-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TNs0vI5N/3MhKnCy21aKYf0eXJqolr4gzYVCvamn5WPhInuMKGC17aFPW7s7kUsN qId0UTVL9EKlNAEDaRzR4g== 0000950149-97-001033.txt : 19970515 0000950149-97-001033.hdr.sgml : 19970515 ACCESSION NUMBER: 0000950149-97-001033 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970514 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CALIFORNIA REAL ESTATE INVESTMENT TRUST CENTRAL INDEX KEY: 0000016387 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 946181186 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08063 FILM NUMBER: 97604847 BUSINESS ADDRESS: STREET 1: 131 STEWART STREET STREET 2: STE 200 CITY: SAN FRANCISCO STATE: CA ZIP: 94105 BUSINESS PHONE: 4159050288 MAIL ADDRESS: STREET 1: 131 STEWART STREET STREET 2: #200 CITY: SAN FRANCISCO STATE: CA ZIP: 94105 10-Q 1 QUARTERLY REPORT 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 -------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission File Number: 1-8063 CALIFORNIA REAL ESTATE INVESTMENT TRUST ------------------------------------------ (Exact name of registrant as specified in its charter) CALIFORNIA 94-6181186 - -------------------------------- --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 131 STEUART STREET, SUITE 200, SAN FRANCISCO, CA 94105 - ------------------------------------------------ ----- (Address of principal executive offices) (Zip Code) (415) 905-0288 -------------- (Registrant's telephone number, including area code) 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 [ ] 2 APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the close of the latest practical date. Class Outstanding at March 31, 1997 - ------------------------------------- ----------------------------- Common Shares of Beneficial Interest $1.00 par value ("Common Shares") 9,137,335 3 - ------------------------------------------------------------------------------ CALIFORNIA REAL ESTATE INVESTMENT TRUST - ------------------------------------------------------------------------------
INDEX PAGE PART I. FINANCIAL INFORMATION Item 1: Financial Statements Consolidated Balance Sheets - March 31, 1997 and December 31, 1996 1 Consolidated Statements of Operations - For the Three Months Ended March 31, 1997 and 1996 2 Consolidated Statements of Cash Flows - For the Three Months Ended March 31, 1997 and 1996 3 Notes to Consolidated Financial Statements 4 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II. OTHER INFORMATION Item 1: Legal Proceedings 15 Item 2: Changes in Securities 15 Item 3: Defaults Upon Senior Securities 15 Item 4: Submission of Matters to a Vote of Security Holders 15 Item 5: Other Information 15 Item 6: Exhibits and Reports on Form 8-K 15
4 PART I. FINANCIAL INFORMATION - -------------------------------------------------------------------------------- Item 1. Financial Statements - -------------------------------------------------------------------------------- CALIFORNIA REAL ESTATE INVESTMENT TRUST AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, 1997 1996 (UNAUDITED) (AUDITED) ------------ ------------ ASSETS INVESTMENTS, GENERALLY HELD FOR SALE: Rental properties $ -- $ 8,585,000 Notes receivable, net of valuation allowances and deferred gains of $6,127,000 at March 31, 1997 and December 31, 1996 2,658,000 1,576,000 Marketable securities available for sale 13,141.000 14,115,000 ------------ ------------ 15,799,000 24,276,000 Cash 8,330,000 4,698,000 Receivables, net of allowance of $1,126,000 and $1,001,000 at March 31, 1997 and December 31, 1996, respectively 687,000 707,000 Other assets 208,000 355,000 ------------ ------------ Total Assets $ 25,024,000 $ 30,036,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Long-term notes payable, collateralized by deeds of trust on rental properties $ 880,000 $ 5,169,000 Accounts payable and accrued expenses 113,000 326,000 Other liabilities -- 70,000 ------------ ------------ Total Liabilities 993,000 5,565,000 ------------ ------------ Commitments SHAREHOLDERS' EQUITY: Shares of beneficial interest, par value $1 a share; unlimited authorization, 9,137,000 shares outstanding at March 31, 1997 and December 31, 1996 9,137,000 9,137,000 Additional paid-in capital 55,145,000 55,118,000 Unrealized holding income (loss) on marketable securities 19,000 (22,000) Accumulated deficit (40,270,000) (39,762,000) ------------ ------------ Total Shareholders' Equity 24,031,000 24,471,000 ------------ ------------ Total Liabilities and Shareholders' Equity $ 25,024,000 $ 30,036,000 ============ ============
See accompanying notes to consolidated financial statements. 1 5 CALIFORNIA REAL ESTATE INVESTMENT TRUST AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1997 1996 ---- ---- REVENUES: Rent $ 236,000 $ 569,000 Interest 323,000 302,000 Other 54,000 -- --------- --------- 613,000 871,000 --------- --------- EXPENSES: Operating expenses 123,000 148,000 Property management 14,000 27,000 Depreciation and amortization 21,000 5,000 Interest 99,000 137,000 General and administrative 432,000 413,000 --------- --------- 689,000 730,000 --------- --------- Income (loss) before gain (loss) on sale of investments (76,000) 141,000 Gain (loss) on sale of investments (432,000) 299,000 --------- --------- Net income (loss) $(508,000) $ 440,000 ========= ========= Net income (loss) per share of beneficial interest $ (0.06) $ 0.05 ========= =========
See accompanying notes to consolidated financial statements. 2 6 CALIFORNIA REAL ESTATE INVESTMENT TRUST AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1997 1996 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (508,000) $ 440,000 ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 21,000 5,000 Loss (gain) on sale of investments 432,000 (299,000) Changes in assets and liabilities: Decrease (increase) in receivables, net 20,000 (9,000) Increase in other assets (53,000) (59,000) (Decrease) increase in accounts payable and accrued expenses (213,000) 258,000 (Decrease) increase in other liabilities (70,000) 2,000 ----------- ----------- Total adjustments to net (loss) income 137,000 (102,000) ----------- ----------- Net cash (used) provided by operating activities (371,000) 338,000 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of investments 7,306,000 -- Improvements to rental properties (64,000) (45,000) Principal collections on notes receivable 8,000 12,000 Principal collections on marketable securities 1,015,000 -- ----------- ----------- Net cash provided by (used in) investing activities 8,265,000 (33,000) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term notes payable (4,289,000) (23,000) Additional paid-in capital 27,000 -- ----------- ----------- Net cash used in financing activities (4,262,000) (23,000) ----------- ----------- Net increase in cash 3,632,000 282,000 Cash, beginning of period 4,698,000 4,778,000 ----------- ----------- Cash, end of period $ 8,330,000 $ 5,060,000 =========== ===========
See accompanying notes to consolidated financial statements. 3 7 CALIFORNIA REAL ESTATE INVESTMENT TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 1. Organization and Basis of Presentation: Organization California Real Estate Investment Trust (the "Trust" or "CalREIT") was organized under the laws of the State of California pursuant to a Declaration of Trust dated September 15, 1966. The Trust became a partner of Totem Square, L. P. ("Totem"), a Washington Limited Partnership in which the Trust owns a 59% interest, on November 30, 1990. The Trust also formed CalREIT Totem Square, Inc. ("Cal-CORP") to act as general partner of Totem. Cal-CORP has a 1% interest in Totem, and Totem Square Associates, an unrelated party, has the remaining 40%. In 1994 the Trust operated as a subsidiary of The Peregrine Real Estate Trust ("Peregrine"), which then held 76% of the Trust's outstanding Common Shares. In April 1994, Peregrine replaced the CalREIT Board of Trustees with a slate of its own Trustees. In 1995, the Board was expanded from three to five Trustees, two of whom were independent. In 1996, the Board of Trustees was comprised of two independent Trustees, one Trustee who concurrently served on the Board of Trustees of Peregrine, a former officer of the Trust, and the then Chief Executive Officer of the Trust. On January 3, 1997, Peregrine sold its entire 76%-ownership interest in the Trust to CalREIT Investors Limited Partnership ("CRIL"), an entity controlled by Samuel Zell. Simultaneous with the closing of this Transaction, the Board of Trustees was expanded to seven members; one Trustee, who also served on the Peregrine Board of Trustees, resigned; and three additional Trustees, nominated by CRIL, were appointed to the Board. As of March 31, 1997, the Trust had sold its two remaining commercial rental properties, Fulton Square Shopping Center and Totem Square in Sacramento, California and in Kirkland, Washington, respectively. At the end of the first quarter, the Trust owned a mortgage note portfolio of four notes encompassing approximately $8,785,000 in loans with an aggregate book value of approximately $2,658,000. These loans bear interest at an overall effective rate of approximately 8%. They are collateralized by mortgages on real property. Three of the investments in the four loans were originated by the Trust in connection with the disposition of Trust properties prior to 1996. The remaining note, in the face amount of approximately $1,090,000, was made in conjunction with the sale of Fulton Square Shopping Center in February 1997. Additionally, as of March 31, 1997 the Trust had approximately $13,141,000 invested in liquid mortgage-backed securities. 4 8 CALIFORNIA REAL ESTATE INVESTMENT TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 1. Organization and Basis of Presentation, continued: Basis of Presentation The accompanying financial statements are unaudited; however, they have been prepared in accordance with generally accepted accounting principles for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring matters) necessary for a fair presentation of the financial statements for these interim periods have been included. The results for the interim period ended March 31, 1997, are not necessarily indicative of the results to be obtained for the full fiscal year. These financial statements should be read in conjunction with the December 31, 1996, audited financial statements and notes thereto, included in the California Real Estate Investment Trust Annual Report on Form 10-K. The accompanying unaudited consolidated financial statements of California Real Estate Investment Trust include the accounts of the Trust, Cal-CORP and Totem. Stock-Based Compensation As of March 31, 1997 and December 31, 1996 there were no stock options outstanding nor stock option plans in place. 2. Investments in Notes Receivable: As of March 31, 1997 and December 31, 1996, the Trust had long-term notes receivable, collateralized by deeds of trust (before valuation allowances and deferred gains) of $8,785,000 and $7,703,000, respectively. The notes are collateralized by real estate properties in California and Arizona. In conjunction with the Trust's plan to monetize assets, its mortgage note investments are classified for accounting purposes as "held for sale." The notes bear interest at rates ranging from 7.63% to 9.5% as of March 31, 1997. For the quarter ended March 31, 1997 the overall effective rate was approximately 8%. 5 9 CALIFORNIA REAL ESTATE INVESTMENT TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 3. Investments in Marketable Securities: At March 31, 1997, the Trust had $13,141,000 invested in liquid mortgage-backed securities classified as "available-for-sale." Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," (SFAS 115) issued in May 1993 requires that at the date of acquisition and at each reporting date, debt and equity securities be classified as "held-to-maturity," "trading," or "available for sale." Investments in debt securities in which the Trust has the positive intent and ability to hold to maturity are required to be classified as "held-to-maturity." "Held-to-maturity" securities are required to be stated at cost and adjusted for amortization of premiums and discounts to maturity in the consolidated balance sheet. Investments in debt and equity securities that are not classified as "held-to-maturity" and equity securities that have readily determinable fair values are to be classified as "trading" or "available-for-sale" and are measured at fair value in the consolidated balance sheet. Securities that are bought and held principally for the purpose of selling them in the near term are classified as "trading." Unrealized holding gains and losses for "trading" securities are included in earnings. Investments that are not classified as "held-to-maturity" or "trading" securities are classified as "available-for-sale." Unrealized holding gains and losses for "available-for-sale" securities are excluded from earnings and reported as a separate component of shareholders' equity until realized. In accordance with SFAS 115, the Trust determines the appropriate classification at the time of purchase and reevaluates such designation at each balance sheet date. 6 10 CALIFORNIA REAL ESTATE INVESTMENT TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 3. Investments in Marketable Securities, continued: At March 31, 1997, the Trust's "available-for-sale" securities consisted of the following:
(In thousands) Unrealized Estimated Cost Gains Losses Fair Value ---- ----- ------ ---------- Federal National Mortgage Association, adjustable rate interest currently at 7.842%, due April 1, 2024 $ 2,681 $ -- $ (17) $ 2,664 Federal Home Loan Mortgage Corporation, adjustable rate interest currently at 7.666%, due June 1, 2024 908 -- (3) 905 Federal National Mortgage Association, adjustable rate interest currently at 7.311%, due April 1, 2025 656 -- (5) 651 Federal National Mortgage Association, adjustable rate interest currently at 6.147%, due May 1, 2026 3,089 17 -- 3,106 Federal National Mortgage Association, adjustable rate interest currently at 6.156%, due June 1, 2026 5,788 27 -- 5,815 -------- -------- -------- -------- $ 13,122 $ 44 $ (25) $ 13,141 ======== ======== ======== ========
The maturity dates above are not necessarily indicative of expected maturities as principal is often prepaid on such instruments. 4. Long-Term Notes Payable: The Trust has one note payable to John Alden Life Insurance Company with an interest rate of 9.25% per annum. Principal and interest are payable monthly until August 7, 2017 when the entire unpaid principal balance and any unpaid interest are due. 7 11 CALIFORNIA REAL ESTATE INVESTMENT TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 5. Income Taxes: The Trust has elected to be taxed as a real estate investment trust and as such, is not taxed on that portion of its taxable income which is distributed to shareholders, provided that at least 95% of its real estate trust taxable income is distributed and that the Trust meets certain other REIT requirements. 6. Related-Party Transactions: Pursuant to an oral agreement with Peregrine, costs for certain general administrative services, including executive services, accounting services, treasury services, financial reporting and internal bookkeeping services, shareholder relations, and directors and officers insurance were shared with Peregrine. The shared costs were allocated to the Trust and Peregrine based upon their respective asset values (real property and notes receivable), subject to annual negotiation. At March 31, 1997 and December 31, 1996, the Trust had $9,000, and $31,000, respectively due to Peregrine pursuant to the cost allocation arrangement. The cost allocation arrangement between the Trust and Peregrine was terminated on January 7, 1997. 7. Statements of Cash Flows Supplemental Information: In connection with the sale and foreclosure of properties, the Trust entered into various non-cash transactions as follows:
(In thousands) For the Three Months Ended March 31, March 31, 1997 1996 ---------- ----------- Sales price less selling costs $ 8,396,000 $ 1,033,000 Amount due from Buyer 1,090,000 (1,033,000) ---------- ----------- Net cash received $7,306,000 $ -- ========= ===========
Cash paid for interest on the Trust's outstanding debt during the three-month periods ended March 31, 1997 and 1996, was $99,000 and $139,000, respectively. 8 12 CALIFORNIA REAL ESTATE INVESTMENT TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 8. Per Share Data: Per share data is for the three-month periods ended March 31, 1997, and March 31, 1996, based on the weighted average number of Common Shares outstanding during each period. The weighted average number of shares used in the computation was 9,137,000. 9. Gain (loss) on Sale of Investments: Components of the gain (loss) on the sale of investments for the three months ended March 31, 1997, and March 31, 1996, were as follows:
(In thousands) For the Three Months Ended March 31, 1997 1996 ---- ---- Sale of Redfield Commercial Center $ -- $ 299,000 Sale of Fulton Square Shopping Center (34,000) -- Sale of Totem Square (398,000) -- --------- --------- $(432,000) $ 299,000 ========= =========
10. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure On April 14, 1997, the Board of Trustees adopted a resolution (i) not to retain Coopers & Lybrand LLP ("C&L") as the Trust's auditors for the fiscal year ending December 31, 1997 and (ii) to engage Ernst & Young LLP as the Trust's independent auditors for the fiscal year ending December 31, 1997. The reports of C&L on the Trust's consolidated financial statements as of and for the two years ended December 31, 1996 and December 31, 1995 did not contain an adverse opinion or a disclaimer opinion nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During the Trust's two most recent fiscal years ended December 31, 1996, there were no disagreements with C&L on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of C&L, would have caused them to make reference thereto in their report(s) on the Trust's financial statements for such fiscal year(s), nor were there any "reportable events" within the meaning of Item 304(a)(1)(v) of Regulation S-K promulgated under the Exchange Act. 9 13 - ------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - ------------------------------------------------------------------------------- The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q. Historical results set forth are not necessarily indicative of the future financial position and results of operations of the Trust. Recent Developments On January 3, 1997, CalReit Investors Limited Partnership ("CRIL"), an affiliate of Equity Group Investments, Inc. ("EGI") and Samuel Zell, purchased from the Trust's former parent, The Peregrine Real Estate Trust ("Peregrine"), 6,959,593 Common Shares in the Trust (representing approximately 76% of the outstanding Common Shares) then owned by Peregrine for an aggregate purchase price of $20,222,011. Prior to the purchase, EGI and Victor Capital Group, L.P. ("VCG") presented to the Board a proposed new business plan in which the Trust would cease to be a REIT and instead become a specialty finance company designed primarily to take advantage of high-yielding "mezzanine" investment opportunities in commercial real estate. EGI and VCG also proposed that they provide the Trust with a new management team to implement the business plan and that they invest through an affiliate a minimum of $30 million in a new class of preferred shares to be issued by the Trust. The Board approved CRIL's purchase of Peregrine's Common Shares, the new business plan and the issuance of the convertible preferred shares of the Trust at $2.69 per share, the preferred shares to be convertible into common shares of the Trust on a one-for-one basis. The Board also concluded that the transfer to CRIL would not jeopardize the qualification of the Trust as a REIT, and exempted CRIL's ownership from certain provisions of the Trust's declaration of trust intended to discourage ownership of more than 10% of the outstanding shares of the Trust. In reaching its decision to approve the foregoing, the Board of Trustees considered a number of factors including the attractiveness of the proposed new business plan, the significant real estate investment and financing experience of the proposed new management team and the significant amount of equity capital the Trust would obtain from the proposed preferred share issuance. The Board also considered the terms of previous alternative offers to purchase Peregrine's interest in the Trust of which the Board was aware and the fact that the average price of the Trust's Common Shares during the 60 trading days preceding the Board of Trustees' meeting at which the proposed equity investment was approved was $2.38 per share. In connection with CRIL's purchase of the 6,959,593 Common Shares from Peregrine, the Board of Trustees increased the size of the Board from five to seven trustees, appointed three new trustees and accepted the resignation of one then incumbent trustee associated with Peregrine. The Trust has filed a preliminary proxy statement with the Securities and Exchange Commission with respect to the annual meeting of its shareholders which is expected to be held in June. At the annual meeting, the Trust's shareholders will be asked to vote on proposals to (i) approve the 10 14 issuance by the Trust of up to $33,000,000 of cumulative convertible preferred shares ("Preferred Shares") to Veqtor Finance Company, LLC ("Veqtor"), an affiliate of Samuel Zell and the principals of VCG (the "Investment"), (ii) approve an amended and restated declaration of trust of the Trust, (iii) elect seven trustees to serve on the Trust's board of trustees, (iv) ratify the appointment of Ernst & Young LLP as auditors of The Trust for the fiscal year 1997 and (v) approve a share option plan. The preliminary proxy statement will also outline the terms of the Investment and the Preferred Shares and the Trust's proposed new business plan and management team. In connection with the commencement of the new business plan (the "New Business Plan"), concurrently with the consummation of the Investment, the Trust will acquire the business of VCG, including VCG's existing management team (the "Acquisition"). The Trust believes that, by acquiring direct ownership of VCG's existing real estate investment banking, real estate advisory and real estate asset management businesses as well as the services of VCG's experienced professional team, the Trust will be better positioned to implement the New Business Plan. The issuance and sale of the Preferred Shares and related transactions are subject to customary conditions, including completion of definitive documentation. CRIL, the affiliate of Samuel Zell, that owns the 76% common share interest in the Trust has advised the Trust that it intends to vote in favor of the proposals presented in the proxy statement. Accordingly, approval of the proposals is assured. The record and meeting dates for the annual meeting will be announced in the near future. Dispositions of Properties and Mortgage Notes As of January 1, 1997, the Trust's investment portfolio included two commercial properties, as well as three mortgage notes secured by real property, all "held for sale." The Trust's real estate portfolio, carried at a book value of $8,585,000 as of January 1, 1997, included Fulton Square Shopping Center in Sacramento, California and a 60% interest in Totem Square, a mixed-use retail property in Kirkland, Washington. During the first quarter, these two commercial properties were sold. The sale of Fulton Square closed on February 14, 1997 and the sale of Totem Square closed on March 3, 1997. The proceeds from these sales were invested in liquid mortgage-backed securities which satisfy REIT-asset qualification requirements and mortgage loans. As of the end of the first quarter, the Trust had $13,141,000 invested in such securities. The Trust's mortgage note portfolio, carried at an aggregate book value of $2,658,000 as of March 31, 1997, consists of four loans which bear interest at an overall effective rate of approximately 8% and are collateralized by mortgages on real property. Management of the Trust's Investments All strategic and investment decisions are made by the Board of Trustees. The Trust is self-administered and has no employees; in 1996 operating and administration services were provided by the employees of Peregrine (for which Peregrine received a reimbursement of costs) and by independent contractors. As of January 7, 1997, the arrangement with Peregrine was mutually terminated. Day-to-day operations and administration of CalREIT are currently being provided by independent contractors. 11 15 United Property Services, Inc. ("UPSI") was the property manager for the Trust's commercial properties. The Trust's agreement with UPSI terminated upon the disposition of Totem Square. The Trust's financial and operating performance information is further set forth in the accompanying financial statements. Comparison of the Three Months Ended March 31, 1997 to the Three Months Ended March 31, 1996 Net Loss of $508,000 was reported by the Trust for the three months ended March 31, 1997, a decrease of $948,000 from the net income of $440,000 for the three months ended March 31, 1996. The net loss was primarily the result of a decrease in rental revenues from properties sold during the period and the losses resulting from the sales of investments. Total Revenues decreased $258,000, or 30%, to $613,000 for the three months ended March 31, 1997, down from $871,000 for the three months ended March 31, 1996 The decrease for the three months ended March 31, 1997, was primarily attributable to a decrease in rental revenue as a result of the sale of the Trust's remaining rental properties. Rental revenues, decreased $333,000, or 38%, to $236,000 for the three months ended March 31, 1997, down from $569,000 for the three months ended March 31, 1996. These decreases were primarily the result of decreases in rental revenue due to the sale of the Redfield Commerce Center in March 1996, the sale of the Bekins Storage Facility in May 1996, the foreclosure sale of the Casa Grande Motor Inn in February 1996, the sale of Fulton Square Shopping Center in February 1997 and the sale of Totem Square in March 1997. Interest revenues increased $21,000, or 7%, to $323,000 for the three months ended March 31, 1997, up from $302,000 for the three months ended March 31, 1996. This increase was primarily due to the increase in interest earned on cash accounts and marketable securities. Total Expenses decreased $41,000, or 60%, to $689,000 for the three months ended March 31, 1997, down from $730,000 for the three months ended March 31, 1996. These decreases were primarily attributable to decreases in operating and interest expenses resulting from the disposition of properties and mortgage notes within the Trust's portfolio during the prior twelve-month period. Interest expense decreased $38,000, or 28%, to $99,000 for the three months ended March 31, 1997, down from $137,000 for the three months ended March 31, 1996. This decrease primarily resulted from the cessation of interest expense on notes secured by properties which have been sold. Dispositions. During the first quarter of 1997, the Trust sold Fulton Square Shopping Center, a retail property located in Sacramento, California. The net loss recognized from the sale of Fulton Square was approximately $34,000. The Trust also sold Totem Square, a retail property located in Kirkland, Washington. The net loss recognized from the sale of Totem Square was approximately $398,000 of which the majority was transfer taxes and the elimination of unamortized tenant improvements and leasing commissions. 12 16 Liquidity and Capital Resources The Trust considers its liquidity and ability to generate cash from operations and financings to be sufficient to sustain day-to-day operations and to implement the New Business Plan. At March 31, 1997, the Trust had $8,330,000 in cash; and an investment portfolio of liquid mortgage-backed securities with a net book value of $13,141,000. The Trust experienced a net increase in cash of $3,632,000 for the three months ended March 31, 1997, compared to a net increase in cash of $282,000 for the three months ended March 31, 1996, a difference of $3,350,000. The Trust's improved cash position during the above twelve-month period resulted from the redeployment of the real estate portfolio into better performing assets, a reduction in overall expenses and from investing activities. As of March 31, 1997 the Trust owned a mortgage note portfolio of four notes totaling approximately $8,785,000 in loans with an aggregate book value of $2,658,000. These loans bear interest at an overall effective rate of 8% and are collateralized by mortgages on real property. The Trust has one long-term outstanding debt obligation of $880,000. Funds From Operations and Funds Available for Distribution. REIT analysts generally consider Funds From Operations (FFO) an appropriate measure of performance in comparing the results of operations of REITs. FFO is defined by the National Association of Real Estate Investment Trusts as net income computed in accordance with generally accepted accounting principles before gains and losses on sales of property and from debt restructuring plus depreciation and amortization. Funds Available for Distribution (FAD) is defined as FFO less capital expenditures funded by operations and loan amortization. The Trust believes that in order to facilitate a clear understanding of the historical operating results of the Trust, FFO and FAD should be examined in conjunction with net income as presented in this report. FFO and FAD should not be considered as an alternative to net income as an indication of the Trust's performance or to cash flow as a measure of liquidity. 13 17 FFO (which was computed without adding back amortization of deferred financing costs and depreciation of non-rental real estate assets) and FAD for the three months ended March 31, 1997 and 1996 are summarized as follows: Calculation of Funds From Operations and Funds Available for Distribution
(In thousands) For the Three Months Ended March 31, 1997 1996 ---- ---- Net income before gain (loss) on sale of investments ($ 76) $ 141 Depreciation and amortization 21 5 ----- ----- Funds From Operations (55) 146 Capital Improvements (64) (45) Loan principal payments -- (23) ----- ----- Funds Available For Distribution $ -- $ 78 ===== =====
14 18 PART II. OTHER INFORMATION Item 1: Legal Proceedings The Trust filed a complaint in San Francisco Superior Court on September 27, 1996, seeking a declaratory judgment against Carrillion V, a California limited partnership, and its general partner, with respect to an earnest money deposit given by the Defendant under a May 1996 mortgage loan purchase agreement. The dispute was settled out-of-court in the Trust's favor for $54,000 (included in other revenues) in the first quarter of 1997. Item 2: Changes in Securities None Item 3: Defaults Upon Senior Securities None Item 4: Submission of Matters to a Vote of Security Holders None Item 5: Other Information None Item 6: Exhibits and Reports on Form 8-K (b) During the quarter ended March 31, 1997, the Trust filed one Report on Form 8-K dated January 3, 1997, reporting a change in control of the Registrant (Item 2 of Form 8-K).
SIGNATURES Pursuant to the requirement 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. CALIFORNIA REAL ESTATE INVESTMENT TRUST May 15, 1997 /s/ Frank A. Morrow - ------------ --------------------- Date Frank A. Morrow, Chairman of the Board 15 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 8,330 13,141 10,806 (7,253) 0 25,024 0 0 25,024 113 880 0 0 64,282 (40,251) 25,024 0 613 0 0 (1,027) 0 (99) (508) 0 0 0 0 0 (508) (.06) 0
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