<PAGE> 1
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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 June 30, 1998 Commission File Number 001-13243
------------------------
PAN PACIFIC RETAIL PROPERTIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Maryland 33-0752457
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1631-B South Melrose Drive 92083
Vista, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (760) 727-1002
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No[ ]
As of August 13, 1998, 21,162,012 shares of the registrant's Common Stock, $.01
par value, were outstanding.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAN PACIFIC RETAIL PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Operating properties, at cost:
Land $ 165,511 $ 139,959
Buildings and improvements (including related party
development and acquisition fees of $1,235) 419,995 313,483
Tenant improvements 30,600 32,148
--------- ---------
616,106 485,590
Less accumulated depreciation and amortization (35,781) (30,076)
--------- ---------
580,325 455,514
Investments in unconsolidated partnerships 9,895 9,921
Cash and cash equivalents 828 --
Restricted cash 340 661
Accounts receivable (net of allowance for doubtful accounts
of $84 and $125, respectively) 1,990 1,626
Accrued rent receivable (net of allowance for doubtful accounts
of $944 and $847, respectively) 8,499 7,620
Notes receivable (net of allowance for doubtful accounts of
$225 at June 30, 1998) 2,096 2,981
Deferred lease commissions (including unamortized related party
amounts of $2,246 and $2,236, respectively, and net of accumulated
amortization of $2,042 and $2,023, respectively) 2,856 2,683
Prepaid expenses 4,159 3,860
Other assets 1,112 2,354
--------- ---------
$ 612,100 $ 487,220
========= =========
LIABILITIES AND EQUITY:
Notes payable $ 111,246 $ 108,316
Line of credit payable 99,418 62,450
Accounts payable (including related party amounts of $42 and $11,
respectively) 2,687 2,183
Accrued expenses and other liabilities (including related party amounts
of $475 and $692, respectively) 5,156 5,600
Dividends payable (including related party amounts of $4,107
and $3,130, respectively) 8,042 6,095
--------- ---------
226,549 184,644
Minority interest 1,540 1,521
--------- ---------
Shareholders' equity:
Common stock par value $.01 per share, 100,000,000 authorized shares,
21,162,012 and 16,814,012 shares issued and outstanding at June 30,
1998 and December 31, 1997, respectively 212 168
Paid in capital in excess of par value 481,182 395,313
Accumulated deficit (97,383) (94,426)
--------- ---------
384,011 301,055
--------- ---------
$ 612,100 $ 487,220
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 3
PAN PACIFIC RETAIL PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
----------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUE:
Base rent $ 15,204 $ 8,324 $ 28,910 $ 15,553
Percentage rent 165 62 307 130
Recoveries from tenants 3,283 1,847 6,212 3,536
Income from unconsolidated partnerships 190 61 350 116
Other 355 305 819 496
-------- -------- -------- --------
19,197 10,599 36,598 19,831
-------- -------- -------- --------
EXPENSES:
Property operating 2,199 1,474 4,336 2,728
Property taxes 1,358 787 2,606 1,476
Property management fees 30 53 47 68
Depreciation and amortization 3,651 2,102 6,953 3,929
Interest 4,668 4,149 9,068 7,985
General and administrative 986 962 1,887 1,880
Other expenses, net 193 216 208 666
-------- -------- -------- --------
13,085 9,743 25,105 18,732
-------- -------- -------- --------
INCOME BEFORE
INCOME TAX EXPENSE
AND MINORITY INTEREST 6,112 856 11,493 1,099
Income tax expense -- (36) -- (65)
Minority interest (10) (26) (19) (57)
-------- -------- -------- --------
NET INCOME $ 6,102 $ 794 $ 11,474 $ 977
======== ======== ======== ========
Basic and diluted earnings per share $ 0.32 $ -- $ 0.64 $ --
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
PAN PACIFIC RETAIL PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
-------------------------
1998 1997
--------- ---------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,474 $ 977
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 6,953 3,929
Amortization of prepaid financing costs 357 177
Income from unconsolidated partnerships (350) (116)
Minority interest 19 57
Changes in assets and liabilities:
Decrease (increase) in restricted cash 321 (742)
Increase in accounts receivable (364) (412)
Increase in accrued rent receivable (879) (311)
Decrease in notes receivable 225 --
Increase in deferred lease commissions (583) (255)
Decrease (increase) in prepaid expenses (157) 170
Increase in other assets (371) (907)
Increase in accounts payable 504 879
Increase in accrued expenses and other liabilities 258 919
--------- ---------
Net cash provided by operating activities 17,407 4,365
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of and additions to operating properties (125,416) (51,169)
Additions to property under development -- (1,807)
Increase (decrease) in construction accounts payable (702) 8
Contributions to unconsolidated partnerships -- (352)
Distributions from unconsolidated partnerships 376 --
Increase in notes receivable -- (4,651)
Collections of notes receivable 59 2,369
--------- ---------
Net cash used in investing activities (125,683) (55,602)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit proceeds 36,968 --
Notes payable proceeds -- 9,600
Notes payable payments (837) (2,351)
Advances from related party -- 38,571
Prepaid financing costs (499) 21
Refunds from loan escrow 43 393
Issuance of common stock 85,913 --
Dividends paid (12,484) --
--------- ---------
Net cash provided by financing activities 109,104 46,234
--------- ---------
NET INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS 828 (5,003)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD -- 8,235
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 828 $ 3,232
========= =========
</TABLE>
(Continued)
<PAGE> 5
PAN PACIFIC RETAIL PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
------------------------
1998 1997
---------- ---------
(unaudited)
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest (net of amounts capitalized of
$49 and $128, respectively) $ 8,886 $ 7,536
Income taxes paid $ 7 $ 13
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Note payable assumed upon acquisition $ 3,767 $19,042
Note receivable/wrap note payable assumed $ -- $ 1,519
Foreclosure of a property securing a note receivable $ 601 $ --
Transfer of acquisition deposits from other assets to property $ 1,465 $ --
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
PAN PACIFIC RETAIL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 1998 (unaudited) and December 31, 1997, and
for the six months ended June 30, 1998 and 1997 (unaudited)
1. MANAGEMENT STATEMENT AND GENERAL
The consolidated financial statements of Pan Pacific Retail Properties,
Inc. (the "Company") were prepared from the books and records of the
Company without audit and in the opinion of management include all
adjustments (consisting of only normal recurring accruals) necessary to
present a fair statement of results for the interim periods presented.
Readers of this quarterly report should refer to the audited financial
statements of the Company for the year ended December 31, 1997, which are
included in the Company's 1997 Annual Report on Form 10-K, as certain
disclosures which would substantially duplicate those contained in such
audited financial statements have been omitted from this report.
2. LINE OF CREDIT
The Company increased its $150,000,000 unsecured credit facility to
$200,000,000 in March 1998. The unsecured credit facility bears interest
at the Company's option at either LIBOR plus 1.375% or a reference rate
and expires in August 2000. At June 30, 1998, the amount drawn on this
line of credit was $99,418,000 and the interest rate was 7.06%. The net
proceeds drawn in the six-month period ended June 30, 1998 were
$36,968,000. These net proceeds, after the effect of a paydown of
approximately $82,200,000 in connection with the Company's secondary
offering (Note 4), were used to acquire thirteen properties for an
aggregate amount of approximately $127,600,000.
3. STOCK OPTION AND INCENTIVE PLAN
In 1997, the Company established the 1997 Stock Option and Incentive Plan
(the "Plan") pursuant to which the Company's Board of Directors may grant
stock options or awards to purchase up to 1,620,000 shares of common stock
to officers, directors and key employees. At the time of the Company's
initial public offering, the Company issued 900,000 common stock options
pursuant to the Plan. The stock options were granted with an exercise
price of $19.50, equal to the stock's fair market value at the date of
grant. On March 17, 1998, the Company granted an additional 277,500 common
stock options with an exercise price of $22.188, equal to the stock's fair
market value at the date of grant. The stock options have seven year terms
and will vest 33-1/3% per year over three years from the date of grant,
except the independent directors who received non-qualified options that
vested 33-1/3% immediately, with the remainder vesting ratably over two
years. An additional 447,500 shares of common stock remain reserved for
issuance under the Plan. No other options or awards have been granted.
During the six-month period ended June 30, 1998, 5,000 options were
forfeited. As such, at June 30, 1998, there were 1,172,500 common stock
options outstanding, 10,000 of which were exercisable and none had
expired.
The following is a reconciliation of the denominator for the basic
earnings per share ("EPS") computation to the denominator of the diluted
EPS computation (all net income is available to common stockholders for
the period presented):
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1998
------------- -------------
<S> <C> <C>
Weighted average shares used for the basic EPS
computation ................................. 18,824,561 17,824,841
Incremental shares from the assumed exercise of
dilutive stock options ...................... 65,766 85,084
---------- ----------
Weighted average shares used for the diluted EPS
computation ................................. 18,890,327 17,909,925
========== ==========
</TABLE>
<PAGE> 7
PAN PACIFIC RETAIL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of June 30, 1998 (unaudited) and December 31, 1997, and
for the six months ended June 30, 1998 and 1997 (unaudited)
4. SECONDARY OFFERING OF COMMON STOCK
On May 18, 1998 the Company completed a secondary offering of 4,348,000
shares of common stock at $21.125 per share (including 348,000 shares
issued as a result of the partial exercise of the overallotment option by
the underwriters on June 11, 1998). The aggregate proceeds to the Company,
net of underwriters' discount, advisory fee and offering costs were
approximately $85,913,000.
5. RELATED PARTY TRANSACTIONS
(a) Included in general and administrative expenses are management fees
totaling $390,000 for the six months ended June 30, 1997, which are a
reimbursement by Pan Pacific Development Properties of costs incurred by
Revenue Properties Company Limited ("Revenue"), a related party, for
managing the development of the properties, directing corporate strategy,
and consulting on operations. Effective August 13, 1997, at the closing of
the Company's initial public offering, these fees are no longer being
incurred by the Company.
(b) Pan Pacific Development Properties paid a consulting fee of $210,000 for
the six months ended June 30, 1997, to a sole proprietorship owned by a
director of Revenue. Effective August 13, 1997, at the closing of the
Company's initial public offering, these fees are no longer being incurred
by the Company.
(c) Pan Pacific Development Properties incurred $431,000 for the six months
ended June 30, 1997, for loan guaranty fees charged by Revenue. These fees
are recorded as a component of other expenses, net. Effective August 13,
1997, at the closing of the Company's initial public offering, these fees
are no longer being incurred by the Company.
(d) The Company received net advances from Revenue of $38,571,000 for the six
months ended June 30, 1997.
(e) Dividends paid to Pan Pacific Development (U.S.) Inc. ("PPD"), a
wholly-owned subsidiary of Revenue, were $6,411,000 during the six months
ended June 30, 1998. At June 30, 1998, $4,107,000 of dividends were
payable to PPD. There were no dividends paid or payable to PPD during the
six-month period ended June 30, 1997.
6. COMMITMENTS AND CONTINGENCIES
Various claims and legal proceedings arise in the ordinary course of
business. The ultimate amount of liability from all claims and actions
cannot be determined with certainty, but in the opinion of management, the
ultimate liability from all pending and threatened legal claims will not
materially affect the consolidated financial statements taken as a whole.
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in connection with the
consolidated financial statements of Pan Pacific Retail Properties, Inc. and
subsidiaries (the "Company"), and the notes thereto, appearing elsewhere in this
report.
The Company receives income primarily from rental revenue (including
recoveries from tenants) from shopping center properties. As a result of the
Company's acquisition and development program, the financial data show increases
in total revenue from period to period, largely attributable to: (i) property
acquisitions and (ii) the benefit of a full period of rental and other revenue
from a property placed into operation in the third quarter of 1997.
The Company believes that overhead costs will decrease as a percentage
of revenue as the Company achieves economies of scale through increases in its
portfolio's revenue base. For example, during the six months ended June 30,
1998, the Company owned properties comprising a weighted average gross leasable
area ("GLA") of 5,247,426 square feet. Total expenses, excluding interest,
depreciation and amortization for the six months ended June 30, 1998 were
$9,084,000 or an annualized $3.46 per square foot. By comparison, during the six
months ended June 30, 1997, the Company owned properties comprising a weighted
average GLA of 3,390,863 square feet. Total expenses, excluding interest,
depreciation and amortization for the six months ended June 30, 1997 were
$6,818,000 or an annualized $4.02 per square foot.
The Company expects that the more significant part of its revenue
growth in the next year or two will come from additional acquisitions and rent
increases from re-leasing and re-tenanting initiatives.
RESULTS OF OPERATIONS
Comparison of Six Months Ended June 30, 1998 to Six Months Ended June
30, 1997.
Total revenue increased by $16,767,000 or 84.5% to $36,598,000 for the
six months ended June 30, 1998 as compared to $19,831,000 for the six months
ended June 30, 1997.
Rental revenue increased by $13,534,000 or 86.3% to $29,217,000 from
$15,683,000 for the six months ended June 30, 1998, compared to the six months
ended June 30, 1997. The increase in rental revenue resulted principally from
the acquisitions of Chico Crossroads in February 1997, Monterey Plaza in April
1997, Fairmont Shopping Center in May 1997, Lakewood Shopping Center in June
1997, Green Valley Town & Country in August 1997, Rainbow Promenade in September
1997, Claremont Village, Olympia West Center and Tacoma Central in November
1997, Tustin Heights Shopping Center, Palmdale Shopping Center and Brookvale
Shopping Center in December 1997, Bear Creek Plaza and San Dimas Marketplace in
January 1998, Milwaukie Marketplace, Pioneer Plaza, Powell Valley Junction and
Shute Park Plaza in February 1998, Manteca Marketplace in March 1998, a 24 Hour
Fitness Building, Panther Lake Shopping Center and Creekside Center in April
1998, Westwood Village Shopping Center and Fashion Faire Place in May 1998, and
Pacific Commons Shopping Center in June 1998 (collectively the "Acquisitions").
In addition, the commencement of operations of Laguna Village Phase II in the
third quarter of 1997 added to this increase.
<PAGE> 9
Recoveries from tenants increased by $2,676,000 or 75.7% to $6,212,000
for the six months ended June 30, 1998, compared to $3,536,000 for the six
months ended June 30, 1997. This increase resulted primarily from the
Acquisitions and Laguna Village Phase II. Recoveries from tenants were 88.9% of
property operating expenses, property taxes and property management fees for the
six months ended June 30, 1998 as compared to 82.8% of the same expenses for the
same period in 1997.
Property expenses include property operating expenses, property taxes
and property management fees. Property operating expenses increased by
$1,608,000 or 58.9% to $4,336,000 from $2,728,000 for the six months ended June
30, 1998, compared to the six months ended June 30, 1997. The increase in
property operating expenses was primarily attributable to the Acquisitions and
Laguna Village Phase II. Property taxes increased by $1,130,000 or 76.6% for the
six months ended June 30, 1998, compared to the six months ended June 30, 1997.
The increase in property taxes was also primarily the result of the Acquisitions
and Laguna Village Phase II.
Depreciation and amortization increased by $3,024,000 or 77.0% to
$6,953,000 from $3,929,000 for the six months ended June 30, 1998, compared to
the six months ended June 30, 1997. This was primarily due to the Acquisitions
and Laguna Village Phase II.
Interest expense increased by $1,083,000 or 13.6% to $9,068,000 from
$7,985,000 for the six months ended June 30, 1998, compared to the six months
ended June 30, 1997. The increase is primarily the result of interest expense
relating to amounts drawn on the Company's unsecured credit facility (the
"Unsecured Credit Facility") to finance the Acquisitions, interest expense
related to the assumption of fixed rate mortgages on Tacoma Central and Olympia
West in the fourth quarter of 1997 as well as interest expense on the fixed rate
mortgage assumed related to Westwood Village Shopping Center in the second
quarter of 1998. These increases were offset by decreases in interest expense
related to the repayment of debt of approximately $134,000,000 in August 1997 in
connection with the Company's initial public offering and approximately
$82,000,000 in May 1998 in connection with the Company's secondary offering.
General and administrative expenses increased by $7,000 or less than 1%
to $1,887,000 from $1,880,000 for the six months ended June 30, 1998, compared
to the six months ended June 30, 1997. This increase was primarily attributable
to annual salary increases and costs associated with additional staffing
necessitated by the Acquisitions, partially offset by the elimination of
management fees paid to Revenue Properties Company Limited ("Revenue") effective
with the completion of the Company's initial public offering. As a percentage of
total revenue, general and administrative expenses were 5.2% and 9.5% for the
six months ended June 30, 1998 and 1997, respectively.
Other expenses, net, consist primarily of loan guaranty fees and the
expensing of due diligence costs for acquisitions that will not be consummated.
Other expenses decreased by $458,000 or 68.8% to $208,000 from $666,000 for the
six months ended June 30, 1998, compared to the six months ended June 30, 1997.
The decrease was primarily due to loan guaranty fees paid to Revenue which are
no longer being charged as the debt which was guaranteed was paid off in August
1997 in connection with the Company's initial public offering. The comparable
period in 1997 also included $194,000 of due diligence costs for acquisitions
that were not completed. This decrease was partially offset by a reserve taken
on a corporate note receivable and the expensing of due diligence costs related
to potential acquisitions which were not consummated in the current period.
<PAGE> 10
The following table compares the operating data for the 19 properties ("Same
Store Properties") that were owned and in operation for the entirety of both the
six months ended June 30, 1998 and June 30, 1997:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Revenue:
Rental $14,280,000 $13,884,000
Recoveries from tenants 3,330,000 3,188,000
Income from unconsolidated
partnerships 451,000 458,000
Other 604,000 452,000
----------- -----------
$18,665,000 $17,982,000
Operating expenses:
Property operating, property taxes
and property management fees 3,820,000 3,753,000
----------- -----------
Operating income $14,845,000 $14,229,000
=========== ===========
</TABLE>
Operating income for the Same Store Properties for the six months ended
June 30, 1998 increased over the same period in the prior year by $616,000. This
increase was attributable to increased rental revenue due to increased occupancy
levels primarily at Sunset Square, Sahara Pavilion South and Winterwood
Pavilion, increases in rent for anchor tenants at Chino Town Square and
Winterwood Pavilion and an increase in percentage rent at Cheyenne Commons. In
addition, other revenue increased due to the effects of 1996 common area
maintenance ("CAM") income accruals that were reversed in 1997 at Chino Town
Square, the reversal in 1998 of a prior year bad debt reserve at Sahara Pavilion
South and 1997 CAM recoveries recorded in 1998 at Country Club Center. Property
operating expenses for these Same Store Properties remained relatively stable
with an increase of only $67,000 for the six months ended June 30, 1998, over
the same period in the prior year.
Comparison of the Three Months Ended June 30, 1998 to the Three Months
Ended June 30, 1997.
Total revenue increased by $8,598,000 or 81.1% to $19,197,000 for the
three months ended June 30, 1998 as compared to $10,599,000 for the three months
ended June 30, 1997.
Rental revenue increased by $6,983,000 or 83.3% to $15,369,000 from
$8,386,000 for the three months ended June 30, 1998, compared to the three
months ended June 30, 1997. The increase in rental revenue resulted principally
from the Acquisitions exclusive of Chico Crossroads previously noted in the
six month comparative results. In addition, the commencement of operations of
Laguna Village Phase II in the third quarter of 1997 added to this increase.
Recoveries from tenants increased by $1,436,000 or 77.7% to $3,283,000
for the three months ended June 30, 1998, compared to $1,847,000 for the three
months ended June 30, 1997. This increase resulted primarily from the
Acquisitions, exclusive of Chico Crossroads, and Laguna Village Phase II.
Recoveries from tenants were 91.5% of property operating expenses, property
taxes and management fees for the three months ended June 30, 1998, as compared
to 79.8% of the same expenses for the comparable period in 1997.
Property expenses include property operating expenses, property taxes
and property management fees. Property operating expenses increased by $725,000
or 49.2% to $2,199,000 from $1,474,000 for the three months ended June 30, 1998,
compared to the three months ended June 30, 1997. The increase in property
operating expenses was primarily attributable to the Acquisitions, exclusive of
Chico Crossroads, and Laguna Village Phase II. Property taxes increased by
$571,000 or 72.6% to $1,358,000 from $787,000 for the three months ended June
30, 1998, compared to the three months ended June 30, 1997. The increase in
property taxes was also primarily the result of the Acquisitions, exclusive
of Chico Crossroads, and Laguna Village Phase II.
<PAGE> 11
Depreciation and amortization increased by $1,549,000 or 73.7% to
$3,651,000 from $2,102,000 for the three months ended June 30, 1998, compared to
the three months ended June 30, 1997. This was primarily due to the
Acquisitions, exclusive of Chico Crossroads, and Laguna Village Phase II.
Interest expense increased by $519,000 or 12.5% to $4,668,000 from
$4,149,000 for the three months ended June 30, 1998, compared to the three
months ended June 30, 1997. The increase is primarily the result of interest
expense relating to amounts drawn on the Company's Unsecured Credit Facility to
finance the Acquisitions, interest expense related to the assumption of fixed
rate mortgages on Tacoma Central and Olympia West in the fourth quarter of 1997
as well as interest expense on the fixed rate mortgage assumed related to
Westwood Village Shopping Center in the second quarter of 1998. These increases
were offset by decreases in interest expense related to the repayment of debt of
approximately $134,000,000 in August 1997 in connection with the Company's
initial public offering and approximately $82,000,000 in May 1998 in connection
with the Company's secondary offering.
General and administrative expenses increased by $24,000 or 2.5% to
$986,000 from $962,000 for the three months ended June 30, 1998, compared to the
three months ended June 30, 1997. This increase was primarily attributable to
annual salary increases and costs associated with additional staffing
necessitated by the Acquisitions, partially offset by the elimination of
management fees paid to Revenue effective with the completion of the Company's
initial public offering. As a percentage of total revenue, general and
administrative expenses were 5.1% and 9.1% for the three months ended June 30,
1998 and 1997, respectively.
Other expenses, net, consist primarily of loan guaranty fees and the
expensing of due diligence costs for acquisitions that will not be consummated.
Other expenses decreased by $23,000 or 10.6% to $193,000 from $216,000 for the
three months ended June 30, 1998, compared to the three months ended June 30,
1997. The decrease was primarily due to loan guaranty fees paid to Revenue which
are no longer being charged as the debt which was guaranteed was paid off in
August 1997 in connection with the Company's initial public offering. This
decrease was partially offset by a reserve taken on a corporate note receivable
and the expensing of due diligence costs related to potential acquisitions which
were not consummated in the current period.
The following table compares the operating data for the 21 properties
("Same Store Properties") that were owned and in operation for the entirety of
both the three months ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Revenue:
Rental $7,668,000 $7,524,000
Recoveries from tenants 1,764,000 1,714,000
Income from unconsolidated
partnerships 240,000 237,000
Other 293,000 295,000
---------- ----------
$9,965,000 $9,770,000
Operating expenses:
Property operating, property taxes
and property management fees 2,011,000 2,111,000
---------- ----------
Operating income $7,954,000 $7,659,000
========== ==========
</TABLE>
Operating income for the Same Store Properties for the three months
ended June 30, 1998 increased over the same periods in the prior year by
$295,000. This increase was attributable to increased rental revenue due to
increased occupancy levels primarily at Sahara Pavilion North, Sahara Pavilion
South and Winterwood Pavilion, increases in base rent for anchor tenants at
Chino Town Square and Winterwood Pavilion and increases in base rents at
Cheyenne Commons. Also, percentage rent increased at Cheyenne Commons and Chico
Crossroads. Property operating expenses for these Same Store Properties
decreased by $100,000 primarily due to a bad debt reserve in 1997 at Sunset
Square.
<PAGE> 12
FUNDS FROM OPERATIONS
The White Paper on Funds from Operations approved by the Board of
Governors of the National Association of Real Estate Investment Trusts
("NAREIT") in March 1995 (the "White Paper") defines Funds from Operations as
net income (loss) (computed in accordance with GAAP), excluding gains (or
losses) from debt restructuring and sales of property, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. Management considers Funds from Operations an
appropriate measure of performance of an equity REIT because it is predicated on
cash flow analyses. The Company computes Funds from Operations in accordance
with standards established by the White Paper. The Company's computation of
Funds from Operations may, however, differ from the methodology for calculating
Funds from Operations utilized by other equity REITs and, therefore, may not be
comparable to such other REITs. Funds from Operations should not be considered
as an alternative to net income (determined in accordance with GAAP) as a
measure of the Company's liquidity or profitability, nor is it indicative of
funds available to fund the Company's cash needs, including its ability to make
distributions.
The following table presents the Company's actual Funds from Operations
for the three and six months ended June 30, 1998 and pro forma Funds from
Operations for the three and six months ended June 30, 1997. The pro forma
information for the three and six months ended June 30, 1997 assumes the initial
public offering and related formation transactions and the repayment of notes
payable with the net proceeds of the initial public offering all had occurred on
January 1, 1997:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------------- -----------------------------
1998 1997 1998 1997
ACTUAL PRO FORMA ACTUAL PRO FORMA
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $6,102,000 $3,833,000 $11,474,000 $ 7,690,000
Add:
Depreciation and amortization 3,651,000 2,444,000 6,953,000 4,612,000
Depreciation of unconsolidated
partnerships 51,000 56,000 104,000 103,000
Depreciation of non-real estate
corporate assets (47,000) (57,000) (105,000) (103,000)
---------- ---------- ----------- -----------
Funds from Operations $9,757,000 $6,276,000 $18,426,000 $12,302,000
========== ========== =========== ===========
Weighted average number of shares
of common stock outstanding
(assuming dilution) 18,890,327 -- 17,909,925 --
Number of shares of common stock
assumed to be outstanding -- 16,814,012 -- 16,814,012
</TABLE>
CASH FLOWS
Comparison of the Six Months Ended June 30, 1998 to the Six Months
Ended June 30, 1997.
Net cash provided by operating activities increased by $13,042,000 to
$17,407,000 for the six months ended June 30, 1998, as compared to $4,365,000
for the six months ended June 30, 1997. The increase was primarily the result of
an increase in net income.
<PAGE> 13
Net cash used in investing activities increased by $70,081,000 to
$125,683,000 for the six months ended June 30, 1998, compared to $55,602,000 for
the six months ended June 30, 1997. The increase was primarily the result of the
acquisition of additional properties in the period. In the comparable period in
1997, the use of cash for investing activities was also primarily for the
purpose of acquisitions.
Net cash provided by financing activities increased by $62,870,000 to
$109,104,000 for the six months ended June 30, 1998, compared to $46,234,000 for
the six months ended June 30, 1997. The increase resulted primarily from the
issuance of capital stock through the Company's secondary offering which closed
in May 1998 and amounts drawn on the Company's Unsecured Credit Facility. The
increase was partially offset by the payments of dividends for the fourth
quarter of 1997 and the first quarter of 1998. In the comparable period in 1997,
cash from financing activities was derived from an increase in advances from a
related party primarily for the purpose of acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes the initial public offering and the related
formation transactions that were completed in August 1997 and the secondary
offering which was completed in May 1998 improved its financial position through
changes to its capital structure, which principally included a substantial
reduction of its overall debt and its debt-to-equity ratio. In connection with
the formation transactions, the Company repaid all of its existing floating rate
mortgage debt. As a result, the total principal amount of outstanding secured
debt after the formation transactions and the acquisition of Green Valley Town &
Country was reduced by approximately $146,000,000. In connection with the
secondary offering, the Unsecured Credit Facility was paid down by approximately
$82,000,000. These transactions resulted in a significant reduction in interest
expense as a percentage of total revenue, 24.8% for the six months ended June
30, 1998 as compared to 40.3% for the six months ended June 30, 1997. Thus, cash
from operations required to fund debt service requirements was substantially
decreased.
The total market capitalization of the Company at June 30, 1998 was
approximately $620,678,000 based on the market closing price at June 30, 1998 of
$19.375 per share and the debt outstanding of approximately $210,664,000
(exclusive of accounts payable and accrued expenses). As a result, the Company's
debt to total market capitalization ratio was approximately 33.9% at June 30,
1998. On May 18, 1998 the Company closed its secondary equity offering of
4,348,000 shares of common stock which includes the partial exercise of the
underwriters' overallotment option. The Company believes that its capital
structure combined with its Unsecured Credit Facility enhances the Company's
ability to take advantage of acquisition opportunities as well as to provide
funds for general corporate purposes.
In March 1998, the Company obtained an increase to its Unsecured Credit
Facility from $150,000,000 to $200,000,000 and a reduction in the borrowing rate
thereunder to LIBOR plus 1.375% (which rate is reduced to 1.25% for as long as
the Company's debt-to-book value ratio is .30 or below). The Company had
approximately $101,000,000 available under the Unsecured Credit Facility at June
30, 1998. At the Company's option, amounts borrowed under the Unsecured Credit
Facility bear interest at either LIBOR plus 1.375% or a reference rate. The
weighted average interest rate for amounts borrowed under the Unsecured Credit
Facility at June 30, 1998 was 7.06%. The Company anticipates that the Unsecured
Credit Facility will continue to be used primarily to acquire additional
properties and for general corporate purposes.
The Company's mortgage indebtedness outstanding at June 30, 1998
requires balloon payments of $129,477,000 in 2000, $4,004,000 in 2004,
$7,395,000 in 2005, and $52,748,000 in 2007. The balloon payments due in the
year 2000 include the balance drawn on the Unsecured Credit Facility at June 30,
1998 of $99,418,000. It is likely that the Company will not have sufficient
funds on hand to repay these balloon amounts at maturity. Therefore, the Company
expects to refinance such debt either through additional debt financings secured
by individual properties or groups of properties, by unsecured private or public
debt offerings or by additional equity offerings. The Unsecured Credit Facility,
which matures in 2000, is renewable.
<PAGE> 14
The Company expects to make distributions from cash available for
distributions which the Company believes will exceed historical cash available
for distributions due to the reduction in debt service resulting from the
repayment of indebtedness described above. Amounts accumulated for distribution
will be invested by the Company primarily in short-term investments such as
collateralized securities of the United States government or its agencies,
high-grade commercial paper and bank deposits or will be used to pay down
outstanding balances on the Unsecured Credit Facility, if any. On October 6,
1997, the Board of Directors of the Company declared the first dividend of
$0.2128 per share paid on October 31, 1997 to shareholders of record on October
22, 1997. The dividend was for the prorated period from August 8, 1997 to
September 30, 1997. On December 5, 1997, the Board of Directors of the Company
declared a dividend of $0.3625 per share for the fourth quarter 1997 which was
paid on January 19, 1998 to shareholders of record on December 29, 1997. On
March 17, 1998, the Board of Directors declared an increased dividend of $0.38
per share for the first quarter 1998 which was paid on April 17, 1998 to
shareholders of record on March 31, 1998. On June 19, 1998 the Board of
Directors declared a dividend of $0.38 per share for the second quarter 1998
which was paid on July 17, 1998 to shareholders of record on June 30, 1998.
The Company expects to meet its short-term liquidity requirements
generally through its current working capital and net cash provided by
operations. The Company believes that its net cash provided by operations will
be sufficient to allow the Company to make the distributions necessary to enable
the Company to continue to qualify as a REIT. The Company also believes that the
foregoing sources of liquidity will be sufficient to fund its short-term
liquidity needs for the foreseeable future.
The Company expects to meet certain long-term liquidity requirements
such as property acquisition and development, scheduled debt maturities,
renovations, expansions and other non-recurring capital improvements through
long-term secured and unsecured indebtedness and the issuance of additional
equity or debt securities. The Company also expects to use funds available under
the Unsecured Credit Facility to finance acquisition and development activities
and capital improvements on an interim basis.
INFLATION
Substantially all of the leases provide for the recovery of real estate
taxes and operating expenses incurred by the Company. In addition, many of the
leases provide for fixed base rent increases or indexed escalations (based on
the consumer price index or other measures) and percentage rent. The Company
believes that inflationary increases in expenses will be substantially offset by
the expense reimbursements, contractual rent increases and percentage rent
described above.
The Unsecured Credit Facility bears interest at a variable rate which
will be influenced by changes in short-term interest rates and will be sensitive
to inflation.
<PAGE> 15
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.1 Articles of Amendment and Restatement of the Company (previously filed as
Exhibit 3.1 to the Company's Registration Statement on Form S-11
(Registration No. 333-28715) and incorporated herein by reference)
3.2 Amended and Restated Bylaws of the Company (previously filed as Exhibit 3.2
to the Company's Registration Statement on Form S-11 (Registration No. 333-28715)
and incorporated herein by reference)
4.1 Form of Certificate of Common Stock (previously filed as Exhibit 4.1 to the
Company's Registration Statement on Form S-11 (Registration No. 333-
28715) and incorporated herein by reference)
10.1 Modification Agreement to the Credit Agreement with Bank of America NT
& SA (previously filed as Exhibit 10.3 to the Company's Registration
Statement on Form S-11 (Registration No. 333-50125) and incorporated
herein by reference)
27.1 Financial Data Schedule (electronically filed with the Securities and Exchange
Commission only)
</TABLE>
(b) Reports on Form 8-K
None
<PAGE> 16
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 on August 10, 1998.
PAN PACIFIC RETAIL PROPERTIES, INC.
By: /s/ Stuart A. Tanz
-------------------------------------
Stuart A. Tanz
President and Chief Executive Officer
By: /s/ David L. Adlard
-------------------------------------
David L. Adlard
Executive Vice President and
Chief Financial Officer
By: /s/ Laurie A. Sneve
-------------------------------------
Laurie A. Sneve, CPA
Vice President and Controller
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,168
<SECURITIES> 0
<RECEIVABLES> 13,888
<ALLOWANCES> 1,303
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 616,106
<DEPRECIATION> 35,781
<TOTAL-ASSETS> 612,100
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 212
<OTHER-SE> 383,799
<TOTAL-LIABILITY-AND-EQUITY> 612,100
<SALES> 0
<TOTAL-REVENUES> 36,598
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 15,812
<LOSS-PROVISION> 225
<INTEREST-EXPENSE> 9,068
<INCOME-PRETAX> 11,493
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,474
<EPS-PRIMARY> .64
<EPS-DILUTED> .64
</TABLE>
