SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM to
COMMISSION FILE NUMBER: 1-7003
PROPERTY CAPITAL TRUST
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2452367
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
ONE POST OFFICE SQUARE, BOSTON, MASSACHUSETTS 02109
(Address of principal executive offices)
(zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(617) 451-2400
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 at least the past 90 days.
Yes X No.
NUMBER OF SHARES OF COMMON SHARES OUTSTANDING AS OF
APRIL 30, 1996: 9,092,424
<PAGE>
PROPERTY CAPITAL TRUST
INDEX
Page
PART I. FINANCIAL INFORMATION Number
Consolidated Balance Sheet - April 30, 1996
and July 31, 1995 (unaudited) 2
Consolidated Statement of Income -
Three and Nine Months Ended April 30, 1996 and 1995 (unaudited) 3
Consolidated Statement of Cash Flows -
Nine Months Ended April 30, 1996 and 1995 (unaudited) 4
Consolidated Statement of Shareholders' Equity -
Nine Months Ended April 30, 1996 and 1995 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6-9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-15
PART II. OTHER INFORMATION
Item 2. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
1
<PAGE>
PART I. FINANCIAL INFORMATION
PROPERTY CAPITAL TRUST
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
APRIL 30, JULY 31,
1996 1995
- --------------------------------------------------------------------------------------------
ASSETS
Real Estate Investments
Owned Properties held directly by the Trust
(net of accumulated depreciation of $13,481,000
and $10,522,000, respectively) $ 81,556,000 $ 83,985,000
Structured Transactions held directly by the Trust 29,028,000 32,571,000
Investment Partnerships 21,993,000 48,299,000
132,577,000 164,855,000
Allowance for possible investment losses (8,767,000) (14,077,000)
123,810,000 150,778,000
Asset Held for Sale directly by the Trust - 10,185,000
123,810,000 160,963,000
Cash and cash equivalents 21,038,000 5,209,000
Interest and rents receivable
Owned Properties held directly by the Trust 1,209,000 1,958,000
Structured Transactions held directly by the Trust 183,000 221,000
Other assets 495,000 1,088,000
$146,735,000 $169,439,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable and accrued expenses $ 3,133,000 $ 3,207,000
Accrued interest 631,000 707,000
Mortgage notes payable 40,018,000 40,145,000
9 3/4% Convertible Subordinated Debentures 2,496,000 2,546,000
10% Convertible Subordinated Debentures 3,125,000 29,125,000
49,403,000 75,730,000
Shareholders' Equity
Common Shares (without par value, unlimited shares
authorized, 9,092,424 and 9,053,881 issued and
outstanding, respectively) 106,391,000 106,190,000
Accumulated deficit (9,059,000) (12,481,000)
Total Shareholders' Equity 97,332,000 93,709,000
$146,735,000 $169,439,000
</TABLE>
See accompanying notes
2
<PAGE>
PROPERTY CAPITAL TRUST
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
1996 1995 1996 1995
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
REVENUES
Rents from Owned Properties held directly
by the Trust $3,055,000 $3,565,000 $9,482,000 $12,203,000
Structured Transactions held directly by
the Trust
Base income 646,000 682,000 1,996,000 2,008,000
Overage income 584,000 471,000 1,617,000 1,357,000
Income from unconsolidated Investment
Partnerships 804,000 553,000 2,879,000 1,270,000
5,089,000 5,271,000 15,974,000 16,838,000
Interest income 100,000 67,000 290,000 69,000
Advisory fee income 66,000 77,000 282,000 237,000
5,255,000 5,415,000 16,546,000 17,144,000
EXPENSES
Expenses on Owned Properties held directly by
the Trust 1,350,000 1,647,000 4,293,000 5,204,000
Interest 1,058,000 1,585,000 3,946,000 5,325,000
Depreciation 867,000 1,059,000 2,959,000 3,166,000
General and administrative expenses 879,000 493,000 2,526,000 1,524,000
Professional fees 75,000 141,000 359,000 266,000
Trustees' fees and expenses 28,000 33,000 103,000 121,000
4,257,000 4,958,000 14,186,000 15,606,000
INCOME BEFORE GAIN ON SALE OF REAL ESTATE
INVESTMENTS AND EXTRAORDINARY ITEM 998,000 457,000 2,360,000 1,538,000
GAIN ON SALE OF REAL ESTATE INVESTMENTS 443,000 110,000 4,724,000 3,209,000
INCOME BEFORE EXTRAORDINARY ITEM 1,441,000 567,000 7,084,000 4,747,000
EXTRAORDINARY (LOSS) GAIN FROM EXTINGUISHMENT
OF DEBT (165,000) 88,000 (397,000) 88,000
NET INCOME $1,276,000 $ 655,000 $6,687,000 $ 4,835,000
NET INCOME PER SHARE
INCOME BEFORE GAIN ON SALE OF REAL ESTATE
INVESTMENTS AND EXTRAORDINARY ITEM $0.11 $0.05 $0.26 $0.17
GAIN ON SALE OF REAL ESTATE INVESTMENTS 0.05 0.01 0.52 0.35
INCOME BEFORE EXTRAORDINARY ITEM 0.16 0.06 0.78 0.52
EXTRAORDINARY (LOSS) GAIN FROM EXTINGUISHMENT
OF DEBT (0.02) 0.01 (0.04) 0.01
NET INCOME PER SHARE $0.14 $0.07 $0.74 $0.53
AVERAGE SHARES OUTSTANDING 9,088,000 9,051,000 9,069,000 9,041,000
</TABLE>
See accompanying notes
3
<PAGE>
PROPERTY CAPITAL TRUST
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
APRIL 30,
1996 1995
OPERATING ACTIVITIES
Net Income $ 6,687,000 $4,835,000
Adjustments to Net Income
Gain on sale of real estate investments (4,724,000) (3,209,000)
Extraordinary loss (gain) from extinguishment of
debt 397,000 (88,000)
Depreciation and amortization 3,107,000 3,310,000
Income from unconsolidated Investment
Partnerships (2,879,000) (1,270,000)
Distributions of income from Investment
Partnerships 6,464,000 1,522,000
Changes in assets and liabilities
Decrease (increase) in interest and rents
receivable 787,000 (12,000)
Decrease in other assets, net 48,000 255,000
(Decrease) increase in accounts payable
and accrued expenses and accrued interest (61,000) 392,000
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,826,000 5,735,000
INVESTING ACTIVITIES
Owned Properties held directly by the Trust
Dispositions 10,828,000 15,310,000
Additions (703,000) (5,587,000)
Structured Transactions held directly by the Trust
Dispositions/repayments 2,953,000 7,000
Additions (600,000) -
Investment Partnerships
Distributions in excess of income 22,855,000 898,000
NET CASH PROVIDED BY INVESTING ACTIVITIES 35,333,000 10,628,000
FINANCING ACTIVITIES
Redemption/repurchase of Convertible Subordinated
Debentures (26,050,000) (1,610,000)
Cash dividends paid (3,265,000) (2,532,000)
Scheduled amortization of mortgage notes payable (127,000) (400,000)
Proceeds from exercise of stock options 112,000 -
Prepayment of mortgage notes payable - (4,440,000)
Repayment of bank note payable, net - (5,000,000)
NET CASH USED IN FINANCING ACTIVITIES (29,330,000) (13,982,000)
NET INCREASE IN CASH AND CASH EQUIVALENTS 15,829,000 2,381,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,209,000 720,000
CASH AND CASH EQUIVALENTS AT END OF PERIOD $21,038,000 $3,101,000
See accompanying notes
4
<PAGE>
PROPERTY CAPITAL TRUST
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
NINE MONTHS ENDED
APRIL 30,
1996 1995
COMMON SHARES
Balance at beginning of period $106,190,000 $106,060,000
Common Shares issued in payment of deferred
Trustees' compensation 89,000 117,000
Stock options exercised 112,000 -
Balance at end of period 106,391,000 106,177,000
ACCUMULATED DEFICIT
Balance at beginning of period (12,481,000) (14,357,000)
Net income 6,687,000 4,835,000
Cash dividends paid (3,265,000) (2,532,000)
Balance at end of period (9,059,000) (12,054,000)
TOTAL SHAREHOLDERS' EQUITY $ 97,332,000 $ 94,123,000
NUMBER OF COMMON SHARES
Common Shares issued and outstanding
at beginning of period 9,053,881 9,030,585
Common Shares issued in payment of deferred
Trustees' compensation 14,903 20,296
Stock options exercised 23,640 -
NUMBER OF COMMON SHARES ISSUED AND
OUTSTANDING AT END OF PERIOD 9,092,424 9,050,881
See accompanying notes
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. BASIS OF PRESENTATION
In the opinion of management of Property Capital Trust (the "Trust"), the
accompanying unaudited consolidated financial statements contain all
adjustments, consisting of normal and recurring adjustments, necessary to
present fairly the Trust's financial position as of April 30, 1996 and the
results of its operations and its cash flows for the periods ended April 30,
1996 and 1995.
Operating results for the nine months ended April 30, 1996 are not necessarily
indicative of the results that may be expected for the remainder of fiscal
1996. The information contained in these financial statements should be read
in conjunction with the Trust's 1995 Annual Report on Form 10-K filed with the
Securities and Exchange Commission on October 30, 1995.
2. REAL ESTATE INVESTMENTS
ASSET HELD FOR SALE DIRECTLY BY THE TRUST
Owned Properties held directly by the Trust which have been approved for sale
and are being marketed for sale are classified as Assets Held for Sale directly
by the Trust.
In January 1996 the Trust sold its one Asset Held for Sale directly by the
Trust, Citibank Office Plaza - Oak Brook. The property was sold for
$11,380,000, resulting in a gain to the Trust of $470,000.
STRUCTURED TRANSACTIONS HELD DIRECTLY BY THE TRUST
Investments in land leasebacks and/or mortgage loans are classified as
Structured Transactions.
As part of the March 1994 restructuring of the Trust's Cincinnati Marriott Inn
investments the Trust committed to lend up to $600,000 to its lessee, secured
by a third leasehold mortgage, to make certain approved capital improvements to
the hotel. In February 1996 the Trust funded the $600,000 loan, which bears
interest at 8.0% per annum with amortization commencing May 1, 1999 and matures
on March 1, 2014.
During the quarter ended January 31, 1996 the Trust sold two Structured
Transactions held directly by the Trust. In December 1995 the Trust sold its
investment in Yorkshire apartments to an unrelated third party for $460,000,
resulting in a gain to the Trust of $310,000. In November 1995 the Trust's
Grosvenor Airport Inn land investment was purchased by the Trust's lessee for
$2,000,000 and the Trust's $2,000,000 mortgage loan was prepaid for $500,000,
with the resulting loss of $1,500,000 being charged against the Trust's
allowance for possible investment losses.
INVESTMENT PARTNERSHIPS
Certain of the Trust's investments have been made through partnerships, or a
participation agreement, in which the Trust or its subsidiary is the general
partner or lead lender and other institutional investors are limited partners
or participants (the "Investment Partnerships").
During the quarter ended April 30, 1996, Property Capital Midwest Associates,
L.P. ("Midwest"), an Investment Partnership which owned four investments in
Overland Park, Kansas, sold its three office properties. The three
investments, all classified as assets held for sale, were College Hills 3,
College Hills 8 and Financial Plaza. The Trust, which has a 53.3% general
partner's interest in this Investment Partnership, previously wrote down these
properties by $2,575,000 to their estimated net realizable value. The net
sales prices of these properties resulted in a gain to the Trust aggregating
$443,000.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
During the quarter ended January 31, 1996, PCA Southwest Associates Limited
Partnership ("Southwest"), an Investment Partnership which owns 1,875
apartments in Houston, Texas, disposed of its Telegraph Hill - B investment by
allowing the first mortgage lender to foreclose on the property and, as a
result, the Trust wrote down its net investment in this property to zero. This
$307,000 write-down was charged against the Trust's allowance for possible
investment losses. The Trust's affiliate has a 45.45% general partner's
interest in this Investment Partnership. In addition, during the quarter two
Investment Partnerships reclassified certain of their real estate investments
to assets held for sale. Midwest reclassified its investment in College Hills
3 to an asset held for sale. In addition, Midwest's Financial Plaza
investment, which was previously reclassified to an asset held for sale, was
further written down by the Trust by $1,255,000. This write-down was charged
against the Trust's previously established allowance for possible investment
losses. Southwest reclassified its investments in St. Charles and Boardwalk to
assets held for sale resulting in a write-down by the Trust of $710,000. This
write-down was charged against the Trust's previously established allowance for
possible investment losses.
During the first quarter of fiscal 1996, three of the Trust's Investment
Partnerships disposed of two Structured Transactions and one Owned Property.
In October 1995, PCA Crossroads Associates, Ltd. sold the land underlying
Crossroads Mall to its lessee, resulting in a gain to the Trust of $3,500,000
on its investment of $2,000,0000. In September 1995, Southwest, which owned
Chimney Rock apartments (714 units), sold the complex which resulted in a gain
to the Trust of $1,000. In August 1995, PCA Canyon View Associates Limited
Partnership ("Canyon View"), an Investment Partnership which held Structured
Transactions in Phases I and II of the Canyon View apartments in San Ramon,
California settled certain litigation. The Investment Partnership received
$300,000 from the first mortgagee of Phase I for permitting it to take title to
Phase I and the Investment Partnership took title to Phase II and received the
proceeds from two letters of credit aggregating $1,750,000. At that time, the
Trust wrote down its investment in this partnership by $1,538,000. This write-
down was charged against the Trust's allowance for possible investment losses.
The Trust has a 23.8% general partner's interest in Canyon View.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
A Condensed Combined Summary of Operations for the unconsolidated Investment
Partnerships for the periods indicated follows:
<TABLE>
<CAPTION>
<S> <C>
Three Months Ended Nine Months Ended
APRIL 30, APRIL 30,
1996 1995 1996 1995
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
REVENUES
Rents from Owned Properties $4,859,000 $5,308,000 $16,155,000 $15,608,000
Structured Transactions
Base income 483,000 652,000 2,091,000 1,996,000
Overage income 63,000 192,000 183,000 473,000
Other income 38,000 127,000 168,000 158,000
5,443,000 6,279,000 18,597,000 18,235,000
EXPENSES
Owned Properties expenses 2,872,000 3,014,000 9,034,000 9,734,000
Depreciation 203,000 1,045,000 985,000 3,088,000
Interest 409,000 581,000 1,407,000 1,387,000
Other 244,000 402,000 811,000 1,137,000
3,728,000 5,042,000 12,237,000 15,346,000
INCOME BEFORE GAIN (LOSS) ON REAL
ESTATE INVESTMENTS 1,715,000 1,237,000 6,360,000 2,889,000
GAIN (LOSS) ON REAL ESTATE INVESTMENTS
Gain on sale of real estate investments 831,000 242,000 14,833,000 242,000
Write-down of real estate investments - - (11,051,000) -
NET INCOME $2,546,000 $1,479,000 $10,142,000 $ 3,131,000
INCOME BEFORE GAIN (LOSS) ON REAL
ESTATE INVESTMENTS
Trust's share of income before gain
(loss) on real estate investments $ 804,000 $ 553,000 $ 2,879,000 $ 1,270,000
Limited partners' share of income
before gain (loss) on real estate
investments 911,000 684,000 3,481,000 1,619,000
GAIN (LOSS) ON REAL ESTATE INVESTMENTS
Trust's share of gain on sale of
real estate investments 443,000 110,000 3,944,000 110,000
Limited partners' share of gain
on sale of real estate investments 388,000 132,000 10,889,000 132,000
Trust's share of write-down of real
estate investments
(previously recorded by the Trust) - - (3,810,000) -
Limited partners' share of write-down
of real estate investments - - (7,241,000) -
NET INCOME $2,546,000 $ 1,479,000 $10,142,000 $ 3,131,000
</TABLE>
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
3. INDEBTEDNESS
During the quarter ended April 30, 1996, the Trust redeemed $11,000,000
principal amount of 10% Convertible Subordinated Debentures at their face
amount and repurchased $50,000 principal amount of the 9 3/4% Convertible
Subordinated Debentures at a discount. The Trust recognized an extraordinary
net loss from the extinguishment of debt of $165,000 due to the write-off of
the debentures' issuance costs.
During the quarter ended January 31, 1996, the Trust redeemed $11,000,000
principal amount of 10% Convertible Subordinated Debentures at their face
amount. The Trust recognized an extraordinary loss from the extinguishment of
debt of $169,000 due to the write-off of the debentures' issuance costs.
During the quarter ended October 31, 1995, the Trust redeemed $4,000,000
principal amount of 10% Convertible Subordinated Debentures at their face
amount. The Trust recognized an extraordinary loss from the extinguishment of
debt of $63,000 due to the write-off of the debentures' issuance costs.
4. SUBSEQUENT EVENTS
Subsequent to the end of the quarter, on May 13, 1996 the Trust retired the
remaining $3,125,000 of its 10% Convertible Subordinated Debentures and on May
24, 1996 retired the remaining $2,496,000 of its 9 3/4% Convertible
Subordinated Debentures.
Additionally, on May 30, 1996 the Trust sold the land underlying the Bluffs II
apartments in San Diego, California for $2,150,000, resulting in a gain to the
Trust of $1,320,000. On June 5, 1996, the first mortgage investment in the
Lisle Hilton Inn in Lisle, Illinois, which was held in an Investment
Partnership, was prepaid at par by the borrower. The Trust's share of the
proceeds of the prepayment was $8,942,000. A portion of the proceeds from
these two transactions was used to prepay $3,000,000 principal amount of the
first mortgage loan secured by Loehmann's Fashion Island in Aventura, Florida.
9
<PAGE>
ITEM 1. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS PLAN
On June 14, 1995, the Trustees adopted a business plan which provides for the
orderly disposition of the Trust's investments (the "Business Plan"). The
Trustees anticipate that the Business Plan will involve dispositions of Owned
Properties and Structured Transactions on a property-by-property basis,
although the Trust will consider bulk sales and other opportunities that may
arise which expedite the disposition process. At the Trust's Annual Meeting of
Shareholders held on December 15, 1995, the Trust's shareholders ratified the
Business Plan and approved certain amendments to the Trust's Declaration of
Trust necessary for its implementation.
To the extent the Trust receives net proceeds from sales of its properties, the
Trust intends to utilize such net proceeds to retire debt and/or make
distributions to shareholders. No assurances can be given as to the time
required to carry out the plan (although the Trustees anticipated in June 1995
that the plan would be fully implemented within three to five years) or the
prices at which the properties can be sold. To date the Business Plan is
proceeding as anticipated. Immediately prior to the implementation of the
Business Plan, the Trust owned 27 investments. During the first nine months of
fiscal 1996, nine properties have been sold or disposed of and the proceeds
have been used to retire $31,671,000 principal amount of the Trust's 10% and 9
3/4% Convertible Subordinated Debentures ($5,621,000 of which were retired
after the end of the third quarter) and to declare a $1.75 special dividend
payable on June 24, 1996. In addition, subsequent to the end of the third
quarter, one property was sold and a mortgage investment was prepaid,
resulting in gross proceeds to the Trust of $11,092,000. The Trust utilized
$3,000,000 from these two dispositions to prepay a portion of the first
mortgage loan on the Trust's Loehmann's Fashion Island property in Aventura,
Florida. As the Trust continues to dispose of investments it intends to
continue to make special distributions to shareholders and may prepay portions
of its debt.
As a result of the implementation of the Business Plan, the disposition of
investments and the payment of special dividends, certain operating results
which have historically been utilized to judge the Trust's financial
performance (such as Funds From Operations and Net Income) are expected to
decrease. Accordingly, shareholders are urged to read the following discussion
of results of operations with this fact in mind.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Trust's debt at April 30, 1996 was $45,639,000 as compared to $71,816,000
at July 31, 1995. The Trust's debt to equity ratio decreased to .47x at April
30, 1996 from .77x at July 31, 1995. The decrease in the Trust's debt was
primarily due to the redemption of $26,000,000 aggregate principal amount of
the Trust's 10% Convertible Subordinated Debentures at their face amount. The
improvement in the debt to equity ratio is primarily due to the redemption of
the 10% debentures and an increase in shareholders' equity as a result of a
$3,500,000 gain on the sale of the Crossroads Mall investment.
The Trust has a $10,000,000 revolving bank line which the Trust believes is
adequate to meet its working capital requirements for the foreseeable future.
At April 30, 1996, no amounts were outstanding on the bank line.
Subsequent to the end of the quarter, on May 13, 1996 the Trust retired the
remaining $3,125,000 of its 10% Convertible Subordinated Debentures and on May
24, 1996 retired the remaining $2,496,000 of its 9 3/4% Convertible
Subordinated Debentures from the proceeds from the sale of real estate
investments. The Trust also made a $3,000,000 prepayment on the $21,732,000
first mortgage loan secured by Loehmann's Fashion Island from the proceeds of
two dispositions made subsequent to the end of the quarter.
Management believes that with cash provided by operating activities retained
after dividends, proceeds from dispositions of properties and the Trust's
borrowing capacity under its existing bank line, the Trust will be able to meet
its fiscal 1996 cash requirements for anticipated capital expenditures on Owned
Properties held directly by the Trust. The Trust currently expects that these
cash requirements will total approximately $300,000 during the remainder of
fiscal 1996. Further, the Trust believes that these same sources will be
sufficient to fund its capital expenditure and anticipated long-term liquidity
requirements for the foreseeable future. As discussed above, the Trust intends
to use the proceeds received from the sale of its real estate investments to
retire debt and/or make distributions to shareholders.
10
<PAGE>
ITEM 1. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
FUNDS FROM OPERATIONS
Funds from Operations is considered by the REIT industry to be an appropriate
measure of performance of an equity REIT. Funds from Operations is calculated
by the Trust consistent with the National Association of Real Estate Investment
Trusts' definition (Funds from Operations equals net income, excluding gains
(losses) from debt restructurings, sales of properties and non-recurring items,
plus depreciation and amortization and after adjustment for unconsolidated
partnerships and joint ventures). Funds from Operations should be considered
in conjunction with net income as presented in the Trust's unaudited financial
statements. Funds from Operations does not represent cash provided by
operating activities in accordance with generally accepted accounting
principles and should not be considered as a substitute for net income as a
measure of results of operations or for cash provided by operating activities
as a measure of liquidity. Funds from Operations was calculated by the Trust
as follows:
<TABLE>
<CAPTION>
<S> <C>
Three Months Ended Nine Months Ended
APRIL 30, APRIL 30,
1996 1995 1996 1995
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Income before Gain on Sale of
Real Estate Investments and
Extraordinary Item $ 998,000 $ 457,000 $2,360,000 $1,538,000
Depreciation on Owned Properties
held directly by the Trust 867,000 1,059,000 2,959,000 3,166,000
Trust's share of depreciation
on unconsolidated Investment
Partnerships 73,000 526,000 399,000 1,553,000
Non-recurring item - - - (404,000)(1)
$1,938,000 $2,042,000 $5,718,000 $5,853,000
</TABLE>
(1)Non-recurring income resulting from the settlement of a bankruptcy
claim filed by the Trust against a former tenant at Loehmann's Fashion Island.
As noted above, the Trust anticipates that Funds from Operations and Net Income
will decline over time as the Trust continues to dispose of its real estate
investments and pay special dividends.
REVIEW OF SIGNIFICANT REAL ESTATE ACTIVITY
APARTMENTS
At July 31, 1995 the Trust had a $3,277,000 investment in PCA Canyon View
Associates Limited Partnership, an Investment Partnership that held Structured
Transactions in Phases I and II of the Canyon View apartments in San Ramon,
California. The Trust has a 23.8% general partner interest in this Investment
Partnership. The Investment Partnership's investments in Phase I were
subordinate to a $12,000,000 first mortgage which had a scheduled maturity of
August 1, 1993, but was extended to August 1, 1994 in anticipation of a
proposed sale. Both phases were also subject to non-subordinated land leases
held by a third party. In August 1994, when it became apparent that a sale was
unlikely to occur, the first mortgagee initiated court proceedings for the
appointment of a receiver for Phase I and foreclosure. Shortly thereafter the
Investment Partnership initiated court proceedings for the appointment of a
receiver for Phase II and foreclosure on Phases I and II. In December 1994 the
Investment Partnership filed for protection under Chapter 11 of the U.S.
Bankruptcy Code. Extensive negotiations then ensued with the Investment
Partnership's lessee and the first mortgagee of Phase I. In August 1995, the
litigation was settled with the Investment Partnership receiving $300,000 from
the first mortgagee for permitting it to foreclose on Phase I and the
Investment Partnership taking title
11
<PAGE>
ITEM 1. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
to Phase II and receiving the proceeds from two letters of credit aggregating
$1,750,000. As a result the Trust incurred a $1,538,000 loss on these
transactions resulting from a $533,000 write-off of the Canyon View Phase I
investment and a $1,005,000 write-down of the Canyon View Phase II investment.
These losses had been previously provided for in the Trust's allowance for
possible investment losses. The Investment Partnership has undertaken a
$1,300,000 capital expenditure program required to correct structural
deficiencies, construction deviations and damaged siding at Phase II. The
program is expected to be completed in the Fall of 1996.
As previously reported, PCA Southwest Associates Limited Partnership, an
Investment Partnership in which the Trust owns a 45.45% general partner
interest, was in default under the terms of the first mortgage on Telegraph
Hill - Phase B, a 259 unit complex, due to nonpayment of principal and
interest. Management was unable to restructure this $2,487,000 mortgage loan
on terms satisfactory to it, and therefore did not oppose the foreclosure by
the first mortgagee in December 1995. At April 30, 1996, two investments held
in this Investment Partnership were classified as assets held for sale. In
January 1996, when these assets were so reclassified, they were written down to
their net realizable values. The Trust's share of the write-down was $710,000,
which was charged against the Trust's previously established allowance for
possible investment losses.
Also, during the first quarter of fiscal 1996, this Investment Partnership sold
the Chimney Rock apartments, a 714 unit complex, to an unrelated third party.
In July 1995 the Trust reclassified this property to an asset held for sale and
wrote the property down by $54,000. A $1,000 gain was realized by the Trust on
the sale. As previously reported, a portion of the funds from this sale were
used by the Investment Partnership in December to pay off, at a $154,000
discount, the first mortgage on St. Charles -Phase A.
In December 1995 the Trust sold the land underlying the Yorkshire apartments
for $460,000 resulting in a gain of $310,000 on its $135,000 investment. For
the year ended July 31, 1995 the Trust earned $42,000 on this investment.
Subsequent to the end of the third quarter the Trust's lessee repurchased the
land underlying the Bluffs II apartments for $2,150,000. The Trust's
investment in this Structured Transaction was $825,000 resulting in a gain of
$1,320,000 after closing expenses. For the year ended July 31, 1995 the Trust
earned $215,000 on this investment.
OFFICE BUILDINGS
During the third quarter the Trust sold three office properties, Financial
Plaza, a cluster of four buildings, College Hills 3 and College Hills 8, all of
which were held by Property Capital Midwest Associates, L.P., one of the
Trust's Investment Partnerships in which the Trust holds a 53.3% general
partner interest. The Trust realized a gain from the sale of $443,000,
primarily from the sale of College Hills 8. The properties had been written
down previously by $2,575,000 (the Trust's share) to their net realizable
values.
As previously reported, during the second quarter of fiscal 1996, Citibank
Office Plaza - Oak Brook was sold at a gain of $470,000 ($.05 per share). At
July 31, 1995 this investment was reclassified to Asset Held for Sale directly
by the Trust and was written down by $971,000 to its expected sales proceeds.
SHOPPING CENTERS
During the first quarter of fiscal 1996 the Investment Partnership which owned
the land under the Crossroads Mall in Boulder, Colorado, sold its investment
back to its lessee. The Trust received approximately $5,500,000 of sales
proceeds on its $2,000,000 investment. For the year ended July 31, 1995 the
Trust earned $365,000 on this investment.
Loehmann's Fashion Island, in Aventura, Florida, an Owned Property held
directly by the Trust, suffered a decrease in the leased rate from 90% at July
31, 1995 to 88% at April 30, 1996. As previously reported, the Trust retained
a new property management and leasing firm in May 1995. Management is
reevaluating its strategy for this property based upon leasing performance and
current projections.
Plaza West Retail Center, in Overland Park, Kansas, a mixed use retail office
complex held by an Investment Partnership, which was reclassified to assets
held for sale at July 31, 1995, is currently being marketed for sale.
12
<PAGE>
ITEM 1. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
HOTELS
During the third quarter the Trust funded a $600,000 third leasehold mortgage
loan to its lessee of the Cincinnati Marriott Inn to make certain capital
improvements. The loan bears interest at 8.0% per annum with amortization
commencing May 1, 1999 and maturing March 1, 2014.
Subsequent to the end of the third quarter the first mortgage investment in the
Lisle Hilton Inn, which was held in an Investment Partnership, was prepaid at
par. The Trust's share of the proceeds was $8,942,000.
As previously reported, in the second quarter of fiscal 1996 the Trust sold to
its lessee/mortgagor the Trust's $4,000,000 Structured Transaction investments
in Grosvenor Airport Inn, a 206 room hotel in South San Francisco, California,
for $2,500,000. The loss on the sale had been fully provided for in the
Trust's allowance for possible investment losses. For the year ended July 31,
1995 the Trust earned $200,000 on this investment.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED APRIL 30, 1996 VERSUS
THE THREE AND NINE MONTHS ENDED APRIL 30, 1995
REVENUES
Rents from Owned Properties held directly by the Trust (base rent plus expense
reimbursements) decreased 14% and 22% for the three and nine months ended April
30, 1996, as compared to the same periods in the prior year, primarily due to
the Trust's sale of the Citibank Office Plaza - Oak Brook office building in
January 1996 and the 6110 Executive Boulevard office building in January 1995,
and the receipt by the Trust in the first quarter of the prior year of $404,000
of non-recurring income related to the settlement of a bankruptcy claim filed
by the Trust against a former tenant at Loehmann's Fashion Island.
There was no significant change in base income from Structured Transactions
held directly by the Trust (land rent and mortgage interest) for the three and
nine months ended April 30, 1996, respectively, as compared to the same periods
in the prior year.
Overage income from Structured Transactions held directly by the Trust
increased 24% and 19% for the three and nine months ended April 30, 1996,
respectively, as compared to the same periods in the prior year, primarily due
to increased overage income from the Sandpiper Cove apartments and the City
Centre Holiday Inn investments.
The Trust's share of income from unconsolidated Investment Partnerships
increased 45% and 127% for the three and nine months ended April 30, 1996,
respectively, as compared to the same periods in the prior year, primarily due
to the increased net income recorded by the Trust from Property Capital Midwest
Associates, L.P. When the properties in this Investment Partnership were
reclassified to assets held for sale they were written down to their expected
sales proceeds; therefore, depreciation is no longer taken on these properties.
The increase is also due to improved performance of certain properties in PCA
Southwest Associates Limited Partnership's portfolio. Additionally, as
previously reported, PCA Canyon View Associates Limited Partnership settled
pending litigation and the partnership received certain income which had not
been previously accrued by the Trust. These increases were offset by the loss
of revenues due to the sale of Financial Plaza, College Hills 3 and College
Hills 8 during the third quarter of fiscal 1996 and the sale of Crossroads Mall
investment and the Chimney Rock apartments in the first quarter of fiscal 1996
and the Braes Hill apartments in the third quarter of fiscal 1995.
Advisory fee income decreased 14% and increased 19% for the three and nine
months ended April 30, 1996, respectively, as compared to the same periods in
the prior years primarily due to timing of distributions paid by the Trust's
Investment Partnerships and the sale of Crossroads Mall, which was held by an
Investment Partnership. Interest income was earned by the Trust in the amount
of $89,000, $101,000 and $100,000 for the first, second and third quarters,
respectively, primarily from short-term investing of sales proceeds prior to
the redemption of debentures.
13
<PAGE>
ITEM 1. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
EXPENSES
Expenses on Owned Properties held directly by the Trust decreased 18% for the
three and nine months ended April 30, 1996, respectively, as compared to the
same periods in the prior year primarily due to the sale of Citibank Office
Plaza - Oak Brook in January 1996 and the sale of 6110 Executive Boulevard in
January 1995.
Interest expense decreased 33% and 26% for the three and nine months ended
April 30, 1996 as compared to the same periods in the prior year primarily due
to the redemption of most of the Trust's 10% Convertible Subordinated
Debentures and the sale of 6110 Executive Boulevard, which was encumbered by a
first mortgage, offset by an increase in interest expense related to Loehmann's
Fashion Island.
Depreciation expense decreased 18% and 7% for the three and nine months ended
April 30, 1996 as compared to the same periods in the prior year, primarily due
to the elimination of depreciation on Citibank Office Plaza -Oak Brook upon its
reclassification as an Asset Held for Sale directly by the Trust in July 1995
and the sale of 6110 Executive Boulevard in January 1995, offset in part by the
write-off of certain tenant improvements at Citibank Office Plaza - Schaumburg
related to a tenant's bankruptcy in the second quarter of fiscal 1996.
General and administrative expenses increased 78% and 66% for the three and
nine months ended April 30, 1996, as compared to the same periods in the prior
year, primarily due to the accrual of severance arrangements for the Trust's
employees provided for as part of the Business Plan. Professional fees
increased 35% for the nine months ended April 30, 1996, due to the legal fees
associated with the Trust's adoption of its Business Plan.
GAIN ON SALE OF REAL ESTATE INVESTMENTS
Net income for the third quarter of fiscal 1996 included a gain of $443,000
($.05 per share) primarily from the sale of College Hills 8. Net income for
the second quarter of fiscal 1996 included a gain of $470,000 ($.05 per share)
on the sale of the Citibank Office Plaza - Oak Brook and a $310,000 ($.04 per
share) gain on the sale of the land underlying the Yorkshire apartments. Net
income for the first quarter of fiscal 1996 included a gain of $3,500,000 ($.39
per share) on the sale of the land underlying Crossroads Mall located in
Boulder, Colorado and a gain of $1,000 on the sale of the Chimney Rock
apartments. In the prior year net income included a gain of $3,099,000 ($.34
per share) on the sale of 6110 Executive Boulevard and a gain of $110,000 ($.01
per share) on the sale of Braes Hill apartments.
EXTRAORDINARY LOSS FROM EXTINGUISHMENT OF DEBT
During the first, second and third quarters of fiscal 1996 the Trust retired
$4,000,000, $11,000,000 and $11,000,000, respectively, of its 10% Convertible
Subordinated Debentures at face value. In the third quarter of fiscal 1996 the
Trust retired $50,000 of its 9 3/4% Convertible Subordinated Debentures at a
discount. Due to the early retirement of these Convertible Subordinated
Debentures the Trust incurred an extraordinary loss on the extinguishment of
debt from the write-off of related issuance costs in the amounts of $63,000
($.01 per share) in the first quarter, $169,000 ($.02 per share) in the second
quarter and $165,000 ($.02 per share) in the third quarter.
DIVIDENDS
On May 22,1996, the Trust declared a special dividend of $1.75 per share
($16,146,000) from the proceeds of sales of properties. Additionally, the
Trust declared a regular quarterly dividend for the third quarter of fiscal
1996 of $.12 per share versus $.10 per share for the same period in the prior
year. The tax classification of these dividends will not be determinable until
the end of the calendar year. The Trust pays its regular quarterly dividends
approximately 55 days following the end of each fiscal quarter.
14
<PAGE>
ITEM 1. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in the Management's Discussion and Analysis of Financial
Condition and Results of Operations section constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Trust, or industry results, to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions, adverse
changes in the real estate market in the regions of the country in which the
Trust owns properties or has investments, and other factors noted in this
report.
PART II. OTHER INFORMATION
ITEM 2. LEGAL PROCEEDINGS
In November 1994, a tenant that occupies approximately 28,000 square feet of
College Hills 3, a 37,700 square foot office building located in Overland Park,
Kansas, owned by Property Capital Midwest Associates, L.P. (an Investment
Partnership), filed an action in the District Court of Johnson County, Kansas,
in which the tenant claimed that the Trust and the Investment Partnership
violated the terms of the tenant's space leases. The tenant alleged that it
had an oral agreement with the Investment Partnership's predecessor-in-title to
the building, the Trust and the Investment Partnership granting the tenant the
right to lease additional space that might become available in the building,
which allegation the Trust and Investment Partnership denied. The tenant also
asserted that it was entitled to damages in excess of $1,000,000, which
assertion was denied by the Trust and the Investment Partnership. The tenant,
the Trust and the Investment Partnership subsequently agreed to a settlement
pursuant to which the litigation was dismissed with prejudice, the building was
sold to the tenant and the Partnership reimbursed the tenant for $100,000 of
the tenant's litigation expenses.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Trust
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
PROPERTY CAPITAL TRUST
REGISTRANT
/S/ROBERT M. MELZER
------------------------
Robert M. Melzer
6/14/96 President and Chief Executive Officer
- -------
Date (Principal Financial Officer)
17
<PAGE>
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