<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________.
Commission File Number 1-10272
SECURITY CAPITAL PACIFIC TRUST
(Exact name of registrant as specified in its charter)
Maryland 74-6056896
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7670 South Chester Street, 80112
Englewood, Colorado (Zip Code)
(Address of principal executive offices)
(303) 708-5959
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing for the past 90 days.
Yes X No ______
-------
The number of shares outstanding of the Registrant's common stock as of May
8, 1998 was 95,100,540.
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
INDEX
<TABLE>
<CAPTION>
Page
Number
-----------
<S> <C>
PART I. Condensed Financial Information
Item 1. Financial Statements
Condensed Balance Sheets--March 31, 1998 (unaudited) and December 31, 1997..... 3
Condensed Statements of Earnings--Three months ended March 31, 1998 and
1997 (unaudited)............................................................. 4
Condensed Statement of Shareholders' Equity--Three months ended March 31, 1998
(unaudited).................................................................. 5
Condensed Statements of Cash Flows--Three months ended March 31, 1998
and 1997 (unaudited)......................................................... 6
Notes to Condensed Financial Statements (unaudited)............................ 7
Independent Auditors' Review Report............................................ 15
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................... 16
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K............................................... 25
</TABLE>
2
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
CONDENSED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS March 31, December 31,
1998 1997
---------- ------------
(unaudited)
<S> <C> <C>
Real estate......................................................................... $2,643,707 $2,604,919
Less accumulated depreciation....................................................... 139,918 129,718
---------- ----------
2,503,789 2,475,201
Investment in Homestead convertible mortgages....................................... 279,544 272,556
Other mortgage notes receivable..................................................... 11,547 12,682
---------- ----------
Net investments................................................................ 2,794,880 2,760,439
Cash and cash equivalents........................................................... 5,310 4,927
Accounts receivable and accrued interest............................................ 12,450 11,544
Restricted cash in tax-deferred exchange escrow..................................... 15,287 --
Other assets........................................................................ 36,223 28,776
---------- ----------
Total assets................................................................... $2,864,150 $2,805,686
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Credit facilities................................................................. $ 163,241 $ 231,500
Long-Term Debt.................................................................... 755,000 630,000
Mortgages payable................................................................. 261,865 265,652
Distributions payable............................................................. -- 31,495
Accounts payable.................................................................. 35,245 35,352
Accrued expenses and other liabilities............................................ 65,821 71,251
---------- ----------
Total liabilities.............................................................. 1,281,172 1,265,250
---------- ----------
Shareholders' equity:
Series A Preferred Shares (5,130,515 convertible shares in 1998 and
5,408,393 in 1997; stated liquidation preference of $25 per share).............. 128,263 135,210
Series B Preferred Shares (4,200,000 shares; stated liquidation
Preference of $25 per share).................................................... 105,000 105,000
Common Shares (93,001,444 shares in 1998 and 92,633,724 in 1997).................. 93,001 92,634
Additional paid-in capital........................................................ 1,275,223 1,268,741
Employee share purchase notes..................................................... (17,107) (17,238)
Unrealized holding gain on Homestead convertible mortgages........................ 86,231 83,794
Distributions in excess of net earnings........................................... (87,633) (127,705)
---------- ----------
Total shareholders' equity..................................................... 1,582,978 1,540,436
---------- ----------
Total liabilities and shareholders' equity..................................... $2,864,150 $2,805,686
========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed
financial statements.
3
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
CONDENSED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1998 1997
------- -------
<S> <C> <C>
Revenues:
Rental revenues...................................... $88,553 $79,950
Interest income on Homestead convertible mortgages... 5,523 3,174
Other income......................................... 1,535 370
------- -------
95,611 83,494
------- -------
Expenses:
Rental expenses...................................... 23,287 20,357
Real estate taxes.................................... 8,021 7,268
Property management fees:
Paid to affiliate................................. -- 2,690
Paid to third parties............................. 113 260
Depreciation on real estate investments.............. 16,258 12,049
Interest............................................. 15,623 13,961
REIT management fee paid to affiliate................ -- 4,617
General and administrative........................... 1,868 272
Administrative services provided by an affiliate..... 953 --
Other................................................ 189 1,744
------- -------
66,312 63,218
------- -------
Earnings from operations............................... 29,299 20,276
Gains on dispositions of depreciated real estate,
net................................................ 15,484 25,335
------- -------
Net earnings........................................... 44,783 45,611
Less Preferred Share dividends....................... 4,712 5,035
------- -------
Net earnings attributable to Common Shares............. $40,071 $40,576
------- -------
Weighted-average Common Shares outstanding - Basic..... 92,783 75,872
------- -------
Weighted-average Common Shares outstanding - Diluted... 99,970 84,326
------- -------
Net earnings and distributions paid per Common Share:
Basic................................................ $ 0.43 $ 0.53
======= =======
Diluted.............................................. $ 0.42 $ 0.51
======= =======
Distributions paid................................... $ 0.34 $ 0.325
======= =======
</TABLE>
The accompanying notes are an integral part of the condensed financial
statements.
4
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
Three Months Ended March 31, 1998
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Shares of
beneficial
interest, $1.00
par value
-------------------------
Series A Series B Unrealized
Preferred Preferred holding
Shares at Shares at Common Employee gain on
aggregate aggregate Shares Additional share Homestead Distributions
liquidation liquidation at par paid-in purchase convertible in excess of
preference preference value capital notes mortgages net earnings Total
----------- ----------- ------ ---------- -------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1997.......... $135,210 $105,000 $92,634 $1,268,741 $(17,238) $83,794 $(127,705) $1,540,436
----------
Comprehensive income:
Net earnings........... -- -- -- -- -- -- 44,783 44,783
Preferred Share
dividends paid........ -- -- -- -- -- -- (4,712) (4,712)
Other comprehensive
income--change in
unrealized holding
gain on Homestead
convertible mortgages. -- -- -- -- -- 2,437 -- 2,437
----------
Comprehensive income
attributable to Common
Shares................... -- -- -- -- -- -- -- 42,508
----------
Net shares repurchased
under Incentive Plan..... -- -- (7) (138) 131 -- -- (14)
Accrued dividend
equivalent units......... -- -- -- 47 -- -- -- 47
Conversion of 277,878
Series A Preferred Shares
into 374,249 Common
Shares................... (6,947) -- 374 6,573 -- -- -- --
Other..................... -- -- -- -- -- -- 1 1
-------- -------- ------- ---------- -------- ------- -------- ----------
Balances at
March 31, 1998............. $128,263 $105,000 $93,001 $1,275,223 $(17,107) $86,231 $(87,633) $1,582,978
======== ======== ======= ========== ======== ======= ======== ==========
</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>
Three Months Ended
March 31,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Operating activities:
Net earnings.................................................................. $ 44,783 $ 45,611
Adjustments to reconcile net earnings to net cash flow provided by operating
activities:
Depreciation and amortization............................................. 16,674 12,466
Gains on dispositions of depreciated real estate, net..................... (15,484) (25,335)
Provision for possible loss on real estate investments.................... -- 1,500
Change in accounts payable.................................................... (3,242) (1,321)
Change in accrued expenses and other liabilities.............................. (5,430) (5,010)
Change in other operating assets.............................................. (2,767) (5,186)
--------- ---------
Net cash flow provided by operating activities............................ 34,534 22,725
--------- ---------
Investing activities:
Real estate investments....................................................... (117,613) (177,877)
Change in tax-deferred exchange escrow........................................ (15,287) (58,958)
Funding of Homestead convertible mortgages.................................... (4,000) (16,250)
Advances on other mortgage notes receivable................................... -- (100)
Principal repayments on other mortgage notes receivable....................... 1,135 88
Proceeds from dispositions, net of closing costs.............................. 99,538 139,062
--------- ---------
Net cash flow used in investing activities................................ (36,227) (114,035)
--------- ---------
Financing activities:
Proceeds from Long-Term Debt.................................................. 125,000 50,000
Debt issuance costs incurred.................................................. (6,589) (218)
Principal prepayment of mortgages payable..................................... (11,100) (9,534)
Regularly scheduled principal payments on mortgages payable................... (840) (603)
Proceeds from credit facilities............................................... 192,094 248,808
Principal payments on credit facilities....................................... (260,353) (165,143)
Cash distributions paid on Common Shares...................................... (31,495) (24,712)
Cash dividends paid on Preferred Shares....................................... (4,712) (5,035)
Other......................................................................... 71 87
--------- ---------
Net cash flow provided by financing activities............................ 2,076 93,650
--------- ---------
Net change in cash and cash equivalents......................................... 383 2,340
Cash and cash equivalents at beginning of period................................ 4,927 5,601
--------- ---------
Cash and cash equivalents at end of period...................................... $ 5,310 $ 7,941
========= =========
Non-cash investing and financing activities:
Assumption of mortgages payable upon purchase of multifamily communities...... $ 8,153 $ 23,527
Series A Preferred Shares converted to Common Shares.......................... $ 6,947 $ 10,374
Change in unrealized holding gain on Homestead convertible mortgages.......... $ 2,437 $ 1,037
</TABLE>
The accompanying notes are an integral part of the
condensed financial statements.
6
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 1998 and 1997
(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 1997 Annual Report on Form 10-K ("1997 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 month periods ended March 31, 1998 and 1997 are not
necessarily indicative of the results to be expected for the entire year.
The accounts of PTR and its controlled 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 ("GAAP") 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 1997 amounts have been reclassified to conform to the 1998
presentation.
New Accounting Rules
In March 1998, a new accounting rule was issued requiring that internal
costs incurred in connection with the acquisition of operating communities be
expensed as incurred. The new rule, which is to be applied prospectively from
the date of issuance, is not expected to have a material impact on PTR's
financial position or results of operations.
In April 1998, new accounting rules were issued requiring that costs
associated with start-up activities, such as the opening of a new business or
division, be expensed as incurred. The new rules, which become effective January
1, 1999, are not expected to have a material impact on PTR's financial position
or results of operations.
Per Share Data
Following is a reconciliation of the numerator and denominator used to
compute basic net earnings per Common Share to that used to compute diluted net
earnings per Common Share, for the periods indicated (in thousands, except per
share amounts):
7
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1998 1997
------- -------
<S> <C> <C>
Reconciliation of numerator between basic and diluted net earnings per
Common Share:
Net earnings attributable to Common Shares - Basic.......................... $40,071 $40,576
Dividends on Series A Preferred Shares................................... 2,370 2,673
------- -------
Net earnings attributable to Common Shares - Diluted........................ $42,441 $43,249
======= =======
Reconciliation of denominator between basic and diluted net earnings per
Common Share:
Weighted-average number of Common Shares outstanding - Basic................ 92,783 75,872
Assumed conversion of Series A Preferred Shares into Common Shares........ 7,056 8,389
Incremental options outstanding........................................... 131 65
------- -------
Weighted-average number of Common Shares outstanding - Diluted.............. 99,970 84,326
======= =======
Net earnings per Common Share - Basic....................................... $ 0.43 $ 0.53
======= =======
Net earnings per Common Share - Diluted..................................... $ 0.42 $ 0.51
======= =======
</TABLE>
(2) Proposed Merger Transaction
On April 2, 1998, PTR announced its agreement to merge with Security
Capital Atlantic Incorporated ("ATLANTIC") (NYSE: SCA), a multifamily real
estate investment trust ("REIT") currently operating primarily in the
southeastern United States. Pursuant to the merger transaction (the "Merger"),
ATLANTIC will be merged with and into PTR, which will continue its existence
under the name "Archstone Communities Trust" ("ARCHSTONE") and will be traded on
the New York Stock Exchange ("NYSE") under the symbol "ASN". In accordance with
the terms of the Merger, each outstanding ATLANTIC common share will be
converted into the right to receive one PTR common share of beneficial interest,
par value $1.00 per share ("Common Share") and each outstanding ATLANTIC Series
A preferred share will be converted into the right to receive one comparable
share of a new class of PTR Series C preferred shares. In addition, PTR will
assume all of ATLANTIC's debt and other liabilities upon consummation of the
Merger which aggregated $595.0 million as of March 31, 1998. The Merger has been
structured as a tax-free merger and will be accounted for under the purchase
method.
The Board of Trustees (the "Board") approved the Merger based upon the
recommendation of a special committee comprised of independent PTR Trustees. The
recommendation of the special committee was based in part upon an opinion
obtained from a financial advisor regarding the fairness, from a financial point
of view, of the exchange ratio to PTR and the holders of PTR Common Shares other
than Security Capital Group Incorporated ("Security Capital"). The Merger, which
is expected to be completed by August 1998, is subject to the approval of
shareholders of both companies (a two-thirds majority of PTR's outstanding
Common Shares and a majority of ATLANTIC's outstanding common shares) and
satisfaction of certain other conditions. PTR filed a registration statement and
joint proxy statement with the Securities and Exchange Commission ("SEC") on
April 28, 1998, relating to the following matters: (i) the proposed Merger of
ATLANTIC with and into PTR; (ii) a proposal to adopt an amended and restated
declaration of trust of PTR which, among other things, would change PTR's name
to "Archstone Communities Trust" and increase the authorized shares from
150,000,000 to 250,000,000; and (iii) a proposal to increase the number of PTR
Common Shares available for award under the PTR 1997 Long-Term Incentive Plan
(the "Incentive Plan") and the PTR 1996 Share Option Plan for Outside Trustees
in an amount equal to the number of shares authorized under the corresponding
ATLANTIC option plans. The registration statement has not been declared
effective.
8
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Security Capital, which at March 31, 1998 owned 33.0% and 49.9% of the
outstanding PTR Common Shares and ATLANTIC common shares, respectively, has
agreed to vote all of its PTR Common Shares and ATLANTIC common shares in favor
of the Merger, subject to certain conditions. If the Merger is consummated,
Security Capital will own approximately 38.7% (based on March 31, 1998
information) of ARCHSTONE's common stock and will be ARCHSTONE's largest
shareholder.
As part of the Merger, PTR distributions would be adjusted following the
close of the transaction to an annualized level of $1.42 per Common Share, an
increase of 4.4% from PTR's current annual distribution level of $1.36 per
Common Share.
(3) Real Estate
Investments in Real Estate
Equity investments in real estate, at cost, were as follows (dollar amounts
in thousands):
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
---------------------- ----------------------
Investment Units Investment Units
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Multifamily:
Operating communities........................... $2,235,600 42,859 $2,237,789 43,465
Communities under construction (1).............. 258,322 5,887 232,770 5,545
Development communities In Planning (1) (2):
Owned......................................... 99,910 5,060 80,781 4,468
Under Control (2) (3)......................... -- 5,291 -- 6,090
---------- ------ ---------- ------
Total development communities In Planning... 99,910 10,351 80,781 10,558
Other land held................................... 27,005 -- 27,517 --
---------- ------ ---------- ------
Total multifamily........................... 2,620,837 59,097 2,578,857 59,568
====== ======
Non-multifamily................................... 22,870 26,062
---------- ----------
Total real estate........................... $2,643,707 $2,604,919
========== ==========
</TABLE>
- ----------------
(1) Unit information is based on management's estimates and has not been audited
or reviewed by PTR's independent auditors.
(2) "In Planning" is defined as parcels of land owned or Under Control upon
which multifamily construction is expected to commence within 36 months.
"Under Control" means PTR has an exclusive right (through contingent
contract or letter of intent) during a contractually agreed-upon time period
to acquire land for future development of multifamily communities, subject
to approval of contingencies during the due diligence process, but does not
currently own the land. There can be no assurance that such land will be
acquired.
(3) PTR's investment as of March 31, 1998 and December 31, 1997 for developments
Under Control was $3.1 million and $3.8 million, respectively, and is
reflected in the "Other assets" caption of PTR's balance sheets.
9
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
The change in investments in real estate, at cost, consisted of the
following (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Balance at January 1, 1998.................................... $2,604,919
----------
Multifamily:
Acquisition and renovation expenditures.................... 39,863
Development expenditures, excluding land acquisitions...... 58,442
Acquisition and improvement of land for development........ 29,121
Recurring capital expenditures............................. 999
Dispositions............................................... (84,297)
----------
Net multifamily activity...................................... 44,128
Non-multifamily dispositions, including land.................. (5,340)
----------
Balance at March 31, 1998..................................... $2,643,707
==========
</TABLE>
At March 31, 1998, PTR had unfunded multifamily construction and
rehabilitation commitments aggregating approximately $230.7 million.
(4) Homestead Convertible Mortgages
During the three month period ended March 31, 1998, PTR funded an
additional $4.0 million under its $198.8 million commitment to provide
development funding to Homestead in the form of convertible mortgage notes,
resulting in a total amount funded of $190.9 million as of March 31, 1998.
Following is a reconciliation of the Homestead convertible mortgages' components
to the amount reflected in the accompanying condensed balance sheet (in
thousands):
<TABLE>
<CAPTION>
March 31,
1998
---------
<S> <C>
Face amount of Homestead convertible mortgages.... $212,545
Original issue discount........................... (21,607)
--------
Amount funded..................................... 190,938
Amortization of original issue discount........... 1,426
Conversion feature-initial value.................. 14,971
Unamortized discount on conversion feature........ (14,022)
Fair value adjustment............................. 86,231
--------
Carrying value and fair value..................... $279,544
========
</TABLE>
The Homestead convertible mortgages 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. The difference between the fair value of the
Homestead convertible mortgages (assuming conversion), as calculated based upon
the trading price of Homestead's common stock on the American Stock Exchange at
March 31, 1998 ($15.125), and the amortized cost of the Homestead convertible
mortgages, is reflected as an additional component of the Homestead convertible
mortgages balance and as an unrealized holding gain in shareholders' equity. The
unrealized holding gain aggregated $86.2 million as of March 31, 1998.
10
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
(5) Borrowings
Credit Facilities
PTR has a $350 million unsecured revolving line of credit with a group of
financial institutions led by Chase Bank of Texas, National Association
("Chase") (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 March 31,
1998) or the federal funds rate plus 0.50%, or at PTR's option, LIBOR (5.6875%
at March 31, 1998) plus 0.75%. 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 $50,000 and
$75,000 for the three months ended March 31, 1998 and 1997, respectively.
A summary of PTR's line of credit borrowings is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Total line of credit......................................... $350,000 $350,000
Borrowings outstanding at end of period...................... 150,000 223,500
Weighted-average daily borrowings............................ 198,429 121,038
Weighted-average daily nominal interest rate................. 6.6% 6.7%
Weighted-average daily effective interest rate............... 7.4% 8.4%
Weighted-average nominal interest rate at end of period...... 6.4% 6.9%
</TABLE>
On September 9, 1996, PTR entered into a short-term, unsecured, borrowing
agreement with Chase. The loan matures March 19, 1999 and bears interest at an
overnight rate which ranged from 6.00% to 7.13% during the three months ended
March 31, 1998. At March 31, 1998, there was $13.2 million outstanding under
this agreement.
Long-Term Debt
PTR has issued Long-Term Debt which bears interest at fixed rates, payable
semi-annually, including $125 million of 7.20% Notes (the "7.20% Notes") issued
on March 6, 1998 which proceeds were used to pay down balances on PTR's credit
facilities. The 7.20% Notes pay interest semi-annually on March 1 and September
1 of each year through March 1, 2013. Annual principal installments of $25
million commence on March 1, 2009.
The following table summarizes the Long-Term Debt as of March 31, 1998:
<TABLE>
<CAPTION>
Issuance Average Effective
and Interest Rate, Average
Outstanding Average including offering Original
Principal Coupon discounts and Life
Date of Issuance Amount Rate issuance costs (Years)
- --------------------------------- ------------ ------- ------------------ --------
<S> <C> <C> <C> <C>
March 6, 1998.................... $125 million 7.200% 7.864% 13.00
March 31, 1997................... 50 million 7.905 7.850 16.00
October 21, 1996................. 130 million 7.350 7.500 6.85
August 6, 1996................... 100 million 7.840 7.950 15.60
February 23, 1996................ 150 million 7.710 7.840 15.50
February 8, 1994................. 200 million 7.240 7.370 14.25
------------ ------- ------------------ --------
Grand Total/Average.............. $755 million 7.469% 7.670% 13.31
------------ ------- ------------------ --------
</TABLE>
11
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (Continued)
Mortgages Payable
Mortgages payable at March 31, 1998 consisted of the following (dollar
amounts in thousands):
<TABLE>
<CAPTION>
Effective Principal Principal
Interest Balance at Balance at
Type of Mortgage Rate (1) March 31, 1998 December 31, 1997
- -------------------------------------------- --------- -------------- -----------------
<S> <C> <C> <C>
Conventional fixed rate................ 8.04% $ 151,480 $ 143,963
Tax-exempt fixed rate (2).............. 6.63 46,170 46,298
Tax-exempt floating rate (2)........... 4.52 57,340 68,440
Combined (3)........................... 8.84 5,778 5,794
Other.................................. 5.05 1,097 1,157
--------- -------------- -----------------
Total/average mortgage debt....... 7.03% $ 261,865 $ 265,652
========= ============== =================
</TABLE>
(1) Represents the effective interest rate, including loan cost amortization
and other ongoing fees and expenses.
(2) Tax-exempt effective interest rates include credit enhancement and other
bond-related costs, where applicable.
(3) This category represents one multifamily community which was refinanced in
1990 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 changes in mortgages payable during the three months ended March 31,
1998 consisted of the following (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Balance at January 1, 1998.................................... $ 265,652
Mortgage notes assumed........................................ 8,153
Principal payments, including prepayment upon
community dispositions...................................... (11,940)
----------
Balance at March 31, 1998..................................... $ 261,865
==========
</TABLE>
12
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (Continued)
Scheduled Debt Maturities
Approximate principal payments due during each of the calendar years in the
20-year period ending December 31, 2017 and thereafter, as of March 31, 1998,
are as follows (in thousands):
<TABLE>
<CAPTION>
Credit Long-Term
Facilities Debt Mortgages Total
---------- --------- --------- -----------
<S> <C> <C> <C> <C>
1998............ $ 13,241 $ -- $ 28,346 $ 41,587
1999............ 150,000 30,000 9,244 189,244
2000............ -- -- 30,901 30,901
2001............ -- 12,500 24,740 37,240
2002............ -- 32,500 18,317 50,817
2003............ -- 38,750 3,171 41,921
2004............ -- 38,750 3,025 41,775
2005............ -- 38,750 13,269 52,019
2006............ -- 38,750 9,918 48,668
2007............ -- 38,750 4,064 42,814
2008............ -- 38,750 20,076 58,826
2009............ -- 61,250 2,897 64,147
2010............ -- 63,750 6,298 70,048
2011............ -- 50,000 3,307 53,307
2012............ -- 55,000 3,298 58,298
2013............ -- 60,000 3,349 63,349
2014............ -- 42,500 16,453 58,953
2015............ -- 40,000 24,592 64,592
2016............ -- 45,000 3,106 48,106
2017............ -- 30,000 3,350 33,350
Thereafter... -- -- 30,144 30,144
---------- --------- --------- -----------
Total........ $ 163,241 $ 755,000 $ 261,865 $ 1,180,106
========== ========= ========= ===========
</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 debt covenants at March 31, 1998.
Interest paid on all borrowings for the three months ended March 31, 1998
was $19.5 million, net of $5.2 million of interest capitalized during
construction. Interest paid on all borrowings for the three months ended March
31, 1997 was $18.9 million, net of $4.4 million of interest capitalized during
construction.
Amortization of loan costs included in interest expense for the three
months ended March 31, 1998 and 1997 was $859,000 and $729,000, respectively.
13
<PAGE>
SECURITY CAPITAL PACIFIC TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (Concluded)
(6) Cash Distributions
PTR paid the first quarter 1998 distribution of $0.34 per Common Share on
February 25, 1998. On April 29, 1998, the Board declared a cash distribution of
$0.34 per Common Share, payable on May 28, 1998, to shareholders of record on
May 14, 1998. On March 31, 1998, PTR paid quarterly dividends of $0.4579 per
PTR Series A cumulative convertible preferred shares of beneficial interest (the
"Series A Preferred Shares") and $0.5625 per Series B cumulative redeemable
preferred shares of beneficial interest (the "Series B Preferred Shares")
(collectively the "Preferred Shares").
(7) Shareholders' Equity
On December 15, 1997, PTR filed a $400 million shelf registration with the
SEC to supplement an existing shelf registration with a balance of $170.9
million. As a result of this filing, PTR can issue securities in the form of
Long-Term Debt, Common Shares and preferred shares on an as-needed basis,
subject to PTR's ability to effect offerings on satisfactory terms.
On April 23, 1998, PTR sold 2,049,587 Common Shares at $22.6875 per share
in an underwritten public offering. The net proceeds of $44.0 million (net of
underwriting discount and offering costs) were used to repay borrowings under
PTR's credit facilities.
After giving effect to the April 23, 1998 Common Share offering and the
$125 million in Long-Term Debt issued March 6, 1998, PTR has approximately
$399.4 million in shelf-registered securities available for issuance.
14
<PAGE>
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Trustees and Shareholders
SECURITY CAPITAL PACIFIC TRUST:
We have reviewed the accompanying condensed balance sheet of SECURITY
CAPITAL PACIFIC TRUST as of March 31, 1998, the related condensed statements of
earnings and cash flows for the three month periods ended March 31, 1998 and
1997, and the statement of shareholders' equity for the three month period ended
March 31, 1998. 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, 1997, and the related statements of earnings, shareholders' equity, and cash
flows for the year then ended (not presented herein); and in our report dated
January 31, 1998, except as to Note 13, which is as of March 6, 1998, 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, 1997 is fairly stated, in all material respects, in relation to the
balance sheet from which it has been derived.
KPMG Peat Marwick LLP
Chicago, Illinois
April 23, 1998
15
<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 1997
Form 10-K as well as the financial statements and notes included in Item 1 of
this report. See PTR's 1997 Form 10-K for a discussion of various risk factors
associated with forward-looking statements made in this document.
Proposed Merger Transaction
On April 2, 1998, PTR announced its agreement to merge with ATLANTIC (NYSE:
SCA), a multifamily REIT currently operating primarily in the southeastern
United States. Pursuant to the Merger, ATLANTIC will be merged with and into
PTR, which will continue its existence under the name "Archstone Communities
Trust" and will be traded on the NYSE under the symbol "ASN". In accordance
with the terms of the Merger, each outstanding ATLANTIC common share will be
converted into the right to receive one PTR Common Share and each outstanding
ATLANTIC Series A preferred share will be converted into the right to receive
one comparable share of a new class of PTR Series C preferred shares. In
addition, PTR will assume all of ATLANTIC's debt and other liabilities upon
consummation of the Merger which aggregated $595.0 million as of March 31, 1998.
Management anticipates replacement of the existing PTR and ATLANTIC lines of
credit with a combined facility to enable ARCHSTONE to efficiently respond to
market opportunities. The new credit facility is expected to be in place by the
Merger date. The Merger has been structured as a tax-free merger and will be
accounted for under the purchase method.
The Board approved the Merger based upon the recommendation of a special
committee comprised of independent PTR Trustees. The recommendation of the
special committee was based in part upon an opinion obtained from a financial
advisor regarding the fairness, from a financial point of view, of the exchange
ratio to PTR and the holders of PTR Common Shares other than Security Capital.
The Merger, which is expected to be completed by August 1998, is subject to the
approval of shareholders of both companies (a two-thirds majority of PTR's
outstanding Common Shares and a majority of ATLANTIC's outstanding common
shares) and satisfaction of certain other conditions. PTR filed a registration
statement and joint proxy statement with the SEC on April 28, 1998, relating to
the following matters: (i) the proposed Merger of ATLANTIC with and into PTR;
(ii) a proposal to adopt an amended and restated declaration of trust of PTR
which, among other things, would change PTR's name to "Archstone Communities
Trust" and increase the authorized shares from 150,000,000 to 250,000,000; and
(iii) a proposal to increase the number of PTR Common Shares available for award
under the Incentive Plan and the PTR 1996 Share Option Plan for Outside Trustees
in an amount equal to the number of shares authorized under the corresponding
ATLANTIC option plans. The registration statement has not been declared
effective.
Security Capital, which at March 31, 1998 owned 33.0% and 49.9% of the
outstanding PTR Common Shares and ATLANTIC common shares, respectively, has
agreed to vote all of its PTR Common Shares and ATLANTIC common shares in favor
of the Merger, subject to certain conditions. If the Merger is consummated,
Security Capital will own approximately 38.7% (based on March 31, 1998
information) of ARCHSTONE's common stock and will be ARCHSTONE's largest
shareholder.
As part of the Merger, PTR distributions would be adjusted following the
close of the transaction to an annualized level of $1.42 per Common Share, an
increase of 4.4% from PTR's current annual distribution level of $1.36 per
Common Share.
Based upon the multifamily portfolios of PTR and ATLANTIC at March 31, 1998
and assuming consummation of the Merger, ARCHSTONE would have 307 multifamily
communities, consisting of 91,201 units in 19 states and Washington, D.C.,
including 26,161 units under construction or In Planning (including 25
communities aggregating 7,875 units that are Under Control but not owned as of
March 31, 1998). Additionally, ARCHSTONE's total market capitalization would be
approximately $5.3 billion.
16
<PAGE>
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. Following is an overview of PTR's multifamily
portfolio and related investment activity as of and for the three months ended
March 31, 1998 (dollar amounts in thousands):
<TABLE>
<CAPTION>
Three Months
Ended
March 31, 1998
------------------
<S> <C>
Operating Communities:
Communities.................................... 138
Units.......................................... 42,859
Total expected investment (1).................. $2,296,990
Communities Under Construction:
Starts During Period:
Communities.................................... 3
Units.......................................... 1,040
Total expected investment (1).................. $ 94,312
Completions During Period:
Communities.................................... 3
Units.......................................... 698
Total expected investment (1).................. $ 41,261
Stabilizations During Period:
Communities.................................... 5
Units.......................................... 1,622
Total expected investment (1).................. $ 92,173
Under Construction at End of Period:
Communities.................................... 18
Units.......................................... 5,887
Total expected investment (1).................. $ 473,656
Investment to date............................. $ 258,322
Development Expenditures During Period.............. $ 58,442
Acquisitions:
Communities.................................... 3
Units.......................................... 568
Total expected investment (1).................. $ 36,215
Dispositions:
Communities.................................... 5
Units.......................................... 1,872
Gross sales proceeds........................... $ 101,109
Gains (2)...................................... $ 15,484
</TABLE>
- ---------
(1) For community developments, represents total budgeted land and development
costs; for operating communities, represents costs plus budgeted
expenditures, including planned rehabilitation costs needed to conform to or
maintain the community at PTR's standards.
(2) Includes the disposition of a non-multifamily operating property with a gain
of $1,057,020.
17
<PAGE>
Current Development Activity
The following table summarizes PTR's development communities under
construction as of March 31, 1998 (dollar amounts in thousands):
<TABLE>
<CAPTION>
Actual or Expected
Total Start Expected Date for Stabilization
Number of PTR Expected Date First Units Date Percentage
Units Investment Investment (1) (Quarter/Year) (Quarter/Year) (2) (Quarter/Year) Leased (3)
--------- ---------- -------------- -------------- ------------------ -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
COMMUNITIES UNDER
CONSTRUCTION:
Central Region:
Denver, Colorado:
Dutch Creek....... 480 $ 2,506 $35,541 Q1/98 Q1/99 Q4/00 n/a
Legacy Heights.... 384 19,843 23,139 Q2/97 Q1/98 Q3/98 55.5%
----- -------- --------
Total Denver.... 864 22,349 58,680
----- -------- --------
Houston, Texas:
Oaks at Medical
Center II........ 318 7,181 20,229 Q4/97 Q4/98 Q3/99 n/a
----- -------- --------
Kansas City, Kansas:
119th & Quiviara.. 220 2,256 15,809 Q1/98 Q1/99 Q1/00 n/a
----- -------- --------
Total Central
Region........... 1,402 31,786 94,718
----- -------- --------
Northwest Region:
Portland, Oregon:
Arbor Heights..... 348 23,115 23,368 Q2/96 Q3/97 Q3/98 75.6%
Hedges Green...... 408 18,034 27,720 Q2/97 Q2/98 Q2/99 n/a
----- -------- --------
Total Portland...... 756 41,149 51,088
----- -------- --------
Salt Lake City,
Utah:
Fairstone at
Riverview........ 492 31,293 32,675 Q2/96 Q2/97 Q2/98 93.5%
----- -------- --------
Seattle, Washington:
Forestview........ 192 12,537 15,577 Q2/97 Q2/98 Q1/99 n/a
Stonemeadow
Farms............ 280 14,814 22,111 Q2/97 Q2/98 Q1/99 n/a
----- -------- --------
Total Seattle....... 472 27,351 37,688
----- -------- --------
Total Northwest
Region........... 1,720 99,793 121,451
----- -------- --------
West Region:
Orange County,
California:
Las Flores
Apartment Homes.. 504 32,447 44,767 Q4/96 Q2/98 Q2/99 n/a
Sorrento.......... 241 18,237 21,997 Q2/97 Q2/98 Q4/98 n/a
----- -------- --------
Total Orange
County............. 745 50,684 66,764
----- -------- --------
Phoenix, Arizona:
Arrowhead I....... 272 15,623 18,805 Q3/96 Q1/98 Q4/98 5.2%
San Marbeya....... 404 8,084 28,246 Q4/97 Q4/98 Q1/00 n/a
San Valiente II... 228 4,010 13,531 Q4/97 Q4/98 Q4/99 n/a
----- -------- --------
Total Phoenix....... 904 27,717 60,582
----- -------- --------
Reno, Nevada:
Meadowview I...... 228 14,885 15,348 Q2/97 Q2/98 Q4/98 n/a
----- -------- --------
San Diego,
California:
Torrey Hills...... 340 11,443 42,963 Q1/98 Q2/99 Q2/00 n/a
----- -------- --------
San Francisco (Bay
Area), California:
Villas at Santa
Rita............. 324 13,825 45,152 Q4/97 Q1/99 Q1/00 n/a
Monterrey Road.... 224 8,189 26,678 Q4/97 Q1/99 Q4/99 n/a
----- -------- --------
Total San
Francisco (Bay
Area).............. 548 22,014 71,830
----- -------- --------
Total West
Region........... 2,765 126,743 257,487
----- -------- --------
Total
Communities
Under
Construction.. 5,887 $258,322 $473,656
===== ======== ========
</TABLE>
18
<PAGE>
(1) Represents total budgeted land and development costs.
(2) Represents the quarter that the first completed units were made available
for leasing (or are expected to be made available). PTR begins leasing
completed units prior to completion of the entire community.
(3) The percentage leased is based on leased units divided by total number of
units in the community (completed and under construction) as of March 31,
1998. An "n/a" indicates the communities where lease-up has not yet
commenced.
See PTR's 1997 Form 10-K for a discussion of various risks associated with
PTR's development and construction activities.
Recent Acquisitions
In addition to its development activity, during the three month period
ended March 31, 1998, PTR completed the acquisition of three operating
multifamily communities (568 units) in Seattle, Washington and Salt Lake City,
Utah at a total expected investment of $36.2 million.
See PTR's 1997 Form 10-K for a discussion of various risks associated with
PTR's acquisition activities.
Results of Operations
Three months ended March 31, 1998 Compared to March 31, 1997
Net earnings for the three months ended March 31, 1998 and 1997 were $44.8
million and $45.6 million, respectively, a decrease of $0.8 million (1.8%).
This decrease resulted primarily from a $9.9 million decrease in net gains on
dispositions of depreciated real estate, partially offset by increased earnings
from multifamily communities, primarily in California, the Pacific Northwest and
Salt Lake City ("West Coast Markets"). A discussion of the major components of
PTR's results of operations follows.
Property Operations
At March 31, 1998 and 1997, multifamily investments comprised over 99% of
PTR's total real estate portfolio, based on total expected investment. The
following table summarizes the net operating income generated from property
operations for each period (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------- Increase /
1998 1997 (decrease)
------- ------- ----------
<S> <C> <C> <C>
Rental revenues............................... $88,553 $79,950 $8,603
------- ------- ------
Property operating expenses:
Rental expenses............................ 23,287 20,357 2,930
Real estate taxes.......................... 8,021 7,268 753
Property management fees................... 113 2,950 (2,837)
------- ------- ------
Total property operating expenses....... 31,421 30,575 846
------- ------- ------
Net operating income.......................... $57,132 $49,375 $7,757
======= ======= ======
Operating margin (net operating
income/rental revenues)...................... 64.5% 61.8% 2.7%
======= ======= ======
</TABLE>
The increases in rental revenues and property operating expenses in each
period are primarily a result of net increases in the number of multifamily
operating units resulting from PTR's substantial acquisition and development
activity and rental rate increases. Management has focused its investment
emphasis primarily on key West Coast Markets which are believed to have higher
growth potential, while reducing investments in certain other markets within
PTR's geography having less attractive growth prospects. A portion of the
increase in revenues and expenses is attributable to the greater emphasis in the
West Coast Markets since these markets are generally characterized by higher per
unit rental rates and, to a lesser extent, higher per unit operating costs. The
positive impact of PTR's investment strategy and customer-focused property
management program is reflected in an improving operating margin which has grown
from 61.8% during the three months ended March 31, 1997 to 64.5% during the
three months ended March 31, 1998. The higher profitability during the three
months ended March 31, 1998 is partially attributable to PTR's acquisition of
SCG Realty Services, Incorporated (the "Property Manager") on September 9, 1997.
After that date, PTR directly incurred personnel and other costs related to
property management-related overhead, in lieu of paying a property
19
<PAGE>
management fee to Security Capital, which resulted in a reduction of property
management fees during the three months ended March 31, 1998, partially offset
by a corresponding increase in rental expenses.
PTR categorizes operating multifamily communities (which include all
completed revenue-generating communities) 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 85.2% and 73.3% of
PTR's operating multifamily portfolio was classified as stabilized as of March
31, 1998 and 1997, respectively, based on total expected investment.
Analysis of Same Store Community Results
The results of PTR's operating communities which were fully operating on
January 1, 1997 ("Same Store Communities") continue to strengthen as a result of
PTR's continued emphasis on customer-focused operations, combined with improving
economic fundamentals in its markets. Following is a summary of Same Store
Community results comparing the first quarter of 1998 to the first quarter of
1997 (dollars in thousands):
<TABLE>
<CAPTION>
Three months ended
March 31, 1998 vs. 1997
-----------------------
<S> <C>
Collections growth................................................. 4.56%
Property operating expense growth.................................. 3.56%
Net operating income growth........................................ 5.18%
Number of units in Same Store Communities.......................... 31,010
Total expected investment of Same Store Communities................ $1,454,993
</TABLE>
Homestead Interest and Homestead Convertible Mortgages
Through March 31, 1998, PTR had funded $190.9 million of its $198.8 million
Homestead funding commitment, of which $4.0 million was funded during the three
months ended March 31, 1998. This leaves a remaining commitment under the
funding agreement of approximately $7.9 million, which management anticipates
will be funded during May 1998.
During the three months ended March 31, 1998 and 1997, PTR recorded $5.5
million and $3.2 million in interest income, respectively ($5.1 million and $2.9
million, respectively for purposes of calculating funds from operations) from
the Homestead convertible mortgages. The increase is a direct result of higher
average outstanding note balances during the three months ended March 31, 1998
as compared to the three months ended March 31, 1997. PTR deducts from net
earnings the interest income related to the amortization of the conversion
discount and warrant-related deferred revenue in calculating funds from
operations.
Upon full funding, PTR will have funded $198.8 million in exchange for
Homestead convertible mortgages having a face amount of $221.3 million. The
Homestead convertible mortgages 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, 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 March 31,
1998 of $15.125, PTR's ownership would result in the following incremental value
per PTR Common Share at March 31, 1998 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
<S> <C>
Homestead common stock price........................................ $15.125
Conversion price.................................................... 11.500
-------
Incremental value per share of Homestead common stock............... $ 3.625
Shares of Homestead common stock upon conversion (at full funding).. 19,246
-------
Total incremental value from conversion............................. $69,767
PTR Common Shares outstanding....................................... 93,001
-------
Assumed incremental value per PTR Common Share...................... $ 0.75
=======
</TABLE>
20
<PAGE>
Depreciation Expense
The increase in depreciation expense resulted primarily from the increase
in the number and cost basis of operating communities, partially offset by
dispositions.
Interest Expense
The following table summarizes PTR's interest expense (in thousands):
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Credit facilities................................. $ 3,893 $ 3,548
Long-Term Debt.................................... 12,248 10,718
Mortgages payable................................. 4,696 4,122
Capitalized interest.............................. (5,214) (4,427)
-------------- --------------
Total interest expense....................... $15,623 $13,961
============== ==============
</TABLE>
The increase in interest expense on PTR's credit facilities resulted
primarily from higher average outstanding balances. Average borrowings on the
line of credit were approximately $198.4 million during the three months ended
March 31, 1998, as compared to average borrowings of approximately $151.6
million for the same period in 1997.
Long-Term Debt interest expense increased due primarily to the issuance of
$50 million of Long-Term Debt in March 1997 and $125 million of Long-Term Debt
in March 1998.
Mortgage interest expense increased as a result of additional weighted-
average debt outstanding due to mortgage assumptions related to community
acquisitions which were partially offset by prepayments during the three months
ended March 31, 1998 and 1997. The increase in interest costs was partially
offset by an increase in capitalized interest which was primarily attributable
to higher levels of multifamily development activity for the three months ended
March 31, 1998 as compared to the same period in 1997.
Administrative Expenses
PTR's overall administrative expenses (REIT management fee paid to
affiliate, general and administrative and administrative services provided by an
affiliate) of $2.8 million during the three months ended March 31, 1998 compares
favorably to the $4.9 million expensed during the three months ended March 31,
1997. PTR did not pay a REIT management fee during the three months ended March
31, 1998 due to the termination of the REIT management agreement upon the
internalization of PTR's management companies which occurred on September 9,
1997. General and administrative expenses increased primarily because PTR now
incurs actual personnel and other operating costs associated with the REIT
management function, a portion of which is capitalized, in lieu of paying a REIT
management fee to Security Capital. The increase in administrative services
provided by an affiliate is attributable to the administrative services
agreement with Security Capital which was entered into on September 9, 1997,
upon closing of the transaction described above.
Gains on Dispositions of Depreciated Real Estate
During the three months ended March 31, 1998, PTR disposed of five
multifamily communities and certain non-multifamily real estate assets,
representing gross proceeds of $101.1 million. As of March 31, 1998, PTR held a
portion of the 1998 disposition proceeds aggregating $15.3 million in an
interest bearing escrow account, pending acquisition of other multifamily
communities to complete a tax-deferred exchange. PTR disposed of 12 multifamily
communities and one industrial building representing gross proceeds of $142.1
million during the three months ended March 31, 1997. For federal income tax
purposes, the dispositions were generally structured as tax-deferred exchanges,
which deferred gain recognition. However, for financial reporting purposes, the
transactions qualified for profit recognition, and aggregate gains of $15.5
million and $25.3 million, were recorded for the three months ended March 31,
1998 and 1997, respectively.
21
<PAGE>
Two parcels of land having an aggregate carrying value of $8.7 million were
held for disposition as of March 31, 1998. Subject to normal closing risks, PTR
expects to complete the disposition of these properties and redeploy the net
proceeds through tax-deferred exchanges, into the acquisition of multifamily
communities.
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 sufficient to
meet all of its cash flow requirements for the foreseeable future.
Operating Activities
Net cash flow provided by operating activities increased by $11.8 million
(52.0%) for the three months ended March 31, 1998 as compared to the same period
in 1997. This increase was due primarily to increased cash generated by
multifamily communities.
Investing and Financing Activities
During the three months ended March 31, 1998 and 1997, PTR invested cash of
$117.6 million and $177.9 million, respectively, in real estate investments
relating primarily to the significant acquisition and development activity
summarized in "-Overview" above. The $117.6 million invested in real estate and
$4.0 million in fundings of Homestead convertible mortgages during the three
months ended March 31, 1998 were financed primarily from $84.2 million of net
proceeds from property dispositions (excluding the $15.3 million held in escrow
pending tax-deferred exchanges) and borrowings under PTR's credit facilities.
These credit facilities were partially repaid from proceeds related to the
issuance of $125 million of Long-Term Debt in March 1998. The $177.9 million
invested in real estate and $16.3 million in fundings of Homestead convertible
mortgages during the three months ended March 31, 1997 were financed primarily
from $80.1 million in net proceeds from property dispositions (excluding $59.0
million held in escrow pending tax-deferred exchanges) and borrowings under
PTR's credit facilities which were partially repaid from $50 million in proceeds
related to Long-Term Debt issued in March 1997.
Other significant financing activity included the payment of $36.2 million
and $29.7 million in Common Share distributions and Preferred Share dividends
for the three months ended March 31, 1998 and 1997, respectively. The increase
is primarily attributable to a 4.6% increase in the distributions paid per
Common Share and an increase in the overall number of Common Shares outstanding.
Preferred Share dividends decreased approximately $0.3 million during the
respective periods as a result of conversion of Series A Preferred Shares to
Common Shares which also resulted in increased Common Share distributions. PTR
prepaid mortgages due to community dispositions of $11.1 million and $9.5
million during the three months ended March 31, 1998 and 1997, respectively.
Significant non-cash investing and financing activities included the
assumption of $8.2 million and $23.5 million of mortgage debt during the three
months ended March 31, 1998 and 1997, respectively, and the conversion of Series
A Preferred Shares to Common Shares aggregating $6.9 million and $10.4 million
during the three months ended March 31, 1998 and 1997, respectively. During the
three months ended March 31, 1998, the unrealized gain associated with the
Homestead convertible mortgages increased $2.4 million to $86.2 million as of
March 31, 1998.
Borrowings and Recent Offerings
PTR has a $350 million unsecured revolving line of credit which had
approximately $135.0 million of borrowings outstanding as of May 8, 1998. The
line of credit matures August 1999 and may be extended annually for an
additional year with the approval of the Lenders. The aggregate amount of
borrowings outstanding under all of PTR's credit facilities as of May 8, 1998
was $142.4 million.
On March 6, 1998, PTR issued $125 million of 7.20% Long-Term Debt, the
proceeds from which were used to pay down balances on PTR's credit facilities.
The 7.20% Notes pay interest semi-annually on March 1 and September 1 of each
year through March 1, 2013, and have an average effective interest rate of 7.86%
and an average life of 13.0 years. Annual principal payments of $25 million
commence on March 1, 2009.
On April 23, 1998, PTR sold 2,049,587 Common Shares at $22.6875 per share
in an underwritten public offering. The net proceeds of $44.0 million (net of
underwriting discount and offering costs) were used to repay borrowings
22
<PAGE>
under PTR's credit facilities.
See "Item 1. Financial Statements, Note 5, Borrowings" for additional
information regarding credit availability, outstanding debt balances, interest
rates, scheduled debt maturities and other terms.
Distributions
PTR paid the first quarter 1998 distribution of $0.34 per Common Share on
February 25, 1998. On April 29, 1998, the Board declared a cash distribution of
$0.34 per Common Share, payable on May 28, 1998, to shareholders of record on
May 14, 1998. On March 31, 1998, PTR paid quarterly dividends of $0.4579 per
Series A Preferred Share and $0.5625 per Series B Preferred Share.
Commitments and Contingencies
At March 31, 1998, PTR had unfunded multifamily construction and
rehabilitation commitments aggregating approximately $230.7 million.
PTR is a party to various claims and routine litigation arising in the
ordinary course of business. PTR does not believe that the results of any such
claims and litigation, individually or in the aggregate, will have a material
adverse effect on its business, financial position or results of operations.
See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in PTR's Form 10-K for a summary of
anticipated cash requirements.
Funding Sources
PTR expects to finance its investment and operating needs including those
outlined above, with cash flow from operating activities, borrowings under its
credit facilities and disposition proceeds from its asset optimization strategy,
prior to arranging long-term financing. PTR uses its credit facilities to
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 $399.4 million in shelf-
registered securities which can be issued in the form of Long-Term Debt, Common
Shares or preferred shares 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 37.1% at March 31, 1998, provides considerable
financial flexibility to fund its investment activities.
Funds From Operations
Funds from operations is defined as net earnings computed in accordance
with GAAP, excluding real estate depreciation, gains (or losses) from
depreciated real estate, provisions for possible losses, non-cash interest
income, extraordinary items and significant non-recurring items. 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. 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, investing and financing
activities, it provides the 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 National Association of Real Estate Investment Trusts' 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 is
not intended to represent cash made available to shareholders. Cash
distributions paid to shareholders are described above under "--Distributions."
23
<PAGE>
Following is a reconciliation of net earnings to funds from operations
(amounts in thousands):
<TABLE>
<CAPTION>
Three Months
Ended March 31,
--------------------------
1998 1997
------- -------
<S> <C> <C>
Net earnings attributable to Common Shares.......................................... $40,071 $40,576
Add (Deduct):
Depreciation on real estate investments......................................... 16,258 12,049
Gains on dispositions of depreciated real estate, net........................... (15,484) (25,335)
Other, net...................................................................... (432) 1,255
------- -------
Funds from operations attributable to Common Shares--Basic.......................... 40,413 28,545
------- -------
Dividends on Series A Preferred Shares.......................................... 2,370 2,673
------- -------
Funds from operations attributable to Common Shares--Diluted........................ 42,783 31,218
======= =======
Weighted-average Common Shares outstanding--Basic................................... 92,783 75,872
======= =======
Weighted-average Common Shares outstanding--Diluted (1)............................. 99,970 84,326
======= =======
</TABLE>
(1) See "Item 1. Financial Statements, Note 1, General" for a reconciliation of
basic to diluted weighted-average Common Shares outstanding.
24
<PAGE>
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
12.1 --Computation of Ratio of Earnings to Fixed Charges.
12.2 --Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Share Dividends.
15 --Letter from KPMG Peat Marwick LLP dated May 14, 1998 regarding
unaudited financial information.
27 --Financial Data Schedule
(b) Reports on Form 8-K:
<TABLE>
<CAPTION>
Date Item Reported Financial Statements
-------------- -------------- --------------------
<S> <C> <C>
March 4, 1998 Item 5, Item 7 No
April 3, 1998 Item 5 No
April 23, 1998 Item 5, Item 7 Yes
April 28, 1998 Item 5, Item 7 No
</TABLE>
25
<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
BY: /s/ Bryan J. Flanagan
--------------------------
Bryan J. Flanagan,
Senior Vice President
(Principal Financial Officer)
BY: /s/ Ash K. Atwood
--------------------------
Ash K. Atwood,
Vice President & Co-Controller
(Principal Accounting Officer)
Date: May 14, 1998
26
<PAGE>
EXHIBIT 12.1
SECURITY CAPITAL PACIFIC TRUST
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, Twelve Months Ended December 31,
------------------- -------------------------------------------------------
1998 1997 1997 (1) 1996 1995 1994 1993
------- ------- ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings from operations...................... $29,299 $20,276 $24,686 $ 94,089 $ 81,696 $46,719 $23,191
Add:
Interest expense............................. 15,623 13,961 61,153 35,288 19,584 19,442 3,923
------- ------- ------- -------- -------- ------- -------
Earnings as adjusted.......................... $44,922 $34,237 $85,839 $129,377 $101,280 $66,161 $27,114
======= ======= ======= ======== ======== ======= =======
Fixed charges:
Interest expense............................. $15,623 $13,961 $61,153 $ 35,288 $ 19,584 $19,442 $ 3,923
Capitalized interest......................... 5,214 4,427 17,606 16,941 11,741 6,029 2,818
------- ------- ------- -------- -------- ------- -------
Total fixed charges......................... $20,837 $18,388 $78,759 $ 52,229 $ 31,325 $25,471 $ 6,741
======= ======= ======= ======== ======== ======= =======
Ratio of earnings to fixed charges............ 2.2 1.9 1.1 2.5 3.2 2.6 4.0
======= ======= ======= ======== ======== ======= =======
</TABLE>
- --------------
(1) Earnings from operations for 1997 includes a one-time, non-cash charge of
$71.7 million associated with costs incurred in acquiring the management
companies from an affiliate. Excluding this charge, the ratio of earnings to
fixed charges for the year ended December 31, 1997 would be 2.0.
27
<PAGE>
EXHIBIT 12.2
SECURITY CAPITAL PACIFIC TRUST
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED SHARE DIVIDENDS
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, Twelve Months Ended December 31,
------------------- -----------------------------------------------
1998 1997 1997 (1) 1996 1995 1994 1993
------- ------- ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings from operations.................................$29,299 $20,276 $24,686 $ 94,089 $ 81,696 $46,719 $23,191
Add:
Interest expense....................................... 15,623 13,961 61,153 35,288 19,584 19,442 3,923
------- ------- ------- -------- -------- ------- -------
Earnings as adjusted.....................................$44,922 $34,237 $85,839 $129,377 $101,280 $66,161 $27,114
======= ======= ======= ======== ======== ======= =======
Combined fixed charges and Preferred Share dividends:
Interest expense.......................................$15,623 $13,961 $61,153 $ 35,288 $ 19,584 $19,442 $ 3,923
Capitalized interest................................... 5,214 4,427 17,606 16,941 11,741 6,029 2,818
------- ------- ------- -------- -------- ------- -------
Total fixed charges..................................$20,837 $18,388 $78,759 $ 52,229 $ 31,325 $25,471 $ 6,741
======= ======= ======= ======== ======== ======= =======
Preferred Share dividends.............................. 4,712 5,035 19,384 24,167 21,823 16,100 1,341
------- ------- ------- -------- -------- ------- -------
Combined fixed charges and Preferred Share dividends.....$25,549 $23,423 $98,143 $ 76,396 $ 53,148 $41,571 $ 8,082
======= ======= ======= ======== ======== ======= =======
Ratio of earnings to combined fixed charges and
Preferred Share dividends.............................. 1.8 1.5 0.9 1.7 1.9 1.6 3.4
======= ======= ======= ======== ======== ======= =======
</TABLE>
- --------------
(1) Earnings from operations for 1997 includes a one-time, non-cash charge of
$71.7 million associated with costs incurred in acquiring the management
companies from an affiliate. Accordingly, earnings from operations were
insufficient to cover combined fixed charges and Preferred Share dividends
by $12.3 million. Excluding this charge, the ratio of earnings to combined
fixed charges and Preferred Share dividends for the year ended December 31,
1997 would be 1.6.
28
<PAGE>
Exhibit 15.1
Board of Trustees and Shareholders
Security Capital Pacific Trust
Gentlemen:
Re: Registration Statements Nos. 333-31031, 333-31033, 333-31405, 333-42283,
333-43723, 333-24035, 333-44639 and 333-51139.
With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our report dated April 23, 1998 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 by an accountant within the meaning of sections
7 and 11 of the Act.
KPMG Peat Marwick LLP
Chicago, Illinois
May 14, 1998
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,310
<SECURITIES> 0
<RECEIVABLES> 12,450
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,643,707
<DEPRECIATION> 139,918
<TOTAL-ASSETS> 2,864,150
<CURRENT-LIABILITIES> 0
<BONDS> 918,241
0
233,263
<COMMON> 93,001
<OTHER-SE> 1,256,714
<TOTAL-LIABILITY-AND-EQUITY> 2,864,150
<SALES> 88,553
<TOTAL-REVENUES> 95,611
<CGS> 0
<TOTAL-COSTS> 47,679
<OTHER-EXPENSES> 3,010
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,623
<INCOME-PRETAX> 40,071
<INCOME-TAX> 0
<INCOME-CONTINUING> 40,071
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,071
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.42
</TABLE>
