<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
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 principal executive offices) (Zip Code)
(415) 905-0288
(Registrant's telephone number, including area code)
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 [ ]
<PAGE> 2
APPLICABLE ONLY TO CORPORATE ISSUERS:
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.
<TABLE>
<CAPTION>
Class Outstanding at June 30, 1996
- ------------------------------------ ----------------------------
<S> <C>
Common Shares of Beneficial Interest 9,156,970
$1.00 par value ("Common Shares")
</TABLE>
<PAGE> 3
- -------------------------------------------------------------------------------
CALIFORNIA REAL ESTATE INVESTMENT TRUST
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDEX PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets -
June 30, 1996 and December 31, 1995 1
Consolidated Statements of Operations -
For the Three Months and Six Months Ended
June 30, 1996 and 1995 2
Consolidated Statements of Cash Flows -
For the Six Months Ended June 30, 1996 and 1995 3
Notes to Consolidated Financial Statements 4 - 9
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 15
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 17
Item 2: Changes in Securities 17
Item 3: Defaults Upon Senior Securities 17
Item 4: Submission of Matters to a Vote of Security Holders 17
Item 5: Other Information 17
Item 6: Exhibits and Reports on Form 8-K 17
</TABLE>
<PAGE> 4
PART I. FINANCIAL INFORMATION
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
(UNAUDITED) (AUDITED)
------------ ------------
<S> <C> <C>
ASSETS
INVESTMENTS, GENERALLY HELD FOR SALE:
Rental properties, net of accumulated depreciation of $2,777,000
and valuation allowance of $6,898,000 at December 31, 1995 $ 9,740,000 $ 17,215,000
Notes receivable, net of deferred gains of $239,000 and
$1,103,000 at June 30, 1996 and December 31, 1995,
respectively, and valuation allowance of $8,048,000
at December 31, 1995 3,770,000 10,502,000
Marketable securities available-for-sale 11,993,000 --
------------ ------------
25,503,000 27,717,000
Cash 4,158,000 4,778,000
Receivables, net of allowance of $971,000 and $700,000
at June 30, 1996 and December 31, 1995, respectively 673,000 680,000
Other assets, net of valuation allowance of $310,000 at
December 31, 1995 321,000 357,000
------------ ------------
Total Assets $ 30,655,000 $ 33,532,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Long-term notes payable, collateralized by deeds of trust
on rental properties $ 5,208,000 $ 8,335,000
Accounts payable and accrued expenses 112,000 209,000
Other liabilities 201,000 81,000
------------ ------------
Total Liabilities 5,521,000 8,625,000
------------ ------------
SHAREHOLDERS' EQUITY:
Shares of beneficial interest, par value $1 a share; unlimited
authorization, 9,157,000 shares outstanding at
June 30, 1996 and December 31, 1995 9,157,000 9,157,000
Additional paid-in capital 55,098,000 55,098,000
Accumulated deficit (39,121,000) (39,348,000)
------------ ------------
Total Shareholders' Equity 25,134,000 24,907,000
------------ ------------
Total Liabilities and Shareholders' Equity $ 30,655,000 $ 33,532,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 5
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Rent $ 534,000 $ 499,000 $ 1,103,000 $ 1,035,000
Interest 246,000 337,000 548,000 680,000
----------- ----------- ----------- -----------
780,000 836,000 1,651,000 1,715,000
----------- ----------- ----------- -----------
EXPENSES:
Operating expenses 178,000 151,000 326,000 284,000
Property management 29,000 21,000 56,000 44,000
Depreciation and amortization 20,000 179,000 25,000 311,000
Interest 137,000 200,000 274,000 428,000
General and administrative 367,000 241,000 780,000 428,000
----------- ----------- ----------- -----------
731,000 792,000 1,461,000 1,495,000
----------- ----------- ----------- -----------
Income before gain on
foreclosure or sale of
investments and valuation
losses 49,000 44,000 190,000 220,000
Gain on foreclosure or sale of
investments 297,000 -- 596,000 66,000
----------- ----------- ----------- -----------
Income before
valuation losses 346,000 44,000 786,000 286,000
Valuation losses (559,000) -- (559,000) --
----------- ----------- ----------- -----------
Net (loss) income $ (213,000) $ 44,000 $ 227,000 $ 286,000
=========== =========== =========== ===========
Net (loss) income per share of
beneficial interest $ (0.02) $ 0.00 $ 0.02 $ 0.03
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 6
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 227,000 $ 286,000
------------ ------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 25,000 311,000
(Gain) on foreclosure or sale of investments (596,000) (66,000)
Valuation losses 559,000 --
Changes in assets and liabilities:
(Increase) decrease in receivables, net (4,000) 129,000
Decrease (increase) in other assets 12,000 (201,000)
Increase in accounts payable
and accrued expenses 12,000 9,000
Increase in other liabilities 130,000 --
------------ ------------
Total adjustments to net income 138,000 182,000
------------ ------------
Net cash provided by operating activities 365,000 468,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investments 11,142,000 --
Purchase of marketable securities (11,993,000) --
Improvements to rental properties (118,000) (91,000)
Principal collections on notes receivable 22,000 830,000
------------ ------------
Net cash (used in) provided by investing activities (947,000) 739,000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term notes payable (38,000) (377,000)
------------ ------------
Net cash used in financing activities (38,000) (377,000)
------------ ------------
Net (decrease) increase in cash (620,000) 830,000
Cash, beginning of period 4,778,000 3,366,000
------------ ------------
Cash, end of period $ 4,158,000 $ 4,196,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 7
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization and Basis of Presentation:
Organization
California Real Estate Investment Trust (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 has
grown to five Trustees of which two are independent. Of the three
remaining Trustees, one is the Chairman of the Board of Trustees and
Chief Executive Officer of CalREIT, one is the Chairman of the Board of
Trustees of Peregrine and one is a former Executive Officer of CalREIT
and Peregrine.
At June 30, 1996, the Trust owned two commercial/retail properties
located in two market areas in the Western United States. The Trust
also owns a mortgage note portfolio comprised of approximately $10.6
million in loans, with an aggregate book value of approximately $3.8
million. These loans bear interest at an overall effective rate of
approximately 8%. They are collateralized by mortgages on real
property. Most of the investments in the five loans were originated by
the Trust in connection with the disposition of Trust properties prior
to 1996. Additionally, at June 30, 1996, the Trust had approximately
$12 million invested in U.S. Government Agency mortgage-backed
securities.
4
<PAGE> 8
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization and Basis of Presentation, continued:
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
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 June 30, 1996 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, 1995 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, Cal-Corp and Totem.
Stock-Based Compensation
In 1995, Statement of Financial Accounting Standards No. 123 (SFAS
123), "Accounting for Stock-Based Compensation" was issued. This
statement requires either recognition or disclosure of a hypothetical
charge for stock options. SFAS 123 also establishes fair value as the
measurement basis for transactions in which an entity acquires goods or
services from nonemployees in exchange for equity instruments. This
statement is effective for transactions entered into after December 15,
1995. The Trust does not intend to record this hypothetical charge for
stock options, but will instead provide required disclosures beginning
with the Form 10-K for the year ending December 31, 1996.
Reclassifications
Certain reclassifications have been made in the presentation of the
1995 financial statements to conform to the 1996 presentation.
5
<PAGE> 9
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
2. Investments in Rental Properties and Notes Receivable:
At June 30, 1996, and December 31, 1995, the Trust was in the process
of repositioning or monetizing its assets, principally investments.
Therefore, all investments are classified as held for sale.
In 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets to Be Disposed Of,"
(SFAS 121) was issued. SFAS 121, requires that an impairment be
recognized to reduce the carrying amount of long-lived assets to their
estimated fair value whenever events or changes in circumstances
indicate that such carrying amount may not be recoverable. After an
impairment is recognized, the reduced carrying amount of the asset is
accounted for as its new cost. In 1996, the Trust adopted the
provisions of SFAS 121. Generally, fair values are estimated using
discounted cash flow, direct capitalization, and market comparison
analyses.
As of the end of the second quarter of 1996, the Trust reported total
valuation losses of $559,000, attributable to an impairment in the
value of the Fulton Square Shopping Center in Sacramento, California, a
reflection of the current physical condition of the property and
changed market conditions.
3. Investments in Marketable Securities:
At June 30, 1996, the Trust had $11,993,000 invested in government
mortgage-backed securities classified as "available-for-sale."
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," (SFAS 115) issued
in May 1993, requires that at the date of acquisition and at each
reporting date, debt and equity securities be classified as
"held-to-maturity," "trading," or "available for sale." Investments in
debt securities in which the Trust has the positive intent and ability
to hold to maturity are required to be classified as
"held-to-maturity." "Held-to-maturity" securities are required to be
stated at cost and adjusted for amortization of premiums and discounts
to maturity in the statement of financial position. Investments in debt
and equity securities that are not classified as "held-to-maturity" and
equity securities that have readily determinable fair values are to be
classified as "trading" or "available-for-sale" and are measured at
fair value in the statement of financial position. Securities that are
bought and held principally for the purpose of selling them in the near
term are classified as "trading." Unrealized holding gains and losses
for "trading" securities are included in earnings.
6
<PAGE> 10
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
3. Investments in Marketable Securities, continued:
Investments that are not classified as "held-to-maturity" or "trading"
securities are classified as "available-for-sale." Unrealized holding
gains and losses for "available-for-sale" securities are excluded from
earnings and reported as a separate component of shareholders' equity
until realized.
In accordance with SFAS 115, the Trust determines the appropriate
classification at the time of purchase and reevaluates such designation
at each balance sheet date.
At June 30, 1996, the Trust's "available-for-sale" securities consisted
of the following:
<TABLE>
<CAPTION>
(In thousands)
Unrealized Estimated
Cost Gains Losses Fair Value
---- ----- ------ ----------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage
Corporation, interest at 7.585%
due June 1, 2024 $ 1,079 $ -- $ -- $ 1,079
Federal National Mortgage
Association, interest at 5.155%
due May 1, 2026 3,792 -- -- 3,792
Federal National Mortgage
Association, interest at 5.145%
due June 1, 2026 7,122 -- -- 7,122
------- ------- ------- -------
$11,993 $ -- $ -- $11,993
------- ------- ------- -------
</TABLE>
The maturity dates above are not necessarily indicative of expected
maturities as principal is often prepaid on such instruments.
4. 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 requirements.
7
<PAGE> 11
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
5. 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 subject to negotiation annually. During the six
month periods ended June 30, 1996, and June 30, 1995, reimbursable
costs charged to the Trust by Peregrine approximated $130,000 and
$222,000, respectively.
At June 30, 1996, and December 31, 1995, respectively, the Trust had
$28,000 and $45,000 due to Peregrine.
6. Statement of Cash Flows Supplemental Information:
In connection with the sale and foreclosure of properties, notes
receivable, and property, plant and equipment the Trust entered into
various non-cash transactions as follows:
<TABLE>
<CAPTION>
(In thousands)
For the Six Months Ended
June 30, June 30,
1996 1995
--------- -----------
<S> <C> <C>
Sales price less selling costs $ 11,199 $ --
Liabilities applied to sales price (57) --
--------- ---------
Net cash received $ 11,142 $ --
------ ---------
</TABLE>
One property which collateralized notes payable of $3,089,000 was
foreclosed upon during the quarter ended March 31, 1996, resulting in
no gain or loss as the net book value of the property was equal to its
debt.
Cash paid for interest during the three month periods ended June 30,
1996 and 1995 was $137,000 and $199,000, respectively. Cash paid for
interest during the six month periods ended June 30, 1996, and June 30,
1995, was $276,000 and $426,000, respectively.
8
<PAGE> 12
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
7. Per Share Data:
Per share data is for the three month and six month periods ended June
30, 1996, and June 30, 1995, based on the weighted average number of
shares of beneficial interest outstanding during each period. The
weighted average number of shares used in the computation was
9,157,000.
8. Gain (Loss) on Foreclosure or Sale of Investments:
Components of the gain (loss) on foreclosure or sale of investments for
the three and six months ended June 30, 1996, and June 30, 1995, were
as follows:
<TABLE>
<CAPTION>
(In thousands)
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sale of Bekins property $ (164) $ -- $ (164) $ --
Sale of Pavilions at Mesa Note 430 -- 430 --
Sale of Spacesaver Mini-Storage Note 30 -- 30 --
Sale of Van 1 -- 1 --
Sale of Redfield property -- -- 299 --
Recognition of deferred gains -- -- -- $ 66
------- -------- ------- ------
$ 297 $ -- $ 596 $ 66
===== ======== ======= =======
</TABLE>
9. Stock Option Plans:
On November 15, 1995, the Board of Trustees approved two stock option
plans (Plans) which may be submitted to shareholders for ratification
at the 1996 Annual Meeting of Shareholders. Options granted under the
Plans may not be exercised until the plans are approved by the
Shareholders.
The Plans provide the members of the Board of Trustees (Plan I) and
certain employees and independent contractors (Plan II) an opportunity
to purchase Shares of Beneficial Interest. The aggregate number of
Shares of Beneficial Interest which may be issued upon exercise of all
Options granted under Plan I and Plan II shall not exceed 500,000 and
500,000, respectively.
9
<PAGE> 13
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
9. Stock Option Plans, continued:
Under the terms of Plan I, options may be granted to members of the
Board of Trustees who are not full-time employees or officers of the
Trust or Peregrine. The option price granted under Plan I shall be the
fair market value of the Shares of Beneficial Interest on the Grant
Date. On the effective date, each participant was granted an initial
option to purchase 100,000 Shares of Beneficial Interest. Each
participant whose commencement of service is after the effective date
shall be granted an initial option to purchase 100,000 Shares of
Beneficial Interest as of the date of participant's commencement of
service. Each participant shall also be granted additional options to
purchase 10,000 Shares of Beneficial Interest on each anniversary of
the grant date of the initial option. On November 15, 1995 (the
effective date), Stock Options to purchase 200,000 Shares of Beneficial
Interest were granted to participants under Plan I. On the grant date,
the fair market value of the Shares of Beneficial Interest was $1.38.
Under the terms of Plan II, options may be granted to certain key
employees of the Trust and Peregrine, including officers and trustees
who are employees of Peregrine, Trustees who are also Trustees of
Peregrine, and consultants and advisors of the Trust. Options may be
granted in any of the following forms: Incentive Stock Options,
Nonqualified Stock Options, or any combination of Incentive Stock
Options and Nonqualified Stock Options. The Stock Option Committee has
the authority and discretion in fixing the option price for
Nonqualified Stock Options. The option price for Incentive Stock
Options shall not be less than 100% of the fair market value of the
shares on the date of grant. Each option agreement shall state the
number of shares and the option price. On November 15, 1995, the Stock
Option Committee granted Nonqualified Stock Options to purchase 330,000
Shares of Beneficial Interest to certain key employees of the Trust and
Peregrine, Trustees who are also Trustees of Peregrine, and consultants
and advisors of the Trust. The option price for the Nonqualified Stock
Options granted was the fair market value of the Shares of Beneficial
Interest on the grant date, which was $1.38.
10
<PAGE> 14
- -------------------------------------------------------------------------------
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.
Overview
During the latter part of 1995 and the first two quarters of 1996, California
Real Estate Investment Trust continued to implement its strategy to monetize the
Trust's assets to implement a growth strategy through merger or acquisitions.
As part of the Trust's strategy, the Trustees reviewed the past, present and
expected future performance of the Casa Grande Motor Inn in Arroyo Grande,
California. Despite significant improvements in operations under a professional
management company, the hotel's current and projected financial performance was
insufficient to cover its debt service requirements. The Trust suspended debt
service payments and contacted the lender on the property with a proposal to
renegotiate financing. The proposal was rejected and in February 1996, the Casa
Grande Motor Inn was returned to the lender through foreclosure at no gain or
loss to the Trust.
Simultaneously, the Trust's four commercial properties were readied for sale.
Leasing, capital and tenant improvement expenditures were approved as they
related to their impact on potential sales prices. As of the end of the second
quarter of 1996, Redfield Commerce Center in Scottsdale, Arizona, and the Bekins
Storage Facility in Pasadena, California, had been sold. Proceeds from these
sales have been invested in a diversified, unleveraged pools of U.S. Government
Agency mortgage-backed securities which satisfy REIT asset qualification
requirements. Also, as of the end of the second quarter of 1996, two of the
Trust's seven mortgage loans had been sold, with the majority of the remaining
mortgage loans packaged for immediate sale.
As the above activities are completed, the Trust continues to generate
substantial amounts of liquid assets with which to pursue an expansion
transaction. With a strong cash position, coupled with New York Stock Exchange
and Pacific Stock Exchange listings, the Trust is becoming increasingly
well-positioned and is entertaining a number of business opportunities.
Concurrent with the search for merger or acquisition candidates, the Trust has
pursued discussions with outside financing sources, including investment banking
firms, to provide either debt or equity financing for CalREIT's expansion plans.
At this time, the Trust believes if a potential transaction were to enter the
final stages of negotiation such financing would be available.
11
<PAGE> 15
It should be noted, however, that any significant transaction proposed by
CalREIT will require the approval of the Board of Trustees of Peregrine and that
trust's Senior Lender Group. Any additional action that Peregrine might take, as
the majority shareholder in the Trust, remains unclear.
12
<PAGE> 16
Comparison of the Six Months and Three Months Ended June 30, 1996 to the Six
Months and Three Months Ended June 30, 1995
Net income of $227,000 was reported by the Trust for the six months ended June
30, 1996, a decrease of $59,000, or 21% from the six months ended June 30, 1995.
Net loss of $213,000 was reported by the Trust for the three months ended June
30, 1996, a decrease of $257,000, or 584% from the net income of $44,000 for the
three months ended June 30, 1995. These decreases were the result of increased
general and administrative expenses and valuation losses offset by decreased
interest and depreciation expense and increased gains on foreclosure and sale of
investments.
Total Revenues decreased $64,000, or 4%, to $1,651,000 for the six months ended
June 30, 1996. Total revenues decreased $56,000, or 7%, to $780,000 for the
three months ended June 30, 1996. This was down from $1,715,000 and $836,000 for
the six and three months ended June 30, 1995, respectively. These decreases are
primarily attributable to a decrease in interest revenue offset by an increase
in rental revenues.
Rental revenues increased $68,000, or 7%, to $1,103,000 for the six months ended
June 30, 1996. Rental revenues increased $35,000, or 7%, to $534,000 for three
months ended June 30, 1996. This was up from $1,035,000 and $499,000 for the six
and three months ended June 30, 1995, respectively. These increases were
primarily the result of increases in rental revenue produced by Totem Square and
Fulton Square Shopping Center which offset decreases resulting from the sale of
Redfield Commerce Center and Bekins Storage Facility. The increase at Totem
Square was primarily attributable to increased occupancy while the increase at
Fulton Square Shopping Center was primarily attributable to increased rental
rates. The decreases at Redfield Commerce Center and the Bekins Storage Facility
resulted from the absence of rent when the properties were sold in March 1996
and May 1996, respectively.
Interest revenues decreased $132,000, or 19%, to $548,000 for the six months
ended June 30, 1996. Interest revenues decreased $91,000, or 27%, to $246,000
for the three months ended June 30, 1996, respectively. This was down from
$680,000 and $337,000 for the six and three months ended June 30, 1995,
respectively. These decreases were primarily due to the decrease in interest
received from one mortgage noteholder offset by an increase in interest earned
on cash accounts.
Total Expenses decreased $34,000, or 2%, to $1,461,000 for the six months ended
June 30, 1996. Total expenses decreased $61,000, or 8%, to $731,000 for the
three months ended June 30, 1996. This was down from $1,495,000 and $792,000 for
the six and three months ended June 30, 1995, respectively. These decreases were
attributable to decreases in depreciation and amortization expenses, as well as,
decreases in interest expense offset by increases in general and administrative
expenses.
Depreciation and amortization expense decreased $286,000, or 92%, to $25,000 for
the six months ended June 30, 1996. The same expenses decreased $159,000, or
89%, to $20,000, for the three months ended June 30, 1996. This was down from
$311,000 and $179,000 for the six
13
<PAGE> 17
and three months ended June 30, 1995, respectively. These decreases are a direct
result of the cessation of depreciation of the Trust's rental properties held
for sale.
Interest expense decreased $154,000, or 36%, to $274,000 for the six months
ended June 30, 1996. Interest expense decreased $63,000, or 32%, to $137,000 for
the three months ended June 30, 1996. This was down from $428,000 and $200,000
for the six and three months ended June 30, 1995, respectively. These decreases
primarily resulted from the cessation of interest expense on the Casa Grande
Motor Inn when it was allowed to be foreclosed upon by the lender in February
1996.
General and administrative expenses increased $352,000, or 82%, to $780,000 for
the six months ended June 30, 1996. The same expenses increased $126,000, or
52%, to $367,000, for the three months ended June 30, 1996. This was up from
$428,000 and $241,000 for the six and three months ended June 30, 1995,
respectively. These increases were due to the net effect of increases and
decreases in various expense categories. The largest increases were generated by
additional Trustee fees and consulting fees related to expansion transaction
activities and the packaging and disposition of the Trust's mortgage notes.
Valuation Losses. As of the end of the second quarter of 1996, the Trust
reported total valuation losses of $559,000, attributable to an impairment in
the value of the Fulton Square Shopping Center in Sacramento, California, a
reflection of the current physical condition of the property and changed market
conditions.
Dispositions. During the first quarter of 1996, the Trust sold Redfield Commerce
Center, an office/warehouse property in Scottsdale, Arizona, and its one hotel
property in Arroyo Grande, California, was allowed to be foreclosed upon after
the lender refused a proposal from the Trust to restructure the debt terms. The
net gain recognized from the sale of the Redfield Commerce Center was $299,000.
There was no gain or loss upon the foreclosure of the Casa Grande Motor Inn as
the net book value of the property was equal to its debt.
During the second quarter of 1996, the Trust sold the Bekins Storage Facility in
Pasadena, California, incurring a loss of $164,000. Also during the second
quarter of 1996, the Trust sold two of its seven mortgage notes. A gain of
$430,000 was recognized upon the sale of the Trust's mortgage note which was
collateralized by a first deed of trust on an office/commercial building in
Phoenix, Arizona, and a gain of $30,000 was recognized upon the sale of the
Trust's mortgage note which was collateralized by a second deed of trust on a
commercial building in Pacheco, California.
Liquidity and Capital Resources
At June 30, 1996, the Trust had $4,158,000 in cash. Its two rental properties
had a net book value of $9,740,000 at that date with collateralized indebtedness
against the rental properties totaling $5,208,000 (54%). CalREIT's $10,647,000
mortgage note portfolio is carried at a net book value of $3,770,000 due
primarily to cumulative write downs in valuation. Its investment
14
<PAGE> 18
in marketable securities had a net book value at June 30, 1996, of $11,993,000.
The primary sources of liquidity for the Trust in the remainder of 1996, which
management believes will adequately meet future liquidity and capital resource
requirements, will be cash on hand, cash generated from operations, interest
payments on its notes and securities, and cash generated from asset
dispositions. The primary demands on the Trust's capital resources will be debt
service payments and expenses associated with the search for, analysis of and
negotiations with respect to expansion transactions.
The Trust experienced a net decrease in cash of $620,000 for the six months
ended June 30, 1996, compared to a net increase in cash of $830,000 for the six
months ended June 30, 1995, a difference of $1,450,000. For the six months ended
June 30, 1996, cash provided by operating activities was $365,000, down $103,000
from $468,000 during the same period in 1995. Cash provided by investing
activities during this same period decreased by $1,686,000 to ($947,000), down
from $739,000, primarily the result of a reduction in collections on notes
receivable; and cash used in financing activities decreased by $339,000 from
$377,000 to $38,000.
The note on Totem Square of $4,275,000 was originally scheduled to mature on
April 1, 1996. The Trust received an extension from the lender to June 18, 1996,
under the same terms and conditions as the original agreement.
Further extension of this note to May 1997 is currently being negotiated.
Funds From Operations and Funds Available for Distribution. REIT analysts
generally consider Funds From Operations (FFO) an appropriate measure of
performance in comparing the results of operations of REIT's. 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 as presented in this report. FFO and FAD should not be
considered as an alternative to net income as an indication of the Trust's
performance or to cash flow as a measure of liquidity.
15
<PAGE> 19
Funds From Operations and Funds Available for Distribution for the three months
and six months ended June 30, 1996 and 1995 are summarized as follows:
Calculation of Funds From Operations and Funds Available for Distribution
<TABLE>
<CAPTION>
(In thousands)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income before
gain on foreclosure or
sale of investments
and valuation losses $ 49 $ 44 $ 190 $ 220
Depreciation and
amortization 20 179 25 311
----- ----- ----- -----
Funds from operations 69 223 215 531
Capital improvements (73) -- (118) (91)
Loan principal
payments (15) (360) (38) (377)
----- ----- ----- -----
Funds available for
distribution $ -- $ -- $ 59 $ 63
===== ===== ===== =====
</TABLE>
16
<PAGE> 20
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
None
17
<PAGE> 21
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
August 14, 1996 /s/ Frank A. Morrow
- --------------- --------------------
Date Frank A. Morrow,
Chairman of the Board and
Chief Executive Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 4,158
<SECURITIES> 11,993
<RECEIVABLES> 5,653
<ALLOWANCES> (1,210)
<INVENTORY> 0
<CURRENT-ASSETS> 20,915
<PP&E> 9,740
<DEPRECIATION> 0
<TOTAL-ASSETS> 30,655
<CURRENT-LIABILITIES> 313
<BONDS> 5,208
0
0
<COMMON> 64,255
<OTHER-SE> (39,121)
<TOTAL-LIABILITY-AND-EQUITY> 30,655
<SALES> 0
<TOTAL-REVENUES> 1,077
<CGS> 0
<TOTAL-COSTS> (207)
<OTHER-EXPENSES> (387)
<LOSS-PROVISION> (559)
<INTEREST-EXPENSE> (137)
<INCOME-PRETAX> (213)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (213)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> 0
</TABLE>
