<PAGE>
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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 JUNE 30, 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, 79912
TEXAS
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
(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.
X
Yes No
The number of shares outstanding of the Registrant's common stock as of July
20, 1995 was:
Shares of Beneficial Interest, $1 par value--72,210,960 shares
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<PAGE>
SECURITY CAPITAL PACIFIC TRUST
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I. Financial Information
Item 1. Financial Statements
Balance Sheets--June 30, 1995 and December 31, 1994.............. 3
Statements of Earnings--Three and six months ended June 30, 1995
and 1994........................................................ 4
Statements of Cash Flows--Six months ended June 30, 1995 and
1994............................................................ 5
Notes to Financial Statements.................................... 6
Independent Auditor's 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 8-K............................. 18
</TABLE>
2
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1995 1994
------ ----------- ------------
(UNAUDITED)
<S> <C> <C>
Real estate........................................... $1,690,564 $1,296,288
Less accumulated depreciation......................... 62,649 46,199
---------- ----------
1,627,915 1,250,089
Mortgage notes receivable............................. 17,903 22,597
---------- ----------
Total investments................................. 1,645,818 1,272,686
Cash and cash equivalents............................. 35,667 8,092
Accounts receivable................................... 2,709 1,657
Other assets.......................................... 16,442 13,343
---------- ----------
Total assets...................................... $1,700,636 $1,295,778
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Line of credit...................................... $ -- $ 102,000
Long term debt...................................... 200,000 200,000
Mortgages payable................................... 152,007 93,624
Distributions payable............................... -- 14,506
Accounts payable.................................... 14,673 17,230
Accrued expenses and other liabilities.............. 30,343 27,776
---------- ----------
Total liabilities................................. 397,023 455,136
---------- ----------
Shareholders' Equity:
Series A Preferred shares (9,200,000 convertible
shares issued; stated liquidation preference of $25
per share)......................................... 230,000 230,000
Series B Preferred shares (4,200,000 shares issued;
stated liquidation preference of $25 per share).... 105,000 --
Common shares (shares issued--72,375,819 in 1995 and
50,620,516 in 1994)................................ 72,376 50,621
Additional paid-in capital.......................... 952,848 622,161
Distributions in excess of net earnings............. (54,675) (60,211)
Treasury shares (164,859 in 1995 and 164,478 in
1994).............................................. (1,936) (1,929)
---------- ----------
Total shareholders' equity........................ 1,303,613 840,642
---------- ----------
Total liabilities and shareholders' equity........ $1,700,636 $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 SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
--------------- ----------------
1995 1994 1995 1994
------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues:
Rental income............................... $65,719 $43,390 $119,236 $80,804
Interest.................................... 719 644 1,274 1,508
------- ------- -------- -------
66,438 44,034 120,510 82,312
------- ------- -------- -------
Expenses:
Rental expenses............................. 25,933 18,864 47,615 34,696
Depreciation................................ 9,126 5,841 16,550 10,791
Interest.................................... 5,123 5,105 11,129 8,259
General and administrative, including REIT
management fee............................. 5,377 3,184 9,548 6,337
Provision for possible loss on investments.. -- -- 120 1,600
Other....................................... 73 275 202 352
------- ------- -------- -------
45,632 33,269 85,164 62,035
------- ------- -------- -------
Net earnings.................................. 20,806 10,765 35,346 20,277
Less Preferred Share dividends................ 5,023 4,025 9,048 8,050
------- ------- -------- -------
Net earnings attributable to common shares.. $15,783 $ 6,740 $ 26,298 $12,227
======= ======= ======== =======
Weighted average common shares
outstanding.............................. 72,027 44,724 61,812 44,696
======= ======= ======== =======
Per common share amounts:
Net earnings attributable to common
shares................................. $ 0.22 $ 0.15 $ 0.43 $ 0.27
======= ======= ======== =======
Distributions paid...................... $0.2875 $ 0.25 $ 0.575 $ 0.50
======= ======= ======== =======
</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>
SIX MONTHS ENDED
JUNE 30,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Operating activities:
Net earnings............................................ $ 35,346 $ 20,277
Items not requiring cash:
Depreciation and amortization......................... 17,119 12,166
Provision for possible loss on investments............ 120 1,600
Increase (decrease) in accounts payable................. (1,614) 261
Increase (decrease) in accrued real estate taxes........ (1,213) 3,513
Increase in accrued interest on long term debt.......... 1,717 5,429
Increase in accrued expenses and other liabilities...... 2,063 3,042
Net change in other operating assets.................... (3,158) 284
--------- ---------
Net cash flow provided by operating activities...... 50,380 46,572
--------- ---------
Investing activities:
Real estate investments................................. (146,945) (268,342)
Sale of real estate property, net....................... -- 5,959
Mortgage notes receivable............................... 4,694 38
--------- ---------
Net cash flow used in investment activities......... (142,251) (262,345)
--------- ---------
Financing activities:
Proceeds from sale of shares, net of expenses........... 317,747 --
Proceeds from line of credit............................ 146,000 163,750
Proceeds from dividend reinvestment and share purchase
plan, net.............................................. 1,002 1,955
Proceeds from long term debt............................ -- 200,000
Cash distributions paid on common shares................ (35,267) (22,335)
Cash dividends paid on Preferred Shares................. (9,048) (8,050)
Debt issuance costs incurred............................ (299) (2,268)
Principal payments on mortgages payable................. (804) (602)
Prepayments of mortgages payable........................ -- (199)
Principal payments on line of credit.................... (248,000) (112,250)
Payment of PACIFIC's line of credit..................... (51,900) --
Other................................................... 15 (289)
--------- ---------
Net cash flow provided by financing activities...... 119,446 219,712
--------- ---------
Net increase in cash and cash equivalents................ 27,575 3,939
Cash and cash equivalents at beginning of period......... 8,092 5,525
--------- ---------
Cash and cash equivalents at end of period............... $ 35,667 $ 9,464
========= =========
Non-cash investing and financing activities:
Purchase money notes given and mortgage notes assumed
upon purchase of multifamily properties................ $ 4,784 $ 41,982
========= =========
Multifamily properties and other net assets acquired in
connection with the Merger which were
funded by:
PTR common shares exchanged for all of the outstanding
shares of PACIFIC's common stock (Note 2)............ $ 138,671 $ --
Mortgage notes assumed................................ 54,403 --
Repayment of the outstanding balance on PACIFIC's line
of credit............................................ 51,900 --
--------- ---------
Net increase in net assets related to Merger.......... $ 244,974 $ --
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 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 and six month periods ended June 30,
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, ("Series A
Preferred Shares") was antidilutive for the three and six months ended June 30,
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 $54.4 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 per share amounts).
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
---------------- ----------------
1995 1994 1995 1994
-------- ------- -------- -------
(ACTUAL)
<S> <C> <C> <C> <C>
Rental income.............................. $65,719 $47,570 $127,854 $87,816
======= ======= ======== =======
Net earnings attributable to common shares. $15,783 $ 7,923 $ 27,954 $14,261
======= ======= ======== =======
Weighted average common shares outstanding. 72,027 49,535 65,614 48,956
======= ======= ======== =======
Per common share amounts:
Net earnings attributable to common
shares.................................. $ 0.22 $ 0.16 $ 0.43 $ 0.29
======= ======= ======== =======
</TABLE>
6
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Concurrently with the consummation of the Merger, PTR completed a
subscription offering pursuant to which PTR received net proceeds of $216.3
million (13.2 million Common Shares issued). The subscription offering was
designed to allow shareholders of PTR to purchase Common Shares at the same
price at which PACIFIC shareholders acquired Common Shares in the Merger
($16.375 per Common Share). Security Capital Group purchased $50 million (3.1
million Common Shares issued) 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>
JUNE 30, 1995 DECEMBER 31, 1994
----------------- -----------------
INVESTMENT UNITS INVESTMENT UNITS
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Multifamily:
Operating properties................... $1,456,389 39,230 $1,121,301 31,640
Developments under construction........ 147,220 5,625 100,401 4,526
Developments in planning............... 41,742 4,856 33,194 4,306
Land held for future development....... 11,856 -- 7,977 --
---------- ------ ---------- ------
Total Multifamily........................ 1,657,207 49,711 1,262,873 40,472
====== ======
Non-multifamily.......................... 33,357 33,415
---------- ----------
Total real estate........................ $1,690,564 $1,296,288
========== ==========
</TABLE>
The change in investments in real estate, at cost, from December 31, 1994 to
June 30, 1995 consisted of the following (in thousands):
<TABLE>
<S> <C>
Balance at December 31, 1994.................................. $1,296,288
Acquisitions and renovation expenditures...................... 312,595
Development expenditures, including land acquisitions......... 78,337
Capital improvements.......................................... 1,639
Acquisition of land held for future development............... 1,582
Provision for possible loss on investments.................... (120)
Other......................................................... 243
----------
Balance at June 30, 1995...................................... $1,690,564
==========
</TABLE>
At July 20, 1995, PTR had contingent contracts or letters of intent, subject
to PTR's final due diligence, to acquire land for the near term development of
4,836 multifamily units with an aggregate estimated development cost of $217.9
million. At the same date, PTR also had contingent contracts or letters of
intent, subject to final due diligence, for the acquisition of 188 additional
multifamily units with an aggregate investment cost of $9.4 million, including
planned renovations.
At July 20, 1995, PTR had unfunded development commitments for developments
under construction of $118.7 million.
PTR's strategy is to focus on the ownership of multifamily properties.
Periodic sales of multifamily and non-multifamily assets may occur as favorable
sales opportunities arise or strategic goals or market evaluation change.
Properties are periodically evaluated for net realizable value and provisions
for possible losses are made if required.
7
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 June 30, 1994 and June 30, 1995, respectively. PTR's net
carrying value after the provisions is $2.6 million. These provisions have no
impact on cash flow from operating activities nor does PTR have any further
financial obligation to the partnership.
To enhance its flexibility in developing and acquiring multifamily
properties, PTR has and will enter into presale agreements with third party
developers to acquire properties developed by such developers where the
developments meet PTR's investment criteria. PTR has and will fund such
developments through development loans to such developers. In addition, to
provide greater flexibility for the use of land acquired for development and to
dispose of excess parcels, PTR will make mortgage loans to PTR Development
Services Incorporated ("PTR Development Services") to purchase land for
development. PTR owns all of the preferred stock of 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 June 30, 1995, the outstanding
balance of development and mortgage loans made by PTR to third party developers
and PTR Development Services aggregated $4.6 and $13.4 million, respectively.
The activities of PTR Development Services and development loans are
consolidated with PTR's activities 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 and six
months ended June 30, 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 and six months ended June 30, 1995 and 1994 were as follows (in
thousands):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- -------------------
1995 1994 1995 1994
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Net earnings attributable to
Common Shares.................... $ 15,783 $ 6,740 $ 26,298 $ 12,227
Add:
Depreciation.................. 9,126 5,841 16,550 10,791
Provision for possible loss on
investments.................. -- -- 120 1,600
---------- ---------- --------- ---------
Funds from operations attributable
to Common Shares................. 24,909 12,581 42,968 24,618
Distributions paid to common
shareholders..................... 20,761 11,174 35,267 22,335
---------- ---------- --------- ---------
Excess of funds from operations
after distributions.............. $ 4,148 $ 1,407 $ 7,701 $ 2,283
========== ========== ========= =========
Weighted average Common Shares
outstanding...................... 72,027 44,724 61,812 44,696
========== ========== ========= =========
</TABLE>
8
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
On July 20, 1995, the Trustees declared a cash distribution of $.2875 per
Common Share to be paid on August 11, 1995 to shareholders of record on July
31, 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 $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 July 20, 1995). Additionally, there is a
commitment fee on the average unfunded line of credit balance. In addition,
Wells Fargo Realty Advisors Funding, Incorporated was 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.
PTR is currently negotiating the extension of the line to August 1997. All debt
incurrences are subject to covenants, as more fully described in the loan
agreement.
At June 30, 1995, PTR was in compliance with all debt covenants.
Interest paid on all borrowings for the six months ended June 30, 1995 was
$15,215,000 including $4,675,000 of interest capitalized during construction.
Interest paid on all borrowings for the six months ended June 30, 1994 was
$3,339,000 including $2,539,000 of interest capitalized during construction.
Amortization of loan costs included in interest expense for the six months
ended June 30, 1995 and 1994 was $569,000 and $1,375,000, respectively.
(6) SERIES B CUMULATIVE REDEEMABLE PREFERRED SHARES
On May 11, 1995, the Board of Trustees authorized PTR to classify and issue
Series B Cumulative Redeemable Preferred Shares ("Series B Preferred Shares").
The net proceeds to PTR from the sale of the Series B Preferred Shares were
$101.4 million. The net proceeds were used for the development and acquisition
of additional multifamily properties, for the repayment of indebtedness under
PTR's revolving line of credit and for working capital purposes. Pending
additional investment in multifamily properties, PTR has invested the remaining
net proceeds in short term money market instruments.
On and after May 24, 2000, the Series B Preferred Shares may be redeemed for
cash at the option of PTR, in whole or in part at a redemption price of $25.00
per share plus accrued and unpaid distributions, if any, thereof. The
redemption price (other than the portion thereof consisting of accrued and
unpaid distributions) is payable solely out of the sale proceeds of other
capital shares of PTR, which may include shares of other series of preferred
shares. The holders of the Series B Preferred Shares have no preemptive rights
with respect to any shares of the capital securities of PTR or any other
securities of PTR convertible into or carrying rights or options to purchase
any such shares. The Series B Preferred Shares have no stated maturity and are
not subject to any sinking fund or other obligation of PTR to redeem or retire
the Series B Preferred Shares and are not convertible into any other securities
of PTR. In addition, holders of the Series B Preferred Shares are entitled to
receive, when and as declared by the Board of Trustees, out of funds legally
available for the payment of distributions, cumulative preferential cash
distributions at the rate of 9% of the liquidation preference per annum
(equivalent to $2.25 per share). Such distributions are cumulative from the
date of original issue and are payable quarterly in arrears on the last day of
each March, June, September and December. The first distribution was paid on
June 30, 1995 in the amount of $998,000.
The Series A Preferred Shares and the Series B Preferred Shares will rank on
a parity as to distributions and liquidation proceeds. Series A Preferred
Shares and Series B Preferred Shares are collectively referred to as "Preferred
Shares".
9
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
(7) REIT MANAGEMENT AND PROPERTY MANAGEMENT AGREEMENTS
In June 1995, PTR renewed and amended its REIT Management agreement with
Security Capital Pacific Incorporated (the "REIT Manager"), formerly Security
Capital (Southwest) Incorporated to provide REIT Management services to PTR.
The REIT Manager is a subsidiary of Security Capital Group which owns
approximately 37.9% of PTR's Common Shares. The REIT Management fee for the six
months ended June 30, 1995 was $9,133,000 and $6,011,000 for the six months
ended June 30, 1994.
SCG Realty Services Incorporated ("SCG Realty Services") has managed and
currently manages a substantial majority of PTR's operating multifamily
properties. For the six months ended June 30, 1995 and 1994, PTR paid SCG
Realty Services aggregate fees of $3,702,000 and $2,892,000, 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 AUDITOR'S 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 June 30, 1995, and the related statements of earnings for the
three- and six-month periods ended June 30, 1995 and 1994 and the statements of
cash flows for the six-month periods ended June 30, 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 the 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, shareholders' equity, and
cash flow 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
July 21, 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. 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 1994 but are expected to increase at a lower rate in 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. 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 it believes are expected to provide some of the most
attractive multifamily growth opportunities.
Concurrently with the consummation of the Merger, PTR completed a
subscription offering pursuant to which PTR received net proceeds of $216.3
million (13.2 million Common Shares issued). 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 issued) in the
subscription offering pursuant to the oversubscription privilege.
RESULTS OF OPERATION
Interim Period Comparison
During the six months ended June 30, 1995, PTR acquired 22 multifamily
properties aggregating 6,833 units for a total purchase price, including
planned renovations, of approximately $305.2 million (acquisitions from the
Merger represented 17 operating multifamily properties, aggregating 5,579
units, for a total purchase price, including planned renovations, of
approximately $242.5 million), and completed development of 6 multifamily
properties aggregating 757 units with a completed cost of $27.2 million. At
June 30, 1995, PTR had 5,625 multifamily units under construction with a
budgeted completion cost of $261.4 million and had in the final planning stages
an estimated 4,856 multifamily units with an aggregate expected investment of
$253.4 million. During the six months ended June 30, 1994, PTR acquired 16
multifamily properties aggregating 5,405 units for a total purchase price,
including planned renovations, of approximately $221.0 million and completed
development of 7 multifamily properties aggregating 1,498 units with a
completed
12
<PAGE>
cost of $59.7 million. At June 30, 1994, PTR had 3,489 multifamily units under
construction with a budgeted completion cost of $159.3 million and had in the
final planning stages an estimated 3,691 multifamily units with an aggregate
budgeted completion cost of $177.1 million.
Property Operations
Property operations contributed to increased net earnings primarily due to
property rental income increases of $38.4 million (47.6%), partially offset by
higher rental expenses, which increased by $12.9 million (37.2%) for the six
months ended June 30, 1995 over 1994. Depreciation expense increased $5.8
million (53.4%) for the six months ended June 30, 1995 over 1994. These
increases are due primarily to additional operating multifamily properties
placed in service. For operating multifamily properties, rental expenses were
40.4% and 43.5% of rental revenue during the six months ended June 30, 1995 and
1994, respectively. At June 30, 1995, 82.6% of PTR's operating multifamily
properties, based on cost, were classified by PTR as stabilized. At June 30,
1995, PTR's operating multifamily properties were 96.2% leased and PTR's
stabilized multifamily properties were 96.6% leased.
Multifamily Properties Stabilized through Both Periods
For the 39 multifamily properties that were stabilized through the six months
ended June 30, 1995 and 1994 (including 3 properties acquired in the Merger),
property level earnings before interest, income taxes, depreciation and
amortization ("EBITDA") as a percentage of PTR's aggregate investment in these
properties increased to 11.2% in 1995 from 10.8% in 1994. EBITDA 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. 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. This increase in return on investment was
achieved at the same time that PTR increased its investment in these properties
by $2.9 million (.78% of total investment in these properties) as a result of
renovation and other capital expenditures. Rental income increased 3.8% (the
majority resulting from 3.3% rental rate increase) for such properties for the
six months ended June 30, 1995 as compared to the six months ended June 30,
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 and a rising interest
rate environment which commenced in the latter part of 1994 which reduced the
turnover ratio. However, management does not anticipate that this trend will
continue throughout 1995 at the same rate experienced in the first six months.
Interest Income
Interest income for the six months ended June 30, 1995 decreased $234,000
(15.5%) compared to 1994, primarily resulting from a decrease in interest
income from a $4.6 million mortgage note receivable which was paid off in April
1995 and from bank accounts due to lower average cash balances in 1995 ($10.8
million) as compared to 1994 ($23.3 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 Expenses
Interest expense increased $2.9 million (34.8%) for the six months ended June
30, 1995 when compared to 1994. The increase is primarily attributable to the
increase in interest expense of $1.7 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 $2.4 million (98.5%) for the six months
ended June 30, 1995 when compared to 1994 as a result of the addition of
mortgages aggregating $73.8 million in connection with the Merger and other
acquisitions.
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<PAGE>
Line of credit interest expense increased $823,000 (28.8%) resulting
primarily from higher outstanding balances and higher interest rates relating
to PTR's revolving credit facility. Average borrowings were approximately $72.9
million (with an average interest rate of 8.76%) during the six months ended
June 30, 1995, as compared to average borrowings of $36.8 million (with an
average interest rate of 7.32%) during 1994.
The increase in interest expense was offset by an increase of $2.1 million
(84.1%) in capitalized interest. The increase in capitalized interest is
attributable to increased multifamily development activity for the six months
ended June 30, 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 $3.1 million (51.9%) during the six months ended June
30, 1995 as compared to 1994 because cash flow increased substantially (see
"REIT Management Agreement"). With the issuance in February 1994 of $200
million of amortizing, long term debt as more fully described under "Liquidity
and Capital Resources," the REIT Management fee will effectively 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. In addition, the REIT
Management agreement was modified to provide that distributions paid in respect
of non-convertible preferred shares, such as the Series B Preferred Shares,
described below in "Liquidity and Capital Resources", 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 June 30, 1994 and 1995, respectively. PTR's net
carrying value after the provisions is $2.6 million. These provisions have no
impact on cash flow from operating activities nor does PTR have any further
financial obligation to the partnership.
Other
Property revenues, operating expenses, income from property operations before
depreciation, income from property operations and net earnings for the three
months ended June 30, 1995 compared to the three months ended June 30, 1994
reflect changes similar to those discussed in the preceding paragraphs for the
comparison of the six months ended on the same dates. The changes are
substantially attributable to the same reasons discussed in the preceding
paragraphs for the six month periods ended June 30, 1995 and 1994.
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 increased by $3.8 million
(8.2%) for the six months ended June 30, 1995 compared to 1994. The increase is
due primarily to increased cash flow from property operations offset partially
by changes in the timing of the payment of accounts payable and accrued
expenses in 1995 as compared to 1994.
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<PAGE>
Investing Activities
During the six months ended June 30, 1995, PTR invested $335.2 million for
the development, acquisition (including properties acquired in the Merger), and
renovation of multifamily properties, net of $59.2 million in mortgages
assumed. During the first six months of 1994, PTR invested $268.3 million for
the development, acquisition, and renovation of multifamily properties, net of
$42.0 million in mortgages assumed. Except for the properties acquired in the
Merger, which were financed with the issuance of Common Shares, these
developments, acquisitions, and renovations were financed with cash on hand and
borrowings under PTR's revolving line of credit, which were repaid with the
proceeds from PTR's equity and debt offerings.
At July 20, 1995, PTR had unfunded development commitments for developments
under construction of $118.7 million. Additionally the land PTR owned or
controlled through letters of intent or contingent contracts at such date,
subject to PTR's final 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 six months ended June 30, 1995 provided
$119.4 million as compared to $219.7 million for the same period in 1994. In
addition, PTR issued $138.7 million in Common Shares in March 1995 in exchange
for all of PACIFIC's common stock. The decrease in cash flow provided by
financing activities is primarily due to the repayment of revolving credit
balances ($299.9 million during the six months ended June 30, 1995 as compared
to $112.3 million during the same period in 1994) offset by more offering
proceeds received during the six months ended June 30, 1995 as compared to long
term debt proceeds received during the same period in 1994. Proceeds from the
offerings were used for acquisition, development and renovation of multifamily
properties, to repay revolving credit balances incurred for such purposes, and
for working capital purposes. Pending additional investment in multifamily
properties, PTR has invested the remaining net proceeds in short term money
market instruments.
On March 23, 1995, PTR increased its unsecured revolving line of credit
facility to $350 million. The line of credit expires August 15, 1996 and 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 of no less than 1.4:1 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 July 26, 1995
there were no 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 (21% at June 30, 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 $200 million long term debt issued in February 1994 and through its
asset optimization strategy. To a lesser extent, under certain circumstances,
PTR may arrange for debt with different maturities in order to optimize its
debt maturity schedule.
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<PAGE>
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
common equity markets. No assurance can be given that changes in market
conditions or other factors will not affect these plans.
On May 11, 1995, the Board of Trustees authorized PTR to classify and issue
Series B Cumulative Redeemable Preferred Shares ("Series B Preferred Shares").
The net proceeds to PTR from the sale of the Series B Preferred Shares were
$101.4 million. The net proceeds were used for the development and acquisition
of additional multifamily properties, for the repayment of indebtedness under
PTR's revolving line of credit and for working capital purposes. Pending
additional investment in multifamily properties, PTR has invested the remaining
net proceeds in short term money market instruments.
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 $50
million (3.1 million Common Shares) of 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 open market purchases. 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
offering discounts, issuance costs, and the interest 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 1.5:1. At June 30, 1995, PTR was in compliance with
all debt covenants.
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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 $9.0 million and $10.1 million for the six months ended June
30, 1995 and 1994, respectively.
Pursuant to the terms of the 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 provisions 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 compatibility, funds from operations for the six
months ended June 30, 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 $18.4 million (74.5%) to
$43.0 million for the six months ended June 30, 1995 from $24.6 million for
1994. The increase resulted primarily from increased properties in operation.
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.
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<PAGE>
PART II--OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITIES HOLDERS
At the shareholders meeting held June 13, 1995, shareholders elected the
following Trustees to office:
<TABLE>
<CAPTION>
SHARES IN SHARES
TRUSTEES FAVOR WITHHELD
-------- ---------- --------
<S> <C> <C>
Calvin K. Kessler..................................... 63,919,100 166,190
James H. Polk, III.................................... 63,824,663 216,681
John C. Schweitzer.................................... 63,920,982 166,195
James A. Cardwell..................................... 63,622,339 458,081
John T. Kelley, III................................... 63,562,736 514,858
C. Ronald Blankenship................................. 63,852,928 229,871
William G. Myers...................................... 63,910,453 172,558
</TABLE>
ITEM 5. OTHER INFORMATION
On May 17, 1995, PTR successfully completed a $105 million public offering
(net proceeds totaled $101.4 million) of 4,200,000 shares of Series B Preferred
Shares of beneficial interest. These Series B preferred shares are redeemable,
solely at the option of PTR, any time after five years and are not convertible
into common shares. See Item 2 "Series B Cumulative Redeemable Preferred
Shares".
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<C> <S> <C>
10 --Fourth Amended and Restated REIT
Management Agreement dated as of June
30, 1995 between PTR and the REIT
Manager. Sequentially numbered page
15 --Letter from KPMG Peat Marwick LLP
dated July 25, 1995 regarding
unaudited financial information. Sequentially numbered page
</TABLE>
(b) Reports on Form 8-K:
<TABLE>
<CAPTION>
ITEM FINANCIAL
DATE REPORTED STATEMENTS
---- -------- ----------
<S> <C> <C>
May 18, 1995 Item 5 No
</TABLE>
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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.
Security Capital Pacific Trust
Date: July 26, 1995
/s/ William Kell
by: ____________________________
William Kell, Vice President and
Duly Authorized Officer and
Principal Financial Officer
<PAGE>
FOURTH AMENDED AND RESTATED REIT MANAGEMENT AGREEMENT
This Fourth Amended and Restated REIT Management Agreement (this "Agreement")
is made and entered into as of the 30th day of June, 1995, by and between
Security Capital Pacific Trust, a Maryland real estate investment trust (the
"Trust"), and Security Capital Pacific Incorporated, a Delaware corporation
(the "REIT Manager").
Witnesseth:
Whereas, the Trust is organized under the laws of the State of Maryland
pursuant to a Restated Declaration of Trust dated as of June 18, 1991, as
amended and supplemented (the "Declaration of Trust"), and currently qualifies
as a "real estate investment trust" as defined in the Internal Revenue Code of
1986, as amended (the "Code"), to make investments of the type permitted for
qualified real estate investment trusts under the Code and not inconsistent
with the Declaration of Trust and the By-Laws of the Trust (the "By-Laws");
Whereas, the Trust, desiring to avail itself of the experience, sources of
information, advice, assistance and certain facilities of, or available to, the
REIT Manager and to have the REIT Manager undertake the duties and
responsibilities hereinafter set forth, on behalf of and subject to the
supervision of the Board of Trustees of the Trust (the "Board"), entered into a
Third Amended and Restated REIT Management Agreement dated as of March 1, 1994,
as amended (the "Prior Agreement"), with the REIT Manager and the term of the
Prior Agreement expires on the date hereof; and
Whereas, the REIT Manager and the Trust desire to amend and restate the Prior
Agreement to extend the term for an additional year and to clarify certain
ambiguities and to more fully give effect to the intentions of the parties
thereto;
Now, Therefore, in consideration of the premises and of the mutual covenants
herein contained, the Trust and the REIT Manager agree that the Prior Agreement
is hereby amended and restated in its entirety as follows:
I. DEFINITIONS
1.1 Definitions. As used in this Agreement, the following capitalized terms
shall have the meanings set forth below.
(a) "Affiliate" means as to any person, (i) any other person directly or
indirectly controlling, controlled by or under common control with such person,
(ii) any other person that owns beneficially, directly or indirectly, 10% or
more of the outstanding capital stock, shares or equity interests of such
person, or (iii) any officer, director, employee, general partner or trustee of
such person or of any other person controlling, controlled by or under common
control with such person (excluding trustees or directors and persons serving
in similar capacities who are not otherwise an Affiliate of such person).
(b) "Average Invested Assets" for any period shall mean the average of the
aggregate book value of the assets of the Trust invested, directly or
indirectly, in equity interests in and loans secured by real estate, before
reserves for depreciation or bad debts or other similar non-cash reserves,
computed by taking the average of such values at the end of each month during
such period.
(c) "Board" shall have the meaning set forth in the recitals hereto.
(d) "By-Laws" shall have the meaning set forth in the recitals hereto.
(e) "Cash Equivalent Investments" means assets of the Trust that consist of
cash, interest-bearing deposits in banks, repurchase agreements with banks and
readily-marketable securities.
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<PAGE>
(f) "Cash Flow" for any period means the sum of (i) Funds Available from
Operations for such period (after deducting all income from Cash Equivalent
Investments), plus (ii) the REIT Management Fees payable pursuant to Section
3.1 hereof, plus (iii) any expenses incurred by the Trust that are unusual in
light of the Trust's historical experience prior to the incurrence thereof and
are incurred at the request of a majority of the Independent Trustees, plus
(iv) 33% of the interest paid during such period on any subordinated debentures
that are (x) issued after the execution of this Agreement and (y) convertible
into shares of beneficial interest of the Trust, provided, however, that this
definition shall be equitably adjusted by mutual agreement in the event of a
recapitalization or other event which results in a reclassification of the
equity securities of the Trust.
(g) "Cause" means either (i) an act of fraud, embezzlement or theft
constituting a felony or an act intentionally against the interests of the
Trust which causes it material injury, (ii) a final determination by a court of
competent jurisdiction that the REIT Manager has committed a material breach of
this Agreement, (iii) a petition shall have been filed against the REIT Manager
for an involuntary proceeding under any applicable bankruptcy, insolvency or
other similar law now or hereafter in effect, and such petition shall not have
been dismissed within 60 days of filing; or a court having jurisdiction shall
have appointed a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the REIT Manager for any substantial
portion of its property, or ordered the winding up or liquidation of its
affairs; or (iv) the REIT Manager shall have commenced a voluntary proceeding
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or shall have made any general assignment for the benefit
of creditors, or shall have failed generally to pay its debts as they become
due.
(h) "Code" shall have the meaning set forth in the recitals hereto.
(i) "Declaration of Trust" shall have the meaning set forth in the recitals
hereto.
(j) "Exchange Act" shall have the meaning set forth in Section 2.13 hereof.
(k) "Funds Available from Operations" for any period means the dollar amount
equal to the sum of (i) net earnings of the Trust for such period, determined
in accordance with generally accepted accounting principles, plus (ii) interest
actually paid on the Trust's senior unsecured long term debt instruments, plus
(iii) non-cash items deducted in calculating net earnings for such period
(including but not limited to depreciation) which are generally added to net
earnings in determining funds from operations for distribution to shareholders
pursuant to prevailing practice among publicly-held real estate investment
trusts, minus (iv) regularly scheduled principal payments on mortgage
indebtedness which has a commercially reasonable amortization schedule, minus
(v) an assumed amount of payments of principal and interest which would have
been paid by the Trust during such periods (excluding prepayments or balloon
payments) under senior unsecured long term debt instruments of the Trust, if
payments were equal to payments on a 20-year fully amortizing mortgage of equal
principal amount and effective interest rate with a payment schedule requiring
equal annual payments of combined principal and interest (but not costs of
issuance), minus (vi) distributions actually paid with respect to any non-
convertible preferred shares of beneficial interest of the Trust. For
calculations under clause (v) of the preceding sentence, all tranches of long
term debt issued simultaneously shall be viewed collectively and shall be
treated as one mortgage financing with an interest rate equal to the Trust's
weighted average effective interest rate for such tranches after giving effect
to any interest rate protection or similar agreements. For example, the
attached Exhibit A shows the assumed effective interest rate and monthly
payment schedules on the $200 million of senior notes issued by the Trust in
February 1994, which will be deducted in calculating Funds Available from
Operations. Funds Available from Operations will not be increased or decreased
by virtue of any of the following: realized gains or losses, capital
expenditures or principal payments, except for principal payments under the
Trust's long term debt instruments as contemplated by clauses (iv) and (v) of
the foregoing sentence.
(l) "Indemnified Party" shall have the meaning set forth in Section 6.2(a)
hereof.
2
<PAGE>
(m) "Independent Trustee" means a Trustee who (i) is not affiliated, directly
or indirectly, with the REIT Manager, whether by ownership of, ownership
interest in, employment by, any material business or professional relationship
with, or service as an officer or director of, the REIT Manager or a business
entity that is an Affiliate of the REIT Manager, (ii) is not serving as a
trustee or director for more than three real estate investment trusts organized
by a Sponsor of the Trust and (iii) performs no other services for the Trust,
except as Trustee. An indirect relationship shall include circumstances in
which a member of the immediate family of a Trustee has one of the foregoing
relationships with the REIT Manager or the Trust.
(n) "Investment Policies" at any time shall have the meaning given thereto
either in (i) the Declaration of Trust or By-Laws as then in effect or (ii) a
written statement adopted by the Board and delivered to the REIT Manager by the
Trust.
(o) "Net Income" for any period means total revenues (excluding gains or
losses from the sale of Trust assets) applicable to such period, less the
expenses applicable to such period other than additions to reserves for
depreciation or bad debts or other similar non-cash reserves.
(p) "REIT Management Fee" shall have the meaning set forth in Section 3.1
hereof.
(q) "Renewal Term" shall have the meaning set forth in Section 4.2 hereof.
(r) "Sponsor" means any person directly or indirectly instrumental in
organizing, wholly or in part, a real estate investment trust, or any person
who will manage or participate in the management of a real estate investment
trust, and any Affiliate of any such person, but excluding (i) any person whose
only relationship with such real estate investment trust is that of an
independent property manager whose only compensation is for property management
services and (ii) independent third parties such as attorneys, accountants and
underwriters whose only compensation is for professional services.
(s) "Total Operating Expenses" for any period means all operating and general
and administrative expenses of the Trust as determined under generally accepted
accounting principles but excluding (i) the expenses of raising capital and
financing, including, without limitation, financing for Trust Properties,
including related investment banking and legal fees, (ii) interest payments on
all debt of the Trust, (iii) taxes, (iv) non-cash expenditures and (v) the
costs related directly to Trust Property acquisition, development, operation
and disposition. The exclusion for costs related directly to Trust Property
acquisition, development, operation and disposition permits exclusion of
expenses incurred with respect to specific individual Trust Properties but does
not permit the exclusion of operating, general and administrative expenses for
the Trust's operations in general.
(t) "Trust Property" means any real property or interest therein and
associated personal property owned by the Trust.
(u) "Trustees" means the Trustees holding office under the Declaration of
Trust at any particular time.
1.2 Accounting Principles. Except as otherwise provided herein, all
accounting and financial terms used herein shall be determined in accordance
with generally accepted accounting principles.
II. DUTIES OF THE REIT MANAGER
2.1 General. The REIT Manager shall use its best efforts to perform each of
the duties set forth in this Agreement and shall have the authority to take all
actions and to execute all documents and instruments that it deems necessary or
advisable in connection with the management and operations of the Trust and the
fulfillment of its duties as set forth herein, subject in each matter to the
supervision of the Board and to the Investment Policies of the Trust, and with
respect to the acquisition, development, financing and disposition of real
property, to the prior approval of the Board.
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2.2 Annual Strategic Plan. The REIT Manager will prepare annually a strategic
plan that incorporates a specific business strategy, an annual operating
budget, investment and disposition objectives and capitalization and funding
strategies. This plan will be presented in the fourth quarter of the year prior
to the year for which such plan applies to the Board for its review and
approval. Consistent with the annual strategic plan, and subject to supervision
by the Board, the REIT Manager will provide acquisition, development and
disposition services including the following:
(a) Investigation and selection of possible acquisitions and
developments, property analysis, market and economic surveys, on-site
physical inspections, review and projection of income and operating
expenses and, when desired, supervising and negotiating the arrangement of
financing;
(b) Conducting negotiations with real estate brokers, owners of property
and their agents, investment bankers and owners of privately and publicly
held real estate companies;
(c) Engaging and supervising, on behalf of the Trust, independent
contractors which provide real estate brokerage, investment banking (as to
which an Affiliate of the REIT Manager may be used if there is no charge to
the Trust for its services, other than the REIT Management Fee) and leasing
services, mortgage brokerage and other financial services and such other
services as may be required relating to the Trust Properties, provided,
however, that the REIT Manager shall not share in any brokerage, investment
banking or similar fees paid to any person engaged by the REIT Manager to
perform such services for the Trust; and
(d) Negotiating on behalf of the Trust for the sale, exchange or other
disposition of any Trust Properties.
2.3 Asset Management. The REIT Manager may retain third-party property
managers and leasing agents for administration, leasing and management of Trust
Properties. Subject to the approval of a majority of the Board, including a
majority of the Independent Trustees, the REIT Manager may provide property
management and/or leasing services for Trust Properties through an Affiliate of
the REIT Manager on terms and conditions no less favorable to the Trust than
those available from qualified unaffiliated third parties; provided, however,
that such services may not be provided through an Affiliate of the REIT Manager
if doing so would jeopardize the Trust's qualification as a real estate
investment trust under Sections 856 through 860 of the Code. The Trust and the
REIT Manager will negotiate in good faith the terms of any future management
agreements between the Trust and Affiliates of the REIT Manager which are
permitted pursuant to this Section 2.3.
2.4 General Administrative Duties. The REIT Manager shall perform, or
supervise the performance of, the necessary administrative functions in the
day-to-day management of the Trust and its operations, including, without
limitation, internal and external financial reporting, property accounting,
shareholder relations, supervision of stock registrar and transfer services and
other necessary services, all in a manner consistent with the Trust's current
practice, subject to changes approved by a majority of the Board.
2.5 Real Estate Investment Advice. The REIT Manager shall advise the Trust
with respect to policy decisions to be made by the Board, shall investigate and
evaluate investment opportunities consistent with the real estate investment
policies and the objectives of the Trust and recommend them to the Board, and
shall provide research, economic and statistical data in connection with the
Trust's real estate investments and policies.
2.6 Short-Term Investments. The REIT Manager may invest and reinvest any
monies and securities of the Trust in short-term investments pending investment
in Trust Properties. Unless a specific new policy is developed by the REIT
Manager and approved by the Board, the REIT Manager may invest and reinvest any
monies and securities of the Trust, pending investment in Trust Properties, in
accordance with current practice and past policies developed by the REIT
Manager and approved by the Board.
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2.7 Agency. The REIT Manager shall act as agent of the Trust in making,
acquiring, financing and disposing of investments, disbursing and collecting
the Trust's funds, paying the debts and fulfilling the obligations of the
Trust, supervising the performance of the managers of the Trust Properties and
handling, prosecuting and settling any claims of or against the Trust, the
Board, holders of the Trust's securities or the Trust's representatives or
properties.
2.8 Retention of Services. The REIT Manager shall retain for and on behalf of
the Trust such services of accountants, legal counsel, appraisers, insurers,
brokers, transfer agents, registrars, developers, banks and other lenders and
others as the REIT Manager deems necessary or advisable in connection with the
management and operations of the Trust and the fulfillment of the REIT
Manager's duties as set forth herein.
2.9 Office and Personnel. The REIT Manager shall maintain on behalf of the
Trust such office space, equipment and personnel, including officers and
employees of the REIT Manager or its Affiliates, as it deems necessary or
advisable in connection with the management and operations of the Trust and the
fulfillment of the REIT Manager's duties as set forth herein.
2.10 Bank Accounts. The REIT Manager may establish one or more bank accounts
in the name of the Trust or in its own name and may deposit into and disburse
from such accounts any monies on behalf of the Trust, provided that no funds in
any such account shall be commingled with funds of the REIT Manager, and the
REIT Manager shall as requested by the Board render appropriate accountings to
the Board of such deposits and disbursements.
2.11 Books and Records. The REIT Manager shall maintain all accounting and
reporting systems, books and records of the Trust, including books of account
and records relating to services performed by the REIT Manager, in form and
quality at least equivalent to the Trust's current practice, and shall make
such books and records accessible for inspection by the Board at any time
during ordinary business hours.
2.12 Appraisals and Reporting. As frequently as may be required by the Board
or as the REIT Manager may deem necessary or advisable, the REIT Manager shall
prepare, or cause to be prepared, with respect to each of the Trust Properties
(i) an appraisal prepared by an independent real estate appraiser, (ii) reports
and information on Trust operations and asset performance at least equivalent,
with respect to quality and clarity of information, to the Trust's current
practice and (iii) other information reasonably requested by the Board.
2.13 Reports, Etc. The REIT Manager shall prepare, or cause to be prepared,
all reports of the Trust required under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and other communications to the holders of the
Trust's securities, including, without limitation, proxy solicitation
materials, and all tax returns and any other reports or other materials
required to be filed with any governmental body or agency, and shall prepare,
or cause to be prepared, all materials and data necessary to complete such
reports and other materials including, without limitation, an annual audit of
the Trust's books of account by a nationally recognized independent accounting
firm.
2.14 Financing and Securities Issuances. The REIT Manager shall provide
services to the Trust in connection with negotiations by the Trust with
investment banking firms, securities brokers or dealers and other institutions
or investors in connection with the sale of securities of the Trust and the
securing of loans for the Trust, provided, however, that the REIT Manager shall
not share in any fees paid by the Trust to third parties for such services.
2.15 Additional Services. The REIT Manager shall perform such additional
services as from time to time may be requested by the Board and agreed to by
the REIT Manager, provided, however, that nothing herein shall require the REIT
Manager to agree to any such request or to perform any additional services to
which it has not previously agreed.
2.16 REIT Qualification, etc. In the performance of its duties and
responsibilities hereunder, the REIT Manager shall refrain from any action (i)
which, in its judgment or in the judgment of the Board of which
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the REIT Manager has written notice, would adversely affect the qualification
of the Trust as a real estate investment trust under the Code, (ii) which would
violate any law, rule or regulation of any governmental body or agency having
jurisdiction over the Trust or its securities, the violation of which could
have a material adverse effect on the Trust or (iii) which would otherwise not
be permitted by the Declaration of Trust.
2.17 Mortgages and Insurance. The REIT Manager shall use its best efforts to
(i) ascertain that any mortgage securing any investment of the Trust shall be a
valid lien upon the mortgaged property according to its terms, for which the
REIT Manager may rely on mortgagee's policies of title insurance issued by
reputable title insurance companies, and that any insurance or guaranty issued
by any person upon which the Board relies is valid and in full force and effect
and enforceable according to its terms, (ii) cause each Trust Property to be
duly insured, to the extent coverage is available on commercially reasonable
terms, against loss or damage by fire, with extended coverage, and against such
other insurable hazards and risks as is customary and appropriate in the
circumstances, provided, however, that if the REIT Manager determines that a
type of insurance coverage currently maintained by the Trust is available, but
no longer on commercially reasonable terms, the REIT Manager shall so advise
the Board and act in accordance with the Board's instructions and (iii) carry
out the policies from time to time specified in writing by the Board with
regard to the protection of Trust Properties. The REIT Manager shall be
entitled to reasonably rely on qualified experts in performing its duties under
this Section 2.17.
2.18 Fidelity Bond. The REIT Manager shall maintain a fidelity bond with a
responsible surety company in an amount approved by the Board covering all
officers and employees of the REIT Manager handling funds of the Trust and any
investment documents or papers, which bonds shall protect against all losses of
any such property from acts of such officers and employees through theft,
embezzlement, fraud and dishonesty.
2.19 Liability Limitation. The REIT Manager shall cause to be included in any
document or agreement prepared for the benefit of, or executed by the REIT
Manager on behalf of, the Trust under which substantial obligations are assumed
on behalf of the Trust clear and complete provisions pursuant to Article 4,
Section 11 of the Declaration of Trust to the effect that the Trustees and the
shareholders of the Trust shall not be personally liable thereunder and that
all parties concerned shall look solely to the property of the Trust for the
satisfaction of any claim against the Trust under any such document or
agreement.
III. COMPENSATION
3.1 REIT Management Fee.
(a) The Trust shall pay the REIT Manager an annual REIT Management Fee equal
to the sum of (i) $855,000, plus (or minus, in the case of annual Cash Flow
below $4,837,000) 16% of the difference between annual Cash Flow and $4,837,000
and (ii) the product of 0.25% per annum multiplied by the average daily balance
of the Trust's Cash Equivalent Investments, measured at the end of each month.
All payments of the REIT Management Fee shall be subject to annual adjustment
at year end as provided in Section 3.5 hereof. The REIT Management Fee shall be
payable monthly in arrears in such amounts indicated by the annual operating
budget approved by a majority of the Board, as revised no more than quarterly
to reflect known material changes.
(b) Within 50 days following the end of each calendar quarter and within 100
calendar days after the end of each calendar year of the Trust (following the
receipt by the Trust of an auditor's report, prepared by a nationally
recognized independent accounting firm, with respect to the Trust's financial
statements for such year), the REIT Manager shall deliver to the Trust a
statement, certified by an officer of the REIT Manager, setting forth the
following: (i) the amount of the estimated REIT Management Fee actually paid by
the Trust for all months during such quarter or year, as the case may be, (ii)
the amount of the REIT Management Fee that should have been paid for such
quarter or year, as the case may be, and (iii) the amount, if any, of accrued
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and unpaid REIT Management Fees. If the annual or quarterly statement, as the
case may be, indicates an overpayment by the Trust of the REIT Management Fee,
such overpayment shall be offset against the next ensuing estimated REIT
Management Fee to become due hereunder, or, if at any time no further REIT
Management Fee can become due, the balance of any overpayment shall be paid
without interest by the REIT Manager within 15 calendar days after demand
therefor by the Trust, such repayment to be due and payable whether or not this
Agreement is still in full force and effect. If the annual or quarterly
statement, as the case may be, indicates an underpayment by the Trust of the
REIT Management Fee with respect to the quarter or year covered thereby, the
Trust, within 15 calendar days after receipt of the statement, shall pay to the
REIT Manager the amount of such underpayment. The REIT Management Fee for any
year shall not be recalculated on the basis of any post-year-end adjustments to
the Trust's taxable income arising, directly or indirectly, from an audit by
the Internal Revenue Service.
3.2 Payment for Additional Services. If the Board shall request the REIT
Manager to render services to the Trust other than those required to be
rendered by the REIT Manager hereunder, such additional services, if performed,
shall be compensated separately on terms to be agreed upon from time to time
between the REIT Manager and the Trust, which terms shall not be less favorable
to the Trust than either (a) the terms under which the REIT Manager is then
performing similar services for other persons, taking into account the full
range of services and prices therefor provided by the REIT Manager to such
other persons or (b) the terms under which qualified unaffiliated persons are
then performing such services for comparable organizations, provided that no
separate fee shall be charged to the Trust for any investment banking services
provided by any Affiliate of the REIT Manager.
3.3 Expenses of the REIT Manager. Without regard to the amount of
compensation received hereunder by the REIT Manager, the REIT Manager shall
bear the following expenses:
(a) wages, salaries and other compensation of the REIT Manager's officers
and employees, including so-called fringe benefits such as life,
disability, medical and health insurance, pension plans, social security
taxes and workers' compensation insurance;
(b) rent and other overhead expenses of the REIT Manager; and
(c) travel and mailing costs pertaining to the REIT Manager's performance
of its duties hereunder, except for expenses described in Section 3.4(a)
below.
3.4 Reimbursable Expenses. The REIT Manager shall pay, or cause to be paid
out of the assets of the Trust, the following operating expenses of the Trust
and, if the REIT Manager advances money for such expenses, it shall be entitled
to reimbursement by the Trust therefor:
(a) travel and other out-of-pocket expenses incurred by directors,
officers and employees of the REIT Manager in connection with seeking
financing (including debt and equity) for the Trust or evaluating,
investigating, negotiating or closing the acquisition, financing,
refinancing or disposition of a Trust Property after the Board has approved
the proposed transaction as set forth in a detailed letter of intent or
equivalent document, irrespective of whether the proposed transaction is
completed;
(b) costs of third-party legal, accounting, tax and similar services
rendered for the Trust;
(c) all other costs and expenses relating to the Trust's operations,
including, without limitation, the costs and expenses of acquiring, owning,
managing, protecting, maintaining and disposing of the Trust's investments,
including travel, appraisal, reporting, audit and legal fees;
(d) all insurance costs incurred in connection with the operation of the
Trust;
(e) expenses connected with payments of interest or distributions in cash
or any other form made or caused to be made by the Board to or on account
of holders of securities of the Trust, including, without limitation,
expenses incurred in connection with any dividend reinvestment plan;
(f) expenses connected with communications to holders of securities of
the Trust and the investment community in general (including meetings
between Affiliates of the REIT Manager and investors or
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analysts) and the other bookkeeping and clerical work necessary in
maintaining relations with holders of securities and in complying with the
continuous reporting and other requirements of governmental bodies or
agencies, including the cost of printing and mailing certificates for
securities and proxy solicitation materials and reports to holders of the
Trust's securities;
(g) transfer agent and registrar's fees and charges; and
(h) expenses relating to any office or office facilities maintained for
the Trust or the Trust Properties separate from the office or offices of
the REIT Manager.
3.5 Refund. In accordance with the Declaration of Trust, with respect to any
fiscal year in which a majority of the Independent Trustees do not find such
excess justified, the Board may require the REIT Manager either (a) to refund
to the Trust, to the extent of any fees received by the REIT Manager during
such fiscal year, the amount, if any, by which the Total Operating Expenses of
the Trust for such fiscal year exceeded the greater of (i) 2% of the sum for
such fiscal year of the Average Invested Assets of the Trust or (ii) 25% of the
Net Income of the Trust for such fiscal year or (b) to reduce its fees by the
amount of such excess during the balance of the fiscal year next following the
fiscal year with respect to which such refund is to be made.
3.6 Restrictions.
(a) The REIT Manager shall not recommend or consummate any transaction which
would involve the acquisition by the Trust of property in which the REIT
Manager or any Affiliate thereof has an ownership interest, including any
transaction prohibited by Article 1, Section 5(g) of the Declaration of Trust,
and neither the REIT Manager nor any Affiliate thereof shall purchase or
otherwise acquire from the Trust any Trust Property; provided, however, that
the REIT Manager may recommend and consummate transactions which involve the
acquisition or disposition by the Trust of property from or to PTR Development
Services Incorporated ("PTR Development Services") or in which PTR Development
Services has an ownership interest, provided that the Trust owns a substantial
majority of the economic interest in PTR Development Services and that a
majority of the Board (including a majority of the Independent Trustees) not
otherwise interested in such transaction approve the transaction as being fair,
competitive and commercially reasonable and no less favorable to the Trust than
acquisitions or dispositions between unaffiliated parties under similar
circumstances.
(b) Other than advances of expenses pursuant to Section 3.4 hereof, the Trust
shall not make loans to, or borrow money from, the REIT Manager or any
Affiliate thereof, unless a majority of the Board (including a majority of the
Independent Trustees) not otherwise interested in such transaction approve the
transaction as being fair, competitive and commercially reasonable and no less
favorable to the Trust than loans between unaffiliated lenders and borrowers
under the same circumstances.
(c) The Trust shall not invest in joint ventures with the REIT Manager or any
Affiliate thereof, unless a majority of the Board (including a majority of the
Independent Trustees) not otherwise interested in such transaction approve the
transaction as being fair and reasonable to the Trust and on substantially the
same terms and conditions as those received by the other joint venturers.
(d) All other material transactions between the Trust and the REIT Manager,
or any Affiliate thereof, shall require approval by a majority of the Board
(including a majority of the Independent Trustees) not otherwise interested in
such transactions as being fair and reasonable to the Trust and on terms and
conditions no less favorable to the Trust than those available from
unaffiliated third parties.
IV. TERMINATION; TERM
4.1 Termination. Notwithstanding any other provision to the contrary, this
Agreement (i) may be terminated without Cause by the Trust upon 60 calendar
days' written notice to the REIT Manager, or by
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the REIT Manager upon 60 calendar days' written notice to the Trust, and (ii)
may be terminated by the Trust for Cause immediately upon providing written
notice to the REIT Manager. Any determination by the Trust to terminate this
Agreement shall be made by the vote of a majority of the Independent Trustees
or the holders of a majority of outstanding Trust voting shares. The REIT
Manager shall immediately notify the Trust of the occurrence of any event
described in Sections 1.1(g)(iii) or (iv). In the event of termination of this
Agreement, the REIT Manager will cooperate with the Trust and take all
reasonable steps requested to assist the Board in making an orderly transition
of the REIT management function.
4.2 Renewal Terms. This Agreement shall continue in force for an initial term
beginning on the date hereof and ending on June 30, 1996, and shall be
renewable by the Trust annually, subject to a determination by a majority of
the Independent Trustees that the REIT Manager's performance hereunder has been
satisfactory and that the compensation payable to the REIT Manager hereunder is
fair. Absent written notice of non-renewal as provided in this Section 4.2,
this Agreement shall be automatically renewed for successive one-year terms
("Renewal Terms") upon the expiration of the initial term and each Renewal
Term. Notice of non-renewal, if given, shall be given in writing by the Trust
to the REIT Manager not less than 60 calendar days before the expiration of the
initial term of this Agreement or 60 calendar days before the expiration of any
Renewal Term thereof.
4.3 Compensation on Termination or Non-Renewal. Until liquidation of the
Trust, in the event the Trust terminates or fails to renew this Agreement on
terms as favorable as those contained in this Agreement or hereafter in a
renewal agreement, in either case other than for Cause, the Trust shall pay the
REIT Manager all fees then accrued and unpaid as of the year or portion thereof
in which the termination occurred.
V. ACTION UPON TERMINATION OR CANCELLATION
5.1 Accounting. The REIT Manager shall immediately upon termination of this
Agreement:
(a) pay over to the Trust all monies collected and held for the account
of the Trust pursuant to this Agreement, after deducting any accrued
compensation and reimbursement for its expenses to which it is then
entitled;
(b) deliver to the Trust a full accounting, including a statement showing
all payments collected by it and a statement of all monies held by it,
covering the period following the date of the last accounting furnished to
the Trust;
(c) refund to the Trust any amounts due pursuant to Section 3.5 hereof;
(d) deliver to the Trust all property and documents of the Trust then in
the custody of the REIT Manager; and
(e) cooperate with the Trust and take all reasonable steps requested to
assist the Board in making an orderly transition of the REIT management
function.
VI. LIABILITY AND INDEMNIFICATION OF REIT MANAGER
6.1 Limitation on Liability. The REIT Manager shall have no responsibility
other than to render the services and take the actions described herein in good
faith and with the exercise of due care and shall not be responsible for any
action of the Board in following or declining to follow any advice or
recommendation of the REIT Manager. The REIT Manager, except by reason of its
own gross negligence, bad faith or willful misconduct, shall not be liable for
any action taken, omitted or suffered to be taken by it in good faith and
believed by it to be authorized or within its discretion or rights or powers
conferred upon it by this Agreement or in reasonable reliance upon the written
opinion of counsel of recognized expertise.
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6.2 Indemnification.
(a) The Trust shall reimburse, indemnify and hold harmless the REIT Manager
and its directors, officers, shareholders, agents and employees and each other
person or entity, if any, controlling the REIT Manager (an "Indemnified
Party"), to the full extent lawful, from and against any and all losses,
claims, damages or liabilities of any nature whatsoever with respect to or
arising from any acts or omissions of the REIT Manager (including ordinary
negligence) in its capacity as such, except with respect to losses, claims,
damages or liabilities with respect to or arising out of the REIT Manager's
gross negligence, bad faith or willful misconduct.
(b) Notwithstanding the indemnification provisions in Section 6.2(a) above,
indemnification will not be allowed for any liability imposed by judgment, and
costs associated therewith, including attorneys' fees, arising from or out of a
violation of state or federal securities laws associated with the offer and
sale of Trust securities. Indemnification will be allowed for settlement and
related expenses of lawsuits alleging securities law violations, and for
expenses incurred in successfully defending such lawsuits, provided that a
court either (i) approves the settlement and finds that indemnification of the
settlement and related costs should be made or (ii) approves indemnification of
litigation costs if a successful defense is made. If indemnification is
unavailable as a result of this Section 6.2(b), the Trust shall contribute to
the aggregate losses, claims, damages or liabilities to which the REIT Manager
or its officers, directors, agents, employees or controlling persons may be
subject in such amount as is appropriate to reflect the relative benefits
received by the Trust and the party seeking contribution and the relative
faults of the Trust and the party seeking contribution, as well as any other
relevant equitable considerations.
(c) Promptly after receipt by an Indemnified Party of notice of the
commencement of any action, such Indemnified Party shall, if a claim in respect
thereof is to be made against the Trust, notify the Trust in writing of the
commencement thereof; but the omission so to notify the Trust shall not relieve
it from any liability that it may have to any Indemnified Party pursuant to
Section 6.2(a) hereof, unless the failure to so notify would itself constitute
gross negligence, bad faith or willful misconduct. In case any such action
shall be brought against an Indemnified Party and it shall notify the Trust of
the commencement thereof, the Trust shall be entitled to participate therein
and, to the extent that it shall wish to assume the defense thereof, with
counsel satisfactory to such Indemnified Party and, after notice from the Trust
to such Indemnified Party of its election so to assume the defense thereof, the
Trust shall not be liable to such Indemnified Party under Section 6.2(a) hereof
for any legal expenses of other counsel or any of the expenses, in each case
subsequently incurred by such Indemnified Party, unless (i) the Trust and the
Indemnified Party shall have mutually agreed to the retention of such counsel
or (ii) the named parties to any such proceeding (including any impleaded
parties) include both the Trust and the Indemnified Party and representation of
both parties by the same counsel would be inappropriate in the reasonable
opinion of the Indemnified Party, due to actual or potential differing
interests between them.
(d) The obligations of the Trust under this Section 6.2 shall be in addition
to any liability which the Trust otherwise may have.
6.3 Representations, Warranties and Covenants of Trust.
(a) The Trust represents and warrants as of the date hereof that:
(i) this Agreement has been duly authorized, executed and delivered on
behalf of the Trust;
(ii) the Trust is fully authorized under the applicable laws governing
the Trust to enter into all of the types of investments and co-investments
described in the Investment Policies;
(iii) the execution and performance of this Agreement by the Trust will
not conflict with, or result in a breach of the terms, conditions or
provisions of, or constitute a default under, or result in any violation
of, any agreement or instrument to which the Trust is subject;
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(iv) the terms of this Agreement are in conformity with the applicable
laws governing the Trust; and
(v) the assets of the Trust do not constitute "plan assets" within the
meaning of the Department of Labor plan asset regulation published at 29
C.F.R. (S) 2510.3-101.
(b) The Trust shall promptly advise the REIT Manager in writing of any
agreements or changes in any agreements, instruments, governing law,
regulations or interpretations thereof affecting the investments of the Trust
or the duties, responsibilities, liabilities or obligations of the REIT
Manager, and any change or any contemplated change with respect to any of the
foregoing or the operation or administration of the Trust that could cause the
assets of the Trust to constitute "plan assets" as defined in paragraph
6.3(a)(v) above.
VII. MISCELLANEOUS PROVISIONS
7.1 Entire Agreement. This Agreement constitutes the entire agreement between
the parties with respect to the subject matter hereof. Any modification or
amendment of this Agreement shall be in writing executed by each of the
parties.
7.2 Assignment. This Agreement may not be assigned by either party except in
the event of an assignment to a successor organization that takes over the
property and carries on the affairs of the assignor, provided that following
any such assignment by the REIT Manager, the persons who controlled the
operations of the REIT Manager immediately prior thereto shall control the
operations of the successor organization, including the performance of its
duties under this Agreement. Any such assignment of this Agreement shall bind
the assignee hereunder in the same manner as the assignor is bound hereunder.
Notwithstanding the foregoing, without the Trust's consent, the REIT Manager
may assign all or any part of the compensation due it hereunder and the REIT
Manager may assign or subcontract any or all of its rights and duties hereunder
with respect to the Trust's corporate efficiency properties to an Affiliate of
the REIT Manager, provided that no such assignment or subcontract shall relieve
the REIT Manager of its obligations hereunder.
7.3 No Partnership or Joint Venture. The Trust and the REIT Manager are not,
and shall not be deemed to be, partners or joint venturers with each other.
7.4 Severability. If any term or provision of this Agreement or the
application thereof to any person or circumstance shall, to any extent, be
invalid or unenforceable, the remainder of this Agreement, or the application
of that term or provision to persons or circumstances other than those as to
which it is held invalid or unenforceable, shall not be affected thereby, and
each term and provision of this Agreement shall be valid and be enforced to the
fullest extent permitted by law.
7.5 Policy and Financial Information. The Trustees shall keep the REIT
Manager informed in writing concerning the investment and financing policies of
the Trust and shall promptly notify the REIT Manager of any intention to make
any new investments, to sell or dispose of any existing investments or to enter
into any agreement or understanding with any third party. The Trust shall
furnish the REIT Manager a certified copy of all financial statements, a signed
copy of each report prepared by independent public accountants, a certified
copy of each amendment or supplement to the Declaration of Trust, the By-Laws
and the Investment Policies and such other information with regard to the
Trust's affairs as the REIT Manager from time to time reasonably may request.
7.6 Notices. Any notices and other communications to be given by any party
hereunder shall be in writing delivered at the address of the respective party
set forth on the signature page hereof, or at such other address as a party
shall have specified to the other party in writing as the address for notices
hereunder. Any such notice or other communication shall be deemed to have been
given when personally delivered or one business day after being forwarded by
overnight courier or five days after being sent by registered or certified
United States mail, postage prepaid.
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7.7 Headings. The section headings used herein have been inserted for
convenience of reference only and shall not be considered in interpreting this
Agreement.
7.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas, without giving effect to the
principles of conflict of laws thereof.
7.9 Board Action. Whenever action on the part of the Trust or the Board is
contemplated in this Agreement, unless otherwise indicated herein, action by a
majority of the Trustees, including a majority of the Independent Trustees,
shall constitute the action provided for herein.
7.10 Other Activities.
(a) Nothing in this Agreement shall prevent the REIT Manager or any Affiliate
thereof from rendering advice to other investors (including other real estate
investment trusts), even if such investors are in competition with the Trust or
any of the Trust's real estate investments or from managing other investments,
including investors and investments advised, sponsored or organized by the REIT
Manager. The REIT Manager also may render such services to joint ventures and
partnerships in which the Trust is a co-venturer or partner and to the other
entities in such joint ventures and partnerships. In addition, nothing in this
Agreement shall limit the right of the REIT Manager or any of its subsidiaries
or Affiliates to engage in any other business or to render services of any kind
(including business activities competitive with those of the Trust) to any
corporation, partnership or other entity. The REIT Manager will inform the
Trustees of any other advisory contracts or investments (other than purchases
of marketable securities or securities which are registered pursuant to Section
12 of the Exchange Act) by the REIT Manager or its Affiliates. When informing
the Trustees of any advisory contracts, the REIT Manager need not identify the
advised entities by name, but shall provide the Board with sufficient
information to permit the Board to evaluate the services performed or to be
performed by the REIT Manager under such contract. Nothing in this Agreement
shall prevent the Trustees from considering the REIT Manager's activities for
itself and for other entities in evaluating the REIT Manager's performance for
purposes of deciding whether or not to renew this Agreement. The Trust will
maintain the confidentiality of all information provided to the Trust pursuant
to this paragraph, subject to disclosure only if required by applicable law or
compelled by appropriate legal process.
(b) The REIT Manager and its Affiliates, directors, officers, employees,
shareholders and subsidiaries shall be free of any obligation to provide the
Trust with the right of first refusal to acquire or invest in any investment
opportunity that may come to any of them in any capacity, whether or not such
investment opportunities are of a character which is within the investment
policies of the Trust. Directors, officers, employees and agents of the REIT
Manager or any of its Affiliates may serve as Trustees, officers, employees,
agents, nominees or signatories of the Trust. When executing documents or
otherwise acting in such capacities for the Trust, such persons shall use their
respective titles for the Trust. Such persons shall receive from the Trust no
compensation for their services to the Trust in any such capacities.
7.11 Independent Trustees' Approval. Notwithstanding anything to the contrary
in this Agreement, a majority of the Independent Trustees must approve the
Trust's annual strategic plan and operating budget; all property acquisitions,
developments, dispositions and unbudgeted (non-emergency) capital expenditures
in excess of $50,000; and all Trust financing, including the issuance of public
and private debt or equity securities. In addition, to the extent that the
Declaration of Trust requires approval of the majority of Independent Trustees
with respect to any matter pertaining to this Agreement, such matter shall be
submitted for such approval and shall not be pursued until such approval is
received.
7.12 Limitation of Liability of Trust. ANY OBLIGATION OR LIABILITY WHATSOEVER
OF THE TRUST WHICH MAY ARISE AT ANY TIME UNDER THIS AGREEMENT OR ANY OBLIGATION
OR LIABILITY WHICH MAY BE INCURRED BY IT PURSUANT TO ANY OTHER INSTRUMENT,
TRANSACTION OR UNDERTAKING CONTEMPLATED HEREBY SHALL BE
12
<PAGE>
SATISFIED, IF AT ALL, OUT OF THE TRUST'S PROPERTIES ONLY. NO SUCH OBLIGATION OR
LIABILITY SHALL BE PERSONALLY BINDING UPON, NOR SHALL RESORT FOR THE
ENFORCEMENT THEREOF BE HAD TO, THE PRIVATE PROPERTY OF ANY OF ITS TRUSTEES,
SHAREHOLDERS, OFFICERS, EMPLOYEES OR AGENTS, REGARDLESS OF WHETHER SUCH
OBLIGATION OR LIABILITY IS IN THE NATURE OF CONTRACT, TORT OR OTHERWISE.
7.13 Declaration of Trust Governs. To the extent that any provision in this
Agreement is inconsistent with or contradicts a provision in the Declaration of
Trust, as the same may be amended and supplemented from time to time, the
Declaration of Trust shall govern and such provision of this Agreement shall be
deemed to have been reformed to be consistent with the Declaration of Trust.
7.14 Authority to Act. The Trust shall furnish to the REIT Manager from time
to time, upon request of the REIT Manager, certified copies of appointments or
designations setting forth the names, titles and authorities of the individuals
who are authorized to act on behalf of the Trust with respect to the Trust's
investments, together with specimen signatures of those individuals who are
authorized to act on its behalf with respect to this Agreement. The REIT
Manager shall furnish to the Trust from time to time, upon request of the
Trust, certificates setting forth the names, titles and authorities of the
persons authorized to act on its behalf and provide specimen signatures of
those individuals who are authorized to act on its behalf with respect to this
Agreement.
7.15 Counterparts. This Agreement may be executed in any number of
counterparts and by each of the parties hereto on separate counterparts; all
such counterparts shall together constitute but one and the same instrument.
In Witness Whereof, the Trust and the REIT Manager have executed this
Agreement as of the day and year first above written.
Address for Notice: Security Capital Pacific Trust
7777 Market Center Avenue /s/ C. Ronald Blankenship
El Paso, Texas 79912 By: _________________________________
C. Ronald Blankenship
Chairman
Address for Notice: Security Capital Pacific
Incorporated
125 Lincoln Avenue /s/ Paul E. Szurek
Santa Fe, New Mexico 87501 By: _________________________________
Paul E. Szurek
Secretary
13
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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 July 21, 1995 related to our
review of interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1993, 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
July 25, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-Q for the six months ended June 30, 1995 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 35,667
<SECURITIES> 0
<RECEIVABLES> 20,612
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,690,564
<DEPRECIATION> 62,649
<TOTAL-ASSETS> 1,700,636
<CURRENT-LIABILITIES> 0
<BONDS> 152,007
<COMMON> 72,376
0
335,000
<OTHER-SE> 896,237
<TOTAL-LIABILITY-AND-EQUITY> 1,700,636
<SALES> 119,236
<TOTAL-REVENUES> 120,510
<CGS> 0
<TOTAL-COSTS> 47,615
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 120
<INTEREST-EXPENSE> 11,129
<INCOME-PRETAX> 35,346
<INCOME-TAX> 0
<INCOME-CONTINUING> 35,346
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,346
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.43
</TABLE>
