-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mp1bxIc17E42hyjZ96YryqoWD3NN73tl9JGaXf3nRy68Gq42WbBCJrBPWEnPgc6e FxBcwJl6zWUviJKmgjB2cA== 0000950131-97-005515.txt : 19970929 0000950131-97-005515.hdr.sgml : 19970929 ACCESSION NUMBER: 0000950131-97-005515 CONFORMED SUBMISSION TYPE: 424B5 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19970911 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: 424B5 SEC ACT: SEC FILE NUMBER: 333-24035 FILM NUMBER: 97678787 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 424B5 1 PROSPECTUS SUPPLEMENT Filed Pursuant to Rule 424(b)(5) Registration No. 333-24035 PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED SEPTEMBER 9, 1997 [LOGO OF SECURITY CAPITAL PACIFIC TRUST] 1,486,686 COMMON SHARES ---------------- Security Capital Pacific Trust ("PTR") is a highly focused real estate investment trust ("REIT") which engages in the development, acquisition, operation and long-term ownership of multifamily communities in the western United States. PTR has elected to be taxed as a REIT for federal income tax purposes and pays regular quarterly distributions to its shareholders. The last reported sale price of PTR's common shares of beneficial interest, par value $1.00 per share (the "Common Shares"), which are listed under the symbol "PTR", on the New York Stock Exchange (the "NYSE") on September 9, 1997 was $22 1/4. See "Price Range of Common Shares and Distributions". The Common Shares offered hereby (this "Offering") are being offered for cash to subscribers to PTR's recent rights offering (see "Introduction--Rights Offering") whose subscriptions were not accepted in whole or in part due to demand in excess of the number of Common Shares offered. See "The Offering". No minimum number of Common Shares is required to be sold as a condition to the consummation of this Offering. ---------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ----------------
UNDERWRITING PROCEEDS TO PRICE TO PUBLIC DISCOUNT(1) PTR(2) ----------------- ----------------- ----------------- Per Share........................ $21.8125 None $21.8125 Total(3)......................... $32,428,338 None $32,428,338
- -------- (1) PTR has agreed to indemnify the placement agent against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "The Offering". (2) Before deducting expenses payable by PTR, which are expected to be minimal. (3) Assumes the sale of all Common Shares offered hereby. ---------------- The date of this Prospectus Supplement is September 9, 1997. PTR OR ITS AFFILIATES MAY ENGAGE IN TRANSACTIONS WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. S-2 INTRODUCTION Unless otherwise indicated, this Prospectus Supplement assumes the sale of 1,486,686 Common Shares in this Offering and the sale of 7,433,433 Common Shares in the Rights Offering (as defined below). RIGHTS OFFERING On August 6, 1997, PTR commenced a rights offering (the "Rights Offering") pursuant to which it distributed to its shareholders transferable rights ("Rights") to subscribe for and purchase up to 7,433,433 Common Shares at a subscription price of $21.8125 per Common Share. Simultaneously with the offering of Common Shares to Rights holders, Security Capital Markets Group Incorporated ("Capital Markets Group"), which is owned by PTR's principal shareholder, Security Capital Group Incorporated ("Security Capital"), sought third-party purchasers, on a best efforts basis, to acquire Common Shares that were not purchased through the exercise of Rights ("Unsubscribed Shares"). Unsubscribed Shares were also available to shareholders who oversubscribed for additional Common Shares. PTR will be issuing all of the 7,433,433 Common Shares available in connection with the Rights Offering, whether through the exercise of Rights, exercise of the oversubscription privilege of shareholders or sales to third parties. The Rights Offering expired on September 9, 1997, and Common Shares purchased pursuant thereto will be issued by September 16, 1997. THE MERGER On September 8, 1997, the shareholders of PTR voted to approve the merger (the "Merger") of PTR's REIT manager, Security Capital Pacific Incorporated (the "REIT Manager" or "REIT Management"), and its property manager, SCG Realty Services Incorporated ("SCG Realty Services"), into a newly formed subsidiary of PTR. See "The Merger Transaction". Prior to the Merger, which closed on September 9, 1997, the REIT Manager and SCG Realty Services were owned by Security Capital. After giving effect to this Offering, the Rights Offering and the Merger, Security Capital will own approximately 33% of the outstanding Common Shares. SECURITY CAPITAL PACIFIC TRUST PTR is a real estate operating company focused on acquiring, developing, owning and operating multifamily communities in the western United States. PTR believes that it distinguishes itself from its competition by being the only company in its target market which combines all of the following: 1. A disciplined investment strategy based on proprietary research which identifies high growth markets and submarkets with attractive long-term demand and supply fundamentals for PTR's multifamily communities; 2. Development experience and proven capability to deliver consistent, state-of-the-art multifamily communities which meet renter preferences and demographic trends; 3. A focus on moderate income product which serves one of the largest segments of the renter population and which PTR believes has very attractive operating characteristics; 4. An investment strategy which allows PTR to redeploy its invested capital and maximize the growth in cash flow generated by PTR's operating multifamily communities; 5. An organization of 259 professionals in 14 offices which combines local market expertise with broad operating company experience. The cornerstone of PTR's growth strategy is its commitment to fundamental real estate research, allowing PTR to deploy and redeploy its capital into markets, products and new business opportunities which PTR believes have the greatest potential for long-term cash flow growth. Management believes that this unique, research-driven strategy will continue to allow PTR to produce attractive long-term returns for its shareholders. S-3 At June 30, 1997, PTR's portfolio consisted of 50,564 multifamily units, including 9,778 units under construction or in planning and owned. The total expected investment of PTR's portfolio at June 30, 1997, including budgeted renovations and development expenditures, was $2.7 billion, including $642.7 million under construction or in planning and owned. In addition, as of the same date, PTR had contingent contracts or letters of intent, subject to PTR's final due diligence and approval of all entitlements, to acquire land for the development of an estimated 6,602 multifamily units with a total budgeted development cost of approximately $612.7 million and owned land for the future development of an expected 1,254 multifamily units with a total budgeted development cost of $67.2 million. The table below illustrates the growth in PTR's multifamily portfolio, based on total expected investment, resulting from the execution of its investment strategy since 1991:
TOTAL EXPECTED INVESTMENT(1) --------------------------------------------------------------------- DECEMBER 31, JUNE 30, ---------------------------------------------------------- 1997 1996 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- -------- -------- ------- (IN THOUSANDS) Operating communities: Acquired(2)............ $1,595,610 $1,514,018 $1,270,419 $ 937,683 $666,497 $205,600 $31,487 Developed(2)........... 464,976 377,810 244,848 171,505 66,893 54,852 24,416 ---------- ---------- ---------- ---------- -------- -------- ------- Total operating communities......... 2,060,586 1,891,828 1,515,267 1,109,188 733,390 260,452 55,903 Communities under construction........... 435,195 354,852 297,549 170,017 140,563 73,898 16,207 Communities in planning and owned(3)........... 207,509 209,155 118,347 194,001 73,578 -- -- ---------- ---------- ---------- ---------- -------- -------- ------- Total owned communities......... $2,703,290 $2,455,835 $1,931,163 $1,473,206 $947,531 $334,350 $72,110 ========== ========== ========== ========== ======== ======== =======
- -------- (1) For operating communities, represents cost plus budgeted renovations. For communities under construction and in planning, represents cost plus additional budgeted development expenditures, which include the cost of land, fees, permits, payments to contractors, materials, architectural and engineering fees and interest and property taxes to be capitalized during the construction period. Does not include land held for future development, which is less than 2% of assets, based on cost. (2) Net of any dispositions. (3) The term "in planning" means that construction is anticipated to commence within 12 months. Highlights of PTR's recent strategic accomplishments include: . PTR's strong growth in the second quarter of 1997 was driven primarily by the successful implementation of its investment strategy, with development activity generating 42% of the growth in pro forma funds from operations and acquisition activity generating 49%. The remaining 9% of growth in pro forma funds from operations was produced by an increase in net operating income for PTR's same-store multifamily portfolio, which achieved net operating income growth of 3.03% compared with 1996. For purposes of this paragraph only, pro forma funds from operations for 1996 has been calculated as if the Homestead transaction described below had occurred on January 1, 1996 (but without giving effect to any other events which are adjusted for in PTR's pro forma condensed financial statements incorporated by reference herein). For a description of how PTR calculates funds from operations and certain limitations in the use of funds from operations as a performance measure, see "Management's Discussion and Analysis of Financial Condition and Results of Operation-- Liquidity and Capital Resources--Funds from Operations". . Based on proprietary market research, PTR identified certain submarkets in California, the Pacific Northwest and Salt Lake City which it believes have favorable market fundamentals and high barriers to entry for new supply that are expected to result in significant growth in multifamily rental revenues. Through the successful execution of all three components of PTR's investment strategy (developments, acquisitions and dispositions) during the last 19 months, PTR has significantly increased the percentage of its capital which is deployed in these markets. As of June 30, 1997, 51% of PTR's capital is now deployed in California, the Pacific Northwest and Salt Lake City (based on total expected investment for S-4 operating communities and development communities under construction). During the second quarter of 1997, average revenue growth for PTR's same- store communities in these markets was 8.28%. . The development of moderate income multifamily communities is an important component of PTR's long-term growth strategy. In the first six months of 1997, PTR commenced construction on 1,925 multifamily units, representing a total expected investment of approximately $131.6 million. Of that total, 1,084 units, or 56.3%, were moderate income. At June 30, 1997, PTR had 6,672 units under construction, representing a total expected investment of $435.2 million. . PTR continues to take advantage of attractive acquisition opportunities in California, the Pacific Northwest and Salt Lake City. During the first six months of 1997, PTR completed the acquisition of 3,717 operating units in California and Seattle, representing a total expected investment of $331.5 million. At June 30, 1997, PTR owned operating communities representing a total expected investment of $875.3 million in California and Seattle. . Since December 1995 and through June 30, 1997, PTR has demonstrated its ability to dispose of existing assets and efficiently redeploy the proceeds into multifamily investments with more attractive long-term growth prospects. The success of this asset optimization strategy was evidenced by the disposition of 12,835 multifamily units, realizing an aggregate gain of approximately $77.2 million on aggregate gross proceeds of approximately $549.4 million, which were redeployed, primarily through tax-deferred exchanges, into strategic acquisitions in targeted western submarkets. . PTR continues to focus on maintaining a strong balance sheet. PTR has a significant equity base with a total equity market capitalization of $2.1 billion at June 30, 1997. A key component of PTR's conservative financial strategy is the issuance of unsecured long-term debt that, in the aggregate, has a relatively level amortization schedule which PTR believes is unusual among multifamily REITs. At June 30, 1997, PTR's $630 million in long-term unsecured debt had an effective average fixed interest rate of 7.64% and an original weighted-average life to maturity of 13.37 years. PTR's long-term debt as a percentage of total long-term undepreciated book capitalization (the sum of long-term debt and shareholders' equity after adding back accumulated depreciation) was 37.70% at June 30, 1997 on an historical basis and 34.85% at June 30, 1997 as adjusted to give effect to the Merger and to the Rights Offering and this Offering (assuming the sale of all Common Shares offered in this Offering) and the application of the net proceeds therefrom. . On October 17, 1996, PTR contributed its Homestead Village(R) properties to a newly formed company, Homestead Village Incorporated ("Homestead"), in exchange for Homestead common stock and entered into a funding commitment agreement to fund the development of certain of such properties in exchange for warrants to purchase Homestead common stock. The Homestead common stock and warrants were subsequently distributed to PTR's common shareholders (the "Homestead Distribution"). On a fully funded and converted basis, PTR will own 34.7% of Homestead's common stock (assuming no further equity offerings by Homestead, conversion of all Homestead convertible mortgage notes by PTR and Security Capital Atlantic Incorporated ("ATLANTIC") and exercise of all outstanding warrants) as a result of its obligation to fund up to $198.8 million to Homestead in exchange for up to $221.3 million of Homestead convertible mortgage notes (the "Homestead Notes"). The Homestead Notes are expected to contribute significantly to PTR's future growth. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--Homestead Interest and Homestead Notes." The Homestead common stock and warrants trade on the American Stock Exchange (the "ASE") under the symbols "HSD" and "HSD.W", respectively. As a result of the Merger, which was consummated on September 9, 1997, PTR is a fully integrated operating company. See "The Merger Transaction" for a description of the Merger whereby Security Capital, which owned the REIT Manager and SCG Realty Services, caused the REIT Manager and SCG Realty Services to merge into a newly formed subsidiary of PTR in exchange for Common Shares. PTR has elected to be taxed as a REIT for federal income tax purposes and was organized in 1963 as a real estate investment trust under the laws of Maryland. Its principal executive offices are located at 7670 South Chester Street, Suite 100, Englewood, Colorado 80112, and its telephone number is (303) 708-5959. S-5 BUSINESS PTR'S OPERATING SYSTEM AND BUSINESS STRATEGY PTR has approximately 259 professionals dedicated to implementing PTR's highly focused, fully integrated business strategy using PTR's "Operating System". PTR's Operating System consists of seven functional areas: fundamental real estate research, opportunistic acquisitions, multifamily developments, comprehensive due diligence and investment analysis, asset optimization, customer-focused property management and an efficient capital markets/finance function. By focusing on a single discipline, professionals within each of these areas develop substantial expertise commensurate with their respective skills and responsibilities. All of these functional areas are integrated by senior management but PTR believes that the focus on separate disciplines by key personnel improves its overall results. PTR utilizes the extensive capabilities of its Operating System to execute its business strategy in order to achieve PTR's primary objective of generating long-term, sustainable growth in per share cash flow. Commitment to Fundamental Real Estate Research PTR is dedicated to a continuing investment in leading edge research and development for markets, products and new business opportunities. PTR utilizes Security Capital Real Estate Research Group Incorporated ("Security Capital Real Estate Research"), an affiliate of PTR, to conduct comprehensive evaluations of its target market on a submarket-by-submarket basis to identify those submarkets that offer strong prospects for long-term cash flow growth. These evaluations, combined with PTR's extensive market experience throughout its target market, enable PTR to identify submarkets that will offer attractive growth opportunities. For each submarket, PTR's research evaluates 24 key variables that PTR has identified as having the greatest impact on multifamily operating performance. This research provides PTR with the information needed to target specific resident profiles and identify the unit mix, density and amenities for each community which will provide the greatest opportunity for consistent rental increases and high occupancies. PTR also evaluates and continually refines its multifamily communities to incorporate technologies and designs that will enhance long-term resident satisfaction. In addition to dedicated market research and continuous refinement of the traditional multifamily product, considerable resources are devoted to researching new products and businesses. The Homestead Village(R) extended- stay lodging product is an example of PTR's research and development efforts which resulted in the creation of an exciting new growth company, Homestead, and resulted in the Homestead Distribution which occurred in November 1996. Another innovative product concept developed by PTR is its master-planned apartment neighborhood, or "village", concept. These "village" communities offer residents an extraordinary level of amenities, including greenbelt areas, soccer and baseball fields, sports courts and large clubhouses with features such as theaters, business centers and community resource centers. PTR believes the "village" concept will generate consistent, long-term growth by providing a large segment of the renter population with amenities far beyond those which are available in traditional multifamily developments. PTR currently has two "village" communities in operation and two additional communities in planning. Opportunistic Acquisitions PTR opportunistically acquires multifamily communities where demographic and market trends indicate a high likelihood of achieving attractive, sustainable operating results. This strategy has resulted in multifamily community acquisitions which have produced attractive returns. Since inception and through June 30, 1997, PTR had acquired 44,871 operating units representing a total expected investment of approximately $2.1 billion. Since early in 1996, PTR specifically focused its acquisition efforts on California, because its research identified the opportunity for very strong growth in operating performance there. PTR acquired a total of 8,368 operating S-6 multifamily units, representing a total expected investment of $642.4 million, in targeted California submarkets during 1996 and 1997. Additionally, at June 30, 1997, PTR had letters of intent or contingent contracts, subject to PTR's final due diligence, for the acquisition of 328 units in Salt Lake City, representing a total expected investment of $17.5 million. This significant acquisition activity is expected to be an important source of PTR's future growth. PTR categorizes operating multifamily communities (which include all communities not in development) as either "stabilized" or "pre-stabilized". The term "stabilized" means that renovation, repositioning, new management and new marketing programs (or development and marketing in the case of newly developed communities) have been completed and in effect for a sufficient period of time (but in no event longer than 12 months, except for major rehabilitations) to achieve 93% occupancy at market rents. Prior to being "stabilized", a community is considered "pre-stabilized". Due to its active investment program, 24% of PTR's multifamily operating portfolio, based on total expected investment, was classified by PTR as pre-stabilized at June 30, 1997. At June 30, 1997, PTR's operating multifamily communities (excluding communities in lease-up) were 94% occupied. For operating communities which PTR has acquired, stabilized operations generally have been achieved six to 12 months after acquisition. For communities which it is developing, PTR expects stabilized operations generally to be achieved 18 to 24 months after construction commences. Multifamily Developments PTR selectively develops multifamily communities where land costs, demographics and market trends indicate a high likelihood of achieving sustainable operating results and consistent cash flow growth. This disciplined approach to development has produced multifamily property developments with desired characteristics including state-of-the-art product, protected locations and attractive returns. Through June 30, 1997, completed development communities, communities under construction and communities in planning and owned represented 41.0% of PTR's multifamily portfolio, based on total expected investment. At June 30, 1997, PTR's multifamily development portfolio consisted of the following:
NUMBER OF TOTAL EXPECTED UNITS INVESTMENT (1) --------- -------------- (DOLLARS IN THOUSANDS) Communities completed (since inception).......... 9,366 $ 464,976 Communities under construction................... 6,672 435,195 Communities in planning and owned................ 3,106 207,509 ------ ---------- Total owned development communities.......... 19,144 $1,107,680 ====== ========== Communities in planning and under control........ 4,278 $ 399,876 ====== ==========
- -------- (1) Represents cost through June 30, 1997 plus additional budgeted development expenditures at June 30, 1997, which include the cost of land, fees, permits, payments to contractors, materials, architectural and engineering fees and interest and property taxes to be capitalized during the construction period. Does not include land held for future development, which is less than 2% of assets, based on cost. PTR's research-driven development strategy is to focus on developing state- of-the-art communities in attractive submarkets to meet renter preferences and demographic trends. Development opportunities also permit PTR to incorporate into its multifamily communities proprietary technologies and designs aimed at enhancing long-term rental growth while reducing ongoing maintenance costs. PTR has had the opportunity to evaluate and refine its multifamily product through its long history of development (PTR has developed multifamily communities since 1970). PTR, unlike a typical merchant builder, intends to be a long-term owner of the communities that it develops. Hence, PTR emphasizes durability by using materials and designs with an added view toward minimizing ongoing operating and maintenance costs. S-7 PTR carefully manages development risks by obtaining zoning and discretionary municipal approvals prior to purchasing land. PTR does not assume construction risk, but instead uses qualified third-party general contractors to build its communities, using guaranteed maximum price contracts. PTR cannot eliminate all development risk, but believes that the opportunities to better control product and realize higher returns from development communities compensate for the limited risk. PTR traditionally has commenced development immediately after acquiring a tract of land. However, in certain cases where land prices are favorable and zoned land is very limited, PTR has acquired and will acquire, on an unleveraged basis, prudent amounts of land zoned for multifamily use. In addition, to allow for entitlements to be finalized prior to purchasing the land, PTR often utilizes options and rights of first refusal in order to control land for future developments with minimal cash investments. The land that PTR owns or controls provides a foundation for future growth by providing a pipeline of future developments at attractive prices. To enhance its flexibility in developing and acquiring communities, PTR may also from time to time enter into presale agreements with third-party owner/developers to acquire development communities which meet PTR's investment criteria. PTR has and will fund such developments through development loans to these owner/developers. In addition, to provide greater flexibility for the use of land acquired for development and to facilitate disposition of excess parcels, PTR has and will make mortgage loans to PTR Development Services Incorporated ("PTR Development Services") to purchase land for development. PTR may also fund developments of multifamily communities by PTR Development Services where the particular community or submarket does not meet PTR's objectives for long-term ownership but presents an attractive investment opportunity. 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. All of the common stock of PTR Development Services is owned by an unaffiliated trust, which is entitled to the remaining 5% of net operating cash flow. At June 30, 1997, PTR had development and mortgage loans outstanding to third-party owner/developers and PTR Development Services aggregating $109.0 million and $19.4 million, respectively. The activities of PTR Development Services and third-party owner/developers are consolidated with PTR's activities and all intercompany transactions have been eliminated in consolidation. Moderate Income Product PTR focuses its development efforts primarily on moderate income communities, which target households with incomes that range from 65-90% of the median household income in the submarket. These households represent one of the largest segments of the multifamily renter market. Residents in this category are value-driven and focus on unit livability and practical amenities such as washer/dryer hookups, storage space and lower density communities with attractive landscaping. PTR's moderate income product comprised 71.3% of PTR's development starts during 1996, based on number of units. Based on PTR's review of information filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), regarding other REITs in PTR's primary target market and other publicly available data, PTR believes that few other REITs currently focus on the moderate income segment within PTR's primary target market. Moreover, based on PTR's proprietary information regarding available land parcels and construction starts in its primary target market, PTR believes that less than 15% of the 1995 and 1996 multifamily development starts in PTR's primary target market cities were moderate income product. Consequently, PTR believes that the moderate income segment is a significantly underserved market with limited competition. PTR believes that focusing on this segment will allow PTR to achieve more consistent rental increases and higher occupancies over the long term and, thereby, realize above average, sustainable cash flow growth and appreciation in value. In PTR's experience, moderate income residents are typically longer-term residents because they often lack the financial resources required to purchase single-family homes. As a result, resident turnover is often lower in PTR's moderate income communities than in its upper middle income communities (which target households with incomes that range from 115-140% of the median household income in the submarket) and middle income S-8 communities (which target households with incomes that range from 90-115% of the median household income in the submarket). PTR estimates that the total cost of refurbishing and re-leasing a unit ranges from $700 to $1,500; therefore, reducing resident turnover can have a material impact on a community's cash flow. Due to market fundamentals and the operating characteristics of moderate income communities, PTR believes that this product category offers greater sustainable cash flow growth. Comprehensive Due Diligence and Investment Analysis PTR believes that comprehensive due diligence is essential prior to investing in acquisitions or developments. PTR employs nine full-time professionals who perform due diligence for PTR. This due diligence team is an important resource which allows PTR to effectively and efficiently close a large volume of investment transactions, while thoroughly evaluating all potential aspects of risk in each transaction. This capability provides PTR with a competitive advantage in acquiring both operating communities and land. Prior to purchasing an asset, the due diligence team works in tandem with PTR's development and operations professionals to thoroughly investigate the following factors: market conditions; competitive communities and developments; comparable sales and rents; existing and projected income and expenses; current and targeted resident profiles; present and projected capital requirements for community acquisitions; development costs for land purchases; and potential liability issues such as environmental and title conditions, tax increases, special assessments and code compliance. In addition, for land acquisitions, all discretionary development approvals are obtained prior to closing, thus ensuring that projected development costs are quantified with a high degree of accuracy and the risk of construction delay is minimized. With the comprehensive data available from research, development and operating professionals, standard financial underwriting is completed on an unleveraged basis in order to evaluate each investment's yield and its prospects for long-term growth in cash flow. PTR's management investment committee, which consists of five members having a combined 77 years of experience in the real estate industry, evaluates all prospective investments prior to submission of investment recommendations to the investment committee of PTR's Board of Trustees (the "Board"). Asset Optimization Strategy The ability to dispose of existing assets and efficiently redeploy the proceeds into communities and submarkets having more attractive long-term growth prospects is an important component of PTR's investment strategy. Each year, management formulates operating and capital plans based on an ongoing active review of PTR's portfolio. Based in part upon the market research provided by Security Capital Real Estate Research and in an effort to optimize its portfolio composition, PTR may, from time to time, seek to dispose of assets that in management's view no longer meet PTR's long-term investment objectives. The proceeds from these selected dispositions will be redeployed, typically through tax-deferred exchanges, into assets that in PTR's view offer better long-term cash flow growth prospects. This allows PTR to continually reposition its portfolio by redeploying capital into communities and markets with superior growth characteristics. PTR's asset optimization strategy is based on the premise that it has a finite amount of investment capital and that this capital should be deployed where it can produce the highest levels of cash flow growth. PTR has demonstrated the ability to enter and exit submarkets based on future growth expectations and the supply/demand fundamentals of the submarkets in which it operates. Since PTR's asset optimization program commenced in December 1995 and through June 30, 1997, PTR had completed the disposition of 12,835 multifamily units, realizing aggregate gains of $77.2 million on aggregate gross proceeds of $549.4 million. The proceeds were redeployed into targeted submarkets in California, the Pacific Northwest and Salt Lake City to allow PTR to take advantage of the strong economic recovery which is underway in these markets. PTR's expected investment in these markets grew from 17% of PTR's total portfolio at December 31, 1995, to 51% of PTR's total portfolio at June 30, 1997, based on total expected investment. S-9 Customer-Focused Property Management PTR believes that its communities must be actively managed in order to maximize cash flow and enhance long-term economic performance. At June 30, 1997, approximately 94% of PTR's operating multifamily communities were managed by PTR, based on total expected investment, with the balance of the communities in various stages of transition to PTR's management. PTR has over 1,250 employees and emphasizes locally-based management of its multifamily communities. PTR has 14 local offices to serve its target market. This network improves PTR's ability to anticipate and respond to changes in local market conditions and resident needs. PTR believes that it has developed superior operating procedures, financial controls, information systems and training programs, which it expects will positively affect growth in rental and occupancy rates. PTR develops systems and procedures which facilitate effective management of its communities. PTR recognizes that a highly focused customer service approach to day-to-day management is essential to maximize short and long-term cash flow growth from each of its multifamily communities. As a result, PTR is dedicated to maximizing the performance of its communities by providing consistent, high quality residential services to its customers. PTR works to develop innovative ideas to enhance customer service and resident satisfaction while maximizing cash flow growth. A few of the programs which have been developed recently and are currently in the process of being implemented are summarized below: . During 1996, SCG Realty Services established five Regional Information Management ("RIM") Centers. The RIM Center concept is designed to enable property-level management personnel to focus on PTR's customers, the residents, while moving certain accounting and administrative functions to the regionally located RIM Center. Each RIM Center is designed to carry out these functions for several area communities and thus benefit from economies of scale, better accounting control and enhanced cash management capabilities. PTR expects to eventually implement the RIM Center concept at all of its operating communities. . SCG Realty Services and the REIT Manager had also initiated resident utility billing programs at approximately 90% of PTR's multifamily operating communities at June 30, 1997. Under this arrangement, water and sewer usage are metered and billed to individual residents, thereby enabling PTR to better control operating expenses, while providing residents with the incentive to minimize usage. . In late 1996, PTR entered into revenue sharing agreements with certain cable television and telephone service providers. The arrangements require the telecommunication providers to continually upgrade service to ensure state-of-the-art offerings in this rapidly changing industry. The agreements also allow PTR to receive a percentage of the service providers' revenues generated from subscribing residents while increasing the quality and accessibility of these services to residents. These creative initiatives coupled with highly focused day-to-day management are expected to contribute to the growth in net operating income generated by PTR's multifamily operating communities. Capital Markets/Finance and Conservative Balance Sheet Strategy PTR believes that a successful REIT must maintain a strong balance sheet and have the ability to access the equity and debt markets efficiently, expeditiously and cost effectively. PTR's ability to efficiently access the capital markets permits it to capitalize on development and acquisition opportunities that PTR identifies in its target market. PTR continues to focus on maintaining its strong balance sheet which has resulted from a conservative balance sheet strategy. PTR has a significant equity base with a total equity market capitalization of $2.1 billion at June 30, 1997. A key component of PTR's conservative balance sheet strategy is the issuance of fixed rate, unsecured, long-term debt. In order to minimize refinancing risk, PTR's long-term debt offerings are carefully S-10 structured to create a relatively level principal maturity schedule, without large repayment obligations in any future year. At June 30, 1997, PTR's $630 million in unsecured long-term debt had an effective average fixed interest rate of 7.64% and an original weighted-average life to maturity of 13.37 years. PTR's long-term debt as a percentage of total long-term undepreciated book capitalization (the sum of long-term debt and shareholders' equity after adding back accumulated depreciation) was 37.70% at June 30, 1997 on an historical basis and 34.85% at June 30, 1997 as adjusted to give effect to the Merger and to the Rights Offering and this Offering (assuming the sale of all Common Shares offered in this Offering) and the application of the net proceeds therefrom. PTR's credit facilities, including its $350 million unsecured revolving line of credit, provide PTR with the financial flexibility to take advantage of attractive investment opportunities prior to raising capital through securities offerings. Additionally, such facilities minimize the amount of cash which must be invested in short-term investments at low yields prior to the deployment of the capital. PTR's conservative balance sheet strategy is expected to provide significant incremental debt capacity and allow PTR to take advantage of future investment opportunities which will contribute to PTR's objective of long-term growth in cash flow per share. GEOGRAPHIC DISTRIBUTION To effectively manage its multifamily communities, PTR has organized its operations into three regions (Central, Northwest and West). Within these regions, PTR's multifamily communities are located in 23 metropolitan areas in 12 states. The table below summarizes the geographic distribution of PTR's multifamily communities which are operating or under construction, based on total expected investment.
DECEMBER 31, JUNE 30, ------------------------- 1997(1) 1996(1) 1995(1) 1994(1) -------- ------- ------- ------- CENTRAL REGION: Austin, Texas......................... 2.88% 4.65% 7.26% 9.92% Dallas, Texas......................... 2.86 3.86 5.22 7.36 Denver, Colorado...................... 5.12 4.61 5.62 7.91 El Paso, Texas........................ 3.38 4.45 5.68 7.84 Houston, Texas........................ 5.11 7.29 8.65 10.74 San Antonio, Texas.................... 5.25 6.37 9.16 13.06 ------ ------ ------ ------ Central Region Total................ 24.60% 31.23% 41.59% 56.83% ------ ------ ------ ------ NORTHWEST REGION: Portland, Oregon...................... 5.48% 6.71% 4.95% -- % Salt Lake City, Utah.................. 4.49 4.94 2.86 -- Seattle, Washington................... 8.86 5.82 4.41 -- ------ ------ ------ ------ Northwest Region Total.............. 18.83% 17.47% 12.22% -- % ------ ------ ------ ------ WEST REGION: Albuquerque, New Mexico............... 5.28% 5.80% 6.60% 7.45% Las Vegas, Nevada..................... 3.99 5.34 6.52 -- Phoenix, Arizona...................... 10.92 12.95 17.70 21.15 Northern California................... 14.02 8.99 2.15 -- Southern California................... 17.74 12.82 2.47 2.24 Tucson, Arizona....................... 1.62 2.73 6.46 7.12 ------ ------ ------ ------ West Region Total................... 53.57% 48.63% 41.90% 37.96% ------ ------ ------ ------ Other Markets....................... 3.00% 2.67% 4.29% 5.21% ------ ------ ------ ------ Total All Markets................. 100.00% 100.00% 100.00% 100.00% ====== ====== ====== ======
- -------- (1) For operating communities, represents cost plus budgeted renovations. For communities under construction, represents cost plus additional budgeted development expenditures, which include the cost of land, fees, permits, payments to contractors, materials, architectural and engineering fees and interest and property taxes to be capitalized during the construction period. S-11 USE OF PROCEEDS The net proceeds to PTR from the sale of the Common Shares offered hereby are expected to be approximately $32.4 million, all of which are expected to be used to repay borrowings under PTR's credit facilities, including its $350 million unsecured revolving line of credit and its short-term borrowing agreement (the "TCB Agreement") with Texas Commerce Bank, National Association ("TCB"). The line of credit matures in August 1999 and may be extended annually for an additional year with the approval of the Lenders. The line of credit bears interest at the greater of prime (8.5% at September 8, 1997) or the federal funds rate plus 0.50%, or at PTR's option, LIBOR (5.6875% at September 8, 1997) plus 0.75% (6.4375% at September 8, 1997). The spread over LIBOR can vary from LIBOR plus 0.50% to LIBOR plus 1.50% based upon the rating of PTR's long-term unsecured senior notes. Loans under the TCB Agreement bear interest at an overnight rate, which ranged from 5.94% to 7.00% during the six months ended June 30, 1997. At September 8, 1997, $151.3 million in borrowings were outstanding under the line of credit and $14.3 million in borrowings were outstanding under the TCB Agreement. The aggregate amount of borrowings outstanding under all of PTR's credit facilities as of September 8, 1997 was $265.5 million. PTR expects to make additional borrowings under the line of credit and the TCB Agreement following this Offering. Borrowings under the line of credit and the TCB Agreement are used for the development and acquisition of multifamily communities and for working capital purposes. PRICE RANGE OF COMMON SHARES AND DISTRIBUTIONS MARKET INFORMATION The Common Shares are listed on the NYSE under the symbol "PTR". The following table sets forth the high and low sales prices of the Common Shares as reported in the NYSE Composite Tape and cash distributions per Common Share for the periods indicated.
CASH HIGH LOW DISTRIBUTIONS ------- ------- ------------- 1995: First Quarter............................. $18 3/8 $16 3/8 $0.2875 Second Quarter............................ 18 1/8 16 5/8 0.2875 Third Quarter............................. 19 1/4 17 0.2875 Fourth Quarter............................ 20 1/2 17 1/4 0.2875 1996: First Quarter............................. 22 1/4 19 1/4 0.31 Second Quarter............................ 22 3/8 20 1/2 0.31 Third Quarter............................. 22 5/8 20 1/4 0.31 Fourth Quarter............................ 23 5/8 19 0.31 1997: First Quarter............................. 25 1/8 21 0.325 Second Quarter............................ 24 1/4 21 1/2 0.325 Third Quarter (through September 9)....... 23 5/8 21 5/8 0.325
In addition to the quarterly cash distributions shown above, PTR made a special distribution of 0.125694 shares of common stock of Homestead and warrants to purchase 0.084326 shares of Homestead common stock per Common Share on November 12, 1996. The securities distributed in the Homestead Distribution had a market value of $3.032 per Common Share, based on the closing prices of such securities on the ASE on November 11, 1996, the day prior to the distribution date. The Homestead Distribution resulted in an adjustment of $3.125 per Common Share ($21.875 before and $18.750 after) on the NYSE on November 12, 1996. On September 5, 1997, PTR had approximately 79,429,200 Common Shares outstanding, approximately 3,000 record holders of Common Shares and approximately 22,500 beneficial holders of Common Shares. After this Offering, the Rights Offering and the Merger, PTR will have approximately 91,644,852 Common Shares outstanding. S-12 DISTRIBUTIONS In order to qualify as a REIT, PTR is required to make distributions (other than capital gain distributions) to its shareholders in amounts at least equal to (i) the sum of (A) 95% of its "REIT taxable income" (computed without regard to the dividends-paid deduction and its net capital gain) and (B) 95% of the net income (after tax), if any, from foreclosure property, minus (ii) the sum of certain items of noncash income. PTR's distribution strategy is to distribute what it believes is a conservative percentage of its cash flow, permitting PTR to retain funds for capital improvements and other investments while funding its distributions. PTR has paid 86 consecutive quarterly cash distributions on the Common Shares. PTR announces the following year's projected annual distribution level after the annual budget review and approval in December of each year by the Board. At its December 1996 meeting, the Board announced an increase in the annual distribution level from $1.24 to $1.30 per Common Share. The payment of distributions is subject to the discretion of the Board and is dependent upon the financial condition and operating results of PTR. For federal income tax purposes, distributions may consist of ordinary income, capital gains, non-taxable return of capital or a combination thereof. Distributions that exceed PTR's current and accumulated earnings and profits (calculated for tax purposes) constitute a return of capital rather than a dividend and reduce the shareholder's basis in the Common Shares. To the extent that a distribution exceeds both current and accumulated earnings and profits and the shareholder's basis in the Common Shares, it will generally be treated as gain from the sale or exchange of that shareholder's Common Shares. For a more complete discussion of the tax treatment of distributions to shareholders, see "Federal Income Tax Considerations--Taxation of PTR's Shareholders" in the accompanying Prospectus. PTR annually notifies shareholders of the taxability of distributions paid during the preceding year. For federal income tax purposes, the following summarizes the taxability of cash distributions paid on the Common Shares:
1996 1995 1994 ----- ----- ----- Per Common Share: Ordinary income....................................... $0.61 $0.92 $0.68 Capital gains......................................... 0.11 -- -- Return of capital..................................... 0.52 0.23 0.32 ----- ----- ----- Total............................................... $1.24 $1.15 $1.00 ===== ===== =====
The Homestead securities distributed by PTR to each holder of Common Shares in the Homestead Distribution were valued at $2.16 per Common Share for federal income tax purposes, of which $1.06 was taxable as ordinary income, $0.19 was taxable as a capital gain and $0.91 was treated as a return of capital. On July 21, 1994, in addition to the normal Common Share distributions paid, PTR redeemed the shareholder purchase rights issued pursuant to the Rights Agreement dated as of February 23, 1990, as amended. Pursuant to the redemption, each holder of record at the close of business on July 21, 1994 was entitled to receive $0.01 per shareholder purchase right. The redemption price was paid on August 12, 1994 and was taxable as ordinary income for federal income tax purposes. Under federal income tax rules, PTR's earnings and profits are first allocated to its preferred shares, which increases the portion of the Common Shares distribution classified as return of capital. PTR's tax returns have not been examined by the Internal Revenue Service (the "IRS") and, therefore, the taxability of distributions is subject to change. S-13 CAPITALIZATION The following table sets forth the capitalization of PTR at June 30, 1997, and as adjusted to give effect to the Merger and to the Rights Offering and this Offering (assuming the sale of all Common Shares offered in this Offering) and the application of the net proceeds therefrom. The table should be read in conjunction with the financial statements of PTR incorporated by reference in this Prospectus Supplement and the accompanying Prospectus.
JUNE 30, 1997 ----------------------- HISTORICAL AS ADJUSTED ---------- ----------- (DOLLARS IN THOUSANDS) Mortgages payable...................................... $ 278,619 $ 278,619 Long-term unsecured debt............................... 630,000 630,000 Shareholders' equity: Shares of Beneficial Interest, par value $1.00 per share; 150,000,000 shares authorized: Series A Preferred Shares (liquidation preference $25.00 per share); 5,574,014 shares outstanding... 139,350 139,350 Series B Preferred Shares (liquidation preference $25.00 per share); 4,200,000 shares outstanding... 105,000 105,000 Common Shares; 79,375,582 shares outstanding; 91,591,234 shares outstanding as adjusted......... 79,376 91,591 Additional paid-in capital......................... 993,602 1,250,745 Unrealized holding gain on Homestead Notes......... 103,142 103,142 Distributions in excess of net earnings............ (23,146) (95,676) ---------- ---------- Total shareholders' equity....................... 1,397,324 1,594,152 ---------- ---------- Total capitalization............................. $2,305,943 $2,502,771 ========== ==========
S-14 THE MERGER TRANSACTION DESCRIPTION OF THE MERGER In January 1997, Security Capital made a proposal to the Board that Security Capital exchange the REIT Manager and SCG Realty Services for Common Shares, with the result that PTR would become an internally managed REIT. On March 18, 1997, a special committee of independent Trustees of the Board (the "Special Committee") recommended that the Board approve the Merger subject to definitive documentation. Following the meeting of the Special Committee, the full Board approved the Merger and Issuance Agreement between PTR and Security Capital (the "Merger Agreement") and the Merger. On March 24, 1997, PTR and Security Capital entered into the Merger Agreement, pursuant to which Security Capital agreed to cause the REIT Manager and SCG Realty Services to be merged into a newly formed subsidiary of PTR. On September 8, 1997, PTR's common shareholders voted to approve the Merger, which closed on September 9, 1997. The employees of the REIT Manager and SCG Realty Services became employees of PTR as a result of the Merger, which was consummated as follows: . Security Capital transferred all of its shares of the REIT Manager and SCG Realty Services to a newly formed subsidiary of PTR in exchange for 3,295,533 Common Shares valued at approximately $75.8 million based on the average closing price of $23.0125 per Common Share as described below. . The number of Common Shares issuable to Security Capital was based on the average closing price of the Common Shares over the five-day period prior to the record date for determining PTR's shareholders entitled to vote at the meeting in connection with the Merger (which was the same as the record date for the Rights dividend). The average closing price of the Common Shares over the five-day period prior to such record date was $23.0125 per Common Share. The subscription price for the Rights Offering (and the offering price for this Offering) was equal to 94.8% of such average price. . The Rights Offering was designed to allow PTR's shareholders (other than Security Capital) the opportunity to maintain (and, to the extent a shareholder successfully oversubscribed for Common Shares pursuant to the oversubscription privilege, to increase) their relative ownership in PTR by purchasing additional Common Shares at a price which was below the price at which Security Capital received Common Shares in the Merger. Security Capital agreed that it would not exercise its Rights to purchase additional Common Shares and that it would not sell its Rights. . In addition to the Rights Offering, as part of the Merger transaction, Security Capital will issue warrants (the "Warrant Issuance") pro rata to holders of PTR's Common Shares and Series A Cumulative Convertible Preferred Shares (the "Series A Preferred Shares"), other than Security Capital, to acquire shares of Security Capital's Class B common stock, par value $.01 per share (the "Class B Stock"), having an aggregate subscription price at the time of the Warrant Issuance of approximately $102 million. The Warrant Issuance was intended to induce holders of Common Shares to vote in favor of the Merger transaction, to broaden Security Capital's shareholder base, to enable Security Capital to raise additional equity capital at a relatively low cost through exercises of warrants and to enable Security Capital to raise additional equity capital in the long run by preserving and enhancing its goodwill with the shareholders of PTR. The Warrant Issuance will occur after the closing of the Merger and the Rights Offering and this Offering. The number of shares of Class B Stock subject to the warrants will be based on the closing price of the Class B Stock on the date the warrants are issued to the agent for the Warrant Issuance for subsequent distribution to holders of Common Shares and Series A Preferred Shares, other than Security Capital. The warrants will expire one year after issuance and will contain customary provisions to protect shareholders from dilution in certain events, including certain distributions and sales of shares of Class B Stock at less than market price. Any securities issued pursuant to the Warrant Issuance will be offered only by means of a separate proxy statement/prospectus which will be delivered to PTR's shareholders. No shareholder will be required to pay any cash or other consideration for the warrants received in the Warrant Issuance or surrender or exchange Common Shares in order to receive warrants. However, PTR believes that a shareholder receiving warrants pursuant to the Warrant Issuance should have ordinary taxable income S-15 equal to the value of the warrants on the issuance date. See "Federal Income Tax Considerations--Tax Effects of the Merger". The Board believes that the Merger will result in an enhancement to shareholder value. Prior to the Merger, PTR paid a fee to the REIT Manager based on a fixed percentage of PTR's cash flow (as defined) which increased proportionately as PTR added assets. The Board believes that PTR has reached a sufficient size to realize economies of scale by internalizing the management function since PTR will have sufficient depth of management and personnel such that additional assets can be acquired, developed and managed without a significant increase in personnel or other costs. These economies of scale should result in an increase in the level of growth in funds from operations. The Board believes that the Merger will further benefit PTR's long-term performance as follows: . The Merger will position PTR to pursue possible acquisitions of other REITs in a more effective way. . Investors and analysts will view an internally managed structure more favorably since PTR's costs, after capitalization of qualifying acquisition and development costs in accordance with generally accepted accounting principles ("GAAP"), will be more comparable to other multifamily REITs. These acquisition and development activities were previously provided by the REIT Manager and paid for as part of the REIT Management fee, which fee was expensed by PTR. Management believes that the increased comparability, in addition to the opportunity for increased funds from operations growth due to the economies of scale, as discussed above, will result in a higher multiple on PTR's funds from operations and an enhancement to shareholder value. . As a consequence of the REIT Manager's and SCG Realty Services' personnel becoming full-time employees of PTR, they will be able to more closely relate the results of their efforts to PTR's performance. . The Merger may result in improvement to PTR's debt rating, which could have a positive impact on PTR's future debt cost. The following are certain potential detriments of the Merger: . The Warrant Issuance will be taxable to holders of Common Shares and Series A Preferred Shares. . The REIT Manager and SCG Realty Services were not profitable. The fees paid by PTR for the REIT Manager's and SCG Realty Services' services in 1996 were approximately $832,000 less than the direct costs and indirect costs incurred by Security Capital in providing these services. . The Merger transaction will result in PTR recording higher administrative expenses related to the internalization of the management function in lieu of paying a fee to the REIT Manager and SCG Realty Services. Security Capital has anticipated that PTR would incur approximately $25.8 million of additional administrative expenses in 1998 by internalizing the management function. Of these expenses, an amount which is subject to a maximum limit of $5.5 million for 1998, is expected to be purchased from Security Capital under an administrative services agreement. See "-- Relationship With Security Capital After the Merger--Administrative Services Agreement". PTR will, however, no longer pay estimated REIT management and property management fees of $35.6 million in 1998. The increased administrative costs of internalizing the management function may be greater than anticipated and no assurance can be given that the cost to PTR of providing such services internally will not exceed the fees paid to the REIT Manager and SCG Realty Services under the prior agreements. . Although the Merger is expected to be immediately accretive to PTR's funds from operations, the Merger may not result in a corresponding increase in the price at which Common Shares trade on the NYSE. The Merger transaction was initiated and structured by individuals who are executive officers of Security Capital, the largest shareholder of PTR. Although no independent representatives were retained to negotiate the terms of the Merger transaction on behalf of PTR, the Board created the Special Committee consisting of Messrs. S-16 John Schweitzer, Calvin Kessler and James Cardwell. The Special Committee engaged Munger, Tolles & Olson LLP as its legal counsel and engaged Robertson, Stephens & Company LLC as its financial advisor to advise it in analyzing and evaluating, and to provide a written opinion with respect to, the fairness of the Merger transaction to PTR and the holders of Common Shares (other than Security Capital). No member of the Special Committee is an officer of PTR or a director or officer of the REIT Manager or SCG Realty Services or an officer or director of Security Capital. However, at August 6, 1997, Messrs. Schweitzer, Kessler and Cardwell beneficially owned 34,602, 32,267 and 32,765 Common Shares, respectively, and Mr. Schweitzer beneficially owned 268 shares of Security Capital's Class A common stock, par value $.01 per share (the "Class A Stock"). Additionally, at August 6, 1997, Mr. Schweitzer beneficially owned $203,219 aggregate principal amount of Security Capital's Convertible Subordinated Debentures due 2014 (the "2014 Convertible Debentures") (convertible into an aggregate of 194 shares of Class A Stock). Trustees of PTR, other than members of the Special Committee, at August 6, 1997, beneficially owned in the aggregate 117,272 Common Shares, 11,811 shares of Class A Stock, $3,012,347 aggregate principal amount of 2014 Convertible Debentures (convertible into an aggregate of 2,879 shares of Class A Stock) and $500,000 aggregate principal amount of Security Capital's Convertible Subordinated Debentures due 2016 (convertible into an aggregate of 433 shares of Class A Stock). Beginning January 1, 1998, each share of Class A Stock will be convertible into 50 shares of Class B Stock. Concurrently with signing the Merger Agreement with PTR, Security Capital also signed substantially similar agreements with each of ATLANTIC and Security Capital Industrial Trust ("SCI"), each of which are affiliates of Security Capital and PTR. The ATLANTIC and SCI transactions also closed on September 9, 1997. RELATIONSHIP WITH SECURITY CAPITAL AFTER THE MERGER Amended and Restated Investor Agreement As part of the Merger transaction, PTR and Security Capital amended and restated various agreements (as so amended and restated, the "Amended and Restated Investor Agreement"), to provide that, without first having consulted with the nominees of Security Capital designated in writing, PTR may not seek Board approval of (i) PTR's annual budget; (ii) incurring expenses in any year exceeding (a) any line item in the annual budget by the greater of $500,000 or 20% and (b) the total expenses set forth in the annual budget by 15%; (iii) the acquisition or sale of any assets in any single transaction or series of related transactions in the ordinary course of PTR's business where the aggregate purchase price paid or received by PTR exceeds $25 million; and (iv) entering into any new contract with a service provider (a) for investment management, property management or leasing services or (b) that reasonably contemplates annual contract payments by PTR in excess of $1 million. PTR is under no obligation to accept or comply with any advice offered by Security Capital with respect to the foregoing matters. Additionally, so long as Security Capital beneficially owns at least 25% of the Common Shares, Security Capital has the right to approve the following matters proposed by PTR: (i) the issuance or sale of any Common Shares (including the grant of any rights, options or warrants to subscribe for or purchase Common Shares or any security convertible into or exchangeable for Common Shares or the issuance or sale of any security convertible into or exchangeable for Common Shares) at a price per share less than the fair market value of a Common Share on the date of such issuance or sale; (ii) the issuance and sale of any disqualified shares (as defined) if, as a result thereof, PTR's Fixed Charge Coverage Ratio (as defined) would be less than 1.4 to 1.0; (iii) the adoption of any employee benefit plan pursuant to which shares of PTR or any securities convertible into shares of PTR may be issued and any action with respect to the compensation of the senior officers of PTR (including the grant or award of any bonuses or share-based incentive awards); and (iv) the incurrence of any additional indebtedness (including guarantees and including renegotiations and restructurings of existing indebtedness) if, as a result thereof, PTR's Interest Expense Coverage Ratio (as defined) would be less than 2.0 S-17 to 1.0. The restriction referred to in clause (i) above does not apply to (A) the sale or grant of any options to purchase shares of beneficial interest of PTR pursuant to the provisions of any benefit plan approved by the shareholders of PTR, (B) the issuance or sale of shares of beneficial interest of PTR upon the exercise of any rights, options or warrants granted, or upon the conversion or exchange of any convertible or exchangeable security issued or sold, prior to the closing date of the Merger or in accordance with the provisions of the Amended and Restated Investor Agreement, (C) the issuance and sale of any shares of beneficial interest of PTR pursuant to any dividend reinvestment and share purchase plan approved by the Board or (D) the issuance, grant or distribution of rights, options or warrants to all holders of Common Shares entitling them to subscribe for or purchase shares of beneficial interest of PTR or securities convertible into or exercisable for shares of beneficial interest. The Amended and Restated Investor Agreement also provides that, so long as Security Capital owns at least 10% of the outstanding Common Shares, PTR may not increase the number of persons serving on the Board to more than eight. Security Capital also is entitled to designate one or more persons to be nominated for election to the Board, as follows: (i) so long as Security Capital owns at least 10% but less than 25% of the outstanding Common Shares, it is entitled to nominate one person; and (ii) so long as Security Capital owns at least 25% of the outstanding Common Shares, it is entitled to nominate that number of persons as bears approximately the same ratio to the total number of members of the Board as the number of Common Shares beneficially owned by Security Capital bears to the total number of outstanding Common Shares, provided that Security Capital is entitled to designate no more than three persons so long as the Board consists of no more than eight members. As part of the Amended and Restated Investor Agreement, Security Capital is permitted to make employment opportunities with Security Capital or its affiliates available to the officers and employees of PTR. Prior to commencing discussions with a senior officer of PTR about any such opportunity, Security Capital is required to give the Board 14 days' prior written notice. In addition, the Amended and Restated Investor Agreement provides Security Capital with registration rights pursuant to which, in certain specified circumstances, Security Capital is permitted to request at any time, registration of all of Security Capital's Common Shares pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"). Security Capital is permitted to request one such registration for every $100 million (based on market value) of Common Shares it owns. Administrative Services Agreement Upon consummation of the Merger transaction, PTR and Security Capital entered into an administrative services agreement (the "Administrative Services Agreement"), pursuant to which Security Capital provides PTR with certain administrative and other services with respect to certain aspects of PTR's business, as selected from time to time by PTR at its option. These services are expected to include, but are not limited to, payroll and tax administration services, cash management and accounts payable services, data processing and other computer services, human resources, research, investor relations, insurance administration and legal administration. The fees payable to Security Capital will be equal to Security Capital's cost of providing such services, plus 20%, subject to a maximum amount of approximately $7.7 million during the initial term of the agreement, of which approximately $2.2 million will apply to the period between closing of the Merger and December 31, 1997 and the remainder will apply to 1998. Cost savings under the Administrative Services Agreement will accrue to PTR. The agreement has an initial term expiring on December 31, 1998 and will be automatically renewed for consecutive one-year terms, subject to approval by a majority of the independent members of the Board. License Agreement PTR and Security Capital entered into a license agreement on the closing date of the Merger (the "License Agreement") pursuant to which Security Capital has granted PTR a non-exclusive license to use Security Capital's registered logo and the non-exclusive right to use the name "Security Capital". The term of the license is for a period of 15 years, subject to PTR's right to extend the license for up to two additional five-year periods. As part of the License Agreement, Security Capital has agreed that during the term of the agreement, it will not exercise its rights under the Declaration of Trust to cause PTR to change its name. S-18 Protection of Business Agreement PTR and Security Capital entered into a protection of business agreement on the closing date of the Merger (the "Protection of Business Agreement"), which prohibits Security Capital and its affiliates from providing, anywhere in the United States, directly or indirectly, substantially the same services as those previously provided by the REIT Manager and SCG Realty Services to any entity that owns or operates multifamily communities. The Protection of Business Agreement does not prohibit Security Capital or its affiliates from owning the securities of any class of PTR or ATLANTIC. The Protection of Business Agreement will terminate in the event of an acquisition, directly or indirectly (other than by purchase from Security Capital or any of its affiliates), by any person (or group of persons acting in concert), other than Security Capital or any of its affiliates, of the greater of (i) 25% or more of the outstanding shares of voting securities of PTR and (ii) the percentage of outstanding voting securities of PTR owned directly or indirectly by Security Capital and its affiliates, in either case without the prior written consent of the Board. Subject to earlier termination pursuant to the preceding sentence, the Protection of Business Agreement will terminate on September 9, 2000, the third anniversary of the closing date of the Merger. INTERESTS OF CERTAIN PERSONS IN THE MERGER Upon consummation of the Merger transaction, the former officers and employees of the REIT Manager and SCG Realty Services (except C. Ronald Blankenship and Jeffrey A. Klopf) became officers and employees of PTR who are compensated for their services by PTR. The following table sets forth the compensation for the Chief Executive Officer and the four other most highly compensated executive officers of PTR (the "Named Executive Officers") who became employees of PTR and for all executive officers as a group (who became employees of PTR) for 1996. All compensation for 1996 was paid by Security Capital.
OTHER ANNUAL NAME AND TITLE SALARY BONUS COMPENSATION -------------- -------- -------- ------------ R. Scot Sellers, Managing Director............ $214,000 $236,000 0 Patrick R. Whelan, Managing Director.......... 190,000 150,000 0 Jay S. Jacobson, Senior Vice President........ 165,000 80,000 0 Bryan J. Flanagan, Senior Vice President...... 180,000 60,750 0 Mark N. Tennison, Senior Vice President....... 150,000 88,000 0 Executive Officers as a group (5 persons)..... 899,000 614,750 0
For 1997, each Named Executive Officer remained an employee of the REIT Manager and was compensated by Security Capital until the closing of the Merger, at which time he became an employee of PTR who is compensated by PTR. For 1997, each Named Executive Officer will receive a salary and be eligible for a target bonus. The actual amount of the bonus (which may be higher or lower than the target bonus) will be determined by the Compensation Committee at the end of the year and will be based on several factors, including individual performance, PTR's performance, PTR's financial condition, competitive conditions in the real estate industry and recommendations of senior management. PTR will continue the same compensation arrangements for the portion of 1997 in which the Named Executive Officers are employees of PTR. The Named Executive Officers will be paid the following salaries for 1997 and will be eligible for the following target bonuses for 1997:
TARGET NAME AND TITLE SALARY BONUS -------------- -------- -------- R. Scot Sellers, President and Chief Executive Officer.............................................. $250,000 $150,000 Patrick R. Whelan, Managing Director.................. 200,000 135,000 Jay S. Jacobson, Senior Vice President................ 198,000 40,000 Bryan J. Flanagan, Senior Vice President.............. 190,000 45,000 Mark N. Tennison, Senior Vice President............... 170,000 50,000
In addition, during 1997 officers of PTR were granted options to purchase Common Shares and officers and certain employees of PTR were granted the right to purchase Common Shares under the Incentive Plan (as defined below). See "Long-Term Incentive Plan". S-19 The following table shows the option and share purchase rights received by (i) the Named Executive Officers, (ii) all executive officers as a group and (iii) all employees, including all officers who are not executive officers, as a group.
OPTION AWARDS SHARE AWARDS ------------------------------------------ --------------------- DOLLAR VALUE OF SHARES SUBJECT TO NUMBER OF EXERCISE EXPIRATION DOLLAR NUMBER OF NAME AND TITLE OPTION(1) SHARES PRICE DATE VALUE(2) SHARES(2) - -------------- ------------ --------- -------- ---------- ----------- --------- R. Scot Sellers, President and Chief Executive Officer...... $ 300,000 13,597 $22 1/16 9/8/2007 $ 6,000,000 271,954 Patrick R. Whelan, Managing Director...... 250,000 11,331 $22 1/16 9/8/2007 5,700,000 258,356 Jay S. Jacobson, Senior Vice President......... 221,000 10,017 $22 1/16 9/8/2007 3,000,000 135,977 Bryan J. Flanagan, Senior Vice President.. 149,500 6,776 $22 1/16 9/8/2007 1,350,000 61,189 Mark N. Tennison, Senior Vice President......... 159,300 7,220 $22 1/16 9/8/2007 2,700,000 122,379 All executive officers as a group (5 persons)............ 1,079,800 48,941 $22 1/16 9/8/2007 18,750,000 849,855 All employees, including all officers who are not executive officers, as a group (166 persons)............... $3,475,250 157,518 $22 1/16 9/8/2007 $49,500,000 2,243,626
- -------- (1) Non-qualified options with dividend equivalent units and vesting schedule of 25% exercisable on the second anniversary and an additional 25% on each of the third, fourth and fifth anniversaries of the date of grant. (2) Represents the maximum amount of Common Shares which may be purchased by participants pursuant to the 1997 grant made under the Incentive Plan. Includes shares which may be purchased plus matching options for two shares granted with respect to each Common Share purchased. In addition to the awards under the Incentive Plan, options will be granted to 50 officers of PTR to purchase an aggregate of $7,442,500 of shares of Class A Stock of Security Capital (based on the exercise price). The Board also adopted a 401(k) plan which permits eligible employees to make pre-tax contributions of up to $9,500 to the plan or such other amount as may be permitted under Section 401(k) of the Internal Revenue Code of 1986, as amended (the "Code"). PTR will match 50% of participants' contributions that do not exceed 6% of their compensation. PTR intends to make such matching contributions in the form of Common Shares. Participants will become vested in the matching contributions 20% per each year of service. Former employees of the REIT Manager and SCG Realty Services will be credited for service for the time they were employees of Security Capital. LONG-TERM INCENTIVE PLAN General The Board has adopted, and PTR's shareholders have approved, the 1997 Incentive Plan (the "Incentive Plan") which authorizes the establishment of one or more option programs and share purchase programs and the award of share grants. No more than 5,650,000 Common Shares in the aggregate may be awarded under the Incentive Plan and no individual may be granted awards with respect to more than 500,000 Common Shares in any one-year period. The Compensation Committee of the Board (the "Compensation Committee") will administer the Incentive Plan. Subject to the terms of the Incentive Plan, the Compensation Committee determines which employees will be eligible to receive awards under the Incentive Plan, and the amount, price, timing and other terms and conditions applicable to such awards. Non-employee Trustees are not eligible to S-20 participate in the Incentive Plan. All employees of PTR or any of its subsidiaries are eligible to participate in the Incentive Plan. Options awarded under the Incentive Plan may be either incentive share options or non-qualified share options. Options become exercisable and expire in accordance with the terms established by the Compensation Committee. Common Shares transferred to a participant pursuant to the exercise of an option may be subject to such additional restrictions or limitations as the Compensation Committee may determine. The Incentive Plan provides generally that participants who are awarded options will also receive dividend equivalent units with respect to the options. The dividend equivalent units will be subject to the same vesting schedule as the options and will be payable when the options are exercised, unless the participant elects to defer receipt, or expire. Each dividend equivalent unit also accumulates additional dividend equivalent units on an annual basis. All dividend equivalent units are paid in the form of Common Shares at the rate of one Common Share per dividend equivalent unit. The Incentive Plan provides that the Compensation Committee may award participants performance stock, subject to achievement of performance objectives. The number of Common Shares and the performance measures and periods will be established by the Compensation Committee at the time the award is made, provided that any performance period will be at least one year. Non-Qualified Options Concurrently with the consummation of the Merger transaction, the Named Executive Officers and other officers and employees of PTR were granted options to purchase Common Shares at $22 1/16 per Common Share, the average of the high and low sale prices of the Common Shares on September 8, 1997, the date the Incentive Plan was approved by PTR's shareholders. The participants have no rights as shareholders with respect to the Common Shares subject to their options until the option is exercised. PTR ordinarily will be entitled to claim a federal income tax deduction on account of the exercise of a non- qualified option and payment of dividend equivalent units. The amount of the deduction is equal to the ordinary income recognized by a participant. Share Purchase Program Concurrently with the consummation of the Merger transaction, PTR permitted the Named Executive Officers and other officers and employees to purchase up to a total of $22,750,000 of Common Shares at $22 1/16 per Common Share, the average of the high and low sale prices of the Common Shares on September 8, 1997, the date the Incentive Plan was approved by PTR's shareholders, with two matching options for each Common Share purchased. Each matching option has a subscription price equal to $22 1/16 per Common Share, the average of the high and low sale prices of the Common Shares on September 8, 1997. No dividend equivalent units will be issued with respect to such matching options. The Common Share purchases provide for a one-year restricted period during which the participants may not, while employed, sell the Common Shares. If a participant leaves the employment of PTR prior to the end of the restricted period, PTR has the right to repurchase the Common Shares at the fair market value of such Common Shares at the time the participant's employment is terminated. At the end of the restricted period, the participant will own the Common Shares without further restriction. However, if the participant sells the Common Shares after the end of the restricted period, the participant's matching options may be adversely affected. PTR made loans for up to 95% of the purchase price available to participants. Each loan is full recourse to the participant and is secured by the purchased Common Shares. S-21 SELECTED FINANCIAL DATA The following table sets forth (i) historical selected financial data for the periods indicated and as of the dates indicated for PTR and (ii) unaudited pro forma selected data as of June 30, 1997 and for the six months ended June 30, 1997 and for the year ended December 31, 1996, giving effect to the Merger, the Homestead Transaction (as defined in the pro forma financial statements incorporated by reference herein) and the acquisition and disposition of certain multifamily communities, as if the noted transactions had occurred as of January 1, 1996 for the Operations Summary, Per Share Data and Other Data information and as of June 30, 1997 for Financial Position information. Pro forma adjustments made to arrive at the pro forma amounts set forth below are described in PTR's pro forma financial statements incorporated by reference herein. The following information should be read in conjunction with and is qualified in its entirety by the PTR historical financial statements and the PTR pro forma financial statements incorporated by reference herein. The unaudited pro forma selected information is intended for informational purposes and is not necessarily indicative of the future financial position or future results of operations of PTR or of the financial position or the results of operations of PTR that would have actually occurred had the noted transactions been completed as of the date or for the periods presented (amounts in thousands, except per share data).
PRO FORMA HISTORICAL SIX MONTHS SIX MONTHS PRO FORMA ENDED JUNE ENDED YEAR ENDED HISTORICAL--YEAR ENDED DECEMBER 31, 30, JUNE 30, DECEMBER 31, ------------------------------------------ 1997 1997 1996 1996 1995 1994 1993 1992 ---------- ---------- ------------ -------- -------- -------- ------- ------- OPERATIONS SUMMARY: Rental revenues....... $163,067 $161,362 $340,098 $322,046 $262,473 $183,472 $76,129 $30,970 Interest income on Homestead Notes...... 6,974 6,974 6,786 2,035 -- -- -- -- Total revenues........ 171,379 169,674 349,050 326,246 264,873 186,105 78,418 32,779 Property management fees paid to affiliates........... -- 5,503 -- 11,610 8,912 7,148 3,862 1,424 REIT management fee paid to affiliate.... -- 9,323 -- 22,191 20,354 13,182 7,073 2,711 General and administrative expense.............. 6,060 588 10,896 1,077 952 784 660 436 Earnings from operations........... 45,358 43,341 87,817(1) 94,089 81,696 46,719 23,191 9,037 Gain (loss) on sale of investments.......... 37,207 37,207 37,492 37,492 2,623 -- 2,302 (51) Preferred Share cash dividends paid....... 9,840 9,840 24,167 24,167 21,823 16,100 1,341 -- Net earnings attributable to Common Shares........ 72,725 70,708 100,272(1) 106,544 62,496 30,619 24,152 8,986 Common Share cash distributions paid... $ 49,657 $ 49,657 $ 90,728 $ 90,728 $ 76,804 $ 46,121 $29,162 $13,059 PER SHARE DATA: Net earnings attributable to Common Shares per Common Share......... 0.91 0.92 $ 1.31(1) $ 1.46 $ 0.93 $ 0.66 $ 0.66 $ 0.46 Common Share cash distributions paid... 0.65 0.65 1.24 1.24 1.15 1.00 0.82 0.70 Series A Preferred Share cash dividends paid................. 0.8755 0.8755 1.75 1.75 1.75 1.75 0.1458 -- Series B Preferred Share cash dividends paid................. $ 1.125 $ 1.125 $ 2.25 $ 2.25 $ 1.363 $ -- $ -- $ -- Weighted-average Common Shares outstanding.......... 79,935 76,639 76,353 73,057 67,052 46,734 36,549 19,435
PRO FORMA HISTORICAL HISTORICAL--YEAR ENDED DECEMBER 31, JUNE 30, JUNE 30, -------------------------------------------------- 1997 1997 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- -------- -------- FINANCIAL POSITION: Real estate owned, at cost................. $2,398,365 $2,391,165 $2,153,363 $1,855,866 $1,296,288 $872,610 $337,274 Homestead Notes....... 246,453 246,453 176,304 -- -- -- -- Total assets.......... 2,613,107 2,605,816 2,282,432 1,840,999 1,295,778 890,301 342,235 Credit facilities..... 203,015 203,015 110,200 129,000 102,000 51,500 54,802 Long-term debt........ 630,000 630,000 580,000 200,000 200,000 -- -- Mortgages payable..... 282,145 278,619 217,188 158,054 93,624 48,872 30,824 Total liabilities..... 1,213,175 1,208,492 1,014,924 565,331 455,136 135,284 94,186 Shareholders' equity.. $1,399,932 $1,397,324 $1,267,508 $1,275,668 $ 840,642 $755,017 $248,049 Number of Common Shares outstanding... 82,672 79,376 75,511 72,211 50,456 44,645 27,034
S-22
HISTORICAL PRO FORMA SIX MONTHS PRO FORMA SIX MONTHS ENDED YEAR ENDED HISTORICAL--YEAR ENDED DECEMBER 31, ENDED JUNE JUNE 30, DECEMBER 31, -------------------------------------------------- 30, 1997 1997 1996 1996 1995 1994 1993 1992 ---------- ---------- ------------ -------- -------- -------- --------- --------- OTHER DATA: Net earnings attributable to Common Shares........ $ 72,725 $ 70,708 $100,272(1) $106,544 $ 62,496 $ 30,619 $ 24,152 $ 8,986 Add (deduct): Real estate depreciation....... 25,709 24,688 49,956 44,887 36,685 24,614 10,509 5,311 Provision for possible loss on investments........ 1,500 1,500 -- -- 420 1,600 2,270 400 (Gain) or loss on disposition of investments........ (37,207) (37,207) (37,492) (37,492) (2,623) -- (2,302) 51 Extraordinary item-- loss on early extinguishment of debt, net.......... -- -- 739 739 -- -- -- -- Amortization related to Homestead Notes(2)........... (528) (528) (799) (141) -- -- -- -- Other (primarily provision for loss on receivables).... -- -- -- -- -- -- 87 174 --------- --------- -------- -------- -------- -------- --------- --------- Funds from operations attributable to Common Shares(3)..... $ 62,199 $ 59,161 $112,676 $114,537 $ 96,978 $ 56,833 $ 34,716 $ 14,922 ========= ========= ======== ======== ======== ======== ========= ========= Net cash provided by operating activities. $ 73,528 $ 70,118 $142,660 $143,939 $121,795 $ 94,625 $ 49,247 $ 20,252 Net cash used by investing activities........... (191,455) (187,379) (455,708) (360,935) (294,488) (368,515) (529,065) (229,489) Net cash provided by financing activities. $ 117,230 $ 117,230 $282,545 $195,720 $191,520 $276,457 $ 478,345 $ 185,130
- ------- (1) Excludes the impact of a one-time pro forma adjustment of approximately $73 million relating to the costs incurred in acquiring the REIT Manager and SCG Realty Services, since the intent of providing this pro forma financial information is to reflect the expected continuing impact of the Merger on PTR. Upon consummation of the Merger, an expense of this nature will be recorded as an operating expense on PTR's statement of earnings, but PTR will not deduct the expense for purposes of calculating funds from operations, due to the non-recurring and non-cash nature of the expense. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--REIT Management Agreement." (2) Represents non-cash amortization associated with the Homestead Note conversion feature and warrant-related deferred revenue which is not recognized for purposes of funds from operations. (3) Funds from operations represents net earnings computed in accordance with GAAP, excluding gains (or losses) from real estate transactions, provisions for possible losses, extraordinary items, significant non- recurring items and real estate depreciation. PTR believes that funds from operations is helpful to a reader as a measure of the performance of an equity REIT because, along with cash flow from operating activities, financing activities and investing activities, it provides a reader with an indication of the ability of PTR to incur and service debt, to make capital expenditures and to fund other cash needs. Funds from operations should not be considered as an alternative to net earnings or any other GAAP measurement of performance as an indicator of PTR's operating performance or as an alternative to cash flows from operating, investing or financing activities as a measure of liquidity. In June 1994, PTR adopted the National Association of Real Estate Investment Trusts' ("NAREIT") revised definition of funds from operations. Under this more conservative definition, loan cost amortization is not added back to net earnings in determining funds from operations. For comparability, funds from operations for the periods prior to July 1994 give effect to the revised definition. The funds from operations measure presented by PTR, while consistent with the NAREIT definition, will not be comparable to similarly titled measures of other REITs which do not compute funds from operations in a manner consistent with PTR. Funds from operations is not intended to represent cash made available to shareholders. Cash distributions paid to shareholders are presented above under "Operations Summary". S-23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with PTR's financial statements and notes thereto incorporated by reference herein. The statements contained in this discussion and elsewhere in this Prospectus Supplement and the accompanying Prospectus that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. These forward-looking statements are based on current expectations, estimates and projections about the industry and markets in which PTR operates, management's beliefs and assumptions made by management. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. PTR's operating results depend primarily on income from multifamily communities, which is substantially influenced by (i) the demand for and supply of multifamily units in PTR's primary target market and submarkets, (ii) operating expense levels, (iii) the effectiveness of property-level operations and (iv) the pace and price at which PTR can acquire and develop additional multifamily communities. Capital and credit market conditions which affect PTR's cost of capital also influence operating results. OVERVIEW General PTR's results of operations, financial position and liquidity have been influenced primarily by the operations of and investments made in PTR's multifamily communities. The term "multifamily" as used herein refers to garden-style communities and excludes Homestead Village(R) extended-stay lodging assets, which were contributed to a new publicly traded company, Homestead, on October 17, 1996, in exchange for certain Homestead securities. S-24 Multifamily Investments The following table provides an overview of PTR's multifamily portfolio and related investment activity for the periods indicated (dollar amounts in thousands):
THREE MONTHS THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, ENDED MARCH 31, 1997 1997 JUNE 30, 1997 -------------- ------------ ------------- OPERATING COMMUNITIES: Communities.................. 133 129 129 Units........................ 40,874 40,786 40,786 Total expected investment(1). $1,928,702 $2,060,586 $2,060,586 COMMUNITIES UNDER CONSTRUCTION: STARTS DURING PERIOD: Communities.................. 1 6 7 Units........................ 192 1,733 1,925 Total expected investment(1). $ 9,383 $ 122,223 $ 131,606 COMPLETIONS DURING PERIOD: Communities.................. -- 2 2 Units........................ -- 732 732 Total expected investment(1). -- $ 46,820 $ 46,820 STABILIZATIONS DURING PERIOD: Communities.................. -- 1 1 Units........................ -- 364 364 Total expected investment(1). -- $ 22,139 $ 22,139 UNDER CONSTRUCTION AT END OF PERIOD: Communities.................. 18 22 22 Units........................ 5,671 6,672 6,672 Total expected investment(1). $ 359,366 $ 435,195 $ 435,195 Investment to date........... $ 227,325 $ 254,843 $ 254,843 DEVELOPMENT EXPENDITURES DURING PERIOD $ 52,883 $ 61,597 $ 114,480 ACQUISITIONS: Communities.................. 5 6 11 Units........................ 1,652 2,065 3,717 Total expected investment(1). $ 143,746 $ 187,737 $ 331,483 DISPOSITIONS (2): Communities.................. 13 13 26 Units........................ 3,480 2,885 6,365 Gross sales proceeds....... $ 142,137 $ 107,679 $ 249,816 Gains...................... $ 25,335 $ 11,872 $ 37,207
- -------- (1) For operating communities and acquisitions, represents cost, including budgeted renovations, as of period end. For communities under construction, represents total budgeted development cost as of period end, which includes the cost of land, fees, permits, payments to contractors, materials, architectural and engineering fees and interest and property taxes to be capitalized during the construction period. (2) Includes the sale of an industrial building and two unrelated parcels of land with gross sales proceeds of approximately $772,241 and an aggregate gain of approximately $382,863. Current Development Activity PTR believes that development of multifamily communities from the ground up, which are built for long-term ownership and designed to meet broad resident preferences and demographic trends, will continue to provide an important source of long-term cash flow growth. PTR believes its ability to compete is significantly enhanced relative to other companies because of PTR's depth of development and acquisition S-25 personnel and presence in local markets combined with its access to investment capital. The following table summarizes PTR's development communities under construction as of June 30, 1997 (dollar amounts in thousands):
TOTAL NUMBER OF PTR EXPECTED UNITS INVESTMENT INVESTMENT (1) % LEASED (2) --------- ---------- -------------- ------------ Communities under Construction and in Lease-Up (3).............. 2,276 $125,416 $132,009 59.5% Other Communities Under Construction (4).... 4,396 129,427 303,186 ----- -------- -------- Total Communities Under Construction.............. 6,672 $254,843 $435,195 ===== ======== ========
- -------- (1) Represents total budgeted development cost, which includes the cost of land, fees, permits, payments to contractors, materials, architectural and engineering fees and interest and property taxes to be capitalized during the construction period. (2) The percentage leased is based on occupied units divided by total number of units in the community (completed and under construction). (3) A development community is considered in "lease-up" once the first units are delivered. (4) Lease-up has not yet commenced. There are risks associated with PTR's development and construction activities which include: development and acquisition opportunities explored may be abandoned; construction costs of a community may exceed original estimates due to increased material, labor or other expenses, which could make completion of the community uneconomical; occupancy rates and rents at a newly completed community are dependent on a number of factors, including market and general economic conditions, and may not be sufficient to make the community profitable; financing may not be available on favorable terms for the development of a community; and construction and lease-up may not be completed on schedule, resulting in increased debt service expense and construction costs. Development activities are also subject to risks relating to the inability to obtain, or delays in obtaining, all necessary land-use, building, occupancy and other required governmental permits and authorizations. The occurrence of any of the events described above could adversely affect PTR's ability to achieve its projected yields on communities under development or redevelopment. To mitigate these risks, PTR obtains zoning and municipal approvals prior to purchasing land. Furthermore, PTR does not take construction risk, but instead uses qualified third-party general contractors to build its communities, using guaranteed maximum price contracts. PTR cannot eliminate all development risk, but believes that the opportunities to better control product and realize higher returns from development communities compensate for the limited risk. Recent Acquisitions In addition to its development activity, during the six month period ended June 30, 1997, PTR completed the acquisition of 11 operating multifamily communities (3,717 units) in California and Seattle at a total expected investment of $331.5 million. Acquisitions entail risks that investments will fail to perform in accordance with expectations and that judgments with respect to the cost of improvements to bring an acquired community up to standards established for the market position intended for that community will prove inaccurate, as well as general investment risks associated with any new real estate investment. Although PTR undertakes an evaluation of the physical condition of each new community before it is acquired, certain defects or necessary repairs may not be detected until after the community is acquired, which could significantly increase PTR's total acquisition costs. S-26 These risks are partially mitigated and managed by the extensive market research and rigorous due diligence process performed in connection with every community considered. These factors combined with PTR's extensive market experience throughout its target market and methodical approval process have proven PTR's ability to select investments that have a high probability of meeting or exceeding underwritten expectations. RESULTS OF OPERATIONS Six Months Ended June 30, 1997 compared to June 30, 1996 Net earnings for the six months ended June 30, 1997 and 1996 were $80.5 million and $54.6 million, respectively, an increase of $25.9 million (47.4%). This increase resulted primarily from a $29.1 million increase in gains on dispositions and increased earnings from multifamily communities offset by the elimination of earnings from Homestead Village properties and higher interest expense. A discussion of the major components of the increase in net earnings follows. Property Operations The following table summarizes the Net Operating Income generated from property operations for each period (in thousands):
HOMESTEAD OTHER NON- MULTIFAMILY VILLAGE MULTIFAMILY TOTAL ----------- --------- ----------- -------- Net Operating Income--Six Months Ended June 30, 1997(1)......... $99,547 -- $1,704 $101,251 Net Operating Income--Six Months Ended June 30, 1996(1)......... 84,519 7,555 1,474 93,548 ------- ------- ------ -------- Increase (decrease)............. $15,028 $(7,555) $ 230 $ 7,703 ======= ======= ====== ========
- -------- (1) Net Operating Income is defined as rental revenues less rental expenses, real estate taxes and property management fees. At June 30, 1997, multifamily investments comprised 99.2% of PTR's total real estate portfolio, based on total expected investment. The overall $15.0 million increase in Net Operating Income from PTR's multifamily communities for the six months ended June 30, 1997 as compared to the six months ended June 30, 1996 was attributable to a $20.8 million increase in rental revenues partially offset by a $5.8 million increase in rental expenses, real estate taxes and property management fees ("Operating Expenses"). The $20.8 million increase in rental revenues from $138.8 million for the six months ended June 30, 1996 to $159.6 million for the six months ended June 30, 1997 was primarily attributable to increases in rental revenues generated by existing multifamily communities, increased investments in newer markets such as California, and dispositions in markets with lower rental rates such as Tucson and Phoenix. Similarly, the $5.8 million increase in Operating Expenses from $54.3 million for the six months ended June 30, 1996 to $60.1 million for the six months ended June 30, 1997 is attributable primarily to higher operating costs in new markets and increases in Operating Expenses associated with existing multifamily communities. Even with these higher operating costs, PTR's multifamily net operating income as a percentage of rental revenues increased from 60.8% in 1996 to 62.4% in 1997 due to the significant revenue increases. Additional information for these communities is presented below under "--Same Store Communities". PTR categorizes operating multifamily communities (which include all communities not under development) as either "stabilized" or "pre-stabilized." The term "stabilized" means that renovation, repositioning, new management and new marketing programs (or development and marketing in the case of newly developed communities) have been completed for a sufficient period of time (but in no event longer than 12 months, except for major rehabilitations) to achieve 93% occupancy at market rents. Prior to being "stabilized," a community is considered "pre-stabilized." Approximately 75.6% and 82.8% of PTR's operating multifamily portfolio was classified as stabilized as of June 30, 1997 and 1996, respectively, based on total expected investment. S-27 The $7.6 million in Homestead Village Net Operating Income shown for the six months ended June 30, 1996 resulted from rental revenues aggregating $14.9 million offset by Operating Expenses aggregating $7.3 million generated from 26 properties operating as of June 30, 1996. The decrease in Net Operating Income related to the Homestead Village(R) properties in the six months ended June 30, 1997 is entirely due to the contribution of all properties to Homestead, a newly formed company, on October 17, 1996. Same Store Communities The following table illustrates selected quarterly and year-to-date performance data for PTR's communities which were fully operational in comparable periods of 1996 and 1997 ("same store communities") followed by selected same store community information by region and market:
FULLY OPERATIONAL FULLY OPERATIONAL COMMUNITIES ON COMMUNITIES ON APRIL 1, 1996 JANUARY 1, 1996 ------------------ ------------------ PORTFOLIO (DOLLAR AMOUNTS IN THOUSANDS): Communities........................... 75 72 Units................................. 23,109 21,878 Total expected investment(1).......... $936,374 $882,689 % of total PTR portfolio(2)........... 37.52% 35.37% THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1997 VS. 1996 1997 VS. 1996 ------------------ ------------------ OPERATING PERFORMANCE: Collections growth(3)................. 2.88% 2.30% Property Operating Expense growth..... 2.64% 2.22% Net Operating Income growth........... 3.03% 2.36% THREE MONTHS ENDED THREE MONTHS ENDED JUNE 30, 1997 JUNE 30, 1996 ------------------ ------------------ SUMMARY INFORMATION ON APRIL 1, 1996 SAME STORE COMMUNITIES (IN ACTUAL DOLLARS): Average physical occupancy............ 94.33% 94.28% Property operating expense ratio(4)... 38.85% 38.94% Average rental rate per unit(5)....... $ 636 $ 610 Recurring capital expenditures per unit................................. $ 92 $ 72
- -------- See notes following next table. S-28
AVERAGE PHYSICAL OCCUPANCY% THREE MONTHS 4/1/96 SAME ENDED COLLECTIONS GROWTH STORE TOTAL PTR JUNE 30, THREE MONTHS COMMUNITIES% PORTFOLIO% ------------------ ENDED JUNE 30, BY MARKET BY MARKET DISTRIBUTION 1997 1996 1997 VS. 1996(3) (2) MARKET(2) - ------------------- -------- -------- ------------------ ------------ ---------- CENTRAL REGION: Austin................ 93.38% 93.57% 4.31% 1.82% 2.88% Dallas................ 93.25 96.87 (1.83) 1.57 2.86 Denver................ 96.23 95.41 4.09 9.32 5.12 El Paso............... 92.52 94.71 (2.15) 7.68 3.38 Houston............... 95.29 96.34 2.50 7.18 5.11 San Antonio........... 94.88 92.49 4.58 9.57 5.25 -------- -------- ----- ------ ------ CENTRAL REGION SUBTOTAL............. 94.48% 94.54% 2.35% 37.14% 24.60% -------- -------- ----- ------ ------ NORTHWEST REGION: Portland.............. 95.63% 93.60% 6.86% 4.13% 5.48% Salt Lake City........ 95.45 93.99 7.00 3.88 4.49 Seattle............... 96.72 94.74 11.13 6.97 8.86 -------- -------- ----- ------ ------ NORTHWEST REGION SUBTOTAL............. 96.05% 94.22% 8.86% 14.98% 18.83% -------- -------- ----- ------ ------ WEST REGION: Albuquerque........... 92.95% 95.30% (4.80)% 4.89% 5.28% Las Vegas............. 93.15 95.10 (0.38) 10.65 3.99 Phoenix............... 94.11 94.37 0.93 15.40 10.92 Northern California... 93.73 96.48 8.19 4.16 14.02 Southern California... 93.66 89.39 7.29 8.35 17.74 Tucson................ 90.73 93.46 (0.67) 1.55 1.62 -------- -------- ----- ------ ------ WEST REGION SUBTOTAL.. 93.47% 93.92% 1.53% 45.00% 53.57% -------- -------- ----- ------ ------ Other Markets........... 95.91% 95.55% 1.64% 2.88% 3.00% -------- -------- ----- ------ ------ Totals.................. 94.33% 94.28% 2.88% 100.00% 100.00% ======== ======== ===== ====== ====== Same store communities as a percentage of total PTR portfolio. 37.52% ======
- -------- (1) Represents cost, including budgeted renovations. (2) Based on total expected investment as of June 30, 1997. (3) Represents percentage growth in rental revenues, net of vacancies, bad debts and concessions. (4) Represents Operating Expenses as a percentage of rental revenues. (5) Represents weighted-average monthly "asking rents" during each period. Homestead Interest and Homestead Notes Through June 30, 1997, PTR had funded $142.4 million of its $198.8 million Homestead funding commitment of which $41.3 million was funded during the six months ended June 30, 1997. This leaves a remaining commitment under the funding commitment agreement of approximately $56.4 million, which will be provided to Homestead throughout the remainder of 1997 and early 1998 to fund developments as needed on development properties contributed by PTR. During the six months ended June 30, 1997, PTR recorded $7.0 million in interest income ($6.4 million for purposes of calculating funds from operations) from the Homestead Notes. PTR deducts from net earnings the S-29 interest income related to the amortization of discounts and warrant-related deferred revenue in calculating funds from operations. Homestead interest income is expected to increase in future periods as PTR continues to fund Homestead's development activity up to its $198.8 million funding commitment. Upon full funding, PTR will have funded $198.8 million in exchange for Homestead Notes having a face amount of $221.3 million. The Homestead Notes are convertible into Homestead common stock after March 31, 1997 on the basis of one share of Homestead common stock for every $11.50 of principal face amount outstanding, which would result in the ownership of approximately 19.2 million shares of Homestead common stock at full funding. Under these assumptions and using the trading price of Homestead common stock at June 30, 1997 of $17.875, PTR's ownership would result in the following incremental value per PTR Common Share at June 30, 1997 (in thousands, except per share amounts:) Homestead common stock price................................... $ 17.875 Conversion price............................................... 11.500 -------- Incremental value per share of Homestead common stock...... $ 6.375 Shares of Homestead common stock upon conversion (at full funding).................................................... 19,246 -------- Total incremental value from conversion.................... $122,693 PTR Common Shares outstanding................................ 79,376 -------- Assumed incremental value per PTR Common Share............. $ 1.55 ========
Upon full funding of the Homestead Notes by PTR and ATLANTIC, PTR's conversion rights would represent a 34.7% ownership interest in Homestead. This ownership interest assumes no further equity offerings by Homestead, conversion of all Homestead Notes by PTR and ATLANTIC and exercise of all outstanding Homestead warrants. Depreciation Expense The increase in depreciation expense resulted primarily from the increase in the number of operating communities partially offset by dispositions, including those related to the contribution of assets to Homestead on October 17, 1996. Interest Expense The following table summarizes PTR's interest expense (in thousands):
SIX MONTHS SIX MONTHS ENDED ENDED JUNE 30, 1997 JUNE 30, 1996 ------------- ------------- Credit facilities............................. $ 7,298 $ 4,203 Long-Term Debt................................ 22,581 11,114 Mortgages payable............................. 8,631 5,969 Capitalized interest.......................... (8,751) (7,509) ------- ------- Total interest expense...................... $29,759 $13,777 ======= =======
Interest expense on PTR's credit facilities increased $3.1 million (73.6%) resulting primarily from higher average outstanding balances. Average borrowings on the line of credit were approximately $117.2 millon (with an average effective interest rate of 8.3%) during the six months ended June 30, 1997, as compared to average borrowings of approximately $94.2 million (with an average effective interest rate of 7.55%) for the same period in 1996. Interest expense on PTR's long-term unsecured debt ("Long Term Debt") increased $11.5 million (103.2%) for the six month period ended June 30, 1997 as compared to the same period in 1996. The increase is primarily attributable to the issuance of $380 million of Long-Term Debt during the year-ended December 31, 1996 and $50 million of Long-Term Debt in March 1997. S-30 Mortgage interest expense increased approximately $2.7 million (44.6%) for the six months ended June 30, 1997 as compared with the same period in 1996. This increase is the result of additional weighted-average debt outstanding due to mortgage assumptions related to community acquisitions which were partially offset by prepayments during 1996 and 1997. The increase in interest costs were partially offset by an increase of approximately $1.2 million (16.5%) in capitalized interest. The increase in capitalized interest is attributable to higher levels of multifamily development activity for the six months ended June 30, 1997 as compared to the same period in 1996. REIT Management Fee Paid to Affiliate The REIT Management fee paid by PTR decreased by approximately 17.3% during the six months ended June 30, 1997 as compared to the same period in 1996. This decrease is primarily attributable to an overall increase in the assumed principal amortization and interest on Long-Term Debt for purposes of the fee calculation, coupled with the fact that interest income on the Homestead Notes has been excluded from the calculation of the fee in accordance with the terms of the agreement. On June 10, 1997, the Board extended the term of the REIT Management Agreement through the earlier of (i) the date of the consummation of the Merger, or (ii) the regularly scheduled Board meeting in the fourth quarter of 1997. See "The Merger Transaction" for information regarding the Merger whereby PTR acquired the operations and businesses of the REIT Manager and SCG Realty Services in exchange for Common Shares. Gains and Provision for Possible Loss on Investments As a result of PTR's asset optimization strategy, PTR disposed of 23 multifamily communities, one industrial building and two parcels of land during the six months ended June 30, 1997, representing gross proceeds of $249.8 million. As of June 30, 1997, PTR held a portion of the 1997 disposition proceeds aggregating $19.7 million in an interest bearing escrow account, pending acquisition of other multifamily communities to complete the tax-deferred exchange. During the six months ended June 30, 1996, PTR disposed of six multifamily communities, one parcel of land and one industrial building representing gross proceeds of $87.8 million. The proceeds from the 1996 and 1997 dispositions have been or will be redeployed into other multifamily communities that in PTR's view offer better long-term cash flow growth prospects. For financial reporting purposes, however, the transactions qualified for profit recognition, and aggregate gains of $37.2 million and $8.1 million, were recorded for the six months ended June 30, 1997 and 1996, respectively. As part of PTR's asset optimization strategy, six multifamily communities and five parcels of land and one industrial building were held for disposition as of June 30, 1997. The aggregate carrying value of properties held for disposition was approximately $79.0 million at June 30, 1997. Subject to normal closing risks, PTR expects to complete the disposition of these communities during 1997 and early 1998 and redeploy the net proceeds from such dispositions, where appropriate, through tax-deferred exchanges, into the acquisition of multifamily communities. Three Month Period Ended June 30, 1997 and 1996 Revenues and expenses for the three months ended June 30, 1997 compared to the three months ended June 30, 1996 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 months ended June 30, 1997 and 1996. ENVIRONMENTAL MATTERS PTR is subject to environmental regulations related to the ownership, operation, development and acquisition of real estate. As part of its due diligence procedures, PTR has conducted Phase I environmental assessments on each community prior to acquisition. The cost of complying with environmental regulations was not material to PTR's results of operations during either period. PTR is not aware of any environmental condition on any of its communities that is likely to have a material adverse effect on PTR's financial position or results of operations. S-31 LIQUIDITY AND CAPITAL RESOURCES PTR considers its liquidity and ability to generate cash from operations and financings to be adequate and expects it to continue to be adequate to meet PTR's operating and capital investment requirements as well as its Homestead funding obligation and shareholder distribution requirements. Operating Activities Net cash flow provided by operating activities increased by $10.0 million (16.6%) for the six months ended June 30, 1997 as compared to the same period in 1996. This increase was due primarily to increased cash generated by multifamily communities and reduced cash outflows for operating assets and liabilities resulting from timing differences. Investing and Financing Activities During the six months ended June 30, 1997 and 1996, PTR invested cash of $371.3 and $284.0 million, respectively, in real estate investments relating primarily to the significant acquisition and development activity summarized in "--Overview" above. The $371.3 million invested in real estate and $41.3 million in fundings of Homestead Notes during the six months ended June 30, 1997 were financed primarily from $224.5 million in net proceeds from property dispositions (excluding $19.7 million held in escrow pending tax-deferred exchanges), and borrowings under PTR's credit facilities which were partially repaid from proceeds related to PTR's $50 million offering of Long-Term Debt issued in March 1997 and $54.3 million in net proceeds from the sale of 2.5 million Common Shares in June 1997. The $284.0 million invested during the six months ended June 30, 1996 was financed primarily from $85.7 million in net proceeds from property dispositions and borrowings under PTR's credit facilities which were partially repaid from proceeds related to PTR's $150 million offering of Long-Term Debt issued in February 1996. Total mortgage debt assumed during 1997 in connection with community acquisitions aggregated $82.8 million. Other significant financing activity included the payment of $59.5 million and $57.6 million in Common Share and preferred share distributions for the six months ended June 30, 1997 and 1996, respectively. The increase is primarily attributable to a 4.8% increase in the distributions paid per Common Share. Preferred Share dividends decreased approximately $2.9 million during the respective periods as a result of conversions of Series A Preferred Shares to Common Shares which resulted in increased Common Share distributions. PTR prepaid mortgages due to community dispositions of $19.9 million and $25.8 million for the six months ended June 30, 1997 and 1996, respectively. Credit Facilities PTR has a $350 million unsecured revolving line of credit with TCB, as agent for a group of financial institutions (collectively, the "Lenders"). The line of credit matures in August 1999 and may be extended annually for an additional year with the approval of the Lenders. The line of credit bears interest at the greater of prime (8.5% at September 8, 1997) or the federal funds rate plus 0.50%, or at PTR"s option, LIBOR (5.6875% at September 8, 1997) plus 0.75% (6.4375% at September 8, 1997). The spread over LIBOR can vary from LIBOR plus 0.50% to LIBOR plus 1.50% based upon the rating of PTR's Long-Term Debt. Additionally, there is a commitment fee on the average unfunded line of credit balance. The commitment fee was $114,000 and $218,000 for the six months ended June 30, 1997 and 1996, respectively. S-32 A summary of PTR's line of credit borrowings is as follows (dollars in thousands):
SIX MONTHS ENDED YEAR ENDED JUNE 30, 1997 DECEMBER 31, 1996 ---------------- ----------------- Total line of credit.................. $350,000 $350,000 Borrowings outstanding at end of period............................... 68,250 99,750 Weighted-average daily borrowings..... 117,162 112,248 Maximum borrowings outstanding at any month end............................ 205,000 188,750 Weighted-average daily nominal interest rate........................ 6.5% 7.3% Weighted-average daily effective interest rate........................ 8.3% 8.8% Weighted-average nominal interest rate at end of period..................... 6.8% 6.6%
At September 8, 1997, there were $151.3 million of borrowings outstanding under PTR's line of credit. On September 9, 1996, PTR entered into a short-term, unsecured, borrowing agreement with TCB. The loan matures March 18, 1998 and bears interest at an overnight rate which ranged from 5.94% to 7.00% during the six months ended June 30, 1997. At September 8, 1997, there were $14.3 million of borrowings outstanding under this agreement. On March 10, 1997, PTR borrowed $60 million under a short-term unsecured borrowing agreement with a financial institution. The loan matures on September 10, 1997. Interest is payable monthly at an annual rate of LIBOR plus 0.60% (6.2563% at September 8, 1997). On April 4, 1997, PTR borrowed an additional $40 million under a short-term unsecured borrowing agreement with the same financial institution, having approximately the same interest rate and repayment terms. The proceeds from both loans were used to repay borrowings under PTR's line of credit. The aggregate amount of borrowings outstanding under all of PTR's credit facilities at September 8, 1997 was $265.5 million. Long-Term Debt At August 31, 1997, PTR had issued a total of $630 million of Long-Term Debt, which bears interest at fixed rates, payable semi-annually. Funds from such issuances were used primarily for acquisition, development and renovation of multifamily communities and to repay balances on credit facilities incurred for such purposes. The following table summarizes the Long-Term Debt as of August 31, 1997:
ISSUANCE AVERAGE EFFECTIVE AND INTEREST RATE, AVERAGE OUTSTANDING AVERAGE INCLUDING OFFERING ORIGINAL PRINCIPAL COUPON DISCOUNTS AND LIFE DATE OF ISSUANCE AMOUNT RATE ISSUANCE COSTS (YEARS) ---------------- ------------ ------- ------------------ -------- March 31, 1997.......... $ 50 million 7.905% 7.850% 16.00 October 21, 1996........ 130 million 7.350 7.500 6.85 August 6, 1996.......... 100 million 7.840 7.950 15.60 February 23, 1996....... 150 million 7.710 7.840 15.50 February 8, 1994........ 200 million 7.240 7.370 14.25 ------------ ----- ----- ----- Total/Average....... $630 million 7.530% 7.640% 13.37 ============ ===== ===== =====
The Long-Term Debt together with PTR's mortgages payable result in a relatively level amortization schedule which minimizes PTR's refinancing risk. The Long-Term Debt, other than a $15 million tranche of 6.500% Notes issued October 21, 1996 and due 2026 (the "6.500% Notes"), is redeemable at 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 Long-Term Debt being redeemed plus accrued interest thereon to the redemption date plus an adjustment, if any, based S-33 on the yield to maturity relating to market yields available at redemption. The 6.500% Notes may be repaid on October 15, 1999 at the option of the holders at their full principal amount together with accrued interest. If the holders do not exercise their right to require PTR to repay the 6.500% Notes on October 15, 1999, they may be repaid at the option of PTR, in whole or in part, at a redemption price equal to the sum of the principal amount of the Long-Term Debt being redeemed plus accrued interest thereon to the redemption date plus an adjustment, if any, based on the yield to maturity relating to market yields available at redemption. The Long-Term Debt is governed by the terms and provisions of an indenture agreement. Mortgages Payable The changes in mortgages payable during the six months ended June 30, 1997 consisted of the following (in thousands): Balance at January 1, 1997..................................... $217,188 Mortgage notes assumed......................................... 82,827 Principal payments, including prepayments upon community dispositions.................................................. (21,396) -------- Balance at June 30, 1997....................................... $278,619 ========
Scheduled Debt Maturities Approximate principal payments due during each of the calendar years in the 20-year period ending December 31, 2016 and thereafter, as of June 30, 1997, are as follows (in thousands):
CREDIT LONG-TERM FACILITIES DEBT MORTGAGES TOTAL ---------- --------- --------- ---------- 1997............................ $134,765 $ -- $ 25,164 $ 159,929 1998............................ 68,250 -- 35,072 103,322 1999............................ -- 30,000 8,609 38,609 2000............................ -- -- 30,323 30,323 2001............................ -- 12,500 24,117 36,617 2002............................ -- 32,500 17,647 50,147 2003............................ -- 38,750 2,076 40,826 2004............................ -- 38,750 2,254 41,004 2005............................ -- 38,750 12,446 51,196 2006............................ -- 38,750 2,652 41,402 2007............................ -- 38,750 13,973 52,723 2008............................ -- 38,750 19,345 58,095 2009............................ -- 36,250 2,125 38,375 2010............................ -- 38,750 2,297 41,047 2011............................ -- 25,000 2,542 27,542 2012............................ -- 30,000 2,689 32,689 2013............................ -- 35,000 2,907 37,907 2014............................ -- 42,500 16,004 58,504 2015............................ -- 40,000 24,155 64,155 2016............................ -- 45,000 2,653 47,653 Thereafter.................... -- 30,000 29,569 59,569 -------- -------- -------- ---------- Total......................... $203,015 $630,000 $278,619 $1,111,634 ======== ======== ======== ==========
Covenants PTR's debt instruments generally contain certain covenants common to the type of facility or borrowing, including financial covenants establishing minimum debt service coverage ratios and maximum leverage ratios. PTR was in compliance with all covenants pertaining to its debt instruments at June 30, 1997. S-34 Commitments and Contingencies At June 30, 1997, PTR had contingent contracts or letters of intent, subject to PTR's final due diligence and approval of all entitlements, to acquire land for new development communities with an estimated 6,602 multifamily units at a total development cost of approximately $612.7 million. At the same date, PTR also had contingent contracts or letters of intent, subject to final due diligence, for the acquisition of 328 additional operating multifamily units with a total expected investment of $17.5 million, including budgeted renovations. At June 30, 1997, PTR had unfunded development commitments for developments under construction of $180.4 million. For a description of unfunded commitments in connection with the Homestead Notes see "--Results of Operations--Homestead Interest and Homestead Notes". PTR expects to finance these activities and other future investment and operating needs with cash on hand, borrowings under its credit facilities and disposition proceeds from its asset optimization strategy, prior to arranging long-term capital. The credit facilities should facilitate an efficient response to market opportunities while minimizing the amount of cash invested in short-term investments at lower yields. Other sources of future liquidity and financial flexibility include $170.9 million (assuming the sale of all Common Shares offered in this Offering) in shelf-registered securities which can be issued on an as-needed basis, subject to PTR's ability to effect offerings on satisfactory terms. PTR believes that its current conservative ratio of long-term debt to total long-term undepreciated book capitalization (the sum of long-term debt and shareholders' equity after adding back accumulated depreciation) of 37.70% at June 30, 1997, on a historical basis and 34.85% at June 30, 1997, as adjusted to give effect to the Merger, and to the Rights Offering and this Offering (assuming the sale of all Common Shares in this Offering) and the application of the net proceeds therefrom, provides considerable flexibility with respect to its ability to finance its investment activities. From time to time, PTR utilizes derivative financial instruments as hedges in anticipation of future debt offerings in order to manage well-defined interest rate risk. In anticipation of the $50 million Long-Term Debt offering that closed March 31, 1997, PTR entered into interest rate contracts with notional amounts aggregating $50 million in 1996. Upon completion of the offering, PTR terminated the interest rate contracts, realizing a gain of approximately $819,000 which has been deferred and is being amortized as an offset to interest expense over the term of the Long-Term Debt that was issued. During August 1997, PTR entered into interest rate contracts with notional amounts aggregating $60 million in anticipation of a long-term debt offering expected to close within the next six months. Distributions PTR paid first, second and third quarter 1997 distributions of $0.325 per Common Share on February 20, May 29, and August 27, 1997. On March 31 and June 30, 1997, PTR paid quarterly dividends on the Series A Preferred Shares of $0.4377425 per share and quarterly dividends on its Series B Cumulative Redeemable Preferred Shares of Beneficial Interest (the "Series B Preferred Shares") of $0.5625 per share. Funds From Operations Funds from operations is defined as net earnings computed in accordance with GAAP, excluding gains (or losses) from real estate transactions, provisions for possible losses on extraordinary items significant non-recurring items and real estate depreciation. PTR believes that funds from operations is helpful to a reader as a measure of the performance of an equity REIT because, along with cash flow from operating activities, financing activities and investing activities, it provides a reader with an indication of the ability of PTR to incur and service debt, to make capital expenditures and to fund other cash needs. Funds from operations should not be considered as an alternative to net earnings or any other GAAP measurement of performance as an indicator of PTR's operating performance or as an alternative to cash flows from operating, investing, or financing activities as a measure of liquidity. In June 1994, PTR adopted NAREIT's revised definition of funds from operations. Under this more conservative definition, loan cost amortization is not added back to net earnings in determining funds from operations. The funds from operations measure presented by PTR, while consistent with the NAREIT definition, will not be comparable to similarly titled measures of other REITs which do not compute funds from operations in a manner consistent with PTR. Funds from operations is not intended to represent cash made available to shareholders. Cash distribution paid to shareholders are described above under "--Results of Operations--Distributions". S-35 In 1996, PTR contributed its Homestead Village extended-stay lodging assets to Homestead. Management believes that funds from operations for the six months ended June 30, 1996 should be adjusted to reflect the effects of the Homestead transaction to provide a more meaningful comparison to the historical 1997 results. Accordingly, pro forma funds from operations for the six months ended June 30, 1996 has been calculated as if the Homestead transaction had occurred on January 1, 1996. The funds from operations information is unaudited and the pro forma funds from operations is not necessarily indicative of what actual funds from operations would have been if the Homestead transaction had occurred on January 1, 1996. Funds from operations and pro forma funds from operations (1996) are as follows (amounts in thousands):
FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED JUNE 30, JUNE 30, ---------------- ---------------- 1997 1996 1997 1996 ------- ------- ------- ------- Net earnings attributable to Common Shares................................... $30,132 $22,366 $70,708 $41,821 Add (Deduct): Real Estate Depreciation................ 12,639 10,624 24,688 21,242 Provision for Possible Loss on Investments............................ -- -- 1,500 -- Gain on disposition of investments, net. (11,872) (5,160) (37,207) (8,083) Extraordinary item-loss on early extinguishment of debt, net............ -- 837 -- 837 Amortization related to Homestead Notes. (283) -- (528) -- ------- ------- ------- ------- Historical funds from operations attributable to Common Shares............ 30,616 28,667 59,161 55,817 Add (deduct) pro forma adjustments relating to the contribution of Homestead Assets: Reduction in revenues and operating expenses(1)............................ -- (4,294) -- (7,555) Increase in interest income(2).......... -- 1,200 -- 2,023 Increase in interest expense(3)......... -- (123) -- (289) Reduction in capitalized interest(4).... -- (603) -- (1,178) REIT Management fee effect(5)........... -- 806 -- 1,447 Other................................... -- (14) -- 8 ------- ------- ------- ------- Total pro forma adjustments........... -- (3,028) -- (5,544) ------- ------- ------- ------- Funds from operations attributable to Common Shares (Pro forma for 1996)..................... $30,616 $25,639 $59,161 $50,273 ======= ======= ======= ======= Weighted-average Common Shares outstanding.............................. 77,398 72,223 76,639 72,217 ======= ======= ======= =======
- -------- (1) Represents the elimination of Homestead's historical revenues and operating expenses. (2) Represents the interest income which would have been recognized on the Homestead Notes, assuming that PTR received Homestead common stock in exchange for its contribution first, and then Homestead Notes in exchange for the balance of its contribution over the respective time periods. (3) Represents the assumed amount of incremental interest expense which would have been incurred as a result of higher line of credit balances due to reduced cash flow. (4) Represents the reclassification of historical interest costs capitalized on Homestead developments to interest expense. (5) Represents the decrease in REIT Management fee that would have resulted from the pro forma adjustments. REIT MANAGEMENT AGREEMENT Effective March 1, 1991, PTR entered into a REIT management agreement (the "REIT Management Agreement") with the REIT Manager pursuant to which the REIT Manager assumed day-to-day management of PTR. Between March 1, 1991 and September 9, 1997, the REIT Manager provided both strategic and day-to-day S-36 management of PTR, including research, investment analysis, acquisition, development, dispositions, property management, capital markets, legal, accounting and other administrative services. The REIT Manager was a wholly owned subsidiary of Security Capital, which owned approximately 34.0% of the Common Shares at August 31, 1997. The REIT Management Agreement required PTR to pay a base annual fee of $855,000 plus 16% of cash flow as defined in the REIT Management Agreement in excess of $4,837,000, payable monthly. In the REIT Management Agreement, cash flow was calculated by reference to PTR's cash flow from operations plus (i) fees paid to the REIT Manager, (ii) extraordinary expenses incurred at the request of the independent Trustees of PTR and (iii) 33% of any interest paid by PTR on convertible subordinated debentures (of which there has been none since inception of the REIT Management Agreement); and after deducting (i) regularly scheduled principal payments (excluding prepayments or balloon payments) for debt with commercially reasonable amortization schedules, (ii) actual or assumed principal and interest payments on Long-Term Debt, (iii) interest income received in connection with the Homestead Notes and (iv) distributions actually paid with respect to any nonconvertible preferred shares of beneficial interest of PTR. The REIT Management Agreement provided that Long-Term Debt was treated as if it had regularly scheduled principal and interest payments similar to a 20-year, level monthly payment, fully amortizing mortgage, with the assumed principal and interest payments deducted from cash flow in determining the fee. Cash flow did not include dividend and interest income from PTR Development Services, realized gains or losses from dispositions of investments or income from cash equivalent investments. The REIT Manager also received a fee of 0.25% per year on the average daily balance of cash equivalent investments. As PTR arranged additional Long-Term Debt and nonconvertible preferred share financing and as additional funding of Homestead Notes occurred, the REIT Management fee effectively declined in proportion to PTR's earnings from operations. This decline resulted from the fact that actual or assumed regularly scheduled principal payments associated with Long-Term Debt and distributions actually paid with respect to nonconvertible preferred shares were deducted from the cash flow amount on which the REIT Management fee was based. Similarly, interest income from the Homestead Notes was not included in the cash flow amount in determining the REIT Management fee. PTR was obligated to reimburse the REIT Manager for certain expenses incurred by the REIT Manager on behalf of PTR relating to PTR's operations, consisting primarily of external professional fees, offering costs and travel expenses. The REIT Management Agreement was renewable by PTR annually, subject to a determination by the independent Trustees (who received performance benchmark information verified by an independent third party) that the REIT Manager's performance was satisfactory and that the compensation payable to the REIT Manager was fair. Each of PTR and the REIT Manager was entitled to terminate the REIT Management Agreement on 60 days' notice. On September 9, 1997, pursuant to the Merger Agreement, Security Capital caused the REIT Manager and SCG Realty Services to be merged into a newly formed subsidiary of PTR. The REIT Management Agreement was terminated on September 9, 1997 upon closing of the Merger. As a result of the Merger, the employees of the REIT Manager and SCG Realty Services have become employees of PTR. The market value of the 3,295,533 Common Shares issued to Security Capital on the Merger date was approximately $73 million, based on the closing price of the Common Shares on such date of $22 1/4, of which approximately $3 million will be allocated to the net tangible assets acquired and the $70 million difference will be accounted for as costs incurred in acquiring the management companies from a related party since the management companies do not qualify as "businesses" for purposes of applying APB Opinion No. 16 "Business Combinations". This one-time adjustment will be recorded as an operating expense on PTR's statement of earnings but PTR will not deduct this expense for purposes of calculating funds from operations, due to the non- recurring and non-cash nature of this expense. See "The Merger Transaction" for a more complete description of the Merger. S-37 MANAGEMENT As a result of the Merger, which was consummated on September 9, 1997, PTR became a fully integrated operating company. PTR has approximately 259 professionals dedicated to implementing its highly focused operating and investment strategy. See "The Merger Transaction" for a description of the Merger whereby Security Capital caused the REIT Manager and SCG Realty Services to merge into a newly formed subsidiary of PTR in exchange for Common Shares. PTR has organized itself such that each operating professional specializes in a particular discipline (such as research, marketing, development, acquisition, due diligence, dispositions, property management, capital markets or financial operations) rather than being responsible for all functions on a project-by-project basis. All investments are approved by PTR's management investment committee, using uniform criteria, prior to being submitted to the investment committee of the Board. Additionally, regional operating professionals focus on specific target markets to ensure high levels of attention to resident services. PTR believes that the quality of management should be assessed in light of the factors discussed below. Management Depth/Succession. PTR believes that management should have several senior executives with the leadership, operational, investment and financial skills and experience to oversee the entire operations of the REIT. PTR believes that several of its senior officers could serve as the principal executive officer and continue PTR's performance. See "--Trustees and Officers of PTR." Strategic Vision and Research Capability. PTR believes that management should have the strategic vision to determine an investment focus that provides both favorable initial yields and strong long-term growth prospects. To identify favorable investment opportunities, PTR relies heavily on the strong research capabilities of Security Capital Real Estate Research. PTR and its affiliates have several persons, who work closely with the senior officers of PTR, devoting substantial time to research on a submarket-by-submarket basis. This research is dedicated to new multifamily investment opportunities as well as new products such as the Homestead Village(R) extended-stay lodging product, which resulted in the spin-off of Homestead in November 1996. Investment Committee Process. PTR believes that an investment committee should provide discipline and guidance to the investment activities of the REIT in order to achieve its investment goals. The five members of PTR's management investment committee have a combined 77 years of experience in the real estate industry. The investment committee receives detailed written analyses and research, in a standardized format, from PTR's personnel and evaluates all prospective investments pursuant to uniform underwriting criteria prior to submission of investment recommendations to the investment committee of the Board. The quality of PTR's investment committee process is demonstrated by PTR's ability to achieve its investment goals and generally exceed its projected initial returns and cash flow growth from PTR's multifamily investments. Development/Redevelopment and Acquisition Capability. PTR believes that by internally developing projects and redeveloping well located existing communities, management can create value for the REIT that normally escapes through sales premiums paid to successful developers. PTR's personnel have substantial development and redevelopment experience, as described in "-- Trustees and Officers of PTR." PTR has 32 full-time professionals committed to development and acquisition activities. This team has arranged for approximately $2.1 billion of successful acquisitions and has developed or commenced development of multifamily communities with a budgeted development cost of approximately $1.2 billion for PTR from March 1991 through June 30, 1997, based on total expected investment. At June 30, 1997, PTR had 9,778 multifamily units under construction or in planning and owned, with a total budgeted development cost of $642.7 million. In addition, as of the same date, PTR had contingent contracts or letters of intent, subject to PTR's final due diligence and approval of all entitlements, to acquire land for the development of an estimated 6,602 multifamily units with a total budgeted development cost of approximately $612.7 million and owned land for the future development of an expected 1,254 multifamily units with a total budgeted development cost of $67.2 million. S-38 Disposition Capability. The ability to identify and effectively complete the cost-effective disposition of targeted communities is essential to the successful execution of PTR's investment strategy. Since PTR's asset optimization program began in December 1995 and through June 30, 1997, PTR had completed the disposition of 12,835 multifamily units, realizing aggregate gains of $77.2 million on aggregate gross proceeds of $549.4 million, which were redeployed, typically on a tax-deferred basis, into strategic acquisitions. Due Diligence Process. PTR believes that management should have experienced senior personnel dedicated to performing comprehensive due diligence. PTR has nine full-time due diligence professionals and has developed uniform systems and procedures for due diligence. PTR's due diligence personnel have analyzed and screened over $4.0 billion of investments. Operating Capability. PTR believes that management can substantially improve funds from operations by actively and effectively managing its multifamily communities. PTR and its affiliates have devoted substantial personnel and financial resources to develop value-added operating systems, which control and effectively administer the management of PTR's multifamily portfolio. Capital Markets Capability. PTR believes that management must be able to effectively raise capital for the REIT in order for the REIT to achieve growth through investment. PTR and its affiliate, Capital Markets Group, have arranged for funding of over $2.0 billion from securities offerings of debt and equity securities and have arranged for credit facilities including an unsecured $350 million line of credit for PTR. These credit facilities provide PTR with the financial flexibility to take advantage of attractive investment opportunities prior to raising capital through securities offerings. Communications/Shareholders Relations Capability. PTR believes that a REIT's success in capital markets and investment activities can be enhanced by management's ability to effectively communicate the REIT's strategy and performance to investors, sellers of property and the financial media. PTR has access to full-time personnel who prepare informational materials for and conduct periodic meetings with the investment community and analysts. PTR believes that successfully combining the foregoing attributes significantly enhances a REIT's ability to increase cash flow and the market valuation of the REIT's portfolio. TRUSTEES AND OFFICERS OF PTR Trustees of PTR C. RONALD BLANKENSHIP--47--Non-Executive Chairman of PTR since June 1997 and Chairman from June 1991 to June 1997. Managing Director of Security Capital since March 1991 and Trustee of PTR since June 1991. Mr. Blankenship is a Director of Strategic Hotel Capital Incorporated and an advisory Director of ATLANTIC and Homestead. From July 1988 to June 1991, Mr. Blankenship was a regional partner with Trammel Crow Residential in Chicago, a multifamily real estate development and property management firm. Prior thereto, Mr. Blankenship was an Executive Vice President and Chief Financial Officer of the Mischer Corporation in Houston, a multi-business holding company with investments primarily in real estate. JAMES A. CARDWELL--65--Trustee of PTR; Chairman and Chief Executive Officer, Petro Stopping Centers, L.P., El Paso, Texas (operation of full-service truck stopping centers) since 1974; Director, El Paso Electric Company. JOHN T. KELLEY, III--56--Trustee of PTR; advisory Trustee of SCI, a REIT affiliated with Security Capital; Chairman of Pacific Retail Trust (ownership and development of infill retail properties in the southwestern United States); from 1987 to 1991, Chairman of the Board, Kelley-Harris Company, Inc., El Paso, Texas (real estate investment company); from 1968 to 1987, Managing Director, LaSalle Partners Limited, Chicago, Illinois (corporate real estate services). Mr. Kelley is also a Director of Security Capital and Tri State Media. S-39 CALVIN K. KESSLER--65--Trustee of PTR; President and principal shareholder, Kessler Industries, Inc., El Paso, Texas (manufacturer of furniture and aluminum castings) since 1960. WILLIAM G. MYERS--70--Trustee of PTR; Trustee of SCI, a REIT affiliated with Security Capital; Chief Executive Officer of Ojai Ranch and Investment Company, Inc., Santa Barbara, California, which he founded in 1963 (agri- business and other investments); Director, Chalone Wine Group, Napa, California. JAMES H. POLK, III--54--Trustee of PTR since 1976; from March 1997 until June 1997, President of Capital Markets Group and Managing Director of Capital Markets Group from August 1992 to March 1997. Mr. Polk was affiliated with Security Capital from March 1991 until June 1997; prior thereto, he was President and Chief Executive Officer of PTR for sixteen years. Mr. Polk is registered with the National Association of Securities Dealers, Inc. and is past President and Trustee of NAREIT. JOHN C. SCHWEITZER--53--Trustee of PTR; Managing Partner, Continental Properties Company, Austin, Texas (real estate and investments) since 1976; General Partner, G.P. Campbell Capital Ltd. (real estate and investments) since 1976; Trustee, Texas Christian University; Director of Homestead and Austin Smiles. Upon consummation of the Merger transaction, each of the officers discussed below became an employee of PTR who is compensated for such services by PTR (other than Mr. Klopf who is compensated by Security Capital). Senior Officers of PTR R. SCOT SELLERS--40--President and Chief Executive Officer of PTR since June 1997; from September 1994 to June 1997, Managing Director of PTR, where he had overall responsibility for PTR's investment program, and from May 1994 to September 1994, Senior Vice President of PTR; from April 1993 to May 1994, Senior Vice President of Security Capital, where he was responsible for national multifamily acquisitions; from September 1981 to April 1993, an operating partner and Vice President of Lincoln Property Company (development, acquisition and management of multifamily communities), where he was responsible, among other things, for the development of more than 6,500 multifamily units in a number of different markets. PATRICK R. WHELAN--40--Managing Director of PTR since December 1995, where he has responsibility for PTR's operations and property management; from October 1994 to September 1997, President of SCG Realty Services, where he had overall responsibility for property management; from February 1994 to October 1994, Senior Vice President and Co-Manager of Multifamily Acquisitions of Security Capital; from July 1986 to January 1994, Senior Vice President of Trammell Crow Company (development, acquisition and management of commercial properties). RICHARD A. BANKS--49--Senior Vice President of PTR since August 1997, where he has overall responsibility for investments and operations in the West Region; from January 1995 to August 1997, President and Chief Executive Officer of Lincoln Residential Services, responsible for the management of over 41,000 apartment units located throughout the western United States; from July 1993 to January 1995, Vice President of Lincoln Property Company; from January 1991 to July 1993, he managed a $300 million real estate portfolio for American Real Estate Group. BRYAN J. FLANAGAN--45--Senior Vice President of PTR since November 1996, where he has responsibility for financial operations; from June 1995 to November 1996, Senior Vice President of Security Capital, where he was responsible for financial operations; from September 1987 to June 1995, Vice President-Financial Analysis for Marriott Hotels, Resorts & Suites. JAY S. JACOBSON--44--Senior Vice President of PTR since June 1996, and from July 1993 to June 1996, Vice President of PTR, where he has overall responsibility for investments and operations in the Central Region; from 1988 to June 1993, Vice President-Residential Development for Michael Swerdlow Companies, Inc. and Hollywood Inc., South Florida real estate development/management companies under common control, where he was responsible for the planning and development of over 2,200 multifamily units as well as other development projects. JEFFREY A. KLOPF--49--Senior Vice President and Secretary of PTR and Security Capital since January 1996, where he provides securities offerings and corporate acquisition services and oversees the provision of legal services for affiliates of Security Capital; from January 1988 to December 1995, partner with Mayer, Brown & Platt where he practiced corporate and securities law. S-40 MARK N. TENNISON--37--Senior Vice President of PTR since December 1996, and from July 1992 to November 1996, Vice President of PTR, where he has overall responsibility for investment and operations in the Northwest Region; from May 1991 to July 1992, Executive Vice President/Chief Operating Officer of Metro Concap, Inc., an operator of over 7,100 multifamily units; from January 1991 to May 1991, attorney for the Federal Deposit Insurance Corporation. PAMELA D. PORTER--36--Vice President of PTR since September 1996, where she has overall responsibility for the nine-person due diligence group and is responsible for contract negotiations for acquisitions, due diligence, approval and oversight of land entitlements and management and implementation of tax-free exchanges; from November 1994 to September 1996, Vice President of SCI, where she had overall responsibility for due diligence and was a member of the due diligence team since November 1993; from May 1992 to November 1993, Partner with Lantana Properties, Inc., a commercial real estate brokerage company in San Antonio, Texas; from July 1991 to April 1992, Broker and Analyst with Wilsonschanzer, Inc. in San Antonio, Texas, where she sold investment properties, performed financial analyses and coordinated market reports. Other Officers of PTR FRANK R. ANDERSON--38--Vice President of PTR since June 1995, where he is a Project Manager in the Northwest Region; prior thereto, Vice President, Acquisitions and Land Development of Shea Homes, a single family and multifamily developer in San Diego, California. ASH K. ATWOOD--33--Vice President of PTR since December 1996, where he is responsible for PTR's corporate accounting and external financial reporting; prior thereto, Senior Manager in the assurance practice of KPMG Peat Marwick LLP, where he had extensive involvement in PTR's annual audit and securities offerings since joining the firm in June 1986. MICHAEL P. BISSELL--47--Vice President of PTR since February 1997, where he is responsible for community operations in the Northwest Region; from August 1996 to September 1997, Vice President of SCG Realty Services; from September 1991 to August 1996, President of Michael P. Bissell & Associates, where he was involved in a variety of consulting assignments with clients in the multifamily industry. JAMES C. BORMANN--44--Vice President of PTR since December 1995, where he is responsible for production and construction activities in the Central Region; from June 1995 to September 1997, Vice President of the REIT Manager; from August 1992 to May 1995, Vice President of construction with Roseland Property Company (formerly Lincoln Property Company Northeast); prior thereto, Construction Superintendent with Toll Brothers, Inc. MICHAEL A. BRITTI--38--Vice President of PTR since September 1996, where he is responsible for new product development and revenue enhancement through portfolio-wide initiatives; from September 1995 to September 1997, he was with the REIT Manager; from November 1993 to September 1995, Vice President-Asset Management with the National Corporation for Housing Partnerships in Washington, D.C., where he led acquisitions and restructuring of large apartment portfolios; from July 1987 to November 1993, Vice President- Investment Management with Oxford Realty Services Corporation in Bethesda, Maryland. HENRY J. BUNIS--44--Vice President of PTR since May 1997, and from October 1994 to May 1997, a member of the acquisitions group, where he is responsible for acquisition of existing communities in the Northwest Region and land acquisitions in Salt Lake City; from May 1994 to October 1994, he was with the acquisition group for Security Capital Atlantic Incorporated; from September 1993 to May 1994, he was with the portfolio acquisitions group for Security Capital. RICHARD W. DICKASON--41--Vice President of PTR since March 1995, where he has overall responsibility for PTR's investment activity in the Northwest Region; from December 1993 to March 1995, Vice President of Security Capital Pacific Incorporated, a REIT that was merged into PTR in March 1995 ("PACIFIC"); from July 1992 to September 1993, President of J.M. Peters Company/Capital Pacific Homes, where he acquired properties for the development of single family homes and apartments; from May 1980 to January 1992, Partner and Vice President of Lincoln Property Company N.C. Inc., where he was responsible for the acquisition, development, construction and management of a 4,000 unit multifamily residential portfolio in the California marketplace; prior thereto, Mr. Dickason represented private investors in the development of condominiums, townhouses, shopping centers and single family homes throughout California. S-41 JOSEPH G. DI CRISTINA--38--Vice President of PTR since March 1995, where he has overall responsibility for PTR's investment activity in the Central Region; from August 1994 to March 1995, Vice President of PACIFIC; prior thereto, Vice President of Forward Planning at Robertson Homes, where he was responsible for the development of eight multifamily projects totalling 2,845 units throughout California. KERRY E. ENDSLEY--48--Vice President of PTR since December 1996, where he is Project Manager in the Central Region; from January 1994 to July 1995, President of Construction for MTI Construction, Inc. in Houston, Texas, where he managed construction of over 1,100 multifamily units in Texas and Colorado; from October 1988 to December 1993, Vice President of General Contracting for Bradley Construction Co., Inc., where he was responsible for over 2,000 multifamily units, schools, dormitories and warehouses and where he recruited personnel. SUE P. FREEDMAN--50--Vice President of PTR since February 1997, where she has overall responsibility for the company's Education and Organizational Development activities; from August 1995 to October 1996, Creator and Manager of Knowledge Work Associates, where she worked with clients on organizational improvement; from January 1994 to July 1995, Manager of Organization Effectiveness for Texas Instruments, where she advised and assisted senior executives in the implementation of change from a traditional to an entrepreneurial culture; from January 1984 to December 1993, with Texas Instruments Systems Group, where her most recent position was manager of organizational effectiveness and where she selected and managed delivery of management and organizational effectiveness programs. THOMAS G. GARLOCK--43--Vice President of PTR since August 1997, where he is responsible for production and construction activities in Southern California and Arizona; from July 1989 to August 1997, Senior Vice President of Construction for Regis Contractors, Inc. where he managed all aspects of multifamily construction in Southern California. PETER M. GRIMM--55--Vice President of PTR since 1975, where he is a Project Manager in the Central Region. DANA K. HAMILTON--28--Vice President of PTR since December 1996, where she is responsible for new product development and revenue enhancement through portfolio-wide initiatives; from April 1996 to December 1996, Vice President of Operations for SCG Realty Services, where she focused on national operations; from August 1994 to April 1995, in the Management Development Program of Security Capital; from June 1993 to October 1993, Consultant to Rouse and Associates in San Francisco, where she was responsible for evaluating the quality of property management at five properties, and Consultant to Construction Specialties International in Jakarta, Indonesia. KEVIN M. HAMPTON--34--Vice President of PTR since December 1996, where he is responsible for land acquisition and product development throughout Southern California; from August 1995 to December 1996, Vice President of Land Acquisitions for The Akins Companies in Irvine, California, where he was responsible for coordination of land acquisition activities and purchase and sale negotiations; from June 1993 to August 1995, Vice President of New Business Development for J.M. Peters Company in Newport Beach, California, where he managed land acquisitions throughout Southern California; from October 1989 to March 1993, Director of Business Development for Lincoln Property Company in Irvine, California. CHRISTOPHER C. HARNESS--45--Vice President of PTR since December 1995, where he is responsible for community operations in Houston, Dallas and El Paso, Texas; from June 1994 to December 1995, Project Manager for the REIT Manager, responsible for the Santa Fe and Albuquerque developments; from August 1993 to June 1994, Senior Analyst for Due Diligence at SCG Realty Services; prior thereto, Mr. Harness was responsible for development of commercial properties in eight Texas markets for Affiliated Builders. NELSON L. HENRY--62--Vice President of PTR since December 1994, where he is responsible for production and construction activities in the West Region; from January 1983 to September 1993, Construction Vice President for Lincoln Property Company N.C. Inc., where he was responsible for the construction of over 8,000 units in Colorado and California; prior thereto, President of Royal Investment Corporation, a regional multifamily and single family developer. S-42 RICK D. JACOBSEN--38--Vice President of PTR since March 1997, where he has been responsible for corporate budgeting and financial planning, and reporting and financial analysis since February 1996; from July 1983 to January 1996, Director of Financial Analysis for Weingarten Realty Investors, Houston, Texas, where he was responsible for budgeting and forecasting, new development underwriting activity and other corporate finance and capital market activities. JOHN JORDANO III--40--Vice President of PTR since March 1995, where he has overall responsibility for PTR's investment activity in the West Region; from August 1994 to March 1995, Vice President of PACIFIC; from January 1992 to July 1994, Senior Vice President of Prospect Partners, where he was responsible for identifying and advising individual and corporate clients on financial institution and Resolution Trust Corporation REO apartment acquisition and investment opportunities in the western United States; prior thereto, Partner with Trammell Crow Residential Company, where he established the Sacramento office and was responsible for the development of multifamily projects. THOMAS D. KLAESS--36--Vice President of PTR since June 1997, where he is responsible for property operations in Denver, Colorado; from April 1994 to June 1997, Senior Operations Manager for SCG Realty Services; from January 1992 to March 1994, District Manager for National Housing Partnership, Inc. DEIDRE A. KURING--36--Vice President of PTR since June 1997, where she is responsible for property operations in Portland, Oregon; from June 1996 to June 1997, she was an Operations Manager for SCG Realty Services. Prior thereto, from December 1995 to May 1996, she was Vice President of Operations for Lexford Properties, Inc., a firm she joined in August 1993 as District Manager; from February 1990 to August 1993, she was District Property Manager and Marketing Director for Polygon Management, Inc. GRETCHEN P. LAMBERSON--32--Vice President of PTR since June 1997, where she is responsible for directing and coordinating human resources activities and policies. Prior thereto, Director of Human Resources from October 1996 to June 1997; from May 1995 to October 1996, she was a Regional Human Resources Manager. Prior thereto, from August 1987 to February 1995, she was a Recruiter for Walt Disney World Co. LAWRENCE S. LEVITT--40--Vice President of PTR since September 1995, where he is responsible for PTR's disposition program as well as for the acquisition of existing communities throughout California; from May 1992 to August 1995, Vice President-Director of Residential Acquisitions of Sares-Regis Group, where he managed the residential acquisitions division; from August 1991 to May 1992, Principal of Integrated Mortgage Resources, a commercial and residential mortgage banking firm; prior thereto, Vice President of Con Am Management Corporation, where he directed acquisition transactions. TONI L. LOPEZ--40--Vice President of PTR since February 1997, where she has overall responsibility for community operations in Denver, Austin and San Antonio; from August 1996 to September 1997, Vice President of SCG Realty Services; since July 1993, Ms. Lopez was responsible for community operations in San Antonio and Austin; from December 1985 to January 1993, Vice President of Beacon Hill Investments, Inc., where she was responsible for new account generation and property and asset management. GREGORY J. LOZINAK--32--Vice President of PTR since June 1997, where he is responsible for property operations in Houston, Texas; from June 1996 to June 1997, he was a Senior Operations Manager for SCG Realty Services, and Operations Manager from January 1994 to June 1996. Prior thereto, Mr. Lozinak was a Captain in the United States Army from October 1987 to December 1993. CHRISTINE M. MEECE--39--Vice President/Regional Controller of PTR since April 1997, where she is responsible for all accounting and financial activities for the West Region; from January 1996 to March 1997, Regional Controller--West Region PTR. Prior to joining PTR, Ms. Meece was Director of Finance and Administration for the Texas operations of Nichols Institute from 1992 to 1995. In addition, she spent eleven years with General Electric Company in various accounting and finance positions. SCOTT V. MONROE--37--Vice President of PTR since February 1997, where he has overall responsibility for community operations in California; from August 1996 to September 1997, Vice President of SCG Realty Services; from March 1987 to July 1996, Vice President, Maxim Property Management, where he had direct management responsibility for a residential portfolio consisting of over 11,000 units located throughout California and Arizona. S-43 CHARLES E. MUELLER, JR.--34--Vice President of PTR since September 1996, where he is responsible for corporate finance and capital markets activities; prior thereto, he was with Capital Markets Group, where he provided financial services to Security Capital and its affiliates; from April 1994 through April 1995, in the Management Development Program of Security Capital. MATTHEW T. MURPHY--33--Vice President of PTR since April 1997, where he is responsible for the accounting and financial reporting for PTR's Northwest Region; from March 1996 to March 1997, Regional Controller for the Northwest Region of PTR; from February 1995 to February 1996 he was with SCI, where he provided accounting and financial reporting services; from March 1992 to January 1995 he was with the REIT Manager where he provided accounting and financial reporting services; prior thereto, he was a staff accountant with Coopers & Lybrand. DANIEL W. OGDEN--36--Vice President of PTR since December 1995, where he is responsible for community operations in Phoenix and Tucson, Arizona, Albuquerque, New Mexico and Reno and Las Vegas, Nevada; from March 1995 to September 1997, Vice President of SCG Realty Services; from June 1994 to February 1995, Executive Vice President of Mutual Real Estate Corporation in Dallas, where he was responsible for the management of a portfolio located in seven states; prior thereto, Regional Vice President of Lincoln Property Company, where he was responsible for the management of over 16,000 multifamily units located in twelve mid-Atlantic/Midwest states. MONICA J. PAIRETT--33--Vice President/Regional Controller of PTR since April 1997, where she is responsible for all accounting and financial activities for the Central Region. Previously, she was Regional Controller for the Central Region of PTR from January 1996 to March 1997. From June 1993 to December 1995 she was Controller, and from May 1991 to June 1993 she was Assistant Controller, with WilsonSchanzer. THOMAS L. POE--40--Vice President of PTR since June 1994, where he is responsible for the accounting and financial reporting for each of PTR's three geographic regions; from April 1992 to September 1997, Vice President of the REIT Manager; from 1988 to 1992, Vice President of Finance and from 1981 to 1992, Real Estate Controller for the Mischer Corporation, Houston, Texas, prior thereto, staff accountant with Arthur Andersen & Company. HAROLD D. RILEY--61--Vice President of PTR since 1974, where he provides accounting and financial reporting services. DAVID K. ROBBINS--45--Vice President of PTR since March 1995, where he is a Project Manager in the West Region; from June 1994 to January 1995, Vice President of ATLANTIC, where he was a member of the development group; from December 1992 to May 1994, Vice President of PTR, where he had overall responsibility for the due diligence group; from January 1988 to December 1992, partner in the law firm of Hill, Farrer & Burrill in Los Angeles, where his practice focused on real estate acquisitions and development. He also served as general counsel to Hollywood Park Racetrack, where he was involved in forming Hollywood Park's public REIT. W. ROBERT SMITH--37--Vice President of PTR since November 1996, where he is a Project Manager in the Central Region; from July 1989 to November 1996, Senior Vice President of IBG Development in Washington, D.C., where he was responsible for the development of high-rise commercial, mixed-use, and residential projects in the central business district. SHYAM R. TAGGARSI--42--Vice President of PTR since September 1996, where he is responsible for development activity in Northern California; from January 1993 to September 1996, Real Estate Consultant in Foster City, California; from December 1987 to January 1993, Development Partner of Trammell Crow Residential in Foster City, California, where he was responsible for all aspects of multifamily residential project management and development in the South Bay area. GARY L. TRUITT--46--Vice President of PTR since December 1995, where he has overall responsibility for production and construction activities in the Northwest Region; from July 1994 to January 1995, Project Manager with C.F. Jordan Inc.; prior thereto, Superintendent of Benchmark Contractors, where he had supervision and code and specifications compliance responsibilities. S-44 TIMOTHY R. WELSH--42--Vice President of PTR since September 1996, where he is a Project Manager of Development in the Central Region; from February 1993 to September 1996, Regional Vice President and Project Manager for C.F. Jordan Residential, a multifamily general contracting company in Dallas and El Paso, Texas; from 1986 to February 1993, Project Manager and Senior Project Engineer with the Weitz Company, a commercial real estate development company in Des Moines, Iowa. DAVID B. WOODWARD--30--Vice President of PTR since June 1993, where he is responsible for community operations in Northern California; prior thereto, asset manager with USF&G's Real Estate Division. K. DOUGLAS WRIGHT--50--Vice President of PTR since July 1995, where he is a Project Manager in the West Region; from December 1991 to June 1995, Mr. Wright was a real estate consultant, developer and asset manager; prior thereto, President of Summit Development Company. THE OFFERING As discussed under "Introduction--Rights Offering", the Rights Offering expired on September 9, 1997. The demand for Common Shares in the Rights Offering, whether through the exercise of Rights, exercise of the oversubscription privilege or sales to third parties, exceeded the number of Common Shares offered, and consequently, PTR was unable to accept, either in whole or in part, all subscriptions. In order to accommodate a portion of the subscription requests, PTR, with the assistance of its affiliate, Capital Markets Group, which will not receive any special compensation from PTR, is offering Common Shares hereby on a best efforts basis at the offering price of $21.8125 per Common Share, which is equal to the subscription price in the Rights Offering. PTR will not pay any person any commission or special fee in connection with the offer or sale of the Common Shares. PTR will indemnify Capital Markets Group against certain liabilities, including liabilities under the Securities Act. In connection with the Rights Offering, Security Capital agreed to pay a fee of $250,000 to Capital Markets Group. CERTAIN FEDERAL INCOME TAX CONSIDERATIONS The following is a summary of certain federal income tax matters of general application pertaining to the holding and disposing of Common Shares under the Code. This discussion is general in nature and is not exhaustive of all possible tax considerations, nor does the discussion address any state, local or foreign tax considerations. The discussion is based on current law, is for general information only, and is not tax advice. This discussion does not purport to deal with all aspects of federal income taxation that may be relevant to particular shareholders in light of their personal investment or tax circumstances, or to certain types of shareholders (including insurance companies, tax exempt organizations, financial institutions or broker dealers, foreign corporations and persons who are not citizens or residents of the United States) subject to special treatment under the federal income tax laws. PTR has not requested and will not request a ruling from the IRS with respect to any of the federal income tax issues discussed below. This Prospectus Supplement does not address the taxation of PTR or the impact on PTR of its election to be taxed as a REIT. Such matters are addressed in the accompanying Prospectus under "Federal Income Tax Considerations--Taxation of PTR". Prospective investors should consult, and must depend on, their own tax advisors regarding the state, local, foreign and other tax consequences of holding and disposing of Common Shares. For a discussion regarding the taxation of dividends and other distributions, see "Federal Income Tax Considerations--Taxation of PTR's Shareholders" in the accompanying Prospectus. S-45 For a discussion of backup withholding, see "Federal Income Tax Considerations--Other Tax Considerations--Backup Withholding" in the accompanying Prospectus. Upon the sale or exchange of Common Shares to a party other than PTR, a holder of Common Shares will realize a capital gain or loss measured by the difference between the amount realized on the sale or other disposition and the holder's adjusted tax basis in the Common Shares (provided the Common Shares are held as a capital asset). Such gain or loss will be a long term capital gain or loss if the holder's holding period with respect to the Common Shares is more than one year at the time of the sale or exchange. Further, any loss on a sale of Common Shares which were held by the holder for six months or less and with respect to which a capital gain dividend was received will be treated as a long term capital loss, up to the amount of the capital gain dividend received with respect to such shares. TAX CONSIDERATIONS REGARDING THE MERGER General The following discussion summarizes the material U.S. federal income tax considerations of the Merger and the Warrant Issuance to PTR and its shareholders. The following discussion is based upon the current provisions of the Code, its legislative history, administrative pronouncements, judicial decisions and Treasury regulations, all of which are subject to change, possibly with retroactive effect. The following discussion does not purport to be a complete discussion of all U.S. federal income tax considerations. The following discussion does not address the tax consequences of the Merger and the Warrant Issuance under state, local or non-U.S. tax laws. In addition, the following discussion may not apply, in whole or in part, to particular categories of PTR shareholders, such as dealers in securities, insurance companies, foreign persons, financial institutions and tax-exempt organizations (except with regard to "unrelated business taxable income"). THE FOLLOWING DISCUSSION IS INCLUDED FOR GENERAL INFORMATION ONLY. ALL PTR SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS TO DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE MERGER OR WARRANT ISSUANCE, INCLUDING ANY STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES. The Merger In the opinion of Mayer, Brown & Platt, based on certain representations of Security Capital and PTR , the Merger is properly treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code. Accordingly, PTR did not recognize income, gain or loss upon the consummation of the Merger (assuming that PTR makes the election described under "--Built-in Gain Rules" below). In addition, the Merger did not result in a taxable event to the PTR shareholders. Nonetheless, such opinion is not binding on the IRS nor will it preclude the IRS from adopting a contrary position. Moreover, since no ruling from the IRS was or will be sought with respect to the federal income tax consequences of the Merger, there can be no complete assurance that the IRS will agree with the conclusions set forth herein. The discussion below assumes that the Merger is treated as a reorganization within the meaning of Section 368(a) of the Code. Basis and Holding Period. The assets formerly held by the REIT Manager and SCG Realty Services have the same adjusted tax basis in the hands of PTR as they had in the hands of the REIT Manager and SCG Realty Services immediately prior to the closing date of the Merger. The holding period for each of the assets of the REIT Manager and SCG Realty Services in the hands of PTR includes the period each asset was held by the REIT Manager and SCG Realty Services immediately prior to the closing date of the Merger. Built-in Gain Rules. Under the "Built-in Gain Rules" of IRS Notice 88-19, 1988-1 C.B. 486, PTR will be subject to a corporate level tax if it disposes of any of the assets acquired from Security Capital in the Merger at any time during the 10-year period beginning on the closing date of the Merger (the "Restriction Period"). This tax would be imposed on PTR at the top regular corporate rate (currently 35%) in effect at the time of the S-46 disposition on the excess of (i) the lesser of (a) the fair market value on the closing date of the assets disposed of or (b) the selling price of such assets over (ii) PTR's adjusted basis on the closing date in such assets (such excess being referred to as the "Built-in Gain"). PTR currently does not intend to dispose of any of the assets acquired in the Merger during the Restriction Period, but there can be no assurance that one or more of such dispositions will not occur. The results described above with respect to the recognition of Built-in Gain assume that PTR will make the appropriate election pursuant to the Built-in Gain Rules or applicable future administrative rules or Treasury regulations. Under the Merger Agreement, PTR covenanted to make this election. Liability for Other Taxes. Pursuant to the Merger Agreement, Security Capital is responsible for income tax liabilities attributable to the operations of the REIT Manager and SCG Realty Services through the consummation of the Merger. However, PTR, as successor to the REIT Manager and SCG Realty Services in the Merger, is severally liable (together with Security Capital and the members of its "affiliated group" within the meaning of Section 1502 of the Code) for income tax liabilities of Security Capital and the members of its "affiliated group" for periods prior to and including the year in which the consummation of the Merger occurred. Security Capital, however, agreed to indemnify and hold harmless PTR from and against any income tax liabilities of the REIT Manager and SCG Realty Services for all periods prior to the closing date of the Merger and any income tax liabilities of Security Capital and the members of its "affiliated group". Consequences of the Merger on PTR's Qualification as a REIT. In light of the unique federal income tax requirements applicable to REITs, the Merger could have adverse consequences on PTR's continued qualification as a REIT. In the opinion of Mayer, Brown & Platt, based upon certain representations of Security Capital and PTR, the consummation of the Merger will not jeopardize the status of PTR as a REIT under the Code. The Warrant Issuance Receipt of Warrants. Pursuant to the Warrant Issuance, (i) a shareholder will have ordinary income upon receipt of a warrant in an amount equal to the fair market value of the warrants received on the issuance date, (ii) a shareholder's tax basis in the warrants received will equal the fair market value of the warrants received on the issuance date and (iii) a shareholder's holding period for the warrants received will begin on the issuance date. Fractional Warrants. If a shareholder receives cash in lieu of a fractional warrant, such shareholder will recognize gain or loss measured by the difference between the tax basis of such fractional warrant (i.e. the fair market value of such fractional warrant on the issuance date) and the amount of cash received. Such gain or loss will constitute capital gain or loss if the shareholder holds the warrants as a capital asset on the issuance date, and will be short-term capital gain or loss since the holding period for such fractional warrants will be less than one year. Disposition of Shares Prior to the Warrant Issuance Record Date. While a shareholder generally would not recognize ordinary income on the disposition of his or her Common Shares, a shareholder disposing of his or her Common Shares on or after the closing date of the Merger and prior to the record date for the Warrant Issuance may recognize ordinary income in an amount equal to the fair market value of the right of a holder of the Common Shares to receive the warrants, measured as of the time of disposition of the Common Shares. A shareholder would not be able to offset any portion of such ordinary income with his or her tax basis in his or her Common Shares. To the extent a shareholder recognizes ordinary income, the amount realized for purposes of calculating capital gain or loss on such disposition will be reduced by the amount of such ordinary income. Tax-Exempt Shareholders. Section 511 of the Code imposes on organizations exempt from federal income tax under Section 501(a) of the Code a tax at corporate income tax rates on such organizations' "unrelated business taxable income." In the opinion of Mayer, Brown & Platt, the receipt by tax-exempt shareholders of PTR of the warrants pursuant to the Warrant Issuance will be treated as unrelated business taxable income. S-47 Backup Withholding. Under the backup withholding rules of the Code (which generally impose a 31% withholding tax on certain persons who fail to furnish the information required under the United States tax reporting requirements), a PTR shareholder may be subject to backup withholding with respect to the receipt of the warrants unless such shareholder (i) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact or (ii) provides a correct taxpayer identification number and certifies under penalties of perjury that the taxpayer identification number is correct and that the holder is not currently subject to backup withholding because of a failure to report all dividend and interest income. Any amount withheld under these rules will be credited against the shareholder's Federal income tax liability. Information Reporting. Security Capital is required to report to the PTR shareholders receiving warrants and the IRS the value of the warrants issued pursuant to the Warrant Issuance on Form 1099-MISC. Sale, Disposition, Exercise or Expiration of Warrants. In general, upon a sale or other disposition of a warrant, a holder of warrants will recognize gain or loss measured by the difference between the amount realized on the sale or other disposition and the warrant holder's tax basis in the warrant. In general, such gain or loss will be a capital gain or loss if the stock into which the warrants are exercisable would be a capital asset in the warrant holder's hands and will be a short-term capital gain or loss because the warrants will expire in one year from the date of issuance. Exercise of Warrants. Except as discussed below with respect to cash received in lieu of fractional Class B Stock, a warrant holder will not recognize gain or loss upon the exercise of a warrant. A warrant holder's tax basis in the Class B Stock received upon exercise of a warrant will be equal to the sum of (1) the warrant holder's tax basis in the warrant exercised and (2) the exercise price paid. The holding period of the Class B Stock received upon the exercise of a warrant will begin on the date of exercise. Holders receiving cash in lieu of fractional Class B Stock upon exercise of a warrant will recognize gain to the extent that the cash received exceeds the warrant holder's tax basis in the portion of the warrant exercised for cash in lieu of fractional Class B Stock. Expiration of the Warrants. If a warrant holder's warrants expire without being exercised, the warrant holder will recognize a loss equal to its tax basis in the expired warrants. In general, such loss will be a capital loss if the stock into which the warrants were exercisable would be a capital asset in the warrant holder's hands and will be a short-term loss because the warrants will expire in one year from the date of issuance. Adjustment of Conversion Ratio. The terms of the warrants distributed pursuant to the Merger Agreement provide for adjustment of the price for exercise if Security Capital makes certain distributions of stock, cash or other property to its shareholders. While Security Capital does not presently contemplate making such a distribution, if Security Capital makes a distribution of cash or property resulting in an adjustment to the exercise price, the holders of the warrants may be viewed as receiving a "deemed distribution" under Section 305 of the Code, even if such warrant holder does not hold any Class B Stock at such time. The deemed distribution would constitute a taxable dividend, taxable as ordinary income, to the extent that the earnings and profits of Security Capital were allocable to the deemed distribution. The amount of the deemed distribution which exceeded the allocated earnings and profits of Security Capital would be considered a return of capital, and would reduce the warrant holder's tax basis in the warrants (but not below zero) by the value of the deemed distribution. To the extent that the value of the deemed distribution exceeds the warrant holder's tax basis in its warrants, the deemed distribution would result in gain to such warrant holder. In any event, the warrant holder's tax basis in its warrants would then immediately be increased by the value of the property deemed to have been distributed. OTHER TAX CONSIDERATIONS Possible Legislative or Other Actions Affecting Tax Consequences Prospective shareholders should recognize that the present federal income tax treatment of an investment in PTR may be modified by legislative, judicial or administrative action at any time and that any such action may affect investments and commitments previously made. The rules dealing with federal income taxation are S-48 constantly under review by persons involved in the legislative process and by the IRS and the Treasury, resulting in revisions of regulations and revised interpretations of established concepts as well as statutory changes. Revisions in federal tax laws and interpretations thereof could adversely affect the tax consequences of an investment in PTR. State and Local Taxes PTR and its shareholders may be subject to state or local taxation in various jurisdictions, including those in which it or they transact business or reside. The state and local tax treatment of PTR and its shareholders may not conform to the federal income tax consequences discussed above. Consequently, prospective shareholders should consult their own tax advisors regarding the effect of state and local tax laws on an investment in the Common Shares of PTR. EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT WITH HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP AND SALE OF SHARES IN AN ENTITY ELECTING TO BE TAXED AS A REAL ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS. VALIDITY OF COMMON SHARES The validity of the issuance of the Common Shares offered pursuant to this Prospectus Supplement will be passed upon for PTR by Mayer, Brown & Platt, Chicago, Illinois. Mayer, Brown & Platt has in the past represented, and is currently representing, PTR, Security Capital and certain of their affiliates. S-49 PROSPECTUS LOGO $300,000,000 DEBT SECURITIES, PREFERRED SHARES AND COMMON SHARES* ---------------- Security Capital Pacific Trust ("PTR") may from time to time offer in one or more series its (i) unsecured senior debt securities (the "Debt Securities"), (ii) Preferred Shares of Beneficial Interest, par value $1.00 per share (the "Preferred Shares"), and (iii) Common Shares of Beneficial Interest, par value $1.00 per share (the "Common Shares"). The Debt Securities, Preferred Shares and Common Shares (together, the "Offered Securities") may be offered, separately or together, in separate series, in amounts, at prices and on terms to be set forth in a supplement to this Prospectus (a "Prospectus Supplement"). The specific terms of the Offered Securities in respect of which this Prospectus is being delivered will be set forth in the applicable Prospectus Supplement and will include, where applicable: (i) in the case of Debt Securities, the specific title, aggregate principal amount, currency, form (which may be registered or bearer, or certificated or global), authorized denominations, maturity, rate (or manner of calculation thereof) and time of payment of interest, terms for redemption at the option of PTR or repayment at the option of the Holder, terms for sinking fund payments, and any initial public offering price; (ii) in the case of Preferred Shares, the specific title and stated value, any dividend, liquidation, redemption, conversion, voting and other rights, and any initial public offering price; and (iii) in the case of Common Shares, any initial public offering price. In addition, such specific terms may include limitations on direct or beneficial ownership and restrictions on transfer of the Offered Securities, in each case as may be appropriate to preserve the status of PTR as a real estate investment trust ("REIT") for federal income tax purposes. The applicable Prospectus Supplement will also contain information, where applicable, about certain United States federal income tax considerations relating to, and any listing on a securities exchange of, the Offered Securities covered by such Prospectus Supplement. The Offered Securities may be offered directly by PTR, through agents designated from time to time by PTR, or to or through underwriters or dealers. If any agents or underwriters are involved in the sale of any of the Offered Securities, their names, and any applicable purchase price, fee, commission or discount arrangement between or among them, will be set forth, or will be calculable from the information set forth, in the applicable Prospectus Supplement. See "Plan of Distribution." No Offered Securities may be sold without delivery of the applicable Prospectus Supplement describing the method and terms of the offering of such series of Offered Securities. ---------------- *Pursuant to Rule 429 under the Securities Act of 1933, as amended (the "Securities Act"), this Prospectus also relates to an additional $120,000,000 of the Debt Securities and Preferred Shares of Beneficial Interest which were registered under a previous registration statement. ---------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------------- The date of this Prospectus is September 9, 1997. SECURITY CAPITAL PACIFIC TRUST PTR's objective is to be the preeminent real estate operating company focusing on the development, acquisition, operation and long-term ownership of multifamily communities in its western United States target market. As a result of the merger of Security Capital Pacific Incorporated and SCG Realty Services Incorporated into a wholly-owned subsidiary of PTR on September 9, 1997, PTR is a fully integrated operating company with 259 professionals dedicated to implementing its highly focused operating and investment strategy. PTR seeks to achieve long-term sustainable growth in cash flow by maximizing the operating performance of its core portfolio through value-added operating systems and concentrating its highly experienced team of professionals on developing and acquiring industry-leading product in targeted submarkets. These submarkets are identified by proprietary research as exhibiting strong job growth and favorable demographic trends. PTR's investment strategy is focused on three principal components: (i) the development of state-of-the-art new communities targeted primarily at one of the largest segments of the renter market, moderate income households; (ii) the acquisition of multifamily communities exhibiting high cash flow growth potential or attractive redevelopment opportunities; and (iii) the execution of its asset optimization strategy, which involves the disposition of properties which no longer meet PTR's investment objectives and the redeployment of the proceeds, typically on a tax-deferred basis, into assets that in PTR's view offer better long-term cash flow growth prospects. PTR was organized in 1963 as a real estate investment trust under the laws of Maryland. Its principal executive offices are located at 7670 South Chester Street, Suite 100, Englewood, Colorado 80112, and its telephone number is (303) 708-5959. USE OF PROCEEDS Unless otherwise described in the applicable Prospectus Supplement, the net proceeds from the sale of the Offered Securities will be used for the development and acquisition of additional multifamily communities, as suitable opportunities arise, for the repayment of certain outstanding indebtedness at such time and for working capital purposes. RATIO INFORMATION For the purpose of computing these ratios, (a) "earnings" consist of earnings from operations plus fixed charges other than capitalized interest and (b) "fixed charges" consist of interest on borrowed funds (including capitalized interest) and amortization of debt discount and expense.
YEAR ENDED DECEMBER 31, ------------------------ SIX MONTHS ENDED 1992 1993 1994 1995 1996 JUNE 30, 1997 ---- ---- ---- ---- ---- ---------------- Ratio of earnings to fixed charges... 2.9 4.0 2.6 3.2 2.5 1.9 Ratio of earnings to fixed charges and Preferred Share dividends....... 2.9 3.4 1.6 1.9 1.7 1.5
2 DESCRIPTION OF DEBT SECURITIES The Debt Securities are to be issued under an Indenture, dated as of February 1, 1994, as supplemented by the First Supplemental Indenture, dated as of February 2, 1994 (as so supplemented, the "Indenture"), between PTR and State Street Bank and Trust Company (the "Trustee"). The Indenture has been incorporated by reference as an exhibit to the Registration Statement of which this Prospectus is a part and is available for inspection at the corporate trust office of the Trustee at 225 Franklin Street, Boston, Massachusetts 02110 or as described below under "Available Information." The Indenture is subject to, and governed by, the Trust Indenture Act of 1939, as amended (the "TIA"). The statements made hereunder relating to the Indenture and the Debt Securities to be issued thereunder are summaries of certain provisions thereof, do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all provisions of the Indenture and such Debt Securities. All section references appearing herein are to sections of the Indenture, and capitalized terms used but not defined herein shall have the respective meanings set forth in the Indenture. GENERAL The Debt Securities will be direct, unsecured obligations of PTR and will rank equally with all other unsecured and unsubordinated indebtedness of PTR. The Indenture provides that the Debt Securities may be issued without limit as to aggregate principal amount, in one or more series, in each case as established from time to time in or pursuant to authority granted by a resolution of PTR's Board of Trustees (the "Board") or as established in one or more indentures supplemental to the Indenture. All Debt Securities of one series need not be issued at the same time and, unless otherwise provided, a series may be reopened, without the consent of the Holders of the Debt Securities of such series, for issuances of additional Debt Securities of such series (Section 301). The Indenture provides that there may be more than one Trustee thereunder, each with respect to one or more series of Debt Securities. Any Trustee under the Indenture may resign or be removed with respect to one or more series of Debt Securities, and a successor Trustee may be appointed to act with respect to such series (Section 608). In the event that two or more persons are acting as Trustee with respect to different series of Debt Securities, each such Trustee shall be a Trustee of a trust under the Indenture separate and apart from the trust administered by any other Trustee (Sections 101 and 609), and, except as otherwise indicated herein, any action described herein to be taken by the Trustee may be taken by each such Trustee with respect to, and only with respect to, the one or more series of Debt Securities for which it is Trustee under the Indenture. Reference is made to the Prospectus Supplement relating to the series of Debt Securities being offered for the specific terms thereof, including: (1) the title of such series of Debt Securities; (2) the aggregate principal amount of such series of Debt Securities and any limit on such principal amount; (3) the percentage of the principal amount at which the Debt Securities of such series will be issued and, if other than the full principal amount thereof, the portion of the principal amount thereof payable upon declaration of acceleration of the maturity thereof, or the method by which any such portion shall be determined; (4) the date or dates, or the method by which such date or dates will be determined, on which the principal of such Debt Securities will be payable and the amount of principal payable thereon; (5) the rate or rates (which may be fixed or variable), or the method by which such rate or rates shall be determined, at which such Debt Securities will bear interest, if any; (6) the date or dates, or the method by which such date or dates will be determined, from which any such interest will accrue, the Interest Payment Dates on which any such interest will be payable, the Regular Record Dates for such Interest Payment Dates, or the method by which such dates shall be determined, the Person to whom, and the manner in which, such interest shall be payable, and the basis upon which interest shall be calculated if other than that of a 360-day year comprised of twelve 30-day months; 3 (7) the place or places where the principal of (and premium or Make-Whole Amount (as defined), if any) and interest and Additional Amounts, if any, on the Debt Securities of such series will be payable, where such Debt Securities may be surrendered for registration of transfer or exchange and where notices or demands to or upon PTR in respect of such Debt Securities and the Indenture may be served; (8) the period or periods within which, the price or prices (including the premium or Make-Whole Amount, if any) at which, the currency or currencies in which, and the other terms and conditions upon which the Debt Securities of such series may be redeemed, as a whole or in part, at the option of PTR, if PTR is to have such an option; (9) the obligation, if any, of PTR to redeem, repay or purchase the Debt Securities of such series pursuant to any sinking fund or analogous provision or at the option of a Holder thereof, and the period or periods within which, the date or dates upon which, the price or prices at which, the currency or currencies, currency unit or units or composite currency or currencies in which, and the other terms and conditions upon which such Debt Securities shall be redeemed, repaid or purchased, as a whole or in part, pursuant to such obligation; (10) if other than United States dollars, the currency or currencies in which the Debt Securities of such series are denominated and payable, which may be a foreign currency or units of two or more foreign currencies or a composite currency or currencies, and the terms and conditions relating thereto; (11) whether the amount of payments of principal of (and premium or Make- Whole Amount, if any) or interest, if any, on the Debt Securities of such series may be determined with reference to an index, formula or other method (which index, formula or method may be, but need not be, based on a currency or currencies, currency unit or units or composite currency or currencies) and the manner in which such amounts shall be determined; (12) whether the principal of (and premium or Make-Whole Amount, if any) or interest or Additional Amounts, if any, on the Debt Securities of such series are to be payable, at the election of PTR or a Holder, in a currency or currencies, currency unit or units or composite currency or currencies, other than that in which such Debt Securities are denominated or stated to be payable, the period or periods within which, and the terms and conditions upon which, such election may be made, and the time and manner of, and identity of the exchange rate agent with responsibility for, determining the exchange rate between the currency or currencies in which such Debt Securities are denominated or stated to be payable and the currency or currencies in which such Debt Securities are to be so payable; (13) any additions to, modifications of or deletions from the terms of such series of Debt Securities with respect to the Events of Default or covenants set forth in the Indenture; (14) whether the Debt Securities of such series will be issued in certificated or book-entry form; (15) whether the Debt Securities of such series will be in registered or bearer form and, if in registered form, the denominations thereof if other than $1,000 and any integral multiple thereof and, if in bearer form, the denominations thereof if other than $5,000 and the terms and conditions relating thereto; (16) the applicability, if any, of the defeasance and covenant defeasance provisions of Article Fourteen of the Indenture to such series of Debt Securities and any provisions in modification thereof, in addition thereto or in lieu thereof; (17) if the Debt Securities of such series are to be issued upon the exercise of debt warrants, the time, manner and place for such Debt Securities to be authenticated and delivered; (18) whether and under what circumstances PTR will pay Additional Amounts as contemplated in the Indenture on the Debt Securities of such series in respect of any tax, assessment or governmental charge and, if so, whether PTR will have the option to redeem such Debt Securities in lieu of making such payment; and (19) any other terms of such series of Debt Securities not inconsistent with the provisions of the Indenture (Section 301). 4 The Debt Securities may provide for less than the entire principal amount thereof to be payable upon declaration of acceleration of the maturity thereof or bear no interest or bear interest at a rate which at the time of issuance is below market rates ("Original Issue Discount Securities"). Special United States federal income tax, accounting and other considerations applicable to Original Issue Discount Securities will be described in the applicable Prospectus Supplement. Under the Indenture, PTR will have the ability, in addition to the ability to issue Debt Securities with terms different from those of Debt Securities previously issued, without the consent of the Holders, to reopen a previous issue of a series of Debt Securities and issue additional Debt Securities of such series. Except as set forth below under "Certain Covenants--Limitations on Incurrence of Debt," the Indenture does not contain any other provisions that would limit the ability of PTR to incur indebtedness or that would afford Holders of Debt Securities protection in the event of a highly leveraged or similar transaction involving PTR or in the event of a change of control of PTR. However, PTR's Restated Declaration of Trust, as amended and supplemented (the "Declaration of Trust"), restricts beneficial ownership of PTR's outstanding Common Shares by a single person, or persons acting as a group, to 9.8% of such Common Shares, with certain exceptions (including an exception for the ownership of up to 49% of such Common Shares in the case of Security Capital Group Incorporated ("Security Capital")). See "Description of Common Shares--Restriction on Size of Holdings." Additionally, the Articles Supplementary relating to PTR's Cumulative Convertible Series A Preferred Shares of Beneficial Interest, par value $1.00 per share (the "Series A Preferred Shares") and PTR's Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $1.00 per share (the "Series B Preferred Shares") restrict beneficial ownership of the Series A Preferred Shares and Series B Preferred Shares, respectively, by a person, or persons acting as a group, to 25% of the Series A Preferred Shares or Series B Preferred Shares, as the case may be. Similarly, the Articles Supplementary for each series of Preferred Shares will contain certain provisions restricting the ownership and transfer of the Preferred Shares. See "Description of Preferred Shares-- Restrictions on Ownership." These restrictions are designed to preserve PTR's status as a REIT and, therefore, may act to prevent or hinder a change of control. Reference is made to the applicable Prospectus Supplement for information with respect to any deletions from, modifications of or additions to the Events of Default or covenants of PTR that are described below, including any addition of a covenant or other provision providing event risk or similar protection. DENOMINATIONS, INTEREST, REGISTRATION AND TRANSFER Unless otherwise described in the applicable Prospectus Supplement, the Debt Securities of any series issued in registered form will be issuable in denominations of $1,000 and integral multiples thereof. Unless otherwise described in the applicable Prospectus Supplement, the Debt Securities of any series issued in bearer form will be issuable in denominations of $5,000 (Section 302). Unless otherwise specified in the applicable Prospectus Supplement, the principal of (and premium or Make-Whole Amount, if any) and interest on any series of Debt Securities will be payable at the corporate trust office of the Trustee, initially located at 225 Franklin Street, Boston, Massachusetts 02110; provided that, at the option of PTR, payment of interest may be made by check mailed to the address of the Person entitled thereto as it appears in the Security Register or by wire transfer of funds to such Person to an account maintained within the United States (Sections 301, 305, 306, 307 and 1002). If any Interest Payment Date, Principal Payment Date or the Maturity Date falls on a day that is not a Business Day, the required payment shall be made on the next Business Day as if it were made on the date such payment was due and no interest shall accrue on the amount so payable for the period from and after such Interest Payment Date, Principal Payment Date or the Maturity Date, as the case may be. "Business Day" means any day, other than a Saturday or Sunday, on which banks in Boston, Massachusetts are not required or authorized by law or executive order to close. Any interest not punctually paid or duly provided for on any Interest Payment Date with respect to a Debt Security ("Defaulted Interest") will forthwith cease to be payable to the Holder on the applicable Regular Record Date and either may be paid to the person in whose name such Debt Security is registered at the close of business on a special record date (the "Special Record Date") for the payment of such 5 Defaulted Interest to be fixed by the Trustee, notice of which shall be given to the Holder of such Debt Security not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner, all as more completely described in the Indenture (Section 307). Subject to certain limitations imposed upon Debt Securities issued in book- entry form, the Debt Securities of any series will be exchangeable for other Debt Securities of the same series and of a like aggregate principal amount and tenor of different authorized denominations upon surrender of such Debt Securities at the corporate trust office of the Trustee referred to above. In addition, subject to certain limitations imposed upon Debt Securities issued in book-entry form, the Debt Securities of any series may be surrendered for registration of transfer thereof at the corporate trust office of the Trustee referred to above. Every Debt Security surrendered for registration of transfer or exchange shall be duly endorsed or accompanied by a written instrument of transfer. No service charge will be made for any registration of transfer or exchange of any Debt Securities, but PTR may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith (Section 305). If the applicable Prospectus Supplement refers to any transfer agent (in addition to the Trustee) initially designated by PTR with respect to any series of Debt Securities, PTR may at any time rescind the designation of any such transfer agent or approve a change in the location at which any such transfer agent acts, except that PTR will be required to maintain a transfer agent in each Place of Payment for such series. PTR may at any time designate additional transfer agents with respect to any series of Debt Securities (Section 1002). Neither PTR nor the Trustee shall be required to (i) issue, register the transfer of or exchange Debt Securities of any series during a period beginning at the opening of business 15 days before any selection of Debt Securities of that series to be redeemed and ending at the close of business on the day of mailing of the relevant notice of redemption; (ii) register the transfer of or exchange any Debt Security, or portion thereof, called for redemption, except the unredeemed portion of any Debt Security being redeemed in part; or (iii) issue, register the transfer of or exchange any Debt Security which has been surrendered for repayment at the option of the Holder, except the portion, if any, of such Debt Security not to be so repaid (Section 305). MERGER, CONSOLIDATION OR SALE PTR may consolidate with, or sell, lease or convey all or substantially all of its assets to, or merge with or into, any other entity, provided that (a) either PTR shall be the continuing entity, or the successor entity (if other than PTR) formed by or resulting from any such consolidation or merger or which shall have received the transfer of such assets is a Person organized and existing under the laws of the United States or any State thereof and shall expressly assume payment of the principal of (and premium or Make-Whole Amount, if any) and any interest (including Additional Amounts, if any) on all of the Debt Securities and the due and punctual performance and observance of all of the covenants and conditions contained in the Indenture; (b) immediately after giving effect to such transaction and treating any indebtedness which becomes an obligation of PTR or any Subsidiary as a result thereof as having been incurred by PTR or such Subsidiary at the time of such transaction, no Event of Default under the Indenture, and no event which, after notice or the lapse of time, or both, would become such an Event of Default, shall have occurred and be continuing; and (c) an officer's certificate and legal opinion covering such conditions shall be delivered to the Trustee (Sections 801 and 803). CERTAIN COVENANTS Limitations on Incurrence of Debt. PTR will not, and will not permit any Subsidiary to, incur any Debt (as defined below) if, immediately after giving effect to the incurrence of such additional Debt and the application of the proceeds thereof, the aggregate principal amount of all outstanding Debt of PTR and its Subsidiaries on a consolidated basis determined in accordance with generally accepted accounting principles is greater than 60% of the sum of (without duplication) (i) PTR's Total Assets (as defined below) as of the end of the calendar quarter covered in PTR's Annual Report on Form 10-K or Quarterly Report on Form 10-Q, as the case may be, most recently filed with the Securities and Exchange Commission (the "Commission") (or, if such filing is not permitted under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with the Trustee) prior to the incurrence of such additional Debt and (ii) the purchase price of any real estate assets or mortgages 6 receivable acquired, and the amount of any securities offering proceeds received (to the extent that such proceeds were not used to acquire real estate assets or mortgages receivable or used to reduce Debt), by PTR or any Subsidiary since the end of such calendar quarter, including those proceeds obtained in connection with the incurrence of such additional Debt (Section 1004). In addition to the foregoing limitation on the incurrence of Debt, PTR will not, and will not permit any Subsidiary to, incur any Debt secured by any mortgage, lien, charge, pledge, encumbrance or security interest of any kind upon any of the property of PTR or any Subsidiary if, immediately after giving effect to the incurrence of such additional Debt and the application of the proceeds thereof, the aggregate principal amount of all outstanding Debt of PTR and its Subsidiaries on a consolidated basis which is secured by any mortgage, lien, charge, pledge, encumbrance or security interest on property of PTR or any Subsidiary is greater than 40% of PTR's Total Assets (Section 1004). In addition to the foregoing limitations on the incurrence of Debt, PTR will not, and will not permit any Subsidiary to, incur any Debt if the ratio of Consolidated Income Available for Debt Service (as defined below) to the Annual Service Charge (as defined below) for the four consecutive fiscal quarters most recently ended prior to the date on which such additional Debt is to be incurred shall have been less than 1.5:1, on a pro forma basis after giving effect thereto and to the application of the proceeds therefrom, and calculated on the assumption that (i) such Debt and any other Debt incurred by PTR and its Subsidiaries since the first day of such four-quarter period and the application of the proceeds therefrom, including to refinance other Debt, had occurred at the beginning of such period; (ii) the repayment or retirement of any other Debt by PTR and its Subsidiaries since the first day of such four-quarter period had been incurred, repaid or retired at the beginning of such period (except that, in making such computation, the amount of Debt under any revolving credit facility shall be computed based upon the average daily balance of such Debt during such period); (iii) in the case of Acquired Debt (as defined below) or Debt incurred in connection with any acquisition since the first day of such four-quarter period, the related acquisition had occurred as of the first day of such period with the appropriate adjustments with respect to such acquisition being included in such pro forma calculation; and (iv) in the case of any acquisition or disposition by PTR or its Subsidiaries of any asset or group of assets since the first day of such four- quarter period, whether by merger, stock purchase or sale, or asset purchase or sale, such acquisition or disposition or any related repayment of Debt had occurred as of the first day of such period with the appropriate adjustments with respect to such acquisition or disposition being included in such pro forma calculation (Section 1004). Existence. Except as permitted under "--Merger, Consolidation or Sale," PTR will do or cause to be done all things necessary to preserve and keep in full force and effect its existence, rights (charter and statutory) and franchises; provided, however, that PTR shall not be required to preserve any right or franchise if it determines that the preservation thereof is no longer desirable in the conduct of its business and that the loss thereof is not disadvantageous in any material respect to the Holders of the Debt Securities (Section 1005). Maintenance of Properties. PTR will cause all of its properties used or useful in the conduct of its business or the business of any Subsidiary to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of PTR may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that PTR and its Subsidiaries shall not be prevented from selling or otherwise disposing for value its properties in the ordinary course of business (Section 1006). Insurance. PTR will, and will cause each of its Subsidiaries to, keep all of its insurable properties insured against loss or damage at least equal to their then full insurable value with financially sound and reputable insurance companies (Section 1007). Payment of Taxes and Other Claims. PTR will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (i) all taxes, assessments and governmental charges levied or imposed upon it or any Subsidiary or upon the income, profits or property of PTR or any Subsidiary and (ii) all lawful claims for 7 labor, materials and supplies which, if unpaid, might by law become a lien upon the property of PTR or any Subsidiary; provided, however, that PTR shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings (Section 1008). Provision of Financial Information. Whether or not PTR is subject to Section 13 or 15(d) of the Exchange Act, PTR will, to the extent permitted under the Exchange Act, file with the Commission the annual reports, quarterly reports and other documents which PTR would have been required to file with the Commission pursuant to such Section 13 and 15(d) (the "Financial Statements") if PTR were so subject, such documents to be filed with the Commission on or prior to the respective dates (the "Required Filing Dates") by which PTR would have been required so to file such documents if PTR were so subject. PTR will also in any event (i) within 15 days of each Required Filing Date (x) transmit by mail to all Holders of Debt Securities, as their names and addresses appear in the Security Register, without cost to such Holders, copies of the annual reports and quarterly reports which PTR would have been required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act if PTR were subject to such Sections and (y) file with the Trustee copies of the annual reports, quarterly reports and other documents which PTR would have been required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act if PTR were subject to such Sections and (ii) if filing such documents by PTR with the Commission is not permitted under the Exchange Act, promptly upon written request and payment of the reasonable cost of duplication and delivery, supply copies of such documents to any prospective Holder (Section 1009). As used herein, "Acquired Debt" means Debt of a Person (i) existing at the time such Person becomes a Subsidiary or (ii) assumed in connection with the acquisition of assets from such Person, in each case, other than Debt incurred in connection with, or in contemplation of, such Person becoming a Subsidiary or such acquisition. Acquired Debt shall be deemed to be incurred on the date of the related acquisition of assets from any Person or the date the acquired Person becomes a Subsidiary. "Annual Service Charge" as of any date means the maximum amount which is payable in any period for interest on, and original issue discount of, Debt of PTR and its Subsidiaries and the amount of dividends which are payable in respect of any Disqualified Stock. "Capital Stock" means, with respect to any Person, any capital stock (including preferred stock), shares, interests, participations or other ownership interests (however designated) of such Person and any rights (other than debt securities convertible into or exchangeable for corporate stock), warrants or options to purchase any thereof. "Consolidated Income Available for Debt Service" for any period means Earnings from Operations (as defined below) of PTR and its Subsidiaries plus amounts which have been deducted, and minus amounts which have been added, for the following (without duplication): (i) interest on Debt of PTR and its Subsidiaries, (ii) provision for taxes of PTR and its Subsidiaries based on income, (iii) amortization of debt discount, (iv) provisions for gains and losses on properties and property depreciation and amortization, (v) the effect of any noncash charge resulting from a change in accounting principles in determining Earnings from Operations for such period and (vi) amortization of deferred charges. "Debt" of PTR or any Subsidiary means any indebtedness of PTR or any Subsidiary, whether or not contingent, in respect of (i) borrowed money or evidenced by bonds, notes, debentures or similar instruments; (ii) indebtedness secured by any mortgage, pledge, lien, charge, encumbrance or any security interest existing on property owned by PTR or any Subsidiary; (iii) the reimbursement obligations, contingent or otherwise, in connection with any letters of credit actually issued or amounts representing the balance deferred and unpaid of the purchase price of any property or services, except any such balance that constitutes an accrued expense or trade payable, or all conditional sale obligations or obligations under any title retention agreement; (iv) the 8 principal amount of all obligations of PTR or any Subsidiary with respect to redemption, repayment or other repurchase of any Disqualified Stock; or (v) any lease of property by PTR or any Subsidiary as lessee which is reflected on PTR's Consolidated Balance Sheet as a capitalized lease in accordance with generally accepted accounting principles to the extent, in the case of items of indebtedness under (i) through (iii) above, that any such items (other than letters of credit) would appear as a liability on PTR's Consolidated Balance Sheet in accordance with generally accepted accounting principles, and also includes, to the extent not otherwise included, any obligation by PTR or any Subsidiary to be liable for, or to pay, as obligor, guarantor or otherwise (other than for purposes of collection in the ordinary course of business), Debt of another Person (other than PTR or any Subsidiary) (it being understood that Debt shall be deemed to be incurred by PTR or any Subsidiary whenever PTR or such Subsidiary shall create, assume, guarantee or otherwise become liable in respect thereof). "Disqualified Stock" means, with respect to any Person, any Capital Stock of such Person which by the terms of such Capital Stock (or by the terms of any security into which it is convertible or for which it is exchangeable or exercisable), upon the happening of any event or otherwise (i) matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, (ii) is convertible into or exchangeable or exercisable for Debt or Disqualified Stock or (iii) is redeemable at the option of the holder thereof, in whole or in part, in each case on or prior to the Stated Maturity of the series of Debt Securities. "Earnings from Operations" for any period means net earnings excluding gains and losses on sales of investments, net as reflected in the financial statements of PTR and its Subsidiaries for such period determined on a consolidated basis in accordance with generally accepted accounting principles. "Subsidiary" means, with respect to any Person, any corporation or other entity of which a majority of (i) the voting power of the voting equity securities or (ii) in the case of a partnership or any other entity other than a corporation, the outstanding equity interest of which are owned, directly or indirectly, by such Person. For the purposes of this definition, "voting equity securities" means equity securities having voting power for the election of directors, whether at all times or only so long as no senior class of security has such voting power by reason of any contingency. "Total Assets" as of any date means the sum of (i) PTR's Undepreciated Real Estate Assets and (ii) all other assets of PTR determined in accordance with generally accepted accounting principles (but excluding accounts receivable and intangibles). "Undepreciated Real Estate Assets" as of any date means the cost (original cost plus capital improvements) of real estate assets of PTR and its Subsidiaries on such date, before depreciation and amortization determined on a consolidated basis in accordance with generally accepted accounting principles. EVENTS OF DEFAULT, NOTICE AND WAIVER The Indenture provides that the following events are "Events of Default" with respect to any series of Debt Securities issued thereunder: (i) default for 30 days in the payment of any installment of interest or Additional Amounts payable on any Debt Security of such series; (ii) default in the payment of the principal of (or premium or Make-Whole Amount, if any, on) any Debt Security of such series at its Maturity; (iii) default in making any sinking fund payment as required for any Debt Security of such series; (iv) default in the performance of any other covenant of PTR contained in the Indenture (other than a covenant added to the Indenture solely for the benefit of a series of Debt Securities issued thereunder other than such series), continued for 60 days after written notice as provided in the Indenture; (v) default in the payment of an aggregate principal amount exceeding $10,000,000 of any evidence of indebtedness of PTR or any mortgage, indenture or other instrument under which such indebtedness is issued or by which such indebtedness is secured, such default having occurred after the expiration of any applicable grace period and having resulted in the acceleration of the maturity of such indebtedness, but only if such indebtedness is not discharged or such acceleration is not rescinded or annulled; (vi) the entry by a court of competent jurisdiction of one or more judgments, orders or decrees against PTR or any of its Subsidiaries in an aggregate amount (excluding amounts fully covered by insurance) in excess of 9 $10,000,000 and such judgments, orders or decrees remain undischarged, unstayed and unsatisfied in an aggregate amount (excluding amounts fully covered by insurance) in excess of $10,000,000 for a period of 30 consecutive days; (vii) certain events of bankruptcy, insolvency or reorganization, or court appointment of a receiver, liquidator or trustee of PTR or any Significant Subsidiary or for all or substantially all of either of its property; and (viii) any other Event of Default provided with respect to a particular series of Debt Securities (Section 501). The term "Significant Subsidiary" means each significant subsidiary (as defined in Regulation S-X promulgated by the Commission) of PTR. If an Event of Default under the Indenture with respect to Debt Securities of any series at the time Outstanding occurs and is continuing, then in every such case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Debt Securities of that series may declare the principal amount (or, if the Debt Securities of that series are Original Issue Discount Securities or Indexed Securities, such portion of the principal amount as may be specified in the terms thereof) of, and the Make-Whole Amount, if any, on, all of the Debt Securities of that series to be due and payable immediately by written notice thereof to PTR (and to the Trustee if given by the Holders). However, at any time after such a declaration of acceleration with respect to Debt Securities of such series (or of all Debt Securities then Outstanding under the Indenture, as the case may be) has been made, but before a judgment or decree for payment of the money due has been obtained by the Trustee, the Holders of not less than a majority in principal amount of Outstanding Debt Securities of such series (or of all Debt Securities then Outstanding under the Indenture, as the case may be) may rescind and annul such declaration and its consequences if (i) PTR shall have deposited with the Trustee all required payments of the principal of (and premium or Make-Whole Amount, if any) and interest, and any Additional Amounts, on the Debt Securities of such series (or of all Debt Securities then outstanding under the Indenture, as the case may be), plus certain fees, expenses, disbursements and advances of the Trustee and (ii) all Events of Default, other than the nonpayment of accelerated principal (or specified portion thereof and the Make-Whole Amount, if any) or interest, with respect to Debt Securities of such series (or of all Debt Securities then Outstanding under the Indenture, as the case may be) have been cured or waived as provided in the Indenture (Section 502). The Indenture also provides that the Holders of not less than a majority in principal amount of the Outstanding Debt Securities of any series (or of all Debt Securities then Outstanding under the Indenture, as the case may be) may waive any past default with respect to such series and its consequences, except a default (i) in the payment of the principal of (or premium or Make-Whole Amount, if any) or interest or Additional Amounts payable on any Debt Security of such series or (ii) in respect of a covenant or provision contained in the Indenture that cannot be modified or amended without the consent of the Holder of each Outstanding Debt Security affected thereby (Section 513). The Trustee is required to give notice to the Holders of Debt Securities within 90 days of a default under the Indenture; provided, however, that the Trustee may withhold notice to the Holders of any series of Debt Securities of any default with respect to such series (except a default in the payment of the principal of (or premium or Make-Whole Amount, if any) or interest or Additional Amounts payable on any Debt Security of such series or in the payment of any sinking fund installment in respect of any Debt Security of such series) if the Responsible Officers of the Trustee consider such withholding to be in the interest of such Holders (Section 601). The Indenture provides that no Holders of Debt Securities of any series may institute any proceedings, judicial or otherwise, with respect to the Indenture or for any remedy thereunder, except in the case of failure of the Trustee, for 60 days, to act after it has received a written request to institute proceedings in respect of an Event of Default from the Holders of not less than 25% in principal amount of the Outstanding Debt Securities of such series, as well as an offer of reasonable indemnity (Section 507). This provision will not prevent, however, any Holder of Debt Securities from instituting suit for the enforcement of payment of the principal of (and premium or Make-Whole Amount, if any), interest on, and Additional Amounts payable with respect to, such Debt Securities at the respective due dates thereof (Section 508). Subject to provisions in the Indenture relating to its duties in case of default, the Trustee is under no obligation to exercise any of its rights or powers under the Indenture at the request or direction of any Holders 10 of any series of Debt Securities then Outstanding under the Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity (Section 602). The Holders of not less than a majority in principal amount of the Outstanding Debt Securities of any series (or of all Debt Securities then Outstanding under the Indenture, as the case may be) shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or of exercising any trust or power conferred upon the Trustee. However, the Trustee may refuse to follow any direction which is in conflict with any law or the Indenture, which may involve the Trustee in personal liability or which may be unduly prejudicial to the Holders of Debt Securities of such series not joining therein (Section 512). Within 120 days after the close of each fiscal year, PTR must deliver to the Trustee a certificate, signed by one of several specified officers, stating whether or not such officer has knowledge of any default under the Indenture and, if so, specifying each such default and the nature and status thereof (Section 1010). MODIFICATION OF THE INDENTURE Modifications and amendments of the Indenture may be made with the consent of the Holders of not less than a majority in principal amount of all Outstanding Debt Securities which are affected by such modification or amendment; provided, however, that no such modification or amendment may, without the consent of the Holder of each such Debt Security affected thereby, (i) change the Stated Maturity of the principal of (or premium or Make-Whole Amount, if any), or any installment of principal of or interest or Additional Amounts payable on, any such Debt Security; (ii) reduce the principal amount of, or the rate or amount of interest on, or any premium or Make-Whole Amount payable on redemption of, or any Additional Amounts payable with respect to, any such Debt Security, or reduce the amount of principal of an Original Issue Discount Security or Make-Whole Amount, if any, that would be due and payable upon declaration of acceleration of the maturity thereof or would be provable in bankruptcy, or adversely affect any right of repayment of the Holder of any such Debt Security; (iii) change the Place of Payment, or the coin or currency, for payment of principal of (and premium or Make-Whole Amount, if any), or interest on, or any Additional Amounts payable with respect to, any such Debt Security; (iv) impair the right to institute suit for the enforcement of any payment on or with respect to any such Debt Security; (v) reduce the above-stated percentage of Outstanding Debt Securities of any series necessary to modify or amend the Indenture, to waive compliance with certain provisions thereof or certain defaults and consequences thereunder or to reduce the quorum or voting requirements set forth in the Indenture; or (vi) modify any of the foregoing provisions or any of the provisions relating to the waiver of certain past defaults or certain covenants, except to increase the required percentage to effect such action or to provide that certain other provisions may not be modified or waived without the consent of the Holder of such Debt Security (Section 902). The Holders of not less than a majority in principal amount of Outstanding Debt Securities have the right to waive compliance by PTR with certain covenants in the Indenture (Section 1012). Modifications and amendments of the Indenture may be made by PTR and the Trustee without the consent of any Holder of Debt Securities for any of the following purposes: (i) to evidence the succession of another Person to PTR as obligor under the Indenture; (ii) to add to the covenants of PTR for the benefit of the Holders of all or any series of Debt Securities or to surrender any right or power conferred upon PTR in the Indenture; (iii) to add Events of Default for the benefit of the Holders of all or any series of Debt Securities; (iv) to add or change any provisions of the Indenture to facilitate the issuance of, or to liberalize certain terms of, Debt Securities in bearer form, or to permit or facilitate the issuance of Debt Securities in uncertificated form, provided that such action shall not adversely affect the interests of the Holders of the Debt Securities of any series in any material respect; (v) to change or eliminate any provisions of the Indenture, provided that any such change or elimination shall become effective only when there are no Debt Securities Outstanding of any series created prior thereto which are entitled to the benefit of such provision; (vi) to secure the Debt Securities; (vii) to establish the form or terms of Debt Securities of any series and any related coupons; (viii) to provide for the acceptance of appointment by a successor Trustee or facilitate the administration of the trusts under the Indenture by more than one Trustee; (ix) to cure any ambiguity, defect or inconsistency in the Indenture or to make any other 11 changes, provided that in each case, such action shall not adversely affect the interests of Holders of Debt Securities of any series in any material respect; (x) to close the Indenture with respect to the authentication and delivery of additional series of Debt Securities or to qualify, or maintain qualification of, the Indenture under the TIA; or (xi) to supplement any of the provisions of the Indenture to the extent necessary to permit or facilitate defeasance and discharge of any series of such Debt Securities, provided that such action shall not adversely affect the interests of the Holders of the Debt Securities of any series in any material respect (Section 901). The Indenture provides that in determining whether the Holders of the requisite principal amount of Outstanding Debt Securities of a series have given any request, demand, authorization, direction, notice, consent or waiver thereunder or whether a quorum is present at a meeting of Holders of Debt Securities, (i) the principal amount of an Original Issue Discount Security that shall be deemed to be outstanding shall be the amount of the principal thereof that would be due and payable as of the date of such determination upon declaration of acceleration of the maturity thereof; (ii) the principal amount of a Debt Security denominated in a Foreign Currency that shall be deemed outstanding shall be the United States dollar equivalent, determined on the issue date for such Debt Security, of the principal amount (or, in the case of an Original Issue Discount Security, the United States dollar equivalent on the issue date of such Debt Security of the amount determined as provided in (i) above); (iii) the principal amount of an Indexed Security that shall be deemed outstanding shall be the principal face amount of such Indexed Security at original issuance, unless otherwise provided with respect to such Indexed Security pursuant to Section 301 of the Indenture; and (iv) Debt Securities owned by PTR or any other obligor upon the Debt Securities or any Affiliate of PTR or of such other obligor shall be disregarded (Section 101). The Indenture contains provisions for convening meetings of the Holders of Debt Securities of a series (Section 1501). A meeting may be called at any time by the Trustee, and also, upon request, by PTR or the Holders of at least 10% in principal amount of the Outstanding Debt Securities of such series, in any such case upon notice given as provided in the Indenture (Section 1502). Except for any consent that must be given by the Holder of each Debt Security affected by certain modifications and amendments of the Indenture, any resolution presented at a meeting or adjourned meeting duly reconvened at which a quorum is present may be adopted by the affirmative vote of the Holders of a majority in principal amount of the Outstanding Debt Securities of such series; provided, however, that, except as referred to above, any resolution with respect to any request, demand, authorization, direction, notice, consent, waiver or other action that may be made, given or taken by the Holders of a specified percentage, which is less than a majority, in principal amount of the Outstanding Debt Securities of a series may be adopted at a meeting or adjourned meeting duly reconvened at which a quorum is present by the affirmative vote of the Holders of such specified percentage in principal amount of the Outstanding Debt Securities of that series. Any resolution passed or decision taken at any meeting of Holders of Debt Securities of any series duly held in accordance with the Indenture will be binding on all Holders of Debt Securities of such series. The quorum at any meeting called to adopt a resolution, and at any reconvened meeting, will be Persons holding or representing a majority in principal amount of the Outstanding Debt Securities of a series; provided, however, that if any action is to be taken at such meeting with respect to a consent or waiver which may be given by the Holders of not less than a specified percentage in principal amount of the Outstanding Debt Securities of a series, the Persons holding or representing such specified percentage in principal amount of the Outstanding Debt Securities of such series will constitute a quorum (Section 1504). Notwithstanding the foregoing provisions, if any action is to be taken at a meeting of Holders of Debt Securities of any series with respect to any request, demand, authorization, direction, notice, consent, waiver or other action that the Indenture expressly provides may be made, given or taken by the Holders of a specified percentage in principal amount of all Outstanding Debt Securities affected thereby, or of the Holders of such series and one or more additional series: (i) there shall be no minimum quorum requirement for such meeting and (ii) the principal amount of the Outstanding Debt Securities of such series that vote in favor of such request, demand, authorization, direction, notice, consent, waiver or other action shall be taken into account in determining whether such request, demand, authorization, direction, notice, consent, waiver or other action has been made, given or taken under the Indenture (Section 1504). 12 Any request, demand, authorization, direction, notice, consent, waiver or other action provided by the Indenture to be given or taken by a specified percentage in principal amount of the Holders of any or all series of Debt Securities may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such specified percentage of Holders in person or by agent duly appointed in writing; and, except as otherwise expressly provided in the Indenture, such action shall become effective when such instrument or instruments are delivered to the Trustee. Proof of execution of any instrument or of a writing appointing any such agent shall be sufficient for any purpose of the Indenture and (subject to Article Six of the Indenture) conclusive in favor of the Trustee and PTR, if made in the manner specified above (Section 1507). DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE PTR may discharge certain obligations to Holders of any series of Debt Securities that have not already been delivered to the Trustee for cancellation and that either have become due and payable or will become due and payable within one year (or scheduled for redemption within one year) by irrevocably depositing with the Trustee, in trust, funds in such currency or currencies, currency unit or units or composite currency or currencies in which such Debt Securities are payable in an amount sufficient to pay the entire indebtedness on such Debt Securities in respect of principal (and premium or Make-Whole Amount, if any) and interest and Additional Amounts payable to the date of such deposit (if such Debt Securities have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be (Section 401). The Indenture provides that, if the provisions of Article Fourteen are made applicable to the Debt Securities of or within any series pursuant to Section 301 of the Indenture, PTR may elect either (i) to defease and be discharged from any and all obligations with respect to such Debt Securities (except for the obligation to pay Additional Amounts, if any, upon the occurrence of certain events of tax, assessment or governmental charge with respect to payments on such Debt Securities and the obligations to register the transfer or exchange of such Debt Securities, to replace temporary or mutilated, destroyed, lost or stolen Debt Securities, to maintain an office or agency in respect of such Debt Securities and to hold moneys for payment in trust) ("defeasance") (Section 1402) or (ii) to be released from its obligations with respect to such Debt Securities under Sections 1004 to 1009, inclusive, of the Indenture (being the restrictions described under "--Certain Covenants") and, if provided pursuant to Section 301 of the Indenture, its obligations with respect to any other covenant, and any omission to comply with such obligations shall not constitute a default or an Event of Default with respect to such Debt Securities ("covenant defeasance") (Section 1403), in either case upon the irrevocable deposit by PTR with the Trustee, in trust, of an amount, in such currency or currencies, currency unit or units or composite currency or currencies in which such Debt Securities are payable at Stated Maturity, or Government Obligations (as defined below), or both, applicable to such Debt Securities which through the scheduled payment of principal and interest in accordance with their terms will provide money in an amount sufficient to pay the principal of (and premium or Make-Whole Amount, if any) and interest on such Debt Securities, and any mandatory sinking fund or analogous payments thereon, on the scheduled due dates therefor. Such a trust may only be established if, among other things, PTR has delivered to the Trustee an Opinion of Counsel (as specified in the Indenture) to the effect that the Holders of such Debt Securities will not recognize income, gain or loss for United States federal income tax purposes as a result of such defeasance or covenant defeasance and will be subject to United States federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance or covenant defeasance had not occurred, and such Opinion of Counsel, in the case of defeasance, must refer to and be based upon a ruling of the Internal Revenue Service or a change in applicable United States federal income tax law occurring after the date of the Indenture (Section 1404). "Government Obligations" means securities which are (i) direct obligations of the United States of America or the government which issued the Foreign Currency in which the Debt Securities of a particular series are payable, for the payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America or such government 13 which issued the Foreign Currency in which the Debt Securities of such series are payable, the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America or such other government, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such Government Obligation or a specific payment of interest on or principal of any such Government Obligation held by such custodian for the account of the holder of a depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the Government Obligation or the specific payment of interest on or principal of the Government Obligation evidenced by such depository receipt (Section 101). Unless otherwise provided in the applicable Prospectus Supplement, if after PTR has deposited funds and/or Government Obligations to effect defeasance or covenant defeasance with respect to Debt Securities of any series, (i) the Holder of a Debt Security of such series is entitled to, and does, elect pursuant to Section 301 of the Indenture or the terms of such Debt Security to receive payment in a currency, currency unit or composite currency other than that in which such deposit has been made in respect of such Debt Security or (ii) a Conversion Event (as defined below) occurs in respect of the currency, currency unit or composite currency in which such deposit has been made, the indebtedness represented by such Debt Security shall be deemed to have been, and will be, fully discharged and satisfied through the payment of the principal of (and premium or Make-Whole Amount, if any) and interest on such Debt Security as they become due out of the proceeds yielded by converting the amount so deposited in respect of such Debt Security into the currency, currency unit or composite currency in which such Debt Security becomes payable as a result of such election or such cessation of usage based on the applicable market exchange rate (Section 1405). "Conversion Event" means the cessation of use of (i) a currency, currency unit or composite currency (other than the ECU or other currency unit) both by the government of the country which issued such currency and for the settlement of transactions by a central bank or other public institutions of or within the international banking community, (ii) the ECU both within the European Monetary System and for the settlement of transactions by public institutions of or within the European Communities or (iii) any currency unit or composite currency other than the ECU for the purposes for which it was established. Unless otherwise provided in the applicable Prospectus Supplement, all payments of principal of (and premium or Make-Whole Amount, if any) and interest on any Debt Security that is payable in a Foreign Currency that ceases to be used by its government of issuance shall be made in United States dollars (Section 101). In the event PTR effects covenant defeasance with respect to any Debt Securities and such Debt Securities are declared due and payable because of the occurrence of any Event of Default other than the Event of Default described in clause (iv) under "--Events of Default, Notice and Waiver" with respect to Sections 1004 to 1009, inclusive, of the Indenture (which Sections would no longer be applicable to such Debt Securities) or described in clause (vii) under "--Events of Default, Notice and Waiver" with respect to any other covenant as to which there has been covenant defeasance, the amount in such currency, currency unit or composite currency in which such Debt Securities are payable, and Government Obligations on deposit with the Trustee, will be sufficient to pay amounts due on such Debt Securities at the time of their Stated Maturity but may not be sufficient to pay amounts due on such Debt Securities at the time of the acceleration resulting from such Event of Default. However, PTR would remain liable to make payment of such amounts due at the time of acceleration. The applicable Prospectus Supplement may further describe the provisions, if any, permitting such defeasance or covenant defeasance, including any modifications to the provisions described above, with respect to the Debt Securities of or within a particular series. REGISTRATION AND TRANSFER Subject to certain limitations imposed upon Debt Securities issued in book- entry form, the Debt Securities of any series will be exchangeable for other Debt Securities of the same series and of a like aggregate principal amount and tenor of different authorized denominations upon surrender of such Debt Securities at the corporate 14 trust office of the Trustee referred to above. In addition, subject to certain limitations imposed upon Debt Securities issued in book-entry form, the Debt Securities of any series may be surrendered for conversion or registration of transfer thereof at the corporate trust office of the Trustee referred to above. Every Debt Security surrendered for registration of transfer or exchange shall be duly endorsed or accompanied by a written instrument of transfer. No service charge will be made for any registration of transfer or exchange of any Debt Securities, but PTR may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith (Section 305). PTR may at any time designate a transfer agent (in addition to the Trustee) with respect to any series of Debt Securities. If PTR has designated such a transfer agent or transfer agents, PTR may at any time rescind the designation of any such transfer agent or approve a change in the location at which any such transfer agent acts, except that PTR will be required to maintain a transfer agent in each Place of Payment for such series (Section 1002). Neither PTR nor the Trustee shall be required to (i) issue, register the transfer of or exchange Debt Securities of any series during a period beginning at the opening of business 15 days before any selection of Debt Securities of that series to be redeemed and ending at the close of business on the day of mailing of the relevant notice of redemption; (ii) register the transfer of or exchange any Debt Security, or portion thereof, called for redemption, except the unredeemed portion of any Debt Security being redeemed in part; or (iii) issue, register the transfer of or exchange any Debt Security which has been surrendered for repayment at the option of the Holder, except the portion, if any, of such Debt Security not to be so repaid (Section 305). BOOK-ENTRY PROCEDURES The Debt Securities of a series may be issued in whole or in part in the form of one or more global securities ("Global Securities") that will be deposited with, or on behalf of, a depository (the "Depository") identified in the applicable Prospectus Supplement relating to such series. Global Securities, if any, are expected to be deposited with The Depository Trust Company, as Depository. Global Securities may be issued in fully registered form and may be issued in either temporary or permanent form. Unless and until it is exchanged in whole or in part for the individual Debt Securities represented thereby, a Global Security may not be transferred except as a whole by the Depository for such Global Security to a nominee of such Depository or by a nominee of such Depository to such Depository or another nominee of such Depository or by the Depository or any nominee of such Depository to a successor Depository or any nominee of such successor. The specific terms of the depository arrangement with respect to a series of Debt Securities will be described in the applicable Prospectus Supplement relating to such series. Unless otherwise indicated in the applicable Prospectus Supplement, PTR anticipates that the following provisions will apply to depository arrangements. Upon the issuance of a Global Security, the Depository for such Global Security or its nominee will credit on its book-entry registration and transfer system the respective principal amounts of the individual Debt Securities represented by such Global Security to the accounts of persons that have accounts with such Depository ("Participants"). Such accounts shall be designated by the underwriters, dealers or agents with respect to such Debt Securities or by PTR if such Debt Securities are offered and sold directly by PTR. Ownership of beneficial interests in a Global Security will be limited to Participants or persons that may hold interests through Participants. Ownership of beneficial interests in such Global Security will be shown on, and the transfer of that ownership will be effected only through, records maintained by the applicable Depository or its nominee (with respect to beneficial interests of Participants) and records of Participants (with respect to beneficial interests of persons who hold through Participants). The laws of some states require that certain purchasers of securities take physical delivery of such securities in definitive form. Such limits and laws may impair the ability to own, pledge or transfer beneficial interest in a Global Security. So long as the Depository for a Global Security or its nominee is the registered owner of such Global Security, such Depository or such nominee, as the case may be, will be considered the sole owner or holder of the Debt Securities represented by such Global Security for all purposes under the Indenture. Except as provided 15 below or in the applicable Prospectus Supplement, owners of beneficial interest in a Global Security will not be entitled to have any of the individual Debt Securities of the series represented by such Global Security registered in their names, will not receive or be entitled to receive physical delivery of any such Debt Securities of such series in definitive form and will not be considered the owners or holders thereof under the Indenture. Payments of principal of, any premium or Make-Whole Amount and any interest on, or any Additional Amounts payable with respect to, individual Debt Securities represented by a Global Security registered in the name of a Depository or its nominee will be made to the Depository or its nominee, as the case may be, as the registered owner of the Global Security representing such Debt Securities. None of PTR, the Trustee, any Paying Agent or the Security Registrar for such Debt Securities will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in the Global Security for such Debt Securities or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. PTR expects that the Depository for a series of Debt Securities or its nominee, upon receipt of any payment of principal, premium, Make-Whole Amount or interest in respect of a permanent Global Security representing any of such Debt Securities, immediately will credit Participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of such Global Security for such Debt Securities as shown on the records of such Depository or its nominee. PTR also expects that payments by Participants to owners of beneficial interests in such Global Security held through such Participants will be governed by standing instructions and customary practices, as is the case with securities held for the account of customers in bearer form or registered in "street name." Such payments will be the responsibility of such Participants. If a Depository for a series of Debt Securities is at any time unwilling, unable or ineligible to continue as depository and a successor depository is not appointed by PTR within 90 days, PTR will issue individual Debt Securities of such series in exchange for the Global Security representing such series of Debt Securities. In addition, PTR may, at any time and in its sole discretion, subject to any limitations described in the applicable Prospectus Supplement relating to such Debt Securities, determine not to have any Debt Securities of such series represented by one or more Global Securities and, in such event, will issue individual Debt Securities of such series in exchange for the Global Security or Securities representing such series of Debt Securities. Individual Debt Securities of such series so issued will be issued in denominations, unless otherwise specified by PTR, of $1,000 and integral multiples thereof. NO PERSONAL LIABILITY No past, present or future trustee, officer, employee or shareholder, as such, of PTR or any successor thereof shall have any liability for any obligations of PTR under the Debt Securities or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Debt Securities by accepting such Debt Securities waives and releases all such liability. The waiver and release are part of the consideration for the issue of Debt Securities (Section 111). TRUSTEE The Indenture provides that there may be more than one Trustee thereunder, each with respect to one or more series of Debt Securities. Any Trustee under the Indenture may resign or be removed with respect to one or more series of Debt Securities, and a successor Trustee may be appointed to act with respect to such series (Section 608). In the event that two or more persons are acting as Trustee with respect to different series of Debt Securities, each such Trustee shall be a Trustee of a trust under the Indenture separate and apart from the trust administered by any other Trustee (Sections 101 and 609), and except as otherwise indicated herein, any action described herein to be taken by the Trustee may be taken by each such Trustee with respect to, and only with respect to, the one or more series of Debt Securities for which it is Trustee under the Indenture. 16 DESCRIPTION OF PREFERRED SHARES GENERAL Subject to limitations prescribed by Maryland law and the Declaration of Trust, the Board is authorized to issue, from the authorized but unissued shares of beneficial interest of PTR, Preferred Shares in series and to establish from time to time the number of Preferred Shares to be included in such series and to fix the designation and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption of the shares of each series, and such other subjects or matters as may be fixed by resolution of the Board or a duly authorized committee thereof. On September 5, 1997, PTR had 5,534,199 of its Series A Preferred Shares issued and outstanding and held of record by approximately 75 shareholders and 4,200,000 of its Series B Preferred Shares issued and outstanding and held of record by approximately 283 shareholders. Reference is made to the Prospectus Supplement relating to the series of Preferred Shares being offered for the specific terms thereof, including: (1) The title and stated value of such series of Preferred Shares; (2) The number of shares of such series of Preferred Shares offered, the liquidation preference per share and the offering price of such Preferred Shares; (3) The dividend rate(s), period(s) and/or payment date(s) or method(s) of calculation thereof applicable to Preferred Shares of such series; (4) The date from which dividends on Preferred Shares of such series shall cumulate, if applicable; (5) The procedures for any auction and remarketing, if any, for Preferred Shares of such series; (6) The provision for a sinking fund, if any, for Preferred Shares of such series; (7) The provision for redemption, if applicable, of Preferred Shares of such series; (8) Any listing of such series of Preferred Shares on any securities exchange; (9) The terms and conditions, if applicable, upon which Preferred Shares of such series will be convertible into Common Shares, including the conversion price (or manner of calculation thereof); (10) Whether interests in Preferred Shares of such series will be represented by Global Securities; (11) Any other specific terms, preferences, rights, limitations or restrictions of such series of Preferred Shares; (12) A discussion of federal income tax considerations applicable to Preferred Shares of such series; (13) The relative ranking and preferences of Preferred Shares of such series as to dividend rights and rights upon liquidation, dissolution or winding up of the affairs of PTR; (14) Any limitations on issuance of any series of Preferred Shares ranking senior to or on a parity with such series of Preferred Shares as to dividend rights and rights upon liquidation, dissolution or winding up of the affairs of PTR; and (15) Any limitations on direct or beneficial ownership and restrictions on transfer of Preferred Shares of such series, in each case as may be appropriate to preserve the status of PTR as a REIT. RANK Unless otherwise specified in the applicable Prospectus Supplement, the Preferred Shares of each Series will, with respect to dividend rights and rights upon liquidation, dissolution or winding up of PTR, rank (i) senior to all classes or series of Common Shares, and to all equity securities ranking junior to such series of Preferred Shares; (ii) on a parity with all equity securities issued by PTR the terms of which specifically provide that such equity securities rank on a parity with the Preferred Shares of such series; and (iii) junior to all equity securities issued by PTR the terms of which specifically provide that such equity securities rank senior to Preferred Shares of such series. 17 DIVIDENDS Holders of Preferred Shares of each series shall be entitled to receive, when, as and if declared by the Board, out of assets of PTR legally available for payment, cash dividends at such rates and on such dates as will be set forth in the applicable Prospectus Supplement. Each such dividend shall be payable to holders of record as they appear on the share transfer books of PTR on such record dates as shall be fixed by the Board. Dividends on any series of the Preferred Shares may be cumulative or noncumulative, as provided in the applicable Prospectus Supplement. Dividends, if cumulative, will be cumulative from and after the date set forth in the applicable Prospectus Supplement. If the Board fails to declare a dividend payable on a dividend payment date on any series of the Preferred Shares for which dividends are noncumulative, then the holders of such series of the Preferred Shares will have no right to receive a dividend in respect of the dividend period ending on such dividend payment date, and PTR will have no obligation to pay the dividend accrued for such period, whether or not dividends on such series are declared payable on any future dividend payment date. If Preferred Shares of any series are outstanding, no full dividends shall be declared or paid or set apart for payment on the Preferred Shares of PTR of any other series ranking, as to dividends, on a parity with or junior to the Preferred Shares of such series for any period unless (i) if such series of Preferred Shares has a cumulative dividend, full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for such payment on the Preferred Shares of such series for all past dividend periods and the then current dividend period or (ii) if such series of Preferred Shares does not have a cumulative dividend, full dividends for the then current dividend period have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for such payment on the Preferred Shares of such series. When dividends are not paid in full (or a sum sufficient for such full payment is not so set apart) upon the Preferred Shares of any series and the shares of any other series of Preferred Shares ranking on a parity as to dividends with the Preferred Shares of such series, all dividends declared upon Preferred Shares of such series and any other series of Preferred Shares ranking on a parity as to dividends with such Preferred Shares shall be declared pro rata so that the amount of dividends declared per share on the Preferred Shares of such series and such other series of Preferred Shares shall in all cases bear to each other the same ratio that accrued dividends per share on the Preferred Shares of such series (which shall not include any cumulation in respect of unpaid dividends for prior dividend periods if such series of Preferred Shares does not have a cumulative dividend) and such other series of Preferred Shares bear to each other. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on Preferred Shares of such series which may be in arrears. Except as provided in the immediately preceding paragraph, unless (i) if such series of Preferred Shares has a cumulative dividend, full cumulative dividends on the Preferred Shares of such series have been or contemporaneously are declared and paid or declared and a sum sufficient of the payment thereof set apart for payment for all past dividend periods and the then current dividend period or (ii) if such series of Preferred Shares does not have a cumulative dividend, full dividends on the Preferred Shares of such series have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for the then current dividend period, no dividends (other than in Common Shares or other capital shares ranking junior to the Preferred Shares of such series as to dividends and upon liquidation) shall be declared or paid or set aside for payment or other distribution shall be declared or made upon the Common Shares or any other capital shares of PTR ranking junior to or on a parity with the Preferred Shares of such series as to dividends or upon liquidation, nor shall any Common Shares or any other capital shares of PTR ranking junior to or on a parity with the Preferred Shares of such series as to dividends or upon liquidation be redeemed, purchased or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such series) by PTR (except by conversion into or exchange for other capital shares of PTR ranking junior to the Preferred Shares of such series as to dividends and upon liquidation). Any dividend payment made on a series of Preferred Shares shall first be credited against the earliest accrued but unpaid dividend due with respect to shares of such series which remains payable. 18 REDEMPTION If so provided in the applicable Prospectus Supplement, the Preferred Shares will be subject to mandatory redemption or redemption at the option of PTR, as a whole or in part, in each case upon the terms, at the times and at the redemption prices set forth in such Prospectus Supplement. The Prospectus Supplement relating to a series of Preferred Shares that is subject to mandatory redemption will specify the number of Preferred Shares of such series that shall be redeemed by PTR in each year commencing after a date to be specified, at a redemption price per share to be specified, together with an amount equal to all accrued and unpaid dividends thereon (which shall not, if such series of Preferred Shares does not have a cumulative dividend, include any cumulation in respect of unpaid dividends for prior dividend periods) to the date of redemption. The redemption price may be payable in cash or other property, as specified in the applicable Prospectus Supplement. If the redemption price for Preferred Shares of any series is payable only from the net proceeds of the issuance of capital shares of PTR, the terms of such series of Preferred Shares may provide that, if no such capital shares shall have been issued or to the extent the net proceeds from any issuance are insufficient to pay in full the aggregate redemption price then due, Preferred Shares of such series shall automatically and mandatorily be converted into shares of the applicable capital shares of PTR pursuant to conversion provisions specified in the applicable Prospectus Supplement. Notwithstanding the foregoing, unless (i) if such series of Preferred Shares has a cumulative dividend, full cumulative dividends on all Preferred Shares of any series shall have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past dividend periods and the then current dividend period or (ii) if such series of Preferred Shares does not have a cumulative dividend, full dividends on all Preferred Shares of any series have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for the then current dividend period, no Preferred Shares of any series shall be redeemed unless all outstanding Preferred Shares of such series are simultaneously redeemed; provided, however, that the foregoing shall not prevent the purchase or acquisition of Preferred Shares of such series pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding Preferred Shares of such series, and, unless (i) if such series of Preferred Shares has a cumulative dividend, full cumulative dividends on all Preferred Shares of any series have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past dividend periods and the then current dividend period or (ii) if such series of Preferred Shares does not have a cumulative dividend, full dividends on all Preferred Shares of any series have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for the then current dividend period, PTR shall not purchase or otherwise acquire directly or indirectly any Preferred Shares of such series (except by conversion into or exchange for capital shares of PTR ranking junior to the Preferred Shares of such series as to dividends and upon liquidation). If fewer than all of the outstanding Preferred Shares of any series are to be redeemed, the number of shares to be redeemed will be determined by PTR and such shares may be redeemed pro rata from the holders of record of Preferred Shares of such series in proportion to the number of Preferred Shares of such series held by such holders (with adjustments to avoid redemption of fractional shares) or by lot in a manner determined by PTR. Notice of redemption will be mailed at least 30 days but not more than 90 days before the redemption date to each holder of record of Preferred Shares of any series to be redeemed at the address shown on the share transfer books of PTR. Each notice shall state: (i) the redemption date; (ii) the number of shares and series of the Preferred Shares to be redeemed; (iii) the redemption price; (iv) the place or places where certificates for such Preferred Shares are to be surrendered for payment of the redemption price; (v) that dividends on the Preferred Shares to be redeemed will cease to accrue on such redemption date; and (vi) the date upon which the holder's conversion rights, if any, as to such Preferred Shares shall terminate. If fewer than all the Preferred Shares of any series are to be redeemed, the notice mailed to each such holder thereof shall also specify the number of Preferred Shares to be redeemed from each such holder. If notice of redemption of any Preferred Shares has been given and if the funds necessary for such redemption have been set aside by PTR in trust for the benefit of 19 the holders of any Preferred Shares so called for redemption, then from and after the redemption date dividends will cease to accrue on such Preferred Shares, and all rights of the holders of such Preferred Shares will terminate, except the right to receive the redemption price. LIQUIDATION PREFERENCE Upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of PTR, then, before any distribution or payment shall be made to the holders of any Common Shares or any other class or series of shares of beneficial interest of PTR ranking junior to such series of Preferred Shares in the distribution of assets upon any liquidation, dissolution or winding up of PTR, the holders of each series of Preferred Shares shall be entitled to receive out of assets of PTR legally available for distribution to shareholders liquidating distributions in the amount of the liquidation preference per share (set forth in the applicable Prospectus Supplement), plus an amount equal to all dividends accrued and unpaid thereon (which shall not include any cumulation in respect of unpaid dividends for prior dividend periods if such series of Preferred Shares does not have a cumulative dividend). After payment of the full amount of the liquidating distributions to which they are entitled, the holders of Preferred Shares of such series will have no right or claim to any of the remaining assets of PTR. In the event that, upon any such voluntary or involuntary liquidation, dissolution or winding up, the available assets of PTR are insufficient to pay the amount of the liquidating distributions on all outstanding Preferred Shares of such series and the corresponding amounts payable on all shares of other classes or series of capital shares of PTR ranking on a parity with Preferred Shares of such series in the distribution of assets, then the holders of Preferred Shares of such series and all other such classes or series of capital shares shall share ratably in any such distribution of assets in proportion to the full liquidating distributions to which they would otherwise be respectively entitled. If liquidating distributions shall have been made in full to all holders of Preferred Shares of such series, the remaining assets of PTR shall be distributed among the holders of any other classes or series of capital shares ranking junior to the Preferred Shares of such series upon liquidation, dissolution or winding up, according to their respective rights and preferences and in each case according to their respective number of shares. For such purposes, the consolidation or merger of PTR with or into any other entity, or the sale, lease or conveyance of all or substantially all of the property or business of PTR, shall not be deemed to constitute a liquidation, dissolution or winding up of PTR. VOTING RIGHTS Holders of the Preferred Shares of each series will not have any voting rights, except as set forth below or in the applicable Prospectus Supplement or as otherwise required by applicable law. The following is a summary of the voting rights that, unless provided otherwise in the applicable Prospectus Supplement, will apply to each series of Preferred Shares. If six quarterly dividends (whether or not consecutive) payable on the Preferred Shares of such series or any other series of Preferred Shares ranking on a parity with such series of Preferred Shares with respect in each case to the payment of dividends, amounts upon liquidation, dissolution and winding up ("Parity Shares") are in arrears, whether or not earned or declared, the number of Trustees then constituting the Board will be increased by two, and the holders of Preferred Shares of such series, voting together as a class with the holders of any other series of Parity Shares (any such other series, the "Voting Preferred Shares"), will have the right to elect two additional trustees to serve on the Board at any annual meeting of shareholders or a properly called special meeting of the holders of Preferred Shares of such series and such Voting Preferred Shares and at each subsequent annual meeting of shareholders until all such dividends and dividends for the current quarterly period on the Preferred Shares of such series and such other Voting Preferred Shares have been paid or declared and set aside for payment. Such voting rights will terminate when all such accrued and unpaid dividends have been declared and paid or set aside for payment. The term of office of all trustees so elected will terminate with the termination of such voting rights. For so long as Security Capital and certain of its affiliates beneficially own in excess of 10% of the outstanding Common Shares, in any such vote by holders of Preferred Shares of such series, 20 Security Capital and certain of its affiliates shall vote their Preferred Shares of such series, if any, in the same respective percentages as the Preferred Shares of such series and Voting Preferred Shares that are not held by such persons. The approval of two-thirds of the outstanding Preferred Shares of such series and all other series of Voting Preferred Shares similarly affected, voting as a single class, is required in order to (i) amend PTR's Declaration of Trust to affect materially and adversely the rights, preferences or voting power of the holders of the Preferred Shares of such series or the Voting Preferred Shares; (ii) enter into a share exchange that affects the Preferred Shares of such series, consolidate with or merge into another entity, or permit another entity to consolidate with or merge into PTR, unless in each such case each Preferred Share of such series remains outstanding without a material and adverse change to its terms and rights or is converted into or exchanged for preferred shares of the surviving entity having preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms or conditions of redemption thereof identical to that of a Preferred Share of such series (except for changes that do not materially and adversely affect the holders of the Preferred Shares of such series); or (iii) authorize, reclassify, create, or increase the authorized amount of any class of shares having rights senior to the Preferred Shares of such series with respect to the payment of dividends or amounts upon liquidation, dissolution or winding up. However, PTR may create additional classes of Parity Shares and other series of Preferred Shares ranking junior to such series of Preferred Shares with respect in each case to the payment of dividends, amounts upon liquidation, dissolution and winding up ("Junior Shares"), increase the authorized number of Parity Shares and Junior Shares and issue additional series of Parity Shares and Junior Shares without the consent of any holder of Preferred Shares of such series. Except as provided above and as required by law, the holders of Preferred Shares of each series will not be entitled to vote on any merger or consolidation involving PTR or a sale of all or substantially all of the assets of PTR. CONVERSION RIGHTS The terms and conditions, if any, upon which Preferred Shares of any series are convertible into Common Shares will be set forth in the applicable Prospectus Supplement relating thereto. Such terms will include the number of Common Shares into which the Preferred Shares of such series are convertible, the conversion price (or manner of calculation thereof), the conversion period, provisions as to whether conversion will be at the option of the holders of the Preferred Shares of such series or PTR, the events requiring an adjustment of the conversion price and provisions affecting conversion in the event of the redemption of the Preferred Shares of such series. RESTRICTIONS ON OWNERSHIP As discussed below under "Description of Common Shares--Restriction on Size of Holdings," for PTR to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), not more than 50% in value of its outstanding shares of beneficial interest may be owned by five or fewer individuals at any time during the last half of a taxable year, and the capital stock must be beneficially owned by 100 or more persons during at least 335 days of PTR's taxable year of 12 months. Therefore, the Articles Supplementary for each series of Preferred Shares will contain certain provisions restricting the ownership and transfer of the Preferred Shares (the "Preferred Shares Ownership Limit Provision"). Except as otherwise described in the applicable Prospectus Supplement relating thereto, the provisions of each Articles Supplementary relating to the Preferred Shares Ownership Limit will provide (as in the case of the Series A Preferred Shares and the Series B Preferred Shares) as summarized below. The Preferred Shares Ownership Limit Provision will provide that, subject to certain exceptions contained in such Articles Supplementary, no person, or persons acting as a group, may beneficially own more than 25% of any series of Preferred Shares outstanding at any time, except as a result of PTR's redemption of Preferred Shares. Shares acquired in excess of the Preferred Shares Ownership Limit Provision must be redeemed by PTR 21 at a price equal to the average daily per share closing sale price during the 30-day period ending on the business day prior to the redemption date. Such redemption is not applicable if a person's ownership exceeds the limitations due solely to PTR's redemption of Preferred Shares; provided that thereafter any additional Preferred Shares acquired by such person shall be Excess Shares (as hereinafter defined). See "Description of Common Shares--Restriction on Size of Holdings." From and after the date of notice of such redemption, the holder of the Preferred Shares thus redeemed shall cease to be entitled to any distribution (other than distributions declared prior to the date of notice of redemption), voting rights and other benefits with respect to such shares except the right to receive payment of the redemption price determined as described above. The Preferred Shares Ownership Limit Provision may not be waived with respect to certain affiliates of PTR. All certificates representing shares of Preferred Shares will bear a legend referring to the restrictions described above. DESCRIPTION OF COMMON SHARES GENERAL The Declaration of Trust authorizes PTR to issue up to 150,000,000 Shares of Beneficial Interest, par value $1.00 per share, consisting of Common Shares, Preferred Shares and such other types or classes of shares of beneficial interest as the Board may create and authorize from time to time. At September 5, 1997 approximately 79,429,200 Common Shares were issued and outstanding and held of record by approximately 3,000 shareholders. The following description sets forth certain general terms and provisions of the Common Shares to which any Prospectus Supplement may relate, including a Prospectus Supplement which provides for Common Shares issuable pursuant to subscription offerings or rights offerings or upon conversion of Preferred Shares which are offered pursuant to such Prospectus Supplement and convertible into Common Shares for no additional consideration. The statements below describing the Common Shares are in all respects subject to and qualified in their entirety by reference to the applicable provisions of the Declaration of Trust and PTR's Bylaws. The outstanding Common Shares are fully paid and, except as set forth below under "--Shareholder Liability," non-assessable. Each Common Share entitles the holder to one vote on all matters requiring a vote of shareholders, including the election of Trustees. Holders of Common Shares do not have the right to cumulate their votes in the election of Trustees, which means that the holders of a majority of the outstanding Common Shares can elect all of the Trustees then standing for election. Holders of Common Shares are entitled to such distributions as may be declared from time to time by the Board out of funds legally available therefor. Holders of Common Shares have no conversion, redemption, preemptive or exchange rights to subscribe to any securities of PTR. In the event of a liquidation, dissolution or winding up of the affairs of PTR, the holders of the Common Shares are entitled to share ratably in the assets of PTR remaining after provision for payment of all liabilities to creditors and payment of liquidation preferences and accrued dividends, if any, on the Series A Preferred Shares and Series B Preferred Shares, and subject to the rights of holders of other series of Preferred Shares, if any. The right of holders of the Common Shares are subject to the rights and preferences established by the Board for the Series A Preferred Shares and Series B Preferred Shares and any other series of Preferred Shares which may subsequently be issued by PTR. See "Description of Preferred Shares." PURCHASE RIGHTS On July 11, 1994, the Board declared a dividend of one preferred share purchase right (a "Purchase Right") for each Common Share outstanding, payable to holders of Common Shares of record at the close of business on July 21, 1994. The holders of any additional Common Shares issued after such date and before the redemption or expiration of the Purchase Rights are also entitled to receive one Purchase Right for each such additional Common Share. Each Purchase Right entitles the holder under certain circumstances to purchase from PTR one 22 one-hundredth of a share of a series of participating preferred shares, par value $1.00 per share (the "Participating Preferred Shares") at a price of $60.00 per one one-hundredth of a Participating Preferred Share, subject to adjustment. Purchase Rights are exercisable when a person or group of persons acquires 20% or more of the outstanding Common Shares (49% in the case of Security Capital and its affiliates) or announces a tender offer or exchange offer for 25% or more of the outstanding Common Shares. Under certain circumstances, each Purchase Right entitles the holder to purchase, at the Purchase Right's then current exercise price, a number of Common Shares having a market value of twice the Purchase Right's exercise price. The acquisition of PTR pursuant to certain mergers or other business transactions would entitle each holder to purchase, at the Purchase Right's then current exercise price, a number of the acquiring company's common shares having a market value at the time equal to twice the Purchase Right's exercise price. The Purchase Rights held by certain 20% shareholders (other than Security Capital) would not be exercisable. The Purchase Rights will expire on July 21, 2004 and are subject to redemption in whole, but not in part, at a price of $.01 per Purchase Right payable in cash, shares of PTR or any other form of consideration determined by the Board. TRANSFER AGENT The transfer agent and registrar for the Common Shares is ChaseMellon Shareholder Services, L.L.C. The Common Shares are listed on the New York Stock Exchange (the "NYSE") under the symbol "PTR." RESTRICTION ON SIZE OF HOLDINGS The Declaration of Trust restricts beneficial ownership of PTR's outstanding shares of beneficial interest by a single person, or persons acting as a group, to 9.8% of such shares. The purposes of the restriction are to assist in protecting and preserving PTR's REIT status and to protect the interest of shareholders in takeover transactions by preventing the acquisition of a substantial block of shares unless the acquiror makes a cash tender offer for all outstanding shares. For PTR to qualify as a REIT under the Code, not more than 50% in value of its outstanding shares of beneficial interest may be owned by five or fewer individuals at any time during the last half of any taxable year. The restriction permits five persons to acquire up to a maximum of 9.8% each, or an aggregate of 49% of the outstanding shares, and, thus, assist the Board in protecting and preserving PTR's REIT status for tax purposes. This restriction does not apply to Security Capital, which counts as numerous holders for purposes of the tax rule, because its shares are attributed to its shareholders for purposes of this rule. Shares of beneficial interest owned by a person or group of persons in excess of 9.8% (49% in the case of Security Capital and its affiliates) of the outstanding shares of beneficial interest ("Excess Shares") are subject to redemption by PTR, at its option, upon 30 days' notice, at a price equal to the average daily per share closing sale price during the 30-day period ending on the business day prior to the redemption date. PTR may make payment of the redemption price at any time or times up to the earlier of five years after the redemption date or liquidation of PTR. PTR may refuse to effect the transfer of any shares of beneficial interest which would make the transferee a holder of Excess Shares. Shareholders of PTR are required to disclose, upon demand of the Board, such information with respect to their direct and indirect ownership of shares of PTR as the Board deems necessary to comply with the provisions of the Code pertaining to qualification, for tax purposes, of REITs, or to comply with the requirements of any other appropriate taxing authority. The 9.8% restriction does not apply to acquisitions by any underwriter in a public offering and sale of shares of beneficial interest of PTR or to any transaction involving the issuance of shares of beneficial interest in which a majority of the Board determines that the eligibility of PTR to qualify as a REIT for federal income tax purposes will not be jeopardized or the disqualification of PTR as a REIT is advantageous to the shareholders. Security Capital's ownership of shares is attributed for tax purposes to its shareholders. The Board has permitted Security Capital to acquire up to 49% of the outstanding Common Shares. TRUSTEE LIABILITY The Declaration of Trust provides that Trustees shall not be individually liable for any obligation or liability incurred by or on behalf of PTR or by Trustees for the benefit and on behalf of PTR. Under the Declaration of 23 Trust and Maryland law governing REITs, Trustees are not liable to PTR or the shareholders for any act or omission except for acts or omissions which constitute bad faith, willful misfeasance or gross negligence in the conduct of their duties. SHAREHOLDER LIABILITY Both Maryland statutory law governing REITs organized under the laws of the state and the Declaration of Trust provide that shareholders shall not be personally or individually liable for any debt, act, omission or obligation of PTR or the Board. The Declaration of Trust further provides that PTR shall indemnify and hold each shareholder harmless from all claims and liabilities to which the shareholder may become subject by reason of his or her being or having been a shareholder and that PTR shall reimburse each shareholder for all legal and other expenses reasonably incurred by the shareholder in connection with any such claim or liability, except to the extent that such claim or liability arises out of the shareholder's bad faith, willful misconduct or gross negligence and provided that such shareholder gives PTR prompt notice of any such claim or liability and permits PTR to conduct the defense thereof. In addition, PTR is required to, and as a matter of practice does, insert a clause in its management and other contracts providing that shareholders assume no personal liability for obligations entered into on behalf of PTR. Nevertheless, with respect to tort claims, contractual claims where shareholder liability is not so negated, claims for taxes and certain statutory liability, the shareholders may, in some jurisdictions, be personally liable to the extent that such claims are not satisfied by PTR. Inasmuch as PTR carries public liability insurance which it considers adequate, any risk of personal liability to shareholders is limited to situations in which PTR's assets plus its insurance coverage would be insufficient to satisfy the claims against PTR and its shareholders. FEDERAL INCOME TAX CONSIDERATIONS PTR intends to operate in a manner that permits it to satisfy the requirements for taxation as a REIT under the applicable provisions of the Code. No assurance can be given, however, that such requirements will be met. The following is a description of the federal income tax consequences to PTR and its shareholders of the treatment of PTR as a REIT. Since these provisions are highly technical and complex, each prospective purchaser of the Offered Securities is urged to consult his or her own tax advisor with respect to the federal, state, local, foreign and other tax consequences of the purchase, ownership and disposition of the Offered Securities. Based upon certain representations of PTR with respect to the facts as set forth and explained in the discussion below, in the opinion of Mayer, Brown & Platt, counsel to PTR, PTR has been organized in conformity with the requirements for qualification as a REIT, and its proposed method of operation described in this Prospectus and as represented by management will enable it to satisfy the requirements for such qualification. This opinion is conditioned upon certain representations made by PTR as to certain factual matters relating to PTR's organization and intended or expected manner of operation. In addition, this opinion is based on the law existing and in effect on the date hereof. PTR's qualification and taxation as a REIT will depend on PTR's ability to meet on a continuing basis, through actual operating results, asset composition, distribution levels and diversity of stock ownership, the various qualification tests imposed under the Code discussed below. Mayer, Brown & Platt will not review compliance with these tests on a continuing basis. No assurance can be given that PTR will satisfy such tests on a continuing basis. In brief, if certain detailed conditions imposed by the REIT provisions of the Code are met, entities such as PTR, that invest primarily in real estate and that otherwise would be treated for federal income tax purposes as corporations, are generally not taxed at the corporate level on their "REIT taxable income" that is currently distributed to shareholders. This treatment substantially eliminates the "double taxation" (at both the corporate and shareholder levels) that generally results from the use of corporations. If PTR fails to qualify as a REIT in any year, however, it will be subject to federal income taxation as if it were a domestic corporation, and its shareholders will be taxed in the same manner as shareholders of ordinary 24 corporations. In this event, PTR could be subject to potentially significant tax liabilities, and therefore the amount of cash available for distribution to its shareholders would be reduced or eliminated. The Board believes that PTR has been organized and operated and currently intends that PTR will continue to operate in a manner that permits it to qualify as a REIT. There can be no assurance, however, that this expectation will be fulfilled, since qualification as a REIT depends on PTR continuing to satisfy numerous asset, income and distribution tests described below, which in turn will be dependent in part on PTR's operating results. The following summary is based on existing law, is not exhaustive of all possible tax considerations and does not give a detailed discussion of any state, local, or foreign tax considerations, nor does it discuss all of the aspects of federal income taxation that may be relevant to a prospective shareholder in light of his or her particular circumstances or to certain types of shareholders (including insurance companies, tax-exempt entities, financial institutions or broker-dealers, foreign corporations and persons who are not citizens or residents of the United States) subject to special treatment under the federal income tax laws. TAXATION OF PTR To qualify as a REIT under the Code for a taxable year, PTR must meet certain organizational and operational requirements. Asset Tests At the close of each quarter of PTR's taxable year, PTR must satisfy certain tests relating to the nature of its assets (determined in accordance with generally accepted accounting principles). First, at least 75% of the value of PTR's total assets must be represented by interests in real property, interests in mortgages on real property, shares in other REITs, cash, cash items, and government securities, and qualified temporary investments. Second, although the remaining 25% of PTR's assets generally may be invested without restriction, securities in this class may not exceed either (i) in the case of securities of any non-government issuer, 5% of the value of PTR's total assets or (ii) 10% of the outstanding voting securities of any one issuer. Gross Income Tests For each taxable year at least 75% of PTR's gross income must be derived from certain real estate sources, including rents from real property and interest on mortgage obligations. Real estate sources for purposes of those requirements also include gains from the sale of real property not held primarily for sale to customers in the ordinary course of business, dividends on REIT shares, interest on loans secured by mortgages on real property and income from foreclosure property. For rents to qualify, they may not be based on the income or profits of any person, except that they may be based on a percentage or percentages of gross income or receipts, and, subject to certain limited exceptions, the REIT's management of the property and rendering of services to tenants must either be with respect to usual or customary services or furnished through a qualified independent contractor. For taxable years beginning after August 5, 1997, the Taxpayer Relief Act of 1997 (the "1997 Act") permits a REIT to render a de minimis amount of impermissible services to tenants, or in connection with the management of property, and still treat amounts received with respect to that property as rent. The value of the impermissible services may not exceed one percent of the gross income from the property. In addition to deriving 75% of its gross income from the sources listed above, at least 95% of PTR's gross income for the taxable year must be derived from real estate sources described above or from dividends, interest, gains from the sale or disposition of stock or other securities that are not dealer property and specified other items. Dividends (including PTR's share of any dividends paid by PTR Development Services Incorporated ("PTR Development Services") and interest on any obligations not collateralized by an interest in real property qualify for purposes of the 95% test, but not for purposes of that 75% test. PTR must also derive less than 30% of its gross income for each taxable year from the sale or other disposition of: (i) real property held for less than four years (other than foreclosure property and by reason of 25 involuntary conversion); (ii) stock or securities held for less than one year; and (iii) property in a prohibited transaction. The 30% gross income test has been repealed by the 1997 Act for taxable years beginning after August 5, 1997. Ownership Restrictions PTR must satisfy certain ownership restrictions under the Code that limit (i) concentration of ownership of its shares of capital stock by specified persons and (ii) ownership by PTR of its tenants. The Declaration of Trust restricts the transfer of shares when necessary to maintain PTR's qualification as a REIT under these standards. See "Description of Common Shares--Restrictions on Size of Holdings." However, because the Code imposes broad attribution rules in determining constructive ownership, no assurance can be given that these restrictions would be effective in maintaining PTR's REIT status. Annual Distribution Requirements So long as PTR qualifies for taxation as a REIT and distributes at least 95% of its real estate investment trust taxable income (computed without respect to net capital gains or the dividends paid deduction) for each taxable year to its shareholders annually, PTR itself will not be subject to federal income tax on that portion of such income distributed to shareholders. PTR will be taxed at regular corporate rates on all income not distributed to shareholders. Nevertheless, it is PTR's policy to distribute at least 95% of its taxable income. For taxable years beginning after August 5, 1997, the 1997 Act permits a REIT to elect to retain and pay income tax on net long-term capital gains it received during the tax year. Thus, if PTR made this election, the shareholders of PTR would include in their income as long-term capital gains their proportionate share of the undistributed long-term capital gains as designated by PTR. Each shareholder of PTR would be deemed to have paid such shareholder's share of the tax, which would be credited or refunded to the shareholder. REITs may also incur taxes for certain other activities. Failure to Quality If PTR fails to qualify for taxation as a REIT in any taxable year and certain relief provisions do not apply, PTR will be subject to tax (including applicable alternative minimum tax) on its taxable income at regular corporate rates. Distributions to shareholders in any year in which PTR fails to quality as a REIT will not be deductible by PTR, nor generally will they be required to be made under the Code. In such event, to the extent of current and accumulated earnings and profits, all distributions to shareholders will be taxable as ordinary income, and subject to certain limitations in the Code, corporate distributees may be eligible for the dividends-received deduction. Unless entitled to relief under specific statutory provisions, PTR also will be disqualified from reelecting taxation as a REIT for the four taxable years following the year during which qualification was lost. TAXATION OF PTR'S SHAREHOLDERS Distributions paid to PTR's shareholders out of current or accumulated earnings and profits of PTR will generally be taxed to them as ordinary income. Such distributions are not eligible for the dividends-receivable deduction for corporations. PTR's earnings and profits will first be allocated to any outstanding Preferred Shares. A distribution of net capital gains by PTR will generally be treated as a long-term capital gain to shareholders to the extent properly designated by PTR as a capital gain distribution and regardless of the length of time a shareholder has held his shares. Capital gains distributions are not eligible for the dividends-received deduction for corporations. Any loss on a sale of shares that were held for six months or less and with respect to which a capital gain distribution was received will be treated as a long-term capital loss, up to the amount of the capital gain distribution received with respect to such shares. A distribution in excess of current or accumulated earnings and profits will constitute a nontaxable return of capital, to the extent of the shareholder's basis in his shares. To the extent such a distribution exceeds such basis, it will be treated as capital gain to those shareholders holding their shares as capital assets. PTR will notify each shareholder as to the portions of each distribution that, in its view, constitute ordinary income, capital gain or return of capital. Should PTR incur ordinary or capital losses, shareholders will not be entitled to include such losses in their own income tax returns. 26 OTHER TAX CONSIDERATIONS Homestead Mortgages PTR holds mortgage notes of Homestead Village Incorporated ("Homestead") which are convertible into shares of Homestead common stock. Pursuant to the terms of the funding commitment agreement, PTR funds $900,000 for each $1,000,000 of convertible mortgage loans. Pursuant to Sections 1271 through 1275 of the Code and regulations thereunder, PTR will be treated as having acquired the convertible mortgage loans with original issue discount in an amount equal to the difference between the issue price (the amount funded by PTR) and the principal amount at maturity of the convertible mortgage loans. PTR will be required to accrue such original issue discount in income on a yield to maturity basis over the terms of the convertible mortgage loans before receipt of the cash attributable to such income. Because PTR is generally required to distribute 95% of its income in order to retain its REIT status and 100% of its income to avoid being taxed, PTR may be required to borrow funds in order to distribute amounts attributable to any such original issue discount. Interest paid by Homestead (and the original issue discount) to PTR on the mortgage notes constitutes qualified income for purposes of determining whether PTR meets the gross income requirements for REIT qualification. The terms of the mortgages provide for adjustment of the price for conversion of the mortgages into the Homestead common stock if Homestead makes certain distributions of stock, cash or other property to its shareholders. If Homestead makes a distribution of cash or property resulting in an adjustment to the conversion price, PTR, as a holder of such convertible mortgages, may be viewed as receiving a "deemed distribution" under Section 305 of the Code, even if PTR does not hold any Homestead common stock at such time. The deemed distribution would constitute a taxable dividend, taxable as ordinary income, to the extent that the earnings and profits of Homestead were allocable to the deemed distribution. The amount of the deemed distribution which exceeded the allocated earnings and profits of Homestead would be considered a return of capital and would reduce PTR's tax basis in the convertible mortgages (but not below zero) by the value of the deemed distribution. To the extent that the value of the deemed distribution exceeds PTR's tax basis in the convertible mortgages, the deemed distribution would result in gain to PTR. PTR's tax basis in the convertible mortgages would then immediately be increased by the value of the property deemed to have been distributed. Except as discussed below with respect to cash received in lieu of fractional shares of Homestead common stock, PTR will not recognize gain or loss upon the exercise of the conversion right. PTR's tax basis in the Homestead common stock received upon the conversion will be equal to PTR's tax basis in the mortgages converted. Upon conversion of the mortgages, PTR will receive cash in lieu of any fractional shares of Homestead common stock and will recognize gain to the extent that the cash received exceeds PTR's tax basis in the portion of the mortgages converted for cash in lieu of fractional shares. In the event that PTR exercises its conversion right, it is expected that PTR, consistent with its status as a REIT, will shortly thereafter distribute to its shareholders or sell in the open market the Homestead common stock received. PTR will recognize gain upon such distribution or sale of the Homestead common stock received upon conversion in an amount equal to the excess of the fair market value of the Homestead common stock over PTR's tax basis therein, and the earnings and profits of PTR will be increased by the amount of any such gain recognized. In computing its taxable income for the year in which any Homestead common stock is distributed, PTR will be allowed a dividends-paid deduction in an amount equal to the fair market value at the time of distribution of the Homestead common stock distributed, but in no event in excess of the earnings and profits of PTR. PTR Development Services PTR Development Services will pay Federal and state income taxes at the full applicable corporate rates on its income prior to payment of any dividends. PTR Development Services will attempt to minimize the amount of such taxes, but there can be no assurance whether or to the extent to which measures taken to minimize taxes will be successful. To the extent that PTR Development Services is required to pay Federal, state or local taxes, the cash available for distribution by PTR Development Services to its shareholders will be reduced accordingly. 27 Backup Withholding PTR will report to its domestic shareholders and to the Internal Revenue Service the amount of distributions paid during each calendar year, and the amount of tax withheld, if any, with respect thereto. Under the backup withholding rules, a shareholder may be subject to backup withholding at applicable rates with respect to distributions paid unless such shareholder (i) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact or (ii) provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies with applicable requirements of the backup withholding rules. A shareholder that does not provide PTR with its correct taxpayer identification number may also be subject to penalties imposed by the IRS. Any amount paid as backup withholding will be credited against the shareholder's income tax liability. In addition, PTR may be required to withhold a portion of capital gain distributions made to any shareholders who fail to certify their non-foreign status to PTR. EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT WITH HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP, AND SALES OF COMMON SHARES, PREFERRED SHARES OR DEBT SECURITIES IN AN ENTITY ELECTING TO BE TAXED AS A REAL ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS. PLAN OF DISTRIBUTION PTR may sell the Offered Securities to one or more underwriters or dealers for public offering and sale by them or may sell the Offered Securities to investors directly or through agents, which agents may be affiliated with PTR. Direct sales to investors may be accomplished through subscription offerings or through subscription rights distributed to PTR shareholders and direct placements to third parties. In connection with subscription offerings or the distribution of subscription rights to shareholders, if all the underlying Offered Securities are not subscribed for, PTR may sell such unsubscribed Offered Securities to third parties directly or through agents and, in addition, whether or not all of the underlying Offered Securities are subscribed for, PTR may concurrently offer additional Offered Securities to third parties directly or through agents, which agents may be affiliated with PTR. Any underwriter, dealer or agent involved in the offer and sale of the Offered Securities will be named in the applicable Prospectus Supplement. The distribution of the Offered Securities may be effected from time to time in one or more transactions at a fixed price or prices, which may be changed, at prices related to the prevailing market prices at the time of sale or at negotiated prices (any of which may represent a discount from the prevailing market price). PTR also may, from time to time, authorize underwriters acting as PTR's agents to offer and sell the Offered Securities upon the terms and conditions set forth in the applicable Prospectus Supplement. In connection with the sale of Offered Securities, underwriters may be deemed to have received compensation from PTR in the form of underwriting discounts or commissions and may also receive commissions from purchasers of Offered Securities for whom they may act as agent. Underwriters may sell Offered Securities to or through dealers, and such dealers may receive compensation in the form of discounts, concessions or commissions from the underwriters and/or commissions from the purchasers for whom they may act as agent. Any underwriting compensation paid by PTR to underwriters or agents in connection with the offering of Offered Securities, and any discounts, concessions or commissions allowed by underwriters to participating dealers, will be set forth in the applicable Prospectus Supplement. Underwriters, dealers and agents participating in the distribution of the Offered Securities may be deemed to be underwriters, and any discounts and commissions received by them and any profit realized by them on resale of the Offered Securities may be deemed to be underwriting discounts and commissions, under the Securities Act. Underwriters, dealers and agents may be entitled, under agreements entered into with PTR, to indemnification against and contribution toward certain 28 civil liabilities, including liabilities under the Securities Act. Any such indemnification agreements will be described in the applicable Prospectus Supplement. If so indicated in the applicable Prospectus Supplement, PTR will authorize dealers acting as PTR's agents to solicit offers by certain institutions to purchase Offered Securities from PTR at the public offering price set forth in such Prospectus Supplement pursuant to Delayed Delivery Contracts ("Contracts") providing for payment and delivery on the date or dates stated in such Prospectus Supplement. Each Contract will be for an amount not less than, and the aggregate principal amount of Offered Securities sold pursuant to Contracts shall be not less nor more than, the respective amounts stated in the applicable Prospectus Supplement. Institutions with whom Contracts, when authorized, may be made include commercial and savings banks, insurance companies, pension funds, investment companies, educational and charitable institutions, and other institutions but will in all cases be subject to the approval of PTR. Contracts will not be subject to any conditions except (i) the purchase by an institution of the Offered Securities covered by its Contracts shall not at the time of delivery be prohibited under the laws of any jurisdiction in the United States to which such institution is subject, and (ii) if the Offered Securities are being sold to underwriters, PTR shall have sold to such underwriters the total principal amount of the Offered Securities less the principal amount thereof covered by Contracts. Certain of the underwriters and their affiliates may be customers of, engage in transactions with and perform services for PTR and its subsidiaries in the ordinary course of business. EXPERTS The financial statements of PTR as of December 31, 1996 and 1995, and for each of the years in the three-year period ended December 31, 1996, and the related schedule incorporated by reference herein, and the combined statements of revenues and certain expenses for certain multifamily communities for the years ended December 31, 1996 and 1995, incorporated by reference herein, have been incorporated by reference herein and in the Registration Statement in reliance upon the reports of KPMG Peat Marwick LLP, independent certified public accountants, incorporated by reference herein and upon the authority of said firm as experts in accounting and auditing. With respect to the unaudited condensed interim financial statements for the periods ended March 31, 1997 and 1996 and June 30, 1997 and 1996, of PTR incorporated by reference herein, the independent public accountants have reported that they applied limited procedures in accordance with professional standards for a review of such information. However, their separate report included in PTR's quarterly report on Form 10-Q for the quarters ended March 31, 1997 and June 30, 1997, incorporated by reference herein, states that they did not audit, and they do not express an opinion, on that interim financial information. Accordingly, the degree of reliance on their report on such information should be restricted considering the limited nature of the review procedures applied. The accountants are not subject to the liability provisions of Section 11 of the Securities Act for their report on the unaudited interim financial information because such report is not a "report" or a "part" of the Registration Statement prepared or certified by the accountants within the meaning of Sections 7 and 11 of the Securities Act. LEGAL MATTERS The validity of the Offered Securities will be passed upon for PTR by Mayer, Brown & Platt, Chicago, Illinois. Mayer, Brown & Platt has in the past represented and is currently representing PTR and certain of its affiliates, including Security Capital. 29 AVAILABLE INFORMATION PTR is subject to the informational requirements of the Exchange Act and, in accordance therewith, files reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; Room 1204, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center, 13th Floor, New York, New York 10048, and are also available on the Commission's worldwide web site at http://www.sec.gov. Copies of such material can be obtained at prescribed rates from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. PTR's outstanding Common Shares, Series A Preferred Shares and Series B Preferred Shares are listed on the NYSE under the symbols "PTR", "PTR-PRA" and "PTR-PRB", respectively, and all such reports, proxy statements and other information filed by PTR with the NYSE may be inspected at the NYSE's offices at 20 Broad Street, New York, New York 10005. This Prospectus constitutes part of a registration statement on Form S-3 (together with all amendments and exhibits, the "Registration Statement") filed by PTR with the Commission under the Securities Act. This Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information, reference is hereby made to the Registration Statement. INCORPORATION BY REFERENCE There are incorporated herein by reference the following documents filed by PTR with the Commission (File No. 1-10272): (a) PTR's Annual Report on Form 10-K for the fiscal year ended December 31, 1996; (b) PTR's Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 1997 and June 30, 1997; (c) PTR's Current Reports on Form 8-K filed January 27, February 20, March 26, June 3, July 21, and September 9, 1997; (d) The description of the Common Shares contained in PTR's registration statement on Form 8-A, as amended; and (e) The description of PTR's preferred share purchase rights contained in PTR's registration statement on Form 8-A, as amended. All documents subsequently filed by PTR pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the termination of the offering of the Offered Securities, shall be deemed to be incorporated by reference in this Prospectus and to be a part hereof from the date of filing of such documents. Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein, or in any subsequently filed document which is also or is deemed to be incorporated by reference herein, modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. PTR will provide without charge to each person, including any beneficial owner, to whom a copy of this Prospectus is delivered, upon the written or oral request of such person, a copy of any or all of the information incorporated herein by reference, other than exhibits to such information unless such exhibits are specifically incorporated by reference into such information. Requests should be addressed to Secretary, Security Capital Pacific Trust, 7670 South Chester Street, Suite 100, Englewood, Colorado 80112, telephone number: (303) 708-5959. 30 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN- TATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOM- PANYING PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR THE SO- LICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SE- CURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPEC- TUS NOR ANY SALE MADE HEREUNDER OR THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF PTR SINCE THE DATE HEREOF OR THEREOF OR THAT THE INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. --------------- TABLE OF CONTENTS PAGE ---- PROSPECTUS SUPPLEMENT Introduction.............................................................. S-3 Security Capital Pacific Trust............................................ S-3 Business.................................................................. S-6 Use of Proceeds........................................................... S-12 Price Range of Common Shares and Distributions............................ S-12 Capitalization............................................................ S-14 The Merger Transaction.................................................... S-15 Selected Financial Data................................................... S-22 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... S-24 Management................................................................ S-38 The Offering.............................................................. S-45 Certain Federal Income Tax Considerations................................. S-45 Validity of Common Shares................................................. S-49 PROSPECTUS Security Capital Pacific Trust............................................ 2 Use of Proceeds........................................................... 2 Ratio Information......................................................... 2 Description of Debt Securities............................................ 3 Description of Preferred Shares........................................... 17 Description of Common Shares.............................................. 22 Federal Income Tax Considerations......................................... 24 Plan of Distribution...................................................... 28 Experts................................................................... 29 Legal Matters............................................................. 29 Available Information..................................................... 30 Incorporation by Reference................................................ 30
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