-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, esz8caQYpuF6N/JKf1W3JDqdQUTFut4qydOZuxjqIgadpxnQgYteHv9oAmjEow/3 fBg8etrE7f9v0rvz6iFpJA== 0000950131-95-000145.txt : 19950515 0000950131-95-000145.hdr.sgml : 19950515 ACCESSION NUMBER: 0000950131-95-000145 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19950202 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROPERTY TRUST OF AMERICA CENTRAL INDEX KEY: 0000080737 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 746056896 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-10272 FILM NUMBER: 95504803 BUSINESS ADDRESS: STREET 1: 7777 MARKET CENTER AVE CITY: EL PASO STATE: TX ZIP: 79912 BUSINESS PHONE: 9158773900 MAIL ADDRESS: STREET 1: 7777 MARKET CENTER AVE CITY: EL PASO STATE: TX ZIP: 79912 FORMER COMPANY: FORMER CONFORMED NAME: EL PASO REAL ESTATE INVESTMENT TRUST DATE OF NAME CHANGE: 19700108 10-Q/A 1 AMENDMENT NO. 1 TO FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A No. 1 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1994. OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____ to ____. Commission File Number 1-10272 PROPERTY TRUST OF AMERICA ----------------------------------------------------------- (Exact name of registrant as specified in its charter) Maryland 74-6056896 ------------------------------- -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7777 Market Center Avenue, El Paso, Texas 79912 -------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (915) 877-3900 ----------------------------------------------------------- (Registrant's telephone number, including area code) None ------------------------------------------------------------------------ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days. Yes X No ----- ----- The number of shares outstanding of the Registrant's common stock as of October 21, 1994 was: Shares of Beneficial Interest, $1 par value - 50,397,188 shares PROPERTY TRUST OF AMERICA INDEX Page Number PART I. Financial Information Item 1. Financial Statements Balance Sheets - September 30, 1994 and December 31, 1993 . . . . . . . . . . . . . . . . . . . 3 Statements of Earnings - Three and Nine months ended September 30, 1994 and 1993 . . . . . . . . . . . 4 Statements of Cash Flows - Nine months ended September 30, 1994 and 1993. . . . . . . . . . . . . . 5 Notes to Financial Statements . . . . . . . . . . . . . 6 Independent Accountants' Review Report. . . . . . . . . 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . 13 PART II. Other Information Item 6. Exhibits and Reports on Form 8K . . . . . . . . . . . . 19 2 PROPERTY TRUST OF AMERICA BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSETS ------
SEPTEMBER 30, DECEMBER 31, 1994 1993 -------------- ------------ (unaudited) Real estate.................................... $1,233,021 $872,610 Less accumulated depreciation.................. 39,071 22,022 ---------- -------- 1,193,950 850,588 Mortgage notes receivable...................... 22,553 22,624 ---------- -------- Total investments.......................... 1,216,503 873,212 Cash and cash equivalents...................... 12,475 5,525 Accounts receivable............................ 2,209 763 Other assets................................... 13,350 10,801 ---------- -------- Total assets............................... $1,244,537 $890,301 ========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------
Liabilities: Line of credit............................... $ 53,500 $ 51,500 Long term debt............................... 200,000 - Mortgages payable............................ 96,200 48,872 Distributions payable........................ - 11,161 Accounts payable............................. 12,494 13,514 Accrued expenses and other liabilities....... 24,719 10,237 ---------- -------- Total liabilities.......................... 386,913 135,284 ---------- -------- Shareholders' Equity: Series A Preferred shares (9,200,000 convertible shares authorized and issued; stated liquidation preference of $25 per share)............................. 230,000 230,000 Common shares (shares issued - 50,561,666 in 1994 and 44,809,208 in 1993)............ 50,562 44,809 Additional paid-in capital................... 621,787 523,053 Distributions in excess of net earnings...... (42,796) (40,916) Treasury shares (164,478 in 1994 and 164,467 in 1993)........................... (1,929) (1,929) ---------- -------- Total shareholders' equity................. 857,624 755,017 ---------- -------- Total liabilities and shareholders' equity..................... $1,244,537 $890,301 ========== ========
The accompanying notes are an integral part of the financial statements. 3 PROPERTY TRUST OF AMERICA STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ----------------------- ------------------------- 1994 1993 1994 1993 -------------------------------------------------- Income: Rental income........................... $50,299 $19,872 $131,103 $50,852 Interest income......................... 585 615 2,093 1,502 ------- ------- -------- ------- 50,884 20,487 133,196 52,354 ------- ------- -------- ------- Expenses: Rental expenses......................... 21,966 7,933 56,662 20,255 Depreciation............................ 6,621 2,536 17,411 6,788 Interest................................ 5,762 1,468 14,021 3,529 General and administrative and REIT management fee................... 3,627 1,960 9,965 5,052 Provision for possible loss on investments........................... - - 1,600 2,270 Other................................... 181 136 533 171 ------- ------- -------- ------- 38,157 14,033 100,192 38,065 ------- ------- -------- ------- Earnings from operations.................. 12,727 6,454 33,004 14,289 Gain on sale of investments, net.......... - - - 2,302 ------- ------- -------- ------- Net earnings.............................. 12,727 6,454 33,004 16,591 Less Series A Preferred share distributions..................... 4,025 - 12,075 - ------- ------- -------- ------- Net earnings attributable to common shares........................ $ 8,702 $ 6,454 $ 20,929 $16,591 ======= ======= ======== ======= Weighted average common shares outstanding............................. 47,051 35,742 45,490 33,950 ======= ======= ======== ======= Per share amounts attributable to common shares: Net earnings............................ $0.18 $0.18 $0.46 $0.49 ======= ======= ======== ======= Distributions........................... $0.25 $0.205 $0.75 $0.615 ======= ======= ======== =======
The accompanying notes are an integral part of the financial statements. 4 PROPERTY TRUST OF AMERICA STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ---------------------- 1994 1993 ---------- ---------- OPERATING ACTIVITIES: Net earnings................................... $ 33,004 $ 16,591 Items not requiring (providing) cash: Depreciation and amortization................ 19,025 7,899 Other, net................................... - 121 Provision for possible loss on investments................................ 1,600 2,270 Gain on sale of investments, net............. - (2,302) Accounts and accrued interest receivable....... (1,446) (74) Accounts payable............................... 792 1,112 Accrued real estate taxes...................... 7,355 1,972 Accrued other expenses and other liabilities... 7,210 1,609 Net change in other operating assets........... (793) (1,562) --------- --------- Net cash flow provided by operating activities................................. 66,747 27,636 --------- --------- INVESTING ACTIVITIES: Real estate investments........................ (319,268) (205,874) Sale of real estate property, net.............. 12,041 6,224 Mortgage notes receivable...................... 71 1,245 --------- --------- Net cash flow used in investment activities.. (307,156) (198,405) --------- --------- FINANCING ACTIVITIES: Proceeds from sale of shares, net of expenses.............................. 101,807 295,667 Proceeds from line of credit................... 216,250 159,000 Proceeds from dividend reinvestment and share purchase plan, net................. 2,896 7,142 Proceeds from long term debt................... 200,000 - Proceeds from exercise of stock options, net... 21 205 Cash distributions paid on common shares....... (33,970) (20,019) Cash distributions paid on preferred shares.... (12,075) - Debt issuance costs incurred................... (3,581) (1,225) Regularly scheduled principal payments on mortgages payable............................ (1,131) (469) Prepayments of mortgages payable............... (8,370) (5,577) Principal payments on line of credit........... (214,250) (213,802) Purchase of treasury shares.................... - (114) Other.......................................... (238) - --------- --------- Net cash flow provided by financing activities....................... 247,359 220,808 --------- --------- Net increase in cash and cash equivalents........ 6,950 50,039 Cash and cash equivalents at beginning of period...................................... 5,525 6,998 --------- --------- Cash and cash equivalents at end of period....... $ 12,475 $ 57,037 ========= ========= Non-cash financing activities: Receipt of purchase notes from sale of non-multifamily investments.................. $ - $ 12,413 Mortgage notes assumed or given upon purchase of multifamily properties.................... $ 56,829 $ 5,000
The accompanying notes are an integral part of the financial statements. 5 PROPERTY TRUST OF AMERICA NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1994 (1) GENERAL The financial statements of Property Trust of America ("PTR") are unaudited and certain information and footnote disclosures normally included in financial statements have been omitted. Certain amounts in the financial statements for 1993 have been reclassified to conform to the 1994 presentation. While management of PTR believes that the disclosures presented are adequate, these interim financial statements should be read in conjunction with the financial statements and notes included in PTR's 1993 Annual Report on Form 10-K. In the opinion of management, the accompanying unaudited financial statements contain all normal recurring adjustments necessary for a fair presentation of PTR's financial statements for the interim period. The results of operations for the three and nine month periods ended September 30, 1994 are not necessarily indicative of the results to be expected for the entire year. Per share data is computed by using the weighted average of common shares outstanding during the period. The assumed conversion of the Cumulative Convertible Series A Preferred Shares of Beneficial Interest, ("Preferred Shares") was antidilutive for the three and nine months ended September 30, 1994. (2) REAL ESTATE Investments in real estate, at cost, were as follows (dollar amounts in thousands):
September 30, 1994 December 31, 1993 ------------------ ------------------ Investment Units Investment Units ----------- ----- ---------- ------ Multifamily: Operating properties...... $1,078,226 30,536 $730,994 22,493 Developments under construction............ 77,426 3,629 84,395 3,048 Developments in planning.. 40,622 5,327 17,490 2,550 Land held for future development.............. 3,366 4,208 ---------- -------- Total Multifamily....... 1,199,640 837,087 Non-multifamily............. 33,381 35,523 ---------- -------- Total real estate....... $1,233,021 $872,610 ========== ========
The change in investments in real estate, at cost, from December 31, 1993 to September 30, 1994 consisted of the following (in thousands):
Balance at December 31, 1993............. $ 872,610 Acquisitions and renovation expenditures........................... 251,488 Development expenditures including land acquisitions........................... 117,205 Capital improvements..................... 2,392 Real estate sold......................... (12,275) Acquisition of land held for future development, net of transfers.......... 3,366 Provision for possible loss on investments............................ (1,600) Other.................................... (165) ---------
6 PROPERTY TRUST OF AMERICA NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1994 Balance at September 30, 1994............ $1,233,021 ========== The land PTR currently owns or controls through letters of intent or contingent contracts, subject to PTR's final due diligence, will allow for development of 6,235 additional multifamily units, which will be an important generator of growth for PTR in 1995 and beyond. The foregoing transactions are subject to a number of conditions, and PTR cannot predict with certainty that any of them will be consummated. At October 21, 1994, PTR had unfunded development commitments for developments under construction of $71.3 million. PTR develops and acquires properties with a view to effective long term operation and ownership. Based upon PTR's market research and in an effort to optimize its portfolio allocation, PTR may from time to time seek to dispose of assets that in management's view do not meet PTR's long term investment criteria and redeploy the proceeds therefrom, preferably through like kind exchanges, into assets that it believes provide better long term growth opportunities. PTR is a minority partner with a 40% interest in a partnership which owns and operates an office building near Dallas, Texas. During the first quarter of 1994, the partnership adopted a strategy of disposing of the property rather than continuing to hold the property as a long term investment. As a result, the managing partner evaluated the building for net realizable value which resulted in a provision for possible loss of $4 million. PTR's share of the loss provision is $1.6 million as reflected in the September 30, 1994 statement of earnings. PTR's net carrying value after the provision is $2.85 million. This provision has no impact on cash flow from operating activities nor does PTR have any financial obligation to the partnership. PTR focuses its investment and development activities on multifamily properties. PTR will continue to aggressively manage non-multifamily properties in order to maximize cash flow, and disposition of such non- multifamily properties may occur as opportunities arise. Properties are periodically evaluated for net realizable value and provisions for possible losses are made if required. (3) DISTRIBUTIONS On October 21, 1994, the Trustees declared a cash distribution of $.25 per common share payable on November 14, 1994 to shareholders of record on November 1, 1994. (4) LINE OF CREDIT AND LONG TERM DEBT Line of Credit On August 4, 1994, PTR consummated a conversion of its $200 million revolving line of credit facility with Texas Commerce Bank, National Association, as agent bank for a group of lenders ("TCB") into an unsecured facility ("TCB line"). Borrowings bear interest at the greater of prime or the federal funds rate plus 1/2%, or at PTR's option, LIBOR plus 1.75% to 2% (varying based upon PTR's Standard & Poors rating). At September 30, 1994, PTR's outstanding LIBOR contract borrowings amounted to $52 million at a base LIBOR rate of 4.875% plus 1.75% for a total rate of 6.625%. Additionally, there is a commitment fee of .125% per annum of the average unfunded line of credit balance. On October 27, 1994, the TCB line was increased to $275 million and 7 PROPERTY TRUST OF AMERICA NOTES TO FINANCIAL STATEMENTS September 30, 1994 the maturity was extended to August 15, 1996. The TCB line may be extended annually for an additional year with the approval of TCB and other participating lenders. All debt incurrences are subject to covenants, as more fully defined in the loan agreement, that PTR maintain (i) an interest coverage ratio of not less than 2:1, (ii) a debt to tangible net worth ratio no greater than 1:1, (iii) an unencumbered pool of real estate properties of which certain properties must meet certain occupancy requirements and which have an aggregate historical cost of at least 175% of unsecured indebtedness. As of September 30, 1994, PTR was in compliance with all debt covenants. Long Term Debt On February 8, 1994, PTR issued $100 million of 6.875% Senior Notes due 2008 (the "2008 Notes") and $100 million of 7.5% Senior Notes due 2014 (the "2014 Notes"), collectively referred to as the "Notes". In February 1994, PTR received $1.3 million in settlement of an interest protection agreement in the form of a Forward Treasury Lock Agreement entered into with an investment banker on January 28, 1994. The agreement included a determination date of February 1, 1994 and a settlement date of February 2, 1994. The notional amounts were $100 million with a reference price of 100.90625% and $75 million with a reference price of 110.4375%. On February 2, 1994, the settlement prices were 100.32813% and 109.46875%, respectively. There are no agreements outstanding. The 2008 Notes bear interest at 6.875% per annum and require annual principal payments of $12.5 million, commencing February 15, 2001. The 2014 Notes bear interest at 7.5% per annum and require annual principal payments of $10 million in 2009, $12.5 million in 2010, $15 million in 2011, $17.5 million in 2012, $20 million in 2013 and $25 million in 2014. Collectively, the Notes have an average life to maturity of 14.25 years and an average effective interest cost, inclusive of offering discounts, issuance costs and proceeds from an interest rate protection agreement, of 7.37% per annum. The Notes are redeemable any time at the option of PTR, in whole or in part, at a redemption price equal to the sum of the principal amount of the Notes being redeemed plus accrued interest thereon to the redemption date plus a yield to maturity adjustment. The Notes are governed by the terms and provisions of an indenture agreement (the "Indenture") between PTR and State Street Bank and Trust Company, as trustee. Under the terms of the Indenture, PTR can incur additional debt only if, after giving effect to the debt being incurred and application of proceeds therefrom, (i) the ratio of debt to total assets, as defined in the Indenture, does not exceed 60%, (ii) the ratio of secured debt to total assets, as defined in the Indenture, does not exceed 40%, and (iii) PTR's pro forma interest coverage ratio, as defined in the Indenture, for the four preceding fiscal quarters is not less than 1.5. As of September 30, 1994, PTR was in compliance with all debt covenants. Interest Interest paid for the nine months ended September 30, 1994 was $14,861,000, including $4,254,000 of interest capitalized during 8 PROPERTY TRUST OF AMERICA NOTES TO FINANCIAL STATEMENTS September 30, 1994 construction. Interest paid for the nine months ended September 30, 1993 was $3,595,000, including $1,527,000 of interest capitalized during construction. Amortization of debt issuance costs included in interest expense for the nine months ended September 30, 1994 and 1993 was $1,614,000 and $1,111,000, respectively. (5) REIT MANAGEMENT AND PROPERTY MANAGEMENT AGREEMENTS In March 1994, PTR renewed its REIT Management agreement with Security Capital (Southwest) Incorporated (the "REIT Manager"), to provide REIT Management services to PTR. The REIT Manager is an affiliate of Security Capital Realty Incorporated ("Realty"), which owns approximately 31.88% of PTR's shares of beneficial interest. In exchange for providing research, investment analysis, acquisition and development services, asset management, capital funding, legal and accounting services, and day-to-day management of PTR's operations, the REIT Management agreement permits the REIT Manager to earn a base annual fee of $855,000, plus 16% of cash flow per year, as defined in the REIT Management agreement, in excess of $4,837,000. Under the terms of the agreement, long term debt described in Note 4 above, is treated as if it had regularly scheduled principal and interest payments like a 20-year, level monthly payment, fully amortizing mortgage and the assumed principal and interest payments are deducted from cash flow in determining the fee. The REIT Manager also receives a fee of 0.25% per year on the average daily balance of cash equivalent investments. The REIT Management Agreement also requires PTR to pay the REIT Manager an incentive fee upon any sale of PTR's real estate assets. For assets owned at March 1, 1991, the fee is equal to 10% of the gain above an agreed asset valuation prepared by an unrelated investment bank. For assets acquired after March 1, 1991, the fee equals 10% of the gain above PTR's all-in cost for the assets, including transaction costs and capital improvements, as increased by the inflation rate since the date of acquisition. All incentive fees are averaged over three-year periods to avoid any windfalls related to sales in any particular year. Any incentive fees earned by the REIT Manager will be paid in common shares at the then market price. On September 22, 1994, the Board of Trustees amended the REIT Management Agreement to eliminate any incentive fees upon tax-deferred exchanges of PTR's real estate assets. The REIT Management fee for the nine months ended September 30, 1994 was $9,443,000 and $4,619,000 for the nine months ended September 30, 1993. No incentive fees have been earned by the REIT Manager. SCG Realty Services Incorporated ("SCG Realty Services"), currently manages approximately 89% of PTR's multifamily properties. In addition to property management, SCG Realty Services performs, among other things, certain due diligence services for PTR's acquisitions. The sole shareholder of PTR's REIT Manager owns 100% of SCG Realty Services' voting stock. For the nine months ended September 30, 1994 and 1993, PTR paid an aggregate of $4.7 million and $2.3 million, respectively, to SCG Realty Services, including $4.5 million and $1.9 million, respectively, in property management fees. Rates for services performed by SCG Realty Services are subject to approval by PTR's independent Board of Trustees 9 PROPERTY TRUST OF AMERICA NOTES TO FINANCIAL STATEMENTS September 30, 1994 and are at rates prevailing in the markets in which PTR operates. In September 1994, PTR's Board of Trustees renewed the property management agreement for an additional year. (6) SHELF REGISTRATION On May 2, 1994, PTR filed a shelf registration statement with the Securities and Exchange Commission. PTR registered a total of $325 million of securities which can be issued in the form of debt securities, preferred shares of beneficial interest, common shares of beneficial interest, shareholder purchase rights or subscription rights for common shares of beneficial interest. On August 16, 1994, PTR raised $102.1 million in gross proceeds from a Rights Offering (see Note 8). Therefore, as of September 30, 1994, $222.9 million in securities were available to be issued under this shelf registration. (7) SHAREHOLDER PURCHASE RIGHTS On July 11, 1994, the Board of Trustees of PTR announced the redemption, effective at the close of business on July 21, 1994, of the shareholder purchase rights issued pursuant to the Rights Agreement dated as of February 23, 1990, as amended. Pursuant to the redemption, each holder of record at the close of business on July 21, 1994 was entitled to receive $0.01 per shareholder purchase right. The redemption price was paid on August 12, 1994. In addition, the Board of Trustees declared a dividend of one preferred share purchase right (a "Purchase Right") for each Common Share outstanding, payable to holders of Common Shares of record at the close of business on July 21, 1994. Each Purchase Right entitles the holder under certain circumstances to purchase from PTR one one-hundredth of a share of Series B Junior Participating Preferred Share, par value $1.00 per share (the "Participating Preferred Shares") at a price of $60.00 per one one- hundredth of a Participating Preferred Share, subject to adjustment. Purchase Rights are exercisable when a person or group of persons acquires 20% or more of the outstanding Common Shares (49% in the case of Realty and certain defined affiliates) or announces a tender offer for 25% or more of the outstanding Common Shares. Under certain circumstances, each Purchase Right entitles the holder to purchase, at the Purchase Right's then current exercise price, a number of Common Shares having a market value of twice the Purchase Right's exercise price. The acquisition of PTR pursuant to certain mergers or other business transactions would entitle each holder to purchase, at the Purchase Right's then current exercise price, a number of the acquiring company's common shares having a market value at that time equal to twice the Purchase Right's exercise price. The Purchase Rights will expire in July 2004 and are subject to redemption in whole, but not in part, at a price of $0.01 per Purchase Right payable in cash, shares of PTR or any other form of consideration determined by PTR's Board of Trustees. (8) RIGHTS OFFERING On August 16, 1994, PTR raised $101.8 million net proceeds from a Rights Offering of 5,593,718 common shares of beneficial interest at a price of $18 1/4 per share. Proceeds from the offering were used to fund developments and to invest in additional multifamily properties in PTR's 10 PROPERTY TRUST OF AMERICA NOTES TO FINANCIAL STATEMENTS September 30, 1994 target market and to repay borrowings under PTR's revolving line of credit. 11 Independent Accountants' Review Report -------------------------------------- The Board of Trustees and Shareholders Property Trust of America: We have reviewed the accompanying balance sheet of Property Trust of America as of September 30, 1994, and the related statements of earnings for the three- and nine-month periods ended September 30, 1994 and 1993, and the statements of cash flows for the nine-month periods ended September 30, 1994 and 1993. These financial statements are the responsibility of the Trust's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical review procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of Property Trust of America as of December 31, 1993, and the related statements of earnings, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated January 18, 1994, except as to note 10, which is as of February 8, 1994, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying balance sheet as of December 31, 1993 is fairly presented, in all material respects, in relation to the balance sheet from which it has been derived. KPMG PEAT MARWICK LLP El Paso, Texas October 24, 1994 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW PTR's operating results depend primarily upon income from multifamily properties, which is substantially influenced by (i) the demand for and supply of multifamily units in PTR's target market and submarkets, (ii) rental expense levels, and (iii) the pace and price at which PTR can develop and acquire additional multifamily properties. Capital and credit market conditions which affect PTR's cost of equity and debt capital also influence operating results. PTR's target market and submarkets have benefitted substantially in recent periods from demographic trends (including job and population growth) which increase the demand for multifamily units while financing constraints (specifically, reduced availability of development capital) have limited new construction to levels substantially below construction activity prior to 1986. Consequently, rental rates for multifamily units have increased more than the inflation rate for the last two years and are expected to continue experiencing such increases for the next twelve months. Rental expense levels also influence operating results, and rental expenses (other than real estate taxes) for multifamily properties have generally increased at approximately the same rate as rents for the past year and are expected to increase at a comparable rate for the next twelve months. REIT Management believes that development of multifamily properties from the ground up which are built for long term ownership and are designed to meet broad renter preferences and demographic trends will provide a greater source of long term cash flow growth in the future. Therefore, while land prices are favorable, PTR has acquired and will acquire, on an unleveraged basis, prudent amounts of zoned land for multifamily development in the foreseeable future. The REIT Manager believes PTR's ability to compete is significantly enhanced relative to other companies because of the REIT Manager's depth of development and acquisition personnel and presence in local markets combined with PTR's access to investment capital. RESULTS OF OPERATIONS INTERIM PERIOD COMPARISON During the nine months ended September 30, 1994, PTR acquired 17 multifamily properties aggregating 6,203 units for a total purchase price, including planned renovations, of approximately $252.1 million and completed development of 10 multifamily properties aggregating 2,378 units with a completed cost of $109.2 million. At September 30, 1994, PTR had 3,629 multifamily units under construction with a budgeted completed cost of $148.7 million and had in the final planning stages an estimated 5,327 multifamily units with an aggregate budgeted completed cost of $264.3 million. During the nine months ended September 30, 1993, PTR acquired 17 multifamily properties aggregating 4,709 units for a total purchase price, including renovations, of approximately $146.6 million and completed development of 3 multifamily properties with 732 units with a completed cost of $30.4 million. At September 30, 1993, PTR had 3,127 multifamily units under construction with a budgeted completed cost of $137.9 million. The percentage of PTR's total rental income generated by multifamily properties was 98.13% and 91.43% for the nine months ended September 30, 1994 and 1993, respectively. This percentage will continue to increase throughout 1994 due to past and ongoing multifamily property developments and acquisitions and the periodic sale of non-multifamily properties. Projected 1994 property level earnings before interest, income taxes, depreciation and amortization ("EBITDA") for all operating multifamily properties owned by PTR as of September 30, 1994 13 is 10.03% of PTR's aggregate cost for these properties. EBITDA does not represent, and should not be construed as, a substitute for net earnings as defined by GAAP and is not indicative of cash flows from operations or that cash flows are sufficient to fund all cash needs. Aggregate cost for the properties includes the purchase price, closing costs and budgeted capital improvements and marketing costs prior to stabilization. Projected EBITDA is based on current lease rates for stabilized properties and current market rates for properties being stabilized and on anticipated operating expenses. No assurance can be given that projected levels of EBITDA will be achieved by these properties or that future developments and acquisitions will achieve the same level of EBITDA relative to PTR's investment basis. Property Operations Including the newly acquired and developed assets, rental income increased $80.3 million (157.8%), which was partially offset by higher rental expenses which increased by $36.4 million (179.7%) and depreciation expense which increased $10.6 million (156.5%) for the nine months ended September 30, 1994 over 1993. These increases are due to operating multifamily acquisitions and multifamily developments placed in service and to rental rate increases. For operating multifamily properties, which comprise 97% of PTR's total operating properties, based on cost at September 30, 1994, rental expenses were 43.8% and 42.4% of rental income during the nine months ended September 30, 1994 and 1993, respectively. Multifamily Properties Fully Operating Throughout Both Periods For the 29 multifamily properties which were fully operating throughout both the nine months ended September 30, 1994 and 1993, property level earnings before interest, income taxes and depreciation (EBITDA) as a percentage of PTR's aggregate investment in these properties increased to 11.1% in 1994 (annualized estimate based on actual results year to date for 1994) from 10.6% in 1993. This increase in return on investment, which is a function of rental rate growth, occupancy levels, expense rate growth and capital expenditure levels, is attributable primarily to growth in rental rates. This increase in return on investment was achieved at the same time that PTR increased its investment in these properties by $2.1 million as a result of renovation and other capital expenditures. EBITDA does not represent, and should not be construed as, a substitute for net earnings as defined by GAAP and is not indicative of cash flows from operations or that cash flows are sufficient to fund all cash needs. The 7.4% increase in rental income (the majority resulting from a 6.81% rental rate increase) for such properties for the nine months ended September 30, 1994 as compared to the same period in 1993 was offset by increases in rental expenses, primarily due to real estate taxes and turnover expenses. Interest Income Interest income for the nine months ended September 30, 1994 increased $591,000 (39.3%) over 1993, primarily resulting from the addition of four purchase money notes aggregating $12.4 million received in 1993 in conjunction with non-multifamily property sales. Interest Expense Interest expense increased $10.5 million (297.3%) for the nine months ended September 30, 1994 when compared to 1993. The increase is primarily attributable to interest expense of $9.3 million resulting from the issuance of $200 million of long term notes in February 1994, as more fully discussed under "Liquidity and Capital Resources." Mortgage interest expense increased $2.3 million (115.1%) for the nine months ended September 30, 1994 when compared to 1993 as a result of the addition of six mortgages aggregating $56.8 million during the nine month period ended September 30, 1994 and three mortgages aggregating $27.0 million during 1993 that were assumed or given in connection with the acquisition of multifamily 14 properties. Line of credit interest expense increased $1.6 million (52.4%) resulting primarily from the amortization of additional loan costs (commitment fees, title policies and legal expenses) relating to PTR's revolving credit facility which was increased from $72 million to $125 million and then to $200 million during 1993 and converted to an unsecured credit facility in August 1994. Average borrowings on the line of credit were approximately $54.9 million (with an average interest rate of 7.24%) during the nine months ended September 30, 1994, as compared to average borrowings of $40.4 million (with an average interest rate of 6.30%) during 1993. The increases in interest expense were offset by an increase of $2.7 million (178.6%) in capitalized interest. The increase in capitalized interest is attributable to increased multifamily development activity for the nine months ended September 30, 1994 as compared to 1993. General and Administrative Expense and REIT Management Fee The REIT Management fee paid by PTR fluctuates with the level of PTR's pre- REIT Management fee cash flow, as defined in the REIT Management Agreement, and therefore increased by $4.8 million (104.4%) during the nine months ended September 30, 1994 as compared to 1993 because cash flow increased substantially. The REIT management fee was 7.1% and 8.8% of total revenues for the nine months ended September 30, 1994 and 1993, respectively. With the issuance of $200 million of amortizing long term debt as more fully described under "Liquidity and Capital Resources," the REIT Management fee will effectively decline in proportion to PTR's net earnings because actual or assumed regularly scheduled principal and interest payments, as defined in the agreement, associated with the long term debt will be deducted from the cash flow amount on which the REIT Management fee is based. Property Dispositions and Provision for Possible Loss PTR develops and acquires properties with a view to effective long term operation and ownership. Based upon PTR's market research and in an effort to optimize its portfolio allocation, PTR may from time to time seek to dispose of assets that in management's view do not meet PTR's long term investment criteria and redeploy the proceeds therefrom, preferably through like kind exchanges, into assets that it believes provide better long term growth opportunities. PTR is a minority partner with a 40% interest in a partnership which owns and operates an office building near Dallas, Texas. During the first quarter of 1994, the partnership adopted a strategy of disposing of the property rather than continuing to hold the property as a long term investment. As a result, the managing partner evaluated the building for net realizable value which resulted in a provision for possible loss of $4 million. PTR's share of the loss provision is $1.6 million as reflected in the September 30, 1994 statement of earnings. PTR's net carrying value after the provision is $2.85 million. This provision has no impact on cash flow from operating activities nor does PTR have any financial obligation to the partnership. PTR focuses its investment and development activities on multifamily properties. PTR will continue to aggressively manage non-multifamily properties in order to maximize cash flow, and disposition of such non-multifamily properties may occur as opportunities arise. Properties are periodically evaluated for net realizable value and provisions for possible losses are made if required. Preferred Share Distributions 15 In November of 1993, PTR issued $230 million of Series A Preferred Shares (the "Preferred Shares") at $25 per share that are entitled to receive an annual distribution of $1.75 per share (7% annual distribution rate), which amounted to $12.075 million for the nine months ended September 30, 1994. The preferred share distributions do not reduce the amount PTR has budgeted for common share distributions but does increase the percentage of the common share distribution which constitutes a non-taxable return of capital. Other Rental income, rental expenses, depreciation and net earnings for the three months ended September 30, 1994 compared to the three months ended September 30, 1993 reflect changes similar to those discussed in the preceding paragraphs for the comparison of the nine months ended on the same dates. The changes are substantially attributable to the same reasons discussed in the preceding paragraphs for the nine month periods ended September 30, 1994 and 1993. ENVIRONMENTAL MATTERS PTR does not expect any environmental condition on its properties to materially adversely affect its results of operations or financial position. LIQUIDITY AND CAPITAL RESOURCES The REIT Manager considers PTR's liquidity and ability to generate cash to be adequate and expects it to continue to be adequate to meet PTR's development, acquisition, operating, debt service and shareholder distribution requirements. Net cash flow provided by operating activities increased by $39.1 million (141.5%) for the nine months ended September 30, 1994 compared to 1993. The increase is due primarily to multifamily property acquisitions and developments as described under "Results of Operations." Investing Activities During the nine months ended September 30, 1994, PTR invested $319.3 million for the development, acquisition and renovation of multifamily properties, net of $56.8 million in mortgages. During the first nine months of 1993, PTR invested $205.9 million for the development, acquisition and renovation of multifamily properties, net of a $5 million mortgage. These developments, acquisitions and renovations were financed with cash on hand and borrowings under PTR's revolving line of credit, which were repaid with the proceeds from PTR's equity and debt offerings. At October 21, 1994, PTR had unfunded development commitments for developments under construction of $71.3 million. Additionally, the land PTR currently owns or controls through letters of intent or contingent contracts, subject to PTR's final due diligence, will allow for the development of 6,235 additional multifamily units, which will be an important generator of growth for PTR in 1995 and beyond. The foregoing transactions are subject to a number of conditions, and PTR cannot predict with certainty that any of them will be consummated. Financing Activities PTR's financing activities for the nine months ended September 30, 1994 provided $26.6 million (12%) more cash flow than for 1993. The increase in cash flow provided by financing activities is primarily due to increased borrowings on the revolving line of credit. On August 4, 1994, PTR consummated a conversion of its $200 million 16 revolving line of credit facility with Texas Commerce Bank, National Association, as agent bank for a group of lenders ("TCB") into an unsecured facility ("TCB line"). Borrowings bear interest at the greater of prime or the federal funds rate plus 1/2%, or at PTR's option, LIBOR plus 1.75%-2% (varying based upon the rating from Standard & Poors). At September 30, 1994, PTR's outstanding LIBOR contract borrowings amounted to $52 million at a base LIBOR rate of 4.875% plus 1.75% for a total rate of 6.625%. Additionally, there is a commitment fee of .125% per annum of the average unfunded line of credit balance. On October 27, 1994, the TCB line was increased to $275 million and the maturity was extended to August 15, 1996. The TCB line may annually be extended for an additional year with the approval of TCB and other participating lenders. All debt incurrences are subject to covenants, as more fully defined in the loan agreement, that PTR maintain (i) an interest coverage ratio of not less than 2:1, (ii) a debt to tangible net worth ratio no greater than 1:1, (iii) an unencumbered pool of real estate properties of which certain properties must meet certain occupancy requirements and which have an aggregate historical cost of at least 175% of unsecured indebtedness. As of September 30, 1994, PTR was in compliance with all debt covenants. PTR expects to finance developments, acquisitions and renovations with cash on hand and borrowings under its line of credit prior to future debt and equity offerings in order to efficiently respond to market opportunities while minimizing the amount of cash invested in short term investments at lower yields. PTR believes that its current conservative ratio of long term debt to total long term capitalization, the sum of long term debt and shareholders' equity, (26% at September 30, 1994) provides it considerable flexibility to prudently utilize long term debt as a future financing tool. PTR intends to limit the sum of long term debt and line of credit debt to less than 50% of the sum of total book capitalization. On May 2, 1994, PTR filed a shelf registration statement with the Securities and Exchange Commission. PTR registered a total of $325 million of securities which can be issued in the form of debt securities, preferred shares of beneficial interest, common shares of beneficial interest, shareholder purchase rights or subscription rights for common shares of beneficial interest. As described below, PTR issued $102.1 in securities in August 1994 leaving, as of September 30, 1994, $222.9 million in securities available to be issued under this shelf registration. On August 16, 1994, PTR raised $101.8 million net proceeds from a Rights Offering of 5,593,718 common shares of beneficial interest at a price of $18 1/4 per share. PTR's shareholders of record on July 21, 1994 received a distribution of one right for each PTR share they owned. Eight rights were required to purchase one PTR share for $18 1/4 in the rights offering. Realty, PTR's principal shareholder and an affiliate of the REIT Manager, exercised in full its rights to acquire PTR shares in the offering at the same price paid by the public ($18 1/4 per share) and acquired additional rights in open-market purchases. Proceeds from the offering were used to fund developments and to invest in additional multifamily properties in PTR's target market and to repay borrowings under PTR's revolving line of credit. On February 8, 1994, PTR issued $100 million of 6.875% Senior Notes due 2008 (the "2008 Notes") and $100 million of 7.5% Senior Notes due 2014 (the "2014 Notes"), collectively referred to as the "Notes". The 2008 Notes bear interest at 6.875% per annum and require annual principal payments of $12.5 million, commencing February 15, 2001. The 2014 Notes bear interest at 7.5% per annum and require aggregate annual principal payments of $10 million in 2009, $12.5 million in 2010, $15 million in 2011, $17.5 million in 2012, $20 million in 2013, and $25 million in 2014. In February 1994, PTR received $1.3 million in settlement of an interest protection agreement in the form of a Forward Treasury Lock Agreement entered into with an investment banker on January 28, 1994. The 17 agreement included a determination date of February 1, 1994 and a settlement date of February 2, 1994. The notional amounts were $100 million with a reference price of 100.90625% and $75 million with a reference price of 110.4375%. On February 2, 1994, the settlement prices were 100.32813% and 109.46875%, respectively. There are no agreements outstanding. Collectively, the Notes have an average life to maturity of 14.25 years and an average effective interest cost, inclusive of offering discounts, issuance costs, and an interest rate protection agreement, of 7.37% per annum. The Notes are redeemable any time at the option of PTR, in whole or in part, at a redemption price equal to the sum of the principal amount of the Notes being redeemed plus accrued interest thereon to the redemption date plus a yield to maturity adjustment. The Notes are governed by the terms and provisions of an indenture agreement (the "Indenture") between PTR and State Street Bank and Trust Company, as trustee. Under the terms of the Indenture, PTR can incur additional debt only if, after giving effect to the debt being incurred and application of proceeds therefrom, (i) the ratio of debt to total assets, as defined in the Indenture, does not exceed 60%, (ii) the ratio of secured debt to total assets, as defined in the Indenture, does not exceed 40%, and (iii) PTR's pro forma interest coverage ratio, as defined in the Indenture, for the four preceding fiscal quarters is not less than 1.5. As of September 30, 1994, PTR was in compliance with all debt covenants. Distributions PTR's current distribution policy is to pay quarterly distributions to holders of Common Shares based upon what it believes to be a prudent percentage of cash flow. Because depreciation is a non-cash expense, cash flow typically will be greater than net earnings attributable to Common Shares. Therefore, quarterly distributions paid will generally be higher than quarterly net earnings. Distributions paid on Common Shares exceeded net earnings attributable to Common Shares by $13 million and $3.4 million for the nine months ended September 30, 1994 and 1993, respectively. Pursuant to the terms of the Preferred Shares, PTR is restricted from declaring or paying any distribution with respect to its Common Shares unless all cumulative distributions with respect to the Preferred Shares have been paid or sufficient funds have been set aside for distributions that have been declared for the then current distribution period with respect to the Preferred Shares. Funds from Operations is defined as net earnings from operations plus certain non-cash items, principally depreciation. PTR believes that Funds from Operations is helpful in understanding a property portfolio in that such calculation reflects cash flow from operating activities and the properties' ability to support interest payments and general operating expenses before the impact of certain activities, such as gains or losses from property sales and changes in accounts receivable and accounts payable. Funds from Operations attributable to Common Shares increased $16.7 million (68.1%)to $41.3 million for the nine months ended September 30, 1994 from $24.6 million for 1993. The increase resulted primarily from increased properties in operation. Funds from Operations should not be construed as a substitute for net earnings in evaluating operating results or as a substitute for cash flow in evaluating liquidity. 18 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10.1 - Amended and Restated Credit Agreement between PTR and Texas Commerce Bank National Association, dated October 27, 1994 (Previously filed). 10.2 - Third Amended and Restated REIT Management Agreement dated March 1, 1994 (Previously filed). 15 -- Letter from KPMG Peat Marwick LLP dated February 1, 1995 regarding unaudited financial information.
27 -- Financial Data Schedule. (b) Reports on Form 8-K: Date Item Reported Financial Statements ---- ------------- -------------------- July 11, 1994 5,7 No July 19, 1994 5,7 No July 27, 1994 5,7 No
19 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. Date: February 1, 1995 PROPERTY TRUST OF AMERICA ---------------- /s/ William Kell ---------------------------------- William Kell, Vice President and Duly Authorized Officer and Principal Financial Officer 20 EX-15 2 LETTER FROM KPMG PEAT MARWICK Exhibit 15 Board of Trustees and Shareholders Property Trust of America Gentlemen: Re: Registration Statement Nos. 33-87184, 33-86444, 33-71040, and 33-25317 With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated October 24, 1994 related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered a part of a registration statement prepared or certified by an accountant, or a report prepared or certified by an accountant within the meaning of sections 7 and 11 of the Act. KPMG PEAT MARWICK LLP El Paso, Texas February 1, 1995 EX-27 3 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, as amended by Form 10-Q/A No. 1 dated February 1, 1995, and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1993 SEP-30-1994 12,475 0 24,762 0 0 0 1,233,021 39,071 1,244,537 0 296,200 50,562 0 270,000 577,062 1,244,537 131,103 133,196 0 56,662 0 1,600 14,021 20,929 0 20,929 0 0 0 20,929 0.46 0.46
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