<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 MARCH 31, 1997
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 THREE MONTHS
ENDED ENDED
MARCH 31, 1997 MARCH 31, 1996
<S> <C> <C>
Rental revenues................................. $ 1,130,000 $1,859,000
----------- ----------
Operating expenses (including related party
amounts of $110,000 and $144,000 in 1997 and
1996 respectively):
Operating.................................. 313,000 479,000
Property tax............................... 105,000 161,000
General and administrative................. 110,000 123,000
Depreciation and amortization.............. 296,000 608,000
Property management fees................... 42,000 64,000
Loss (gain) on sale of property............ 770,000 (952,000)
----------- ----------
Total operating expenses......... 1,636,000 483,000
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Operating income (loss)......................... (506,000) 1,376,000
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Other income/(expense):
Interest income............................ 164,000 156,000
Interest expense........................... (724,000) (1,070,000)
Reincorporation/merger expenses............ (98,000)
----------- ----------
Total other income/(expense).......... (658,000) (914,000)
----------- ----------
Net income (loss) before minority interest...... (1,164,000) 462,000
Minority interest in joint venture.............. (79,000) (99,000)
----------- ----------
Net income (loss)............................... $(1,243,000) $ 363,000
----------- ----------
----------- ----------
Net income (loss) per share of beneficial
interest...................................... $ (0.34) $ 0.10
----------- ----------
----------- ----------
</TABLE>
See notes to consolidated financial statements.
Page 2 of 9
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PACIFIC REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MAR 31, 1997 DEC 31, 1996
------------ ------------
<S> <C> <C>
Investment in commercial properties:
Land........................................ $ 10,104,000 $ 10,104,000
Buildings and improvements.................. 28,188,000 28,187,000
Accumulated depreciation...................... (7,523,000) (7,271,000)
------------ ------------
Commercial properties - net................. 30,769,000 31,020,000
Property in receivership........................ 4,438,000 4,438,000
Notes receivable(net of allowance of
$495,000 in 1997 and $507,000 in 1996)........ 6,273,000 6,279,000
Cash............................................ 859,000 1,011,000
Restricted cash................................. 1,023,000 1,154,000
Accounts receivable (net of allowance of
$67,000 in 1997 and $143,000 in 1996........... 199,000 489,000
Deferred lease commissions - net................ 395,000 425,000
Deferred financing costs - net.................. 333,000 329,000
Other assets.................................... 1,019,000 1,038,000
------------ ------------
Total................................... $ 45,308,000 $ 46,183,000
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage loans.............................. $ 25,626,000 $ 25,700,000
Short-term notes............................ 7,840,000 7,700,000
Security deposits........................... 107,000 118,000
Accounts payable and other
liabilities............................... 2,322,000 1,968,000
------------ ------------
Total liabilities....................... 35,895,000 35,486,000
------------ ------------
Commitments and contingencies
Minority interest in joint venture.............. 3,334,000 3,375,000
Shareholders' Equity:
Shares of beneficial interest, $10
par value, authorized: 1997 and 1996,
10,611,863; shares issued and
outstanding: 1997 and 1996, 3,706,845.... 37,068,000 37,068,000
Additional paid-in capital.................. 11,009,000 11,009,000
Accumulated deficit......................... (41,998,000) (40,755,000)
------------ ------------
Shareholders' equity - net.................. 6,079,000 7,322,000
------------ ------------
Total................................... $45,308,000 $46,183,000
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements.
Page 3 of 9
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PACIFIC REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended March 31,
1997 1996
------------ ------------
<S> <C> <C>
Cash Flow from Operating Activities:
Net income (loss)................................. $(1,243,000) $ 363,000
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation.................................... 252,000 539,000
Amortization of note receivable discount........ (6,000) (5,000)
Amortization of deferred cost................... 44,000 68,000
Minority interest in joint venture's operations. 79,000 99,000
Provision for doubtful receivables.............. 63,000 (26,000)
Loss (gain) on sale of property................. 770,000 (952,000)
Changes in operating assets and liabilities:
Accounts payable and other liabilities.......... (416,000) (156,000)
Security deposits............................... (11,000) 31,000
Deferred lease commissions...................... (44,000)
Deferred financing costs........................ (18,000)
Accounts receivable............................. 226,000 (89,000)
Other assets.................................... 19,000 (32,000)
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Net cash used by operating activities............... (241,000) (204,000)
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Cash Flow from Investing Activities:
Decrease in restricted cash..................... 131,000
Construction of properties...................... (1,000) (26,000)
Collection of notes receivable.................. 13,000 19,000
Proceeds from sale of Menlo Center.............. 5,025,000
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Net cash provided in investing activities........... 143,000 5,018,000
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Cash Flow from Financing Activities:
Proceeds from short-term notes.................. 140,000
Re-Payment of mortgage loans.................... (74,000) (112,000)
Re-Payment of short-term notes.................. (4,100,000)
Distributions of joint venture partner.......... (120,000) (120,000)
----------- -----------
Net cash used by financing activities............... (54,000) (4,332,000)
----------- -----------
Increase (decrease) in cash....................... (152,000) 482,000
Cash, January 1................................. 1,011,000 308,000
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Cash, March 31.................................. $ 859,000 $ 790,000
----------- -----------
----------- -----------
NON CASH INVESTING AND FINANCING:
Assumption of mortgage note payable by the buyer of Menlo Center for
$10,730,000 in 1996.
Establishment of an impound account for approximately $1,000,000 for
Monterey Plaza Shopping Center tenant during 1996, which was funded by
another tenant.
</TABLE>
See notes to consolidated financial statements.
Page 4 of 9
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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 Monterey Plaza and five notes receivable
Pacific Real Estate Investment Trust entered into a Purchase Agreement with
Pan Pacific Development (U.S.) Inc. ("Pan Pacific"), a wholly owned
subsidiary of Revenue Properties Company Limited, a Canadian corporation,
dated as of April 1, 1997, pursuant to which Pan Pacific will purchase from
the Trust the Monterey Plaza Shopping Center, located in San Jose,
California and five notes receivable. The Trust sold Monterey Plaza
Shopping Center for $24,957,000 and the Trust's five notes receivable for
$4,606,000 to Pan Pacific on April 25, 1997. After assumption of the
existing loan balance of approximately $18,371,000, the net cash proceeds
to the Trust were $11,192,000, less closing costs from the transaction and
repayment of short term debt. As part of this transaction, Pan Pacific has
become the primary obligor on the First Deed of Trust secured by Mt. Shasta
Shopping Center with a remaining principal balance of $1,519,000. In the
event of a default by Pan Pacific, the Trust remains liable on this First
Deed of Trust. In connection with the sale, a loss of approximately
$770,000 was recorded by the Trust in the first quarter of 1997.
Reclassifications
Certain 1996 amounts have been reclassified to conform with the 1997
presentation.
Related Party Transactions
Fees paid or payable to the Advisor and Menlo Management Company for three
months ended March 31, 1997 and 1996 were as follows:
1997 1996
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ADVISOR
-------
Advisory fee - .1% of Assets...... $ 11,000 $ 14,000
MENLO MANAGEMENT COMPANY
------------------------
Property management fees.......... 42,000 64,000
Administrative services........... 38,000 38,000
Lease commissions................. 23,000
Loan fee.......................... 19,000 28,000
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Total......................... $ 110,000 $ 167,000
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Page 5 of 9
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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 ended March 31, 1997 and 1996 were as follows:
1997 1996
---- ----
Weighted average number of shares outstanding 3,706,845 3,706,845
EFFECTS OF RECENT ACCOUNT PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per
Share." This statement establishes and simplifies standards for computing and
presenting earnings per share. SFAS 128 will be effective for the Trust's
fourth quarter of 1997, and requires restatement of all previously reported
earnings per share data that are presented. Early adoption of this Statement
is not permitted. SFAS 128 replaces primary and fully diluted earnings per
share with basic and diluted earnings per share. The Trust expects that basic
and diluted earnings per share amounts will not be materially different from
the Trust's primary and fully diluted earnings per share amounts.
Page 6 of 9
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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 three months ended
March 31, 1997 as compared to cash flow used by operating activities of $204,000
for the three months ended March 31, 1996. The net change is primarily due to
the timing differences in the receipt of rents and payments of trade payables
and change in expense levels resulting from property disposition.
Cash flow provided by investing activities was $143,000 for the three months
ended March 31, 1997 compared to $5,018,000 for the three months ended March 31,
1996. The net change was primarily the result of the sale of Menlo Center in
1996.
Cash flow used by financing activities was $54,000 for the three months ended
March 31, 1997 as compared to $4,332,000 for the three months ended March 31,
1996. The decrease in 1997 is primarily due to assumption of mortgage debt and
the repayment of short-term notes payable as the result of the sale of Menlo
Center as well as a decrease in the restricted cash accounts.
The Trust's other sources of liquidity include: (1) extension of short-term
notes payable for periods not to exceed five years and (2) approximately
$6,106,000 in mortgage loans receivable which mature at various dates over the
next 3 years.
(2) MATERIAL CHANGES IN RESULTS OF OPERATIONS FOR THREE MONTHS ENDED MARCH
31, 1997 VS. 1996:
Net loss for the three months ended March 31, 1997 was $1,243,000 as compared
to a net income of $363,000 for the three months ended March 31, 1996.
During the first three months rental revenues decreased from $1,859,000 in
1996 to $1,130,000 in 1997, a decrease of $729,000 or 39%. This decrease
resulted from the sale of Menlo Center in February 1996 and the placement of
El Portal Shopping Center into receivership in October 1996.
Operating expenses decreased from $479,000 in 1996 to $313,000 in 1997, a
decrease of $166,000 or 35%. Property taxes decreased from $161,000 in 1996
to $105,000 in 1997, a decrease of $56,000, or 35%. Property management fees
decreased from $64,000 in 1996 to $42,000 in 1997, a decrease of $22,000, or
34%. Depreciation and Amortization decreased from $608,000 in 1996 to
$296,000 in 1997, a decrease of $312,000, or 51%. Each of these decreases
resulted from the sale of Menlo Center in February 1996 and the placement of
El Portal Shopping Center into receivership in October 1996.
General and administrative expense decreased from $123,000 in 1996 to $110,000
in 1997, a decrease of $13,000 or 11% due to cost saving measures.
Loss on the sale of property of $770,000 in 1997 represents the anticipated
loss on the sale of Monterey Plaza Shopping Center and the Trust's five notes
receivable. Gain on the sale of property of $952,000 in 1996 represents the
gain on the sale of Menlo Center which was sold in February 1996.
Interest income increased by $8,000, or 5%, from $156,000 in 1996 to $164,000,
as a result of the interest earned on restricted funds.
Interest expense decreased by $346,000, or 32%, from $1,070,000 in 1996 to
$724,000 in 1997, the decrease was primarily due to the sale of Menlo Center in
1996 and the assumption of related mortgage debt by the buyer, and the pay-down
of short-term debt, as well as the placement of El Portal Shopping Center in
receivership in 1996.
Page 7 of 9
<PAGE>
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per
Share." This statement establishes and simplifies standards for computing
and presenting earnings per share. SFAS 128 will be effective for the
Trust's fourth quarter of 1997, and requires restatement of all previously
reported earnings per share data that are presented. Early adoption of this
Statement is not permitted. SFAS 128 replaces primary and fully diluted
earnings per share with basic and diluted earnings per share. The Trust
expects that basic and diluted earnings per share amounts will not be
materially different from the Trust's primary and fully diluted earnings per
share amounts.
ITEM 6 (b) - Report on Form 8K was filed on April 1, 1997.
Page 8 of 9
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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: May , 1997 By:
------------------------ ------------------------------------
Robert Ch. Gould
VICE PRESIDENT
Date: May , 1997 By:
------------------------ ------------------------------------
Harry E. Kellogg
TREASURER
Page 9 of 9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,882,000
<SECURITIES> 0
<RECEIVABLES> 6,835,000
<ALLOWANCES> (562,000)
<INVENTORY> 0
<CURRENT-ASSETS> 2,081,000
<PP&E> 42,730,000
<DEPRECIATION> (7,523,000)
<TOTAL-ASSETS> 45,308,000
<CURRENT-LIABILITIES> 2,429,000
<BONDS> 33,466,000
0
0
<COMMON> 37,068,000
<OTHER-SE> (30,989,000)
<TOTAL-LIABILITY-AND-EQUITY> 45,308,000<F1>
<SALES> 0
<TOTAL-REVENUES> 1,294,000
<CGS> 0
<TOTAL-COSTS> 2,458,000
<OTHER-EXPENSES> 79,000<F2>
<LOSS-PROVISION> 562,000
<INTEREST-EXPENSE> 724,000
<INCOME-PRETAX> (1,243,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,243,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,243,000)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.34)
<FN>
<F1>includes $3,334,000 of Minority Interest in Joint Venture
<F2>represents Minority Interest portion of Current net loss.
</FN>
</TABLE>
