<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 AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
COMMISSION FILE NUMBER: 001-13243
PAN PACIFIC RETAIL PROPERTIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
MARYLAND 33-0752457
(State of Incorporation) (I.R.S. Employer Identification No.)
1621-B SOUTH MELROSE DRIVE, 92083
VISTA, CALIFORNIA (zip code)
(Address of Principal Executive Offices)
</TABLE>
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 10, 1999, the number of shares of the Registrant's common
stock outstanding was 21,162,012.
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<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,
ASSETS: 1999 1998
--------- -----------
(unaudited)
<S> <C> <C>
Operating properties, at cost:
Land $197,624 $186,891
Buildings and improvements (including related party development
and acquisition fees of $1,235) 531,747 501,645
Tenant improvements 23,424 20,986
-------- --------
752,795 709,522
Less accumulated depreciation and amortization (51,846) (42,044)
-------- --------
700,949 667,478
Investments in unconsolidated partnerships 1,484 9,946
Cash and cash equivalents 1,998 2,759
Restricted cash 408 912
Accounts receivable (net of allowance for doubtful accounts of
$491 and $412, respectively) 2,068 2,958
Accrued rent receivable (net of allowance for doubtful accounts of
$1,209 and $1,071, respectively) 10,885 9,643
Notes receivable 2,211 2,411
Deferred lease commissions (including unamortized related party
amounts of $2,218 and $2,310, respectively, and net of accumulated
amortization of $2,348 and $2,093, respectively) 3,426 2,955
Prepaid expenses 5,623 5,244
Other assets 3,499 1,235
-------- --------
$732,551 $705,541
======== ========
LIABILITIES AND EQUITY:
Notes payable $170,111 $144,024
Line of credit payable 145,000 138,500
Accounts payable (including related party amounts of $6 and $16,
respectively) 3,547 5,880
Accrued expenses and other liabilities (including related party amounts
of $385 and $389, respectively) 5,698 8,504
Distributions payable (including related party amounts
of $4,323 and $4,107, respectively) 8,798 8,227
-------- --------
333,154 305,135
Minority interests 17,322 17,318
-------- --------
Stockholders' equity:
Common stock par value $.01 per share, 100,000,000 authorized
shares, 21,162,012 shares issued and outstanding
at June 30, 1999 and December 31, 1998 212 212
Paid in capital in excess of par value 481,182 481,182
Accumulated deficit (99,319) (98,306)
-------- --------
382,075 383,088
-------- --------
$732,551 $705,541
======== ========
</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,
--------------------------- ---------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUE:
Base rent $ 19,433 $ 15,204 $ 38,376 $ 28,910
Percentage rent 165 165 325 307
Recoveries from tenants 4,061 3,283 8,109 6,212
Gain on sale of real estate 75 -- 75 --
Income from unconsolidated partnerships 74 190 185 350
Other 538 406 1,091 909
-------- -------- -------- --------
24,346 19,248 48,161 36,688
-------- -------- -------- --------
EXPENSES:
Property operating 2,821 2,229 5,678 4,383
Property taxes 1,781 1,358 3,550 2,606
Depreciation and amortization 4,344 3,651 8,464 6,953
Interest 5,647 4,668 11,037 9,068
General and administrative 1,278 986 2,703 1,887
Other 75 244 113 298
-------- -------- -------- --------
15,946 13,136 31,545 25,195
-------- -------- -------- --------
INCOME BEFORE MINORITY INTERESTS 8,400 6,112 16,616 11,493
Minority interests (321) (10) (699) (19)
-------- -------- -------- --------
NET INCOME $ 8,079 $ 6,102 $ 15,917 $ 11,474
======== ========= ========= ========
Basic and diluted earnings per share $ 0.38 $ 0.32 $ 0.75 $ 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,
---------------------------
1999 1998
--------- ---------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,917 $ 11,474
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 8,464 6,953
Amortization of prepaid financing costs 295 357
Gain on sale of real estate (75) --
Income from unconsolidated partnerships (185) (350)
Accrued interest on note receivable (4) --
Minority interests 699 19
Changes in assets and liabilities:
Decrease in restricted cash 504 321
Decrease (increase) in accounts receivable 890 (364)
Increase in accrued rent receivable (1,147) (879)
Decrease in notes receivable -- 225
Increase in deferred lease commissions (908) (583)
Increase in prepaid expenses (674) (157)
Increase in other assets (713) (371)
Increase (decrease) in accounts payable (329) 504
Increase (decrease) in accrued expenses
and other liabilities (2,806) 258
-------- ---------
Net cash provided by operating activities 19,928 17,407
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of and additions to operating
properties (29,865) (125,416)
Proceeds from sale of real estate 4,400 --
Decrease in construction accounts payable
and accrued expenses (2,004) (702)
Contributions to unconsolidated partnerships (60) --
Distributions from unconsolidated partnerships -- 376
Acquisition of minority interest in
unconsolidated partnership (7,163) --
Collections of notes receivable 204 59
-------- ---------
Net cash used in investing activities (34,488) (125,683)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit proceeds 53,762 129,868
Line of credit payments (47,262) (92,900)
Notes payable proceeds 35,000 --
Notes payable payments (8,913) (837)
Prepaid financing costs -- (499)
Financing deposits (1,747) --
Acquisition of minority interests (16) --
Refunds from loan escrow -- 43
Issuance of common stock -- 85,913
Dividends paid (17,025) (12,484)
-------- ---------
Net cash provided by financing activities 13,799 109,104
-------- ---------
NET INCREASE/(DECREASE) CASH AND CASH EQUIVALENTS (761) 828
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,759 --
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,998 $ 828
======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest (net of amounts capitalized
of $177 and $49, respectively) $ 10,741 $ 8,886
</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,
---------------------------
1999 1998
--------- ---------
(unaudited)
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Note payable assumed upon acquisition $ -- $ 3,767
Foreclosure of a property securing a note
receivable $ -- $ 601
Transfer of acquisition deposits from other
assets to property $ -- $ 1,465
Transfer from investment in unconsolidated
partnerships to property $ 15,775 $ --
Distributions payable $ 8,798 $ 8,042
Acquisition of partnership interests $ 13 $ 33
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
PAN PACIFIC RETAIL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1999 (UNAUDITED) AND DECEMBER 31, 1998,
AND FOR THE THREE AND SIX
MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA)
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, 1998, which are included in the Company's 1998
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. Certain reclassifications of 1998 amounts have been made in
order to conform to 1999 presentation.
2. NOTES PAYABLE
On June 29, 1999, the Company completed a $35,000,000 financing
transaction. This financing is evidenced by notes payable, secured by deeds of
trust, bears interest at 7.2% and is due in June 2006. The net proceeds from
this transaction were used to pay down the line of credit.
3. GAIN ON SALE OF REAL ESTATE
On June 30, 1999, the Company sold a single-tenant property for cash of
$4,400,000 and recognized a gain of $75,000.
4. STOCK OPTION PLAN
In March 1999, the Company granted an additional 233,000 stock options
under the 1997 Stock Option and Incentive Plan.
5. EARNINGS PER SHARE
The following is a reconciliation of the numerator and denominator for the
calculation of basic and diluted earnings per share for the three and six months
ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED JUNE 30, MONTHS ENDED JUNE 30,
------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income available to common stockholders:
Basic $ 8,079 $ 6,102 $ 15,917 $ 11,474
Add-back income allocated to Pan Pacific
(Portland), LLC units (minority interest) 313 -- 679 --
----------- ----------- ----------- -----------
Diluted $ 8,392 $ 6,102 $ 16,596 $ 11,474
=========== =========== =========== ===========
Weighted average shares:
Basic 21,162,012 18,824,561 21,162,012 17,824,841
Incremental shares from assumed:
Exercise of dilutive stock options 14,674 65,766 8,451 85,084
Conversion of Pan Pacific (Portland), LLC
units 832,617 -- 832,617 --
----------- ----------- ----------- -----------
Diluted 22,009,303 18,890,327 22,003,080 17,909,925
=========== =========== =========== ===========
</TABLE>
For the three and six months ended June 30, 1999 and 1998, 1,203,501 and
337,500 options, respectively, were excluded from the calculation of diluted
weighted-average shares because they were antidilutive.
<PAGE> 7
PAN PACIFIC RETAIL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1999 (UNAUDITED) AND DECEMBER 31, 1998,
AND FOR THE THREE AND SIX
MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA)
6. RELATED PARTY TRANSACTIONS
(a) Distributions on common stock paid to Revenue Properties (U.S.) Inc. ("U.S.
Inc."), previously named Pan Pacific Development (U.S.) Inc., were
$8,430,000 and $6,411,000 during the six months ended June 30, 1999 and
1998, respectively. At June 30, 1999 and 1998, $4,323,000 and $4,107,000,
respectively, of distributions were payable to U.S. Inc.
(b) The Company had a note receivable at December 31, 1998 of $144,000 due from
an executive officer. The note was paid in full by the executive during the
first quarter of 1999.
7. 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.
8. SUBSEQUENT EVENT
In July 1999, the Company completed a $56,300,000 financing transaction.
This financing is evidenced by notes payable, secured by deeds of trust, bears
interest at 7.1% and is due in July 2009. The net proceeds from this transaction
were used to pay down the line of credit.
<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 program, the financial data show increases in total
revenue from period to period, primarily attributable to the acquisition of
additional properties.
The Company has experienced economies of scale as it has grown its
portfolio from 25 properties, at the initial public offering ("IPO") in August
1997, to 55 properties at June 30, 1999. For example, during the six months
ended June 30, 1999, the Company owned properties comprising a weighted average
gross leasable area ("GLA") of 7,452,012 square feet. Total expenses, excluding
interest, depreciation and amortization for the six months ended June 30, 1999
were $12,044,000 or an annualized $3.23 per square foot. By comparison, during
the six months ended June 30, 1998, the Company owned properties comprising a
weighted average GLA of 5,247,426 square feet. Total expenses, excluding
interest, depreciation and amortization, for the six months ended June 30, 1998
were $9,174,000 or an annualized $3.50 per square foot.
The Company expects that the most significant part of its revenue growth in
the next year or two will come from additional acquisitions, rent increases from
re-leasing and re-tenanting initiatives, the benefit of the stabilization of the
properties acquired during 1998 and 1999 and the revenue generated from expanded
GLA due to the buildout of outparcels.
RESULTS OF OPERATIONS
Comparison of the six months ended June 30, 1999 to the six months ended
June 30, 1998.
Total revenue increased by $11,473,000 or 31.3% to $48,161,000 from
$36,688,000 for the six months ended June 30, 1999, compared to the six months
ended June 30, 1998.
Rental revenue increased by $9,484,000 or 32.5% to $38,701,000 from
$29,217,000 for the six months ended June 30, 1999, compared to the six months
ended June 30, 1998. The increase in rental revenue resulted principally from
the acquisition of San Dimas Marketplace and Bear Creek Plaza 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 Shopping Center in May 1998,
Pacific Commons Shopping Center in June 1998, Oregon Trail, Hermiston Plaza and
Hood River Center in October 1998, Sandy Marketplace, Southgate Center, Oregon
City Shopping Center, Sunset Mall, Mira Loma Shopping Center and Glen Cove
Center in November 1998, the remaining 50% interest in Melrose Village Plaza in
January 1999, Auburn North Shopping Center in March 1999 and Marina Village in
April 1999 (collectively, the "1998 and 1999 Acquisitions").
Recoveries from tenants increased by $1,897,000 or 30.5% to $8,109,000 from
$6,212,000 for the six months ended June 30, 1999, compared to the six months
ended June 30, 1998. This increase resulted primarily from the 1998 and 1999
Acquisitions. Recoveries from tenants were 87.9% of property operating expenses
and property taxes for the six months ended June 30, 1999 compared to 88.9% of
the same expenses for the same period in 1998.
Property expenses include property operating expenses and property taxes.
Property operating expenses increased by $1,295,000 or 29.6% to $5,678,000 from
$4,383,000 for the six months ended June 30, 1999, compared to the six months
ended June 30, 1998. The increase in property operating expenses was primarily
attributable to the 1998 and 1999 Acquisitions. Property taxes increased by
$944,000 or 36.2% to $3,550,000 from $2,606,000 for the six months ended June
30, 1999, compared to the six months ended June 30, 1998. The increase in
property taxes was also primarily the result of the 1998 and 1999 Acquisitions.
Depreciation and amortization increased by $1,511,000 or 21.7% to
$8,464,000 from $6,953,000 for the six months ended June 30, 1999 compared to
the six months ended June 30, 1998. This was primarily due to the 1998 and 1999
Acquisitions.
<PAGE> 9
Interest expense increased by $1,969,000 or 21.7% to $11,037,000 from
$9,068,000 for the six months ended June 30, 1999, compared to the six months
ended June 30, 1998, primarily as a result of interest expense relating to
amounts drawn on the Company's unsecured credit facility (the "Unsecured Credit
Facility") to finance acquisitions, interest expense on the fixed rate mortgage
assumed related to Westwood Village Shopping Center in the second quarter of
1998 as well as interest expense on the fixed rate mortgages assumed related to
Sunset Mall, Oregon City Shopping Center, Sandy Marketplace and Southgate Center
in the fourth quarter of 1998. These increases were offset by a decrease in
interest expense related to the repayment of debt of approximately $82,000,000
in May 1998 in connection with the Company's secondary offering of common stock.
General and administrative expenses increased by $816,000 or 43.2% to
$2,703,000 from $1,887,000 for the six months ended June 30, 1999, compared to
the six months ended June 30, 1998. This increase was primarily attributable to
costs associated with additional staffing necessitated by the 1998 acquisitions,
annual compensation increases as well as a one-time accrual for executive
severance cost. As a percentage of total revenue, general and administrative
expenses were 5.6% and 5.1% for the six months ended June 30, 1999 and 1998,
respectively.
The following table compares the operating data for the 33 properties
("Same Properties") that were owned and in operation for the entirety of the six
months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenue:
Rental $26,495,000 $25,794,000
Recoveries from tenants 5,690,000 5,645,000
Operating income from unconsolidated
partnership 189,000 153,000
Other 534,000 484,000
----------- -----------
$32,908,000 $32,076,000
Operating expenses:
Property operating and property taxes 6,527,000 6,332,000
----------- -----------
Operating income $26,381,000 $25,744,000
=========== ===========
</TABLE>
Operating income for the Same Properties for the six months ended June 30,
1999 increased over the same period in the prior year by $637,000 or 2.5%. This
increase was attributable to increased rental revenue primarily due to income
related to the development of pads at Brookvale Shopping Center, Sunset Square
and Winterwood Pavilion, and increased occupancy at Canyon Ridge Plaza and
Laguna Village. Operating expenses for these Same Properties increased by
$195,000 or 3.1% primarily due to bad debt expense at Chino Town Square,
Fairmont Shopping Center, Rainbow Promenade and Sahara Pavilion South.
Comparison of the three months ended June 30, 1999 to the three months
ended June 30, 1998.
Total revenue increased by $5,098,000 or 26.5% to $24,346,000 from
$19,248,000 for the three months ended June 30, 1999, compared to the three
months ended June 30, 1998.
Rental revenue increased by $4,229,000 or 27.5% to $19,598,000 from
$15,369,000 for the three months ended June 30, 1999, compared to the three
months ended June 30, 1998. The increase in rental revenue resulted principally
from the 1998 and 1999 Acquisitions exclusive of San Dimas Marketplace, Bear
Creek Plaza, Milwaukie Marketplace, Pioneer Plaza, Powell Valley Junction, Shute
Park Plaza and Manteca Marketplace (collectively, the "first quarter 1998
Acquisitions") previously noted in the six month comparative results.
Recoveries from tenants increased by $778,000 or 23.7% to $4,061,000 from
$3,283,000 for the three months ended June 30, 1999, compared to the three
months ended June 30, 1998. This increase resulted primarily from the 1998 and
1999 Acquisitions exclusive of the first quarter 1998 Acquisitions. Recoveries
from tenants were 88.2% of property operating expenses and property taxes for
the three months ended June 30, 1999 compared to 91.5% of the same expenses for
the same period in 1998.
Property expenses include property operating expenses and property taxes.
Property operating expenses increased by $592,000 or 26.6% to $2,821,000 from
$2,229,000 for the three months ended June 30, 1999, compared to the three
months ended June 30, 1998. The increase in property operating expenses was
primarily attributable to the 1998 and 1999 Acquisitions exclusive of the first
quarter 1998 Acquisitions. Property taxes increased by $423,000 or 31.1% to
$1,781,000 from $1,358,000 for the three months ended June 30, 1999, compared to
the three months ended June 30, 1998. The increase in property taxes
<PAGE> 10
was also primarily the result of the 1998 and 1999 Acquisitions exclusive of the
first quarter 1998 Acquisitions.
Depreciation and amortization increased by $693,000 or 19.0% to $4,344,000
from $3,651,000 for the three months ended June 30, 1999 compared to the three
months ended June 30, 1998. This was primarily due to the 1998 and 1999
Acquisitions exclusive of the first quarter 1998 Acquisitions.
Interest expense increased by $979,000 or 21.0% to $5,647,000 from
$4,668,000 for the three months ended June 30, 1999, compared to the three
months ended June 30, 1998, primarily as a result of interest expense relating
to amounts drawn on the Company's unsecured credit facility (the "Unsecured
Credit Facility") to finance acquisitions, interest expense on the fixed rate
mortgage assumed related to Westwood Village Shopping Center in the second
quarter of 1998 as well as interest expense on the fixed rate mortgages assumed
related to Sunset Mall, Oregon City Shopping Center, Sandy Marketplace and
Southgate Center in the fourth quarter of 1998. These increases were offset by a
decrease in interest expense related to the repayment of debt of approximately
$82,000,000 in May 1998 in connection with the Company's secondary offering of
common stock.
General and administrative expenses increased by $292,000 or 29.6% to
$1,278,000 from $986,000 for the three months ended June 30, 1999, compared to
the three months ended June 30, 1998. This increase was primarily attributable
to costs associated with additional staffing necessitated by the 1998
acquisitions and annual compensation increases. As a percentage of total
revenue, general and administrative expenses were 5.3% and 5.1% for the three
months ended June 30, 1999 and 1998, respectively.
The following table compares the operating data for the 40 properties
("Same Properties") that were owned and in operation for the entirety of the
three months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenue:
Rental $15,557,000 $15,175,000
Recoveries from tenants 3,259,000 3,212,000
Operating income from unconsolidated
partnership 76,000 83,000
Other 349,000 265,000
----------- -----------
$19,241,000 $18,735,000
Operating expenses:
Property operating and property taxes 3,661,000 3,561,000
----------- -----------
Operating income $15,580,000 $15,174,000
=========== ===========
</TABLE>
Operating income for the Same Properties for the three months ended June
30, 1999 increased over the same period in the prior year by $406,000 or 2.7%.
This increase was attributable to increased rental revenue primarily due to
income related to the development of pads at Sunset Square and Winterwood
Pavilion and increases in occupancy at Canyon Ridge Plaza, Sahara Pavilion
North, Sunset Square and Winterwood Pavilion. Other income increased primarily
due to a termination fee received at Claremont Village Plaza. This increase was
offset by a 1998 percentage rent adjustment at Chico Crossroads recorded in
1999, and by a judgment received at Sunset Square in 1998. Operating expenses
for these Same Properties increased by $100,000 or 2.8% primarily due to bad
debt expense at Rainbow Promenade and Sahara Pavilion South, and increases in
common area maintenance costs at Rainbow Promenade and Winterwood Pavilion.
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 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 those 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,
nor is it indicative of funds available to fund the Company's cash needs,
including its ability to make distributions.
<PAGE> 11
The following table presents the Company's Funds from Operations for the
three and six months ended June 30, 1999 and three and six months ended June 30,
1998:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
------------------------------- - ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 8,079,000 $ 6,102,000 $ 15,917,000 $ 11,474,000
Add:
Depreciation and amortization 4,344,000 3,651,000 8,464,000 6,953,000
Depreciation of unconsolidated
partnerships 2,000 51,000 4,000 104,000
Depreciation of non-real estate
corporate assets (111,000) (47,000) (196,000) (105,000)
Minority interest in Pan Pacific
(Portland), LLC 313,000 -- 679,000 --
Less:
Gain on sale of real estate (75,000) -- (75,000) --
------------ ------------ ------------ ------------
Funds from Operations $ 12,552,000 $ 9,757,000 $ 24,793,000 $ 18,426,000
============ ============ ============ ============
Weighted average number of shares
of common stock outstanding
(assuming dilution) 22,009,303 18,890,327 22,003,080 17,909,925
</TABLE>
CASH FLOWS
Comparison of the six months ended June 30, 1999 to the six months ended
June 30, 1998.
Net cash provided by operating activities increased by $2,521,000 to
$19,928,000 for the six months ended June 30, 1999, as compared to $17,407,000
for the six months ended June 30, 1998. The increase was primarily the result of
an increase in operating income due to property acquisitions offset by a
decrease in accrued expenses and other liabilities.
Net cash used in investing activities decreased by $91,195,000 to
$34,488,000 for the six months ended June 30, 1999, compared to $125,683,000 for
the six months ended June 30, 1998. The decrease was primarily the result of a
decrease in additions to properties offset by proceeds from the sale of real
estate and the acquisition of minority interest in an unconsolidated
partnership.
Net cash provided by financing activities decreased by $95,305,000 to
$13,799,000 for the six months ended June 30, 1999, compared to $109,104,000 for
the six months ended June 30, 1998. The decrease resulted primarily from a
decrease in net borrowings under the Unsecured Credit Facility and a decrease in
the issuance of common stock offset by a decrease in payments under the
Unsecured Credit Facility and an increase in notes payable proceeds.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Computer systems,
software and devices with embedded technology that are date-sensitive may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures, miscalculations or disruptions in operations,
including, among other things, a temporary inability to process transactions or
engage in similar normal business activities.
The Company has conducted an assessment of how it may be impacted by the
Year 2000 issue and is implementing a comprehensive plan to address all known
aspects of the issue.
Based on the Company's assessment of its internal computer systems
(including related hardware, software, customized applications and network
systems) with respect to the Year 2000 issue, the Company determined that its
existing network and IBM AS400 operating systems were not Year 2000 compliant.
Accordingly, the Company recently replaced its network operating system with a
new operating system and completed a conversion to a new software package, which
does not run on the IBM AS400 but on a Year 2000 compliant NT platform. The
Company believes that these measures, the actual costs of
<PAGE> 12
which have been and are expected to continue to be insignificant in the
aggregate, will enable its internal computer systems to be Year 2000 compliant.
The Company is also reviewing the efforts of its significant tenants,
vendors and other service providers to become Year 2000 compliant. Letters and
questionnaires have been or are in the process of being sent to all critical
entities with which the Company does business to assess their Year 2000
readiness. The Company will review the responses to such letters and
questionnaires, assess the impact that the Year 2000 readiness status of such
entities may have on the Company's operations, and take whatever action is
deemed necessary. To date, the Company has received responses from 39% of the
212 tenants surveyed and 96% of the 23 vendors and service providers surveyed.
Based on these responses, there has been no indication that the respondents have
any material concerns related to their ability to address all of their known
significant Year 2000 issues on a timely basis. The Company anticipates that
these review activities will be on-going for 1999 and will include any necessary
follow-up efforts. The Company, however, cannot presently estimate the total
cost of this phase of its Year 2000 readiness program. Although the review of
these third parties is continuing, the Company is not currently aware of any
third party circumstances with respect to the Year 2000 issue that would have a
material adverse impact on the Company. The Company can provide no assurance
that the Year 2000 compliance plans of these third parties will be successfully
completed in a timely manner.
Based on the results to date of the Company's internal assessment and
external inquiries, the Company does not believe that the Year 2000 issue will
pose significant operational problems for the Company or otherwise have a
material adverse effect on its results of operations or financial position.
Although management believes it has undertaken a careful and thorough analysis,
if all Year 2000 issues are not properly identified, or assessment, remediation
and testing efforts are not completed in a timely manner with respect to the
problems that are identified, there can be no assurance that the Year 2000 issue
will not have a material adverse effect on the Company's results of operations
or adversely affect the Company's relationships with tenants, vendors and other
service providers. Further, management believes it has undertaken a careful
survey of third party entities and does not believe there to be a material
concern based upon the potential third party risks that have been identified,
however, there can be no assurance that the Year 2000 issues of these other
entities will not have a material adverse effect on the Company's results of
operations. A contingency plan is being developed for dealing with the most
reasonably likely worst case scenario resulting from the Year 2000 issues.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes the secondary offering 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 secondary offering, the Unsecured
Credit Facility was paid down by approximately $82,000,000. This transaction
resulted in a reduction in interest expense as a percentage of total revenue,
22.9% for the six months ended June 30, 1999 and 24.7% for the six months ended
June 30, 1998. Thus, cash from operations needed to fund debt service
requirements was substantially decreased.
The total market capitalization of the Company at June 30, 1999, was
approximately $741,257,000, based on the market closing price at June 30, 1999
of $19.375 per share (assuming the conversion of PPP LLC's 832,617 units) and
the debt outstanding of approximately $315,111,000 (exclusive of accounts
payable and accrued expenses). As a result, the Company's debt to total market
capitalization ratio was approximately 42.5% at June 30, 1999. The Board of
Directors adopted a policy of limiting the Company's indebtedness to
approximately 50% of its total market capitalization. However, the Company may
from time to time modify its debt policy in light of current economic or market
conditions including but not limited to the relative costs of debt and equity
capital, market conditions for debt and equity securities and fluctuations in
the market price of its common stock. Accordingly, the Company may increase or
decrease its debt to market capitalization ratio beyond the limit described
above.
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. At June 30, 1999, the Company had $55,000,000 available under the
Unsecured Credit Facility. 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, 1999 was 6.40%. The Company will
continue to use the Unsecured Credit Facility to take advantage of select
acquisition opportunities as well as to provide funds for general corporate
purposes. It is expected, however, that the rate of external growth in 1999 will
continue to be at a slower pace than the rate of external growth during 1998.
The Company's indebtedness outstanding at June 30, 1999 requires balloon
payments of $175,059,000 in 2000, $4,004,000 in 2004, $7,443,000 in 2005,
$30,520,000 in 2006, $67,491,000 in 2007 and $5,873,000 in 2012. The balloon
payments due in the year 2000 include the balance drawn on the Unsecured Credit
Facility at June 30, 1999 of $145,000,000. 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
<PAGE> 13
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. At the end of the second
quarter, the Company closed a $35,000,000 financing transaction evidenced by
notes payable, secured by deeds of trust on two properties, Rainbow Promenade
and San Dimas Marketplace, bearing interest at 7.2%. Shortly after the end of
the second quarter, the Company closed a second financing transaction for
$56,300,000 also evidenced by notes payable, secured by deeds of trust on four
properties, Melrose Village Plaza, Monterey Plaza, Tustin Marketplace and
Tanasbourne Village, bearing interest at 7.1%. The proceeds were used to pay
down the Unsecured Credit Facility. Following these financing transactions, 35
of the Company's 55 properties remain unencumbered. The Unsecured Credit
Facility, which matures in 2000, is renewable, subject to certain conditions.
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 in 1998 and from the net cash flows from acquired
properties. Amounts accumulated for distributions 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.
The following table provides historical distribution information:
<TABLE>
<CAPTION>
Distribution
Quarter Ended Date Declared Record Date Date Paid Per Share
------------- ------------- ----------- --------- ------------
<S> <C> <C> <C> <C>
September 30, 1997 October 6, 1997 October 22, 1997 October 31, 1997 $0.2128
December 31, 1997 December 5, 1997 December 29, 1997 January 19, 1998 $0.3625
March 31, 1998 March 17, 1998 March 31, 1998 April 17, 1998 $0.3800
June 30, 1998 June 19, 1998 June 30, 1998 July 17, 1998 $0.3800
September 30, 1998 September 11, 1998 October 5, 1998 October 21, 1998 $0.3800
December 31, 1998 December 8, 1998 December 22, 1998 January 20, 1999 $0.3800
March 31, 1999 February 10, 1999 March 17, 1999 April 16, 1999 $0.4000
June 30, 1999 June 15, 1999 June 28, 1999 July 16, 1999 $0.4000
</TABLE>
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, the issuance of additional equity or debt
securities and the use of net proceeds from the disposition of non-strategic
assets. 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
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.
IMPACT OF ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT ADOPTED BY THE COMPANY
Effective January 1, 1999, the Company adopted Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities". The effect of the adoption was
immaterial.
<PAGE> 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and equity prices. The
primary market risk to which we are exposed is interest rate risk, which is
sensitive to many factors, including governmental monetary and tax policies,
domestic and international economic and political considerations and other
factors that are beyond our control.
INTEREST RATE RISK
As of June 30, 1999, the Company had $145,000,000 of outstanding floating
rate debt under the Unsecured Credit Facility. In order to modify and manage the
interest characteristics of outstanding debt and limit the effects of interest
rates on operations, the Company may use a variety of financial instruments. The
Company was not a party to any hedging agreements with respect to its floating
rate debt as of June 30, 1999. The Company does not enter into any transactions
for speculative or trading purposes. The Company does not believe that the
interest rate risk represented by its floating rate debt is material as of that
date in relation to the $732,551,000 of total assets of the Company and
approximately $426,146,000 market capitalization of the Company's common stock
and operating partnership units.
<PAGE> 15
PART II -- OTHER INFORMATION
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)
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 Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on August 10, 1999.
PAN PACIFIC RETAIL PROPERTIES, INC.
By: /s/ Stuart A. Tanz By: /s/ Laurie A. Sneve
------------------------------- -----------------------------------
Stuart A. Tanz Laurie A. Sneve, CPA
President and Vice President and Controller
Chief Executive Officer
<PAGE> 17
EXHIBIT INDEX
<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)
27.1 Financial Data Schedule (electronically filed with the Securities and Exchange
Commission only)
</TABLE>
<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> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,406
<SECURITIES> 0
<RECEIVABLES> 16,864
<ALLOWANCES> 1,700
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 752,795
<DEPRECIATION> 51,846
<TOTAL-ASSETS> 732,551
<CURRENT-LIABILITIES> 0
<BONDS> 0
212
0
<COMMON> 0
<OTHER-SE> 381,863
<TOTAL-LIABILITY-AND-EQUITY> 732,551
<SALES> 0
<TOTAL-REVENUES> 48,161
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 20,829
<LOSS-PROVISION> 298
<INTEREST-EXPENSE> 11,037
<INCOME-PRETAX> 15,997
<INCOME-TAX> 80
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,917
<EPS-BASIC> .75
<EPS-DILUTED> .75
</TABLE>
