<PAGE> 1
This filing is made pursuant
PROSPECTUS SUPPLEMENT to Rule 424(b)(2) & (4) under
the Securities Act of
1933 in connection with
(TO PROSPECTUS DATED MAY 23, 1996) Registration No. 333-02798
2,800,000 SHARES
PACIFIC GULF PROPERTIES INC.
COMMON STOCK
------------------
Pacific Gulf Properties Inc. (the "Company"), a self-administered and
self-managed equity real estate investment trust, owns, operates, manages,
leases, acquires and rehabilitates multifamily and industrial properties. The
Company focuses on properties located in California and the Pacific Northwest,
with the largest concentration in Southern California. The Company owns and
operates 21 multifamily properties, containing 3,945 apartment units, and 11
industrial properties, containing an aggregate of 3,091,000 leasable square
feet.
Of the shares of common stock of the Company (the "Common Stock") offered
hereby, 2,015,581 shares are being sold by the Company, and 784,419 shares are
being sold by a stockholder (the "Selling Stockholder"). The net proceeds from
the sale of the Company's shares of Common Stock will be used to fund a portion
of the acquisition price of nine industrial properties.
To ensure that the Company maintains its qualification as a real estate
investment trust, ownership by any person, with certain exceptions, is limited
to 9.8% of the total number of shares of the Company's outstanding Common Stock
(including convertible securities of the Company). See "Description of Common
Stock" in the accompanying Prospectus.
The Common Stock is listed on the American Stock Exchange (the "ASE") under
the symbol "PAG." On May 23, 1996, the last reported sale price of the Common
Stock on the ASE was $16.375. See "Price Range of Common Stock and
Distributions."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THE ACCOMPANYING PROSPECTUS FOR
CERTAIN RISK FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2) SELLING STOCKHOLDER(2)
- -------------------------------------------------------------------------------------------------------
Per Share....................... $16.375 $.90 $15.475 $15.475
- -------------------------------------------------------------------------------------------------------
Total(3)........................ $45,850,000 $2,520,000 $31,191,116 $12,138,884
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) Before deducting $908,000 in estimated expenses payable by the Company. The
Selling Stockholder is obligated to pay its own legal and other expenses,
including underwriting discounts and commissions relating to the sale of its
shares of Common Stock.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
420,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions, and Proceeds to Company will be $52,727,500,
$2,898,000 and $37,690,616, respectively. See "Underwriting."
------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about May 30,
1996.
ALEX. BROWN & SONS
INCORPORATED
OPPENHEIMER & CO., INC.
PRUDENTIAL SECURITIES INCORPORATED
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS MAY 23, 1996
LOGO
<PAGE> 2
PACIFIC GULF BUSINESS PARK
Tukwila, Washington
ESCONDIDO BUSINESS CENTER
Escondio, California
(Proposed Acquisition)
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in,
or incorporated by reference into, this Prospectus Supplement and the
accompanying Prospectus. Unless indicated otherwise, the information contained
in this Prospectus Supplement assumes no exercise of the Underwriters' over-
allotment option. Unless the context otherwise requires, as used herein the term
"Company" includes Pacific Gulf Properties Inc. and its consolidated operating
partnership, PGP Inland Communities, L.P.
THE COMPANY
The Company, a self-administered and self-managed equity real estate
investment trust ("REIT"), owns, operates, manages, leases, acquires and
rehabilitates multifamily and industrial properties. The Company's properties
are located in California and the Pacific Northwest, with the largest
concentration in Southern California. The Company focuses on this geographic
region due to management's extensive experience in these markets and
management's belief that these markets present potential for long-term economic
growth. The Company currently owns a portfolio of 21 multifamily properties,
containing 3,945 apartment units (the "Multifamily Properties"), and 11
industrial properties, containing an aggregate of 3,091,000 leasable square feet
(the "Industrial Properties," and collectively with the Multifamily Properties,
the "Properties").
Management believes that focusing on two property types allows the Company
greater opportunities and flexibility than would be available by investing in
only one property type. Apartments have shorter term leases than industrial
properties and, hence, apartment rental income reacts more quickly to changes in
economic conditions. Lease income on industrial properties reacts more slowly to
changes in the economy due to longer term leases on such properties. The values
of these two property types and the opportunities they present for growth are
affected by the timing of these rental adjustments. This distinction, along with
other market factors that impact the demand for multifamily and industrial
properties differently, provides the Company with greater options in
implementing its investment, disposition and property management strategies.
The Company's objective is to increase shareholder value by improving net
operating income of existing properties and through acquisitions. Management
closely monitors rental operations and administrative expenses, utilizes new
technologies, periodically conducts contract reviews, and seeks opportunities to
maximize economies of scale in order to control costs, reduce tenant turnover
and assure that the Company is competitive in all aspects of its operations. The
Company also seeks to increase shareholder value through the acquisition of
properties that provide attractive initial returns and opportunities to increase
net operating income. Additionally, the Company seeks well-located properties in
strong markets where values have suffered due to poor management or maintenance
and that can be acquired at less than replacement cost. See "Risk Factors" in
the accompanying Prospectus.
Mr. Glenn L. Carpenter, the Company's Chairman and Chief Executive Officer,
and his five member senior management team have an average of 17 years real
estate experience within the Company's markets. The Company employs
approximately 135 persons, of whom 110 are on-site or property related.
THE ACQUISITION PROPERTIES
Management believes that while attractive investment opportunities exist
for both multifamily and industrial properties, the most attractive
opportunities currently exist within the industrial sector. Management believes
that the Southern California industrial property market is poised for recovery
based upon an increasing level of leasing interest and a limited supply of new
product. As evidence of this, the Company has observed recent increases in the
prices for industrial properties and tenant requests for longer term leases.
S-3
<PAGE> 4
The Company has entered into agreements to purchase nine industrial
properties (collectively, the "Acquisition Properties") located in California
containing an aggregate of 1,352,000 leasable square feet. The aggregate
consideration for the Acquisition Properties will be $54.1 million, which will
be funded primarily with the Company's proceeds from this Offering. Such
proceeds, after deducting underwriting discounts and commissions and estimated
expenses of this Offering, will be approximately $30.3 million ($36.8 million if
the Underwriters' over-allotment option is exercised in full), based on the
offering price of $16.375. The balance will be funded with the Company's
short-term acquisition line of credit. Management believes that long-term
financing, which has not as yet been secured, will be secured prior to
expiration of the acquisition line of credit. The purchases are expected to
close shortly after completion of the Offering. Management believes it is
acquiring these Acquisition Properties at less than their estimated replacement
cost based upon management's analysis of the size, location and other amenities
of the Acquisition Properties, data pertaining to sales of vacant land similar
to the land on which the Acquisition Properties are located, published industry
development costs and management's experience with industrial properties. These
acquisitions will also further the Company's objective of increasing its
presence in certain of its markets and expanding into new markets, both of which
offer attractive opportunities.
RECENT DEVELOPMENTS
Portfolio Acquisition. In 1995, the Company formed a limited partnership
using a DOWNREIT structure that acquired 11 multifamily communities with 1,368
apartment units in Southern California at an agreed value of approximately $71.5
million. The Company obtained a minimum 78% equity interest in, and full
management and control of, the operating partnership and the right to 100% of
cash flow until certain thresholds are achieved. To finance this portfolio
acquisition, the partnership used $12.8 million that was contributed to it by
the Company from its line of credit, issued approximately 225,000 limited
partnership units to the prior owners, and assumed $55.1 million of existing
indebtedness encumbering the properties. The Company has implemented its systems
and procedures for management, cost efficiencies and re-tenanting at these
properties, and has begun rehabilitation and new marketing programs. These
efforts have already resulted in increases in the net operating income produced
by these properties, and further increases are expected as the Company's
programs are fully implemented.
Disposition of Texas Portfolio. In 1995, the Company sold its Texas
portfolio of 1,085 apartment units for approximately $31.1 million, at a
substantial economic gain and at a time when, in the Company's view, market
values of these properties had appreciated substantially. The Company used the
net proceeds from the sale to acquire one multifamily property at a purchase
price of $12.5 million and one industrial property at a purchase price of $17.3
million; both properties are located in the Greater Seattle area. The Company
believes these new properties were acquired at prices below their replacement
cost and have rents generally at or below current market rates, providing a
greater potential for future growth. Also, by having narrowed its geographic
focus, the Company is better able to concentrate the efforts of its management
personnel.
Entry into "Active Senior" Housing Market. In 1994, the Company acquired a
138-unit apartment community in Laguna Hills, California, at a purchase price of
$7.8 million, of which $4.8 million was funded by the Company's line of credit
and $3.0 million by the assumption of existing indebtedness encumbering the
properties. The Company expanded this property in 1995 to include substantial
recreational facilities and other amenities and facilities aimed at the special
needs of seniors. In 1995, the Company acquired three senior apartment
communities, consisting of 308 apartment units in Southern California as part of
the portfolio acquisition described above. The agreed value for these properties
was $12.9 million, all of which was funded by the assumption of existing
indebtedness encumbering the properties.
Increases in Distributions. In December 1995, the Company declared an
increase in its quarterly distribution, from $0.39 per share to $0.40 per share
of Common Stock. The percentage
S-4
<PAGE> 5
increase in the Company's quarterly distribution was less than the percentage
increase in the Company's Fund from Operations, consistent with the Company's
goal of decreasing its payout ratio in order to retain and reinvest additional
funds while increasing its distributions.
First Quarter 1996 Results. Revenues for the first quarter of 1996 were
$10.8 million compared with $8.4 million for the first quarter of 1995. Funds
from Operations (as defined under "Summary Financial Information") for the first
quarter of 1996 were $2.1 million compared with $1.9 million for the first
quarter of 1995. Net operating income for the Company's 2,209 multifamily units
that were owned by the Company in the first quarters of both 1995 and 1996
increased to $2.4 million for the first quarter of 1996, compared with $2.2
million for the first quarter of 1995, a 9% increase. Occupancy for these
properties increased from 91% in the first quarter of 1995 to 94% in the first
quarter of 1996. Multifamily rental income for the period ended March 31, 1996
totaled $7.1 million and included $3.1 million generated by leased properties
acquired during 1995 and $4.0 million from existing Multifamily Properties. For
industrial space, effective rents on space renewed in the first quarter of 1996
remained consistent with existing rental rates on expiring leases. Industrial
rental income for the period ended March 31, 1996 totaled $3.8 million and
included $0.8 million generated by two industrial parks acquired in late 1995
and in 1996 and $3.0 million from existing Industrial Properties. Overall
occupancy for the multifamily and industrial portfolios was 93% and 95%,
respectively, as of March 31, 1996.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by Company............................. 2,015,581 shares
Common Stock offered by Selling Stockholder................. 784,419 shares
Common Stock to be outstanding after the Offering........... 6,875,860 shares (1)
Use of Proceeds from Company Offering....................... To fund the purchase of
the Acquisition Properties
ASE Symbol.................................................. PAG
</TABLE>
- ---------------
(1) Assumes the Underwriters' over-allotment option is not exercised. Excludes
636,404 shares of Common Stock reserved for issuance under the Company's
1993 Share Option Plan and 249,074 shares of Common Stock reserved for
issuance under the Company's Dividend Reinvestment Plan. Also excludes an
aggregate of 225,452 shares of Common Stock which the Company will have the
right, but not the obligation, to issue if the holders of the limited
partnership interests ("OP Units") in the Company's subsidiary operating
partnership, PGP Inland Communities, L.P., exercise their right commencing
approximately September 1997 to require the operating partnership to
purchase their OP Units.
S-5
<PAGE> 6
SUMMARY FINANCIAL INFORMATION
The following table sets forth summary historical and pro forma financial
information for the Company and the multifamily and industrial operations
acquired from Santa Anita Realty Enterprises, Inc. (the "Predecessor"). The
following summary financial information should be read in conjunction with
"Selected Financial and Operating Data," "Management's Discussion and Analysis
of Financial Condition and Results of Operations," the pro forma condensed
consolidated financial information and notes thereto contained in this
Prospectus Supplement, and the consolidated and combined financial statements
and related notes incorporated by reference in the accompanying Prospectus.
For the year ended December 31, 1995, the pro forma operating information
is presented as if the following transactions occurred as of the beginning of
the period: (i) the purchase and disposition of certain multifamily and
industrial properties completed by the Company during 1995 and 1996, as more
fully described in the pro forma condensed consolidated financial statements,
(ii) the purchase of the Acquisition Properties and (iii) the completion of this
Offering, the establishment of the acquisition line of credit (see "Business and
Properties -- Acquisition Line of Credit") and the application of the net
proceeds thereof as described in this Prospectus Supplement. For the three
months ended March 31, 1996, the pro forma operating information is presented as
if the following transactions occurred as of the beginning of the period: (i)
the purchase of an industrial property in 1996, as more fully described in the
pro forma condensed consolidated financial statements, (ii) the purchase of the
Acquisition Properties and (iii) the completion of this Offering, the
establishment of the acquisition line of credit and the application of the net
proceeds thereof as described in this Prospectus Supplement. Pro forma balance
sheet information is presented as if the Acquisition Properties were acquired
and this Offering were consummated on March 31, 1996. The estimated net proceeds
of this Offering have been calculated based on the offering price of $16.375 per
share and after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company. The pro forma operating information
incorporates certain assumptions that are included in the notes to the pro forma
condensed consolidated financial statements included elsewhere in this
Prospectus Supplement. The pro forma financial information is not necessarily
indicative of what the actual financial position and results of operations of
the Company would have been as of the dates or for the periods indicated, nor
does it purport to represent the financial position and results of operations
for any future period.
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<PAGE> 7
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
PREDECESSOR COMPANY
---------------------------------- ----------------------------------------
HISTORICAL
---------------------------------------------------------------- PRO FORMA
1991 1992 1993 1994 (1) 1995 1995 (2)
-------- -------- -------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Rental income...................... $ 8,392 $ 11,653 $ 16,152 $ 26,144 $ 37,091 $ 51,144
Rental property expenses........... 3,124 4,845 7,506 10,376 12,782 18,059
--------- --------- --------- ----------- ----------- -----------
Net rental property earnings....... 5,268 6,808 8,646 15,768 24,309 33,085
Income (loss) before gain on sale
of properties and extraordinary
item.............................. (1,207) (1,620) (12,036) 2,158 1,739 3,188
Net income (loss).................. (1,207) (1,620) (12,036) (832) 8,403 3,188
Net income (loss) per common
share............................. -- -- -- (.07)(3) 1.74 0.47
Weighted average common shares..... -- -- -- 4,273,337(3) 4,830,723 6,846,304
BALANCE SHEET DATA
Real estate, net of accumulated
depreciation...................... $ 70,281 $ 95,914 $ 97,698 $ 193,457 $ 278,692 --
Total assets....................... 73,944 100,186 99,984 202,519 288,591 --
Senior debt........................ 52,824 78,613 88,740 69,480 149,847 --
Convertible subordinated
debentures........................ 55,526 55,659 --
Total equity....................... 22,112 23,200 9,501 70,860 71,980 --
PROPERTY DATA (end of period)
Total apartment properties......... 5 9 10 13 21 21
Total apartment units.............. 1,290 2,398 2,654 3,292 3,945 3,945
Apartment units occupied........... 95% 93% 92% 93% 92% 92%
Total industrial properties........ 3 3 3 9 10 20
Industrial leasable area (sq.
ft.).............................. 185,000 185,000 185,000 2,426,000 2,902,000 4,443,000
Industrial leasable area leased.... 89% 97% 95% 97% 96% 92%
SUPPLEMENTAL DATA
Funds From Operations -- New
Definition (4).................... $ 480 $ 662 $ 1,572 $ 5,879 $ 7,820 $ 10,993
Cash flow information:
Operating......................... (367) (348) 1,307 3,950 7,138 --
Investing......................... (18,084) (27,660) (15,323) (99,504) (84,480) --
Financing......................... 18,398 28,318 13,798 98,649 76,674 --
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------
COMPANY
----------------------------------------
HISTORICAL
------------------------- PRO FORMA
1995 1996 1996 (2)
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING DATA
Rental income...................... $ 8,428 $ 10,835 $ 12,852
Rental property expenses........... 2,955 3,734 4,279
----------- ----------- -----------
Net rental property earnings....... 5,473 7,101 8,573
Income (loss) before gain on sale
of properties and extraordinary
item.............................. 544 293 964
Net income (loss).................. 544 293 964
Net income (loss) per common
share............................. .11 .06 0.14
Weighted average common shares..... 4,796,729 4,864,044 6,879,625
BALANCE SHEET DATA
Real estate, net of accumulated
depreciation...................... $ 199,942 $ 284,970 $ 337,305
Total assets....................... 208,777 294,390 348,490
Senior debt........................ 77,609 157,606 181,423
Convertible subordinated
debentures........................ 55,558 55,649 55,649
Total equity....................... 69,542 70,409 100,692
PROPERTY DATA (end of period)
Total apartment properties......... 13 21 21
Total apartment units.............. 3,292 3,945 3,945
Apartment units occupied........... 92% 93% 93%
Total industrial properties........ 9 11 20
Industrial leasable area (sq.
ft.).............................. 2,426,000 3,091,000 4,443,000
Industrial leasable area leased.... 97% 95% 94%
SUPPLEMENTAL DATA
Funds From Operations -- New
Definition (4).................... $ 1,944 $ 2,128 $ 3,026
Cash flow information:
Operating......................... 615 1,849 --
Investing......................... (7,840) (8,049) --
Financing......................... 6,259 5,819 --
</TABLE>
- ---------------
(1) Includes the combined historical operations of the Company (from February 18
through December 31, 1994) and the Predecessor's multifamily and industrial
operations (prior to February 18, 1994).
(2) See notes to pro forma condensed consolidated financial statements included
elsewhere in this Prospectus Supplement.
(3) Per share data for 1994 was based on the weighted average common shares
outstanding for the period February 18, 1994 (the closing date of the
Company's initial public offering) through December 31, 1994 and the
Company's net loss for that period.
(4) Funds From Operations ("FFO") is defined by the National Association of Real
Estate Investment Trusts ("NAREIT") to mean net income, computed in
accordance with generally accepted accounting principles ("GAAP"), excluding
gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. Management generally considers Funds From
Operations to be a useful measure of the operating performance of an equity
REIT because, together with net income and cash flows, FFO provides
investors with an additional basis to evaluate the ability of a REIT to
incur and service debt and to fund acquisitions and other capital
expenditures. FFO does not represent cash flow from operations as defined by
generally accepted accounting principles, should not be considered as an
alternative to net income as an indicator of the Company's operating
performance and is not indicative of cash available to fund all cash flow
needs. FFO does not measure whether cash flow is sufficient to fund all of
the Company's cash needs including principal amortization, capital
improvements and distributions to stockholders. FFO also does not represent
cash flows generated from operating, investing or financing activities as
defined by GAAP. Further, FFO as disclosed by other REITs may not be
comparable to the Company's calculation of FFO. On March 3, 1995, NAREIT
modified the calculation of FFO to, among other things, eliminate
amortization of deferred financing costs and depreciation of non-real estate
assets as items added back to net income when computing FFO. See "Selected
Financial and Operating Data".
S-7
<PAGE> 8
THE COMPANY
Pacific Gulf Properties Inc., a self-administered and self-managed equity
REIT, owns, operates, manages, leases, acquires and rehabilitates multifamily
and industrial properties. The Company currently owns a portfolio of 21
Multifamily Properties, containing 3,945 units, and 11 Industrial Properties,
containing 3,091,000 leasable square feet. As of March 31, 1996, the Multifamily
Properties and the Industrial Properties were 93% and 95% occupied,
respectively.
The Company focuses on properties located in California and the Pacific
Northwest, with the largest concentration in Southern California. Management has
extensive experience in these markets and believes that these markets present
potential for long-term economic growth because of their proximity to Pacific
Rim and NAFTA trading partners, access to ports and other facilities,
anticipated growth in population and employment, and desirable climates and
recreational environments.
The Company concentrates on middle-market apartment communities, with
emphasis on family-style apartments and active senior living for those ages 55
and older. The Company has emphasized these middle-market communities because
they are favored by current demographic and economic trends and, thus management
believes that these types of communities will provide attractive long-term
returns. In addition, management believes that active senior housing typically
has lower operating and management costs due to lower tenant turnover.
The Company also focuses on multi-tenant business parks and mid-size
warehouse/distribution facilities. By emphasizing these types of industrial
properties, the Company attempts to limit its risk from any single tenant or
property. Whenever possible, the Company seeks a significant market share in its
principal submarkets so that it can accommodate its tenants as their needs
change and have an influence on trends in market rents.
Management believes that focusing on two property types allows the Company
greater opportunities and flexibility than would be available by investing only
in one property type. Apartments have shorter leases than industrial properties
and, hence, apartment rental income reacts more quickly to changes in economic
conditions. Lease income on industrial properties reacts more slowly to changes
in the economy due to longer term leases on such properties. The values of these
two property types and the opportunities they present for growth are affected by
the timing of these rental adjustments. This distinction, along with other
market factors that impact the demand for multifamily and industrial properties
differently, provides the Company with greater options in implementing its
investment, disposition and property management strategies.
The Company also may pursue development of active senior housing or
multi-tenant industrial properties on a limited basis where management believes
such development would provide the Company with satisfactory returns on a
risk-adjusted basis, after taking into account returns available through
acquisition opportunities.
The Company's objective is to increase shareholder value by continuing to
grow its Funds from Operations by improving net operating income of existing
properties and through acquisitions. Management closely monitors rental
operations and administrative expenses, utilizes new technologies, periodically
conducts contract reviews, and seeks opportunities to maximize economies of
scale in order to control costs, reduce tenant turnover and assure that the
Company is competitive in all aspects of its operations. The Company also seeks
to increase shareholder value through the acquisition of properties that provide
attractive initial returns and opportunities to increase Funds from Operations.
Additionally, the Company seeks well-located properties in strong markets where
values have suffered due to poor management or maintenance and that can be
acquired at less than replacement cost.
The Company's executive offices are located at 363 San Miguel Drive,
Newport Beach, California 92660. The telephone number is (714) 721-2700. The
Company was incorporated in Maryland in August 1993.
S-8
<PAGE> 9
USE OF PROCEEDS
The net proceeds from the sale of the Company's shares of the Common Stock
offered hereby, after deducting underwriting discounts and commissions and
estimated expenses of this Offering, are approximately $30.3 million ($36.8
million if the Underwriters' over-allotment option is exercised in full), based
on the offering price of $16.375. The Company intends to use the net proceeds to
fund a portion of the purchase of the Acquisition Properties, all of which will
be acquired from unaffiliated third parties. The balance of the purchase price
of the Acquisition Properties will be financed with the Company's acquisition
line of credit. See "Business and Properties -- Acquisition Line of Credit." To
the extent the net proceeds are not used to fund the acquisition of the
Acquisition Properties, they will be used for working capital purposes,
including potential funding of additional acquisitions not yet identified, and
to repay Company debt (although repayment of such debt is not expected to be
material).
If the Underwriters' over-allotment option is exercised in whole or in
part, any balance of the net proceeds will be used to repay Company debt and for
working capital purposes.
The Company will not receive any portion of the proceeds from the sale of
Common Stock of the Selling Stockholder.
SELLING STOCKHOLDER
In connection with the Company's initial public offering and related
transactions, the Company issued to Santa Anita Realty Enterprises, Inc.
("Realty" or the "Selling Stockholder") an aggregate of 784,419 shares of Common
Stock. In keeping with the Selling Stockholder's previously announced strategy
of disposing of all non-core real-estate assets, the Selling Stockholder has
elected to dispose of its entire investment in the Company's Common Stock. The
Company will not receive any portion of the proceeds from the sale of the
Selling Stockholder's shares of Common Stock. The Company and the Selling
Stockholder have agreed to indemnify each other for certain liabilities in
connection with the Offering.
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<PAGE> 10
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
The Common Stock of the Company began trading on the American Stock
Exchange ("ASE") under the symbol "PAG" following its initial public offering on
February 10, 1994. The following sets forth the high and low closing prices for
the Common Stock on the ASE and the distributions declared for the periods
indicated:
<TABLE>
<CAPTION>
DISTRIBUTIONS
HIGH LOW DECLARED
---- ---- -------------
<S> <C> <C> <C>
1994
1st Quarter.................................................. $18 1/2 $17 1/4 $ .18
2nd Quarter.................................................. 17 7/8 16 1/8 .39
3rd Quarter.................................................. 17 1/2 15 1/2 .39
4th Quarter.................................................. 16 7/8 12 3/4 .39
1995
1st Quarter.................................................. 16 1/4 14 5/8 .39
2nd Quarter.................................................. 16 1/4 14 1/2 .39
3rd Quarter.................................................. 16 5/8 14 5/8 .39
4th Quarter.................................................. 16 3/4 13 .40
1996
1st Quarter.................................................. 18 3/4 16 1/8 .40
2nd Quarter (through
May 23, 1996)................................................ 18 1/4 16 3/8 --
</TABLE>
The closing price of the Common Stock on the ASE on May 23, 1996 was
$16 3/8 per share.
Since the initial public offering, the Company has declared regular
quarterly distributions to its stockholders. Federal income tax law requires
that a REIT distribute annually at least 95% of its REIT taxable income -- for
the Company, approximately $2.5 million and $2.3 million in 1994 and 1995 ($.58
and $.48, respectively, per share of Common Stock). See "Federal Income Tax
Considerations -- Annual Distribution Requirements." Future distributions by the
Company will be at the discretion of the Board of Directors and will depend upon
the actual Funds from Operations of the Company, its financial condition,
capital requirements, the annual distribution requirements under the REIT
provisions of the Internal Revenue Code, applicable legal restrictions and such
other factors as the Board of Directors deems relevant. Although the Company
intends to continue to make quarterly distributions to its stockholders, no
assurances can be given as to the amount of distributions, if any, distributed
in the future.
The Company anticipates that cash available for distribution will be
greater than earnings and profits due to non-cash expenses, primarily
depreciation and amortization, incurred by the Company. Distributions by the
Company to the extent of its current accumulated earnings and profits for
federal income tax purposes will be taxable to shareholders as ordinary dividend
income. Distributions in excess of earnings and profits generally will be
treated as non-taxable return of capital. Such distributions have the effect of
deferring taxation until the sale of a shareholder's Common Stock. In order to
maintain its qualification as a REIT, the Company could be required to make
distributions in excess of cash available for distribution. The Company
estimates that 35% and 68% of the distributions paid in 1994 and 1995,
respectively, were a return on capital for federal income tax purposes.
During 1995, the Company implemented a Dividend Reinvestment and Stock
Purchase Plan, which permits shareholders to acquire additional shares of Common
Stock by automatically reinvesting cash distributions and making optional cash
purchases without payment of any broker commissions or service charges.
Shareholders who do not participate in such Plan continue to receive cash
distributions as paid.
S-10
<PAGE> 11
CAPITALIZATION
The following table sets forth the historical and pro forma capitalization
of the Company as of March 31, 1996. The pro forma capitalization reflects the
receipt of the net proceeds from the sale of 2,015,581 shares of Common Stock by
the Company pursuant to this Offering, the establishment of the acquisition line
of credit, the incurrence of debt to acquire the Acquisition Properties, and the
use of the net proceeds thereof as described in "Use of Proceeds". The
information set forth in the following table should be read in conjunction with
the pro forma consolidated financial statements and related notes thereto
appearing elsewhere in this Prospectus Supplement, the consolidated and combined
financial statements and notes thereto incorporated by reference in the
accompanying Prospectus, and the discussion set forth in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------------
HISTORICAL PRO FORMA(1)
---------- ------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Debt:
Loans payable............................................... $ 157,606 $157,606
Acquisition line of credit.................................. -- 23,817
8.375% Convertible Subordinated Debentures.................. 55,649 55,649
-------- --------
Total debt.......................................... 213,255 237,072
-------- --------
Shareholders' equity:
Preferred shares, $.01 par value; 5,000,000 shares
authorized; no shares outstanding........................ -- --
Common shares, $.01 par value; 25,000,000 shares authorized;
4,859,767 shares issued and outstanding; 6,875,348 shares
issued and outstanding, on a pro forma basis (2)......... 49 69
Excess shares, $.01 par value; 30,000,000 shares authorized;
no shares outstanding.................................... -- --
Outstanding restricted stock................................ (638) (638)
Additional paid-in capital.................................. 78,028 108,291
Distributions in excess of earnings......................... (7,030) (7,030)
-------- --------
Total shareholders' equity.................................. 70,409 100,692
-------- --------
Total capitalization................................ $ 283,664 $337,764
======== ========
</TABLE>
- ---------------
(1) See notes to pro forma condensed consolidated financial statements included
elsewhere in this Prospectus Supplement.
(2) Excludes 636,404 shares of Common Stock reserved for issuance under the
Company's 1993 Share Option Plan and 249,074 shares of Common Stock reserved
for issuance under the Company's Dividend Reinvestment Plan. Also excludes
an aggregate of 225,452 shares of Common Stock which the Company will have
the right, but not the obligation, to issue to the holders of the limited
partnership interests ("OP Units") in the Company's subsidiary operating
partnership, PGP Inland Communities, L.P., if such holders exercise their
right in the future to require the operating partnership to purchase their
OP Units.
S-11
<PAGE> 12
BUSINESS AND PROPERTIES
GENERAL
The tables below set forth certain information relating to the Company's
Multifamily and Industrial Properties by location and type as of March 31, 1996.
For the quarter ended March 31, 1996, approximately 60% and 40% of Company's net
operating income was derived from its Multifamily and Industrial Properties,
respectively. These tables do not include the Acquisition Properties.
Multifamily
<TABLE>
<CAPTION>
PERCENT
NUMBER OF NET
OF OPERATING
PROPERTIES UNITS INCOME(1) OCCUPANCY
---------- ----- --------- ---------
<S> <C> <C> <C> <C>
California
Inland Empire(2)............................. 11 1,368 35% 93%
Orange County................................ 3 742 21 93
Pacific Northwest
Seattle, WA.................................. 6 1,556 37 94
Portland, OR................................. 1 279 7 94
-- ----- ---
Total or Weighted Average...................... 21 3,945 100% 93
== ===== ===
</TABLE>
Industrial
<TABLE>
<CAPTION>
PERCENT
NUMBER LEASABLE OF NET
OF SQUARE OPERATING
PROPERTIES FEET INCOME(1) OCCUPANCY
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
California
Inland Empire(2)............................. 3 1,009,214 26% 97%
San Diego.................................... 1 356,800 12 97
Orange County................................ 2 441,453 8 80(3)
Los Angeles.................................. 1 623,261 29 100
Pacific Northwest
Seattle, WA.................................. 4 660,666 25 95
-- --------- ---
Total or Weighted Average...................... 11 3,091,394 100% 95
== ========= ===
</TABLE>
- ---------------
(1) Rental revenue less rental expenses and real estate taxes for the three
months ended March 31, 1996.
(2) Includes the eastern portion of Los Angeles County adjacent to the
Riverside/San Bernardino metropolitan area.
(3) Includes a 189,526 square foot business park acquired in March 1996 that is
currently undergoing rehabilitation by the Company.
The information in the following sections is forward looking and involves
risks and uncertainties that could significantly impact the Company's Funds from
Operations in the short and long term. Higher than expected acquisition, rental
and/or rehabilitation costs, delays in the rehabilitation of properties, a
downturn in the local economies and/or the lack of growth of such economies
could reduce the Company's Funds from Operations.
S-12
<PAGE> 13
MULTIFAMILY PROPERTIES
The Company invests primarily in two types of multifamily apartment
communities: communities oriented to family-style living and communities for
active seniors ages 55 and older.
The Company focuses on family-style apartment communities with greater
concentrations of two- and three-bedroom units with rents affordable by middle
income families. The Company believes that there is a strong demand among middle
income families for affordable rental housing such as that offered by the
Company.
The Company also focuses on active senior housing for individuals ages 55
and older, where seniors can be involved in activities, social gatherings and
other types of entertainment with residents of their own age group. The Company
offers no assisted living or related services; the Company's properties are
oriented to those seniors interested in renting versus owning and who are able
to care for themselves. The Company believes that the senior population will
continue to grow and that the market for rental housing for active seniors will
be strong. In addition, management believes that active senior housing typically
has lower operating and management costs due to lower tenant turnover.
Each of the Multifamily Properties provides tenants with attractive
amenities, including a swimming pool (except Inn at Laguna Hills) and clubhouse,
and many include jacuzzis, tennis courts, sports courts and saunas. Many offer
additional features such as vaulted ceilings, fireplaces, washers and dryers,
cable television and limited access gates. None of the Multifamily Properties
currently are subject to rent control or rent stabilization regulations.
However, certain of these properties are subject to restrictions based upon
tax-exempt loan requirements. There can be no assurances that rent control or
rent stabilization regulations will not be imposed in the future.
The following table presents information concerning the Multifamily
Properties, including average gross scheduled rents per unit and percentage of
units occupied as of March 31, 1996:
<TABLE>
<CAPTION>
AVERAGE
UNIT AVERAGE
YEAR SIZE RENT
PROPERTY LOCATION COMPLETED UNITS (SQ FT) PER UNIT OCCUPANCY
- ------------------------------------ ---------------- --------- ------ ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Applewood(1)........................ Santa Ana, CA 1972 406 801 $ 695 92%
Park Place.......................... Santa Ana, CA 1990 196 799 632 94
Inn at Laguna Hills(2).............. Laguna Hills, CA 1994 140 500 600 94
Daisy 5(1)(3)....................... Covina, CA 1977 38 897 706 95
Daisy 7(1)(3)....................... Diamond Bar, CA 1978 204 950 779 99
Daisy 12(1)(3)...................... San Dimas, CA 1979 102 952 691 98
Daisy 16(1)(3)...................... West Covina, CA 1981 250 986 717 90
Daisy 17(1)(3)...................... San Dimas, CA 1981 156 962 694 93
Lariat(1)(3)........................ San Dimas, CA 1981 30 970 759 93
Daisy 19(1)(3)...................... Ontario, CA 1983 125 1,019 725 92
Daisy 20(1)(3)...................... Ontario, CA 1982 155 1,000 665 89
Sunnyside I(1)(2)(3)................ San Dimas, CA 1984 164 495 515 93
Sunnyside II(1)(2)(3)............... Ontario, CA 1983 60 493 506 87
Sunnyside III(1)(2)(3).............. Ontario, CA 1985 84 504 516 89
Fulton's Landing.................... Everett, WA 1988 248 745 507 91
Fulton's Crossing................... Everett, WA 1986 256 803 529 93
Lora Lakes.......................... Burien, WA 1987 234 907 606 96
Holly Ridge......................... Burien, WA 1987 146 946 631 99
Hampton Bay......................... Kent, WA 1987 304 884 617 95
Heatherwood(1)...................... Federal Way, WA 1985 368 741 527 93
Waterhouse.......................... Beaverton, OR 1990 279 937 649 94
------
Total or Weighted Average........... 3,945 93
=====
</TABLE>
- ---------------
(1) Under rehabilitation.
(2) Properties serving active senior tenants (individuals ages 55 and older).
(3) Owned by PGP Inland Communities, L.P., a limited partnership in which the
Company has a minimum 78% equity interest, full management and control, and
the right to 100% of cash flow until certain net operating income levels are
achieved.
S-13
<PAGE> 14
INDUSTRIAL PROPERTIES
The Company focuses on multi-tenant business parks and mid-size
warehouse/distribution facilities. Whenever possible, the Company seeks a
significant market share in its principal markets so that it can accommodate its
tenants as their needs change and have an influence on trends in market rents.
The Company also seeks properties that are well-located and offer convenient
access to major distribution points, such as shipping ports, major airports and
major freeways.
Management believes that the Southern California industrial property market
is poised for recovery based upon an increasing level of leasing interest and a
limited supply of new product. As evidence of this, the Company already has
observed recent increases in the prices for industrial properties and tenant
requests for longer term leases. With over 70% of its industrial leases expiring
during the next three years, the Company believes it is in a good position to
capitalize on anticipated rental rate increases. The Company's industrial
properties are currently occupied by over 400 tenants, and no one tenant
accounts for more than 2.5% of the Company's total rental revenues.
The Company generally offers industrial leases in the one- to five-year
range. Lease terms include, in most cases, annual adjustments based on changes
in the consumer price index and from one to three months' free rent. The
standard lease also includes some refurbishing and tenant improvement allowance
with the amount varying depending upon the length of the lease, the size of the
space leased and the use. The Company seeks tenants primarily involved in
warehouse, distribution, assembly and light manufacturing activities.
The following table presents information concerning the Industrial
Properties, including the actual average rent per square foot and percentage of
the leasable square footage leased and occupied by tenants as of March 31, 1996:
<TABLE>
<CAPTION>
LEASABLE NUMBER AVERAGE BASE
DATE SQUARE OF RENT PER
PROPERTY LOCATION COMPLETED FOOTAGE TENANTS SQ. FT. OCCUPANCY
- ------------------------------- ----------------------- --------- ---------- ------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Seattle I...................... Seattle, WA 1968 42,240 2 $.40 100%
Seattle II..................... Seattle, WA 1981 64,077 10 .57 96
Seattle III.................... Seattle, WA 1981 78,720 14 .49 94
Pacific Gulf Business Tukwila, WA 1975-79 475,629 188 .50 95
Park(1)......................
Etiwanda....................... Ontario, CA 1991 576,327 3 .29 100
Golden West.................... Rancho Cucamonga, CA 1990 296,821 86 .37 91
Vista.......................... Vista, CA 1990 356,800 11 .38 97
Baldwin Industrial Park........ Baldwin Park, CA 1986 623,261 17 .38 100
Pacific Gulf Business Garden Grove, CA 1986 189,526 76 .63 68
Park(1)......................
Garden Grove Industrial Park... Garden Grove, CA 1979 251,927 11 .39 89
Crescent Business Center....... Rancho Cucamonga, CA 1981 136,066 24 .40 97
--------- ---
Total or Weighted Average...... 3,091,394 442 95
========= ===
</TABLE>
- ---------------
(1) Under rehabilitation.
S-14
<PAGE> 15
The following table shows scheduled lease expirations for all leases for
the Industrial Properties as of March 31, 1996.
<TABLE>
<CAPTION>
ANNUAL PERCENTAGE
NUMBER GLA OF BASE RENT PERCENTAGE ANNUAL
OF LEASES EXPIRING OF EXPIRING OF GLA BASE RENT
EXPIRING LEASES LEASES EXPIRING EXPIRING
--------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1996........................ 164 1,020,000 $ 4,818,000 35% 35%
1997........................ 126 533,000 2,559,000 18 19
1998........................ 93 487,000 2,611,000 17 19
1999........................ 35 279,000 1,359,000 10 10
2000........................ 15 47,000 268,000 2 2
2001........................ 4 71,000 307,000 2 2
2002........................ 1 302,000 1,015,000 10 7
2003........................ 2 61,000 328,000 2 2
2004........................ 1 90,000 469,000 3 3
2005 and thereafter......... 1 12,000 58,000 1 1
--- --------- ----------- ---- ----
Totals...................... 442 2,902,000 $13,792,000 100% 100%
=== ========= =========== ==== ====
</TABLE>
ACQUISITION PROPERTIES
Management believes that an attractive opportunity exists to acquire
well-located industrial properties at prices below replacement cost in markets
where rents are expected to increase in the near term. The Company has entered
into agreements to acquire the nine Acquisition Properties located in California
and containing an aggregate of 1,352,000 leasable square feet, for an aggregate
purchase price of $54.1 million, including budgeted capital expenditures of
approximately $1.7 million. The Company will finance the Acquisition Properties
with the net proceeds of this Offering, and its acquisition line of credit. See
"-- Acquisition Line of Credit."
The Company expects to close the purchases of the Acquisition Properties
shortly after completion of this Offering. The Company has satisfied itself as
to major matters, such as title, condition and environmental matters, and the
purchases remain subject to satisfaction of other customary conditions for
similar transactions in the real estate industry, such as non-occurrence of
unexpected events prior to closing, funding and issuance of satisfactory title
insurance policies.
The Company's acquisition of the Acquisition Properties continues the
Company's efforts of building its influence and diversification in its target
markets so as to better enable it to meet the changing needs of its tenants, be
a factor in affecting market rents and offer a diversity of product to a greater
portion of the tenant market.
S-15
<PAGE> 16
The following table presents information regarding the Acquisition
Properties as of March 31, 1996.
<TABLE>
<CAPTION>
AVERAGE
BASE
DATE LEASABLE NUMBER RENT
COM- PURCHASE SQUARE OF PER SQ.
PROPERTY LOCATION PLETED PRICE(1) FOOTAGE TENANTS FT.(2) OCCUPANCY(2)
- ----------------------- --------------------- ------- ----------- --------- ------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Eden Landing Commerce
Park................. Hayward, CA 1972-74 $ 7,950,000 193,358 104 $.63 88%
San Marcos Commerce
Center............... San Marcos, CA 1985 2,900,000 72,100 15 .38 94
Bay San Marcos
Industrial Center.... San Marcos, CA 1988 4,790,000 121,768 7 .41 90
Escondido Business
Center............... Escondido, CA 1988-92 10,610,000 251,464 64 .48 94
Bell Ranch Industrial
Park................. Santa Fe Springs, CA 1981 3,850,000 128,640 2 .27 100
La Mirada Business
Center............... La Mirada, CA 1975 3,750,000 82,010 48 .61 88
Pacific Park........... Aliso Viejo, CA 1988 7,050,000 99,622 39 .94 92
North County Business
Park................. Yorba Linda, CA 1987-89 6,550,000 105,516 13 .57 94
Riverview Industrial
Park................. San Bernardino, CA 1980 6,650,000 297,180 8 .25 87
----------- --------- ---
Total or Weighted
Average.............. $54,100,000 1,351,658 300 91
=========== ========= ===
</TABLE>
- ---------------
(1) Includes budgeted capital expenditures of approximately $1.7 million.
(2) Based upon March 1996 rent rolls.
Eden Landing Commerce Park. This business park is located in Hayward near
Interstate 880, a major East Bay transportation corridor and contains a total of
approximately 193,000 leasable square feet. This business park is the Company's
first investment in Northern California. The Company intends to locate a
regional manager at this site and expects to acquire additional properties in
this region in the future.
San Marcos Commerce Center, Bay San Marcos Industrial Center and Escondido
Business Center. These business parks, consisting of an aggregate of 445,000
leasable square feet, are located in the same market as the Company's Vista
Distribution Center. Combined with the 357,000 leasable square feet at Vista,
the Company will have a significant presence in the North San Diego County
market and will have a wide variety of space available to meet tenant demands
for premises ranging in size from 500 to 50,000 leasable square feet.
San Marcos Commerce Center contains approximately 72,000 leasable square
feet of industrial/warehouse space in six single story multi-tenant buildings.
Each building has 16 foot ceiling clearance and ground-level loading doors. The
property is located off Highway 78 between Interstates 5 and 15. Management
believes that it can improve this property's performance by addressing deferred
maintenance and utilizing its own management personnel.
Bay San Marcos Industrial Center contains approximately 122,000 leasable
square feet of warehouse and distribution space in two single story multi-tenant
buildings. One of the buildings has 12 dock-high and 14 ground-level loading
doors, while the other has 14 dock-high loading doors. Both buildings have 22 to
24 feet ceiling clearances and truck staging and loading areas. The property is
located off Highway 78, between Interstates 5 and 15.
Escondido Business Center contains approximately 251,000 leasable square
feet of multi-tenant industrial space in 13 buildings. The property consists of
three phases, providing tenants with a variety of premises from 500 square feet
multi-tenant space to 20,000 square feet single tenant buildings with both
dock-high and ground-level loading doors and 16 feet ceiling clearances. This
S-16
<PAGE> 17
property is located at the junction of Highway 78 and Interstate 15. The Company
intends to locate a regional manager at this location, who will have
responsibility for the Company's approximately 802,000 leasable square feet in
North San Diego County.
Bell Ranch Industrial Park, La Mirada Business Center, Pacific Park and
North County Business Park. These business parks, consisting of an aggregate of
approximately 416,000 leasable square feet, are located in the same market as
the Company's Garden Grove Industrial Center and Pacific Gulf Business Center.
Combined with the 441,000 leasable square feet at these existing properties, the
Company will have a significant presence in the Orange County market and will
have a variety of space available to meet tenant demands for premises ranging in
size from 500 to 73,000 leasable square feet.
Bell Ranch Industrial Park contains approximately 129,000 leasable square
feet of warehouse space in one multi-tenant building. The Property is located in
an excellent industrial area between Interstates 5 and 605 in the City of Santa
Fe Springs. The tenants currently occupying this property have leases at rental
rates significantly below current market rates.
La Mirada Business Center contains approximately 82,000 leasable square
feet in six free-standing buildings. The six buildings are designed for and
utilized by a variety of small office or light industrial users seeking premises
between 500 to 2,000 leasable square feet. This property is located in the
triangle of highways created by Interstates 5 and 605 and Highway 91, providing
its tenants with superior access to Los Angeles, Orange County and the Inland
Empire. This property is being purchased from a financial institution.
Management believes that it can improve this property's financial performance by
addressing deferred maintenance and improving management.
Pacific Park is an approximately 100,000 leasable square foot business park
consisting of six multi-tenant buildings. The warehouse portion of each building
has a rear grade-level truck door and 16 feet ceiling clearances. Management
believes that the desirability of this property will be enhanced upon the
completion of the nearby San Joaquin Hills Tollway, which is expected in late
1996.
North County Business Park, which contains approximately 106,000 leasable
square feet, is a business park in a master planned business development. This
property consists of four buildings near Highway 91 in Northern Orange County.
The Company believes it will be able to improve this property's financial
performance by replacing existing absentee management with the Company's own
management personnel.
Riverview Industrial Park. This property consists of approximately 297,000
square feet of multi-tenant industrial/warehouse space with five buildings, and
is located in the same market as the Company's Etiwanda, Golden West and
Crescent business parks. Combined with the approximately 1,009,000 leasable
square feet located at these existing properties, the Company will have an
aggregate of approximately 1,306,000 leasable square feet in the Inland Empire.
The property is located near the junction of Interstates 10 and 215, major
transportation corridors for the Inland Empire. The buildings have a mix of
dock-high and grade-level loading doors and 20 to 22 feet ceiling clearances.
The Company is acquiring this property from an insurance company, which had
foreclosed on the property, and expects to improve the property's financial
performance by addressing deferred maintenance items and managing the property
from its existing regional office located at its Golden West property.
S-17
<PAGE> 18
Lease Expirations
The following table shows scheduled lease expirations for the Acquisition
Properties based upon the current rent rolls for each Acquisition Property.
<TABLE>
<CAPTION>
AVERAGE
NUMBER OF GLA OF ANNUAL BASE PERCENTAGE RENT OF
LEASES EXPIRING RENT OF EXPIRING OF GLA EXPIRING
EXPIRING LEASES LEASES EXPIRING LEASES
--------- --------- ---------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1996.............................. 151 416,000 $2,623,000 34% 38%
1997.............................. 81 259,000 1,630,000 21 24
1998.............................. 32 131,000 857,000 11 12
1999.............................. 21 183,000 887,000 15 13
2000.............................. 12 225,000 819,000 18 12
2001.............................. 2 13,000 66,000 1 1
2002.............................. -- -- -- -- --
2003.............................. 1 4,000 27,000 -- --
2004.............................. -- -- -- -- --
2005 and thereafter............... -- -- -- -- --
--- --------- ---------- --- ----
Totals............................ 300 1,231,000 $6,909,000 100% 100%
=== ========= ========== === ====
</TABLE>
ACQUISITION LINE OF CREDIT
The Company has received a commitment for an unsecured short-term line of
credit from Bank of America (the "Bank") to provide a portion of the funds
necessary to close the purchase of the Acquisition Properties. Subject to
successful completion of this Offering and the Bank's completion of normal due
diligence relating to these acquisitions, the Bank will provide up to $33.0
million for the Company that will be used together with the proceeds of this
Offering to acquire the Acquisition Properties. The Company currently expects
that the interest rate on this line of credit will be 2% over either the 30, 60
or 90 day LIBOR, subject to entering into definitive agreements therefor. If the
acquisition line of credit is not obtained, the Company will have to seek
alternative financing sources to satisfy its contractual obligations to purchase
the Acquisition Properties; however, no assurance can be given that the Company
will be successful in doing so.
The acquisition line of credit will have a term of up to five months, at
which time the Acquisition Properties will, at the Company's option, either be
added to the Company's existing line of credit collateral pool or the Company
will obtain real estate financings to repay the acquisition line of credit. The
Company anticipates that any real estate financings would have a term in excess
of seven years, bear interest at a rate of approximately 8% (based upon current
market conditions) and provide for principal amortization over a 25 year term.
In connection with the foregoing, the Company is finalizing arrangements
for an amendment to its existing line of credit agreement, including an increase
in the amount of the line to $68.0 million and the revision of certain covenant
provisions. The existing line of credit had an outstanding balance of $19.2
million as of March 31, 1996. This debt bears interest at 1.75% over the 30 day
LIBOR. The weighted average interest rate on the existing line of credit for the
three months ended March 31, 1996 was 7.41%.
S-18
<PAGE> 19
SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected historical and pro forma financial
and operating data of the Company and the multifamily and industrial operations
acquired from Santa Anita Realty Enterprises, Inc. (the "Predecessor"). The
following summary financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the pro forma condensed consolidated financial information and
notes thereto contained in this Prospectus Supplement, and the consolidated and
combined financial statements and related notes incorporated by reference in the
accompanying Prospectus.
For the year ended December 31, 1995, the pro forma operating information is
presented as if the following transactions occurred as of the beginning of the
period: (i) the purchase and disposition of certain multifamily and industrial
properties completed by the Company during 1995 and 1996, as more fully
described in the pro forma condensed consolidated financial statements, (ii) the
purchase of the Acquisition Properties and (iii) the completion of this
Offering, the establishment of the acquisition line of credit (see "Business and
Properties -- Acquisition Line of Credit") and the application of the net
proceeds thereof as described in this Prospectus Supplement. For the three
months ended March 31, 1996, the pro forma operating information is presented as
if the following transactions occurred as of the beginning of the period: (i)
the purchase of an industrial property in 1996, as more fully described in the
pro forma condensed consolidated financial statements (ii) the purchase of the
Acquisition Properties and (iii) the completion of this Offering, the
establishment of the acquisition line of credit and the application of the net
proceeds thereof as described in this Prospectus Supplement. Pro forma balance
sheet information is presented as if the Acquisition Properties were acquired
and this Offering were consummated on March 31, 1996. The estimated net proceeds
of this Offering have been calculated based on the offering price of $16.375 per
share and after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company. The pro forma operating information
incorporates certain assumptions that are included in the notes to the pro forma
condensed consolidated financial statements included elsewhere in this
Prospectus Supplement. The pro forma financial information is not necessarily
indicative of what the actual financial position and results of operations of
the Company would have been as of the dates or for the periods indicated, nor
does it purport to represent the financial position and results of operations
for any future period.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------- ---------------------------------
PREDECESSOR COMPANY COMPANY
----------------------------- ------------------------------------- ---------------------------------
HISTORICAL HISTORICAL
--------------------------------------------------------- PRO FORMA --------------------- PRO FORMA
1991 1992 1993 1994(1) 1995 1995(2) 1995 1996 1996(2)
------- -------- -------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Rental income:
Multifamily.......... $ 7,607 $ 10,768 $ 15,150 $ 18,937 $ 24,898 $ 27,846 $ 5,466 $ 7,051 $ 7,051
Industrial........... 785 885 1,002 7,207 12,193 23,298 2,962 3,784 5,801
------- ------- ------- --------- --------- --------- --------- --------- ---------
8,392 11,653 16,152 26,144 37,091 51,144 8,428 10,835 12,852
------- ------- ------- --------- --------- --------- --------- --------- ---------
Rental property
expenses:
Multifamily.......... 2,905 4,639 7,261 8,835 10,215 11,691 2,331 2,786 2,786
Industrial........... 219 206 245 1,541 2,567 6,368 624 948 1,493
------- ------- ------- --------- --------- --------- --------- --------- ---------
3,124 4,845 7,506 10,376 12,782 18,059 2,955 3,734 4,279
Depreciation........... 1,687 2,282 2,634 3,721 6,081 7,805 1,400 1,835 2,062
Interest (including
amortization of
financing costs)..... 4,180 5,398 6,028 8,164 14,066 19,669 3,002 4,326 4,900
General and
administrative....... 1,286 1,394 1,538 1,725 2,423 2,423 527 647 647
Minority interest in
losses of combined
partnerships......... (678) (646) (492) -- -- -- -- -- --
Reduction in carrying
value of Predecessor
properties........... -- -- 10,974 -- -- -- -- -- --
------- ------- ------- --------- --------- --------- --------- --------- ---------
9,599 13,273 28,188 23,986 35,352 47,956 7,884 10,542 11,888
------- ------- ------- --------- --------- --------- --------- --------- ---------
Income (loss) before
gain on sale of
properties and
extraordinary item... (1,207) (1,620) (12,036) 2,158 1,739 3,188 544 293 964
Gain on sale of real
estate............... -- -- -- -- 6,664 -- -- -- --
Extraordinary item..... -- -- -- (2,990) -- -- -- -- --
------- ------- ------- --------- --------- --------- --------- --------- ---------
Net income (loss)...... (1,207) (1,620) (12,036) (832) 8,403 3,188 544 293 964
======= ======= ======= ========= ========= ========= ========= ========= =========
Net income (loss) per
common share......... (.07)(3) 1.74 0.47 .11 .06 0.14
========= ========= ========= ========= ========= =========
Weighted average common
shares............... 4,273,337(3) 4,830,723 6,846,304 4,796,729 4,864,044 6,879,625
</TABLE>
S-19
<PAGE> 20
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------- ---------------------------------
PREDECESSOR COMPANY COMPANY
----------------------------- ------------------------------------- ---------------------------------
HISTORICAL HISTORICAL
--------------------------------------------------------- PRO FORMA --------------------- PRO FORMA
1991 1992 1993 1994(1) 1995 1995(2) 1995 1996 1996(2)
------- -------- -------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Real estate, net of
accumulated
depreciation:
Multifamily.......... $62,811 $ 88,519 $ 90,375 $ 113,706 $ 175,879 -- $ 113,542 $ 175,460 $175,460
Industrial........... 7,470 7,395 7,323 79,751 102,813 -- 86,400 109,510 161,845
------- -------- -------- --------- --------- --------- --------- ---------
Total real estate...... 70,281 95,914 97,698 193,457 278,692 -- 199,942 284,970 337,305
Total assets........... 73,944 100,186 99,984 202,519 288,591 -- 208,777 294,390 348,490
Senior debt............ 52,824 78,613 88,740 69,480 149,847 -- 77,609 157,606 181,423
Convertible
subordinated
debentures........... -- -- -- 55,526 55,659 -- 55,558 55,649 55,649
Total equity........... 22,112 23,200 9,501 70,860 71,980 -- 69,542 70,409 100,692
PROPERTY DATA (end of
period)
Total apartment
properties........... 5 9 10 13 21 21 13 21 21
Total apartment
units................ 1,290 2,398 2,654 3,292 3,945 3,945 3,292 3,945 3,945
Apartment units
occupied............. 95% 93% 92% 93% 92% 92 % 92% 93% 93 %
Total industrial
properties........... 3 3 3 9 10 20 9 11 20
Industrial leasable
area
(sq. ft.)............ 185,000 185,000 185,000 2,426,000 2,902,000 4,443,000 2,426,000 3,091,000 4,443,000
Industrial leasable
area leased.......... 89% 97% 95% 97% 96% 92 % 97% 95% 94 %
SUPPLEMENTAL DATA
Funds from
operations -- New
Definition(4)........ $ 480 $ 662 $ 1,572 $ 5,879 $ 7,820 $ 10,993 $ 1,944 $ 2,128 $ 3,026
Cash flow information:
Operating............ (367) (348) 1,307 3,950 7,138 -- 615 1,849 --
Investing............ (18,084) (27,660) (15,323) (99,504) (84,480) -- (7,840) (8,049) --
Financing............ 18,398 28,318 13,798 98,649 76,674 -- 6,259 5,819 --
</TABLE>
- ---------------
(1) Includes the combined historical operations of the Company (from February 18
through December 31, 1994) and the Predecessor's multifamily and industrial
operations (prior to February 18, 1994).
(2) See notes to pro forma condensed consolidated financial statements included
elsewhere in this Prospectus Supplement.
(3) Per share data for 1994 was based on the weighted average common shares
outstanding for the period February 18, 1994 (the closing date of the
Company's initial public offering) through December 31, 1994 and the
Company's net loss for that period.
(Footnotes continued on the following page)
S-20
<PAGE> 21
(4) Funds From Operations ("FFO") is defined by the National Association of Real
Estate Investment Trusts ("NAREIT") to mean net income, computed in
accordance with generally accepted accounting principles ("GAAP"), excluding
gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. Management generally considers Funds From
Operations to be a useful financial performance measure of the operating
performance of an equity REIT because, together with net income and cash
flows, FFO provides investors with an additional basis to evaluate the
ability of a REIT to incur and service debt and to fund acquisitions and
other capital expenditures. FFO does not represent cash flow from operations
as defined by generally accepted accounting principles, should not be
considered as an alternative to net income as an indicator of the Company's
operating performance and is not indicative of cash available to fund all
cash flow needs. FFO does not measure whether cash flow is sufficient to
fund all of the Company's cash needs, including principal amortization,
capital improvements and distributions to stockholders. FFO also does not
represent cash flows generated from operating, investing or financing
activities as defined by GAAP. Further, FFO as disclosed by other REITs may
not be comparable to the Company's calculation of FFO. On March 3, 1995,
NAREIT modified the calculation of FFO to, among other things, eliminate
amortization of deferred financing costs and depreciation of non-real estate
assets as items added back to net income when computing FFO. Presented below
is the calculation of FFO consistent with the methodology historically used
by the Company (the "Old Definition") reconciled to the revised calculation
adopted by NAREIT (the "New Definition") which the Company adopted as of
January 1, 1996.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------- --------------------------------
PREDECESSOR COMPANY COMPANY
------------------------------ ------------------------------ --------------------------------
HISTORICAL HISTORICAL
--------------------------------------------------- PRO FORMA ------------------ PRO FORMA
1991 1992 1993 1994(1) 1995 1995 1995 1996 1996
------- ------- -------- ------ ------- --------- ------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss).......... $(1,207) $(1,620) $(12,036) $ (832) $8,403 $ 3,188 $ 544 $ 293 $ 964
Depreciation and
amortization............. 1,727 2,325 2,719 4,344 7,090 8,921 1,603 2,112 2,349
Nonrecurring and
extraordinary items...... -- -- 10,974 2,990 (6,664 ) -- -- -- --
------- -------- -------- ------ ------- ------- ------ ------ ------
Funds From
Operations -- Old
Definition............... 520 705 1,657 6,502 8,829 12,109 2,147 2,405 3,313
Amortization:
Debenture discount and
costs.................. -- -- -- (464) (552 ) (552) (139) (142) (142)
Costs related to
financing assumed from
Predecessor and line of
credit costs........... (40) (43) (85) (159) (302 ) (302) (57) (86) (86)
Long-term financing
costs.................. -- -- -- -- (155 ) (262) (7) (49) (59)
------- -------- -------- ------ ------- ------- ------ ------ ------
Funds From
Operations -- New
Definition............... $ 480 $ 662 $ 1,572 $5,879 $7,820 $10,993 $ 1,944 $ 2,128 $3,026
======= ======== ======== ====== ======= ======= ====== ====== ======
</TABLE>
S-21
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with "Selected
Financial And Operating Data" and the financial statements and notes thereto of
the Company and the Predecessor incorporated by reference in the accompanying
Prospectus. Such financial statements and information have been prepared to
reflect the Company's initial period of operations and its financial condition
together with the combined historical financial statements of the Predecessor's
properties, for periods prior to the consummation of the Company's initial
public offering in February 1994.
The combined historical financial statements are comprised of the Company
and the operations, assets and liabilities of certain properties which prior to
the initial public offering were owned and operated by Santa Anita Realty
Enterprises, Inc ("Realty"). These properties were acquired by the Company in
February 1994 in connection with consummation of the initial public offering and
related formation transactions.
The comparability of the financial information discussed below is impacted
by the following: the acquisition of one industrial property containing 189,000
leasable square feet acquired by the Company in March 1996; the acquisition of
12 multifamily properties containing 1,736 apartment units, the acquisition of
one industrial property containing approximately 476,000 square feet, and the
disposition of four multifamily properties consisting of 1,085 apartment units
during 1995; the initial public offering and other acquisition transactions
during 1994, including the acquisition of three multifamily properties
containing 638 apartment units and three industrial properties containing
2,241,000 square feet; the acquisition of one multifamily property containing
256 apartment units in 1993; and four multifamily properties containing an
aggregate of 1,108 apartment units during the last eight months of 1992. The
changes in operating results from period to period discussed below are primarily
the result of increases in the number of multifamily properties and related
apartment units and in the leased square footage of additional industrial
properties acquired.
RESULTS OF OPERATIONS
For comparison purposes, the Company's operating results for the period
February 18, 1994 through December 31, 1994 have been added to the operating
results of the Predecessor for the period January 1, 1994 through February 17,
1994 to present the results of operations for the year ended December 31, 1994
used in the following comparisons.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1996 TO THREE MONTHS ENDED
MARCH 31, 1995
Multifamily rental income increased by $1,585,000 or 29%, from $5,466,000
in 1995 to $7,051,000 in 1996. This increase was primarily attributable to the
acquisition of 12 multifamily properties containing 1,736 apartment units in
1995 offset by the disposition of four multifamily properties containing 1,085
apartment units during the last quarter of 1995. Industrial rental income
increased by $822,000 or 28%, from $2,962,000 in 1995 to $3,784,000 in 1996.
This increase was primarily attributable to the recent acquisition of two
industrial parks containing approximately 665,000 square feet of space. As a
result of these changes, total revenues increased by $2,407,000, or 29% from
$8,428,000 in 1995 to $10,835,000 in 1996.
Multifamily rental income for the period ended March 31, 1996 totaled
$7,051,000 and included $3,099,000 related to 12 multifamily properties acquired
during 1995.
Industrial rental income for the period ended March 31, 1996 totaled
$3,784,000 and included $837,000 related to the recent acquisition of two
industrial parks.
Multifamily rental property expenses increased by $455,000, or 20% from
$2,331,000 in 1995 to $2,786,000 in 1996. This increase was primarily
attributable to the acquisition of 12 multifamily properties containing 1,736
apartment units in 1995. Industrial rental property expenses increased
S-22
<PAGE> 23
by $324,000, or 52%, from $624,000 in 1995 to $948,000 in 1996. This increase
was primarily attributable to the recent acquisition of two industrial parks.
Multifamily rental property expenses for the period ended March 31, 1996
totaled $2,786,000 and included $1,237,000 related to 12 multifamily properties
acquired during 1995.
Industrial rental property expenses for the period ended March 31, 1996
totaled $948,000 and included $282,000 related to the recent acquisition of two
industrial parks.
Depreciation increased by $435,000, or 31%, from $1,400,000 in 1995 to
$1,835,000 in 1996. This increase was primarily attributable to additional
depreciation relating to the acquisition of 12 multifamily properties in late
1995, two recently acquired industrial parks, and capital improvements made to
rehabilitate existing properties.
Interest expense (including amortization of financing costs) increased by
$1,324,000, or 44%, from $3,002,000 in 1995 to $4,326,000 in 1996. This increase
was attributable to increased borrowings outstanding during 1996, as compared to
1995, pursuant to new borrowings of $63,517,000 relating to the acquisition of
12 multifamily properties and two industrial parks during 1995 and 1996 and
$24,850,000 of tax-exempt mortgage indebtedness assumed with the Company's 1995
acquisitions. Interest resulting from the amortization of financing costs
increased by $74,000, or 36%, from $203,000 in 1995 to $277,000 in 1996. This
increase is attributable primarily to the amortization of debenture discount and
costs and of loan fees associated with borrowings used to finance the
acquisition of Multifamily and Industrial Properties in late 1995.
General and administrative expenses increased by $120,000, or 23%, from
$527,000 in 1995 to $647,000 in 1996. This increase was primarily attributable
to personnel increases related to the 1995 acquisitions made during the second
half of 1995, and to the accrual of estimated bonuses in 1996 (no similar
accrual was made in 1995 first quarter).
For the three months ended March 31, 1996, the Company generated net income
of $293,000 compared to net income of $544,000 in 1995. These results are
attributable to the foregoing.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1995 TO THE YEAR ENDED DECEMBER 31,
1994
Multifamily rental income increased by $5,961,000, or 31%, from $18,937,000
in 1994 to $24,898,000 in 1995. This increase was primarily attributable to the
acquisition of 12 multifamily properties containing 1,736 apartment units in
1995 offset by the disposition of four multifamily properties containing 1,085
apartment units during the last quarter of 1995. Industrial rental income
increased by $4,986,000, or 69%, from $7,207,000 in 1994 to $12,193,000 in 1995.
This increase was primarily attributable to the acquisition of three industrial
parks during the last half of 1994 containing approximately 1,011,000 square
feet of space. As a result of these changes, total revenues increased by
$10,947,000, or 42%, from $26,144,000 to $37,091,000 in 1995.
Multifamily rental income for the year ended December 31, 1995 totaled
$24,898,000 and included $3,990,000 related to 12 multifamily properties
acquired during 1995 and $5,987,000 related to the four multifamily properties
sold during the last quarter of 1995.
Industrial rental income for the year ended December 31, 1995 totaled
$12,193,000 and included $192,000 related to the two industrial properties
acquired during 1995.
Multifamily rental property expenses increased by $1,380,000, or 16%, from
$8,835,000 in 1994 to $10,215,000 in 1995. This increase was primarily
attributable to the acquisition of 12 multifamily properties containing 1,736
apartment units in 1995. Industrial rental property expenses increased by
$1,026,000, or 67%, from $1,541,000 in 1994 to $2,567,000 in 1995. This increase
was primarily attributable to the acquisition of three industrial parks during
the last half of 1994.
S-23
<PAGE> 24
Multifamily rental property expenses for the year ended December 31, 1995
totaled $10,215,000 and included $1,779,000 related to 12 multifamily properties
acquired during 1995 and $2,403,000 related to the four multifamily properties
sold during the last quarter of 1995.
Industrial rental property expenses for the year ended December 31, 1995
totaled $2,567,000 and included $25,000 related to the industrial properties
acquired during 1995.
Depreciation increased by $2,360,000, or 63%, from $3,721,000 in 1994 to
6,081,000 in 1995 as a result of the acquisition of 12 multifamily properties in
1995, the three industrial properties acquired in late 1994, and the capital
improvements made to rehabilitate existing properties.
Interest expense (including amortization of financing costs) increased by
$5,902,000, or 72%, from $8,164,000 in 1994 to $14,066,000 in 1995. This
increase was attributable to increased borrowings outstanding during 1995, as
compared to 1994, pursuant to new borrowings of $55,517,000 relating to the
acquisition of 12 multifamily properties and one industrial park during the last
half of 1995 and $24,850,000 of tax-exempt mortgage indebtedness assumed with
the Company's recent acquisitions. Interest resulting from the amortization of
financing costs increased by $386,000, or 62%, from $623,000 in 1994 to
$1,009,000 in 1995. This increase is attributable primarily to the additional
amortization relating to the convertible subordinated debentures issued on
February 18, 1994, outstanding for the entire year in 1995, and amortization of
loan fees associated with borrowings used to finance acquisitions completed in
late 1994 and during 1995.
General and administrative expenses increased by $698,000, or 40%, from
$1,725,000 in 1994 to $2,423,000 in 1995. This increase was primarily
attributable to personnel increases related to the 1994 and 1995 acquisitions
made during the second half of each year, respectively.
For the year ended December 31, 1995, the Company incurred net income of
$8,403,000 compared to a net loss of $832,000 in 1994. These improved results
are attributable to the foregoing, and are offset partially by a $6,664,000 net
gain from the sale of the Texas multifamily portfolio in 1995 and a $2,990,000
loss from the extinguishment of debt in 1994 relating to the acquisition of
certain of the properties from Realty.
COMPARISON OF YEAR ENDED DECEMBER 31, 1994 TO THE YEAR ENDED DECEMBER 31, 1993
Multifamily rental income increased by $3,787,000, or 25%, from $15,150,000
in 1993 to $18,937,000 in 1994. The increase was primarily attributable to the
acquisition of three multifamily properties containing 638 apartment units in
1994. Industrial rental income increased by $6,205,000, or 619%, from $1,002,000
in 1993 to $7,207,000 in 1994. This increase was primarily attributable to the
acquisition of six industrial parks containing approximately 2,241,000 square
feet of space. As a result of these changes, total revenues increased by
$9,992,000, or 62%, from $16,152,000 in 1993 to $26,144,000 in 1994.
Multifamily rental income for the year ended December 31, 1994 totaled
$18,937,000 and included $2,389,000 related to three multifamily properties
acquired during 1994.
Industrial rental income for the year ended December 31, 1994 totaled
$7,207,000 and included $4,912,000 related to six industrial properties acquired
during 1994.
Multifamily rental property expenses increased by $1,574,000, or 22%, from
$7,261,000 in 1993 to $8,835,000 in 1994. This increase was primarily
attributable to the acquisitions of three multifamily properties in 1994.
Industrial rental property expenses increased by $1,296,000, or 529%, from
$245,000 in 1993 to $1,541,000 in 1994. This increase was primarily attributable
to the acquisition of six industrial parks.
Multifamily rental property expenses for the year ended December 31, 1994
totaled $8,835,000 and included $1,250,000 related to the multifamily properties
acquired during 1994.
S-24
<PAGE> 25
Industrial rental property expenses for the year ended December 31, 1994
totaled $1,541,000 and included $909,000 related to the industrial properties
acquired during 1994.
Depreciation increased by $1,087,000, or 41%, from $2,634,000 in 1993 to
$3,721,000 in 1994 as a result of the acquisition of three multifamily
properties and six industrial properties in 1994, and capital improvements made
to rehabilitate existing properties.
Interest expense (including amortization of financing costs) increased by
$2,136,000, or 35%, from $6,028,000 in 1993 to $8,164,000 in 1994. This increase
was attributable to increased borrowings outstanding during 1994, as compared to
1993, resulting from changes in the Predecessor Multifamily and Industrial
Operations and the Company's debt structure. Such changes in 1994 included the
issuance of $56.5 million principal amount of convertible subordinated
debentures (net of debenture discount), borrowings of $39,100,000 under the
Company's new variable rate revolving credit facility, new mortgage notes of
$15,200,000 relating to the acquisition of one multifamily property and two
industrial parks during 1994, offset by the repayment of $73,300,000 of the
Predecessor's indebtedness using proceeds from the Offerings. In addition, the
increase in interest expense was attributable to a higher borrowing rate in the
Company's variable rate credit facility during 1994 as compared to 1993, which
resulted from overall increases in the prime rate and LIBOR rates. Interest
resulting from the amortization of financing costs increased by $538,000, or
633%, from $85,000 in 1993 to $623,000 in 1994. This increase is primarily
attributable to the issuance of convertible subordinated debentures on February
18, 1994 and the amortization of the debenture discount and costs.
General and administrative expenses increased by $187,000, or 12%, from
$1,538,000 in 1993 to $1,725,000 in 1994. This was primarily attributable to the
growth related to the 1994 acquisitions.
For the year ended December 31, 1994, the Company incurred a net loss of
$832,000, compared to a net loss of $12,036,000 in 1993. These improved results
are attributable to the foregoing, the nonrecurring loss of $10,974,000
recognized in 1993 by Realty as a result of the formation transactions which
reduced the carrying value of the Predecessor's properties, and are partially
offset by a $2,990,000 extraordinary loss from the extinguishment of debt in
1994.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1993 TO THE YEAR ENDED DECEMBER 31,
1992
Multifamily rental income increased by $4,382,000, or 41%, from $10,768,000
in 1992 to $15,150,000 in 1993. This increase was primarily attributable to
rental revenues from the five multifamily properties acquired during 1992 and
1993. Industrial rental income (rent from the Seattle Industrial Buildings)
increased $117,000, or 13%, from $885,000 in 1992 to $1,002,000 in 1993. This
increase was primarily attributable to increases in rental rates. As a result of
the above changes, total revenues increased by $4,499,000, or 39%, from
$11,653,000 in 1992 to $16,152,000 in 1993.
Multifamily rental income for the year ended December 31, 1993 totaled
$15,150,000 and included $6,465,000 related five multifamily properties acquired
during 1993.
Multifamily rental property expenses increased by $2,622,000, or 57%, from
$4,639,000 in 1992 to $7,261,000 in 1993. This increase was primarily
attributable to the acquisition of five multifamily properties during 1992 and
1993.
Multifamily rental property expenses for the year ended December 31, 1993
totaled $7,261,000 and included $3,332,000 related the multifamily properties
acquired during 1993.
Depreciation increased by $352,000, or 15%, from $2,282,000 in 1992 to
$2,634,000 in 1993. This increase was primarily attributable to additional
depreciation relating to the additional multifamily properties acquired during
1993 and late 1992.
S-25
<PAGE> 26
Interest expense (including amortization of financing costs) increased by
$630,000, or 12%, from $5,398,000 in 1992 to $6,028,000 in 1993. This increase
was primarily attributable to increased borrowings relating to the acquisition
of five multifamily properties during 1992 and 1993. Interest resulting from the
amortization of financing costs increased by $42,000 or 98% to $85,000 in 1993
from $43,000 in 1992 related primarily to transfer amortization associated with
additional borrowings in early 1993.
General and administrative expenses increased by $144,000, or 10%, from
$1,394,000 in 1992 to $1,538,000 in 1993. This was primarily the result of
increased accounting, professional and director fees.
For the year ended December 31, 1993, a net loss of $12,036,000, including
a non-recurring loss of $10,974,000 resulting from the formation transactions
which was recognized by Realty in 1993, was incurred, compared to a net loss of
$1,620,000 in 1992. Excluding the non-recurring loss, the Predecessor incurred a
loss of $1,062,000 for the year ended December 31, 1993, compared to a net loss
of $1,620,000 in 1992. These improved results are attributable to the foregoing.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had $2,466,000 of cash to meet its immediate
short-term liquidity requirements. Future short-term liquidity requirements are
anticipated to be met through net cash flow from operations, existing working
capital and, if necessary, funding from the Company's revolving line of credit.
The Company has a secured revolving line of credit from Bank of America for a
maximum amount of $35,000,000 which expires in June 1997. As of March 31, 1996,
the Company had borrowed $19,169,000 under the revolving line of credit.
During the first quarter of 1996, the Company borrowed $8,000,000 from a
life insurance company for a ten-year term at an interest rate of 7.3%. This
loan is secured by a 304-unit apartment community located in Kent, Washington.
The proceeds of this loan were used, in part, to acquire a 189,526 square foot
industrial park located in Garden Grove, California.
In March of 1996, the Company extended four letters of credit which secure
a portion of the Company's tax-exempt mortgage debt to December 31, 1996.
The Company has received a commitment for an unsecured short-term
acquisition line of credit with Bank of America National Trust and Savings
Association (the "Bank") to provide the funds necessary to close the purchase of
the Acquisition Properties. Subject to successful completion of this Offering
and the Bank's completion of normal due diligence relating to these
acquisitions, the Bank will provide up to $33,000,000 for the Company that will
be used together with the proceeds of the Offering to acquire the Acquisition
Properties. If the acquisition line of credit is not obtained, the Company will
have to seek alternative funding sources to complete the purchases of the
Acquisition Properties; however, no assurance can be given that the Company will
be successful in doing so.
The acquisition line of credit will have a term of up to five months, at
which time the properties will either be added to the Company's existing line of
credit collateral pool or the Company will obtain real estate financing repay
the acquisition line of credit. The Company anticipates that any real estate
financings would have a term in excess of seven years, bear interest at a rate
of approximately 8% (under current market conditions) and provide for principal
amortization over a 25 year term. In conjunction with the acquisition line of
credit certain terms and conditions of the company's existing line of credit
agreement have been amended, including an increase in the amount of the line to
$68,000,000 and the revision of certain covenant provisions.
Cash provided by operating activities increased from $615,000 for the three
months ended March 31, 1995 to $1,849,000 for the same period in 1996 due to the
full year effect of rental income from acquisitions completed by the Company
during 1995 and 1996.
S-26
<PAGE> 27
Cash used in investing activities increased from $7,840,000 for the three
months ended March 31, 1995 to $8,049,000 for the same period in 1996. The
increase is due to additional improvements made at the Company's properties in
1996 over expenditures in 1995.
Cash provided by financing activities decreased from $6,259,000 for the
three months ended March 31, 1995 to $5,819,000 for the three months ended March
31, 1996. The decrease resulted from a decrease in net borrowings in 1996 as
compared to the prior period.
Cash provided by operating activities increased from $1,307,000 for the
year ended December 31, 1993 to $3,950,000 for the year ended December 31, 1994
and $7,138,000 for the year ended December 31, 1995. The primary reason for
these increases related to the additional rental income contributed by
properties acquired during 1994 and 1995.
Cash used in investing activities increased from $15,323,000 for the year
ended December 31, 1993 to $99,504,000 of the year ended December 31, 1994 and
then decreased to $84,480,000 for the year ended December 31, 1995 primarily as
a result of acquisitions which increased from $15,323,000 in 1993 to $99,504,000
in 1994 and to $113,663,000 in 1995, net of $29,183,000 of proceeds from the
sale of the Texas apartment portfolio in 1995.
Cash provided by financing activities increased from $13,798,000 for the
year ended December 31, 1993 to $98,649,000 for the year ended December 31, 1994
and then decreased to $76,674,000 for the year ended December 31, 1995 primarily
as a result of the issuance of $124,098,000 of common stock and debentures, the
formation transactions pursuant to the initial public offering in February 1994,
and borrowings of $54,336,000 and $116,370,000 in 1994 and 1995, respectively.
The Company intends to acquire additional properties and may seek to fund
these acquisitions through a combination of equity offerings and debt financing.
The Company anticipates that adequate cash will be available to fund its
operating and administrative expenses, continuing debt service obligations and
the payment of dividends in accordance with REIT requirements in the foreseeable
future.
The information in the immediately preceding paragraph is forward looking
and involves risk and uncertainties that could significantly impact the
Company's expected liquidity requirements in the short and long term. While it
is impossible to itemize the many factors and specific events that could affect
the Company's outlook for its liquidity requirements, such factors would include
the actual timing of and costs associated with the Company's acquisitions, the
actual capital expenditures associated therewith, and the strength of the local
economies of the submarkets in which the Company operates. Higher than expected
acquisition, rental and/or rehabilitation costs, delays in the rehabilitation of
properties, a downturn in the local economies and/or the lack of growth of such
economies could reduce the Company's revenues and increase its expenses,
resulting in a greater burden on the Company's liquidity than that which the
Company has described above.
In order to qualify as a REIT for federal income tax purposes, the Company
is required to make distributions to its stockholders of at least 95% of REIT
taxable income. The Company expects to use its cash flow from operating
activities for distributions to stockholders and for payment of other
expenditures. The Company intends to invest amounts accumulated for distribution
in short-term investments.
CAPITAL EXPENDITURES
The Company capitalizes the direct and indirect cost of expenditures for
the acquisition or rehabilitation of its multifamily and industrial properties.
The Company also capitalizes the direct cost of capital expenditures which are
considered revenue producing ("Revenue Producing") and other expenditures which
increase the service life of the Company's properties ("Restorations").
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Revenue Producing expenditures are improvements which significantly
increase the revenue-producing capability of the asset including tenant
improvements at industrial properties, installation of washers and dryers at
multifamily properties, and other value-added additions.
Rehabilitation expenditures are costs the Company determines are necessary
during the due diligence phase immediately preceding the acquisition of a
property. At newly acquired properties, the Company often finds it necessary to
upgrade the physical appearance of such properties and to complete the
maintenance and repair work which had been deferred by prior owners.
Restorations are nonrevenue-producing capital expenditures which recur on a
regular basis, and have estimated useful lives of more than one year.
Make ready costs incurred after a property's rehabilitation, such as carpet
and appliance replacement, interior painting and window coverings are expensed.
The following table summarizes capital expenditures incurred by the Company
(excluding costs incurred related to the Texas multifamily portfolio sold in
1995) for the years ended December 31, 1995 and 1994 and for the three months
ended March 31, 1996 and 1995 (all amounts are in thousands):
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------ -------------------
1995 1994 1996 1995
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Multifamily
Acquisitions..................................... $ 85,726 $28,375 $ -- $ --
Revenue-producing................................ 272 -- 34 --
Rehabilitation................................... 1,514 1,115 527 269
Restoration...................................... 58 19 12 299
-------- ------- -------- --------
87,570 29,509 573 568
-------- ------- -------- --------
Industrial
Acquisitions..................................... 24,591 69,667 6,800 7,157
Revenue producing................................ 865 226 550 115
Rehabilitation................................... 162 -- 126 --
Restorations..................................... 99 -- -- --
-------- ------- -------- --------
25,717 69,893 7,476 7,272
-------- ------- -------- --------
$113,287 $99,402 $ 8,049 $ 7,840
======== ======= ======== ========
</TABLE>
The Company anticipates incurring similar capital expenditures in the
remainder of 1996. The Company expects such expenditures will be funded from
available cash balances, revolving lines of credit and proceeds from
refinancings.
ECONOMIC CONDITIONS
All of the Company's leases on its Multifamily Properties are for a period
of one year or less. The Company's leases on its Industrial Properties generally
have terms ranging from one to five years and contain provisions providing for
rental increases based either on fixed increase or on increases in the Consumer
Price Index. Management believes the nature of its multifamily leases and the
provisions contained in its industrial leases provide for increases in the
tenants' base rent and tend to mitigate the adverse impact of inflation.
Many regions of the United States, including regions in which the Company
owns properties, have in the past experienced an economic recession. Adverse
changes in general or local economic conditions could result in the inability of
some existing tenants to the Company to meet their lease obligations and could
adversely affect the Company's ability to attract or retain tenants.
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<PAGE> 29
MANAGEMENT
The directors, executive officers and key employees of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------- --- -------------------------------------
<S> <C> <C>
Glenn L. Carpenter............................. 53 Chairman of the Board, President and
Chief Executive Officer
Donald G. Herrman.............................. 39 Executive Vice President, Chief
Financial Officer and Secretary
Lonnie P. Nadal................................ 40 Vice President of Acquisitions
Robert A. Dewey................................ 36 Vice President of Industrial
Operations
Kimberly G. Brown.............................. 40 Vice President of Apartment
Operations
Angela M. Wixted............................... 41 Treasurer/Controller
Stewart W. Bowie............................... 71 Director
Peter L. Eppinga............................... 54 Director
John F. Kooken................................. 64 Director
Royce B. McKinley.............................. 75 Director
Robert E. Morgan............................... 76 Director
Keith W. Renken................................ 60 Director
</TABLE>
The following is a biographical summary of experience for the executive
officers, key employees and directors of the Company.
Glenn L. Carpenter has been President, Chief Executive Officer and a
director of the Company since its formation in 1993. Mr. Carpenter served as
Chief Executive Officer of Realty from January 1992 until February 1994, and
served in various officer positions from 1979. Mr. Carpenter has been a member
of NAREIT since 1980 and served on NAREIT's Board of Governors.
Donald G. Herrman has been Executive Vice President since May 1995, and
Secretary and Chief Financial Officer of the Company since its formation in
1993. From the Company's formation through May 1995, Mr. Herrman also served as
Senior Vice President of the Company. Mr. Herrman served as Vice
President-Finance for Realty from January 1992 to February 1994 and served in
various officer positions at Realty from 1985. Mr. Herrman is a certified public
accountant in California.
Lonnie P. Nadal has been Vice President of Acquisitions of the Company
since its formation in 1993. Mr. Nadal served as Vice President-Acquisitions of
Realty from January 1992 to February 1994, and as a Director of Operations from
August 1991 until February 1994. From 1983 until 1991, Mr. Nadal was a partner
of Lincoln Property Company, a real estate development and property management
company.
Robert A. Dewey has served as Vice President of Industrial Operations of
the Company since January 1995, and had served as Vice President of Operations
of the Company from its formation in 1993 until January 1995. Mr. Dewey served
as Director of Asset Management for Realty from 1992 until February 1994. From
1991 to 1992, he was oversight manager of the Newport Beach office of the
Resolution Trust Corporation. From 1988 to 1990, Mr. Dewey was a Commercial
Manager for a real estate development company.
Kimberly G. Brown has served as Vice President of Apartment Operations of
the Company since January 1, 1996, and had served as Director of Apartment
Operations and Regional Manager for the Pacific Northwest apartment communities
owned by the Company from August 1993 until December 1995. From 1991 to August
of 1993, Ms. Brown served as a district manager for Lexford Properties, Irving,
Texas.
Angela M. Wixted has served as Treasurer and Controller of the Company
since October 1994. Ms. Wixted served as a financial consultant for various
clients from 1993 to 1994. During 1992,
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<PAGE> 30
Ms. Wixted was controller for O'Donnell Property Services. From 1986 to 1992,
Ms. Wixted served as CFO/Controller of SDC Investments, Inc. Ms. Wixted is a
certified public accountant in California.
Stewart Bowie has served as a Director of the Company since 1994. Mr. Bowie
is retired, having previously served as Chief Executive Officer of SDC, Inc., a
real estate development firm, and was Chairman of the California Business
Properties Association. Mr. Bowie currently serves on the Board of Oak Grove Oil
Company.
Peter L. Eppinga has served as a Director of the Company since 1994. Mr.
Eppinga is a practicing attorney and business consultant. He previously served
as President of Laguna Hills Properties, a company established by Sears Savings
Bank to deal with certain non-performing loans and as Senior Vice President of
Sears Savings Bank and as Chairman of Sears Savings Bank's Problem Loan
Committee.
John F. Kooken has served as a Director of the Company since 1994. Mr.
Kooken is retired, having previously served as Vice Chairman from 1987 to 1992
and as Chief Financial Officer from 1984 until 1992 of Security Pacific
Corporation. Mr. Kooken currently serves on the Boards of Directors of US
Facilities Corp., Glendale Federal Bank, Southern California Healthcare Systems
and Huntington Memorial Hospital.
Royce B. McKinley has served as a Director of the Company since 1994. Mr.
McKinley is retired, having previously served as Chairman and Chief Executive
Officer of Realty from 1989 to 1991, as President and Chief Executive Officer of
Realty from 1979 to 1989 and as director of Realty and Santa Anita Operating
Company from 1979 to 1993. Mr. McKinley is a past president of NAREIT.
Robert E. Morgan has served as a Director of the Company since 1994. Mr.
Morgan is retired, having previously served as President and Chief Executive
Officer of Coldwell Banker First Newport Corporation, a real estate investment
trust, and as President of Coldwell Banker Real Estate Finance Services. Mr.
Morgan currently serves on the Boards of Directors of Meridian Industrial Trust,
Meridian Point Realty Trust 83 and Bixby Ranch Company.
Keith W. Renken has served as a Director of the Company since 1994. Mr.
Renken is the retired Managing Partner of the Los Angeles office of Deloitte &
Touche and was with the firm from 1959 through 1992. He is currently teaching at
the University of Southern California's School of Accounting in the "Executive
in Residence" program. Mr. Renken serves on the Board of Directors of Coast
Federal Bank and several other privately-owned companies.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of the material federal income tax considerations
regarding the Offering is based on current law, is for general information only
and is not tax advice. This discussion does not purport to deal with all aspects
of taxation that may be relevant to particular shareholders in light of their
personal investment or tax circumstances, or to certain types of shareholders
including insurance companies, tax-exempt organizations or retirement accounts
(except to the extent discussed under the heading "-- Taxation of Tax-Exempt
Shareholders"), financial institutions or broker-dealers, foreign corporations
and persons who are not citizens or residents of the United States (except to
the extent discussed under the heading "-- Taxation of Non-U.S. Shareholders"),
which are subject to special treatment under the federal income tax laws.
EACH PROSPECTIVE PURCHASER OF COMMON SHARES IS URGED TO CONSULT WITH ITS
OWN TAX ADVISOR TO DETERMINE THE IMPACT OF SUCH PROSPECTIVE PURCHASER'S PERSONAL
TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
SALE OF COMMON SHARES IN AN ENTITY ELECTING TO BE TAXED AS A REIT, INCLUDING THE
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE,
OWNERSHIP, SALE AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
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<PAGE> 31
TAXATION OF THE COMPANY
General. The Company has made an election to be taxed as a REIT under
Sections 856 through 860 of the Code, commencing with its taxable year ended
December 31, 1994. The Company believes that it has been organized and has
operated in such a manner as to qualify for taxation as a REIT under the Code,
and the Company intends to continue to operate in such a manner, but no
assurance can be given that it has operated or will operate in a manner so as to
qualify or remain qualified.
The sections of the Code and Treasury Regulations governing REITs are
highly technical and complex. The following sets forth the material aspects of
the sections that govern the federal income tax treatment of a REIT and its
shareholders. This summary is qualified in its entirety by the applicable Code
provisions, Treasury Regulations and rules promulgated thereunder, and
administrative and judicial interpretations thereof.
In the opinion of Cox, Castle & Nicholson, LLP, counsel to the Company,
commencing with the Company's taxable year ended December 31, 1994, the Company
was organized in conformity with the requirements for qualification as a REIT,
and its method of operation has enabled, and its proposed method of operation
will enable, it to continue to meet the requirements under the Code for
qualification and taxation as a REIT. It must be emphasized that this opinion is
based on various assumptions and is conditioned upon the accuracy of certain
representations made by the Company as to factual matters relating to the
Company's organization, operations, income, assets, distributions and stock
ownership. The Company's qualification as a REIT depends on the Company having
met and continuing to meet -- through actual operating results, distribution
levels and diversity of stock ownership -- the various qualification tests
imposed under the Code and discussed below, the results of which will not be
reviewed by Cox, Castle & Nicholson, LLP. Accordingly, no assurance can be given
that the actual results of the Company's operations for any particular taxable
year have satisfied or will satisfy such requirements. An opinion of counsel is
not binding on the IRS or the courts, and no assurance can be given that the IRS
will not challenge the Company's eligibility for taxation as a REIT. Further,
the anticipated federal income tax treatment described in this Prospectus may be
changed, perhaps retroactively, by legislative, administrative or judicial
action at any time. See "-- Failure to Qualify."
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that is currently
distributed to shareholders. This treatment substantially eliminates the "double
taxation" (at the corporate and shareholder levels) of income that generally
results from an investment in a regular corporation. However, the Company will
be subject to federal income tax as follows: First, the Company will be taxed at
regular corporate rates on any undistributed "REIT taxable income" (as defined
below), including undistributed net capital gains. Second, under certain
circumstances the Company may be subject to the "alternative minimum tax" as a
consequence of its items of tax preference to the extent that tax exceeds its
regular tax. Third, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" (generally, property acquired by reason of
default on indebtedness held by the Company) that is held primarily for sale to
customers in the ordinary course of business or (ii) other nonqualifying income
from foreclosure property, it will be subject to tax at the highest corporate
rate on such income. Fourth, if the Company has net income from prohibited
transactions (which are, in general, certain sales or other dispositions of
property held primarily for sale to customers in the ordinary course of
business, other than foreclosure property), such income will be subject to a
100% tax. Fifth, if the Company should fail to satisfy the 75% gross income test
or the 95% gross income test (as discussed below), but has nonetheless
maintained its qualification as a REIT because certain other requirements have
been met, it will be subject to a 100% tax on an amount equal to (a) the greater
of the amount by which the Company fails the 75% or 95% test, multiplied by (b)
a fraction intended to reflect the Company's profitability. Sixth, if the
Company should fail to distribute during each calendar year at least the sum (i)
85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain
net income for such year, and (iii) any
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<PAGE> 32
undistributed taxable income from prior periods, the Company would be subject to
a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. Seventh, with respect to any asset (a "Built-in Gain
Asset") acquired by the Company from a corporation which is or has been a C
corporation (i.e., generally a corporation subject to full corporate-level tax)
in certain transactions in which the basis of the Built-in Gain Asset in the
hands of the Company is determined by reference to the basis of the asset in the
hands of the C corporation, if the Company recognizes gain on the disposition of
such asset during the 10-year period (the "Recognition Period") beginning on the
date on which such asset was acquired by the Company, then, to the extent of the
Built-in Gain (i.e., the excess of (a) the fair market value of such asset over
(b) the Company's adjusted basis in such asset, determined as of the beginning
of the Recognition Period), such gain will be subject to tax at the highest
regular corporate rate pursuant to IRS regulations that have not yet been
promulgated.
Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association (i) that is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable shares, or
by transferable certificates of beneficial interest; (iii) that would be taxable
as a domestic corporation but for Sections 856 through 859 of the Code; (iv)
that is neither a financial institution nor an insurance company subject to
certain provisions of the Code; (v) the beneficial ownership of which is held by
100 or more persons; (vi) in which during the last half of each taxable year not
more than 50% in value of its outstanding stock is owned, actually or
constructively, by five or fewer individuals (as defined in the Code to include
certain entities); and (vii) which meets certain other tests, described below,
regarding the nature of its income and assets. The Code provides that conditions
(i) to (iv), inclusive, must be met during the entire taxable year and that
condition (v) must be met during at least 335 days of a taxable year of 12
months, or during a proportionate part of a taxable year of less than 12 months.
Conditions (v) and (vi) will not apply until after the first taxable year for
which an election is made to be taxed as a REIT.
The Company believes that it has issued sufficient shares to allow it to
satisfy conditions (v) and (vi). In addition, the Company's Charter provides for
restrictions regarding the transfer and ownership of shares, which restrictions
are intended to assist the Company in continuing to satisfy the share ownership
requirements described in (v) and (vi) above. Such transfer and ownership
restrictions are described in the accompanying Prospectus. These restrictions
may not ensure that the Company will, in all cases, be able to satisfy the share
ownership requirements described above. If the Company fails to satisfy such
share ownership requirements, the Company's status as a REIT will terminate. See
"Failure to Qualify."
To monitor the Company's compliance with the share ownership requirements,
the Company is required to maintain records regarding the actual ownership of
its shares. To do so, the Company must demand written statements each year from
the record holders of certain percentages of its shares of stock in which the
record holders are to disclose the actual owners of the shares (i.e., the
persons required to include in gross income the REIT dividends). A REIT with
2,000 or more record shareholders must demand statements from record holders of
5% or more of its shares, one with less than 2,000, but more than 200 record
shareholders must demand statements from record holders of 1% or more of the
shares, while a REIT with 200 or fewer record shareholders must demand
statements from record holders of 0.5% or more of the shares. A list of those
persons failing or refusing to comply with this demand must be maintained as
part of the Company's records. A shareholder who fails or refuses to comply with
the demand must submit a statement with its tax return disclosing the actual
ownership of the shares and certain other information.
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the character of the
assets and gross income of the partnership shall retain the same character in
the hands of the REIT for purposes of Section 856 of the Code, including
satisfying the gross income tests and the assets tests, discussed below. Thus,
the Company's proportionate share of the assets,
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<PAGE> 33
liabilities and items of income of PGP Inland Communities, L.P., the Company's
subsidiary operating partnership (the "Operating Partnership"), are treated as
assets, liabilities and items of income of the Company for purposes of applying
the requirements described herein. The Company controls the Operating
Partnership and believes it has operated the Operating Partnership in a manner
consistent with the requirements for qualification as a REIT, and intends to
continue to operate the Operating Partnership in such a manner. However, there
can be no assurance that the Company has operated or will actually operate the
Operating Partnership in a manner that has enabled or will enable the Company to
continue to satisfy the REIT provisions of the Code.
Income Tests. In order to maintain qualification as a REIT, the Company
annually must satisfy three gross income requirements. First, at least 75% of
the Company's gross income (excluding gross income from certain sales of real
property held primarily for sale) for each taxable year must be derived directly
or indirectly from investments relating to real property or mortgages on real
property (including "rents from real property" and, in certain circumstances,
interest) or from certain types of temporary investments. Second, at least 95%
of the Company's gross income (excluding gross income from certain sales of real
property held primarily for sale) for each taxable year must be derived from
items of income that qualify under the 75% test, dividends, interest and gain
from the sale or disposition of stock or securities (or from any combination of
the foregoing). Third, gain from the sale or other disposition of stock or
securities held for less than one year, gain from certain sales of real property
held primarily for sale and gain from the sale or other disposition of real
property held for less than four years (apart from involuntary conversions and
sales of foreclosure property) must represent less than 30% of the Company's
gross income for each taxable year.
Rents received by the Company qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, rents received from a tenant will not qualify as
"rents from real property" in satisfying the gross income test if the Company,
or an owner of 10% or more of the Company, actually or constructively owns 10%
or more of such tenant (a "Related Party Tenant"). Third, if rent attributable
to personal property, leased in connection with a lease of real property, is
greater than 15% of the total rent received under the lease, then the portion of
rent attributable to such personal property will not qualify as "rents from real
property." Finally, for rents received to qualify as "rents from real property,"
the Company generally must not operate or manage the property or furnish or
render services to the tenants of such property, other than through an
independent contractor from whom the Company derives no revenue, provided,
however, the Company may directly perform certain services that are "usually or
customarily rendered" in connection with the rental of space for occupancy only
and not otherwise considered "rendered to the occupant" of the property. The
Company regularly monitors its activities to ensure that the foregoing tests are
satisfied.
The Company receives fees in exchange for management services rendered to
the Operating Partnership. Although the percentage of those fees exceeding the
Company's capital interest in the Operating Partnership will not qualify under
the 75% or 95% gross income tests, the Company believes that the aggregate
amount of such income (together with any other nonqualifying income) in any
taxable year has not exceeded and will not exceed the limits on nonqualifying
income under the gross income tests.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions generally will be available if (i) the Company's failure to meet such
tests was due to reasonable cause and not due to willful neglect, (ii) the
Company attaches to its return for that year a schedule of the nature and amount
of each item of its income and (iii) any incorrect information on the schedule
was not due to fraud with intent to evade tax. However, in the event the Company
does not meet these tests, the Company would not be
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<PAGE> 34
entitled to the benefit of these relief provisions. If these relief provisions
are inapplicable to a particular set of circumstances involving the Company, the
Company will not qualify as a REIT. As discussed above in "-- General," even if
these relief provisions apply, a tax would be imposed with respect to the excess
nonqualifying income. There are no comparable relief provisions which could
mitigate the consequences of a failure to satisfy the 30% gross income test.
Asset Tests. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets must be represented by real
estate assets, stock or debt instruments held for not more than one year
purchased with the proceeds of a stock offering or long-term (at least five
years) debt offering of the Company, cash, cash items and government securities.
Second, not more than 25% of Company's total assets may be represented by
securities other than those included in the 75% asset test. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by the Company may not exceed 5% of the value of the Company's
total assets and the Company may not own more than 10% of any one issuer's
outstanding voting securities. In applying these tests, the Company will be
deemed to own a proportionate share of any assets owned, directly or indirectly,
by the Operating Partnership based on its capital interest in the Operating
Partnership.
The Company believes that it has complied and will continue to comply with
the asset tests. Substantially all of the Company's investments represent
qualifying real estate assets, including the Company's share of the assets of
the Operating Partnership.
Annual Distribution Requirements. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends) to
its shareholders in an amount at least equal to (i) the sum of (a) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and the Company's net capital gain) and (b) 95% of the net income
(after tax), if any, from foreclosure property, minus (ii) the sum of certain
items of noncash income. "REIT taxable income" for any year means the taxable
income of the Company for such year (excluding any net income derived either
from property held primarily for sale to customers or from foreclosure
property), subject to certain adjustments provided in the REIT provisions of the
Code. In addition, if the Company disposes of any Built-in Gain Asset during
such asset's Recognition Period, the Company will be required, pursuant to IRS
regulations which have not yet been promulgated, to distribute at least 95% of
the Built-in Gain (after tax), if any, recognized on the disposition of such
asset. Such distributions must be paid in the taxable year to which they relate,
or in the following taxable year if declared before the Company timely files its
tax return for such year and if paid on or before the first regular dividend
payment after such declaration. The Company intends to make, and to cause the
Operating Partnership to make, timely distributions sufficient to satisfy these
annual distribution requirements. To the extent that the Company does not
distribute all of its net capital gain or distributes at least 95%, but less
than 100%, of its REIT taxable income, as adjusted, it will be subject to tax
thereon at regular capital gain and ordinary corporate tax rates.
It is possible that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet the distribution requirements described
above due to timing differences between the actual receipt of income and actual
payment of deductible expenses and the inclusion of such income and deduction of
such expenses in arriving at taxable income of the Company, or if nondeductible
capital expenditures such as principal amortization or capital expenditures
exceed the amount of noncash deductions. In the event that such timing
differences occur, in order to meet the distribution requirements, the Company
may find it necessary to arrange, or to cause the Operating Partnership to
arrange, for short-term or long-term borrowing, to sell assets, or to pay
dividends in the form of taxable stock dividends.
Under certain circumstances, the Company may be able to rectify a failure
to meet the above distribution requirements for a year by paying "deficiency
dividends" to shareholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. The Company will,
however, be required to pay interest based upon the amount of any deduction
taken for deficiency dividends.
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<PAGE> 35
Furthermore, if the Company should fail to distribute each calendar year at
least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of
its REIT capital gain income for such year and (iii) any undistributed taxable
income from prior periods, the Company will be subject to a 4% excise tax on the
excess of such required distribution over the amounts actually distributed. Any
REIT taxable income and capital gains on which tax is imposed for any year is
treated as an amount distributed during that year for purposes of this excise
tax.
FAILURE TO QUALIFY
If the Company should fail to qualify for taxation as a REIT in any taxable
year, and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
rates applicable to regular C corporations. Distributions to shareholders in any
year in which the Company fails to qualify as a REIT will not be deductible by
the Company nor will they be required to be made. As a result, the Company's
failure to qualify as a REIT will reduce the cash available for distribution by
the Company to shareholders. In addition, if the Company fails to qualify as a
REIT, all distributions to shareholders will be taxable as ordinary income to
the extent of the Company's current and accumulated earnings and profits, and,
subject to certain limitations in the Code, corporate distributees may be
eligible for the dividends received deduction. Unless entitled to relief under
specific statutory provisions, the Company will also be disqualified from
taxation as a REIT for the four taxable years following the year during which
qualification was lost. It is not possible to state whether in all circumstances
the Company would be entitled to such statutory relief. In addition, a recent
federal budget proposal contains language which, if enacted, would result in the
immediate taxation of all gain inherent in a C corporation's assets upon an
election by the corporation to become a REIT, and thus would effectively
preclude the Company from re-electing REIT status following a termination of its
REIT qualification.
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable domestic shareholders out of current or accumulated earnings
and profits (and not designated as capital gain dividends) will be taken into
account by them as ordinary income and will not be eligible for the dividends
received deduction for corporations. Distributions that are properly designated
by the Company as capital gain dividends will be taxed as long-term capital gain
(to the extent they do not exceed the Company's actual net capital gain for the
taxable year) without regard to the period for which the shareholder has held
its shares. However, corporate shareholders may be required to treat up to 20%
of certain capital gain dividends as ordinary income. Distributions (not
designated as capital gain dividends) in excess of current and accumulated
earnings and profits will be treated as tax-free returns of capital to the
extent of the shareholder's basis in the shares, and will reduce the adjusted
basis of such shares (but not below zero). To the extent distributions in excess
of current and accumulated earnings and profits exceed the basis of a
shareholder's shares they will be included in income as long-term capital gain
(or short-term capital gain if the shares have been held for one year or less),
assuming the shares are a capital asset in the hands of the shareholder. In
addition, any dividend declared by the Company in October, November or December
of any year payable to a shareholder of record on a specified date in any such
month shall be treated as both paid by the Company and received by the
shareholder on December 31 of such year, provided that the dividend is actually
paid by the Company during January of the following calendar year. Shareholders
may not include in their individual income tax returns any net operating losses
or capital losses of the Company.
Upon any sale or other disposition of shares, a domestic shareholder will
recognize gain or loss for federal income tax purposes in an amount equal to the
difference between (i) the amount of cash and the fair market value of any
property received on such sale or other disposition and (ii) the holder's
adjusted basis in such shares for tax purposes. In general, provided the shares
were held as a capital asset, any gain or loss realized on a taxable disposition
of shares will be treated as long-term
S-35
<PAGE> 36
capital gain or loss if the shares have been held for more than 12 months and
otherwise as short-term capital gain or loss. However, any loss upon a sale or
exchange of shares by a shareholder who has held such shares for six months or
less (after applying certain holding period rules) will be treated as a
long-term capital loss to the extent of distributions from the Company required
to be treated by such shareholder as long-term capital gain.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company reports to its domestic shareholders and the IRS the amount of
dividends paid with respect to each calendar year, and the amount of tax
withheld therefrom, if any. Under the backup withholding rules, a shareholder
may be subject to backup withholding at a rate of 31% with respect to dividends
paid unless such holder (i) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact or (ii) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with applicable requirements of the backup
withholding rules. A shareholder that does not provide the Company with its
correct taxpayer identification number may also be subject to penalties imposed
by the IRS. Any amount withheld under the backup withholding rules will be
creditable against the shareholder's income tax liability. In addition, the
Company may be required to withhold a portion of capital gain distributions made
to any shareholders who fail to certify to their non-foreign status to the
Company. See "-- Taxation of Non-U.S. Shareholders."
TAXATION OF TAX-EXEMPT SHAREHOLDERS
The IRS has ruled that amounts distributed as dividends by a REIT do not
constitute unrelated business taxable income ("UBTI") when received by a
tax-exempt entity. Based on that ruling, dividend income from the Company should
not, subject to certain exceptions described below, be UBTI to a qualified plan,
IRA or other tax-exempt entity (a "Tax-Exempt Shareholder") provided the
Tax-Exempt Shareholder has not held its shares as "debt financed property"
within the meaning of Section 514 of the Code and the shares are not otherwise
used in an unrelated trade or business of the Tax-Exempt Shareholder. Similarly,
income from the sale of Common Stock should not, subject to certain exceptions
described below, constitute UBTI unless the Tax-Exempt Shareholder has held such
Common Stock as a dealer (under Section 512(b)(5)(B) of the Code) or as
"debt-financed property."
For Tax-Exempt Shareholders that are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Sections
501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code, respectively, income from an
investment in the Company will constitute UBTI unless the organization is able
to properly deduct amounts set aside or placed in reserve for certain purposes
so as to offset the income generated by its investment in the Company. Such
prospective investors should consult their tax advisors concerning these
"set-aside" and reserve requirements.
Notwithstanding the above, however, a portion of the dividends paid by the
Company shall be treated as UBTI to certain trusts if the Company is treated as
a "pension held REIT." A trust will be subject to this rule if it (i) is
described in Section 401(a) of the Code, (ii) is tax-exempt under Section 501(a)
of the Code and (iii) holds more than 10% (by value) of the interests in the
REIT. Tax-exempt pension funds that are described in Section 401(a) of the Code
are referred to below as "qualified trusts."
The Company will be treated as a "pension held REIT" if (i) it would not
have qualified as a REIT but for the fact that Section 856(h)(3) of the Code
provides that stock owned by qualified trusts shall be treated, for purposes of
the "five or fewer" shareholder requirement (discussed above), as owned by the
beneficiaries of the trust (rather than by the trust itself) and (ii) either (a)
at least one such qualified trust holds more than 25% (by value) of the
interests in the Company or (b) one or more such qualified trusts, each of whom
owns more than 10% (by value) of the
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<PAGE> 37
interests in the Company, hold in the aggregate more than 50% (by value) of the
interests in the Company. The Company believes that it has not been, and is not,
a "pension held REIT."
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing United States federal income taxation of the ownership
and disposition of stock by persons that are, for purposes of such taxation,
nonresident alien individuals, foreign corporations, foreign partnerships or
foreign estates or trusts (collectively, "Non-U.S. Shareholders") are complex,
and no attempt is made herein to provide more than a brief summary of such
rules. Accordingly, the discussion does not address all aspects of United States
federal income tax law and does not address state, local or foreign tax
consequences that may be relevant to a Non-U.S. Shareholder in light of its
particular circumstances. In addition, this discussion is based on current law,
which is subject to change, and assumes that the Company qualifies for taxation
as a REIT. Prospective Non-U.S. Shareholders should consult with their own tax
advisors to determine the impact of federal, state, local and foreign income and
other tax laws with regard to an investment in Common Stock, including any
reporting requirements.
Distributions. Distributions by the Company to a Non-U.S. Shareholder that
are neither attributable to gain from sales or exchanges by the Company of
United States real property interests nor designated by the Company as capital
gains dividends will be treated as dividends of ordinary income to the extent
that they are made out of current or accumulated earnings and profits of the
Company. Such distributions generally will be subject to withholding of United
States federal income tax at a 30% rate on the total amount distributed unless
an applicable income tax treaty reduces or eliminates that tax. However,
dividends that are "effectively connected" with the conduct of a trade or
business by the Non-U.S. Shareholder will be subject to tax on a net basis at
graduated rates, in the same manner as domestic shareholders are taxed with
respect to such dividends, and are generally not subject to withholding. Any
such "effectively connected" dividends received by a Non-U.S. Shareholder that
is a corporation may also be subject to an additional branch profits tax at a
30% rate or such lower rate as may be specified by an applicable income tax
treaty.
Pursuant to current Treasury Regulations, dividends paid to an address in a
country outside the United States are generally presumed to be paid to a
resident of such country for purposes of ascertaining the requirement of
withholding discussed above and the applicability of a tax treaty rate. Under
proposed Treasury Regulations not currently in effect, however, a Non-U.S.
Shareholder who seeks to claim the benefit of an applicable treaty rate would be
required to satisfy certain certification and other requirements. Under certain
treaties, lower withholding rates generally applicable to dividends do not apply
to dividends from a REIT, such as the Company. A Non-U.S. Shareholder must file
a properly completed and executed IRS Form 4224 (or, under proposed regulations
not currently in effect, IRS Form W-8) with the Company's withholding agent
certifying that the investment to which the distribution relates is effectively
connected with the conduct of a United States trade or business of such Non-U.S.
Shareholder in order to qualify for the exemption from withholding under the
effectively connected income exemption discussed above.
Distributions that are neither attributable to gain from sales or exchanges
by the Company of United States real property interests nor designated by the
Company as capital gains dividends and that are in excess of current or
accumulated earnings and profits of the Company will not be taxable to a
Non-U.S. Shareholder to the extent that they do not exceed the adjusted basis of
the shareholder's Common Stock, but rather will reduce the adjusted basis of
such Common Stock. To the extent such distributions in excess of the Company's
current and accumulated earnings and profits exceed the adjusted basis of a
Non-U.S. Shareholder's Common Stock, they will give rise to gain from the sale
or exchange of the Common Stock, the tax treatment of which is described below.
Under current Treasury Regulations, if it cannot be determined at the time a
distribution is made whether or not such distribution will be in excess of
current or accumulated earnings and profits, the entire distribution will
generally be treated as a dividend subject to withholding. However, amounts thus
withheld are generally refundable if it is subsequently determined that such
distribution was, in
S-37
<PAGE> 38
fact, in excess of current or accumulated earnings and profits of the Company.
Under proposed regulations not currently in effect, the Company may, at its
option, make a reasonable estimate of the portion of a distribution that is out
of current or accumulated earnings and profits and withhold only with respect to
such portion, although any such determination would not affect the Non-U.S.
Shareholder's liability for the 30% tax on the amount ultimately determined to
have been distributed out of the Company's current or accumulated earnings and
profits.
Distributions to a Non-U.S. Shareholder that are designated by the Company
at the time of distribution as capital gains dividends (other than those
attributable to gain from sales or exchanges by the Company of United States
real property interests) generally will not be subject to United States federal
income taxation unless (i) the investment in the Common Shares is effectively
connected with the Non-U.S. Shareholder's United States trade or business, in
which case the Non-U.S. Shareholder will be subject to the same treatment as
domestic shareholders with respect to such gain (except that a shareholder that
is a foreign corporation may also be subject to the 30% branch profits tax, as
discussed above) or (ii) the Non-U.S. Shareholder is a nonresident alien
individual who is present in the United States for 183 days or more during the
taxable year and either has a "tax home" in the United States or sold his shares
under circumstances where the sale is attributable to a U.S. office, in which
case the nonresident alien individual will be subject a 30% tax on the
individual's capital gains.
Distributions to a Non-U.S. Shareholder that are attributable to gain from
sales or exchanges by the Company of United States real property interests will
be treated as income that is effectively connected with a United States trade or
business of the Non-U.S. Shareholder. Non-U.S. Shareholders would thus generally
be taxed on such distributions at the same rates applicable to domestic
shareholders (subject to a special alternative minimum tax in the case of
nonresident alien individuals). Also, such gain may be subject to a 30% branch
profits tax in the hands of a corporate Non-U.S. Shareholder that is not
entitled to a treaty exemption or rate reduction. The Company is required to
withhold 35% of any such distribution, and the withheld amount is creditable
against the Non-U.S. Shareholder's United States federal income tax liability.
Sale of Common Shares. Gain recognized by a Non-U.S. Shareholder upon a
sale or other disposition of Common Shares generally will not be subject to
United States federal income tax unless (i) the Company is not a "domestically
controlled REIT," or (ii) the investment in the Common Shares is effectively
connected with the Non-U.S. Shareholder's United States trade or business or
(iii) in the case of a Non-U.S. Shareholder who is a nonresident alien
individual, the individual is present in the United States for 183 days or more
during the taxable year and either has a "tax home" in the United States or sold
his shares under circumstances where the sale is attributable to a U.S. office.
A domestically controlled REIT is defined generally as a REIT in which at all
times during a specified testing period less than 50% in value of the stock was
held directly or indirectly by foreign persons. The Company currently believes
that it is a domestically controlled REIT. However, because the Common Stock
will be publicly traded, no assurance can be given that the Company is or will
continue to be a domestically-controlled REIT. In the circumstances described
above in clauses (i) and (ii), the Non-U.S. Shareholders will generally be
subject to the same treatment as domestic shareholders with respect to such gain
(subject to a special alternative minimum tax in the case of nonresident alien
individuals in the circumstances described above in clause (i) and, in the case
of foreign corporations, subject to the possible application of the 30% branch
profits tax, discussed above). In the circumstances described above in clause
(iii), the nonresident alien individual will be subject to a 30% tax on the
individual's capital gain.
Information Reporting and Backup Withholding. The Company must report
annually to the IRS and to each Non-U.S. Shareholder the amount of distributions
subject to withholding as described above and the tax withheld with respect to
such distributions, regardless of whether withholding is actually required.
Copies of the information returns reporting such distributions and withholding
may also be made available to the tax authorities in the country in which the
Non-U.S. Shareholder resides under the provisions of an applicable income tax
treaty. Additional issues may
S-38
<PAGE> 39
arise pertaining to information reporting and backup withholding for Non-U.S.
Shareholders. Non-U.S. Shareholders should consult their tax advisors with
regard to U.S. information reporting and backup withholding.
TAX RISKS ASSOCIATED WITH OWNING AN INTEREST IN THE OPERATING PARTNERSHIP
The Company owns an interest in the Operating Partnership. The ownership of
an interest in the Operating Partnership may involve special tax risks,
including the possible challenge by the IRS of (i) allocations of income and
expense items, which could affect the computation of taxable income of the
Company and (ii) the status of the Operating Partnership as a partnership (as
opposed to an association taxable as a corporation) for federal income tax
purposes. If the Operating Partnership is treated as an association taxable as a
corporation for federal income tax purposes, the Operating Partnership would be
treated as a taxable entity. In addition, in such a situation, (i) if the
Company owned more than 10% of the outstanding voting securities of the
Operating Partnership, or the value of such securities exceeded 5% of the value
of the Company's assets, the Company would fail to satisfy the asset tests
described above and would therefore fail to qualify as a REIT, (ii)
distributions from the Operating Partnership to the Company would be treated as
dividends, which are not taken into account in satisfying the 75% gross income
test described above and would, therefore, preclude the Company from satisfying
such test, (iii) the interest in the Operating Partnership held by the Company
would not qualify as a "real estate asset," which could preclude the Company
from meeting the 75% asset test described above and (iv) the Company would not
be able to deduct its share of any losses generated by the Operating Partnership
in computing its taxable income. See "-- Failure to Qualify" for a discussion of
the effect of the Company's failure to meet such tests for a taxable year.
Although the Company believes it will be so treated, the Operating
Partnership has not requested, and does not intend to request, a ruling from the
IRS that it will be treated as a partnership for federal income tax purposes.
Instead, Cox, Castle & Nicholson, LLP has delivered its opinion that based on
the provisions of the agreement of the Operating Partnership, certain factual
assumptions and representations as to factual matters, the Operating Partnership
will be treated as a partnership for federal income tax purposes rather than an
association or publicly traded partnership taxable as a corporation. Unlike a
private letter ruling, an opinion of counsel is not binding on the IRS, and no
assurance can be given that the IRS will not challenge the status of the
Operating Partnership as a partnership for federal income tax purposes. If such
a challenge were sustained by a court, the Operating Partnership could be
treated as a corporation for federal income tax purposes.
OTHER TAX CONSEQUENCES
The Company and its shareholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its shareholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective shareholders should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in the Company.
S-39
<PAGE> 40
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated, Oppenheimer & Co., Inc. and Prudential
Securities Incorporated have severally agreed to purchase from the Company and
the Selling Stockholder the following respective number of shares of Common
Stock at the public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus Supplement.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- -------------------------------------------------------------------------------- ---------
<S> <C>
Alex. Brown & Sons Incorporated................................................. 673,334
Oppenheimer & Co., Inc. ........................................................ 673,333
Prudential Securities Incorporated.............................................. 673,333
Bear, Stearns & Co. Inc. ....................................................... 90,000
Dean Witter Reynolds Inc. ...................................................... 90,000
A.G. Edwards & Sons, Inc. ...................................................... 90,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.............................. 90,000
PaineWebber Incorporated........................................................ 90,000
Smith Barney Inc. .............................................................. 90,000
Everen Securities, Inc. ........................................................ 60,000
Pacific Crest Securities........................................................ 60,000
Ragen MacKenzie Incorporated.................................................... 60,000
Van Kasper & Company............................................................ 60,000
---------
Total................................................................. 2,800,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of the Common Stock offered hereby if any
such shares are purchased.
The Company and the Selling Stockholder have been advised by the
Representatives of the Underwriters that the Underwriters propose to offer the
shares of Common Stock to the public at the public offering price set forth on
the cover page of this Prospectus Supplement and to certain dealers at such
price less a concession not in excess of $.52 per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $.10 per
share to certain other dealers. After the Offering, the Offering price and the
other selling terms may be changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus Supplement, to purchase up
to 420,000 additional shares of Common Stock at the public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus Supplement. To the extent that the Underwriters exercise such option,
each of the Underwriters will have a firm commitment to purchase approximately
the same percentage thereof that the number of shares of Common Stock to be
purchased by it shown in the above table bears to 2,800,000 and the Company will
be obligated, pursuant to the option, to sell such shares to the Underwriters.
The Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the shares of Common Stock offered hereby. If
purchased, the Underwriters will offer such additional shares on the same terms
as those on which the 2,800,000 shares are being offered hereby.
S-40
<PAGE> 41
The Company has agreed to pay Alex. Brown & Sons Incorporated a financial
advisory fee of up to approximately $125,000 for advisory services rendered in
connection with the evaluation, analysis and structuring of the Company
offering.
Certain of the Underwriters have provided various investment banking
services to the Company from time to time, for which they have received
customary compensation.
The Company and the Selling Stockholder have agreed to indemnify the
Underwriters, as well as one-another, against certain liabilities, including
liabilities under the Securities Act of 1933, as amended, or to contribute to
payments the Underwriters may be required to make in respect thereof.
The Company and each of its executive officers and directors have agreed
not to offer, sell, contract to sell or otherwise issue or dispose of any shares
of Common Stock or options to purchase shares of Common Stock (except for
issuances by the Company pursuant to the Company's 1993 Share Option Plan and
the Dividend Reinvestment Plan) for a period of 90 days after the date of this
Prospectus Supplement without the prior written consent of Alex. Brown & Sons
Incorporated.
LEGAL MATTERS
Certain legal matters, including certain tax matters as described under
"Federal Income Tax Considerations," will be passed upon for the Company by Cox,
Castle & Nicholson, LLP. Certain legal matters will be passed upon for the
Underwriters by Gibson, Dunn & Crutcher LLP. Cox, Castle & Nicholson, LLP and
Gibson, Dunn & Crutcher LLP will rely as to all matters of Maryland law,
including the legality of the Common Stock, on the opinions of Piper & Marbury
LLP, Baltimore, Maryland.
S-41
<PAGE> 42
[THIS PAGE INTENTIONALLY LEFT BLANK]
S-42
<PAGE> 43
PACIFIC GULF PROPERTIES INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1996................. F-3
Pro Forma Condensed Consolidated Statement of Operations
for the Three Months Ended March 31, 1996........................................ F-4
Pro Forma Condensed Consolidated Statement of Operations
for the Year ended December 31, 1995............................................. F-5
Notes to Pro Forma Condensed Consolidated Financial Statements...................... F-6
BAY SAN MARCOS INDUSTRIAL PARK
Report of Independent Auditors...................................................... F-10
Statement of Revenues and Certain Expenses for the Year Ended December 31, 1995 and
the Three Months Ended March 31, 1996 (Unaudited)................................ F-11
Notes to Statement of Revenues and Certain Expenses................................. F-12
ESCONDIDO BUSINESS CENTER
Report of Independent Certified Public Accountants.................................. F-14
Statement of Revenues and Certain Expenses for the Year Ended December 31, 1995
and the Three Months Ended March 31, 1996 (Unaudited)............................ F-15
Notes to Statement of Revenues and Certain Expenses................................. F-16
EDEN LANDING COMMERCE PARK
Report of Independent Auditors...................................................... F-18
Statement of Revenue and Expenses for the Year Ended December 31, 1995 and the Three
Months Ended March 31, 1996 (Unaudited).......................................... F-19
Notes to Statement of Revenues and Certain Expenses................................. F-20
RIVERVIEW INDUSTRIAL PARK
Report of Independent Auditors...................................................... F-22
Statement of Revenue and Certain Expenses for the Year Ended December 31, 1995 and
the Three Months Ended March 31, 1996 (Unaudited)................................ F-23
Notes to Statement of Revenues and Certain Expenses................................. F-24
PACIFIC PARK
Report of Independent Auditors...................................................... F-26
Statement of Revenue and Certain Expenses for the Year Ended December 31, 1995 and
the Three Months Ended March 31, 1996 (Unaudited)................................ F-27
Notes to Statement of Revenues and Certain Expenses................................. F-28
</TABLE>
F-1
<PAGE> 44
PACIFIC GULF PROPERTIES INC.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
Pacific Gulf Properties Inc. (the "Company") was formed in 1993 and
completed its initial public offering in February 1994. Subsequent to the
completion of this offering of 2,015,581 shares of Common Stock (the
"Offering"), it is anticipated that the Company will acquire nine additional
industrial properties containing approximately 1,352,000 leasable square feet
located in California as more fully described in this Prospectus Supplement (the
"Acquisition Properties").
The following unaudited Pro Forma Condensed Consolidated Balance Sheet as
of March 31, 1996 is based on the unaudited historical financial statements of
the Company and has been prepared as if each of the following transactions had
occurred as of March 31, 1996: (i) the completion of this Offering, the
establishment of the Company's acquisition line of credit and the application of
the net proceeds thereof as described in this Prospectus Supplement, and (ii)
the purchase of the Acquisition Properties. The following unaudited Pro Forma
Condensed Consolidated Statement of Operations for the year ended December 31,
1995 is based on the historical financial statements of the Company and has been
prepared as if each of the following transactions had occurred as of the
beginning of the period presented: (i) the purchases completed by the Company
during 1995 consisting of 12 multifamily properties and one industrial property
containing approximately 475,000 leasable square feet located in Seattle,
Washington, (ii) the sale of the Company's four multifamily properties located
in Texas, (iii) the purchase completed by the Company in March 1996 of an
industrial property containing approximately 189,000 leasable square feet
located in Garden Grove, California, (iv) the purchase of the Acquisition
Properties, and (v) the completion of the Offering, the establishment of the
Company's acquisition line of credit and the application of the net proceeds
thereof as described in this Prospectus Supplement. The unaudited Pro Forma
Condensed Consolidated Statement of Operations for the three months ended March
31, 1996 is based on the historical financial statements of the Company and has
been prepared as if each of the following transactions had occurred as of the
beginning of the period presented: (i) the purchase completed by the Company in
March 1996 of an industrial property containing approximately 189,000 leasable
square feet located in Garden Grove, California, (ii) the purchase of the
Acquisition Properties, and (iii) the completion of the Offering, the
establishment of the Company's acquisition line of credit and the application of
the net proceeds thereof as described in this Prospectus Supplement.
The following pro forma information is not necessarily indicative of what
the Company's financial position or results of operations would have been
assuming the completion of the described transactions as of the beginning of the
periods indicated, nor does it purport to project the Company's financial
position or results of operations at any future date or for any future period.
In addition, the historical operating results for the three months ended March
31, 1996 are not necessarily indicative of the results to be obtained by the
Company for the year ending December 31, 1996. The following information should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and all of the financial statements and
notes thereto contained elsewhere in this Prospectus Supplement, the
accompanying Prospectus or incorporated therein by reference.
F-2
<PAGE> 45
PACIFIC GULF PROPERTIES INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ISSUANCE OF BEFORE
COMPANY COMMON ACQUISITION ACQUISITION COMPANY
HISTORICAL SHARES PROPERTIES PROPERTIES PRO FORMA
---------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Real estate, net........... $ 284,970 $ -- $ 284,970 $ 52,335(B) $337,305
Cash and cash
equivalents.............. 2,466 30,283(A) 32,749 (28,518)(B) 4,231
Accounts receivable........ 857 -- 857 -- 857
Other assets............... 6,097 -- 6,097 -- 6,097
-------- ------- -------- -------- --------
$ 294,390 $30,283 $ 324,673 $ 23,817 $348,490
======== ======= ======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Loans payable.............. $ 157,606 $ -- $ 157,606 $ -- $157,606
Acquisition line of
credit................... -- -- -- 23,817(B) 23,817
Accounts payable and
accrued liabilities...... 5,264 -- 5,264 -- 5,264
Dividends payable.......... 1,944 -- 1,944 -- 1,944
Convertible subordinated
debentures............... 55,649 -- 55,649 -- 55,649
-------- ------- -------- -------- --------
220,463 220,463 23,817 244,280
Minority interest in
consolidated
partnership.............. 3,518 -- 3,518 3,518
Shareholders' equity
Common shares............ 49 20(A) 69 -- 69
Outstanding restricted
stock................. (638) -- (638) -- (638 )
Additional paid in
capital............... 78,028 30,263(A) 108,291 -- 108,291
Distributions in excess
of earnings........... (7,030) -- (7,030) -- (7,030 )
-------- ------- -------- -------- --------
70,409 30,283 100,692 -- 100,692
-------- ------- -------- -------- --------
$ 294,390 $30,283 $ 324,673 $ 23,817 $348,490
======== ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the pro forma financial
statements.
F-3
<PAGE> 46
PACIFIC GULF PROPERTIES INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
BEFORE
COMPANY PRO FORMA ACQUISITION ACQUISITION COMPANY
HISTORICAL ADJUSTMENTS PROPERTIES PROPERTIES(I) PRO FORMA
------------- ----------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES
Rental income
Multifamily............... $ 7,051 $ -- $ 7,051 $ -- $ 7,051
Industrial................ 3,784 195(C) 3,979 1,822 5,801
--------- ---- ------- ------ ---------
10,835 195 11,030 1,822 12,852
EXPENSES
Rental property expenses
Multifamily............... 2,786 -- 2,786 -- 2,786
Industrial................ 948 72(C) 1,020 473 1,493
--------- ---- ------- ------ ---------
3,734 72 3,806 473 4,279
Depreciation................. 1,835 16(D) 1,851 211 2,062
Interest (including
amortization of financing
costs).................... 4,326 124(E) 4,450 450 4,900
General and administrative... 647 -- 647 -- 647
--------- ---- ------- ------ ---------
10,542 212 10,754 1,134 11,888
--------- ---- ------- ------ ---------
NET INCOME..................... $ 293 $ (17) $ 276 $ 688 $ 964
========= ==== ======= ====== =========
WEIGHTED AVERAGE COMMON
SHARES(J)(K)................. 4,864,044 6,879,625
========= =========
NET INCOME PER COMMON SHARE.... $.06 $.14
</TABLE>
The accompanying notes are an integral part of the pro forma financial
statements.
F-4
<PAGE> 47
PACIFIC GULF PROPERTIES INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
BEFORE
COMPANY PRO FORMA ACQUISITION ACQUISITION COMPANY
HISTORICAL ADJUSTMENTS PROPERTIES PROPERTIES(I) PRO FORMA
---------- ----------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES
Rental income
Multifamily.............. $ 24,898 $ 2,948(F) $27,846 $-- $ 27,846
Industrial............... 12,193 3,996(F) 16,189 7,109 23,298
--------- ------- ------- ------ ---------
37,091 6,944 44,035 7,109 51,144
EXPENSES
Rental property expenses
Multifamily.............. 10,215 1,476(F) 11,691 -- 11,691
Industrial............... 2,567 1,695(F) 4,262 2,106 6,368
--------- ------- ------- ------ ---------
12,782 3,171 15,953 2,106 18,059
Depreciation................ 6,081 881(G) 6,962 843 7,805
Interest (including
amortization of financing
costs)................... 14,066 3,800(H) 17,866 1,803 19,669
General and
administrative........... 2,423 -- 2,423 -- 2,423
--------- ------- ------- ------ ---------
35,352 7,852 43,204 4,752 47,956
--------- ------- ------- ------ ---------
INCOME BEFORE GAIN ON SALE OF
PROPERTIES(L)............... $ 1,739 $ (908) $ 831 $ 2,357 $ 3,188
========= ======= ======= ====== =========
WEIGHTED AVERAGE
COMMON SHARES(J)(K)......... 4,830,723 6,846,304
========= =========
INCOME BEFORE GAIN ON SALES OF
PROPERTIES PER COMMON
SHARE....................... $.36 $.47
</TABLE>
The accompanying notes are an integral part of the pro forma financial
statements.
F-5
<PAGE> 48
PACIFIC GULF PROPERTIES INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(Dollars in thousands, except per share data)
(A) Reflects the issuance of 2,015,581 additional shares of Common Stock of the
Company at the offering price of $16.375 per share and the application of
the net proceeds from the Offering as follows:
<TABLE>
<S> <C>
Common stock issued at $.01 par value per share.............................. $ 20
Capital in excess of par value............................................... 32,985
-------
Gross proceeds from the Offering............................................. 33,005
Less: offering costs......................................................... (2,722)
-------
Net proceeds from the Offering available for purchase of the Acquisition
Properties and planned capital improvements................................ $30,283
=======
</TABLE>
(B) Reflects the purchase of the Acquisition Properties as follows:
<TABLE>
<CAPTION>
PROPERTY LOCATION PURCHASE PRICE
------------------------------------------------ ---------------------- --------------
<S> <C> <C>
Bay San Marcos Industrial Park San Marcos, CA $ 4,678
Escondido Business Center Escondido, CA 10,372
Bell Ranch Road Santa Fe Springs, CA 3,750
Riverview Industrial Park San Bernardino, CA 6,425
Pacific Center Aliso Viejo, CA 6,900
Eden Landing Commerce Center Hayward, CA 7,550
North County Yorba Linda, CA 6,350
San Marcos Commerce Center San Marcos, CA 2,710
La Mirada Business Center La Mirada, CA 3,600
-------
$ 52,335
=======
</TABLE>
The Acquisition Properties are being purchased from third parties and have
been reflected at their purchase price. The Company plans expending $1,765
for capital improvements relating to the Acquisition Properties subsequent
to their purchase. In conjunction with the purchase of the Acquisition
Properties, the Company anticipates borrowing $23,817 under its Acquisition
Line of Credit to fund a portion of such acquisitions with the remainder of
the purchase price funded from proceeds of the Offering. Net proceeds from
the Offering remaining after these acquisitions will be used to fund the
Company's planned capital improvements to the Acquisition Properties.
(C) The pro forma adjustments for the three months ended March 31, 1996 include
the actual revenues and certain expenses of a 189,000 square foot
industrial property acquired by the Company during March 1996 for the
period prior to its purchase, adjusted to reflect increased property taxes
based on the properties' acquisition cost and current property tax rates.
(D) Depreciation on the industrial property acquired by the Company during
1996, for the period prior to its acquisition, is computed utilizing the
estimated remaining useful life of approximately 40 years and the
depreciable cost basis of the property as follows:
<TABLE>
<CAPTION>
PRO FORMA
DATE OF PURCHASE DEPRECIABLE DEPRECIATION
PROPERTY ACQUISITION PRICE BASIS EXPENSE
------------------------------- -------------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Pacific Gulf Business Park..... March 16, 1996 $6,800 $ 3,009 $ 16
</TABLE>
F-6
<PAGE> 49
(E) Interest expense associated with the borrowing used to finance the purchase
of the industrial property acquired by the Company during 1996, for the
period prior to its acquisition, was calculated based on the actual
interest rate of the specific new borrowing as follows:
<TABLE>
<CAPTION>
PRO FORMA
INTEREST INTEREST
PROPERTY DEBT RATE EXPENSE
-------------------------------------------------------- ------ -------- ---------
<S> <C> <C> <C>
Pacific Gulf Business Park.............................. $8,000 7.3% $ 122
Amortization of loan fees and financing costs on related
borrowings financing the acquisition.................. 2
----
$ 124
====
</TABLE>
The Company borrowed $8,000 of new debt related to this acquisition
collateralized by another property. Of the borrowing, $6,800 was used to
purchase the property. The remaining proceeds will be used to rehabilitate
the Property.
(F) The pro forma adjustments for the year ended December 31, 1995 include the
actual revenues and certain expenses of multifamily and industrial
properties for the period prior to their acquisition or disposal by the
Company as follows:
<TABLE>
<CAPTION>
1995 TEXAS 1996
ACQUISITIONS DISPOSITIONS ACQUISITION TOTAL
------------ ------------ ----------- ------
<S> <C> <C> <C> <C>
Rental income
Multifamily.............................. $ 8,426 $ (5,478) $ -- $2,948
Industrial............................... 3,272 -- 724 3,996
------- ------- ---- ------
11,698 (5,478) 724 6,944
------- ------- ---- ------
Rental property expenses
Multifamily.............................. 3,878 (2,402) -- 1,476
Industrial............................... 1,317 -- 378 1,695
------- ------- ---- ------
5,195 (2,402) 378 3,171
------- ------- ---- ------
$ 6,503 $ (3,076) $ 346 $3,773
======= ======= ==== ======
</TABLE>
F-7
<PAGE> 50
(G) Reflects additional depreciation expense of $1,414 relating to the
multifamily and industrial properties acquired by the Company, net of the
reduction in depreciation due to the sale of the Company's Texas apartment
portfolio of $533, which represents the actual depreciation relating to the
Texas apartment portfolio for the three month period ended March 31, 1996.
The additional depreciation expense on the multifamily and industrial
properties acquired by the Company during 1995 and 1996, for the period
prior to their acquisition, was computed utilizing the estimated remaining
useful lives and depreciable cost basis of the properties as follows:
<TABLE>
<CAPTION>
DEPRECIABLE PRO FORMA
DATE OF PURCHASE BASIS DEPRECIATION
PROPERTY ACQUISITION PRICE (EXCLUDING LAND) EXPENSE
------------------------- ------------------ -------- ---------------- ------------
<S> <C> <C> <C> <C>
40 Year Life Property:
Konwiser Acquisition
Properties.......... August 16, 1995 $71,469 $ 52,281 $ 817
Heatherwood
Apartments.......... November 21, 1995 12,500 10,000 222
Tukwila Business Park.. December 15, 1995 17,250 11,019 264
Pacific Gulf Business
Park................ March 16, 1996 6,800 3,009 75
5 Year Life Property:
Personal Property...... August 16, 1995 289 289 36
------
$1,414
======
</TABLE>
(H) Reflects additional interest expense of $4,546 relating to the multifamily
and industrial properties acquired by the Company, net of the reduction in
interest due to the sale of the Company's Texas apartment portfolio of
$746, which represents the actual interest relating to the Texas apartment
portfolio for the year ended December 31, 1995. The additional interest
expense associated with the borrowings used to finance the purchase of the
multifamily and industrial properties acquired by the Company during 1995
and 1996, for the period prior to their acquisition, was calculated based
on existing rates for assumed debt and the specific interest rates on new
borrowings follows:
<TABLE>
<CAPTION>
PRO FORMA
INTEREST INTEREST
PROPERTY DEBT RATE EXPENSE
------------------------------------------------------ ------- -------- ---------
<S> <C> <C> <C>
Konwiser Acquisition Properties....................... $30,263 8.0% $ 1,513
13,000 8.0% 650
24,850 5.7% 885
Tukwila Business Park................................. 11,765 7.4% 838
Pacific Gulf Business Park............................ 8,000 7.3% 584
Amortization of loan fees and financing costs on
related borrowings financing the acquisitions....... 76
---------
$ 4,546
=========
</TABLE>
F-8
<PAGE> 51
(I) Reflects the actual revenues and certain expenses of the Acquisition
Properties for the period indicated, adjusted to reflect increased property
taxes based on the properties' acquisition cost and current property tax
rates.
Depreciation relating to the Acquisition Properties is computed utilizing
the remaining estimated useful lives of approximately 40 years and the
depreciable cost basis of the properties as follows:
<TABLE>
<CAPTION>
PRO FORMA DEPRECIATION EXPENSE
DEPRECIABLE --------------------------------------
PURCHASE BASIS THREE MONTHS ENDED YEAR ENDED
PROPERTY PRICE (EXCLUDING LAND) MARCH 31, 1996 DECEMBER 31, 1995
-------------------- -------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Eden Landing........ $ 7,550 $ 5,460 $ 34 $ 137
Riverview........... 6,425 5,281 33 132
Essex Portfolio..... 15,050 9,465 59 237
Bell Ranch.......... 3,750 3,000 19 75
North County........ 6,350 3,169 20 79
San Marcos
Commerce.......... 2,710 1,871 12 47
Koll Pacific Park... 6,900 3,001 19 75
La Mirada........... 3,600 2,453 15 61
------- ------- ---- ----
$52,335 $ 33,700 $211 $ 843
======= ======= ==== ====
</TABLE>
The additional interest expense is associated with the planned borrowings
under the Company's acquisition line of credit which will be used, in part,
to finance such acquisitions. The additional interest is calculated for the
period indicated based on an interest rate of LIBOR plus 2%, the expected
actual rate on the date of the borrowings. A .125% change in the interest
rate on all variable rate debt would change the Company's pro forma
interest expense by $13,000 for the three months ended March 31, 1996 and
$54,000 for the year ended December 31, 1995.
Interest expense relating to the Acquisition Properties is calculated as
follows:
<TABLE>
<CAPTION>
PRO FORMA INTEREST EXPENSE
---------------------------
THREE MONTHS
ENDED YEAR ENDED
INTEREST MARCH 31, DECEMBER 31,
PROPERTY DEBT RATE 1996 1995
--------------------------------------- ------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Acquisition Properties................. $23,817 7.4% $443 $1,772
Amortization of loan fees and financing
costs on related borrowing financing
the acquisitions..................... 7 31
------ ------------
$450 $1,803
============ ===========
</TABLE>
(J) Represents the weighted average of common shares and common stock
equivalents outstanding during the period indicated. Common Stock
equivalents include stock options which are considered dilutive for
purposes of computing primary earnings per share.
(K) Pro forma weighted average common shares include 2,015,581 shares of Common
Stock to be issued as part of this Offering.
(L) Excludes the nonrecurring gain from the sale of the Texas apartment
portfolio in November 1995 of $6,664.
F-9
<PAGE> 52
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
Pacific Gulf Properties Inc.
We have audited the accompanying statement of revenues and certain expenses
of Bay San Marcos Industrial Park for the year ended December 31, 1995. The
statement is the responsibility of management. Our responsibility is to express
an opinion on the statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statement. We believe that
our audit provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission (for
inclusion in a Registration Statement on Form S-3 of Pacific Gulf Properties
Inc.) as described in Note 2 to the statement and is not intended to be a
complete presentation of the revenues and expenses of Bay San Marcos Industrial
Park.
In our opinion, the statement referred to above presents fairly, in all
material respects, the revenues and certain expenses, as defined above, of Bay
San Marcos Industrial Park for the year ended December 31, 1995, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Newport Beach, California
April 25, 1996
F-10
<PAGE> 53
BAY SAN MARCOS INDUSTRIAL PARK
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995
AND THE THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1995 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
REVENUES
Rental and other income....................................... $637,000 $148,000
CERTAIN EXPENSES
Property operating and maintenance............................ 101,000 30,000
Real estate taxes............................................. 93,000 23,000
Management fees............................................... 26,000 6,000
-------- --------
220,000 59,000
-------- --------
REVENUES IN EXCESS OF CERTAIN EXPENSES.......................... $417,000 $ 89,000
======== ========
</TABLE>
See accompanying notes.
F-11
<PAGE> 54
BAY SAN MARCOS INDUSTRIAL PARK
NOTES TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE
THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
1. ORGANIZATION
Bay San Marcos Industrial Park (the "Property") contains 121,768 leasable
square feet of industrial space and is located in San Marcos, California.
Pacific Gulf Properties Inc. (the "Company") has contracted to acquire the
Property.
2. BASIS OF PRESENTATION
The statement of revenues and certain expenses presents the operations of
the Property for the year ended December 31, 1995 and for the three months ended
March 31, 1996 (unaudited) and has been prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission (for
inclusion in a Registration Statement on Form S-3 of the Company).
Certain expenses that are dependent on the particular owner and the
carrying value of the Property have been excluded from the statement. The
excluded expenses consist primarily of depreciation, interest, and amortization
of loan fees. Consequently, the revenues in excess of certain expenses as
presented is not intended to be a complete presentation of the Property's
revenues and expenses nor is it intended to be comparable to the proposed future
operations of the Property.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Property is generally leased to tenants under lease terms that are
greater than a year and are accounted for as operating leases. Revenues from
leases are recognized on a straight-line basis over the term of the related
leases. Cost recoveries from tenants are recognized as income in the period the
related costs are accrued.
Capitalization Policy
Recurring repair and maintenance costs are expensed as incurred. Major
replacements and betterments are capitalized.
Use of Estimates
The preparation of the statement in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the statement. Actual results could differ from
these estimates in the near term.
Tenant Concentration
At December 31, 1995 three tenants leased 68% of the Property's leaseable
square footage. The rental revenue earned from each of these tenants totaled
$170,000, $105,000 and $90,000 during the year ended December 31, 1995.
F-12
<PAGE> 55
BAY SAN MARCOS INDUSTRIAL PARK
NOTES TO STATEMENT OF REVENUES AND CERTAIN EXPENSES -- (CONTINUED)
4. FUTURE MINIMUM LEASE PAYMENTS
The Property is leased to tenants under leases expiring at various dates
through the year 2000. These leases contain provisions for rent increases based
on cost-of-living indices and certain leases contain renewal options. The
minimum future lease payments to be received under the terms of these operating
leases for each of the next five years ending December 31, are as follows:
<TABLE>
<S> <C>
1996..................................................... $ 436,000
1997..................................................... 339,000
1998..................................................... 254,000
1999..................................................... 89,000
2000..................................................... 15,000
</TABLE>
F-13
<PAGE> 56
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
Pacific Gulf Properties, Inc.
We have audited the accompanying statement of revenues and certain expenses
of Escondido Business Center for the year ended December 31, 1995. The statement
is the responsibility of management. Our responsibility is to express an opinion
on the statement based on our audit.
We conducted our audit in accordance with generally accepted audited
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statement. We believe that
our audit provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission (for
inclusion in a Registration Statement on Form S-3 of Pacific Gulf Properties,
Inc.) as described in Note 2 to the statement and is not intended to be a
complete presentation of the revenues and expenses of Escondido Business Center.
In our opinion, the statement referred to above presents fairly, in all
material respects, the revenues and certain expenses, as defined above, of
Escondido Business Center for the year ended December 31, 1995, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
West Palm Beach, Florida
April 25, 1996
F-14
<PAGE> 57
ESCONDIDO BUSINESS CENTER
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE
THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, 1996
1995 -------------
------------ (UNAUDITED)
<S> <C> <C>
REVENUES
Rental and other income...................................... $1,233,000 $ 339,000
CERTAIN EXPENSES
Property operating and maintenance........................... 307,000 66,000
Real estate taxes............................................ 118,000 22,000
Management fees.............................................. 42,000 12,000
---------- --------
467,000 100,000
---------- --------
REVENUES IN EXCESS OF CERTAIN EXPENSES......................... $ 766,000 $ 239,000
========== ========
</TABLE>
See accompanying notes.
F-15
<PAGE> 58
ESCONDIDO BUSINESS CENTER
NOTES TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995
AND THE THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
1. ORGANIZATION
Escondido Business Center (the "Property") contains 251,464 leasable square
feet of industrial space and is located in Escondido, California. Pacific Gulf
Properties Inc. (the "Company") has contracted to acquire the Property.
2. BASIS OF PRESENTATION
The statement of revenues and certain expenses presents the operations of
the Property for the year ended December 31, 1995 and the three months ended
March 31, 1996 (unaudited), and has been prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission (for
inclusion in a Registration Statement on Form S-3 of the Company).
Certain expenses that are dependent on the particular owner and the
carrying value of the Property have been excluded from the statement. The
excluded expenses consist primarily of depreciation, amortization, interest and
selected professional fees. Consequently, the revenues in excess of certain
expenses as presented is not intended to be a complete presentation of the
Property's revenues and expenses nor is it intended to be comparable to the
proposed future operations of the Property.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Property is generally leased to tenants under lease terms that are
greater than one year and are accounted for as operating leases. Revenues from
leases are recognized on a straight-line basis over the term of the related
leases. Cost recoveries from tenants are recognized as income in the period the
related costs are accrued.
Capitalization Policy
Recurring repair and maintenance costs are expensed as incurred. Major
replacements and betterments are capitalized.
Use of Estimates
The preparation of the statement in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the statement. Actual results could differ from
these estimates in the near term.
Tenant Concentration
At December 31, 1995, one tenant leased 8% of the Property's leasable
square footage. The rental revenue earned from this tenant totaled $121,000
during the year ended December 31, 1995.
4. MANAGEMENT FEES
The Property is subject to an agreement with MIG Management Services of
California, Inc., a property management company affiliated with the current
owner of the Property, to maintain and manage the operations of the Property.
Management fees are based on 3.5% of total collected income, as defined, from
the Property.
F-16
<PAGE> 59
ESCONDIDO BUSINESS CENTER
NOTES TO STATEMENT OF REVENUES AND CERTAIN EXPENSES -- (CONTINUED)
5. FUTURE MINIMUM LEASE PAYMENTS
The Property is leased to tenants under leases expiring at various dates
through the year 2001. These leases contain provisions for rent increased based
on cost-of-living indices and certain leases contain renewal options. The
minimum future lease payments to be received under the terms of these operating
leases for each of the next five years ending December 31 and thereafter, are as
follows:
<TABLE>
<S> <C>
1996............................................................ $1,023,000
1997............................................................ 724,000
1998............................................................ 281,000
1999............................................................ 133,000
2000............................................................ 108,000
Thereafter...................................................... 9,000
</TABLE>
F-17
<PAGE> 60
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
Pacific Gulf Properties Inc.
We have audited the accompanying statement of revenues and certain expenses
of Eden Landing Commerce Park for the year ended December 31, 1995. The
statement is the responsibility of management. Our responsibility is to express
an opinion on the statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statement. We believe that
our audit provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission (for
inclusion in a Registration Statement on Form S-3 of Pacific Gulf Properties
Inc.) as described in Note 2 to the statement and is not intended to be a
complete presentation of the revenues and expenses of Eden Landing Commerce
Park.
In our opinion, the statement referred to above presents fairly, in all
material respects, the revenues and certain expenses, as defined above, of Eden
Landing Commerce Park for the year ended December 31, 1995, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Newport Beach, California
May 20, 1996
F-18
<PAGE> 61
EDEN LANDING COMMERCE PARK
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995
AND THE THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1995 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
REVENUES
Rental and other income....................................... $1,270,000 $326,000
CERTAIN EXPENSES
Property operating and maintenance............................ 471,000 100,000
Real estate taxes............................................. 54,000 14,000
Management fees............................................... 57,000 15,000
-------- --------
582,000 129,000
-------- --------
REVENUES IN EXCESS OF CERTAIN EXPENSES.......................... $ 688,000 $197,000
======== ========
</TABLE>
See accompanying notes.
F-19
<PAGE> 62
EDEN LANDING COMMERCE PARK
NOTES TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE
THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
1. ORGANIZATION
Eden Landing Commerce Park (the "Property") contains 193,358 leasable
square feet of industrial space and is located in Hayward, California. Pacific
Gulf Properties Inc. (the "Company") has contracted to acquire the Property.
2. BASIS OF PRESENTATION
The statement of revenues and certain expenses presents the operations of
the Property for the year ended December 31, 1995 and for the three months ended
March 31, 1996 (unaudited) and has been prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission (for
inclusion in a Registration Statement on Form S-3 of the Company).
Certain expenses that are dependent on the particular owner and the
carrying value of the Property have been excluded from the statement. The
excluded expenses consist primarily of depreciation, interest, and amortization
of loan fees. Consequently, the revenues in excess of certain expenses as
presented is not intended to be a complete presentation of the Property's
revenues and expenses nor is it intended to be comparable to the proposed future
operations of the Property.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Property is generally leased to tenants under lease terms that are
greater than a year and are accounted for as operating leases. Revenues from
leases are recognized on a straight-line basis over the term of the related
leases. Cost recoveries from tenants are recognized as income in the period the
related costs are accrued.
Capitalization Policy
Recurring repair and maintenance costs are expensed as incurred. Major
replacements and betterments are capitalized.
Use of Estimates
The preparation of the statement in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the statement. Actual results could differ from
these estimates in the near term.
4. MANAGEMENT FEES
The Property is subject to an agreement with R&B Realty Group, a property
management company, to maintain and manage the operations of the Property.
Management fees are based on 4.5% of total collected income, as defined, from
the Property.
F-20
<PAGE> 63
EDEN LANDING COMMERCE PARK
NOTES TO STATEMENT OF REVENUES AND CERTAIN EXPENSES -- (CONTINUED)
5. FUTURE MINIMUM LEASE PAYMENTS
The Property is leased to tenants under leases expiring at various dates
through the year . These leases contain provisions for rent increases based
on cost-of-living indices and certain leases contain renewal options. The
minimum future lease payments to be received under the terms of these operating
leases for each of the next five years ending December 31, are as follows:
<TABLE>
<S> <C>
1996..................................................... 715,000
1997..................................................... 334,000
1998..................................................... 165,000
1999..................................................... 80,000
2000..................................................... 33,000
</TABLE>
F-21
<PAGE> 64
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
Pacific Gulf Properties Inc.
We have audited the accompanying statement of revenues and certain expenses
of Riverview Industrial Park for the year ended December 31, 1995. The statement
is the responsibility of management. Our responsibility is to express an opinion
on the statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statement. We believe that
our audit provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission (for
inclusion in a Registration Statement on Form S-3 of Pacific Gulf Properties
Inc.) as described in Note 2 to the statement and is not intended to be a
complete presentation of the revenues and expenses of Riverview Industrial Park.
In our opinion, the statement referred to above presents fairly, in all
material respects, the revenues and certain expenses, as defined above, of
Riverview Industrial Park for the year ended December 31, 1995, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Newport Beach, California
May 20, 1996
F-22
<PAGE> 65
RIVERVIEW INDUSTRIAL PARK
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995
AND THE THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1995 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
REVENUES
Rental and other income....................................... $ 938,000 $228,000
CERTAIN EXPENSES
Property operating and maintenance............................ 183,000 37,000
Real estate taxes............................................. 104,000 27,000
Management fees............................................... 68,000 17,000
-------- --------
355,000 81,000
-------- --------
REVENUES IN EXCESS OF CERTAIN EXPENSES.......................... $ 583,000 $147,000
======== ========
</TABLE>
See accompanying notes.
F-23
<PAGE> 66
RIVERVIEW INDUSTRIAL PARK
NOTES TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE
THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
1. ORGANIZATION
Riverview Industrial Park (the "Property") contains 297,180 leasable square
feet of industrial space and is located in San Bernardino, California. Pacific
Gulf Properties Inc. (the "Company") has contracted to acquire the Property.
2. BASIS OF PRESENTATION
The statement of revenues and certain expenses presents the operations of
the Property for the year ended December 31, 1995 and for the three months ended
March 31, 1996 (unaudited) and has been prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission (for
inclusion in a Registration Statement on Form S-3 of the Company).
Certain expenses that are dependent on the particular owner and the
carrying value of the Property have been excluded from the statement. The
excluded expenses consist primarily of depreciation, interest, and amortization
of loan fees. Consequently, the revenues in excess of certain expenses as
presented is not intended to be a complete presentation of the Property's
revenues and expenses nor is it intended to be comparable to the proposed future
operations of the Property.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Property is generally leased to tenants under lease terms that are
greater than a year and are accounted for as operating leases. Revenues from
leases are recognized on a straight-line basis over the term of the related
leases. Cost recoveries from tenants are recognized as income in the period the
related costs are accrued.
Capitalization Policy
Recurring repair and maintenance costs are expensed as incurred. Major
replacements and betterments are capitalized.
Use of Estimates
The preparation of the statement in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the statement. Actual results could differ from
these estimates in the near term.
Tenant Concentration
At December 31, 1995 two tenants leased 60% of the Property's leasable
square footage. The rental revenue earned from each of these two tenants totaled
$400,000 and $260,000, for the year ended December 31, 1995.
4. MANAGEMENT FEES
The Property is subject to an agreement with Ares Realty Capital, Inc., a
property management company, to maintain and manage the operations of the
Property. Management fees are based on a monthly payment of $2,843 plus an
amount equal to the greater of $2,800 or 3% of monthly gross collections, as
defined, from the Property.
F-24
<PAGE> 67
RIVERVIEW INDUSTRIAL PARK
NOTES TO STATEMENT OF REVENUES AND CERTAIN EXPENSES -- (CONTINUED)
5. FUTURE MINIMUM LEASE PAYMENTS
The Property is leased to tenants under leases expiring at various dates
through the year . These leases contain provisions for rent increases based
on cost-of-living indices and certain leases contain renewal options. The
minimum future lease payments to be received under the terms of these operating
leases for each of the next five years ending December 31, are as follows:
<TABLE>
<S> <C>
1996..................................................... 728,000
1997..................................................... 712,000
1998..................................................... 678,000
1999..................................................... 592,000
2000..................................................... 346,000
</TABLE>
F-25
<PAGE> 68
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
Pacific Gulf Properties Inc.
We have audited the accompanying statement of revenues and certain expenses
of Pacific Park for the year ended December 31, 1995. The statement is the
responsibility of management. Our responsibility is to express an opinion on the
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statement. We believe that
our audit provides a reasonable basis for our opinion.
The accompanying statement was prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission (for
inclusion in a Registration Statement on Form S-3 of Pacific Gulf Properties
Inc.) as described in Note 2 to the statement and is not intended to be a
complete presentation of the revenues and expenses of Pacific Park.
In our opinion, the statement referred to above presents fairly, in all
material respects, the revenues and certain expenses, as defined above, of
Pacific Park for the year ended December 31, 1995, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Newport Beach, California
May 20, 1996
F-26
<PAGE> 69
PACIFIC PARK
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995
AND THE THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1995 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
REVENUES
Rental and other income....................................... $ 985,000 $250,000
CERTAIN EXPENSES
Property operating and maintenance............................ 179,000 37,000
Real estate taxes............................................. 88,000 19,000
Management fees............................................... 95,000 17,000
-------- --------
362,000 73,000
-------- --------
REVENUES IN EXCESS OF CERTAIN EXPENSES.......................... $ 623,000 $177,000
======== ========
</TABLE>
See accompanying notes.
F-27
<PAGE> 70
PACIFIC PARK
NOTES TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE
THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
1. ORGANIZATION
Pacific Park (the "Property") contains 99,622 leasable square feet of
industrial space and is located in Aliso Viejo, California. Pacific Gulf
Properties Inc. (the "Company") has contracted to acquire the Property.
2. BASIS OF PRESENTATION
The statement of revenues and certain expenses presents the operations of
the Property for the year ended December 31, 1995 and for the three months ended
March 31, 1996 (unaudited) and has been prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission (for
inclusion in a Registration Statement on Form S-3 of the Company).
Certain expenses that are dependent on the particular owner and the
carrying value of the Property have been excluded from the statement. The
excluded expenses consist primarily of depreciation, interest, and amortization
of loan fees. Consequently, the revenues in excess of certain expenses as
presented is not intended to be a complete presentation of the Property's
revenues and expenses nor is it intended to be comparable to the proposed future
operations of the Property.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Property is generally leased to tenants under lease terms that are
greater than a year and are accounted for as operating leases. Revenues from
leases are recognized on a straight-line basis over the term of the related
leases. Cost recoveries from tenants are recognized as income in the period the
related costs are accrued.
Capitalization Policy
Recurring repair and maintenance costs are expensed as incurred. Major
replacements and betterments are capitalized.
Use of Estimates
The preparation of the statement in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the statement. Actual results could differ from
these estimates in the near term.
4. MANAGEMENT FEES
The Property is subject to an agreement with Koll Management Services, a
property management company to maintain and manage the operations of the
Property. Management fees are based on 3% of total rental income, as defined,
from the Property and reimbursement of onsite property payroll and related
costs. Reimbursed onsite property payroll and related costs totaled $65,000 and
$9,500 for the year ended December 31, 1995 and the three months ended March 31,
1996, respectively.
F-28
<PAGE> 71
PACIFIC PARK
NOTES TO STATEMENT OF REVENUES AND CERTAIN EXPENSES -- (CONTINUED)
5. FUTURE MINIMUM LEASE PAYMENTS
The Property is leased to tenants under leases expiring at various dates
through the year . These leases contain provisions for rent increases based
on cost-of-living indices and certain leases contain renewal options. The
minimum future lease payments to be received under the terms of these operating
leases for each of the next five years ending December 31, are as follows:
<TABLE>
<S> <C>
1996..................................................... 804,000
1997..................................................... 503,000
1998..................................................... 287,000
1999..................................................... 172,000
2000..................................................... 17,000
</TABLE>
F-29
<PAGE> 72
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-30
<PAGE> 73
This filing is made pursuant
to Rule 424(b)(1) & (2) under
the Securities Act of
1933 in connection with
Registration No. 333-02798
PROSPECTUS
PACIFIC GULF PROPERTIES INC.
$112,155,139
COMMON STOCK AND PREFERRED STOCK BY THE COMPANY
LOGO AND
784,419 SHARES OF COMMON STOCK BY THE SELLING STOCKHOLDER
------------------------
Pacific Gulf Properties Inc. (the "Company") may from time to time offer
and sell shares of its common stock, par value $.01 per share (the "Common
Stock"), and shares of its preferred stock, par value $.01 per share (the
"Preferred Stock," and together with the Common Stock, the "Company Offered
Securities"), with an aggregate public offering price not to exceed $112,155,139
in Company Offered Securities, and 784,419 shares of the Company's Common Stock
offered hereby by Santa Anita Realty Enterprises, Inc. ("Realty" or the "Selling
Stockholder"). The Selling Stockholder may offer and sell from time to time an
aggregate of 784,419 shares of the Company's Common Stock (the "Selling
Stockholder Offered Securities"). The Company will not receive any of the
proceeds from the sale of any Common Stock by the Selling Stockholder. See "Use
of Proceeds" and "Plan of Distribution." The Company Offered Securities and the
Selling Stockholder Offered Securities are collectively referred to herein as
the "Offered Securities." The Offered Securities may be offered separately or
together, in separate series, in amounts and at prices and terms to be set forth
in one or more supplements to this Prospectus (each a "Prospectus Supplement").
The terms of the Preferred Stock, including the specific designation and
stated value per share, any dividend, liquidation, redemption, conversion,
voting and other rights, preferences, privileges and restrictions of the
Preferred Stock will be set forth in the applicable Prospectus Supplement. In
addition, such specific terms may include limitations on direct or beneficial
ownership and restrictions on transfer of the Offered Securities, in each case
as may be appropriate to preserve the status of the Company as a real estate
investment trust ("REIT") for Federal income tax purposes. The specific number
of shares of Common Stock and issuance price per share will be set forth in the
applicable Prospectus Supplement.
The applicable Prospectus Supplement will also contain information about
all material Federal income tax considerations relating to, and any listing on a
securities exchange of, the Offered Securities covered by such Prospectus
Supplement.
The Company and the Selling Stockholder may sell all or a portion of any
offering of its securities directly, through agents designated from time to
time, or to or through underwriters or dealers. If any agents or underwriters
are involved in the sale of any of the Offered Securities, their names, and any
applicable purchase price, fee, commission or discount arrangement between or
among them, will be set forth, or will be calculable from the information set
forth, in the applicable Prospectus Supplement. No Offered Securities may be
sold without delivery of the applicable Prospectus Supplement describing the
method and terms of the offering of such Offered Securities.
SEE "RISK FACTORS" BEGINNING AT PAGE 7 OF THIS PROSPECTUS FOR CERTAIN RISK
FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK OR THE PREFERRED STOCK.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT
PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO
THE CONTRARY IS UNLAWFUL.
------------------------
The date of this Prospectus is May 23, 1996
<PAGE> 74
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 (the "Registration
Statement"), of which this Prospectus is a part, under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the Offered Securities.
This Prospectus does not contain all of the information set forth in the
Registration Statement, certain portions of which have been omitted as permitted
by the rules and regulations of the Commission. Statements contained in this
Prospectus as to the content of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of the
contract or other document filed as an exhibit to the Registration Statement,
each statement being qualified in all respects by that reference and the
exhibits to the Registration Statement. For further information regarding the
Company and the Offered Securities, reference is hereby made to the Registration
Statement, the exhibits to the Registration Statement, and the documents
incorporated by reference into the Registration Statement, which may be obtained
from the Commission at its principal office in Washington, D.C., upon payment of
fees prescribed by the Commission.
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy and information statements and other information
with the Commission. These reports, proxy and information statements, and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the regional offices of the Commission located at 13th Floor, 7 World
Trade Center, New York, New York 10048, and at 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such material can be obtained from
the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Common Stock is
traded on the American Stock Exchange, Inc. ("ASE"). The reports, proxy and
information statements and other information can also be inspected at the
offices ASE, 86 Trinity Place, New York, New York 10006-1881.
2
<PAGE> 75
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are incorporated herein by reference the following documents
heretofore filed by the Company under the Exchange Act with the Commission.
<TABLE>
<C> <S>
(a) The Company's Current Report on Form 8-K, dated August 30, 1995;
(b) The Company's Current Report on Form 8-K/A, dated October 27, 1995;
(c) The Company's Current Report on Form 8-K/A, dated May 7, 1996, amending the
Company's Current Report on Form 8-K/A, dated October 27, 1995;
(d) The Company's Current Report on Form 8-K/A, dated May 20, 1996, amending the
Company's Current Report on Form 8-K/A, dated May 7, 1996, amending the Company's
Current Report on Form 8-K/A, dated October 27, 1995;
(e) The Company's Current Report on Form 8-K, dated November 28, 1995;
(f) The Company's Current Report on Form 8-K/A, dated May 7, 1996, amending the
Company's Current Report on Form 8-K, dated November 28, 1995;
(g) The Company's Annual Report on Form 10-K, dated March 21, 1996;
(h) The Company's Annual Report on Form 10-K/A for the fiscal year ended December 31,
1995, dated May 7, 1996, amending the Company's Annual Report on Form 10-K, dated
March 21, 1996;
(i) The Company's Annual Report on Form 10-K/A for the fiscal year December 31, 1995,
dated May 20, 1996, amending the Company's Annual Report on Form 10-K/A, dated May
7, 1996.
(j) The Company's Quarterly Report on Form 10-Q, dated May 1, 1996;
(k) The Company's Quarterly Report on Form 10-Q/A for the quarter ended March 31, 1996,
dated May 7, 1996, amending the Company's Quarterly Report on Form 10-Q, dated May
1, 1996;
(l) The Company's Current Report on Form 8-K, dated May 7, 1996;
(m) The Company's Current Report on Form 8-K/A, dated May 20, 1996, amending the
Company's Current Report on Form 8-K, dated May 7, 1996; and
(n) The description of the Company's Common Stock and 8.375% Convertible Subordinated
Debentures Due 2001 contained in its Registration Statement on Form 8-A/A filed
with the Commission, on January 25, 1994 (file no. 1-12546).
</TABLE>
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering made hereby shall be deemed to be incorporated
by reference into this Prospectus, and to be a part hereof from the date of
filing such documents. Any statement contained in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of the Registration Statement, this Prospectus, and any
applicable Prospectus Supplement to the extent that a statement contained in the
Registration Statement, this Prospectus, any applicable Prospectus or any other
subsequently filed document that is also incorporated by reference herein
modifies or supersedes that statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a Prospectus and accompanying Prospectus
Supplement is delivered, upon written or oral request of that person, a copy of
any document incorporated herein by reference (other than exhibits to those
documents unless the exhibits are specifically incorporated by reference into
the documents that this Prospectus incorporates by reference). Written or oral
requests should be directed to Shareholder Relations, Pacific Gulf Properties
Inc., 363 San Miguel Drive, Newport Beach, California 92660; telephone (714)
721-2700.
3
<PAGE> 76
THE COMPANY
Pacific Gulf Properties Inc., a self-administered and self-managed equity
REIT, owns, operates, manages, leases, acquires and rehabilitates multifamily
and industrial properties. At March 31, 1996, the Company owned a portfolio of
21 multifamily properties, containing 3,945 units, and 11 industrial properties,
containing 3,091,000 leasable square feet.
The Company focuses on properties located in California and the Pacific
Northwest, with the largest concentration in Southern California. Management has
extensive experience in these markets, and believes that these markets present
potential for long-term economic growth because of their proximity to Pacific
Rim and NAFTA trading partners, access to ports and other facilities,
anticipated growth in population and employment, and desirable climate and
recreational environment.
Management believes that focusing on two property types allows the Company
greater opportunities and flexibility than would be available by investing only
in one property type. Multifamily and industrial property values move
differently within real estate cycles. Apartments have shorter leases than
industrial properties and, hence, apartment rental income reacts more quickly to
changes in economic conditions. Lease income on industrial properties lags
changes in the real estate market due to longer term leases on such properties.
The values of these properties and the potential they present for growth are
affected by the timing of these rental adjustments.
The Company's objective is to increase shareholder value by continuing to
grow its Funds from Operations by improving net operating income of existing
properties and through acquisitions. Management closely monitors rental
operations and administrative expenses, utilizes new technologies, periodically
conducts contract reviews, and seeks opportunities to maximize economies of
scale in order to control costs, reduce tenant turnover and assure that the
Company is competitive in all aspects of its operations. The Company also seeks
to increase shareholder value through the acquisition of properties that provide
attractive initial returns and opportunities to increase Funds from Operations.
Additionally, the Company seeks well-located properties in strong markets where
values have suffered due to poor management or maintenance and that can be
acquired at less than replacement cost.
The Company's Common Stock is listed on the American Stock Exchange under
the symbol "PAG." The Company's executive offices are located at 363 San Miguel
Drive, Newport Beach, California, 92660. The telephone number is (714) 721-2700.
The Company was incorporated in Maryland in August of 1993.
USE OF PROCEEDS
Unless otherwise described in the Prospectus Supplement which accompanies
this Prospectus, the Company intends to use the net proceeds from the sale of
the Company Offered Securities for general corporate purposes, which may include
acquiring additional industrial or multifamily properties or interests in
entities owning industrial or multifamily properties as suitable opportunities
arise, making improvements to properties, repaying certain then-outstanding
secured or unsecured indebtedness and for working capital. Pending use for the
foregoing purposes, such proceeds may be invested in short-term,
interest-bearing time or demand deposits with financial institutions, cash items
or qualified government securities.
The Company will not receive any proceeds from the sale of any Common Stock
by the Selling Stockholder.
4
<PAGE> 77
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratios of earnings to fixed charges for
the Company and for the predecessor to the Company prior to February 18, 1994.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------- MARCH 31,
1995 1994 1993 1992 1991 1996
------ ------ ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges........ 1.12x 1.26x .74x .58x .55x 1.07x
</TABLE>
For the purpose of calculating the ratio of earnings to fixed charges,
earnings consist of net earnings before income taxes, extraordinary items,
minority/predecessor interest income and fixed charges. Fixed charges consist of
interest expense, capitalized interest and amortization of deferred financing
costs.
Prior to completion of the Company's initial public offering in February
1994, the predecessor of the Company operated in a highly leveraged manner. As a
result, although the Company and the predecessor have historically generated
positive net cash flow, the financial statements of the predecessor show net
losses for the periods prior to February 1994. Consequently, the computation of
the ratio of earnings to fixed charges for such periods indicate that earnings
were inadequate to cover fixed charges by approximately $1.6 million, $2.3
million and $1.9 million for the years ended December 31, 1993, 1992 and 1991
respectively.
SELLING STOCKHOLDER
Upon completion of its initial public offering in February 1994, the
Company purchased the multifamily and industrial operations of Realty. In
connection with such acquisition the Company issued 149,900 shares of its Common
Stock to Realty. Additionally, in October 1994, the Company acquired Realty's
interest in the partnership that owned Baldwin Industrial Park, which contains
623,000 leasable square feet of industrial space, for 559,748 shares of Common
Stock, and issued 74,671 shares of Common Stock to Realty as payment for the
Company's corporate offices and certain other assets. The aggregate of 784,419
shares so issued to Realty constitute the Selling Stockholder Offered Securities
which are covered by the Registration Statement of which this Prospectus is a
part.
The Prospectus Supplement relating to any shares of Common Stock offered by
the Selling Stockholder will set forth the number of shares of such Common Stock
offered, as well as the number of shares of Common Stock and percentage of such
class owned by the Selling Stockholder upon completion of such offering. In the
event that any offering by the Selling Stockholder is underwritten, the Company
will have the right to select the managing underwriter or underwriters, subject
to approval by the Selling Stockholder. Additionally, if an offering by the
Selling Stockholder is made in conjunction with an offering by the Company of
Company Offered Securities, the Selling Stockholder must sell its Common Stock
to the underwriter selected by the Company on the same terms and conditions as
are applicable to the Company, unless otherwise stated in an applicable
Prospectus Supplement. The Selling Stockholder may also elect to sell all or a
portion of its shares of Common Stock pursuant to an exemption from
registration. Under the terms of an agreement between the Company and the
Selling Stockholder dated November 15, 1993, the Selling Stockholder must also
comply with various terms and conditions in selling its shares of Common Stock.
PLAN OF DISTRIBUTION
The Company and the Selling Stockholder may sell the Offered Securities
through one or more underwriters or dealers, directly to one or more purchasers,
through agents, or through a combination of any such methods of sale. Any such
underwriter or agent involved in the offer and sale of the Offered Securities
will be named in the applicable Prospectus Supplement. Sales of Offered
Securities pursuant to any applicable Prospectus Supplement may be effected from
time to time in one or more transactions at a fixed price or prices which may be
changed, at prices related to the prevailing market prices at the
5
<PAGE> 78
time of sale or at negotiated prices. The Company also may, from time to time,
authorize underwriters acting as the Company's agents or the Selling
Stockholder's agents to offer and sell the Offered Securities upon the terms and
conditions as are set forth in the applicable Prospectus Supplement. In
connection with the sale of the Offered Securities, underwriters may be deemed
to have received compensation from the Company or the Selling Stockholder in the
form of underwriting discounts or commissions and may also receive commissions
from purchasers of the Offered Securities for whom they may act as agent.
Underwriters may sell the Offered Securities to or through dealers, and such
dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers for
whom they may act as agent.
Any underwriting compensation paid by the Company or the Selling
Stockholder to underwriters or agents in connection with the offering of the
Offered Securities, and any discounts, concessions or commissions allowed by
underwriters to participating dealers, will be set forth in the applicable
Prospectus Supplement. Underwriters, dealers and agents participating in the
distribution of the Offered Securities may be deemed to be underwriters, and any
discounts and commissions received by them and any profit realized by them on
resale of the Offered Securities may be deemed to be underwriting discounts and
commissions under the Securities Act. Underwriters, dealers, and agents may be
entitled, under agreements entered into with the Company, to indemnification
against and contribution toward certain civil liabilities, including liabilities
under the Securities Act. Underwriters, dealers and agents may engage in
transactions with, or perform services for, or be customers of, the Company in
the ordinary course of business.
If so indicated in the applicable Prospectus Supplement, the Company or the
Selling Stockholder, as the case may be, will authorize dealers acting as the
Company's or the Selling Stockholder's agents to solicit offers by certain
institutions to purchase the Offered Securities from the Company or the Selling
Stockholder at the public offering price set forth in such Prospectus Supplement
pursuant to Delayed Delivery Contracts ("Contracts") providing for payment and
delivery on the date or dates stated in such Prospectus Supplement. Each
Contract will be for an amount not less than, and the aggregate amount of the
Offered Securities sold pursuant to Contracts shall be not less nor more than,
the respective amounts stated in the applicable Prospectus Supplement.
Institutions with whom Contracts, when authorized, may be made include
commercial and savings banks, insurance companies, pension funds, investment
companies, educational and charitable institutions, and other institutions but
will in all cases be subject to the approval of the Company. Contracts will not
be subject to any conditions except: (i) the purchase by an institution of the
Offered Securities covered by its Contracts shall not at the time of delivery be
prohibited under the laws of any jurisdiction in the United States to which such
institution is subject; and (ii) if the Offered Securities are being sold to
underwriters, the Company or the Selling Stockholder shall have sold to such
underwriters the total amount of the Offered Securities less the amount thereof
covered by the Contracts.
Unless otherwise specified in the related Prospectus Supplement, each
series of Company Offered Securities will be a new issue with no established
trading market, other than the Common Stock which is listed on the American
Stock Exchange. Any shares of Common Stock sold by the Company pursuant to a
Prospectus Supplement will be listed on such exchange, subject to official
notice of issuance; the shares of Common Stock comprising the Selling
Stockholder Offered Securities have previously been listed on the American Stock
Exchange. The Company may elect to list any series of Preferred Stock on any
exchange, but is not obligated to do so. It is possible that one or more
underwriters may make a market in a series of Offered Securities, but will not
be obligated to do so and may discontinue any market making at any time without
notice. Therefore, no assurance can be given as to the liquidity of the trading
market of the Offered Securities.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for the Company and its
subsidiaries in the ordinary course of business.
6
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RISK FACTORS
Prospective investors should carefully consider the following information
in conjunction with the other information contained in this Prospectus and the
applicable Prospectus Supplement before purchasing Offered Securities.
DEBT FINANCING; RISK OF RISING INTEREST RATES
The Company is subject to the risks normally associated with debt
financing, including the risk that the Company's cash flow will be insufficient
to meet required payments of principal and interest, that the Company will not
be able to refinance existing indebtedness on its properties, or that the terms
of such refinancing will not be as favorable as the terms of existing
indebtedness. As of December 31, 1995, the Company had outstanding approximately
$150 million of indebtedness secured by certain of its properties.
If prevailing interest rates or other factors at the time of refinancing
result in higher interest rates on refinancing, the Company's interest expense
would increase, which would adversely affect the Company's cash provided by
operating activities and its ability to make distributions or payments to
holders of its securities. In addition, in the event the Company were unable to
secure refinancing of such indebtedness on acceptable terms, the Company might
be forced to dispose of properties upon disadvantageous terms, which might
result in losses to the Company and might adversely affect the Company's funds
from operations. In addition, if a property or properties are mortgaged to
secure payment of indebtedness and the Company is unable to meet mortgage
payments, the property could be foreclosed upon by or otherwise transferred to
the mortgagee with a consequent loss of income and asset value to the Company.
RISKS OF ACQUISITION AND DEVELOPMENT ACTIVITIES
The Company intends to actively continue to acquire industrial and
multifamily residential properties. Acquisitions of such properties entail risks
that investments will fail to perform in accordance with expectations. Estimates
of the costs of improvements to bring an acquired property up to standards
established for the market position intended for that property may prove
inaccurate. In addition, there are general real estate investment risks
associated with any new real estate investment.
The Company may also pursue industrial and multi-family residential
property development projects, although it has not heretofore done so. Such
projects generally require various governmental and other approvals, the receipt
of which cannot be assured. Such development activities will entail certain
risks, including the expenditure of funds on and devotion of management's time
to projects which may not come to fruition; the risk that construction costs of
a project may exceed original estimates, possibly making the project not
economical; the risk that occupancy rates and rents at a completed project will
be less than anticipated; and the risk that expenses at a completed development
will be higher than anticipated. These risks may result in a development project
causing a reduction in funds from operations or the funds available for
distribution.
GENERAL REAL ESTATE INVESTMENT RISKS
Real property investments are subject to a variety of risks. The yields
available from equity investments in real estate depend on the amount of income
generated and expenses incurred. If the Company's properties do not generate
sufficient income to meet operating expenses, including debt service and capital
expenditures, the Company's cash flow and ability to make distributions to its
stockholders will be adversely affected. The performance of the economy in each
of the areas in which the Company's properties are located affects occupancy,
market rental rates and expenses and, consequently, has an impact on the income
from the Company's properties and their underlying values. The financial results
of major local employers may have an impact on the cash flow and value of
certain of the Company's properties.
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LACK OF GEOGRAPHIC DIVERSIFICATION
The Company's properties are located in California and the Pacific
Northwest, with the largest concentration in Southern California. Income from
the Company's properties may be adversely affected by the general economic
climate, local economic conditions in which the Properties are located, such as
an oversupply of space or a reduction in demand for rental space, the
attractiveness of the Company's properties to tenants, competition from other
available space, the ability of the Company to provide the adequate maintenance
and insurance and increased operating expenses. There is also the risk that as
leases on the Company's properties expire, tenants will enter into new leases on
terms that are less favorable to the Company. Income and real estate values may
also be adversely affected by such factors as applicable laws (e.g., ADA and tax
laws), interest rate levels and the availability of financing. In addition, real
estate investments are relatively illiquid and, therefore, will tend to limit
the ability of the Company to vary its portfolio promptly in response to changes
in economic or other conditions.
AFFORDABLE HOUSING LAWS
Certain of the Company's multi-family properties are, and will be in the
future, subject to federal, state and local statutes or other restrictions
requiring that a percentage of apartment homes be made available to residents
whose incomes do not exceed a certain percentage of the local median. These laws
and regulations, as well as any changes thereto making it more difficult to meet
such requirements, or a reduction in or elimination of certain financing
advantages available to those persons satisfying such requirements, could
adversely affect the Company's profitability and its ability to develop certain
communities in the future.
COMPETITION
Numerous industrial and residential properties compete with the Company's
properties in attracting tenants to lease space. Some of these competing
properties are newer, better located or better capitalized than the Company's
properties. The number of competitive properties in a particular area could have
a material effect on the Company's ability to lease space in its properties or
at newly developed or acquired properties and on the rents charged.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real estate is liable for the costs of removal or
remediation of certain hazardous or toxic substances on or in such property.
Such laws often impose such liability without regard to whether the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. The presence of such substances, or the failure to properly
remediate such substances, may adversely affect the owner's or operator's
ability to sell or rent such property or to borrow using such property as
collateral. Persons who arrange for the disposal or treatment of hazardous or
toxic substances may also be liable for the costs or removal or remediation of
such substances at a disposal or treatment facility, whether or not such
facility is owned or operated by such person. In connection with the ownership
(direct or indirect), operation, management and development of real properties,
the Company may be considered an owner or operator of such properties or as
having arranged for the disposal or treatment of hazardous or toxic substances
and, therefore, may be potentially liable for removal or remediation costs, as
well as certain other costs, including governmental fines and injuries to
persons and property.
Certain environmental laws impose liability for any release of
asbestos-containing materials ("ACMs") into the air. In addition, third parties
may seek recovery from owners or operators of real properties for personal
injury associated with exposure to ACMs released from such properties. Limited
quantities of ACMs are present in various building materials such as floor
coverings, ceiling texture material, acoustical tiles and decorative treatments
located at certain of the Company's properties. The ACMs present at such
properties are generally in good condition, and possess low probabilities for
unintentional disturbance. The Company has implemented operations and mainte-
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nance plans for properties where ACMs are present or reasonably suspected. It is
the Company's policy that generally ACMs will be removed by the Company in the
ordinary course of renovation and construction.
There may also be potential liability associated with lead-based paint
arising from lawsuits alleging personal injury and related claims. Typically,
the existence of lead paint is more of a concern in residential units than in
commercial properties. A structure built prior to 1978 may contain lead-based
paint and thus may present a potential for exposure to lead. Structures built
after 1978 are not likely to contain lead-based paint. The Company's existing
multifamily properties have not been tested for lead-based paint; because most
were constructed before 1978, they may contain lead-based paint, and thus could
pose a potential health risk caused by exposure to lead.
The existence of electric transmission lines near the Company's properties
were not searched for. Electric transmission lines are one of many sources of
electro-magnetic fields ("EMFs") to which people may be exposed. Research into
potential health impacts associated with exposure to EMFs has produced
inconclusive results. Notwithstanding the lack of conclusive scientific
evidence, some states now regulate the strength of electric and magnetic fields
emanating from electric transmission lines, while others have required
transmission facilities to measure for levels of EMFs. In addition, the Company
understands that lawsuits have, on occasion, been filed (primarily against
electric utilities) alleging personal injuries resulting from exposure as well
as fear of adverse health effects. In addition, fear of adverse health effects
from transmission lines has been a factor considered in determining property
values in obtaining financing and in condemnation proceedings. Therefore, there
is a potential for the value of the Company's properties to be affected as a
result of proximity to a transmission line and for the Company to be exposed to
damage claims by persons exposed to EMFs.
Each of the Company's properties has been subjected to a Phase I or similar
environmental assessment (which involves general inspections without soil
sampling or groundwater analysis and generally without radon testing) completed
by licensed and qualified independent environmental consultant companies. Some
of the properties have been subject to a limited subsurface investigation. These
environmental assessments have not revealed any environmental liability, nor is
the Company aware of any environmental liability, that the Company's management
believes would have a material adverse effect on the company's business, assets
or results of operations.
No assurance can be given that existing environmental assessments with
respect to any of the Properties would reveal all environmental liabilities,
that any prior owner of any of the Company's properties did not create any
material environmental condition not known to the Company, or that a material
environmental condition does not otherwise exist as to any one or more of the
Company's properties.
GENERAL UNINSURED LOSSES
The Company carries comprehensive liability, fire, flood, extended coverage
and rental loss insurance for each of its properties, with policy
specifications, limits and deductibles customarily carried for similar
properties. There are, however, certain types of extraordinary losses which are
either uninsurable or not economically insurable. Further, all of the Company's
properties are located in areas that are subject to earthquake activity.
Although the Company has obtained certain limited earthquake insurance policies,
should one or more of the Company's properties sustain damage as a result of an
earthquake, the Company may sustain losses due to insurance deductibles,
co-payments on insured losses or uninsured losses.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
Tax Liabilities Upon Failure to Qualify as a REIT. The Company made the
election to be treated for federal income tax purposes as a REIT under the
Internal Revenue Code of 1986, as amended (the "Code"). No assurance can be
given that the Company will operate in a manner enabling it to remain so
qualified. Qualification as a REIT involves the application of highly technical
and complex Code provisions which have only a limited number of judicial or
administra-
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tive interpretations, and the determination of various factual matters and
circumstances not entirely within the Company's control may impact its ability
to qualify as a REIT. In addition, no assurance can be given that new
legislation, regulations, administrative interpretations or court decisions will
not significantly change the tax laws with respect to the qualification as a
REIT or the federal income tax consequences of such qualification.
If in any taxable year the Company does not qualify as a REIT, it would be
taxed as a regular corporation and distributions to the holders of the Common
Stock would not be deductible by the Company in computing its taxable income. In
addition, unless entitled to relief under certain statutory provisions, the
Company will also be disqualified from treatment as a REIT for the four taxable
years following the year during which qualification was lost. This treatment
would significantly reduce the funds from operations available for investment or
distribution or payment to holders of the securities because of the additional
tax liability to the Company for the year or years involved. In addition, the
Company would no longer be required by the Code to make any distributions.
To qualify as a REIT, the Company is required to distribute at least 95% of
its taxable income to its shareholders each year. Possible timing differences
between receipt of income and payment of expenses, and the inclusion and
deduction of such amounts in determining taxable income, could require the
Company to reduce its dividends below the level necessary to maintain its
qualification as a REIT, which would have material adverse tax consequences.
QUALIFICATION OF THE OPERATING PARTNERSHIP AS A PARTNERSHIP FOR FEDERAL INCOME
TAX PURPOSES; IMPACT ON REIT STATUS
PGP Inland Communities, L.P., the Company's subsidiary operating
partnership (the "Operating Partnership"), is intended to be treated as a
partnership for federal income tax purposes. If the IRS were to challenge
successfully the status of the Operating Partnership as a partnership for
federal income tax purposes, the Operating Partnership would be treated as an
association taxable as a corporation. In such event, for federal income tax
purposes the character of the Company's assets and income pertaining to its
interest in the Operating Partnership would change, and could cause the Company
to fail to meet the requirements for taxation as a REIT for federal income tax
purposes and therefore to be taxed as a regular corporation. The imposition of a
corporate tax on the Company and the Operating Partnership would significantly
reduce the funds from operations available for investment or distribution or
payment to holders of the securities.
Other REIT Taxes. Although qualified to be taxed as a REIT, certain
transactions or other events could lead to the Company being taxed at rates
ranging from 4% to 100% on certain income or gains.
DEPENDENCE ON KEY PERSONNEL
The Company's management has substantial experience in acquiring, managing
and financing multifamily and industrial properties. The Company believes that
its success will depend in significant part upon the efforts of such persons and
that it may be difficult to replace such persons with individuals having
comparable experience.
ISSUANCE OF SHARES MAY ADVERSELY AFFECT MARKET PRICE OF COMMON STOCK AND DILUTE
PER SHARE AMOUNTS AVAILABLE FOR DISTRIBUTION
Future issuances of substantial amounts of Common Stock upon conversion of
the Company's 8.375% Convertible Subordinated Debentures (the "Debentures")
could adversely affect the market price for the Common Stock and dilute per
share amounts available for distribution to shareholders. An aggregate of
$56,551,000 in principal amount of Debentures, convertible into an aggregate of
3,036,710 additional shares of Common Stock, was issued by the Company in
February 1994. The Debentures are convertible at any time at the election of the
holders.
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DESCRIPTION OF COMMON STOCK
The summary of the terms of the Company's Common Stock set forth below does
not purport to be complete and is subject to and qualified in its entirety by
reference to the Articles of Incorporation and Bylaws of the Company.
GENERAL
The Articles of Incorporation of the Company provide that the Company may
issue up to 60,000,000 shares of capital stock, consisting of 25,000,000 shares
of common stock, par value $.01 per share (the "Common Stock"), 30,000,000
shares of excess stock, par value $.01 per share (the "Excess Shares"), and
5,000,000 shares of preferred stock, par value $.01 per share (the "Preferred
Stock"). As of March 15, 1996, 4,857,351 shares of Common Stock and no shares of
Preferred Stock or Excess Shares were issued and outstanding. Under Maryland
law, shareholders generally are not liable for the corporation's debts or
obligations.
TERMS
All shares of Common Stock offered hereby by the Company will be upon
issuance and delivery against payment, and all shares of Common Stock offered
hereby by the Selling Stockholder are, duly authorized, fully paid and
nonassessable. Subject to the preferential rights of any other shares or series
of capital stock and to the provisions of the Company's Articles of
Incorporation regarding Excess Shares, holders of Common Stock will be entitled
to receive distributions on such shares if, as and when authorized and declared
by the Board of Directors of the Company out of assets legally available
therefor, and to share ratably in the assets of the Company legally available
for distribution to its shareholders in the event of its liquidation,
dissolution or winding-up after payment of, or adequate provision for, all known
debts and liabilities of the Company.
The Company commenced quarterly distributions on its Common Stock on April
15, 1994, and intends to continue making quarterly distributions on the
outstanding shares of Common Stock.
Subject to the provisions of the Company's Articles of Incorporation,
regarding Excess Shares and to the matters discussed under "Certain Provisions
of Maryland Law and of the Company's Articles of Incorporation and
Bylaws -- Control Share Acquisitions," each outstanding share of Common Stock
entitles the holder to one vote on all matters submitted to a vote of
shareholders, including the election of directors, and, except as otherwise
required by law or except as provided with respect to any other class or series
of stock, the holders of such Common Stock will possess the exclusive voting
power. There is no cumulative voting in the election of directors, which means
that the holders of all plurality of the outstanding Common Stock can elect all
of the directors then standing for election and the holders of the remaining
Common Stock will not be able to elect any directors.
Holders of Common Stock have no conversion, sinking fund, redemption rights
or preemptive rights to subscribe for any securities of the Company.
Subject to the provisions of the Company's Articles of Incorporation,
regarding Excess Shares, all Common Stock will have equal dividend,
distribution, liquidation and other rights, and will have no preference,
appraisal or exchange rights.
Pursuant to the Maryland General Corporation Law (the "MGCL"), a
corporation generally cannot dissolve, amend its Articles of Incorporation,
merge, transfer all or substantially all of its assets, engage in a share
exchange or engage in certain similar fundamental transactions unless
recommended by the Board of Directors and approved by the affirmative vote of
shareholders holding at least two-thirds of the shares entitled to vote on the
matter unless a lesser percentage (but not less than a majority of all of the
votes entitled to be cast on the matter) is set forth in the corporation's
Articles of Incorporation. The Company's Articles of Incorporation require the
affirmative vote of shareholders holding at least a majority of all the votes
entitled to be cast on such
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matters. In addition, a number of other provisions of the MGCL could have a
significant effect on the Common Stock and the rights and obligations of holders
thereof. See "Certain Provisions of Maryland Law of the Company's Articles of
Incorporation and Bylaws."
The transfer agent and registrar for the Common Stock is Harris Trust
Company of California.
DESCRIPTION OF PREFERRED STOCK
GENERAL
The following description of terms of the Preferred Stock sets forth
certain general terms and provisions of the Preferred Stock to which any
Prospectus Supplement may relate. Certain other terms of any series of the
Preferred Stock offered by any Prospectus Supplement will be described in such
Prospectus Supplement. The description of certain provisions of the Preferred
Stock set forth below and in any Prospectus Supplement does not purport to be
complete and is subject to and qualified in its entirety by reference to the
Company's Articles of Incorporation and the Board of Directors' resolution or
resolutions relating to each series of the Preferred Stock which will be filed
with the Commission and incorporated by reference as an exhibit to the
Registration Statement of which this Prospectus is a part at or prior to the
time of the issuance of such series of Preferred Stock.
Subject to limitations prescribed by the MGCL and the Articles of
Incorporation, the Board of Directors is authorized to issue shares of Preferred
Stock in one or more series, to establish from time to time the number of shares
of Preferred Stock to be included in any such series and to fix for any such
series the designation and any preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption. The Company is authorized to issue five million shares
of Preferred Stock, of which no shares are currently outstanding.
The Preferred Stock shall have the dividend, liquidation, redemption and
voting rights set forth below, unless otherwise provided in a Prospectus
Supplement relating to a particular series of the Preferred Stock. Reference is
made to the Prospectus Supplement relating to the particular series of the
Preferred Stock offered thereby for specific terms, including: (i) the
designation and stated value per share of such Preferred Stock and the number of
shares offered; (ii) the amount of liquidation preference per share; (iii) the
initial public offering price at which such Preferred Stock will be issued; (iv)
the dividend rate (or method of calculation), the dates on which dividends shall
be payable and the dates from which dividends shall commence to cumulate, if
any; (v) any redemption or sinking fund provisions; (vi) any conversion right;
(vii) any listing of the Preferred Stock on any securities exchange; (viii) any
additional voting, dividend, liquidation, redemption, sinking fund and other
rights, preferences, privileges, limitations and restrictions not in conflict
with the Articles of Incorporation or the MGCL; (ix) a discussion of Federal
income tax considerations applicable to the Preferred Stock; (x) the relative
ranking and preferences of the Preferred Stock as to dividends and rights upon
liquidation; and (xi) any limitations on direct or beneficial ownership and
restrictions on transfer. The Preferred Stock will, when issued for lawful
consideration therefor, be fully paid and nonassessable and will have no
preemptive rights.
Unless otherwise indicated in a Prospectus Supplement relating thereto,
Harris Trust Company of California will be the transfer agent and registrar for
shares of each series of Preferred Stock.
RANK
Unless otherwise specified in the Prospectus Supplement, the Preferred
Stock will, with respect to dividend rights upon liquidation, dissolution or
winding up of the Company, rank: (i) senior to all classes or series of Common
Stock and to all equity securities ranking junior to such Preferred Stock; (ii)
on a parity with all equity securities issued by the Company the terms of which
specifically provide that such equity securities rank on a parity with the
Preferred Stock; and (iii) junior to all equity securities issued by the Company
the terms of which specifically provide
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that such equity securities rank senior to the Preferred Stock. The rights of
the holders of each series of Preferred Stock will be subordinate to those of
the Company's general creditors.
DIVIDENDS
Holders of each series of Preferred Stock shall be entitled to receive,
when, as and if declared by the Board of Directors, out of assets of the Company
legally available for payment, cash dividends at such rates and on such dates as
will be set forth in the applicable Prospectus Supplement. Such rate may be
fixed or variable or both. Each such dividend shall be payable to holders of
record as they appear on the share transfer books of the Company on such record
dates as shall be fixed by the Board of Directors, as specified in the
Prospectus Supplement relating to such series of Preferred Stock.
Dividends on any series of Preferred Stock may be cumulative or
noncumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the Board of Directors fails to declare a
dividend payable on a dividend payment date on any series of Preferred Stock for
which dividends are noncumulative, then the holders of such series of Preferred
Stock will have no right to receive a dividend in respect of the dividend period
ending on such dividend payment date, and the Company will have no obligation to
pay the dividend accrued for such period, whether or not dividends on such
series are declared payable on any future dividend payment date. Dividends on
shares of each series of Preferred Stock for which dividends are cumulative will
accrue from the date on which the Company initially issues shares of such
series.
So long as any series of Preferred Stock shall be outstanding, unless: (i)
full dividends (including, if such dividends are cumulative, dividends for prior
dividend periods) shall have been paid or declared and set apart for payment on
all outstanding shares of Preferred Stock of such series and all other classes
and series of Preferred Stock (other than "Junior Stock," as defined below; and
(ii) the repurchase or other mandatory retirement of, or with respect to any
sinking or other analogous fund for, any shares of Preferred Stock of such
series or any other Preferred Stock of any class or series (other than Junior
Stock), the Company may not declare any dividends on any Common Stock or any
other equity securities of the Company ranking as to dividends or distributions
of assets junior to such series of Preferred Stock (the Common Stock and any
such other equity securities being herein referred to as "Junior Stock"), or
make any payment on account of, or set apart money for the purchase, redemption
of other retirement of or for a sinking or other analogous fund, for any Junior
Stock or make any distribution in respect thereof, whether in cash or property
or in obligations or equity securities of the Company, other than shares of
Junior Stock which are neither convertible into, nor exchangeable or exercisable
for, any securities of the Company other than shares of Junior Stock.
Any dividend payment made on a series of Preferred Stock shall first be
credited against the earliest accrued but unpaid dividend due with respect to
shares of such series which remains payable.
REDEMPTION
A series of Preferred Stock may be redeemable in whole or in part, from
time to time, at the option of the Company, or may be subject to mandatory
redemption pursuant to a sinking fund or otherwise, in each case upon the terms,
at the times and at the redemption prices set forth in the Prospectus Supplement
related to such series. Shares of Preferred Stock redeemed by the Company will
be restored to the status of authorized but unissued Preferred Stock of the
Company.
The Prospectus Supplement relating to a series of Preferred Stock that is
subject to mandatory redemption will specify the number of shares of such
Preferred Stock that shall be redeemed by the Company in each year commencing
after a date to be specified, at a redemption price per share to be specified,
together with an amount equal to all accrued and unpaid dividends thereon (which
shall
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not, if such Preferred Stock does not have a cumulative dividend, include any
accumulation in respect of unpaid dividends for prior dividend periods) to the
date of redemption. The redemption price may be payable in cash or other
property, as specified in the applicable Prospectus Supplement. If the
redemption price for Preferred Stock of any series is payable only from the net
proceeds of the issuance of equity securities of the Company, the terms of such
series of Preferred Stock may provide that, if no such equity securities shall
have been issued or, to the extent the net proceeds from any issuance are
insufficient to pay in full the aggregate redemption price then due, such
Preferred Stock shall automatically and mandatorily be converted into the
applicable equity securities of the Company pursuant to conversion provisions
specified in the applicable Prospectus Supplement.
So long as any dividends on shares of any series of Preferred Stock or any
other series of Preferred Stock of the Company ranking on a parity as to
dividends and distribution of assets with such series of Preferred Stock are in
arrears, no shares of any such series of Preferred Stock or such other series of
Preferred Stock of the Company will be redeemed (whether by mandatory or
optional redemption) unless all such shares are simultaneously redeemed, and the
Company will not purchase or otherwise acquire any such shares; provided,
however, that the foregoing will not prevent the purchase or acquisition of such
shares pursuant to a purchase or exchange offer made on the same terms to
holders of all such shares outstanding.
In the event that fewer than all of the outstanding shares of a series of
Preferred Stock are to be redeemed, whether by mandatory or optional redemption,
the number of shares to be redeemed will be determined by lot or pro rata
(subject to rounding to avoid fractional shares) as may be determined by the
Company or by any other method as may be determined by the Company in its sole
discretion to be equitable. From and after the redemption date (unless default
shall be made by the Company in providing for the payment of the redemption
price plus accumulated and unpaid dividends, if any), dividends shall cease to
accumulate on the shares of Preferred Stock called for redemption and all rights
of the holders thereof (except the right to receive the redemption price plus
accumulated and unpaid dividends, if any) shall cease.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Company, then, before any distribution or payment shall be
made to the holders of any Junior Stock, the holders of each series of Preferred
Stock shall be entitled to receive out of assets of the Company legally
available for distribution to stockholders, liquidating distributions in the
amount of the liquidation preference per share (set forth in the applicable
Prospectus Supplement), plus an amount equal to all dividends accrued and unpaid
thereon (which shall not include any accumulation in respect of unpaid dividends
for prior dividend periods if such Preferred Stock does not have a cumulative
dividend). After payment of the full amount of the liquidating distributions to
which they are entitled, the holders of Preferred Stock will have no right or
claim to any of the remaining assets of the Company. In the event that, upon any
such voluntary or involuntary liquidation, dissolution or winding up, the
available assets of the Company are insufficient to pay the amount of the
liquidating distributions on all outstanding Preferred Stock and the
corresponding amounts payable on all shares of other classes or series of equity
securities of the Company ranking on a parity with the Preferred Stock in the
distribution of assets, then the holders of the Preferred Stock and all other
such classes or series of equity securities shall share ratably in any such
distribution of assets in proportion to the full liquidating distributions to
which they would otherwise be respectively entitled.
If liquidating distributions shall have been made in full to all holders of
Preferred Stock, the remaining assets of the Company shall be distributed among
the holders of shares of Junior Stock, according to their respective rights and
preferences and in each case according to their respective number of shares. For
such purposes, the consolidation or merger of the Company with or into any other
corporation, or the sale, lease or conveyance of all or substantially all of the
assets or business
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of the Company, shall not be deemed to constitute a liquidation, dissolution or
winding up of the Company.
VOTING RIGHTS
Except as indicated below or in a Prospectus Supplement relating to a
particular series of Preferred Stock, or except as required by applicable law,
holders of the Preferred Stock will not be entitled to vote for any purpose.
So long as any series of Preferred Stock remains outstanding, the consent
or the affirmative vote of the holders of at least a majority of the votes
entitled to be cast with respect to the then outstanding shares of such series
of Preferred Stock together with any "Other Preferred Stock" (as defined below),
voting as one class, either expressed in writing or at a meeting called for that
purpose, will be necessary: (i) to permit, effect or validate the authorization,
or any increase in the authorized amount, of any class or series of equity
securities of the Company ranking prior to Preferred Stock of such series as to
dividends, voting or upon distribution of assets; and (ii) to repeal, amend or
otherwise change any of the provisions applicable to the Preferred Stock of such
series in any manner which adversely affects the powers, preferences, voting
power or other rights or privileges of such series of Preferred Stock. In case
any series of Preferred Stock would be so affected by any such action referred
to in clause (ii) above in a different manner than one or more series of Other
Preferred Stock which will be similarly affected, the holders of the Preferred
Stock of such series, together with any series of Other Preferred Stock which
will be similarly affected, will be entitled to be cast with respect to each
such series of Preferred Stock and Other Preferred Stock then outstanding, in
lieu of the consent or affirmative vote hereinafter otherwise required.
With respect to any matter as to which the Preferred Stock of any series is
entitled to vote, holders of the Preferred Stock of such series and any other
series of Preferred Stock ranking on a parity with such series of Preferred
Stock as to dividends and distributions of assets and which by its terms
provides for similar voting rights (the "Other Preferred Stock") will be
entitled to cast the number of votes set forth in the Prospectus Supplement with
respect to that series of Preferred Stock. As a result of the provisions
described in the preceding paragraph requiring the holders of shares of a series
of Preferred Stock to vote together as a class with the holders of shares of one
or more series of Other Preferred Stock, it is possible that the holders of such
shares of Other Preferred Stock could approve action that would adversely affect
such series of Preferred Stock, including the creation of a class of shares of
beneficial interest ranking prior to such shares of Preferred Stock as to
dividends, voting or distributions of assets.
CONVERSION RIGHTS
The terms and conditions, if any, upon which shares of any series of
Preferred Stock are convertible into Common Stock will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include the
number of shares of Common Stock into which the Preferred Stock is convertible,
the conversion price (or manner of calculation thereof), the conversion period,
the provisions as to whether conversion will be at the option of the holders of
the Preferred Stock or the Company, the events requiring an adjustment of the
conversion price and the provisions affecting conversion.
RESTRICTIONS ON OWNERSHIP
See "Restrictions on Transfer of Capital Stock" for a discussion of the
restrictions on transfers of shares of capital stock necessary for the Company
to qualify as a REIT under the Internal Revenue Code of 1986, as amended.
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RESTRICTIONS ON TRANSFER OF CAPITAL STOCK
For the Company to qualify as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), not more than 50% in value of its issued and
outstanding capital stock may be owned, directly or constructively, by five or
fewer individuals (as defined in the Code to include certain entities) during
the last half of a taxable year, and the shares of issued and outstanding
capital stock of the Company must be beneficially owned by 100 or more persons
during at least 335 days of a taxable year of twelve months (or during a
proportionate part of a shorter taxable year). Because the Board of Directors
believes it is essential for the Company to qualify as a REIT, the Board of
Directors has included certain provisions in the Articles of Incorporation
restricting the acquisition of the Company's capital stock, including Common
Stock.
The provision setting forth the Ownership Limit provides that, subject to
certain exceptions, no shareholder (other than Realty) may own, or be deemed to
own by virtue of the constructive ownership provisions of the Code, more than
the Ownership Limit, which is equal to 9.8% in value or in number, whichever is
more restrictive, of the issued and outstanding capital stock of the Company.
The constructive ownership rules are complex and may cause Common Stock owned
directly or constructively by a group of related individuals or entities to be
constructively owned by one individual or entity. As a result, the acquisition
of less than 9.8% in value or in number of shares of the Common Stock (or the
acquisition of an interest in an entity which owns Common Shares) by an
individual or entity could cause that individual or entity (or another
individual or entity) to constructively own in excess of 9.8% in value or in
number of the issued and outstanding capital stock of the Company, and thus
subject such Common Stock to the Ownership Limit. In addition, for these
purposes, Common Stock that may be acquired upon conversion of the 8.375%
Convertible Subordinated Debentures Due 2001 previously issued by the Company
(the "Debentures") owned or deemed owned by an investor, but not Common Stock
issuable with respect to Debentures held by others, are deemed to be owned by
the investor and outstanding prior to conversion, for purposes of determining
the percentage of ownership of Common Stock owned by that investor.
The Board of Directors may waive the Ownership Limit with respect to a
particular shareholder if evidence satisfactory to the Board of Directors and
the Company's tax counsel is presented that such ownership will not then or in
the future jeopardize the Company's status as a REIT. As a condition of such
waiver, the Board of Directors may require opinions of counsel satisfactory to
it and an undertaking from the applicant with respect to preserving the REIT
status of the Company. If shares of Common Stock are issued or transferred to
any person, which would result in a violation of the Ownership Limit, or which
would cause the Company to be beneficially owned by fewer than 100 persons, such
issuance or transfer shall be null and void ab initio, and the intended
transferee will acquire no rights to, or economic interest in, the Common Stock.
The Articles of Incorporation provide that a transfer or other event that
results in a person owning Common Stock in excess of the Ownership Limit is null
and void ab initio as to the intended transferee or purported owner, and the
intended transferee or purported owner acquires or retains no rights or economic
interest in those shares of Common Stock. Common Stock purportedly owned, or
deemed to be owned, or transferred to a person in excess of the Ownership Limit,
will automatically be exchanged for shares of a separate class of stock ("Excess
Shares") that will be transferred, by operation of law, to a trust for the
exclusive benefit of the transferee or transferees to whom the Common Stock may
ultimately be transferred (without violating the Ownership Limit). While held in
trust, the Excess Shares will not be entitled to vote, will not be considered
outstanding for purposes of any shareholder vote or the determination of a
quorum for such vote, and will not be entitled to participate in any
distributions made by the Company. Any dividend or distribution paid to a
proposed transferree or owner on Excess Shares prior to the discovery by the
Company that such shares have become directly or constructively owned in
violation of the Company's Articles of Incorporation shall be repaid to the
Company upon demand. The intended transferree or owner may, at any time the
Excess Shares are held by the Company in trust, transfer the Excess Shares at a
price not to exceed the price paid by the intended transferee or owner to any
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<PAGE> 89
person whose ownership of such Excess Shares would be permitted under the
Ownership Limit, at which time the Excess Shares will automatically be exchanged
for shares of Common Stock. In addition, the Company would have the right, for a
period of 90 days during the time the Excess Shares are held by the Company in
trust, to purchase all or any portion of the Excess Shares from the intended
transferee or owner at a price equal to the lesser of the price paid for the
shares of Common Stock by the intended transferee or owner and the closing
market price for the shares of Common Stock on the date the Company exercises
its option to purchase the Common Stock. This period commences on the date of
the violative transfer of ownership if the intended transferee or owner gives
notice of the transfer to the Company, or the date the Board of Directors
determines that a violative transfer has occurred with no notices provided.
The Ownership Limit will not be automatically removed even if the REIT
provisions of the Code are changed so as to no longer contain any ownership
concentration limitation or if the Board of Directors and the shareholders of
the Company determine that it is no longer in the best interest of the Company
to attempt to qualify, or to continue to qualify, as a REIT. Except as otherwise
described above, any change of the Ownership Limit would require an amendment to
the Articles of Incorporation. Amendments to the Articles of Incorporation
require recommendation by the Board of Directors and the affirmative vote of
shareholders holding at least a majority of all the votes entitled to be cast on
the matter. In addition to preserving the Company's status as a REIT, the
Ownership Limit may have the effect of precluding an acquisition of control of
the REIT without the approval of the Board of Directors.
All certificates representing shares of Common Stock will bear a legend
referring to the restrictions described above.
All persons who own a specified percentage (or more) of outstanding Common
Stock must file an affidavit with the Company containing information regarding
their ownership of Common Stock, as set forth in the Treasury Regulations. Under
current Treasury Regulations, the percentage will be set between one-half of one
percent and five percent, depending on the number of record holders of Common
Stock. In addition, each shareholder shall upon demand by the Company be
required to disclose to the Company in writing such information with respect to
the direct, indirect and constructive ownership of shares as the Board of
Directors deems necessary to comply with the provisions of the Code applicable
to a REIT or to comply with the requirements of any taxing authority or
government agency.
The ownership limitations could have the effect of discouraging a takeover
or other transaction in which holders of some, or a majority, of Common Stock
might receive a premium for their shares over the then prevailing market price
or which such holders might believe to be otherwise in their best interest.
CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS
The following paragraphs summarize certain provisions of Maryland law and
the Company's Articles of Incorporation and Bylaws. The summary does not purport
to be complete and is subject to and qualified in its entirety by reference to
the Company's Articles of Incorporation and Bylaws, copies of which are exhibits
to the Registration Statement of which this Prospectus is a part, as described
in "Additional Information," and to Maryland law.
CLASSIFICATION OF THE BOARD OF DIRECTORS
The Company's Articles of Incorporation provide that the number of
directors of the Company may be established by the Board of Directors, but may
not be fewer than three nor more than eleven. Any vacancy will be filled, at any
regular meeting or at any special meeting called for that purpose, by a majority
of the remaining directors, except that a vacancy resulting from an increase in
the
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<PAGE> 90
number of directors will be filled by a majority of the entire Board of
Directors. Pursuant to the terms of the Articles of Incorporation, the directors
are divided into three classes -- i.e., Class I, Class II, and Class III.
Presently, one class will hold office for a term expiring at the annual meeting
of shareholders to be held in 1996 (i.e., Class II), another class will hold
office for a term expiring at the annual meeting of shareholders to be held in
1997 (i.e., Class III), and another class will hold office for a term expiring
at the annual meeting of shareholders to be held in 1998 (i.e., Class I). As the
term of each class expires, directors in that class will be elected for a term
of three years or until their successors are duly elected and qualify. The
Company believes that classification of the Board of Directors will help to
assure the continuity and stability of the Company's business strategies and
policies as determined by the Board of Directors.
The classified director provision could have the effect of making the
removal of incumbent directors more time-consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its shareholders. At least two annual meetings of
shareholders, instead of one, will generally be required to effect a change in a
majority of the Board of Directors. Thus, the classified board provision could
increase the likelihood that incumbent directors will retain their positions.
Holders of Common Stock will have no right to cumulative voting in the election
of directors. Consequently, at each annual meeting of shareholders, the holders
of a plurality of Common Stock will be able to elect all of the successors of
the class of directors whose term expires at that meeting.
REMOVAL OF DIRECTORS
The Articles of Incorporation provide that a director may be removed only
for cause and only by the affirmative vote of shareholders holding at least
two-thirds of all the votes entitled to be cast in the election of directors.
This provision, when coupled with the provision in the Bylaws authorizing the
Board of Directors to fill vacant directorships, precludes shareholders from
removing incumbent directors except upon a substantial affirmative vote and upon
a finding of cause and filling the vacancies created by such removal with their
own nominees.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Articles of Incorporation limit the liability of the
Company's directors and officers to the Company and its shareholders to the
fullest extent permitted from time to time by Maryland law. Maryland law
presently permits the liability of directors and officers to a corporation or
its shareholders for money damages to be limited, except (i) to the extent that
it is proved that the director or officer actually received an improper benefit
or profit, or (ii) if a judgment or other final adjudication is entered in a
proceeding based on a finding that the director's or officer's action, or
failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceedings. This provision
does not limit the ability of the Company or its shareholders to obtain other
relief, such as an injunction or rescission.
The Company's Bylaws require the Company to indemnify its directors,
officers and certain other parties to the fullest extent permitted from time to
time by Maryland law. The MGCL permits a corporation to indemnify its directors,
officers and certain other parties against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made a party by reason of their service to
or at the request of the corporation, unless it is established that the act or
omission of the indemnified party was material to the matter giving rise to the
proceeding and (i) was committed in bad faith or was the result of active and
deliberate dishonesty, (ii) the indemnified party actually received an improper
personal benefit, or (iii) in the case of any criminal proceeding, the
indemnified party had reasonable cause to believe that the act or omission was
unlawful. Indemnification may be made against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by the director or officer
in connection with the proceeding; provided, however, that if the proceeding is
one by or in the right
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<PAGE> 91
of the corporation, indemnification may not be made with respect to any
proceeding in which the director or officer has been adjudged to be liable on
the basis that personal benefit was improperly received. The termination of any
proceeding by conviction, or upon a plea of nolo contendere or its equivalent,
or an entry of any order of probation prior to judgment, creates a rebuttable
presumption that the director or officer did not meet the requisite standard of
conduct required for indemnification to be permitted. It is the position of the
Securities and Exchange Commission that indemnification of directors and
officers for liabilities arising under the Securities Act is against public
policy and is unenforceable pursuant to Section 14 of the Securities Act.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange, or in certain circumstances, an asset transfer or
issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns ten percent or more of the
voting power of the corporation's shares or an affiliate of the corporation who,
at any time within the two-year period prior to the date in question, was the
beneficial owner of ten percent or more of the voting power of the then
outstanding voting stock of the corporation (an "Interested Stockholder") or an
affiliate thereof are prohibited for five years after the most recent date on
which the Interested Stockholder became an Interested Stockholder. Thereafter,
any such business combination must be recommended by the Board of Directors of
such corporation and approved by the affirmative vote of at least (a) 80% of the
votes entitled to be cast by holders of outstanding voting shares of the
corporation voting together as a single voting group, and (b) two-thirds of the
votes entitled to be cast by holders of voting shares other than shares held by
the Interested Stockholder with whom the business combination is to be effected,
unless, among other things, the corporation's shareholders receive a fair price
(as defined in the MGCL) for their shares and the consideration is received in
cash or in the same form as previously paid by the Interested Stockholder for
its shares. These provisions of Maryland law do not apply, however, to business
combinations that are approved or exempted by the Board of Directors of the
corporation prior to the time that the Interested Stockholder becomes an
Interested Stockholder. As permitted by Maryland law, the Articles of
Incorporation of the Company include a provision exempting all future business
combinations involving the Company from the operation of the business
combination statute.
CONTROL SHARE ACQUISITIONS
The Company's Bylaws currently contain a provision exempting from the
control share acquisition statute described below any and all acquisitions by
any person of shares of capital stock of the Company, specifically including
Realty. The current or future directors of the Company may decide to eliminate
or amend this provision, although no such change is currently contemplated.
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquiror or by officers or directors who
are employees of the corporation. "Control shares" are voting shares of stock
which, if aggregated with all other such shares of stock previously acquired by
such person, or in respect of which such person is able to exercise or direct
the exercise of voting power, would entitle the acquiror to exercise voting
power in electing directors within one of the following ranges of voting power:
(i) one-fifth or more but less than one-third; (ii) one-third or more but less
than a majority; or (iii) a majority of all voting power. Control shares do not
include shares the acquiring person is then entitled to vote as a result of
having previously obtained stockholder approval. A "control share acquisition"
means the acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the Board of Directors to call a special meeting of shareholders to
be held within 50 days of demand to consider the voting
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rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any shareholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for control shares, as of the date of the last control share
acquisition or, if a meeting of shareholders is held where the voting rights of
such shares are considered and not approved, as of the date of the meeting. If
voting rights for control shares are approved at a shareholders meeting and the
acquiror becomes entitled to vote a majority of the shares entitled to vote, all
other shareholders may exercise appraisal rights. The fair value of the shares
as determined for purposes of such appraisal rights may not be less than the
highest price per share paid in the control share acquisition, and certain
limitations and restrictions otherwise applicable to the exercise of dissenters'
rights do not apply in the context of a control share acquisition.
The control share acquisition statute does not apply to shares acquired in
a merger, consolidation or share exchange if the Company is a party to the
transaction and such transaction is otherwise effected under the provision of
the MGCL; or to acquisitions approved or exempted by the Articles of
Incorporation or Bylaws of the Company.
AMENDMENT TO THE ARTICLES OF INCORPORATION
The Company's Articles of Incorporation, including its provisions on
classification of the Board of Directors and removal of directors, may be
amended only with the recommendation of the Board of Directors and by the
affirmative vote of shareholders holding at least a majority of all the votes
entitled to be cast on the matter.
DISSOLUTION OF THE COMPANY
The dissolution of the Company must be approved by the affirmative vote of
shareholders holding at least a majority of all the votes entitled to be cast or
the written consent of all shares entitled to vote on this matter.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws of the Company provide that (a) with respect to an annual
meeting of shareholders, nominations of persons for election to the Board of
Directors and the proposal of business to be considered by shareholders may be
made only (i) pursuant to the Company's notice of the meeting, (ii) by the Board
of Directors, or (iii) by a shareholder who is entitled to vote at the meeting
and who has complied with the advance notice procedures set forth in the Bylaws,
and (b) with respect to special meetings of shareholders, only the business
specified in the Company's notice of the meeting may be brought before the
meeting of shareholders, and nominations of persons for election to the Board of
Directors may be made only (i) pursuant to the Company's notice of meeting, (ii)
by the Board of Directors, or (iii) provided that the Board of Directors has
determined that directors shall be elected at such meeting, by a shareholder who
is entitled to vote at the meeting and who has complied with the advance notice
provisions set forth in the Bylaws.
The provisions in the Articles of Incorporation on classification of the
Board of Directors and removal of directors, the business combination and, if
the applicable provision in the Company's Bylaws is rescinded, control share
acquisition provisions of the MGCL, and the advance notice provisions of the
Bylaws could have the effect of discouraging a takeover or other transaction in
which holders of some, or a majority, of the Common Stock might receive a
premium for their Common Stock over the then prevailing market price or which
such holders might believe to be otherwise in their best interests.
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FEDERAL INCOME TAX CONSIDERATIONS
The Company believes it has operated, and the Company intends to continue
to operate, in such a manner as to qualify as a REIT under the Code, but no
assurance can be given that it will at all times so qualify.
The provisions of the Code pertaining to REITs are highly technical and
complex. The following is a brief and general summary of certain provisions that
currently govern the federal income tax treatment of the Company and its
stockholders. For the particular provisions that govern the federal income tax
treatment of the Company and its stockholders, reference is made to Sections 856
through 860 of the Code and the regulations thereunder. The following summary is
qualified in its entirety by such reference.
Under the Code, if certain requirements are met in a taxable year, a REIT
generally will not be subject to federal income tax with respect to income that
it distributes to its stockholders. If the Company fails to qualify during any
taxable year as a REIT, unless certain relief provisions are available, it will
be subject to tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates, which could have a material adverse
effect upon its stockholders.
In any year in which the Company qualifies to be taxed as a REIT,
distributions made to its stockholders out of current or accumulated earnings
and profits will be taxed to stockholders as ordinary income except that
distributions of net capital gains designated by the company as capital gain
dividends will be taxed as long-term capital gain income to the stockholders. To
the extent that distributions exceed current or accumulated earnings and
profits, they will constitute a return of capital, rather than dividend or
capital gain income, and will reduce the basis for the stockholder's securities
with respect to which the distribution is paid or, to the extent that they
exceed such basis, will be taxed in the same manner as gain from the sale of
those securities.
Investors are urged to consult their own tax advisors with respect to the
appropriateness of an investment in the Offered Securities and with respect to
the tax consequences arising under federal law and the laws of any state,
municipality or other taxing jurisdiction, including tax consequences resulting
from such investor's own tax characteristics. In particular, foreign investors
should consult their own tax advisors concerning tax consequences of an
investment in the Company, including the possibility of United States income tax
withholding on Company distributions.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Cox, Castle &
Nicholson, LLP, Los Angeles, California, and the legality of the Offered
Securities will be passed upon for the Company and the Selling Stockholder by
Piper & Marbury LLP, Baltimore, Maryland.
EXPERTS
The financial statements for Pacific Gulf Properties Inc. and the
Predecessor Multifamily and Industrial Operations included in the Company's
Annual Report on Form 10-K/A for the year ended December 31, 1995 and
incorporated by reference in this Prospectus have been audited by Ernst & Young
LLP, independent auditors, as stated in their report appearing therein and has
been so included in reliance upon the report given upon their authority as
experts in accounting and auditing.
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<PAGE> 95
NORTH COUNTY BUSINESS PARK
Yorba Linda, California
(Proposed Acquisition)
BELL RANCH INDUSTRIAL PARK
Santa Fe Springs, California
(Proposed Acquisition)
EDEN LANDING COMMERCE PARK
Hayward, California
(Proposed Acquisition)
SAN MARCOS INDUSTRIAL CENTER
San Marcos, California
(Proposed Acquisition)
23
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED HEREIN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR THE ACCOMPANYING PROSPECTUS
SUPPLEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER,
AGENT, OR DEALER. THIS PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS OR THE ACCOMPANYING PROSPECTUS SUPPLEMENT, NOR ANY SALE OF SECURITIES
BEING OFFERED PURSUANT TO THIS PROSPECTUS OR ANY ACCOMPANYING PROSPECTUS
SUPPLEMENT SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF OR THEREOF.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Supplement Summary................ S-3
Summary Financial Information................ S-6
The Company.................................. S-8
Use of Proceeds.............................. S-9
Selling Stockholder.......................... S-9
Price Range of Common Stock and
Distributions.............................. S-10
Capitalization............................... S-11
Business and Properties...................... S-12
Selected Financial and Operating Data........ S-19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................. S-22
Management................................... S-29
Federal Income Tax Considerations............ S-30
Underwriting................................. S-40
Legal Matters................................ S-41
Index to Financial Statements................ F-1
PROSPECTUS
Available Information........................ 2
Incorporation of Certain Documents
by Reference............................... 3
The Company.................................. 4
Use of Proceeds.............................. 4
Ratio of Earnings to Fixed Charges........... 5
Selling Stockholder.......................... 5
Plan of Distribution......................... 5
Risk Factors................................. 7
Description of Common Stock.................. 11
Description of Preferred Stock............... 12
Restrictions on Transfer of Capital Stock.... 16
Certain Provisions of Maryland Law
and of the Company's Articles of
Incorporation and Bylaws................... 17
Federal Income Tax Considerations............ 21
Legal Matters................................ 21
Experts...................................... 21
</TABLE>
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2,800,000 SHARES
LOGO
PACIFIC GULF
PROPERTIES INC.
COMMON STOCK
---------------------------------------
PROSPECTUS SUPPLEMENT
---------------------------------------
ALEX. BROWN & SONS
INCORPORATED
OPPENHEIMER & CO., INC.
PRUDENTIAL SECURITIES INCORPORATED
May 23, 1996
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