<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended September 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the Transition Period from _______ to _______
Commission File Number: 1-12546
PACIFIC GULF PROPERTIES INC.
(Exact name of Registrant as specified in its Charter)
MARYLAND 33-0577520
State of Incorporation (I.R.S. Employer Identification No.)
4220 VON KARMAN, SECOND FLOOR, NEWPORT BEACH
CALIFORNIA 92660-2002 (Address of principal
executive offices, including zip code)
714-223-5000
(Registrant's telephone number, including area code)
COMMON STOCK, PAR VALUE $.01 PER SHARE, 14,295,454 SHARES
WERE OUTSTANDING AS OF October 24, 1997
Indicate by check mark whether the Registrant (1) has
filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months
(or for such shorter period that the Registrant was
required to file such reports) and (2)
has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
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PACIFIC GULF PROPERTIES INC.
FORM 10-Q
PART I: FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
<S> <C>
Item 1. Financial Statements
INDEX TO FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996 1
Consolidated Statements of Operations for the Nine Months
ended September 30, 1997 and September 30, 1996 2
Consolidated Statements of Operations for the Three Months
ended September 30, 1997 and September 30, 1996 3
Consolidated Statements of Cash Flows for the Nine Months
ended September 30, 1997 and September 30, 1996 4
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II: OTHER INFORMATION 9
SIGNATURES 10
</TABLE>
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PACIFIC GULF PROPERTIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Real estate assets
Land $ 164,422 $ 111,253
Buildings 402,572 270,458
--------- ---------
566,994 381,711
Accumulated depreciation (36,744) (28,844)
--------- ---------
530,250 352,867
Cash and cash equivalents 1,258 1,523
Accounts receivable 2,501 2,125
Other assets 14,567 8,125
--------- ---------
$ 548,576 $ 364,640
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Loans payable $ 277,383 $ 197,401
Accounts payable and accrued liabilities 8,711 5,671
Dividends payable 6,139 4,001
Convertible subordinated debentures 12,652 14,227
--------- ---------
304,885 221,300
Minority interest in consolidated partnerships 8,465 3,518
Commitments and contingencies -- --
Shareholders' equity
Preferred shares, $.01 par value; 5,000,000 shares authorized;
270,270 shares Class A and 470,588 shares Class B outstanding at
September 30, 1997 and no shares outstanding at December 31, 1996 7 --
Common shares, $.01 par value; 25,000,000 shares
authorized; 14,294,379 at September 30, 1997 and
9,757,917 shares outstanding at December 31, 1996 143 98
Excess shares, $.01 par value; 30,000,000 shares
authorized; no shares outstanding -- --
Outstanding restricted stock (865) (877)
Additional paid-in capital 259,558 157,895
Distributions in excess of net earnings (23,617) (17,294)
--------- ---------
235,226 139,822
--------- ---------
$ 548,576 $ 364,640
========= =========
</TABLE>
See accompanying notes
1
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PACIFIC GULF PROPERTIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30
------------------------------
1997 1996
---------- -------
<S> <C> <C>
REVENUES
Rental income
Industrial properties $ 24,850 $14,469
Multifamily properties 24,339 21,673
-------- -------
49,189 36,142
EXPENSES
Rental property expenses
Industrial properties 5,864 3,791
Multifamily properties 9,421 8,527
-------- -------
15,285 12,318
Depreciation 8,073 5,921
Interest (including amortization of debenture discount and
financing costs of $ 619 and $924 respectively) 12,621 13,613
General and administrative expenses 2,238 2,056
Minority partners' interest in earnings of consolidated partnerships 114 --
-------- -------
38,331 33,908
-------- -------
INCOME BEFORE GAIN/LOSS ON SALE OF REAL ESTATE 10,858 2,234
Gain (Loss) on sale of real estate (111) 74
-------- -------
NET INCOME $ 10,747 $ 2,308
Less preferred dividend requirements 390 --
-------- -------
INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 10,357 $ 2,308
======== =======
INCOME AVAILABLE PER COMMON SHARE $ 0.81 $ 0.39
======== =======
DIVIDENDS DECLARED PER COMMON SHARE $ 1.23 $ 1.20
======== =======
</TABLE>
See accompanying notes
2
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PACIFIC GULF PROPERTIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30
-------------------------------
1997 1996
------- -------
<S> <C> <C>
REVENUES
Rental income
Industrial properties $ 9,620 $ 6,071
Multifamily properties 8,837 7,372
------- -------
18,457 13,443
EXPENSES
Rental property expenses
Industrial properties 2,185 1,714
Multifamily properties 3,425 2,834
------- -------
5,610 4,548
Depreciation 3,139 2,116
Interest (including amortization of debenture discount and
financing costs of $176 and $325 respectively) 4,669 4,782
General and administrative expenses 766 708
Minority partners' interest in earnings of consolidated partnerships 94 --
------- -------
14,278 12,154
------- -------
INCOME BEFORE GAIN ON SALE OF REAL ESTATE 4,179 1,289
Gain on sale of real estate -- 74
------- -------
NET INCOME $ 4,179 $ 1,363
Less preferred dividend requirements 275 --
------- -------
INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 3,904 $ 1,363
======= =======
INCOME AVAILABLE PER COMMON SHARE $ 0.27 $ 0.19
======= =======
DIVIDENDS DECLARED PER COMMON SHARE $ 0.41 $ 0.40
======= =======
</TABLE>
See accompanying notes
3
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PACIFIC GULF PROPERTIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30
------------------------------
1997 1996
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income available to common shareholders $ 10,357 $ 2,308
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 7,990 5,921
Amortization of debenture discount
and financing costs 619 924
(Gain)/loss on sale of real estate 111 (74)
Compensation recognized related to restricted stock
issued to employees 12 102
Net decrease in other assets (4,186) (1,525)
Net increase in liabilities 3,040 1,697
--------- --------
Net cash provided by operating activities 17,943 9,353
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net additions to real estate assets (185,283) (74,163)
Property and equipment, net (3,452) 7,695
--------- --------
Net cash used in investing activities (188,735) (66,468)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving line of credit 98,778 28,075
Repayment of revolving lines of credit (46,719) (5,000)
Proceeds from mortgage notes payable 39,642 8,000
Repayment of mortgage notes payable (14,685) (3,904)
Proceeds from construction loans 2,966 --
Debentures converted to common shares (1,574) --
Issuance of common shares 88,477 36,540
Issuance of preferred shares 13,237 --
Minority partners' interest in consolidated partnerships 4,947 --
Distributions paid (14,542) (6,812)
--------- --------
Net cash provided by financing activities 170,527 56,899
--------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (265) (216)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 1,523 2,847
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,258 $ 2,631
========= ========
</TABLE>
See accompanying notes
4
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS
Pacific Gulf Properties Inc. was incorporated in Maryland and operates
as a Real Estate Investment Trust ("REIT") under the Internal Revenue
Code of 1986, as amended. The consolidated financial statements include
the accounts of Pacific Gulf Properties Inc. (the "Company") and its
consolidated partnerships, PGP Inland Communities, L.P., PGP Von Karman
Properties, Terrace Gardens-PGP L.P. and Morning View Terrace-PGP L.P.
(the "Partnerships"). The information furnished has been prepared in
accordance with generally accepted accounting principles for interim
financial reporting and the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. In the opinion of management, all adjustments
considered necessary for the fair presentation of the Company's
financial position, results of operations and cash flows have been
included. These financial statements should be read in conjunction with
the Company's Annual Report on Form 10-K for the year ended December
31, 1996.
2. REAL ESTATE ACQUISITIONS AND DISPOSITIONS
In the first quarter of 1997, the Company used proceeds from a January
1997 public offering of its common shares to acquire four industrial
properties consisting of 1,091,372 leasable square feet for an
aggregate purchase price of $36,806,000. (See Note 5.) The properties
consist of two industrial locations in Southern California with 320,971
leasable square feet, one in Woodland, California with 570,000 leasable
square feet, and one in Algona, Washington with 200,401 leasable square
feet.
In May 1997, the Company acquired the Algona Distribution Center, a
vacant industrial distribution facility containing approximately
263,000 leasable square feet located in Algona, Washington for
approximately $8,750,000, which the Company financed with borrowings
under the Acquisition Facility (as defined below). The Company
anticipates spending up to $1,300,000 for capital improvements which
may include, subject to future tenant needs, installation of additional
dock-high doors, rehabilitation of the existing loading dock area and
tenant improvements. The center is adjacent to the PGP Distribution
Center, which the Company acquired in January 1997.
Also in May 1997, the Company acquired a 12.8 acre land parcel located
in the Pacific Commerce Centre in Lake Forest, California for
$3,500,000, which it financed with borrowings under the Acquisition
Facility. The Company anticipates that the site will be developed into
a multi-tenant industrial complex of buildings housing tenants in
spaces ranging in size from 3,500 to 15,000 square feet. The
preliminary plans anticipate approximately 204,000 leasable square feet
of 24 foot clear height buildings including both grade level loading
and dock-high loading. The Company has budgeted approximately
$8,700,000 million for development costs.
In June 1997, the Company acquired a controlling general partnership
interest in two partnerships that own two active senior apartment
communities adjacent to each other located in Escondido, California.
The properties contain an aggregate of 551 studio, one-bedroom, and
two-bedroom apartment units. Following the acquisition, the Company
became the sole general partner of the existing limited partnerships
that own and manage the properties. The existing partners of the
partnerships received an aggregate of approximately 265,000 units of
limited partnership interests in such partnerships which may be
tendered for redemption to the Company any time beginning, in most
cases, two years after the closing of the transaction. Upon tender, the
Company, at its election, may either issue common shares for the units
on a one-for-one basis (subject to certain adjustments) or pay cash for
the units based on the then fair market value of the common shares.
In June 1997, the Company sold its 7,000 square foot Corporate Office
in Newport Beach, California. The loss recognized on the sale totaled
$111,000. The Company relocated to a newly acquired 28,000 square foot
facility also located in Newport Beach, California which was purchased
for $3,286,000 on April 17, 1997.
On July 18, 1997, the Company purchased five industrial/distribution
properties (the "LPIF Properties") containing approximately 1,532,000
leasable square feet located in California markets where the Company
has existing management. The LPIF properties were purchased from
Lincoln Pacific Industrial Fund for a total consideration of
$67,250,000. The Company funded the purchase with $41,625,000 in
5
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borrowings under an unsecured credit facility established by the
Company for acquisition purposes (the "Acquisition Facility"), and
$12,000,000 in borrowings under the Company's revolving line of credit
together with $10,000,000 in net proceeds from the issuance of 470,588
shares of Class B Preferred Stock shares and available cash (see Note
5). See Current Report on Form 8-K filed August 1, 1997 for further
discussion.
In July 1997, the Company acquired a 17.3 acre land parcel in the
Pacific Commerce Centre located in Lake Forest, California for
$6,250,000, which it financed with borrowings under the Acquisition
Facility. The Company plans to develop a 235,000 square foot
multi-tenant industrial business park consisting of sixteen buildings
offering tenants spaces ranging in size from 1,000 square feet to 4,000
square feet. The Company has budgeted approximately $14,000,000 for
development costs.
In August 1997, the Company acquired a vacant industrial
distribution/manufacturing facility in North San Diego County,
California for $16,750,000 situated on 27.5 acres consisting of one
building to be rehabilitated containing approximately 375,000 square
feet, and an additional five acres of land on which the Company plans
to develop approximately 88,000 square feet of warehouse space. The
property was purchased with proceeds financed by a construction loan,
the Company's revolving line of credit and cash. The Company has
budgeted approximately $2,300,000 for rehabilitation costs.
In September 1997, the Company acquired a 142,000 square foot
industrial park in Concord, California for $7,600,000, which it
financed with proceeds from the Acquisition Facility and cash.
The property consists of five tilt-up buildings offering tenant spaces
ranging in size from 1,850 square feet to 15,000 square feet.
3. LOANS PAYABLE
The Company's loans payable at September 30, 1997 and December 31, 1996
consist of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
Mortgage notes payable $195,047 $183,682
Construction loans 16,591 33
Revolving line of credit 65,745 13,686
-------- --------
$277,383 $197,401
======== ========
</TABLE>
4. CONVERTIBLE SUBORDINATED DEBENTURES
As of September 30, 1997, the Company's outstanding convertible
subordinated debentures totaled $12,652,000, net of unamortized
discount of $112,000. Conversion of all the outstanding debentures,
which are convertible into common shares at a rate of 53.6986 common
shares of Common Stock per $1,000 of principal amount of debentures,
would require the issuance of an additional 685,409 common shares. If
the debentures were fully converted, the net income attributable to
each common share would not be diluted. During the nine months ended
September 30, 1997, $1,673,000 in aggregate principal amount of
debentures ($1,574,000 net of discount) were converted into 89,807
common shares.
5. SHAREHOLDERS' EQUITY
In January 1997, the Company received gross proceeds of approximately
$47,200,000 from the issuance of 2,300,000 common shares (including
proceeds from the issuance of 300,000 common shares pursuant to the
exercise of the underwriter's overallotment option) at a price of
$20.50 per share. The Company used the proceeds to fund the acquisition
of certain properties, to repay debt and for general corporate
purposes.
6
<PAGE> 9
On December 31, 1996, the Company entered into an agreement to issue
1,351,351 shares of Class A Senior Cumulative Convertible Preferred
Stock (the "Class A Preferred Stock") to Five Arrows Realty Securities
L.L.C. ("Five Arrows") at a price of $18.50 per share over the course
of 1997 in a maximum of three separate issuances, the timing of which
may be specified by the Company. The Class A Preferred Stock is
convertible into common shares, on a one-for-one basis, subject to
adjustment upon certain events. The annual dividend per share on the
Class A Preferred Stock is $1.70 ($0.425 per share per quarter) from
the date of issuance until December 31, 1997 and thereafter, the
greater of $1.70 per share of 104% of the then current dividend on the
Company's common stock. At its option, the Company may redeem the Class
A Preferred Stock beginning December 31, 2001 for cash at a premium of
6% over the initial $18.50 per share liquidation value decreasing to
zero by December 31, 2009. The Class A Preferred Stock, or any shares
of common stock into which such Class A Preferred Stock could be
converted, are nontransferable until December 31, 1997. In April 1997,
the Company completed the sale of 270,270 shares of Class A Preferred
Stock at a price of $18.50 per share for aggregate proceeds of
$5,000,000.
On April 11, 1997, the Company's shelf registration statement on Form
S-3, which was filed in March 1997, was declared effective. The shelf
registration statement covers a maximum aggregate offering price of
$250,000,000 in Common Stock, Preferred Stock, debt securities and
warrants to purchase such securities.
In May 1997, the Company entered into a second agreement with Five
Arrows to issue 1,411,765 shares of Class B Senior Cumulative
Convertible Preferred Stock (the "Class B Preferred Stock") to Five
Arrows at a price of $21.25 per share over the course of 1997 in a
maximum of three separate issuances, the timing of which may be
specified by the Company. Upon each issuance of Class B Preferred
Stock, the Company is required to pay a transaction fee of $.75 per
share being issued. The terms of the Class B Preferred Stock are
substantially similar to those of the Class A Preferred Stock, except
that (i) the liquidation preference of the Class B Preferred Stock is
$21.25 per share (plus accumulated, accrued and unpaid dividends) and
(ii) Five Arrows will not be entitled to designate any additional
representatives to the Company's Board of Directors while it owns both
the Class A Preferred Stock and the Class B Preferred Stock. In July
1997, the Company completed the sale of 470,588 shares of Class B
Preferred Stock at a price of $21.25 per share for aggregate proceeds
of $10,000,000.
In June 1997, the Company received gross proceeds of approximately
$44,800,000 from the issuance of 2,131,700 shares of Common Stock
(including proceeds from the issuance of 31,700 shares of Common Stock
sold pursuant to the exercise of the underwriter's overallotment
option) at a price of $21.00 per share. The Company used the proceeds
to repay debt and for general corporate purposes.
During the nine months ended September 30, 1997, 955 shares of Common
Stock were issued through the Company's Dividend Reinvestment Program.
6. PER COMMON SHARE DATA
Per common share amounts are calculated based upon weighted average
common shares outstanding and common share equivalents of 12,843,805
and 5,962,234 for the nine months ended September 30, 1997 and 1996,
respectively and 14,322,119 and 7,323,936 for the three months ended
September 30, 1997 and 1996, respectively. Common share equivalents
include stock options which are considered dilutive for the purposes of
computing primary earnings per share.
7. COMMON SHARE DISTRIBUTIONS AND PREFERRED STOCK DIVIDENDS
On September 12, 1997, the Company declared its quarterly distribution
of $.41 per common share covering shares outstanding at September 30,
1997. Assuming the Board continues to declare quarterly distributions
the estimated annual distribution based on this amount would be $1.64.
The distribution was paid on October 10, 1997 to holders of record on
October 1, 1997.
Preferred stock dividends of $112,000 related to the 270,270 shares of
Class A Preferred Stock were paid by the Company on August 15, 1997.
Preferred stock dividends of $115,000 and $163,000 related to 270,270
shares of Class A Preferred Stock and 470,588 shares of Class B
Preferred Stock have been accrued through September 30, 1997 at the
rate of $0.425 per share per quarter.
7
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8. INTEREST
Interest incurred for the nine months ended September 30 consists of
the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
Interest incurred $ 13,174 $12,689
Amortization:
Debenture discount and costs 106 429
Costs related to financing assumed from the
Company's Predecessor and line of credit costs 258 296
Long-term financing costs 255 199
Interest capitalized (1,172) --
-------- -------
Interest expense $ 12,621 $13,613
======== =======
</TABLE>
8
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PACIFIC GULF PROPERTIES INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion addresses the consolidated financial statements of the
Company for the three and nine months ended September 30, 1997 and 1996,
together with liquidity and capital resources as of September 30, 1997.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1996
Industrial rental income increased by $10,381,000 or 72%, from $14,469,000 in
1996 to $24,850,000 in 1997. This increase was primarily attributable to the
acquisition of thirteen industrial parks containing approximately 3,654,000
square feet of leasable area in 1996 and 1997. Multifamily rental income
increased by $2,666,000, or 12%, from $21,673,000 in 1996 to $24,339,000 in
1997. This increase was primarily attributable to an increase in rental rates
and to the acquisition of multifamily properties containing 716 apartment units
during the fourth quarter of 1996 and the second quarter of 1997. As a result of
these changes, total revenues increased by $13,047,000 or 36%, from $36,142,000
in 1996 to $49,189,000 in 1997.
Industrial rental income for the nine months ended September 30, 1997 totaled
$24,850,000 and included $6,430,000 related to the industrial parks acquired
since September 30, 1996.
Multifamily rental income for the nine months ended September 30, 1997 totaled
$24,339,000 and included $1,976,000 related to multifamily properties acquired
during the fourth quarter of 1996 and second quarter of 1997.
Industrial rental property expenses increased $2,073,000, or 55%, from
$3,791,000 in 1996 to $5,864,000 in 1997. This increase was primarily
attributable to the acquisition of the above referenced industrial parks.
Multifamily rental property expenses increased by $894,000, or 10%, from
$8,527,000 in 1996 to $9,421,000 in 1997. This increase was primarily
attributable to the acquisition of multifamily properties containing 716
apartment units during the fourth quarter of 1996 and the second quarter of
1997.
Industrial rental property expenses for the nine months ended September 30, 1997
totaled $5,864,000 and included $1,829,000 related to industrial parks acquired
since September 30, 1996.
Multifamily rental property expenses for the nine months ended September 30,
1997 totaled $9,421,000 and included $697,000 related to multifamily properties
acquired during the fourth quarter of 1996 and the second quarter of 1997.
Total depreciation increased by $2,152,000, or 36%, from $5,921,000 in 1996 to
$8,073,000 in 1997. This increase was primarily attributable to additional
depreciation relating to the acquisition of thirteen industrial parks, three
multifamily properties, and capital improvements made to rehabilitate existing
properties.
Interest expense (including amortization of debenture discount and financing
costs) decreased by $992,000, or 7%, from $13,613,000 in 1996 to $12,621,000 in
1997. This decrease was primarily attributable to a decrease in convertible
subordinated debentures outstanding, offset by an increase in outstanding
borrowings due to new acquisitions made during 1996 and 1997.
General and administrative expenses increased by $182,000, or 9%, from
$2,056,000 in 1996 to $2,238,000 in 1997. This increase was primarily
attributable to personnel increases related to acquisitions made during the
fourth quarter of 1996 and in 1997.
Minority partners' interest in earnings of consolidated partnerships was
$114,000 in 1997 due to the June 1997 acquisition of a controlling general
partner interest in the two partnerships that own the senior apartments (see
Note 2).
A loss on the sale of real estate in the amount of $111,000 was recorded in the
1997 period (see Note 2), a gain of $74,000 from the sale of land and buildings
to an existing tenant at one of the industrial properties during August 1996.
9
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COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1997 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1996
Industrial rental income increased by $3,549,000, or 58%, from $6,071,000 in
1996 to $9,620,000 in 1997. This increase was primarily attributable to the
acquisition of thirteen industrial parks containing approximately 3,654,000
square feet of leasable area in 1996 and 1997. Multifamily rental income
increased by $1,465,000, or 20%, from $7,372,000 in 1996 to $8,837,000 in 1997.
This increase was primarily attributable to an increase in rental rates and to
the acquisition of multifamily properties containing 716 apartment units during
the fourth quarter of 1996 and the second quarter of 1997. As a result of these
changes, total revenues increased by $5,014,000, or 37%, from $13,443,000 in
1996 to $18,457,000 in 1997.
Industrial rental income for the three months ended September 30, 1997 totaled
$9,620,000 and included $3,458,000 related to the industrial parks acquired
since September 30, 1996.
Multifamily rental income for the three months ended September 30, 1997 totaled
$8,837,000 and included $1,261,000 related to the multifamily properties
acquired during the fourth quarter of 1996 and the second quarter of 1997.
Industrial rental property expenses increased $471,000, or 27%, from $1,714,000
in 1996 to $2,185,000 in 1997. This increase was primarily attributable to the
acquisition of the above referenced industrial parks. Multifamily rental
property expenses increased by $591,000, or 21%, from $2,834,000 in 1996 to
$3,425,000 in 1997. This increase was primarily attributable to the acquisition
of multifamily properties containing 716 apartment units during the fourth
quarter of 1996 and the second quarter of 1997.
Industrial rental property expenses for the three months ended September 30,
1997 totaled $2,185,000 and included $749,000 related to industrial parks
acquired since September 30, 1996.
Multifamily rental property expenses for the three months ended September 30,
1997 totaled $3,425,000 and included $435,000 related to multifamily properties
acquired during the fourth quarter of 1996 and the second quarter of 1997.
Total depreciation increased by $1,023,000, or 48%, from $2,116,000 in 1996 to
$3,139,000 in 1997. This increase was primarily attributable to additional
depreciation relating to the acquisition of thirteen industrial parks, three
multifamily properties, and capital improvements made to rehabilitate existing
properties.
Interest expense (including amortization of debenture discount and financing
costs) decreased by $113,000, or 2%, from $4,782,000 in 1996 to $4,669,000 in
1997. This decrease was primarily attributable to a decrease in convertible
subordinated debentures outstanding, offset by an increase in outstanding
borrowings due to new acquisitions made during 1996 and 1997.
General and administrative expenses increased by $58,000, or 8%, from $708,000
in 1996 to $766,000 in 1997. This increase was primarily attributable to
personnel increases related to acquisitions made during the fourth quarter of
1996 and in 1997.
Minority partners' interest in earnings of consolidated partnerships was $94,000
in 1997 due to the June 1997 acquisition of a controlling general partner
interest in the two partnerships that own the senior apartments (see Note 2).
A gain on the sale of real estate in the amount of $74,000 was recorded in the
1996 period, with no corresponding charge in the comparable period for 1997 (see
Note 2).
10
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LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had $1,258,000 of cash to meet its immediate
short-term liquidity requirements and to fund the purchase of future
acquisitions. Future short-term liquidity requirements are anticipated to be met
through net cash flow from operations, existing working capital, Preferred Stock
issuances to Five Arrows possible offerings of debt or equity and, if necessary,
funding from the Company's revolving line of credit. The Company has a secured
revolving line of credit ("Line of Credit") from Bank of America (the "Bank")
for a maximum amount of $65,000,000 which expires in July, 1998. As of September
30, 1997, the Company had an outstanding balance of $32,120,000 under the
revolving line of credit.
The Company has obtained an unsecured credit facility (the "Acquisition
Facility") from Bank of America which provides up to $35,000,000 for the
acquisition of qualifying properties and $33,625,000 for the acquisition of a
portfolio of five industrial properties. The Acquisition Facility has a term of
six months, bears interest at a rate of LIBOR plus 2.00% and provides that up to
50% of the acquisition costs actually paid by the Company may be funded by the
facility. The Acquisition Facility also provides that the proceeds will be
repaid, at the Company's option, either by drawings on the existing Line of
Credit and adding the related property to the Line of Credit's collateral pool
or by the company obtaining real estate financing or other funds to repay the
Acquisition Facility. The Company has entered into an agreement with Prudential
Life Insurance Company ("Prudential") to refinance $33,625,000 of its
Acquisition Facility. Any amounts borrowed under the Acquisition Facility,
excluding the borrowing related to the industrial portfolio acquisition, reduce
amounts available under the Line of Credit. As of September 30, 1997, the
Acquisition Facility had an outstanding balance of $33,625,000, all of which was
related to the industrial portfolio acquisition. On October 10, 1997, the
Company funded the loan with Prudential and repaid the amounts outstanding on
the Acquisition Facility.
The Company intends to acquire additional properties and may seek to fund these
acquisitions through proceeds received from a combination of its Line of Credit,
Acquisition Facility, Class A Preferred Stock, Class B Preferred Stock, equity
offerings or debt financings, but no assurance can be given that any
acquisitions will be completed.
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.
Cash provided by operating activities increased from $9,353,000 for the period
ended September 30, 1996 to $17,943,000 for the period ended September 30, 1997.
The primary reason for these increases related to the additional rental income
contributed by properties acquired during 1996 and 1997.
Cash used in investing activities increased from $66,468,000 for the period
ended September 30, 1996 to $188,735,000 for the period ended September 30, 1997
as a result of acquisitions, offset by the disposal of property.
Cash provided by financing activities increased from $56,899,000 for the period
ended September 30, 1996 to $170,527,000 for the year ended September 30, 1997
primarily as a result of the issuance of Common Stock from a stock offering and
the conversion of debentures in 1997.
The Company has an agreement with Five Arrows to issue 1,351,351 shares of Class
A Senior Cumulative Convertible Preferred Stock at a price of $18.50. During
April 1997, the Company, pursuant to this agreement, issued 270,270 shares of
Class A Senior Cumulative Convertible Preferred Stock raising gross proceeds of
$5,000,000 (see Note 5 for additional information). The proceeds were used to
pay off a portion of a mortgage note totaling $7,200,000 and general corporate
purposes.
In May 1997, the Company entered into a second agreement with Five Arrows to
issue 1,411,765 shares of Class B Senior Cumulative Convertible Preferred Stock
at a price of $21.25. During July 1997, the Company, pursuant to this agreement,
issued 470,588 shares of Class B Senior Cumulative Convertible Preferred Stock
raising gross proceeds of $10,000,000 (see Note 5 for additional information).
The proceeds were used together with funds from other sources to acquire an
industrial portfolio consisting of five properties with over 1.5 million
leasable square feet. On October 23, 1997, the Company, pursuant to this
agreement issued 235,294 shares of Class B Senior Cumulative Convertible
Preferred Stock raising gross proceeds of $5,000,000. The proceeds were used
primarily for capital expenditures.
The immediately preceding paragraphs contain forward looking information
involving risks 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
11
<PAGE> 14
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, competition 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.
12
<PAGE> 15
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K
During the quarter ended September 30, 1997, the Company filed two
Current Reports on Form 8-K. On August 1, 1997, the Company filed a
Report on Form 8-K, reporting under Item 7, the industrial portfolio
acquisition in July 1997. On August 4, 1997, the Company filed a Report
on Form 8-K/A, reporting under Item 7, amending its August 1, 1997 Form
8-K.
13
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACIFIC GULF PROPERTIES INC.
/s/Glenn L. Carpenter /s/Donald G. Herrman
- ------------------------- -----------------------------------------
Glenn L. Carpenter Donald G. Herrman
Chairman and Chief Executive Officer Chief Financial Officer and Secretary
DATED: October 30, 1997
14
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