<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995.
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 1-10272
SECURITY CAPITAL PACIFIC TRUST
---------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 74-6056896
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7777 Market Center Avenue, El Paso, Texas 79912
-------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(915) 877-3900
----------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 for the
past 90 days.
Yes X No
----- -----
The number of shares outstanding of the Registrant's common stock as of April
24, 1995 was:
Shares of Beneficial Interest, $1 par value - 72,212,337 shares
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
INDEX
Page
Number
PART I. Financial Information
Item 1. Financial Statements
Balance Sheets - March 31, 1995 and
December 31, 1994 . . . . . . . . . . . . . . . . . . . 3
Statements of Earnings - Three months
ended March 31, 1995 and 1994 . . . . . . . . . . . . . 4
Statements of Cash Flows - Three months ended
March 31, 1995 and 1994 . . . . . . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . 6
Independent Auditors' Review Report . . . . . . . . . . 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 12
PART II. Other Information
Item 4. Submission of Matters to Vote of Securities Holders . . 18
Item 5. Other Information . . . . . . . . . . . . . . . . . . . 18
Item 6. Exhibits and Reports on Form 8K . . . . . . . . . . . . 18
2
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
------
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1995 1994
---------- ------------
(unaudited)
<S> <C> <C>
Real estate........................................ $1,599,564 $1,296,288
Less accumulated depreciation...................... 53,573 46,199
---------- ----------
1,545,991 1,250,089
Mortgage notes receivable.......................... 22,577 22,597
---------- ----------
Total investments.............................. 1,568,568 1,272,686
Cash and cash equivalents.......................... 9,393 8,092
Due from subscription agent........................ 72,608 --
Accounts receivable................................ 2,154 1,657
Other assets....................................... 18,487 13,343
---------- ----------
Total assets................................... $1,671,210 $1,295,778
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Line of credit................................... $ 76,090 $ 102,000
Long term debt................................... 200,000 200,000
Mortgages payable................................ 147,859 93,624
Distributions payable............................ -- 14,506
Accounts payable................................. 16,636 17,230
Accrued expenses and other liabilities........... 23,294 27,776
---------- ----------
Total liabilities.............................. 463,879 455,136
---------- ----------
Shareholders' Equity:
Series A Preferred shares (9,200,000 convertible
shares authorized and issued; stated
liquidation preference of $25 per share)....... 230,000 230,000
Common shares (shares issued - 72,376,815 in
1995 and 50,620,516 in 1994)................... 72,377 50,621
Additional paid-in capital....................... 956,579 622,161
Distributions in excess of net earnings.......... (49,696) (60,211)
Treasury shares (164,478 in 1995 and 1994)....... (1,929) (1,929)
---------- ----------
Total shareholders' equity..................... 1,207,331 840,642
---------- ----------
Total liabilities and shareholders' equity..... $1,671,210 $1,295,778
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------
1995 1994
------- -------
<S> <C> <C>
Revenues:
Rental income................................. $53,517 $37,414
Interest...................................... 555 863
------- -------
54,072 38,277
------- -------
Expenses:
Rental expenses............................... 21,682 15,832
Depreciation.................................. 7,424 4,950
Interest...................................... 6,006 3,154
General and administrative, including REIT
management fee.............................. 4,171 3,152
Provision for possible loss on investments.... 120 1,600
Other......................................... 129 77
------- -------
39,532 28,765
------- -------
Net earnings.................................... 14,540 9,512
Less Series A Preferred share dividends......... 4,025 4,025
------- -------
Net earnings attributable to common shares.. $10,515 $ 5,487
======= =======
Weighted average common shares outstanding...... 51,485 44,668
======= =======
Per common share amounts:
Net earnings attributable to common shares.... $ .20 $ .12
======= =======
Distributions paid............................ $ .2875 $ .25
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings................................... $ 14,540 $ 9,512
Items not requiring (providing) cash:
Depreciation and amortization................ 7,671 5,635
Provision for possible loss on
investments................................ 120 1,600
Increase (decrease) in accounts payable........ (1,371) 504
Decrease in accrued real estate taxes.......... (3,947) (286)
Increase (decrease) in accrued
interest on long term debt................... (3,644) 1,950
Increase in accrued expenses and
other liabilities............................ 3,108 2,338
Net change in other operating assets........... (4,461) (4,325)
--------- ---------
Net cash flow provided by operating
activities................................. 12,016 16,928
--------- ---------
INVESTING ACTIVITIES:
Real estate investments........................ (58,946) (85,236)
Mortgage notes receivable...................... 20 22
--------- ---------
Net cash flow used in investment
activities................................. (58,926) (85,214)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from sale of shares,
net of expenses.............................. 143,721 --
Proceeds from line of credit................... 101,000 50,750
Proceeds from dividend reinvestment
and share purchase plan, net................. 1,002 991
Proceeds from long term debt................... -- 200,000
Cash distributions paid on common shares....... (14,506) (11,161)
Cash dividends paid on preferred shares........ (4,025) (4,025)
Debt issuance costs incurred................... (112) (2,258)
Principal payments on mortgages payable........ (230) (474)
Principal payments on line of credit........... (126,910) (102,250)
Principal payment on PACIFIC's line of credit.. (51,900) --
Other.......................................... 171 (233)
--------- ---------
Net cash flow provided by
financing activities........................ 48,211 131,340
--------- ---------
Net increase in cash and cash equivalents........ 1,301 63,054
Cash and cash equivalents at beginning of
period......................................... 8,092 5,525
--------- ---------
Cash and cash equivalents at end of period....... $ 9,393 $ 68,579
========= =========
Non-cash investing and financing activities:
Purchase money notes given upon purchase
of multifamily properties...................... $ -- $ 7,850
Due from subscription agent (Note 2)............. $ 72,608 $ --
Multifamily properties and other net assets
acquired in connection with Merger which were
funded by:
PTR common shares exchanged for all of the
outstanding shares of PACIFIC's common
stock (Note 2)............................... $ 138,671 $ --
Mortgages assumed.............................. 54,465 --
Repayment of the outstanding balance on
PACIFIC's line of credit....................... 51,900 --
--------- ---------
Net increase in net assets related to Merger.... $ 245,036 $ --
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1995
(1) GENERAL
The financial statements of SECURITY CAPITAL PACIFIC TRUST ("PTR"),
formerly Property Trust of America, are unaudited and certain information
and footnote disclosures normally included in financial statements have been
omitted. Certain amounts in the financial statements for 1994 have been
reclassified to conform to the 1995 presentation. While management of PTR
believes that the disclosures presented are adequate, these interim
financial statements should be read in conjunction with the financial
statements and notes included in PTR's 1994 Annual Report on Form 10-K.
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of PTR's financial statements
for the interim period. The results of operations for the three month period
ended March 31, 1995 are not necessarily indicative of the results to be
expected for the entire year.
Per share data is computed by using the weighted average of common
shares outstanding during the period. The assumed conversion of the
Cumulative Convertible Series A Preferred Shares of Beneficial Interest,
("Preferred Shares") was antidilutive for both the three months ended March
31, 1995 and 1994.
(2) MERGER OF SECURITY CAPITAL PACIFIC INCORPORATED AND CONCURRENT SUBSCRIPTION
OFFERING
On March 23, 1995, PTR consummated a merger (the Merger) of Security
Capital Pacific Incorporated (PACIFIC), a Maryland corporation, with and
into PTR. PACIFIC was a private multifamily REIT controlled by Security
Capital Group Incorporated (Security Capital Group), PTR's principal
shareholder. In the Merger, each outstanding share of PACIFIC common stock
was converted into 0.611 of a PTR common share (Common Share). As a
result, 8,468,460 Common Shares were issued in the Merger in exchange for
all of the outstanding shares of PACIFIC common stock. The Merger has been
accounted for as a purchase and, accordingly, the results of operations of
PACIFIC have been included in PTR's financial statements from March 23,
1995.
In connection with the Merger, PTR paid off the balance outstanding
($51.9 million) on PACIFIC's line of credit and assumed $54.5 million in
mortgages.
The following summarized pro forma (unaudited) information assumes the
Merger occurred on January 1, 1994. The weighted average Common Shares
outstanding have been adjusted to reflect the Merger conversion rate (.611
of a Common Share for each PACIFIC common share). The pro forma financial
information does not necessarily reflect the results of operations that
would have occurred had PACIFIC and PTR constituted a single entity during
such period (in thousands, except share amounts).
<TABLE>
THREE MONTHS ENDED
MARCH 31,
------------------
1995 1994
-------- --------
<S> <C> <C>
Rental income................................. $62,136 $40,246
======= =======
Net earnings attributable to common shares.... $12,171 $ 6,338
======= =======
Weighted average common shares outstanding.... 59,201 48,448
======= =======
Per common share amounts:
Net earnings attributable to common shares.. $ 0.21 $ 0.13
======= =======
</TABLE>
6
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS
March 31, 1995
Concurrently with the consummation of the Merger, PTR completed a
subscription offering pursuant to which PTR received subscriptions for
$216.6 million (13.2 million Common Shares). At March 31, 1995 PTR had a
$72.6 million receivable from its subscription agent in connection with the
subscription offering, which was subsequently collected. The subscription
offering was designed to allow shareholders of PTR to purchase Common
Shares at the same price PACIFIC shareholders were acquiring Common Shares
in the Merger ($16.375 per Common Share). Security Capital Group purchased
$50 million (3.1 million Common Shares) in the subscription offering
pursuant to the oversubscription privilege.
(3) REAL ESTATE
Investments in real estate, at cost, were as follows (dollar amounts
in thousands):
<TABLE>
<CAPTION>
March 31, 1995 December 31, 1994
------------------ -------------------
Investment Units Investment Units
---------- ----- ---------- ------
<S> <C> <C> <C> <C>
Multifamily:
Operating properties..................... $1,402,774 38,160 $1,121,301 31,640
Developments under
construction........................... 113,119 4,416 100,401 4,526
Developments in planning................. 41,997 4,993 33,194 4,306
Land held for future
development............................. 8,259 - 7,977 -
---------- ------ ---------- ------
Total Multifamily...................... 1,566,149 47,569 1,262,873 40,472
====== ======
Non-multifamily........................... 33,415 33,415
---------- ----------
Total real estate...................... $1,599,564 $1,296,288
========== ==========
</TABLE>
The change in investments in real estate, at cost, from December 31,
1994 to March 31, 1995 consisted of the following (in thousands):
Balance at December 31, 1994. . . . . . . $1,296,288
Acquisitions and renovation expenditures. 264,933
Development expenditures, including land
acquisitions. . . . . . . . . . . . . . 37,589
Capital improvements. . . . . . . . . . . 606
Acquisition of land held for future
development . . . . . . . . . . . . . . 281
Provision for possible loss on
investments . . . . . . . . . . . . . . (120)
Other . . . . . . . . . . . . . . . . . . (13)
----------
Balance at March 31, 1995 . . . . . . . . $1,599,564
==========
At April 24, 1995, PTR had contingent contracts or letters of
7
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS
March 31, 1995
intent, subject to PTR's final due diligence, to acquire land for the near
term development of 4,473 multifamily units with an aggregate estimated
development cost of $225.6 million. At the same date, PTR also had
contingent contracts or letters of intent, subject to final due diligence,
for the acquisition of 1,431 additional multifamily units with an aggregate
investment cost of $65.3 million, including planned renovations.
At April 24, 1995, PTR had unfunded development commitments for
developments under construction of $100.5 million.
PTR's strategy is to focus on the ownership of multifamily properties.
Accordingly, periodic sales of non-multifamily assets have occurred and may
continue to occur as favorable sales opportunities arise. Properties are
periodically evaluated for net realizable value and provisions for possible
losses are made if required.
PTR is a minority partner with a 40% interest in a partnership which
owns and operates an office building near Dallas, Texas. During the first
quarter of 1994, the partnership adopted a strategy of disposing of the
property rather than continuing to hold the property as a long term
investment. As a result, the managing partner evaluated the building for
net realizable value which resulted in a provision for possible loss of $4
million in the first quarter of 1994 and an additional $300,000 in the
first quarter of 1995. PTR's share of the loss provisions is $1.6 million
and $120,000 as reflected in the statement of earnings for March 31, 1994
and March 31, 1995, respectively. PTR's net carrying value after the
provisions is $2,695,000. These provisions had no impact on cash flow from
operating activities nor does PTR have any further financial obligation to
the partnership.
PTR owns all of the preferred stock of PTR Development Services
Incorporated (PTR Development Services), which entitles PTR to
substantially all of the net operating cash flow (95%) of PTR Development
Services. Security Capital Group owns all of the common stock of PTR
Development Services and is in negotiations to transfer such stock at cost
to an unrelated third party. The common stock is entitled to receive the
remaining 5% of net operating cash flow. As of March 31, 1995, the
outstanding balances of mortgage loans made by PTR to PTR Development
Services for the purchase of land for multifamily unit development
aggregated $9.8 million. Owning land through PTR Development Services
provides greater flexibility for the use of such land and the disposition
of excess parcels. The activities of PTR Development Services are
consolidated with PTR's and all intercompany transactions have been
eliminated in consolidation.
(4) DISTRIBUTIONS
PTR's current policy is to pay distributions to shareholders based
upon funds from operations and aggregating annually at least 95% of its
taxable income. Funds from operations is not to be construed as a
substitute for "net earnings" in evaluating operating results nor as a
substitute for "cash flow" in evaluating liquidity. In July 1994, PTR
changed to a more conservative policy of expensing the amortization of loan
costs in determining funds from operations. For comparability, funds from
operations for the three months ended March 31, 1994 has been restated to
give effect to this policy as if it had been in effect since January 1994.
Funds from operations for the three months ended March 31,
8
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS
March 31, 1995
1995 and 1994 was as follows (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Net earnings attributable to common shares.... $10,515 $ 5,487
Add (Deduct):
Depreciation................................ 7,424 4,950
Provision for possible loss on investments.. 120 1,600
------- -------
Funds from operations attributable to common
shares....................................... 18,059 12,037
Distributions paid to common shareholders..... 14,506 11,161
------- -------
Excess of funds from operations after
distributions................................ $ 3,553 $ 876
======= =======
Weighted average shares outstanding........... 51,485 44,668
======= =======
</TABLE>
On April 20, 1995, the Trustees declared a cash distribution of $.2875
per common share to be paid on May 12, 1995 to shareholders of record on
May 1, 1995.
(5) BORROWINGS
Concurrent with the Merger (See Note 2), PTR increased its unsecured
revolving line of credit facility with Texas Commerce Bank, National
Association, as agent bank for a group of lenders ("TCB"), to a commitment
of $350 million and received a reduction in the interest rate to the
greater of prime or the federal funds rate plus 0.50%, or at PTR's option,
LIBOR plus 1.625% (which can vary from LIBOR plus 1.25% to LIBOR plus 2.0%
based upon the rating of PTR's senior unsecured debt - 1.625% at April 1,
1995). Additionally, there is a commitment fee on the average unfunded
line of credit balance. In addition, Wells Fargo Realty Advisors Funding,
Incorporated was also added as co-agent.
The TCB line matures August 1996 and may annually be extended for an
additional year with the approval of TCB and the other participating
lenders. All debt incurrences are subject to covenants, as more fully
described in the loan agreement.
At March 31, 1995, PTR was in compliance with all debt covenants.
Interest paid on all borrowings for the three months ended March 31,
1995 was $11,492,000, including $2,257,000 of interest capitalized during
construction. Interest paid on all borrowings for the three months ended
March 31, 1994 was $1,586,000, including $1,207,000 of interest capitalized
during construction.
Amortization of loan costs included in interest expense for the three
months ended March 31, 1995 and 1994 was $247,000 and $685,000,
respectively.
(6) REIT MANAGEMENT AND PROPERTY MANAGEMENT AGREEMENTS
In March 1995, PTR extended its REIT Management agreement with
9
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS
March 31, 1995
Security Capital Pacific Incorporated (the "REIT Manager"), formerly Security
Capital (Southwest) Incorporated, to June 30, 1995, to provide REIT Management
services to PTR. The REIT Manager is a subsidiary of Security Capital Group,
which owns approximately 37.9% of the Common Shares. The REIT
Management fee for the three months ended March 31, 1995 was $3,957,000 and
$3,004,000 for the three months ended March 31, 1994.
SCG Realty Services Incorporated (SCG Realty Services) has managed and
currently manages a substantial majority of PTR's operating multifamily
properties. For the three months ended March 31, 1995 and 1994, PTR paid SCG
Realty Services aggregate fees of $1,895,000 and $1,358,000, respectively. In
addition to property management, SCG Realty Services has performed certain due
diligence services for PTR's acquisitions. Effective October 1, 1994, SCG
Realty Services no longer performed due diligence services for PTR. Security
Capital Group is the sole shareholder of SCG Realty Services. Rates for
services performed by SCG Realty Services are subject to annual approval by
PTR's independent Trustees (who receive an annual review from an independent
third party) and are at rates prevailing in the markets in which PTR operates.
10
<PAGE>
Independent Auditors' Review Report
-----------------------------------
The Board of Trustees and Shareholders
SECURITY CAPITAL PACIFIC TRUST:
We have reviewed the accompanying balance sheet of SECURITY CAPITAL PACIFIC
TRUST as of March 31, 1995, and the related statements of earnings and cash
flows for the three-month periods ended March 31, 1995 and 1994. These
financial statements are the responsibility of the Trust's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical review procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of SECURITY CAPITAL PACIFIC TRUST as of
December 31, 1994, and the related statements of earnings, stockholders' equity,
and cash flows for the year then ended (not presented herein); and in our report
dated February 28, 1995, except as to Note 10, which is as of March 23, 1995, we
expressed an unqualified opinion on those financial statements. In our opinion,
the information set forth in the accompanying balance sheet as of December 31,
1994 is fairly presented, in all material respects, in relation to the balance
sheet from which it has been derived.
KPMG PEAT MARWICK LLP
El Paso, Texas
April 27, 1995
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Security Capital Pacific Trust's ("PTR") operating results depend
primarily upon income from multifamily properties, which is substantially
influenced by (i) the demand for and supply of multifamily units in PTR's target
market and submarkets, (ii) rental expense levels, (iii) the effectiveness of
property level operations and (iv) the pace and price at which PTR can develop
and acquire additional multifamily properties. Capital and credit market
conditions which affect PTR's cost of equity and debt capital also influence
operating results.
PTR's target market and submarkets have benefitted substantially in
recent periods from demographic trends (including job and population growth)
that increase the demand for multifamily units while financing constraints
(specifically, reduced availability of development capital) have limited new
construction to levels substantially below construction activity prior to 1986.
Consequently, rental rates for multifamily units have increased more than the
inflation rate for the last two years and are expected to continue experiencing
such increases for 1995. Expense levels also influence operating results, and
rental expenses (other than real estate taxes) for multifamily properties have
generally increased at approximately the same rate as rents for the past year
and are expected to increase at a slightly lower rate than rents for 1995.
MERGER AND CONCURRENT SUBSCRIPTION OFFERING
On March 23, 1995, PTR consummated a merger (the "Merger") of Security
Capital Pacific Incorporated ("PACIFIC"), a Maryland corporation, with and into
PTR. In the Merger, each outstanding share of PACIFIC common stock was
converted into 0.611 of a PTR common share ("Common Share"). As a result,
8,468,460 Common Shares were issued in the Merger in exchange for all of the
outstanding shares of PACIFIC common stock. Additionally, PTR changed its name
from Property Trust of America to Security Capital Pacific Trust to more
accurately reflect its newly expanded target market. The Merger expands PTR's
target market to include a six-state region of the western United States with
129 submarkets. As a result, PTR is well-positioned to deploy capital in the
geographic areas of the United States that Security Capital Pacific Incorporated
(the "REIT Manager") believes are expected to provide some of the most
attractive multifamily growth opportunities.
In connection with the Merger, PTR paid off the balance outstanding
($51.9 million) on PACIFIC's line of credit and assumed $54.5 million in
mortgages.
Concurrently with the consummation of the Merger, PTR completed a
subscription offering pursuant to which PTR received subscriptions for $216.6
million (13.2 million Common Shares). The subscription offering was designed to
allow shareholders of PTR to purchase Common Shares at the same price PACIFIC
shareholders were acquiring Common Shares in the Merger ($16.375 per Common
Share). Security Capital Group Incorporated ("Security Capital Group") purchased
$50 million (3.1 million Common Shares) in the subscription offering pursuant to
the oversubscription privilege.
RESULTS OF OPERATIONS
Interim Period Comparison
During the three months ended March 31, 1995, PTR acquired 19
multifamily properties aggregating 6,041 units for a total purchase price,
including planned renovations, of approximately $261.2 million (acquisitions
from the Merger represented 17 operating multifamily properties, aggregating
5,579 units, for a total purchase price of approximately $242.5 million), and
completed development of 4 multifamily properties aggregating 479 units with a
completed cost of $20.3 million. At April 24, 1995, PTR had 4,700 multifamily
units under construction with a budgeted completion cost of $205.4 million and
had in the final planning stages an estimated 5,240
12
<PAGE>
multifamily units with an aggregate expected investment of $269.3 million.
During the three months ended March 31, 1994, PTR acquired five multifamily
properties aggregating 1,374 units for a total purchase price, including planned
renovations, of approximately $53 million and completed development of five
multifamily properties aggregating 1,016 units with a completed cost of $38.3
million. At March 31, 1994, PTR had 3,188 multifamily units under construction
with a budgeted completion cost of $144.1 million and had in the final planning
stages an estimated 2,458 multifamily units with an aggregate budgeted
completion cost of $112.6 million.
The percentage of PTR's total rental income generated by multifamily
properties was 98.6% and 97.9% for the three months ended March 31, 1995 and
1994, respectively. This percentage will continue to increase throughout 1995
due to the Merger, past and ongoing multifamily property acquisitions and
developments and the periodic sale of non-multifamily properties.
Property Operations
Property operations contributed to increased net earnings primarily due to
property rental income increases of $16.1 million (43.0%), partially offset by
higher rental expenses, which increased by $5.9 million (36.9%) for the period.
Depreciation expense increased $2.5 million (50.0%) for the three months ended
March 31, 1995 over 1994. These increases are due to additional operating
multifamily properties placed in service and to rental rate increases. For
operating multifamily properties, which comprise 97.7% of PTR's total operating
properties based on cost at March 31, 1995, rental expenses were 41.0% and 42.7%
of rental income during the three months ended March 31, 1995 and 1994,
respectively. At March 31, 1995, 81.0% of PTR's operating multifamily
properties, based on cost, were classified by PTR as stabilized as compared to
56.9% for the same period in 1994. At March 31, 1995, PTR's operating
multifamily properties were 95% leased and PTR's stabilized multifamily
properties were 96.1% leased.
Multifamily Properties Stabilized throughout Both Periods
For the 39 multifamily properties that were stabilized throughout the three
months ended March 31, 1995 and 1994, property level earnings before interest,
income taxes, depreciation and amortization ("EBITDA") as a percentage of PTR's
aggregate investment in these properties increased to 11.49% in 1995 from 11.0%
in 1994. EBITDA does not represent and should not be substituted for net
earnings as defined by generally accepted accounting principles ("GAAP") and is
not indicative of cash flows from operations or that cash flows are sufficient
to fund all cash needs. This increase in return on investment, which is a
function of rental rate growth, occupancy levels, expense rate growth and
capital expenditure levels, is attributable primarily to growth in rental rates,
and was achieved at the same time that PTR increased its investment in these
properties by $1.2 million (.34% of total investment in these properties) as a
result of renovation and other capital expenditures. Rental income increased
5.1% (the majority resulting from 4.8% rental rate increase) for such properties
for the three months ended March 31, 1995 as compared to the three months ended
March 31, 1994. Performance of these properties was further enhanced by
decreases in rental expenses, primarily due to lower turnover expenses. Lower
turnover expenses resulted from certain asset management programs designed to
reduce turnover, and a rising interest rate environment which commenced in the
latter part of 1994 and contributed to such reduction by decreasing the number
of residents moving out to purchase homes. However, management does not
anticipate that property operation expenses will decline throughout 1995 at
the same rate experienced during the first quarter.
Interest Income
Interest income for the three months ended March 31, 1995 decreased
$308,000 (35.7%) as compared to 1994, primarily resulting from a decrease in
interest income from bank accounts due to lower average cash balances in 1995
($2.5 million) as
13
<PAGE>
compared to 1994 ($43.6 million). The higher average cash balances in 1994
resulted from the proceeds of the long term debt offering of $200 million which
was closed in February 1994, as more fully discussed under "Liquidity and
Capital Resources."
Interest Expense
Interest expense increased $2.9 million (90.4%) for the three months ended
March 31, 1995 when compared to 1994. The increase is primarily attributable to
the increase in interest expense of $1.6 million resulting from the issuance of
$200 million of long term notes in February 1994, as more fully discussed under
"Liquidity and Capital Resources" and the increase in line of credit interest
expense as discussed below.
Mortgage interest expense increased $764,000 (64.3%) for the three months
ended March 31, 1995 when compared to 1994 primarily as a result of the addition
of mortgages aggregating $48.7 million during 1994.
Line of credit interest expense increased $1.5 million (126.3%) resulting
primarily from higher outstanding balances and higher interest rates relating to
PTR's revolving credit facility. Average borrowings on the line of credit were
approximately $127.0 million (with an average interest rate of 8.15%) during the
three months ended March 31, 1995, as compared to average borrowings of $32.8
million (with an average interest rate of 7.05%) during 1994.
The increases in interest expense were offset by an increase of $1.0
million (87.0%) in capitalized interest. The increase in capitalized interest
is attributable to increased multifamily development activity for the three
months ended March 31, 1995 as compared to 1994.
General and Administrative Expense Including REIT Management Fee
The REIT management fee paid by PTR fluctuates with the level of PTR's pre-
REIT management fee cash flow, as defined in the REIT management agreement, and
therefore increased by $953,000 (31.7%) during the three months ended March 31,
1995 as compared to 1994 because cash flow increased substantially (see "REIT
Management Agreement"). With the issuance of $200 million of amortizing, long
term debt as more fully described under "Liquidity and Capital Resources," the
REIT Management fee will decline in proportion to PTR's earnings from operations
because actual or assumed regularly scheduled principal and interest payments,
as defined in the agreement, associated with the long term debt will be deducted
from the cash flow amount on which the REIT Management fee is based.
Provision for Possible Loss
PTR is a minority partner with a 40% interest in a partnership which owns
and operates an office building near Dallas, Texas. During the first quarter of
1994, the partnership adopted a strategy of disposing of the property rather
than continuing to hold the property as a long term investment. As a result,
the managing partner evaluated the building for net realizable value which
resulted in provisions for possible loss of $4 million in the first quarter of
1994 and an additional $300,000 in the first quarter of 1995. PTR's share of
the loss provisions were $1.6 million and $120,000 as reflected in the statement
of earnings for March 31, 1994 and 1995, respectively. PTR's net carrying value
after the provisions is $2.7 million. These provisions had no impact on cash
flow from operating activities nor does PTR have any further financial
obligation to the partnership.
14
<PAGE>
ENVIRONMENTAL MATTERS
PTR is not aware of any environmental condition on any of its properties
which is likely to have a material adverse effect upon its results of operations
or financial position.
LIQUIDITY AND CAPITAL RESOURCES
The REIT Manager considers PTR's liquidity and ability to generate cash to
be adequate and expects it to continue to be adequate to meet PTR's development,
acquisition, operating, debt service and shareholder distribution requirements.
Net cash flow provided by operating activities decreased by $4.9 million
(29.0%) for the three months ended March 31, 1995 compared to 1994. The
decrease is due primarily to changes in the timing of the payment of accrued
expenses in 1995 as compared to 1994.
Investing Activities
During the three months ended March 31, 1995, PTR invested $248.9 million
for the development, acquisition (including properties acquired in the Merger),
and renovation of multifamily properties, net of $54.5 million in mortgages
assumed. During the first three months of 1994, PTR invested $85.2 million for
the development, acquisition, and renovation of multifamily properties, net of
$7.9 million in mortgages assumed. These developments, acquisitions, and
renovations were financed with cash on hand, shares issued in the Merger, and
borrowings under PTR's revolving line of credit, which were repaid with the
proceeds from PTR's equity and debt offerings.
At April 24, 1995, PTR had unfunded development commitments for
developments under construction of $100.5 million. Additionally the land PTR
owned or controlled though letters of intent or contingent contracts at such
date, subject to PTR's final due diligence, will allow for the development of
additional multifamily units, which will be an important generator of growth for
PTR in 1996 and beyond. The foregoing transactions are subject to a number of
conditions, and PTR cannot predict with certainty that any of them will be
consummated.
Financing Activities
PTR's financing activities for the three months ended March 31, 1995
provided $48.2 million as compared to $131.3 million for the same period in
1994. Net cash proceeds received from the $216.3 million concurrent subscription
offering were $143.7 million for the three months ended March 31, 1995 ($72.6
million was subsequently collected) as compared to $200 million of long term
debt proceeds for the same period in 1994. In addition, PTR issued $138.7
million in Common Shares in exchange for all of PACIFIC's Common Stock. Proceeds
from the offerings were used for acquisition, development and renovation of
multifamily properties or to repay revolving credit balances incurred for such
purposes.
On August 4, 1994, PTR consummated a conversion of its $200 million
revolving line of credit facility with TCB and the other participating lenders
into an unsecured facility, which was increased to $275 million and extended to
August 15, 1996 on October 27, 1994 and was further increased to $350 million on
March 23, 1995. The line of credit may annually be extended for an additional
year with the approval of TCB and the other participating lenders. Borrowings
bear interest at the greater of prime or the federal funds rate plus 0.5% or, at
PTR's option, LIBOR plus 1.625% (which can vary from LIBOR plus 1.25% to LIBOR
plus 2.0% based upon the rating of PTR's senior unsecured debt). Additionally,
there is a commitment fee on the average unfunded line of credit balance. All
debt incurrences are subject to covenants that PTR maintain (i) an interest
coverage ratio of not less than 2:1, (ii) a debt to tangible net worth ratio no
greater than 1:1, (iii) a fixed charge ratio
15
<PAGE>
of no less than 1.4 and (iv) an unencumbered pool of real estate properties of
which certain properties must meet certain occupancy requirements and which have
an aggregate historical cost of at least 175% of unsecured indebtedness. PTR is
in compliance with all debt covenants. At May 3, 1995, there were $25 million
of borrowings outstanding under the line of credit.
PTR expects to finance developments, acquisitions and renovations with cash
on hand and borrowings under its line of credit prior to arranging long term
capital in order to efficiently respond to market opportunities while minimizing
the amount of cash invested in short term investments at lower yields. PTR
believes that its current conservative ratio of long term debt to total long
term capitalization, the sum of long term debt and shareholders' equity (22% at
March 31, 1995), provides considerable flexibility to prudently utilize long
term debt as a future financing tool. PTR intends to limit the sum of long term
debt and line of credit debt to less than 40% (debt covenants permit up to 50%)
of the sum of total book capitalization. PTR expects primarily to fund
additional growth for the foreseeable future through further issuances of
unsecured long term, fixed rate amortizing debt securities similar to the Notes
issued in February 1994 and through its asset optimization strategy. To a
lesser extent, under certain circumstances, PTR may, on occasion, arrange for
debt with different maturities in order to optimize its debt maturity schedule.
Based on the Merger, its recent subscription offering, debt issuance
capacity, asset optimization strategy and current real estate and debt market
conditions, PTR believes it has reached an optimal level of equity
capitalization. Hence, PTR has no plans to raise additional capital through the
equity markets. No assurance can be given that changes in market conditions or
other factors will not affect these plans.
On March 23, 1995, PTR raised $216.3 million of net proceeds from a
subscription offering of 13.2 million Common Shares at a price of $16.375 per
Common Share, which was the same price per Common Share on which the exchange
ratio for the Merger was based. The subscription offering closed concurrently
with the consummation of the Merger. The subscription offering was designed to
allow shareholders the opportunity to purchase Common Shares at the same price
at which PACIFIC shareholders acquired Common Shares in the Merger and to
maintain PTR's balance sheet ratios. Security Capital Group acquired 3,053,435
Common Shares ($50 million) in the subscription offering pursuant to the
oversubscription privilege.
On August 16, 1994, PTR raised $101.8 million of net proceeds from a rights
offering of 5,593,718 Common Shares at a price of $18.25 per Common Share.
Security Capital Group exercised in full its rights to acquire Common Shares in
the offering at the same price paid by the public ($18.25 per Common Share) and
acquired additional rights in the open market. Proceeds from the offering were
used to fund developments and to invest in additional multifamily properties in
PTR's target market and to repay borrowings under PTR's line of credit.
On February 8, 1994, PTR issued $100 million of 6.875% Senior Notes due
2008 (the "2008 Notes") and $100 million of 7.5% Senior Notes due 2014 (the
"2014 Notes"), collectively referred to as the "Notes". The 2008 Notes bear
interest at 6.875% per annum and require annual principal payments of $12.5
million, commencing February 15, 2001. The 2014 Notes bear interest at 7.5% per
annum and require aggregate annual principal payments of $10 million in 2009,
$12.5 million in 2010, $15 million in 2011, $17.5 million in 2012, $20 million
in 2013, and $25 million in 2014. Collectively, the Notes have an average life
to maturity of 14.25 years and an average effective interest cost, inclusive of
16
<PAGE>
offering discounts, issuance costs, and the interest rate protection agreement,
of 7.37% per annum. The Notes are redeemable any time at the option of PTR, in
whole or in part, at a redemption price equal to the sum of the principal amount
of the Notes being redeemed plus accrued interest thereon to the redemption date
plus an adjustment, if any, based on the yield to maturity relative to market
yields available at redemption. The Notes are governed by the terms and
provisions of an indenture agreement (the "Indenture") between PTR and State
Street Bank and Trust Company, as trustee.
Under the terms of the Indenture, PTR can incur additional debt only if,
after giving effect to the debt being incurred and application of proceeds
therefrom, (i) the ratio of debt to total assets, as defined in the Indenture,
does not exceed 60%, (ii) the ratio of secured debt to total assets, as defined
in the Indenture, does not exceed 40%, and (iii) PTR's pro forma interest
coverage ratio, as defined in the Indenture, for the four preceding fiscal
quarters is not less than 1.5.
Distributions
PTR's current distribution policy is to pay quarterly distributions to
holders of Common Shares based upon what it believes to be a prudent percentage
of cash flow. Because depreciation is a non-cash expense, cash flow typically
will be greater than net earnings attributable to Common Shares. Therefore,
quarterly distributions paid will generally be higher than quarterly net
earnings.
Distributions paid on Common Shares exceeded net earnings attributable to
Common Shares by $4.0 million and $5.7 million for the three months ended March
31, 1995 and 1994, respectively.
Pursuant to the terms of the Series A Preferred Shares ("Preferred
Shares"), PTR is restricted from declaring or paying any distribution with
respect to its Common Shares unless all cumulative distributions with respect to
the Preferred Shares have been paid or sufficient funds have been set aside for
distributions that have been declared for the then current distribution period
with respect to the Preferred Shares.
Funds from operations represents PTR's net earnings computed in accordance
with GAAP, excluding gains (or losses) plus depreciation and provision for
possible loss on investments. PTR believes that funds from operations is
helpful in understanding a property portfolio in that such calculation reflects
cash flow from operating activities and the properties' ability to support
interest payments and general operating expenses before the impact of certain
activities, such as gains or losses from property sales and changes in accounts
receivable and accounts payable. In July 1994, PTR changed to a more
conservative policy of expensing the amortization of loan costs in determining
funds from operations. For comparability, funds from operations for the three
months ended March 31, 1994 has been restated to give effect to this policy as
if it had been in effect since January 1, 1994. As a result, funds from
operations attributable to Common Shares increased $6.1 million (50.0%)to $18.1
million for the three months ended March 31, 1995 from $12.0 million for 1994.
The increase resulted primarily from increased properties in operation. Funds
from operations should not be considered as an alternative to net earnings or
any other GAAP measurement of performance as an indicator of PTR's operating
performance nor as an alternative to cash flows from operating, investing or
financing activity as a measure of liquidity.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITIES HOLDERS
At a special meeting held March 23, 1995, the holders of PTR common shares
approved the Merger Agreement among PTR, PACIFIC and Security Capital Group
pursuant to which, among other things, (i) PACIFIC merged with and into PTR,
(ii) each share of PACIFIC common stock outstanding immediately prior to
consummation of the Merger was converted into 0.611 of a PTR common share, and
(iii) PTR's name was changed to "Security Capital Pacific Trust." The Merger was
approved by 40,703,862 shares (80.7% of PTR's shares) with 707,936 shares voting
against the Merger (1.4% of PTR's shares) and 503,809 shares abstaining (1% of
PTR's shares).
ITEM 5. OTHER INFORMATION
On March 23, 1995, PTR completed the Merger as more fully described under
"Item 2, Management's Discussion and Analysis of Financial Condition and Results
of Operations - Merger and Concurrent Subscription Offering."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<S> <C> <C>
15 Letter from KPMG Peat Marwick LLP dated Sequentially
May 4, 1995 regarding unaudited numbered page 20
financial information.
</TABLE>
(b) Reports on Form 8-K:
<TABLE>
<CAPTION>
Date Item Reported Financial Statements
-------------- ------------- --------------------
<S> <C> <C>
March 29, 1995 Item 5 No
</TABLE>
18
<PAGE>
SIGNATURES
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 thereunto duly authorized.
Date: May 4, 1995 SECURITY CAPITAL PACIFIC TRUST
/s/ William Kell
----------------------------------
William Kell, Vice President and
Duly Authorized Officer and
Principal Financial Officer
<PAGE>
Exhibit 15
Board of Trustees and Shareholders
Security Capital Pacific Trust
Gentlemen:
Re: Registration Statement Nos. 33-86444, 33-78402, 33-71040,
33-44631 and 33-25317
With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our report dated April 27, 1995 related to our
review of interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered a part of a registration statement prepared or certified by an
accountant, or a report prepared or certified by an accountant within the
meaning of sections 7 and 11 of the Act.
KPMG PEAT MARWICK LLP
El Paso, Texas
May 4, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 9,393
<SECURITIES> 0
<RECEIVABLES> 97,339
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,599,564
<DEPRECIATION> 53,573
<TOTAL-ASSETS> 1,671,210
<CURRENT-LIABILITIES> 0
<BONDS> 147,859
<COMMON> 72,377
0
230,000
<OTHER-SE> 904,954
<TOTAL-LIABILITY-AND-EQUITY> 1,671,210
<SALES> 53,517
<TOTAL-REVENUES> 54,072
<CGS> 0
<TOTAL-COSTS> 21,682
<OTHER-EXPENSES> 129
<LOSS-PROVISION> 120
<INTEREST-EXPENSE> 6,006
<INCOME-PRETAX> 10,515
<INCOME-TAX> 0
<INCOME-CONTINUING> 10,515
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,515
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
</TABLE>
