<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, 2000
COMMISSION FILE NUMBER: 001-13243
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PAN PACIFIC RETAIL PROPERTIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
MARYLAND 33-0752457
(State of Incorporation) (I.R.S. Employer 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
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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 1, 2000, the number of shares of the Registrant's common stock
outstanding was 21,252,512.
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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: 2000 1999
--------- ------------
(unaudited)
<S> <C> <C>
Operating properties, at cost:
Land $ 212,617 $ 209,071
Buildings and improvements (including related party development
and acquisition fees of $1,235) 582,025 569,519
Tenant improvements 27,574 26,496
--------- ---------
822,216 805,086
Less accumulated depreciation and amortization (64,401) (57,025)
--------- ---------
757,815 748,061
Investment in unconsolidated partnership 1,505 1,496
Cash and cash equivalents -- 1,097
Restricted cash 308 592
Accounts receivable (net of allowance for doubtful accounts of
$549 and $608, respectively) 2,962 3,295
Accrued rent receivable (net of allowance for doubtful accounts of
$1,497 and $1,377, respectively) 13,471 12,391
Notes receivable 2,697 3,043
Deferred lease commissions (including unamortized related party
amounts of $2,523 and $2,396, respectively, and net of accumulated
amortization of $2,406 and $2,281, respectively) 4,186 3,943
Prepaid expenses 6,244 7,987
Other assets 2,528 2,632
--------- ---------
$ 791,716 $ 784,537
========= =========
LIABILITIES AND EQUITY:
Notes payable $ 226,800 $ 228,490
Line of credit payable 141,550 128,800
Accounts payable, accrued expenses and other liabilities (including
related party amounts of $431 and $404, respectively) 10,359 13,074
Distributions payable (including related party amounts
of $4,539 and $4,323, respectively) 9,408 8,960
--------- ---------
388,117 379,324
Minority interests 22,689 23,347
--------- ---------
Stockholders' equity:
Common stock par value $.01 per share, 100,000,000 authorized shares,
21,252,512 shares issued and outstanding at June 30, 2000
and December 31, 1999 213 213
Paid in capital in excess of par value 481,485 481,312
Accumulated deficit (100,788) (99,659)
--------- ---------
380,910 381,866
--------- ---------
$ 791,716 $ 784,537
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
PAN PACIFIC RETAIL PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUE:
Base rent $ 21,789 $ 19,433 $ 43,078 $ 38,376
Percentage rent 173 165 300 325
Recoveries from tenants 4,658 4,061 9,624 8,109
Net gain on sale of real estate -- 75 -- 75
Income from unconsolidated partnership 78 74 149 185
Other 667 538 1,277 1,091
-------- -------- -------- --------
27,365 24,346 54,428 48,161
-------- -------- -------- --------
EXPENSES:
Property operating 2,955 2,821 6,355 5,678
Property taxes 2,046 1,781 4,029 3,550
Depreciation and amortization 4,770 4,344 9,426 8,464
Interest 7,344 5,647 14,316 11,037
General and administrative 1,277 1,278 2,489 2,703
Other 55 75 86 113
-------- -------- -------- --------
18,447 15,946 36,701 31,545
-------- -------- -------- --------
INCOME BEFORE MINORITY INTERESTS 8,918 8,400 17,727 16,616
Minority interests (504) (321) (1,003) (699)
-------- -------- -------- --------
NET INCOME $ 8,414 $ 8,079 $ 16,724 $ 15,917
======== ======== ======== ========
Basic and diluted earnings per share $ 0.40 $ 0.38 $ 0.79 $ 0.75
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
PAN PACIFIC RETAIL PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------
2000 1999
-------- --------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 16,724 $ 15,917
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,426 8,464
Amortization of prepaid financing costs 338 295
Net gain on sale of real estate -- (75)
Income from unconsolidated partnership (149) (185)
Accrued interest on note receivable -- (4)
Minority interests 1,003 699
Changes in assets and liabilities:
Decrease in restricted cash 284 504
Decrease in accounts receivable 333 890
Increase in accrued rent receivable (1,080) (1,147)
Increase in deferred lease commissions (649) (908)
Decrease (increase) in prepaid expenses 1,431 (674)
Increase in other assets (93) (713)
Decrease in accounts payable, accrued expenses
and other liabilities (3,033) (3,135)
-------- --------
Net cash provided by operating activities 24,535 19,928
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of and additions to operating properties (18,853) (29,865)
Proceeds from sale of real estate -- 4,400
Increase (decrease) in construction accounts payable
and accrued expenses 491 (2,004)
Contributions to unconsolidated partnership -- (60)
Distributions from unconsolidated partnership 140 --
Acquisition of interest in unconsolidated partnership -- (7,163)
Acquisition of minority interests (412) (16)
Increase in other assets (9) --
Collections of notes receivable 349 204
Increases in notes receivable (3) --
-------- --------
Net cash used in investing activities (18,297) (34,504)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit proceeds 29,500 53,762
Line of credit payments (16,750) (47,262)
Notes payable proceeds -- 35,000
Notes payable payments (1,690) (8,913)
Financing deposits -- (1,747)
Prepaid financing costs (27) --
Distributions paid (18,368) (17,025)
-------- --------
Net cash (used in) provided by financing activities (7,335) 13,815
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,097) (761)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,097 2,759
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ -- $ 1,998
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest (net of amounts capitalized of
$35 and $177, respectively) $ 13,860 $ 10,741
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Transfer from investment in unconsolidated partnerships
to property $ -- $ 15,775
Distributions payable $ 9,408 $ 8,798
Accrued liability for or acquisition of partnership interests $ 285 $ 13
</TABLE>
See accompanying notes to consolidated financial statements.
4
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PAN PACIFIC RETAIL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999,
AND FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (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 consolidated financial statements
of the Company for the year ended December 31, 1999, which are included in the
Company's 1999 Annual Report on Form 10-K, as certain disclosures which would
substantially duplicate those contained in the audited consolidated financial
statements have been omitted from this report.
2. STOCK OPTION PLAN
In March 2000 and 1999, the Company granted an additional 173,000 and
233,000 stock options, respectively, under the 1997 Stock Option and Incentive
Plan and the 2000 Stock Incentive Plan of Pan Pacific Retail Properties.
3. 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, 2000 and 1999:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income available to common stockholders:
Basic $ 8,414 $ 8,079 $ 16,724 $ 15,917
Add-back income allocated to Pan Pacific
(Portland), LLC and Pan Pacific (Rancho
Las Palmas), LLC units (minority interests) 504 313 990 679
----------- ----------- ----------- -----------
Diluted $ 8,918 $ 8,392 $ 17,714 $ 16,596
=========== =========== =========== ===========
Weighted average shares:
Basic 21,252,512 21,162,012 21,252,512 21,162,012
Incremental shares from assumed:
Exercise of dilutive stock options 33,131 14,674 16,177 8,451
Conversion of Pan Pacific (Portland), LLC
and Pan Pacific (Rancho Las Palmas),
LLC units 1,147,204 832,617 1,147,204 832,617
----------- ----------- ----------- -----------
Diluted 22,432,847 22,009,303 22,415,893 22,003,080
=========== =========== =========== ===========
</TABLE>
For the three and six months ended June 30, 2000, 312,167 and 1,234,834
stock options, respectively, were excluded from the calculation of diluted
weighted-average shares because they were antidilutive. For the three and six
months ended June 30, 1999, 1,203,501 stock options were excluded from the
calculation of diluted weighted-average shares because they were antidilutive.
5
<PAGE> 6
PAN PACIFIC RETAIL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999,
AND FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA)
4. RELATED PARTY TRANSACTIONS
(a) Distributions on common stock paid to Revenue Properties (U.S.) Inc.
("RPUS") were $8,863,000 and $8,430,000 during the six months ended June 30,
2000 and 1999, respectively. At June 30, 2000 and 1999, $4,539,000 and
$4,323,000, respectively, of distributions were payable to RPUS.
(b) The Company received $40,000 and $100,000 for the six months ended June 30,
2000 and 1999, respectively, which represent a reimbursement of costs incurred
by the Company in providing financial services to RPUS. These amounts are
included as a reduction of general and administrative expenses.
5. 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.
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<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY LANGUAGE
The discussions in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 which
reflect management's current views with respect to future events and financial
performance. Forward-looking statements are subject to risks and uncertainties.
Factors that could cause actual results to differ materially from expectations
include market valuations of the Company's stock, financial performance and
operations of its shopping centers, real estate conditions, execution of
shopping center development programs, successful completion of renovations,
completion of pending acquisitions, changes in the availability of additional
acquisitions, changes in local or national economic conditions, and other risks
detailed from time to time in reports filed with the Securities and Exchange
Commission including the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
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. Primarily as a result
of the Company's acquisition program and outparcel buildout program, the
financial data show increases in total revenue from period to period.
The Company has experienced economies of scale as it has grown its
portfolio from 25 properties in 1997 to 59 properties at June 30, 2000. For
example, during the six months ended June 30, 2000, the Company owned properties
comprising a weighted average gross leasable area of 8,209,537 square feet.
Total expenses, excluding interest, depreciation and amortization for the six
months ended June 30, 2000 were $12,959,000 or an annualized $3.16 per square
foot. During the six months ended June 30, 1999, the Company owned properties
comprising a weighted average gross leasable area 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. These expense rates per square foot compare favorably with the same
calculations for the six months ended June 30, 1998 and 1997 where the rates per
square foot were $3.50 and $4.02, respectively.
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, the benefit of the stabilization
of properties acquired during 1998 and 1999 and the revenue generated from
expanded gross leasable area due to the buildout of outparcels.
RESULTS OF OPERATIONS
Comparison of the six months ended June 30, 2000 to the six months ended
June 30, 1999.
Total revenue increased by $6,267,000 or 13.0% to $54,428,000 from
$48,161,000 for the six months ended June 30, 2000, compared to the six months
ended June 30, 1999.
Rental revenue increased by $4,677,000 or 12.1% to $43,378,000 from
$38,701,000 for the six months ended June 30, 2000, compared to the six months
ended June 30, 1999. The increase in rental revenue resulted principally from
the properties acquired during 1999 and the property acquired in April 2000
offset by property dispositions in 1999.
Recoveries from tenants increased by $1,515,000 or 18.7% to $9,624,000 from
$8,109,000 for the six months ended June 30, 2000, compared to the six months
ended June 30, 1999. This increase resulted primarily from the properties
acquired during 1999 and the property acquired in April 2000 offset by property
dispositions in 1999. Recoveries from tenants were 92.7% of property operating
expenses and property taxes for the six months ended June 30, 2000 compared to
87.9% of the same expenses for the same period in 1999.
Property expenses include property operating expenses and property taxes.
Property operating expenses increased by $677,000 or 11.9% to $6,355,000 from
$5,678,000 for the six months ended June 30, 2000, compared to the six months
ended June 30, 1999. The increase in property operating expenses was primarily
attributable to the properties acquired during 1999
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<PAGE> 8
and the property acquired in April 2000 offset by property dispositions in 1999.
Property taxes increased by $479,000 or 13.5% to $4,029,000 from $3,550,000 for
the six months ended June 30, 2000, compared to the six months ended June 30,
1999. The increase in property taxes was also primarily the result of the
properties acquired during 1999 and the property acquired in April 2000 offset
by property dispositions in 1999.
Depreciation and amortization increased by $962,000 or 11.4% to $9,426,000
from $8,464,000 for the six months ended June 30, 2000, compared to the six
months ended June 30, 1999. This was primarily due to the properties acquired
during 1999 and the property acquired in April 2000 offset by property
dispositions in 1999.
Interest expense increased by $3,279,000 or 29.7% to $14,316,000 from
$11,037,000 for the six months ended June 30, 2000, compared to the six months
ended June 30, 1999, primarily as a result of interest expense relating to
additional funds drawn on the Company's Unsecured Credit Facility to finance
acquisitions, an increase in the LIBOR component of the borrowing cost on the
Unsecured Credit Facility over the comparable period in 1999 and interest
expense on the fixed rate mortgage assumed related to Rancho Las Palmas Retail
Center in the third quarter of 1999.
General and administrative expenses decreased by $214,000 or 7.9% to
$2,489,000 from $2,703,000 for the six months ended June 30, 2000, compared to
the six months ended June 30, 1999. This decrease was primarily attributable to
one-time executive severance costs recorded in the first quarter of 1999 offset
by annual compensation increases in the first quarter of 2000. As a percentage
of total revenue, general and administrative expenses were 4.6% and 5.6% for the
six months ended June 30, 2000 and 1999, respectively.
The following table compares the operating data for the 52 properties
("Same Properties") that were owned and in operation for the entirety of the six
months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
2000 1999
------- -------
<S> <C> <C>
Revenue:
Rental $38,715 $37,306
Recoveries from tenants 8,427 7,821
Operating income from unconsolidated
partnership 154 189
Other 656 787
------- -------
$47,952 $46,103
Property operating and property tax expenses 9,103 8,883
------- -------
Operating income $38,849 $37,220
======= =======
</TABLE>
Operating income for the Same Properties for the six months ended June 30,
2000 increased over the same period in the prior year by $1,629,000 or 4.4%.
This increase was attributable primarily to increased rental revenue of
$1,409,000 due to increases in occupancy and releasing rates at Green Valley
Town & Country, Manteca Marketplace, Monterey Plaza, Olympia Square, Oregon
Trail Shopping Center, Powell Valley Junction and Sahara Pavilion South.
Recoveries from tenants increased by $606,000, while property operating and
property tax expenses only increased by $220,000. The increase in recoveries
from tenants over the increase in related expenses is due to increases in
occupancy and stronger recovery language in our leases. Other income decreased
by $131,000 due to a termination fee received at Claremont Village Plaza in the
second quarter of 1999.
Comparison of the three months ended June 30, 2000 to the three months
ended June 30, 1999.
Total revenue increased by $3,019,000 or 12.4% to $27,365,000 from
$24,346,000 for the three months ended June 30, 2000, compared to the three
months ended June 30, 1999.
Rental revenue increased by $2,364,000 or 12.1% to $21,962,000 from
$19,598,000 for the three months ended June 30, 2000, compared to the three
months ended June 30, 1999. The increase in rental revenue resulted principally
from the properties acquired in the second, third and fourth quarters of 1999
and the property acquired in April 2000 offset by property dispositions in 1999.
Recoveries from tenants increased by $597,000 or 14.7% to $4,658,000 from
$4,061,000 for the three months ended June 30, 2000, compared to the three
months ended June 30, 1999. The increase resulted principally from the
properties acquired in the second, third and fourth quarters of 1999 and the
property acquired in April 2000 offset by property dispositions in 1999.
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<PAGE> 9
Recoveries from tenants were 93.1% of property operating expenses and property
taxes for the three months ended June 30, 2000 compared to 88.2% of the same
expenses for the same period in 1999.
Property expenses include property operating expenses and property taxes.
Property operating expenses increased by $134,000 or 4.8% to $2,955,000 from
$2,821,000 for the three months ended June 30, 2000, compared to the three
months ended June 30, 1999. The increase resulted principally from the
properties acquired in the second, third and fourth quarters of 1999 and the
property acquired in April 2000 offset by property dispositions in 1999.
Property taxes increased by $265,000 or 14.9% to $2,046,000 from $1,781,000 for
the three months ended June 30, 2000, compared to the three months ended June
30, 1999. The increase in property taxes was also primarily the result of the
properties acquired in the second, third and fourth quarters of 1999 and the
property acquired in April 2000 offset by property dispositions in 1999.
Depreciation and amortization increased by $426,000 or 9.8% to $4,770,000
from $4,344,000 for the three months ended June 30, 2000 compared to the three
months ended June 30, 1999. The increase resulted principally from the
properties acquired in the second, third and fourth quarters of 1999 and the
property acquired in April 2000 offset by property dispositions in 1999.
Interest expense increased by $1,697,000 or 30.0% to $7,344,000 from
$5,647,000 for the three months ended June 30, 2000, compared to the three
months ended June 30, 1999, primarily as a result of interest expense relating
to additional funds drawn on the Company's Unsecured Credit Facility to finance
acquisitions, an increase in the LIBOR component of the borrowing cost on the
Unsecured Credit Facility over the comparable period in 1999 and interest
expense on the fixed rate mortgage assumed related to Rancho Las Palmas Retail
Center in the third quarter of 1999.
General and administrative expenses remained essentially flat at $1,277,000
for the three months ended June 30, 2000, compared to $1,278,000 for the three
months ended June 30, 1999. As a percentage of total revenue, general and
administrative expenses were 4.7% and 5.2% for the three months ended June 30,
2000 and 1999, respectively.
The following table compares the operating data for the 53 properties
("Same Properties") that were owned and in operation for the entirety of the
three months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------
2000 1999
------- -------
<S> <C> <C>
Revenue:
Rental $19,818 $18,926
Recoveries from tenants 4,103 3,904
Operating income from unconsolidated
partnership 80 76
Other 273 395
------- -------
$24,274 $23,301
Property operating and property tax expenses 4,413 4,419
------- -------
Operating income $19,861 $18,882
======= =======
</TABLE>
Operating income for the Same Properties for the three months ended June
30, 2000 increased over the same period in the prior year by $979,000 or 5.2%.
This increase was attributable to increased rental revenue primarily due to
increases in occupancy and releasing rates at Auburn North, Monterey Plaza,
Oregon Trail Shopping Center and Sahara Pavilion South. Recoveries from tenants
increased by $199,000, while property operating and property tax expenses
remained constant. This increase is due to increases in occupancy and stronger
recovery language in our leases. Other income decreased by $122,000 due to a
termination fee received at Claremont Village Plaza in the second quarter of
1999.
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 such other REITs. Funds
from Operations should not
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<PAGE> 10
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. NAREIT's clarification to the definition of Funds from
Operations, which became effective January 1, 2000, had no impact on the
calculation of our Funds from Operations.
The following table presents the Company's Funds from Operations (assuming
dilution) for the three and six months ended June 30, 2000 and three and six
months ended June 30, 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 8,414,000 $ 8,079,000 $ 16,724,000 $ 15,917,000
Add:
Depreciation and amortization 4,770,000 4,344,000 9,426,000 8,464,000
Depreciation of unconsolidated
partnership 2,000 2,000 4,000 4,000
Depreciation of non-real estate
corporate assets (105,000) (111,000) (206,000) (196,000)
DownREIT minority interests 504,000 313,000 990,000 679,000
Less:
Net gain on sale of real estate -- (75,000) -- (75,000)
------------ ------------ ------------ ------------
Funds from Operations $ 13,585,000 $ 12,552,000 $ 26,938,000 $ 24,793,000
============ ============ ============ ============
Weighted average number of shares
of common stock outstanding
(assuming dilution) 22,432,847 22,009,303 22,415,893 22,003,080
</TABLE>
CASH FLOWS
Comparison of the six months ended June 30, 2000 to the six months ended
June 30, 1999.
Net cash provided by operating activities increased by $4,607,000 to
$24,535,000 for the six months ended June 30, 2000, as compared to $19,928,000
for the six months ended June 30, 1999. The increase was primarily the result of
an increase in operating income and depreciation and amortization due to
property acquisitions and a decrease in prepaid expenses.
Net cash used in investing activities decreased by $16,207,000 to
$18,297,000 for the six months ended June 30, 2000, compared to $34,504,000 for
the six months ended June 30, 1999. The decrease was primarily the result of a
decrease in acquisitions of and additions to operating properties and a decrease
in the acquisition of interest in an unconsolidated partnership. These decreases
were offset by a decrease in proceeds from the sale of real estate.
Net cash used in financing activities increased by $21,150,000 to
$7,335,000 for the six months ended June 30, 2000, compared to net cash provided
by financing activities of $13,815,000 for the six months ended June 30, 1999.
The increase resulted primarily from a decrease in borrowings under the
Unsecured Credit Facility, a decrease in notes payable proceeds and an increase
in distributions paid. These increases were reduced by a decrease in payments
under the Unsecured Credit Facility, a decrease in notes payable payments and a
decrease in financing deposits.
LIQUIDITY AND CAPITAL RESOURCES
The total market capitalization of the Company at June 30, 2000, was
approximately $819,144,000, based on the market closing price at June 30, 2000
of $20.125 per share (assuming the conversion of 1,147,204 DownREIT LLC units)
and the debt outstanding of approximately $368,350,000. As a result, the
Company's debt to total market capitalization ratio was approximately 45.0% at
June 30, 2000. 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
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<PAGE> 11
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. Considering current
market volatility with regard to stock prices, an alternate measure of leverage
used within the industry, which is not affected by fluctuations in stock price,
is the ratio of debt to gross real estate assets. At June 30, 2000 the Company's
debt to gross real estate assets ratio was 44.8%.
At June 30, 2000, the Company had $58,450,000 available under its Unsecured
Credit Facility. In October 1999, the Company received an investment grade
credit rating of BBB- from Standard & Poor's, thereby reducing the Company's
interest rate under the Unsecured Credit Facility by 22.5 basis points. As such,
at the Company's option, amounts borrowed under the Unsecured Credit Facility
bear interest at either LIBOR plus 1.15% or a reference rate determined by the
lead bank of the lending group. The weighted average interest rate for
short-term LIBOR contracts under the Unsecured Credit Facility at June 30, 2000
was 7.81%. 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. The Company acquired one property in the first
six months of 2000 and the rate of property acquisitions in 1999 was at a slower
pace than the rate during 1998 in response to capital market conditions. This
decreased rate of growth is expected to continue through the year 2000.
The Company's indebtedness outstanding at June 30, 2000 requires balloon
payments of $141,450,000 in 2002, $4,004,000 in 2004, $7,395,000 in 2005,
$30,520,000 in 2006, $74,644,000 in 2007, $46,355,000 in 2009, $23,191,000 in
2010 and $5,836,000 in 2012. The balloon payment due in the year 2002 represents
the balance drawn on the Unsecured Credit Facility at June 30, 2000 of
$141,450,000. With regard to the balloon payments noted above, 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 this 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 terms of future financing transactions will be
subject to general market conditions at the time.
We did not engage in any financing transactions in the first six months of
2000. During 1999, the Company completed a number of financing transactions. 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%. At the beginning of the third 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 Heights Shopping Center and Tanasbourne Village, bearing interest at
7.1%. The proceeds were used to pay down the Unsecured Credit Facility.
Also in the third quarter of 1999, the Company formed Pan Pacific (Rancho
Las Palmas), LLC (the "RLPLLC") and Pan Pacific (RLP), Inc. in connection with
the acquisition of Rancho Las Palmas Retail Center. As part of the acquisition,
and in exchange for an interest in the asset contributed to RLPLLC by an
individual, 314,587 DownREIT LLC units were issued.
In the fourth quarter of 1999 the Company entered into a new $200,000,000
Unsecured Credit Facility for three years under similar terms and conditions as
the old facility and with the same group of banks. The Unsecured Credit Facility
matures in December 2002. In addition, the Company entered into a modification
agreement with the lender on the Chino Town Square property. The loan was set to
mature in March of 2000. Under the terms of the modification agreement, the
maturity date was extended to January 2010 and the interest rate was reduced
from 8.0% to 7.72%. Following these financing transactions, at June 30, 2000, 40
of the Company's 59 properties remain unencumbered.
The Company expects to make distributions from net cash provided by
operations. Operating cash flows in excess of amounts to be used 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.
11
<PAGE> 12
The following table provides certain historical distribution information:
<TABLE>
<CAPTION>
Distribution
Quarter Ended Date Declared Record Date Date Paid Per Share
------------- ------------- ----------- --------- ------------
<S> <C> <C> <C> <C>
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
September 30, 1999 September 9, 1999 September 24, 1999 October 22, 1999 $0.4000
December 31, 1999 December 9, 1999 December 22, 1999 January 21, 2000 $0.4000
March 31, 2000 February 9, 2000 March 17, 2000 April 14, 2000 $0.4200
June 30, 2000 June 13, 2000 June 26, 2000 July 21, 2000 $0.4200
</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.
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, 2000, the Company had $141,550,000 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 changes in
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, 2000. The Company does not enter into
any transactions for speculative or trading purposes. The Company does not
believe that its weighted average interest rate of 7.7% on its fixed rate debt
is materially different from current fair market interest rates for debt
instruments with similar risks and maturities. Additionally, 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 $791,716,000 of total assets of the
Company and approximately $450,794,000 market capitalization of the Company's
common stock and DownREIT LLC units.
12
<PAGE> 13
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
13
<PAGE> 14
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 1, 2000.
PAN PACIFIC RETAIL PROPERTIES, INC.
By: /s/ Stuart A. Tanz By: /s/ Joseph B. Tyson
-------------------------------- ------------------------------
Stuart A. Tanz Joseph B. Tyson, CPA
President and Chief Executive Officer Executive Vice President and
Chief Financial Officer
14
<PAGE> 15
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>
