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 SEPTEMBER 30, 1997
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)
101 FEDERAL STREET, BOSTON, MASSACHUSETTS 02110
-----------------------------------------------
(Address of principal executive offices)
(zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(617) 737-0100
--------------
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 NOVEMBER 7, 1997: 9,584,220
---------
<PAGE>
PROPERTY CAPITAL TRUST
INDEX
Page
PART I. FINANCIAL INFORMATION Number
------
Consolidated Balance Sheet - September 30, 1997
and December 31, 1996 (unaudited) 2
Consolidated Statement of Operations
Three and Nine Months Ended September 30, 1997
and 1996 (unaudited) 3
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 1997 and 1996
(unaudited) 4
Consolidated Statement of Shareholders' Equity -
Nine Months Ended September 30, 1997 and 1996
(unaudited) 5
Notes to Consolidated Financial Statements
(unaudited) 6 - 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 13
PART II. OTHER INFORMATION
None
1
<PAGE>
PART I. FINANCIAL INFORMATION
PROPERTY CAPITAL TRUST
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1997 1996
- --------------------------------------------------------------------------------
ASSETS
Real Estate Investments
Owned Properties held directly by the Trust
(net of accumulated depreciation of
$2,717,000 and $7,846,000, respectively) 9,858,000 $ 52,001,000
Structured Transactions held directly by
the Trust 5,016,000 28,195,000
Investment Partnerships 981,000 1,528,000
------------- -------------
15,855,000 81,724,000
Assets Held for Sale directly by the Trust 53,898,000 16,984,000
------------- -------------
69,753,000 98,708,000
Cash and cash equivalents 26,679,000 1,648,000
Interest and rents receivable
Owned Properties held directly by the Trust 968,000 1,611,000
Structured Transactions held directly by
the Trust 35,000 147,000
Other assets 1,839,000 1,180,000
------------- -------------
$ 99,274,000 $ 103,294,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accounts payable and accrued expenses $ 5,741,000 $ 5,024,000
Accrued interest 346,000 248,000
Mortgage notes payable 36,420,000 36,650,000
------------- -------------
42,507,000 41,922,000
------------- -------------
Shareholders' Equity
Common Shares (without par value, unlimited
shares authorized, 9,584,220 and 9,400,860
issued and 9,394,274 and 9,206,933
outstanding, respectively) 108,568,000 108,053,000
Accumulated deficit (50,465,000) (45,319,000)
------------- -------------
58,103,000 62,734,000
Less cost of Treasury Shares (1,336,000) (1,362,000)
------------- -------------
Total Shareholders' Equity 56,767,000 61,372,000
------------- -------------
$ 99,274,000 $ 103,294,000
============= =============
See accompanying notes
2
<PAGE>
PROPERTY CAPITAL TRUST
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -------------------------
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Rents from Owned Properties held directly by the Trust $ 2,678,000 $ 3,012,000 $ 8,742,000 $ 8,998,000
Structured Transactions held directly by the Trust
Base income 583,000 662,000 1,817,000 1,961,000
Overage income 322,000 886,000 995,000 2,130,000
Income from unconsolidated Investment Partnerships 45,000 161,000 135,000 1,575,000
------------ ------------ ------------ ------------
3,628,000 4,721,000 11,689,000 14,664,000
Interest income 108,000 73,000 304,000 348,000
Advisory fee income 2,000 33,000 18,000 218,000
------------ ------------ ------------ ------------
3,738,000 4,827,000 12,011,000 15,230,000
------------ ------------ ------------ ------------
EXPENSES
Expenses on Owned Properties held directly by the Trust 1,126,000 1,270,000 3,931,000 3,965,000
Interest 723,000 777,000 2,180,000 2,833,000
General and administrative expenses 642,000 1,026,000 1,691,000 2,842,000
Depreciation 125,000 948,000 1,180,000 2,960,000
Professional fees 36,000 105,000 146,000 299,000
Trustees' fees and expenses 24,000 34,000 71,000 103,000
Write-down of real estate investment -- 3,000,000 -- 3,000,000
------------ ------------ ------------ ------------
2,676,000 7,160,000 9,199,000 16,002,000
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE GAIN ON SALE OF REAL ESTATE
INVESTMENTS AND EXTRAORDINARY ITEM 1,062,000 (2,333,000) 2,812,000 (772,000)
GAIN ON SALE OF REAL ESTATE INVESTMENTS 4,750,000 832,000 26,128,000 3,115,000
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 5,812,000 (1,501,000) 28,940,000 2,343,000
EXTRAORDINARY LOSS FROM EXTINGUISHMENT OF DEBT -- -- -- (287,000)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 5,812,000 ($ 1,501,000) $ 28,940,000 $ 2,056,000
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE
INCOME (LOSS) BEFORE GAIN ON SALE OF REAL ESTATE
INVESTMENTS AND EXTRAORDINARY ITEM $ 0.11 ($ 0.25) $ 0.30 ($ 0.08)
GAIN ON SALE OF REAL ESTATE INVESTMENTS 0.50 0.09 2.73 0.34
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 0.61 (0.16) 3.03 0.26
EXTRAORDINARY LOSS FROM EXTINGUISHMENT OF DEBT -- -- -- (0.03)
------------ ------------ ------------ ------------
NET INCOME (LOSS) PER SHARE $ 0.61 ($ 0.16) $ 3.03 $ 0.23
============ ============ ============ ============
AVERAGE SHARES OUTSTANDING 9,584,000 9,298,000 9,561,000 9,170,000
============ ============ ============ ============
</TABLE>
See accompanying notes
3
<PAGE>
PROPERTY CAPITAL TRUST
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 28,940,000 $ 2,056,000
Adjustments to Net Income
Gain on sale of real estate investments (26,128,000) (3,115,000)
Extraordinary loss from extinguishment of debt -- 287,000
Depreciation and amortization 1,320,000 3,095,000
Write-down of real estate investment -- 3,000,000
Income from unconsolidated Investment Partnerships (135,000) (1,575,000)
Distributions of income from Investment Partnerships 24,000 1,575,000
Changes in assets and liabilities
Decrease in interest and rents receivable 755,000 303,000
Increase in other assets, net (799,000) (592,000)
Increase in accounts payable and accrued
expenses and accrued interest 841,000 1,763,000
------------ ------------
Net Cash Provided by Operating Activities 4,818,000 6,797,000
------------ ------------
INVESTING ACTIVITIES
Owned Properties held directly by the Trust
Dispositions 8,865,000 10,828,000
Additions (3,116,000) (764,000)
Structured Transactions held directly by the Trust
Dispositions/repayments 46,750,000 2,154,000
Additions -- (600,000)
Investment Partnerships
Distributions in excess of income 1,515,000 32,893,000
------------ ------------
Net Cash Provided by Investing Activities 54,014,000 44,511,000
------------ ------------
FINANCING ACTIVITIES
Cash dividends paid (34,086,000) (28,725,000)
Scheduled amortization of mortgage notes payable (230,000) (217,000)
Proceeds from exercise of stock options 515,000 226,000
Prepayment of mortgage notes payable -- (3,000,000)
Redemption/repurchase of Convertible Subordinated Debentures -- (19,645,000)
------------ ------------
Net Cash Used in Financing Activities (33,801,000) (51,361,000)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 25,031,000 (53,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,648,000 5,570,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 26,679,000 $ 5,517,000
============ ============
</TABLE>
See accompanying notes
4
<PAGE>
PROPERTY CAPITAL TRUST
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON SHARES
Balance at beginning of period $ 108,053,000 $ 106,201,000
Stock options exercised 515,000 226,000
Common Shares issued in payment of deferred
Trustees' compensation -- 1,378,000
Conversion of Convertible Subordinated Debentures -- 26,000
------------- -------------
Balance at end of period 108,568,000 107,831,000
------------- -------------
ACCUMULATED DEFICIT
Balance at beginning of period (45,319,000) (9,497,000)
Net income 28,940,000 2,056,000
Cash dividends paid (34,086,000) (28,725,000)
------------- -------------
Balance at end of period (50,465,000) (36,166,000)
------------- -------------
TREASURY SHARES
Balance at beginning of period (1,362,000) --
Distribution to Trustees of Treasury Shares included in Rabbi
Trust for the benefit of Trustees (3,981 Treasury Shares) 26,000 --
Purchase of Treasury Shares included in Rabbi Trust for
the benefit of Trustees (189,601 Treasury Shares) -- (1,300,000)
------------- -------------
Balance at end of period (1,336,000) (1,300,000)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY $ 56,767,000 $ 70,365,000
============= =============
NUMBER OF COMMON SHARES
Common Shares issued at beginning of period 9,400,860 9,055,795
Stock options exercised 183,360 114,540
Common Shares issued in payment of deferred
Trustees' compensation -- 202,590
Conversion of Convertible Subordinated Debentures -- 1,198
------------- -------------
Common Shares Issued at End of Period 9,584,220 9,374,123
============= =============
</TABLE>
See accompanying notes
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
On January 15, 1997, the Trust elected to change its fiscal year from a year
ended July 31 to the calendar year, effective January 1, 1997.
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 September 30, 1997 and the
results of its operations and its cash flows for the periods ended September 30,
1997 and 1996.
Operating results for the nine months ended September 30, 1997 are not
indicative of the results that may be expected for the remainder of calendar
1997. The information contained in these financial statements should be read in
conjunction with the Trust's 1996 Annual Report on Form 10-K filed with the SEC
on October 30, 1996, as amended by the Trust's Amendment No. 1 on Form 10-K/A
filed with the SEC on November 4, 1996.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, EARNINGS PER SHARE, which is required to be adopted on December 31, 1997.
At that time, the Trust will be required to change the method currently used to
compute earnings per share and to restate all prior periods. The impact of
Statement No. 128 on the calculation of earnings per share for these periods is
not expected to be material.
VALUATION OF REAL ESTATE INVESTMENTS
Real estate investments are carried at cost, net of accumulated depreciation and
any impairment losses. On August 1, 1996, the Trust adopted FASB Statement No.
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, which requires impairment losses to be recorded on
specific long-lived assets used in operations where indicators of impairment are
present and the undiscounted cash flows (net realizable value) estimated to be
generated by those assets are less than the assets' carrying amount. Prior to
August 1, 1996, the Trust's real estate investments were carried net of an
allowance for possible investment losses. The Trust's allowance for possible
investment losses was based upon management's estimate of the net realizable
value of each investment, and to the extent this was less than the carrying
value of an investment, an allowance for possible investment losses was
established. The adoption of Statement No. 121 did not have any effect on the
Trust's financial position or results of operations. However, the carrying
values of certain real estate assets were written down against available
reserves.
2. REAL ESTATE INVESTMENTS
ASSETS HELD FOR SALE DIRECTLY BY THE TRust
In March 1997, Loehmann's Fashion Island and Citibank Office Plaza - Schaumburg,
previously classified as Owned Properties held directly by the Trust, were
reclassified to Assets Held for Sale directly by the Trust.
In July 1997, the Trust sold Citibank Office Plaza - Schaumburg to an unrelated
third party for $9,640,000, resulting in no gain or loss to the Trust.
Previously, during the transition period ended December 31, 1996, the Trust
allocated $936,000 from its former allowance for possible investment losses to
this investment.
At September 30, 1997, the Trust had two investments, with a total carrying
value of $53,898,000, classified as Assets Held for Sale directly by the Trust,
Loehmann's Fashion Island and One Park West.
Subsequent to the end of the quarter, the Trust sold the One Park West office
building to an unrelated third party for $20,685,000, resulting in a gain to the
Trust of approximately $1,334,000 after closing costs. In March 1993, a wholly
owned subsidiary of the Trust acquired the equity interest of its lessee in One
Park West, subject to a first mortgage loan of $10,227,000. Upon acquisition the
Trust utilized a portion of its previously established allowance for possible
investment losses to write down this investment by $6,000,000. At July 31, 1996,
the Trust reclassified One Park West to an Asset Held for Sale directly by the
Trust and again wrote down its investment in this property by $1,519,000. This
loss was charged against the Trust's previously established allowance for
possible investment losses.
Also subsequent to the end of the quarter, an affiliate of the Trust entered
into a contract to sell Loehmann's Fashion Island for approximately $37,200,000.
The closing is expected to occur in early December.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
STRUCTURED TRANSACTIONS HELD DIRECTLY BY THE TRUST
Investments in land leasebacks and/or mortgage loans are classified as
Structured Transactions.
At December 31, 1996, the Trust's most significant relationship with any single
third-party owner of real estate was with the National Corporation for Housing
Partnerships ("NHP") which, through affiliates, was the lessee/mortgagor in two
of the Trust's apartment investments. The Trust's investments with NHP consisted
of a $5,400,000 land leaseback in Sandpiper Cove Apartments and investments
totaling $9,770,000 in Elm Creek Apartments (a $2,230,000 land leaseback and a
$7,540,000 leasehold mortgage loan). In September 1997, the Trust sold these
investments to NHP for $20,000,000, resulting in a gain to the Trust of
$4,750,000 after closing costs.
During the quarter ended March 31, 1997, the Trust sold its land investment in
the Chicago City Centre Holiday Inn to an unrelated third party for $20,577,000.
The Trust's investment in this property was $2,000,000, resulting in a gain to
the Trust of $18,577,000.
During the quarter ended June 30, 1997, the Trust's Lakeside Center land
investment was purchased by the Trust's lessee for $2,350,000. The Trust's
investment in this property was $350,000, resulting in a gain to the Trust of
$1,944,000 after closing costs.
In September 1997, the Trust sold its land and mortgage investments in Roseburg
Valley Mall to its lessee/mortgagor for $3,950,000, resulting in no gain or loss
to the Trust.
Subsequent to the end of the quarter, the Trust's $400,000 land investment in
Northbrook Apartments, located in San Bernardino, California, was sold to the
Trust's lessee for $750,000.
INVESTMENT PARTNERSHIPS
Certain of the Trust's investments have been made through partnerships in which
the Trust is the general partner and other institutional investors are limited
partners (the "Investment Partnerships"). Based upon generally accepted
accounting principles, the Trust uses the equity method to account for its
Investment Partnerships.
In June 1997, Telegraph Hill Apartments, the last real estate investment owned
by PCA Southwest Associates Limited Partnership, was sold for $13,750,000. The
Trust realized a gain of $857,000 on the sale.
In September 1997, the Trust received a final distribution from PCA Canyon View
Associates Limited Partnership. At September 30, 1997, two remaining Investment
Partnerships, Property Capital Midwest Associates, L.P. and PCA Southwest
Associates Limited Partnership continued in existence, holding as their sole
assets cash reserves to meet possible contingent claims.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
A Condensed Combined Summary of Income for the unconsolidated Investment
Partnerships for the periods indicated follows:
Investment Partnerships
CONDENSED COMBINED STATEMENT OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ------------------------------
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Rents from Owned Properties $ 15,000 $ 2,371,000 $ 1,897,000 $ 11,113,000
Structured Transactions
Base income -- -- -- 796,000
Overage income -- -- -- 63,000
Other income 81,000 40,000 130,000 128,000
------------ ------------ ------------ ------------
96,000 2,411,000 2,027,000 12,100,000
------------ ------------ ------------ ------------
EXPENSES
Owned Properties expenses -- 1,557,000 1,332,000 6,552,000
Depreciation -- 145,000 114,000 613,000
Interest -- 281,000 279,000 1,009,000
Other 1,000 74,000 41,000 570,000
------------ ------------ ------------ ------------
1,000 2,057,000 1,766,000 8,744,000
------------ ------------ ------------ ------------
INCOME BEFORE GAIN (LOSS) ON REAL ESTATE
INVESTMENTS 95,000 354,000 261,000 3,356,000
GAIN (LOSS) ON REAL ESTATE INVESTMENTS
Gain on sale of real estate investments -- 3,496,000 1,885,000 4,437,000
Write-down of real estate investments -- (1,178,000) -- (5,095,000)
------------ ------------ ------------
NET INCOME $ 95,000 $ 2,672,000 $ 2,146,000 $ 2,698,000
============ ============ ============ ============
INCOME BEFORE GAIN (LOSS) ON REAL ESTATE
INVESTMENTS Trust's share of income before gain
(loss) on
real estate investments $ 45,000 $ 161,000 $ 135,000 $ 1,575,000
Limited partners share of income before
gain (loss) on real estate investments 50,000 193,000 126,000 1,781,000
GAIN (LOSS) ON REAL ESTATE INVESTMENTS
Trust's share of gain on sale of real
estate investments -- 832,000 857,000 1,325,000
Limited partners share of gain on sale of
real estate investments -- 2,664,000 1,028,000 3,112,000
Trust's share of write-down of real estate
investments (previously recorded by the Trust) -- (576,000) -- (2,541,000)
Limited partners share of write-down of real
estate investments -- (602,000) -- (2,554,000)
------------ ------------ ------------
NET INCOME $ 95,000 $ 2,672,000 $ 2,146,000 $ 2,698,000
============ ============ ============ ============
</TABLE>
8
<PAGE>
ITEM 1. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS PLAN
- -------------
The Trust currently operates under a business plan (the "Business Plan") which
provides for the orderly disposition of all of the Trust's investments on a
property-by-property basis. 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. The Trust has utilized net proceeds from the sales of its
properties to retire debt, make distributions to the Trust's shareholders and to
satisfy the Trust's cash needs. The Trust intends to utilize future net sales
proceeds to make distributions to its shareholders and to satisfy its cash
needs.
At September 30, 1997, the Trust had five investments remaining. Since that
date, two investments have been sold and one is under contract to be sold.
Although no assurances can be given as to the time required to sell the Trust's
remaining investments or the amount of net proceeds that will be realized from
such sales, management believes that its July 25, 1997 estimate of aggregate
distributions to shareholders of sale proceeds from the inception of the
Business Plan of between $12.75 and $13.25 continues to be accurate. Management
believes that at least $12.75 per share will have been distributed to
shareholders by the end of 1998 and that when reserves established to meet
contingent liabilities are distributed some time after 1998, the total
distributions from the proceeds of sale will exceed $13.00 per share. To date
the Trust has declared $9.60 per share in special dividends (inclusive of the
$2.50 per share declared on October 24 and payable on November 24). The
foregoing statements are forward-looking statements and are estimates subject to
a number of factors and other uncertainties, certain of which are described
below. See "Special Note Regarding Forward-Looking Statements."
As a result of the disposition of investments and the payment of special
dividends from proceeds of the sales of the Trust's investments, certain
operating results which have historically been utilized to judge the Trust's
financial performance (such as Funds from Operations) have decreased and are
expected to continue to decrease. Shareholders are urged to read the following
discussion with this in mind.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------------
The Trust's debt at September 30, 1997 was $36,420,000 versus $36,650,000 at
December 31, 1996. The Trust's debt to equity ratio was .64x at September 30,
1997 and .60x at December 31, 1996. All of the Trust's debt consists of first
mortgage debt on its Owned Properties. The Trust has a revolving bank line which
the Trust believes is adequate to meet its working capital requirements for the
foreseeable future. The bank line was reduced from $10,000,000 to $5,000,000
during the quarter ended March 31, 1997. At September 30, 1997, there were no
outstanding borrowings under the bank line.
Funds from Operations
- ---------------------
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 nonrecurring 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 consolidated 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.
9
<PAGE>
ITEM 1. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
As provided for in the Business Plan, the Trust is disposing of all of its
assets. As a result, the Trust's funds from operations are expected to decline
as assets are sold and the net proceeds are distributed to shareholders. Funds
from operations were calculated by the Trust as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income (Loss) before Gain on Sale of Real Estate
Investments and Extraordinary Item $ 1,062,000 ($2,333,000) $ 2,812,000 ($ 772,000)
Depreciation of Owned Properties held directly
by the Trust 125,000 948,000 1,180,000 2,960,000
Trust's share of depreciation from unconsolidated
Investment Partnerships -- 60,000 52,000 234,000
Nonrecurring item -- 3,000,000 -- 3,000,000
----------- ----------- ----------- -----------
$ 1,187,000 $ 1,675,000 $ 4,044,000 $ 5,422,000
=========== =========== =========== ===========
</TABLE>
REVIEW OF SIGNIFICANT REAL ESTATE ACTIVITY DURING THE NINE MONTHS ENDED
- -----------------------------------------------------------------------
SEPTEMBER 30, 1997
- ------------------
At September 30, 1997, the Trust's principal asset was its portfolio of real
estate investments, which consisted of five properties, comprised of one
apartment complex, two office buildings, one shopping center and one hotel. Set
forth below is a discussion of significant changes in the portfolio during the
nine months ended September 30, 1997.
APARTMENTS
The Trust's $5,400,000 investment in the Sandpiper Cove Apartments, located in
Boynton Beach, Florida, and its $9,770,000 investment in the Elm Creek
Apartments, located in Elmhurst, Illinois, were repurchased by an affiliate of
the Trust's lessees in September 1997 for $20,000,000. The Trust realized a gain
on the sale of these investments of $4,750,000 ($.50 per share). Subsequent to
the end of the quarter, the Trust's $400,000 investment in the Northbrook
Apartments, located in San Bernardino, California, was repurchased by its lessee
for $750,000. The Trust realized a gain on the sale of this investment of
$350,000 ($.04 per share).
Telegraph Hill Apartments, located in Houston, Texas, which was held in an
Investment Partnership, was sold in June 1997. The Trust's share of the sales
proceeds was $1,300,000 and the Trust realized a gain from the sale of this
investment of $857,000 ($.09 per share).
OFFICE BUILDINGS
Citibank Office Plaza - Schaumburg, located in Schaumburg, Illinois, was sold in
July 1997 at its book value. The Trust received sales proceeds of approximately
$8,700,000. Subsequent to the end of the quarter, One Park West, located in
Chevy Chase, Maryland, was sold for $20,685,000. The Trust realized a gain from
the sale of this investment of approximately $1,334,000 ($.14 per share) and net
sales proceeds of $10,900,000, after closing expenses and adjustments and
repayment of its first mortgage.
10
<PAGE>
ITEM 1. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
SHOPPING CENTERS
Loehmann's Fashion Island, located in Aventura, Florida, was reclassified to an
Asset Held for Sale directly by the Trust at March 31, 1997. The property is
currently under contract for sale for approximately $37,200,000 and a closing is
anticipated in early December.
The Trust's lessee/mortgagor of Roseburg Valley Mall, located in Roseburg,
Oregon, repurchased the Trust's $3,950,000 investment in September 1997 at book
value, resulting in no gain or loss.
The Trust's lessee of Lakeside Center located in Burbank, California,
repurchased the Trust's $350,000 land investment in June 1997 for $2,350,000.
The Trust realized a gain from the sale of this investment of $1,944,000 ($.20
per share).
HOTELS
In January 1997, the Trust sold its land investment in City Centre Holiday Inn
located in Chicago, Illinois, for $20,577,000. The Trust's investment in this
project was $2,000,000 resulting in a gain to the Trust of $18,577,000.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
- ----------------------------------------------------------------------------
VERSUS THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996
- ---------------------------------------------------------
REVENUES
Rents from Owned Properties held directly by the Trust (base rent plus expense
reimbursements) decreased 11% for the three months ended September 30, 1997, as
compared to the same period in the prior year, primarily due to the sale of
Citibank Office Plaza -Schaumburg in July 1997 and decreased revenues from One
Park West. Rents from Owned Properties held directly by the Trust decreased 3%
for the nine months ended September 30, 1997, as compared to the same period in
the prior year, due to the sale of Citibank Office Plaza - Schaumburg, the sale
of Citibank Office Plaza - Oak Brook in January 1996 and the decreased revenues
from One ParkWest offset by the receipt of lease termination payments totaling
$420,000 in the first half of the year from former tenants of Loehmann's Fashion
Island and Citibank Office Plaza - Schaumburg. Rents from Owned Properties held
directly by the Trust included rents from Loehmann's Fashion Island, One Park
West (which was sold in October 1997) and Citibank Office Plaza - Schaumburg
(which was sold in July 1997) which are classified as Assets Held for Sale
directly by the Trust.
Base income from Structured Transactions held directly by the Trust decreased by
12% and 7%, respectively, and overage income decreased by 64% and 53%,
respectively, for the three and nine months ended September 30, 1997 as compared
to the same periods in the prior year. These decreases were primarily due to the
sale of the City Centre Holiday Inn investment in January 1997 and Lakeside
Center in June 1997.
The Trust's share of income from unconsolidated Investment Partnerships
decreased 72% and 91%, respectively, for the three and nine months ended
September 30, 1997, as compared to the same periods in the prior year, primarily
due to the dispositions of the College Hills 3 investment in March 1996, the
College Hills 8 and Financial Plaza investments in April 1996, the St. Charles
and Boardwalk investments in June 1996, the Canyon View II investment in August
1996, Plaza West Retail Center in October 1996 and Telegraph Hill in June 1997.
In addition, the first mortgage investment in the Lisle Hilton Inn was repaid in
June 1996.
Interest income increased 48% for the three months ended September 30, 1997 as
compared to the same period in the prior year, and decreased 13% for the nine
months ended September 30, 1997 as compared to the same period in the prior
year. Interest income is earned on net proceeds received by the Trust from the
sale of its investments, which proceeds are invested until they are distributed
to shareholders in the form of special dividends. Advisory fee income decreased
94% and 92%, respectively, for the three and nine months ended September 30,
1997, as compared to the same periods in the prior year, due to the sale of
investments held by the Investment Partnerships noted above.
11
<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 11% and 1%,
respectively, for the three and nine months ended September 30, 1997 primarily
due to the sale of Citibank Office Plaza - Schaumburg in July 1997. The decrease
for the nine months ended September 30, 1997 was partially offset by a payment
by the Trust of $125,000 in settlement of litigation with a tenant at Loehmann's
Fashion Island. Interest expense decreased 7% and 23% for the three and nine
months ended September 30, 1997, as compared to the same periods in the prior
year. For the three month period ended September 30, 1997 the decrease was
primarily due to a reduction in the interest rate on the Loehmann's Fashion
Island first mortgage. The decrease for the nine months ended September 30, 1997
was primarily due to the retirement of all of the Trust's remaining outstanding
10% and 9 3/4% Convertible Subordinated Debentures prior to June 1996 and a
$3,000,000 amortization payment made on the Loehmann's Fashion Island first
mortgage in June 1996.
Depreciation expense decreased 87% and 60%, respectively, for the three and nine
months ended September 30, 1997, as compared to the same periods in the prior
year, due to the elimination of depreciation on Citibank Office Plaza -
Schaumburg and Loehmann's Fashion Island in March 1997 and One Park West in July
1996 upon their reclassification to Assets Held for Sale directly by Trust,
partially offset by the write-off of certain tenant improvements due to early
lease terminations at Loehmann's Fashion Island. General and administrative
expenses decreased 37% and 40%, respectively, for the three and nine months
ended September 30, 1997, as compared to the same periods in the prior year,
primarily due to the accrual of severance arrangements in the prior periods for
certain of the Trust's employees in conjunction with the implementation of the
Business Plan. Professional fees decreased by 66% and 51%, respectively, for the
three and nine months ended September 30, 1997, as compared to the same periods
in the prior year, primarily due to the reduced size of the investment
portfolio.
GAIN ON SALE OF REAL ESTATE INVESTMENTS
Net income for the nine months ended September 30, 1997 included a gain on sale
of real estate investments of $26,128,000, comprised of $4,750,000 from the sale
of Elm Creek and Sandpiper Cove Apartments in September 1997, $1,944,000 from
the sale of Lakeside Center in June 1997, $857,000 from the sale of the
Telegraph Hill Apartments in June 1997 and $18,577,000 from the sale of City
Centre Holiday Inn investment in January 1997. For the nine months ended
September 30, 1996, net income included a gain on sale of real estate
investments of $3,115,000, comprised of $832,000 from the sale of Canyon View II
Apartments in August 1996, $443,000 from the sale of College Hills 8 in April
1996, $1,320,000 from the sale of the land underlying Bluffs II in May 1996,
$50,000 from the sale of the St. Charles and Boardwalk Apartments in June 1996
and $470,000 from the sale of Citibank Office Plaza - Oak Brook in January 1996.
EXTRAORDINARY LOSS FROM EXTINGUISHMENT OF DEBT
Net income for the nine months ended September 30, 1996 reflected an
extraordinary loss from extinguishment of debt of $287,000 related to the
write-off of original issuance costs when the Trust redeemed its Convertible
Subordinated Debentures.
DIVIDENDS
For the three months ended September 30, 1997, the Trustees declared a regular
quarterly dividend of $.06 per share and a special dividend of $2.50 per share,
each payable on November 24, 1997 to shareholders of record on November 13,
1997. Due to the magnitude of the dividends declared in relation to the Trust's
stock price at that time, the American Stock Exchange has determined that the
Trust's shares will trade ex-dividend on November 25, 1997. As a result of the
success of the Trust in implementing its Business Plan, at the date of this
report the Trust has disposed of all but three of its investments, and one of
the three is under contract to be sold. These dispositions have caused the
Trust's revenues to decline significantly. Consequently, management does not
anticipate that the Trust will declare any regular quarterly dividends from
operations in the future. The Trust will, of course, continue to declare special
dividends as its remaining assets are sold.
12
<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 Item 1 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" 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, including the sales proceeds payable to the Trust
for its properties, 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.
13
<PAGE>
PART II. OTHER INFORMATION
NONE
14
<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
President and Chief Executive Officer
Date: November 13, 1997
15
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