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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
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 0-8725
PACIFIC REAL ESTATE INVESTMENT TRUST
A CALIFORNIA TRUST
(Exact name of registrant as specified in its charter)
94-1572930
(I.R.S. Employer Identification No.)
1010 EL CAMINO REAL, SUITE 210, MENLO PARK, CALIFORNIA 94025
(Address of principal executive offices, including zip code)
(415) 327-7147
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Shares of Beneficial Interest, par value $10 per share ("Trust Shares")
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 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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
No market for Trust Shares currently exists and therefore a market value for
such Trust Shares cannot be determined.
The number of Trust Shares outstanding as of December 31, 1995 was
3,706,845, $10 par value per share.
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TABLE OF CONTENTS
<TABLE>
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PAGE
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PART I
Item 1. Business.................................................................................... 1
Item 2. Properties.................................................................................. 7
Item 3. Legal Proceedings........................................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders......................................... 17
PART II
Item 5. Market for Registrant's Trust Shares and Related Shareholder Matters........................ 18
Item 6. Selected Financial Data..................................................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 21
Item 8. Consolidated Financial Statements and Supplementary Data.................................... 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ 45
PART III
Item 10. Directors and Executive Officers of Registrant.............................................. 45
Item 11. Executive Compensation...................................................................... 46
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 46
Item 13. Certain Relationships and Related Transactions.............................................. 47
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................. 48
Signatures............................................................................................... 49
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PART I
ITEM 1. BUSINESS
(a) Historical Development of Business:
Pacific Real Estate Investment Trust (the "Trust") was organized pursuant to
a Declaration of Trust on April 17, 1963. The Trust is a California real
estate investment trust and qualifies as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended ("Code").
The Trust invests in real estate interests and at December 31, 1995 owned
(i) a 100% equity interest in two shopping centers, (ii) a 40% controlling
interest in Kingsco, a general partnership that owns a shopping center and
(iii) a 100% equity interest in a retail and professional office complex. In
addition, the Trust holds various notes receivable, most of which are
secured by deeds of trust, and were acquired in connection with sales or
assignments of Trust properties or contractual rights to acquire properties.
The Trust's total assets were $63 million at December 31, 1995 and $95
million at December 31, 1994.
(b) Financial Information About Industry Segments:
The Trust is currently involved in only one industry segment real estate.
The Trust operates and holds for investment, income producing real property
and promissory notes secured by real property. All of these activities are
included in the real estate industry segment. Therefore, all of the
revenues, operating profits and assets reported in the Consolidated
Financial Statements contained herein relate to this industry segment.
(c) Narrative Description of the Business:
OVERVIEW
The Trust owns and manages a portfolio of neighborhood shopping centers, and
a professional office and retail complex. Each of the Trust's properties is
located in the metropolitan San Francisco Bay Area. Historically, the Trust has
specialized in the acquisition and redevelopment of existing shopping centers,
as well as the development of new centers. The Trust's existing property
portfolio, described more fully below under "Properties," consists primarily of
properties situated in "in-fill" locations in suburban areas which are generally
characterized by dense populations and restrictions on development.
The Trust's shopping centers attract local area customers and are typically
anchored by a supermarket, superdrug, or other type of convenience store. Anchor
retailers are critically important to the success of the shopping center because
they attract consistent local traffic and repeat shoppers whose expenditures
support a variety of other stores in the shopping center. Examples of anchor
retailers in the Trust's shopping center properties are Lucky Stores and
Walgreen. The overall tenant mix in each of the Trust's shopping centers
typically caters to the retailing of day-to-day consumer necessities rather than
high-priced luxury or specialty items.
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the Trust's objectives and policies with
respect to investment, disposition, financing and certain other activities in
light of current conditions. Current capital constraints affecting the Trust
effectively preclude new acquisitions of significance. The investment policies
and other policies of the Trust are reviewed herein in the context of the
Trust's current financial condition. These policies are determined by the
Trustees, and may be amended or revised from time to time at the discretion of
the Trustees without a vote of the holders of beneficial interests of the Trust
("shareholders"). No assurance can be given that these investment objectives
will be attained or that the value of the Trust will not decrease.
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INVESTMENT POLICY. The Trust's historic investment objective has been to
invest in commercial real estate which would generate cash distributions and
long-term capital appreciation. This policy was successful from 1964 until
recent years. Since 1974 the Trust has sought to accomplish these objectives by
acquisition, development and redevelopment of anchored neighborhood shopping
centers and commercial property in Northern California. One reason we
concentrated in retail was because the anchor retail stores tended to limit
oversupply by building only to demand. But in recent years the emergence of an
entirely new group of retailers have changed that completely resulting in
increasing over-construction in retail. In addition, during the last four years,
lack of access to equity capital and strongly adverse property market conditions
have hampered and increasingly frustrated the Trust's achievement of its
investment objectives. These circumstances have resulted in the suspension of
cash distributions to shareholders, a reduction in the value of the Trust's
assets and lack of liquidity for shareholders. The Trust has not acquired new
investment property since 1992 and its development activities have been
suspended.
Since 1991 the Trust has been actively seeking to recapitalize to overcome
these challenges. This activity has been conducted both under the direction of
several investment bankers as well as independently with institutional
investors. Recapitalization strategies that have been considered include joint
venture, merger and listing on one of the national stock exchanges. During the
early 1990's the impact of a nationwide economic recession and the volatility of
public capital markets have prevented a successful outcome to these efforts. The
Trust have conducted active discussions with potential merger or joint venture
candidates and the Trustees plan to explore exhaustively every reasonable
opportunity. However in the event that this strategy cannot be achieved in the
best interest of the shareholders the Trustees are committed to pursuing an
alternative approach involving the orderly sale of the Trust's assets. Such an
approach is expected to enable the Trust to meet all of its debt obligations and
to distribute remaining proceeds to its shareholders as liquidating dividends.
There can be no assurance as to the amount of such liquidating dividends at this
time because the Trust must determine the exact net value of its assets in the
marketplace.
The value of the Trust's property portfolio has declined during the past
three years. This decline is the result of several factors. Most prominent has
been the collapse of commercial real estate values nationwide as a result of
overbuilding and fallout from the savings and loan collapse and the consequent
establishment of the Resolution Trust Corporation, which liquidated large
numbers of commercial properties at prices significantly below replacement cost,
severely depressing the nation's property markets. Another prominent factor has
been the pronounced depth and protracted nature of the economic recession and
defense industry cutbacks which severely affected California real estate values.
Concurrent with these economic forces, the value of the Trust's shopping center
portfolio has also been adversely affected by rapid and continuing changes in
the retail industry. The proliferation of "big-box" discount retailers
characterized by their predatory pricing and marketing practices is having a
widespread impact, putting many traditional retailers at risk and some into
bankruptcy. The corollary effect of this retailing revolution has been an
aggressive overbuilding in the retail sector, increased vacancy, tenant business
failures and the driving down of rents and property values. The combination of
these economic and retail industry trends has adversely affected many retail
REITs as well as the Trust.
While the Trust's investment policy emphasizes equity real estate
investments, it may invest in stock of other REITs, partnerships and other real
estate interests. If the Trust were successful in locating a suitable merger or
joint venture partner, it is possible that such a strategy could result in an
exchange of stock or investment in stock of another REIT or real estate entity.
In considering dispositions, the Trust makes disposition decisions based on
current market conditions and its objective of realizing maximum value for its
shareholders.
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FINANCING. The Trust intends to continue to restructure its portfolio
during 1996 in order to reduce indebtedness. This goal is to be achieved by
either an infusion of equity capital or the sale of one or more of the Trust's
properties, repayment of associated indebtedness and reduction of debt service
costs.
In the event that the Trustees are successful in attracting additional
capital, they have the full authority to issue additional interests in the Trust
on such terms and for such consideration as they judge appropriate.
DISTRIBUTIONS. Historically, the Trust's policy has been to pay dividends
to its shareholders in an amount approximating 100% of its cash flows from
operations (i.e., net operating income plus depreciation and amortization).
Capital gains have been distributed on a case by case basis. That portion of a
distribution which is sheltered by depreciation and amortization constitutes a
nontaxable return of capital to the shareholders. Dividends were paid on a
regular basis for twenty-nine years, however, on February 25, 1993, the Trustees
unanimously decided to suspend the payment of regular dividends in order to
conserve the Trust's cash flow, in an effort to meet its capital needs, to
maintain the quality of the Trust's properties and to protect the Trust's
credit, since the Trustees concluded that the Trust could no longer rely on its
traditional sources of liquidity (i.e., secured bank financing and "intrastate"
equity offerings) for these purposes. The suspension of regular dividends will
continue until sufficient liquidity can be arranged from alternative sources.
The suspension of dividends is not expected to affect the Trust's qualification
as a REIT.
WORKING CAPITAL RESERVES. The Trust seeks to maintain working capital
reserves (and, when not sufficient, access to borrowings) in amounts that the
Trustees determine to be adequate to meet normal capital demands in connection
with the operation of the Trust's business and investments. As noted above, the
Trust expects that it will either restructure or sell either all or a portion of
its portfolio in order to generate adequate working capital reserves.
CONFLICTS OF INTEREST POLICIES. The Trust has adopted certain policies
designed to reduce potential conflicts of interest. Such policies do not apply
where a Trustee, officer or affiliate has acquired property for the sole purpose
of facilitating its acquisition by the Trust, and the total consideration paid
by the Trust does not exceed the cost of the property to such person (which cost
is increased by such person's holding costs and decreased by any income received
by such person from the property) and no special benefit results to such person.
The Trustees may engage in real estate transactions which may be of the type
conducted by the Trust, but it is not anticipated that such transactions will
have a material effect upon the Trust's operations.
OTHER POLICIES. The Trust intends to operate in a manner that will not
subject it to regulation under the Investment Company Act of 1940, as amended.
The Trust does not intend (i) to invest in the securities of other issuers for
the purpose of exercising control over such issuers, (ii) to underwrite
securities of other issuers or (iii) to trade actively in loans or other
investments.
The Trust may make investments other than as previously described, although
it does not currently do so. The Trust has authority to repurchase or otherwise
reacquire Trust Shares it has issued or may issue and it may engage in such
activities in the future. The Trustees have no present intention of causing the
Trust to repurchase any of the Trust Shares, and any such action would be taken
only in conformity with applicable federal and state laws and the requirements
for qualifying as a REIT under the Code and the Treasury Regulations. Although
the Trust may do so in the future in connection with the purchase of additional
properties or otherwise, the Trust has not issued securities in exchange for
property, nor has it reacquired any of its securities. The Trust may make loans
to third parties, including, without limitation, to officers and to joint
ventures in which the Trust decides to participate.
At all times, the Trust intends to meet the requirements of the Code to
qualify as a REIT unless, because of changes in future economic, market or legal
conditions, or changes in the Code or in the Treasury Regulations, the Trustees
elect to revoke the Trust's REIT election.
3
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MARKET CONDITIONS
The Company does not believe that the real estate market is an efficient
market. Local conditions and the type of commercial operations conducted at each
property directly affect property values in ways that may be unrelated to
overall nationwide, regional or neighborhood market trends. The real estate
market is also highly competitive, and maintaining property values is difficult.
Access to economically available equity capital is critical to creating and
maintaining real estate values. Other real estate investment trusts (many of
which are much larger than the Trust), pension trusts, private investors, and
real estate syndicates compete directly with the Trust for capital. In addition
to these geographic and industry considerations, the market for real estate is
heavily influenced by finance, bond and securities markets, as well as
political, regulatory and Code factors.
During the last several years, investors have become increasingly selective
about real estate. This heightened selectivity has occurred against a complex
marketplace backdrop characterized by declining values and reduced liquidity,
lack of capital, adverse fallout resulting from reform of the tax code, property
over-building, solvency crisis in the savings and loan industry and the related
incidences of distress sales and dumping of swollen property inventories by the
Resolution Trust Corporation. Most of this occurred within the context of a
severe national economic recession. While 1994 began to witness the gradual
recovery of the real estate market nationwide, the Trustees believe that the
overall economic recovery in California during 1995 has continued by and large
to lag the nationwide trend and continues to retard recovery of the California
property markets. While the Trustees believe that the California real estate
market will eventually recover, as the California economy emerges from
recession, for the near term, they do not expect values to recover to the market
levels achieved in the late 1980's and early 1990's, prior to the downturn. This
is particularly true for retail property and there can be no assurance that this
improvement will occur or that 1996 will see any improvement. Thus there remain
significant impediments to the Trust's ability to resume cash distributions or
establish liquidity for its shareholders without improvement in market values
and either capital restructuring or asset sales.
The Trust is not involved in research and development activities other than
market research.
GOVERNMENT REGULATION
ENVIRONMENTAL MATTERS. Under various federal, state and local laws,
ordinances and regulations, an owner or operator of real property may become
liable for the costs of removal or remediation of certain hazardous substances
released on or in its property. Such laws impose such liability without regard
to whether the owner or operator knew of, or was responsible for, the release of
such hazardous substances. The presence of such substances, or the failure to
properly remediate such substances, when released, usually reduces the value and
adversely affects the ability to sell such real estate or to borrow using such
real estate as collateral.
The Trust has notified a governmental authority of a spill from a former dry
cleaning shop at King's Court Shopping Center and the Regional Water Quality
Control Board of Santa Clara County has issued a clean-up order to the Trust.
Currently, a plan of remediation has been prepared with a proposed plan of
action for clean-up of the contamination. The remediation clean-up is now
underway and is expected to last at least two years. This plan has been approved
by the pertinent regulatory agencies on an interim basis, pending review of
remediation and testing results. The cost to Kingsco for the clean-up is
estimated to be $632,000, of which $503,000 has already been expended. The Trust
was not a partner of Kingsco at the time the contamination occurred, and intends
to look to the seller of the Trust's 40% interest in Kingsco, Kingsco's
insurance carriers at the time of the contamination, the other partners of
Kingsco and the entity that caused the contamination for payment of the clean-up
costs. The Trust believes that the representations and warranties made by the
seller in the agreement pursuant to which the Trust acquired its partnership
interest give the Trust a cause of action against the seller for the clean-up
costs.
In another, unrelated, environmental audit of the gasoline service station
pad ("Exxon Pad") at King's Court Shopping Center, the Phase I and II work
identified gasoline and possibly other service
4
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station by-products in the soil underneath the station and its pumps. Exxon
Corporation has assumed financial and legal responsibility of the hazardous
materials and remediation of the Exxon Pad. The environmental firm responsible
for maintaining and analyzing the data from various monitoring wells on the Pad
continues to report to Menlo Management Company and governmental authorities on
a quarterly basis. Remediation efforts are now underway and include both vapor
extraction and "pump and treat" activities, depending upon the location of the
materials in the soil and water.
The Trust has also become aware of a spill from a former dry cleaning
establishment at El Portal Shopping Center. This spill probably occurred prior
to the Trust's ownership of the property. The Contra Costa County Regional Water
Quality Control Board is currently reviewing the situation and a clean-up
remediation proposed by the Trust. The cost of clean-up and timetable have not
yet been identified, however, based on current knowledge, the cost is not
expected to have a material effect on the Trust's financial position. On March
21, 1996, the Trustees authorized the expenditures up to $100,000 for
remediation.
Compliance with federal, state and local laws and regulations relating to
the protection of the environment could have a significant impact on the
financial position of the Trust. However, other than disclosed herein, the
Trustees are not currently aware of any conditions that would have a material
adverse effect on the Trust.
AMERICANS WITH DISABILITIES ACT. The Trust's properties are subject to the
Americans with Disabilities Act of 1990, as amended (the "ADA"). The ADA has
separate compliance requirements for "public accommodations" and "commercial
facilities" and generally requires that public facilities such as retail
shopping centers be made accessible to people with disabilities. These
requirements became effective in 1992. Compliance with the ADA requirements will
require removal of access barriers and other capital improvements at the Trust's
properties. Noncompliance could result in imposition of fines by the United
States government or an award of damages to private litigants. However, the
Trust does not believe that the costs of compliance will be material. If
required changes involve a greater expenditure than the Trust currently
anticipates, or if the changes must be made on a more accelerated basis than it
anticipates, the Trust could be adversely affected.
MANAGEMENT
The search for suitable real estate capitalization and portfolio
restructuring is pursued by the Trust's investment advisor, Collier Investments
(the "Advisor"), a proprietorship owned by Charles R. Collier. Under the terms
of an Investment Advisory Agreement between the Trust and the Advisor, the
Advisor has agreed to use its best efforts to present to the Trust
recapitalization and portfolio restructuring opportunities consistent with the
investment policies and objectives of the Trust. After careful study and review,
the Advisor may recommend to the Trustees those opportunities or strategies
whose character is consistent with the investment program of the Trust. In
addition to relying on the advice of the Advisor, the Trustees occasionally
employ the services of independent professional consultants.
The Trust employs no full-time executives or administrative staff. The
leasing and management of the Trust's properties and administration of the Trust
itself is performed by an independent contractor, Menlo Management Company.
Eighty-three percent of the outstanding capital stock of Menlo Management is
owned by Robert C. Gould and the remainder is owned by Charles R. Collier, who
is Mr. Gould's father-in-law. California Bavarian Company, a privately held
California corporation, provides service to the Trust on a contractual basis for
a monthly service fee.
The Trust has five trustees who meet once a month and who are compensated by
the Trust. The Trustees include: Wilcox Patterson, who serves as President;
Harry E. Kellogg, who serves as Treasurer; John H. Hoefer and Robert C. Gould,
who serve as Vice Presidents and William S. Royce, who serves as Secretary. The
Trustees, Officers and Advisor all invest in the Trust.
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COMPETITION
The Trust's properties are all located in metropolitan communities in the
San Francisco Bay Area. Each property is situated amidst fully developed
commercial and retail areas. As such, there are other competing neighborhood and
community shopping centers and professional office facilities located in near
proximity to the Trust's properties. These factors will have a bearing on the
Trust's ability to rent its properties to tenants on economic terms and to
impose effective mechanisms to control operating costs and resultant net income.
The Trust must compete for tenants and services with other property owners who
may have greater resources or more attractive locations than those available to
the Trust and its officers, directors and agents. Moreover, the extent and
increasing rates of changes in community demographics, public policy, retail and
office usage patterns, merchandising practices, consumer tastes and financial
strength of tenants, amongst other considerations, can all affect adversely a
property's competitive position in varying ways.
INSURANCE
The Trust typically maintains comprehensive liability, fire, extended
coverage and rental loss insurance with respect to its properties, and generally
requires tenants to reimburse the Trust for their pro rata share of the Trust's
insurance premiums and to maintain their own general liability insurance with
respect to the properties with policy terms and insured limits customarily
carried for similar properties. There are, however, certain types of losses
(such as from wars, flood, riots or earthquakes) which may be uninsurable or
insurable only at rates which, in the Trust's opinion, are prohibitive. Two of
the Trust's properties (El Portal Shopping Center and King's Court Shopping
Center) are insured against damage from earthquakes.
(d) Foreign Operations
The Trust does not engage in any foreign operations or derive revenues from
foreign sources.
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ITEM 2. PROPERTIES
DESCRIPTION OF THE TRUST'S PROPERTIES
The following table sets forth certain information relating to the Trust's
properties as of December 31, 1995:
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GROSS EFFECTIVE
PERCENTAGE LEASABLE AREA 1995 ANNUAL ANNUAL RENT PERCENT
OWNERSHIP (SQ FT) MINIMUM PER SQUARE PERCENT LEASED &
NAME/LOCATION INTEREST (1)(2) RENT (3) FOOT LEASED OCCUPIED
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100% 271,426 $ 939,000 $ 3.45 58% 44%
El Portal Shopping Center
San Pablo, California
40% 78,576 1,301,000 16.55 100% 100%
King's Court Shopping Center
Los Gatos, California
100% 54,903 1,734,000 31.58 100% 100%
Menlo Center (7)
Menlo Park, California
100%(1) 183,180 2,671,000 14.58 95% 39%
Monterey Plaza
Shopping Center
San Jose, California
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ANCHORS AND PRINCIPAL
NAME/LOCATION TENANTS (1)
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Safeway Stores (4);
McCrory Stores (5);
Long's Drug Stores (6)
El Portal Shopping Center
San Pablo, California
Lunardi's Supermarket;
Bank of America
King's Court Shopping Center
Los Gatos, California
Dean Witter Reynolds
Inc.; Kepler's Books
and Magazines
Menlo Center (7)
Menlo Park, California
Lucky Stores; HomeBase
(4); Walgreen
Monterey Plaza
Shopping Center
San Jose, California
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(1) Lucky Stores owns its store at Monterey Plaza Shopping Center and,
therefore, is not a tenant of the Trust. Even though the Trust does not
benefit directly from the economic performance of this anchor store, the
anchor is nonetheless critical to the success of the Trust's shopping
center.
(2) The aggregate gross leasable area does not include approximately 51,000
square feet at Monterey Plaza Shopping Center. This represents the store
owned by Lucky Stores.
(3) Total annual minimum rent for the year ended December 31, 1995, excluding
(a) percentage rents, (b) additional rent payable by tenants such as common
area maintenance, real estate taxes and other expense reimbursements, and
(c) future contractual rent escalations or Consumer Price Index adjustments.
Percentage rents are paid over and above base rents, and are calculated as a
percentage of a tenant's gross sales above a predetermined threshold. The
amount of percentage rents received to date by the Trust has not been
material to the Trust's operations. Figures for total annual minimum rent in
the above table have been calculated based on rental payments currently due,
and have been adjusted for the effects of recognizing rent on a
straight-line basis as reported in the Trust's financial statements.
(4) Safeway, at El Portal, and HomeBase, at Monterey Plaza, ceased retail
operations during 1994. Both tenants continue to be obligated under their
lease agreements. Safeway is current with their lease payments and HomeBase
is delinquent in payment of its rents and charges since January 1, 1996 as a
consequence of a dispute with the Trust over certain lease provisions. The
Trust expects that this dispute will be resolved satisfactorily. Under the
terms of both leases, the tenants have the right to sublease their space
without obtaining approval of the Trust. Both tenants are actively seeking
sublessees. HomeBase at El Portal terminated its lease with the Trust on
December 31, 1994 by agreement with the Trust and ceased retail operations
in April 1995. See below for further discussion on each of these
circumstances.
(5) McCrory Corporation is operating its J.J. Newberry Store at El Portal under
protection of Chapter 11 of the U.S. Bankruptcy Code. As part of the
Settlement Agreement between the Trustee in Bankruptcy and the Trust,
McCrory modified its lease to provide, in effect, for a year-to-year lease
with mutual termination rights. Effective rent and triple net recoveries
were reduced under the terms of the Settlement Agreement.
(6) Long's Drug Store's lease at El Portal expired in February 1996 and Long's
has vacated the center.
(7) Menlo Center was sold in February 1996. See below (under Property Sales) for
further discussion.
EL PORTAL SHOPPING CENTER. El Portal Shopping Center is a community
shopping center located in the community of San Pablo, California. The center
was acquired by the Trust in 1976, and repositioned and expanded in 1978 and
1986, respectively. The center has a total of 271,426 square feet of gross
leasable area. From 1976 to 1995 El Portal was an important source of cash flow
to the Trust.
Today, El Portal is again in need of substantial redevelopment to meet the
rapidly changing methods of retailing and changing consumer shopping patterns in
the Center's trade area.
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During 1994, the structure of the Center's anchor tenancy underwent a series
of material changes. In February 1994 the parent of Newberry, McCrory
Corporation, operating under the protection of Chapter 11 of the United States
Bankruptcy Code (filed February 26, 1992), modified its lease, effectively
reducing the terms of the lease to a one year maturity with a series of one year
extensions and reducing the annual rental income stream by $62,000 and
converting the triple net lease terms into gross lease terms. At the same time,
the Newberry Store changed its merchandising format from that of a conventional
variety store to a "99 CENTS" discount close-out store.
During 1994, the Safeway Store suffered a sharp decline in gross sales
volume as a result of newly established competing supermarkets in the trade
area. In October 1994, Safeway abruptly terminated its operations. While Safeway
is still liable for rent under the terms of its lease, the lease provides no
mechanism affording the landlord the right to require continuing business
operations. Safeway threatens to sub-lease its store to a local supermarket user
whose usage and market draw would be inferior to that of a conventional Safeway
Store. This store closing has had a substantial negative impact on the retail
sales traffic in the Center and on the ability of the Center's remaining tenants
to maintain viable retail sales volumes. The Trust is presently negotiating with
a possible satisfactory replacement tenant for the Safeway Store and has
received strong interest from a leading national warehouse supermarket chain.
However, it has no assurance that these negotiations will be successful.
Also, late in 1994, Waban Inc, the parent of the HomeBase warehouse discount
store chain, announced plans to close its stores in the Bay Area including its
100,000 square foot HomeBase store at El Portal. The Trust's lease with HomeBase
contained sufficient provisions enabling the Trust to negotiate successfully for
an economically acceptable lease termination. In exchange for a lease
termination effective December 31, 1994 the Trust negotiated a $6,000,000 lease
buy-out offer from HomeBase. The full amount of the buy-out was paid to the
Trust on December 30, 1994. This sum was paid to the lender as required under
the terms of the property financing. The HomeBase operations remained active at
El Portal until April 8, 1995.
The combined effect of these three developments has prompted Long's Drug,
the Center's fourth anchor tenant, to close its store at the termination of its
lease in February 1996.
The result of these anchor lease events has been very serious. While the
Center has successfully maintained acceptable overall occupancy levels in 1994
and 1995, it has been at the cost of reduced rental revenues and it is doubtful
that many smaller retailers will be able to continue to sustain themselves as a
result of the anchor store closures.
The Trust is vigorously exploring redevelopment possibilities with potential
replacement retailers and the City of San Pablo in its effort to salvage as much
equity as possible for shareholders. It is too soon to predict how successful
these efforts will be.
At December 31, 1995, El Portal Shopping Center was 58% leased. The
percentage of the center that is both leased and occupied at December 31, 1995
was 44%. Tenants leasing 10% or more of the rentable space as of December 31,
1995 are:
<TABLE>
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GROSS
LEASABLE PERCENT OF TOTAL
AREA (SQ GROSS LEASABLE BASE
TENANT FT) AREA RENTAL/YEAR END OF LEASE TERM
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<S> <C> <C> <C> <C>
Safeway Stores 37,141 14% $ 179,000 August 1998
(6 options for 5 years)
Newberry 28,130 10% $ 125,000 January 2002 with right to
terminate by either
landlord or tenant at end
of each calendar year
prior to lease maturity.
</TABLE>
In 1995 the Trust discovered that there had been a toxic spill by a former
dry cleaner tenant. This spill probably occurred prior to the Trust's
acquisition of the Center. See above under Governmental Regulation --
Environmental Matters for a discussion of this spill.
8
<PAGE>
KING'S COURT SHOPPING CENTER. This neighborhood shopping center is located
in the community of Los Gatos, California. The center is anchored by Lunardi's
Supermarket, a local supermarket chain, and an array of retail and service
tenants such as Hallmark Cards, Wells Fargo Bank and Bank of America. King's
Court Shopping Center has 76,612 square feet of gross leasable space. The Trust
presently owns a 40% interest in Kingsco, the general partnership which owns
this shopping center. In addition, the Trust manages King's Court Shopping
Center and has control over the shopping center's operations, including any
leasing, renovation, sale and financing activities.
Kingsco owns a leasehold estate as to the land and fee title as to the
improvements (excluding a gas station). The ground lease has a 65-year term
expiring in 2024, and requires minimum annual payments of $40,000 plus 12% of
the property's gross rental revenue in excess of $333,333 per annum. The Trust
is presently attempting to negotiate with the ground lessors to extend the
ground lease. There can be no assurance that these negotiations will succeed on
economically acceptable terms. The carrying cost of the center, which includes
the other partners' interest in the property, was $6,208,000 after depreciation
at December 31, 1995. The property is security for a first mortgage loan with an
interest rate of prime +1.75%. At December 31, 1995 the rate was 10.25% and the
outstanding balance was $1,343,000.
At December 31, 1995, King's Court Shopping Center was 100% leased. Tenants
occupying 10% or more of the rentable space as of December 31, 1995 are:
<TABLE>
<CAPTION>
GROSS
LEASABLE PERCENT OF TOTAL
AREA (SQ GROSS LEASABLE BASE RENTAL/
TENANT FT) AREA YEAR END OF LEASE TERM
- ----------------------------------------- ----------- ----------------- -------------- ---------------------------
<S> <C> <C> <C> <C>
Lunardi's Supermarket 22,000 29% $ 140,000(1) November 2003
(1 option for 10 years)
</TABLE>
- ------------------------
(1) Additional percentage rents paid by Lunardi's Supermarket were $140,000 in
1995, $99,000 in 1994, and $103,000 in 1993.
The Trust has discovered toxic pollution of the ground water under King's
Court Shopping Center. See above under Governmental Regulation -- Environmental
Matters for discussion of this circumstance.
MENLO CENTER. Menlo Center is a prime quality mixed-use retail and
professional office redevelopment project located near Stanford University in
downtown Menlo Park, California. Menlo Center was completed in December 1989 and
contains 54,903 square feet of gross leasable space (including storage space and
common areas). The complex comprises a retail plaza of 15,375 square feet,
anchored by Kepler's Books and Magazines, which draws its patrons from
throughout the mid-San Francisco Peninsula. The professional office space
contains 38,591 square feet, and is anchored by Dean Witter Reynolds Inc. Menlo
Management Company, the entity which currently provides management services to
the Trust, has a lease for 3,193 square feet of office space at Menlo Center,
and the Trust's executive office is located within such space.
The Trust leases a 10,500 square foot portion of the land underlying Menlo
Center. The ground lease has an effective term of 40 years, grants the Trust ten
consecutive five-year renewal options and contains an option to purchase upon
the death of the ground lessor.
At December 31, 1995, Menlo Center was 100% leased. Tenants occupying 10% or
more of the rentable space as of December 31, 1995 are:
<TABLE>
<CAPTION>
GROSS
LEASABLE PERCENT OF TOTAL
AREA (SQ GROSS LEASABLE BASE
TENANT FT) AREA RENTAL/YEAR END OF LEASE TERM
- -------------------------------------------- ----------- ----------------- ----------- ---------------------------
<S> <C> <C> <C> <C>
Kepler's Books and Magazines 12,279 22% $ 382,000 August 1999
(2 options for 10 years)
Thomas Associates 8,759 16% $ 341,000 March 1996
(1 option for 5 years)
Dean Witter Reynolds, Inc. 6,002 11% $ 144,000 October 1999
(2 options for 5 years)
</TABLE>
9
<PAGE>
At December 31, 1995, the Trust's investment in Menlo Center was $17,376,000
before accumulated depreciation, and the total indebtedness on this property was
$10,738,000. The Trust reduced the carrying value of Menlo Center to $15,000,000
after depreciation during 1994 in order to reflect its opinion of the then
current market value. Menlo Center was sold on February 29, 1996.
MONTEREY PLAZA SHOPPING CENTER. This community shopping center is located
in San Jose, California. The Trust began the development of this shopping center
in 1987, and completed development in 1990. The center has 233,000 square feet
of retail space, of which the Trust owns 182,405 square feet, or all but the
Lucky Store. In addition to the Lucky Stores anchor, other retailers include
Walgreen, McDonald's, Lyon's Restaurant and Taco Bell.
In November 1994, HomeBase ceased its operations at Monterey Plaza as part
of its overall strategy to close certain stores in Northern California. HomeBase
remains liable for payment of rent and related occupancy charges. HomeBase is
delinquent in payment of its rents and charges since January 1, 1996 as a
consequence of a dispute with the Trust over certain lease provisions. The Trust
expects that this dispute will be resolved satisfactorily. HomeBase does not
have the obligation to maintain continuous business operations. HomeBase and the
Trust are actively seeking an acceptable replacement tenant or sublessee at this
time, though there is no assurance that one will be found. The HomeBase lease is
an obligation of Waban, Inc., a New York Stock Exchange company. It is also a
guaranteed by T.J.X. Corporation, also a New York Stock Exchange company. This
anchor store closure has had a negative impact on retail sales in the rest of
the shopping center. Replacement of this anchor continues to be a major goal of
the Trust. The building (101,500 sq ft) will require substantial capital
investment in order to prepare it for occupancy by a replacement retail tenant.
At December 31, 1995, Monterey Plaza Shopping Center was 95% leased. If the
HomeBase vacancy is accounted for, the percentage of the Center both leased and
occupied at December 31, 1995 was 39%. Tenants leasing 10% or more of the
rentable space as of December 31, 1995 are:
<TABLE>
<CAPTION>
GROSS
LEASABLE PERCENT OF TOTAL
AREA (SQ GROSS LEASABLE BASE RENTAL/
TENANT FT) AREA YEAR END OF LEASE TERM
- ------------------------------------------ --------- ----------------- ------------- --------------------------
<S> <C> <C> <C> <C>
HomeBase 101,500 55% $ 1,172,000 September 2010
(4 options for 5 years)
</TABLE>
At December 31, 1995, the Trust's investment in Monterey Plaza Shopping
Center after accumulated depreciation was $25,673,000, and the total
indebtedness on this property was $18,568,000.
VESTING OF TITLE TO PROPERTIES
With the exceptions of the land under King's Court Shopping Center, a
portion of the land under Menlo Center, and a parcel of land adjacent to El
Portal Shopping Center fee title to all the properties is owned by the Trust.
For King's Court Shopping Center, the Trust acquired a 40% controlling interest
in the general partnership which owns a leasehold estate as to the land and fee
title as to the improvements (excluding a gas station). The ground lease has a
65-year term expiring in 2024. In Menlo Park, the Trust leases a 10,500 square
feet portion of the land underlying the Menlo Center project. The ground lease
has an effective term of 40 years, grants the Trust 10 consecutive 5-year
renewal options, and contains an option to purchase upon death of the ground
lessor. At El Portal the Trust leases a 2.513-acre parcel of land adjacent to
the El Portal Shopping Center and fronting onto San Pablo Avenue. The ground
lease has an effective term of fifty years and contains an option to purchase
upon the death of one of the ground lessors.
PROPERTY CONDITION
All of the buildings are suitable and adequate for the purposes for which
they were designed, are being used for those purposes, where leased and
occupied, and are in a good state of repair. However, due to changes in retail
industry practice, the Trust believes that several of its buildings at El Portal
may be either functionally obsolete or require substantial physical upgrading in
order to be capable of re-letting on economic terms in today's retailing
environment. Moreover, in recent years it has become
10
<PAGE>
increasingly evident that tenant improvements for new and replacement tenants
have escalated in cost significantly in excess of the rate of inflation and have
tended to increase capitalization in Trust properties to a material extent. This
trend is partially a consequence of the growing competitiveness of the rental
marketplace in which the Trust's properties operate. This is evident at Monterey
Plaza Shopping Center where the building formerly occupied by HomeBase will
require substantial physical renovation and upgrading in order to prepare it for
occupancy by a replacement retail tenant.
PROPERTY SALES
The Trust sold the Lakeshore Plaza Shopping Center on March 13, 1995 for a
sales price of $31,292,000. The proceeds of this sale after provision for
assumption of the existing First Deed of Trust financing, repayment of junior
financing, closing costs, escrow holdbacks for supplemental property taxes,
vacant spaces and pending tenant improvement allowances, legal fees, transfer
taxes and miscellaneous selling expenses, were all used to pay down other
short-term Trust debt, including debenture indebtedness maturing in July 1995.
On February 29, 1996, the Trust sold Menlo Center for a sales price of
$16,200,000. The existing financing was assumed by the buyer. After provision
for closing costs, transfer fees and real estate commissions, the proceeds of
this sale were all used to pay down other short-term Trust indebtedness and to
provide working capital for the Trust. The Trust remains liable to the buyer for
an annual net income subsidy for the remaining term of the First Deed of Trust
financing which matures in 2000.
PRINCIPAL TENANTS
HomeBase, Inc. ("HomeBase") is the Trust's largest tenant. HomeBase, a
discount home improvement and hardware chain, is a subsidiary of Waban, Inc.
("Waban") which is traded on the New York Stock Exchange and, as of December 31,
1995, has credit ratings of BA3 and BB- as determined by Moody's and Standard
and Poor's respectively. In November 1993, Waban announced plans to close or
relocate approximately 24 of a total of 90 HomeBase Stores in locations where it
perceived limited potential to achieve its corporate objectives. In the fall of
1994, HomeBase notified the Trust that it intended to shut down its operations
at both El Portal Shopping Center and Monterey Plaza Shopping Center in pursuit
of this policy. At that time, HomeBase's leases accounted for 29% of the Trust's
gross leasable area and 17% of base rent revenues. The Monterey Plaza lease is
guaranteed by T.J.X. Corporation and Waban, Inc., both of which are listed on
the New York Stock Exchange.
Because of the terms of the HomeBase lease at El Portal, the Trust
successfully negotiated an adequate financial compensation for HomeBase's
closure of operations. On December 30, 1994, HomeBase paid a lease termination
fee of $6,000,000 to the Trust. In exchange, HomeBase was granted the ability to
terminate its lease effective December 31, 1994 with the obligation to surrender
the premises to the Trust by April 1995. Under the terms of the First Deed of
Trust to First Nationwide Life Insurance Company securing the loan on El Portal,
the full proceeds of this lease buy out were applied towards principal reduction
and prepayment penalty applicable to this loan. HomeBase closed its store on
April 8, 1995.
HomeBase closed its store at Monterey Plaza in November 1994. The HomeBase
lease contains no continuous business operations provision; the lease only
requires HomeBase to continue to pay rents and other occupancy charges as they
become due. HomeBase is delinquent in payment of its rents and charges since
January 1, 1996 as a consequence of a dispute with the Trust over certain lease
provisions. The Trust expects that this dispute will be resolved satisfactorily.
The closure has had a negative impact on the volume of retail sales business
transacted at the Center. HomeBase and the Trust are cooperating to locate a
suitable replacement anchor retailer for the 101,500 square foot premises.
Replacing this anchor is a major goal for the Trust.
Safeway, Inc. ("Safeway") is the Trust's second largest tenant, in terms of
gross leasable area. Safeway is a major operator of retail supermarkets in the
United States and Canada. Safeway is listed on the New York Stock Exchange and,
as of December 31, 1995, has credit ratings of BA1/BA2 and BBB- from Moody's and
Standard and Poor's respectively. Safeway comprises 6% of the Trust's gross
11
<PAGE>
leasable area and 3% of its base rental revenue at December 31, 1995. As
indicated above, Safeway closed operations at the El Portal store in October
1994. At the present time, Safeway remains liable for rent and occupancy costs
during the remaining term of its lease and is current with all lease payments.
Other significant tenants at the Trust's properties include McCrory
Corporation (Newberry), Walgreen and Lunardi's Supermarkets, which lease
properties representing approximately 11% of the Trust's gross leasable area and
7% of its base rental revenues. McCrory Corporation is operating under the
jurisdiction of the Bankruptcy Court, having filed for relief under Chapter 11
of the Bankruptcy Code in 1992.
Information with respect to the Trust's five largest tenants as of December
31, 1995 is set forth in the following table:
<TABLE>
<CAPTION>
GROSS
LEASABLE ANNUALIZED
AREA PERCENTAGE OF BASE RENTAL PERCENTAGE OF
TENANT NUMBER OF LEASES (SQ FT) TOTAL INCOME TOTAL
- ---------------------------------------- ----------------- --------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
HomeBase................................ 1 101,500 17% $ 1,172,000 18%
Safeway................................. 1 37,141 6% 179,000 3%
McCrory Corporation (Newberry).......... 1 28,130 5% 125,000 2%
Lunardi's Supermarket................... 1 23,960 4% 140,000 2%
Walgreen................................ 1 14,000 2% 191,000 3%
</TABLE>
OCCUPANCY RATES FOR PAST FIVE YEARS
The following table shows year-end occupancy rates for rentable space both
leased and occupied, expressed as a percentage of total rentable square footage
for each of the Trust's properties for the past five fiscal years:
<TABLE>
<CAPTION>
PROPERTY 1991 1992 1993 1994 1995
- --------------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
El Portal Shopping Center (1)........................................ 98% 98% 97% 56% 44%
King's Court Shopping Center......................................... 100% 100% 100% 98% 100%
Menlo Center......................................................... 100% 100% 100% 97% 100%
Monterey Plaza Shopping Center (1)................................... 93% 91% 98% 43% 39%
</TABLE>
- ------------------------
(1) The Safeway Store at El Portal Shopping Center and the HomeBase store at
Monterey Plaza Shopping Center are leased but not currently occupied. Long's
Drug has vacated its premises at El Portal upon the expiration of its lease
in February 1996. This has had the impact of reducing the occupancy rate to
36%. See Description of Trust's Properties and Principal Tenants.
AVERAGE EFFECTIVE ANNUAL BASE RENT PER SQUARE FOOT FOR PAST FIVE YEARS
The following table shows average effective annual rent per square foot for
each of the Trust's properties for the past five years:
<TABLE>
<CAPTION>
PROPERTY 1991 1992 1993 1994 1995
- ---------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
El Portal Shopping Center........................... $ 6.57 $ 7.63 $ 7.39 $ 6.08 $ 3.45
King's Court Shopping Center........................ 13.69 14.79 14.85 16.24 16.55
Menlo Center........................................ 29.55 29.80 29.45 30.73 31.58
Monterey Plaza Shopping Center...................... 12.72 13.73 14.14 14.03 14.58
</TABLE>
12
<PAGE>
LEASE EXPIRATIONS
The following table shows lease expirations for the next ten years for
existing tenants at the Trust's properties as of December 31, 1995, assuming
that none of the tenants exercise renewal options:
<TABLE>
<CAPTION>
AVERAGE ANNUAL
ANNUALIZED MINIMUM RENT PERCENT OF
APPROXIMATE MINIMUM RENT PER SQUARE TOTAL LEASED
LEASE AREA UNDER FOOT UNDER SQUARE FOOTAGE
NUMBER OF IN SQUARE EXPIRING EXPIRING REPRESENTED BY
LEASE EXPIRATION YEAR LEASES EXPIRING FEET LEASES LEASES EXPIRING LEASES
- ----------------------------- --------------- ------------ ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
1996......................... 32 97,947 $ 1,126,643 $ 11.50 21.20%
1997......................... 14 37,510 680,947 18.15 8.12%
1998......................... 12 54,204 624,980 11.53 11.74%
1999......................... 11 34,484 988,417 28.66 7.47%
2000......................... 8 19,488 519,179 26.64 4.22%
2001......................... 6 18,642 486,518 26.10 4.04%
2002......................... 1 28,130 125,000 4.44 6.09%
2003......................... 4 31,242 408,938 13.09 6.76%
2004......................... 2 4,887 113,603 23.25 1.06%
2005......................... 1 1,388 29,148 21.00 0.30%
AFTER 2005................... 7 133,977 1,729,933 12.91 29.00%
--
------------ ------------- ------- -------
TOTAL 98 461,899 6,833,306 14.79 100.00%
--
--
------------ ------------- ------- -------
------------ ------------- ------- -------
</TABLE>
LEASES
The majority of the anchor leases on the Trust's retail properties provide
for initial lease terms of between ten and twenty years, and the leases on the
Trust's smaller shop spaces typically provide for lease terms of between three
and five years. The Trust typically seeks to structure the leases on its
properties as "triple net" leases that impose on the tenant pro rata obligations
for real property taxes and assessments, repairs and maintenance of common areas
and insurance. Through the use of triple net leases, the Trust seeks to reduce
its exposure to escalating operational costs and risks and the demands upon
managerial time typically associated with investments in real estate. In this
way, triple net leases provide opportunities for income growth from contractual
rent increases without corresponding increases in operational costs. However,
the Trust has agreed in certain instances to retain or limit the responsibility
for some obligations that would otherwise be the responsibility of the tenant
under a triple net lease. Tenants occupying the professional office space in
Menlo Center are on gross leases, as is customary in professional office lease
practice. Gross leases do not require tenants to bear their share of property
taxes or costs of insurance and maintenance of common areas. At El Portal
Shopping Center, several retail tenants are not responsible for full payment of
property taxes, insurance or common area maintenance expenses. At Kings Court
Shopping Center, one tenant is not responsible for its property taxes, insurance
and common area maintenance expenses. Triple net expenses for vacant space are
not recoverable and are thus net property expense to the Trust.
OUTSTANDING INDEBTEDNESS
As of December 31, 1995, the combined total indebtedness of the Trust was
approximately $48,008,000, consisting entirely of fixed rate debt except for
$1,343,000 of floating rate debt. Aggregate indebtedness included $36,818,000 in
long-term mortgage loans with maturity dates ranging from 1999 to 2000,
$11,190,000 in short-term notes payable with maturity dates ranging from 1996 to
1997. The following table sets forth certain information with respect to the
Trust's mortgage loans:
13
<PAGE>
<TABLE>
<CAPTION>
ANNUAL
PROPERTY OR INTERESTS MATURITY PRINCIPAL SCHEDULED INTEREST ANNUAL DEBT BALANCE DUE AT
PLEDGED AS COLLATERALT DATE BALANCE AMORTIZATION RATE SERVICE MATURITY (1)
- -------------------------- ---------- -------------- ------------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
El Portal................. 07/01/00 $ 4,538,000 $ 783,000 9.625% $ 583,000 $ 3,755,000
King's Court.............. 06/01/99 1,343,000 123,000 10.25%(3) 168,000 1,220,000
Menlo Center.............. 02/07/00 10,738,000 437,000 9.470% 1,107,000 10,301,000
Monterey Plaza............ 02/07/00 18,568,000 725,000 9.720% 1,954,000 17,843,000
Mt. Shasta (2)............ 01/02/99 1,631,000 293,000 9.375% 238,000 1,338,000
---------- -------------- ------------- ----- ------------- --------------
TOTAL..................... $ 36,818,000 $ 2,361,000 $ 4,050,000 $ 34,457,000
-------------- ------------- ------------- --------------
-------------- ------------- ------------- --------------
</TABLE>
- ------------------------
(1) Assumes no prepayments of principal prior to due dates thereof. The Trust's
primary mortgage loan with respect to El Portal Shopping Center does not
permit prepayment until after July 1995, and thereafter permits prepayment
with a penalty. Mortgage loans with respect to Menlo Center and Monterey
Plaza Shopping Center permit prepayment, but with substantial prepayment
penalties.
(2) This property is no longer owned by the Trust, but the Trust remains the
primary obligor on the underlying mortgage. See "Mortgage Notes Relating to
Property Sales" below.
(3) This mortgage loan bears interest at prime +1.75%.
The following table shows the scheduled maturity of the Trust's long-term
mortgage loans over the next five years:
<TABLE>
<CAPTION>
PRINCIPAL PERCENTAGE
AMOUNT OF TOTAL
YEAR MATURING INDEBTEDNESS
- ------------------------------------------------------------------------- -------------- ------------
<S> <C> <C>
1996..................................................................... 528,000 1.43%
1997..................................................................... 577,000 1.57%
1998..................................................................... 631,000 1.71%
1999..................................................................... 3,111,000 8.45%
2000..................................................................... 31,971,000 86.84%
-------------- ------------
Total, December 31, 1995................................................. $ 36,818,000 100.00%
-------------- ------------
-------------- ------------
</TABLE>
As discussed above, the Trust is currently reviewing the feasibility of
redeveloping El Portal Shopping Center. In addition, routine ongoing
requirements of building upkeep and tenant replacements will necessitate capital
expenditures during the future. The precise extent of such expenditures cannot
yet be determined.
MORTGAGE NOTES RELATING TO PROPERTY SALES
As part of its strategy to focus on metropolitan "in-fill" locations as
opposed to more rural locations, the Trust sold two properties, one each in 1988
and 1990. In connection with such sales, the Trust accepted seller financing:
(i) WESTWOOD VILLAGE SHOPPING CENTER. In December 1988, the Trust sold
the Westwood Village Shopping Center for $6,475,000, payable in cash of
$1,100,000 and a $5,375,000 seller-carryback note receivable due in seven
years with interest only payments at a rate of 9%. In March 1990, the
purchaser obtained a $4,100,000 loan secured by a first mortgage on this
shopping center to pay down the Trust's note. The remaining amount owed to
the Trust is subordinate to this new loan. The principal balance owed to the
Trust on December 31, 1995 was $1,120,000 and payments are current. This
loan was to mature in December 1995. The borrower requested an extension of
the maturity date to December 1996 and the Trust granted this request. The
shopping center income is sufficient to cover the payments on this note.
However, there is considerable vacancy at Westwood Village due to
overbuilding of retail facilities in the Redding area. This has put downward
pressure on rents and property values. The Trust feels that this note will
ultimately be collectible.
14
<PAGE>
(ii) MT. SHASTA SHOPPING CENTER. In August 1990, the Trust sold the Mt.
Shasta Shopping Center for $5,100,000, payable in cash of $900,000 and a
$4,200,000 all-inclusive promissory note and second deed of trust due
January 1, 1999 (the "Mt. Shasta Note"). The Mt. Shasta Note bears interest
9.25%. Because the interest rate was less than the market rate during the
initial period, the Mt. Shasta Note was discounted by $303,000 which is
being recognized as additional interest income over the term of the Mt.
Shasta Note. The Mt. Shasta Note requires interest only payments until it
matures on January 1, 1999. The Trust continues to be the primary obligor on
the underlying first mortgage note, the principal balance of which at
December 31, 1995 was $1,631,000. Payments on the Mt. Shasta note are
current. The current owner of Mt. Shasta Shopping Center expects to
refinance the property and thereby repay the Trust's remaining loan balance.
There is no assurance, however, that this refinance can be accomplished.
OTHER DEVELOPMENTS
On December 10, 1993, the Trust entered into a purchase and sale agreement
(the "Plaza 580 Agreement") with Plaza 580 Ltd., pursuant to which the Trust
obtained an option to purchase a shopping center located in Livermore,
California. On March 10, 1994, the Trust entered into three additional purchase
option agreements: (i) with DSL/Elk Grove, a California joint venture, with
respect to a shopping center located in Elk Grove, California (the "Elk Grove
Agreement"); (ii) with R/ P Manteca Limited Partnership, a California limited
partnership, with respect to Mission Ridge Shopping Center located in Manteca,
California (the "Manteca Agreement"); and (iii) with DSL/Fair Oaks, a California
joint venture, with respect to Northridge Center located in Fair Oaks,
California (the "Northridge Agreement").
Pursuant to an agreement dated May 9, 1994 (the "Plaza 580 Assignment
Agreement"), the Trust assigned its rights under the Plaza 580 Agreement to
Western Investment Real Estate Trust ("WIRET"), a California real estate
investment trust, for the sum of $556,519, adjusted for certain closing costs
and prorations. On May 27, 1994, WIRET closed its acquisition of the Trust's
rights under the Plaza 580 Agreement and acquired the underlying property.
Pursuant to the Plaza 580 Assignment Agreement, the Trust guaranteed the payment
of certain rental rates with respect to two empty shop spaces located at Plaza
580 for a period of 24 months. The Trust also agreed to repay a portion of the
purchase price with respect to any of such empty spaces that remain unleased at
the end of the 24-month period. This space has since been leased.
Pursuant to an agreement dated May 11, 1994 (the "Second Assignment
Agreement"), the Trust assigned its rights as purchaser under each of the Elk
Grove Agreement, the Manteca Agreement and the Northridge Agreement to WIRET for
$1,804,211, as adjusted for certain closing costs and prorations. On June 7,
1994, the transactions contemplated by the Second Assignment Agreement were
consummated. Pursuant to the Second Assignment Agreement, the Trust guaranteed
the payment of rent for 24 months for certain empty space at the Elk Grove and
Northridge centers, and agreed to repay to WIRET, at the end of 24 months, a
portion of the purchase price applicable to such empty space which remains
unleased (or leased to tenants that do not meet certain guidelines) as of such
24-month period. At December 31, 1995 these spaces have all been leased. The
Trust also agreed to pay pro forma rents for certain space at Northridge which
space is subject to leases that expire within the first year after closing.
During 1994, the Trust recorded a net gain of $994,000 and rent guarantee
reserve accrual of $390,000, as the result of Plaza 580 Assignment Agreement and
the Second Assignment Agreement. In 1995, the Trust increased the reserve by an
additional $213,000, accordingly the remaining deferred gain of $203,000 is
reflected in accounts payable and other liabilities.
In connection with the above transactions, on June 7, 1994, (i) Scotts
Valley Plaza, a California limited partnership ("Scotts"), granted to the Trust
a one-year option to acquire the shopping center commonly known as Scotts
Village Plaza and (ii) Scotts Village Phase II, a California limited partnership
("Scotts II"), granted a one-year option to the Trust to purchase Scotts Valley
Square, both of which are located in Scotts Valley, California. Concurrently
with the grant of these options and in
15
<PAGE>
connection with the transactions contemplated by the Second Assignment
Agreement, the Trust made a loan to Malcolm R. Riley, one of the principals in
Scotts and Scotts II, in the amount of $750,000. The loan bears interest at 9%
per annum, payable monthly, and the principal is due and payable in 6 years.
Simultaneously, the Trust made a loan to Russell R. Pratt, another of the
principals in Scotts and Scotts II, in the amount of $500,000. That loan bears
interest at 8% per annum, payable monthly, and the principal is due and payable
in 6 years. Each of these loans is secured by the borrower's respective
partnership interests in Scotts and Scotts II. The Trust also made a loan in the
amount of $75,000 to Scotts, which bears interest at 8.6% per annum (payable
monthly), is due in 6 years and is secured by a second deed of trust on Scotts
Village Plaza. Payment on these notes are current.
16
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Trust is not presently involved in any material litigation nor, to its
knowledge, is any material litigation threatened against the Trust or its
properties, other than routine litigation arising out of the ordinary course of
business, some of which is expected to be covered by the Trust's liability
insurance and all of which collectively is not expected to have a material
adverse effect on the business or financial condition of the Trust.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1995.
17
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S TRUST SHARES AND RELATED SHAREHOLDER MATTERS
MARKET VALUE OF TRUST SHARES
There is no established public trading market for Trust Shares.
Historically, the Trust maintained consecutive offerings of new Trust Shares to
existing shareholders and to the investing public at prices representing the
then current estimated market value for the Trust Shares. The Trust's policy has
been to review the prices at which Trust Shares were offered at least annually,
and at such other times as the Trustees believed the estimated value of the
Trust's assets had changed to a degree sufficient to alter the prices of Trust
Shares. In the past, Trust Shares have been offered solely to California
residents pursuant to an exemption from the registration requirements of the
federal securities laws, and have been qualified with the State of California
for issuance pursuant to offering circulars prepared by the Trust. The Trust's
most recent offering circular expired on December 15, 1992, and no new Trust
Shares have been sold since such date.
The Trust also historically maintained a dividend reinvestment program
through which existing shareholders were able to purchase Trust Shares at a
discount from the then current offering price in lieu of receiving dividends in
cash. The dividend reinvestment program has been suspended since the expiration
of the Trust's last offering circular in December 1992.
From time to time, to provide existing shareholders with a means of trading
Trust Shares, Pacific Real Estate Securities Co., Inc. ("Presco") has acted as a
crossing agent on behalf of the Trust so that persons interested in acquiring
Trust Shares could purchase Trust Shares from persons interested in selling
Trust Shares. Because there is no current offering circular in place, Presco is
not presently effecting crossing transfers of Trust Shares, ceased operation as
an N.A.S.D. broker/dealer in November 1995, and has subsequently been wound up
in 1996. Shareholders wishing to liquidate their interests in the Trust must
locate buyers for their Trust Shares independently. As of December 31, 1995,
there were 145,000 Trust Shares available for sale by existing shareholders. At
this time, the Trust cannot predict when or at what price these Trust Shares
will be liquidated.
As of December 31, 1995, there were 3,706,845 Trust Shares issued and
outstanding which were held of record by approximately 3,500 shareholders.
18
<PAGE>
DISTRIBUTION POLICY
The following table sets forth on a quarterly basis historical distributions
made by the Trust during its last three fiscal years. Distributions are based on
operating results for the quarter prior to the quarter in which they are
declared. Historical distributions are not intended to be indicative of future
distributions.
<TABLE>
<CAPTION>
DISTRIBUTIONS
PER TRUST SHARE
----------------
<S> <C>
1993:
First quarter (until suspension of dividends)................... .155
Second quarter.................................................. 0.000
Third quarter................................................... 0.000
Fourth quarter (special distribution)........................... 0.050
-------
Total......................................................... $ 0.205
-------
-------
1994:
First quarter................................................... $ 0.000
Second quarter.................................................. 0.000
Third quarter................................................... 0.000
Fourth quarter.................................................. 0.000
Total......................................................... $ 0.000
-------
-------
1995:
First quarter................................................... $ 0.000
Second quarter.................................................. 0.000
Third quarter................................................... 0.000
Fourth quarter.................................................. 0.000
-------
Total......................................................... $ 0.000
-------
-------
</TABLE>
Historically, the Trust's policy has been to pay dividends to its
shareholders in an amount approximating 100% of its cash flows from operations
(i.e., net operating income plus depreciation and amortization). From its
inception in 1963, the Trust made 155 consecutive bi-monthly or quarterly
regular distributions. With respect to distributions paid in 1991, 1992 and the
first quarter of 1993, 100% of the amount paid was sheltered from current
taxable liability as a result of book depreciation expense. On February 25,
1993, the payment of dividends was suspended in order to conserve the Trust's
cash flow, to provide for its capital improvements program, to maintain the
quality of the Trust's properties and to protect the Trust's credit, since the
Trustees concluded that the Trust could no longer rely on its traditional
sources of liquidity (i.e., secured bank financing and "intrastate" equity
offerings). The Trust is applying the funds that would otherwise have been
distributed to its shareholders (i) to fund capital expenditures necessary to
maintain its properties, (ii) to make requisite principal payments on its
mortgage indebtedness and (iii) to facilitate tenant improvements required upon
developing and reletting of the Trust's properties. Because the Trust did not
have taxable income for 1995, the suspension of dividends is not expected to
affect the Trust's qualification as a REIT.
In December 1993, the Trust declared a special distribution of $0.05 per
Trust share, payable on or prior to December 31, 1993 to all Trust shareholders
of record on November 30, 1993. The timing of resumption of regular dividend
payments is not known at this time.
19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following represents selected financial data for the Trust for the five
years ended December 31, 1995. Acquisitions and dispositions which occurred
during the periods presented below materially affect the comparability of the
data. The data should be read in conjunction with the consolidated financial
statements included elsewhere herein.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31: 1995 1994 1993 1992 1991
- ------------------------------------------- ----------- ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Operating Data:
Rental revenues............................ $ 9,183,000 $12,417,000 $ 9,725,000 $ 8,683,000 $ 6,972,000
----------- ----------- ------------- ------------- -----------
----------- ----------- ------------- ------------- -----------
Operating income........................... $ 2,031,000 $ 4,130,000 $ 2,730,000 $ 2,919,000 $ 1,975,000
Property acquisition expenses,
reincorporation expenses and expenses of
prospective offering...................... (214,000) (1,159,000) (1,833,000) (80,000)
Interest income/(expense) net.............. (4,727,000) (7,468,000) (4,588,000) (3,450,000) (2,125,000)
Loss on impairment of property value....... (8,000,000)
Gain on lease termination.................. 3,577,000
Gain (loss) on property sales.............. (213,000) 994,000 (100,000)
----------- ----------- ------------- ------------- -----------
Loss before minority interest in joint
venture................................... (3,123,000) (7,926,000) (3,691,000) (611,000) (250,000)
Less minority interest in joint venture's
operations................................ (325,000) (328,000) (238,000) (255,000) (214,000)
----------- ----------- ------------- ------------- -----------
Net loss................................... $(3,448,000) $(8,254,000) $ (3,929,000) $ (866,000) $ (464,000)
----------- ----------- ------------- ------------- -----------
----------- ----------- ------------- ------------- -----------
Net loss per share of beneficial
interest.................................. $ (0.930) $ (2.227) $ (1.060) $ (0.230) $ (0.130)
Cash dividends per share of beneficial
interest.................................. $ 0.000 $ 0.000 $ 0.205 $ 0.620 $ 0.887
<CAPTION>
AS OF DECEMBER 31:
- -------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets............................... $62,875,000 $95,287,000 $ 112,697,000 $ 110,269,000 $86,009,000
Mortgages and other loans payable.......... $48,008,000 $75,770,000 $ 84,887,000 $ 78,643,000 $50,972,000
Weighted average number of shares
outstanding............................... 3,706,845 3,706,845 3,707,072 3,706,308 3,684,899
</TABLE>
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Financial Data" and the Consolidated Financial Statements and the Notes thereto
appearing elsewhere herein.
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994
During 1995 the Trust continued its efforts to recapitalize through a
variety of ways, including joint venture or merger with a compatible real estate
partner. The chief impediment has been rising yield expectations of potential
institutional investor partners. In addition, the process has been hindered by
the problems at El Portal Shopping Center and the unresolved HomeBase vacancy at
Monterey Plaza, as well as the toxic pollution at King's Court Shopping Center.
In order to meet its debt obligations and improve its earnings from operations,
the Trust sold its Lakeshore Plaza Shopping Center in March 1995, Menlo Center
in February 1996, and is considering the sale of further assets in 1996 in order
to achieve these goals.
Net loss for the year ended December 31, 1995 was $3,448,000 as compared to
a net loss of $8,254,000 for the year ended December 31, 1994, a decrease in the
loss of $4,806,000.
Rental revenues decreased from $12,417,000 to 9,183,000, a decrease of
$3,234,000, or 26%, as a result of the sale of Lakeshore Plaza Shopping Center
and the declining revenues at El Portal Shopping Center as a result of the
HomeBase lease termination in 1994.
Operating expenses decreased from $2,162,000 in 1994 to $2,145,000 in 1995,
a decrease of $17,000, or 1% due to additional expense of El Portal ground lease
and offset by a decrease in Lakeshore Plaza expense due to the sale of the
Center.
Property taxes increased from $953,000 in 1994 to $1,194,000 in 1995, an
increase of $241,000, or 25% due to supplemental bills at Monterey Plaza
Shopping Center. Property management fees decreased from $456,000 in 1994 to
$318,000 in 1995, a decrease of $138,000, or 30%. Depreciation and amortization
decreased from $3,862,000 in 1994 to $2,886,000 in 1995, a decrease of $976,000
or 25%. Each of these decreases resulted from the sale of Lakeshore Plaza
Shopping Center with the exception of property taxes.
General and administrative expenses decreased from $854,000 in 1994 to
$609,000 in 1995, a decrease of $245,000 due to cost saving measures.
Interest income decreased by $396,000, or 38%, from $1,033,000 to $637,000,
as a result of the early repayment of two mortgage notes receivable during 1994.
Interest expense decreased by $3,137,000, or 37%, from $8,501,000 to
$5,364,000, due to a pay-down on the El Portal mortgage, a prepayment penalty in
1994 made in conjunction with the sale of Lakeshore Plaza Shopping Center and
the pay-down of short-term debt.
In connection with a prospective offering of debt or equity securities,
potential merger or joint venture activities, the potential acquisition of
additional properties, and the proposed reincorporation as a Maryland
Corporation, the Trust incurred expenses of $214,000 in 1995 as compared to
$1,159,000 in 1994. These expenses were offset in part by a profit of $994,000
on the sale of property options accrued during this effort.
The aggregate lease-up rate for three of the Trust's four properties was
approximately 97% at December 31, 1995 and December 31, 1994. At one property
(El Portal) as a result of the termination of the HomeBase lease in 1994, the
lease rate declined to 58%. At another property (Monterey Plaza) where the
HomeBase lease remains in effect and the lease-up rate was 95%, the actual
occupancy rate declined to 39%. Both of these declines relate primarily to
vacancy arising from anchor tenant lease terminations or cessation of
operations. The aggregate occupancy rate for the Trust's overall portfolio at
December 31, 1995 was 55%.
21
<PAGE>
COMPARISON OF YEAR ENDED DECEMBER 31, 1994 TO YEAR ENDED DECEMBER 31, 1993
During 1994 the Trust endeavored to recapitalize and to reduce its ratio of
debt to equity. It sought to achieve this through a variety of ways including a
public equity offering, private offerings of debt and/or equity and joint
venture or merger with a compatible real estate enterprise. The Trust was
advised throughout this process by its investment bankers. Due to market factors
chiefly affecting yield and interest rates these goals could not be achieved and
in the interests of preserving shareholder value the Trust decided to sell the
Lakeshore Plaza to a pension fund. The sale was completed on March 13, 1995.
In the course of generating proposals that culminated in the sale of
Lakeshore Plaza the Trust's property portfolio was formally exposed to the
investment market. This exposure elicited several offers which were predicated
on estimates of value for all the Trust's properties with the exception of the
El Portal Shopping Center. El Portal was not a candidate for evaluation in this
manner because of the losses in its tenant structure and its redevelopment
needs. As a result of these estimates of value generated in competitive formal
bids and subsequent informal negotiations, the Trustees were able to assess the
probable current market value of most of its property portfolio. This had not
previously been possible due to the dearth of comparable property transactions
in the Bay Area since the decline of the real estate markets during the recent
recession.
The estimated current market value information gathering in the process
described above led the Trustees to the decision to adjust the Trust's book
values to more closely reflect these current market values. The aggregate of
these write-downs at December 31, 1994 was $8,000,000. The details of the amount
of each adjustment are contained in the notes to the Trust's consolidated
financial statements.
Net loss for the year ended December 31, 1994 was $8,254,000 as compared to
a net loss of $3,929,000 for the year ended December 31, 1993, an increase in
the loss of $4,325,000. This increase was caused by an increase in interest
expense of $2,663,000 and a loss on impairment of property value of $8,000,000
offset by the early termination of a lease which resulted in a net gain of
$3,578,000 after giving effect to writing off the remaining book value of the
building and associated tenant improvements leased by the former tenant, the
sale of options on four shopping center properties which resulted in a net gain
of $994,000, a one time loan commitment fee expensed in 1993 which did not recur
in 1994 and $1,400,000 increase in operating income.
Rental revenues increased from $9,725,000 to $12,417,000, an increase of
$2,692,000, or 28%, primarily as a result of income generated from a newly
developed property, Lakeshore Plaza Shopping Center, which was fully operational
beginning in October 1993.
Operating expenses decreased from $2,254,000 in 1993 to $2,162,000 in 1994,
a decrease of $92,000, or 4% due to reduced bad debt expense offset by increased
operating expenses at Lakeshore Plaza Shopping Center.
Property taxes increased from $874,000 in 1993 to $953,000 in 1994, an
increase of $79,000, or 9%. Property management fees increased from $320,000 in
1993 to $456,000 in 1994, an increase of $136,000, or 43%. Depreciation and
amortization increased from $3,052,000 in 1993 to $3,862,000 in 1994, an
increase of $810,000 or 27%. Each of these increases resulted from Lakeshore
Plaza Shopping Center becoming fully operational beginning in October 1993.
General and administrative expenses increased from $495,000 in 1993 to
$854,000 in 1994, an increase of $359,000 due to increased administrative
expenses connected with the proposed reorganization.
Interest income decreased by $133,000, or 11% from $1,166,000 to $1,033,000,
as a result of the early repayment of two mortgage notes receivable originally
scheduled to be repaid in future years.
Interest expense increased by $2,935,000, or 53%, from $5,567,000 to
$8,501,000, due to the assumption of new debt for Lakeshore Plaza Shopping
Center, and the cessation of capitalized interest on this project as well as a
prepayment penalty of $271,000 in connection with early repayment of a portion
of the outstanding debt on El Portal Shopping Center.
22
<PAGE>
In connection with a prospective offering of debt or equity securities and
the potential acquisition of additional properties, the Trust proposed
reincorporation as a Maryland corporation and incurred $1,159,000 in 1994 as
compared to $989,000 in 1993.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow used by operating activities was $1,759,000 in 1995, compared to
cash flow provided by operating activities of $3,930,000 in 1994 and $33,000
used in 1993. The decrease in 1995 was primarily due to a one-time lease
termination fee received in 1994 at one property. Additionally, cash flow from
rental operations has declined in 1995.
Cash flow provided by investing activities was $29,623,000 in 1995, as
compared to cash flow provided by investing activities in 1994 of $5,513,000 and
$4,767,000 used in 1993. The increase in 1995 was due to proceeds received from
the sale of Lakeshore Plaza Shopping Center. The increase in cash provided in
1994 was due to the early pay off of two notes receivable in 1994 and the
decrease in 1993 was due to a property under construction in 1992 being
substantially completed by early 1993.
Cash flow used by financing activities was $28,122,000 in 1995 as compared
to $9,633,000 used in 1994 and $4,824,000 provided in 1993. The increase in 1995
is due to repayment of a mortgage note and the repayment of an unsecured note
payable and short-term notes payable due to the sale of Lakeshore Plaza Shopping
Center. The decrease in 1994 is primarily due to the early pay off of three
mortgage notes payable paid early as a result of refinance by owner of a
property formerly owned by the Trust, and also due to a mortgage loan pay-down
due to HomeBase lease buy-out at El Portal Shopping Center. The increase in 1993
is primarily due to an increase in proceeds from short-term notes.
The Trust's financial structure at December 31, 1995 shows debt financing,
including short-term and unsecured notes, representing approximately 68% of the
book value of the Trust's properties, before depreciation. The decrease in
leverage from the level of 75% in 1994 is primarily due to the Trust's use of
the proceeds from the sale of Lakeshore Plaza Shopping Center to pay off the
Lakeshore Plaza mortgage note, $8,045,000 of unsecured notes, and short term
notes.
The Trust has a number of short-term notes due in 1996 and 1997. Menlo
Management Company is the general partner of the partnership lenders which hold
these short-term mortgage notes. The aggregate balance owed on these notes is
$11,190,000 at December 31, 1995. The Trust has one $500,000 note due in May
1996. This note was paid off in March 1996.
Sources of liquidity for the Trust include five mortgage loans receivable,
totaling approximately $6,565,000 at December 31, 1995. Two of these loans
result from the sale of properties prior to 1991. Payments on these notes are
due as follows: $1,120,000 in 1996 and $4,200,000 in January 1999. The balance
of $1,325,000 of these notes matures in 2000.
The Trustees believe that the Trust has sufficient working capital and
sources of liquidity to meet its current needs. The Trustees have considered the
long-term liquidity needs of the Trust and have evaluated the following means of
raising additional capital: (i) a merger or joint venture with a suitable
existing REIT or real estate company, (ii) a public or private equity offering,
(iii) or restructuring or sale of all or part of the Trust's portfolio.
The Trustees will consider the sale of one or more of the Trust's properties
if an acceptable price and terms could be obtained. However, certain of the
Trust's mortgage loans provide for substantial prepayment penalties. Also, in
order for a purchaser to assume this debt, the applicable lender's consent would
be required. The Trust has engaged in formal negotiations during 1994 and in
1995 regarding restructuring the Trust and the sale of certain Trust properties.
The Trust is presently engaged in active discussions for the restructuring of
the Trust through a joint venture or private equity offering. However, the
discussions presently under way are not sufficiently advanced to generate any
firm offer. The Trust expects to pursue such avenues actively during 1996.
However, if these
23
<PAGE>
negotiations are unsuccessful, the Trust will sell certain of its assets in
order to generate liquidity sufficient to meet the Trust's needs. In pursuit of
this strategy, on February 29, 1996, the Trust sold Menlo Center using the net
proceeds to reduce the Trust's debt and to provide working capital.
There has been no public market for Trust Shares, nor have there been any
known market-makers. From time to time, to provide shareholders with a means of
trading Trust Shares, Presco has acted as a crossing agent on behalf of the
Trust so that persons interested in acquiring Trust Shares could purchase Trust
Shares from persons interested in selling Trust Shares. Presco has ceased to
function in this capacity and the company has been wound up in 1996. The price
of Trust Shares sold by the Trust and selling shareholders was determined by the
Trustees, based on their estimate of the value of the Trust's properties and
other assets net of estimated liabilities, with the properties being valued
based on estimates of the long-term investment value of each property, rather
than on current market value or liquidation value, assuming that the properties
were held as long-term assets rather than being sold in mid-term or liquidated
in currently depressed market conditions. This valuation approach assumed that
the Trust would continue as a "going concern", and did not take into account
then current market value or liquidation value and costs of liquidation. All
existing shareholders who resided in California were given the opportunity to
purchase shares in cross-selling transactions. Distributions of $760,000 were
paid to shareholders in 1993.
JOINT VENTURE INTEREST
The Trust presently owns a 40% interest in Kingsco, the general partnership
which owns King's Court Shopping Center. In addition, the Trust has managing
control over King's Court Shopping Center operations, including any leasing,
renovation, sale or financing activities. The term of the partnership continues
until September 30, 2039. Cash flows and expenses of the partnership are
allocated in accordance with the partners' respective percentage interests, with
the Trust's allocation being equal to its 40% interest. The shopping center is
managed by Menlo Management on behalf of the Trust, and the Trust does not
receive any portion of the management fee paid to Menlo Management for such
management services.
OTHER CAPITAL EXPENDITURES
Each shopping center prepares an annual capital expenditure budget which is
intended to provide for all necessary recurring capital improvements. At the
present time, the Trust's existing shopping centers have been properly
maintained on a current and regular basis and there are no material deferred
capital maintenance obligations outstanding. However, the Trust expects that
several of its buildings may require significant capital investment in 1996.
This is particularly evident at El Portal Shopping Center where redevelopment
and re-letting of obsolete or outmoded physical stores will require upgrading.
This is also true at Monterey Plaza Shopping Center where the building formerly
occupied by HomeBase and now vacant will require substantial capital investment
in order to prepare it for occupancy by a replacement retail tenant. The Trust
believes that in order to fund capital budgets for such physical improvements it
may have to raise capital in a variety of ways including sale of assets, raising
debt or entering into a joint venture or merger or other restructuring. These
potential capital improvement needs have been discussed above in Item 2.
Properties -- Description of Trust's Properties.
ECONOMIC CONDITIONS
In the last three years, inflation has not had a significant impact on the
Trust because of the relatively low inflation rate. Nonetheless, the majority of
the Trust's leases contain provisions designed to mitigate the adverse impact of
inflation. Such provisions include clauses enabling the Trust to receive
percentage rents which generally increase as prices rise, and/or escalation
clauses which are typically related to increases in the Consumer Price Index or
similar inflation indices. Most of the Trust's leases require the tenant to pay
its share of operating expenses, including common area maintenance, real estate
taxes and insurance, thereby reducing the Trust's exposure to increases in
24
<PAGE>
costs and operating expenses resulting from inflation. However, several tenants
do not pay such expense reimbursements under the terms of their leases, as
indicated in "Item 2 Properties -- Leases" section.
The United States generally, and the State of California in particular, has
experienced a recent economic recession. The State of California continues to
show the effect of economic recession, and further adverse changes in general or
local economic conditions could result in the inability of some existing tenants
of the Trust to meet their lease obligations and could otherwise adversely
affect the Trust's ability to attract or retain tenants. The Trust's shopping
centers are typically anchored by national or regionally recognized supermarket,
super drug and other convenience stores which usually offer day-to-day
necessities rather than high-priced luxury items. These types of retailers, in
the experience of the Trust, generally continue to maintain their volume of
sales despite a slowdown in economic conditions. However, economic conditions
are not the only or even necessarily the major influences that can affect the
success of tenants in achieving or maintaining sufficient sales volumes.
Competitive factors and overall changes in retail merchandising practices can
have an equal or even greater impact. The loss of an anchor retailer can lead to
the diminution of retail sales and the loss of other retailers in the same
shopping center. This can seriously affect the viability of a shopping center,
as has become particularly evident at El Portal Shopping Center and, to a lesser
extent, at Monterey Plaza Shopping Center.
25
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PACIFIC REAL ESTATE INVESTMENT TRUST
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report............................................................................... 27
Consolidated Financial Statements:
Balance Sheets at December 31, 1995 and 1994............................................................. 28
Statements of Operations for the Years Ended December 31, 1995, 1994 and 1993............................ 29
Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1995, 1994 and 1993....... 30
Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993............................ 31
Notes to Consolidated Financial Statements............................................................... 32
Financial Statement Schedules:
XI -- Commercial Properties and Accumulated Depreciation at December 31, 1995............................ 42
XII -- Mortgage Loans on Real Estate at December 31, 1995................................................ 43
</TABLE>
Financial statements and supplemental financial statement schedules not
included have been omitted because of the absence of conditions under which they
are required or because the information is included elsewhere in this report.
26
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders of Pacific Real Estate Investment Trust:
We have audited the accompanying consolidated financial statements of
Pacific Real Estate Investment Trust (the "Trust") and its joint venture listed
in the foregoing table of contents. Our audits also included the financial
statement schedules listed in the foregoing table of contents. These financial
statements and financial statement schedules are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Trust and its joint venture
at December 31, 1995 and 1994, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles. Also in our opinion,
such financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information shown therein.
DELOITTE & TOUCHE
San Francisco, California
March 1, 1996
27
<PAGE>
PACIFIC REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
1995 1994
--------------- ---------------
<S> <C> <C>
Investment in commercial properties:
Land......................................................................... $ 14,308,000 $ 24,015,000
Buildings and improvements................................................... 56,345,000 77,521,000
Accumulated depreciation..................................................... (18,375,000) (17,000,000)
--------------- ---------------
Commercial properties -- net................................................. 52,278,000 84,536,000
Mortgage notes receivable...................................................... 6,565,000 6,515,000
Tenant and other notes receivable -- net....................................... 246,000 271,000
Cash........................................................................... 308,000 666,000
Restricted cash................................................................ 100,000
Accounts receivable (net of allowance of $146,000 in 1995 and $103,000 in
1994)......................................................................... 891,000 791,000
Deferred lease commissions -- net.............................................. 742,000 860,000
Deferred financing costs -- net................................................ 440,000 584,000
Other assets................................................................... 1,305,000 1,064,000
--------------- ---------------
Total...................................................................... $ 62,875,000 $ 95,287,000
--------------- ---------------
--------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage loans............................................................... $ 36,818,000 $ 57,335,000
Short-term notes............................................................. 11,190,000 15,435,000
Unsecured note payable....................................................... 3,000,000
Security deposits............................................................ 231,000 291,000
Accounts payable and other liabilities....................................... 566,000 1,673,000
--------------- ---------------
Total liabilities.......................................................... 48,805,000 77,734,000
--------------- ---------------
Commitments and contingencies..................................................
Minority interest in joint venture............................................. 3,321,000 3,356,000
Shareholders' Equity:
Shares of beneficial interest, $10 par value, authorized: 1995 and 1994,
10,611,863; shares issued and outstanding: 1995 and 1994, 3,706,845......... 37,068,000 37,068,000
Additional paid-in capital..................................................... 11,009,000 11,009,000
Distributions in excess of net income.......................................... (37,328,000) (33,880,000)
--------------- ---------------
Shareholders' equity -- net.................................................... 10,749,000 14,197,000
--------------- ---------------
Total...................................................................... $ 62,875,000 $ 95,287,000
--------------- ---------------
--------------- ---------------
</TABLE>
See notes to consolidated financial statements.
28
<PAGE>
PACIFIC REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------------- --------------- --------------
<S> <C> <C> <C>
Rental revenues.................................................. $ 9,183,000 $ 12,417,000 $ 9,725,000
-------------- --------------- --------------
Operating expenses (including related party amounts of $694,000,
$996,000 and $391,000 in 1995, 1994 and 1993, respectively):
Operating...................................................... 2,145,000 2,162,000 2,254,000
Property tax................................................... 1,194,000 953,000 874,000
General and administrative..................................... 609,000 854,000 495,000
Depreciation and amortization.................................. 2,886,000 3,862,000 3,052,000
Property management fees....................................... 318,000 456,000 320,000
-------------- --------------- --------------
Total operating expenses..................................... 7,152,000 8,287,000 6,995,000
-------------- --------------- --------------
Operating income................................................. 2,031,000 4,130,000 2,730,000
-------------- --------------- --------------
Other income/(expense):
Interest income................................................ 637,000 1,033,000 1,166,000
Interest expense............................................... (5,364,000) (8,230,000) (5,567,000)
Gain (loss) on sale of options................................. (213,000) 994,000
Reincorporation expenses....................................... (139,000) (355,000) (421,000)
Property acquisition expenses.................................. (75,000) (503,000) (187,000)
Expenses of prospective offering............................... (301,000) (381,000)
Prepayment penalty............................................. (271,000)
Gain on lease termination...................................... 3,577,000
Loss on impairment of property value........................... (8,000,000)
Loan commitment fees........................................... (1,031,000)
-------------- --------------- --------------
Total other expense -- net................................... (5,154,000) (12,056,000) (6,421,000)
-------------- --------------- --------------
Net loss before minority interest................................ (3,123,000) (7,926,000) (3,691,000)
Minority interest in joint venture............................... (325,000) (328,000) (238,000)
-------------- --------------- --------------
Net loss......................................................... $ (3,448,000) $ (8,254,000) $ (3,929,000)
-------------- --------------- --------------
-------------- --------------- --------------
Net loss per share of beneficial interest........................ $ (0.93) $ (2.23) $ (1.06)
-------------- --------------- --------------
-------------- --------------- --------------
</TABLE>
See notes to consolidated financial statements.
29
<PAGE>
PACIFIC REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
BENEFICIAL INTEREST ADDITIONAL DISTRIBUTIONS
--------------------------- PAID-IN IN EXCESS OF
SHARES AMOUNT CAPITAL NET INCOME
----------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Balance January 1, 1993........................... 3,707,072 $ 37,071,000 $ 11,010,000 $ (20,937,000)
Net Loss.......................................... (3,929,000)
Distribution to Shareholders...................... (760,000)
----------- -------------- -------------- ---------------
Balance December 31, 1993......................... 3,707,072 37,071,000 11,010,000 (25,626,000)
Repurchase of shares.............................. (227) (3,000) (1,000)
Net Loss.......................................... (8,254,000)
----------- -------------- -------------- ---------------
Balance December 31, 1994......................... 3,706,845 37,068,000 11,009,000 (33,880,000)
Net Loss.......................................... (3,448,000)
----------- -------------- -------------- ---------------
Balance December 31, 1995......................... 3,706,845 $ 37,068,000 $ 11,009,000 $ (37,328,000)
----------- -------------- -------------- ---------------
----------- -------------- -------------- ---------------
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
PACIFIC REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------------- -------------- ---------------
<S> <C> <C> <C>
Cash Flow from Operating Activities:
Net loss..................................................... $ (3,448,000) $ (8,254,000) $ (3,929,000)
Adjustments to reconcile net loss to net cash provided (used)
by operating activities:
Depreciation............................................... 2,496,000 3,290,000 2,708,000
Amortization of note receivable discount................... (64,000) (34,000) 2,000
Amortization of deferred cost.............................. 359,000 570,000 345,000
Minority interest in joint venture's operations............ 325,000 328,000 238,000
Provision for doubtful receivables......................... 103,000 161,000 540,000
Loss (gain) on sale of options............................. 213,000 (994,000)
Gain on lease termination.................................. (3,578,000)
Proceeds from lease termination............................ 6,000,000
Loss on impairment of property value....................... 8,000,000
Changes in operating assets and liabilities:
Accounts payable and other liabilities................... (1,107,000) (501,000) 1,291,000
Security deposits........................................ (60,000) (38,000) 22,000
Deferred lease commissions............................... (97,000) (217,000) (414,000)
Deferred financing costs................................. 404,000
Accounts receivable...................................... (238,000) (417,000) (378,000)
Other assets............................................. (241,000) (386,000) (862,000)
--------------- -------------- ---------------
Net cash provided (used) by operating activities............... (1,759,000) 3,930,000 (33,000)
--------------- -------------- ---------------
Cash Flow from Investing Activities:
(Increase) decrease in restricted cash....................... (100,000) 207,000
Construction of properties................................... (107,000) (1,491,000) (4,981,000)
Collection of notes receivable............................... 78,000 6,030,000 122,000
Additions of notes receivable................................ (4,000) (1,327,000) (115,000)
Proceeds from sales of Lakeshore............................. 29,869,000
Proceeds (costs) from sale of options........................ (213,000) 2,301,000
--------------- -------------- ---------------
Net cash provided (used) in investing activities............... 29,523,000 5,513,000 (4,767,000)
--------------- -------------- ---------------
Cash Flow from Financing Activities:
Proceeds from (costs of) sale of Trust Shares................ (4,000)
Proceeds from short-term notes............................... 800,000 3,905,000 5,275,000
Proceeds from mortgage loans................................. 1,500,000 22,850,000
Re-payment of mortgage loans................................. (20,517,000) (9,712,000) (683,000)
Re-payment of short-term notes............................... (5,045,000) (4,810,000) (21,198,000)
Re-payment of unsecured note payable......................... (3,000,000)
Payment of financing costs................................... (152,000) (300,000)
Distributions of joint venture partner....................... (360,000) (360,000) (360,000)
Distributions to shareholders................................ (760,000)
--------------- -------------- ---------------
Net cash provided (used) by financing activities............... (28,122,000) (9,633,000) 4,824,000
--------------- -------------- ---------------
Increase (decrease) in cash.................................. (358,000) (190,000) 24,000
Cash, January 1............................................ 666,000 856,000 832,000
--------------- -------------- ---------------
Cash, December 31.......................................... $ 308,000 $ 666,000 $ 856,000
--------------- -------------- ---------------
--------------- -------------- ---------------
</TABLE>
See notes to consolidated financial statements.
31
<PAGE>
PACIFIC REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Pacific Real Estate Investment Trust (the "Trust") is a trust organized
under the laws of the State of California. The Trust is an investment vehicle
whose purpose is to acquire, hold for investment, and ultimately sell, interests
in neighborhood and community shopping centers and commercial property in
selected Northern California metropolitan areas. The Trust has qualified and
intends to continue to qualify as a real estate investment trust under
provisions of the Internal Revenue Code.
CONSOLIDATION
The consolidated financial statements include the Trust and a joint venture
("Kingsco") in which the Trust has a 40% controlling interest. The joint venture
is included in the consolidated financial statements as the Trust has control
over the joint venture's operations, including all leasing, renovation, sale or
refinancing activities. All significant intercompany transactions and balances
have been eliminated.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PROPERTIES
Properties are stated at the lower of depreciated cost or realizable value
from the operation and ultimate sale of such properties. Acquisition fees and
interest incurred during construction periods are capitalized. Property and
improvements acquired by the Trust in connection with its acquisition of a
controlling interest in a joint venture are stated at amounts agreed upon among
the partners at the date of acquisition which approximated market value at such
date. Depreciation is computed by the straight-line method over estimated useful
lives ranging from three to forty years. Properties and the related accumulated
depreciation are removed from the accounts at the time of sale. The related gain
or loss is included in the statement of operations. The determination of
estimated realizable value involves subjective judgement because the actual
market value of real estate can be determined only by negotiation between the
parties in a sales transaction.
DEFERRED LEASE COMMISSIONS
Deferred lease commissions are amortized on a straight-line basis over the
lives of the related leases, which range from two to forty years.
DEFERRED FINANCING COSTS
Deferred financing costs represent loan fees and points paid to obtain
certain mortgage financing. These amounts are amortized on a straight-line basis
over the lives of the related loans which range from six to ten years.
32
<PAGE>
PACIFIC REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OTHER ASSETS
Certain lease agreements contain provisions for fixed rent increases for
future periods and for periods of rent abatement during the earliest portion of
such leases. Rental revenue from such leases is recognized on a straight-line
basis over the lives of the related leases. Rental revenues in excess of amounts
currently billed are reflected in other assets in the accompanying balance
sheets.
INCOME TAXES
The Internal Revenue Code provides that a trust qualifies as a real estate
investment trust if, among other things, the trust distributes each year at
least 95% of its taxable income to shareholders. If the Trust distributes at
least 95% of its taxable income to shareholders, such distributions can be
treated as deductions for income tax purposes. Because it is the policy of the
Trust to distribute amounts approximately equal to its taxable income plus
depreciation and amortization, no provision for income taxes has been made in
the accompanying financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of receivables and short-term notes payable are
reasonable estimates of fair value due to the short period of time until their
expected realization. The carrying amount of mortgage loans is a reasonable
estimate of fair value based on the borrowing rates currently available to the
Trust for loans with similar terms and average maturities.
NET LOSS PER SHARE OF BENEFICIAL INTEREST
Net loss per share of beneficial interest, is computed by dividing net loss
by the weighted average number of shares outstanding of 3,706,845 in 1995 and
1994 and 3,707,072 in 1993.
RECLASSIFICATIONS
Certain 1994 amounts have been reclassified to conform with the 1995
presentation.
2. INVESTMENT ADVISOR, PROPERTY MANAGEMENT AGREEMENTS AND SALES SUPPORT
SERVICES AGREEMENT
The Trust has entered into certain transactions with Collier Investment (the
"Advisor"), which is both the investment advisor to the Trust and its real
estate broker, Menlo Management Company and Pacific Real Estate Securities Co.
Inc. ("Presco"). Menlo Management Company manages the Trust's properties, is
affiliated with the Advisor and is the owner of Presco. Until its dissolution in
1995, Presco provided support services and acted as a crossing agent for
shareholders wishing to purchase existing shares of the Trust.
In April 1992, the Trust and the Advisor agreed that, during 1992 and 1993,
the Advisor would be paid only real estate brokerage commissions at negotiated
rates in connection with the purchase of the Trust's properties, in lieu of the
base compensation otherwise payable under the investment advisory agreement. The
investment advisory agreement was also amended to provide that, commencing
January 1, 1994, the Trust pays to the Advisor, an annual base advisory fee
equal to 0.2% of the average gross invested assets of the Trust (as defined in
the advisory agreement). The Advisor also may receive real estate brokerage
commissions at negotiated rates in connection with the purchase, sale or
refinancing of the Trust's properties. In July 1994 the Advisor offered to
reduce the annual base advisory fee by 50% retroactive to January 1, 1994. The
Investment Advisor also voluntarily waived real estate brokerage commissions in
connection with both the sale of Lakeshore Plaza Shopping Center, which was sold
on March 13, 1995, and the sale of Menlo Center, which was sold on February 29,
1996.
The investment advisory agreement also provides for a yearly incentive
compensation payment to the Advisor equal to the sum of: (1) 10% of net realized
capital gains, excluding any depreciation, less accumulated realized capital
losses, if any; plus (2) 7.5% of the amount, if any, by which net income,
33
<PAGE>
PACIFIC REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
before depreciation but excluding capital gains, exceeded a minimum base yield
of 8.6% per annum on average net worth (as defined in the agreement) during the
preceding calendar year. Net income for this purpose is after deduction of the
regular fee, whether or not such fees were paid. No incentive compensation fees
were paid to the Advisor in 1995, 1994 or 1993.
The Trust has a property management agreement with Menlo Management Company,
which is related to the Advisor through common ownership, to manage the Trust's
properties for a percentage of gross rentals ranging from 4% to 5% for each
property. In addition, for each property, Menlo Management Company receives
leasing commissions based on a percentage of the total lease rental revenues,
with certain minimum commission charges. Menlo Management Company is the lessee
of office space in one of the Trust's properties. The Trustees believe that the
terms of the lease and property management agreements are comparable to terms
the Trust would obtain from non-related parties.
Menlo Management Company receives fees for administrative services provided
to the Trust and development, planning and negotiating services in connection
with development work at the Trust's properties.
Fees paid or payable to the Advisor, Menlo Management Company and Presco in
1995, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ------------- -------------
<S> <C> <C> <C>
ADVISOR
Advisory fee........................................................... $ 68,000 $ 112,000
MENLO MANAGEMENT COMPANY
Property management fees............................................... 313,000 456,000 $ 321,000
Administrative services................................................ 199,000 260,000 57,000
Loan fees.............................................................. 114,000 132,000 247,000
Development, planning and lease negotiation............................ 180,000
Lease commissions...................................................... 68,000 126,000 334,000
Real estate brokerage commissions...................................... 145,000
PRESCO
Sales support services and reimbursements.............................. 16,000
Capital fund raising cost reimbursements............................... 36,000 144,000
----------- ------------- -------------
Total.............................................................. $ 762,000 $ 1,267,000 $ 1,299,000
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
Real estate brokerage commissions and fees for development, planning and
lease negotiations have been capitalized and property and lease commissions have
been deferred.
3. NOTES RECEIVABLE
Notes receivable consist of the following at December 31, 1995 and December
31, 1994:
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Mortgage notes............................................................ $ 6,565,000 $ 6,515,000
Unsecured loans (principally to tenants).................................. 285,000 344,000
Allowance for doubtful accounts........................................... (39,000) (73,000)
------------- -------------
Total................................................................... $ 6,811,000 $ 6,786,000
------------- -------------
------------- -------------
</TABLE>
The mortgage notes outstanding at December 31, 1995 result from sale of two
shopping center properties located in Northern California bear interest from 9%
to 9.25% and loans (see note 12). At the time of sale, the two shopping center
notes were discounted to yield market interest rates ranging
34
<PAGE>
PACIFIC REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
from 9.5% to 13%. The discounts are recognized as interest income over the life
of the note. The mortgage notes receivable have been pledged as security for
various short-term notes payable, which were extended to various dates in 1996
and in 1997.
Notes receivable are due as follows:
<TABLE>
<S> <C>
1996............................. $1,157,000
1997............................. 50,000
1998............................. 19,000
1999............................. 4,213,000
2000............................. 1,329,000
Thereafter....................... 161,000
Less discounts................... (80,000)
Less allowance for bad debt...... (38,000)
----------
Total.......................... $6,811,000
----------
----------
</TABLE>
The debtor of a note scheduled to mature in December 1995 requested an
extension to December 1996 and the Trust granted this extension in September
1995.
4. SHORT-TERM NOTES
At December 31, 1995, notes outstanding totaled $11,190,000 with interest
rates ranging from 10% to 10.20%. The notes are secured by mortgage notes
receivable from property sales (see Note 3), additional deeds of trust on
existing properties and the Trust's interest in a joint venture. All of these
notes at December 31, 1995 are held by private limited partnerships independent
of the Trust in which Menlo Management Company has a general partnership
interest. Interest of $1,163,000 and $1,442,000 was paid on these notes in 1995
and 1994 respectively. The Notes are due in 1997 with the exception of one note
for $500,000 which was paid off in March 1996. On March 13, 1995 the Trust paid
off short-term notes of $5,045,000 with proceeds from the sale of Lakeshore
Plaza Shopping Center.
5. UNSECURED NOTE PAYABLE
The Trust obtained a $3 million unsecured note (loan and debenture) bearing
interest at 10% on the first $1 million, 17% on the second $1 million and 18.1%
on the final $1 million. The note terms called for interest payments of 10% on
the first $1 million and 9% on the balance. The remaining interest was accrued,
without compounding. This note was paid off on March 13, 1995 from the sale of
Lakeshore Plaza Shopping Center.
6. MORTGAGE LOANS
Operating properties are pledged as collateral for mortgage loans which have
interest rates varying from 9.375% to 10.25% at December 31, 1995. The loans are
payable monthly over periods through July 2000. In connection with the sale of
one property, the Trust remains the primary obligator on the underlying
non-recourse note payable, totaling $1,631,000, which is secured by a first deed
of trust on the property sold. The all-inclusive promissory note receivable from
the buyer was received by the Trust at the date of sale.
35
<PAGE>
PACIFIC REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Mortgage loans mature in future years as follows (see Note 10 regarding
repayments subsequent to December 31, 1995):
<TABLE>
<S> <C>
1996............................. $ 528,000
1997............................. 577,000
1998............................. 631,000
1999............................. 3,111,000
2000............................. 31,971,000
-----------
Total.......................... $36,818,000
-----------
-----------
</TABLE>
Total interest costs in 1995, 1994 and 1993 were $5,364,000, $8,230,000 and
$8,247,000, of which $2,681,000 was capitalized in 1993. Interest paid was
$5,364,000, $8,501,000 and $5,317,000, respectively, net of capitalized
interest.
In 1993 loan commitment fees totaling $1,031,000 were charged to expense.
The Trustees determined to forego these loan fees because the foregone
commitment required a higher fixed rate of interest as compared with alternative
financing available.
7. COMMERCIAL PROPERTY OPERATING LEASES
Space in the Trust's operating properties is leased to tenants under
long-term noncancelable operating leases. The lease agreements provide for fixed
minimum rentals and generally include provisions for reimbursement of a portion
of common area maintenance expenses, property taxes, insurance, and percentage
rents. Minimum rentals under these leases at December 31, 1995 are as follows
(excluding Menlo Center which was sold on February 29, 1996, see note 10):
<TABLE>
<S> <C>
1996............................. $ 4,580,000
1997............................. 4,129,000
1998............................. 3,509,000
1999............................. 3,187,000
2000............................. 3,053,000
Thereafter....................... 19,073,000
-----------
Total.......................... $37,531,000
-----------
-----------
</TABLE>
Rental revenues in 1995, 1994 and 1993 included $153,000, $196,000 and
$188,000 of contingent rentals based on individual tenants' sales volumes.
For the years ending December 31, 1995, 1994 and 1993 rental revenues
representing 14% in 1995 and 17% in 1994 and 1993, of total revenues were earned
from a single tenant at one of the Trust's properties in 1995 and at two of the
Trust's properties in 1994 and 1993.
8. GAIN ON LEASE TERMINATION
In December 1994, HomeBase, an anchor tenant at El Portal Shopping Center
reached an agreement with the Trust whereby in exchange for a lease termination
the Trust accepted a $6,000,000 lease buy-out payment.
Under the term of the mortgage loan secured by the property $5,729,000 of
this lease buy out was applied towards the principal reduction and $271,000 was
applied as a prepayment penalty. In connection with this transaction, the Trust
determined that the HomeBase facility became functionally obsolete, therefore
the remaining book value of $2,040,000 and associated accrued rents receivable
resulting from the straightlining of HomeBase's rent of $383,000 were charged
against the lease termination payment resulting in a net gain of $3,577,000.
36
<PAGE>
PACIFIC REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SALE OF LAKESHORE PLAZA
The Trust sold the Lakeshore Plaza Shopping Center on March 13, 1995 for a
sales price of $31,292,000. The proceeds of this sale after provision for
assumption of the existing First Deed of Trust financing ($15,826,000 at March
13, 1995), repayment of second mortgage ($4,000,000), closing costs, escrow
holdbacks for supplemental property taxes, vacant spaces and pending tenant
improvement allowances, legal fees, transfer taxes and miscellaneous selling
expenses, were all used to pay down other short-term notes ($5,045,000) and an
unsecured note payable including interest payable ($3,467,000). The loss on sale
was recognized in 1994 (see Note 11).
10. SALE OF MENLO CENTER
The Trust sold Menlo Center on February 29, 1996. The sales price was
$16,200,000. The buyer assumed the existing financing in the amount of
$10,730,102. After payment of closing costs, transfer taxes, real estate
commissions and miscellaneous selling expenses, all totalling approximately
$550,000, the net proceeds of approximately $4,935,000 were used to repay
short-term debt and to provide working capital. Under the terms of the sale
contract, the Trust is obligated to subsidize the buyer's net operating income
to the extent necessary to assure the buyer of an 8.5% investment yield from the
operation of Menlo Center. The Trust's liability in this respect extends to the
maturity date of the existing First Trust Deed financing which the buyer assumed
in the purchase. This financing expires in 2000.
11. LOSS OF IMPAIRMENT OF PROPERTY VALUE
In 1994, the Trustees decided to reduce the carrying value of two of the
Trust's properties to reflect their estimated current market value more
accurately. Accordingly, Menlo Center's carrying value was reduced by $3,600,000
to $15,000,000 after depreciation. Lakeshore Plaza Shopping Center's carrying
value was reduced by $3,500,000 and an additional $900,000 related to deferred
lease commissions and financing costs.
12. PROPERTY PURCHASE OPTIONS
On December 10, 1993, the Trust entered into a purchase and sale agreement
(the "Plaza 580 Agreement") with Plaza 580 Ltd., pursuant to which the Trust
obtained an option to purchase a shopping center located in Livermore,
California. On March 10, 1994, the Trust entered into three additional option
purchase agreements: (i) with DSL/Elk Grove, a California joint venture, with
respect to a shopping center located in Elk Grove, California (the "Elk Grove
Agreement"); (ii) with R/ P Manteca Limited Partnership, a California limited
partnership, with respect to Mission Ridge Shopping Center located in Manteca,
California (the "Manteca Agreement"); and (iii) with DSL/Fair Oaks, a California
joint venture, with respect to Northridge Center located in Fair Oaks,
California (the "Northridge Agreement").
Pursuant to an agreement dated May 9, 1994 (the "Plaza 580 Assignment
Agreement"), the Trust assigned its rights under the Plaza 580 Agreement to
Western Investment Real Estate Trust ("WIRET"), a California real estate
investment trust, for the sum of $556,519, adjusted for certain closing costs
and prorations. On May 27, 1994, WIRET closed its acquisition of the Trust's
rights under the Plaza 580 Agreement and acquired the underlying property.
Pursuant to the Plaza 580 Assignment Agreement, the Trust guaranteed the payment
of certain rental rates with respect to one empty shop space located at Plaza
580 for a period of 24 months. The Trust also agreed to repay a portion of the
purchase price with respect to any of such empty spaces that remain unleased at
the end of the 24-month period. All vacant spaces have been leased and at
December 31, 1995 there are no vacancies, although the Trust is obligated to pay
some rents for spaces in which the tenant's rent start dates are later than
their lease commencement dates.
37
<PAGE>
PACIFIC REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pursuant to an agreement dated May 11, 1994 (the "Second Assignment
Agreement"), the Trust assigned its rights as purchaser under each of the Elk
Grove Agreement, the Manteca Agreement and the Northridge Agreement to WIRET for
$1,804,211, as adjusted for certain closing costs and prorations. On June 7,
1994, the transactions contemplated by the Second Assignment Agreement were
consummated. Pursuant to the Second Assignment Agreement, the Trust guaranteed
the payment of rent for 24 months for certain empty shop spaces at the Elk Grove
and Northridge centers, and agreed to repay to WIRET, at the end of 24 months, a
portion of the purchase price applicable to such empty spaces which remain
unleased (or leased to tenants that do not meet certain guidelines) as of such
24-month period. The Trust also agreed to pay pro forma rents for certain space
at Northridge which space is subject to leases that expire within the first year
after closing. At December 31, 1995, all such spaces have been leased. The Trust
has some residual rental obligations on newly leased space pending actual
occupancy by the tenants.
During 1994, the Trust recorded a net gain of $994,000 and rent guarantee
reserve accrual of $390,000, as the result of Plaza 580 Assignment Agreement and
the Second Assignment Agreement. In 1995, the Trust increased the reserve by an
additional $213,000, accordingly the remaining deferred gain of $203,000 is
reflected in accounts payable and other liabilities.
In connection with the above transactions, on June 7, 1994, (i) Scotts
Valley Plaza, a California limited partnership ("Scotts"), granted to the Trust
a one-year option to acquire the shopping center commonly known as Scotts
Village Plaza and (ii) Scotts Village Phase II, a California limited partnership
("Scotts II"), granted a one-year option to the Trust to purchase Scotts Valley
Square, both of which are located in Scotts Valley, California. Concurrently
with the grant of these options and in connection with the transactions
contemplated by the Second Assignment Agreement, the Trust made a loan to
Malcolm R. Riley, one of the principals in Scotts and Scotts II, in the amount
of $750,000. The loan bears interest at 9% per annum, payable monthly, and the
principal is due and payable in 6 years. Simultaneously, the Trust made a loan
to Russell R. Pratt, another of the principals in Scotts and Scotts II, in the
amount of $500,000. That loan bears interest at 8% per annum, payable monthly,
and the principal is due and payable in 6 years. Each of these loans is secured
by the borrower's respective partnership interests in Scotts and Scotts II. The
Trust also made a loan in the amount of $75,000 to Scotts, which bears interest
at 8.6% per annum (payable monthly), is due in 6 years and is secured by a
second deed of trust on Scotts Village Plaza.
13. DISTRIBUTIONS TO SHAREHOLDERS
During the second quarter of 1993, distributions were suspended. Except for
a special distribution in December of 1993, distributions have remained
suspended. Distributions during 1993 totaled $.205 per share and resulted in a
nontaxable return of capital reportable by shareholders on their individual tax
returns.
14. REINCORPORATION TRANSACTIONS
The Trustees have formed Pacific Real Estate Investment Trust, Inc. (the
"Successor Company") as a Maryland corporation for the purpose of effecting a
reincorporation (the "Reincorporation Transactions"). The Successor Company has
no material assets or liabilities. The Trust held a Special Meeting of the
Shareholders on March 18, 1994, at which time the Reincorporation Transactions
were approved by the Trust's shareholders. If completed, the Reincorporation
Transactions would cause the Trust to transfer all of its assets and assign and
delegate all of its enforceable liabilities and obligations to the Successor
Company in exchange for 1,235,690 shares of Common Stock, $.01 par value (the
"Common Shares"), of the Successor Company, and the Trust thereafter would
liquidate, distributing the Common Shares to the shareholders of the Trust in
cancellation of their shares of beneficial interest, in the ratio of one Common
Share for each three shares of beneficial interest held of record by the
shareholders on the record date for the liquidating distribution. The
one-for-three
38
<PAGE>
PACIFIC REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
exchange ratio would in effect result in a reverse split of the currently
outstanding shares of beneficial interest, in order to facilitate subsequent
financing transactions by the Successor Company. As part of its assumption of
the Trust's obligations, the Successor Company would commit to issue up to an
additional 36,283 Common Shares in the event of exercise (during a two-year
period beginning January 1, 1995) of warrants issued by the Trust in January
1992, covering an aggregate of 108,848.5 shares of beneficial interest.
Expenses incurred in connection with the Reincorporation Transactions are
reflected as reincorporation expenses in the accompanying consolidated statement
of operations.
As a result of the present conditions of the capital markets, the Trust does
not currently expect to effect the Reincorporation Transactions. This could
change in the future if the reincorporation would facilitate the Trust's
objectives.
15. EXPENSES OF PROSPECTIVE OFFERING
The Trust was involved in discussions with underwriters regarding a
potential offering of the Successor Company's Common Shares and/or debt
securities to public or private purchasers, should the Reincorporation
Transactions be consummated. The expenses incurred in connection with such a
prospective offering are reflected in the accompanying consolidated statements
of operations as expenses of prospective offering as the ultimate timing and
form of such transaction, if any, is not determinable.
16. COMMITMENTS AND CONTINGENCIES
The Trust is obligated on four land leases. The first lease extends through
2012 and requires minimum annual payments of $26,000, plus 8% of the property's
rental revenue in excess of $325,000. The second lease extends through 2024 and
requires minimum annual payments of $40,000, plus 12% of the property's annual
rental revenue in excess of $333,000. The third lease extends through 2028, has
ten consecutive five-year renewal options, an option to purchase upon death of
the ground lessor, and requires minimum annual payments of $60,000 prior to an
adjustment for inflation. As discussed in Note 10, Menlo Center was sold on
February 29, 1996 and the Trust is no longer obligated under this third land
lease which is assumed by the buyer of Menlo Center. The fourth lease extends
through 2045 and contains a dual option for the Trust to acquire fee title and
for the ground lessor to "put" the property to the Trust. The option for the
Trust to acquire commences upon the death of one of the ground lessors and lasts
for five years from said date. The option for the ground lessors to "put" the
property to the Trust incepts March 1, 1998 and survives through the term of the
ground lease. The annual rent is $184,400 with annual increases of 4%. The
purchase price under the options is the minimum ground rent capitalized at a 10%
yield. Land lease expense totaled $400,000 in 1995, $236,000 in 1994 and
$217,000 in 1993.
In connection with the refinancing efforts at the King's Court Shopping
Center in 1994, the Kingsco partnership initiated an environmental audit of the
property. The Phase I and II stages of the environmental audit identified
certain dry cleaning solvents which had contaminated the ground water beneath
the shopping center. Currently, a Phase III plan of remediation has been
prepared with a proposed plan of action for clean-up of the contamination
expected to be completed in approximately two years or longer. The cost to
Kingsco for the clean-up is estimated to be $632,000 of which $503,000 has been
expended in 1994 and 1995. The Trust was not a partner of Kingsco at the time
the contamination occurred, and intends to look to the seller of the Trust's 40%
interest in Kingsco, Kingsco's insurance carriers at the time of the
contamination, the other partners of Kingsco and the entity that caused the
contamination for payment of the clean-up costs. The Trust believes that the
representations and warranties made by the seller in the agreement pursuant to
which the Trust acquired its partnership interest give the Trust a cause of
action against the seller for the clean-up costs. The interim plan of
remediation has been approved by the Regional Water Quality Control
39
<PAGE>
PACIFIC REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Board and remediation has commenced. Accordingly, $129,000 and $632,000 is
reflected in the accompanying consolidated balance sheet at December 31, 1995 as
Other Liabilities and Other Assets respectively.
In another, unrelated, environmental audit of the gasoline service station
pad ("Exxon Pad") at King's Court Shopping Center, the Phase I and II work
identified gasoline and possibly other service station by-products in the soil
underneath the station and its pumps. Exxon Corporation has assumed financial
and legal responsibility for the hazardous materials and remediation of the
Exxon Pad. The environmental firm responsible for maintaining and analyzing the
data from various monitoring wells on the Pad continues to report to Menlo
Management Company and governmental authorities on a quarterly basis.
Remediation efforts have commenced and include both vapor extraction and "pump
and treat" activities, depending upon the location of the materials in the soil
and water.
In connection with redevelopment efforts at El Portal Shopping Center, dry
cleaning solvents have been discovered to have contaminated the ground water
beneath the shopping center, arising from dry cleaning operations which probably
preceded the Trust's ownership of the property. At the present time, the site
characterization and negotiation with regulatory authorities are proceeding. The
ultimate exposure to the Trust cannot yet be determined, however, based on
current knowledge it is not expected to have a material adverse effect upon the
Trust's financial position.
17. SHAREHOLDERS' EQUITY
In January 1992, the Trust began a Rights Offering, which entitled each
shareholder of record on December 31, 1991, to purchase an additional share in
the Trust for each share owned. The rights were exercisable at $13.68 per share
through March 20, 1992 when the offering expired. In addition, each right was
accompanied by one warrant which entitles the owner to purchase an additional
one-half share of beneficial interest for $7.00 during a two-year period
beginning January 1, 1995. (This is equivalent to a purchase price of $14.00 for
each whole share.) At December 31, 1995, 217,697 warrants, covering 108,848.5
shares of beneficial interest, were issued and outstanding.
40
<PAGE>
SCHEDULE XI
PACIFIC REAL ESTATE INVESTMENT TRUST
COMMERCIAL PROPERTIES AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
- ------------------------- ------------ ------------------------- --------------------------
INITIAL COST TO TRUST (1) COST CAPITALIZED
------------------------- SUBSEQUENT TO ACQUISITION
BUILDINGS --------------------------
AND CARRYING
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS COSTS
- ------------------------- ------------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
COMMERCIAL PROPERTIES:
El Portal Shopping Center $ 4,538,000 $ 875,000 $ 2,308,000 $ 10,730,000 $ 1,234,000
San Pablo, California...
King's Court Shopping 1,343,000 9,137,000 757,000
Center
Los Gatos, California...
Menlo Center 10,738,000 3,329,000 13,411,000 (3,109,000) 3,745,000
Menlo Park,
California..............
Monterey Plaza Shopping 18,568,000 10,104,000 12,717,000 1,658,000 3,757,000
Center
San Jose, California....
Mt. Shasta Shopping 1,631,000
Center
Mt. Shasta, California
(7).....................
------------ ----------- ------------ ------------ -----------
TOTAL.................. $36,818,000 $14,308,000 $ 37,573,000 $ 10,036,000 $ 8,736,000
------------ ----------- ------------ ------------ -----------
------------ ----------- ------------ ------------ -----------
<CAPTION>
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H
- ------------------------- ------------------------------------- ------------------- ------------ ------------
GROSS AMOUNT AT WHICH CARRIED AT
CLOSE OF PERIOD (2)
-------------------------------------
BUILDINGS
AND ACCUMULATED DATE OF DATE
DESCRIPTION LAND IMPROVEMENTS TOTAL (3) DEPRECIATION (4)(6) CONSTRUCTION ACQUIRED
- ------------------------- ----------- ----------- ----------- ------------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
COMMERCIAL PROPERTIES:
El Portal Shopping Center $ 875,000 $14,272,000 $15,147,000 $ 9,311,000 (5) 9/76
San Pablo, California...
King's Court Shopping 9,894,000 9,894,000 3,686,000 (8) 12/86
Center
Los Gatos, California...
Menlo Center 3,329,000 14,047,000 17,376,000 2,815,000 (9)
Menlo Park, 11/84, 5/86,
California.............. 8/88
Monterey Plaza Shopping 10,104,000 18,132,000 28,236,000 2,563,000 (9) 7/87, 1/88,
Center 4/88, 7/88,
San Jose, California.... 10/88, 3/89
Mt. Shasta Shopping
Center
Mt. Shasta, California
(7).....................
----------- ----------- ----------- -------------------
TOTAL.................. $14,308,000 $56,345,000 $70,653,000 $18,375,000
----------- ----------- ----------- -------------------
----------- ----------- ----------- -------------------
</TABLE>
See notes on following page
41
<PAGE>
SCHEDULE XI
PACIFIC REAL ESTATE INVESTMENT TRUST
COMMERCIAL PROPERTIES AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
Notes:
<TABLE>
<S> <C> <C>
(1) Construction costs incurred under the initial construction subsequent to
purchase of the land are included as initial cost to the Trust.
(2) The aggregate cost for federal income tax purposes is $68,295,000.
(3) Balance, January 1, 1993.................................. $ 75,883,000
Acquisitions............................................ 28,642,000
Improvements capitalized subsequent to acquisition...... 1,314,000
Construction period interest capitalized................ 4,306,000
------------
Balance, December 31, 1993................................ 110,145,000
Improvements capitalized subsequent to acquisition...... 1,491,000
Retirements............................................. (3,000,000)
Loss on impairment of property value.................... (7,100,000)
------------
Balance, December 31, 1994................................ 101,536,000
Improvements capitalized subsequent to acquisition...... 108,000
Retirements............................................. (30,991,000)
------------
Balance, December 31, 1995................................ $ 70,653,000
------------
------------
(4) Balance, January 1, 1993.................................. $ 11,962,000
Additions charged to expense............................ 2,708,000
------------
Balance, December 31, 1993................................ 14,670,000
Additions charged to expense............................ 3,290,000
Retirements............................................. (960,000)
------------
Balance, December 31, 1994................................ 17,000,000
Additions charged to expense............................ 2,496,000
Retirements............................................. (1,121,000)
------------
Balance, December 31, 1995................................ $ 18,375,000
------------
------------
(5) Property initially acquired subsequent to construction. However, major
redevelopment work at the property was begun in 1985 and was completed
in 1987.
(6) Depreciation is computed on lives ranging from three to forty years.
(7) This property has been sold, but the Trust remains primarily liable for
the note payable, which is secured by the property sold. An
all-inclusive promissory note receivable from the buyer was received by
the Trust as the date of sale. Such financing is commonly referred to as
"wraparound" financing.
(8) This property is owned by a joint venture in which the Trust has a 40%
controlling interest.
(9) This property was acquired at various times and development was
completed in 1991.
</TABLE>
42
<PAGE>
SCHEDULE XII
PACIFIC REAL ESTATE INVESTMENT TRUST
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1995
<TABLE>
<CAPTION>
COLUMN F
COLUMN C COLUMN E ----------------
COLUMN A COLUMN B --------- COLUMN D ------------ CARRYING AMOUNT
- ---------------------------- ------------- MATURITY ---------------------------- FACE AMOUNT OF
DESCRIPTION INTEREST RATE DATE PERIODIC PAYMENT TERMS OF MORTGAGE MORTGAGE (1)(5)
- ---------------------------- ------------- --------- ---------------------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
SECURED LOANS:
Westwood Shopping Center 9% 12/96 $7,967/mo. principal and $ 5,375,000 $ 1,069,000 (2)
(Second mortgage secured by interest. Balloon payment
shopping center) of $1,121,000 due at
maturity.
Mt. Shasta Shopping Center 9.25 % 1/99 $32,375/mo. interest only. 4,200,000 4,171,000 (3)
(Wraparound second mortgage Balloon payment of
secured by shopping center) $4,200,000 due at maturity.
Scotts Valley Loans
Malcom Riley.............. 9 % 6/2000 $5,625 750,000 750,000 (4)
Russell Pratt............. 8 % 6/2000 $3,333 500,000 500,000 (4)
Scotts Valley Plaza....... 8.6 % 6/2000 $537.50 75,000 75,000
------------ ----------------
TOTAL SECURED LOANS......... $10,900,000 6,565,000
------------ ----------------
------------ ----------------
</TABLE>
43
<PAGE>
SCHEDULE XII
PACIFIC REAL ESTATE INVESTMENT TRUST
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1995
Notes:
<TABLE>
<S> <C> <C> <C>
(1) The aggregate cost for federal income tax purpose is $6,563,000.
(2) Net of discount of $51,000 based on an effective interest rate of 9.75%.
(3) Net discount of $29,000 based on an effective interest rate of 9.5%.
(4) Loans secured by interest in partnership which owns commercial real estate.
(5) Balance, January 1, 1993................................... $11,159,000
Deductions during year:
Amortization of discount................................... (2,000)
Collection of principal.................................... (27,000) (29,000)
---------- -----------
Balance at December 31, 1993............................... 11,130,000
Deductions during year:
Amortization of discount................................... 34,000
Additions.................................................. 1,325,000
Collection of Principal.................................... (5,974,000) (4,615,000)
Balance at December 31, 1994............................... 6,515,000
Deductions during year:
Amortization of discount................................... 64,000
Collection of Principal.................................... (14,000) 50,000
---------- -----------
Balance at December 31, 1995............................... $ 6,565,000
-----------
-----------
</TABLE>
44
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Mr. Wilcox Patterson, age 55, was elected a Trustee in 1980, and President
of the Trust in May 1985. Mr. Patterson is a director of Grove Farm Company,
Inc., a sugar plantation and real estate development corporation located on
Kauai in the Hawaiian Islands. He is also an independent real estate manager and
investor. Mr. Patterson served as Regional Vice President of Northern California
Savings and Loan Association between April 1979 and September 1980. Prior to
that appointment, he served as a Vice President and Manager of the Menlo Park
branch of Northern California Savings and Loan Association. In these capacities,
he has gained considerable experience in real estate financing.
Mr. John H. Hoefer, age 80, was elected a Trustee in 1982 and Vice President
in June 1988. Mr. Hoefer is a Rear Admiral, United States Naval Reserve. He was
founder of Hoefer, Dieterich and Brown, Inc., an advertising agency in San
Francisco, and was its Chairman at the time of its merger with Chiat/Day, Inc.
in 1979. He was also a Chairman of Chiat/Day, Inc. (San Francisco).
Mr. Harry E. Kellogg, age 72, has served as a Trustee and Treasurer of the
Trust since the date of its inception and was an initial investor. Mr. Kellogg
was elected Executive Vice President of the Trust on December 5, 1978 and was
President from February 1980 to May 1985. Mr. Kellogg has served as Trustee of
the Seattle Retail Clerks Union Pension Fund, the GEMCO Retail Clerks Union
Pension Trust Fund and is the former Vice President Finance and Secretary of
Leslie Salt Co., a salt production company, with extensive real estate holdings
in the San Francisco Bay Area. At Leslie Salt Co., from which he retired in
1979, Mr. Kellogg was responsible for the financial, administrative and tax
matters of the company.
Mr. William S. Royce, age 77, has been an investor in the Trust since 1964
and was elected a Trustee in 1980 and Secretary on June 15, 1988. Mr Royce is an
independent management consultant specializing in business planning and regional
economic development. He retired in 1984 from SRI International (Stanford
Research Institute). Mr. Royce also is a director of Diablo Research Corporation
and Treasurer of the Silicon Valley Economic Roundtable.
Mr. Robert C. Gould, age 51, was elected a Trustee and appointed Vice
President in June 1989 and has previously served as a Vice President and
Secretary of the Trust from 1985 through 1988. Mr. Gould is President and a
director of Menlo Management. Mr. Gould is the son-in-law of Charles R. Collier
and, together with his wife, owns 83% of Menlo Management. Prior to his
employment with Menlo Management, he was a real estate analyst with
Shell-Mex/B.P. Ltd., a subsidiary of the Royal Dutch/Shell Group of Companies.
He is a registered NASD principal and securities representative, and a licensed
California real estate broker.
45
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
During the fiscal year ended December 31, 1995, there were no officers
and/or Trustees whose aggregate direct remuneration exceeded $100,000. With
respect to the President of the Trust, aggregate direct remuneration, consisting
of fees for services performed as a Trustee, paid during the last three fiscal
years was as follows:
<TABLE>
<CAPTION>
AGGREGATE
NAME AND DIRECT
PRINCIPAL POSITION YEAR REMUNERATION
- --------------------------------- --------- ---------------
<S> <C> <C>
Wilcox Patterson, President 1995 $ 16,600
1994 $ 16,200
1993 $ 16,400
</TABLE>
During fiscal 1995, aggregate direct remuneration paid to all Trustees and
officers as a group (five persons) was $26,400, all of which consisted of fees
for services performed as Trustees. Trustees are paid a monthly fee of $200 for
their services and a fee of $200 per Trustee meeting attended. Committee members
receive $100 per committee meeting attended. The Trust has an Audit Committee,
which makes recommendations concerning the engagement of independent public
accountants, reviews the plans and results of the audit engagement and reviews
the adequacy of the Trust's internal accounting controls, and a Compensation
Committee.
None of the Trustees or executive officers of the Trust has failed to file,
on a timely basis, reports required to be filed pursuant to Section 16 of the
Securities Exchange Act of 1934, as amended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as to each of the Trustees the number of
Trust Shares owned, directly or indirectly, by him on December 31, 1995. No
person is known by the Trust to be the beneficial owner of more than five
percent of the Trust's outstanding Trust Shares. Each person identified in the
table has sole voting and investment power with respect to all Trust Shares
shown as beneficially owned by such person, except as otherwise set forth in the
notes to the table. Unless otherwise indicated, the address of each person
listed below is 1010 El Camino Real, Suite 210, Menlo Park, California 94025.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENT OF
NAME OWNED CLASS (1)
- ------------------------------------------------------------------------- ----------------- ------------
<S> <C> <C>
John H. Hoefer (2)(3).................................................... 68,003 1.835%
Harry E. Kellogg (4)..................................................... 7,293 .197%
Wilcox Patterson (4)(5).................................................. 27,900 .753%
William S. Royce (2)(3).................................................. 2,708 .073%
Robert C. Gould.......................................................... 1,471 .040%
</TABLE>
- ------------------------
(1) Based on 3,706,845 Trust Shares outstanding as of December 31, 1995, and
warrants to purchase 108,848.5 Trust Shares held by certain shareholders as
of December 31, 1995.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
(4) Voting and investment power are shared.
(5) Includes 21,584 Trust Shares owned by members of Mr. Patterson's family as
to which Mr. Patterson disclaims any beneficial ownership interest.
46
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INCENTIVE COMPENSATION PLAN
For 1990 and thereafter, the Trustees have approved an incentive
compensation plan for Robert C. Gould, Trustee and Vice President of the Trust.
The annual incentive bonus under the agreement will be determined as follows:
7.5% of the difference between "operating income" and 8.6% "adjusted average
equity." "Operating income" is defined as income from operations before
depreciation, gain on property sales, and deductions for investment advisory
fee, but after deduction for amortization of deferred costs. "Adjusted average
equity" is defined as the average of the year's beginning and ending
shareholders' equity plus accumulated depreciation. Incentive compensation will
be paid in stock, valued per share at the time the compensation is paid at a
price equal to the net proceeds per share received by the Trust in sales of
shares to the public. The Trustees intend to review and modify if appropriate
for each succeeding year, the percentage return on adjusted average equity used
in the above calculation so that it is comparable to rates of return being
earned by competing real estate entities. For 1995, 1994 and 1993, the incentive
compensation program resulted in no bonus payment to Mr. Gould.
INVESTMENT ADVISOR, PROPERTY MANAGEMENT AGREEMENTS AND SALES SUPPORT SERVICES
AGREEMENT
Collier Investment acts as both investment advisor and real estate broker
for the Trust. Menlo Management manages the Trust's properties. Until its
dissolution in 1995, Presco provided support and capital fund raising services
and acted as a crossing agent for shareholders wishing to purchase existing
Trust shares. Collier Investment is a proprietorship of Russell Collier. Menlo
Management is 17% owned by Mr. Collier and 83% owned by Robert C. Gould, a
Trustee and Vice President of the Trust. See Note 2 of Notes to Consolidated
Financial Statements for a description of the compensation paid to Collier
Investment and Menlo Management during the fiscal year ended December 31, 1995.
Beginning on January 1, 1994, a revised investment advisory agreement became
effective, which provides for a base advisory fee to Collier Investment of 1/5
of 1% of gross Trust assets. In July 1994 at Mr. Collier's request this fee was
reduced by 50% to 1/10 of 1% of gross Trust assets retroactive to January 1,
1994. Mr. Collier also voluntarily waived his right to receive any real estate
brokerage commissions as a result of the sales of Lakeshore Plaza Shopping
Center, which was sold on March 13, 1995, and Menlo Center, which was sold on
February 29, 1996.
LOANS FROM AFFILIATES OF MENLO MANAGEMENT COMPANY
Due to the shortage or unavailability of equity financing, the Trust
obtained short-term financing at competitive rates to provide working capital
and to complete the development of its Lakeshore Plaza Shopping Center through a
group of private limited partnerships. Menlo Management Company serves as
general partner in these partnerships and the Notes are secured by mortgages on
the Trust's properties or pledge of Promissory Notes owned by the Trust.
47
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES. See Item 8 of
this Annual Report or Form 10-K for Consolidated Financial Statements for the
Trust, Notes thereto, and Consolidated Supplemental Schedules. A Table of
Contents to Consolidated Financial Statements and Consolidated Supplemental
Schedules is included in Item 8 and incorporated herein by reference.
(b) REPORTS ON FORM 8-K. Report on Form 8-K was filed by the Trust on March
28, 1995. In 1996, Report on Form 8-K was filed by the Trust on March 14, 1996.
(c) Exhibits:
<TABLE>
<CAPTION>
TABLE
REFERENCE EXHIBIT LOCATION
- -------------- ----------------------------- -----------------------------------------------
<S> <C> <C>
3 and 4 Declaration of Trust and Incorporated by reference from Form 10 and Form
Amendments 8-K of May 4, 1982
</TABLE>
The exhibits required by Item 601 of Regulation 5-K have been filed with
previous reports by the registrant and are incorporated by reference thereto.
48
<PAGE>
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.
PACIFIC REAL ESTATE INVESTMENT TRUST
Registrant
By: /s/ WILCOX PATTERSON
-----------------------------------
Wilcox Patterson, PRESIDENT
(PRINCIPAL EXECUTIVE OFFICER)
By: /s/ HARRY E. KELLOGG
-----------------------------------
Harry E. Kellogg, TREASURER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
Date: March 21, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES DATE
- ------------------------------------------------------------ ------------------
<S> <C>
/s/ WILCOX PATTERSON
------------------------------------------------
Wilcox Patterson, March 21, 1996
PRESIDENT AND TRUSTEE
/s/ HARRY E. KELLOGG
------------------------------------------------
Harry E. Kellogg, March 21, 1996
TREASURER AND TRUSTEE
/s/ ROBERT C. GOULD
------------------------------------------------
Robert C. Gould, March 21, 1996
TRUSTEE
/s/ WILLIAM S. ROYCE
------------------------------------------------
William S. Royce, March 21, 1996
TRUSTEE
/s/ JOHN H. HOEFER
------------------------------------------------
John H. Hoefer, March 21, 1996
TRUSTEE
</TABLE>
49
<PAGE>
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.
PACIFIC REAL ESTATE INVESTMENT TRUST
Registrant
By:
-----------------------------------
Wilcox Patterson, PRESIDENT
(PRINCIPAL EXECUTIVE OFFICER)
By:
-----------------------------------
Harry E. Kellogg, TREASURER
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
Date: March 21, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES DATE
- ------------------------------------------------------------ ------------------
<S> <C>
------------------------------------------------
Wilcox Patterson, March 21, 1996
PRESIDENT AND TRUSTEE
------------------------------------------------
Harry E. Kellogg, March 21, 1996
TREASURER AND TRUSTEE
------------------------------------------------
Robert C. Gould, March 21, 1996
TRUSTEE
------------------------------------------------
William S. Royce, March 21, 1996
TRUSTEE
------------------------------------------------
John H. Hoefer, March 21, 1996
TRUSTEE
</TABLE>
50
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 408,000
<SECURITIES> 0
<RECEIVABLES> 6,957,000
<ALLOWANCES> 146,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,299,000
<PP&E> 70,653,000
<DEPRECIATION> (18,375,000)
<TOTAL-ASSETS> 62,875,000
<CURRENT-LIABILITIES> 797,000
<BONDS> 48,008,000
0
0
<COMMON> 37,068,000
<OTHER-SE> (26,319,000)
<TOTAL-LIABILITY-AND-EQUITY> 62,875,000<F1>
<SALES> 0
<TOTAL-REVENUES> 9,820,000
<CGS> 0
<TOTAL-COSTS> 12,943,000
<OTHER-EXPENSES> 325,000<F2>
<LOSS-PROVISION> 185,000
<INTEREST-EXPENSE> 5,364,000
<INCOME-PRETAX> (3,448,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,448,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,448,000)
<EPS-PRIMARY> (.93)
<EPS-DILUTED> (.93)
<FN>
<F1>includes $3,321,000 of Minority Intrest in Joint Venture
<F2>represents Minority interest portion of Current net loss
</FN>
</TABLE>
