<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 SEPTEMBER 30, 2000
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.)
1631-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 November 6, 2000, the number of shares of the Registrant's common
stock outstanding was 21,252,512.
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<PAGE> 2
PAN PACIFIC RETAIL PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS: 2000 1999
------------- ------------
(unaudited)
<S> <C> <C>
Operating properties, at cost:
Land $ 219,952 $ 209,071
Buildings and improvements (including related party development
and acquisition fees of $1,235) 600,668 569,519
Tenant improvements 29,402 26,496
--------- ---------
850,022 805,086
Less accumulated depreciation and amortization (68,575) (57,025)
--------- ---------
781,447 748,061
Investment in unconsolidated partnership 1,515 1,496
Cash and cash equivalents -- 1,097
Restricted cash 171 592
Accounts receivable (net of allowance for doubtful accounts of
$609 and $608, respectively) 4,008 3,295
Accrued rent receivable (net of allowance for doubtful accounts of
$1,548 and $1,377, respectively) 13,930 12,391
Notes receivable 2,886 3,043
Deferred lease commissions (including unamortized related party
amounts of $2,949 and $2,396, respectively, and net of accumulated
amortization of $2,375 and $2,281, respectively) 4,630 3,943
Prepaid expenses 6,984 7,987
Other assets 4,004 2,632
--------- ---------
$ 819,575 $ 784,537
========= =========
LIABILITIES AND EQUITY:
Notes payable $ 225,926 $ 228,490
Line of credit payable 168,500 128,800
Accounts payable, accrued expenses and other liabilities (including
related party amounts of $387 and $404, respectively) 12,264 13,074
Distributions payable (including related party amounts
of $4,539 and $4,323, respectively) 9,408 8,960
--------- ---------
416,098 379,324
Minority interests 22,680 23,347
--------- ---------
Stockholders' equity:
Common stock par value $.01 per share, 100,000,000 authorized shares,
21,252,512 shares issued and outstanding at September 30, 2000
and December 31, 1999 213 213
Paid in capital in excess of par value 481,574 481,312
Accumulated deficit (100,990) (99,659)
--------- ---------
380,797 381,866
--------- ---------
$ 819,575 $ 784,537
========= =========
</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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
2000 1999 2000 1999
--------- ---------- --------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUE:
Base rent $ 22,163 $ 20,014 $ 65,241 $ 58,390
Percentage rent 135 185 435 510
Recoveries from tenants 5,011 4,500 14,635 12,609
Net gain on sale of real estate -- -- -- 75
Income from unconsolidated partnership 77 82 226 267
Other 658 584 1,935 1,675
-------- -------- -------- --------
28,044 25,365 82,472 73,526
-------- -------- -------- --------
EXPENSES:
Property operating 3,330 3,100 9,685 8,778
Property taxes 2,054 1,895 6,083 5,445
Depreciation and amortization 4,992 4,598 14,418 13,062
Interest 7,627 6,165 21,943 17,202
General and administrative 812 1,178 3,301 3,881
Other 32 68 118 181
-------- -------- -------- --------
18,847 17,004 55,548 48,549
-------- -------- -------- --------
INCOME BEFORE MINORITY INTERESTS 9,197 8,361 26,924 24,977
Minority interests (473) (341) (1,476) (1,040)
-------- -------- -------- --------
NET INCOME $ 8,724 $ 8,020 $ 25,448 $ 23,937
======== ======== ======== ========
Basic and diluted earnings per share $ 0.41 $ 0.38 $ 1.20 $ 1.13
</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 NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2000 1999
--------- -------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 25,448 $ 23,937
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 14,418 13,062
Amortization of prepaid financing costs 508 502
Net gain on sale of real estate -- (75)
Income from unconsolidated partnership (226) (267)
Minority interests 1,476 1,040
Changes in assets and liabilities:
Decrease in restricted cash 421 673
Increase in accounts receivable (713) (183)
Increase in accrued rent receivable (1,539) (2,116)
Increase in deferred lease commissions (1,333) (1,275)
Decrease (increase) in prepaid expenses 525 (1,378)
Increase in other assets (1,673) (1,157)
Decrease in accounts payable, accrued expenses and other liabilities (631) (672)
--------- ---------
Net cash provided by operating activities 36,681 32,091
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of and additions to operating properties (47,010) (45,387)
Proceeds from sale of real estate -- 4,400
Increase (decrease) in construction accounts payable and accrued expenses 83 (2,317)
Distributions from unconsolidated partnership 207 20
Acquisition of interest in unconsolidated partnership -- (7,163)
Acquisition of minority interests (533) (16)
Increase in other assets (11) --
Collections of notes receivable 442 812
Increases in notes receivable (285) (258)
--------- ---------
Net cash used in investing activities (47,107) (49,909)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit proceeds 63,700 72,062
Line of credit payments (24,000) (111,662)
Notes payable proceeds -- 91,300
Notes payable payments (2,564) (9,652)
Prepaid financing costs (31) (1,166)
Distributions paid (27,776) (25,823)
--------- ---------
Net cash provided by financing activities 9,329 15,059
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,097) (2,759)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,097 2,759
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ -- $ --
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest (net of amounts capitalized of $50 and $203, respectively) $ 21,226 $ 16,578
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Transfer from investment in unconsolidated partnerships to property $ -- $ 15,775
Distributions payable $ 9,408 $ 8,840
Accrued liability for or acquisition of partnership interests $ 164 $ 13
Note payable assumed upon acquisition of property $ -- $ 12,523
Minority interest from acquisition of property $ -- $ 6,134
Issuance of restricted stock $ 262 $ 91
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
PAN PACIFIC RETAIL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999,
AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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. ACQUISITION
In August 2000, the Company entered into a definitive agreement pursuant
to which it has agreed to acquire Western Properties Trust ("Western"), a
California real estate investment trust, in a stock-for-stock merger (the
"Merger"). Each Western common share will be converted into the right to receive
0.62 of a share of Company common stock. As a result, the Company will issue, in
the aggregate, approximately 11,700,000 shares of its common stock, assuming the
exchange of all exchangeable securities of Western subsidiaries prior to the
consummation of the Merger. In connection with the Merger, the Company will also
assume Western's debt. The Merger will be voted upon by the stockholders of the
Company and the shareholders of Western at a special meeting to be held by each
of the Company and Western on November 9, 2000. Upon closing, the Company will
account for this transaction using the purchase method of accounting and will
record approximately $1,800,000 in compensation expense in the fourth quarter
of 2000 as a result of the accelerated vesting of restricted stock.
3. STOCK OPTION PLAN
In March 2000 and 1999, the Company granted an additional 173,000 and
233,000 stock options, respectively, under the 2000 Stock Option and Incentive
Plan and the 1997 Stock Incentive Plan of Pan Pacific Retail Properties.
4. 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 nine
months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------ ------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income available to common stockholders:
Basic $ 8,724 $ 8,020 $ 25,448 $ 23,937
Add-back income allocated to Pan Pacific
(Portland), LLC and Pan Pacific (Rancho
Las Palmas), LLC units (minority interests) 473 344 1,463 1,023
----------- ----------- ----------- -----------
Diluted $ 9,197 $ 8,364 $ 26,911 $ 24,960
=========== =========== =========== ===========
Weighted average shares:
Basic 21,252,512 21,208,387 21,252,512 21,177,640
Incremental shares from assumed:
Exercise of dilutive stock options 72,510 18,626 24,496 10,377
Conversion of Pan Pacific (Portland), LLC
and Pan Pacific (Rancho Las Palmas), LLC units 1,147,204 856,553 1,147,204 840,684
----------- ----------- ----------- -----------
Diluted 22,472,226 22,083,566 22,424,212 22,028,701
=========== =========== =========== ===========
</TABLE>
<PAGE> 6
PAN PACIFIC RETAIL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999,
AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA)
4. EARNINGS PER SHARE (CONTINUED)
For the three and nine months ended September 30, 2000, 310,167 and
1,182,834 stock options, respectively, were excluded from the calculation of
diluted weighted-average shares because they were antidilutive. For the three
and nine months ended September 30, 1999, 1,198,834 stock options were excluded
from the calculation of diluted weighted-average shares because they were
antidilutive.
5. RELATED PARTY TRANSACTIONS
(a) Distributions on common stock paid to Revenue Properties (U.S.) Inc.
("RPUS") were $13,402,000 and $12,753,000 during the nine months ended September
30, 2000 and 1999, respectively. At September 30, 2000 and 1999, $4,539,000 and
$4,323,000, respectively, of distributions were payable to RPUS.
(b) The Company received $55,000 and $125,000 for the nine months ended
September 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.
(c) The Company has notes receivable at September 30, 2000 of $285,000 due from
executive officers. The notes are interest only, bear interest at 7.00% and
mature in August 2001. The Company had notes receivable at September 30, 1999 of
$260,000 due from executive officers. The notes were interest only, bore
interest at 7.00% and matured in August 2000.
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> 7
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 61 properties at September 30, 2000. For
example, during the nine months ended September 30, 2000, the Company owned
properties comprising a weighted average gross leasable area of 8,249,980 square
feet. Total expenses, excluding interest, depreciation and amortization for the
nine months ended September 30, 2000 were $19,187,000 or an annualized $3.10 per
square foot. During the nine months ended September 30, 1999, the Company owned
properties comprising a weighted average gross leasable area of 7,513,037 square
feet. Total expenses, excluding interest, depreciation and amortization, for the
nine months ended September 30, 1999 were $18,285,000 or an annualized $3.25 per
square foot. These expense rates per square foot compare favorably with the same
calculations for the nine months ended September 30, 1998 and 1997 where the
rates per square foot were $3.32 and $4.03, 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 and the benefit of the
stabilization of properties acquired during 1999 and 2000.
RESULTS OF OPERATIONS
Comparison of the nine months ended September 30, 2000 to the nine
months ended September 30, 1999.
Total revenue increased by $8,946,000 or 12.2% to $82,472,000 from
$73,526,000 for the nine months ended September 30, 2000, compared to the nine
months ended September 30, 1999.
Rental revenue increased by $6,776,000 or 11.5% to $65,676,000 from
$58,900,000 for the nine months ended September 30, 2000, compared to the nine
months ended September 30, 1999. The increase in rental revenue resulted
principally from the properties acquired during 1999 and 2000 offset by property
dispositions in 1999.
Recoveries from tenants increased by $2,026,000 or 16.1% to $14,635,000
from $12,609,000 for the nine months ended September 30, 2000, compared to the
nine months ended September 30, 1999. This increase resulted primarily from the
properties acquired during 1999 and 2000 offset by property dispositions in
1999. Recoveries from tenants were 92.8% of property operating expenses and
property taxes for the nine months ended September 30, 2000 compared to 88.7% of
the same expenses for the same period in 1999.
<PAGE> 8
Property expenses include property operating expenses and property
taxes. Property operating expenses increased by $907,000 or 10.3% to $9,685,000
from $8,778,000 for the nine months ended September 30, 2000, compared to the
nine months ended September 30, 1999. The increase in property operating
expenses was primarily attributable to the properties acquired during 1999 and
2000 offset by property dispositions in 1999. Property taxes increased by
$638,000 or 11.7% to $6,083,000 from $5,445,000 for the nine months ended
September 30, 2000, compared to the nine months ended September 30, 1999. The
increase in property taxes was also primarily the result of the properties
acquired during 1999 and 2000 offset by property dispositions in 1999.
Depreciation and amortization increased by $1,356,000 or 10.4% to
$14,418,000 from $13,062,000 for the nine months ended September 30, 2000,
compared to the nine months ended September 30, 1999. This was primarily due to
the properties acquired during 1999 and 2000 offset by property dispositions in
1999.
Interest expense increased by $4,741,000 or 27.6% to $21,943,000 from
$17,202,000 for the nine months ended September 30, 2000, compared to the nine
months ended September 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 $580,000 or 14.9% to
$3,301,000 from $3,881,000 for the nine months ended September 30, 2000,
compared to the nine months ended September 30, 1999. This decrease was
primarily attributable to one-time executive severance costs recorded in 1999
and an increase in internal capitalized leasing costs recorded in 2000, which is
an offset to related general and administrative expenses, offset by annual
compensation increases in 2000. As a percentage of total revenue, general and
administrative expenses were 4.0% and 5.3% for the nine months ended September
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
nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2000 1999
------- -------
<S> <C> <C>
Revenue:
Rental $58,167 $56,511
Recoveries from tenants 12,741 12,071
Operating income from unconsolidated
partnership 233 273
Other 971 1,198
------- -------
$72,112 $70,053
Property operating and property tax expenses 13,733 13,564
------- -------
Operating income $58,379 $56,489
======= =======
</TABLE>
Operating income for the Same Properties for the nine months ended
September 30, 2000 increased over the same period in the prior year by
$1,890,000 or 3.4%. This increase was attributable primarily to increased rental
revenue of $1,656,000 due to increases in rental rates at Manteca Marketplace,
Melrose Village Plaza, Monterey Plaza, Powell Valley Junction and Sunset Square,
as well as increases in occupancy at Green Valley Town & Country and Oregon
Trail Shopping Center. Recoveries from tenants increased by $670,000, while
property operating and property tax expenses only increased by $169,000. 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 $227,000 due to a termination fee received at Claremont
Village Plaza in the second quarter of 1999.
<PAGE> 9
Comparison of the three months ended September 30, 2000 to the three
months ended September 30, 1999.
Total revenue increased by $2,679,000 or 10.6% to $28,044,000 from
$25,365,000 for the three months ended September 30, 2000, compared to the three
months ended September 30, 1999.
Rental revenue increased by $2,099,000 or 10.4% to $22,298,000 from
$20,199,000 for the three months ended September 30, 2000, compared to the three
months ended September 30, 1999. The increase in rental revenue resulted
principally from the properties acquired in the third and fourth quarters of
1999 and the properties acquired in 2000 offset by property dispositions in
1999.
Recoveries from tenants increased by $511,000 or 11.4% to $5,011,000
from $4,500,000 for the three months ended September 30, 2000, compared to the
three months ended September 30, 1999. The increase resulted principally from
the properties acquired in the third and fourth quarters of 1999 and the
properties acquired in 2000 offset by property dispositions in 1999. Recoveries
from tenants were 93.1% of property operating expenses and property taxes for
the three months ended September 30, 2000 compared to 90.1% of the same expenses
for the same period in 1999.
Property expenses include property operating expenses and property
taxes. Property operating expenses increased by $230,000 or 7.4% to $3,330,000
from $3,100,000 for the three months ended September 30, 2000, compared to the
three months ended September 30, 1999. The increase resulted principally from
the properties acquired in the third and fourth quarters of 1999 and the
properties acquired in 2000 offset by property dispositions in 1999. Property
taxes increased by $159,000 or 8.4% to $2,054,000 from $1,895,000 for the three
months ended September 30, 2000, compared to the three months ended September
30, 1999. The increase in property taxes was also primarily the result of the
properties acquired in the third and fourth quarters of 1999 and the properties
acquired in 2000 offset by property dispositions in 1999.
Depreciation and amortization increased by $394,000 or 8.6% to
$4,992,000 from $4,598,000 for the three months ended September 30, 2000
compared to the three months ended September 30, 1999. The increase resulted
principally from the properties acquired in the third and fourth quarters of
1999 and the properties acquired in 2000 offset by property dispositions in
1999.
Interest expense increased by $1,462,000 or 23.7% to $7,627,000 from
$6,165,000 for the three months ended September 30, 2000, compared to the three
months ended September 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 $366,000 or 31.1% to
$812,000 from $1,178,000 for the three months ended September 30, 2000, compared
to the three months ended September 30, 1999. The decrease resulted from an
increase in internal capitalized leasing costs which is an offset to related
general and administrative expenses. As a percentage of total revenue, general
and administrative expenses were 2.9% and 4.6% for the three months ended
September 30, 2000 and 1999, respectively.
The following table compares the operating data for the 54 properties
("Same Properties") that were owned and in operation for the entirety of the
three months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
2000 1999
------- -------
<S> <C> <C>
Revenue:
Rental $20,202 $19,776
Recoveries from tenants 4,513 4,382
Operating income from unconsolidated 79 84
partnership
Other 318 416
------- -------
$25,112 $24,658
Property operating and property tax expenses 4,833 4,844
------- -------
Operating income $20,279 $19,814
======= =======
</TABLE>
<PAGE> 10
Operating income for the Same Properties for the three months ended
September 30, 2000 increased over the same period in the prior year by $465,000
or 2.4%. This increase was attributable to increased rental revenue of $426,000
primarily due to increases in rental rates at Chino Town Square, Laurentian
Center, Melrose Village Plaza, Monterey Plaza and Powell Valley Junction, as
well as increases in occupancy at Hermiston Plaza, Oregon Trail Shopping Center
and Sahara Pavilion North. Recoveries from tenants increased by $131,000, while
property operating and property tax expenses remained consistent. This increase
is due to stronger recovery language in our leases.
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 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 nine months ended September 30, 2000 and
three and nine months ended September 30, 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 8,724,000 $ 8,020,000 $ 25,448,000 $ 23,937,000
Add:
Depreciation and amortization 4,992,000 4,598,000 14,418,000 13,062,000
Depreciation of unconsolidated
partnership 2,000 2,000 6,000 6,000
Depreciation of non-real estate
corporate assets (106,000) (100,000) (312,000) (296,000)
DownREIT minority interests 473,000 344,000 1,463,000 1,023,000
Less:
Net gain on sale of real estate -- -- -- (75,000)
------------ ------------ ------------ ------------
Funds from Operations $ 14,085,000 $ 12,864,000 $ 41,023,000 $ 37,657,000
============ ============ ============ ============
Weighted average number of shares
of common stock outstanding
(assuming dilution) 22,472,226 22,083,566 22,424,212 22,028,701
</TABLE>
CASH FLOWS
Comparison of the nine months ended September 30, 2000 to the nine
months ended September 30, 1999.
Net cash provided by operating activities increased by $4,590,000 to
$36,681,000 for the nine months ended September 30, 2000, as compared to
$32,091,000 for the nine months ended September 30, 1999. The increase was
primarily the result of an increase in operating income before depreciation and
amortization due to property acquisitions and a decrease in prepaid expenses.
<PAGE> 11
Net cash used in investing activities decreased by $2,802,000 to
$47,107,000 for the nine months ended September 30, 2000, compared to
$49,909,000 for the nine months ended September 30, 1999. The decrease was
primarily the result of a decrease in the acquisition of interest in an
unconsolidated partnership and no further decrease in construction accounts
payable and accrued expenses offset by an increase in acquisitions of and
additions to operating properties and a decrease in proceeds from the sale of
real estate.
Net cash provided by financing activities decreased by $5,730,000 to
$9,329,000 for the nine months ended September 30, 2000, compared to net cash
provided by financing activities of $15,059,000 for the nine months ended
September 30, 1999. The decrease resulted primarily from a decrease in notes
payable proceeds, a decrease in borrowings under the Unsecured Credit Facility
and an increase in distributions paid, offset by a decrease in payments under
the Unsecured Credit Facility, a decrease in notes payable payments and a
decrease in prepaid financing costs.
LIQUIDITY AND CAPITAL RESOURCES
The total market capitalization of the Company at September 30, 2000,
was approximately $843,820,000, based on the market closing price at September
30, 2000 of $20.0625 per share (assuming the conversion of 1,147,204 subsidiary
units) and the debt outstanding of approximately $394,426,000. As a result, the
Company's debt to total market capitalization ratio was approximately 46.7% at
September 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 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.
At September 30, 2000, the Company had $31,500,000 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
September 30, 2000 was 7.78%. 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's indebtedness outstanding at September 30, 2000 requires
balloon payments of $168,500,000 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 September 30,
2000 of $168,500,000. 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 new financing transactions in the first nine
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 subsidiary units were issued.
<PAGE> 12
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
September 30, 2000, 42 of the Company's 61 properties remain unencumbered.
In August 2000, the Company entered into a definitive agreement pursuant
to which it has agreed to acquire Western Properties Trust ("Western"), a
California real estate investment trust. The transaction is a stock for stock
merger (the "Merger") including assumption of debt whereby each Western common
share will be converted into the right to receive 0.62 of a share of Company
common stock. As a result, the Company will issue, in the aggregate,
approximately 11,700,000 shares of its common stock, assuming the exchange of
all exchangeable securities of Western subsidiaries prior to the consummation of
the Merger. In connection with the Merger, the Company will also assume
Western's debt. The Merger will be voted upon by the stockholders of the Company
and the shareholders of Western at a special meeting to be held by each of the
Company and Western on November 9, 2000. The Company will account for this
transaction using the purchase method of accounting.
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.
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
September 30, 2000 September 15, 2000 September 25, 2000 October 20, 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.
<PAGE> 13
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 September 30, 2000, the Company had $168,500,000 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 September 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 $819,575,000 of total
assets of the Company and approximately $449,394,000 market capitalization of
the Company's common stock and subsidiary units.
<PAGE> 14
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
A Form 8-K was filed on August 23, 2000 for the purpose of
reporting that Pan Pacific Retail Properties, Inc. ("Pan
Pacific") entered into an Agreement and Plan of Merger on August
21, 2000 with Western Properties Trust, a California real estate
investment trust ("Western"), whereby Western, subject to the
conditions of the agreement and approval of the transaction by
the stockholders of Pan Pacific and the shareholders of Western,
would be merged with and into Pan Pacific and Pan Pacific would
continue as the surviving corporation. Concurrently with the
execution of the merger agreement, Revenue Properties (U.S.),
Inc. ("RPUS"), Pan Pacific Development (Nevada), Inc. ("PPD")
and Western entered into a Voting Agreement pursuant to which
RPUS and PPD agreed to vote in favor of the merger. RPUS and PPD
collectively own approximately 51% of the outstanding shares of
Pan Pacific common stock.
A Form 8-K was filed on October 6, 2000 for the purpose of
providing information prepared by Pan Pacific Retail Properties,
Inc.'s management relating to the proposed merger of WPT, Inc.
(which will succeed Western Properties Trust immediately prior
to such merger) with and into Pan Pacific Retail Properties,
Inc.
<PAGE> 15
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 November 6, 2000.
PAN PACIFIC RETAIL PROPERTIES, INC.
<TABLE>
<S> <C>
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
</TABLE>
<PAGE> 16
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>
