<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For Quarter Ended: March 31, 1995 Commission File Number: 1-8063
CALIFORNIA REAL ESTATE INVESTMENT TRUST
---------------------------------------
(Exact Name of Registrant as Specified in its Charter)
CALIFORNIA 94-6181186
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
131 STEUART STREET, SUITE 200, SAN FRANCISCO, CA 94105
-------------------------------------------------------
(Address of registrant's principal executive offices) (Zip Code)
(415) 905-0288
--------------
(Registrant's telephone number, including area code)
1300 Ethan Way, Suite 200, Sacramento, CA 95825
------------------------------------------------
(Former name or former address if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the close of the latest practical date.
Class Outstanding at March 31, 1995
- ------------------------------------ -----------------------------
Common Shares of Beneficial Interest 9,156,969
$1.00 par value ("Common Shares")
<PAGE> 2
- --------------------------------------------------------------------------------
CALIFORNIA REAL ESTATE INVESTMENT TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDEX PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets -
March 31, 1995 and December 31, 1994 1
Consolidated Statements of Operations -
For the Three Months Ended March 31, 1995 and 1994 2
Consolidated Statements of Cash Flows -
For the Three Months Ended March 31, 1995 and 1994 3
Notes to Consolidated Financial Statements 4 - 7
Item 2: Management's Discussion and Analysis of the
Financial Condition and Results of Operations 8 - 10
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 11
Item 2: Changes in Securities 11
Item 3: Defaults Upon Senior Securities 11
Item 4: Submission of Matters to a Vote of Security Holders 11
Item 5: Other Information 11
Item 6: Exhibits and Reports on Form 8-K 11
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1995 1994
(UNAUDITED) (AUDITED)
--------- -------
ASSETS
<S> <C> <C>
INVESTMENTS:
Rental properties, less accumulated depreciation of $2,361,000
and $2,229,000 at March 31, 1995 and December 31, 1994,
respectively, and valuation allowance of $5,863,000 at
March 31, 1995 and December 31, 1994 $ 18,259,000 $ 18,391,000
Notes receivable, net of valuation allowances and deferred
gains of $7,116,000 and $7,182,000 at
March 31, 1995 and December 31, 1994, respectively 12,780,000 13,532,000
------------ ------------
31,039,000 31,923,000
Cash 4,476,000 3,366,000
Receivables, net of allowance of $504,000 and $323,000
at March 31, 1995 and December 31, 1994, respectively 872,000 974,000
Other assets, net of valuation allowance of $310,000 at
March 31, 1995 and December 31, 1994 395,000 277,000
------------ ------------
Total Assets $ 36,782,000 $ 36,540,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Long-term notes payable, collateralized by deeds of trust
on rental properties $ 8,723,000 $ 8,740,000
Accounts payable and accrued expenses 58,000 43,000
Other liabilities 74,000 72,000
------------ ------------
Total Liabilities 8,855,000 8,855,000
------------ ------------
Commitments
SHAREHOLDERS' EQUITY:
Shares of beneficial interest, par value $1 a share; unlimited
authorization, 9,157,000 shares outstanding at
March 31, 1995 and December 31, 1994 9,157,000 9,157,000
Additional paid-in capital 55,098,000 55,098,000
Accumulated deficit (36,328,000) (36,570,000)
------------ ------------
Total Shareholders' Equity 27,927,000 27,685,000
------------ ------------
Total Liabilities and Shareholders' Equity $ 36,782,000 $ 36,540,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1995 1994
---- ----
<S> <C> <C>
REVENUES:
Rent $536,000 $ 779,000
Interest 343,000 352,000
Hotel 60,000 --
-------- ----------
939,000 1,131,000
-------- ----------
EXPENSES:
Operating expenses 133,000 269,000
Hotel operating expenses 60,000 --
Property management 23,000 120,000
Depreciation and amortization 132,000 177,000
Interest 228,000 351,000
General and administrative 187,000 215,000
-------- ----------
763,000 1,132,000
-------- ----------
Income (loss) before gain on foreclosure
or sale of investments 176,000 (1,000)
Gain on foreclosure or sale of investments 66,000 --
-------- ----------
Net income (loss) $242,000 $ (1,000)
======== ==========
Net income (loss) per share of beneficial interest $ 0.03 $ (0.00)
======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 242,000 $ (1,000)
---------- ----------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 132,000 177,000
(Gain) on foreclosure or sale of investments (66,000) --
Changes in assets and liabilities:
Decrease (increase) in receivables,net 102,000 (123,000)
(Increase) decrease in other assets (118,000) 24,000
Increase (decrease) in accounts payable
and accrued expenses 15,000 (6,000)
Increase (decrease) in other liabilities 2,000 (1,000)
---------- ----------
Total adjustments to net income (loss) 67,000 71,000
---------- ----------
Net cash provided by operating activities 309,000 70,000
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to The Peregrine Real Estate Trust -- (5,000)
Improvements to rental properties -- (81,000)
Collections on notes receivable 818,000 11,000
---------- ----------
Net cash provided by (used in) investing activities 818,000 (75,000)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term notes payable (17,000) (22,000)
---------- ----------
Net cash used in financing activities (17,000) (22,000)
---------- ----------
Net increase (decrease) in cash 1,110,000 (27,000)
Cash, beginning of period 3,366,000 3,451,000
---------- ----------
Cash, end of period $4,476,000 $3,424,000
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization and Basis of Presentation:
Organization
California Real Estate Investment Trust was organized under the laws of the
State of California pursuant to a Declaration of Trust dated September 15,
1966.
The Trust became a partner of Totem Square, L. P. (Totem), a Washington
Limited Partnership in which the Trust owns a 59% interest, on November 30,
1990. The Trust also formed CalREIT Totem Square, Inc. (Cal-CORP) to act as
general partner of Totem. Cal-CORP has a 1% interest in Totem, and Totem
Square Associates, an unrelated party, has the remaining 40%.
On April 14, 1994, The Peregrine Real Estate Trust (formerly Commonwealth
Equity Trust) as majority shareholder owning 76% of the Trust's outstanding
Shares of Beneficial Interest, voted its shares to replace the Board of
Trustees. At that time, the Trust elected a new Board of Trustees all of
whom were key management personnel of The Peregrine Real Estate Trust
(Peregrine). Subsequently, the Board was changed and is now comprised of a
Trustee who also serves on Peregrine's Board of Trustees, and two remaining
Trustees, both of whom are executive officers of Peregrine and one of whom
is also a Trustee of Peregrine.
The Trust currently owns a hotel and four other commercial/retail
properties located in five market areas in the Western United States. The
Trust also owns a mortgage note portfolio comprising approximately $20
million in loans, with book values of approximately $12.8 million, which
bear interest at an overall effective rate of approximately 8% and are
collateralized by mortgages on real property. Most of the investments in
the eight loans were done in connection with the disposition of Trust
properties prior to 1994. Two independent Trustees are slated to be added
to the Board on May 15, 1995.
Basis of Presentation
The accompanying financial statements are unaudited; however, they have
been prepared in accordance with generally accepted accounting principles
for interim financial information and in conjunction with the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do
not include all of the disclosures required by
4
<PAGE> 7
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting solely of normal
recurring matters) necessary for a fair presentation of the financial
statements for these interim periods have been included. The results for
the interim period ended March 31, 1995 are not necessarily indicative of
the results to be obtained for the full fiscal year. These financial
statements should be read in conjunction with the December 31, 1994 audited
financial statements and notes thereto, included in the California Real
Estate Investment Trust Annual Report on Form 10-K.
The accompanying unaudited consolidated financial statements of California
Real Estate Investment Trust include the accounts of the Trust and Totem.
2. Income Taxes:
The Trust has elected to be taxed as a real estate investment trust and as
such, is not taxed on that portion of its taxable income which is
distributed to shareholders, provided that at least 95% of its real estate
trust taxable income is distributed and that the Trust meets certain other
REIT investments.
3. Related-Party Transactions:
The Trust and Peregrine are both self-administered. However, they share
certain costs, including personnel costs, for which the Trust reimburses
Peregrine pursuant to a cost allocation agreement based on each trust's
respective asset values (real property and notes receivable) that is
negotiated annually. During the three months ended March 31, 1995,
reimbursable costs charged to the Trust by Peregrine approximated $108,000.
This amount was offset against the following amounts due from Peregrine.
At March 31, 1995 and December 31, 1994, the Trust had amounts due from
Peregrine aggregating $93,000 and $202,000, net of valuation allowances of
$141,000. Such uncollateralized amounts are due on demand; the remaining
$93,000 due from Peregrine to the Trust will be satisfied against future
cost allocations.
5
<PAGE> 8
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
4. Cash Flow Information:
Cash paid for interest during the periods reported was as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
1995 1994
---- ----
<S> <C> <C>
Interest $ 227,000 $ 350,000
========= =========
</TABLE>
5. Per Share Data:
Per share data is based on the weighted average number of common shares
outstanding during the three months ended March 31, 1995 and 1994. The
weighted average numbers of shares used in the computation were 9,157,000
and 9,145,000 for the three months ended March 31, 1995 and March 31, 1994,
respectively. At March 31, 1995 there were no outstanding stock options.
6. Hotel Management Agreement:
On June 1, 1994, a professional hotel management company was signed to
lease the Trust's hotel. That lease agreement provided the Trust and the
hotel management company the opportunity to renegotiate its terms. The
lease terms are currently being renegotiated. Management of the Trust
anticipates reaching an agreement under which the Trust will be in at least
a break-even position before debt service.
7. Historical Funds from Operations and Funds Available for Distribution:
Equity REIT analysts generally consider Funds From Operations (FFO) an
appropriate measure of performance in comparing the results of operations
of REITs. FFO is defined by the National Association of Real Estate
Investment Trusts as net income computed in accordance with generally
accepted accounting principles before gains and losses on sales of property
and from debt restructuring plus depreciation and amortization. Funds
Available for Distribution (FAD) is defined as FFO less capital
expenditures funded by operations and loan amortization. The Trust believes
that in order to facilitate a clear understanding of the historical
operating results of the Trust, FFO and FAD should be examined in
conjunction with net income (loss) as presented in this report. FFO and FAD
should not be considered as an
6
<PAGE> 9
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
alternative to net income (loss) as an indication of the Trust's performance or
to cash flow as a measure of liquidity.
Funds From Operations and Funds Available for Distribution for the three months
ended March 31, 1995 and 1994 are summarized as follows:
Calculation of Funds From Operations and Funds Available for Distribution
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
1995 1994
---- ----
<S> <C> <C>
Net income (loss) before gain
on foreclosure or sale of investments $242 $ (1)
Depreciation and amortization 132 177
---- ----
Funds From Operations 374 176
Capital improvements -- (81)
Loan principal payments (17) (22)
---- ----
Funds Available for Distribution $357 $ 73
==== ====
</TABLE>
7
<PAGE> 10
- -------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- -------------------------------------------------------------------------------
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this Form 10-Q.
Historical results set forth are not necessarily indicative of future financial
position and results of operations of the Trust.
During the latter part of 1994 and the first quarter of 1995, the Trust began to
explore alternative strategies to grow the company through acquisitions,
joint-venture arrangements and possibly an infusion of new capital. A strategy
was developed to rationalize the portfolio and to concentrate on one asset
class. It is also expected that over time, the Trust's holdings will favor
equity positions rather than mortgages. The Board explored growth opportunities
in single and multi-tenant industrial buildings, retail centers and hotel
properties. Early research indicated potential growth opportunities for CalREIT
within the lodging industry where the economics appear to be firming. In the
coming months, management intends to continue to explore multiple options to
expand the Trust but will focus on growth potential within the lodging industry.
Results of Operations
The Trust believes that to facilitate a clear understanding of the operating
results of the Trust, Funds From Operations should be examined in conjunction
with net income (loss). Industry analysts generally define Funds From Operations
as net income (loss) adjusted for certain non-cash expenses, primarily
depreciation and amortization. Funds From Operations should not be considered as
a substitute for net income as an indication of the Trust's performance or as a
substitute for cash flow as a measure of its liquidity.
Comparison of the Three Months Ended March 31, 1995 to the Three Months Ended
March 31, 1994
- -------------------------------------------------------------------------------
Total Revenues decreased by $192,000, or 17%, to $939,000 for the three months
ended March 31, 1995, down from $1,131,000 for the three months ended March 31,
1994. This decrease was primarily attributable to the sale of the Imperial
Canyon shopping center in April 1994.
Rental revenues decreased by $243,000, or 31%, to $536,000 for the three months
ended March 31, 1995, down from $779,000 for the three months ended March 31,
1994. This decrease was due primarily to the absence of $185,000 in rents
collected by the Imperial Canyon shopping center for the three months ended
March 31, 1994 and to a decrease of $73,000 in rents from Fulton Square to
$95,000 (attributable to a decrease in occupancy) for the three months ended
March 31, 1995, down from $168,000 for the three months ended March 31, 1994.
8
<PAGE> 11
Interest revenue decreased by $9,000 or 3% from $352,000 for the three months
ended March 31, 1994 to $343,000 for the three months ended March 31, 1995.
Revenue from hotel operations was $60,000 for the three months ended March 31,
1995, all of which comprised lease revenue from CapStar, the professional hotel
management company that leases the Trust's hotel. The lease agreement provides
the Trust and CapStar the opportunity to renegotiate its terms, and CapStar has
asked to renegotiate certain lease terms. It has said it must improve the
property's earning capacity. It has taken a number of steps to accomplish this
including increasing the number of advance group and tour bookings, implementing
a local marketing program and substantially revamping the property's food and
beverage operations. During the three months ended March 31, 1995, while the
renegotiations were taking place, CapStar did not make the payments called for
by the lease. Management of the Trust anticipates reaching an agreement under
which CapStar will continue to lease the hotel and the Trust will at least be in
a break-even position before debt service. Pending the outcome of these
negotiations, all hotel revenue for the three months ended March 31, 1995 has
been reserved against. The expense related to that reserve comprises the entire
$60,000 of hotel operating expenses for the three months ended March 31, 1995.
The Trust recorded neither hotel revenue nor hotel operating expenses for the
three months ended March 31, 1994.
Total Expenses decreased by $369,000, or 33%, to $763,000 for the three months
ended March 31, 1995, down from $1,132,000 for the three months ended March 31,
1994. Much of this improvement resulted from the reduction in operating
expenses, property management fees, depreciation and amortization expense and
interest expense related to the Imperial Canyon shopping center. In the
aggregate, these expenses were $212,000 less for the three months ended March
31, 1995 than for the three months ended March 31, 1994 due to that property's
sale. An additional $89,000 decrease in property management fees was
attributable to the decrease in the monthly property management fee from 5% to
3% of collected rents which the Trust negotiated with its new property
management firm and to the absence of an additional management fee paid to the
Trust's former advisor.
9
<PAGE> 12
General and administrative fees decreased by $28,000, or 13%, to $187,000 for
the three months ended March 31, 1995, down from $215,000 for the three months
ended March 31, 1994. The decrease was primarily due to a combination of
factors: legal fees, directors fees and accounting fees decreased by $141,000
in the aggregate, while the reimbursement of costs to Peregrine (which
reimbursement was not present during the three months ended March 31, 1994, as
the Trust was not self-administered) accounted for an increase of $108,000.
Net income of $242,000 was reported by the Trust for the three months ended
March 31, 1995, an improvement of $243,000 over the net loss of $1,000 for the
three months ended March 31, 1994. This increase was the result of a significant
decrease in the total expenses of the Trust for the three months ended March 31,
1995 compared with the three months ended March 31, 1994 and a gain recognized
in connection with a principal payment on a note receivable for the three months
ended March 31, 1995 compared with no gain recorded for the three months ended
March 31, 1994.
Operating income increased by $177,000 to $176,000 for the three months ended
March 31, 1995, up from a $1,000 loss for the three months ended March 31, 1994.
Although total revenues decreased, as discussed above, the Trust's expenses, in
the aggregate, decreased by a greater amount, causing the increase in operating
income. Expenses decreased in every category (except for hotel operating
expenses, which were not present for the three months ended March 31, 1994) for
the three months ended March 31, 1995 compared with the three months ended March
31, 1994.
Liquidity and Capital Resources
At March 31, 1995, the Trust had $4,476,000 in cash. Its five properties had a
net book value of approximately $18,259,000 at that date with collateralized
indebtedness against rental properties totaling $8,723,000 (48%). CalREIT's
$19,896,000 note portfolio is carried at a book value of $12,780,000 due
primarily to cumulative write downs in valuation. The primary sources of
liquidity for the Trust in the remainder of 1995, which management believes will
adequately meet its future liquidity and capital resource requirements, will be
its cash on hand, cash generated from operations and interest payments on its
notes. The primary demands on the Trust's capital resources will be debt service
payments and the funding of capital improvements to the Trust's properties. In
addition, in order to maintain its REIT status, the Trust must distribute to
shareholders approximately $1,000,000 in 1995 and intends to do so in the late
third or early fourth quarter.
10
<PAGE> 13
The Trust's cash flows for the three months ended March 31, 1995 produced an
increase in cash of $1,110,000 compared to the cash flows for the three months
ended March 31, 1994, which yielded a decrease in cash of $27,000, an
improvement of $1,137,000. For the three months ended March 31, 1995 compared to
the three months ended March 31, 1994, cash provided by operating activities
increased by $239,000 to $309,000 from $70,000; cash from investing activities
increased by $893,000 to providing $818,000 (which resulted from collections on
notes receivable) from using $75,000; and cash used in financing activities
decreased by $5,000 to $17,000 from $22,000.
The Trust's debt-to-equity ratio was 1:3 at March 31, 1995 and 1994. The
Trust's current ratio (cash, accounts receivable in the next 12 months and
prepaid expenses; divided by distributions payable, accounts payable and other
liabilities due within the next 12 months) of approximately 3:1 is indicative of
the Trust's financial stability at this time.
11
<PAGE> 14
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
None
Item 2: Changes in Securities
None
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
The Trust filed on Form 8-K/A during the quarter ended
March 31, 1995:
Changes in Registrant's Certifying Accountant
12
<PAGE> 15
SIGNATURES
Pursuant to the requirement 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.
CALIFORNIA REAL ESTATE INVESTMENT TRUST
May 15, 1995 /s/ Frank A. Morrow
- -------------------------------- --------------------------------
Date Frank A. Morrow,
Chairman of the Board and
Chief Executive Officer
May 15, 1995 /s/ Arnold E. Brown
- -------------------------------- --------------------------------
Date Arnold E. Brown
Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-1-1995
<PERIOD-END> MAR-31-1995
<CASH> 4,476
<SECURITIES> 0
<RECEIVABLES> 21,977
<ALLOWANCES> (13,793)
<INVENTORY> 0
<CURRENT-ASSETS> 12,660
<PP&E> 26,483
<DEPRECIATION> 2,361
<TOTAL-ASSETS> 36,782
<CURRENT-LIABILITIES> 132
<BONDS> 8,723
<COMMON> 9,157
0
0
<OTHER-SE> 18,770
<TOTAL-LIABILITY-AND-EQUITY> 36,782
<SALES> 0
<TOTAL-REVENUES> 1,005
<CGS> 0
<TOTAL-COSTS> 216
<OTHER-EXPENSES> 319
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 228
<INCOME-PRETAX> 242
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 242
<EPS-PRIMARY> .03<F1>
<EPS-DILUTED> .03<F1>
<FN>
<F1>SHARES OF BENEFICIAL INTEREST EQUIVALENTS WERE ANTI-DILUTIVE. THE FIGURES
PRESENTED ABOVE ARE SIMPLE EPS.
</FN>
</TABLE>
