, 1991 TABLE OF CONTENTS
PAGE ---- RECITALS............................................................................................. 1 DECLARATION.......................................................................................... 1 ARTICLE 1. THE TRUST................................................................................ 1 Section 1. Name.............................................................................. 1 Section 2. Resident Agent.................................................................... 2 Section 3. Nature of Trust................................................................... 2 Section 4. Purpose of the Trust.............................................................. 2 Section 5. Prohibited Activities............................................................. 3 Section 6. Conflicts of Interest............................................................. 6 ARTICLE 2. SHARES................................................................................... 6 Section 1. Shares, Certificates of Beneficial Interest....................................... 6 Section 2. Sale of Shares.................................................................... 8 Section 3. Offering of Shares................................................................ 8 Section 4. Treasury Shares................................................................... 9 Section 5. Transferability of Shares......................................................... 9 Section 6. Effect of Transfer of Shares or Death, Insolvency or Incapacity of Shareholders...................................................................... 9 Section 7. Shareholders' Disclosure; Trustees' Right to Refuse to Transfer Shares; Limitation on Holdings; Redemption of Shares.............................. 9 ARTICLE 3. SHAREHOLDERS............................................................................. 12 Section 1. Shareholders' Meetings............................................................ 12 Section 2. Voting............................................................................ 12 Section 3. Distributions..................................................................... 13 Section 4. Report to Shareholders............................................................ 13 Section 5. Inspection of Trust Books......................................................... 14 Section 6. Nonliability and Indemnification of Shareholders.................................. 14 Section 7. Notice of Nonliability............................................................ 15 ARTICLE 4. THE TRUSTEES............................................................................. 15 Section 1. Number, Terms of Office, Qualification and Compensation of the Trustees........... 15 Section 2. Resignation, Removal and Death.................................................... 15 Section 3. Vacancies......................................................................... 16 Section 4. Successor Trustees................................................................ 16 Section 5. Actions by and Meetings of Trustees............................................... 16
Page ---- Section 6. Title and Authority of Trustees................................................... 17 Section 7. The Advisor....................................................................... 17 Section 8. Powers of Trustees................................................................ 18 Section 9. Trustees' Right to Own Shares in Trust............................................ 20 Section 10. Transactions between Trustees and their Affiliates and the Trust.................. 20 Section 11. Non-liability of Trustees......................................................... 21 Section 12. Indemnification of Trustees....................................................... 21 Section 13. Persons Dealing with Trustees..................................................... 21 Section 14. Administrative Powers of Trustees................................................. 22 Section 15. Election of Officers.............................................................. 22 Section 16. (Omitted)......................................................................... 22 Section 17. Committees of Trustees, Delegation of Powers and Duties to Committees, Trustees, Officers and Employees.................................................. 22 ARTICLE 5. DURATION AND TERMINATION OF TRUST........................................................ 23 Section 1. Termination of Trust.............................................................. 23 Section 2. Organization as a Corporation..................................................... 23 Section 3. Merger............................................................................ 24 Section 4. Duration of Trust................................................................. 24 ARTICLE 6. AMENDMENTS............................................................................... 24 Section 1. Amendment by Shareholders......................................................... 24 Section 2. Amendment by Trustees............................................................. 24 Section 3. Requirements of Maryland Law...................................................... 24 ARTICLE 7. MISCELLANEOUS............................................................................ 24 Section 1. Construction...................................................................... 24 Section 2. Headings for Reference Only....................................................... 24 Section 3. Filing and Recording.............................................................. 24 Section 4. Applicable Law.................................................................... 24 Section 5. Execution and Effect of Restated Declaration of Trust............................. 25 Section 6. Certifications.................................................................... 25 Section 7. (Omitted)......................................................................... 25 Section 8. Severability...................................................................... 25 Section 9. (Omitted)......................................................................... 26 Section 10. Names and Addresses of Trustees................................................... 26 Section 11. Bylaws............................................................................ 26 Section 12. Recordation....................................................................... 26
Page ---- ARTICLE 8. LIMITATION OF LIABILITY FOR TRUSTEES AND OFFICERS; INDEMNIFICATION........................................................................ 26 Section 1....................................................................................... 26 Section 2....................................................................................... 27 Section 3....................................................................................... 27 Section 4....................................................................................... 27 Section 5....................................................................................... 27 Section 6....................................................................................... 27
PROPERTY TRUST OF AMERICA RESTATED DECLARATION OF TRUST The Declaration of Trust of Property Trust of America made in El Paso, Texas, January 18, 1963, as amended and restated June 10, 1974, and as subsequently amended June 2, 1981, June 29, 1982, September 6, 1983, July 2, 1984, June 12, 1987, May 6, 1988 and May 5, 1989, is hereby amended and restated in its entirety as of June 18, 1991, as follows: RECITALS 1. This real estate investment trust was created under the name of El Paso Real Estate Investment Trust by an original Declaration of Trust dated January 18, 1963, as amended and restated from time to time thereafter. The name of the Trust was changed to Property Trust of America on April 1, 1970. 2. The Trustees desire that this Trust qualify as a "real estate investment trust" under the provisions of the Internal Revenue Code of 1954 so long as such qualification, in the opinion of the Trustees, is advantageous to the shareholders. 3. This Trust is a real estate investment trust under the laws of the State of Maryland. DECLARATION NOW, THEREFORE, the Trustees hereby declare that they assume the duties of Trustees hereunder and hold all assets of the Trust presently existing and hereafter to be received, and all rents, income, profits and gains therefrom, from whatever source derived, in trust, for the Shareholders in accordance with the terms and conditions hereinafter provided. ARTICLE 1. THE TRUST SECTION 1. NAME. The Trust created by this Declaration of Trust is herein referred to as the "Trust" and shall be known by the name "PROPERTY TRUST OF AMERICA." So far as may be practicable, legal and convenient, the affairs of the Trust shall be conducted and transacted under that name, which name shall not refer to the Trustees individually or personally or to the beneficiaries or Shareholders of the Trust, or to any officers, employees or agents of the Trust. An assumed name certificate setting forth such name has been filed in the manner prescribed by law. Under circumstances in which the Trustees determine that the use of the name "Property Trust of America" is not practicable, legal or convenient, they may as appropriate use their names with suitable reference to their trustee status, or some other suitable designation, or they may adopt another name under which the Trust may hold property or operate in any jurisdiction which name shall not, to the knowledge of the Trustees, refer to beneficiaries or Shareholders of the Trust. Legal title to all the properties subject from time to time to this Declaration of Trust shall be transferred to, vested, and held by the Trustees as joint tenants with right of survivorship as Trustees of this Trust, except that the Trustees shall have the power to cause legal title to any property of this Trust to be held by and/or in the name of one or more of the Trustees, or any other person as nominee, on such terms, in such manner, and with such powers as the Trustees may determine, provided that the interest of the Trust therein is appropriately protected. The Trust shall have the authority to operate under an assumed name or names in such state or states or any political subdivision thereof where it would be legal, practical or convenient to operate in the name of the Trust. The Trust shall have the authority to file such assumed name certificates or other instruments in such places as may be required by applicable law to operate under such assumed name or names. SECTION 2. RESIDENT AGENT. The name and address of the Resident Agent of the Trust in the State of Maryland is The Corporation Trust Incorporated, First Maryland Building, 25 South Charles Street, Baltimore, Maryland 21201. The Trust may have such other offices or places of business within or without the State of Maryland as the Trustees may from time to time determine. SECTION 3. NATURE OF TRUST. The Trust is a real estate investment trust under the laws of the State of Maryland. The Trust is not intended to be, shall not be deemed to be, and shall not be treated as, a general partnership, limited partnership, joint stock association or corporation. The Shareholders shall be beneficiaries in that capacity in accordance with the rights conferred upon them hereunder. SECTION 4. PURPOSE OF THE TRUST. (a) The Trust is formed pursuant to the provisions of, and shall have all the powers provided in, Title 8, General Corporation Law of Maryland, as same may be amended from time to time. Its purpose is to invest in notes, bonds and other obligations secured by mortgages on real property and to purchase, hold, lease, manage, sell, exchange, develop, subdivide and improve real property and interests in real property, and in general, to carry on any other acts in connection with the foregoing and to have and exercise all powers conferred by the laws of the State of Maryland upon real estate investment trusts formed under the laws of the State of Maryland, and to do any or all of the things herein set forth to the same extent as natural persons might or could do. In addition, it is intended that the business of the Trust will be conducted so that the Trust will qualify (so long as such qualification, in the opinion of the Trustees, is advantageous to the Shareholders) as a "real estate investment trust" as defined in Part II, Subchapter M of Chapter 1 of the Internal Revenue Code of 1954, as now enacted and as it may be hereafter amended. (b) The Trust shall not be primarily engaged in investing, reinvesting, or trading in securities. In addition, the Trust will not engage in margin transactions or short sales; invest in puts, calls, straddles, spreads or any combination thereof; invest or trade in commodities or commodity contracts. The Trust shall invest primarily in nonspeculative, high quality, easily tradeable securities consistent with prudent investment standards and only upon the advice and recommendation of its investment advisor. SECTION 5. PROHIBITED ACTIVITIES. The Trust shall also conform to the following restrictions and prohibitions in its operations: (a) The Trust shall not invest more than ten (10%) percent of its total assets in unimproved real property, excluding property which is being developed or will be developed within a reasonable period. (b) The Trust shall not invest in junior mortgage loans unless, by appraisal or other method that the Independent Trustees determine, (a) the capital invested in such mortgage loan is adequately secured on the basis of the equity of the borrower in the property underlining such investment and the ability of the borrower to repay the mortgage loan, or (b) such mortgage loan of the Trust is a financing device entered into by the Trust to establish the priority of its capital investment over the capital invested by others investing with the Trust in a real estate project. The Independent Trustees shall determine that any such junior mortgage loan is not and may not be made subordinate to a mortgage held by the Advisor, an affiliate of the Advisor, or a Trustee of the Trust. "Independent Trustee" means a trustee who (i) is not affiliated, directly or indirectly, with an Advisor of the Trust, whether by ownership of, ownership interest in, employment by, any material business or professional relationship with, or service as an officer, or director of, such Advisor or a business entity which is an affiliate of such Advisor, (ii) is not serving as a Trustee or director for more than three real estate investment trusts organized by a sponsor of the Trust, and (iii) performs no other services for the Trust, except as Trustee. An indirect relationship shall include circumstances in which a member of the immediate family of a Trustee has one of the foregoing relationships with the Trust or with an Advisor of the Trust. (c) The aggregate borrowing of the Trust, secured or unsecured, shall not be unreasonable in relation to the net assets of the Trust and shall be reviewed by the Trustees at least quarterly. The maximum amount of such borrowing in relation to the net assets shall, in the absence of a satisfactory showing that a higher level of borrowing is appropriate, not exceed 300%. Any excess in borrowing over such 300% level shall be approved by a majority of the Independent Trustees and disclosed to Shareholders in the next quarterly report of the Trust, along with justification for such excess. The term "net assets" means the total assets (other than intangibles) at cost, before deducting depreciation or other non-cash reserves, less total liabilities, calculated at least quarterly on a basis consistently applied. (d) The Trust shall issue no warrants or options to purchase its securities to the advisor of the Trust or any person affiliated with the advisor, or to any other persons at exercise prices less than the fair market value of such securities on the date of the grant. (e) The Trust shall not compensate any Independent Contractor employed by the Trust at a rate higher than the going rate, if any, for like services in the community or locale in which such services are performed, nor shall any such Independent Contractor in any event be compensated at a rate higher than a reasonable rate for services performed for the Trust. (f) The Trust shall not issue debt securities unless the historical debt service coverage (in the most recently completed fiscal year) as adjusted for known changes is sufficient to properly service that higher level of debt. (g) The Trust may not invest in or make mortgage loans unless an appraisal is obtained concerning the underlying property. In cases in which a majority of the Independent Trustees so determine, and in all cases in which the transaction is with the Advisor, Trustee, sponsor or affiliates thereof, such an appraisal must be obtained from an independent, qualified appraiser concerning the underlying property. This appraisal shall be maintained in the Trust's records for at least five years, and shall be available for inspection and duplication by any shareholder. In addition to the appraisal, a mortgagee's or owner's title insurance policy or commitment as to the priority of the mortgage or the condition of the title must be obtained. Further, the Advisor and Trustees shall observe the following policies in connection with investing in or making mortgage loans: (1) the Trust shall not make or invest in mortgage loans, including construction loans, on any one property if the aggregate amount of all mortgage loans outstanding on the property, including the loans of the Trust, would exceed an amount equal to 85% of the appraised value of the property as determined by appraisal unless substantial justification exists because of the presence of other underwriting criteria; and (2) the Trust shall not make or invest in any mortgage loans that are subordinate to any mortgage or equity interest of the Advisor, Trustees, sponsors or affiliates of the Trust. (h) Total Operating Expenses of the Trust shall not exceed in any fiscal year of the greater of: (1) two percent (2%) of the average of the aggregate book value of the assets of the Trust invested, directly or indirectly, in equity interests in and loans secured by real estate, before reserves for depreciation or bad debts or other similar non-cash reserves, computed by taking the average of such values at the end of each month during such period; or (2) twenty-five percent (25%) of the Net Income of the Trust for such year. "Net Income" shall mean total revenues applicable to such year, less the expenses applicable to such year other than additions to reserves for depreciation or bad debts or other similar non-cash reserves. For the purposes of this section, Net Income shall exclude the gain from the sale of the Trust's assets. "Total Operating Expenses" shall mean all operating, general, and administrative expenses of the Trust as determined under generally accepted accounting principles, except the expenses of raising capital, interest payments, taxes, non-cash expenditures, incentive fees paid to the Advisor and costs related directly to asset acquisition, operation and disposition. The Independent Trustees shall have the fiduciary responsibility of limiting such expenses to amounts that do not exceed such limitations unless such Independent Trustees shall have made a finding that, based on such unusual and non-recurring factors which they deem sufficient, a higher level of expenses is justified for such year. Any such findings and the reasons in support thereof shall be reflected in the minutes of the meeting of the Trustees. Within sixty (60) days after the day of any fiscal quarter of the Trust for which Total Operating Expenses (for the twelve (12) months then ended) exceeded 2% of average invested assets (as calculated in Article 1, Section 5(h)(1) above) or twenty-five percent of Net Income, whichever is greater, there shall be sent to the shareholders of the Trust a written disclosure of such fact, together with an explanation of the facts the Independent Trustees considered in arriving at the conclusion that such higher operating expenses were justified. In the event that the Independent Trustees do not determine such excess expenses are justified, the Advisor shall reimburse the Trust for the amount by which the aggregate annual expenses paid or incurred by the Trust exceeded the limitations herein provided. (i) The Trust shall not invest in real estate contracts of sale, otherwise known as land sale contracts, unless such contracts of sale are in recordable form and are appropriately recorded in the chain of title. SECTION 6. CONFLICTS OF INTEREST. The Trust shall not purchase property from a sponsor, Advisor, Trustee, or affiliates thereof, unless a majority of the Trustees, including a majority of the Independent Trustees not otherwise interested in such transaction, approve the transaction as being fair and reasonable to the Trust and at a price to the Trust no greater than the cost of the asset to such sponsor, Advisor, Trustee or affiliates thereof, or, if the price to the Trust is in excess of such cost, that substantial justification for such excess exists and such excess is not unreasonable. In no event shall the cost of such asset to the Trust exceed its current appraised value. (a) The Trust shall not sell property to a sponsor, Advisor, Trustee or affiliates thereof. (b) The Trust may not make loans to or borrow money from the sponsor, Advisor, Trustee or affiliates thereof, unless a majority of the Trustees (including a majority of the Independent Trustees) not otherwise interested in such transaction approve the transaction as being fair, competitive, and commercially reasonable and no less favorable to the Trust than loans between unaffiliated lenders and borrowers under the same circumstances. (c) The Trust shall not invest in joint ventures with the sponsor, Advisor, Trustee or affiliates thereof, unless a majority of Trustees (including a majority of the Independent Trustees) not otherwise interested in such transactions, approve the transaction as being fair and reasonable to the Trust and shall be on substantially the same terms and conditions as though received by the other joint venturers. (d) All other transactions between the Trust and the sponsor, Advisor, Trustee or affiliates thereof, shall require approval by a majority of the Trustees (including a majority of the Independent Trustees) not otherwise interested in such transactions as being fair and reasonable to the Trust and on terms and conditions not less favorable to the Trust than those available from unaffiliated third parties. ARTICLE 2. SHARES SECTION 1. SHARES, CERTIFICATES OF BENEFICIAL INTEREST. The units into which the beneficial interests in the Trust shall be divided shall be designated as Shares, with a par value of $1.00 per Share. Ownership of Shares shall be evidenced by certificates in such form as shall be determined by the Trustees from time to time in accordance with the laws of the State of Maryland. The owners of such Shares, who are the beneficiaries of the Trust, shall be designated as Shareholders. The certificates shall be negotiable and title thereto shall be transferred by assignment or delivery in all respects as a stock certificate of a Maryland corporation. The Trust shall have authority to issue an aggregate of 25,000,000 Shares. The consideration paid for the issuance of Shares shall be determined by the Trustees and shall consist of money paid or property actually received. The Trustees shall hold the money or property received for the issuance of Shares for the benefit of the owners of such Shares. Shares shall not be issued until the full amount of the consideration has been received by the Trust. The Trustees may authorize Share dividends or Share splits. All Shares issued hereunder shall be, when issued, fully paid, and no assessment shall ever be made upon the Shareholders. The Shareholders shall have no legal title or interest in the property of the Trust and no right to a partition thereof or to an accounting during the continuance of the Trust but only to the rights expressly provided in the Declaration of Trust. The Board of Trustees may classify or reclassify any unissued Shares from time to time by setting or changing the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, or terms or conditions of redemption of the Shares by filing articles supplementary pursuant to the applicable laws of the State of Maryland. The Board of Trustees is authorized to issue from the authorized but unissued Shares of the Trust Preferred Shares in series and to establish from time to time the number of Preferred Shares to be included in each such series and to fix the designation and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption of the shares of each series. Except for Shares so classified or reclassified and any Preferred Shares issued hereunder, all other Shares shall be designated as Common Shares, each of which Common Shares shall be equal in all respects to every other Common Share. The authority of the Board with respect to each unissued series shall include, but not be limited to, determination of the following: (a) The number of Shares constituting that series and the distinctive designation of that series; (b) The dividend rate on the Shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on Shares of that series; (c) Whether that series shall have voting rights, in addition to the voting rights provided by law, if any, and, if so, the terms of such voting rights; (d) Whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provisions for adjustment of the conversion rate in such events as the Board of Trustees shall determine; (e) Whether or not the Shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption which amount may vary under different conditions and at different redemption rates; provided however, that any proposed issuance of Shares which are redeemable at the option of the holder shall be approved by Shareholders holding a majority of the Trust's outstanding Shares of all classes; (f) Whether that series shall have a sinking fund for the redemption or purchase of Shares of that series, and, if so, the terms and amount of such sinking fund; (g) The rights of the Shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Trust, and the relative rights of priority, if any, of payment of Shares of that series; (h) Any other relative rights, preferences and limitations of that series. SECTION 2. SALE OF SHARES. The Trustees, in their discretion, may from time to time issue or sell or contract to issue or sell, Shares, including Shares held in the treasury, to such party or parties and for money or property actually received, as allowed by the laws of the State of Maryland, at such time or times, and on such terms as the Trustees may deem appropriate. In connection with any issuance of Shares, the Trustees, in their discretion, may provide for the issuance of fractional Shares or may provide for the issuance of scrip for fractions of Shares and determine the terms of such scrip including, without limiting the generality of the foregoing, the time within which any such scrip must be surrendered in exchange for Shares and the right, if any, of holders of scrip upon the expiration of the time so fixed, the right, if any, to receive proportional distributions, and the right, if any, to redeem scrip for cash, or the Trustees may, in their discretion, or if they see fit at the option of each holder, provide in lieu of scrip for the adjustment of fractions in cash. The Shareholders shall have no preemptive rights of any kind whatsoever (preemptive rights hereby defined as including, but not limited to, the right to purchase or subscribe for or otherwise acquire any Shares of the Trust of any class, whether now or hereafter authorized, or any securities or obligations convertible into or exchangeable for, or any right, warrant or option to purchase such Shares whether or not such Shares are issued and/or disposed of for cash, property, or other consideration of any kind). Options or warrants issued by the Trust to purchase Shares shall not be exercisable later than five (5) years from the date of issuance thereof." SECTION 3. OFFERING OF SHARES. The Trustees are authorized to cause to be made from time to time offerings of the Shares of the Trust to the public at public offering prices deemed appropriate. For this purpose, the Trustees are authorized to enter into a contract with an underwriter or distributing company (hereinafter referred to as the Distributor), which shall be granted such commissions for its services as may be agreed upon by the parties. Any such contract shall be for an initial term of not more than two years, and thereafter terminable at will by the Trustees upon 60 days written notice to the Distributor. Such contract shall not be assignable by the Distributor, without the written consent of the Trust. SECTION 4. TREASURY SHARES. The Trust may repurchase or otherwise acquire its own shares at the prevailing market price and for this purpose the Trust may create and maintain such reserves as are deemed necessary and proper. Shares issued hereunder and purchased or otherwise acquired for the account of the Trust shall not, so long as they belong to the Trust, either receive distributions (except that they shall be entitled to receive distributions payable in Shares of the Trust) or be voted at any meeting of the Shareholders. Such Shares may, in the discretion of the Trustees, be held in the treasury and be disposed of by the Trustees at such time or times, to such party or parties, and for such consideration, as the Trustees may deem appropriate. SECTION 5. TRANSFERABILITY OF SHARES. Shares in the Trust shall be transferable in accordance with the procedure prescribed from time to time in the Trust Bylaws. The persons in whose name the Shares are registered on the books of the Trust shall be deemed the absolute owners thereof and, until a transfer is effected on the books of the Trust, the Trustees shall not be affected by any notice, actual or constructive, of any transfer. Any issuance, redemption or transfer of Trust Shares which would operate to disqualify the Trust as a real estate investment trust for purposes of Federal income tax, is null and void, and such transaction will be canceled when so determined in good faith by the Trustees. SECTION 6. EFFECT OF TRANSFER OF SHARES OR DEATH, INSOLVENCY OR INCAPACITY OF SHAREHOLDERS. Neither the transfer of Shares nor the death, insolvency or incapacity of any Shareholder shall operate to dissolve or terminate the Trust, nor shall it entitle any transferee, legal representative or other person to a partition of the property of the Trust or to an accounting. SECTION 7. SHAREHOLDERS' DISCLOSURE; TRUSTEES' RIGHT TO REFUSE TO TRANSFER SHARES; LIMITATION ON HOLDINGS; REDEMPTION OF SHARES. (A) SHAREHOLDERS' DISCLOSURE. The shareholders shall upon demand disclose to the Trustees in writing such information with respect to direct and indirect ownership of the Shares as the Trustees deem necessary to comply with the real estate investment trust provisions of the Internal Revenue Code (the "REIT Tax Provisions") or to comply with the requirements of any taxing authority or governmental agency. The REIT Tax Provisions shall mean Parts II and III of Subchapter M of Chapter I of Subtitle A of the Internal Revenue Code of 1954, as now enacted or hereafter amended, and other provisions of the Code referred to or incorporated in, or referring to or incorporating any other provisions of said Parts II or III, or similar provisions of successor statutes, and applicable regulations under and rulings with respect to the aforesaid provisions of said Code. (B) RIGHT TO REFUSE TO TRANSFER SHARES. Whenever it is deemed by them to be reasonably necessary to protect the tax status of the Trust as a real estate investment trust, the Trustees may require a statement or affidavit from each proposed transferee of Shares setting forth the number of Shares already owned by him and any related person specified in the form prescribed by the Trustees for that purpose. If, in the opinion of the Trustees, the proposed transfer may jeopardize the qualification of the Trust as a real estate investment trust, the Trustees shall have the right, but not a duty, to refuse to transfer the Shares to the proposed transferee. All contracts for the sale or other transfer of Shares shall be subject to this provision. (C) LIMITATION ON HOLDINGS. Notwithstanding any other provisions of this Restated Declaration of Trust to the contrary and subject to the provisions of Section 7(e), no person, or persons acting as a group, shall at any time directly or indirectly acquire ownership in the aggregate of more than 9.8% of the outstanding Shares of the Trust (the "Limit"). Shares owned by a person or group of persons in excess of the Limit at any time shall be deemed "Excess Shares." For the purpose of this Section 7, the term "ownership" shall be defined in accordance with or by reference to the qualification requirements of the REIT Tax Provisions and shall also mean ownership as defined under Rule 13(d) promulgated by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 (the "1934 Act"), and the term "group" shall have the same meaning as that term has for purposes of such Rule 13(d). All Shares which any person has the right to acquire upon exercise of outstanding rights, options and warrants, and upon conversion of any securities convertible into Shares, if any, shall be considered outstanding for purposes of the Limit if such inclusion will cause such person to own more than the Limit. The term "securities" shall mean any stock, shares, voting trust certificates, bonds, debentures, notes or other evidences of indebtedness or ownership or in general any instruments commonly known as "securities" or any certificates of interest, shares or participations in temporary or interim certificates for, receipts for, guarantees of, or warrants, options or rights to subscribe to, purchase or acquire any of the foregoing. The term "person" shall mean and include individuals, corporations, limited partnerships, general partnerships, joint stock companies or associations, joint ventures, associations, consortia, companies, trusts, banks, trust companies, land trusts, common law trusts, business trusts, or other entities and governments and agencies and political subdivisions thereof. (D) REDEMPTION OF EXCESS SHARES. The Trustees, upon 30 days prior written notice to the holder thereof of its intention to do so, may at any time or times thereafter redeem any or all Shares that are Excess Shares (including Shares that remain or become Excess Shares because of the decrease in outstanding Shares resulting from such redemption) by giving written notice of redemption to the holder thereof, unless, prior to the giving of such written notice of redemption, the holder thereof shall have disposed of its ownership in the Shares that are Excess Shares; and from and after the date of giving of such notice of redemption ("redemption date"), the Shares called for redemption shall cease to be outstanding and the holder thereof shall cease to be entitled to dividends, voting rights and other benefits with respect to such Shares excepting only the right to payment by the Trust of the redemption price determined and payable as set forth in the following two sentences. Subject to the limitation on payment set forth in the following sentence, the redemption price of each Excess Share called for redemption shall be the average daily per Share closing sales price, if the Shares of the Trust are listed on a national securities exchange or, if not, are reported on the NASDAQ National Market System, and if the Shares are not so listed or reported, shall be the mean between the average per Share closing bid prices and the average per Share closing asked prices, in each case during the 30 day period ending on the business day prior to the redemption date, or if there have been no sales on a national securities exchange or the NASDAQ National Market System and no published bid quotations and no published asked quotations with respect to Shares of the Trust during such 30 day period, the redemption price shall be the price determined by the Trustees in good faith. Unless the Trustees determine that it is in the interest of the Trust to make earlier payment of all of the amount determined as the redemption price per Share in accordance with the preceding sentence, the redemption price may be payable, at the option of the Trustees, at any time or times up to, but not later than, the earlier of (i) five years after the redemption date, or (ii) the liquidation of the Trust, in which latter event the redemption price shall not exceed an amount which is the sum of the per Share distributions designated as liquidating distributions and return of capital distributions declared with respect to unredeemed Shares of the Trust of record subsequent to the redemption date; and in any event, no interest shall accrue with respect to the period subsequent to the redemption date to the date of such payment. (E) EXEMPTIONS. The Limit set forth in Section 7(c) shall not apply to the acquisition of Shares or rights, options or warrants for or securities convertible into Shares by an underwriter in a public offering or in any transaction involving the issuance by the Trust of Shares or rights, options or warrants for or securities convertible into Shares, in which a majority of the Trustees determine that the underwriter or other person or party initially acquiring same will make a timely distribution thereof to or among other holders such that, following such distribution, none of such Shares will be Excess Shares. The Trustees in their discretion may exempt from the Limit ownership of certain designated Shares while owned by a person who has provided the Trustees with evidence and assurances acceptable to the Trustees that the qualification of the Trust as a real estate investment trust would not be jeopardized thereby. (F) DISQUALIFYING ACQUISITION. Notwithstanding any other provision of this Restated Declaration of Trust to the contrary, any purported acquisition of Shares of the Trust which would result in the disqualification of the Trust as a real estate investment trust shall be null and void, unless the Trustees, prior to such acquisition, shall have determined that the disqualification of the Trust is advantageous to shareholders. (G) OTHER ACTION. Nothing contained in this Section 7 or in any other provision of this Restated Declaration of Trust shall limit the authority of the Trustees to take such other action as they deem necessary or advisable to protect the Trust and the interests of the shareholders by preservation of the Trust's qualification as a real estate investment trust under the REIT Tax Provisions (so long as such qualification, in the opinion of the Trustees, is advantageous to the shareholders). The Trustees may in their discretion place a statement in such form as they may deem appropriate on the face or back of certificates for Trust Shares referring to the provisions of this Section 7. (H) SEVERABILITY. If any provision of this Section 7 or any application of any such provision is determined to be invalid by any Federal or state court having jurisdiction over the issues, the validity of the remaining provisions shall not be affected and other applications of such provision shall be affected only to the extent necessary to comply with the determination of such court. To the extent this Section 7 may be inconsistent with any other provision of this Restated Declaration of Trust, this Section 7 shall be controlling. (I) ENFORCEMENT. The Board of Trustees is specifically authorized to seek equitable relief, including an injunction, to enforce the provisions of this Section 7. (J) NON-WAIVER. No delay or failure on the part of the Trust or the Board of Trustees in exercising any rights hereunder shall operate as a waiver of any rights of the Trust, except to the extent especially waived in writing by the Trust. ARTICLE 3. SHAREHOLDERS SECTION 1. SHAREHOLDERS' MEETINGS. There shall be an annual meeting of the Shareholders at such time and place, either within or without the State of Maryland, as the Trustees shall prescribe, at which all Trustees shall be elected or re-elected and any other proper business may be conducted. The annual meeting of Shareholders shall be held upon reasonable notice and within a reasonable period (not less than 30 days) following delivery of the annual report, but in any event such meeting must be held within six months after the end of each full fiscal year. Special meetings of Shareholders may be called by a majority of the Trustees, a majority of the Independent Trustees, or by any officer of the Trust, and shall be called upon the written request of Shareholders holding in the aggregate not less than ten percent (10%) of the outstanding Shares of the Trust entitled to vote in the manner provided in the Bylaws. If there shall be no Trustees, the officers of the Trust shall promptly call a special meeting of the Shareholders for the election of successor Trustees. Written or printed notice stating the place, date and hour of the Shareholders' meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than 10 nor more than 50 days before the day of the meeting either personally or by mail, by or at the direction of the Trustees or any officer or person calling the meeting, to each Shareholder of record entitled to vote in such meeting. No other business than that which is stated in the call for a special meeting shall be considered at such meeting. A majority of the outstanding Shares entitled to vote at any meeting represented in person or by proxy shall constitute a quorum at any such meeting. Whenever any action is to be taken by the Shareholders, it shall, except as otherwise authorized by law or this Declaration of Trust or the Bylaws, be authorized by a majority of the votes cast at a meeting of Shareholders by holders of Shares entitled to vote thereon. SECTION 2. VOTING. At each meeting of the Shareholders, each Shareholder entitled to vote shall have the right to vote, in person or by proxy, the number of shares of the Trust owned by him upon each matter upon which the vote of the Shareholders is taken. In any election in which more than one vacancy is to be filled, each Shareholder may vote the number of shares of the Trust owned by him for each vacancy to be filled. There shall be no right of cumulative voting. Each outstanding Share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of Shareholders, except (a) to the extent that the Declaration of Trust or articles supplementary (to the extent permitted by Maryland law) limit or deny voting rights to the holders of the Shares of any class or series, or (b) as otherwise provided by Maryland law. SECTION 3 DISTRIBUTIONS. The Trustees shall (and may more frequently) declare and pay within thirty (30) days after the end of each fiscal year period in each calendar year after the calendar year in which the Trust is created, to the Shareholders as near to all of the net income of the Trust, including capital gains, as the Trustees shall deem prudent but in any event, shall, from time to time, declare and pay to the Shareholders such distributions as may be necessary to continue to qualify the Trust as a Real Estate Investment Trust, as defined in Part II, Subchapter M of Chapter 1 of the Internal Revenue Code of 1954, as now enacted, and as subsequently amended, (so long as such qualification, in the opinion of the Trustees, is in the best interest of the Shareholders) as well as such additional distributions as the Trustees may in their discretion declare. Each distribution when made shall be accompanied by a written statement indicating, to the fullest extent practicable, the sources of the distribution. The Trustees may declare and pay dividends or other distributions to those who are Shareholders as of a specified record date or, alternatively, to those who are or were Shareholders at any time during any quarter or year or other applicable period on the basis that each Shareholder shall receive, with respect to each Share, that proportion of such dividend or distribution per Share that the number of days each Share is owned of record by such Shareholder during such quarter, year, or other applicable period, bears to the total number of days in such quarter, year, or other applicable period. SECTION 4. REPORT TO SHAREHOLDERS. The Trust shall prepare, file and deliver to its Shareholders an annual report concerning its operations for the preceding fiscal year containing financial statements prepared in accordance with generally accepted accounting principles which are audited and reported on by independent certified public accountants. The Trust shall include in its annual report to Shareholders (i) the ratio of the costs of raising capital during the period to the capital raised, and (ii) the aggregate amount of advisory fees and the aggregate amount of other fees paid to the Advisor and all affiliates of the Advisor by the Trust and including fees or charges paid to the Advisor and all affiliates of the Advisor by third parties doing business with the Trust. The Trust shall also include in its annual report, separately stated, full disclosure of all material terms, factors, and circumstances surrounding any and all transactions involving the Trust, and the Trustees, Advisors, sponsors and/or affiliates thereof occurring in the year for which the annual report is made. Independent Trustees are specifically charged with a duty to examine and comment in the report on the fairness of such transactions. Annual reports shall be mailed or delivered to each Shareholder as of a record date after the end of such fiscal year and each holder of other publicly held securities of the Trust within 90 days after the end of the fiscal year to which it relates. SECTION 5. INSPECTION OF TRUST BOOKS. The books and records of the Trust shall be open to inspection upon the written demand of a Shareholder at any reasonable time for a purpose reasonably related to his interests as a Shareholder and shall be exhibited at any time when required by the demand at any Shareholders' meeting of 10 percent of the Shares represented at the meeting. Such inspection by a Shareholder may be made in person or by agent or attorney and the right of inspection includes the right to make extracts. Demand of inspection other than at a Shareholders' meeting shall be made in writing upon the President, or the Secretary, of the Trust. The duly authorized officials of any state shall have the same right of inspection as a Shareholder. SECTION 6. NONLIABILITY AND INDEMNIFICATION OF SHAREHOLDERS. Shareholders shall not be personally or individually liable in any manner whatsoever for any debt, act, omission or obligation incurred by the Trust or the Trustees and shall be under no obligation to the Trust or its creditors with respect to such Shares other than the obligation to pay to the Trust the full amount of the consideration for which the Shares were issued or to be issued. The Shareholders shall not be liable to assessment and the Trustees shall have no power to bind the Shareholders personally. The Trust shall indemnify and hold each Shareholder harmless from and against all claims and liabilities, whether they proceed to judgment or are settled or otherwise brought to a conclusion, to which such Shareholder may become subject by reason of his being or having been a Shareholder, and shall reimburse such Shareholder for all legal and other expenses reasonably incurred by him in connection with any such claim or liability. Provided, however, that no such Shareholder shall be indemnified or reimbursed if such claim, obligation or liability is finally adjudged by a competent court of law to have arisen out of the Shareholder's bad faith, willful misconduct or gross negligence, and provided further, that such Shareholder must give prompt notice as to any such claims or liabilities or suits and must take such action as will permit the Trust to conduct the defense thereof. The rights accruing to a Shareholder under this Section 6 shall not exclude any other right to which such Shareholder may be lawfully entitled, nor shall anything herein contained restrict the right of the Trust to indemnify or reimburse a Shareholder in any appropriate situation even though not specifically provided herein; provided, however, that the Trust shall have no liability to reimburse Shareholders for taxes assessed against them by reason of their ownership of Shares, nor for any losses suffered by reason of changes in the market value of securities of the Trust. No amendment to the Declaration of Trust increasing or enlarging the liability of the Shareholders shall be made without the unanimous written consent of all of the Shareholders. SECTION 7. NOTICE OF NONLIABILITY. The Trustees shall use every reasonable means to assure that all persons having dealings with the Trust shall be informed that the private property of the Shareholders and the Trustees shall not be subject to claims against and obligations of the Trust to any extent whatever. The Trustee shall cause to be inserted in every written agreement, undertaking or obligation made or issued on behalf of the Trust, an appropriate provision to the effect that the Shareholders and the Trustees shall not be personally liable thereunder, and that all parties concerned shall look solely to the Trust Property for the satisfaction of any claim thereunder, and appropriate reference shall be made to this Declaration of Trust. The omission of such a provision from any such agreement, undertaking or obligation, or the failure to use any other means of giving such notice, shall not, however, render the Shareholders or the Trustees personally liable. ARTICLE 4. THE TRUSTEES SECTION 1. NUMBER, TERMS OF OFFICE, QUALIFICATION AND COMPENSATION OF THE TRUSTEES. There shall be not less than three nor more than fifteen Trustees (referred to as the "Trustees" or the "Board of Trustees"). The number of Trustees shall be determined from time to time by resolution of the Trustees. The term of office of each Trustee shall be one year and until the election and qualification of his successor. Trustees may succeed themselves in office. Trustees shall be individuals who are at least 21 years old and not under legal disability. No person shall qualify as a Trustee until he shall have agreed in writing to be bound by this Declaration. No Trustee shall be required to give bond, surety or securities to secure the performance of his duties or obligations hereunder. No reduction in the number of Trustees shall have the effect of removing any Trustee from office prior to the expiration of his term. Whenever a vacancy in the number of Trustees shall occur, until such vacancy is filled as provided in Article 4, Section 3, the Trustees or Trustee continuing in office, regardless of their number, shall have all the powers granted to the Trustees and shall discharge all the duties imposed upon the Trustees by this Declaration of Trust. The Trustees shall receive such fees for their services and expenses as they shall deem reasonable and proper, subject, however, to the fees and expenses limitations of Article 1, Section 5(h). A majority of the Trustees shall not be affiliated with the Advisor of the Trust or with any organization affiliated with the Advisor of the Trust. EXPERIENCE OF TRUSTEES. A Trustee shall have at least three years of relevant experience demonstrating the knowledge and experience required to successfully acquire and manage the type of assets being acquired by the Trust. At least one of the Independent Trustees shall have three years of relevant real estate experience. SECTION 2. RESIGNATION, REMOVAL AND DEATH. A Trustee may resign at any time by giving written notice thereof in recordable form to the other Trustees at the principal office of the Trust. The acceptance of a resignation shall not be necessary to make it effective. A Trustee may be removed with or without cause by the vote of the holders of two-thirds of the outstanding Shares or by vote of two-thirds of the Trustees then in office (which action shall be taken only by vote at a meeting and not by authorization without a meeting, anything in Article 4, Section 5, to the contrary notwithstanding). Upon the resignation or removal of any Trustee, he shall execute and deliver such documents and render such accounting as the remaining Trustees shall require and shall thereupon be discharged as Trustee. Upon the incapacity or death of any Trustee, his status as a Trustee shall immediately terminate at such incapacity or death, and his legal representatives shall perform the acts set forth in the preceding sentence. SECTION 3. VACANCIES. The resignation, removal, incompetency or death of any or all of the Trustees shall not terminate the Trust or affect its continuity. During a vacancy, the remaining Trustee or Trustees may exercise the powers of the Trustees hereunder. Whenever there shall be a vacancy or vacancies among the Trustees (including vacancies resulting from an increase in the number of Trustees) such vacancy or vacancies shall be filled either at a special meeting of Shareholders called for that purpose or at the next annual meeting of Shareholders. Trustees elected at special meetings of Shareholders to fill vacancies shall hold office until the next annual meeting of Shareholders. Independent Trustees shall nominate replacements for vacancies amongst the Independent Trustees' positions. SECTION 4. SUCCESSOR TRUSTEES. The right, title and interest of the Trustees in and to the Trust property shall vest automatically in all persons who may hereafter become Trustees upon their due election and qualification without any further act, and thereupon they shall have the same rights, privileges, powers, duties and immunities as though originally named as Trustees in this Declaration of Trust. Appropriate written evidence of the election and qualification of Successor Trustees shall be filed with the records of the Trust and in such other offices or places as the Trustees may deem necessary, appropriate or desirable. Upon the resignation, removal or death of a Trustee, he (and in the event of his death, his estate) shall automatically cease to have any right, title or interest in or to any of the Trust property, and the right, title and interest in such Trustee in and to the Trust property shall vest automatically in the remaining Trustees without any further act. SECTION 5. ACTIONS BY AND MEETINGS OF TRUSTEES. The Trustees may act with or without a meeting. Except as otherwise provided herein, any action of a majority of Trustees present at a duly convened meeting of the Trustees shall be conclusive and binding as an action of the Trustees. A quorum for meetings of the Trustees shall be a majority of all of the Trustees in office. Action may be taken without a meeting only by unanimous consent of all of the Trustees in office and shall be evidenced by a written certificate or instrument signed by all of the Trustees in office. Any action taken by Trustees in accordance with the provisions of this Section 5 shall be conclusive and binding upon the Trust, upon the Trustees, and upon the Shareholders, as an action of all the Trustees, collectively, and of the Trust. Any deed, mortgage, evidence of indebtedness or other instrument, agreement or document of any character, whether similar or dissimilar, executed by one or more of the Trustees, when authorized at a meeting or by written authorization without a meeting in accordance with the provisions of this Section 5, shall be valid and binding upon the Trustees, the Trust and the Shareholders. SECTION 6. TITLE AND AUTHORITY OF TRUSTEES. The Trustees shall hold the legal title to all property belonging to the Trust. They shall have absolute and exclusive control, management and disposition thereof, and absolute and exclusive control over the management and conduct of the business affairs of the Trust, free from any power or control on the part of the Shareholders, in the same manner as if they were the absolute owners thereof, subject only to the express limitations in the Declaration. SECTION 7. THE ADVISOR. "Advisor" means the person or entity responsible for directing or performing the day-to-day business affairs of the Trust, including a person or entity to which an Advisor subcontracts substantially all such functions. In their exercise of the absolute control and management of all of the assets of the Trust, the Trustees may contract with an Advisor to advise them in respect of investing and reinvesting the funds of the Trust in real property assets, interests in real property, mortgages secured by real property, leasehold interests in real property, interests in mortgages, or other assets. ADVISORY CONTRACT. It shall be the duty of the Trustees to evaluate the performance of the Advisor before entering into or renewing any advisory contract. The criteria used in such evaluation shall be reflected in the minutes of such meeting. Each contract for the services of an Advisor entered into by the Trustees shall have a term of no more than one year. Each advisory contract shall be terminable by a majority of the Independent Trustees or the Advisor on sixty days written notice without cause. The Trustees shall determine that any Advisor possesses sufficient qualifications to perform the advisory function for the Trust and to justify the compensation provided for it in its contract with the Trust. ADVISORY COMPENSATION. The Independent Trustees shall determine from time- to-time and at least annually that the compensation which the Trust contracts to pay to the Advisor is reasonable in relation to the nature and quality of the services performed and that such compensation is within the limits prescribed by Article 1, Section 5(h) of this Declaration of Trust. The Independent Trustees shall also supervise the performance of the Advisor and the compensation paid to it by the Trust to determine that the provisions of such contract are being carried out. Each such determination shall be based on the factors set forth below and all other factors such Independent Trustees may deem relevant, and the findings of such Trustees on each of such factors shall be recorded in the minutes of the Trustees: (a) the size of the advisory fee in relation to the size, composition and profitability of the portfolio of the Trust; (b) the success of the Advisor in generating opportunities that meet the investment objectives of the Trust; (c) the rates charged to other real estate investment trusts and to investors other than real estate investment trusts by advisors performing similar services; (d) additional revenues realized by the Advisor and its affiliates through the relationship with the Trust, including loan administration, underwriting or broker commissions, servicing, engineering, inspection and other fees, whether paid by the Trust or by others with whom the Trust does business; (e) the quality and extent of service and advice furnished by the Advisor; (f) the performance of the investment portfolio of the Trust, including income, conservation or appreciation of capital, frequency of problem investments and competence in dealing with distress situations; and (g) the quality of the portfolio of the Trust in relationship to the investments generated by the Advisor for its own account. SECTION 8. POWERS OF TRUSTEES. The Trustees shall have all the powers necessary, convenient or appropriate to effectuate the purposes of the Trust and may take any action which they deem necessary or desirable and proper to carry out such purposes. Any determination of the purposes of the Trust made by the Trustees in good faith shall be conclusive. In construing the provisions of the Declaration, the presumption shall be in favor of the grant of powers to the Trustees. Subject to the limitations contained in Article 1 hereof, the Trustees' powers shall include the following: (1) To purchase, acquire through the issuance of Shares in the Trust, obligations of the Trust or otherwise, and to mortgage, sell, acquire on lease, hold, manage, improve, lease to others, option, exchange, release and partition real estate interests of every nature, including freehold, leasehold, mortgage, ground rent and other interests therein, and to erect, construct, alter, repair, demolish or otherwise change buildings and structures of every nature. (2) To purchase, acquire through the issuance of Shares in the Trust, obligations of the Trust or otherwise, option, sell and exchange stocks, bonds, notes, certificates of indebtedness and securities of every nature. (3) To purchase, acquire through the issuance of Shares in the Trust, obligations of the Trust or otherwise, mortgage, sell, acquire on lease, hold, manage, improve, lease to others, option and exchange personal property of every nature. (4) To hold legal title to property of the Trust in the name of the Trust, or in the name of one or more of the Trustees for the Trust, or of any other person for the Trust, without disclosure of the interest of the Trust therein. (5) To borrow money for the purposes of the Trust and to give notes or other negotiable or nonnegotiable instruments of the Trust therefor; to enter into other obligations or guarantee the obligations of others on behalf of and for the purposes of the Trust; and to mortgage or pledge or cause to be mortgaged or pledged real and personal property of the Trust to secure such notes, debentures, bonds, instruments or other obligations. (6) To lend money on behalf of the Trust and to invest the funds of the Trust. (7) To create reserve funds for such purposes as they deem advisable. (8) To deposit funds of the Trust in banks and other depositories without regard to whether such accounts will draw interest. (9) To pay taxes and assessments imposed upon or chargeable against the Trust or the Trustees by virtue of or arising out of the existence, property, business or activities of the Trust. (10) To purchase, issue, sell or exchange Shares of the Trust as provided in Article 2 hereof. (11) To exercise with respect to property of the Trust, all options, privileges and rights, whether to vote, assent, subscribe or convert, or of any other nature; to grant proxies; and to participate in and accept securities issued under any voting trust agreement. (12) To participate in any reorganization, readjustment, consolidation, merger, dissolution, sale or purchase of assets, lease, or similar proceedings of any corporation, partnership or other organization in which the Trust shall have an interest and in connection therewith to delegate discretionary powers to any reorganization, protective or similar committee and to pay assessments and other expenses in connection therewith. (13) To engage or employ agents, representatives and employees of any nature, or independent contractors, including, without limiting the generality of the foregoing, Transfer Agents for the transfer of Shares in the Trust, Registrars, underwriters for the sale of Shares in the Trust, independent certified public accountants, attorneys at law, appraisers, and real estate agents and brokers; and to delegate to one or more Trustees, agents, representatives, employees, independent contractor or other persons such powers and duties as the Trustees deem appropriate. (14) To determine conclusively the allocation between capital and income of the receipts, holdings, expenses and disbursements of the Trust, regardless of the allocation which might be considered appropriate in the absence of this provision. (15) To determine conclusively the value from time to time and to revalue the real estate, securities and other property of the Trust by means of independent appraisals. (16) To compromise or settle claims, questions, disputes and controversies by, against or affecting the Trust. (17) To solicit proxies of the Shareholders. (18) To adopt a fiscal year for the Trust and to change such fiscal year. (19) To adopt and use a seal. (20) To merge the Trust with or into any other trust or corporation in accordance with the laws of the State of Maryland. (21) To deal with the Trust property in every way, including joint ventures, partnerships and any other combinations or associations, that it would be lawful for an individual to deal with the same, whether similar to or different from the ways herein and hereinabove specified. (22) To determine whether or not, at any time or from time to time, to attempt to cause the Trust to qualify for taxation as a "real estate investment trust," as that term is defined in the Internal Revenue Code of 1954. SECTION 9. TRUSTEES' RIGHT TO OWN SHARES IN TRUST. A Trustee may acquire, hold and dispose of Shares in the Trust for his individual account and may exercise all rights of a Shareholder to the same extent and in the same manner as if he were not a Trustee. After the commencement of any public offering of the Shares of the Trust, the Trustees may purchase Shares only at the current offering price then prevailing in connection with such public offering, less all or any part of the selling or other commission as may be agreed with the Distributor. SECTION 10. TRANSACTIONS BETWEEN TRUSTEES AND THEIR AFFILIATES AND THE TRUST. No Trustee, officer, or advisor of the Trust, or any person affiliated with any such persons, shall sell any property or assets to the Trust or purchase any property or assets from the Trust, directly or indirectly, nor shall any person receive any commission or other remuneration, directly or indirectly, in connection with the purchase or sale of Trust assets, except as permitted under the provisions of Article 1, Section 5(i) of this Declaration. Nothing herein, however, shall prohibit any Trustee or any affiliate of a Trustee or Trustees, acting as agent or counsel, from executing transactions or performing legal or other services for the Trust and receiving the prevailing rate of commission or other compensation for his or its services, or if there are no prevailing rates for such services, then at such rates and on such terms as can be agreed upon between the Trustee or his affiliate and the Trust as fair and reasonable and such transactions are hereby expressly permitted. SECTION 11. NON-LIABILITY OF TRUSTEES. The Trustees shall have no rights of indemnity or exoneration against any Shareholder individually with respect to any liability or obligation of the Trust; but, as hereinafter provided the Trustees may satisfy any claims they have against the Trust out of the Trust assets. No Trustee shall be liable for any act or neglect of any person or firm with respect to the performance of any duty, service or act which has been delegated to such person or firm by the Trustees pursuant to authority contained in these Trust Articles; the Trustees shall, however, use good faith in selecting and appointing agents or representatives to whom authority to act on behalf of the Trust is delegated. No Trustee shall be individually liable for any obligation or liability incurred by or on behalf of the Trust or by the Trustees for the benefit and on behalf of the Trust. SECTION 12. INDEMNIFICATION OF TRUSTEES. The Trust shall indemnify and hold harmless each Trustee from and against all claims and liabilities, whether they proceed to judgment or are settled, to which such Trustee may become subject by reason of his being or having been a Trustee, or by reason of any action alleged to have been taken or omitted by him as Trustee, and shall reimburse him for all legal and other expenses reasonably incurred by him in connection with any such claim or liability, including any claim or liability arising under the provisions of federal or state securities laws; provided, however, that no Trustee shall be indemnified or reimbursed under the foregoing provisions in relation to any matter unless it shall have been adjudicated that his action or omission did not constitute willful misfeasance, bad faith or gross negligence in the conduct of his duties, or, unless, in the absence of such an adjudication, the Trust shall have received a written opinion from independent counsel, approved by the Trustees, to the effect that if the matter of willful misfeasance, bad faith or gross negligence in the conduct of duties had been adjudicated, it would have been adjudicated in favor of such Trustee. The rights accruing to a Trustee under these provisions shall not exclude any other right to which he may be lawfully entitled, nor shall anything herein contained restrict the right of the Trust to indemnify or reimburse such Trustee in any proper cause even though not specifically provided for herein. SECTION 13. PERSONS DEALING WITH TRUSTEES. No corporation, person, transfer agent or other party shall be required to examine or investigate the trusts, terms or conditions contained in this Declaration or otherwise applicable to the Trust, and every such corporation, person, transfer agent or other party may deal with Trust property and assets as if the Trustees were the sole and exclusive owners thereof free of all trusts; and no such corporation, person, transfer agent or other party dealing with the Trustees or with the Trust or Trust property and assets shall be required to see to the application of any money or property paid or delivered to any Trustee, or nominee, agent or representative of the Trust or the Trustees. A certificate executed by or on behalf of the Trustees or by any other duly authorized representative of the Trust, delivered to any person or party dealing with the Trust or Trust property and assets, or, if relating to real property, recorded in the deed records for the county or district in which such real property lies, certifying as to the identity and authority of the Trustees, agents, or representatives of the Trust for the time being, or as to any action of the Trustees or of the Trust, or of the Shareholders, or as to any other fact affecting or relating to the Trust or these Trust Articles, may be treated as conclusive evidence thereof by all persons dealing with the Trust. No provision of these Trust Articles shall diminish or affect the obligation of the Trustees and every other representative or agent of the Trust to deal fairly and act in good faith with respect to the Trust and the Shareholders insofar as the relationship and accounting among the parties to the Trust is concerned; but no third party dealing with the Trust or with any Trustee, agent or representative of the Trust shall be obliged or required to inquire into, investigate or be responsible for the discharge and performance of such fiduciary obligation. SECTION 14. ADMINISTRATIVE POWERS OF TRUSTEES. The Trustees shall have power to pay the expenses of organization and administration of the Trust, including all legal and other expenses in connection with the preparation and carrying out of the plan for the formation of the Trust, the acquisition of properties thereunder and the issuance of Shares thereunder; and to employ such officers, experts, counsel, managers, salesmen, agents, workmen, clerks and other persons as they think best. SECTION 15. ELECTION OF OFFICERS. The Trustees may annually elect a Chairman of the Board and a President of the Trust. The Trustees may also annually elect one or more Vice Presidents, a Secretary, a Treasurer, Assistant Secretaries, Assistant Treasurers, and such other officers as the Trustees shall deem proper. Except as required by law, the officers of the Trust need not be Trustees. All officers and agents of the Trust shall have such authority and perform such duties in the management of the Trust as may be provided in the Bylaws or as may be determined by the Trustees not inconsistent with the Bylaws. Any officer or agent elected or appointed by the Trustees may be removed by the Trustees whenever in their judgment the best interest of the Trust will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of any officer or agent shall not of itself create contract rights. The Trustees shall fix the compensation of all of officers. SECTION 16. (OMITTED). SECTION 17. COMMITTEES OF TRUSTEES, DELEGATION OF POWERS AND DUTIES TO COMMITTEES, TRUSTEES, OFFICERS AND EMPLOYEES . The Trustees may, in their discretion, by resolution passed by a majority of the Trustees, designate from among their members one or more committees which shall consist of one or more Trustees. The Trustees may designate one or more Trustees as alternate members of any such committee, who may replace any absent or disqualified member at any meeting of the committee. Such committees shall have and may exercise such powers as shall be conferred or authorized by the resolution appointing them. A majority of any such committee may determine its action and fix the time and place of its meetings, unless the Trustees shall otherwise provide. The Trustees, by resolution passed by a majority of the Trustees, may at any time change the membership of any such committee, fill vacancies in it, or dissolve it. The Bylaws, or a majority of the Trustees, may authorize any one or more of the Trustees, or any one or more of the officers or employees or agents of the Trust, on behalf of the Trust, to exercise and perform any and all powers granted to the Trustees, and to discharge any and all duties imposed upon the Trustees, and to do any acts and to execute any instruments deemed by such person or persons to be necessary or appropriate to exercise such power or to discharge such duties, and to exercise his own sound judgment in so doing. The authority to act upon any transaction which under the terms of this Declaration of Trust requires the vote of a majority of the disinterested Trustees may not be delegated to any committee. ARTICLE 5. DURATION AND TERMINATION OF TRUST SECTION 1. TERMINATION OF TRUST. The Trust may be terminated at any time by a vote or written consent of the holders of a majority of the outstanding Trust Shares of all classes. In connection with any termination of the Trust, the Trustees, upon receipt of such releases or indemnity as they deem necessary for their protection, may (1) Sell and convert into cash the property of the Trust and distribute the net proceeds among the Shareholders ratably; or (2) Convey the property of the Trust to one or more persons, entities, trusts or corporations for consideration consisting in whole or in part of cash, shares of stock, or other property of any kind, and distribute the net proceeds among the Shareholders ratably, at valuations fixed by the Trustees, in cash or in kind, or partly in cash and partly in kind; provided that the proposal to proceed as described in this clause (2) shall have been set forth in the written approval of the Shareholders holding a two-thirds majority of the Shares issued and outstanding. Upon termination of the Trust and distribution to the Shareholders as herein provided, a majority of the Trustees shall execute and lodge among the records of the Trust an instrument in writing setting forth the fact of such termination, and the Trustees shall thereupon be discharged from all further liabilities and duties hereunder, and the right, title and interest of all Shareholders shall cease and be canceled and discharged. SECTION 2. ORGANIZATION AS A CORPORATION. Whenever the Trustees deem it for the best interests of the Shareholders that the Trust be organized as a corporation, the Trustees shall have full power to organize such corporation, under the laws of such state as they may consider appropriate, in the place and stead of this Trust without procuring the consent of any of the Shareholders, in which event the capital stock of such corporation shall be and remain the same as fixed under this Agreement and Declaration and the Shareholders shall receive and accept stock in such corporation on the same basis as they hold Shares in this Trust. SECTION 3. MERGER. This Trust may merge into a Maryland or foreign business trust or into a Maryland or foreign corporation having capital stock or one or more such business trusts or such corporations may merge into it in accordance with the provisions of Maryland law. SECTION 4. DURATION OF TRUST. Subject to possible earlier termination in accordance with the provisions of Article 5 hereof, the duration of the Trust shall be perpetual or, in any jurisdiction in which such duration is not permitted, then the Trust shall terminate on the latest date permitted by the law of such jurisdiction. ARTICLE 6. AMENDMENTS SECTION 1. AMENDMENT BY SHAREHOLDERS. Except as provided in Section 2 of this Article 6, the Declaration of Trust may be amended only by the affirmative vote or written consent of the holders of at least two-thirds of the shares entitled to vote thereon. SECTION 2. AMENDMENT BY TRUSTEES. The Trustees by a two-thirds vote may amend provisions of the Declaration of Trust from time to time to qualify as a real estate investment trust under the Internal Revenue Code of 1954 or under Title 8, General Corporation Law of Maryland. SECTION 3. REQUIREMENTS OF MARYLAND LAW. The Declaration of Trust may not be amended except as provided in Section 8-501, General Corporation Law of Maryland. ARTICLE 7. MISCELLANEOUS SECTION 1. CONSTRUCTION. This Declaration shall be construed in such a manner as to give effect to the intent and purposes of the Trust and the Declaration. If any provisions hereof appear to be in conflict, more specific provisions shall control over general provisions. This Declaration shall govern all of the relationships among the Trustees and Shareholders of the Trust; and each provision hereof should be effective for all purposes and to all persons dealing with the Trust to the fullest extent possible under applicable law in each jurisdiction in which the Trust shall engage in business. SECTION 2. HEADINGS FOR REFERENCE ONLY. Headings preceding the text, articles and sections hereof have been inserted solely for convenience and reference, and shall not be construed to affect the meaning, construction or effect of this Declaration of Trust. SECTION 3. FILING AND RECORDING. This Declaration of Trust shall be filed in the manner prescribed for real estate investment trusts under Maryland law and shall be filed for record in any county where real property is owned by the Trust. SECTION 4. APPLICABLE LAW. This Declaration of Trust has been executed with reference to and its construction and interpretation shall be governed by the laws of Maryland, and the rights of all parties and the construction and effect of every provision hereof shall be subject to and construed according to the laws of Maryland. SECTION 5. EXECUTION AND EFFECT OF RESTATED DECLARATION OF TRUST. A restated Declaration of Trust containing the original Declaration of Trust dated January 18, 1963, as amended and/or restated to the time of execution of the Restated Declaration of Trust, may be executed at any time or from time to time by a majority of the Trustees and filed with the State Department of Assessments and Taxation of Maryland, and such Restated Declaration of Trust shall thereafter be effective and may thereafter be referred to in lieu of the original Declaration of Trust and/or amendments or restatements thereof. SECTION 6. CERTIFICATIONS. Any certificates signed by a person who, according to the records of the State Department of Assessments and Taxation of Maryland appears to be a Trustee hereunder, shall be conclusive evidence as to the matters so certified in favor of any person dealing with the Trust or the Trustees or any one or more of them, and the successors or assigns of such persons, which certificate may certify to any matter relating to the affairs of the Trust, including but not limited to any of the following: A vacancy among the Trustees; the number and identity of Trustees; this Declaration of Trust and any Amendments thereto, or any Restated Declaration of Trust and any Amendments thereto, or that there are no Amendments to the Declaration of Trust or any Restated Declaration of Trust; a copy of the Bylaws of the Trust or any Amendment thereto; the due authorization of the execution of any instrument or writing; the vote at any meeting of Trustees or a committee thereof or Shareholders; the fact that the number of Trustees present at any meeting or executing any written instrument satisfies the requirements of the Declaration of Trust; a copy of any Bylaw adopted by the Shareholders or the identity of any officer elected by the Trustees; or the existence or nonexistence of any fact or facts which in any manner relate to the affairs of the Trust. If the Declaration of Trust or any Restated Declaration of Trust is filed or recorded in any recording office other than the State Department of Assessments and Taxation of Maryland, any one dealing with real estate so located that instruments affecting the same should be filed or recorded in such recording office may rely conclusively upon any certificate of the kind described above which is signed by a person who according to the records of such recording office appears to be a Trustee hereunder. In addition, the Secretary or any Assistant Secretary of the Trust or any other officer of the Trust designated by the Bylaws or by action of the Trustees may sign any certificate of the kind described in this Section 6, and such certificate shall be conclusive evidence as to the matters so certified in favor of any person dealing with the Trust, and the successors and assigns of such person. SECTION 7. (OMITTED). SECTION 8. SEVERABILITY. If any provision of the Declaration of Trust shall be invalid or unenforceable, such invalidity or unenforceability shall attach only to such provision and shall not in any manner affect or render invalid or unenforceable any other provision of the Declaration of Trust, and the Declaration of Trust shall be carried out, if possible, as if such invalid or unenforceable provision were not contained therein. SECTION 9. (OMITTED). SECTION 10. NAMES AND ADDRESSES OF TRUSTEES. The name and address of each of the Trustees is set forth below. Name Address ---- ------- Calvin K. Kessler 8600 Gateway East El Paso, Texas 79907 James H. Polk, III 141 E. Palace Avenue Santa Fe, New Mexico 87501 John T. Kelley, III 600 Sunland Park Drive Building #5, Suite 100 El Paso, Texas 79912 John C. Schweitzer 100 Congress, Suite 930 Austin, Texas 78701 Charles F. Jordan, III 310 North Mesa, Suite 220 El Paso, Texas 79901 James A. Cardwell 6080 Surety Drive El Paso, Texas 79905 C. Ronald Blankenship 141 E. Palace Avenue Santa Fe, New Mexico 87501 SECTION 11. BYLAWS. The Bylaws of the Trust may be altered, amended or repealed, and new Bylaws may be adopted, at any meeting of the Board of Trustees of the Trust by a majority vote of the Trustees, subject to repeal or change by action of the Shareholders of the Trust entitled to vote thereon. SECTION 12. RECORDATION. The Declaration of Trust shall be filed in the manner prescribed for real estate investment trusts under Maryland law. ARTICLE 8. LIMITATION OF LIABILITY FOR TRUSTEES AND OFFICERS; INDEMNIFICATION SECTION 1. A Trustee or officer of the Trust shall not be liable for monetary damages to the Trust or its shareholders for any act or omission in the performance of his duties unless: (1) The Trustee or officer actually received an improper benefit in money, property or services (in which case, such liability shall be for the amount of the benefit in money, property or services actually received); (2) The Trustee's or officer's action or failure to act was the result of active and deliberate dishonesty and was material to the cause of action being adjudicated; (3) The Trustee's or officer's action or failure to act constitutes willful misconduct or deliberate recklessness; or (4) Such liability to the Trust is specifically imposed upon Trustees or officers by statute. SECTION 2. In the event that any provision or portion of a provision of this Article 8 is determined to be in conflict with any applicable statute, such provision or portion thereof shall be inapplicable to the extent of such conflict. SECTION 3. In the event that any provision or portion of a provision of this Article 8 is determined to be invalid, void, illegal or unenforceable, the remainder of the provisions of this Article 8 shall continue to be valid and enforceable and shall in no way be affected, impaired or invalidated. SECTION 4. Nothing in this Article 8 shall be construed to diminish, limit or impair any rights or defenses afforded to officers or Trustees by common law, statute, other provisions of this Restated Declaration of Trust, the Bylaws of the Trust or otherwise, and the provisions of this Article 8 shall be deemed to be cumulative thereto. SECTION 5. References in this Article 8 to Trustees or officers shall be deemed to refer to any person who is or was a Trustee or officer of the Trust and any person who, while a Trustee or officer of the Trust, is or was serving at the request of the Trust as a director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise. SECTION 6. Notwithstanding any other provisions of this Restated Declaration of Trust, the Trust, for the purpose of providing indemnification for its Trustees and officers, shall have the authority, without specific shareholder approval, to enter into insurance or other arrangements, with persons or entities which are not regularly engaged in the business of providing insurance coverage, to indemnify all Trustees and officers of the Trust against any and all liabilities and expenses incurred by them by reason of their being Trustees or officers of the Trust, whether or not the Trust would otherwise have the power under this Restated Declaration of Trust or under Maryland law to indemnify such persons against such liability. Without limiting the power of the Trust to procure or maintain any kind of insurance or other arrangement, the Trust may, for the benefit of persons indemnified by it, (i) create a trust fund, (ii) establish any form of self-insurance, (iii) secure its indemnity obligation by grant of any security interest or other lien on the assets of the corporation, or (iv) establish a letter of credit, guaranty or surety arrangement. Any such insurance or other arrangement may be procured, maintained or established within the Trust or with any insurer or other person deemed appropriate by the Board of Trustees regardless of whether all or part of the stock or other securities thereof are owned in whole or in part by the Trust. In the absence of fraud, the judgment of the Board of Trustees as to the terms and conditions of insurance or other arrangement and the identity of the insurer or other person participating in any arrangement shall be conclusive, and such insurance or other arrangement shall not be subject to voidability, nor subject, the Trustees approving such insurance or other arrangement to liability, on any ground, regardless of whether Trustees participating and approving such insurance or other arrangement shall be beneficiaries thereof. IN WITNESS WHEREOF, the undersigned, constituting all of the present Trustees of Property Trust of America, have each executed this Restated Declaration of Trust as Trustees. /s/ Calvin K. Kessler ---------------------------------------- Calvin K. Kessler /s/ James H. Polk, III ---------------------------------------- James H. Polk, III /s/ John T. Kelley, III ---------------------------------------- John T. Kelley, III /s/ John C. Schweitzer ---------------------------------------- John C. Schweitzer /s/ Charles F. Jordan, III ---------------------------------------- Charles F. Jordan, III /s/ James A. Cardwell ---------------------------------------- James A. Cardwell /s/ C. Ronald Blankenship ---------------------------------------- C. Ronald Blankenship STATE OF TEXAS ) ) COUNTY OF EL PASO ) On the 5th day of July 1991, before me, the undersigned, a notary public in and for Santa Fe County, New Mexico, personally appeared Calvin K. Kessler known to me to be the person whose name is subscribed to the within instrument and acknowledged that he executed the same for the purposes therein contained. IN WITNESS WHEREOF, I hereunto set my hand and official seal. /s/ Virginia Gonzalez ---------------------------------------- Notary Public In and For The State of New Mexico My commission expires: 01-08-92 - -------------------------- STATE OF TEXAS ) ) COUNTY OF EL PASO ) On the ______ of July 1991, before me, the undersigned, a notary public in and for Santa Fe County, New Mexico, personally appeared John T. Kelley, III known to me to be the person whose name is subscribed to the within instrument and acknowledged that he executed the same for the purposes therein contained. IN WITNESS WHEREOF, I hereunto set my hand and official seal. ________________________________________ Notary Public In and For The State of New Mexico My commission expires: - -------------------------- STATE OF TEXAS ) ) COUNTY OF EL PASO ) On the _____ day of July 1991, before me, the undersigned, a notary public in and for Santa Fe County, New Mexico, personally appeared Calvin K. Kessler known to me to be the person whose name is subscribed to the within instrument and acknowledged that he executed the same for the purposes therein contained. IN WITNESS WHEREOF, I hereunto set my hand and official seal. ________________________________________ Notary Public In and For The State of New Mexico My commission expires: __________________________ STATE OF TEXAS ) ) COUNTY OF EL PASO ) On the 5th day of July 1991, before me, the undersigned, a notary public in and for Santa Fe County, New Mexico, personally appeared John T. Kelley, III known to me to be the person whose name is subscribed to the within instrument and acknowledged that he executed the same for the purposes therein contained. IN WITNESS WHEREOF, I hereunto set my hand and official seal. /s/ Joyce Mowad ---------------------------------------- Notary Public In and For The State of New Mexico My commission expires: 9-27-93 - -------------------------- STATE OF TEXAS ) ) COUNTY OF EL PASO ) On the 3rd day of July 1991, before me, the undersigned, a notary public in and for Santa Fe County, New Mexico, personally appeared Charles F. Jordan, III known to me to be the person whose name is subscribed to the within instrument and acknowledged that he executed the same for the purposes therein contained. IN WITNESS WHEREOF, I hereunto set my hand and official seal. /s/ Joyce Mowad ---------------------------------------- Notary Public In and For The State of New Mexico My commission expires: 9-27-93 - -------------------------- STATE OF TEXAS ) ) COUNTY OF EL PASO ) On the ______ of July 1991, before me, the undersigned, a notary public in and for Santa Fe County, New Mexico, personally appeared James A. Cardwell known to me to be the person whose name is subscribed to the within instrument and acknowledged that he executed the same for the purposes therein contained. IN WITNESS WHEREOF, I hereunto set my hand and official seal. ________________________________________ Notary Public In and For The State of New Mexico My commission expires: __________________________ STATE OF TEXAS ) ) COUNTY OF EL PASO ) On the 3rd day of July 1991, before me, the undersigned, a notary public in and for Santa Fe County, New Mexico, personally appeared Charles F. Jordan, III known to me to be the person whose name is subscribed to the within instrument and acknowledged that he executed the same for the purposes therein contained. IN WITNESS WHEREOF, I hereunto set my hand and official seal. ________________________________________ Notary Public In and For The State of New Mexico My commission expires: __________________________ STATE OF TEXAS ) ) COUNTY OF EL PASO ) On the 3rd of July 1991, before me, the undersigned, a notary public in and for Santa Fe County, New Mexico, personally appeared James A. Cardwell known to me to be the person whose name is subscribed to the within instrument and acknowledged that he executed the same for the purposes therein contained. IN WITNESS WHEREOF, I hereunto set my hand and official seal. /s/ Barbara Evans ---------------------------------------- Notary Public In and For The State of New Mexico My commission expires: 11-15-92 - -------------------------- STATE OF NEW MEXICO ) ) COUNTY OF SANTA FE ) On the 9th day of July 1991, before me, the undersigned, a notary public in and for Santa Fe County, New Mexico, personally appeared James H. Polk, III known to me to be the person whose name is subscribed to the within instrument and acknowledged that he executed the same for the purposes therein contained. IN WITNESS WHEREOF, I hereunto set my hand and official seal. /s/ Christine Y. Canoose ---------------------------------------- Notary Public In and For The State of New Mexico My commission expires: 3-7-93 - -------------------------- STATE OF NEW MEXICO ) ) COUNTY OF SANTA FE ) On the 9th day of July 1991, before me, the undersigned, a notary public in and for Santa Fe County, New Mexico, personally appeared C. Ronald Blankenship known to me to be the person whose name is subscribed to the within instrument and acknowledged that he executed the same for the purposes therein contained. IN WITNESS WHEREOF, I hereunto set my hand and official seal. /s/ Christine Y. Canoose ---------------------------------------- Notary Public In and For The State of New Mexico My commission expires: 3-7-93 - -------------------------- STATE OF TEXAS ) ) COUNTY OF TRAVIS ) On the 3rd day of July 1991, before me, the undersigned, a notary public in and for Travis County, Texas, personally appeared John C. Schweitzer known to me to be the person whose name is subscribed to the within instrument and acknowledged that he executed the same for the purposes therein contained. IN WITNESS WHEREOF, I hereunto set my hand and official seal. /s/ Jeanne Welch ---------------------------------------- Notary Public In and For The State of Texas My commission expires: 2-14-93 - -------------------------- EX-12.1 3 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12.1 SECURITY CAPITAL PACIFIC TRUST COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLAR AMOUNTS IN THOUSANDS) (UNAUDITED)
TWELVE MONTHS ENDED DECEMBER 31, ------------------------------------------------- 1997(1) 1996 1995 1994 1993 1992 ------- -------- -------- ------- ------- ------- Earnings from operations..... $24,686 $ 94,089 $ 81,696 $46,719 $23,191 $ 9,037 Add: Interest expense........... 61,153 35,288 19,584 19,442 3,923 3,214 ------- -------- -------- ------- ------- ------- Earnings as adjusted......... $85,839 $129,377 $101,280 $66,161 $27,114 $12,251 ======= ======== ======== ======= ======= ======= Fixed charges: Interest expense........... $61,153 $ 35,288 $ 19,584 $19,442 $ 3,923 $ 3,214 Capitalized interest....... 17,606 16,941 11,741 6,029 2,818 989 ------- -------- -------- ------- ------- ------- Total fixed charges...... $78,759 $ 52,229 $ 31,325 $25,471 $ 6,741 $ 4,203 ======= ======== ======== ======= ======= ======= Ratio of earnings to fixed charges..................... 1.1 2.5 3.2 2.6 4.0 2.9 ======= ======== ======== ======= ======= =======
- -------- (1) Earnings from operations for 1997 includes a one-time non-cash charge of $71.7 million associated with costs incurred in acquiring the Management Companies from an affiliate. Excluding this charge, the ratio of earnings to fixed charges for the year ended December 31, 1997 would be 2.0. EX-12.2 4 COMPUTATION OF RATIO OF EARNINGS EXHIBIT 12.2 SECURITY CAPITAL PACIFIC TRUST COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED SHARE DIVIDENDS (DOLLAR AMOUNTS IN THOUSANDS) (UNAUDITED)
TWELVE MONTHS ENDED DECEMBER 31, ------------------------------------------------- 1997(1) 1996 1995 1994 1993 1992 ------- -------- -------- ------- ------- ------- Earnings from operations..... $24,686 $ 94,089 $ 81,696 $46,719 $23,191 $ 9,037 Add: Interest expense........... 61,153 35,288 19,584 19,442 3,923 3,214 ------- -------- -------- ------- ------- ------- Earnings as adjusted......... $85,839 $129,377 $101,280 $66,161 $27,114 $12,251 ======= ======== ======== ======= ======= ======= Combined fixed charges and preferred share dividends: Interest expense........... $61,153 $ 35,288 $ 19,584 $19,442 $ 3,923 $ 3,214 Capitalized interest....... 17,606 16,941 11,741 6,029 2,818 989 ------- -------- -------- ------- ------- ------- Total fixed charges...... 78,759 52,229 31,325 25,471 6,741 4,203 Preferred share dividends.... 19,384 24,167 21,823 16,100 1,341 -- ------- -------- -------- ------- ------- ------- Combined fixed charges and preferred dividends......... $98,143 $ 76,396 $ 53,148 $41,571 $ 8,082 $ 4,203 ======= ======== ======== ======= ======= ======= Ratio of earnings to combined fixed charges and preferred share dividends............. 0.9 1.7 1.9 1.6 3.4 2.9 ======= ======== ======== ======= ======= =======
- -------- (1) Earnings from operations for 1997 includes a one-time non-cash charge of $71.7 million associated with costs incurred in acquiring the Management Companies from an affiliate. Excluding this charge, the ratio of earnings to fixed charges for the year ended December 31, 1997 would be 1.6. EX-21 5 SUBSIDIARIES OF PTR EXHIBIT 21 ---------- STATE OF INCORPORATION OR SUBSIDIARY NAME ORGANIZATION - --------------- -------------------------- SCP Nevada Holdings 1 Incorporated Nevada SCP Utah Holdings 1 Incorporated Utah SCP Utah Holdings 2 Incorporated Utah PTR - California Holdings (1) Incorporated Maryland PTR - California Holdings (2) Incorporated Maryland Las Flores Development Company Texas PTR Holdings (Texas) Incorporated Texas PTR Multifamily Incorporated Delaware PTR - New Mexico (1) Incorporated Delaware SCG Realty Services Incorporated Delaware PTR - California Holdings (3) Incorporated Delaware PTR - Multifamily Holdings Incorporated Delaware PTR - Texas Holdings (1) Incorporated Delaware SCP Utah Holdings (4) Incorporated Utah SCP Utah Holdings (5) Incorporated Utah Spectrum Apartment Locators, Inc. Texas PTR Development Services Incorporated Delaware Archstone Financial Services, Inc. Delaware EX-23 6 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT The Board of Trustees and Shareholders of Security Capital Pacific Trust: We consent to incorporation by reference in registration statements No. 333-31031 (Form S-8), No. 333-31033 (Form S-8), No. 333-31405 (Form S-8), No. 333-42283 (Form S-3), No. 333-43723 (Form S-8) No. 333-24035 (Form S-3) and No. 333-44639 (Form S-3) of Security Capital Pacific Trust of our report dated January 31, 1998, except as to Note 13 which is as of March 6, 1998, relating to the balance sheets of Security Capital Pacific Trust as of December 31, 1997 and 1996, and the related statements of earnings, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997, and the related schedule, which report appears in the December 31, 1997 annual report on Form 10-K of Security Capital Pacific Trust. KPMG Peat Marwick LLP Chicago, Illinois March 19, 1998 EX-27 7 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Form 10-K for the twelve months ended December 31, 1997 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1996 JAN-01-1997 DEC-31-1997 4,927 0 11,544 0 0 0 2,604,919 129,718 2,805,686 0 861,500 0 240,210 92,634 1,207,592 2,805,686 335,060 355,662 0 175,944 90,879 3,000 61,153 53,534 0 53,534 0 0 0 53,534 0.65 0.65
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