<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, 1996
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 1-10272
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 (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
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.
Yes X No
The number of shares outstanding of the Registrant's common stock as of
August 6, 1996 was: 72,392,081
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<PAGE>
SECURITY CAPITAL PACIFIC TRUST
INDEX
<TABLE>
<C> <S> <C>
PART I. Condensed Financial Information
Item 1. Financial Statements
Condensed Balance Sheets--June 30, 1996 (unaudited) and
December 31, 1995............................................. 3
Condensed Statements of Earnings--Three and six months ended
June 30, 1996 and 1995 (unaudited)............................ 4
Condensed Statements of Cash Flows--Six months ended June 30,
1996 and 1995 (unaudited)..................................... 5
Notes to Condensed Financial Statements....................... 6
Independent Auditors' Review Report........................... 11
Management's Discussion and Analysis of Financial Condition
Item 2. 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
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
ASSETS
------ (UNAUDITED)
<S> <C> <C>
Real estate........................................... $2,069,873 $1,855,866
Less accumulated depreciation......................... 97,820 81,979
---------- ----------
1,972,053 1,773,887
Mortgage notes receivable............................. 14,696 15,844
---------- ----------
Total investments................................. 1,986,749 1,789,731
Cash and cash equivalents............................. 4,376 26,919
Accounts receivable................................... 3,473 3,318
Other assets.......................................... 22,318 21,031
---------- ----------
Total assets...................................... $2,016,916 $1,840,999
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Line of credit...................................... $ 179,250 $ 129,000
Long term debt...................................... 350,000 200,000
Mortgages payable................................... 131,180 158,054
Distributions payable............................... -- 22,437
Accounts payable.................................... 28,014 21,040
Accrued expenses and other liabilities.............. 33,311 34,800
---------- ----------
Total liabilities................................. 721,755 565,331
---------- ----------
Shareholders' Equity:
Series A Preferred shares (9,051,000 convertible
shares in 1996 and 9,200,000 in 1995; stated
liquidation preference of $25 per share)........... 226,275 230,000
Series B Preferred shares (4,200,000 shares issued;
stated liquidation preference of $25 per share).... 105,000 105,000
Common shares (shares issued--72,557,033 in 1996 and
72,375,819 in 1995)................................ 72,557 72,376
Additional paid-in capital.......................... 956,223 952,679
Distributions in excess of net earnings............. (62,956) (82,450)
Treasury shares (164,952 in 1996 and 164,901 in
1995).............................................. (1,938) (1,937)
---------- ----------
Total shareholders' equity........................ 1,295,161 1,275,668
---------- ----------
Total liabilities and shareholders' equity........ $2,016,916 $1,840,999
========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
3
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
CONDENSED STATEMENT OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
--------------- -----------------
1996 1995 1996 1995
------- ------- -------- --------
<S> <C> <C> <C> <C>
Rental income................................ $79,491 $65,719 $155,300 $119,236
Interest..................................... 452 719 999 1,274
------- ------- -------- --------
79,943 66,438 156,299 120,510
------- ------- -------- --------
Expenses:
Rental expenses............................ 22,226 18,501 42,565 33,344
Real estate taxes.......................... 6,256 5,624 13,359 10,364
Property management fees paid to
affiliates................................ 2,973 1,808 5,828 3,907
Depreciation............................... 10,624 9,126 21,242 16,550
Interest................................... 7,257 5,123 13,777 11,129
REIT management fee paid to affiliates..... 5,724 5,176 11,279 9,133
General and administrative................. 230 201 506 415
Provision for possible loss on investments. -- -- -- 120
Other...................................... 191 73 361 202
------- ------- -------- --------
55,481 45,632 108,917 85,164
------- ------- -------- --------
Earnings from operations..................... 24,462 20,806 47,382 35,346
Gain on sale of investments.................. 5,160 -- 8,083 --
------- ------- -------- --------
Net earnings before extraordinary item....... 29,622 20,806 55,465 35,346
Less extraordinary item--loss on early
extinguishment of debt...................... 870 -- 870 --
------- ------- -------- --------
Net earnings................................. 28,752 20,806 54,595 35,346
Less preferred share dividends............... 6,386 5,023 12,774 9,048
------- ------- -------- --------
Net earnings attributable to common shares... $22,366 $15,783 $ 41,821 $ 26,298
======= ======= ======== ========
Weighted average common shares outstanding... 72,223 72,027 72,217 61,812
======= ======= ======== ========
Per common share amounts:
Net earnings attributable to common shares. $ 0.31 $ 0.22 $ 0.58 $ 0.43
======= ======= ======== ========
Distributions paid......................... $ 0.31 $0.2875 $ 0.62 $ 0.5750
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
4
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Operating activities:
Net earnings............................................ $ 54,595 $ 35,346
Adjustments to reconcile net earnings to net cash flow
provided by operating activities:
Depreciation and amortization......................... 22,069 17,119
Provision for possible loss on investments............ -- 120
Gain on sale of investments........................... (8,083) --
Decrease in accounts payable............................ (6,085) (1,614)
Decrease in accrued real estate taxes................... (3,326) (1,213)
Increase in accrued interest on long term debt.......... 3,853 1,717
Increase (decrease) in accrued expenses and other
liabilities............................................ (2,016) 2,063
Net change in other operating assets.................... (885) (3,158)
--------- ---------
Net cash flow provided by operating activities...... 60,122 50,380
--------- ---------
Investing activities:
Real estate investments................................. (283,961) (146,945)
Mortgage notes receivable............................... -- (38)
Proceeds from mortgage notes receivable repayments...... 1,148 4,732
Proceeds from sale of investments....................... 85,696 --
--------- ---------
Net cash flow used in investment activities......... (197,117) (142,251)
--------- ---------
Financing activities:
Proceeds from line of credit............................ 233,885 146,000
Proceeds from long term debt............................ 150,000 --
Principal payments on line of credit.................... (183,635) (248,000)
Payoff of PACIFIC's line of credit...................... -- (51,900)
Regularly scheduled principal payments on mortgages
payable................................................ (1,029) (804)
Prepayment of mortgages payable......................... (25,845) --
Debt issuance costs incurred............................ (1,385) (299)
Proceeds from sale of shares, net of expenses........... -- 317,747
Proceeds from dividend reinvestment and share purchase
plan, net.............................................. -- 1,002
Cash distributions paid on common shares................ (44,785) (35,267)
Cash dividends paid on preferred shares................. (12,774) (9,048)
Other................................................... 20 15
--------- ---------
Net cash flow provided by financing activities...... 114,452 119,446
--------- ---------
Net increase (decrease) in cash and cash equivalents..... (22,543) 27,575
Cash and cash equivalents at beginning of period......... 26,919 8,092
--------- ---------
Cash and cash equivalents at end of period............... $ 4,376 $ 35,667
========= =========
Non-cash investing and financing activities:
Mortgage notes assumed upon purchase of multifamily
properties............................................. $ -- $ 4,784
========= =========
Series A Preferred Shares exchanged for common shares... $ 3,725 $ --
========= =========
Multifamily properties and other net assets acquired in
connection with the merger with Security Capital
Pacific Incorporated ("PACIFIC") which were funded by:
PTR common shares exchanged for all of the outstanding
shares of PACIFIC's common stock..................... $ -- $ 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 the merger...... $ -- $ 244,974
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
5
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
(UNAUDITED)
(1) GENERAL
The financial statements of SECURITY CAPITAL PACIFIC TRUST ("PTR") are
unaudited and certain information and footnote disclosures normally included in
financial statements have been omitted. 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 1995 Annual Report on Form 10-K, as amended by Form 10-K/A No. 1.
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments consisting of normal recurring adjustments for a fair
presentation of PTR's financial statements for the interim periods presented.
The results of operations for the three and six month periods ended June 30,
1996 are not necessarily indicative of the results to be expected for the
entire year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(2) PROPOSED SPIN-OFF OF PTR'S HOMESTEAD VILLAGE EXTENDED-STAY LODGING ASSETS
TO HOMESTEAD VILLAGE INCORPORATED
On May 21, 1996, the Board of Trustees of PTR approved the spin-off (the
"Spin-off") of PTR's Homestead Village(R) extended-stay lodging assets to a
newly formed company, Homestead Village Incorporated (formerly Homestead
Village Properties Incorporated) ("Homestead"). As part of the Spin-off, PTR is
expected to contribute 54 Homestead Village properties (or the rights to
acquire such properties) to Homestead in exchange for 9,485,727 shares of
Homestead common stock. Simultaneously with the Spin-off, PTR is expected to
receive 6,363,789 warrants to acquire additional shares of Homestead common
stock in exchange for entering into a funding commitment agreement for which
PTR has agreed to provide $129.0 million in secured financing for developments
to Homestead and receive up to $144.0 million in convertible mortgage notes. In
addition, upon consumation of the Spin-off, it is expected that an additional
$77.0 million of convertible mortgage notes will be held by PTR. Upon
consumation of the Spin-off the Homestead common stock and warrants will be
distributed to PTR shareholders. Giving effect to the issuance of the Homestead
common stock at the consummation of the Spin-off, the exercise of all Homestead
warrants and the conversion of all mortgage loans outstanding and which could
be made under the funding commitment agreement, PTR and its shareholders will
own 63.21% of Homestead. A combined proxy statement and registration statement
relating to the Spin-off was declared effective on August 12, 1996 and PTR's
shareholders are scheduled to vote on the Spin-off on September 12, 1996. As of
June 30, 1996 PTR's Homestead Village properties consisted of 26 operating
properties and 28 properties under construction or in planning, representing a
total expected investment of $282.7 million. For the six months ended June 30,
1996, PTR's Homestead Village operations accounted for approximately 5% of
PTR's total earnings from operations. If approved by PTR's shareholders, the
reduction in operating results attributable to Homestead Village would be
partially offset by interest earned on the convertible mortgages on an as
funded basis.
6
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
(3) REAL ESTATE
Investments
Investments in real estate, at cost, were as follows (dollar amounts in
thousands):
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
----------------- -----------------
INVESTMENT UNITS INVESTMENT UNITS
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Multifamily:
Operating properties............ $1,744,705 44,575 $1,584,994 41,503
Developments under construction. 230,718 6,943(1) 187,507 6,676(1)
Developments in planning:
Developments owned............ 40,239 3,719(1) 22,933 2,328(1)
Developments under control(2). -- 4,499(1) -- 3,822(1)
---------- ------ ---------- ------
Total developments in
planning................... 40,239 8,218 22,933 6,150
---------- ------ ---------- ------
Land held for future
development.................... 27,603 -- 29,688 --
---------- ------ ---------- ------
Total multifamily........... 2,043,265 59,736 1,825,122 54,329
====== ======
Non-multifamily................... 26,608 30,744
---------- ----------
Total real estate........... $2,069,873 $1,855,866
========== ==========
</TABLE>
- --------
(1) Unit information is based on management's estimates and is unaudited and
not reviewed by the independent auditors.
(2) PTR's investment as of June 30, 1996 and December 31, 1995 for developments
under control was $4.2 million and $2.2 million, respectively, and is
reflected in the "Other assets" caption of PTR's balance sheets.
The change in investment in real estate, at cost, consisted of the following
(in thousands):
<TABLE>
<S> <C>
Balance at December 31, 1995................................. $1,855,866
Acquisitions................................................. 121,689
Development expenditures, including land acquisitions........ 160,754
Nonrecurring capital improvements and renovation
expenditures................................................ 7,771
Recurring capital improvements............................... 3,631
Acquisition and improvement of land held for future
development................................................. 3,145
Real estate sold............................................. (83,015)
Other........................................................ 32
----------
Balance at June 30, 1996..................................... $2,069,873
==========
</TABLE>
At August 6, 1996, PTR had contingent contracts or letters of intent,
including developments under control, subject to PTR's final due diligence to
acquire land for the near term development of an estimated 7,084 multifamily
units with an aggregate estimated development cost of $422.9 million. At the
same date, PTR also had contingent contracts or letters of intent, subject to
final due diligence, for the acquisition of 2,815 additional multifamily units
with an aggregate investment cost of $207.9 million, including planned
renovation.
At August 6, 1996, PTR had unfunded development commitments for developments
under construction of $178.8 million.
7
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
Gain on Sale and Valuation of Long-Lived Investments
PTR's strategy is to focus on the ownership of multifamily properties. PTR
develops and acquires multifamily 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 composition, PTR may from time to time seek to dispose
of assets that in management's view do not meet PTR's long-term investment
objective and redeploy the proceeds therefrom, preferably through exchanges,
into assets that in PTR's view offer better long-term return prospects. As a
result of this asset optimization strategy, PTR disposed of six multifamily
properties and one industrial building during the six months ended June 30,
1996 under disposition/exchange agreements. Under the terms of the
dispositions, net cash proceeds representing the value of the properties
disposed of were placed into a trust. At the direction of PTR, seven
multifamily properties primarily located in California and land for a near term
development were acquired utilizing the $85.7 million in aggregate net proceeds
received from dispositions. For federal income tax purposes, the dispositions
were structured as tax deferred like-kind exchanges. For financial reporting
purposes, the dispositions qualified for profit recognition and an aggregate
gain of $8.1 million was recorded for the six months ended June 30, 1996.
Statement of Financial Accounting Standard No. 121 entitled "Accounting For
The Impairment Of Long-Lived Assets And For Long-Lived Assets To Be Disposed
Of" was adopted by PTR effective January 1, 1996, as required by the Statement.
As part of PTR's asset optimization strategy, 13 multifamily properties and one
non-multifamily property were held for disposition as of June 30, 1996. The
aggregate carrying value of properties held for disposition was $140.8 million
at June 30, 1996, which is less than fair market value, net of cost to sell.
Such properties are not depreciated during the period for which they are
determined to be held for disposition. Subject to normal closing risks, PTR
expects to complete the disposition of all such properties during 1996, and
redeploy the net proceeds from such dispositions through exchanges into the
acquisition of other properties. The earnings from operations for properties
held for disposition which is included in PTR's earnings from operations for
the six months ended June 30, 1996 and 1995 was $6,441,000 and $5,965,000,
respectively.
Long-lived investments held and used by PTR are periodically evaluated for
impairment and provisions for possible losses are made if required. As of June
30, 1996, such investments are carried at cost, which is not in excess of fair
market value.
Third Party Owner--Developments
To enhance its flexibility in developing and acquiring multifamily
properties, PTR has and will enter into presale agreements with third party
owner-developers to acquire properties developed by such owner-developers where
the developments meet PTR's investment criteria. PTR has and will fund such
developments through development loans to such owner-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. All of the common stock of PTR Development Services
is owned by an unaffiliated trust. The common stock is entitled to receive the
remaining 5% of net operating cash flow. As of June 30, 1996, the outstanding
balance of development and mortgage loans made by PTR to third party owner-
developers and PTR Development Services aggregated $92.7 million and $4.6
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 common shareholders based
upon funds from operations and aggregating annually at least 95% of its taxable
income. On July 23, 1996 the Trustees declared a cash distribution of $0.31 per
common share to be paid on August 15, 1996 to shareholders of record on August
5, 1996.
8
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
(5) BORROWINGS
Line of Credit
PTR has an unsecured revolving line of credit facility with Texas Commerce
Bank, National Association, as agent bank for a group of lenders ("TCB") of
$350 million, which matures August 1997 and may annually be extended for an
additional year with the approval of TCB and the other participating lenders.
In August 1996, PTR negotiated the extension of the line to August 1998 and a
reduction in the adjusted LIBOR interest rate to LIBOR plus 0.75% to LIBOR plus
1.50% based upon the rating of PTR's senior unsecured debt. All debt
incurrences are subject to covenants, as more fully described in the loan
agreement. The TCB line bears interest at an interest rate of the greater of
prime (8.25% at June 30, 1996) or the federal funds rate plus .50%, or at PTR's
option, LIBOR (5.50% at June 30, 1996) plus 1.375% which can vary from LIBOR
plus 1.0% to LIBOR plus 1.75% (6.875% at June 30, 1996) based upon the rating
of PTR's senior unsecured debt. Additionally, there is a commitment fee on the
average unfunded line of credit balance. The commitment fee was $218,000 and
$260,000 for the six months ended June 30, 1996 and 1995, respectively.
Long Term Debt
On February 23, 1996, PTR issued $50 million of 7.15% Notes due 2010 (the
"7.15% Notes") and $100 million of 7.90% Notes due 2016 (the "7.90% Notes" and
together with the 7.15% Notes, the "February 1996 Notes" and together with the
August 1996 Notes (as defined in note 9), the "Notes"). The 7.15% Notes require
annual principal payments of $6.25 million, commencing February 15, 2003, which
will fully amortize the principal balance as of February 15, 2010. The 7.90%
Notes require aggregate annual principal payments of $10 million in 2011, $12.5
million in 2012, $15 million in 2013, $17.5 million in 2014, $20 million in
2015 and $25 million in 2016, which will fully amortize the principal balance
as of February 15, 2016. Collectively, the February 1996 Notes are unsecured
and had an original average life to maturity of 15.5 years and an average
effective interest cost, including offering discounts and issuance costs of
7.84% 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 relating to market yields
available at redemption. The Notes are governed by the terms and provisions of
a supplemental indenture agreement dated February 2, 1994 ("the Indenture")
between PTR and State Street Bank and Trust Company.
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.
Mortgage Notes Payable and General Items
During the second quarter of 1996, PTR prepaid $25.8 million in mortgage
notes payable. Such early extinguishment of debt resulted in prepayment
penalties and a write-off of unamortized loan costs in the aggregate of
$870,000 which was recorded by PTR as an extraordinary item for the six months
ended June 30, 1996.
At June 30, 1996, PTR was in compliance with all debt covenants.
Interest paid on all borrowings for the six months ended June 30, 1996 was
$16,879,000, including $7,509,000 of interest capitalized during construction.
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.
Amortization of loan costs included in interest expense for the six months
ended June 30, 1996 and 1995 was $827,000 and $569,000 respectively.
9
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONCLUDED)
(6) SHAREHOLDERS' EQUITY
During the second quarter of 1996, 149,000 of PTR's Cumulative Convertible
Series A Preferred Shares of Beneficial interest ("Series A Preferred Shares")
were converted, at the option of the shareholder, into 181,214 of PTR's common
shares (a conversion ratio of 1.2162 common shares for each Series A Preferred
Share).
(7) EARNINGS PER SHARE
Earnings per share is computed based on the weighted average number of
common shares outstanding during the period. Exercise of outstanding options
to acquire 38,000 PTR common shares would not have a material dilutive effect
on earnings per share. Inclusion of PTR's Series A Preferred Shares as a
common share equivalent in the earnings per share computation is antidilutive
for both the three and six months ended June 30, 1996 and 1995.
(8) REIT MANAGEMENT AND PROPERTY MANAGEMENT AGREEMENTS
In May 1996, PTR renewed and amended its REIT Management agreement with
Security Capital Pacific Incorporated (the "REIT Manager"), to provide REIT
Management services to PTR. The REIT Manager is a wholly owned subsidiary of
Security Capital Group Incorporated ("SCG"), which owns approximately 37.8% of
PTR's outstanding common shares.
SCG Realty Services Incorporated ("SCG Realty Services") has managed and
currently manages a substantial majority of PTR's operating multifamily
properties (83.92% and 79.09% as of June 30, 1996 and 1995, respectively). For
the six months ended June 30, 1996 and 1995, PTR paid SCG Realty Services
aggregate fees of $4,779,000 and $3,702,000, respectively. Homestead Realty
Services Incorporated ("Homestead Realty Services"), formed in June 1995,
manages all of PTR's operating Homestead Village properties. For the six
months ended June 30, 1996 and 1995, PTR paid Homestead Realty Services
aggregate fees of $1,049,000, and $205,000, respectively. SCG owns each of SCG
Realty Services and Homestead Realty Services. Rates for services performed by
SCG Realty Services and Homestead Realty Services are subject to annual
approval by PTR's independent Trustees (who receive an annual review from an
independent third party) and management believes are at rates prevailing in
the markets in which PTR operates.
(9) SUBSEQUENT EVENTS
On August 6, 1996, PTR issued $20 million of 7.550% Notes due 2008 (the
"7.550% Notes"), $20 million of 7.625% Notes due 2009 (the "7.625% Notes"),
$20 million of 7.650% Notes due 2010 (the "7.650% Notes"), $20 million of
8.100% Notes due 2015 (the "8.100% Notes") and $20 million of 8.150% Notes due
2016 (the "8.150% Notes" and, together with the 7.550% Notes, the 7.625%
Notes, the 7.650% Notes and the 8.100% Notes, the "August 1996 Notes").
The 7.550% Notes bear interest at 7.550% per annum and will mature on August
1, 2008. The 7.625% Notes bear interest at 7.625% per annum and will mature on
August 1, 2009. The 7.650% Notes bear interest at 7.650% per annum and will
mature on August 1, 2010. The 8.100% Notes bear interest at 8.100% per annum
and will mature on August 1, 2015. The 8.150% Notes bear interest at 8.150%
per annum and will mature on August 1, 2016.
Collectively, the August 1996 Notes are unsecured and have an original
average life to maturity of 15.60 years and an average effective interest
cost, including offering discounts and issuance costs of 7.95% per annum,
payable semi-annually.
10
<PAGE>
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Trustees and Shareholders
SECURITY CAPITAL PACIFIC TRUST:
We have reviewed the accompanying balance sheet of SECURITY CAPITAL PACIFIC
TRUST as of June 30, 1996, and the related statements of earnings for the
three-and six-month periods ended June 30, 1996 and 1995 and the statements of
cash flows for the six-month periods ended June 30, 1996 and 1995.
These condensed 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 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 condensed 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, 1995, 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 31, 1996, except as to Note 12, which is as of February 23, 1996,
we expressed an unqualified opinion on those financial statements. In our
opinion, the information set forth in the accompanying condensed balance sheet
as of December 31, 1995 is fairly stated, in all material respects, in relation
to the balance sheet from which it has been derived.
KPMG PEAT MARWICK LLP
Chicago, Illinois
August 12, 1996
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) operating 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 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. 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 1996.
Expense levels also influence operating results, and operating expenses (other
than real estate taxes) as a percentage of revenues for multifamily properties
have decreased slightly throughout the past twelve months and are expected to
increase somewhat less than the rate of inflation for 1996.
RESULTS OF OPERATIONS
Interim Period Comparison
During the six months ended June 30, 1996, PTR acquired seven multifamily
properties aggregating 2,637 units for a total purchase price, including
planned renovations, of approximately $127.5 million. In addition, PTR
completed development of 11 properties aggregating 2,286 units with a
completion cost of approximately $106.8 million. At August 6, 1996 PTR had
7,079 multifamily units under construction with a budgeted completion cost of
$397.6 million and had in planning an estimated 3,671 multifamily units with an
aggregate expected investment cost of approximately $198.5 million. 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 including properties acquired in
the merger with Security Capital Pacific Incorporated (the "Merger") and
completed development of six multifamily properties aggregating 757 units with
a completion cost of $27.2 million. At June 30, 1995, PTR had 5,625 multifamily
units under construction with a budgeted completion cost of approximately
$261.4 million and had in planning an estimated 5,693 multifamily units with an
aggregate budgeted completion cost of $293.9 million.
The percentage of PTR's total rental income generated by multifamily
properties was 99.02% and 98.57% for the six months ended June 30, 1996 and
1995, respectively. This percentage will continue to increase throughout 1996
due to past and ongoing multifamily property acquisitions and developments and
the periodic sale of non-multifamily properties.
Property Operations
Property operations contributed to increased net earnings primarily due to
property rental revenue increases of $36.1 million (30.25%), partially offset
by higher rental expense, property management fees and real estate taxes, which
increased by $14.1 million (29.69%) for the period. Depreciation expense
increased $4.7 million (28.35%) for the six months ended June 30, 1996 as
compared to the same period in 1995. These increases are due to operating
multifamily properties placed in service, through development and acquisition
of additional properties and to rental rate increases. At June 30, 1996, 82.83%
of PTR's operating multifamily properties, based on expected cost, were
classified by PTR as stabilized properties. At June 30, 1996, PTR's operating
multifamily properties were 95.7% leased and PTR's stabilized multifamily
properties were 96.0% leased.
Proposed Spin-off of PTR's Homestead Village extended-stay lodging assets to
Homestead Village Incorporated
As described under Liquidity and Capital Resources, the Board of Trustees of
PTR approved the Spin-off of PTR's Homestead Village extended-stay lodging
assets. For the six months ended June 30, 1996, PTR's Homestead Village
operations accounted for approximately 5% of PTR's total earnings from
operations. If approved by PTR's shareholders, the reduction in operating
results attributable to Homestead Village would be partially offset by interest
earned on the convertible mortgages on an as funded basis.
12
<PAGE>
Interest Expense
Interest expense increased $2.6 million (23.79%) for the six months ended
June 30, 1996 as compared to the same period in 1995. The increase is
attributable to an increase in interest expense of $3.9 million resulting from
the issuance of $150 million of unsecured long term notes in February 1996, as
more fully discussed under "Liquidity and Capital Resources" and the increase
in mortgage and line of credit interest expense as discussed below. These
increases were offset by an increase in capitalized interest discussed below.
Mortgage interest expense increased $1.0 million (21.5%) for the six months
ended June 30, 1996 as compared to the same period in 1995 as a result of
mortgages aggregating $66.5 million assumed as a result of the Merger and the
acquisition of properties during 1995.
Line of credit interest expense increased $521,000 (14.15%) resulting from
higher outstanding balances and an increase in amortization of additional loan
costs (commitment fees, administrative fees, and legal fees) relating to PTR's
revolving credit facility offset by lower interest rates. Average borrowings on
the line of credit were approximately $94.2 million (with an average interest
rate of 7.55%) during the six months ended June 30, 1996, as compared to
average borrowings of approximately $72.9 million (with an average interest
rate of 8.76%) for the same period in 1995.
The increases in interest expense were also offset by an increase of $2.8
million (60.62%) in capitalized interest. The increase in capitalized interest
is attributable primarily to higher levels of multifamily development activity
for the six months ended June 30, 1996 as compared to the same period in 1995.
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 $2.1 million (23.50%) during the six months ended June
30, 1996 as compared to the same period in 1995 because cash flow increased
substantially . With the issuance in February 1994 of $200 million and February
1996 of $150 million of amortizing, unsecured long term debt and the issuance
in August 1996 of $100 million unsecured long term debt as more fully described
under "Liquidity and Capital Resources," the REIT management fee effectively
declines in proportion to PTR's cash flow as defined in the REIT management
agreement with Security Capital Pacific Incorporated (the "REIT Manager"),
because actual or assumed regularly scheduled principal and interest payments,
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 in 1995 to provide that distributions paid in respect of
non-convertible preferred shares, such as the Series B Cumulative Redeemable
Preferred Shares of Beneficial Interest issued in May 1995 are deducted from
the cash flow amount on which the REIT management fee is based. Further, from
and after the Spin-off, interest income from the convertible mortgage notes
will be deducted from the cash flow amount on which the REIT management fee is
based.
Gain on Sale and Valuation of Long-Lived Investments
PTR's strategy is to focus on the ownership of multifamily properties. PTR
develops and acquires multifamily 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 composition, PTR may from time to time seek to dispose
of assets that in management's view do not meet PTR's long-term investment
objective and redeploy the proceeds therefrom, preferably through exchanges,
into assets that in PTR's view offer better long-term return prospects. As a
result of this asset optimization strategy, PTR disposed of six multifamily
properties and one industrial building during the six months ended June 30,
1996 under disposition/exchange agreements. Under the terms of the disposition,
net cash proceeds representing the value of the properties disposed of were
placed into a trust. At the direction of PTR, seven multifamily properties
primarily located in California and land for near term development were
acquired utilizing the $85.7 million in aggregate net proceeds received from
dispositions. For federal income tax purposes, the dispositions were structured
as tax deferred like-kind exchanges. For financial reporting purposes, the
dispositions qualified for profit recognition and an aggregate gain of
$8.1 million was recorded for the six months ended June 30, 1996.
13
<PAGE>
Properties held for effective long-term operation and ownership are
periodically evaluated for impairment and provisions for possible losses are
made if required. As a result of such evaluation, PTR recorded a provision for
possible loss during the first quarter of 1995 of $120,000 relating to the
impairment of a non-multifamily investment which was sold in October 1995. As
of June 30, 1996, PTR's real estate investments are carried at cost, which is
not in excess of fair market value.
Extraordinary Item--Loss on Early Extinguishment of Debt
During the second quarter of 1996, PTR prepaid $25.8 million in mortgage
notes payable. Such early extinguishment of debt resulted in prepayment
penalties and a write-off of unamortized loan costs in the aggregate of
$870,000 which was recorded by PTR as an extraordinary item for the six months
ended June 30, 1996.
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, 1996 compared to the three months ended June 30,
1995 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, 1996 and 1995.
ENVIRONMENTAL MATTERS
PTR does not expect any environmental condition on its properties 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 from
operations and financings to be adequate and expects it to continue to be
adequate to meet PTR's development, acquisition, operating, debt service and
shareholder distribution requirements.
Operating Activities
Net cash flow provided by operating activities increased by $9.7 million
(19.34%) for the six months ended June 30, 1996 compared to the same period in
1995. The increase is due primarily to increased net earnings and changes in
the timing of the payment of accounts payable and accrued expenses in 1996 as
compared to 1995.
Investing Activities
During the six months ended June 30, 1996, PTR invested $297.0 million in
the development, acquisition and renovation of multifamily properties, of
which $284.0 million was paid in cash. For the same period, PTR received $85.7
million in proceeds in connection with property dispositions. During the first
six months of 1995, PTR invested $335.2 million in the development,
acquisition (including properties acquired in the Merger) and renovation of
multifamily properties, of which $146.9 million was paid in cash and net of
$59.2 million in mortgages assumed. Except for the properties acquired in the
Merger, which were financed with the issuance of common shares, developments,
acquisitions, and renovations were financed with cash on hand and borrowings.
At August 6, 1996, PTR had contingent contracts or letters of intent,
including developments under control, subject to PTR's final due diligence to
acquire land for the near term development of an estimated 7,084 multifamily
units with an aggregate estimated development cost of $422.9 million. At the
same date, PTR also had contingent contracts or letters of intent, subject to
final due diligence, for the acquisition of 2,815 additional multifamily units
with an aggregate investment cost of $207.9 million, including planned
renovation. At August 6, 1996, PTR had unfunded development commitments for
developments under construction of $178.8 million.
On May 21, 1996, the Board of Trustees of PTR approved the spin-off (the
"Spin-off") of PTR's Homestead Village(R) extended-stay lodging assets to a
newly formed company, Homestead Village Properties Incorporated (formerly
Homestead Village Incorporated ("Homestead"). As part of the Spin-off, PTR is
14
<PAGE>
expected to contribute 54 Homestead Village properties (or the rights to
acquire such properties) to Homestead in exchange for 9,485,727 shares of
Homestead common stock. Simultaneously with the Spin-off, PTR is expected to
receive 6,363,789 warrants to acquire additional shares of Homestead common
stock in exchange for entering into a funding commitment agreement for which
PTR has agreed to provide $129 million in secured financing for developments to
Homestead and receive up to $144.0 million in convertible mortgage notes. In
addition, upon consumation of the Spin-off, it is expected that an additional
$77.0 million of convertible mortgage notes will be held by PTR. Upon
consumation of the Spin-off, the Homestead common stock and warrants will be
distributed to PTR shareholders. Giving effect to the issuance of the Homestead
common stock at the consummation of the Spin-off, the exercise of all Homestead
warrants and the conversion of all mortgage loans outstanding and which could
be made under the funding commitment agreement, PTR and its shareholders will
own 63.21% of Homestead. A combined proxy statement and registration statement
relating to the Spin-off was declared effective on August 12, 1996 and PTR's
shareholders are scheduled to vote on the Spin-off on September 12, 1996. As of
June 30, 1996 PTR's Homestead Village properties consisted of 26 operating
properties and 28 properties under construction or in planning, representing a
total expected investment of $282.7 million.
Financing Activities
PTR's net financing activities for the six months ended June 30, 1996
provided $114.5 million as compared to $119.4 million for the same period in
1995. The decrease in cash flow provided by financing activities is due to an
increase in distributions to shareholders ($57.6 million for the six months
ended June 30, 1996 as compared to $44.3 million for the same period in 1995)
and a decrease in debt and equity offering proceeds received during the six
months ended June 30, 1996 ($150 million) as compared to the same period in
1995 ($317.7 million) offset by an increase in line of credit proceeds ($233.9
million for the six months ended June 30, 1996 as compared to $146.0 million
for the same period in 1995) and less repayment of the revolving credit
balances ($183.6 million for the six months ended June 30, 1996 as compared to
$299.9 million for the same period in 1995).
PTR has an unsecured revolving line of credit facility with Texas Commerce
Bank, National Association, as agent bank for a group of lenders ("TCB") of
$350 million, which matures August 1997 and may annually be extended for an
additional year with the approval of TCB and the other participating lenders.
In August 1996, PTR negotiated the extension of the line to August 1998 and a
reduction in the adjusted LIBOR interest rate to LIBOR plus 1.125% . All debt
incurrences are subject to covenants, as more fully described in the loan
agreement. The TCB line bears interest at an interest rate of the greater of
prime (8.25% at June 30, 1996) or the federal funds rate plus .50% or at PTR's
option, LIBOR (5.50% at June 30, 1996) plus 1.375% which can vary from LIBOR
plus 1.0% to LIBOR plus 1.75% (6.875% at June 30, 1996) based upon of the
rating of PTR's senior unsecured debt. Additionally, there is a commitment fee
on the average unfunded line of credit balance. At August 9, 1996, after giving
effect to the application of net proceeds received from the issuance of the
August Notes (discussed below), there were $81.8 million of borrowings
outstanding under the line of credit.
On August 6, 1996, PTR issued $20 million of 7.550% Notes due 2008 (the
"7.550% Notes"), $20 million of 7.625% Notes due 2009 (the "7.625% Notes"), $20
million of 7.650% Notes due 2010 (the "7.650% Notes"), $20 million of 8.100%
Notes due 2015 (the "8.100% Notes") and $20 million of 8.150% Notes due 2016
(the "8.150% Notes" and, together with the 7.550% Notes, the 7.625% Notes, the
7.650% Notes and the 8.100% Notes, the "August 1996 Notes"). The 7.550% Notes
bear interest at 7.550% per annum and will mature on August 1, 2008. The 7.625%
Notes bear interest at 7.625% per annum and will mature on August 1, 2009. The
7.650% Notes bear interest at 7.650% per annum and will mature on August 1,
2010. The 8.100% Notes bear interest at 8.100% per annum and will mature on
August 1, 2015. The 8.150% Notes bear interest at 8.150% per annum and will
mature on August 1, 2016.
Collectively, the August 1996 Notes are unsecured and have an original
average life to maturity of 15.60 years and an average effective interest cost,
including offering discounts and issuance costs of 7.95% per annum, payable
semi-annually.
15
<PAGE>
On February 23, 1996, PTR issued $50 million of 7.15% Notes due 2010 (the
"7.15% Notes") and $100 million of 7.90% Notes due 2016 (the "7.90% Notes" and
together with the 7.15% Notes, the "February 1996 Notes" and together with the
August 1996 Notes, the "Notes"). The 7.15% Notes require annual principal
payments of $6.25 million, commencing February 14, 2003. The 7.90% Notes
require aggregate annual principal payments of $10 million in 2011, $12.5
million in 2012, $15 million in 2013, $17.5 million in 2014, $20 million in
2015 and $25 million in 2016. Collectively, the February 1996 Notes are
unsecured and had an original average life to maturity of 15.5 years and an
average effective interest cost, including offering discounts and issuance
costs of 7.84% 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 relating to market yields
available at redemption. The Notes are governed by the terms and provisions of
a supplemental indenture agreement dated February 2, 1994 (the "Indenture")
between PTR and State Street Bank and Trust Company.
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.
During the second quarter of 1996, 149,000 of PTR's Cumulative Convertible
Series A Preferred Shares of Beneficial interest ("Series A Preferred Shares")
were converted, at the option of the shareholder, into 181,214 of PTR's Common
Shares (a conversion ratio of 1.2162 Common Shares for each Series A Preferred
Share).
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). 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 purchased $50 million (3.1 million
Common Shares) in the subscription offering pursuant to the oversubscription
privilege.
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. This will allow PTR to respond efficiently 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 undepreciated book capitalization, the sum of long term debt
and shareholders' equity after adding back accumulated depreciation (25.67 % at
June 30, 1996 on a historical basis and 29.44% on a pro forma basis giving
effect to the sale of the August 1996 Notes and the application of the net
proceeds therefrom), provides considerable flexibility to prudently increase
its capital base by utilizing long-term debt as a financing tool in the future.
PTR has the ability to finance a significant level of investment activity with
this additional debt issuance capacity, together with its asset optimization
strategy and internally generated funds made available as the dividend payout
ratio is reduced closer to the minimum level to qualify as a REIT (see
discussion in "Distributions" below). Hence, PTR has no current 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.
Multifamily Properties Fully Operating throughout Both Periods
For the 109 multifamily properties that were fully operating throughout the
six months ended June 30, 1996 and 1995, which represents 54.9% of PTR's total
invested capital of $2.22 billion at June 30, 1996, assuming full funding for
properties under construction, operating expenses were 40.04% and 40.87% of
rental revenue for such properties during the six months ended June 30, 1996
and 1995, respectively. Projected property level earnings before interest,
income taxes, depreciation and amortization ("EBITDA") as a percentage of PTR's
expected aggregate investment (including all planned capital expenditures and
renovation costs) in these properties increased to 11.21% in 1996 from 10.61%
in 1995. EBITDA is not to be construed as a substitute for
16
<PAGE>
"net earnings" in evaluating operating results, nor as a substitute for "cash
flow" in evaluating liquidity and may not be comparable to other similarly
titled measures of other companies. This increase in return on investment,
which is a function of rental rate growth, occupancy levels, expense rate
growth and capital expenditure levels, is attributable primarily to growth in
rental rates and the control of operating expense growth. This increase in
return on investment was achieved at the same time that PTR increased its
investment in these properties by approximately $21.7 million (2.08% of total
expected investment in these properties) as a result of renovation and other
capital expenditures. Net operating income increased 4.39% as a result of a
2.96% rental revenue increase and a 0.89% increase in operating expenses for
such properties for the six months ended June 30, 1996 as compared to the same
period in 1995.
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. Such distributions will annually aggregate at least 95% of PTR's
taxable income. 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 attributable to common shares.
Distributions paid on common shares exceeded net earnings attributable to
common shares by approximately $3.0 million and approximately $9.0 million for
the six months ended June 30, 1996 and 1995, 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 and 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
Funds from operations represents PTR's net earnings computed in accordance
with generally accepted accounting principles excluding gains (or losses) plus
depreciation and provision for possible loss on investments. PTR believes that
funds from operations is helpful in understanding a property portfolio's
ability to support interest payments and general operating expenses. Funds from
operations attributable to common shares increased $12.8 million (29.9%) to
$55.8 million for the six months ended June 30, 1996 from $43.0 million for the
same period in 1995. 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 and may not be comparable to other similarly titled
measures of other companies. Funds from operations for the three months and six
months ended June 30, 1996 and 1995 was as follows (dollars and shares in
thousands):
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
---------------- ----------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net earnings attributable to common shares... $22,366 $15,783 $41,821 $26,298
Add (Deduct):
Depreciation............................... 10,624 9,126 21,242 16,550
Provision for possible loss on investments. -- -- -- 120
Gain on investment properties.............. (5,160) -- (8,083) --
Extraordinary item--loss on early
extinguishment of debt.................... 870 -- 870 --
Amortization of early extinguishment of
debt cost................................. (33) -- (33) --
------- ------- ------- -------
Funds from operations attributable to common
shares...................................... 28,667 24,909 55,817 42,968
Distributions paid to common shareholders.... 22,348 20,761 44,785 35,267
------- ------- ------- -------
Excess of funds from operations after
distributions............................... $ 6,319 $ 4,148 $11,032 $ 7,701
======= ======= ======= =======
Weighted average common shares outstanding... 72,223 72,027 72,217 61,812
======= ======= ======= =======
</TABLE>
17
<PAGE>
PART II--OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITIES HOLDERS
At the annual shareholders meeting held May 21, 1996, shareholders elected
the following Trustees to office:
<TABLE>
<CAPTION>
SHARES IN SHARES
TRUSTEES FAVOR WITHHELD
-------- ---------- --------
<S> <C> <C>
Calvin K. Kessler..................................... 61,322,957 173,234
James H. Polk, III.................................... 60,843,538 652,653
John C. Schweitzer.................................... 61,056,188 440,003
James A. Cardwell..................................... 61,045,936 450,255
John T. Kelley, III................................... 61,055,767 440,424
C. Ronald Blankenship................................. 60,864,364 631,827
William G. Myers...................................... 61,320,388 175,803
</TABLE>
ITEM 5. OTHER INFORMATION
On August 6, 1996, PTR issued $20 million of 7.550% Notes due 2008, $20
million of 7.625% Notes due 2009, $20 million of 7.650% Notes due 2010, $20
million of 8.100% Notes due 2015 and $20 million of 8.150% Notes due 2016 as
more fully described under Item 2, Management's Discussion and Analysis of
Financial Condition and Results of Operations--"Liquidity and Capital
Resources--Financing Activities."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<C> <S>
12-- Statement regarding Computation of Ratio of Earnings to Fixed
Charges.
15-- Letter from KPMG Peat Marwick dated August 14, 1996 regarding
unaudited financial information.
27-- Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
<TABLE>
<CAPTION>
DATE ITEM REPORTED FINANCIAL STATEMENTS
---- -------------- --------------------
<S> <C> <C>
May 22, 1996.......................... Item 5, Item 7 No
August 1, 1996........................ Item 5, Item 7 Yes
August 5, 1996........................ Item 5, Item 7 Yes
</TABLE>
18
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
SECURITY CAPITAL PACIFIC TRUST
/s/ James W. Kluber
-------------------------------------
James W. Kluber, Vice President
and Duly Authorized Officer and
Principal Financial Officer
Date: August 14, 1996
S-1
<PAGE>
EXHIBIT 12
SECURITY CAPITAL PACIFIC TRUST
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 TWELVE MONTHS ENDED DECEMBER 31,
----------------- ---------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings from
Operations............. $ 47,382 $ 35,346 $ 81,696 $46,719 $23,191 $ 9,037 $2,078
Add:
Interest Expense....... 13,777 11,129 19,584 19,442 3,923 3,214 3,952
-------- -------- -------- ------- ------- ------- ------
Earnings as adjusted.... $ 61,159 $ 46,475 $101,280 $66,161 $27,114 $12,251 $6,030
======== ======== ======== ======= ======= ======= ======
Fixed Charges:
Interest Expense....... $ 13,777 $ 11,129 $ 19,584 $19,442 $ 3,923 $ 3,214 $3,952
Capitalized Interest... 7,509 4,675 11,741 6,029 2,818 989 157
-------- -------- -------- ------- ------- ------- ------
Total Fixed Charges.. $ 21,286 $ 15,804 $ 31,325 $25,471 $ 6,741 $ 4,203 $4,109
======== ======== ======== ======= ======= ======= ======
Ratio of Earnings as
adjusted to Total Fixed
Charges................ 2.9 2.9 3.2 2.6 4.0 2.9 1.5
======== ======== ======== ======= ======= ======= ======
</TABLE>
<PAGE>
Board of Trustees and Shareholders
Security Capital Pacific Trust
Gentlemen:
Re: Registration Statements Nos. 333-4455, 333-9615, 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 August 12, 1996 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
Chicago, Illinois
August 14, 1996
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