<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, 1997
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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
7670 SOUTH CHESTER STREET, ENGLEWOOD, 80112
COLORADO (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(303) 708-5959
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
7777 MARKET CENTER AVENUE, EL PASO TEXAS 79912
(915) 877-3900
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing for the past 90 days.
X
Yes No
The number of shares outstanding of the Registrant's common stock as of
August 6, 1997 was 79,425,564
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<PAGE>
SECURITY CAPITAL PACIFIC TRUST
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<C> <S> <C>
PART I. Condensed Financial Information
Item 1. Financial Statements
Condensed Balance Sheets--June 30, 1997 (unaudited) and
December 31, 1996.......................................... 3
Condensed Statements of Earnings--Three and six months
ended June 30, 1997 and 1996 (unaudited)................... 4
Condensed Statement of Shareholders' Equity--Six months
ended June 30, 1997 (unaudited)............................ 5
Condensed Statements of Cash Flows--Six months ended June
30, 1997 and 1996 (unaudited).............................. 6
Notes to Condensed Financial Statements (unaudited)........ 7
Independent Auditors' Review Report........................ 16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 17
PART II. Other Information
Item 4. Submission of Matters to a Vote of Securities Holders...... 29
Item 6. Exhibits and Reports on Form 8-K........................... 29
</TABLE>
2
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1997 1996
------ ----------- ------------
(UNAUDITED)
<S> <C> <C>
Real estate........................................... $2,391,165 $2,153,363
Less accumulated depreciation......................... 104,330 97,574
---------- ----------
2,286,835 2,055,789
Homestead Notes....................................... 246,453 176,304
Other mortgage notes receivable....................... 12,861 13,525
---------- ----------
Net investments................................... 2,546,149 2,245,618
Cash and cash equivalents............................. 5,570 5,601
Accounts receivable and accrued interest.............. 5,382 4,157
Restricted cash in tax-deferred exchange escrow....... 19,707 42
Other assets.......................................... 29,008 27,014
---------- ----------
Total assets...................................... $2,605,816 $2,282,432
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Credit facilities................................... $ 203,015 $ 110,200
Long-Term Debt...................................... 630,000 580,000
Mortgages payable................................... 278,619 217,188
Distributions payable............................... -- 24,537
Accounts payable.................................... 32,676 22,782
Accrued expenses and other liabilities.............. 64,182 60,217
---------- ----------
Total liabilities................................. 1,208,492 1,014,924
---------- ----------
Shareholders' equity:
Series A Preferred Shares (5,574,014 convertible
shares in 1997 and 6,494,967 in 1996; stated
liquidation preference of $25 per share)........... 139,350 162,374
Series B Preferred Shares (4,200,000 shares issued;
stated liquidation
preference of $25 per share)....................... 105,000 105,000
Common Shares (shares issued--79,375,582 in 1997 and
75,510,986 in 1996)................................ 79,376 75,511
Additional paid-in capital.......................... 993,602 918,434
Unrealized holding gain on Homestead Notes.......... 103,142 74,923
Distributions in excess of net earnings............. (23,146) (68,734)
---------- ----------
Total shareholders' equity........................ 1,397,324 1,267,508
---------- ----------
Total liabilities and shareholders' equity........ $2,605,816 $2,282,432
========== ==========
</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,
--------------- -----------------
1997 1996 1997 1996
------- ------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Rental revenues............................ $81,412 $79,491 $161,362 $155,300
Interest income on Homestead Notes......... 3,800 -- 6,974 --
Other interest income...................... 968 452 1,338 999
------- ------- -------- --------
86,180 79,943 169,674 156,299
------- ------- -------- --------
EXPENSES:
Rental expenses............................ 19,870 21,943 40,227 42,029
Real estate taxes.......................... 6,656 6,256 13,924 13,359
Property management fees:
Paid to affiliate........................ 2,813 2,973 5,503 5,828
Paid to third parties.................... 197 283 457 536
Depreciation............................... 12,639 10,624 24,688 21,242
Interest................................... 15,798 7,257 29,759 13,777
REIT management fee paid to affiliate...... 4,706 5,724 9,323 11,279
General and administrative................. 316 230 588 506
Other...................................... 120 191 1,864 361
------- ------- -------- --------
63,115 55,481 126,333 108,917
------- ------- -------- --------
Earnings from operations..................... 23,065 24,462 43,341 47,382
Gain on disposition of investments, net...... 11,872 5,160 37,207 8,083
------- ------- -------- --------
Net earnings before extraordinary item....... 34,937 29,622 80,548 55,465
Less extraordinary item--loss on early
extinguishment of debt...................... -- 870 -- 870
------- ------- -------- --------
Net earnings................................. 34,937 28,752 80,548 54,595
Less Preferred Share dividends............... 4,805 6,386 9,840 12,774
------- ------- -------- --------
Net earnings attributable to Common Shares. $30,132 $22,366 $ 70,708 $ 41,821
======= ======= ======== ========
Weighted-average Common Shares outstanding... 77,398 72,223 76,639 72,217
======= ======= ======== ========
Per Common Share amounts:
Primary.................................... $ 0.39 $ 0.31 $ 0.92 $ 0.58
======= ======= ======== ========
Fully diluted.............................. $ 0.38 $ -- $ 0.90 $ --
======= ======= ======== ========
Distributions paid........................... $ 0.325 $ 0.31 $ 0.65 $ 0.62
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
4
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES OF BENEFICIAL
INTEREST, $1.00 PAR
VALUE
-----------------------
SERIES A SERIES B
PREFERRED PREFERRED COMMON
SHARES AT SHARES AT SHARES
AGGREGATE AGGREGATE AT ADDITIONAL UNREALIZED DISTRIBUTIONS
LIQUIDATION LIQUIDATION PAR PAID-IN HOLDING IN EXCESS OF
PREFERENCE PREFERENCE VALUE CAPITAL GAINS NET EARNINGS TOTAL
----------- ----------- ------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1,
1997................... $162,374 $105,000 $75,511 $918,434 $ 74,923 $(68,734) $1,267,508
Net earnings........... -- -- -- -- -- 80,548 80,548
Shareholder
distributions......... -- -- -- -- -- (34,960) (34,960)
Sale of shares, net of
expenses.............. -- -- 2,500 51,755 -- -- 54,255
Conversion of 920,953
Series A
Preferred Shares into
1,240,396 Common
Shares................ (23,024) -- 1,240 21,784 -- -- --
Change in unrealized
holding gain on
Homestead Notes....... -- -- -- -- 28,219 -- 28,219
Exercise of warrants
and options........... -- -- 125 1,629 -- -- 1,754
-------- -------- ------- -------- -------- -------- ----------
Balances at June 30,
1997................... $139,350 $105,000 $79,376 $993,602 $103,142 $(23,146) $1,397,324
======== ======== ======= ======== ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
5
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1997 1996
-------- --------
<S> <C> <C>
Operating activities
Net earnings............................................. $ 80,548 $ 54,595
Adjustments to reconcile net earnings to net cash flow
provided by operating activities:.......................
Depreciation and amortization.......................... 25,521 22,069
Gain on disposition of investments, net................ (37,207) (8,083)
Provision for possible loss on investments............. 1,500 --
Change in accounts payable............................... (176) (6,085)
Change in accrued expenses and other liabilities......... 3,966 (1,489)
Change in other operating assets......................... (4,034) (885)
-------- --------
Net cash flow provided by operating activities......... 70,118 60,122
-------- --------
Investing activities:
Real estate investments.................................. (371,250) (283,961)
Change in tax-deferred exchange escrow................... (19,665) --
Funding of Homestead Notes............................... (41,250) --
Advances on other mortgage notes receivable.............. (200) --
Principal repayments on other mortgage notes receivable.. 864 1,148
Gross proceeds from dispositions......................... 249,816 87,782
Closing costs related to dispositions.................... (5,694) (2,086)
-------- --------
Net cash flow used in investing activities............. (187,379) (197,117)
-------- --------
Financing activities:
Proceeds from Long-Term Debt............................. 50,000 150,000
Debt issuance costs incurred............................. (700) (1,385)
Prepayment of mortgages payable due to community
dispositions............................................ (19,850) (25,845)
Regularly scheduled principal payments on mortgages
payable................................................. (1,547) (1,029)
Proceeds from credit facilities.......................... 464,920 233,885
Principal payments on credit facilities.................. (372,105) (183,635)
Proceeds from sale of Common Shares, net................. 54,255 --
Cash distributions paid on Common Shares................. (49,657) (44,785)
Cash dividends paid on Preferred Shares.................. (9,840) (12,774)
Proceeds from exercise of warrants and options........... 1,754 20
-------- --------
Net cash flow provided by financing activities......... 117,230 114,452
-------- --------
Net decrease in cash and cash equivalents.................. (31) (22,543)
Cash and cash equivalents at beginning of period........... 5,601 26,919
-------- --------
Cash and cash equivalents at end of period................. $ 5,570 $ 4,376
======== ========
Non-cash investing and financing activities:
Assumption of mortgages payable upon purchase of
multifamily communities................................. $ 82,827 $ --
Series A Preferred Shares converted to Common Shares..... $ 23,024 $ 3,725
Change in unrealized holding gain on Homestead Notes..... $ 28,219 $ --
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
6
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
(UNAUDITED)
(1) GENERAL
The condensed 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 1996 Annual Report on Form 10-K.
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments necessary 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, 1997 and 1996
are not necessarily indicative of the results to be expected for the entire
year.
The accounts of PTR and its majority-owned subsidiaries are consolidated in
the accompanying condensed financial statements. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The preparation of these financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the dates of the financial statements
and the reported amounts of revenues and expenses during the reporting
periods. Actual amounts realized or paid could differ from those estimates.
Reclassifications
Certain of the 1996 amounts have been reclassified to conform to the 1997
presentation.
Per Share Data
Primary earnings per share is computed based on the weighted average number
of common shares of beneficial interest, par value $1.00 per share ("Common
Share(s)"), outstanding. Fully diluted earnings per Common Share is calculated
from the weighted average Common Shares outstanding plus the Common Shares
that would be outstanding assuming conversion of the weighted average number
of outstanding cumulative convertible Series A Preferred Shares of Beneficial
Interest, par value $1.00 per share ("Series A Preferred Shares"), outstanding
Trustee options and certain warrants exercisable by third parties. For
purposes of the fully diluted earnings per share calculation, dividends on the
Series A Preferred Shares are added back to net earnings attributable to
Common Shares. Primary earnings per share and fully diluted earnings per share
were approximately the same for the three and six months ended June 30, 1996.
PTR will adopt Statement of Financial Accounting Standards ("SFAS") No. 128,
Earnings per Share, which changes the method used to compute earnings per
share, in the fourth quarter of 1997. The impact of SFAS No. 128 on the
calculation of PTR's earnings per share is not expected to be material.
7
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
(2) REAL ESTATE
Investments
Equity investments in real estate, at cost, were as follows (dollar amounts
in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
----------------- -----------------
UNITS INVESTMENT UNITS INVESTMENT UNITS
----- ---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Multifamily:
Operating communities........... $2,028,940 40,786 $1,861,561 42,702
Communities under construction.. 254,843 6,672(1) 186,710 5,479(1)
Development communities in
planning:
Development communities owned. 49,965 3,106(1) 48,504 3,351(1)
Development communities under
control...................... (2) 4,278(1) (2) 3,737(1)
---------- ------ ---------- ------
Total development
communities................ 49,965 7,384 48,504 7,088
---------- ------ ---------- ------
Land held for future development.. 31,412 -- 30,043 --
---------- ------ ---------- ------
Total multifamily........... 2,365,160 54,842 2,126,818 55,269
---------- ------ ---------- ------
Non-multifamily................... 26,005 26,545
---------- ----------
Total real estate........... $2,391,165 $2,153,363
========== ==========
</TABLE>
- --------
(1) Unit information is based on management's estimates and has not been
audited or reviewed by PTR's independent auditors.
(2) PTR's investment as of June 30, 1997 and December 31, 1996 for developments
under control was $3.7 million and $1.6 million, respectively, and is
reflected in the "Other assets" caption of PTR's balance sheets.
The change in investments in real estate, at cost, consisted of the following
(in thousands):
<TABLE>
<S> <C>
Balance at January 1, 1997................................... $2,153,363
Multifamily:
Acquisition and renovation expenditures.................... 340,682
Development expenditures, excluding land acquisitions...... 114,480
Acquisition and improvement of land held for current or
future development........................................ 4,150
Recurring capital expenditures............................. 4,836
Dispositions............................................... (224,263)
Provisions for possible loss on investments................ (1,500)
----------
Net multifamily activity subtotal............................ 2,391,748
Non-multifamily dispositions................................. (583)
----------
Balance at June 30, 1997..................................... $2,391,165
==========
</TABLE>
At June 30, 1997, PTR had contingent contracts or letters of intent, subject
to PTR's final due diligence and approval of all entitlements, to acquire land
for the development of an estimated 6,602 multifamily units with an aggregate
estimated development cost of approximately $612.7 million. At the same date,
PTR also had contingent contracts or letters of intent, subject to final due
diligence, for the acquisition of 328 additional operating multifamily units
with a total expected investment of $17.5 million, including planned
renovations.
At June 30, 1997, PTR had unfunded development commitments for developments
under construction of $180.4 million.
8
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
Gains and Provision for Possible Loss on Investments
Each year, REIT Management formulates operating and capital plans based on an
ongoing active review of PTR's portfolio. Based in part upon the market
research provided by Security Capital Real Estate Research Group Incorporated,
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 no longer meet PTR's
long-term investment objectives. The proceeds from these selected dispositions
are redeployed, typically through tax-deferred exchanges, into assets that in
PTR's view offer better long-term cash flow growth prospects. As a result of
this asset optimization strategy, PTR disposed of 23 multifamily communities,
one industrial building and two parcels of land during the six months ended
June 30, 1997, representing gross proceeds of $249.8 million, and disposed of
six multifamily communities, one parcel of land and one industrial building
during the six months ended June 30, 1996, representing gross proceeds of $87.8
million. As of June 30, 1997, PTR held a portion of the 1997 disposition
proceeds aggregating $19.7 million in an interest bearing escrow account,
pending acquisition of other multifamily communities to complete the tax-
deferred exchange. For federal income tax purposes, the majority of the 1997
and 1996 dispositions were structured as tax-deferred exchanges which deferred
gain recognition. For financial reporting purposes, however, the transactions
qualified for profit recognition and aggregate gains of $37.2 million and $8.1
million were recorded for the six months ended June 30, 1997 and 1996,
respectively.
As part of PTR's asset optimization strategy, six multifamily communities,
five parcels of land and one industrial building were held for disposition as
of June 30, 1997. The aggregate carrying value of properties held for
disposition was approximately $79 million at June 30, 1997. Each community's
carrying value is less than or equal to its estimated fair market value, net of
estimated costs to sell. Such communities 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 communities
during 1997 and early 1998 and redeploy the net proceeds from such
dispositions, where appropriate, through tax-deferred exchanges into the
acquisition of multifamily communities. The property level earnings, after
interest and depreciation, from communities held for disposition at June 30,
1997 which are included in PTR's earnings from operations for the six months
ended June 30, 1997 and 1996 were $3.6 million and $3.5 million, respectively.
(3) HOMESTEAD NOTES
In addition to multifamily investment activity, PTR had developed and
operated extended-stay lodging facilities under the Homestead Village name
since 1992. On October 17, 1996, PTR contributed its Homestead Village
properties to Homestead Village Incorporated ("Homestead"), a new publicly-
traded company, in exchange for certain Homestead securities. As of the
contribution date, the Homestead Village properties constituted approximately
7.1% of PTR's total assets, at cost. The Homestead Village properties generated
approximately 8.1% of PTR's net operating income (rental revenues less rental
expenses, real estate taxes and property management fees) for the six months
ended June 30, 1996.
During the six month period ended June 30, 1997, PTR funded an additional
$41.3 million under its $198.8 million commitment to provide development
funding to Homestead in the form of convertible mortgage notes ("Homestead
Notes"), resulting in a total amount funded of $142.4 million as of June 30,
1997.
Following is a reconciliation of the Homestead Notes' components to the
amount reflected in the accompanying Balance Sheet (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------
<S> <C>
Face amount of Homestead Notes............................. $158,557
Original issue discount.................................... (16,119)
--------
Amount funded.............................................. 142,438
Amortization of original issue discount.................... 531
Conversion feature-initial value........................... 11,168
Unamortized discount on conversion feature................. (10,826)
Fair value adjustment...................................... 103,142
--------
Carrying value and fair value.............................. $246,453
========
</TABLE>
9
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
The Homestead Notes are convertible into Homestead common stock on the basis
of one share of Homestead common stock for every $11.50 of principal face
amount outstanding. Accordingly, fair value was calculated based upon the
conversion value of the Homestead Notes using the trading price of Homestead
common stock at June 30, 1997 of $17.875. The fair value adjustment is
recognized as an unrealized gain in shareholders' equity.
PTR expects to complete the funding of the remaining $56.4 million under its
funding commitment in 1997 and early 1998.
(4) BORROWINGS
Credit Facilities
PTR has a $350 million unsecured revolving line of credit with Texas
Commerce Bank, National Association ("TCB"), as agent for a group of financial
institutions (collectively, the "Lenders"). The line matures in August 1999
and may be extended annually for an additional year with the approval of the
Lenders. The line of credit bears interest at the greater of prime (8.5% at
June 30, 1997) or the federal funds rate plus 0.50%, or at PTR's option, LIBOR
(5.6875% at June 30, 1997) plus 1.125% (6.8125% at June 30, 1997), which
spread was reduced from 1.125% to 0.75% effective August 13, 1997. The spread
over LIBOR can vary from LIBOR plus 0.50% to LIBOR plus 1.50% based upon the
rating of PTR's long-term unsecured senior notes ("Long-Term Debt").
Additionally, there is a commitment fee on the average unfunded line of credit
balance. The commitment fee was $114,000 and $218,000 for the six months ended
June 30, 1997 and 1996, respectively.
A summary of PTR's line of credit borrowings is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
---------------- -----------------
<S> <C> <C>
Total line of credit.................. $350,000 $350,000
Borrowings outstanding at end of
period............................... 68,250 99,750
Weighted-average daily borrowings..... 117,162 112,248
Maximum borrowings outstanding at any
month end............................ 205,000 188,750
Weighted-average daily nominal
interest rate........................ 6.5% 7.3%
Weighted-average daily effective
interest rate........................ 8.3% 8.8%
Weighted-average nominal interest rate
at end of period..................... 6.8% 6.6%
</TABLE>
On September 9, 1996, PTR entered into a short-term, unsecured, borrowing
agreement with TCB. The loan matures March 18, 1998 and bears interest at an
overnight rate which ranged from 5.94% to 7.00% during the six months ended
June 30, 1997. At June 30, 1997, there was $34.8 million outstanding under
this agreement.
On March 10, 1997, PTR borrowed $60 million under a short-term, unsecured,
borrowing agreement with a financial institution. The loan matures on
September 10, 1997, but provides for early repayment at PTR's option on the
10th day of each month during the term. Interest is payable monthly at an
annual rate of LIBOR plus 0.60% (6.2875% at June 30, 1997). On April 4, 1997,
PTR borrowed an additional $40 million under a short-term, unsecured,
borrowing agreement with the same financial institution, having approximately
the same interest rate and repayment terms. The proceeds from both loans were
used to repay borrowings under PTR's line of credit.
10
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
LONG-TERM DEBT
PTR has issued Long-Term Debt which bears interest at fixed rates, payable
semi-annually. Funds from such issuances were used primarily for acquisition,
development and renovation of multifamily communities and to repay balances on
credit facilities incurred for such purposes. The following table summarizes
the Long-Term Debt as of June 30, 1997:
<TABLE>
<CAPTION>
ISSUANCE AVERAGE EFFECTIVE
AND INTEREST RATE,
OUTSTANDING PRINCIPAL INCLUDING OFFERING ORIGINAL
PRINCIPAL PAYMENT COUPON DISCOUNTS AND MATURITY LIFE
DATE OF ISSUANCE AMOUNT REQUIREMENT RATE ISSUANCE COSTS DATE (YEARS)
- ---------------- ------------ ----------- ------ ------------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
3/31/97................. $ 20 million (1) 7.500% 7.443% 4/1/07 10.00
3/31/97................. 30 million (1) 8.050 8.038 4/1/17 20.00
------------ ----- ----- -----
Subtotal/Average........ $ 50 million 7.905% 7.850% 16.00
------------ ----- ----- -----
10/21/96................ $ 15 million (1) 6.600% 7.030% 10/15/99 3.00
10/21/96................ 20 million (1) 6.950 7.400 10/15/02 6.00
10/21/96................ 20 million (1) 7.150 7.500 10/15/03 7.00
10/21/96................ 20 million (1) 7.250 7.630 10/15/04 8.00
10/21/96................ 20 million (1) 7.300 7.640 10/15/05 9.00
10/21/96................ 20 million (1) 7.375 7.685 10/15/06 10.00
10/21/96................ 15 million (2) 6.500 6.750 10/15/26 30.00
------------ ----- ----- -----
Subtotal/Average........ $130 million 7.350% 7.500% 6.85
------------ ----- ----- -----
8/6/96.................. $ 20 million (1) 7.550% 7.680% 8/1/08 12.00
8/6/96.................. 20 million (1) 7.625 7.730 8/1/09 13.00
8/6/96.................. 20 million (1) 7.650 7.770 8/1/10 14.00
8/6/96.................. 20 million (1) 8.100 8.210 8/1/15 19.00
8/6/96.................. 20 million (1) 8.150 8.250 8/1/16 20.00
------------ ----- ----- -----
Subtotal/Average........ $100 million 7.840% 7.950% 15.60
------------ ----- ----- -----
2/23/96................. $ 50 million (3) 7.150% 7.300% 2/15/10 10.50
2/23/96................. 100 million (4) 7.900 8.030 2/15/16 18.00
------------ ----- ----- -----
Subtotal/Average........ $150 million 7.710% 7.840% 15.50
------------ ----- ----- -----
2/8/94.................. $100 million (5) 6.875% 6.978% 2/15/08 10.50
2/8/94.................. 100 million (6) 7.500 7.653 2/15/14 18.00
------------ ----- ----- -----
Subtotal/Average........ $200 million 7.240% 7.370% 14.25
------------ ----- ----- -----
Grand Total/Average..... $630 million 7.530% 7.640% 13.37
============ ===== ===== =====
</TABLE>
- --------
(1) Entire principal amount due at maturity.
(2) The 6.500% notes may be repaid on October 15, 1999 at the option of the
holders at their full principal amount together with accrued interest.
(3) These notes require aggregate annual principal payments of $6.25 million
commencing in 2003.
(4) These 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.
(5) These notes require annual principal payments of $12.5 million commencing
in 2001.
(6) These notes require aggregate annual principal payments of $10 million in
2009, $12.5 million in 2010, $15 million in 2011, $17.5 million in 2012,
$20 million in 2013, and $25 million in 2014.
11
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
Mortgages Payable
Mortgages payable at June 30, 1997 consisted of the following (dollar
amounts in thousands):
<TABLE>
<CAPTION>
PRINCIPAL
BALLOON BALANCE PRINCIPAL
EFFECTIVE SCHEDULED PERIODIC PAYMENT AT BALANCE AT
INTEREST MATURITY PAYMENT DUE AT JUNE 30, DECEMBER 31,
COMMUNITY RATE(1) DATE TERMS MATURITY 1997 1996
- --------- --------- --------- -------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
CONVENTIONAL FIXED RATE:
Tigua Village......... N/A 05/01/97 (2) $ N/A $ -- $ 683
Silvercliff........... 7.65% 11/10/97 (2) 7,304 7,335 7,382
Braeswood Park........ 7.50 01/01/98 (2) 6,635 6,693 6,761
Seahawk(8)............ N/A 01/10/98 (8) N/A -- 5,427
La Tierra at the
Lakes................ 7.88 12/01/98 (2) 25,105 25,794 26,019
Windsail(8)........... N/A 02/01/99 (8) N/A -- 4,798
Fairwood Landing...... 8.75 12/21/99 (2) 5,501 5,782 5,831
Greenpointe........... 8.50 03/01/00 (2) 3,416 3,607 3,638
Mountain Shadow....... 8.50 03/01/00 (2) 3,136 3,311 3,340
Sunterra.............. 8.25 03/01/00 (2) 7,627 8,066 8,138
Brompton Court........ 8.38 09/01/00 (2) 13,340 14,199 14,318
Marina Lakes.......... 7.85 07/19/01 (2) 12,393 13,453 --
Treat Commons......... 7.50 09/14/01 (2) 6,537 7,131 7,192
El Dorado............. 7.53 10/01/02 (2) 15,548 16,635 16,718
Ashton Place.......... 8.24 10/01/23 (3) N/A 47,074 47,342
Double Tree II(8)..... N/A 05/01/33 (8) N/A -- 4,750
-------- --------
159,080 162,337
-------- --------
TAX-EXEMPT FIXED
RATE(4):
Fox Creek............. N/A 06/01/97 (9) N/A -- 4,236
Pelican Point......... 9.67 10/02/97 (2) 14,774 16,000 --
Cherry Creek.......... 8.41 11/01/01 (2) 2,780 3,875 4,000
Redwood Shores........ 5.68 10/01/08 (2) 16,820 25,000 25,220
Crossroads............ 6.76 12/15/18 (5) 4,435 4,435 4,435
-------- --------
49,310 37,891
-------- --------
TAX-EXEMPT FLOATING
RATE(4):
River Meadows......... 5.08 10/01/05 (6) 10,000 10,000 --
Apple Creek........... 5.33 09/01/07 (6) 11,100 11,100 11,100
La Jolla Point........ 5.10 08/01/14 (6) 13,232 21,600 --
Le Club............... 5.05 11/01/15 (6) 21,700 21,700 --
-------- --------
64,400 11,100
-------- --------
COMBINED(7):
Las Flores............ 8.80 06/01/24 (3) N/A 5,829 5,860
---- -------- --- ------ -------- --------
Total/Average
Mortgage Debt...... 7.24% $278,619 $217,188
==== ======== ========
</TABLE>
- --------
(1) Represents the effective interest rate, including loan cost amortization
and other ongoing fees and expenses.
(2) Regular amortization with a balloon payment due at maturity.
(3) Fully amortizing.
(4) Tax-exempt effective interest rates include credit enhancement and other
bond-related costs, where applicable.
(5) Semi-annual payments are interest only until December 2003 at 5.4%, at
which time the interest rate is adjusted to the current market rate
(6) Payments are interest only until maturity and the interest rate is
adjusted weekly or monthly.
(7) In 1990, the Las Flores apartments were refinanced pursuant to multifamily
bonds aggregating $6.2 million. The bonds consist of $4.5 million Series A
tax exempt fixed rate bonds and $1.7 million Series B taxable fixed rate
bonds. The bonds are guaranteed by the GNMA mortgage-backed securities
program.
(8) Mortgage was prepaid upon community disposition.
(9) The Fox Creek bonds were refunded. New bonds with a scheduled maturity
date of August 15, 2027 were issued on August 8, 1997, which require
monthly payments of interest only until August 2007 at which time monthly
principal and interest payments commence in an amount sufficient to
amortize the balance over the remaining term.
12
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
The changes in mortgages payable during the six months ended June 30, 1997
consisted of the following (in thousands):
<TABLE>
<S> <C>
Balance at January 1, 1997..................................... $217,188
Mortgage notes assumed......................................... 82,827
Principal payments, including prepayments upon community
dispositions.................................................. (21,396)
--------
Balance at June 30, 1997....................................... $278,619
========
</TABLE>
Scheduled Debt Maturities
Approximate principal payments due during each of the calendar years in the
20-year period ending December 31, 2016 and thereafter, as of June 30, 1997,
are as follows (in thousands):
<TABLE>
<CAPTION>
CREDIT LONG-TERM
FACILITIES DEBT MORTGAGES TOTAL
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
1997............................ $134,765 $ -- $ 25,164 $ 159,929
1998............................ 68,250 -- 35,072 103,322
1999............................ -- 30,000 8,609 38,609
2000............................ -- -- 30,323 30,323
2001............................ -- 12,500 24,117 36,617
2002............................ -- 32,500 17,647 50,147
2003............................ -- 38,750 2,076 40,826
2004............................ -- 38,750 2,254 41,004
2005............................ -- 38,750 12,446 51,196
2006............................ -- 38,750 2,652 41,402
2007............................ -- 38,750 13,973 52,723
2008............................ -- 38,750 19,345 58,095
2009............................ -- 36,250 2,125 38,375
2010............................ -- 38,750 2,297 41,047
2011............................ -- 25,000 2,542 27,542
2012............................ -- 30,000 2,689 32,689
2013............................ -- 35,000 2,907 37,907
2014............................ -- 42,500 16,004 58,504
2015............................ -- 40,000 24,155 64,155
2016............................ -- 45,000 2,653 47,653
Thereafter.................... -- 30,000 29,569 59,569
-------- -------- -------- ----------
Total......................... $203,015 $630,000 $278,619 $1,111,634
======== ======== ======== ==========
</TABLE>
General
PTR's debt instruments generally contain certain covenants common to the
type of facility or borrowing, including financial covenants establishing
minimum debt service coverage ratios and maximum leverage ratios. PTR was in
compliance with all covenants pertaining to its debt instruments at June 30,
1997.
Interest paid on all borrowings for the six months ended June 30, 1997 was
$26.0 million, net of $8.8 million of interest capitalized during
construction. Interest paid on all borrowings for the six months ended June
30, 1996 was $9.4 million, net of $7.5 million of interest capitalized during
construction.
Amortization of loan costs included in interest expense for the six months
ended June 30, 1997 and 1996 was $1,513,000 and $827,000 respectively.
13
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
(5) CASH DISTRIBUTIONS
PTR paid first and second quarter 1997 distributions of $0.325 per Common
Share on February 20 and May 29, 1997. On July 21, 1997 the Board of Trustees
(the "Board") declared a cash distribution of $0.325 per Common Share, payable
on August 27, 1997, to shareholders of record on August 13, 1997. On March 31
and June 30, 1997, PTR paid quarterly dividends of $0.4377425 per cumulative
convertible Series A Preferred Share and $0.5625 per cumulative redeemable
Series B Preferred Share.
(6) SHAREHOLDERS' EQUITY
On March 27, 1997, PTR filed a $300 million shelf registration with the
Securities and Exchange Commission. These securities can be issued on an as-
needed basis, subject to PTR's ability to effect offerings on satisfactory
terms.
On June 4, 1997, PTR sold 2,500,000 Common Shares to Goldman, Sachs & Co.
for an aggregate purchase price of $54.5 million. The net proceeds of $54.3
million (net of $150,000 of offering costs) were used to repay borrowings
under PTR's $350 million unsecured revolving line of credit and its short-term
borrowing agreement with TCB.
On August 6, 1997, PTR commenced a rights offering to subscribe for and
purchase 7,433,433 Common Shares at a price of $21 13/16 per share (the
"Subscription Price"). PTR's common shareholders of record on August 6, 1997
will receive a dividend of one right for each Common Share held. Seven rights
entitle the holder to purchase one Common Share at the Subscription Price. The
rights are transferable and will expire on September 9, 1997. The offering is
designed to allow PTR common shareholders (other than Security Capital) the
opportunity to maintain their relative ownership in PTR by purchasing
additional Common Shares at a price which is below the price at which Security
Capital is receiving Common Shares in the proposed merger described in note 7.
The funds from the rights offering will be used to repay borrowings under
certain credit facilities of PTR.
After giving effect to the rights offering described above, assuming such
offering is fully subscribed, PTR will have approximately $203.3 million in
shelf-registered securities available for issuance.
(7) PROPOSED MERGER TRANSACTION
Effective March 1, 1991, PTR entered into a 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 ("Security Capital").
SCG Realty Services Incorporated ("SCG Realty Services"), a wholly-owned
subsidiary of Security Capital, managed 94.1% and 83.9% (based on total
expected investment) of PTR's operating multifamily communities as of June 30,
1997 and 1996, respectively. Rates for services performed by SCG Realty
Services are subject to annual approval by PTR's independent Trustees (who
receive an annual review from an independent third party). Management believes
that such rates are consistent with those prevailing in the markets in which
PTR operates.
On August 5, 1997, the Securities and Exchange Commission declared effective
a registration statement filed by Security Capital relating to warrants to
purchase Class B common stock of Security Capital, and containing PTR's proxy
statement relating to a proposed merger transaction whereby PTR would acquire
the operations and businesses of the REIT Manager and SCG Realty Services
valued at approximately $75.8 million in exchange for Common Shares. The $75.8
million value was based on a three-year discounted analysis
14
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONCLUDED)
of net operating income prepared by Security Capital and revised after
negotiation with a special committee comprised of independent Trustees (the
"Special Committee"). The number of Common Shares issuable to Security Capital
was determined using a per Common Share price of $23.0125 (the average market
price of Common Shares over the five-day period prior to the August 6, 1997
record date for determining PTR's shareholders entitled to vote on the proposed
merger). As a result of the transaction, PTR would become an internally managed
REIT and Security Capital would remain PTR's largest shareholder (34% ownership
at August 6, 1997). The Board approved the proposed merger transaction based on
the recommendation of the Special Committee. The proposed merger transaction
requires the approval of a two-thirds majority of PTR's outstanding Common
Shares. PTR's proxy statement was mailed to PTR's common shareholders and a
meeting of PTR's common shareholders to vote on the proposed merger is
scheduled to be held on September 8, 1997. Assuming that the market value of
the Common Shares issued to Security Capital on the transaction date is $75.8
million, approximately $3.1 million will be allocated to the net tangible
assets acquired and the $72.7 million difference will be accounted for as costs
incurred in acquiring the management companies from a related party since the
management companies do not qualify as "businesses" for purposes of applying
APB Opinion No. 16, "Business Combinations". Upon consummation of the merger,
this expense will be recorded as an operating expense on PTR's statement of
earnings.
On June 10, 1997, the Board extended the term of the REIT Management
Agreement through the earlier of (i) the date of the consummation of the
proposed merger described above, or (ii) the regularly scheduled Board meeting
in the fourth quarter of 1997.
In addition, subject to and after the closing of the proposed merger and
after the closing of the rights offering described in note 6, Security Capital
will issue warrants pro rata to holders of PTR's Common Shares and Series A
Preferred Shares (other than Security Capital), to acquire shares of Class B
common stock of Security Capital having an aggregate subscription price at the
time of issuance of approximately $102 million. The number of shares of Class B
common stock subject to the warrants will be based on the closing price of such
shares on the date the warrants are issued to a warrant distribution agent for
subsequent distribution to the holders of Common Shares and Series A Preferred
Shares. The warrants will have a term of one year. Security Capital is issuing
the warrants to induce PTR common shareholders to vote in favor of the proposed
merger and to raise additional equity capital at a relatively low cost in
addition to other benefits.
15
<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 June 30, 1997, the related condensed statements of
earnings for the three and six-month periods ended June 30, 1997 and 1996, the
statement of shareholders' equity for the six-month period ended June 30,
1997, and the statements of cash flows for the six-month periods ended June
30, 1997 and 1996. 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, 1996, 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 29, 1997, except as to Note 13, which is as of March 10, 1997,
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, 1996 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 13, 1997
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information should be read in conjunction with PTR's financial
statements and notes thereto included in Item 1 of this report.
The statements contained in this discussion and elsewhere in this report
that are not historical facts are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements are based on
current expectations, estimates and projections about the industry and markets
in which PTR operates, management's beliefs and assumptions made by
management. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates" and variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions which are difficult to predict. Therefore,
actual outcomes and results may differ materially from what is expressed or
forecasted in such forward-looking statements. PTR undertakes no obligation to
update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise. PTR's operating results depend
primarily on income from multifamily communities, which is substantially
influenced by (i) the demand for and supply of multifamily units in PTR's
primary 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 acquire and develop additional multifamily communities. Capital
and credit market conditions which affect PTR's cost of capital also influence
operating results.
OVERVIEW
General
PTR's results of operations, financial position and liquidity have been
influenced primarily by the operations of and investments made in PTR's
multifamily communities. The term "multifamily" as used herein refers to
garden-style communities and excludes Homestead Village(R) extended-stay
lodging assets, which were contributed to a new publicly-traded company,
Homestead, on October 17, 1996, in exchange for certain Homestead securities.
17
<PAGE>
Multifamily Investments
The following table provides an overview of PTR's multifamily portfolio and
related investment activity for the periods indicated (dollar amounts in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS
THREE MONTHS ENDED SIX MONTHS
ENDED JUNE 30, ENDED
MARCH 31, 1997 1997 JUNE 30, 1997
-------------- ------------ -------------
<S> <C> <C> <C>
OPERATING COMMUNITIES:
Communities.................. 133 129 129
Units........................ 40,874 40,786 40,786
Total expected investment(1). $1,928,702 $2,060,586 $2,060,586
COMMUNITIES UNDER CONSTRUCTION:
STARTS DURING PERIOD:
Communities.................. 1 6 7
Units........................ 192 1,733 1,925
Total expected investment(1). $ 9,383 $ 122,223 $ 131,606
COMPLETIONS DURING PERIOD:
Communities.................. -- 2 2
Units........................ -- 732 732
Total expected investment(1). -- $ 46,820 $ 46,820
STABILIZATIONS DURING PERIOD:
Communities.................. -- 1 1
Units........................ -- 364 364
Total expected investment(1). -- $ 22,139 $ 22,139
UNDER CONSTRUCTION AT END OF
PERIOD:
Communities.................. 18 22 22
Units........................ 5,671 6,672 6,672
Total expected investment(1). $ 359,366 $ 435,195 $ 435,195
Investment to date........... $ 227,325 $ 254,843 $ 254,843
DEVELOPMENT EXPENDITURES DURING
PERIOD $ 52,883 $ 61,597 $ 114,480
ACQUISITIONS:
Communities.................. 5 6 11
Units........................ 1,652 2,065 3,717
Total expected investment(1). $ 143,746 $ 187,737 $ 331,483
DISPOSITIONS (2):
Communities.................. 13 13 26
Units........................ 3,480 2,885 6,365
Gross sales proceeds....... $ 142,137 $ 107,679 $ 249,816
Gains...................... $ 25,335 $ 11,872 $ 37,207
</TABLE>
- --------
(1) For operating communities and acquisitions, represents cost, including
budgeted renovations, as of period end. For communities under construction,
represents total budgeted development cost as of period end, which includes
the cost of land, fees, permits, payments to contractors, materials,
architectural and engineering fees and interest and property taxes to be
capitalized during the construction period.
(2) Includes the sale of an industrial building and two unrelated parcels of
land with gross sales proceeds of approximately $772,241 and an aggregate
gain of approximately $382,863.
Current Development Activity
PTR believes that development of multifamily communities from the ground up,
which are built for long-term ownership and designed to meet broad resident
preferences and demographic trends, will continue to provide an important
source of long-term cash flow growth. PTR believes its ability to compete is
significantly enhanced relative to other companies because of the REIT
Manager's depth of development and acquisition
18
<PAGE>
personnel and presence in local markets combined with PTR's access to
investment capital. The following table summarizes PTR's development
communities under construction as of June 30, 1997 (dollar amounts in
thousands):
<TABLE>
<CAPTION>
TOTAL
NUMBER OF PTR EXPECTED
UNITS INVESTMENT INVESTMENT (1) % LEASED (2)
--------- ---------- -------------- ------------
<S> <C> <C> <C> <C>
Communities under
Construction and in
Lease-Up (3).............. 2,276 $125,416 $132,009 59.5%
Other Communities
Under Construction (4).... 4,396 129,427 303,186
----- -------- --------
Total Communities Under
Construction.............. 6,672 $254,843 $435,195
===== ======== ========
</TABLE>
- --------
(1) Represents total budgeted development cost, which includes the cost of
land, fees, permits, payments to contractors, materials, architectural and
engineering fees and interest and property taxes to be capitalized during
the construction period.
(2) The percentage leased is based on occupied units divided by total number
of units in the community (completed and under construction).
(3) A development community is considered in "lease-up" once the first units
are delivered.
(4) Lease-up has not yet commenced.
There are risks associated with PTR's development and construction
activities which include: development and acquisition opportunities explored
may be abandoned; construction costs of a community may exceed original
estimates due to increased material, labor or other expenses, which could make
completion of the community uneconomical; occupancy rates and rents at a newly
completed community are dependent on a number of factors, including market and
general economic conditions, and may not be sufficient to make the community
profitable; financing may not be available on favorable terms for the
development of a community; and construction and lease-up may not be completed
on schedule, resulting in increased debt service expense and construction
costs. Development activities are also subject to risks relating to the
inability to obtain, or delays in obtaining, all necessary land-use, building,
occupancy and other required governmental permits and authorizations. The
occurrence of any of the events described above could adversely affect PTR's
ability to achieve its projected yields on communities under development or
redevelopment.
To mitigate these risks, PTR obtains zoning and municipal approvals prior to
purchasing land. Furthermore, PTR does not take construction risk, but instead
uses qualified third-party general contractors to build its communities, using
guaranteed maximum price contracts. PTR cannot eliminate all development risk,
but believes that the opportunities to better control product and realize
higher returns from development communities compensate for the limited risk.
Recent Acquisitions
In addition to its development activity, during the six month period ended
June 30, 1997, PTR completed the acquisition of 11 operating multifamily
communities (3,717 units) in California and Seattle at a total expected
investment of $331.5 million.
Acquisitions entail risks that investments will fail to perform in
accordance with expectations and that judgments with respect to the cost of
improvements to bring an acquired community up to standards established for
the market position intended for that community will prove inaccurate, as well
as general investment risks associated with any new real estate investment.
Although PTR undertakes an evaluation of the physical condition of each new
community before it is acquired, certain defects or necessary repairs may not
be detected until after the community is acquired, which could significantly
increase PTR's total acquisition costs.
19
<PAGE>
These risks are partially mitigated and managed by the extensive market
research and rigorous due diligence process performed in connection with every
community considered. These factors combined with PTR's extensive market
experience throughout its target market and methodical approval process have
proven PTR's ability to select investments that have a high probability of
meeting or exceeding underwritten expectations.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1997 compared to June 30, 1996
Net earnings for the six months ended June 30, 1997 and 1996 were $80.5
million and $54.6 million, respectively, an increase of $25.9 million (47.4%).
This increase resulted primarily from a $29.1 million increase in gains on
dispositions and increased earnings from multifamily communities offset by the
elimination of earnings from Homestead Village properties and higher interest
expense. A discussion of the major components of the increase in net earnings
follows.
Property Operations
The following table summarizes the Net Operating Income generated from
property operations for each period (in thousands):
<TABLE>
<CAPTION>
HOMESTEAD OTHER NON-
MULTIFAMILY VILLAGE MULTIFAMILY TOTAL
----------- --------- ----------- --------
<S> <C> <C> <C> <C>
Net Operating Income--Six Months
Ended June 30, 1997(1)......... $99,547 -- $1,704 $101,251
Net Operating Income--Six Months
Ended June 30, 1996(1)......... 84,519 7,555 1,474 93,548
------- ------- ------ --------
Increase (decrease)............. $15,028 $(7,555) $ 230 $ 7,703
======= ======= ====== ========
</TABLE>
- --------
(1) Net Operating Income is defined as rental revenues less rental expenses,
real estate taxes and property management fees.
At June 30, 1997, multifamily investments comprised 99.2% of PTR's total
real estate portfolio, based on total expected investment. The overall $15.0
million increase in Net Operating Income from PTR's multifamily communities
for the six months ended June 30, 1997 as compared to the six months ended
June 30, 1996 was attributable to a $20.8 million increase in rental revenues
partially offset by a $5.8 million increase in rental expenses, real estate
taxes and property management fees ("Operating Expenses"). The $20.8 million
increase in rental revenues from $138.8 million for the six months ended June
30, 1996 to $159.6 million for the six months ended June 30, 1997 was
primarily attributable to increases in rental revenues generated by existing
multifamily communities, increased investments in newer markets such as
California, and dispositions in markets with lower rental rates such as Tucson
and Phoenix. Similarly, the $5.8 million increase in Operating Expenses from
$54.3 million for the six months ended June 30, 1996 to $60.1 million for the
six months ended June 30, 1997 is attributable primarily to higher operating
costs in new markets and increases in Operating Expenses associated with
existing multifamily communities. Even with these higher operating costs,
PTR's multifamily net operating income as a percentage of rental revenues
increased from 60.8% in 1996 to 62.4% in 1997 due to the significant revenue
increases. Additional information for these communities is presented below
under "Same Store Communities".
PTR categorizes operating multifamily communities (which include all
communities not under development) as either "stabilized" or "pre-stabilized."
The term "stabilized" means that renovation, repositioning, new management and
new marketing programs (or development and marketing in the case of newly
developed communities) have been completed for a sufficient period of time
(but in no event longer than 12 months, except for major rehabilitations) to
achieve 93% occupancy at market rents. Prior to being "stabilized," a
community is considered "pre-stabilized." Approximately 75.6% and 82.8% of
PTR's operating multifamily portfolio was classified as stabilized as of June
30, 1997 and 1996, respectively, based on total expected investment.
20
<PAGE>
The $7.6 million in Homestead Village Net Operating Income shown for the six
months ended June 30, 1996 resulted from rental revenues aggregating $14.9
million offset by Operating Expenses aggregating $7.3 million generated from
26 properties operating as of June 30, 1996. The decrease in Net Operating
Income related to the Homestead Village(R) properties in the six months ended
June 30, 1997 is entirely due to the contribution of all properties to
Homestead, a newly formed company, on October 17, 1996.
Same Store Communities
The following table illustrates selected quarterly and year-to-date
performance data for PTR's communities which were fully operational in
comparable periods of 1996 and 1997 ("same store communities") followed by
selected same store community information by region and market:
<TABLE>
<CAPTION>
FULLY OPERATIONAL FULLY OPERATIONAL
COMMUNITIES ON COMMUNITIES ON
APRIL 1, 1996 JANUARY 1, 1996
------------------ ------------------
<S> <C> <C>
PORTFOLIO (DOLLAR AMOUNTS IN THOUSANDS):
Communities........................... 75 72
Units................................. 23,109 21,878
Total expected investment(1).......... $936,374 $882,689
% of total PTR portfolio(2)........... 37.52% 35.37%
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 VS. 1996 1997 VS. 1996
------------------ ------------------
<S> <C> <C>
OPERATING PERFORMANCE:
Collections growth(3)................. 2.88% 2.30%
Property Operating Expense growth..... 2.64% 2.22%
Net Operating Income growth........... 3.03% 2.36%
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996
------------------ ------------------
<S> <C> <C>
SUMMARY INFORMATION ON APRIL 1, 1996
SAME STORE COMMUNITIES (IN ACTUAL
DOLLARS):
Average physical occupancy............ 94.33% 94.28%
Property operating expense ratio(4)... 38.85% 38.94%
Average rental rate per unit(5)....... $ 636 $ 610
Recurring capital expenditures per
unit................................. $ 92 $ 72
</TABLE>
- --------
See notes following next table.
21
<PAGE>
<TABLE>
<CAPTION>
AVERAGE PHYSICAL
OCCUPANCY%
THREE MONTHS 4/1/96 SAME
ENDED COLLECTIONS GROWTH STORE TOTAL PTR
JUNE 30, THREE MONTHS COMMUNITIES% PORTFOLIO%
------------------ ENDED JUNE 30, BY MARKET BY
MARKET DISTRIBUTION 1997 1996 1997 VS. 1996(3) (2) MARKET(2)
- ------------------- -------- -------- ------------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
CENTRAL REGION:
Austin................ 93.38% 93.57% 4.31% 1.82% 2.88%
Dallas................ 93.25 96.87 (1.83) 1.57 2.86
Denver................ 96.23 95.41 4.09 9.32 5.12
El Paso............... 92.52 94.71 (2.15) 7.68 3.38
Houston............... 95.29 96.34 2.50 7.18 5.11
San Antonio........... 94.88 92.49 4.58 9.57 5.25
-------- -------- ----- ------ ------
CENTRAL REGION
SUBTOTAL............. 94.48% 94.54% 2.35% 37.14% 24.60%
-------- -------- ----- ------ ------
NORTHWEST REGION:
Portland.............. 95.63% 93.60% 6.86% 4.13% 5.48%
Salt Lake City........ 95.45 93.99 7.00 3.88 4.49
Seattle............... 96.72 94.74 11.13 6.97 8.86
-------- -------- ----- ------ ------
NORTHWEST REGION
SUBTOTAL............. 96.05% 94.22% 8.86% 14.98% 18.83%
-------- -------- ----- ------ ------
WEST REGION:
Albuquerque........... 92.95% 95.30% (4.80)% 4.89% 5.28%
Las Vegas............. 93.15 95.10 (0.38) 10.65 3.99
Phoenix............... 94.11 94.37 0.93 15.40 10.92
Northern California... 93.73 96.48 8.19 4.16 14.02
Southern California... 93.66 89.39 7.29 8.35 17.74
Tucson................ 90.73 93.46 (0.67) 1.55 1.62
-------- -------- ----- ------ ------
WEST REGION SUBTOTAL.. 93.47% 93.92% 1.53% 45.00% 53.57%
-------- -------- ----- ------ ------
Other Markets........... 95.91% 95.55% 1.64% 2.88% 3.00%
-------- -------- ----- ------ ------
Totals.................. 94.33% 94.28% 2.88% 100.00% 100.00%
======== ======== ===== ====== ======
Same store communities
as a percentage
of total PTR portfolio. 37.52%
======
</TABLE>
- --------
(1) Represents cost, including budgeted renovations.
(2) Based on total expected investment as of June 30, 1997.
(3) Represents percentage growth in rental revenues, net of vacancies, bad
debts and concessions.
(4) Represents Operating Expenses as a percentage of rental revenues.
(5) Represents weighted-average monthly "asking rents" during each period.
Homestead Interest and Homestead Notes
Through June 30, 1997, PTR had funded $142.4 million of its $198.8 million
Homestead funding commitment of which $41.3 million was funded during the six
months ended June 30, 1997. This leaves a remaining commitment under the
funding commitment agreement of approximately $56.4 million, which will be
provided to Homestead throughout the remainder of 1997 and early 1998 to fund
developments as needed on development properties contributed by PTR.
During the six months ended June 30, 1997, PTR recorded $7.0 million in
interest income ($6.4 million for purposes of calculating funds from
operations) from the Homestead Notes. PTR deducts from net earnings the
interest income related to the amortization of discounts and warrant-related
deferred revenue in calculating funds from operations. Homestead interest
income is expected to increase in future periods as PTR continues to fund
Homestead's development activity up to its $198.8 million funding commitment.
22
<PAGE>
Upon full funding, PTR will have funded $198.8 million in exchange for
Homestead Notes having a face amount of $221.3 million. The Homestead Notes
are convertible into Homestead common stock after March 31, 1997 on the basis
of one share of Homestead common stock for every $11.50 of principal face
amount outstanding, which would result in the ownership of approximately 19.2
million shares of Homestead common stock at full funding. Under these
assumptions and using the trading price of Homestead common stock at June 30,
1997 of $17.875, PTR's ownership would result in the following incremental
value per PTR Common Share at June 30, 1997 (in thousands, except per share
amounts:)
<TABLE>
<S> <C>
Homestead common stock price................................... $ 17.875
Conversion price............................................... 11.500
--------
Incremental value per share of Homestead common stock...... $ 6.375
Shares of Homestead common stock upon conversion (at full
funding).................................................... 19,246
--------
Total incremental value from conversion.................... $122,693
PTR Common Shares outstanding................................ 79,376
--------
Assumed incremental value per PTR Common Share............. $ 1.55
========
</TABLE>
Upon full funding of the Homestead Notes by PTR and Security Capital
Atlantic Incorporated ("ATLANTIC"), PTR's conversion rights would represent a
34.7% ownership interest in Homestead. This ownership interest assumes no
further equity offerings by Homestead, conversion of all Homestead Notes by
PTR and ATLANTIC and exercise of all outstanding Homestead warrants.
Depreciation Expense
The increase in depreciation expense resulted primarily from the increase in
the number of operating communities partially offset by dispositions,
including those related to the contribution of assets to Homestead on October
17, 1996.
Interest Expense
The following table summarizes PTR's interest expense (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Credit facilities............................. $ 7,298 $ 4,203
Long-Term Debt................................ 22,581 11,114
Mortgages payable............................. 8,631 5,969
Capitalized interest.......................... (8,751) (7,509)
------- -------
Total interest expense...................... $29,759 $13,777
======= =======
</TABLE>
Interest expense on PTR's credit facilities increased $3.1 million (73.6%)
resulting primarily from higher average outstanding balances. Average
borrowings on the line of credit were approximately $117.2 millon (with an
average effective interest rate of 8.3%) during the six months ended June 30,
1997, as compared to average borrowings of approximately $94.2 million (with
an average effective interest rate of 7.55%) for the same period in 1996.
Interest expense on PTR's Long-Term Debt increased $11.5 million (103.2%)
for the six month period ended June 30, 1997 as compared to the same period in
1996. The increase is primarily attributable to the issuance of $380 million
of Long-Term Debt during the year-ended December 31, 1996 and $50 million of
Long-Term Debt in March 1997.
Mortgage interest expense increased approximately $2.7 million (44.6%) for
the six months ended June 30, 1997 as compared with the same period in 1996.
This increase is the result of additional weighted-average debt outstanding
due to mortgage assumptions related to community acquisitions which were
partially offset by prepayments during 1996 and 1997.
23
<PAGE>
The increase in interest costs were partially offset by an increase of
approximately $1.2 million (16.5%) in capitalized interest. The increase in
capitalized interest is attributable to higher levels of multifamily
development activity for the six months ended June 30, 1997 as compared to the
same period in 1996.
REIT Management Fee Paid to Affiliate
The REIT Management fee paid by PTR decreased by approximately 17.3% during
the six months ended June 30, 1997 as compared to the same period in 1996.
This decrease is primarily attributable to an overall increase in the assumed
principal amortization and interest on Long-Term Debt for purposes of the fee
calculation, coupled with the fact that interest income on the Homestead Notes
has been excluded from the calculation of the fee in accordance with the terms
of the agreement. In the future, to the extent that PTR completes additional
Long-Term Debt offerings and nonconvertible preferred share financing and as
additional fundings of the Homestead Notes occur, the REIT Management fee will
continue to decline in proportion to PTR's earnings from operations.
On June 10, 1997, the Board extended the term of the REIT Management
Agreement through the earlier of (i) the date of the consummation of the
proposed merger described below, or (ii) the regularly scheduled Board meeting
in the fourth quarter of 1997. See "Liquidity and Capital Resources--Proposed
Merger Transaction and Related Rights Offering" for information regarding a
(i) proposed merger transaction whereby PTR would acquire the operations and
businesses of the REIT Manager and SCG Realty Services in exchange for Common
Shares and (ii) related rights offering.
Gains and Provision for Possible Loss on Investments
As a result of PTR's asset optimization strategy, PTR disposed of 23
multifamily communities, one industrial building and two parcels of land
during the six months ended June 30, 1997, representing gross proceeds of
$249.8 million. As of June 30, 1997, PTR held a portion of the 1997
disposition proceeds aggregating $19.7 million in an interest bearing escrow
account, pending acquisition of other multifamily communities to complete the
tax-deferred exchange. During the six months ended June 30, 1996, PTR disposed
of six multifamily communities, one parcel of land and one industrial building
representing gross proceeds of $87.8 million. The proceeds from the 1996 and
1997 dispositions have been or will be redeployed into other multifamily
communities that in PTR's view offer better long-term cash flow growth
prospects. For financial reporting purposes, however, the transactions
qualified for profit recognition, and aggregate gains of $37.2 million and
$8.1 million, were recorded for the six months ended June 30, 1997 and 1996,
respectively.
As part of PTR's asset optimization strategy, six multifamily communities
and five parcels of land and one industrial building were held for disposition
as of June 30, 1997. The aggregate carrying value of properties held for
disposition was approximately $79.0 million at June 30, 1997. Subject to
normal closing risks, PTR expects to complete the disposition of these
communities during 1997 and early 1998 and redeploy the net proceeds from such
dispositions, where appropriate, through tax-deferred exchanges, into the
acquisition of multifamily communities.
Three Month Period Ended June 30, 1997 and 1996
Revenues and expenses for the three months ended June 30, 1997 compared to
the three months ended June 30, 1996 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 months ended
June 30, 1997 and 1996.
ENVIRONMENTAL MATTERS
PTR is subject to environmental regulations related to the ownership,
operation, development and acquisition of real estate. As part of its due
diligence procedures, PTR has conducted Phase I environmental assessments on
each community prior to acquisition. The cost of complying with environmental
regulations was not material to PTR's results of operations during either
period. PTR is not aware of any environmental condition on any of its
communities that is likely to have a material adverse effect on PTR's
financial position or results of operations.
24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
PTR considers its 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 operating and capital investment requirements as well as its Homestead
funding obligation and shareholder distribution requirements.
Operating Activities
Net cash flow provided by operating activities increased by $10.0 million
(16.6%) for the six months ended June 30, 1997 as compared to the same period
in 1996. This increase was due primarily to increased cash generated by
multifamily communities and reduced cash outflows for operating assets and
liabilities resulting from timing differences.
Investing and Financing Activities
During the six months ended June 30, 1997 and 1996, PTR invested cash of
$371.3 and $284.0 million, respectively, in real estate investments relating
primarily to the significant acquisition and development activity summarized
in "Overview" above. The $371.3 million invested in real estate and $41.3
million in fundings of Homestead Notes during the six months ended June 30,
1997 were financed primarily from $224.5 million in net proceeds from property
dispositions (excluding $19.7 million held in escrow pending tax-deferred
exchanges), and borrowings under PTR's credit facilities which were partially
repaid from proceeds related to PTR's $50 million offering of Long-Term Debt
issued in March 1997 and $54.3 million in net proceeds from the sale of
2,500,000 Common Shares in June 1997. The $284.0 million invested during the
six months ended June 30, 1996 was financed primarily from $85.7 million in
net proceeds from property dispositions and borrowings under PTR's credit
facilities which were partially repaid from proceeds related to PTR's $150
million offering of Long-Term Debt issued in February 1996. Total mortgage
debt assumed during 1997 in connection with community acquisitions aggregated
$82.8 million.
Other significant financing activity included the payment of $59.5 million
and $57.6 million in Common and Preferred Share distributions for the six
months ended June 30, 1997 and 1996, respectively. The increase is primarily
attributable to a 4.8% increase in the distributions paid per Common Share.
Preferred Share dividends decreased approximately $2.9 million during the
respective periods as a result of conversion of Series A Preferred Shares to
Common Shares which resulted in increased Common Share distributions. PTR
prepaid mortgages due to community acquisitions of $19.9 million and $25.8
million for the six months ended June 30, 1997 and 1996, respectively.
Borrowings
PTR has a $350 million unsecured revolving line of credit with approximately
$115.3 million of borrowings outstanding as of August 13, 1997. The line of
credit matures August 1999 and may be extended annually for an additional year
with the approval of the Lenders. The LIBOR spread was reduced from 1.125% to
0.75% on the line of credit effective August 13, 1997. The aggregate amount of
borrowings outstanding under all of PTR's credit facilities as of August 13,
1997 was $215.3 million.
See "Item 1. Financial Statements, Note 4, Borrowings" for additional
information regarding credit availability, outstanding debt balances, interest
rates, scheduled debt maturities and other terms.
Commitments and Contingencies
At June 30, 1997, PTR had contingent contracts or letters of intent, subject
to PTR's final due diligence and approval of all entitlements, to acquire land
for new development communities with an estimated 6,602 multifamily units at a
total development cost of approximately $612.7 million. At the same date, PTR
also had contingent contracts or letters of intent, subject to final due
diligence, for the acquisition of 328 additional operating multifamily units
with a total expected investment of $17.5 million, including budgeted
renovations. At June 30, 1997, PTR had unfunded development commitments for
developments under construction of $180.4 million. For a description of
unfunded commitments in connection with the Homestead Notes see "--Results of
Operations--Homestead Interest and Homestead Notes."
25
<PAGE>
PTR expects to finance these activities and other future investment and
operating needs with cash on hand, borrowings under its credit facilities and
disposition proceeds from its asset optimization strategy, prior to arranging
long-term capital. The credit facilities should facilitate an efficient
response to market opportunities while minimizing the amount of cash invested
in short-term investments at lower yields. Other sources of future liquidity
and financial flexibility include $203.3 million (at August 6, 1997 assuming
the rights offering described below is fully subscribed) in shelf-registered
securities which can be issued on an as-needed basis, subject to PTR's ability
to effect offerings on satisfactory terms. 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) of 37.7% at June 30, 1997, provides
considerable flexibility with respect to its ability to finance its investment
activities.
From time to time, PTR utilizes derivative financial instruments as hedges
in anticipation of future debt offerings in order to manage well-defined
interest rate risk. In anticipation of the $50 million Long-Term Debt offering
that closed March 31, 1997, PTR entered into interest rate contracts with
notional amounts aggregating $50 million in 1996. Upon completion of the
offering, PTR terminated the interest rate contracts, realizing a gain of
approximately $819,000 which has been deferred and is being amortized as an
offset to interest expense over the term of the Long-Term Debt that was
issued.
Distributions
PTR paid first and second quarter 1997 distributions of $0.325 per Common
Share on February 20 and May 29, 1997. On July 21, 1997, the Board declared a
cash distribution of $0.325 per Common Share, payable on August 27, 1997, to
shareholders of record on August 13, 1997. On March 31 and June 30, 1997, PTR
paid quarterly dividends on the Series A Preferred Shares of $0.4377425 per
share and quarterly dividends on its Series B Cumulative Redeemable Preferred
Shares of Beneficial Interest (the "Series B Preferred Shares") of $0.5625 per
share.
Proposed Merger Transaction and Related Rights Offering
On August 5, 1997, the Securities and Exchange Commission declared effective
a registration statement filed by Security Capital relating to warrants to
purchase Class B common stock of Security Capital, and containing PTR's proxy
statement relating to a proposed merger transaction whereby PTR would acquire
the operations and businesses of the REIT Manager and SCG Realty Services
valued at approximately $75.8 million in exchange for Common Shares. The $75.8
million value was based on a three-year discounted analysis of net operating
income prepared by Security Capital and revised after negotiation with a
special committee comprised of independent Trustees (the "Special Committee").
The number of Common Shares issuable to Security Capital was determined using
a per Common Share price of $23.0125 (the average market price of Common
Shares over the five-day period prior to the August 6, 1997 record date for
determining PTR's common shareholders entitled to vote on the proposed
merger). As a result of the transaction, PTR would become an internally
managed REIT and Security Capital would remain PTR's largest shareholder (34%
ownership at August 6, 1997). The Board of Trustees (the "Board") approved the
proposed merger transaction based on the recommendation of the Special
Committee. The proposed merger transaction requires the approval of a two-
thirds majority of PTR's outstanding Common Shares. PTR's proxy statement was
mailed to PTR's common shareholders and a meeting of PTR's common shareholders
to vote on the proposed merger is scheduled to be held on September 8, 1997.
Assuming that the market value of the Common Shares issued to Security Capital
on the transaction date is $75.8 million, approximately $3.1 million will be
allocated to the net tangible assets acquired and the $72.7 million difference
will be accounted for as costs incurred in acquiring the management companies
from a related party since the management companies do not qualify as
"businesses" for purposes of applying APB Opinion No. 16, "Business
Combinations." Upon consummation of the merger, this expense will be recorded
as an operating expense on PTR's statement of earnings, however, PTR will not
deduct this expense for purposes of calculating funds from operations, due to
the non-recurring and non-cash nature of the expense.
In addition, subject to and after the closing of the proposed merger and
after the closing of the rights offering described below, Security Capital
will issue warrants pro rata to holders of PTR's Common Shares and Series A
Preferred Shares (other than Security Capital), to acquire shares of Class B
common stock of Security Capital
26
<PAGE>
having an aggregate subscription price at the time of issuance of
approximately $102 million. The number of shares of Class B common stock
subject to the warrants will be based on the closing price of such shares on
the date the warrants are issued to a warrant distribution agent for
subsequent distribution to the holders of Common Shares and Series A Preferred
Shares. The warrants will have a term of one year. Security Capital is issuing
the warrants to induce PTR common shareholders to vote in favor of the
proposed merger and to raise additional equity capital at a relatively low
cost in addition to other benefits.
On August 6, 1997, PTR commenced a rights offering to subscribe for and
purchase 7,433,433 Common Shares at a price of $21 13/16 per share (the
"Subscription Price"). PTR's common shareholders of record on August 6, 1997
will receive a dividend of one right for each Common Share held. Seven rights
entitle the holder to purchase one Common Share at the Subscription Price. The
rights are transferable and will expire on September 9, 1997. The offering is
designed to allow PTR common shareholders (other than Security Capital) the
opportunity to maintain their relative ownership in PTR by purchasing
additional Common Shares at a price which is below the price at which Security
Capital is receiving Common Shares in the proposed merger. The funds from the
rights offering will be used to repay borrowings under certain credit
facilities of PTR.
Funds From Operations
Funds from operations is defined as net earnings computed in accordance with
generally accepted accounting principles (GAAP), excluding gains (or losses)
from real estate transactions, provisions for possible losses, extraordinary
items, significant non-recurring items and real estate depreciation. PTR
believes that funds from operations is helpful to the reader as a measure of
the performance of an equity REIT because, along with cash flow from operating
activities, financing activities and investing activities, it provides a
reader with an indication of the ability of PTR to incur and service debt, to
make capital expenditures and to fund other cash needs. The funds from
operations measure presented by PTR, while consistent with the NAREIT
definition, will not be comparable to similarly titled measures of other
REIT's which do not compute funds from operations in a manner consistent with
PTR. Funds from operations should not be considered as an alternative to net
earnings or any other GAAP measurement of performance as an indicator of PTR's
operating performance or as an alternative to cash flows from operating,
investing, or financing activities as a measure of liquidity. Funds from
operations is not intended to represent cash made available to shareholders.
Cash distributions paid to shareholders are described above under
"Distributions".
In 1996, PTR contributed its Homestead Village extended-stay lodging assets
to Homestead. Management believes that funds from operations for the six
months ended June 30, 1996 should be adjusted to reflect the effects of the
Homestead transaction to provide a more meaningful comparison to the
historical 1997 results. Accordingly, pro forma funds from operations for the
six months ended June 30, 1996 has been calculated as if the Homestead
transaction had occurred on January 1, 1996. The funds from operations
information is unaudited and the pro forma funds from operations is not
necessarily indicative of what actual funds from operations would have been if
the Homestead transaction had occurred on January 1, 1996.
27
<PAGE>
Funds from operations and pro forma funds from operations (1996) are as
follows (amounts in thousands):
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
---------------- ----------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net earnings attributable to Common
Shares................................... $30,132 $22,366 $70,708 $41,821
Add (Deduct):
Real Estate Depreciation................ 12,639 10,624 24,688 21,242
Provision for Possible Loss on
Investments............................ -- -- 1,500 --
Gain on disposition of investments, net. (11,872) (5,160) (37,207) (8,083)
Extraordinary item-loss on early
extinguishment of debt, net............ -- 837 -- 837
Amortization related to Homestead Notes. (283) -- (528) --
------- ------- ------- -------
Historical funds from operations
attributable to Common Shares............ 30,616 28,667 59,161 55,817
Add (deduct) pro forma adjustments
relating to the contribution of Homestead
Assets:
Reduction in revenues and operating
expenses(1)............................ -- (4,294) -- (7,555)
Increase in interest income(2).......... -- 1,200 -- 2,023
Increase in interest expense(3)......... -- (123) -- (289)
Reduction in capitalized interest(4).... -- (603) -- (1,178)
REIT Management fee effect(5)........... -- 806 -- 1,447
Other................................... -- (14) -- 8
------- ------- ------- -------
Total pro forma adjustments........... -- (3,028) -- (5,544)
------- ------- ------- -------
Funds from operations attributable to
Common Shares
(Pro forma for 1996)..................... $30,616 $25,639 $59,161 $50,273
======= ======= ======= =======
Weighted-average Common Shares
outstanding.............................. 77,398 72,223 76,639 72,217
======= ======= ======= =======
</TABLE>
- --------
(1) Represents the elimination of Homestead's historical revenues and operating
expenses.
(2) Represents the interest income which would have been recognized on the
Homestead Notes, assuming that PTR received Homestead common stock in
exchange for its contribution first, and then Homestead Notes in exchange
for the balance of its contribution over the respective time periods.
(3) Represents the assumed amount of incremental interest expense which would
have been incurred as a result of higher line of credit balances due to
reduced cash flow.
(4) Represents the reclassification of historical interest costs capitalized on
Homestead developments to interest expense.
(5) Represents the decrease in REIT Management fee that would have resulted
from the pro forma adjustments.
28
<PAGE>
PART II--OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITIES HOLDERS
At the annual shareholders meeting held June 10, 1997, shareholders elected
the following Trustees to office:
<TABLE>
<CAPTION>
COMMON COMMON
SHARES IN SHARES
FAVOR AGAINST
---------- ---------
<S> <C> <C>
Calvin K. Kessler.................................... 69,895,066 239,502
James H. Polk III.................................... 69,889,340 245,228
John C. Schweitzer................................... 69,917,142 217,426
James A. Cardwell.................................... 64,730,296 5,404,272
John T. Kelley III................................... 64,746,702 5,387,866
William G. Myers..................................... 69,893,023 241,545
C. Ronald Blankenship................................ 69,915,586 218,982
</TABLE>
Additionally, shareholders approved the 1996 Share Option Plan for Outside
Trustees, with 67,700,643 Common Shares voted in favor and 1,769,500 Common
Shares voted against.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<C> <C> <S>
12 -- Statement regarding Computation of Ratio of Earnings to Fixed
Charges.
15 -- Letter from KPMG Peat Marwick LLP dated August 14, 1997 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 29, 1997 Item 5, Item 7 No
</TABLE>
29
<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/ Bryan J. Flanagan
_____________________________________
Bryan J. Flanagan
Senior Vice President
(Principal Financial Officer)
/s/ Ash K. Atwood
_____________________________________
Ash K. Atwood,
Vice President & Co-Controller
(Principal Accounting Officer)
Date: August 14, 1997
30
<PAGE>
EXHIBIT 12.1
SECURITY CAPITAL PACIFIC TRUST
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30, Twelve Months Ended December 31,
-------- -----------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings from operations........... $43,341 $47,382 $ 94,089 $ 81,696 $46,719 $23,191 $ 9,037
Add:
Interest Expense.............. 29,759 13,777 35,288 19,584 19,442 3,923 3,214
------- ------- -------- -------- ------- ------- -------
Earnings as adjusted............... $73,100 $61,159 $129,377 $101,280 $66,161 $27,114 $12,251
======= ======= ======== ======== ======= ======= =======
Fixed charges:
Interest expense.............. $29,759 $13,777 $ 35,288 $ 19,584 $19,442 $ 3,923 $ 3,214
Capitalized interest.......... 8,751 7,509 16,941 11,741 6,029 2,818 989
------- ------- -------- -------- ------- ------- -------
Total fixed charges........... $38,510 $21,286 $ 52,229 $ 31,325 $25,471 $ 6,741 $ 4,203
======= ======= ======== ======== ======= ======= =======
Ratio of earnings to fixed
charges........................... 1.9 2.9 2.5 3.2 2.6 4.0 2.9
======= ======= ======== ======== ======== ======= =======
</TABLE>
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
EXHIBIT 12.2
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED SHARE DIVIDENDS
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30, Twelve Months Ended December 31,
-------- -----------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings from operations...................... $43,341 $47,382 $ 94,089 $ 81,696 $46,719 $ 23,191 $ 9,037
Add:
Interest expense.......................... 29,759 13,777 35,288 19,584 19,442 3,923 3,214
------- ------- -------- -------- ------- -------- -------
Earnings as adjusted.......................... $73,100 $61,159 $129,377 $101,280 $66,161 $ 27,114 $12,251
======= ======= ======== ======== ======= ======== =======
Combined fixed charges and preferred
share dividends:
Interest expense.......................... $29,759 $13,777 $ 35,288 $ 19,584 $19,442 $ 3,923 $ 3,214
Capitalized interest...................... 8,751 7,509 16,941 11,741 6,029 2,818 989
------- ------- -------- -------- ------- -------- -------
Total fixed charges...................... 38,510 21,286 52,229 31,325 25,471 6,741 4,203
Preferred share dividends..................... 9,840 12,774 24,167 21,823 16,100 1,341 --
------- ------- -------- -------- ------- -------- -------
Combined fixed charges and preferred
share dividends.............................. $48,350 $34,060 76,396 $ 53,148 $41,571 $ 8,082 $ 4,203
======= ======= ======== ======== ======= ======== =======
Ratio of earnings to combined fixed charges
and preferred share dividends................ 1.5 1.8 1.7 1.9 1.6 3.4 2.9
======= ======= ======== ======== ======= ======== =======
</TABLE>
<PAGE>
EXHIBIT 15.1
Board of Trustees and Shareholders
Security Capital Pacific Trust
Gentlemen:
Re: Registration Statements Nos. 33-25317, 333-4455, 333-12885, 333-24035,
and 333-26267
With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our report dated August 13, 1997 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, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from the
Form 10-Q for the six months ended June 30, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 5,570
<SECURITIES> 0
<RECEIVABLES> 5,382
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,391,165
<DEPRECIATION> 104,330
<TOTAL-ASSETS> 2,605,816
<CURRENT-LIABILITIES> 0
<BONDS> 833,015
0
244,350
<COMMON> 79,376
<OTHER-SE> 1,073,598
<TOTAL-LIABILITY-AND-EQUITY> 2,605,816
<SALES> 161,362
<TOTAL-REVENUES> 169,674
<CGS> 0
<TOTAL-COSTS> 84,799
<OTHER-EXPENSES> 10,275
<LOSS-PROVISION> 1,500
<INTEREST-EXPENSE> 29,759
<INCOME-PRETAX> 70,708
<INCOME-TAX> 0
<INCOME-CONTINUING> 70,708
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 70,708
<EPS-PRIMARY> 0.92
<EPS-DILUTED> 0.90
</TABLE>
