<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 SEPTEMBER 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)
<TABLE>
<CAPTION>
ITEM I - FINANCIAL STATEMENTS THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------- ------------- ------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Rental revenues. . . . . . . . . . . . . . . . . . . . . $1,371,000 $1,875,000 $4,698,000 $6,882,000
---------- ---------- ---------- ----------
Operating expenses (including related party amounts
of $113,000 three months ended September 30, 1996
and $374,000 nine months ended September 30, 1996,
$152,000 three months ended September 30, 1995 and
$548,000 nine months ended September 30, 1995)
Operating . . . . . . . . . . . . . . . . . . . . . 468,000 525,000 1,322,000 1,635,000
Property tax. . . . . . . . . . . . . . . . . . . . 127,000 169,000 414,000 580,000
General and administrative. . . . . . . . . . . . . 127,000 141,000 386,000 508,000
Depreciation and amortization . . . . . . . . . . . 576,000 679,000 1,687,000 2,226,000
Property management fees. . . . . . . . . . . . . . 46,000 67,000 160,000 244,000
---------- ---------- ---------- ----------
Total operating expenses . . . . . . . . . . . . 1,344,000 1,581,000 3,969,000 5,193,000
---------- ---------- ---------- ----------
Operating income . . . . . . . . . . . . . . . . . . . . 27,000 294,000 729,000 1,689,000
---------- ---------- ---------- ----------
Other income/(expense):
Interest income . . . . . . . . . . . . . . . . . . 153,000 162,000 470,000 475,000
Interest expense. . . . . . . . . . . . . . . . . . (791,000) (1,184,000) (2,686,000) (4,179,000)
Reincorporation expenses. . . . . . . . . . . . . . (9,000) (139,000)
Gain(loss) on property sale . . . . . . . . . . . . (20,000) 772,000
Loss on sale of options . . . . . . . . . . . . . . (102,000)
---------- ---------- ---------- ----------
Total other income/(expense) . . . . . . . . . . (658,000) (1,031,000) (1,444,000) (3,945,000)
---------- ---------- ---------- ----------
Net loss before minority interest. . . . . . . . . . . . (631,000) (737,000) (715,000) (2,256,000)
---------- ---------- ---------- ----------
Minority interest in joint venture . . . . . . . . . . . (109,000) (83,000) (313,000) (253,000)
---------- ---------- ---------- ----------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . (740,000) (820,000) (1,028,000) (2,509,000)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net loss per share of beneficial interest. . . . . . . . $ (0.20) $ (0.22) $ (0.28) $ (0.68)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
Page 2 of 7
<PAGE>
PACIFIC REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ------------
1996 1995
---- ----
<S> <C> <C>
Investment in commercial properties:
Operating properties:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,979,000 $ 14,308,000
Buildings and improvements . . . . . . . . . . . . . . . 42,518,000 56,345,000
Accumulated depreciation . . . . . . . . . . . . . . . . (16,940,000) (18,375,000)
------------- -------------
Operating properties - net . . . . . . . . . . . . . . . 36,557,000 52,278,000
Mortgage notes receivable. . . . . . . . . . . . . . . . . . 6,570,000 6,565,000
Tenant and other notes receivable - net. . . . . . . . . . . 184,000 246,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 510,000 308,000
Restricted cash. . . . . . . . . . . . . . . . . . . . . . . 1,294,000 100,000
Accounts receivable (net of allowance of $119,000 in
1996 and $125,000 in 1995) . . . . . . . . . . . . . . . . . 460,000 891,000
Deferred lease commissions - net . . . . . . . . . . . . . . 431,000 742,000
Deferred financing costs - net . . . . . . . . . . . . . . . 242,000 440,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 1,032,000 1,305,000
------------- -------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . 47,280,000 62,875,000
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage loans . . . . . . . . . . . . . . . . . . . . . . $ 25,773,000 $ 36,818,000
Short-term notes . . . . . . . . . . . . . . . . . . . . . 7,245,000 11,190,000
Security deposits. . . . . . . . . . . . . . . . . . . . . 137,000 231,000
Accounts payable and other liabilities . . . . . . . . . . 1,070,000 566,000
------------- -------------
Total liabilities. . . . . . . . . . . . . . . . . . . . 34,225,000 48,805,000
------------- -------------
Commitments and contingencies
Minority interest in joint venture . . . . . . . . . . . . . 3,334,000 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. . . . . . . . . . . . (38,356,000) (37,328,000)
------------- -------------
Shareholders' equity - net . . . . . . . . . . . . . . . . . 9,721,000 10,749,000
------------- -------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . $ 47,280,000 $ 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 nine months ended
September 30, September 30,
------------- -------------
1996 1995
---- ----
<S> <C> <C>
Cash Flow from Operating Activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . $ (1,028,000) $ (2,509,000)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . 1,460,000 1,912,000
Amortization of note receivable discount . . . . . . . . (17,000) (59,000)
Amortization of deferred cost. . . . . . . . . . . . . . 223,000 283,000
Minority interest in joint venture's operations. . . . . 313,000 254,000
Provision for doubtful receivables . . . . . . . . . . . 77,000 79,000
Gain on sale of property . . . . . . . . . . . . . . . . (772,000)
Loss on sale of options. . . . . . . . . . . . . . . . . 102,000
Changes in operating assets and liabilities
Accounts payable and other liabilities . . . . . . . . . 513,000 (1,248,000)
Security deposits. . . . . . . . . . . . . . . . . . . . 29,000 (65,000)
Deferred lease commissions . . . . . . . . . . . . . . . (79,000) (63,000)
Accounts receivable. . . . . . . . . . . . . . . . . . . 339,000 181,000
Other assets . . . . . . . . . . . . . . . . . . . . . . 199,000 (54,000)
------------- -------------
Net cash provided (used) by operating activities . . . . . 1,257,000 (1,187,000)
------------- -------------
Cash Flow from Investing Activities:
Increase in restricted cash. . . . . . . . . . . . . . . (1,194,000)
Construction of properties . . . . . . . . . . . . . . . (220,000) (23,000)
Collection of notes receivable . . . . . . . . . . . . . 74,000 59,000
Additions to notes receivable. . . . . . . . . . . . . . (4,000)
Proceeds from sale of Lakeshore. . . . . . . . . . . . . 14,043,000
Proceeds from sale of Menlo Center . . . . . . . . . . . 4,845,000
Uses from sale of options. . . . . . . . . . . . . . . . (102,000)
------------- -------------
Net cash provided by investing activities. . . . . . . . . 3,505,000 13,973,000
------------- -------------
Cash Flow from Financing Activities:
Proceeds from short-term notes . . . . . . . . . . . . . 455,000 100,000
Re-Payment of mortgage loans . . . . . . . . . . . . . . (315,000) (4,566,000)
Re-Payment of short-term notes . . . . . . . . . . . . . (4,400,000) (5,045,000)
Re-Payment of unsecured loans. . . . . . . . . . . . . . (3,000,000)
Distributions to joint venture partner . . . . . . . . . (300,000) (300,000)
------------- -------------
Net cash used by financing activities. . . . . . . . . . . (4,560,000) (12,811,000)
------------- -------------
Increase (decrease) in cash . . . . . . . . . . . . . . . 202,000 (25,000)
Cash, January 1 . . . . . . . . . . . . . . . . . . . . 308,000 666,000
------------- -------------
Cash, September 30. . . . . . . . . . . . . . . . . . . 510,000 641,000
------------- -------------
------------- -------------
</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
<PAGE>
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
Since it is the policy of the Trust to distribute amounts approximately
equal to its taxable income plus depreciation, no provision for income
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
$10,730,102. After payment of closing costs, transfer taxes, real estate
commissions and miscellaneous selling expenses, all totalling approximately
$445,000, the net proceeds of approximately $4,845,000 were used to repay
short-term debt and to provide working capital. Additional expenses in the
second and third quarter of $180,000 represent expenses per the terms of
the sale contract. 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
ownership and 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.
Monterey Plaza
In August 1996, HomeBase assigned its lease to Wal-Mart, making a net
payment to the Trust of $964,000 as consideration. The cash proceeds from
this transaction were placed in a restricted cash account, subject to the
terms of the first mortgage lender and the demand of another tenant. Under
the terms of Wal-Mart's assumption, the lease was substantially modified.
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 nine months ended 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
Sept 30, 1996 Sept 30, 1995 Sept 30, 1996 Sept 30, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
ADVISOR
Advisory fee - .1% of Assets . . . . $ 12,000 $ 16,000 $ 38,000 $ 53,000
MENLO MANAGEMENT COMPANY
Property management fees . . . . . . 46,000 66,000 160,000 243,000
Administrative services. . . . . . . 38,000 41,000 113,000 156,000
Lease commissions. . . . . . . . . . 29,000 25,000 56,000 43,000
Loan fees. . . . . . . . . . . . . . 17,000 26,000 63,000 88,000
Rent . . . . . . . . . . . . . . . . 3,000 6,000
--------- --------- --------- ---------
Total. . . . . . . . . . . . . . . 142,000 177,000 430,000 589,000
--------- --------- --------- ---------
--------- --------- --------- ---------
</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 nine months ended September 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
<PAGE>
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 provided by operating activities was $1,257,000 for the nine months
ended September 30, 1996 as compared to cash used of $1,187,000 for the nine
months ended September 30, 1995. The net change is primarily due to the sale of
both Lakeshore Plaza Shopping Center in 1995 and Menlo Center in 1996, partially
offset by establishment of an impound account for restricted cash for Monterey
Plaza.
Cash flow provided by investing activities was $3,505,000 for the nine months
ended September 30, 1996 compared to $13,973,000 for the nine months ended
September 30, 1995. The reduction in cash flow from this source results from
the difference in the cash proceeds arising from the sale of Menlo Center in
1996 compared to the cash proceeds arising from the sale of Lakeshore Plaza
Shopping Center in March 1995, partially offset by an increase in restricted
cash for the impound account set up for Monterey Plaza.
Cash flow used by financing activities was $4,560,000 for the nine months ended
September 30, 1996 as compared to $12,811,000 for the nine months ended
September 30, 1995. This reduction in 1996 is due to repayment of a smaller
amount of short term notes payable as a result of the sale of Menlo Center as
compared to the repayment of a larger value of unsecured notes payable and short
term notes payable resulting from the sale of Lakeshore Plaza Shopping Center in
1995.
The Trust's other sources of liquidity include: (1) extension of short-term
notes payable for periods not to exceed five years; (2) approximately $6,570,000
in mortgage loans receivable which mature at various dates over the next five
years.
(2) MATERIAL CHANGES IN RESULTS OF OPERATIONS FOR NINE MONTHS ENDED
SEPTEMBER 30, 1996 VS. 1995:
Net loss for the nine months ended September 30, 1996 was $1,028,000 as compared
to a net loss of $2,509,000 for the nine months ended September 30, 1995.
During the first nine months rental revenues decreased from $6,882,000 in 1995
to $4,698,000 as a result of declining revenues at El Portal Shopping Center and
the sales of both Lakeshore Plaza Shopping Center in March 1995 and Menlo Center
in February 1996.
Operating expenses decreased from $1,635,000 in 1995 to $1,322,000 in 1996, a
decrease of $313,000 or 19% due to the sales of Lakeshore Plaza Shopping Center
in 1995 and Menlo Center in 1996. This decrease was partially offset by an
increase in ground lease rental expense for leased land adjacent to El Portal
Shopping Center.
Property taxes decreased from $580,000 in 1995 to $414,000 in 1996, a decrease
of $166,000, or 29%. Property management fees decreased from $244,000 in 1995
to $160,000 in 1996, a decrease of $84,000, or 34%. Depreciation and
Amortization decreased from $2,226,000 in 1995 to $1,687,000 in 1996, a decrease
of $539,000, or 24%. Each of these decreases resulted from the sales of
Lakeshore Plaza Shopping Center in March 1995 and of Menlo Center in February
1996.
General and administrative expense decreased from $508,000 in 1995 to $386,000
in 1996, a decrease of $122,000 or 24% due to cost saving measures and reduced
administrative activity.
Interest expense decreased by $1,493,000, or 36%, from $4,179,000 in 1995 to
$2,686,000 in 1996. Of this decrease $330,000 is due to the sale of Lakeshore
Plaza Shopping Center in 1995, $604,000 is due to the sale of Menlo Center in
1996, and $463,000 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 September 30, 1996 vs 1995 were for
the same reason in relative proportionate amounts as those shown for the nine
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: October 31, 1996 By: /s/ ROBERT CH. GOULD
----------------- -------------------------------------
Robert Ch. Gould
VICE PRESIDENT
Date: October 31, 1996 By: /s/ HARRY E. KELLOGG
----------------- -------------------------------------
Harry E. Kellogg
TREASURER
Page 7 of 7
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,804,000
<SECURITIES> 0
<RECEIVABLES> 6,793,000
<ALLOWANCES> (39,000)
<INVENTORY> 0
<CURRENT-ASSETS> 2,264,000
<PP&E> 53,497,000
<DEPRECIATION> (16,940,000)
<TOTAL-ASSETS> 47,280,000
<CURRENT-LIABILITIES> 1,207,000
<BONDS> 33,018,000
0
0
<COMMON> 37,068,000
<OTHER-SE> (27,347,000)
<TOTAL-LIABILITY-AND-EQUITY> 47,280,000<F1><F2>
<SALES> 0
<TOTAL-REVENUES> 5,168,000
<CGS> 0
<TOTAL-COSTS> 5,883,000<F1>
<OTHER-EXPENSES> 313,000<F3>
<LOSS-PROVISION> 158,000
<INTEREST-EXPENSE> 2,686,000
<INCOME-PRETAX> (1,028,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,028,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,028,000)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> (.28)
<FN>
<F1>Includes a gain from the Sale of a Property of $772,000.
<F2>Includes $3,334,000 of Minority Interest in Joint Venture.
<F3>Represents Minority Interest Portion of Current Net Income/Loss.
</FN>
</TABLE>
