-----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, WZc27UAF7kcvjHUFS1MgSKa316W/HCU4cmqlVlvsPitM2D+OsPjmWijA2Y15S9H1 MEPD0MLRDD0OCk6/VqAVIw== 0000950131-98-003338.txt : 19980515 0000950131-98-003338.hdr.sgml : 19980515 ACCESSION NUMBER: 0000950131-98-003338 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SECURITY CAPITAL PACIFIC TRUST CENTRAL INDEX KEY: 0000080737 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 746056896 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10272 FILM NUMBER: 98621400 BUSINESS ADDRESS: STREET 1: 7670 SOUTH CHESTER ST CITY: ENGLEWOOD STATE: CO ZIP: 80112 BUSINESS PHONE: 3037085959 MAIL ADDRESS: STREET 1: 7670 SOUTH CHESTER ST CITY: ENGLEWOOD STATE: CO ZIP: 80112 FORMER COMPANY: FORMER CONFORMED NAME: PROPERTY TRUST OF AMERICA DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: EL PASO REAL ESTATE INVESTMENT TRUST DATE OF NAME CHANGE: 19700108 10-Q 1 FORM 10-Q DATED 3/31/98 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _______________. Commission File Number 1-10272 SECURITY CAPITAL PACIFIC TRUST (Exact name of registrant as specified in its charter) Maryland 74-6056896 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7670 South Chester Street, 80112 Englewood, Colorado (Zip Code) (Address of principal executive offices) (303) 708-5959 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days. Yes X No ______ ------- The number of shares outstanding of the Registrant's common stock as of May 8, 1998 was 95,100,540. SECURITY CAPITAL PACIFIC TRUST INDEX
Page Number ----------- PART I. Condensed Financial Information Item 1. Financial Statements Condensed Balance Sheets--March 31, 1998 (unaudited) and December 31, 1997..... 3 Condensed Statements of Earnings--Three months ended March 31, 1998 and 1997 (unaudited)............................................................. 4 Condensed Statement of Shareholders' Equity--Three months ended March 31, 1998 (unaudited).................................................................. 5 Condensed Statements of Cash Flows--Three months ended March 31, 1998 and 1997 (unaudited)......................................................... 6 Notes to Condensed Financial Statements (unaudited)............................ 7 Independent Auditors' Review Report............................................ 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................... 16 PART II. Other Information Item 6. Exhibits and Reports on Form 8-K............................................... 25
2 SECURITY CAPITAL PACIFIC TRUST CONDENSED BALANCE SHEETS (In thousands, except share data)
ASSETS March 31, December 31, 1998 1997 ---------- ------------ (unaudited) Real estate......................................................................... $2,643,707 $2,604,919 Less accumulated depreciation....................................................... 139,918 129,718 ---------- ---------- 2,503,789 2,475,201 Investment in Homestead convertible mortgages....................................... 279,544 272,556 Other mortgage notes receivable..................................................... 11,547 12,682 ---------- ---------- Net investments................................................................ 2,794,880 2,760,439 Cash and cash equivalents........................................................... 5,310 4,927 Accounts receivable and accrued interest............................................ 12,450 11,544 Restricted cash in tax-deferred exchange escrow..................................... 15,287 -- Other assets........................................................................ 36,223 28,776 ---------- ---------- Total assets................................................................... $2,864,150 $2,805,686 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Credit facilities................................................................. $ 163,241 $ 231,500 Long-Term Debt.................................................................... 755,000 630,000 Mortgages payable................................................................. 261,865 265,652 Distributions payable............................................................. -- 31,495 Accounts payable.................................................................. 35,245 35,352 Accrued expenses and other liabilities............................................ 65,821 71,251 ---------- ---------- Total liabilities.............................................................. 1,281,172 1,265,250 ---------- ---------- Shareholders' equity: Series A Preferred Shares (5,130,515 convertible shares in 1998 and 5,408,393 in 1997; stated liquidation preference of $25 per share).............. 128,263 135,210 Series B Preferred Shares (4,200,000 shares; stated liquidation Preference of $25 per share).................................................... 105,000 105,000 Common Shares (93,001,444 shares in 1998 and 92,633,724 in 1997).................. 93,001 92,634 Additional paid-in capital........................................................ 1,275,223 1,268,741 Employee share purchase notes..................................................... (17,107) (17,238) Unrealized holding gain on Homestead convertible mortgages........................ 86,231 83,794 Distributions in excess of net earnings........................................... (87,633) (127,705) ---------- ---------- Total shareholders' equity..................................................... 1,582,978 1,540,436 ---------- ---------- Total liabilities and shareholders' equity..................................... $2,864,150 $2,805,686 ========== ==========
The accompanying notes are an integral part of the condensed financial statements. 3 SECURITY CAPITAL PACIFIC TRUST CONDENSED STATEMENTS OF EARNINGS (In thousands, except per share amounts) (Unaudited)
Three Months Ended March 31, ------------------- 1998 1997 ------- ------- Revenues: Rental revenues...................................... $88,553 $79,950 Interest income on Homestead convertible mortgages... 5,523 3,174 Other income......................................... 1,535 370 ------- ------- 95,611 83,494 ------- ------- Expenses: Rental expenses...................................... 23,287 20,357 Real estate taxes.................................... 8,021 7,268 Property management fees: Paid to affiliate................................. -- 2,690 Paid to third parties............................. 113 260 Depreciation on real estate investments.............. 16,258 12,049 Interest............................................. 15,623 13,961 REIT management fee paid to affiliate................ -- 4,617 General and administrative........................... 1,868 272 Administrative services provided by an affiliate..... 953 -- Other................................................ 189 1,744 ------- ------- 66,312 63,218 ------- ------- Earnings from operations............................... 29,299 20,276 Gains on dispositions of depreciated real estate, net................................................ 15,484 25,335 ------- ------- Net earnings........................................... 44,783 45,611 Less Preferred Share dividends....................... 4,712 5,035 ------- ------- Net earnings attributable to Common Shares............. $40,071 $40,576 ------- ------- Weighted-average Common Shares outstanding - Basic..... 92,783 75,872 ------- ------- Weighted-average Common Shares outstanding - Diluted... 99,970 84,326 ------- ------- Net earnings and distributions paid per Common Share: Basic................................................ $ 0.43 $ 0.53 ======= ======= Diluted.............................................. $ 0.42 $ 0.51 ======= ======= Distributions paid................................... $ 0.34 $ 0.325 ======= =======
The accompanying notes are an integral part of the condensed financial statements. 4 SECURITY CAPITAL PACIFIC TRUST CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY Three Months Ended March 31, 1998 (In thousands, except share data) (Unaudited)
Shares of beneficial interest, $1.00 par value ------------------------- Series A Series B Unrealized Preferred Preferred holding Shares at Shares at Common Employee gain on aggregate aggregate Shares Additional share Homestead Distributions liquidation liquidation at par paid-in purchase convertible in excess of preference preference value capital notes mortgages net earnings Total ----------- ----------- ------ ---------- -------- ----------- ------------- ---------- Balances at December 31, 1997.......... $135,210 $105,000 $92,634 $1,268,741 $(17,238) $83,794 $(127,705) $1,540,436 ---------- Comprehensive income: Net earnings........... -- -- -- -- -- -- 44,783 44,783 Preferred Share dividends paid........ -- -- -- -- -- -- (4,712) (4,712) Other comprehensive income--change in unrealized holding gain on Homestead convertible mortgages. -- -- -- -- -- 2,437 -- 2,437 ---------- Comprehensive income attributable to Common Shares................... -- -- -- -- -- -- -- 42,508 ---------- Net shares repurchased under Incentive Plan..... -- -- (7) (138) 131 -- -- (14) Accrued dividend equivalent units......... -- -- -- 47 -- -- -- 47 Conversion of 277,878 Series A Preferred Shares into 374,249 Common Shares................... (6,947) -- 374 6,573 -- -- -- -- Other..................... -- -- -- -- -- -- 1 1 -------- -------- ------- ---------- -------- ------- -------- ---------- Balances at March 31, 1998............. $128,263 $105,000 $93,001 $1,275,223 $(17,107) $86,231 $(87,633) $1,582,978 ======== ======== ======= ========== ======== ======= ======== ==========
The accompanying notes are an integral part of the condensed financial statements. 5 SECURITY CAPITAL PACIFIC TRUST CONDENSED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Three Months Ended March 31, ---------------------- 1998 1997 --------- --------- Operating activities: Net earnings.................................................................. $ 44,783 $ 45,611 Adjustments to reconcile net earnings to net cash flow provided by operating activities: Depreciation and amortization............................................. 16,674 12,466 Gains on dispositions of depreciated real estate, net..................... (15,484) (25,335) Provision for possible loss on real estate investments.................... -- 1,500 Change in accounts payable.................................................... (3,242) (1,321) Change in accrued expenses and other liabilities.............................. (5,430) (5,010) Change in other operating assets.............................................. (2,767) (5,186) --------- --------- Net cash flow provided by operating activities............................ 34,534 22,725 --------- --------- Investing activities: Real estate investments....................................................... (117,613) (177,877) Change in tax-deferred exchange escrow........................................ (15,287) (58,958) Funding of Homestead convertible mortgages.................................... (4,000) (16,250) Advances on other mortgage notes receivable................................... -- (100) Principal repayments on other mortgage notes receivable....................... 1,135 88 Proceeds from dispositions, net of closing costs.............................. 99,538 139,062 --------- --------- Net cash flow used in investing activities................................ (36,227) (114,035) --------- --------- Financing activities: Proceeds from Long-Term Debt.................................................. 125,000 50,000 Debt issuance costs incurred.................................................. (6,589) (218) Principal prepayment of mortgages payable..................................... (11,100) (9,534) Regularly scheduled principal payments on mortgages payable................... (840) (603) Proceeds from credit facilities............................................... 192,094 248,808 Principal payments on credit facilities....................................... (260,353) (165,143) Cash distributions paid on Common Shares...................................... (31,495) (24,712) Cash dividends paid on Preferred Shares....................................... (4,712) (5,035) Other......................................................................... 71 87 --------- --------- Net cash flow provided by financing activities............................ 2,076 93,650 --------- --------- Net change in cash and cash equivalents......................................... 383 2,340 Cash and cash equivalents at beginning of period................................ 4,927 5,601 --------- --------- Cash and cash equivalents at end of period...................................... $ 5,310 $ 7,941 ========= ========= Non-cash investing and financing activities: Assumption of mortgages payable upon purchase of multifamily communities...... $ 8,153 $ 23,527 Series A Preferred Shares converted to Common Shares.......................... $ 6,947 $ 10,374 Change in unrealized holding gain on Homestead convertible mortgages.......... $ 2,437 $ 1,037
The accompanying notes are an integral part of the condensed financial statements. 6 SECURITY CAPITAL PACIFIC TRUST NOTES TO CONDENSED FINANCIAL STATEMENTS March 31, 1998 and 1997 (Unaudited) (1) General The condensed financial statements of SECURITY CAPITAL PACIFIC TRUST ("PTR") are unaudited and certain information and footnote disclosures normally included in financial statements have been omitted. While management of PTR believes that the disclosures presented are adequate, these interim financial statements should be read in conjunction with the financial statements and notes included in PTR's 1997 Annual Report on Form 10-K ("1997 Form 10-K"). In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary for a fair presentation of PTR's financial statements for the interim periods presented. The results of operations for the three month periods ended March 31, 1998 and 1997 are not necessarily indicative of the results to be expected for the entire year. The accounts of PTR and its controlled subsidiaries are consolidated in the accompanying condensed financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation. The preparation of these financial statements in conformity with generally accepted accounting principles ("GAAP") required management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual amounts realized or paid could differ from those estimates. Reclassifications Certain 1997 amounts have been reclassified to conform to the 1998 presentation. New Accounting Rules In March 1998, a new accounting rule was issued requiring that internal costs incurred in connection with the acquisition of operating communities be expensed as incurred. The new rule, which is to be applied prospectively from the date of issuance, is not expected to have a material impact on PTR's financial position or results of operations. In April 1998, new accounting rules were issued requiring that costs associated with start-up activities, such as the opening of a new business or division, be expensed as incurred. The new rules, which become effective January 1, 1999, are not expected to have a material impact on PTR's financial position or results of operations. Per Share Data Following is a reconciliation of the numerator and denominator used to compute basic net earnings per Common Share to that used to compute diluted net earnings per Common Share, for the periods indicated (in thousands, except per share amounts): 7 SECURITY CAPITAL PACIFIC TRUST NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Three Months Ended March 31, ------------------- 1998 1997 ------- ------- Reconciliation of numerator between basic and diluted net earnings per Common Share: Net earnings attributable to Common Shares - Basic.......................... $40,071 $40,576 Dividends on Series A Preferred Shares................................... 2,370 2,673 ------- ------- Net earnings attributable to Common Shares - Diluted........................ $42,441 $43,249 ======= ======= Reconciliation of denominator between basic and diluted net earnings per Common Share: Weighted-average number of Common Shares outstanding - Basic................ 92,783 75,872 Assumed conversion of Series A Preferred Shares into Common Shares........ 7,056 8,389 Incremental options outstanding........................................... 131 65 ------- ------- Weighted-average number of Common Shares outstanding - Diluted.............. 99,970 84,326 ======= ======= Net earnings per Common Share - Basic....................................... $ 0.43 $ 0.53 ======= ======= Net earnings per Common Share - Diluted..................................... $ 0.42 $ 0.51 ======= =======
(2) Proposed Merger Transaction On April 2, 1998, PTR announced its agreement to merge with Security Capital Atlantic Incorporated ("ATLANTIC") (NYSE: SCA), a multifamily real estate investment trust ("REIT") currently operating primarily in the southeastern United States. Pursuant to the merger transaction (the "Merger"), ATLANTIC will be merged with and into PTR, which will continue its existence under the name "Archstone Communities Trust" ("ARCHSTONE") and will be traded on the New York Stock Exchange ("NYSE") under the symbol "ASN". In accordance with the terms of the Merger, each outstanding ATLANTIC common share will be converted into the right to receive one PTR common share of beneficial interest, par value $1.00 per share ("Common Share") and each outstanding ATLANTIC Series A preferred share will be converted into the right to receive one comparable share of a new class of PTR Series C preferred shares. In addition, PTR will assume all of ATLANTIC's debt and other liabilities upon consummation of the Merger which aggregated $595.0 million as of March 31, 1998. The Merger has been structured as a tax-free merger and will be accounted for under the purchase method. The Board of Trustees (the "Board") approved the Merger based upon the recommendation of a special committee comprised of independent PTR Trustees. The recommendation of the special committee was based in part upon an opinion obtained from a financial advisor regarding the fairness, from a financial point of view, of the exchange ratio to PTR and the holders of PTR Common Shares other than Security Capital Group Incorporated ("Security Capital"). The Merger, which is expected to be completed by August 1998, is subject to the approval of shareholders of both companies (a two-thirds majority of PTR's outstanding Common Shares and a majority of ATLANTIC's outstanding common shares) and satisfaction of certain other conditions. PTR filed a registration statement and joint proxy statement with the Securities and Exchange Commission ("SEC") on April 28, 1998, relating to the following matters: (i) the proposed Merger of ATLANTIC with and into PTR; (ii) a proposal to adopt an amended and restated declaration of trust of PTR which, among other things, would change PTR's name to "Archstone Communities Trust" and increase the authorized shares from 150,000,000 to 250,000,000; and (iii) a proposal to increase the number of PTR Common Shares available for award under the PTR 1997 Long-Term Incentive Plan (the "Incentive Plan") and the PTR 1996 Share Option Plan for Outside Trustees in an amount equal to the number of shares authorized under the corresponding ATLANTIC option plans. The registration statement has not been declared effective. 8 SECURITY CAPITAL PACIFIC TRUST NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued) Security Capital, which at March 31, 1998 owned 33.0% and 49.9% of the outstanding PTR Common Shares and ATLANTIC common shares, respectively, has agreed to vote all of its PTR Common Shares and ATLANTIC common shares in favor of the Merger, subject to certain conditions. If the Merger is consummated, Security Capital will own approximately 38.7% (based on March 31, 1998 information) of ARCHSTONE's common stock and will be ARCHSTONE's largest shareholder. As part of the Merger, PTR distributions would be adjusted following the close of the transaction to an annualized level of $1.42 per Common Share, an increase of 4.4% from PTR's current annual distribution level of $1.36 per Common Share. (3) Real Estate Investments in Real Estate Equity investments in real estate, at cost, were as follows (dollar amounts in thousands):
March 31, 1998 December 31, 1997 ---------------------- ---------------------- Investment Units Investment Units ---------- ------ ---------- ------ Multifamily: Operating communities........................... $2,235,600 42,859 $2,237,789 43,465 Communities under construction (1).............. 258,322 5,887 232,770 5,545 Development communities In Planning (1) (2): Owned......................................... 99,910 5,060 80,781 4,468 Under Control (2) (3)......................... -- 5,291 -- 6,090 ---------- ------ ---------- ------ Total development communities In Planning... 99,910 10,351 80,781 10,558 Other land held................................... 27,005 -- 27,517 -- ---------- ------ ---------- ------ Total multifamily........................... 2,620,837 59,097 2,578,857 59,568 ====== ====== Non-multifamily................................... 22,870 26,062 ---------- ---------- Total real estate........................... $2,643,707 $2,604,919 ========== ==========
- ---------------- (1) Unit information is based on management's estimates and has not been audited or reviewed by PTR's independent auditors. (2) "In Planning" is defined as parcels of land owned or Under Control upon which multifamily construction is expected to commence within 36 months. "Under Control" means PTR has an exclusive right (through contingent contract or letter of intent) during a contractually agreed-upon time period to acquire land for future development of multifamily communities, subject to approval of contingencies during the due diligence process, but does not currently own the land. There can be no assurance that such land will be acquired. (3) PTR's investment as of March 31, 1998 and December 31, 1997 for developments Under Control was $3.1 million and $3.8 million, respectively, and is reflected in the "Other assets" caption of PTR's balance sheets. 9 SECURITY CAPITAL PACIFIC TRUST NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued) The change in investments in real estate, at cost, consisted of the following (in thousands):
Balance at January 1, 1998.................................... $2,604,919 ---------- Multifamily: Acquisition and renovation expenditures.................... 39,863 Development expenditures, excluding land acquisitions...... 58,442 Acquisition and improvement of land for development........ 29,121 Recurring capital expenditures............................. 999 Dispositions............................................... (84,297) ---------- Net multifamily activity...................................... 44,128 Non-multifamily dispositions, including land.................. (5,340) ---------- Balance at March 31, 1998..................................... $2,643,707 ==========
At March 31, 1998, PTR had unfunded multifamily construction and rehabilitation commitments aggregating approximately $230.7 million. (4) Homestead Convertible Mortgages During the three month period ended March 31, 1998, PTR funded an additional $4.0 million under its $198.8 million commitment to provide development funding to Homestead in the form of convertible mortgage notes, resulting in a total amount funded of $190.9 million as of March 31, 1998. Following is a reconciliation of the Homestead convertible mortgages' components to the amount reflected in the accompanying condensed balance sheet (in thousands):
March 31, 1998 --------- Face amount of Homestead convertible mortgages.... $212,545 Original issue discount........................... (21,607) -------- Amount funded..................................... 190,938 Amortization of original issue discount........... 1,426 Conversion feature-initial value.................. 14,971 Unamortized discount on conversion feature........ (14,022) Fair value adjustment............................. 86,231 -------- Carrying value and fair value..................... $279,544 ========
The Homestead convertible mortgages are convertible into Homestead common stock on the basis of one share of Homestead common stock for every $11.50 of principal face amount outstanding. The difference between the fair value of the Homestead convertible mortgages (assuming conversion), as calculated based upon the trading price of Homestead's common stock on the American Stock Exchange at March 31, 1998 ($15.125), and the amortized cost of the Homestead convertible mortgages, is reflected as an additional component of the Homestead convertible mortgages balance and as an unrealized holding gain in shareholders' equity. The unrealized holding gain aggregated $86.2 million as of March 31, 1998. 10 SECURITY CAPITAL PACIFIC TRUST NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued) (5) Borrowings Credit Facilities PTR has a $350 million unsecured revolving line of credit with a group of financial institutions led by Chase Bank of Texas, National Association ("Chase") (collectively the "Lenders"). The line 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 March 31, 1998) or the federal funds rate plus 0.50%, or at PTR's option, LIBOR (5.6875% at March 31, 1998) plus 0.75%. 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 ("Long-Term Debt"). Additionally, there is a commitment fee on the average unfunded line of credit balance. The commitment fee was $50,000 and $75,000 for the three months ended March 31, 1998 and 1997, respectively. A summary of PTR's line of credit borrowings is as follows (dollars in thousands):
Three Months Ended Year Ended March 31, 1998 December 31, 1997 ------------------ ----------------- Total line of credit......................................... $350,000 $350,000 Borrowings outstanding at end of period...................... 150,000 223,500 Weighted-average daily borrowings............................ 198,429 121,038 Weighted-average daily nominal interest rate................. 6.6% 6.7% Weighted-average daily effective interest rate............... 7.4% 8.4% Weighted-average nominal interest rate at end of period...... 6.4% 6.9%
On September 9, 1996, PTR entered into a short-term, unsecured, borrowing agreement with Chase. The loan matures March 19, 1999 and bears interest at an overnight rate which ranged from 6.00% to 7.13% during the three months ended March 31, 1998. At March 31, 1998, there was $13.2 million outstanding under this agreement. Long-Term Debt PTR has issued Long-Term Debt which bears interest at fixed rates, payable semi-annually, including $125 million of 7.20% Notes (the "7.20% Notes") issued on March 6, 1998 which proceeds were used to pay down balances on PTR's credit facilities. The 7.20% Notes pay interest semi-annually on March 1 and September 1 of each year through March 1, 2013. Annual principal installments of $25 million commence on March 1, 2009. The following table summarizes the Long-Term Debt as of March 31, 1998:
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 6, 1998.................... $125 million 7.200% 7.864% 13.00 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 ------------ ------- ------------------ -------- Grand Total/Average.............. $755 million 7.469% 7.670% 13.31 ------------ ------- ------------------ --------
11 SECURITY CAPITAL PACIFIC TRUST NOTES TO CONDENSED FINANCIAL STATEMENTS -- (Continued) Mortgages Payable Mortgages payable at March 31, 1998 consisted of the following (dollar amounts in thousands):
Effective Principal Principal Interest Balance at Balance at Type of Mortgage Rate (1) March 31, 1998 December 31, 1997 - -------------------------------------------- --------- -------------- ----------------- Conventional fixed rate................ 8.04% $ 151,480 $ 143,963 Tax-exempt fixed rate (2).............. 6.63 46,170 46,298 Tax-exempt floating rate (2)........... 4.52 57,340 68,440 Combined (3)........................... 8.84 5,778 5,794 Other.................................. 5.05 1,097 1,157 --------- -------------- ----------------- Total/average mortgage debt....... 7.03% $ 261,865 $ 265,652 ========= ============== =================
(1) Represents the effective interest rate, including loan cost amortization and other ongoing fees and expenses. (2) Tax-exempt effective interest rates include credit enhancement and other bond-related costs, where applicable. (3) This category represents one multifamily community which was refinanced in 1990 pursuant to multifamily bonds aggregating $6.2 million. The bonds consist of $4.5 million Series A tax-exempt fixed rate bonds and $1.7 million Series B taxable fixed rate bonds. The changes in mortgages payable during the three months ended March 31, 1998 consisted of the following (in thousands):
Balance at January 1, 1998.................................... $ 265,652 Mortgage notes assumed........................................ 8,153 Principal payments, including prepayment upon community dispositions...................................... (11,940) ---------- Balance at March 31, 1998..................................... $ 261,865 ==========
12 SECURITY CAPITAL PACIFIC TRUST NOTES TO CONDENSED FINANCIAL STATEMENTS -- (Continued) Scheduled Debt Maturities Approximate principal payments due during each of the calendar years in the 20-year period ending December 31, 2017 and thereafter, as of March 31, 1998, are as follows (in thousands):
Credit Long-Term Facilities Debt Mortgages Total ---------- --------- --------- ----------- 1998............ $ 13,241 $ -- $ 28,346 $ 41,587 1999............ 150,000 30,000 9,244 189,244 2000............ -- -- 30,901 30,901 2001............ -- 12,500 24,740 37,240 2002............ -- 32,500 18,317 50,817 2003............ -- 38,750 3,171 41,921 2004............ -- 38,750 3,025 41,775 2005............ -- 38,750 13,269 52,019 2006............ -- 38,750 9,918 48,668 2007............ -- 38,750 4,064 42,814 2008............ -- 38,750 20,076 58,826 2009............ -- 61,250 2,897 64,147 2010............ -- 63,750 6,298 70,048 2011............ -- 50,000 3,307 53,307 2012............ -- 55,000 3,298 58,298 2013............ -- 60,000 3,349 63,349 2014............ -- 42,500 16,453 58,953 2015............ -- 40,000 24,592 64,592 2016............ -- 45,000 3,106 48,106 2017............ -- 30,000 3,350 33,350 Thereafter... -- -- 30,144 30,144 ---------- --------- --------- ----------- Total........ $ 163,241 $ 755,000 $ 261,865 $ 1,180,106 ========== ========= ========= ===========
General 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 debt covenants at March 31, 1998. Interest paid on all borrowings for the three months ended March 31, 1998 was $19.5 million, net of $5.2 million of interest capitalized during construction. Interest paid on all borrowings for the three months ended March 31, 1997 was $18.9 million, net of $4.4 million of interest capitalized during construction. Amortization of loan costs included in interest expense for the three months ended March 31, 1998 and 1997 was $859,000 and $729,000, respectively. 13 SECURITY CAPITAL PACIFIC TRUST NOTES TO CONDENSED FINANCIAL STATEMENTS -- (Concluded) (6) Cash Distributions PTR paid the first quarter 1998 distribution of $0.34 per Common Share on February 25, 1998. On April 29, 1998, the Board declared a cash distribution of $0.34 per Common Share, payable on May 28, 1998, to shareholders of record on May 14, 1998. On March 31, 1998, PTR paid quarterly dividends of $0.4579 per PTR Series A cumulative convertible preferred shares of beneficial interest (the "Series A Preferred Shares") and $0.5625 per Series B cumulative redeemable preferred shares of beneficial interest (the "Series B Preferred Shares") (collectively the "Preferred Shares"). (7) Shareholders' Equity On December 15, 1997, PTR filed a $400 million shelf registration with the SEC to supplement an existing shelf registration with a balance of $170.9 million. As a result of this filing, PTR can issue securities in the form of Long-Term Debt, Common Shares and preferred shares on an as-needed basis, subject to PTR's ability to effect offerings on satisfactory terms. On April 23, 1998, PTR sold 2,049,587 Common Shares at $22.6875 per share in an underwritten public offering. The net proceeds of $44.0 million (net of underwriting discount and offering costs) were used to repay borrowings under PTR's credit facilities. After giving effect to the April 23, 1998 Common Share offering and the $125 million in Long-Term Debt issued March 6, 1998, PTR has approximately $399.4 million in shelf-registered securities available for issuance. 14 INDEPENDENT AUDITORS' REVIEW REPORT The Board of Trustees and Shareholders SECURITY CAPITAL PACIFIC TRUST: We have reviewed the accompanying condensed balance sheet of SECURITY CAPITAL PACIFIC TRUST as of March 31, 1998, the related condensed statements of earnings and cash flows for the three month periods ended March 31, 1998 and 1997, and the statement of shareholders' equity for the three month period ended March 31, 1998. These condensed financial statements are the responsibility of the Trust's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of SECURITY CAPITAL PACIFIC TRUST as of December 31, 1997, and the related statements of earnings, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated January 31, 1998, except as to Note 13, which is as of March 6, 1998, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of December 31, 1997 is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. KPMG Peat Marwick LLP Chicago, Illinois April 23, 1998 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following information should be read in conjunction with PTR's 1997 Form 10-K as well as the financial statements and notes included in Item 1 of this report. See PTR's 1997 Form 10-K for a discussion of various risk factors associated with forward-looking statements made in this document. Proposed Merger Transaction On April 2, 1998, PTR announced its agreement to merge with ATLANTIC (NYSE: SCA), a multifamily REIT currently operating primarily in the southeastern United States. Pursuant to the Merger, ATLANTIC will be merged with and into PTR, which will continue its existence under the name "Archstone Communities Trust" and will be traded on the NYSE under the symbol "ASN". In accordance with the terms of the Merger, each outstanding ATLANTIC common share will be converted into the right to receive one PTR Common Share and each outstanding ATLANTIC Series A preferred share will be converted into the right to receive one comparable share of a new class of PTR Series C preferred shares. In addition, PTR will assume all of ATLANTIC's debt and other liabilities upon consummation of the Merger which aggregated $595.0 million as of March 31, 1998. Management anticipates replacement of the existing PTR and ATLANTIC lines of credit with a combined facility to enable ARCHSTONE to efficiently respond to market opportunities. The new credit facility is expected to be in place by the Merger date. The Merger has been structured as a tax-free merger and will be accounted for under the purchase method. The Board approved the Merger based upon the recommendation of a special committee comprised of independent PTR Trustees. The recommendation of the special committee was based in part upon an opinion obtained from a financial advisor regarding the fairness, from a financial point of view, of the exchange ratio to PTR and the holders of PTR Common Shares other than Security Capital. The Merger, which is expected to be completed by August 1998, is subject to the approval of shareholders of both companies (a two-thirds majority of PTR's outstanding Common Shares and a majority of ATLANTIC's outstanding common shares) and satisfaction of certain other conditions. PTR filed a registration statement and joint proxy statement with the SEC on April 28, 1998, relating to the following matters: (i) the proposed Merger of ATLANTIC with and into PTR; (ii) a proposal to adopt an amended and restated declaration of trust of PTR which, among other things, would change PTR's name to "Archstone Communities Trust" and increase the authorized shares from 150,000,000 to 250,000,000; and (iii) a proposal to increase the number of PTR Common Shares available for award under the Incentive Plan and the PTR 1996 Share Option Plan for Outside Trustees in an amount equal to the number of shares authorized under the corresponding ATLANTIC option plans. The registration statement has not been declared effective. Security Capital, which at March 31, 1998 owned 33.0% and 49.9% of the outstanding PTR Common Shares and ATLANTIC common shares, respectively, has agreed to vote all of its PTR Common Shares and ATLANTIC common shares in favor of the Merger, subject to certain conditions. If the Merger is consummated, Security Capital will own approximately 38.7% (based on March 31, 1998 information) of ARCHSTONE's common stock and will be ARCHSTONE's largest shareholder. As part of the Merger, PTR distributions would be adjusted following the close of the transaction to an annualized level of $1.42 per Common Share, an increase of 4.4% from PTR's current annual distribution level of $1.36 per Common Share. Based upon the multifamily portfolios of PTR and ATLANTIC at March 31, 1998 and assuming consummation of the Merger, ARCHSTONE would have 307 multifamily communities, consisting of 91,201 units in 19 states and Washington, D.C., including 26,161 units under construction or In Planning (including 25 communities aggregating 7,875 units that are Under Control but not owned as of March 31, 1998). Additionally, ARCHSTONE's total market capitalization would be approximately $5.3 billion. 16 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. Following is an overview of PTR's multifamily portfolio and related investment activity as of and for the three months ended March 31, 1998 (dollar amounts in thousands):
Three Months Ended March 31, 1998 ------------------ Operating Communities: Communities.................................... 138 Units.......................................... 42,859 Total expected investment (1).................. $2,296,990 Communities Under Construction: Starts During Period: Communities.................................... 3 Units.......................................... 1,040 Total expected investment (1).................. $ 94,312 Completions During Period: Communities.................................... 3 Units.......................................... 698 Total expected investment (1).................. $ 41,261 Stabilizations During Period: Communities.................................... 5 Units.......................................... 1,622 Total expected investment (1).................. $ 92,173 Under Construction at End of Period: Communities.................................... 18 Units.......................................... 5,887 Total expected investment (1).................. $ 473,656 Investment to date............................. $ 258,322 Development Expenditures During Period.............. $ 58,442 Acquisitions: Communities.................................... 3 Units.......................................... 568 Total expected investment (1).................. $ 36,215 Dispositions: Communities.................................... 5 Units.......................................... 1,872 Gross sales proceeds........................... $ 101,109 Gains (2)...................................... $ 15,484
- --------- (1) For community developments, represents total budgeted land and development costs; for operating communities, represents costs plus budgeted expenditures, including planned rehabilitation costs needed to conform to or maintain the community at PTR's standards. (2) Includes the disposition of a non-multifamily operating property with a gain of $1,057,020. 17 Current Development Activity The following table summarizes PTR's development communities under construction as of March 31, 1998 (dollar amounts in thousands):
Actual or Expected Total Start Expected Date for Stabilization Number of PTR Expected Date First Units Date Percentage Units Investment Investment (1) (Quarter/Year) (Quarter/Year) (2) (Quarter/Year) Leased (3) --------- ---------- -------------- -------------- ------------------ -------------- ---------- COMMUNITIES UNDER CONSTRUCTION: Central Region: Denver, Colorado: Dutch Creek....... 480 $ 2,506 $35,541 Q1/98 Q1/99 Q4/00 n/a Legacy Heights.... 384 19,843 23,139 Q2/97 Q1/98 Q3/98 55.5% ----- -------- -------- Total Denver.... 864 22,349 58,680 ----- -------- -------- Houston, Texas: Oaks at Medical Center II........ 318 7,181 20,229 Q4/97 Q4/98 Q3/99 n/a ----- -------- -------- Kansas City, Kansas: 119th & Quiviara.. 220 2,256 15,809 Q1/98 Q1/99 Q1/00 n/a ----- -------- -------- Total Central Region........... 1,402 31,786 94,718 ----- -------- -------- Northwest Region: Portland, Oregon: Arbor Heights..... 348 23,115 23,368 Q2/96 Q3/97 Q3/98 75.6% Hedges Green...... 408 18,034 27,720 Q2/97 Q2/98 Q2/99 n/a ----- -------- -------- Total Portland...... 756 41,149 51,088 ----- -------- -------- Salt Lake City, Utah: Fairstone at Riverview........ 492 31,293 32,675 Q2/96 Q2/97 Q2/98 93.5% ----- -------- -------- Seattle, Washington: Forestview........ 192 12,537 15,577 Q2/97 Q2/98 Q1/99 n/a Stonemeadow Farms............ 280 14,814 22,111 Q2/97 Q2/98 Q1/99 n/a ----- -------- -------- Total Seattle....... 472 27,351 37,688 ----- -------- -------- Total Northwest Region........... 1,720 99,793 121,451 ----- -------- -------- West Region: Orange County, California: Las Flores Apartment Homes.. 504 32,447 44,767 Q4/96 Q2/98 Q2/99 n/a Sorrento.......... 241 18,237 21,997 Q2/97 Q2/98 Q4/98 n/a ----- -------- -------- Total Orange County............. 745 50,684 66,764 ----- -------- -------- Phoenix, Arizona: Arrowhead I....... 272 15,623 18,805 Q3/96 Q1/98 Q4/98 5.2% San Marbeya....... 404 8,084 28,246 Q4/97 Q4/98 Q1/00 n/a San Valiente II... 228 4,010 13,531 Q4/97 Q4/98 Q4/99 n/a ----- -------- -------- Total Phoenix....... 904 27,717 60,582 ----- -------- -------- Reno, Nevada: Meadowview I...... 228 14,885 15,348 Q2/97 Q2/98 Q4/98 n/a ----- -------- -------- San Diego, California: Torrey Hills...... 340 11,443 42,963 Q1/98 Q2/99 Q2/00 n/a ----- -------- -------- San Francisco (Bay Area), California: Villas at Santa Rita............. 324 13,825 45,152 Q4/97 Q1/99 Q1/00 n/a Monterrey Road.... 224 8,189 26,678 Q4/97 Q1/99 Q4/99 n/a ----- -------- -------- Total San Francisco (Bay Area).............. 548 22,014 71,830 ----- -------- -------- Total West Region........... 2,765 126,743 257,487 ----- -------- -------- Total Communities Under Construction.. 5,887 $258,322 $473,656 ===== ======== ========
18 (1) Represents total budgeted land and development costs. (2) Represents the quarter that the first completed units were made available for leasing (or are expected to be made available). PTR begins leasing completed units prior to completion of the entire community. (3) The percentage leased is based on leased units divided by total number of units in the community (completed and under construction) as of March 31, 1998. An "n/a" indicates the communities where lease-up has not yet commenced. See PTR's 1997 Form 10-K for a discussion of various risks associated with PTR's development and construction activities. Recent Acquisitions In addition to its development activity, during the three month period ended March 31, 1998, PTR completed the acquisition of three operating multifamily communities (568 units) in Seattle, Washington and Salt Lake City, Utah at a total expected investment of $36.2 million. See PTR's 1997 Form 10-K for a discussion of various risks associated with PTR's acquisition activities. Results of Operations Three months ended March 31, 1998 Compared to March 31, 1997 Net earnings for the three months ended March 31, 1998 and 1997 were $44.8 million and $45.6 million, respectively, a decrease of $0.8 million (1.8%). This decrease resulted primarily from a $9.9 million decrease in net gains on dispositions of depreciated real estate, partially offset by increased earnings from multifamily communities, primarily in California, the Pacific Northwest and Salt Lake City ("West Coast Markets"). A discussion of the major components of PTR's results of operations follows. Property Operations At March 31, 1998 and 1997, multifamily investments comprised over 99% of PTR's total real estate portfolio, based on total expected investment. The following table summarizes the net operating income generated from property operations for each period (in thousands):
Three Months Ended March 31, ---------------------------- Increase / 1998 1997 (decrease) ------- ------- ---------- Rental revenues............................... $88,553 $79,950 $8,603 ------- ------- ------ Property operating expenses: Rental expenses............................ 23,287 20,357 2,930 Real estate taxes.......................... 8,021 7,268 753 Property management fees................... 113 2,950 (2,837) ------- ------- ------ Total property operating expenses....... 31,421 30,575 846 ------- ------- ------ Net operating income.......................... $57,132 $49,375 $7,757 ======= ======= ====== Operating margin (net operating income/rental revenues)...................... 64.5% 61.8% 2.7% ======= ======= ======
The increases in rental revenues and property operating expenses in each period are primarily a result of net increases in the number of multifamily operating units resulting from PTR's substantial acquisition and development activity and rental rate increases. Management has focused its investment emphasis primarily on key West Coast Markets which are believed to have higher growth potential, while reducing investments in certain other markets within PTR's geography having less attractive growth prospects. A portion of the increase in revenues and expenses is attributable to the greater emphasis in the West Coast Markets since these markets are generally characterized by higher per unit rental rates and, to a lesser extent, higher per unit operating costs. The positive impact of PTR's investment strategy and customer-focused property management program is reflected in an improving operating margin which has grown from 61.8% during the three months ended March 31, 1997 to 64.5% during the three months ended March 31, 1998. The higher profitability during the three months ended March 31, 1998 is partially attributable to PTR's acquisition of SCG Realty Services, Incorporated (the "Property Manager") on September 9, 1997. After that date, PTR directly incurred personnel and other costs related to property management-related overhead, in lieu of paying a property 19 management fee to Security Capital, which resulted in a reduction of property management fees during the three months ended March 31, 1998, partially offset by a corresponding increase in rental expenses. PTR categorizes operating multifamily communities (which include all completed revenue-generating communities) 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 85.2% and 73.3% of PTR's operating multifamily portfolio was classified as stabilized as of March 31, 1998 and 1997, respectively, based on total expected investment. Analysis of Same Store Community Results The results of PTR's operating communities which were fully operating on January 1, 1997 ("Same Store Communities") continue to strengthen as a result of PTR's continued emphasis on customer-focused operations, combined with improving economic fundamentals in its markets. Following is a summary of Same Store Community results comparing the first quarter of 1998 to the first quarter of 1997 (dollars in thousands):
Three months ended March 31, 1998 vs. 1997 ----------------------- Collections growth................................................. 4.56% Property operating expense growth.................................. 3.56% Net operating income growth........................................ 5.18% Number of units in Same Store Communities.......................... 31,010 Total expected investment of Same Store Communities................ $1,454,993
Homestead Interest and Homestead Convertible Mortgages Through March 31, 1998, PTR had funded $190.9 million of its $198.8 million Homestead funding commitment, of which $4.0 million was funded during the three months ended March 31, 1998. This leaves a remaining commitment under the funding agreement of approximately $7.9 million, which management anticipates will be funded during May 1998. During the three months ended March 31, 1998 and 1997, PTR recorded $5.5 million and $3.2 million in interest income, respectively ($5.1 million and $2.9 million, respectively for purposes of calculating funds from operations) from the Homestead convertible mortgages. The increase is a direct result of higher average outstanding note balances during the three months ended March 31, 1998 as compared to the three months ended March 31, 1997. PTR deducts from net earnings the interest income related to the amortization of the conversion discount and warrant-related deferred revenue in calculating funds from operations. Upon full funding, PTR will have funded $198.8 million in exchange for Homestead convertible mortgages having a face amount of $221.3 million. The Homestead convertible mortgages are convertible into Homestead common stock 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 March 31, 1998 of $15.125, PTR's ownership would result in the following incremental value per PTR Common Share at March 31, 1998 (in thousands, except per share amounts):
Homestead common stock price........................................ $15.125 Conversion price.................................................... 11.500 ------- Incremental value per share of Homestead common stock............... $ 3.625 Shares of Homestead common stock upon conversion (at full funding).. 19,246 ------- Total incremental value from conversion............................. $69,767 PTR Common Shares outstanding....................................... 93,001 ------- Assumed incremental value per PTR Common Share...................... $ 0.75 =======
20 Depreciation Expense The increase in depreciation expense resulted primarily from the increase in the number and cost basis of operating communities, partially offset by dispositions. Interest Expense The following table summarizes PTR's interest expense (in thousands):
Three Months Three Months Ended Ended March 31, 1998 March 31, 1997 -------------- -------------- Credit facilities................................. $ 3,893 $ 3,548 Long-Term Debt.................................... 12,248 10,718 Mortgages payable................................. 4,696 4,122 Capitalized interest.............................. (5,214) (4,427) -------------- -------------- Total interest expense....................... $15,623 $13,961 ============== ==============
The increase in interest expense on PTR's credit facilities resulted primarily from higher average outstanding balances. Average borrowings on the line of credit were approximately $198.4 million during the three months ended March 31, 1998, as compared to average borrowings of approximately $151.6 million for the same period in 1997. Long-Term Debt interest expense increased due primarily to the issuance of $50 million of Long-Term Debt in March 1997 and $125 million of Long-Term Debt in March 1998. Mortgage interest expense increased as a result of additional weighted- average debt outstanding due to mortgage assumptions related to community acquisitions which were partially offset by prepayments during the three months ended March 31, 1998 and 1997. The increase in interest costs was partially offset by an increase in capitalized interest which was primarily attributable to higher levels of multifamily development activity for the three months ended March 31, 1998 as compared to the same period in 1997. Administrative Expenses PTR's overall administrative expenses (REIT management fee paid to affiliate, general and administrative and administrative services provided by an affiliate) of $2.8 million during the three months ended March 31, 1998 compares favorably to the $4.9 million expensed during the three months ended March 31, 1997. PTR did not pay a REIT management fee during the three months ended March 31, 1998 due to the termination of the REIT management agreement upon the internalization of PTR's management companies which occurred on September 9, 1997. General and administrative expenses increased primarily because PTR now incurs actual personnel and other operating costs associated with the REIT management function, a portion of which is capitalized, in lieu of paying a REIT management fee to Security Capital. The increase in administrative services provided by an affiliate is attributable to the administrative services agreement with Security Capital which was entered into on September 9, 1997, upon closing of the transaction described above. Gains on Dispositions of Depreciated Real Estate During the three months ended March 31, 1998, PTR disposed of five multifamily communities and certain non-multifamily real estate assets, representing gross proceeds of $101.1 million. As of March 31, 1998, PTR held a portion of the 1998 disposition proceeds aggregating $15.3 million in an interest bearing escrow account, pending acquisition of other multifamily communities to complete a tax-deferred exchange. PTR disposed of 12 multifamily communities and one industrial building representing gross proceeds of $142.1 million during the three months ended March 31, 1997. For federal income tax purposes, the dispositions were generally structured as tax-deferred exchanges, which deferred gain recognition. However, for financial reporting purposes, the transactions qualified for profit recognition, and aggregate gains of $15.5 million and $25.3 million, were recorded for the three months ended March 31, 1998 and 1997, respectively. 21 Two parcels of land having an aggregate carrying value of $8.7 million were held for disposition as of March 31, 1998. Subject to normal closing risks, PTR expects to complete the disposition of these properties and redeploy the net proceeds through tax-deferred exchanges, into the acquisition of multifamily communities. 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 sufficient to meet all of its cash flow requirements for the foreseeable future. Operating Activities Net cash flow provided by operating activities increased by $11.8 million (52.0%) for the three months ended March 31, 1998 as compared to the same period in 1997. This increase was due primarily to increased cash generated by multifamily communities. Investing and Financing Activities During the three months ended March 31, 1998 and 1997, PTR invested cash of $117.6 million and $177.9 million, respectively, in real estate investments relating primarily to the significant acquisition and development activity summarized in "-Overview" above. The $117.6 million invested in real estate and $4.0 million in fundings of Homestead convertible mortgages during the three months ended March 31, 1998 were financed primarily from $84.2 million of net proceeds from property dispositions (excluding the $15.3 million held in escrow pending tax-deferred exchanges) and borrowings under PTR's credit facilities. These credit facilities were partially repaid from proceeds related to the issuance of $125 million of Long-Term Debt in March 1998. The $177.9 million invested in real estate and $16.3 million in fundings of Homestead convertible mortgages during the three months ended March 31, 1997 were financed primarily from $80.1 million in net proceeds from property dispositions (excluding $59.0 million held in escrow pending tax-deferred exchanges) and borrowings under PTR's credit facilities which were partially repaid from $50 million in proceeds related to Long-Term Debt issued in March 1997. Other significant financing activity included the payment of $36.2 million and $29.7 million in Common Share distributions and Preferred Share dividends for the three months ended March 31, 1998 and 1997, respectively. The increase is primarily attributable to a 4.6% increase in the distributions paid per Common Share and an increase in the overall number of Common Shares outstanding. Preferred Share dividends decreased approximately $0.3 million during the respective periods as a result of conversion of Series A Preferred Shares to Common Shares which also resulted in increased Common Share distributions. PTR prepaid mortgages due to community dispositions of $11.1 million and $9.5 million during the three months ended March 31, 1998 and 1997, respectively. Significant non-cash investing and financing activities included the assumption of $8.2 million and $23.5 million of mortgage debt during the three months ended March 31, 1998 and 1997, respectively, and the conversion of Series A Preferred Shares to Common Shares aggregating $6.9 million and $10.4 million during the three months ended March 31, 1998 and 1997, respectively. During the three months ended March 31, 1998, the unrealized gain associated with the Homestead convertible mortgages increased $2.4 million to $86.2 million as of March 31, 1998. Borrowings and Recent Offerings PTR has a $350 million unsecured revolving line of credit which had approximately $135.0 million of borrowings outstanding as of May 8, 1998. The line of credit matures August 1999 and may be extended annually for an additional year with the approval of the Lenders. The aggregate amount of borrowings outstanding under all of PTR's credit facilities as of May 8, 1998 was $142.4 million. On March 6, 1998, PTR issued $125 million of 7.20% Long-Term Debt, the proceeds from which were used to pay down balances on PTR's credit facilities. The 7.20% Notes pay interest semi-annually on March 1 and September 1 of each year through March 1, 2013, and have an average effective interest rate of 7.86% and an average life of 13.0 years. Annual principal payments of $25 million commence on March 1, 2009. On April 23, 1998, PTR sold 2,049,587 Common Shares at $22.6875 per share in an underwritten public offering. The net proceeds of $44.0 million (net of underwriting discount and offering costs) were used to repay borrowings 22 under PTR's credit facilities. See "Item 1. Financial Statements, Note 5, Borrowings" for additional information regarding credit availability, outstanding debt balances, interest rates, scheduled debt maturities and other terms. Distributions PTR paid the first quarter 1998 distribution of $0.34 per Common Share on February 25, 1998. On April 29, 1998, the Board declared a cash distribution of $0.34 per Common Share, payable on May 28, 1998, to shareholders of record on May 14, 1998. On March 31, 1998, PTR paid quarterly dividends of $0.4579 per Series A Preferred Share and $0.5625 per Series B Preferred Share. Commitments and Contingencies At March 31, 1998, PTR had unfunded multifamily construction and rehabilitation commitments aggregating approximately $230.7 million. PTR is a party to various claims and routine litigation arising in the ordinary course of business. PTR does not believe that the results of any such claims and litigation, individually or in the aggregate, will have a material adverse effect on its business, financial position or results of operations. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" included in PTR's Form 10-K for a summary of anticipated cash requirements. Funding Sources PTR expects to finance its investment and operating needs including those outlined above, with cash flow from operating activities, borrowings under its credit facilities and disposition proceeds from its asset optimization strategy, prior to arranging long-term financing. PTR uses its credit facilities to 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 $399.4 million in shelf- registered securities which can be issued in the form of Long-Term Debt, Common Shares or preferred shares 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 37.1% at March 31, 1998, provides considerable financial flexibility to fund its investment activities. Funds From Operations Funds from operations is defined as net earnings computed in accordance with GAAP, excluding real estate depreciation, gains (or losses) from depreciated real estate, provisions for possible losses, non-cash interest income, extraordinary items and significant non-recurring items. 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. PTR believes that funds from operations is helpful to the reader as a measure of the performance of an equity REIT because, along with cash flow from operating, investing and financing activities, it provides the reader with an indication of the ability of PTR to incur and service debt, to make capital expenditures and to fund other cash needs. The funds from operations measure presented by PTR, while consistent with the National Association of Real Estate Investment Trusts' definition, will not be comparable to similarly titled measures of other REIT's 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 described above under "--Distributions." 23 Following is a reconciliation of net earnings to funds from operations (amounts in thousands):
Three Months Ended March 31, -------------------------- 1998 1997 ------- ------- Net earnings attributable to Common Shares.......................................... $40,071 $40,576 Add (Deduct): Depreciation on real estate investments......................................... 16,258 12,049 Gains on dispositions of depreciated real estate, net........................... (15,484) (25,335) Other, net...................................................................... (432) 1,255 ------- ------- Funds from operations attributable to Common Shares--Basic.......................... 40,413 28,545 ------- ------- Dividends on Series A Preferred Shares.......................................... 2,370 2,673 ------- ------- Funds from operations attributable to Common Shares--Diluted........................ 42,783 31,218 ======= ======= Weighted-average Common Shares outstanding--Basic................................... 92,783 75,872 ======= ======= Weighted-average Common Shares outstanding--Diluted (1)............................. 99,970 84,326 ======= =======
(1) See "Item 1. Financial Statements, Note 1, General" for a reconciliation of basic to diluted weighted-average Common Shares outstanding. 24 PART II--OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 12.1 --Computation of Ratio of Earnings to Fixed Charges. 12.2 --Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Share Dividends. 15 --Letter from KPMG Peat Marwick LLP dated May 14, 1998 regarding unaudited financial information. 27 --Financial Data Schedule (b) Reports on Form 8-K:
Date Item Reported Financial Statements -------------- -------------- -------------------- March 4, 1998 Item 5, Item 7 No April 3, 1998 Item 5 No April 23, 1998 Item 5, Item 7 Yes April 28, 1998 Item 5, Item 7 No
25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Security Capital Pacific Trust BY: /s/ Bryan J. Flanagan -------------------------- Bryan J. Flanagan, Senior Vice President (Principal Financial Officer) BY: /s/ Ash K. Atwood -------------------------- Ash K. Atwood, Vice President & Co-Controller (Principal Accounting Officer) Date: May 14, 1998 26 EX-12.1 2 COMPUTATION OF RATIO OF EARNINGS EXHIBIT 12.1 SECURITY CAPITAL PACIFIC TRUST COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollar amounts in thousands) (Unaudited)
Three Months Ended March 31, Twelve Months Ended December 31, ------------------- ------------------------------------------------------- 1998 1997 1997 (1) 1996 1995 1994 1993 ------- ------- ------- -------- -------- ------- ------- Earnings from operations...................... $29,299 $20,276 $24,686 $ 94,089 $ 81,696 $46,719 $23,191 Add: Interest expense............................. 15,623 13,961 61,153 35,288 19,584 19,442 3,923 ------- ------- ------- -------- -------- ------- ------- Earnings as adjusted.......................... $44,922 $34,237 $85,839 $129,377 $101,280 $66,161 $27,114 ======= ======= ======= ======== ======== ======= ======= Fixed charges: Interest expense............................. $15,623 $13,961 $61,153 $ 35,288 $ 19,584 $19,442 $ 3,923 Capitalized interest......................... 5,214 4,427 17,606 16,941 11,741 6,029 2,818 ------- ------- ------- -------- -------- ------- ------- Total fixed charges......................... $20,837 $18,388 $78,759 $ 52,229 $ 31,325 $25,471 $ 6,741 ======= ======= ======= ======== ======== ======= ======= Ratio of earnings to fixed charges............ 2.2 1.9 1.1 2.5 3.2 2.6 4.0 ======= ======= ======= ======== ======== ======= =======
- -------------- (1) Earnings from operations for 1997 includes a one-time, non-cash charge of $71.7 million associated with costs incurred in acquiring the management companies from an affiliate. Excluding this charge, the ratio of earnings to fixed charges for the year ended December 31, 1997 would be 2.0. 27 EX-12.2 3 COMPUTATION OF RATIO OF EARNINGS EXHIBIT 12.2 SECURITY CAPITAL PACIFIC TRUST COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED SHARE DIVIDENDS (Dollar amounts in thousands) (Unaudited)
Three Months Ended March 31, Twelve Months Ended December 31, ------------------- ----------------------------------------------- 1998 1997 1997 (1) 1996 1995 1994 1993 ------- ------- ------- -------- -------- ------- ------- Earnings from operations.................................$29,299 $20,276 $24,686 $ 94,089 $ 81,696 $46,719 $23,191 Add: Interest expense....................................... 15,623 13,961 61,153 35,288 19,584 19,442 3,923 ------- ------- ------- -------- -------- ------- ------- Earnings as adjusted.....................................$44,922 $34,237 $85,839 $129,377 $101,280 $66,161 $27,114 ======= ======= ======= ======== ======== ======= ======= Combined fixed charges and Preferred Share dividends: Interest expense.......................................$15,623 $13,961 $61,153 $ 35,288 $ 19,584 $19,442 $ 3,923 Capitalized interest................................... 5,214 4,427 17,606 16,941 11,741 6,029 2,818 ------- ------- ------- -------- -------- ------- ------- Total fixed charges..................................$20,837 $18,388 $78,759 $ 52,229 $ 31,325 $25,471 $ 6,741 ======= ======= ======= ======== ======== ======= ======= Preferred Share dividends.............................. 4,712 5,035 19,384 24,167 21,823 16,100 1,341 ------- ------- ------- -------- -------- ------- ------- Combined fixed charges and Preferred Share dividends.....$25,549 $23,423 $98,143 $ 76,396 $ 53,148 $41,571 $ 8,082 ======= ======= ======= ======== ======== ======= ======= Ratio of earnings to combined fixed charges and Preferred Share dividends.............................. 1.8 1.5 0.9 1.7 1.9 1.6 3.4 ======= ======= ======= ======== ======== ======= =======
- -------------- (1) Earnings from operations for 1997 includes a one-time, non-cash charge of $71.7 million associated with costs incurred in acquiring the management companies from an affiliate. Accordingly, earnings from operations were insufficient to cover combined fixed charges and Preferred Share dividends by $12.3 million. Excluding this charge, the ratio of earnings to combined fixed charges and Preferred Share dividends for the year ended December 31, 1997 would be 1.6. 28 EX-15 4 LETTER FROM PEAT MARWICK Exhibit 15.1 Board of Trustees and Shareholders Security Capital Pacific Trust Gentlemen: Re: Registration Statements Nos. 333-31031, 333-31033, 333-31405, 333-42283, 333-43723, 333-24035, 333-44639 and 333-51139. With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated April 23, 1998 related to our review of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not considered a part of a registration statement prepared or certified by an accountant, or a report prepared by an accountant within the meaning of sections 7 and 11 of the Act. KPMG Peat Marwick LLP Chicago, Illinois May 14, 1998 29 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 5,310 0 12,450 0 0 0 2,643,707 139,918 2,864,150 0 918,241 0 233,263 93,001 1,256,714 2,864,150 88,553 95,611 0 47,679 3,010 0 15,623 40,071 0 40,071 0 0 0 40,071 0.43 0.42
-----END PRIVACY-ENHANCED MESSAGE-----