-----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, WKR7T1e8geWB0/LYfUN3h6TFDrzT9XBSFru/w0IS3eSgFIpTshA4f1JWKbA9Xf9g CWTRs2F4d3tP46IdenvQew== 0000080737-97-000003.txt : 19971117 0000080737-97-000003.hdr.sgml : 19971117 ACCESSION NUMBER: 0000080737-97-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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-Q SEC ACT: SEC FILE NUMBER: 001-10272 FILM NUMBER: 97717932 BUSINESS ADDRESS: STREET 1: 7777 MARKET CENTER AVE CITY: EL PASO STATE: TX ZIP: 79912 BUSINESS PHONE: 9158771767 MAIL ADDRESS: STREET 1: 7777 MARKET CENTER AVE CITY: EL PASO STATE: TX ZIP: 79912 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-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 7670 SOUTH CHESTER STREET, 80112 ENGLEWOOD, COLORADO (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (303) 708-5959 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) 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 for the past 90 days. Yes X No The number of shares outstanding of the Registrant's common stock as of November 4, 1997 was 92,504,044. SECURITY CAPITAL PACIFIC TRUST INDEX
PAGE NUMBER -------- PART I. Condensed Financial Information Item 1. Financial Statements Condensed Balance Sheets--September 30, 1997 (unaudited) and December 31, 1996 3 Condensed Statements of Operations--Three and nine months ended September 30, 1997 and 1996 (unaudited)............................................................... 4 Condensed Statement of Shareholders' Equity--Nine months ended September 30, 1997 (unaudited).............................................................................. 5 Condensed Statements of Cash Flows--Nine months ended September 30, 1997 and 1996 (unaudited).................................................................... 6 Notes to Condensed Financial Statements (unaudited)...................................... 7 Independent Auditors' Review Report...................................................... 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................................... 17 PART II. Other Information Item 4. Submission of Matters to a Vote of Securities Holders.................................... 29 Item 6. Exhibits and Reports on Form 8-K......................................................... 29
2 SECURITY CAPITAL PACIFIC TRUST CONDENSED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31, ASSETS 1997 1996 ------------- -------------- (UNAUDITED) Real estate ..........................................................................$ 2,465,625 $ 2,153,363 Less accumulated depreciation.......................................................... 115,613 97,574 ------------- -------------- 2,350,012 2,055,789 Homestead Notes........................................................................ 279,092 176,304 Other mortgage notes receivable........................................................ 15,845 13,525 ------------- -------------- Net investments........................................................... 2,644,949 2,245,618 Cash and cash equivalents.............................................................. 6,172 5,601 Restricted cash in tax-deferred exchange escrow........................................ 22,960 42 Accounts receivable and accrued interest............................................... 11,729 4,157 Other assets........................................................................... 32,314 27,014 ------------- -------------- Total assets.............................................................. $ 2,718,124 $ 2,282,432 ============= ============== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Credit facilities................................................................. $ 99,433 $ 110,200 Long-Term Debt.................................................................... 630,000 580,000 Mortgages payable................................................................. 283,254 217,188 Distributions payable............................................................. -- 24,537 Accounts payable.................................................................. 31,634 22,782 Accrued expenses and other liabilities............................................ 63,986 60,217 ------------- -------------- Total liabilities......................................................... 1,108,307 1,014,924 ------------- -------------- Shareholders' equity: Series A Preferred Shares (5,517,199 convertible shares in 1997 and 6,494,967 in 1996; stated liquidation preference of $25 per share)..................... 137,930 162,374 Series B Preferred Shares (4,200,000 shares issued; stated liquidation preference of $25 per share)................................................. 105,000 105,000 Common Shares (shares issued--92,481,177 in 1997 and 75,510,986 in................ 1996). ........................................................................... 92,481 75,511 Additional paid-in capital........................................................ 1,266,035 918,434 Employee share purchase notes..................................................... (17,100) -- Unrealized holding gain on Homestead Notes........................................ 115,349 74,923 Distributions in excess of net earnings........................................... (89,878) (68,734) ------------- -------------- Total shareholders' equity................................................ 1,609,817 1,267,508 ------------- -------------- Total liabilities and shareholders' equity................................$ 2,718,124 $ 2,282,432 ============= ==============
The accompanying notes are an integral part of the condensed financial statements. 3 SECURITY CAPITAL PACIFIC TRUST CONDENSED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ----------------------- 1997 1996 1997 1996 ------------- ---------- --------- ---------- Revenues: Rental revenues........................................... $ 85,760 $ 84,802 $ 247,122 $ 240,102 Interest income on Homestead Notes........................ 4,430 -- 11,404 -- Other income.............................................. 686 590 2,024 1,589 ------------- ---------- --------- ---------- 90,876 85,392 260,550 241,691 ------------- ---------- --------- ---------- Expenses: Rental expenses........................................... 22,484 24,972 62,711 67,001 Real estate taxes......................................... 7,135 6,594 21,059 19,953 Property management fees: Paid to affiliate.................................... 2,139 2,960 7,642 8,788 Paid to third parties................................ 194 267 651 803 Depreciation on real estate investments................... 13,364 10,987 38,052 32,230 Interest.................................................. 15,943 8,624 45,702 22,401 REIT management fee paid to affiliate..................... 3,717 5,866 13,040 17,145 General and administrative................................ 723 264 1,311 770 Administrative services fee paid to affiliate........... 228 -- 228 -- Costs incurred in acquiring management companies from an affliliate..................................... 71,707 -- 71,707 -- Other..................................................... 99 140 1,963 501 ------------- ---------- --------- ---------- 137,733 60,674 264,066 169,592 ------------- ---------- --------- ---------- Earnings (loss) from operations................................ (46,857) 24,718 (3,516) 72,099 Gain on disposition of investments, net................ 10,723 25,257 47,930 33,340 ------------- ---------- --------- ---------- Net earnings (loss) before extraordinary item.................. (36,134) 49,975 44,414 105,439 Less extraordinary item--loss on early extinguishment of debt.............................................. -- -- -- 870 ------------- ---------- --------- ---------- Net earnings (loss)............................................ (36,134) 49,975 44,414 104,569 Less Preferred Share dividends......................... 4,785 6,182 14,625 18,956 ------------- ---------- --------- ---------- Net earnings (loss) attributable to Common Shares.............. $ (40,919) $ 43,793 $ 29,789 $ 85,613 Weighted-average Common Shares outstanding..................... 81,506 72,628 78,280 72,355 ============= ========== ========= ========== Per Common Share amounts: Primary................................................... $ (0.50) $ 0.60 $ 0.38 $ 1.18 ============= ========== ========= ========== Fully diluted............................................. $ (0.50) $ 0.57 $ 0.38 $ 1.18 ============= ========== ========= ========== Distributions paid..................................... $ 0.32 $ 0.31 $ 0.975 $ 0.93 ============= ========== ========= ==========
The accompanying notes are an integral part of the condensed financial statements. 4 SECURITY CAPITAL PACIFIC TRUST CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY NINE MONTHS ENDED SEPTEMBER 30, 1997 (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
SHARES OF BENEFICIAL ------------------------ INTEREST, $1.00 PAR VALUE ------------------------- SERIES A SERIES B PREFERRED PREFERRED SHARES AT SHARES AT COMMON EMPLOYEE AGGREGATE AGGREGATE SHARES ADDITIONAL SHARE UNREALIZED DISTRIBUTIONS LIQUIDATION LIQUIDATION AT PAR PAID-IN PURCHASE HOLDING IN EXCESS OF PREFERENCE PREFERENCE VALUE CAPITAL NOTES GAINS NET EARNINGS TOTAL --------- --------- --------- ---------- ----------- ----------- ------------ ---------- Balances at January 1, 1997.... $ 162,374 $ 105,000 $ 75,511 $ 918,434 $ -- $ 74,923 $ (68,734) $1,267,508 Net earnings............... -- -- -- -- -- -- 44,414 44,414 Shareholder distributions.. -- -- -- -- -- -- (65,558) (65,558) 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 employee share purchase plan...... -- -- 813 17,109 (17,100) -- -- 822 Conversion of 977,768 Series A Preferred Shares into 1,316,909 Common Shares....... (24,444) -- 1,317 23,127 -- -- -- -- Change in unrealized holding gain on Homestead Notes.. -- -- -- -- -- 40,426 -- 40,426 Exercise of warrants and options.................. -- -- 124 1,629 -- -- -- 1,753 --------- --------- --------- ---------- ------------ ---------- ------------- ----------- Balances at September 30, 1997......................... $ 137,930 $ 105,000 $ 92,481 $1,266,035 $ (17,100) $ 115,349 $ (89,878) $1,609,817 ========= ========= ========= ========== ============ ========== ============= ===========
The accompanying notes are an integral part of the condensed financial statements. 5 SECURITY CAPITAL PACIFIC TRUST CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 1997 1996 ------------ ----------- Operating activities: Net earnings..................................................................... $ 44,414 $ 104,569 Adjustments to reconcile net earnings to net cash flow provided by operating activities:................................................................... Depreciation and amortization............................................... 39,334 33,658 Gain on disposition of investments, net..................................... (47,930) (33,340) Provision for possible loss on investments.................................. 1,500 -- Costs incurred in acquiring management companies from an affiliate.......... 71,707 -- Change in accounts payable....................................................... 1,097 (2,261) Change in accrued expenses and other liabilities................................. 3,771 784 Change in other operating assets................................................. (12,225) (6,822) ------------ ----------- Net cash flow provided by operating activities.............................. 101,668 96,588 ------------ ----------- Investing activities: Real estate investments.......................................................... (468,720) (462,412) Change in tax-deferred exchange escrow........................................... (22,918) (13,503) Funding of Homestead Notes....................................................... (61,250) -- Advances on other mortgage notes receivable...................................... (3,763) -- Principal repayments on other mortgage notes receivable.......................... 1,443 1,450 Gross proceeds from dispositions................................................. 290,516 186,000 Closing costs related to dispositions............................................ (6,325) (3,510) ------------ ----------- Net cash flow used in investing activities.................................. (271,017) (291,975) ------------ ----------- Financing activities: Proceeds from Long-Term Debt..................................................... 50,000 250,000 Debt issuance costs incurred..................................................... (1,424) (3,123) Prepayment of mortgages payable due to community dispositions.................... (26,543) (25,845) Regularly scheduled principal payments on mortgages payable...................... (2,225) (1,461) Proceeds from credit facilities.................................................. 884,782 353,235 Principal payments on credit facilities.......................................... (895,549) (310,885) Proceeds from sale of Common Shares, net......................................... 249,223 -- Cash distributions paid on Common Shares......................................... (75,472) (67,325) Cash dividends paid on Preferred Shares.......................................... (14,625) (18,956) Proceeds from exercise of warrants and options................................... 1,753 -- ------------ ----------- Net cash flow provided by financing activities.............................. 169,920 175,640 ------------ ----------- Net change in cash and cash equivalents............................................... 571 (19,747) Cash and cash equivalents at beginning of period...................................... 5,601 26,919 ------------ ----------- Cash and cash equivalents at end of period............................................ $ 6,172 $ 7,172 ============ =========== 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 Long-term Incentive Plan .......... $ 17,100 $ -- Assumption of mortgages payable upon purchase of multifamily communities......... $ 94,834 $ 88,711 Series A Preferred Shares converted to Common Shares............................. $ 24,444 $ 12,425 Change in unrealized holding gain on Homestead Notes............................. $ 40,426 $ --
The accompanying notes are an integral part of the condensed financial statements. 6 SECURITY CAPITAL PACIFIC TRUST NOTES TO CONDENSED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) (1) GENERAL The condensed financial statements of SECURITY CAPITAL PACIFIC TRUST ("PTR") are unaudited and certain information and footnote disclosures normally included in financial statements have been omitted. While management of PTR believes that the disclosures presented are adequate, these interim financial statements should be read in conjunction with the financial statements and notes included in PTR's 1996 Annual Report on Form 10-K. In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary for a fair presentation of PTR's financial statements for the interim periods presented. The results of operations for the three and nine month periods ended September 30, 1997 and 1996 are not necessarily indicative of the results to be expected for the entire year. The accounts of PTR, its majority-owned subsidiaries and PTR Development Services Incorporated are consolidated in the accompanying condensed 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") required 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. RECLASSIFICATIONS Certain 1996 amounts have been reclassified to conform to the 1997 presentation. PER SHARE DATA Primary earnings per share is computed based on the weighted average number of common shares of beneficial interest, par value $1.00 per share ("Common Share(s)"), outstanding. Fully diluted earnings per Common Share is 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 cumulative convertible Series A Preferred Shares of Beneficial Interest, par value $1.00 per share ("Series A Preferred Shares") and outstanding stock options using the treasury stock method. For purposes of the fully diluted earnings per share calculation, dividends on the Series A Preferred Shares are added back to net earnings attributable to Common Shares. PTR will adopt Statement of Financial Accounting Standards ("SFAS") No. 128, EARNINGS PER SHARE, which changes the method used to compute earnings per share, in the fourth quarter of 1997. The impact of SFAS No. 128, which will be applied retroactively, on the calculation of PTR's earnings per share is not expected to be material. 7 SECURITY CAPITAL PACIFIC TRUST NOTES TO CONDENSED FINANCIAL STATEMENTS -- (Continued) (2) REAL ESTATE INVESTMENTS Equity investments in real estate, at cost, were as follows (dollar amounts in thousands):
SEPTEMBER 30, 1997 DECEMBER 31, 1996 ----------------------------- ---------------------------- INVESTMENT UNITS INVESTMENT UNITS ------------- ------------- ------------- ------------- Multifamily: Operating communities.................................. $ 2,121,365 42,184 $ 1,861,561 42,702 Communities under construction (1)..................... 233,148 5,480 186,710 5,479 Development communities in planning (1) (2): Owned............................................. 53,191 3,502 64,685 4,921 Under control (3)................................. -- 7,250 -- 6,041 ------------ ------------- ------------- ----------- Total development communities in planning.... 53,191 10,752 64,685 10,962 Other land held............................................. 31,876 -- 13,862 -- ------------ ------------- ------------- ----------- Total multifamily............................ 2,439,580 58,416 2,126,818 59,143 ------------ ============= ------------- =========== Non-multifamily............................................. 26,045 26,545 ------------ ------------- Total real estate............................ $ 2,465,625 $ 2,153,363 ============ =============
- ---------- (1) Unit information is based on management's estimates and has not been audited or reviewed by PTR's independent auditors. (2) During the third quarter of 1997, PTR changed its definition of development communities in planning. In planning is now defined as developments for which construction is anticipated to commence within 36 months, rather than 12 months, as previously defined. This change was made due to the lengthy entitlement process required for new developments in many of PTR's markets. Accordingly, December 31, 1996 balances have been adjusted to give effect to this change in definition for comparison purposes. (3) PTR's investment as of September 30, 1997 and December 31, 1996 for developments under control was $5.6 million and $2.0 million, respectively, and is reflected in the "Other assets" caption of PTR's balance sheets. The change in investments in real estate, at cost, consisted of the following (in thousands): Balance at January 1, 1997............................................. $ 2,153,363 Multifamily: Acquisition and renovation expenditures........................... 395,517 Development expenditures, excluding land acquisitions............. 162,010 Acquisition and improvement of land held for development.......... 6,044 Recurring capital expenditures.................................... 6,464 Dispositions...................................................... (255,690) Provisions for possible loss on investments....................... (1,500) -------------- Net multifamily activity subtotal...................................... 2,466,208 Non-multifamily dispositions........................................... (583) -------------- Balance at September 30, 1997.......................................... $ 2,465,625 ==============
8 SECURITY CAPITAL PACIFIC TRUST NOTES TO CONDENSED FINANCIAL STATEMENTS -- (Continued) At September 30, 1997, PTR had contingent contracts or letters of intent, subject to PTR's final due diligence and approval of all entitlements, to acquire land for the development of an estimated 7,250 multifamily units with an aggregate estimated development cost of approximately $664.5 million. At the same date, PTR also had contingent contracts or letters of intent, subject to final due diligence, for the acquisition of 208 additional operating multifamily units with a total expected investment of $18.8 million, including planned renovations. At September 30, 1997, PTR had unfunded development commitments for developments under construction of $136.9 million. GAINS ON DISPOSITIONS OF INVESTMENTS Each year, PTR formulates operating and capital plans based on an ongoing active review of PTR's portfolio. Based in part upon the market research purchased from Security Capital Real Estate Research Group Incorporated (a subsidiary of Security Capital Group Incorporated, PTR's principal shareholder ( "Security Capital Group")), and in an effort to optimize its portfolio composition, PTR may from time to time seek to dispose of assets that in management's view no longer meet PTR's long-term investment objectives. The proceeds from these selected dispositions are redeployed, typically through tax-deferred exchanges, into assets that in PTR's view offer better long-term cash flow growth prospects. As part of this asset optimization strategy, PTR disposed of 25 multifamily communities, one industrial building and two parcels of land during the nine months ended September 30, 1997, representing gross proceeds of $290.5 million, and disposed of 12 multifamily communities, one industrial building and one parcel of land during the nine months ended September 30, 1996, representing gross proceeds of $186.0 million. As of September 30, 1997, PTR held a portion of the 1997 disposition proceeds aggregating $23.0 million in an interest bearing escrow account, pending acquisition of other multifamily communities to complete the tax-deferred exchange. For federal income tax purposes, the majority of the 1997 and 1996 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 $47.9 million and $33.3 million were recorded for the nine months ended September 30, 1997 and 1996, respectively. As part of PTR's asset optimization strategy, ten multifamily communities and four parcels of land were held for disposition as of September 30, 1997. The aggregate carrying value of properties held for disposition was approximately $104.2 million at September 30, 1997. Each property's carrying value is less than or equal to its estimated fair market value, net of estimated costs to sell. Operating communities are not depreciated during the period for which they are determined to be held for disposition. Subject to normal closing risks, PTR expects to complete the disposition of these properties during 1997 and 1998 and redeploy the net proceeds from such dispositions, where appropriate, through tax-deferred exchanges into the acquisition of multifamily communities. The property level earnings, after interest and depreciation, from communities held for disposition at September 30, 1997 which are included in PTR's earnings from operations for the nine months ended September 30, 1997 and 1996 were $5.8 million and $6.1 million, respectively. (3) HOMESTEAD NOTES In addition to multifamily investment activity, PTR had developed and operated extended-stay lodging facilities under the Homestead Village name since 1992. On October 17, 1996, PTR contributed its Homestead Village properties to Homestead Village Incorporated ("Homestead"), a new publicly-traded company, in exchange for certain Homestead securities. As of the contribution date, the Homestead Village(R) properties constituted approximately 7.1% of PTR's total assets, at cost. The Homestead Village properties generated approximately 8.5% of PTR's net operating income (rental revenues less rental expenses, real estate taxes and property management fees) for the nine months ended September 30, 1996. During the nine month period ended September 30, 1997, PTR funded an additional $61.3 million under its $198.8 million commitment to provide development funding to Homestead in the form of convertible mortgage notes ("Homestead Notes"), resulting in a total amount funded of $162.4 million as of September 30, 1997. 9 SECURITY CAPITAL PACIFIC TRUST NOTES TO CONDENSED FINANCIAL STATEMENTS -- (Continued) Following is a reconciliation of the Homestead Notes' components to the amount reflected in the accompanying Balance Sheet (in thousands):
SEPTEMBER 30, 1997 ---------------- Face amount of Homestead Notes.............................. $ 180,820 Original issue discount..................................... (18,382) ---------------- Amount funded............................................... 162,438 Amortization of original issue discount..................... 791 Conversion feature-initial value............................ 12,736 Unamortized discount on conversion feature.................. (12,222) Fair value adjustment....................................... 115,349 ---------------- Carrying value and fair value............................... $ 279,092 ================
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. Accordingly, fair value was calculated based upon the conversion value of the Homestead Notes using the trading price of Homestead common stock at September 30, 1997 of $17.75. The fair value adjustment is recognized as an unrealized gain in shareholders' equity. PTR will adopt SFAS No. 130, REPORTING COMPREHENSIVE INCOME in 1998. As a result of this pronouncement, PTR will report changes in the unrealized gain or loss ($115.3 million unrealized gain as of September 30, 1997) on the Homestead Notes as an element of comprehensive income. PTR expects to complete the funding of the remaining $36.4 million under its funding commitment in 1997 and early 1998. (4) BORROWINGS CREDIT FACILITIES PTR has a $350 million unsecured revolving line of credit with Texas Commerce Bank, National Association ("TCB"), as agent for a group of financial institutions (collectively, the "Lenders"). The line matures in 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 (8.5% at September 30, 1997) or the federal funds rate plus 0.50%, or at PTR's option, LIBOR ( 5.6875% at September 30, 1997) plus 0.75% (6.4375% at September 30, 1997). 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"). Additionally, there is a commitment fee on the average unfunded line of credit balance. The commitment fee was $280,000 and $294,000 for the nine months ended September 30, 1997 and 1996, respectively. A summary of PTR's line of credit borrowings is as follows (dollars in thousands):
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, 1997 DECEMBER 31, 1996 ------------------- ------------------ Total line of credit....................................... $ 350,000 $ 350,000 Borrowings outstanding at end of period.................... 80,000 99,750 Weighted-average daily borrowings.......................... 116,470 112,248 Maximum borrowings outstanding at any month end............ 205,000 188,750 Weighted-average daily nominal interest rate............... 6.8% 7.3% Weighted-average daily effective interest rate............. 8.5% 8.8% Weighted-average nominal interest rate at end of period.... 6.4% 6.6%
On September 9, 1996, PTR entered into a short-term, unsecured, borrowing agreement with TCB. The loan matures March 18, 1998 and bears interest at an overnight rate which ranged from 5.94% to 7.13% during the nine months ended September 30, 1997. At September 30, 1997, there was $19.4 million outstanding under this agreement. 10 SECURITY CAPITAL PACIFIC TRUST NOTES TO CONDENSED FINANCIAL STATEMENTS -- (Continued) On March 10, 1997, PTR borrowed $60 million under a short-term, unsecured, borrowing agreement with a financial institution. On April 4, 1997, PTR borrowed an additional $40 million under a short-term, unsecured, borrowing agreement with the same financial institution, having approximately the same interest rate and repayment terms. The proceeds from both loans were used to repay borrowings under PTR's line of credit. At maturity on September 10, 1997, PTR repaid the entire outstanding balance of both loans in full, by drawing on PTR's $350 million line of credit. 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 September 30, 1997:
ISSUANCE AVERAGE EFFECTIVE AND INTEREST RATE, AVERAGE OUTSTANDING AVERAGE INCLUDING OFFERING ORIGINAL DATE OF ISSUANCE PRINCIPAL COUPON DISCOUNTS AND LIFE AMOUNT RATE ISSUANCE COSTS (YEARS) ------------- -------- ------------------ ------- March 31, 1997...................... $ 50 million 7.905% 7.850% 16.00 October 21, 1996.................... 130 million 7.350 7.500 6.85 August 06, 1996..................... 100 million 7.840 7.950 15.60 February 23, 1996................... 150 million 7.710 7.840 15.50 February 08, 1994................... 200 million 7.240 7.370 14.25 ------------- -------- ------------------ ------- Grand Total/Average................. $ 630 million 7.530% 7.640% 13.37 ============= ======== ================== =======
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 a future debt offering, PTR entered into four separate interest rate contracts in August and October 1997 with notional amounts aggregating $120 million, which PTR plans to terminate when the anticipated offering is completed. As of October 21, 1997, the fair market value of these contracts was an unrealized loss of approximately $618,000. The gain or loss ultimately realized upon termination of the hedge will be deferred and amortized into interest expense over the term of the related debt. MORTGAGES PAYABLE Mortgages payable at September 30, 1997 consisted of the following (dollar amounts in thousands):
EFFECTIVE PRINCIPAL PRINCIPAL INTEREST BALANCE AT BALANCE AT TYPE OF MORTGAGE RATE (1) SEPTEMBER 30, 1997 DECEMBER 31, 1996 - ------------------------------------------ ----------------- ----------------- ------------------ Conventional fixed rate............ 8.05% $ 151,824 $ 162,337 Tax-exempt fixed rate (2).......... 6.81 57,077 33,655 Tax-exempt floating rate (2)....... 4.88 68,540 15,336 Combined (3)....................... 8.84 5,813 5,860 ----------------- ------------- ---------------- Total/Average Mortgage Debt 7.05% $ 283,254 $ 217,188 ================= ============== ================
- ---------- (1) Represents the effective interest rate, including loan cost amortization and other ongoing fees and expenses. (2) Tax-exempt effective interest rates include credit enhancement and other bond-related costs, where applicable. (3) This category represents one multifamily community which was refinanced in 1990 pursuant to multifamily bonds aggregating $6.2 million. The bonds consist of $ 4.5 million Series A tax-exempt fixed rate bonds and $1.7 million Series B taxable fixed rate bonds. 11 SECURITY CAPITAL PACIFIC TRUST NOTES TO CONDENSED FINANCIAL STATEMENTS -- (Continued) The changes in mortgages payable during the nine months ended September 30, 1997 consisted of the following (in thousands): Balance at January 1, 1997.................................................. $ 217,188 Mortgage notes assumed...................................................... 94,834 Principal payments, including prepayments upon community dispositions....... (28,768) ------------- Balance at September 30, 1997............................................... $ 283,254 =============
SCHEDULED DEBT MATURITIES Approximate principal payments due during each of the calendar years in the 20-year period ending December 31, 2016 and thereafter, as of September 30, 1997, are as follows (in thousands):
Credit Long-Term Facilities Debt Mortgages Total ----------- ------------- ------------- ------------- 1997............................. $ 19,433 $ -- $ 24,442 $ 43,875 1998............................. 80,000 -- 28,503 108,503 1999............................. -- 30,000 8,680 38,680 2000............................. -- -- 30,642 30,642 2001............................. -- 12,500 24,510 37,010 2002............................. -- 32,500 18,070 50,570 2003............................. -- 38,750 2,532 41,282 2004............................. -- 38,750 2,746 41,496 2005............................. -- 38,750 12,975 51,725 2006............................. -- 38,750 3,222 41,972 2007............................. -- 38,750 14,608 53,358 2008............................. -- 38,750 20,093 58,843 2009............................. -- 36,250 2,931 39,181 2010............................. -- 38,750 2,762 41,512 2011............................. -- 25,000 2,836 27,836 2012............................. -- 30,000 3,007 33,007 2013............................. -- 35,000 3,252 38,252 2014............................. -- 42,500 16,378 58,878 2015............................. -- 40,000 24,560 64,560 2016............................. -- 45,000 3,092 48,092 Thereafter................... -- 30,000 33,413 63,413 ----------- ------------- ------------- ------------- Total........................ $ 99,433 $ 630,000 $ 283,254 $ 1,012,687 =========== ============= ============= =============
GENERAL 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 September 30, 1997. Interest paid on all borrowings for the nine months ended September 30, 1997 was $45.8 million, net of $13.3 million of interest capitalized during construction. Interest paid on all borrowings for the nine months ended September 30, 1996 was $20.8 million, net of $12.8 million of interest capitalized during construction. Amortization of loan costs included in interest expense for the nine months ended September 30, 1997 and 1996 was $ 2.4 million and $ 1.4 million respectively. 12 SECURITY CAPITAL PACIFIC TRUST NOTES TO CONDENSED FINANCIAL STATEMENTS -- (Continued) (5) CASH DISTRIBUTIONS PTR paid first, second and third quarter 1997 distributions of $0.325 per Common Share on February 20, May 29, and August 27, 1997. On October 29, 1997 the Board of Trustees (the "Board") declared a cash distribution of $0.325 per Common Share, payable on November 26, 1997, to shareholders of record on November 12, 1997. On March 31, June 30, and September 30, 1997, PTR paid quarterly dividends of $0.4377425 per cumulative convertible Series A Preferred Share and $0.5625 per Series B cumulative redeemable preferred shares of beneficial interest (the "Series B Preferred Shares"). (6) SHAREHOLDERS' EQUITY On March 27, 1997, PTR filed a $300 million shelf registration with the Securities and Exchange Commission to supplement an existing shelf registration with a balance of $170 million. These securities can be issued on an as-needed basis, subject to PTR's ability to effect offerings on satisfactory terms. On June 4, 1997, PTR sold 2,500,000 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 TCB. 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 transferable rights ("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 ("Capital Markets Group"), which is owned by Security Capital Group, sought investors on a best efforts basis, to oversubscribe and acquire Common Shares that were not purchased through the exercise of Rights ("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. After giving effect to the offerings described above and the $50 million in Long-Term Debt issued March 31, 1997, PTR has approximately $170.9 million in shelf-registered securities available for issuance. (7) CONSUMMATION OF MERGER On September 8, 1997, PTR terminated its REIT management agreement with Security Capital Pacific Incorporated (the "REIT Manager") and the property management agreement with SCG Realty Services Incorporated (the "Property Manager") (collectively the "Management Companies"), pursuant to a merger transaction (the " Merger") whereby PTR acquired the operations and businesses of 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 PTR Trustees 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 (33.2% ownership at September 30, 1997). The market value of the 3,295,533 Common Shares issued to Security Capital Group on the Merger date was approximately $73.3 million, based on the $22.25 per share closing price of the Common Shares, of which approximately $1.6 million was allocated to the estimated fair value of the net tangible assets acquired. The $71.7 million difference was accounted for as costs incurred in acquiring the Management Companies from an affiliate, rather than "goodwill", since the Management Companies did not qualify as businesses for purposes of applying APB Opinion No. 16 BUSINESS COMBINATIONS. 13 SECURITY CAPITAL PACIFIC TRUST NOTES TO CONDENSED FINANCIAL STATEMENTS -- (Continued) 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. 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, payroll and human resources, cash management, accounts payable, data processing, research, 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 cost of such services plus 20%. These fees may not exceed market rates and are subject to a maximum of approximately $2.2 million during 1997 and $5.5 million during 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. 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 PTR Board. In addition, after the closing of the Merger, 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. PTR common shareholders received 0.052646 warrants for each Common Share held and Series A preferred shareholders 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 a long-term incentive plan (the "Incentive Plan") which provides for awards consisting of (1) options to purchase Common Shares, (2) dividend equivalent units ("DEUs") on options, (3) a share purchase program, and (4) share awards. No more than 5,650,000 Common Shares in the aggregate may be awarded under the Incentive Plan and no individual may be granted awards with respect to more than 500,000 Common Shares in any one-year period. Under the Incentive Plan, certain employees of PTR purchased 813,430 Common Shares at a price of $22.0625 per share (the average of the high and low price per share on September 8, 1997). PTR financed up to 95% of the total purchase price through ten-year recourse loans to the participants aggregating $17.1 million. The loans, which have been recognized as a reduction of Shareholders' Equity, bear interest at a floating rate equal to the lower of PTR's annual dividend yield (5.9% at September 8, 1997) on the initial purchase price or 6% per annum. The loans are secured by the Common Shares purchased. For each Common Share purchased, participants were granted options to purchase two additional Common Shares at a price of $22.0625 per share. This share purchase opportunity and the options awarded in connection therewith were issued in connection with the Merger and is not expected to be repeated. Also, under the Incentive Plan, PTR granted options to purchase 206,461 Common Shares at an exercise price of $22.0625 per share to officers and certain employees of PTR. These options are entitled to DEUs which are calculated as the difference between PTR's annual dividend yield and the S&P 500 average dividend yield times the number of shares under option. Previously awarded DEUs accrue additional DEUs based on PTR's annual dividend rate. As of September 30, 1997 no DEUs had been issued. PTR expects to award options of this type on an annual basis. Options awarded to date under the Incentive Plan have a term of 10 years and generally vest at 25% per year commencing on the second anniversary date of the grant. PTR has adopted the provisions of SFAS No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION. Under these provisions, PTR has elected to continue to account 14 SECURITY CAPITAL PACIFIC TRUST NOTES TO CONDENSED FINANCIAL STATEMENTS -- (Concluded) for stock-based compensation under APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and related interpretations. Accordingly, no compensation cost has been recognized as the exercise price of options awarded was equal to the market price at the date of grant. PTR intends to provide the pro forma disclosures required by SFAS No. 123 in its December 31, 1997 financial statements. 15 INDEPENDENT AUDITORS' REVIEW REPORT The Board of Trustees and Shareholders SECURITY CAPITAL PACIFIC TRUST: We have reviewed the accompanying condensed balance sheet of SECURITY CAPITAL PACIFIC TRUST as of September 30, 1997, the related condensed statements of operations for the three and nine-month periods ended September 30, 1997 and 1996, the statement of shareholders' equity for the nine-month period ended September 30, 1997, and the statements of cash flows for the nine-month periods ended September 30, 1997 and 1996. These condensed financial statements are the responsibility of the Trust's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of SECURITY CAPITAL PACIFIC TRUST as of December 31, 1996, and the related statements of earnings, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated January 29, 1997, except as to Note 13, which is as of March 10, 1997, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of December 31, 1996 is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. KPMG PEAT MARWICK LLP Chicago, Illinois October 21, 1997 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with PTR's 1996 Form 10-K as well as the financial statements and notes included in Item 1 of this report. See PTR's 1996 Form 10-K for a discussion of various risk factors associated with forward-looking statements made in this document. OVERVIEW GENERAL PTR's results of operations, financial position and liquidity have been influenced primarily by the operations of and investments made in PTR's multifamily communities. The term "multifamily" as used herein refers to garden-style communities and excludes Homestead Village extended-stay lodging assets, which were contributed to a new publicly-traded company, Homestead, on October 17, 1996, in exchange for certain Homestead securities. CONSUMMATION OF MERGER On September 8, 1997, PTR terminated its REIT management agreement with the Management Companies pursuant to the Merger whereby PTR acquired the operations and businesses of 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 PTR Trustees 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 (33.2% ownership at September 30, 1997). The financial impact of the Merger is discussed in more detail below under "--Results of Operations" and "--Liquidity and Capital Resources". LONG-TERM INCENTIVE PLAN On September 8, 1997, PTR sold 813,430 Common Shares at $22.0625 per share to eligible employees in exchange for 10-year recourse loans aggregating $17.1 million and cash of $0.8 million. Participants were awarded options to purchase 1,626,860 Common Shares at an exercise price of $22.0625 per share. PTR will recognize interest income of approximately $1.0 million annually in connection with the share purchase loans. Distributions paid on the shares purchased will be used first to service the interest and then the principal on the respective employee loans, with any excess paid to the participant. Also on September 8, 1997, PTR granted options to purchase 206,461 Common Shares to officers and certain employees at an exercise price of $22.0625 per share. PTR will recognize compensation cost related to the DEU feature associated with these options. No DEUs had been issued as of September 30, 1997. No compensation cost is recognized for the fair value of the awarded options, since the exercise price was equal to the market price at the date of grant. See "Item 1. Financial Statements, Note 8, Long-Term Incentive Plan" for additional information regarding vesting, interest rates, and other terms of the Long-Term Incentive Plan. 17 MULTIFAMILY INVESTMENTS The following table provides an overview of PTR's multifamily portfolio and related investment activity for the periods indicated (dollar amounts in thousands):
THREE MONTHS THREE MONTHS THREE MONTHS NINE MONTHS ENDED ENDED ENDED ENDED MARCH 31, 1997 JUNE 30, 1997 SEPTEMBER 30, 1997 SEPTEMBER 30, 1997 -------------- ------------- ------------------ ------------------ OPERATING COMMUNITIES: Communities............................. 133 129 133 133 Units................................... 40,874 40,786 42,184 42,184 Total expected investment(1)............ $ 1,928,702 $ 2,060,586 $ 2,155,676 $ 2,155,676 COMMUNITIES UNDER CONSTRUCTION: STARTS DURING PERIOD: Communities............................. 1 6 -- 7 Units................................... 192 1,733 -- 1,925 Total expected investment(1)............ $ 9,393 $ 123,769 -- $ 133,162 COMPLETIONS DURING PERIOD: Communities............................. -- 2 3 5 Units................................... -- 732 1,192 1,924 Total expected investment(1)............ -- $ 46,590 $ 67,211 $ 113,801 STABILIZATIONS DURING PERIOD: Communities............................. -- 1 2 3 Units................................... -- 364 696 1,060 Total expected investment(1)............ -- $ 22,139 $ 42,663 $ 64,802 UNDER CONSTRUCTION AT END OF PERIOD: Communities............................. 18 . 22 18 18 Units................................... 5,671 6,672 5,480 5,480 Total expected investment(1)............ $ 359,366 $ 435,195 $ 370,081 $ 370,081 Investment to date...................... $ 227,325 $ 254,843 $ 233,148 $ 233,148 DEVELOPMENT EXPENDITURES DURING PERIOD....... $ 52,883 $ 61,597 $ 47,530 $ 162,010 ACQUISITIONS: Communities............................. 5 6 3 14 Units................................... 1,652 2,065 688 4,405 Total expected investment(1)............ $ 144,112 $ 188,089 $ 45,611 $ 377,812 DISPOSITIONS: Communities............................. 12 11 2 25 Units................................... 3,480 2,885 482 6,847 Gross sales proceeds (2)........... $ 142,137 $ 107,679 $ 40,700 $ 290,516 Gains (2).......................... $ 25,335 $ 11,872 $ 10,723 $ 47,930
- --------- (1) For operating communities and acquisitions, represents cost, including budgeted renovations, as of the end of each period. For communities under construction, represents total budgeted development cost as of the end of each period, which includes the cost of land, fees, permits, payments to contractors, materials, architectural and engineering fees and interest and property taxes to be capitalized during the construction period. (2) Includes the sale of an industrial building and two unrelated parcels of land with gross sales proceeds of approximately $772,241 and an aggregate gain of approximately $382,863. CURRENT DEVELOPMENT ACTIVITY 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 continue to provide an important source of long-term cash flow growth. PTR 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 PTR's access to investment capital. The following table summarizes PTR's development communities under construction as of September 30, 1997 (dollar amounts in thousands): 18
START ACTUAL OR EXPECTED TOTAL DATE EXPECTED DATE FOR STABILIZATION NUMBER OF PTR EXPECTED (QUARTER/ FIRST UNITS DATE UNITS INVESTMENT INVESTMENT(1) YEAR) (QUARTER/YEAR)(2) (QUARTER/YEAR) % LEASED (3) --------- ---------- ------------ ------ ----------------- -------------- ----------- COMMUNITIES UNDER CONSTRUCTION AND IN LEASE UP (4): CENTRAL REGION: DALLAS, TEXAS: Park Meadows............... 368 $ 16,165 $ 16,963 Q3/96 Q2/97 Q2/98 59.8% ----- --------- --------- NORTHWEST REGION: PORTLAND, OREGON: Arbor Heights.............. 348 21,206 22,818 Q2/96 Q3/97 Q3/98 19.3 Cambridge Crossing......... 250 13,783 15,564 Q3/96 Q3/97 Q3/98 25.2 ----- --------- --------- Total Portland........... 598 34,989 38,382 ----- --------- --------- SALT LAKE CITY, UTAH: Mountain Shadow Expansion.. 88 4,216 4,726 Q4/96 Q3/97 Q1/98 35.2 Riverview.................. 492 25,984 32,558 Q2/96 Q2/97 Q3/98 25.6 ----- --------- --------- Total Salt Lake City..... 580 30,200 37,284 ----- --------- --------- SEATTLE, WASHINGTON: Canyon Creek............... 336 24,547 25,335 Q2/96 Q1/97 Q4/97 79.8 Harbour Pointe............. 229 14,466 15,073 Q3/96 Q2/97 Q1/98 46.7 ----- --------- --------- Total Seattle............ 565 39,013 40,408 ----- --------- --------- Total Northwest Region. 1,743 104,202 116,074 ----- --------- --------- WEST REGION: PHOENIX, ARIZONA: San Palmera................ 412 25,569 25,454 Q4/95 Q4/96 Q4/97 87.4 ----- --------- --------- Total in Lease-up.. 2,523 145,936 158,491 ----- --------- --------- OTHER COMMUNITIES UNDER CONSTRUCTION (5): CENTRAL REGION: DALLAS, TEXAS: Timber Ridge II............ 192 6,751 9,393 Q1/97 Q4/97 Q2/98 n/a ----- --------- --------- DENVER, COLORADO: Federal Heights............ 384 8,107 22,772 Q2/97 Q1/98 Q2/99 n/a ----- --------- --------- HOUSTON, TEXAS: Memorial Heights II........ 256 12,882 15,880 Q4/96 Q4/97 Q3/98 n/a ----- --------- --------- Total Central Region..... 832 27,740 48,045 ----- --------- --------- NORTHWEST REGION: PORTLAND, OREGON: Hedges Creek............... 408 9,661 27,307 Q2/97 Q2/98 Q2/99 n/a ----- --------- --------- SEATTLE, WASHINGTON: Forestview................. 192 3,992 15,340 Q2/97 Q2/98 Q1/99 n/a Stonemeadow................ 280 6,767 21,723 Q2/97 Q2/98 Q1/99 n/a ----- --------- --------- Total Seattle............ 472 10,759 37,063 ----- --------- --------- Total Northwest Region. 880 20,420 64,370 ----- --------- --------- WEST REGION: ORANGE COUNTY, CALIFORNIA: Las Flores Apartment Homes. 504 15,470 43,894 Q4/96 Q1/98 Q2/99 n/a Sorrento................... 241 8,323 21,539 Q2/97 Q1/98 Q4/98 n/a ----- --------- --------- Total Orange County...... 745 23,793 65,433 ----- --------- --------- PHOENIX, ARIZONA: Arrowhead I................ 272 9,462 18,654 Q3/96 Q4/97 Q3/98 n/a ----- --------- --------- RENO, NEVADA: Meadowview I............... 228 5,797 15,088 Q2/97 Q1/98 Q4/98 n/a ----- --------- --------- Total West Region...... 1,245 39,052 99,175 ----- --------- --------- Total Other.......... 2,957 87,212 211,590 ----- --------- --------- Total Communities Under Construction 5,480 $ 233,148 $ 370,081 ===== ========= =========
- --------- (1) Represents total budgeted development cost, which includes the cost of land, fees, permits, payments to contractors, materials, architectural and engineering fees and interest and property taxes to be capitalized during the construction period. (2) Represents the quarter that the first completed units were made available for leasing (or are expected to be made available). PTR begins leasing completed units prior to completion of the entire community. (3) The percentage leased is based on leased units divided by total number of units in the community (completed and under construction). (4) A development community is considered in "lease-up" once the first units are delivered. (5) Lease-up has not yet commenced. See PTR's 1996 Form 10-K for a discussion of various risks associated with PTR's development and construction activities. 19 RECENT ACQUISITIONS In addition to its development activity, during the nine month period ended September 30, 1997, PTR completed the acquisition of 14 operating multifamily communities (4,405 units) in California, Seattle and Salt Lake City at a total expected investment of $377.8 million. See PTR's 1996 Form 10-K for a discussion of various risks associated with PTR's acquisition activities. RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO SEPTEMBER 30, 1996 Net earnings for the nine months ended September 30, 1997 and 1996 were $44.4 million and $104.6 million, respectively, a decrease of $60.2 million (57.5%). This decrease resulted from a one-time operating expense adjustment of approximately $71.7 million related to the costs incurred in acquiring the businesses and operations of the Management Companies from Security Capital Group in the Merger. See "--Costs Incurred in Acquiring Management Companies from an Affiliate" below. The impact of this one-time expense, the elimination of earnings from Homestead Village properties and higher interest expense were partially offset by a $14.6 million increase in gains on dispositions and increased earnings from multifamily communities, primarily in California, the Pacific Northwest and Salt Lake City ("West Coast Markets"). A discussion of the major components of PTR's results of operations follows. PROPERTY OPERATIONS AND ACQUISITION OF PROPERTY MANAGER The following table summarizes the Net Operating Income generated from property operations for each period (in thousands):
HOMESTEAD OTHER NON- MULTIFAMILY VILLAGE MULTIFAMILY TOTAL ----------- -------- ----------- ----- Net Operating Income--Nine Months Ended September 30, 1997(1)............................. $ 152,219 $ -- $ 2,840 $ 155,059 Net Operating Income--Nine Months Ended September 30, 1996(1)............................. 129,039 12,190 2,328 143,557 --------- -------- -------- ---------- Increase (decrease).............. $ 23,180 $(12,190) $ 512 $ 11,502 ========= ======== ======== ==========
- --------- (1) Net Operating Income is defined as rental revenues less rental expenses, real estate taxes and property management fees. At September 30, 1997, multifamily investments comprised 99.2% of PTR's total real estate portfolio, based on total expected investment. The overall $23.2 million increase in Net Operating Income from PTR's multifamily communities for the nine months ended September 30, 1997 as compared to the nine months ended September 30, 1996 was attributable to a $29.9 million increase in rental revenues partially offset by a $6.7 million increase in rental expenses, real estate taxes and property management fees ("Operating Expenses"). The $29.9 million increase in rental revenues from $214.4 million for the nine months ended September 30, 1996 to $244.3 million for the nine months ended September 30, 1997 was attributable primarily to increases in rental revenues generated by existing multifamily communities and increased revenues from new investments 20 in West Coast Markets. Similarly, the $6.7 million increase in Operating Expenses from $85.4 million for the nine months ended September 30, 1996 to $92.1 million for the nine months ended September 30, 1997 is attributable primarily to additional Operating Expenses from new communities, higher operating costs in new markets and increases in Operating Expenses associated with existing multifamily communities. Multifamily property management fees for the nine months ended September 30, 1997 as compared to the same period in 1996, decreased $0.4 million primarily as a result of the termination of the property management agreement upon consummation of the Merger. After the Merger, PTR directly incurs personnel and other costs related to property management, in lieu of paying a property management fee to Security Capital Group. As a result of these factors, PTR's multifamily net operating income as a percentage of rental revenues increased from 60.2% in 1996 to 62.3% in 1997. Additional information for these communities is presented below under "--Same Store Communities". PTR categorizes operating multifamily communities (which include all communities not under development) as either "stabilized" or "pre-stabilized." The term "stabilized" means that 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 rents. Prior to being "stabilized", a community is considered "pre-stabilized". Approximately 71.9% and 76.3% of PTR's operating multifamily portfolio was classified as stabilized as of September 30, 1997 and 1996, respectively, based on total expected investment. The $12.2 million in Homestead Village Net Operating Income shown for the nine months ended September 30, 1996 resulted from rental revenues aggregating $23.3 million offset by Operating Expenses aggregating $11.1 million generated from 28 properties operating as of September 30, 1996. The decrease in Net Operating Income related to the Homestead Village properties in the nine months ended September 30, 1997 is entirely due to the contribution of all properties to Homestead, a newly formed company, on October 17, 1996. SAME STORE COMMUNITIES The following table illustrates selected quarterly and year-to-date performance data for PTR's communities which were fully operational in comparable periods of 1996 and 1997 ("Same Store Communities") followed by selected same store community information by region and market:
FULLY OPERATIONAL FULLY OPERATIONAL COMMUNITIES ON COMMUNITIES ON JULY 1, 1996 JANUARY 1, 1996 ----------------- ------------------ PORTFOLIO (DOLLAR AMOUNTS IN THOUSANDS): Communities............................... 88 69 Units...................................... 27,793 21,034 Total expected investment(1)............... $1,171,771 $844,192 % of total PTR portfolio(2)................ 46.39% 33.42% THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1997 1997 ----------------- ------------------ OPERATING PERFORMANCE VS. PRIOR YEAR: Collections growth(3)...................... 3.25% 2.59% Property Operating Expense growth.......... 2.82% 2.61% Net Operating Income growth................ 3.55% 2.58% Recurring capital expenditures per unit (4) $ 39 $ 150 THREE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 ----------------- ------------------ SUMMARY INFORMATION ON JULY 1, 1996 SAME STORE COMMUNITIES (IN ACTUAL DOLLARS): Average physical occupancy................. 94.74% 94.54% Property operating expense ratio(5)........ 40.13% 40.30% Average rental rate per unit(6)............ $ 644 $ 625 See notes following next table.
21
AVERAGE PHYSICAL OCCUPANCY % COLLECTIONS GROWTH THREE MONTHS THREE MONTHS 7/1/96 SAME TOTAL PTR ENDED ENDED STORE PORTFOLIO % MARKET DISTRIBUTION SEPTEMBER 30, SEPTEMBER 30, 1996 COMMUNITIES % BY --------------------- 1997 1996 1997 VS. 1996 (3) BY MARKET (2) MARKET(2) ------- ------ ----------------- ------------- --------- CENTRAL REGION: Austin........................................... 94.55% 95.43% 2.97% 2.39% 2.85% Dallas........................................... 96.38 96.19 3.75 3.99 2.89 Denver........................................... 96.37 97.02 6.05 9.16 5.15 El Paso.......................................... 94.05 94.46 (2.45) 7.21 3.35 Houston.......................................... 96.15 96.12 7.14 4.88 5.07 San Antonio...................................... 95.75 92.22 6.07 11.32 5.25 ----- ----- ----- ----- ----- CENTRAL REGION SUBTOTAL.......................... 95.49% 94.70% 4.09% 38.95% 24.56% ----- ----- ----- ----- ----- NORTHWEST REGION: Portland......................................... 94.06% 91.79% 7.88% 3.94% 5.42% Salt Lake City................................... 93.06 94.47 3.56 3.11 5.15 Seattle.......................................... 96.21 95.71 11.19 5.57 9.97 ----- ----- ----- ----- ----- NORTHWEST REGION SUBTOTAL........................ 94.68% 94.23% 8.25% 12.62% 20.54% ----- ----- ----- ----- ----- WEST REGION: Albuquerque...................................... 94.06% 94.72% (2.61%) 7.37% 5.24% Las Vegas........................................ 92.22 96.14 (3.17) 8.52 3.95 Phoenix.......................................... 93.82 94.23 0.65 13.41 9.85 Northern California.............................. 97.13 97.00 5.86 3.35 13.88 Southern California.............................. 94.72 92.63 6.87 12.91 17.69 Tucson........................................... 91.86 93.98 0.31 1.24 1.59 ----- ----- ----- ----- ----- WEST REGION SUBTOTAL............................. 93.86% 94.38% 1.28% 46.80% 52.20% ----- ----- ----- ----- ----- Other Markets......................................... 96.43% 96.31% (0.58%) 1.63% 2.70% ----- ----- ----- ------ ------ Totals .............................................. 94.74% 94.54% 3.25% 100.00% 100.00% ===== ===== ===== ====== ====== Same Store Communities as a percentage of total PTR portfolio 46.39% ======
- -------- (1) Represents cost, including budgeted renovations. (2) Based on total expected investment as of September 30, 1997. (3) Represents percentage growth in rental revenues, net of vacancies, bad debts and concessions. (4) Actual recurring capital expenditures per unit for PTR's multifamily communities that were fully operating during the entire nine months ended September 30, 1997. (5) Represents Operating Expenses as a percentage of rental revenues. (6) Represents weighted-average monthly "asking rents" during each period. Approximately 53% of PTR's total capital is currently deployed in its West Coast Markets. These communities currently represent only 29% of PTR's same store portfolio, however, this percentage will increase significantly over the next three calendar quarters as recent acquisitions and developments are added to the same store portfolio. Management believes that the addition of new communities in the West Coast Markets to its same store portfolio will have a positive impact on future growth in rental revenues, Net Operating Income, and cash flow provided by operating activities. HOMESTEAD INTEREST AND HOMESTEAD NOTES Through September 30, 1997, PTR had funded $162.4 million of its $198.8 million Homestead funding commitment of which $61.3 million was funded during the nine months ended September 30, 1997. This leaves a remaining commitment under the funding commitment agreement of approximately $36.4 million, which will be provided to Homestead throughout the remainder of 1997 and early 1998 to fund developments as needed on development properties contributed by PTR. 22 During the nine months ended September 30, 1997, PTR recorded $11.4 million in interest income ($10.5 million 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 future periods as PTR continues to fund Homestead's development activity up to its $198.8 million funding commitment. Upon 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 September 30, 1997 of $17.75, PTR's ownership would result in the following incremental value per PTR Common Share at September 30, 1997 (in thousands, except per share amounts:) Homestead common stock price.........................................$ 17.750 Conversion price..................................................... 11.500 -------- Incremental value per share of Homestead common stock...........$ 6.25 Shares of Homestead common stock upon conversion (at full funding) 19,246 -------- Total incremental value from conversion.........................$120,288 PTR Common Shares outstanding..................................... 92,481 -------- Assumed incremental value per PTR Common Share..................$ 1.30 ========
Upon full funding of the Homestead Notes by PTR and Security Capital Atlantic Incorporated ("ATLANTIC"), PTR's conversion rights would represent a 34.7% ownership interest in Homestead. This ownership interest assumes no further equity offerings by Homestead, conversion of all Homestead Notes by PTR and ATLANTIC and exercise of all outstanding Homestead warrants. DEPRECIATION EXPENSE The increase in depreciation expense resulted primarily from the increase in the number of operating communities partially offset by dispositions, including those related to the contribution of assets to Homestead on October 17, 1996. INTEREST EXPENSE The following table summarizes PTR's interest expense (in thousands):
NINE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 INCREASE % INCREASE ------------------ ------------------ -------- ---------- Credit facilities............. $ 11,294 $ 7,428 $ 3,866 52.0% Long-Term Debt................ 34,456 18,958 15,498 81.7 Mortgages payable............. 13,284 8,839 4,445 50.3 Capitalized interest.......... (13,332) (12,824) (508) 4.0 ----------- ---------- --------- ------- Total interest expense... $ 45,702 $ 22,401 $ 23,301 104.0% =========== ========== ========= =======
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 $116.5 million (with an average effective interest rate of 8.5%) during the nine months ended September 30, 1997, as compared to average borrowings of approximately $114.0 million (with an average effective interest rate of 8.56%) for the same period in 1996. 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 upon maturity on September 10, 1997. 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 which were partially offset by prepayments during 1996 and 1997. 23 The increase in interest costs were partially offset by an increase in capitalized interest which was primarily attributable to higher levels of multifamily development activity for the nine months ended September 30, 1997 as compared to the same period in 1996. REIT MANAGEMENT FEE AND ACQUISITION OF REIT MANAGER The REIT management fee paid by PTR decreased by approximately 23.9% during the nine months ended September 30, 1997 as compared to the same period in 1996 due primarily to the Homestead transaction described above, higher Long-Term Debt levels and the termination of the REIT management agreement upon closing of the Merger on September 8, 1997. Pursuant to the consummation of the Merger, PTR acquired the REIT Manager and became an internally-managed REIT. Subsequent to September 8, 1997 the REIT management fee is replaced with the actual personnel and other operating costs associated with the REIT management function. These costs are recorded as general and administrative expenses, which resulted in the $0.5 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 in accordance with GAAP. 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, payroll and human resources, cash management, accounts payable, data processing, research, 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 cost of service plus 20%, subject to a maximum of approximately $2.2 million during 1997 and $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 date through September 30, 1997 under this agreement aggregated $0.2 million. The ASA, which expires on December 31, 1998, provides for annual renewals for consecutive one-year terms, subject to approval by a majority of the independent members of the PTR Board. 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 the Merger date was approximately $73.3 million, based on the $22.25 per share closing price of the Common Shares, of which approximately $1.6 million was allocated to the estimated fair value of the tangible net assets acquired. The $71.7 million difference was accounted for as costs incurred in acquiring the Management Companies from an affiliate, rather than "goodwill" 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 Operations but was not deducted for purposes of calculating funds from operations, due to the non-recurring and non-cash nature of this expense. GAINS ON DISPOSITIONS OF INVESTMENTS PTR employs a market research-based asset optimization strategy aimed at optimizing its portfolio composition in order to maximize growth in cash flow from operating communities. Since the inception of this strategy in December 1995 and through September 30, 1997, PTR has redeployed gross proceeds from dispositions aggregating $590.1 million from markets with less attractive economic fundamentals to well-located communities primarily in PTR's West Coast Markets which have high barriers to entry against new supply and stronger long-term growth prospects. During the nine months ended September 30, 1997, PTR disposed of 25 multifamily communities, one industrial building and two parcels of land, representing gross proceeds of $290.5 million. As of September 30, 1997, PTR held a portion of the 1997 disposition proceeds aggregating $23.0 million in an interest bearing escrow account, pending acquisition of other multifamily communities to complete the tax-deferred exchange. PTR disposed of 12 multifamily communities, one industrial building and one parcel of land representing gross proceeds of $186.0 million during the nine months ended September 30, 1996. For federal income tax purposes, the majority of the 1997 and 1996 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 $47.9 million and $33.3 million, were recorded for the nine months ended September 30, 1997 and 1996, respectively. Ten multifamily communities and four parcels of land were held for disposition as of September 30, 1997. The aggregate carrying value of properties held for disposition was approximately $104.2 million at September 30, 1997. Subject to normal closing risks, PTR expects to complete the disposition of these properties during 1997 and 1998 and redeploy the net proceeds from such dispositions, where appropriate, through tax-deferred exchanges, into the acquisition of multifamily communities. 24 THREE MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND 1996 Revenues and expenses for the three months ended September 30, 1997 compared to the three months ended September 30, 1996 reflect changes similar to those discussed in the preceding paragraphs for the comparison of the nine months ended on the same dates. The changes are substantially attributable to the same reasons discussed in the preceding paragraphs for the nine months ended September 30, 1997 and 1996. ENVIRONMENTAL MATTERS PTR is subject to environmental regulations related to the ownership, operation, development and acquisition of real estate. As part of its due diligence procedures, PTR has conducted Phase I environmental assessments on each community prior to acquisition. The cost of complying with environmental regulations was not material to PTR's results of operations during either period. PTR is not aware of any environmental condition on any of its communities that is likely to have a material adverse effect on PTR's financial position or results of operations. 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 adequate to meet PTR's operating and capital investment requirements as well as its Homestead funding obligation and shareholder distribution requirements. OPERATING ACTIVITIES Net cash flow provided by operating activities increased by $5.1 million (5.3%) for the nine months ended September 30, 1997 as compared to the same period in 1996. This increase was due primarily to increased cash generated by multifamily communities. INVESTING AND FINANCING ACTIVITIES During the nine months ended September 30, 1997 and 1996, PTR invested cash of $468.7 million and $462.4 million, respectively, in real estate investments relating primarily to the significant acquisition and development activity summarized in "--Overview" above. The $468.7 million invested in real estate and $61.3 million in fundings of Homestead Notes during the nine months ended September 30, 1997 were financed primarily from $261.3 million in net proceeds from property dispositions (excluding $22.9 million held in escrow pending tax-deferred exchanges), and borrowings under PTR's credit facilities. These credit facilities were partially repaid from proceeds primarily related to PTR's $50 million offering of Long-Term Debt issued in March 1997, $54.3 million in net proceeds from the sale of 2,500,000 Common Shares in June 1997 and the $194.1 million in net proceeds from the Rights and Oversubscription Offering in September 1997. The $462.4 million invested during the nine months ended September 30, 1996 was financed primarily from $182.5 million in net proceeds from property dispositions and borrowings under PTR's credit facilities which were partially repaid from $250 million in proceeds related to Long-Term Debt issued during the nine months ended September 30, 1996. Other significant financing activity included the payment of $90.1 million and $86.3 million in Common and Preferred Share distributions for the nine months ended September 30, 1997 and 1996, respectively. The increase is primarily attributable to a 4.8% increase in the distributions paid per Common Share and an increase in the overall number of Common Shares outstanding. Preferred Share dividends decreased approximately $4.3 million during the respective periods as a result of conversion of Series A Preferred Shares to Common Shares which also resulted in increased Common Share distributions. PTR prepaid mortgages due to community dispositions of $26.5 million and $25.8 million for the nine months ended September 30, 1997 and 1996, respectively. Significant non-cash investing and financing activities for the nine months ended September 30, 1997 included (i) the acquisition of the operations and businesses of the Management Companies in exchange for Common Shares with a market value on the date of the Merger of $73.3 million (ii) the assumption of $ 94.8 million and $ 88.7 million of mortgage debt during 1997 and 1996, respectively, in connection with community acquisitions and (iii) the 25 conversion of Series A Preferred Shares to Common Shares aggregating $24.4 million and $12.4 million in 1997 and 1996, respectively. During 1997, the unrealized gain associated with the Homestead Notes increased $ 40.4 million to $115.3 million as of September 30, 1997. BORROWINGS PTR has a $350 million unsecured revolving line of credit with approximately $123.0 million of borrowings outstanding as of October 31, 1997. The line of credit matures August 1999 and may be extended annually for an additional year with the approval of the Lenders. The LIBOR spread was reduced from 1.125% to 0.75% on the line of credit effective August 13, 1997. The aggregate amount of borrowings outstanding under all of PTR's credit facilities as of October 31, 1997 was $145.0 million. At maturity on September 10, 1997, PTR repaid the entire outstanding balance aggregating $100 million on two separate short-term, unsecured borrowing agreements with a financial institution by drawing on PTR's $350 million unsecured, revolving line of credit. See "Item 1. Financial Statements, Note 4, Borrowings" for additional information regarding credit availability, outstanding debt balances, interest rates, scheduled debt maturities and other terms. COMMITMENTS AND CONTINGENCIES At September 30, 1997, PTR had contingent contracts or letters of intent, subject to PTR's final due diligence and approval of all entitlements, to acquire land for new development communities with an estimated 7,250 multifamily units at a total development cost of approximately $664.5 million. At the same date, PTR also had contingent contracts or letters of intent, subject to final due diligence, for the acquisition of 208 additional operating multifamily units with a total expected investment of $18.8 million, including budgeted renovations. At September 30, 1997, PTR had unfunded development commitments for developments under construction of $136.9 million. For a description of unfunded commitments in connection with the Homestead Notes see "--Results of Operations--Homestead Interest and Homestead Notes." PTR expects to finance these activities and other future investment and operating needs with cash on hand, borrowings under its credit facilities and disposition proceeds from its asset optimization strategy, prior to arranging long-term capital. The credit facilities should facilitate an efficient 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 $170.9 million in shelf-registered securities which can be issued on an as-needed basis, subject to PTR's ability to effect offerings on satisfactory terms. PTR believes that its current conservative ratio of long-term debt to total long-term undepreciated book capitalization (the sum of long-term debt and shareholders' equity after adding back accumulated depreciation) of 34.6% at September 30, 1997, provides considerable flexibility with respect to its ability to finance its investment activities. 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 a future debt offering, PTR entered into four separate interest rate contracts in August and October 1997 with notional amounts aggregating $120 million , which PTR plans to terminate when the anticipated offering is completed. As of October 21, 1997, the fair market value of these contracts was an unrealized loss of approximately $618,000. The gain or loss ultimately realized upon termination of the hedge will be deferred and amortized into interest expense over the term of the related debt. 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. DISTRIBUTIONS PTR paid first, second and third quarter 1997 distributions of $0.325 per Common Share on February 20, May 29, and August 27, 1997. On October 29, 1997, the Board declared a cash distribution of $0.325 per Common Share, payable on November 26, 1997, to shareholders of record on November 12, 1997. On March 31, June 30, and September 30, 1997, PTR paid quarterly dividends on the Series A Preferred Shares of $0.4377425 per share and quarterly dividends on its Series B Preferred Shares of $0.5625 per share. 26 FUNDS FROM OPERATIONS Funds from operations is defined as net earnings computed in accordance with GAAP, excluding gains (or losses) from real estate transactions, provisions for possible losses, extraordinary items, significant non-recurring items and real estate depreciation. 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 activities, financing activities and investing activities, it provides a 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 National Association of Real Estate Investment Trusts (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 described above under "--Distributions". In 1996, PTR contributed its Homestead Village extended-stay lodging assets to Homestead. Management believes that funds from operations for the nine months ended September 30, 1996 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 the nine months ended September 30, 1996 has been calculated as if the Homestead transaction had occurred on January 1, 1996. 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, 1996. 27 Funds from operations and pro forma funds from operations (1996) are as follows (amounts in thousands):
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 1997 1996 1997 1996 ---- ---- ---- ---- Net earnings attributable to Common Shares............................ $(40,919) $ 43,793 $ 29,789 $ 85,613 Add (Deduct): Depreciation on real estate investments.......................... 13,364 10,987 38,052 32,230 Provision for possible loss on investments....................... -- -- 1,500 -- Gain on disposition of investments, net.......................... (10,723) (25,257) (47,930) (33,340) Extraordinary item-loss on early extinguishment of debt, net..... -- (49) -- 788 Amortization related to Homestead Notes.......................... (340) -- (868) -- Costs incurred in acquiring Management Companies from an affiliate............................................. 71,707 -- 71,707 -- -------- -------- ---------- --------- Historical funds from operations attributable to Common Shares........ 33,089 29,474 92,250 85,291 Add (deduct) pro forma adjustments relating to the contribution of Homestead Assets: Reduction in revenues and operating expenses (1)................. -- (4,635) -- (12,190) Increase in interest income (2).................................. -- 1,668 -- 3,691 Increase in interest expense (3)................................. -- (157) -- (446) Reduction in capitalized interest (4)............................ -- (857) -- (2,035) REIT Management fee effect (5)................................... -- 953 -- 2,400 Other ......................................................... -- (34) -- (26) -------- -------- ---------- --------- Total pro forma adjustments................................. -- (3,062) -- (8,606) -------- -------- ---------- --------- Funds from operations attributable to Common Shares (Pro forma for 1996)............................................... $ 33,089 $ 26,412 $ 92,250 $ 76,685 ======== ========= ========= ========= Weighted-average Common Shares outstanding............................ 81,506 72,628 78,280 72,355 ======== ========= ========= =========
- ---------- (1) Represents the elimination of Homestead's historical revenues and operating expenses. (2) Represents the 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. 28 PART II--OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITIES HOLDERS At a special meeting of PTR's common shareholders held on September 8, 1997, shareholders approved the Merger and Issuance Agreement which among other things contemplated the acquisition of the businesses and operations of the Management Companies from Security Capital Group in exchange for 3,295,533 Common Shares. Of the total Common Shares voted, 62,972,738 (99.3%) were voted in favor and 463,192 (0.7%) were voted against the transaction. Additionally, shareholders approved an amendment to PTR's Restated Declaration of Trust exempting the Merger transactions from certain provisions which restrict transactions with affiliates. Of the total Common Shares voted 64,689,368 (99.3%) were voted in favor of the proposal and 457,816 (0.7%) were voted against the proposal. The final proposal approved by the shareholders at the special meeting was the 1997 Long-Term Incentive Plan. Of the total Common Shares voted, 60,389,291 (95.3%) were voted in favor of the proposal and 2,990,954 (4.7%) were voted against the proposal. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 12.1 -- Computation of Ratio of Earnings to Fixed Charges. 12.2 -- Computation of Ratio of Earnings to Fixed Charges and Preferred Share Dividends. 15 -- Letter from KPMG Peat Marwick LLP dated November 13, 1997 regarding unaudited financial information. 27 -- Financial Data Schedule
(b) Reports on Form 8-K:
DATE ITEM REPORTED FINANCIAL STATEMENTS ------------ --------------- -------------------- July 21, 1997 Item 5, Item 7 Yes September 9, 1997 Item 7 Yes September 15, 1997 Item 5, Item 7 No
29 SIGNATURES Pursuant to the requirements 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 By: /s/ BRYAN J. FLANAGAN -------------------------------- Bryan J. Flanagan SENIOR VICE PRESIDENT (PRINCIPAL FINANCIAL OFFICER) BY: /s/ ASH K. ATWOOD -------------------------------- Ash K. Atwood, VICE PRESIDENT & CO-CONTROLLER (PRINCIPAL ACCOUNTING OFFICER) Date: November 13, 1997 30 EX-12.1 2 EXHIBIT 12.1 EXHIBIT 12.1 SECURITY CAPITAL PACIFIC TRUST COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLAR AMOUNTS IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, TWELVE MONTHS ENDED DECEMBER 31, ------------- -------------------------------- 1997 1996 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- ---- Earnings from operations......... $ (3,516)(1) $ 72,099 $ 94,089 $ 81,696 $ 46,719 $ 23,191 $ 9,037 Add: Interest expense............ 45,702 22,401 35,288 19,584 19,442 3,923 3,214 ---------- --------- --------- --------- -------- -------- -------- Earnings as adjusted............. $ 42,186 $ 94,500 $ 129,377 $ 101,280 $ 66,161 $ 27,114 $ 12,251 ========== ========= ========= ========= ======== ======== ======== Fixed charges: Interest expense............ $ 45,702 $ 22,401 $ 35,288 $ 19,584 $ 19,442 $ 3,923 $ 3,214 Capitalized interest........ 13,332 12,824 16,941 11,741 6,029 2,818 989 ---------- --------- --------- --------- -------- -------- -------- Total fixed charges......... $ 59,034 $ 35,225 $ 52,229 $ 31,325 $ 25,471 $ 6,741 $ 4,203 ========== ========= ========= ========= ======== ======== ======== Ratio of earnings to fixed charges 0.7(1) 2.7 2.5 3.2 2.6 4.0 2.9 ========== ========== ========= ========= ======== ====== ==========
- --------- (1) Earnings from operations for 1997 includes a one-time 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 nine months ended September 30, 1997 would be 1.9. EX-12.2 3 EXHIBIT 12.2 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)
NINE MONTHS ENDED SEPTEMBER 30, TWELVE MONTHS ENDED DECEMBER 31, ------------- -------------------------------- 1997 1996 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- ---- Earnings from operations $ (3,516)(1) $ 72,099 $ 94,089 $ 81,696 $ 46,719 $ 23,191 $ 9,037 Add: Interest expense............... 45,702 22,401 35,288 19,584 19,442 3,923 3,214 --------- --------- ---------- --------- ------- -------- ------- Earnings as adjusted................ $ 42,186 $ 94,500 $ 129,377 $ 101,280 $ 66,161 $ 27,114 $ 12,251 ========= ========= ========= ========= ======= ======== ======== Combined fixed charges and preferred share dividends: Interest expense............... $ 45,702 $ 22,401 $ 35,288 $ 19,584 $ 19,442 $ 3,923 $ 3,214 Capitalized interest........... 13,332 12,824 16,941 11,741 6,029 2,818 989 --------- --------- --------- --------- -------- -------- -------- Total fixed charges.......... 59,034 35,225 52,229 31,325 25,471 6,741 4,203 Preferred share dividends .......... 14,625 18,956 24,167 21,823 16,100 1,341 -- --------- --------- ---------- --------- ---------- --------- -------- Combined fixed charges and preferred dividends......................... $ 73,659 $ 54,181 $ 76,396 $ 53,148 $ 41,571 $ 8,082 $ 4,203 ======== ========= ========== ========= ======== ======== ======== Ratio of earnings to combined fixed charges and preferred share dividends......................... 0.6 (1) 1.7 1.7 1.9 1.6 3.4 2.9 ========= ========== ========== ========= ======== ======== ========
- --------- (1) Earnings from operations for 1997 includes a one-time 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 combined fixed charges and preferred share dividends for the nine months ended September 30, 1997 would be 1.5. EX-15.1 4 LETTER TO BOARD OF DIRECTORS & SHAREHOLDERS Exhibit 15.1 Board of Trustees and Shareholders Security Capital Pacific Trust Gentlemen: Re: Registration Statements Nos. 33-25317, 333-4455, 333-12885, 333-24035, 333-26267, 333-31031, 333-31033 and 333-31405. With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated October 21, 1997 related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered a part of a registration statement prepared or certified by an accountant, or a report prepared by an accountant within the meaning of sections 7 and 11 of the Act. KPMG Peat Marwick LLP Chicago, Illinois November 13, 1997 EX-27 5 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Form 10-Q for the nine months ended September 30, 1997 and is qualifed in its entirety by reference to such financial statements. 0000080737 SECURITY CAPITAL PACIFIC TRUST 1,000 9-MOS DEC-31-1996 JAN-01-1997 SEP-30-1997 6,172 0 11,729 0 0 0 2,465,625 115,613 2,718,124 0 729,433 0 242,930 92,481 1,274,406 2,718,124 247,122 260,550 0 130,115 86,749 1,500 45,702 29,789 0 29,789 0 0 0 29,789 0.38 0.38
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