<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A No. 1
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994.
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
PROPERTY TRUST OF AMERICA
-----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 74-6056896
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7777 Market Center Avenue, El Paso, Texas 79912
--------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(915) 877-3900
-----------------------------------------------------------
(Registrant's telephone number, including area code)
None
------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing for the
past 90 days.
Yes X No
----- -----
The number of shares outstanding of the Registrant's common stock as of October
21, 1994 was:
Shares of Beneficial Interest, $1 par value - 50,397,188 shares
<PAGE>
PROPERTY TRUST OF AMERICA
INDEX
Page
Number
PART I. Financial Information
Item 1. Financial Statements
Balance Sheets - September 30, 1994 and
December 31, 1993 . . . . . . . . . . . . . . . . . . . 3
Statements of Earnings - Three and Nine months
ended September 30, 1994 and 1993 . . . . . . . . . . . 4
Statements of Cash Flows - Nine months ended
September 30, 1994 and 1993. . . . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . 6
Independent Accountants' Review Report. . . . . . . . . 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 13
PART II. Other Information
Item 6. Exhibits and Reports on Form 8K . . . . . . . . . . . . 19
2
<PAGE>
PROPERTY TRUST OF AMERICA
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993
-------------- ------------
(unaudited)
<S> <C> <C>
Real estate.................................... $1,233,021 $872,610
Less accumulated depreciation.................. 39,071 22,022
---------- --------
1,193,950 850,588
Mortgage notes receivable...................... 22,553 22,624
---------- --------
Total investments.......................... 1,216,503 873,212
Cash and cash equivalents...................... 12,475 5,525
Accounts receivable............................ 2,209 763
Other assets................................... 13,350 10,801
---------- --------
Total assets............................... $1,244,537 $890,301
========== ========
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
Liabilities:
<S> <C> <C>
Line of credit............................... $ 53,500 $ 51,500
Long term debt............................... 200,000 -
Mortgages payable............................ 96,200 48,872
Distributions payable........................ - 11,161
Accounts payable............................. 12,494 13,514
Accrued expenses and other liabilities....... 24,719 10,237
---------- --------
Total liabilities.......................... 386,913 135,284
---------- --------
Shareholders' Equity:
Series A Preferred shares (9,200,000
convertible shares authorized and issued;
stated liquidation preference of
$25 per share)............................. 230,000 230,000
Common shares (shares issued - 50,561,666
in 1994 and 44,809,208 in 1993)............ 50,562 44,809
Additional paid-in capital................... 621,787 523,053
Distributions in excess of net earnings...... (42,796) (40,916)
Treasury shares (164,478 in 1994 and
164,467 in 1993)........................... (1,929) (1,929)
---------- --------
Total shareholders' equity................. 857,624 755,017
---------- --------
Total liabilities and
shareholders' equity..................... $1,244,537 $890,301
========== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
PROPERTY TRUST OF AMERICA
STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -------------------------
1994 1993 1994 1993
--------------------------------------------------
<S> <C> <C> <C> <C>
Income:
Rental income........................... $50,299 $19,872 $131,103 $50,852
Interest income......................... 585 615 2,093 1,502
------- ------- -------- -------
50,884 20,487 133,196 52,354
------- ------- -------- -------
Expenses:
Rental expenses......................... 21,966 7,933 56,662 20,255
Depreciation............................ 6,621 2,536 17,411 6,788
Interest................................ 5,762 1,468 14,021 3,529
General and administrative and
REIT management fee................... 3,627 1,960 9,965 5,052
Provision for possible loss on
investments........................... - - 1,600 2,270
Other................................... 181 136 533 171
------- ------- -------- -------
38,157 14,033 100,192 38,065
------- ------- -------- -------
Earnings from operations.................. 12,727 6,454 33,004 14,289
Gain on sale of investments, net.......... - - - 2,302
------- ------- -------- -------
Net earnings.............................. 12,727 6,454 33,004 16,591
Less Series A Preferred
share distributions..................... 4,025 - 12,075 -
------- ------- -------- -------
Net earnings attributable to
common shares........................ $ 8,702 $ 6,454 $ 20,929 $16,591
======= ======= ======== =======
Weighted average common shares
outstanding............................. 47,051 35,742 45,490 33,950
======= ======= ======== =======
Per share amounts attributable
to common shares:
Net earnings............................ $0.18 $0.18 $0.46 $0.49
======= ======= ======== =======
Distributions........................... $0.25 $0.205 $0.75 $0.615
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
PROPERTY TRUST OF AMERICA
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1994 1993
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings................................... $ 33,004 $ 16,591
Items not requiring (providing) cash:
Depreciation and amortization................ 19,025 7,899
Other, net................................... - 121
Provision for possible loss on
investments................................ 1,600 2,270
Gain on sale of investments, net............. - (2,302)
Accounts and accrued interest receivable....... (1,446) (74)
Accounts payable............................... 792 1,112
Accrued real estate taxes...................... 7,355 1,972
Accrued other expenses and other liabilities... 7,210 1,609
Net change in other operating assets........... (793) (1,562)
--------- ---------
Net cash flow provided by operating
activities................................. 66,747 27,636
--------- ---------
INVESTING ACTIVITIES:
Real estate investments........................ (319,268) (205,874)
Sale of real estate property, net.............. 12,041 6,224
Mortgage notes receivable...................... 71 1,245
--------- ---------
Net cash flow used in investment activities.. (307,156) (198,405)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from sale of shares,
net of expenses.............................. 101,807 295,667
Proceeds from line of credit................... 216,250 159,000
Proceeds from dividend reinvestment
and share purchase plan, net................. 2,896 7,142
Proceeds from long term debt................... 200,000 -
Proceeds from exercise of stock options, net... 21 205
Cash distributions paid on common shares....... (33,970) (20,019)
Cash distributions paid on preferred shares.... (12,075) -
Debt issuance costs incurred................... (3,581) (1,225)
Regularly scheduled principal payments on
mortgages payable............................ (1,131) (469)
Prepayments of mortgages payable............... (8,370) (5,577)
Principal payments on line of credit........... (214,250) (213,802)
Purchase of treasury shares.................... - (114)
Other.......................................... (238) -
--------- ---------
Net cash flow provided by
financing activities....................... 247,359 220,808
--------- ---------
Net increase in cash and cash equivalents........ 6,950 50,039
Cash and cash equivalents at beginning
of period...................................... 5,525 6,998
--------- ---------
Cash and cash equivalents at end of period....... $ 12,475 $ 57,037
========= =========
Non-cash financing activities:
Receipt of purchase notes from sale of
non-multifamily investments.................. $ - $ 12,413
Mortgage notes assumed or given upon purchase
of multifamily properties.................... $ 56,829 $ 5,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
PROPERTY TRUST OF AMERICA
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1994
(1) GENERAL
The financial statements of Property Trust of America ("PTR") are
unaudited and certain information and footnote disclosures normally
included in financial statements have been omitted. Certain amounts in the
financial statements for 1993 have been reclassified to conform to the 1994
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
1993 Annual Report on Form 10-K.
In the opinion of management, the accompanying unaudited financial
statements contain all 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 nine month periods ended September
30, 1994 are not necessarily indicative of the results to be expected for
the entire year.
Per share data is computed by using the weighted average of common
shares outstanding during the period. The assumed conversion of the
Cumulative Convertible Series A Preferred Shares of Beneficial Interest,
("Preferred Shares") was antidilutive for the three and nine months ended
September 30, 1994.
(2) REAL ESTATE
Investments in real estate, at cost, were as follows (dollar amounts
in thousands):
<TABLE>
<CAPTION>
September 30, 1994 December 31, 1993
------------------ ------------------
Investment Units Investment Units
----------- ----- ---------- ------
<S> <C> <C> <C> <C>
Multifamily:
Operating properties...... $1,078,226 30,536 $730,994 22,493
Developments under
construction............ 77,426 3,629 84,395 3,048
Developments in planning.. 40,622 5,327 17,490 2,550
Land held for future
development.............. 3,366 4,208
---------- --------
Total Multifamily....... 1,199,640 837,087
Non-multifamily............. 33,381 35,523
---------- --------
Total real estate....... $1,233,021 $872,610
========== ========
</TABLE>
The change in investments in real estate, at cost, from December 31,
1993 to September 30, 1994 consisted of the following (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1993............. $ 872,610
Acquisitions and renovation
expenditures........................... 251,488
Development expenditures including land
acquisitions........................... 117,205
Capital improvements..................... 2,392
Real estate sold......................... (12,275)
Acquisition of land held for future
development, net of transfers.......... 3,366
Provision for possible loss on
investments............................ (1,600)
Other.................................... (165)
---------
</TABLE>
6
<PAGE>
PROPERTY TRUST OF AMERICA
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1994
Balance at September 30, 1994............ $1,233,021
==========
The land PTR currently owns or controls through letters of intent or
contingent contracts, subject to PTR's final due diligence, will allow for
development of 6,235 additional multifamily units, which will be an
important generator of growth for PTR in 1995 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.
At October 21, 1994, PTR had unfunded development commitments for
developments under construction of $71.3 million.
PTR develops and acquires properties with a view to effective long
term operation and ownership. Based upon PTR's market research and in an
effort to optimize its portfolio allocation, PTR may from time to time seek
to dispose of assets that in management's view do not meet PTR's long term
investment criteria and redeploy the proceeds therefrom, preferably through
like kind exchanges, into assets that it believes provide better long term
growth opportunities.
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. PTR's share of the loss provision is $1.6 million as reflected in
the September 30, 1994 statement of earnings. PTR's net carrying value
after the provision is $2.85 million. This provision has no impact on cash
flow from operating activities nor does PTR have any financial obligation
to the partnership.
PTR focuses its investment and development activities on multifamily
properties. PTR will continue to aggressively manage non-multifamily
properties in order to maximize cash flow, and disposition of such non-
multifamily properties may occur as opportunities arise. Properties are
periodically evaluated for net realizable value and provisions for possible
losses are made if required.
(3) DISTRIBUTIONS
On October 21, 1994, the Trustees declared a cash distribution of $.25
per common share payable on November 14, 1994 to shareholders of record on
November 1, 1994.
(4) LINE OF CREDIT AND LONG TERM DEBT
Line of Credit
On August 4, 1994, PTR consummated a conversion of its $200 million
revolving line of credit facility with Texas Commerce Bank, National
Association, as agent bank for a group of lenders ("TCB") into an unsecured
facility ("TCB line"). Borrowings bear interest at the greater of prime or
the federal funds rate plus 1/2%, or at PTR's option, LIBOR plus 1.75% to
2% (varying based upon PTR's Standard & Poors rating). At September 30,
1994, PTR's outstanding LIBOR contract borrowings amounted to $52 million
at a base LIBOR rate of 4.875% plus 1.75% for a total rate of 6.625%.
Additionally, there is a commitment fee of .125% per annum of the average
unfunded line of credit balance.
On October 27, 1994, the TCB line was increased to $275 million and
7
<PAGE>
PROPERTY TRUST OF AMERICA
NOTES TO FINANCIAL STATEMENTS
September 30, 1994
the maturity was extended to August 15, 1996. The TCB line may be extended
annually for an additional year with the approval of TCB and other
participating lenders. All debt incurrences are subject to covenants, as
more fully defined in the loan agreement, 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) 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. As of September 30, 1994, PTR was in compliance
with all debt covenants.
Long Term Debt
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".
In February 1994, PTR received $1.3 million in settlement of an
interest protection agreement in the form of a Forward Treasury Lock
Agreement entered into with an investment banker on January 28, 1994. The
agreement included a determination date of February 1, 1994 and a
settlement date of February 2, 1994. The notional amounts were $100 million
with a reference price of 100.90625% and $75 million with a reference price
of 110.4375%. On February 2, 1994, the settlement prices were 100.32813%
and 109.46875%, respectively. There are no agreements outstanding.
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 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 proceeds from an interest rate protection agreement, of
7.37% per annum. The Notes are redeemable any time at the option of PTR,
in whole or in part, at a redemption price equal to the sum of the
principal amount of the Notes being redeemed plus accrued interest thereon
to the redemption date plus a yield to maturity adjustment. 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. As of September 30,
1994, PTR was in compliance with all debt covenants.
Interest
Interest paid for the nine months ended September 30, 1994 was
$14,861,000, including $4,254,000 of interest capitalized during
8
<PAGE>
PROPERTY TRUST OF AMERICA
NOTES TO FINANCIAL STATEMENTS
September 30, 1994
construction. Interest paid for the nine months ended September 30, 1993
was $3,595,000, including $1,527,000 of interest capitalized during
construction.
Amortization of debt issuance costs included in interest expense for
the nine months ended September 30, 1994 and 1993 was $1,614,000 and
$1,111,000, respectively.
(5) REIT MANAGEMENT AND PROPERTY MANAGEMENT AGREEMENTS
In March 1994, PTR renewed its REIT Management agreement with Security
Capital (Southwest) Incorporated (the "REIT Manager"), to provide REIT
Management services to PTR. The REIT Manager is an affiliate of Security
Capital Realty Incorporated ("Realty"), which owns approximately 31.88% of
PTR's shares of beneficial interest. In exchange for providing research,
investment analysis, acquisition and development services, asset
management, capital funding, legal and accounting services, and day-to-day
management of PTR's operations, the REIT Management agreement permits the
REIT Manager to earn a base annual fee of $855,000, plus 16% of cash flow
per year, as defined in the REIT Management agreement, in excess of
$4,837,000. Under the terms of the agreement, long term debt described in
Note 4 above, is treated as if it had regularly scheduled principal and
interest payments like a 20-year, level monthly payment, fully amortizing
mortgage and the assumed principal and interest payments are deducted from
cash flow in determining the fee. The REIT Manager also receives a fee of
0.25% per year on the average daily balance of cash equivalent investments.
The REIT Management Agreement also requires PTR to pay the REIT
Manager an incentive fee upon any sale of PTR's real estate assets. For
assets owned at March 1, 1991, the fee is equal to 10% of the gain above an
agreed asset valuation prepared by an unrelated investment bank. For
assets acquired after March 1, 1991, the fee equals 10% of the gain above
PTR's all-in cost for the assets, including transaction costs and capital
improvements, as increased by the inflation rate since the date of
acquisition. All incentive fees are averaged over three-year periods to
avoid any windfalls related to sales in any particular year. Any incentive
fees earned by the REIT Manager will be paid in common shares at the then
market price. On September 22, 1994, the Board of Trustees amended the
REIT Management Agreement to eliminate any incentive fees upon tax-deferred
exchanges of PTR's real estate assets.
The REIT Management fee for the nine months ended September 30, 1994
was $9,443,000 and $4,619,000 for the nine months ended September 30, 1993.
No incentive fees have been earned by the REIT Manager.
SCG Realty Services Incorporated ("SCG Realty Services"), currently
manages approximately 89% of PTR's multifamily properties. In addition to
property management, SCG Realty Services performs, among other things,
certain due diligence services for PTR's acquisitions. The sole
shareholder of PTR's REIT Manager owns 100% of SCG Realty Services' voting
stock. For the nine months ended September 30, 1994 and 1993, PTR paid an
aggregate of $4.7 million and $2.3 million, respectively, to SCG Realty
Services, including $4.5 million and $1.9 million, respectively, in
property management fees. Rates for services performed by SCG Realty
Services are subject to approval by PTR's independent Board of Trustees
9
<PAGE>
PROPERTY TRUST OF AMERICA
NOTES TO FINANCIAL STATEMENTS
September 30, 1994
and are at rates prevailing in the markets in which PTR operates. In
September 1994, PTR's Board of Trustees renewed the property management
agreement for an additional year.
(6) SHELF REGISTRATION
On May 2, 1994, PTR filed a shelf registration statement with the
Securities and Exchange Commission. PTR registered a total of $325 million
of securities which can be issued in the form of debt securities, preferred
shares of beneficial interest, common shares of beneficial interest,
shareholder purchase rights or subscription rights for common shares of
beneficial interest. On August 16, 1994, PTR raised $102.1 million in gross
proceeds from a Rights Offering (see Note 8). Therefore, as of September
30, 1994, $222.9 million in securities were available to be issued under
this shelf registration.
(7) SHAREHOLDER PURCHASE RIGHTS
On July 11, 1994, the Board of Trustees of PTR announced the
redemption, effective at the close of business on July 21, 1994, of the
shareholder purchase rights issued pursuant to the Rights Agreement dated
as of February 23, 1990, as amended. Pursuant to the redemption, each
holder of record at the close of business on July 21, 1994 was entitled to
receive $0.01 per shareholder purchase right. The redemption price was
paid on August 12, 1994.
In addition, the Board of Trustees declared a dividend of one
preferred share purchase right (a "Purchase Right") for each Common Share
outstanding, payable to holders of Common Shares of record at the close of
business on July 21, 1994. Each Purchase Right entitles the holder under
certain circumstances to purchase from PTR one one-hundredth of a share of
Series B Junior Participating Preferred Share, par value $1.00 per share
(the "Participating Preferred Shares") at a price of $60.00 per one one-
hundredth of a Participating Preferred Share, subject to adjustment.
Purchase Rights are exercisable when a person or group of persons acquires
20% or more of the outstanding Common Shares (49% in the case of Realty and
certain defined affiliates) or announces a tender offer for 25% or more of
the outstanding Common Shares. Under certain circumstances, each Purchase
Right entitles the holder to purchase, at the Purchase Right's then current
exercise price, a number of Common Shares having a market value of twice
the Purchase Right's exercise price. The acquisition of PTR pursuant to
certain mergers or other business transactions would entitle each holder to
purchase, at the Purchase Right's then current exercise price, a number of
the acquiring company's common shares having a market value at that time
equal to twice the Purchase Right's exercise price. The Purchase Rights
will expire in July 2004 and are subject to redemption in whole, but not in
part, at a price of $0.01 per Purchase Right payable in cash, shares of PTR
or any other form of consideration determined by PTR's Board of Trustees.
(8) RIGHTS OFFERING
On August 16, 1994, PTR raised $101.8 million net proceeds from a
Rights Offering of 5,593,718 common shares of beneficial interest at a
price of $18 1/4 per share. Proceeds from the offering were used to fund
developments and to invest in additional multifamily properties in PTR's
10
<PAGE>
PROPERTY TRUST OF AMERICA
NOTES TO FINANCIAL STATEMENTS
September 30, 1994
target market and to repay borrowings under PTR's revolving line of credit.
11
<PAGE>
Independent Accountants' Review Report
--------------------------------------
The Board of Trustees and Shareholders
Property Trust of America:
We have reviewed the accompanying balance sheet of Property Trust of
America as of September 30, 1994, and the related statements of earnings for the
three- and nine-month periods ended September 30, 1994 and 1993, and the
statements of cash flows for the nine-month periods ended September 30, 1994 and
1993. 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 Property Trust of America as of December 31,
1993, and the related statements of earnings, shareholders' equity, and cash
flows for the year then ended (not presented herein); and in our report dated
January 18, 1994, except as to note 10, which is as of February 8, 1994, 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,
1993 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
October 24, 1994
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
PTR's 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, and (iii) 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) which
increase the demand for multifamily units while financing constraints
(specifically, reduced availability of development capital) have limited new
construction to levels substantially below construction activity prior to 1986.
Consequently, rental rates for multifamily units have increased more than the
inflation rate for the last two years and are expected to continue experiencing
such increases for the next twelve months. Rental expense levels also influence
operating results, and rental expenses (other than real estate taxes) for
multifamily properties have generally increased at approximately the same rate
as rents for the past year and are expected to increase at a comparable rate for
the next twelve months.
REIT Management believes that development of multifamily properties from
the ground up which are built for long term ownership and are designed to meet
broad renter preferences and demographic trends will provide a greater source of
long term cash flow growth in the future. Therefore, while land prices are
favorable, PTR has acquired and will acquire, on an unleveraged basis, prudent
amounts of zoned land for multifamily development in the foreseeable future.
The REIT Manager believes PTR's ability to compete is significantly enhanced
relative to other companies because of the REIT Manager's depth of development
and acquisition personnel and presence in local markets combined with PTR's
access to investment capital.
RESULTS OF OPERATIONS
INTERIM PERIOD COMPARISON
During the nine months ended September 30, 1994, PTR acquired 17
multifamily properties aggregating 6,203 units for a total purchase price,
including planned renovations, of approximately $252.1 million and completed
development of 10 multifamily properties aggregating 2,378 units with a
completed cost of $109.2 million. At September 30, 1994, PTR had 3,629
multifamily units under construction with a budgeted completed cost of $148.7
million and had in the final planning stages an estimated 5,327 multifamily
units with an aggregate budgeted completed cost of $264.3 million. During the
nine months ended September 30, 1993, PTR acquired 17 multifamily properties
aggregating 4,709 units for a total purchase price, including renovations, of
approximately $146.6 million and completed development of 3 multifamily
properties with 732 units with a completed cost of $30.4 million. At September
30, 1993, PTR had 3,127 multifamily units under construction with a budgeted
completed cost of $137.9 million.
The percentage of PTR's total rental income generated by multifamily
properties was 98.13% and 91.43% for the nine months ended September 30, 1994
and 1993, respectively. This percentage will continue to increase throughout
1994 due to past and ongoing multifamily property developments and acquisitions
and the periodic sale of non-multifamily properties. Projected 1994 property
level earnings before interest, income taxes, depreciation and amortization
("EBITDA") for all operating multifamily properties owned by PTR as of September
30, 1994
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<PAGE>
is 10.03% of PTR's aggregate cost for these properties. EBITDA does not
represent, and should not be construed as, a substitute for net earnings as
defined by GAAP and is not indicative of cash flows from operations or that cash
flows are sufficient to fund all cash needs. Aggregate cost for the properties
includes the purchase price, closing costs and budgeted capital improvements and
marketing costs prior to stabilization. Projected EBITDA is based on current
lease rates for stabilized properties and current market rates for properties
being stabilized and on anticipated operating expenses. No assurance can be
given that projected levels of EBITDA will be achieved by these properties or
that future developments and acquisitions will achieve the same level of EBITDA
relative to PTR's investment basis.
Property Operations
Including the newly acquired and developed assets, rental income increased
$80.3 million (157.8%), which was partially offset by higher rental expenses
which increased by $36.4 million (179.7%) and depreciation expense which
increased $10.6 million (156.5%) for the nine months ended September 30, 1994
over 1993. These increases are due to operating multifamily acquisitions and
multifamily developments placed in service and to rental rate increases. For
operating multifamily properties, which comprise 97% of PTR's total operating
properties, based on cost at September 30, 1994, rental expenses were 43.8% and
42.4% of rental income during the nine months ended September 30, 1994 and 1993,
respectively.
Multifamily Properties Fully Operating Throughout Both Periods
For the 29 multifamily properties which were fully operating throughout
both the nine months ended September 30, 1994 and 1993, property level earnings
before interest, income taxes and depreciation (EBITDA) as a percentage of PTR's
aggregate investment in these properties increased to 11.1% in 1994 (annualized
estimate based on actual results year to date for 1994) from 10.6% in 1993.
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 $2.1 million as a result of renovation and other capital
expenditures. EBITDA does not represent, and should not be construed as, a
substitute for net earnings as defined by GAAP and is not indicative of cash
flows from operations or that cash flows are sufficient to fund all cash needs.
The 7.4% increase in rental income (the majority resulting from a 6.81% rental
rate increase) for such properties for the nine months ended September 30, 1994
as compared to the same period in 1993 was offset by increases in rental
expenses, primarily due to real estate taxes and turnover expenses.
Interest Income
Interest income for the nine months ended September 30, 1994 increased
$591,000 (39.3%) over 1993, primarily resulting from the addition of four
purchase money notes aggregating $12.4 million received in 1993 in conjunction
with non-multifamily property sales.
Interest Expense
Interest expense increased $10.5 million (297.3%) for the nine months ended
September 30, 1994 when compared to 1993. The increase is primarily
attributable to interest expense of $9.3 million resulting from the issuance of
$200 million of long term notes in February 1994, as more fully discussed under
"Liquidity and Capital Resources."
Mortgage interest expense increased $2.3 million (115.1%) for the nine
months ended September 30, 1994 when compared to 1993 as a result of the
addition of six mortgages aggregating $56.8 million during the nine month
period ended September 30, 1994 and three mortgages aggregating $27.0 million
during 1993 that were assumed or given in connection with the acquisition of
multifamily
14
<PAGE>
properties.
Line of credit interest expense increased $1.6 million (52.4%) resulting
primarily from the amortization of additional loan costs (commitment fees, title
policies and legal expenses) relating to PTR's revolving credit facility which
was increased from $72 million to $125 million and then to $200 million during
1993 and converted to an unsecured credit facility in August 1994. Average
borrowings on the line of credit were approximately $54.9 million (with an
average interest rate of 7.24%) during the nine months ended September 30, 1994,
as compared to average borrowings of $40.4 million (with an average interest
rate of 6.30%) during 1993.
The increases in interest expense were offset by an increase of $2.7
million (178.6%) in capitalized interest. The increase in capitalized interest
is attributable to increased multifamily development activity for the nine
months ended September 30, 1994 as compared to 1993.
General and Administrative Expense and 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 $4.8 million (104.4%) during the nine months ended
September 30, 1994 as compared to 1993 because cash flow increased
substantially. The REIT management fee was 7.1% and 8.8% of total revenues for
the nine months ended September 30, 1994 and 1993, respectively. With the
issuance of $200 million of amortizing long term debt as more fully described
under "Liquidity and Capital Resources," the REIT Management fee will
effectively decline in proportion to PTR's net earnings 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.
Property Dispositions and Provision for Possible Loss
PTR develops and acquires properties with a view to effective long term
operation and ownership. Based upon PTR's market research and in an effort to
optimize its portfolio allocation, PTR may from time to time seek to dispose of
assets that in management's view do not meet PTR's long term investment criteria
and redeploy the proceeds therefrom, preferably through like kind exchanges,
into assets that it believes provide better long term growth opportunities.
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. PTR's share of the
loss provision is $1.6 million as reflected in the September 30, 1994 statement
of earnings. PTR's net carrying value after the provision is $2.85 million.
This provision has no impact on cash flow from operating activities nor does PTR
have any financial obligation to the partnership.
PTR focuses its investment and development activities on multifamily
properties. PTR will continue to aggressively manage non-multifamily properties
in order to maximize cash flow, and disposition of such non-multifamily
properties may occur as opportunities arise. Properties are periodically
evaluated for net realizable value and provisions for possible losses are made
if required.
Preferred Share Distributions
15
<PAGE>
In November of 1993, PTR issued $230 million of Series A Preferred Shares
(the "Preferred Shares") at $25 per share that are entitled to receive an annual
distribution of $1.75 per share (7% annual distribution rate), which amounted to
$12.075 million for the nine months ended September 30, 1994. The preferred
share distributions do not reduce the amount PTR has budgeted for common share
distributions but does increase the percentage of the common share distribution
which constitutes a non-taxable return of capital.
Other
Rental income, rental expenses, depreciation and net earnings for the three
months ended September 30, 1994 compared to the three months ended September 30,
1993 reflect changes similar to those discussed in the preceding paragraphs for
the comparison of the nine months ended on the same dates. The changes are
substantially attributable to the same reasons discussed in the preceding
paragraphs for the nine month periods ended September 30, 1994 and 1993.
ENVIRONMENTAL MATTERS
PTR does not expect any environmental condition on its properties to
materially adversely affect 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 $39.1 million
(141.5%) for the nine months ended September 30, 1994 compared to 1993. The
increase is due primarily to multifamily property acquisitions and developments
as described under "Results of Operations."
Investing Activities
During the nine months ended September 30, 1994, PTR invested $319.3
million for the development, acquisition and renovation of multifamily
properties, net of $56.8 million in mortgages. During the first nine months of
1993, PTR invested $205.9 million for the development, acquisition and
renovation of multifamily properties, net of a $5 million mortgage. 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 October 21, 1994, PTR had unfunded development commitments for
developments under construction of $71.3 million. Additionally, the land PTR
currently owns or controls through letters of intent or contingent contracts,
subject to PTR's final due diligence, will allow for the development of 6,235
additional multifamily units, which will be an important generator of growth for
PTR in 1995 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 nine months ended September 30, 1994
provided $26.6 million (12%) more cash flow than for 1993. The increase in cash
flow provided by financing activities is primarily due to increased borrowings
on the revolving line of credit.
On August 4, 1994, PTR consummated a conversion of its $200 million
16
<PAGE>
revolving line of credit facility with Texas Commerce Bank, National
Association, as agent bank for a group of lenders ("TCB") into an unsecured
facility ("TCB line"). Borrowings bear interest at the greater of prime or the
federal funds rate plus 1/2%, or at PTR's option, LIBOR plus 1.75%-2% (varying
based upon the rating from Standard & Poors). At September 30, 1994, PTR's
outstanding LIBOR contract borrowings amounted to $52 million at a base LIBOR
rate of 4.875% plus 1.75% for a total rate of 6.625%. Additionally, there is a
commitment fee of .125% per annum of the average unfunded line of credit
balance. On October 27, 1994, the TCB line was increased to $275 million and
the maturity was extended to August 15, 1996. The TCB line may annually be
extended for an additional year with the approval of TCB and other participating
lenders. All debt incurrences are subject to covenants, as more fully defined
in the loan agreement, 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) 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. As of September 30, 1994, PTR
was in compliance with all debt covenants.
PTR expects to finance developments, acquisitions and renovations with
cash on hand and borrowings under its line of credit prior to future debt and
equity offerings 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, (26% at September 30, 1994) provides it 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 50% of the
sum of total book capitalization.
On May 2, 1994, PTR filed a shelf registration statement with the
Securities and Exchange Commission. PTR registered a total of $325 million of
securities which can be issued in the form of debt securities, preferred shares
of beneficial interest, common shares of beneficial interest, shareholder
purchase rights or subscription rights for common shares of beneficial interest.
As described below, PTR issued $102.1 in securities in August 1994 leaving, as
of September 30, 1994, $222.9 million in securities available to be issued under
this shelf registration.
On August 16, 1994, PTR raised $101.8 million net proceeds from a Rights
Offering of 5,593,718 common shares of beneficial interest at a price of $18 1/4
per share. PTR's shareholders of record on July 21, 1994 received a
distribution of one right for each PTR share they owned. Eight rights were
required to purchase one PTR share for $18 1/4 in the rights offering. Realty,
PTR's principal shareholder and an affiliate of the REIT Manager, exercised in
full its rights to acquire PTR shares in the offering at the same price paid by
the public ($18 1/4 per 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 revolving 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. In February 1994, PTR received $1.3 million
in settlement of an interest protection agreement in the form of a Forward
Treasury Lock Agreement entered into with an investment banker on January 28,
1994. The
17
<PAGE>
agreement included a determination date of February 1, 1994 and a settlement
date of February 2, 1994. The notional amounts were $100 million with a
reference price of 100.90625% and $75 million with a reference price of
110.4375%. On February 2, 1994, the settlement prices were 100.32813% and
109.46875%, respectively. There are no agreements outstanding. 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 an interest
rate protection agreement, of 7.37% per annum. The Notes are redeemable any time
at the option of PTR, in whole or in part, at a redemption price equal to the
sum of the principal amount of the Notes being redeemed plus accrued interest
thereon to the redemption date plus a yield to maturity adjustment. 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. As of September 30, 1994, PTR was in compliance
with all debt covenants.
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 $13 million and $3.4 million for the nine months ended
September 30, 1994 and 1993, 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 is defined as net earnings from operations plus
certain non-cash items, principally depreciation. 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. Funds from Operations
attributable to Common Shares increased $16.7 million (68.1%)to $41.3 million
for the nine months ended September 30, 1994 from $24.6 million for 1993. The
increase resulted primarily from increased properties in operation. Funds from
Operations should not be construed as a substitute for net earnings in
evaluating operating results or as a substitute for cash flow in evaluating
liquidity.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 - Amended and Restated Credit Agreement between PTR and Texas Commerce
Bank National Association, dated October 27, 1994 (Previously filed).
10.2 - Third Amended and Restated REIT Management Agreement dated March 1,
1994 (Previously filed).
15 -- Letter from KPMG Peat Marwick LLP dated February 1, 1995 regarding
unaudited financial information.
<TABLE>
<CAPTION>
27 -- Financial Data Schedule.
(b) Reports on Form 8-K:
Date Item Reported Financial Statements
---- ------------- --------------------
<S> <C> <C>
July 11, 1994 5,7 No
July 19, 1994 5,7 No
July 27, 1994 5,7 No
</TABLE>
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 1, 1995 PROPERTY TRUST OF AMERICA
----------------
/s/ William Kell
----------------------------------
William Kell, Vice President
and Duly Authorized Officer
and Principal Financial Officer
20
<PAGE>
Exhibit 15
Board of Trustees and Shareholders
Property Trust of America
Gentlemen:
Re: Registration Statement Nos. 33-87184, 33-86444, 33-71040, and 33-25317
With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our report dated October 24, 1994 related to our
review of interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered a part of a registration statement prepared or certified by an
accountant, or a report prepared or certified by an accountant within the
meaning of sections 7 and 11 of the Act.
KPMG PEAT MARWICK LLP
El Paso, Texas
February 1, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from the
Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, as
amended by Form 10-Q/A No. 1 dated February 1, 1995, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1993
<PERIOD-END> SEP-30-1994
<CASH> 12,475
<SECURITIES> 0
<RECEIVABLES> 24,762
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,233,021
<DEPRECIATION> 39,071
<TOTAL-ASSETS> 1,244,537
<CURRENT-LIABILITIES> 0
<BONDS> 296,200
<COMMON> 50,562
0
270,000
<OTHER-SE> 577,062
<TOTAL-LIABILITY-AND-EQUITY> 1,244,537
<SALES> 131,103
<TOTAL-REVENUES> 133,196
<CGS> 0
<TOTAL-COSTS> 56,662
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,600
<INTEREST-EXPENSE> 14,021
<INCOME-PRETAX> 20,929
<INCOME-TAX> 0
<INCOME-CONTINUING> 20,929
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,929
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.46
</TABLE>
