<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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, Texas 79912
--------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(915) 877-3900
--------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing for the
past 90 days.
Yes X No
___ ____
The number of shares outstanding of the Registrant's common stock as of
April 23, 1996 was: 72,210,869
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
INDEX
Page
Number
PART I. Condensed Financial Information
Item 1. Financial Statements
Condensed Balance Sheets - March 31, 1996 (unaudited) and
December 31, 1995............................................... 2
Condensed Statements of Earnings - Three months ended
March 31, 1996 and 1995 (unaudited)............................. 3
Condensed Statements of Cash Flows - Three months ended
March 31, 1996 and 1995 (unaudited)............................. 4
Notes to Condensed Financial Statements (unaudited)............... 5
Independent Auditors' Review Report............................... 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 11
PART II. Other Information
Item 5. Other Information.............................................. 16
Item 6. Exhibits and Reports on Form 8-K............................... 16
2
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
------
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
------------ ------------
(unaudited)
<S> <C> <C>
Real estate............................................................. $1,930,632 $1,855,866
Less accumulated depreciation........................................... 90,158 81,979
---------- ----------
1,840,474 1,773,887
Mortgage notes receivable............................................... 14,764 15,844
---------- ----------
Total investments................................................... 1,855,238 1,789,731
Cash and cash equivalents............................................... 8,338 26,919
Accounts receivable..................................................... 3,047 3,318
Other assets............................................................ 23,311 21,031
---------- ----------
Total assets........................................................ $1,889,934 $1,840,999
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Line of credit.......................................................... $ 36,250 $ 129,000
Long term debt.......................................................... 350,000 200,000
Mortgages payable....................................................... 157,570 158,054
Distributions payable................................................... -- 22,437
Accounts payable........................................................ 24,488 21,040
Accrued expenses and other liabilities.................................. 26,504 34,800
---------- ----------
Total liabilities..................................................... 594,812 565,331
---------- ----------
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
Series B Preferred shares (4,200,000 shares issued; stated liquidation
preference of $25 per share).......................................... 105,000 105,000
Common shares (shares issued - 72,375,819 in 1996 and 1995)............. 72,376 72,376
Additional paid-in capital.............................................. 952,679 952,679
Distributions in excess of net earnings................................. (62,996) (82,450)
Treasury shares (164,950 in 1996 and 164,901 in 1995)................... (1,937) (1,937)
---------- ----------
Total shareholders' equity............................................ 1,295,122 1,275,668
---------- ----------
Total liabilities and shareholders' equity............................ $1,889,934 $1,840,999
========== ==========
The accompanying notes are an integral part of the condensed financial statements.
</TABLE>
3
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
CONDENSED STATEMENT OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------------
1996 1995
------- -------
<S> <C> <C>
REVENUES:
Rental income.............................................. $75,809 $53,517
Interest................................................... 547 555
------- -------
76,356 54,072
------- -------
EXPENSES:
Rental expenses, excluding real estate taxes............... 23,194 16,943
Real estate taxes.......................................... 7,103 4,739
Depreciation............................................... 10,618 7,424
Interest................................................... 6,520 6,006
General and administrative, including REIT management fee.. 5,831 4,171
Provision for possible loss on investments................. -- 120
Other...................................................... 170 129
------- -------
53,436 39,532
------- -------
Earnings from operations..................................... 22,920 14,540
Gain on sale of investments.................................. 2,923 --
------- -------
Net earnings................................................. 25,843 14,540
Less Preferred share dividends............................... 6,388 4,025
------- -------
Net earnings attributable to common shares................... $19,455 $10,515
======= =======
Weighted average common shares outstanding................... 72,211 51,485
======= =======
Per common share amounts:
Net earnings attributable to common shares................. $ 0.27 $ 0.20
======= =======
Distributions paid......................................... $ 0.31 $0.2875
======= =======
</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>
THREE MONTHS
ENDED MARCH 31,
--------------------
1996 1995
-------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net earnings..................................... $ 25,843 $ 14,540
Adjustments to reconcile net earnings to cash flow
provided by operations activities:
Depreciation and amortization.................. 11,036 7,671
Provision for possible loss on investments..... -- 120
Gain on investment properties.................. (2,923) --
Decrease in accounts payable..................... (8,658) (1,371)
Decrease in accrued real estate taxes............ (2,965) (3,947)
Decrease in accrued interest on long term debt... (2,492) (3,644)
Increase (decrease) in accrued expenses and
other liabilities............................... (2,840) 3,108
Net change in other operating assets............. (829) (4,461)
-------- ---------
Net cash flow provided by operating activities. 16,172 12,016
-------- ----------
INVESTING ACTIVITIES:
Real estate investments.......................... (101,323) (58,946)
Mortgage notes receivable........................ 1,081 20
Sale of real estate property, net................ 39,147 --
-------- ---------
Net cash flow used in investment activities.... (61,095) (58,926)
-------- ---------
FINANCING ACTIVITIES:
Proceeds from sale of shares, net of expenses.... -- 143,721
Proceeds from line of credit..................... 63,135 101,000
Proceeds from dividend reinvestment and share
purchase plan, net.............................. -- 1,002
Proceeds from long term debt..................... 150,000 --
Cash distributions paid on common shares......... (22,437) (14,506)
Cash dividends paid on preferred shares.......... (6,388) (4,025)
Debt issuance costs incurred..................... (1,598) (112)
Payoff of PACIFIC's line of credit............... -- (51,900)
Principal payments on line of credit............. (155,885) (126,910)
Regularly scheduled principal payments on
mortgages payable............................... (484) (230)
Other............................................ (1) 171
-------- ---------
Net cash flow provided by financing activities. 26,342 48,211
-------- ----------
Net increase (decrease) in cash and cash
equivalents....................................... (18,581) 1,301
Cash and cash equivalents at beginning of period... 26,919 8,092
-------- ----------
Cash and cash equivalents at end of period......... $ 8,338 $ 9,393
======== ==========
Non-cash investing and financing activities:
Due from subscription agent........................ $ -- $ 72,608
Multifamily properties and other net assets
acquired in connection with the merger
with and into 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....................... $ -- $ 54,465
Repayment of the outstanding balance on
PACIFIC's line of credit.................... $ -- $ 51,900
-------- ----------
Net increase in net assets related to the
merger....................................... $ -- $ 245,036
======== ==========
</TABLE>
The accompanying notes are an integral part
of the condensed financial statements.
5
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 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.
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 month periods ended March
31, 1996 and 1995 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) REAL ESTATE
Investments
Investments in real estate, at cost, were as follows (dollar amounts in
thousands):
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
---------------------- -------------------
Investment Units Investment Units
---------- -------- ---------- ------
<S> <C> <C> <C> <C>
Multifamily:
Operating properties................... $1,615,150 42,129 $1,584,994 41,503
Developments under construction........ 212,758 6,326(1) 187,507 6,676(1)
Developments in planning:
Developments owned.................. 45,106 3,924(1) 22,933 2,328(1)
Developments under control(2)....... -- 3,764(1) -- 3,822(1)
---------- -------- ---------- ------
Total developments in planning... 45,106 7,688 22,933 6,150
---------- -------- ---------- ------
Land held for future development....... 26,855 -- 29,688 --
---------- -------- ---------- ------
Total multifamily................ 1,899,869 56,143 1,825,122 54,329
======== ======
Non-multifamily........................... 30,763 30,744
--------- ----------
Total real estate................ $1,930,632 $1,855,866
========== ==========
</TABLE>
6
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
(UNAUDITED)
- ---------------
(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 March 31, 1996 and December 31, 1995 for
developments under control was $3.8 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>
<CAPTION>
<S> <C>
Balance at December 31, 1995......................... $1,855,866
Acquisitions and renovation expenditures............. 31,950
Development expenditures, including land
acquisitions........................................ 78,353
Capital improvements................................. 801
Acquisition and improvement of land held for future
development......................................... 2,302
Real estate sold..................................... (38,664)
Other................................................ 24
----------
Balance at March 31, 1996............................ $1,930,632
==========
</TABLE>
At April 23, 1996, PTR had contingent contracts or letters of intent,
subject to PTR's final due diligence to acquire land for the near term
development of an estimated 5,911 multifamily units with an aggregate estimated
development cost of $356.2 million. At the same date, PTR also had contingent
contracts or letters of intent, subject to final due diligence, for the
acquisition of 2,648 additional multifamily units with an aggregate investment
cost of $174.8 million, including planned renovation.
At April 23, 1996, PTR had unfunded development commitments for
developments under construction of $152.8 million.
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
objectives and redeploy the proceeds therefrom, preferably through like-kind
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 four
multifamily properties during the first quarter of 1996 and redeployed the $39.1
million in aggregate net proceeds through like-kind exchanges into the
acquisition of two existing multifamily properties in California and land for
near term development. PTR recorded an aggregate gain from such dispositions of
$2.9 million for the three months ended March 31, 1996.
7
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
(UNAUDITED)
Statement of Financial Accounting Standard No. 121 ("FAS 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, eight multifamily
properties and one non-multifamily property were held for disposition as of
March 31, 1996. FAS 121 requires that investments held for disposition be
carried at the lower of the investments' depreciated cost or fair market value
less cost to sell. The aggregate carrying value of properties held for
disposition was $97.2 million at March 31, 1996, which is less than not in
excess of fair market value less 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 eight multifamily properties during 1996, and redeploy the
net proceeds from such dispositions through like-kind exchanges into the
acquisition of other properties. The non-multifamily property was disposed of
on April 11, 1996 for a gain of approximately $136,000. The earnings from
operations for properties held for disposition which is included in PTR's
earnings from operations for the three months ended March 31,1996 and 1995 was
$2,517,000 and $2,321,000, 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 March
31, 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 March 31, 1996, the outstanding
balance of development and mortgage loans made by PTR to third party owner-
developers and PTR Development Services aggregated $50.3 million and $3.2
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.
(3) DISTRIBUTIONS
PTR's current policy is to pay distributions to shareholders based upon
funds from operations and aggregating annually at least 95% of its taxable
income. Funds from operations is not to be construed as a substitute for "net
earnings" in evaluating operating results nor as a substitute for "cash flow" in
evaluating liquidity. Funds from operations for the three months ended March 31,
1996 and 1995 was as follows (dollars and shares in thousands):
8
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Net earnings attributable to common shares........... $19,455 $10,515
Add (Deduct):
Depreciation....................................... 10,618 7,424
Provision for possible loss on investments......... -- 120
Gain on investment properties...................... (2,923) --
------- -------
Funds from operations attributable to common shares.. 27,150 18,059
Distributions paid to common shareholders............ 22,437 14,506
------- -------
Excess of funds from operations after distributions.. $ 4,713 $ 3,553
======= =======
Weighted average common shares outstanding........... 72,211 51,485
======= =======
</TABLE>
On April 23, 1996 the Trustees declared a cash distribution of $0.31
per common share to be paid on May 16, 1996 to shareholders of record on
May 7, 1996.
(4) BORROWINGS
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. 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 March 31, 1996) or the
federal funds rate plus .50%, or at PTR's option, LIBOR (5.4375% at March
31, 1996) plus 1.375% which can vary from LIBOR plus 1.0% to LIBOR plus
1.75% (6.8125% at March 31, 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 $110,000 and
$51,000 for the three months ended March 31, 1996 and 1995, respectively.
On February 23, 1996, PTR issued $50 million of 7.15% Notes due 2010
(the "2010 Notes") and $100 million of 7.90% Notes due 2016 (the "2016
Notes" and together with the 2010 Notes, the "2010 and 2016 Notes"). The
2010 Notes bear interest at 7.15% per annum and require annual principal
payments of $6.25 million, commencing February 15, 2003, which will fully
amortize the principle balance as of February 15, 2010. The 2016 Notes bear
interest at 7.90% per annum and 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 principle balance as of February 15, 2016. Collectively,
the 2010 and 2016 Notes are unsecured and had an original average life to
maturity of 15.5 years and average effective interest cost, including
offering discounts and issuance costs of 7.84% per annum. The 2010 and 2016
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 2010 and 2016 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.
9
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
(UNAUDITED)
Under the terms of the Indenture, PTR can incur additional debt only
if, after giving effect to the debt being incurred and application of
proceeds therefrom, (i) the ratio of debt to total assets, as defined in
the Indenture, does not exceed 60% (ii) the ratio of secured debt to total
assets, as defined in the Indenture, does not exceed 40%, and (iii) PTR's
pro forma interest coverage ratio, as defined in the Indenture, for the
four preceding fiscal quarters is not less than 1.5:1.
At March 31, 1996, PTR was in compliance with all debt covenants.
Interest paid on all borrowings for the three months ended March 31,
1996 was $12,745,000, including $3,497,000 of interest capitalized during
construction. Interest paid on all borrowings for the three months ended
March 31, 1995 was $11,492,000, including $2,257,000 of interest
capitalized during construction.
Amortization of loan costs included in interest expense for the three
months ended March 31, 1996 and 1995 was $418,000 and $247,000
respectively.
(6) 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 30,000 PTR common shares would not have a material
dilutive effect on earnings per share. Inclusion of PTR's Cumulative
Convertible Series A Preferred Shares of Beneficial Interest ("Series A
Preferred Shares") as a common share equivalent in the earnings per share
computation is antidilutive for both the three months ended March 31, 1996
and 1995.
(7) REIT MANAGEMENT AND PROPERTY MANAGEMENT AGREEMENTS
In June 1995, PTR renewed and in December 1995 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 subsidiary of Security Capital Group Incorporated ("SCG"), which owns
approximately 37.9% of PTR's common shares. The REIT Management fee was
$5,555,000 and $3,957,000 for the three months ended March 31, 1996 and
1995, respectively.
SCG Realty Services Incorporated ("SCG Realty Services") has managed
and currently manages a substantial majority of PTR's operating multifamily
properties (86.61% and 74.55% as of March 31, 1996 and 1995, respectively).
For the three months ended March 31, 1996 and 1995, PTR paid SCG Realty
Services aggregate fees of $2,354,000 and $1,895,000, respectively.
Homestead Realty Services Incorporated ("Homestead Realty Services"),
formed in June 1995, manages all of PTR's operating Homestead Village
properties. For the three months ended March 31, 1996, PTR paid Homestead
Realty Services aggregate fees of $499,700. 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.
10
<PAGE>
Independent Auditors' Review Report
-----------------------------------
The Board of Trustees and Shareholders
SECURITY CAPITAL PACIFIC TRUST:
We have reviewed the accompanying condensed balance sheet of SECURITY CAPITAL
PACIFIC TRUST as of March 31, 1996, and the related condensed statements of
earnings and cash flows for the three-month periods ended March 31, 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, stockholders' 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
April 23, 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) rental expense levels, (iii) the effectiveness of property
level operations and (iv) the pace and price at which PTR can develop and
acquire additional multifamily properties. Capital and credit market conditions
which affect PTR's cost of 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 rental 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 three months ended March 31, 1996, PTR acquired two multifamily
properties aggregating 815 units for a total purchase price, including planned
renovations, of approximately $31.3 million. In addition, PTR completed
development of three moderate income properties aggregating 391 units with a
completion cost of approximately $12.4 million. At April 23, 1996 PTR had 6,633
multifamily units under construction with a budgeted completion cost of $350.3
million and had in planning an estimated 7,985 multifamily units with an
aggregate expected investment cost of approximately $453.9 million. During
the three months ended March 31, 1995, PTR acquired 19 multifamily properties
aggregating 6,041 units for a total purchase price, including planned
renovations, of approximately $261.2 million (acquisition from the Merger (as
defined in "Liquidity and Capital Resources - Investing Activities") represented
17 operating multifamily properties, aggregating 5,579 units, for a total
purchase price of approximately $246.1 million) and completed development of
four multifamily properties aggregating 479 units with a completion cost
including planned renovation of $20.3 million. At March 31, 1995, PTR had 4,761
multifamily units under construction with a budgeted completion cost of
approximately $209.2 million and had in planning an estimated 6,707 multifamily
units with an aggregate budgeted completion cost of $338.2 million.
The percentage of PTR's total rental income generated by multifamily
properties was 99.06% and 98.60% for the three months ended March 31, 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 $22.3 million (41.65%), partially offset by
higher rental expense and real estate taxes, which increased by $8.6 million
(39.73%) for the period. Depreciation expense increased $3.2 million (43.02%)
for the three months ended March 31, 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 March 31, 1996, 86.10% of PTR's operating multifamily
properties, based on expected cost, were classified by PTR as stabilized
properties. At March 31, 1996, PTR's operating multifamily properties were
95.28% leased and PTR's stabilized multifamily properties were 95.94% leased.
12
<PAGE>
Multifamily Properties Fully Operating throughout Both Periods
For the 109 multifamily properties that were fully operating throughout the
three months ended March 31, 1996 and 1995, which comprise 71.52% of PTR's total
operating properties based on undepreciated cost at March 31, 1996, rental
expenses and real estate taxes were 39.36% and 40.74% of rental revenue for such
properties during the three months ended March 31, 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 11.26% in 1996 from 10.66% in 1995. EBITDA is not
to be construed as a substitute for "net earnings" in evaluating operating
results, nor as a substitute for "cash flow" in evaluating liquidity. This
increase in return on investment, which is a function of rental rate growth,
occupancy levels, expense rate growth and capital expenditure levels, is
attributable primarily to growth in rental rates 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
$18.0 million (1.55% of total expected investment in these properties) as a
result of renovation and other capital expenditures. Net operating income
increased 5.02% as a result of a 2.61% rental revenue increase and a 0.85%
decrease in rental expenses for such properties for the three months ended March
31, 1996 as compared to the same period in 1995.
Interest Expense
Interest expense increased $514,000 (8.65%) for the three months ended
March 31, 1996 as compared to the same period in 1995. The increase is primarily
attributable to an increase in interest expense of $1.1 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 interest expense as discussed below. These increases were offset by a
decrease in line of credit interest expense and an increase in capitalized
interest both discussed below.
Mortgage interest expense increased $1.2 million (63.33%) for the three
months ended March 31, 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 subsequent to the first quarter of 1995.
Line of credit interest expense decreased $649,000 (23.61%) resulting from
lower outstanding balances and interest rates relating to PTR's revolving credit
facility offset by an increase in amortization of additional loan costs
(commitment fees, administrative fees, and legal fees) relating to PTR's credit
facility which was renewed to August 1997. Average borrowings on the line of
credit were approximately $94.2 million (with an average interest rate of 7.58%)
during the three months ended March 31, 1996, as compared to average borrowings
of approximately $127.0 million (with an average interest rate of 8.15%) for the
same period in 1995.
The increases in interest expense were also offset by an increase of $1.2
million (54.95%) in capitalized interest. The increase in capitalized interest
is attributable to higher levels of multifamily development activity for the
three months ended March 31, 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 $1.6 million (40.38%) during the three months ended March
31, 1996 as compared to the same period in 1995 because cash flow increased
substantially . With the issuance in February 1994 of $200 million of
amortizing, unsecured long term debt and the issuance in February 1996 of $150
million of amortizing, unsecured long term debt as more fully described under
"Liquidity and Capital Resources," the REIT management fee effectively declines
in proportion to PTR's earnings from operations because actual or assumed
regularly scheduled principal and interest payments, as defined in the REIT
management agreement with Security Capital Pacific Incorporated (the "REIT
Manager"), associated with the long term debt will be deducted
13
<PAGE>
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.
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
objectives and redeploy the proceeds therefrom, preferably through like-kind
exchanges, into assets in PTR's view offer better long-term return prospects .
As a result of this asset optimization strategy, PTR disposed of four
multifamily properties during the first quarter of 1996 and redeployed the $39.1
million in aggregate net disposition proceeds through like-kind exchanges into
the acquisition of two existing multifamily properties in California and land
for near term development. PTR recorded an aggregate gain from such dispositions
of $2.9 million for the three months ended March 31, 1996.
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
March 31, 1996, PTR's real estate investments are carried at cost, which is not
in excess of fair market value.
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 $4.2 million
(34.59%) for the three months ended March 31, 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 three months ended March 31, 1996, PTR invested $113.4 million
in the development, acquisition and renovation of multifamily properties. During
the first three months of 1995, PTR invested $248.9 million in the development,
acquisition (including properties acquired in the Merger) and renovation of
multifamily properties, net of $54.5 million in mortgages assumed. Except for
the properties acquired in the Merger, which were financed with the issuance of
common shares, these developments, acquisitions, and renovations were financed
with cash on hand and borrowings under PTR's revolving line of credit, which
were repaid in 1995 with the proceeds from PTR's equity and debt offerings.
14
<PAGE>
At April 23, 1996 PTR had unfunded development commitments for developments
under construction of approximately $152.8 million. In addition, PTR had
approximately $453.9 million of developments in planning at such date. The
foregoing transactions are subject to a number of conditions, and PTR cannot
predict with certainty that any of them will be consummated.
PTR also develops and operates Homestead Village(R) properties that are
comprised of moderately priced corporate efficiency units which are rented for
terms generally shorter than six months. As of April 23, 1996, PTR owned 25
operating Homestead Village properties and had 27 Homestead Village properties
in development.
After a detailed review of Homestead Village's performance, the Board of
Trustees (the "Board") has asked REIT Management to evaluate all options
relating to the operation of Homestead Village assets in order to maximize PTR
shareholder value. The analysis will include whether Homestead Village assets
should continue to be developed within PTR, be spun out as a new stand-alone
entity with a target market extending beyond PTR's current market area, or be
offered for sale, merger or disposition to a national operator. The Board has
asked that the analysis be completed during 1996 and has engaged Goldman, Sachs
& Co. to advise it on this matter. It is possible that certain actions, if
pursued, may require approval of the Board and possible shareholder vote. A
special committee of independent Trustees has been appointed to consider this
matter.
On March 23, 1995, PTR consummated a merger (the "Merger") of Security
Capital Pacific Incorporated ("PACIFIC"), a Maryland corporation, with and into
PTR. In the Merger, each outstanding share of PACIFIC common stock was converted
into the right to receive 0.611 of a Common Share. As a result, 8,468,460 Common
Shares were issued in the Merger in exchange for all of the outstanding shares
of PACIFIC common stock. Additionally, PTR changed its name from Property Trust
of America to Security Capital Pacific Trust to more accurately reflect its
newly expanded target market. The Merger expanded PTR's target market to include
a six-state region of the western United States that the REIT Manager believes
is expected to provide some of the most attractive multifamily growth
opportunities.
Financing Activities
PTR's net financing activities for the three months ended March 31, 1996
provided $26.3 million as compared to $48.2 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 ($28.8 million for the three months ended March
31, 1996 as compared to $18.5 million for the same period in 1995) and a
decrease in line of credit proceeds ($63.1 million for the three months ended
March 31, 1996 as compared to $101.0 million for the same period in 1995) offset
by more debt and equity offering proceeds received during the three months ended
March 31, 1996 ($150 million) as compared to the same period in 1995 ($143.7
million) and less repayment of the revolving credit balances ($155.9 million for
the three months ended March 31, 1996 as compared to $178.8 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.
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 March 31, 1996) or the federal funds rate plus .50% or at
PTR's option, LIBOR (5.4375% at March 31, 1996) plus 1.375% which can vary from
LIBOR plus 1.0% to LIBOR plus 1.75% (6.8125% at March 31, 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 April 23, 1996, there
were $53.5 million of borrowings outstanding under the line of credit.
On February 23, 1996, PTR issued $50 million of 7.15% Notes due 2010 (the
"2010 Notes") and $100 million of 7.90% Notes due 2016 (the '2016 Notes" and
together with the 2010 Notes, the "2010 and 2016 Notes"). The 2010 Notes bear
interest at 7.15% per annum and require annual principal payments of $6.25
million, commencing February
15
<PAGE>
14, 2003. The 2016 Notes bear interest at 7.90% per annum and 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 2010 and 2016 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 2010 and
2016 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 2010 and 2016 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.
Concurrently with the consummation of the Merger (see discussion in
"Investing Activities" above), 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 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 undepreciated book capitalization, the sum of long term debt and
shareholders' equity after adding back accumulated depreciation (26.82 % at
March 31, 1996 ), 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 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.
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 attributable to common shares.
Distributions paid on common shares exceeded net earnings attributable to
common shares by approximately $3.0 million and approximately $4.0 million for
the three months ended March 31, 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.
16
<PAGE>
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 $9.1 million (50.34%) to
$27.2 million for the three months ended March 31, 1996 from $18.1 million for
the same period in 1995. The increase resulted primarily from increased
properties in operation. Funds from operations should not be considered as a
substitute for "net earnings" in evaluating operating results nor as a
substitute for "cash flow" in evaluating liquidity.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On February 23, 1996, PTR issued $50 million of 7.15% Notes due 2010,
and $100 million of 7.90% Notes due 2014 as more fully described under Item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations - "Results of Operation Financing Activities".
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
12 -- Statement regarding Computation of Ratio of Earnings to Fixed
Charges.
15 -- Letter from KPMG Peat Marwick dated May 2, 1996 regarding
unaudited financial information.
27 -- Financial Data Schedule
(b) Reports on Form 8-K:
Date Item Reported Financial Statements
----- -------------- --------------------
February 6, 1996 Item 5, Item 7 Yes
February 15, 1996 Item 5 No
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 3, 1996 SECURITY CAPITAL PACIFIC TRUST
/s/ James W. Kluber
--------------------------------
James W. Kluber , Vice President
and Duly Authorized Officer and
Principal Financial Officer
<PAGE>
EXHIBIT 12
SECURITY CAPITAL PACIFIC TRUST
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31, Period Ended December 31,
------------------ ---------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------- ------- -------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Earnings from Operations $22,920 $14,540 $ 81,696 $46,719 $23,191 $ 9,037 $2,078
Add:
Interest Expense 6,520 6,006 19,584 19,442 3,923 3,214 3,952
------- ------- -------- ------- ------- ------- ------
Net Earnings as adjusted $29,440 $20,546 $101,280 $66,161 $27,114 $12,251 $6,030
======= ======= ======== ======= ======= ======= ======
Fixed Charges:
Interest Expense $ 6,520 $ 6,006 $ 19,584 $19,442 $ 3,923 $ 3,214 $3,952
Capitalized Interest 3,497 2,257 11,741 6,029 2,818 989 157
------- ------- -------- ------- ------- ------- ------
Total Fixed Charges $10,017 $ 8,263 $ 31,325 $25,471 $ 6,741 $ 4,203 $4,109
======= ======= ======== ======= ======= ======= ======
Ratio of Net Earnings to Fixed Charges 2.9 2.5 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. 33-86444, 33-78402, 33-71040, 33-44631, and
33-25317
With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our report dated April 23, 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
May 3, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 8,338
<SECURITIES> 0
<RECEIVABLES> 17,811
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,930,632
<DEPRECIATION> 90,158
<TOTAL-ASSETS> 1,889,934
<CURRENT-LIABILITIES> 0
<BONDS> 507,570
<COMMON> 72,376
0
335,000
<OTHER-SE> 887,746
<TOTAL-LIABILITY-AND-EQUITY> 1,889,934
<SALES> 75,809
<TOTAL-REVENUES> 76,356
<CGS> 0
<TOTAL-COSTS> 30,297
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,520
<INCOME-PRETAX> 19,455
<INCOME-TAX> 0
<INCOME-CONTINUING> 19,455
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,455
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
</TABLE>
