<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER JUNE 30, 1996
Commission File Number 0-8725
PACIFIC REAL ESTATE INVESTMENT TRUST
A CALIFORNIA TRUST
I.R.S. Employer Identification No. 94-1572930
1010 El Camino Real, Suite 210
Menlo Park, CA 94025
Telephone: (415) 327-7147
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--------- ---------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the close of the period covered by this report.
$10 Par Value, 3,706,845 shares
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<PAGE>
PACIFIC REAL ESTATE INVESTMENT TRUST
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
ITEM I - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ----------------------------
JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1996 JUNE 30, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Rental revenues $ 1,468,000 $ 2,109,000 $ 3,327,000 $ 5,007,000
------------- ------------- ------------- -------------
Operating expenses (including related party
amounts of $117,000 three months ended
June 30, 1996 and $261,000 six months
ended June 30, 1996, $155,000 three months
ended June 30, 1995 and $394,000 six months
ended June 30, 1995)
Operating 375,000 563,000 854,000 1,110,000
Property tax 126,000 170,000 287,000 411,000
General and administrative 136,000 185,000 259,000 367,000
Depreciation and amortization 503,000 665,000 1,111,000 1,547,000
Property management fees 50,000 68,000 114,000 177,000
------------- ------------- ------------- -------------
Total operating expenses 1,190,000 1,651,000 2,625,000 3,612,000
------------- ------------- ------------- -------------
Operating income 278,000 458,000 702,000 1,395,000
------------- ------------- ------------- -------------
Other income/(expense):
Interest income 161,000 160,000 317,000 313,000
Interest expense (825,000) (1,185,000) (1,895,000) (2,995,000)
Reincorporation expenses (63,000) (130,000)
Gain (loss) on property sale (160,000) 792,000
Loss on sale of options (102,000) (102,000)
------------- ------------- ------------- -------------
Total other income/(expense) (824,000) (1,190,000) (786,000) (2,914,000)
------------- ------------- ------------- -------------
Net loss before minority interest (546,000) (732,000) (84,000) (1,519,000)
------------- ------------- ------------- -------------
Minority interest in joint venture (105,000) (85,000) (204,000) (170,000)
------------- ------------- ------------- -------------
Net loss $ (651,000) (817,000) $ (288,000) $ (1,689,000)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net loss per share of beneficial interest $ (0.18) $ (0.22) $ (0.08) $ (0.46)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
Page 2 of 7
<PAGE>
PACIFIC REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
ASSETS
JUNE 30,1996 DEC 31, 1995
-------------- --------------
<S> <C> <C>
Investment in commercial properties:
Operating properties:
Land $ 10,979,000 $ 14,308,000
Buildings and improvements 42,367,000 56,345,000
Accumulated depreciation (16,479,000) (18,375,000)
-------------- --------------
Operating properties - net 36,867,000 52,278,000
Mortgage notes receivable 6,568,000 6,565,000
Tenant and other notes receivable - net 222,000 246,000
Cash 396,000 308,000
Restricted cash 100,000 100,000
Accounts receivable (net of allowance of $191,000 in
1996 and $161,000 in 1995) 1,065,000 891,000
Deferred lease commissions - net 497,000 742,000
Deferred financing costs - net 260,000 440,000
Other assets 1,106,000 1,305,000
-------------- --------------
Total $ 47,081,000 $ 62,875,000
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage loans $ 25,869,000 $ 36,818,000
Short-term notes 7,090,000 11,190,000
Security deposits 139,000 231,000
Accounts payable and other liabilities 177,000 566,000
-------------- --------------
Total liabilities 33,275,000 48,805,000
-------------- --------------
Commitments and contingencies
Minority interest in joint venture 3,345,000 3,321,000
Shareholders' Equity:
Shares of beneficial interest, $10 par value,
authorized:
1996 and 1995, 10,611,863; shares issued and
outstanding: 1996 and 1995, 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 (37,616,000) (37,328,000)
-------------- --------------
Shareholders' equity - net 10,461,000 10,749,000
-------------- --------------
Total $ 47,081,000 $ 62,875,000
-------------- --------------
-------------- --------------
</TABLE>
See notes to consolidated financial statements.
Page 3 of 7
<PAGE>
PACIFIC REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the six months ended June 30,
1996 1995
------------ ------------
<S> <C> <C>
Cash Flow from Operating Activities:
Net loss $ (288,000) $ (1,689,000)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation 999,000 1,329,000
Amortization of note receivable discount (11,000) (39,000)
Amortization of deferred cost 110,000 203,000
Minority interest in joint venture's operations 204,000 170,000
Provision for doubtful receivables 52,000 30,000
Gain on sale of property (792,000)
Loss on sale of options 102,000
Changes in operating assets and liabilities
Accounts payable and other liabilities (380,000) (1,133,000)
Security deposits 31,000 (65,000)
Deferred lease commissions (50,000) (46,000)
Accounts receivable (241,000) 66,000
Other assets 125,000 (82,000)
------------ ------------
Net cash used by operating activities (241,000) (1,154,000)
------------ ------------
Cash Flow from Investing Activities:
Construction of properties (69,000) (66,000)
Collection of notes receivable 32,000 36,000
Additions to notes receivable (4,000)
Proceeds from sale of Lakeshore 14,043,000
Proceeds from sale of Menlo Center 4,865,000
Proceeds (uses) from sale of options (102,000)
------------ ------------
Net cash provided in investing activities 4,828,000 13,907,000
------------ ------------
Cash Flow from Financing Activities:
Proceeds from short-term notes 100,000
Re-Payment of mortgage loans (219,000) (4,444,000)
Re-Payment of short-term notes (4,100,000) (5,045,000)
Re-Payment of unsecured loans (3,000,000)
Distributions of joint venture partner (180,000) (180,000)
------------ ------------
Net cash used by financing activities (4,499,000) (12,569,000)
------------ ------------
Increase in cash 88,000 184,000
Cash, January 1 308,000 666,000
------------ ------------
Cash, June 30 $ 396,000 $850,000
------------ ------------
------------ ------------
</TABLE>
NON CASH TRANSACTIONS
Assumption of mortgage note payable by the buyers of Lakeshore Plaza Shopping
Center for $15,826,000 in 1995 and Menlo Center for $10,730,000 in 1996.
See notes to consolidated financial statements.
Page 4 of 7
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PACIFIC REAL ESTATE INVESTMENT TRUST
NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
Basis of Presentation
The accompanying unaudited financial statements include all adjustments which
are, in the opinion of management, necessary for fair presentation of the
Trust's financial position, including changes therein, and results of
operations for the interim period reported upon. Such statements have been
prepared from the Trust's accounting records in accordance with the
instructions to Form 10-Q.
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 incomes taxes has been
made in the accompanying financial statements.
Sale of Menlo Center
The Trust sold Menlo Center on February 29, 1996. The sale price was
$16,200,000. The buyer assumed the existing financing in the amount of
$10,730,000. After payment of closing costs, transfer taxes, real estate
commissions to unaffiliated third party and miscellaneous selling expenses,
all totalling approximately $445,000, the net proceeds of approximately
$4,865,000 were used to repay short-term debt and to provide working capital.
Additional expenses in the second quarter of $160,000 represent expenses per
the terms of the sale contract. Under the terms of the purchase and sale
agreement, 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. The financing expires in
2000.
Reclassifications
Certain 1995 amounts have been reclassified to conform with the 1996
presentation.
Related Party Transactions
Fees paid or payable to the Advisor and Menlo Management Company for three
months and six months ended 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
ADVISOR
Advisory fee - .1% of Assets $ 12,000 $ 9,000 $ 26,000 $ 37,000
MENLO MANAGEMENT COMPANY
Property management fees 50,000 68,000 114,000 177,000
Administrative services 37,000 50,000 75,000 115,000
Lease commissions 4,000 27,000 18,000
Loan fee 18,000 25,000 46,000 62,000
Rent 3,000 3,000
--------- --------- --------- ---------
Total $ 121,000 $ 155,000 $ 288,000 $ 412,000
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Net Income Per Share of Beneficial Interest
Net income per share of beneficial interest is computed by dividing net
income by the weighted average number of shares outstanding for the three
months and six months ended June 30, 1996 and 1995 were as follows:
1996 1995
-------- ---------
Weighted average number of shares outstanding 3,706,845 3,706,845
Page 5 of 7
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PACIFIC REAL ESTATE INVESTMENT TRUST
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND OF
OPERATIONS.
(1) LIQUIDITY AND CAPITAL RESOURCES:
Cash flow used by operating activities was $241,000 for the six months ended
June 30, 1996 as compared to cash used of $1,154,000 for the six months ended
June 30, 1995. The net change is primarily due to both the sale of Lakeshore
Plaza Shopping Center in 1995 and Menlo Center in 1996.
Cash flow provided by investing activities was $4,828,000 for the six months
ended June 30, 1996 compared to $13,907,000 for the six months ended June 30,
1995. The results are from the proceeds from the sale of Menlo Center in 1996
compared to the proceeds from the sale of Lakeshore Plaza Shopping Center in
March 1995.
Cash flow used by financing activities was $4,499,000 for the six months ended
June 30, 1996 as compared to $12,569,000 for the six months ended June 30, 1995.
The lower amount in 1996 is due to repayment of short term notes payable due
to the sale of Menlo Center compared to the larger amount in 1995 arising
from repayment of unsecured notes payable and short term notes payable due to
the sale of Lakeshore Plaza Shopping Center.
The Trust's other sources of liquidity include: (1) extension of short-term
notes payable for periods not to exceed five years; (2) approximately $6,568,000
in mortgage notes receivable which mature at various dates over the next four
years.
(2) MATERIAL CHANGES IN RESULTS OF OPERATIONS FOR SIX MONTHS ENDED JUNE 30,
1996 VS. 1995:
Net loss for the six months ended June 30, 1996 was $288,000 as compared to a
net loss of $1,689,000 for the six months ended June 30, 1995.
During the first six months rental revenues decreased from $5,007,000 in 1995 to
$3,327,000 as a result of declining revenues at El Portal Shopping Center and
the sale of both Lakeshore Plaza Shopping Center in March 1995 and Menlo Center
in February 1996.
Operating expenses decreased from $1,110,000 in 1995 to $854,000 in 1996, a
decrease of $256,000 or 23% due to the sale of Lakeshore Plaza Shopping Center
in 1995 and Menlo Center in 1996. This decrease was partially offset by an
increase in El Portal Shopping Center ground lease.
Property taxes decreased from $411,000 in 1995 to $287,000 in 1996, a decrease
of $124,000, or 30%. Property management fees decreased from $177,000 in 1995
to $114,000 in 1996, a decrease of $63,000, or 36%. Depreciation and
Amortization decreased from $1,547,000 in 1995 to $1,111,000 in 1996, a decrease
of $436,000, or 28%. Each of these decreases resulted from both the sale of
Lakeshore Plaza Shopping Center in March 1995 and Menlo Center in February 1996.
General and administrative expense decreased from $367,000 in 1995 to $259,000
in 1996, a decrease of $108,000 or 29% due to cost saving measures.
Interest expense decreased by $1,100,000, or 37%, from $2,995,000 in 1995 to
$1,895,000 in 1996. Of this decrease $330,000 is due to the sale of Lakeshore
Plaza Shopping Center in 1995, $349,000 is due to the sale of Menlo Center in
1996, and $380,000 is due to the repayment of an unsecured note payable and
short term notes payable which were paid off in 1995 and 1996.
Material changes for the three months ended June 30, 1996 vs 1995 were for the
same reason in relative proportionate amounts as those shown for the six months.
ITEM 6 (b) - Report on Form 8K was filed on March 14, 1996.
Page 6 of 7
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
PACIFIC REAL ESTATE INVESTMENT TRUST
Date: July 25, 1996 By:
---------------- ------------------------------
Robert Ch. Gould
VICE PRESIDENT
Date: July 25, 1996 By:
---------------- ------------------------------
Harry E. Kellogg
TREASURER
Page 7 of 7
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 496,000
<SECURITIES> 0
<RECEIVABLES> 9,790,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,561,000
<PP&E> 53,346,000
<DEPRECIATION> (16,497,000)
<TOTAL-ASSETS> 47,081,000
<CURRENT-LIABILITIES> 316,000
<BONDS> 32,959,000
0
0
<COMMON> 37,068,000
<OTHER-SE> (26,607,000)
<TOTAL-LIABILITY-AND-EQUITY> 47,081,000<F2>
<SALES> 0
<TOTAL-REVENUES> 3,644,000
<CGS> 0
<TOTAL-COSTS> 3,728,000<F1>
<OTHER-EXPENSES> 204,000<F3>
<LOSS-PROVISION> 230,000
<INTEREST-EXPENSE> 1,895,000
<INCOME-PRETAX> (288,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (288,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (288,000)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
<FN>
<F3>Represents Minority Intrest Portion of Current Net Income/(loss)
<F2>Includes $3,345,000 of Minority Intrest in Joint Venture
<F1>Includes a gain from the Sale of a Property of $792,000
</FN>
</TABLE>
