-----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, seywi5Rh1uIdrbJu64Q0YN4bQuZf/J2Rm5zxZQDriGI3wzWmzL6chRmmW/QFes13 P4G64NXIkt9K+ctTGQWM6g== 0000950131-95-001949.txt : 19950728 0000950131-95-001949.hdr.sgml : 19950728 ACCESSION NUMBER: 0000950131-95-001949 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950727 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SECURITY CAPITAL PACIFIC TRUST 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 SEC ACT: 1934 Act SEC FILE NUMBER: 001-10272 FILM NUMBER: 95556285 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: PROPERTY TRUST OF AMERICA DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: EL PASO REAL ESTATE INVESTMENT TRUST DATE OF NAME CHANGE: 19700108 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1995. OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . COMMISSION FILE NUMBER 1-10272 SECURITY CAPITAL PACIFIC TRUST (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MARYLAND 74-6056896 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 7777 MARKET CENTER AVENUE, EL PASO, 79912 TEXAS (ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE) OFFICES) (915) 877-3900 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days. X Yes No The number of shares outstanding of the Registrant's common stock as of July 20, 1995 was: Shares of Beneficial Interest, $1 par value--72,210,960 shares - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITY CAPITAL PACIFIC TRUST INDEX
PAGE NUMBER ------ PART I. Financial Information Item 1. Financial Statements Balance Sheets--June 30, 1995 and December 31, 1994.............. 3 Statements of Earnings--Three and six months ended June 30, 1995 and 1994........................................................ 4 Statements of Cash Flows--Six months ended June 30, 1995 and 1994............................................................ 5 Notes to Financial Statements.................................... 6 Independent Auditor's Review Report.............................. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 12 PART II. Other Information Item 4. Submission of Matters to Vote of Securities Holders.......... 18 Item 5. Other Information............................................ 18 Item 6. Exhibits and Reports on Form 8-K............................. 18
2 SECURITY CAPITAL PACIFIC TRUST BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31, ASSETS 1995 1994 ------ ----------- ------------ (UNAUDITED) Real estate........................................... $1,690,564 $1,296,288 Less accumulated depreciation......................... 62,649 46,199 ---------- ---------- 1,627,915 1,250,089 Mortgage notes receivable............................. 17,903 22,597 ---------- ---------- Total investments................................. 1,645,818 1,272,686 Cash and cash equivalents............................. 35,667 8,092 Accounts receivable................................... 2,709 1,657 Other assets.......................................... 16,442 13,343 ---------- ---------- Total assets...................................... $1,700,636 $1,295,778 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Liabilities: Line of credit...................................... $ -- $ 102,000 Long term debt...................................... 200,000 200,000 Mortgages payable................................... 152,007 93,624 Distributions payable............................... -- 14,506 Accounts payable.................................... 14,673 17,230 Accrued expenses and other liabilities.............. 30,343 27,776 ---------- ---------- Total liabilities................................. 397,023 455,136 ---------- ---------- Shareholders' Equity: Series A Preferred shares (9,200,000 convertible shares issued; stated liquidation preference of $25 per share)......................................... 230,000 230,000 Series B Preferred shares (4,200,000 shares issued; stated liquidation preference of $25 per share).... 105,000 -- Common shares (shares issued--72,375,819 in 1995 and 50,620,516 in 1994)................................ 72,376 50,621 Additional paid-in capital.......................... 952,848 622,161 Distributions in excess of net earnings............. (54,675) (60,211) Treasury shares (164,859 in 1995 and 164,478 in 1994).............................................. (1,936) (1,929) ---------- ---------- Total shareholders' equity........................ 1,303,613 840,642 ---------- ---------- Total liabilities and shareholders' equity........ $1,700,636 $1,295,778 ========== ==========
The accompanying notes are an integral part of the financial statements. 3 SECURITY CAPITAL PACIFIC TRUST STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, --------------- ---------------- 1995 1994 1995 1994 ------- ------- -------- ------- Revenues: Rental income............................... $65,719 $43,390 $119,236 $80,804 Interest.................................... 719 644 1,274 1,508 ------- ------- -------- ------- 66,438 44,034 120,510 82,312 ------- ------- -------- ------- Expenses: Rental expenses............................. 25,933 18,864 47,615 34,696 Depreciation................................ 9,126 5,841 16,550 10,791 Interest.................................... 5,123 5,105 11,129 8,259 General and administrative, including REIT management fee............................. 5,377 3,184 9,548 6,337 Provision for possible loss on investments.. -- -- 120 1,600 Other....................................... 73 275 202 352 ------- ------- -------- ------- 45,632 33,269 85,164 62,035 ------- ------- -------- ------- Net earnings.................................. 20,806 10,765 35,346 20,277 Less Preferred Share dividends................ 5,023 4,025 9,048 8,050 ------- ------- -------- ------- Net earnings attributable to common shares.. $15,783 $ 6,740 $ 26,298 $12,227 ======= ======= ======== ======= Weighted average common shares outstanding.............................. 72,027 44,724 61,812 44,696 ======= ======= ======== ======= Per common share amounts: Net earnings attributable to common shares................................. $ 0.22 $ 0.15 $ 0.43 $ 0.27 ======= ======= ======== ======= Distributions paid...................... $0.2875 $ 0.25 $ 0.575 $ 0.50 ======= ======= ======== =======
The accompanying notes are an integral part of the financial statements. 4 SECURITY CAPITAL PACIFIC TRUST STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, -------------------- 1995 1994 --------- --------- Operating activities: Net earnings............................................ $ 35,346 $ 20,277 Items not requiring cash: Depreciation and amortization......................... 17,119 12,166 Provision for possible loss on investments............ 120 1,600 Increase (decrease) in accounts payable................. (1,614) 261 Increase (decrease) in accrued real estate taxes........ (1,213) 3,513 Increase in accrued interest on long term debt.......... 1,717 5,429 Increase in accrued expenses and other liabilities...... 2,063 3,042 Net change in other operating assets.................... (3,158) 284 --------- --------- Net cash flow provided by operating activities...... 50,380 46,572 --------- --------- Investing activities: Real estate investments................................. (146,945) (268,342) Sale of real estate property, net....................... -- 5,959 Mortgage notes receivable............................... 4,694 38 --------- --------- Net cash flow used in investment activities......... (142,251) (262,345) --------- --------- Financing activities: Proceeds from sale of shares, net of expenses........... 317,747 -- Proceeds from line of credit............................ 146,000 163,750 Proceeds from dividend reinvestment and share purchase plan, net.............................................. 1,002 1,955 Proceeds from long term debt............................ -- 200,000 Cash distributions paid on common shares................ (35,267) (22,335) Cash dividends paid on Preferred Shares................. (9,048) (8,050) Debt issuance costs incurred............................ (299) (2,268) Principal payments on mortgages payable................. (804) (602) Prepayments of mortgages payable........................ -- (199) Principal payments on line of credit.................... (248,000) (112,250) Payment of PACIFIC's line of credit..................... (51,900) -- Other................................................... 15 (289) --------- --------- Net cash flow provided by financing activities...... 119,446 219,712 --------- --------- Net increase in cash and cash equivalents................ 27,575 3,939 Cash and cash equivalents at beginning of period......... 8,092 5,525 --------- --------- Cash and cash equivalents at end of period............... $ 35,667 $ 9,464 ========= ========= Non-cash investing and financing activities: Purchase money notes given and mortgage notes assumed upon purchase of multifamily properties................ $ 4,784 $ 41,982 ========= ========= Multifamily properties and other net assets acquired in connection with the Merger which were funded by: PTR common shares exchanged for all of the outstanding shares of PACIFIC's common stock (Note 2)............ $ 138,671 $ -- Mortgage notes assumed................................ 54,403 -- Repayment of the outstanding balance on PACIFIC's line of credit............................................ 51,900 -- --------- --------- Net increase in net assets related to Merger.......... $ 244,974 $ -- ========= =========
The accompanying notes are an integral part of the financial statements. 5 SECURITY CAPITAL PACIFIC TRUST NOTES TO FINANCIAL STATEMENTS JUNE 30, 1995 (1) GENERAL The financial statements of SECURITY CAPITAL PACIFIC TRUST ("PTR"), formerly Property Trust of America, are unaudited and certain information and footnote disclosures normally included in financial statements have been omitted. Certain amounts in the financial statements for 1994 have been reclassified to conform to the 1995 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 1994 Annual Report on Form 10-K. In the opinion of management, the accompanying unaudited financial statements contain all adjustments consisting of 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 six month periods ended June 30, 1995 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, ("Series A Preferred Shares") was antidilutive for the three and six months ended June 30, 1995 and 1994. (2) MERGER OF SECURITY CAPITAL PACIFIC INCORPORATED AND CONCURRENT SUBSCRIPTION OFFERING On March 23, 1995, PTR consummated a merger (the Merger) of Security Capital Pacific Incorporated (PACIFIC), a Maryland corporation, with and into PTR. Pacific was a private multifamily REIT controlled by Security Capital Group Incorporated ("Security Capital Group"), PTR's principal shareholder. In the Merger, each outstanding share of PACIFIC common stock was converted into 0.611 of a PTR common share ("Common Share"). As a result, 8,468,460 Common Shares were issued in the Merger in exchange for all of the outstanding shares of PACIFIC common stock. The Merger has been accounted for as a purchase and, accordingly, the results of operations of PACIFIC have been included in PTR's financial statements from March 23, 1995. In connection with the Merger, PTR paid off the balance outstanding ($51.9 million) on PACIFIC's line of credit and assumed $54.4 million in mortgages. The following summarized pro forma (unaudited) information assumes the Merger occurred on January 1, 1994. The weighted average Common Shares outstanding have been adjusted to reflect the Merger conversion rate (.611 of a Common Share for each PACIFIC common share). The pro forma financial information does not necessarily reflect the results of operations that would have occurred had PACIFIC and PTR constituted a single entity during such period (in thousands, except per share amounts).
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ---------------- ---------------- 1995 1994 1995 1994 -------- ------- -------- ------- (ACTUAL) Rental income.............................. $65,719 $47,570 $127,854 $87,816 ======= ======= ======== ======= Net earnings attributable to common shares. $15,783 $ 7,923 $ 27,954 $14,261 ======= ======= ======== ======= Weighted average common shares outstanding. 72,027 49,535 65,614 48,956 ======= ======= ======== ======= Per common share amounts: Net earnings attributable to common shares.................................. $ 0.22 $ 0.16 $ 0.43 $ 0.29 ======= ======= ======== =======
6 SECURITY CAPITAL PACIFIC TRUST NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Concurrently with the consummation of the Merger, PTR completed a subscription offering pursuant to which PTR received net proceeds of $216.3 million (13.2 million Common Shares issued). The subscription offering was designed to allow shareholders of PTR to purchase Common Shares at the same price at which PACIFIC shareholders acquired Common Shares in the Merger ($16.375 per Common Share). Security Capital Group purchased $50 million (3.1 million Common Shares issued) in the subscription offering pursuant to the oversubscription privilege. (3) REAL ESTATE Investments in real estate, at cost, were as follows (dollar amounts in thousands):
JUNE 30, 1995 DECEMBER 31, 1994 ----------------- ----------------- INVESTMENT UNITS INVESTMENT UNITS ---------- ------ ---------- ------ Multifamily: Operating properties................... $1,456,389 39,230 $1,121,301 31,640 Developments under construction........ 147,220 5,625 100,401 4,526 Developments in planning............... 41,742 4,856 33,194 4,306 Land held for future development....... 11,856 -- 7,977 -- ---------- ------ ---------- ------ Total Multifamily........................ 1,657,207 49,711 1,262,873 40,472 ====== ====== Non-multifamily.......................... 33,357 33,415 ---------- ---------- Total real estate........................ $1,690,564 $1,296,288 ========== ==========
The change in investments in real estate, at cost, from December 31, 1994 to June 30, 1995 consisted of the following (in thousands): Balance at December 31, 1994.................................. $1,296,288 Acquisitions and renovation expenditures...................... 312,595 Development expenditures, including land acquisitions......... 78,337 Capital improvements.......................................... 1,639 Acquisition of land held for future development............... 1,582 Provision for possible loss on investments.................... (120) Other......................................................... 243 ---------- Balance at June 30, 1995...................................... $1,690,564 ==========
At July 20, 1995, PTR had contingent contracts or letters of intent, subject to PTR's final due diligence, to acquire land for the near term development of 4,836 multifamily units with an aggregate estimated development cost of $217.9 million. At the same date, PTR also had contingent contracts or letters of intent, subject to final due diligence, for the acquisition of 188 additional multifamily units with an aggregate investment cost of $9.4 million, including planned renovations. At July 20, 1995, PTR had unfunded development commitments for developments under construction of $118.7 million. PTR's strategy is to focus on the ownership of multifamily properties. Periodic sales of multifamily and non-multifamily assets may occur as favorable sales opportunities arise or strategic goals or market evaluation change. Properties are periodically evaluated for net realizable value and provisions for possible losses are made if required. 7 SECURITY CAPITAL PACIFIC TRUST NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 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 in the first quarter of 1994 and an additional $300,000 in the first quarter of 1995. PTR's share of the loss provisions is $1.6 million and $120,000 as reflected in the statement of earnings for June 30, 1994 and June 30, 1995, respectively. PTR's net carrying value after the provisions is $2.6 million. These provisions have no impact on cash flow from operating activities nor does PTR have any further financial obligation to the partnership. To enhance its flexibility in developing and acquiring multifamily properties, PTR has and will enter into presale agreements with third party developers to acquire properties developed by such developers where the developments meet PTR's investment criteria. PTR has and will fund such developments through development loans to such developers. In addition, to provide greater flexibility for the use of land acquired for development and to dispose of excess parcels, PTR will make mortgage loans to PTR Development Services Incorporated ("PTR Development Services") to purchase land for development. PTR owns all of the preferred stock of PTR Development Services, which entitles PTR to substantially all of the net operating cash flow (95%) of PTR Development Services. Security Capital Group owns all of the common stock of PTR Development Services and is in negotiations to transfer such stock at cost to an unrelated third party. The common stock is entitled to receive the remaining 5% of net operating cash flow. As of June 30, 1995, the outstanding balance of development and mortgage loans made by PTR to third party developers and PTR Development Services aggregated $4.6 and $13.4 million, respectively. The activities of PTR Development Services and development loans are consolidated with PTR's activities and all intercompany transactions have been eliminated in consolidation. (4) DISTRIBUTIONS PTR's current policy is to pay distributions to shareholders based upon funds from operations and aggregating annually at least 95% of its taxable income. Funds from operations is not to be construed as a substitute for "net earnings" in evaluating operating results nor as a substitute for "cash flow" in evaluating liquidity. In July 1994, PTR changed to a more conservative policy of expensing the amortization of loan costs in determining funds from operations. For comparability, funds from operations for the three and six months ended June 30, 1994 has been restated to give effect to this policy as if it had been in effect since January 1994. Funds from operations for the three and six months ended June 30, 1995 and 1994 were as follows (in thousands):
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, --------------------- ------------------- 1995 1994 1995 1994 ---------- ---------- --------- --------- Net earnings attributable to Common Shares.................... $ 15,783 $ 6,740 $ 26,298 $ 12,227 Add: Depreciation.................. 9,126 5,841 16,550 10,791 Provision for possible loss on investments.................. -- -- 120 1,600 ---------- ---------- --------- --------- Funds from operations attributable to Common Shares................. 24,909 12,581 42,968 24,618 Distributions paid to common shareholders..................... 20,761 11,174 35,267 22,335 ---------- ---------- --------- --------- Excess of funds from operations after distributions.............. $ 4,148 $ 1,407 $ 7,701 $ 2,283 ========== ========== ========= ========= Weighted average Common Shares outstanding...................... 72,027 44,724 61,812 44,696 ========== ========== ========= =========
8 SECURITY CAPITAL PACIFIC TRUST NOTES TO FINANCIAL STATEMENTS--(CONTINUED) On July 20, 1995, the Trustees declared a cash distribution of $.2875 per Common Share to be paid on August 11, 1995 to shareholders of record on July 31, 1995. (5) BORROWINGS Concurrent with the Merger (See Note 2), PTR increased its unsecured revolving line of credit facility with Texas Commerce Bank, National Association, as agent bank for a group of lenders ("TCB") to $350 million and received a reduction in the interest rate to the greater of prime or the federal funds rate plus 0.50%, or at PTR's option, LIBOR plus 1.625% (which can vary from LIBOR plus 1.25% to LIBOR plus 2.0% based upon the rating of PTR's senior unsecured debt--1.625% at July 20, 1995). Additionally, there is a commitment fee on the average unfunded line of credit balance. In addition, Wells Fargo Realty Advisors Funding, Incorporated was added as co-agent. The TCB line matures August 1996 and may annually be extended for an additional year with the approval of TCB and the other participating lenders. PTR is currently negotiating the extension of the line to August 1997. All debt incurrences are subject to covenants, as more fully described in the loan agreement. At June 30, 1995, PTR was in compliance with all debt covenants. Interest paid on all borrowings for the six months ended June 30, 1995 was $15,215,000 including $4,675,000 of interest capitalized during construction. Interest paid on all borrowings for the six months ended June 30, 1994 was $3,339,000 including $2,539,000 of interest capitalized during construction. Amortization of loan costs included in interest expense for the six months ended June 30, 1995 and 1994 was $569,000 and $1,375,000, respectively. (6) SERIES B CUMULATIVE REDEEMABLE PREFERRED SHARES On May 11, 1995, the Board of Trustees authorized PTR to classify and issue Series B Cumulative Redeemable Preferred Shares ("Series B Preferred Shares"). The net proceeds to PTR from the sale of the Series B Preferred Shares were $101.4 million. The net proceeds were used for the development and acquisition of additional multifamily properties, for the repayment of indebtedness under PTR's revolving line of credit and for working capital purposes. Pending additional investment in multifamily properties, PTR has invested the remaining net proceeds in short term money market instruments. On and after May 24, 2000, the Series B Preferred Shares may be redeemed for cash at the option of PTR, in whole or in part at a redemption price of $25.00 per share plus accrued and unpaid distributions, if any, thereof. The redemption price (other than the portion thereof consisting of accrued and unpaid distributions) is payable solely out of the sale proceeds of other capital shares of PTR, which may include shares of other series of preferred shares. The holders of the Series B Preferred Shares have no preemptive rights with respect to any shares of the capital securities of PTR or any other securities of PTR convertible into or carrying rights or options to purchase any such shares. The Series B Preferred Shares have no stated maturity and are not subject to any sinking fund or other obligation of PTR to redeem or retire the Series B Preferred Shares and are not convertible into any other securities of PTR. In addition, holders of the Series B Preferred Shares are entitled to receive, when and as declared by the Board of Trustees, out of funds legally available for the payment of distributions, cumulative preferential cash distributions at the rate of 9% of the liquidation preference per annum (equivalent to $2.25 per share). Such distributions are cumulative from the date of original issue and are payable quarterly in arrears on the last day of each March, June, September and December. The first distribution was paid on June 30, 1995 in the amount of $998,000. The Series A Preferred Shares and the Series B Preferred Shares will rank on a parity as to distributions and liquidation proceeds. Series A Preferred Shares and Series B Preferred Shares are collectively referred to as "Preferred Shares". 9 SECURITY CAPITAL PACIFIC TRUST NOTES TO FINANCIAL STATEMENTS--(CONCLUDED) (7) REIT MANAGEMENT AND PROPERTY MANAGEMENT AGREEMENTS In June 1995, PTR renewed and amended its REIT Management agreement with Security Capital Pacific Incorporated (the "REIT Manager"), formerly Security Capital (Southwest) Incorporated to provide REIT Management services to PTR. The REIT Manager is a subsidiary of Security Capital Group which owns approximately 37.9% of PTR's Common Shares. The REIT Management fee for the six months ended June 30, 1995 was $9,133,000 and $6,011,000 for the six months ended June 30, 1994. SCG Realty Services Incorporated ("SCG Realty Services") has managed and currently manages a substantial majority of PTR's operating multifamily properties. For the six months ended June 30, 1995 and 1994, PTR paid SCG Realty Services aggregate fees of $3,702,000 and $2,892,000, respectively. In addition to property management, SCG Realty Services has performed certain due diligence services for PTR's acquisitions. Effective October 1, 1994, SCG Realty Services no longer performed due diligence services for PTR. Security Capital Group is the sole shareholder of SCG Realty Services. Rates for services performed by SCG Realty Services are subject to annual approval by PTR's independent Trustees (who receive an annual review from an independent third party) and are at rates prevailing in the markets in which PTR operates. 10 INDEPENDENT AUDITOR'S REVIEW REPORT The Board of Trustees and Shareholders SECURITY CAPITAL PACIFIC TRUST: We have reviewed the accompanying balance sheet of SECURITY CAPITAL PACIFIC TRUST as of June 30, 1995, and the related statements of earnings for the three- and six-month periods ended June 30, 1995 and 1994 and the statements of cash flows for the six-month periods ended June 30, 1995 and 1994. 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 SECURITY CAPITAL PACIFIC TRUST as of December 31, 1994, and the related statements of earnings, shareholders' equity, and cash flow for the year then ended (not presented herein); and in our report dated February 28, 1995, except as to Note 10, which is as of March 23, 1995, 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, 1994 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 July 21, 1995 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Security Capital Pacific Trust's ("PTR") 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, (iii) the effectiveness of property level operations and (iv) 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) that increase the demand for multifamily units. 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 1995. 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 1994 but are expected to increase at a lower rate in 1995. MERGER AND CONCURRENT SUBSCRIPTION OFFERING On March 23, 1995, PTR consummated a merger (the "Merger") of Security Capital Pacific Incorporated ("PACIFIC"), a Maryland corporation, with and into PTR. In the Merger, each outstanding share of PACIFIC common stock was converted into 0.611 of a PTR Common Share. As a result, 8,468,460 common shares were issued in the Merger in exchange for all of the outstanding shares of PACIFIC common stock. Additionally, PTR changed its name from Property Trust of America to Security Capital Pacific Trust to more accurately reflect its newly expanded target market. The Merger expands PTR's target market to include a six-state region of the western United States with 129 submarkets. As a result, PTR is well-positioned to deploy capital in the geographic areas of the United States that it believes are expected to provide some of the most attractive multifamily growth opportunities. Concurrently with the consummation of the Merger, PTR completed a subscription offering pursuant to which PTR received net proceeds of $216.3 million (13.2 million Common Shares issued). The subscription offering was designed to allow shareholders of PTR to purchase Common Shares at the same price PACIFIC shareholders were acquiring Common Shares in the Merger ($16.375 per Common Share). Security Capital Group Incorporated ("Security Capital Group") purchased $50 million (3.1 million Common Shares issued) in the subscription offering pursuant to the oversubscription privilege. RESULTS OF OPERATION Interim Period Comparison During the six months ended June 30, 1995, PTR acquired 22 multifamily properties aggregating 6,833 units for a total purchase price, including planned renovations, of approximately $305.2 million (acquisitions from the Merger represented 17 operating multifamily properties, aggregating 5,579 units, for a total purchase price, including planned renovations, of approximately $242.5 million), and completed development of 6 multifamily properties aggregating 757 units with a completed cost of $27.2 million. At June 30, 1995, PTR had 5,625 multifamily units under construction with a budgeted completion cost of $261.4 million and had in the final planning stages an estimated 4,856 multifamily units with an aggregate expected investment of $253.4 million. During the six months ended June 30, 1994, PTR acquired 16 multifamily properties aggregating 5,405 units for a total purchase price, including planned renovations, of approximately $221.0 million and completed development of 7 multifamily properties aggregating 1,498 units with a completed 12 cost of $59.7 million. At June 30, 1994, PTR had 3,489 multifamily units under construction with a budgeted completion cost of $159.3 million and had in the final planning stages an estimated 3,691 multifamily units with an aggregate budgeted completion cost of $177.1 million. Property Operations Property operations contributed to increased net earnings primarily due to property rental income increases of $38.4 million (47.6%), partially offset by higher rental expenses, which increased by $12.9 million (37.2%) for the six months ended June 30, 1995 over 1994. Depreciation expense increased $5.8 million (53.4%) for the six months ended June 30, 1995 over 1994. These increases are due primarily to additional operating multifamily properties placed in service. For operating multifamily properties, rental expenses were 40.4% and 43.5% of rental revenue during the six months ended June 30, 1995 and 1994, respectively. At June 30, 1995, 82.6% of PTR's operating multifamily properties, based on cost, were classified by PTR as stabilized. At June 30, 1995, PTR's operating multifamily properties were 96.2% leased and PTR's stabilized multifamily properties were 96.6% leased. Multifamily Properties Stabilized through Both Periods For the 39 multifamily properties that were stabilized through the six months ended June 30, 1995 and 1994 (including 3 properties acquired in the Merger), property level earnings before interest, income taxes, depreciation and amortization ("EBITDA") as a percentage of PTR's aggregate investment in these properties increased to 11.2% in 1995 from 10.8% in 1994. EBITDA is not to be construed as a substitute for "net earnings" in evaluating operating results, nor as a substitute for "cash flow" in evaluating liquidity. 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 $2.9 million (.78% of total investment in these properties) as a result of renovation and other capital expenditures. Rental income increased 3.8% (the majority resulting from 3.3% rental rate increase) for such properties for the six months ended June 30, 1995 as compared to the six months ended June 30, 1994. Performance of these properties was further enhanced by decreases in rental expenses, primarily due to lower turnover expenses. Lower turnover expenses resulted from certain asset management programs and a rising interest rate environment which commenced in the latter part of 1994 which reduced the turnover ratio. However, management does not anticipate that this trend will continue throughout 1995 at the same rate experienced in the first six months. Interest Income Interest income for the six months ended June 30, 1995 decreased $234,000 (15.5%) compared to 1994, primarily resulting from a decrease in interest income from a $4.6 million mortgage note receivable which was paid off in April 1995 and from bank accounts due to lower average cash balances in 1995 ($10.8 million) as compared to 1994 ($23.3 million). The higher average cash balances in 1994 resulted from the proceeds of the long term debt offering of $200 million which was closed in February 1994, as more fully discussed under "Liquidity and Capital Resources." Interest Expenses Interest expense increased $2.9 million (34.8%) for the six months ended June 30, 1995 when compared to 1994. The increase is primarily attributable to the increase in interest expense of $1.7 million resulting from the issuance of $200 million of long term notes in February 1994, as more fully discussed under "Liquidity and Capital Resources" and the increase in line of credit interest expense as discussed below. Mortgage interest expense increased $2.4 million (98.5%) for the six months ended June 30, 1995 when compared to 1994 as a result of the addition of mortgages aggregating $73.8 million in connection with the Merger and other acquisitions. 13 Line of credit interest expense increased $823,000 (28.8%) resulting primarily from higher outstanding balances and higher interest rates relating to PTR's revolving credit facility. Average borrowings were approximately $72.9 million (with an average interest rate of 8.76%) during the six months ended June 30, 1995, as compared to average borrowings of $36.8 million (with an average interest rate of 7.32%) during 1994. The increase in interest expense was offset by an increase of $2.1 million (84.1%) in capitalized interest. The increase in capitalized interest is attributable to increased multifamily development activity for the six months ended June 30, 1995 as compared to 1994. General and Administrative Expense Including 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 $3.1 million (51.9%) during the six months ended June 30, 1995 as compared to 1994 because cash flow increased substantially (see "REIT Management Agreement"). With the issuance in February 1994 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 earnings from operations 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. In addition, the REIT Management agreement was modified to provide that distributions paid in respect of non-convertible preferred shares, such as the Series B Preferred Shares, described below in "Liquidity and Capital Resources", will be deducted from the cash flow amount on which the REIT Management fee is based. Provision for Possible Loss 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 provisions for possible loss of $4 million in the first quarter of 1994 and an additional $300,000 in the first quarter of 1995. PTR's share of the loss provisions were $1.6 million and $120,000 as reflected in the statement of earnings for June 30, 1994 and 1995, respectively. PTR's net carrying value after the provisions is $2.6 million. These provisions have no impact on cash flow from operating activities nor does PTR have any further financial obligation to the partnership. Other Property revenues, operating expenses, income from property operations before depreciation, income from property operations and net earnings for the three months ended June 30, 1995 compared to the three months ended June 30, 1994 reflect changes similar to those discussed in the preceding paragraphs for the comparison of the six months ended on the same dates. The changes are substantially attributable to the same reasons discussed in the preceding paragraphs for the six month periods ended June 30, 1995 and 1994. ENVIRONMENTAL MATTERS PTR is not aware of any environmental condition on any of its properties which is likely to have a material adverse effect upon 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 $3.8 million (8.2%) for the six months ended June 30, 1995 compared to 1994. The increase is due primarily to increased cash flow from property operations offset partially by changes in the timing of the payment of accounts payable and accrued expenses in 1995 as compared to 1994. 14 Investing Activities During the six months ended June 30, 1995, PTR invested $335.2 million for the development, acquisition (including properties acquired in the Merger), and renovation of multifamily properties, net of $59.2 million in mortgages assumed. During the first six months of 1994, PTR invested $268.3 million for the development, acquisition, and renovation of multifamily properties, net of $42.0 million in mortgages assumed. Except for the properties acquired in the Merger, which were financed with the issuance of Common Shares, 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 July 20, 1995, PTR had unfunded development commitments for developments under construction of $118.7 million. Additionally the land PTR owned or controlled through letters of intent or contingent contracts at such date, subject to PTR's final diligence, will allow for the development of additional multifamily units, which will be an important generator of growth for PTR in 1996 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 six months ended June 30, 1995 provided $119.4 million as compared to $219.7 million for the same period in 1994. In addition, PTR issued $138.7 million in Common Shares in March 1995 in exchange for all of PACIFIC's common stock. The decrease in cash flow provided by financing activities is primarily due to the repayment of revolving credit balances ($299.9 million during the six months ended June 30, 1995 as compared to $112.3 million during the same period in 1994) offset by more offering proceeds received during the six months ended June 30, 1995 as compared to long term debt proceeds received during the same period in 1994. Proceeds from the offerings were used for acquisition, development and renovation of multifamily properties, to repay revolving credit balances incurred for such purposes, and for working capital purposes. Pending additional investment in multifamily properties, PTR has invested the remaining net proceeds in short term money market instruments. On March 23, 1995, PTR increased its unsecured revolving line of credit facility to $350 million. The line of credit expires August 15, 1996 and may annually be extended for an additional year with the approval of TCB and the other participating lenders. Borrowings bear interest at the greater of prime or the federal funds rate plus 0.5% or, at PTR's option, LIBOR plus 1.625% (which can vary from LIBOR plus 1.25% to LIBOR plus 2.0% based upon the rating of PTR's senior unsecured debt). Additionally, there is a commitment fee on the average unfunded line of credit balance. All debt incurrences are subject to covenants 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) a fixed charge ratio of no less than 1.4:1 and (iv) 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. PTR is in compliance with all debt covenants. At July 26, 1995 there were no borrowings outstanding under the line of credit. PTR expects to finance developments, acquisitions and renovations with cash on hand and borrowings under its line of credit prior to arranging long term capital 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 (21% at June 30, 1995), provides 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 40% (debt covenants permit up to 50%) of the sum of total book capitalization. PTR expects primarily to fund additional growth for the foreseeable future through further issuances of unsecured long term, fixed rate amortizing debt securities similar to the $200 million long term debt issued in February 1994 and through its asset optimization strategy. To a lesser extent, under certain circumstances, PTR may arrange for debt with different maturities in order to optimize its debt maturity schedule. 15 Based on the Merger, its recent subscription offering, debt issuance capacity, asset optimization strategy and current real estate and debt market conditions, PTR believes it has reached an optimal level of equity capitalization. Hence, PTR has no plans to raise additional capital through the common equity markets. No assurance can be given that changes in market conditions or other factors will not affect these plans. On May 11, 1995, the Board of Trustees authorized PTR to classify and issue Series B Cumulative Redeemable Preferred Shares ("Series B Preferred Shares"). The net proceeds to PTR from the sale of the Series B Preferred Shares were $101.4 million. The net proceeds were used for the development and acquisition of additional multifamily properties, for the repayment of indebtedness under PTR's revolving line of credit and for working capital purposes. Pending additional investment in multifamily properties, PTR has invested the remaining net proceeds in short term money market instruments. On March 23, 1995, PTR raised $216.3 million of net proceeds from a subscription offering of 13.2 million Common Shares at a price of $16.375 per Common Share, which was the same price per Common Share on which the exchange ratio for the Merger was based. The subscription offering closed concurrently with the consummation of the Merger. The subscription offering was designed to allow shareholders the opportunity to purchase Common Shares at the same price at which PACIFIC shareholders acquired Common Shares in the Merger and to maintain PTR's balance sheet ratios. Security Capital Group acquired $50 million (3.1 million Common Shares) of the subscription offering pursuant to the oversubscription privilege. On August 16, 1994, PTR raised $101.8 million of net proceeds from a rights offering of 5,593,718 Common Shares at a price of $18.25 per Common Share. Security Capital Group exercised in full its rights to acquire Common Shares in the offering at the same price paid by the public ($18.25 per Common 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 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. 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 the interest 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 an adjustment, if any, based on the yield to maturity relative to market yields available at redemption. 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 1.5:1. At June 30, 1995, PTR was in compliance with all debt covenants. 16 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 $9.0 million and $10.1 million for the six months ended June 30, 1995 and 1994, 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 represents PTR's net earnings computed in accordance with GAAP, excluding gains (or losses) plus depreciation and provisions for possible loss on investments. 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. In July 1994, PTR changed to a more conservative policy of expensing the amortization of loan costs in determining funds from operations. For compatibility, funds from operations for the six months ended June 30, 1994 has been restated to give effect to this policy as if it had been in effect since January 1, 1994. As a result, funds from operations attributable to Common Shares increased $18.4 million (74.5%) to $43.0 million for the six months ended June 30, 1995 from $24.6 million for 1994. The increase resulted primarily from increased properties in operation. Funds from operations is not to be construed as a substitute for "net earnings" in evaluating operating results nor as a substitute for "cash flow" in evaluating liquidity. 17 PART II--OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITIES HOLDERS At the shareholders meeting held June 13, 1995, shareholders elected the following Trustees to office:
SHARES IN SHARES TRUSTEES FAVOR WITHHELD -------- ---------- -------- Calvin K. Kessler..................................... 63,919,100 166,190 James H. Polk, III.................................... 63,824,663 216,681 John C. Schweitzer.................................... 63,920,982 166,195 James A. Cardwell..................................... 63,622,339 458,081 John T. Kelley, III................................... 63,562,736 514,858 C. Ronald Blankenship................................. 63,852,928 229,871 William G. Myers...................................... 63,910,453 172,558
ITEM 5. OTHER INFORMATION On May 17, 1995, PTR successfully completed a $105 million public offering (net proceeds totaled $101.4 million) of 4,200,000 shares of Series B Preferred Shares of beneficial interest. These Series B preferred shares are redeemable, solely at the option of PTR, any time after five years and are not convertible into common shares. See Item 2 "Series B Cumulative Redeemable Preferred Shares". ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10 --Fourth Amended and Restated REIT Management Agreement dated as of June 30, 1995 between PTR and the REIT Manager. Sequentially numbered page 15 --Letter from KPMG Peat Marwick LLP dated July 25, 1995 regarding unaudited financial information. Sequentially numbered page
(b) Reports on Form 8-K:
ITEM FINANCIAL DATE REPORTED STATEMENTS ---- -------- ---------- May 18, 1995 Item 5 No
18 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. Security Capital Pacific Trust Date: July 26, 1995 /s/ William Kell by: ____________________________ William Kell, Vice President and Duly Authorized Officer and Principal Financial Officer EX-10 2 4TH AMD & RSTD MAN. AGMT. FOURTH AMENDED AND RESTATED REIT MANAGEMENT AGREEMENT This Fourth Amended and Restated REIT Management Agreement (this "Agreement") is made and entered into as of the 30th day of June, 1995, by and between Security Capital Pacific Trust, a Maryland real estate investment trust (the "Trust"), and Security Capital Pacific Incorporated, a Delaware corporation (the "REIT Manager"). Witnesseth: Whereas, the Trust is organized under the laws of the State of Maryland pursuant to a Restated Declaration of Trust dated as of June 18, 1991, as amended and supplemented (the "Declaration of Trust"), and currently qualifies as a "real estate investment trust" as defined in the Internal Revenue Code of 1986, as amended (the "Code"), to make investments of the type permitted for qualified real estate investment trusts under the Code and not inconsistent with the Declaration of Trust and the By-Laws of the Trust (the "By-Laws"); Whereas, the Trust, desiring to avail itself of the experience, sources of information, advice, assistance and certain facilities of, or available to, the REIT Manager and to have the REIT Manager undertake the duties and responsibilities hereinafter set forth, on behalf of and subject to the supervision of the Board of Trustees of the Trust (the "Board"), entered into a Third Amended and Restated REIT Management Agreement dated as of March 1, 1994, as amended (the "Prior Agreement"), with the REIT Manager and the term of the Prior Agreement expires on the date hereof; and Whereas, the REIT Manager and the Trust desire to amend and restate the Prior Agreement to extend the term for an additional year and to clarify certain ambiguities and to more fully give effect to the intentions of the parties thereto; Now, Therefore, in consideration of the premises and of the mutual covenants herein contained, the Trust and the REIT Manager agree that the Prior Agreement is hereby amended and restated in its entirety as follows: I. DEFINITIONS 1.1 Definitions. As used in this Agreement, the following capitalized terms shall have the meanings set forth below. (a) "Affiliate" means as to any person, (i) any other person directly or indirectly controlling, controlled by or under common control with such person, (ii) any other person that owns beneficially, directly or indirectly, 10% or more of the outstanding capital stock, shares or equity interests of such person, or (iii) any officer, director, employee, general partner or trustee of such person or of any other person controlling, controlled by or under common control with such person (excluding trustees or directors and persons serving in similar capacities who are not otherwise an Affiliate of such person). (b) "Average Invested Assets" for any period shall mean the average of the aggregate book value of the assets of the Trust invested, directly or indirectly, in equity interests in and loans secured by real estate, before reserves for depreciation or bad debts or other similar non-cash reserves, computed by taking the average of such values at the end of each month during such period. (c) "Board" shall have the meaning set forth in the recitals hereto. (d) "By-Laws" shall have the meaning set forth in the recitals hereto. (e) "Cash Equivalent Investments" means assets of the Trust that consist of cash, interest-bearing deposits in banks, repurchase agreements with banks and readily-marketable securities. 1 (f) "Cash Flow" for any period means the sum of (i) Funds Available from Operations for such period (after deducting all income from Cash Equivalent Investments), plus (ii) the REIT Management Fees payable pursuant to Section 3.1 hereof, plus (iii) any expenses incurred by the Trust that are unusual in light of the Trust's historical experience prior to the incurrence thereof and are incurred at the request of a majority of the Independent Trustees, plus (iv) 33% of the interest paid during such period on any subordinated debentures that are (x) issued after the execution of this Agreement and (y) convertible into shares of beneficial interest of the Trust, provided, however, that this definition shall be equitably adjusted by mutual agreement in the event of a recapitalization or other event which results in a reclassification of the equity securities of the Trust. (g) "Cause" means either (i) an act of fraud, embezzlement or theft constituting a felony or an act intentionally against the interests of the Trust which causes it material injury, (ii) a final determination by a court of competent jurisdiction that the REIT Manager has committed a material breach of this Agreement, (iii) a petition shall have been filed against the REIT Manager for an involuntary proceeding under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, and such petition shall not have been dismissed within 60 days of filing; or a court having jurisdiction shall have appointed a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the REIT Manager for any substantial portion of its property, or ordered the winding up or liquidation of its affairs; or (iv) the REIT Manager shall have commenced a voluntary proceeding under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or shall have made any general assignment for the benefit of creditors, or shall have failed generally to pay its debts as they become due. (h) "Code" shall have the meaning set forth in the recitals hereto. (i) "Declaration of Trust" shall have the meaning set forth in the recitals hereto. (j) "Exchange Act" shall have the meaning set forth in Section 2.13 hereof. (k) "Funds Available from Operations" for any period means the dollar amount equal to the sum of (i) net earnings of the Trust for such period, determined in accordance with generally accepted accounting principles, plus (ii) interest actually paid on the Trust's senior unsecured long term debt instruments, plus (iii) non-cash items deducted in calculating net earnings for such period (including but not limited to depreciation) which are generally added to net earnings in determining funds from operations for distribution to shareholders pursuant to prevailing practice among publicly-held real estate investment trusts, minus (iv) regularly scheduled principal payments on mortgage indebtedness which has a commercially reasonable amortization schedule, minus (v) an assumed amount of payments of principal and interest which would have been paid by the Trust during such periods (excluding prepayments or balloon payments) under senior unsecured long term debt instruments of the Trust, if payments were equal to payments on a 20-year fully amortizing mortgage of equal principal amount and effective interest rate with a payment schedule requiring equal annual payments of combined principal and interest (but not costs of issuance), minus (vi) distributions actually paid with respect to any non- convertible preferred shares of beneficial interest of the Trust. For calculations under clause (v) of the preceding sentence, all tranches of long term debt issued simultaneously shall be viewed collectively and shall be treated as one mortgage financing with an interest rate equal to the Trust's weighted average effective interest rate for such tranches after giving effect to any interest rate protection or similar agreements. For example, the attached Exhibit A shows the assumed effective interest rate and monthly payment schedules on the $200 million of senior notes issued by the Trust in February 1994, which will be deducted in calculating Funds Available from Operations. Funds Available from Operations will not be increased or decreased by virtue of any of the following: realized gains or losses, capital expenditures or principal payments, except for principal payments under the Trust's long term debt instruments as contemplated by clauses (iv) and (v) of the foregoing sentence. (l) "Indemnified Party" shall have the meaning set forth in Section 6.2(a) hereof. 2 (m) "Independent Trustee" means a Trustee who (i) is not affiliated, directly or indirectly, with the REIT Manager, whether by ownership of, ownership interest in, employment by, any material business or professional relationship with, or service as an officer or director of, the REIT Manager or a business entity that is an Affiliate of the REIT Manager, (ii) is not serving as a trustee or director for more than three real estate investment trusts organized by a Sponsor of the Trust and (iii) performs no other services for the Trust, except as Trustee. An indirect relationship shall include circumstances in which a member of the immediate family of a Trustee has one of the foregoing relationships with the REIT Manager or the Trust. (n) "Investment Policies" at any time shall have the meaning given thereto either in (i) the Declaration of Trust or By-Laws as then in effect or (ii) a written statement adopted by the Board and delivered to the REIT Manager by the Trust. (o) "Net Income" for any period means total revenues (excluding gains or losses from the sale of Trust assets) applicable to such period, less the expenses applicable to such period other than additions to reserves for depreciation or bad debts or other similar non-cash reserves. (p) "REIT Management Fee" shall have the meaning set forth in Section 3.1 hereof. (q) "Renewal Term" shall have the meaning set forth in Section 4.2 hereof. (r) "Sponsor" means any person directly or indirectly instrumental in organizing, wholly or in part, a real estate investment trust, or any person who will manage or participate in the management of a real estate investment trust, and any Affiliate of any such person, but excluding (i) any person whose only relationship with such real estate investment trust is that of an independent property manager whose only compensation is for property management services and (ii) independent third parties such as attorneys, accountants and underwriters whose only compensation is for professional services. (s) "Total Operating Expenses" for any period means all operating and general and administrative expenses of the Trust as determined under generally accepted accounting principles but excluding (i) the expenses of raising capital and financing, including, without limitation, financing for Trust Properties, including related investment banking and legal fees, (ii) interest payments on all debt of the Trust, (iii) taxes, (iv) non-cash expenditures and (v) the costs related directly to Trust Property acquisition, development, operation and disposition. The exclusion for costs related directly to Trust Property acquisition, development, operation and disposition permits exclusion of expenses incurred with respect to specific individual Trust Properties but does not permit the exclusion of operating, general and administrative expenses for the Trust's operations in general. (t) "Trust Property" means any real property or interest therein and associated personal property owned by the Trust. (u) "Trustees" means the Trustees holding office under the Declaration of Trust at any particular time. 1.2 Accounting Principles. Except as otherwise provided herein, all accounting and financial terms used herein shall be determined in accordance with generally accepted accounting principles. II. DUTIES OF THE REIT MANAGER 2.1 General. The REIT Manager shall use its best efforts to perform each of the duties set forth in this Agreement and shall have the authority to take all actions and to execute all documents and instruments that it deems necessary or advisable in connection with the management and operations of the Trust and the fulfillment of its duties as set forth herein, subject in each matter to the supervision of the Board and to the Investment Policies of the Trust, and with respect to the acquisition, development, financing and disposition of real property, to the prior approval of the Board. 3 2.2 Annual Strategic Plan. The REIT Manager will prepare annually a strategic plan that incorporates a specific business strategy, an annual operating budget, investment and disposition objectives and capitalization and funding strategies. This plan will be presented in the fourth quarter of the year prior to the year for which such plan applies to the Board for its review and approval. Consistent with the annual strategic plan, and subject to supervision by the Board, the REIT Manager will provide acquisition, development and disposition services including the following: (a) Investigation and selection of possible acquisitions and developments, property analysis, market and economic surveys, on-site physical inspections, review and projection of income and operating expenses and, when desired, supervising and negotiating the arrangement of financing; (b) Conducting negotiations with real estate brokers, owners of property and their agents, investment bankers and owners of privately and publicly held real estate companies; (c) Engaging and supervising, on behalf of the Trust, independent contractors which provide real estate brokerage, investment banking (as to which an Affiliate of the REIT Manager may be used if there is no charge to the Trust for its services, other than the REIT Management Fee) and leasing services, mortgage brokerage and other financial services and such other services as may be required relating to the Trust Properties, provided, however, that the REIT Manager shall not share in any brokerage, investment banking or similar fees paid to any person engaged by the REIT Manager to perform such services for the Trust; and (d) Negotiating on behalf of the Trust for the sale, exchange or other disposition of any Trust Properties. 2.3 Asset Management. The REIT Manager may retain third-party property managers and leasing agents for administration, leasing and management of Trust Properties. Subject to the approval of a majority of the Board, including a majority of the Independent Trustees, the REIT Manager may provide property management and/or leasing services for Trust Properties through an Affiliate of the REIT Manager on terms and conditions no less favorable to the Trust than those available from qualified unaffiliated third parties; provided, however, that such services may not be provided through an Affiliate of the REIT Manager if doing so would jeopardize the Trust's qualification as a real estate investment trust under Sections 856 through 860 of the Code. The Trust and the REIT Manager will negotiate in good faith the terms of any future management agreements between the Trust and Affiliates of the REIT Manager which are permitted pursuant to this Section 2.3. 2.4 General Administrative Duties. The REIT Manager shall perform, or supervise the performance of, the necessary administrative functions in the day-to-day management of the Trust and its operations, including, without limitation, internal and external financial reporting, property accounting, shareholder relations, supervision of stock registrar and transfer services and other necessary services, all in a manner consistent with the Trust's current practice, subject to changes approved by a majority of the Board. 2.5 Real Estate Investment Advice. The REIT Manager shall advise the Trust with respect to policy decisions to be made by the Board, shall investigate and evaluate investment opportunities consistent with the real estate investment policies and the objectives of the Trust and recommend them to the Board, and shall provide research, economic and statistical data in connection with the Trust's real estate investments and policies. 2.6 Short-Term Investments. The REIT Manager may invest and reinvest any monies and securities of the Trust in short-term investments pending investment in Trust Properties. Unless a specific new policy is developed by the REIT Manager and approved by the Board, the REIT Manager may invest and reinvest any monies and securities of the Trust, pending investment in Trust Properties, in accordance with current practice and past policies developed by the REIT Manager and approved by the Board. 4 2.7 Agency. The REIT Manager shall act as agent of the Trust in making, acquiring, financing and disposing of investments, disbursing and collecting the Trust's funds, paying the debts and fulfilling the obligations of the Trust, supervising the performance of the managers of the Trust Properties and handling, prosecuting and settling any claims of or against the Trust, the Board, holders of the Trust's securities or the Trust's representatives or properties. 2.8 Retention of Services. The REIT Manager shall retain for and on behalf of the Trust such services of accountants, legal counsel, appraisers, insurers, brokers, transfer agents, registrars, developers, banks and other lenders and others as the REIT Manager deems necessary or advisable in connection with the management and operations of the Trust and the fulfillment of the REIT Manager's duties as set forth herein. 2.9 Office and Personnel. The REIT Manager shall maintain on behalf of the Trust such office space, equipment and personnel, including officers and employees of the REIT Manager or its Affiliates, as it deems necessary or advisable in connection with the management and operations of the Trust and the fulfillment of the REIT Manager's duties as set forth herein. 2.10 Bank Accounts. The REIT Manager may establish one or more bank accounts in the name of the Trust or in its own name and may deposit into and disburse from such accounts any monies on behalf of the Trust, provided that no funds in any such account shall be commingled with funds of the REIT Manager, and the REIT Manager shall as requested by the Board render appropriate accountings to the Board of such deposits and disbursements. 2.11 Books and Records. The REIT Manager shall maintain all accounting and reporting systems, books and records of the Trust, including books of account and records relating to services performed by the REIT Manager, in form and quality at least equivalent to the Trust's current practice, and shall make such books and records accessible for inspection by the Board at any time during ordinary business hours. 2.12 Appraisals and Reporting. As frequently as may be required by the Board or as the REIT Manager may deem necessary or advisable, the REIT Manager shall prepare, or cause to be prepared, with respect to each of the Trust Properties (i) an appraisal prepared by an independent real estate appraiser, (ii) reports and information on Trust operations and asset performance at least equivalent, with respect to quality and clarity of information, to the Trust's current practice and (iii) other information reasonably requested by the Board. 2.13 Reports, Etc. The REIT Manager shall prepare, or cause to be prepared, all reports of the Trust required under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and other communications to the holders of the Trust's securities, including, without limitation, proxy solicitation materials, and all tax returns and any other reports or other materials required to be filed with any governmental body or agency, and shall prepare, or cause to be prepared, all materials and data necessary to complete such reports and other materials including, without limitation, an annual audit of the Trust's books of account by a nationally recognized independent accounting firm. 2.14 Financing and Securities Issuances. The REIT Manager shall provide services to the Trust in connection with negotiations by the Trust with investment banking firms, securities brokers or dealers and other institutions or investors in connection with the sale of securities of the Trust and the securing of loans for the Trust, provided, however, that the REIT Manager shall not share in any fees paid by the Trust to third parties for such services. 2.15 Additional Services. The REIT Manager shall perform such additional services as from time to time may be requested by the Board and agreed to by the REIT Manager, provided, however, that nothing herein shall require the REIT Manager to agree to any such request or to perform any additional services to which it has not previously agreed. 2.16 REIT Qualification, etc. In the performance of its duties and responsibilities hereunder, the REIT Manager shall refrain from any action (i) which, in its judgment or in the judgment of the Board of which 5 the REIT Manager has written notice, would adversely affect the qualification of the Trust as a real estate investment trust under the Code, (ii) which would violate any law, rule or regulation of any governmental body or agency having jurisdiction over the Trust or its securities, the violation of which could have a material adverse effect on the Trust or (iii) which would otherwise not be permitted by the Declaration of Trust. 2.17 Mortgages and Insurance. The REIT Manager shall use its best efforts to (i) ascertain that any mortgage securing any investment of the Trust shall be a valid lien upon the mortgaged property according to its terms, for which the REIT Manager may rely on mortgagee's policies of title insurance issued by reputable title insurance companies, and that any insurance or guaranty issued by any person upon which the Board relies is valid and in full force and effect and enforceable according to its terms, (ii) cause each Trust Property to be duly insured, to the extent coverage is available on commercially reasonable terms, against loss or damage by fire, with extended coverage, and against such other insurable hazards and risks as is customary and appropriate in the circumstances, provided, however, that if the REIT Manager determines that a type of insurance coverage currently maintained by the Trust is available, but no longer on commercially reasonable terms, the REIT Manager shall so advise the Board and act in accordance with the Board's instructions and (iii) carry out the policies from time to time specified in writing by the Board with regard to the protection of Trust Properties. The REIT Manager shall be entitled to reasonably rely on qualified experts in performing its duties under this Section 2.17. 2.18 Fidelity Bond. The REIT Manager shall maintain a fidelity bond with a responsible surety company in an amount approved by the Board covering all officers and employees of the REIT Manager handling funds of the Trust and any investment documents or papers, which bonds shall protect against all losses of any such property from acts of such officers and employees through theft, embezzlement, fraud and dishonesty. 2.19 Liability Limitation. The REIT Manager shall cause to be included in any document or agreement prepared for the benefit of, or executed by the REIT Manager on behalf of, the Trust under which substantial obligations are assumed on behalf of the Trust clear and complete provisions pursuant to Article 4, Section 11 of the Declaration of Trust to the effect that the Trustees and the shareholders of the Trust shall not be personally liable thereunder and that all parties concerned shall look solely to the property of the Trust for the satisfaction of any claim against the Trust under any such document or agreement. III. COMPENSATION 3.1 REIT Management Fee. (a) The Trust shall pay the REIT Manager an annual REIT Management Fee equal to the sum of (i) $855,000, plus (or minus, in the case of annual Cash Flow below $4,837,000) 16% of the difference between annual Cash Flow and $4,837,000 and (ii) the product of 0.25% per annum multiplied by the average daily balance of the Trust's Cash Equivalent Investments, measured at the end of each month. All payments of the REIT Management Fee shall be subject to annual adjustment at year end as provided in Section 3.5 hereof. The REIT Management Fee shall be payable monthly in arrears in such amounts indicated by the annual operating budget approved by a majority of the Board, as revised no more than quarterly to reflect known material changes. (b) Within 50 days following the end of each calendar quarter and within 100 calendar days after the end of each calendar year of the Trust (following the receipt by the Trust of an auditor's report, prepared by a nationally recognized independent accounting firm, with respect to the Trust's financial statements for such year), the REIT Manager shall deliver to the Trust a statement, certified by an officer of the REIT Manager, setting forth the following: (i) the amount of the estimated REIT Management Fee actually paid by the Trust for all months during such quarter or year, as the case may be, (ii) the amount of the REIT Management Fee that should have been paid for such quarter or year, as the case may be, and (iii) the amount, if any, of accrued 6 and unpaid REIT Management Fees. If the annual or quarterly statement, as the case may be, indicates an overpayment by the Trust of the REIT Management Fee, such overpayment shall be offset against the next ensuing estimated REIT Management Fee to become due hereunder, or, if at any time no further REIT Management Fee can become due, the balance of any overpayment shall be paid without interest by the REIT Manager within 15 calendar days after demand therefor by the Trust, such repayment to be due and payable whether or not this Agreement is still in full force and effect. If the annual or quarterly statement, as the case may be, indicates an underpayment by the Trust of the REIT Management Fee with respect to the quarter or year covered thereby, the Trust, within 15 calendar days after receipt of the statement, shall pay to the REIT Manager the amount of such underpayment. The REIT Management Fee for any year shall not be recalculated on the basis of any post-year-end adjustments to the Trust's taxable income arising, directly or indirectly, from an audit by the Internal Revenue Service. 3.2 Payment for Additional Services. If the Board shall request the REIT Manager to render services to the Trust other than those required to be rendered by the REIT Manager hereunder, such additional services, if performed, shall be compensated separately on terms to be agreed upon from time to time between the REIT Manager and the Trust, which terms shall not be less favorable to the Trust than either (a) the terms under which the REIT Manager is then performing similar services for other persons, taking into account the full range of services and prices therefor provided by the REIT Manager to such other persons or (b) the terms under which qualified unaffiliated persons are then performing such services for comparable organizations, provided that no separate fee shall be charged to the Trust for any investment banking services provided by any Affiliate of the REIT Manager. 3.3 Expenses of the REIT Manager. Without regard to the amount of compensation received hereunder by the REIT Manager, the REIT Manager shall bear the following expenses: (a) wages, salaries and other compensation of the REIT Manager's officers and employees, including so-called fringe benefits such as life, disability, medical and health insurance, pension plans, social security taxes and workers' compensation insurance; (b) rent and other overhead expenses of the REIT Manager; and (c) travel and mailing costs pertaining to the REIT Manager's performance of its duties hereunder, except for expenses described in Section 3.4(a) below. 3.4 Reimbursable Expenses. The REIT Manager shall pay, or cause to be paid out of the assets of the Trust, the following operating expenses of the Trust and, if the REIT Manager advances money for such expenses, it shall be entitled to reimbursement by the Trust therefor: (a) travel and other out-of-pocket expenses incurred by directors, officers and employees of the REIT Manager in connection with seeking financing (including debt and equity) for the Trust or evaluating, investigating, negotiating or closing the acquisition, financing, refinancing or disposition of a Trust Property after the Board has approved the proposed transaction as set forth in a detailed letter of intent or equivalent document, irrespective of whether the proposed transaction is completed; (b) costs of third-party legal, accounting, tax and similar services rendered for the Trust; (c) all other costs and expenses relating to the Trust's operations, including, without limitation, the costs and expenses of acquiring, owning, managing, protecting, maintaining and disposing of the Trust's investments, including travel, appraisal, reporting, audit and legal fees; (d) all insurance costs incurred in connection with the operation of the Trust; (e) expenses connected with payments of interest or distributions in cash or any other form made or caused to be made by the Board to or on account of holders of securities of the Trust, including, without limitation, expenses incurred in connection with any dividend reinvestment plan; (f) expenses connected with communications to holders of securities of the Trust and the investment community in general (including meetings between Affiliates of the REIT Manager and investors or 7 analysts) and the other bookkeeping and clerical work necessary in maintaining relations with holders of securities and in complying with the continuous reporting and other requirements of governmental bodies or agencies, including the cost of printing and mailing certificates for securities and proxy solicitation materials and reports to holders of the Trust's securities; (g) transfer agent and registrar's fees and charges; and (h) expenses relating to any office or office facilities maintained for the Trust or the Trust Properties separate from the office or offices of the REIT Manager. 3.5 Refund. In accordance with the Declaration of Trust, with respect to any fiscal year in which a majority of the Independent Trustees do not find such excess justified, the Board may require the REIT Manager either (a) to refund to the Trust, to the extent of any fees received by the REIT Manager during such fiscal year, the amount, if any, by which the Total Operating Expenses of the Trust for such fiscal year exceeded the greater of (i) 2% of the sum for such fiscal year of the Average Invested Assets of the Trust or (ii) 25% of the Net Income of the Trust for such fiscal year or (b) to reduce its fees by the amount of such excess during the balance of the fiscal year next following the fiscal year with respect to which such refund is to be made. 3.6 Restrictions. (a) The REIT Manager shall not recommend or consummate any transaction which would involve the acquisition by the Trust of property in which the REIT Manager or any Affiliate thereof has an ownership interest, including any transaction prohibited by Article 1, Section 5(g) of the Declaration of Trust, and neither the REIT Manager nor any Affiliate thereof shall purchase or otherwise acquire from the Trust any Trust Property; provided, however, that the REIT Manager may recommend and consummate transactions which involve the acquisition or disposition by the Trust of property from or to PTR Development Services Incorporated ("PTR Development Services") or in which PTR Development Services has an ownership interest, provided that the Trust owns a substantial majority of the economic interest in PTR Development Services and that a majority of the Board (including a majority of the Independent Trustees) not otherwise interested in such transaction approve the transaction as being fair, competitive and commercially reasonable and no less favorable to the Trust than acquisitions or dispositions between unaffiliated parties under similar circumstances. (b) Other than advances of expenses pursuant to Section 3.4 hereof, the Trust shall not make loans to, or borrow money from, the REIT Manager or any Affiliate thereof, unless a majority of the Board (including a majority of the Independent Trustees) not otherwise interested in such transaction approve the transaction as being fair, competitive and commercially reasonable and no less favorable to the Trust than loans between unaffiliated lenders and borrowers under the same circumstances. (c) The Trust shall not invest in joint ventures with the REIT Manager or any Affiliate thereof, unless a majority of the Board (including a majority of the Independent Trustees) not otherwise interested in such transaction approve the transaction as being fair and reasonable to the Trust and on substantially the same terms and conditions as those received by the other joint venturers. (d) All other material transactions between the Trust and the REIT Manager, or any Affiliate thereof, shall require approval by a majority of the Board (including a majority of the Independent Trustees) not otherwise interested in such transactions as being fair and reasonable to the Trust and on terms and conditions no less favorable to the Trust than those available from unaffiliated third parties. IV. TERMINATION; TERM 4.1 Termination. Notwithstanding any other provision to the contrary, this Agreement (i) may be terminated without Cause by the Trust upon 60 calendar days' written notice to the REIT Manager, or by 8 the REIT Manager upon 60 calendar days' written notice to the Trust, and (ii) may be terminated by the Trust for Cause immediately upon providing written notice to the REIT Manager. Any determination by the Trust to terminate this Agreement shall be made by the vote of a majority of the Independent Trustees or the holders of a majority of outstanding Trust voting shares. The REIT Manager shall immediately notify the Trust of the occurrence of any event described in Sections 1.1(g)(iii) or (iv). In the event of termination of this Agreement, the REIT Manager will cooperate with the Trust and take all reasonable steps requested to assist the Board in making an orderly transition of the REIT management function. 4.2 Renewal Terms. This Agreement shall continue in force for an initial term beginning on the date hereof and ending on June 30, 1996, and shall be renewable by the Trust annually, subject to a determination by a majority of the Independent Trustees that the REIT Manager's performance hereunder has been satisfactory and that the compensation payable to the REIT Manager hereunder is fair. Absent written notice of non-renewal as provided in this Section 4.2, this Agreement shall be automatically renewed for successive one-year terms ("Renewal Terms") upon the expiration of the initial term and each Renewal Term. Notice of non-renewal, if given, shall be given in writing by the Trust to the REIT Manager not less than 60 calendar days before the expiration of the initial term of this Agreement or 60 calendar days before the expiration of any Renewal Term thereof. 4.3 Compensation on Termination or Non-Renewal. Until liquidation of the Trust, in the event the Trust terminates or fails to renew this Agreement on terms as favorable as those contained in this Agreement or hereafter in a renewal agreement, in either case other than for Cause, the Trust shall pay the REIT Manager all fees then accrued and unpaid as of the year or portion thereof in which the termination occurred. V. ACTION UPON TERMINATION OR CANCELLATION 5.1 Accounting. The REIT Manager shall immediately upon termination of this Agreement: (a) pay over to the Trust all monies collected and held for the account of the Trust pursuant to this Agreement, after deducting any accrued compensation and reimbursement for its expenses to which it is then entitled; (b) deliver to the Trust a full accounting, including a statement showing all payments collected by it and a statement of all monies held by it, covering the period following the date of the last accounting furnished to the Trust; (c) refund to the Trust any amounts due pursuant to Section 3.5 hereof; (d) deliver to the Trust all property and documents of the Trust then in the custody of the REIT Manager; and (e) cooperate with the Trust and take all reasonable steps requested to assist the Board in making an orderly transition of the REIT management function. VI. LIABILITY AND INDEMNIFICATION OF REIT MANAGER 6.1 Limitation on Liability. The REIT Manager shall have no responsibility other than to render the services and take the actions described herein in good faith and with the exercise of due care and shall not be responsible for any action of the Board in following or declining to follow any advice or recommendation of the REIT Manager. The REIT Manager, except by reason of its own gross negligence, bad faith or willful misconduct, shall not be liable for any action taken, omitted or suffered to be taken by it in good faith and believed by it to be authorized or within its discretion or rights or powers conferred upon it by this Agreement or in reasonable reliance upon the written opinion of counsel of recognized expertise. 9 6.2 Indemnification. (a) The Trust shall reimburse, indemnify and hold harmless the REIT Manager and its directors, officers, shareholders, agents and employees and each other person or entity, if any, controlling the REIT Manager (an "Indemnified Party"), to the full extent lawful, from and against any and all losses, claims, damages or liabilities of any nature whatsoever with respect to or arising from any acts or omissions of the REIT Manager (including ordinary negligence) in its capacity as such, except with respect to losses, claims, damages or liabilities with respect to or arising out of the REIT Manager's gross negligence, bad faith or willful misconduct. (b) Notwithstanding the indemnification provisions in Section 6.2(a) above, indemnification will not be allowed for any liability imposed by judgment, and costs associated therewith, including attorneys' fees, arising from or out of a violation of state or federal securities laws associated with the offer and sale of Trust securities. Indemnification will be allowed for settlement and related expenses of lawsuits alleging securities law violations, and for expenses incurred in successfully defending such lawsuits, provided that a court either (i) approves the settlement and finds that indemnification of the settlement and related costs should be made or (ii) approves indemnification of litigation costs if a successful defense is made. If indemnification is unavailable as a result of this Section 6.2(b), the Trust shall contribute to the aggregate losses, claims, damages or liabilities to which the REIT Manager or its officers, directors, agents, employees or controlling persons may be subject in such amount as is appropriate to reflect the relative benefits received by the Trust and the party seeking contribution and the relative faults of the Trust and the party seeking contribution, as well as any other relevant equitable considerations. (c) Promptly after receipt by an Indemnified Party of notice of the commencement of any action, such Indemnified Party shall, if a claim in respect thereof is to be made against the Trust, notify the Trust in writing of the commencement thereof; but the omission so to notify the Trust shall not relieve it from any liability that it may have to any Indemnified Party pursuant to Section 6.2(a) hereof, unless the failure to so notify would itself constitute gross negligence, bad faith or willful misconduct. In case any such action shall be brought against an Indemnified Party and it shall notify the Trust of the commencement thereof, the Trust shall be entitled to participate therein and, to the extent that it shall wish to assume the defense thereof, with counsel satisfactory to such Indemnified Party and, after notice from the Trust to such Indemnified Party of its election so to assume the defense thereof, the Trust shall not be liable to such Indemnified Party under Section 6.2(a) hereof for any legal expenses of other counsel or any of the expenses, in each case subsequently incurred by such Indemnified Party, unless (i) the Trust and the Indemnified Party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the Trust and the Indemnified Party and representation of both parties by the same counsel would be inappropriate in the reasonable opinion of the Indemnified Party, due to actual or potential differing interests between them. (d) The obligations of the Trust under this Section 6.2 shall be in addition to any liability which the Trust otherwise may have. 6.3 Representations, Warranties and Covenants of Trust. (a) The Trust represents and warrants as of the date hereof that: (i) this Agreement has been duly authorized, executed and delivered on behalf of the Trust; (ii) the Trust is fully authorized under the applicable laws governing the Trust to enter into all of the types of investments and co-investments described in the Investment Policies; (iii) the execution and performance of this Agreement by the Trust will not conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, any agreement or instrument to which the Trust is subject; 10 (iv) the terms of this Agreement are in conformity with the applicable laws governing the Trust; and (v) the assets of the Trust do not constitute "plan assets" within the meaning of the Department of Labor plan asset regulation published at 29 C.F.R. (S) 2510.3-101. (b) The Trust shall promptly advise the REIT Manager in writing of any agreements or changes in any agreements, instruments, governing law, regulations or interpretations thereof affecting the investments of the Trust or the duties, responsibilities, liabilities or obligations of the REIT Manager, and any change or any contemplated change with respect to any of the foregoing or the operation or administration of the Trust that could cause the assets of the Trust to constitute "plan assets" as defined in paragraph 6.3(a)(v) above. VII. MISCELLANEOUS PROVISIONS 7.1 Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof. Any modification or amendment of this Agreement shall be in writing executed by each of the parties. 7.2 Assignment. This Agreement may not be assigned by either party except in the event of an assignment to a successor organization that takes over the property and carries on the affairs of the assignor, provided that following any such assignment by the REIT Manager, the persons who controlled the operations of the REIT Manager immediately prior thereto shall control the operations of the successor organization, including the performance of its duties under this Agreement. Any such assignment of this Agreement shall bind the assignee hereunder in the same manner as the assignor is bound hereunder. Notwithstanding the foregoing, without the Trust's consent, the REIT Manager may assign all or any part of the compensation due it hereunder and the REIT Manager may assign or subcontract any or all of its rights and duties hereunder with respect to the Trust's corporate efficiency properties to an Affiliate of the REIT Manager, provided that no such assignment or subcontract shall relieve the REIT Manager of its obligations hereunder. 7.3 No Partnership or Joint Venture. The Trust and the REIT Manager are not, and shall not be deemed to be, partners or joint venturers with each other. 7.4 Severability. If any term or provision of this Agreement or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Agreement, or the application of that term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Agreement shall be valid and be enforced to the fullest extent permitted by law. 7.5 Policy and Financial Information. The Trustees shall keep the REIT Manager informed in writing concerning the investment and financing policies of the Trust and shall promptly notify the REIT Manager of any intention to make any new investments, to sell or dispose of any existing investments or to enter into any agreement or understanding with any third party. The Trust shall furnish the REIT Manager a certified copy of all financial statements, a signed copy of each report prepared by independent public accountants, a certified copy of each amendment or supplement to the Declaration of Trust, the By-Laws and the Investment Policies and such other information with regard to the Trust's affairs as the REIT Manager from time to time reasonably may request. 7.6 Notices. Any notices and other communications to be given by any party hereunder shall be in writing delivered at the address of the respective party set forth on the signature page hereof, or at such other address as a party shall have specified to the other party in writing as the address for notices hereunder. Any such notice or other communication shall be deemed to have been given when personally delivered or one business day after being forwarded by overnight courier or five days after being sent by registered or certified United States mail, postage prepaid. 11 7.7 Headings. The section headings used herein have been inserted for convenience of reference only and shall not be considered in interpreting this Agreement. 7.8 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, without giving effect to the principles of conflict of laws thereof. 7.9 Board Action. Whenever action on the part of the Trust or the Board is contemplated in this Agreement, unless otherwise indicated herein, action by a majority of the Trustees, including a majority of the Independent Trustees, shall constitute the action provided for herein. 7.10 Other Activities. (a) Nothing in this Agreement shall prevent the REIT Manager or any Affiliate thereof from rendering advice to other investors (including other real estate investment trusts), even if such investors are in competition with the Trust or any of the Trust's real estate investments or from managing other investments, including investors and investments advised, sponsored or organized by the REIT Manager. The REIT Manager also may render such services to joint ventures and partnerships in which the Trust is a co-venturer or partner and to the other entities in such joint ventures and partnerships. In addition, nothing in this Agreement shall limit the right of the REIT Manager or any of its subsidiaries or Affiliates to engage in any other business or to render services of any kind (including business activities competitive with those of the Trust) to any corporation, partnership or other entity. The REIT Manager will inform the Trustees of any other advisory contracts or investments (other than purchases of marketable securities or securities which are registered pursuant to Section 12 of the Exchange Act) by the REIT Manager or its Affiliates. When informing the Trustees of any advisory contracts, the REIT Manager need not identify the advised entities by name, but shall provide the Board with sufficient information to permit the Board to evaluate the services performed or to be performed by the REIT Manager under such contract. Nothing in this Agreement shall prevent the Trustees from considering the REIT Manager's activities for itself and for other entities in evaluating the REIT Manager's performance for purposes of deciding whether or not to renew this Agreement. The Trust will maintain the confidentiality of all information provided to the Trust pursuant to this paragraph, subject to disclosure only if required by applicable law or compelled by appropriate legal process. (b) The REIT Manager and its Affiliates, directors, officers, employees, shareholders and subsidiaries shall be free of any obligation to provide the Trust with the right of first refusal to acquire or invest in any investment opportunity that may come to any of them in any capacity, whether or not such investment opportunities are of a character which is within the investment policies of the Trust. Directors, officers, employees and agents of the REIT Manager or any of its Affiliates may serve as Trustees, officers, employees, agents, nominees or signatories of the Trust. When executing documents or otherwise acting in such capacities for the Trust, such persons shall use their respective titles for the Trust. Such persons shall receive from the Trust no compensation for their services to the Trust in any such capacities. 7.11 Independent Trustees' Approval. Notwithstanding anything to the contrary in this Agreement, a majority of the Independent Trustees must approve the Trust's annual strategic plan and operating budget; all property acquisitions, developments, dispositions and unbudgeted (non-emergency) capital expenditures in excess of $50,000; and all Trust financing, including the issuance of public and private debt or equity securities. In addition, to the extent that the Declaration of Trust requires approval of the majority of Independent Trustees with respect to any matter pertaining to this Agreement, such matter shall be submitted for such approval and shall not be pursued until such approval is received. 7.12 Limitation of Liability of Trust. ANY OBLIGATION OR LIABILITY WHATSOEVER OF THE TRUST WHICH MAY ARISE AT ANY TIME UNDER THIS AGREEMENT OR ANY OBLIGATION OR LIABILITY WHICH MAY BE INCURRED BY IT PURSUANT TO ANY OTHER INSTRUMENT, TRANSACTION OR UNDERTAKING CONTEMPLATED HEREBY SHALL BE 12 SATISFIED, IF AT ALL, OUT OF THE TRUST'S PROPERTIES ONLY. NO SUCH OBLIGATION OR LIABILITY SHALL BE PERSONALLY BINDING UPON, NOR SHALL RESORT FOR THE ENFORCEMENT THEREOF BE HAD TO, THE PRIVATE PROPERTY OF ANY OF ITS TRUSTEES, SHAREHOLDERS, OFFICERS, EMPLOYEES OR AGENTS, REGARDLESS OF WHETHER SUCH OBLIGATION OR LIABILITY IS IN THE NATURE OF CONTRACT, TORT OR OTHERWISE. 7.13 Declaration of Trust Governs. To the extent that any provision in this Agreement is inconsistent with or contradicts a provision in the Declaration of Trust, as the same may be amended and supplemented from time to time, the Declaration of Trust shall govern and such provision of this Agreement shall be deemed to have been reformed to be consistent with the Declaration of Trust. 7.14 Authority to Act. The Trust shall furnish to the REIT Manager from time to time, upon request of the REIT Manager, certified copies of appointments or designations setting forth the names, titles and authorities of the individuals who are authorized to act on behalf of the Trust with respect to the Trust's investments, together with specimen signatures of those individuals who are authorized to act on its behalf with respect to this Agreement. The REIT Manager shall furnish to the Trust from time to time, upon request of the Trust, certificates setting forth the names, titles and authorities of the persons authorized to act on its behalf and provide specimen signatures of those individuals who are authorized to act on its behalf with respect to this Agreement. 7.15 Counterparts. This Agreement may be executed in any number of counterparts and by each of the parties hereto on separate counterparts; all such counterparts shall together constitute but one and the same instrument. In Witness Whereof, the Trust and the REIT Manager have executed this Agreement as of the day and year first above written. Address for Notice: Security Capital Pacific Trust 7777 Market Center Avenue /s/ C. Ronald Blankenship El Paso, Texas 79912 By: _________________________________ C. Ronald Blankenship Chairman Address for Notice: Security Capital Pacific Incorporated 125 Lincoln Avenue /s/ Paul E. Szurek Santa Fe, New Mexico 87501 By: _________________________________ Paul E. Szurek Secretary 13 EX-15 3 KPMG REPORT EXHIBIT 15 Board of Trustees and Shareholders Security Capital Pacific Trust Gentlemen: Re: Registration Statement Nos. 33-86444, 33-78402, 33-71040, 33-44631 and 33- 25317 With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated July 21, 1995 related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1993, 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 July 25, 1995 EX-27 4 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Form 10-Q for the six months ended June 30, 1995 and is qualified in its entirety by reference to such financial statements. 6-MOS DEC-31-1995 JAN-01-1995 JUN-30-1995 35,667 0 20,612 0 0 0 1,690,564 62,649 1,700,636 0 152,007 72,376 0 335,000 896,237 1,700,636 119,236 120,510 0 47,615 0 120 11,129 35,346 0 35,346 0 0 0 35,346 0.43 0.43
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