ITEM 1. BUSINESS
SECURITY CAPITAL PACIFIC TRUST
The objective of Security Capital Pacific Trust (formerly known as Property Trust of America, and referred to herein as "PTR") is to be the preeminent real estate operating company focusing on multifamily property in its target market. PTR'S REIT manager is Security Capital Pacific Incorporated (the "REIT Manager" or "REIT Management"). Through its REIT Manager, PTR is a fully integrated operating company which engages in development, acquisition, operation and long term ownership of multifamily properties. At March 23, 1995, PTR owned and operated or was developing 47,120 multifamily units. The total investment cost of all of PTR's multifamily properties is $1.9 billion, including planned renovations and development expenditures.
PTR seeks to achieve long term sustainable growth in cash flow and distributions by maximizing operating performance through value-added asset management, concentrating its fully integrated development capability and experienced team of professionals on developing industry-leading product in targeted submarkets that exhibit strong job growth and demographic trends and implementing an asset optimization strategy of redeploying capital into targeted moderate income developments with significant long-term cash flow growth prospects.
PTR has traditionally focused on multifamily assets in the Southwest. In November 1994, PTR's Board of Trustees (the "Board") expanded PTR's target market to include a six-state region of the western United States comprised of California, Idaho, Nevada, Oregon, Utah and Washington. On March 23, 1995, PTR consummated a merger (the "Merger") of Security Capital Pacific Incorporated, a Maryland corporation ("PACIFIC"), with and into PTR. The assets acquired from PACIFIC in the Merger are located in some of the new markets, which the REIT Manager believes have significant growth prospects. Concurrently with the Merger, PTR completed a subscription offering of common shares of beneficial interest, $1.00 par value per share ("Common Shares"), at a price of $16.375 per share, pursuant to which PTR received subscriptions for 13.2 million Common Shares representing proceeds of $216.6 million.
Based on the Merger, its recent subscription offering, debt issuance capacity, asset optimization strategy and current real estate and debt market conditions, PTR believes it has reached an optimal level of equity capitalization. Hence, PTR has no plans to raise additional capital through the equity markets. For the foreseeable future, PTR intends to fund its capital needs through implementation of its asset optimization strategy and the issuance of additional fixed-rate, fully amortizing long term debt. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources."
PTR highlights include:
. Average rental rates increased 6.42% in 1994 for PTR's multifamily properties that were fully operational throughout both 1994 and 1993. At March 23, 1995, PTR's operating multifamily properties were 95.8% leased.
. PTR believes that development of multifamily properties from the ground up that are built for long term ownership and are designed to meet broad renter preferences and demographic trends will provide a greater source of long term cash flow growth in the future than acquisitions. PTR expects to complete an additional 1,991 multifamily units by June 30, 1995. At March 23, 1995, PTR had completed $217.7 million of developments, had $201.3 million of developments under construction and owned land for which it is planning $253 million of developments.
. Security Capital Group Incorporated (which reflects the imminent name change from Security Capital Realty Incorporated and is referred to herein as "Security Capital Group"), PTR's largest shareholder, which owned 37.9% of the Common Shares at March 30, 1995, is the owner of the REIT Manager and has provided investment capital to PTR, at the same times and on the same terms made available to public investors.
. Based on forecasts published by Woods & Poole Economics, Inc., the projected growth in population of PTR's primary target market is 39.5% for the years 1994-2015, whereas the projected growth in population in the U.S. as a whole for such period is 19.2%. For the same time period, job growth is projected to be 31.5% in PTR's primary target market, and 22.4% in the U.S. as a whole.
. A review of local market information in PTR's primary target market indicates that the number of multifamily units for which building permits have been issued has declined significantly from mid-1980 levels. In 1985, 55,005 units were permitted as compared to 32,394 units in 1994.
. PTR's long term debt as a percentage of total long term book capitalization was 26% at December 31, 1994 and 22% at March 23, 1995 on a pro forma basis, giving effect to the Merger and the concurrent subscription offering and property acquisitions through March 23, 1995. Giving effect to the use of the proceeds from the subscription offering that closed on March 23, 1995, there would be no borrowings outstanding under PTR's $350 million revolving line of credit at March 23, 1995.
PTR has elected to be taxed as a real estate investment trust ("REIT") for federal income tax purposes. PTR was formed in 1963 and is a real estate investment trust organized under the laws of Maryland. Its principal executive offices are located at 7777 Market Center Avenue, El Paso, Texas 79912, and its telephone number is (915) 877-3900.
STRATEGY FOR CASH FLOW AND DISTRIBUTION GROWTH
PTR seeks to achieve long term sustainable growth in cash flow and distributions by maximizing operating performance through value-added asset management, concentrating its fully integrated development capabilities and experienced team of professionals on developing industry-leading product in targeted submarkets that exhibit strong job growth and demographic trends and implementing an asset optimization strategy of redeploying capital into targeted moderate income developments with significant long-term cash flow growth prospects.
Commitment to Fundamental Real Estate Research. PTR utilizes its affiliate, Security Capital (U.S.) Investment Research Incorporated ("Security Capital (U.S.) Investment Research"), to conduct comprehensive evaluations of its target markets on a submarket-by-submarket basis to identify those submarkets and product types that present above average prospects for long term cash flow growth. These evaluations, combined with PTR's experience in development and as one of the largest multifamily property owners in its target market, enable PTR to identify the submarkets with the highest projected job and population growth and to determine the product type to develop, acquire and own in each submarket to appeal to the local resident base.
Asset Review and Reallocation. PTR develops and acquires properties with a view to effective long term operation and ownership. REIT Management's asset managers actively review PTR's asset base. These reviews generate operating and capital plans and, with guidance from Security Capital (U.S.) Investment Research, identify submarkets and product types that PTR believes represent better long term growth opportunities. For each market, PTR's research evaluates five major economic factors, further broken down into 20-25 submarket characteristics. This research provides PTR with the demographic information to target specific resident profiles and identify unit size, density and amenities for each community which will provide the greatest opportunity for consistent rental increases and high occupancies and will be contributors to long term income growth. Based upon PTR's market research and in an effort to optimize its portfolio allocation, PTR may from time to time seek to dispose of assets that in management's view do not meet PTR's long
term investment criteria and redeploy the proceeds therefrom, preferably through like-kind exchanges, into assets that it believes provide better long term growth opportunities.
Development. Through March 23, 1995, PTR has completed $217.7 million of multifamily developments, has $201.3 million of developments under construction and owns land for which it is planning $253 million of developments. PTR has engaged in multifamily development since 1970. PTR has developed from the ground up, or has under development, 29.8%, based on cost, of its multifamily portfolio as of March 23, 1995. Historically, actual operating results on properties developed by PTR have generally exceeded projected operating results and the results available from acquisitions. PTR's development strategy is to focus on developing state of the art product in attractive submarkets to meet renter preferences and demographic trends. PTR believes that developing communities designed for long term appeal to the largest segment of the renter population will allow PTR to achieve more consistent rental increases and higher occupancies over the long term and, thereby, realize cash flow growth. PTR minimizes development risks by having zoning, site planning, construction budgets and similar risks resolved or assumed by third parties prior to PTR's commitment. PTR also targets development for markets with high occupancy rates where population and job growth trends indicate increasing future demand. PTR cannot eliminate all development risk but believes that the opportunities to better control product and realize higher returns from development properties compensate for the retained risk.
Development opportunities also permit PTR to incorporate into 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, unlike a typical merchant builder, intends to own long term the properties that it develops. Hence, PTR focuses on the quality of construction, materials and design with a view towards minimizing long term operation and maintenance costs.
REIT Management believes that development of multifamily units from the ground up that are built for long term ownership and are designed to meet broad renter preferences and demographic trends will provide a greater source of long term cash flow growth. Therefore, while land prices are favorable, PTR has acquired and will acquire, on an unleveraged basis, prudent amounts of zoned land for future multifamily development. For purposes of the property charts and other information in this report, land held for these future developments, which comprises less than 1% of assets, based on cost, is not aggregated with the multifamily properties.
PTR believes that effective execution of the strategy described above will contribute to long term sustainable growth in cash flow and distributions.
MULTIFAMILY PROPERTIES
PTR categorizes operating multifamily properties (which include all properties 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 properties) have been completed and in effect for a sufficient period of time (but in no case longer than 12 months or, in the case of properties requiring major rehabilitation, as long as 18 months) to achieve 93% occupancy at market rents. Prior to being "stabilized," a property is considered "pre- stabilized." For operating properties that PTR has acquired, stabilized operations generally have been achieved six to twelve months after acquisition. For properties that PTR has developed, stabilized operations generally have been achieved twelve to eighteen months after construction commenced. Due to its active development and acquisition programs, 80.5% of PTR's operating multifamily properties, based on cost, were classified by PTR as stabilized as of March 23, 1995. At March 23, 1995, PTR's operating multifamily properties were 95.8% leased and PTR's stabilized multifamily properties were 96.5% leased.
PTR's multifamily properties are primarily garden style, two-story multifamily dwellings that range in size from 57 units to 896 units. Resident leases are generally for six-month to twelve-month terms and require
security deposits. As of March 23, 1995, PTR owned 27 properties that contain affordable corporate efficiency units which are rented for terms generally shorter than six months. As of March 23, 1995, nine of these properties were under development, including one in the leasing stage, and six were in planning. PTR expects to develop more of these properties.
PTR believes that its multifamily communities generally occupy strategic locations in growing submarkets. At March 23, 1995, excluding affordable corporate efficiency properties, the average unit size for properties operating, under development and in planning is 833 square feet, with 53.5% of the units having two or more bedrooms. Many units have washer/dryer connections and walk-in closets, which REIT Management believes substantially enhance marketability. PTR improves attractiveness by investing in extensive landscaping when developing or repositioning multifamily units. Other features frequently included in PTR's multifamily communities are swimming pools, playgrounds, volleyball courts, fitness centers and community rooms.
PTR expects to continue to focus a portion of its future development and acquisition efforts on moderate income multifamily housing, which includes moderately priced apartments and efficiency units priced to appeal to the largest segment of the renter population, based on income, age and family size.
NON-MULTIFAMILY PROPERTIES
PTR focuses its investment and development activities on multifamily properties. It will continue to aggressively manage its non-multifamily properties in order to maximize cash flow, and periodic sales of non- multifamily properties may occur as opportunities arise. The percentage of PTR's rental income generated by non-multifamily properties was less than 2% of total rental income during 1994.
Hotel. PTR owns a 338-room, five-story hotel building and land located in the Fisherman's Wharf area of San Francisco, California. The hotel building is leased to Holiday Inns of America, Inc. The lease expires in 2018. Holiday Inns has recently renovated portions of this building at its own expense. The effective annual rent is 25% of the hotel's gross room revenues and 5% of gross food and beverage sales. Holiday Inns operates this building jointly with its 243-room building across the street, and PTR's rental income is based on total revenues for both buildings, prorated based on the number of rooms in PTR's building. Average occupancy for the one-year period ended December 31, 1994 was 82.8%, at an average room rate of $89.77.
Office/Industrial. PTR owns one office building through a 40% owned joint venture, and owns three industrial properties. PTR's office building is located in the Dallas, Texas metropolitan area. As of March 23, 1995, this office building was 98.2% leased. PTR's industrial properties are warehouse/showroom facilities located in Texas and California, ranging in size from 37,200 square feet to 130,000 square feet and were 100% leased at March 23, 1995.
INVESTMENT ANALYSIS
Prospective property investments are analyzed pursuant to several underwriting criteria, including purchase price, competition and other market factors, and prospects for growth in income and market value. PTR's investment decision is based upon the expected contribution of the property to cash flow growth which provides the opportunity for increases in shareholder distributions. The expected economic contribution is based on an estimate of all cash revenues from leases and other revenue sources, minus expenses incurred in operating the property (generally, real estate taxes, insurance, maintenance, personnel costs and utility charges, but excluding depreciation, debt service and amortization of loan costs). Residual value and the effects of debt financing are not considered in the calculation.
The economic contribution of properties cannot be predicted with certainty, and no assurance can be given that developed or acquired properties will contribute to increased cash flow and shareholder distributions, or that developments and acquisitions will be available on comparable terms in the future.
STRATEGIC ACCOMPLISHMENTS
Developments and Acquisitions
The REIT Manager's development and acquisition specialists are each assigned to a specific metropolitan area within PTR's target market where they are present each week to review available properties, meet with potential sellers, process planning approvals and monitor construction in progress. PTR has selectively developed and acquired multifamily properties where land costs, demographic trends and market trends indicate a high likelihood of achieving expected operating results. This system has produced multifamily property developments and acquisitions on favorable terms. As of March 23, 1995, the multifamily portfolio consisted of the following (dollars in thousands):
-------- (1) Represents cost, including planned renovations, for properties owned at March 23, 1995. Represents budgeted development cost, which includes the cost of land, fees, permits, payments to contractors, architectural and engineering fees and interest and property taxes to be capitalized during the construction period, for properties under development. Does not include land held for future development, which is less than 1% of assets based on cost.
As of March 23, 1995, PTR had contingent contracts or letters of intent, subject to final due diligence, to acquire land for the near term development of 5,877 multifamily units with an aggregate estimated development cost of $289.3 million. At the same date, PTR also had contingent contracts or letters of intent, subject to final due diligence, for the acquisition of 1,821 additional multifamily units with an aggregate investment cost of $76.4 million, including planned renovations. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources."
Property Management
The REIT Manager believes that a successful REIT must actively manage its properties in order to increase cash flow and enhance the long term economic performance of the properties. Prior to retaining the REIT Manager, PTR's properties were managed by several different property managers for whom PTR was one of many customers. In order to gain more control over multifamily operations, in August 1991, the REIT Manager retained SCG Realty Services Incorporated ("SCG Realty Services"), a property management firm, to replace other firms as the property manager for most of PTR's multifamily properties. Security Capital Group is SCG Realty Services' sole shareholder. At March 23, 1995, SCG Realty Services managed 84.6% of PTR's operating multifamily units, with the balance in various stages of transition to SCG Realty Services' management.
SCG Realty Services has over 987 employees dedicated to the management of PTR's properties. SCG Realty Services emphasizes locally-based management of PTR's properties and has opened ten local offices to serve PTR's target market. This network improves SCG Realty Services' ability to respond to changes in local market conditions and resident needs. The REIT Manager believes that SCG Realty Services has developed superior marketing programs, operating procedures, financial controls, information systems and training programs, which it expects to positively affect rental returns and occupancy rates. In addition, incentive compensation programs have been implemented for on-site property managers to further improve the performance of the properties. Rates for services performed by SCG Realty Services are subject to annual approval by PTR's independent Trustees (who receive an annual review from an independent third party)
and are at rates prevailing in the markets in which PTR operates. During 1994, PTR paid aggregate fees of $7,148,000 to SCG Realty Services.
The REIT Manager has taken an active role in overseeing SCG Realty Services' management of PTR's multifamily properties and has assembled a staff of asset managers to provide better oversight and long term direction.
Capital Markets
REIT Management believes that a successful REIT must have the ability to access the equity and debt markets efficiently, expeditiously and inexpensively. PTR's capital markets ability permits it to capitalize on the development and acquisition opportunities that PTR believes exist in its target market. In order to maximize this function and enhance relationships with major institutional sources of capital, Security Capital Group has formed a registered broker-dealer subsidiary, Security Capital Markets Group Incorporated ("Capital Markets Group"). Capital Markets Group's services are included in the REIT Manager's fee and do not result in a separate charge to PTR. Capital Markets Group and the REIT Manager have arranged innovative public offering structures, underwritten offerings and substantial credit facilities for PTR, including:
In June 1991, PTR raised $21.4 million of net proceeds from a rights offering to holders of Common Shares;
In November 1991, PTR raised $45.6 million of net proceeds from a public offering of Common Shares to shareholders and institutions;
In April 1992, PTR raised $69.8 million of net proceeds from a public offering of Common Shares that was 71% underwritten by a syndicate of investment banks;
In October 1992, PTR raised $73.4 million of net proceeds from a rights offering to holders of Common Shares and a sale of shelf-registered Common Shares to new institutional investors;
In February and March 1993, PTR raised $129.5 million of net proceeds from a public offering of Common Shares that was 82% underwritten by a syndicate of investment banks;
In September 1993, PTR raised $165.3 million of net proceeds from a rights offering to holders of Common Shares and a sale of shelf-registered Common Shares to institutional investors;
In November 1993, PTR raised $219.7 million of net proceeds from an underwritten public offering of Cumulative Convertible Series A Preferred Shares of Beneficial Interest, $1.00 par value per share ("Preferred Shares");
In February 1994, PTR raised $196.4 million of net proceeds from an underwritten public offering of fully amortizing, long term senior debt securities (the "Notes");
In August 1994, PTR raised $101.8 million of net proceeds from a rights offering to holders of Common Shares; and
In March 1995, PTR raised $216.3 million of net proceeds from a subscription offering for Common Shares that closed concurrently with the Merger (see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources Financing Activities").
For the Common Share offerings, PTR's underwriting commissions (all of which were paid to unaffiliated underwriters) have been $8.8 million, representing 1.05% of gross proceeds of $835.1 million, compared to an average commission cost of 5.49% for all public equity REIT offerings of common shares, other than initial public offerings, from January 1, 1991 through March 23, 1995, or $37.1 million less than the industry average commission on the same amount of gross proceeds.
When the REIT Manager was retained, PTR had $14.3 million of lines of credit available to it for developments and acquisitions. The REIT Manager has arranged increases in PTR's borrowing capacity as follows:
In October 1991, the REIT Manager negotiated a $20 million line of credit for PTR from Texas Commerce Bank National Association ("TCB") at an interest rate of prime plus 1/2 of 1%;
In August 1992, with the REIT Manager's assistance in the syndication process, TCB arranged with a group of banks to increase this line of credit to $72 million at an interest rate of prime plus 1/4 of 1%;
In February 1993, the REIT Manager negotiated and assisted in syndicating an increase in the line of credit to $125 million;
In November 1993, the REIT Manager negotiated and assisted in syndicating an extension of this line of credit from August 1994 to August 1995 and an increase to $200 million, with a reduction in interest rate to prime or, at PTR's option, LIBOR plus 2%;
In August 1994, the REIT Manager negotiated and assisted in converting the line of credit to an unsecured facility;
In October 1994, the REIT Manager negotiated and assisted in syndicating an extension of the line of credit from August 1995 to August 1996 and an increase to $275 million, with a reduction in interest rate to the greater of prime or the federal funds rate plus 0.5% or, at PTR's option, LIBOR plus 1.75% to 2.0% (varying based upon the rating of PTR's senior unsecured debt); and
In March 1995, the REIT Manager negotiated and assisted in syndicating an increase in the line of credit to $350 million, with a reduction in interest rate to the greater of prime or the federal funds rate plus 0.5% or, at PTR's option, LIBOR plus 1.625% (which can vary from LIBOR plus 1.25% to LIBOR plus 2.0% based upon the rating of PTR's senior unsecured debt).
PTR's increased borrowing capacity enables it to develop and acquire multifamily properties prior to equity and long term debt offerings and to eliminate or minimize the amount of cash it must invest in short term investments at low yields. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources."
PTR's strategy includes maintaining a conservative ratio of long term debt to total long term book capitalization (26% at December 31, 1994 and 22% at March 23, 1995 on a pro forma basis, giving effect to the Merger and the concurrent subscription offering and property acquisitions through March 23, 1995). PTR believes its current conservative leverage provides considerable flexibility to prudently utilize long term debt as a financing tool in the future. During 1995, PTR intends to prudently increase its capital base with debt, while keeping long term debt below 50% of total book capitalization. PTR also intends to limit the sum of total long term and outstanding revolving credit debt to less than 50% of the sum of book capitalization and outstanding revolving credit debt (32% at December 31, 1994 and 22% at March 23, 1995 on a pro forma basis, giving effect to the Merger and the concurrent subscription offering and property acquisitions through March 23, 1995).
THE REIT MANAGER
The REIT Manager provides both strategic and day-to-day management for PTR, including research, investment analysis, acquisition and development services, asset management, capital markets services, disposition of assets and legal and accounting services, all of which are included in the REIT Management fee. Hence, PTR depends upon the quality of the management provided by the REIT Manager. As of March 23, 1995, 94 professionals were employed by the REIT Manager and its specialized service affiliates. The REIT Manager also provides office and other facilities for PTR's needs.
The REIT Manager believes that the quality of management should be assessed in light of the following factors:
Management Depth/Succession. Management should have several senior executives with the leadership, operational, investment and financial skills and experience to oversee the entire operations of the REIT. The REIT Manager believes that several of its senior officers could serve as the principal executive officer and continue PTR's performance. See "--Officers of PTR and Directors and Officers of the REIT Manager and Relevant Affiliates."
Strategic Vision. Management should have the strategic vision to determine an investment focus that provides favorable initial yields and growth prospects. The REIT Manager demonstrated its strategic vision by focusing PTR on multifamily properties in target markets where demographic and supply factors have permitted high occupancies at increasing rents. This focus has enabled PTR to consistently make investments on attractive terms. See "--Strategic Accomplishments--Developments and Acquisitions" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
Research Capability. Management should have the means for researching markets to determine appropriate investment opportunities. PTR divides its target market into numerous submarkets for analysis purposes. The REIT Manager and its affiliate, Security Capital (U.S.) Investment Research, have several professionals devoting substantial time to research, on a submarket-by- submarket basis, who are closely supervised by the Managing Directors of the REIT Manager; hence, the REIT Manager's research has provided guidance for PTR's strategic focus and investment program.
Investment Committee Process. Investment committees should provide discipline and guidance to the investment activities of the REIT in order to achieve its investment goals. The members of the REIT Manager's Investment Committee have a combined 69 years of experience in the real estate industry. See "--Officers of PTR and Directors and Officers of the REIT Manager and Relevant Affiliates." The Investment Committee receives detailed written analyses and research, in a standardized format, from the REIT Manager's development and acquisition personnel and evaluates all prospective investments pursuant to uniform underwriting criteria prior to submission of investment recommendations to the Board. The quality of the REIT Manager's Investment Committee process is evident from the ability of PTR to achieve its investment goals, generally realizing its projected initial returns and growth from multifamily investments.
Development/Redevelopment Capability. Development returns generally are higher than acquisition returns. PTR can better control the quality of developed properties than acquired properties. Hence, development is an important source of cash flow growth even during attractive acquisition markets. By internally developing projects and redeveloping well located existing properties, management can capture for the REIT the value that normally escapes through sales premiums paid to successful developers. The REIT Manager's personnel have substantial development and redevelopment experience, as described in "--Officers of PTR and Directors and Officers of the REIT Manager and Relevant Affiliates." The REIT Manager has 31 full-time development professionals (which include seven due diligence professionals). At March 23, 1995, the REIT Manager had under construction 4,433 multifamily units for PTR, with a total budgeted cost of $201.3 million, and had in the final planning stages an estimated 5,092 multifamily units with a total budgeted cost of $253 million. The REIT Manager has engaged in substantial development on behalf of PTR at attractive yields that have generally exceeded projections. See "-- Multifamily Properties" and "--Strategic Accomplishments--Developments and Acquisitions."
Acquisitions Capability/Due Diligence Process. Management should have experienced senior personnel dedicated to acquiring investments and performing intelligent and thorough due diligence. The REIT Manager has 11 full-time acquisition and due diligence professionals (including the seven due diligence professionals who also focus on development) and has developed uniform systems and procedures for due diligence. As described under "--Strategic Accomplishments--Developments and Acquisitions," the REIT Manager's acquisition and due diligence personnel have screened and selected a large volume of successful investments.
Capital Markets Capability. Management must be able effectively to raise equity and debt capital for the REIT in order for the REIT to achieve growth through investment. As set forth under "--Strategic
Accomplishments--Capital Markets," the REIT Manager has successfully arranged funding for PTR's investment program.
Operating Capability. Management can substantially improve cash flow by actively and effectively operating assets. As described under "--Strategy for Cash Flow and Distribution Growth" and "--Strategic Accomplishments--Property Management," the REIT Manager and its affiliates have devoted substantial personnel and financial resources to effectively administer and control the operations of PTR's multifamily assets.
Communications/Shareholder Relations Capability. A REIT's success in capital markets and asset acquisition 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. The REIT Manager believes that PTR has now generally established an excellent reputation among these constituencies through its performance and the REIT Manager's communications ability. The REIT Manager provides at its expense full-time personnel who prepare informational materials for and conduct periodic meetings with shareholders, the investment community and analysts.
Successfully combining the foregoing attributes can establish for a REIT the ability to increase cash flow and the market valuation of the REIT's portfolio. Both PTR's cash flow and market valuation have increased under the REIT Manager's administration.
OFFICERS OF PTR AND DIRECTORS AND OFFICERS OF THE REIT MANAGER AND RELEVANT AFFILIATES
Directors and Senior Officers of the REIT Manager.
Members of the REIT Manager's Investment Committee are designated by an asterisk.
*C. RONALD BLANKENSHIP--45--Chairman of PTR; since March 1991, Chairman of the REIT Manager and Managing Director of Security Capital Group; from June 1988 to March 1991, Regional Partner, Trammell Crow Residential, Chicago, Illinois (multifamily real estate development and property management); prior thereto, Executive Vice President and Chief Financial Officer, The Mischer Corporation, Houston, Texas (multibusiness holding company with investments primarily in real estate). While with Trammell Crow Residential, Mr. Blankenship was on the Management Board for Trammell Crow Residential Services, a property management company that managed approximately 90,000 multifamily units nationwide, and was chief executive officer of Trammell Crow Residential Services-North, which managed 10,000 multifamily units in the Midwest and Northeast. In his various positions prior to his affiliation with the REIT Manager, Mr. Blankenship supervised the development of approximately 9,300 multifamily units. Mr. Blankenship supervises the overall operations of PTR and the REIT Manager.
PATRICK R. WHELAN--38--Director of the REIT Manager since February 1995; President of SCG Realty Services since October 1994, where he is responsible for overall property management; from February 1994 to October 1994, Senior Vice President and Co-Manager of Multifamily Acquisitions of Security Capital Group; from April 1991 to January 1994, Senior Vice President of Trammell Crow Company (development, acquisition and management of commercial properties) where he most recently had regional responsibilities for asset management, leasing and acquisitions/dispositions of a $300 million portfolio of properties.
*DAVID C. DRESSLER, JR.--41--Managing Director of SCG Multifamily Development Incorporated ("SCG Multifamily Development") since January 1994, PTR since May 1993 and the REIT Manager since April 1992; Director of the REIT Manager since June 1992; from 1984 to May 1991, Regional Partner, Trammell Crow Residential, Boston, Massachusetts (multifamily real estate development and property management). While with Trammell Crow Residential, Mr. Dressler was on the Management Board for Trammell Crow Residential Services (managing 90,000 multifamily units nationwide) and was co-founder and a board member of Trammell Crow Residential Services-North, which managed 10,000 multifamily units in the Midwest and Northeast. In his various positions prior to his affiliation with the REIT Manager, Mr.
Dressler supervised the development of approximately 6,500 multifamily units. Mr. Dressler supervises the development activities of the REIT Manager on behalf of PTR.
CONSTANCE B. MOORE--39--Managing Director of PTR since May 1994, Director and Managing Director of the REIT Manager since March 1994, Senior Vice President of Security Capital Group from March 1993 to June 1994; from January 1990 to December 1992, President and Director of Kingswood Realty Advisors, Inc., investment advisor to ICM Property Investors, a New York Stock Exchange ("NYSE") listed REIT, and from March 1991 to December 1992, President and Director of ICM Property Investors; from April 1989 to December 1989, consultant to Bedford Properties, a real estate development and management firm where Ms. Moore was responsible for acquiring a controlling interest in ICM Property Investors and Kingswood for Bedford; from January 1983 to November 1988, Senior Vice President and Director of Consolidated Capital Equities Corporation where she was in charge of portfolio and asset management for Consolidated Capital's $3.0 billion diversified debt and equity portfolio.
*R. SCOT SELLERS--38--Managing Director of PTR since September 1994 and Senior Vice President of PTR from May 1994 to September 1994, where he has overall responsibility for PTR's investment and development program; Director and Managing Director of the REIT Manager since September 1994; from April 1993 to May 1994, Senior Vice President of Security Capital Group, where he was responsible for portfolio acquisitions from institutional sources; from September 1981 to April 1993, Mr. Sellers was an operating partner and Vice President of Lincoln Property Company (LPC) (development, acquisition and management of multifamily properties) where he was responsible, among other things, for the development of more than 6,500 apartment units in a number of different markets.
JOSHUA M. BROWN--43--Senior Vice President of PTR and the REIT Manager since September 1994, where he has overall responsibility for multifamily acquisitions and dispositions; from January 1991 to June 1994, President of Prentiss Properties Realty Advisors, Inc., where he directed the firm's tax- exempt institutional advisory business; from June 1983 to December 1990 Vice President of Fayez Sarofim & Co., where he worked with the firm's real estate advisory group, Sarofim Realty Advisors; prior thereto, Vice President, Director of Investment Administration for CB Institutional Realty Advisors in Los Angeles.
*JOHN H. GARDNER JR.--41--Director of the REIT Manager since February 1995; Senior Vice President of PTR and the REIT Manager since September 1994, where he has overall responsibility for multifamily asset management; from December 1984 to January 1993, Vice President of Asset Management and through September 1994, Managing Director and Principal of Copley Real Estate Advisors in Boston, where he had overall responsibility for the portfolio management function for eight accounts valued at $7.5 billion; prior thereto, Real Estate Manager of Equity Real Estate at John Hancock Companies.
K. BRUCE WEBSTER--38--Senior Vice President of PTR and the REIT Manager since March 1995 and of PACIFIC from November 1994 to March 1995, where he had responsibility for PACIFIC's portfolio performance and asset management; from June 1993 to November 1994, Vice President of Asset Management at Irvine Apartment Communities with responsibility for property operations, portfolio performance and long term positioning; prior thereto, President and Chief Operating Officer of Trammell Crow Residential Services North where he had responsibility and accountability for management company operations and property performance in the midwestern and northeastern United States.
Other Officers.
ARIEL AMIR--35--Vice President of Security Capital Group since June 1994; from September 1985 to April 1994, an attorney with the law firm of Weil, Gotshal & Manges, New York, New York where he practiced securities and corporate law for eight years. Mr. Amir provides securities offerings and corporate acquisition services to PTR.
ANTHONY R. ARNEST--44--Vice President of PTR and the REIT Manager since November 1994, where he is the head of the due diligence group; from December 1990 to September 1994, Mr. Arnest maintained a
private law practice specializing in real estate, development and business and financial consulting; from March 1990 to November 1990, Director of Infill Acquisitions with Lewis Homes of California; from January 1986 to March 1990, Vice President, Director of Acquisitions and Forward Planning/Due Diligence with Wesco Development; prior thereto, House Counsel for Torino Development.
MARK J. CHAPMAN--37--Vice President of PTR since March 1995, where he is a member of the asset management group, and Vice President of PACIFIC from November 1994 to March 1995; from July 1989 to November 1994, Vice President at Copley Real Estate Advisors, Inc. where he directed asset management for Copley assets located from Connecticut to Virginia, valued in excess of $1.5 billion; prior thereto, Director of Asset Management for Liberty Real Estate with responsibility for assets east of the Mississippi River, including multifamily, office and retail properties.
MARK G. CONROE--37--Vice President of PTR and the REIT Manager since January 1995, where he has overall responsibility for the multifamily corporate affordable housing development program, Homestead Village properties; from February 1994 to January 1995, Vice President of Security Capital Atlantic Incorporated, where he was a member of the development group; from October 1991 to February 1994, President of Classic Communities, Inc., a home building company; prior thereto General Partner and Executive Vice President of the Mozart Development Company, a real estate development company.
RICHARD W. DICKASON--38--Vice President of PTR and the REIT Manager since March 1995, where he is a member of the development group, and Vice President of PACIFIC from December 1993 to March 1995; from July 1992 to September 1993, President at J.M. Peters Company/Capital Pacific Homes, where he acquired property 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 sizable 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.
JOSEPH G. DI CRISTINA--35--Vice President of PTR and the REIT Manager since March 1995, where he is a member of the development group, and Vice President of PACIFIC from August 1994 to March 1995; prior thereto, Vice President of Forward Planning at Robertson Homes.
PETER M. GRIMM--52--Vice President of SCG Multifamily Development since January 1994 and Vice President of PTR, of which he has been an officer since 1975.
JAMES M. HARLEY--43--Vice President of PTR and the REIT Manager since June 1993, where he provides asset management services for PTR's Homestead Village properties; from 1988 to July 1993, Regional Vice President--Acquisitions and Development of Holiday Inn Worldwide; prior thereto, Senior Vice President-- Hotel Division of Webb Companies, a Lexington, Kentucky based real estate development company.
NELSON L. HENRY--59--Vice President of PTR since December 1994, where he is a member of the development group with responsibilities for production and project construction planning; from January 1983 to September 1993, Construction Vice President for Lincoln Property Company N.C. Inc. where he was responsible for the coordination of development in Colorado and California; prior thereto, President of Royal Investment Corporation, a regional multifamily and single-family developer.
JAY S. JACOBSON--42--Vice President of SCG Multifamily Development since January 1994 and PTR since July 1993; 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; from 1981 to 1988, General Partner and Chief Executive Officer of Meridian Land Company, a Denver-based real estate development company.
W. GEOFFREY JEWETT--46--Vice President of PTR and the REIT Manager since March 1995, where he is a member of the asset management group, and Vice President of PACIFIC from November 1994 to March 1995; from May 1994 to November 1994, Vice President of Security Capital (Atlantic) Incorporated where he had overall responsibility for the acquisitions group; from September 1993 to April 1994, Mr. Jewett was involved with and then had overall responsibility for acquisitions for PACIFIC; prior thereto, Vice President of LaSalle Partners Limited in its acquisitions and property finance group where he provided investment property sale, financing and acquisition services on behalf of corporate and institutional clients throughout the western United States.
JOHN JORDANO III--38--Vice President of PTR and the REIT Manager since March 1995, where he is a member of the development group, and Vice President of PACIFIC from August 1994 to March 1995; 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.
WILLIAM KELL--38--Vice President of the REIT Manager since June 1991 and Vice President of PTR since October 1993, where he has overall responsibility for multifamily accounting and financial reporting; from 1987 to 1991, Vice President, Bohannon Development Corporation, El Paso, Texas (multifamily development); prior thereto, Manager with KPMG Peat Marwick in its El Paso, Texas office.
STEVEN R. LEBLANC--37--Vice President of SCG Multifamily Development since January 1994 and PTR since March 1992; from 1984 to 1992, Operating Partner and Senior Vice President, Lincoln Property Company, Dallas, Texas (multifamily real estate owners and operators).
B. THOMAS MILLER, JR.--33--Vice President of Security Capital (U.S.) Investment Research since January 1994 where he conducts strategic market analysis for the REIT Manager and affiliated companies; from December 1985 to December 1993, Senior Manager with the Arthur Andersen Real Estate Services Group in Washington D.C.; prior thereto, an Associate with Kenneth Leventhal & Co. in Dallas.
GLENN E. MORGAN--34--Vice President of Security Capital (U.S.) Investment Research since January 1994, where he is responsible for market research; from December 1992 to December 1993, Mr. Morgan developed actuarial and econometric models for American Credit Indemnity, a subsidiary of Dun & Bradstreet.
JOHN R. PATTERSON--43--Vice President of PTR and the REIT Manager since January 1995, where he has overall responsibility for operations and asset management of the corporate affordable housing product, Homestead Village properties; from July 1993 to January 1995, a Senior Vice President in business development at NationsBank in Atlanta; prior thereto, Division President and Partner of Trammell Crow Residential Services.
MARK P. PEPPERCORN--32--Vice President of PTR since February 1995 where he is a member of the development group; from September 1994 to February 1995, he was a member of the acquisitions group for Security Capital Atlantic Incorporated and previously, for PTR; from February 1992 to June 1993, Mr. Peppercorn was responsible for the multifamily brokerage division of Transwestern Property Company in Houston, Texas; and prior thereto, he was an Associate Vice President of Eastdil Realty Incorporated.
GREGG A. PLOUFF--38--Vice President of PTR and the REIT Manager since March 1995, where he is a member of the acquisitions group, and Vice President of PACIFIC from July 1994 to March 1995; prior to November 1993, Mr. Plouff served in an acquisitions consulting capacity for PTR; prior thereto, Mr. Plouff was with Trammell Crow Residential, most recently as a partner, where he was involved with residential development in the Dallas, Chicago and Southern California markets.
THOMAS L. POE--37--Vice President of the REIT Manager since April 1992, Vice President of PTR since June 1994 and controller of PTR since October 1994, where he is responsible for accounting and financial reporting; from 1988 to 1992, Vice President of Finance for the Mischer Corporation, Houston, Texas (real estate investments).
HAROLD D. RILEY--58--Vice President of the REIT Manager since March 1991, where he provides accounting and financial reporting services; Vice President of PTR since 1974.
DAVID K. ROBBINS--43--Vice President of PTR and the REIT Manager since March 1995, where he is responsible for land acquisitions and property development in Tucson, Arizona; from April 1994 to March 1995, Vice President of Security Capital Atlantic Incorporated, where he was responsible for land acquisitions and property development in Richmond, Virginia; from December 1992 to March 1994, Vice President of PTR, where he had overall responsibility for due diligence; prior thereto, a partner and attorney with the law firm of Hill, Farrer & Burrill, Los Angeles, California, where he practiced real estate law for 12 years.
PAUL E. SZUREK--34--Secretary and General Counsel of the REIT Manager and PTR; Senior Vice President, and from April 1991 to June 1993, Vice President, Secretary and General Counsel of Security Capital Group; prior thereto, a shareholder and attorney with the law firm of Kemp, Smith, Duncan & Hammond, El Paso, Texas, where he practiced securities law for seven years. Mr. Szurek provides securities offering and corporate acquisition services to PTR and oversees the provision of legal services to PTR.
MARK N. TENNISON--34--Vice President of SCG Multifamily Development since January 1994 and PTR since July 1992; 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; and from August 1987 to December 1990, Partner with Trammell Crow Residential (development, construction and management of multifamily properties).
In addition, an affiliate of the REIT Manager employs a number of accounting professionals who provide centralized accounting services for PTR.
Shareholder Relations and Capital Markets. The following persons provide shareholder relations and capital markets services to PTR:
DOUGLAS K. BALL--54--Senior Vice President of PTR and the REIT Manager since June 1993, President since May 1994 and Senior Vice President from August 1993 to May 1994 of Capital Markets Group, where he participates in capital markets and institutional investor relations; from August 1990 to June 1993, Senior Vice President of Koll-Rubloff in its Strategic Management Division, where he provided strategic real estate consulting and transaction services to diverse corporate clients throughout the United States; from August 1988 to July 1990, engaged in private investment activities; from April 1981 to July 1988, Managing Director of LaSalle Partners Limited, where he served as Director of the Services Division. Prior thereto, Mr. Ball was National Director of Insurance Industry Marketing at IBM Corporation. Mr. Ball is registered with the National Association of Securities Dealers, Inc.
K. SCOTT CANON--33--Vice President of Capital Markets Group since August 1993 and a member of Capital Markets Group since March 1992; from September 1991 to March 1992, a personal account director for Chase Manhattan Investment Services; from August 1987 to September 1991, a member of private client services for Goldman, Sachs & Co. Mr. Canon is registered with the National Association of Securities Dealers, Inc.
JEFFREY A. COZAD--30--Senior Vice President of PTR since December 1994 and Vice President of PTR from June 1992 to December 1994; Senior Vice President of Capital Markets Group since December 1994, Vice President from September 1992 to November 1994 (in its New York office since June 1993) and a member of Capital Markets Group since March 1992; from August 1991 to August 1992, a member of Security Capital Group; in June 1991, Mr. Cozad obtained a M.B.A. from The University of Chicago; prior
thereto, an analyst with LaSalle Partners Limited, where he provided corporate real estate services to major institutions from 1986 to 1989. Mr. Cozad is registered with the National Association of Securities Dealers, Inc.
JAMES L. EVANS--41--Senior Vice President of Capital Markets Group since December 1994; from December 1992 to November 1994, Managing Director of Copley Real Estate Advisors, where he was responsible for all acquisitions in Southern California and worked on capital raising and asset management; prior thereto, Mr. Evans was a real estate lending officer at Chemical Bank. Mr. Evans is registered with the National Association of Securities Dealers, Inc.
GERARD DE GUNZBURG--47--Vice President of Capital Markets Group in its New York office since January 1993; from June 1988 to December 1992, a consultant to American and European companies; prior thereto, Director and Partner of Lincoln Property Company, Europe, where he arranged real estate financing from 1976 to 1988. Mr. de Gunzburg is registered with the National Association of Securities Dealers, Inc.
ALISON C. HEFELE--35--Vice President of Capital Markets Group since February 1994, where she provides capital markets services for affiliates of the firm; from January 1990 to February 1994, Vice President with Prudential Real Estate Investors (strategic planning and business development for institutional real estate investment management services); from September 1985 to January 1990, a management consultant with McKinsey & Company; prior thereto, a financial analyst with Morgan Stanley Realty Inc. Ms. Hefele is registered with the National Association of Securities Dealers, Inc.
JAMES H. POLK III--52--Trustee of PTR; Managing Director of Capital Markets Group since August 1992. Mr. Polk has been affiliated with the REIT Manager since March 1991; prior thereto, he was President of PTR for sixteen years. He is registered with the National Association of Securities Dealers, Inc. and is a past President of the National Association of Real Estate Investment Trusts, Inc.
INSURANCE
PTR carries comprehensive general liability coverage on its owned properties, with limits of liability of $50 million per property and per occurrence (subject to appropriate deductibles), to insure against liability claims and provide for the costs of defense. Similarly, PTR is insured against the risk of direct physical damage in amounts necessary to reimburse PTR on a replacement cost basis for costs incurred to repair or rebuild each property, including loss of rental income during the reconstruction period.
COMPETITION
Within its geographic areas of operation, PTR is subject to competition from a variety of investors, including insurance companies, pension funds, corporate and individual real estate developers and investors and other REITs with investment objectives similar to those of PTR. Some of these competitors have substantial financial resources and staffs and long operating histories. As an owner of real estate properties, PTR competes with other owners of similar properties in connection with their financing, sale, lease or other disposition and use.
ENVIRONMENTAL MATTERS
Many jurisdictions have adopted laws and regulations relating to environmental controls and the development of real estate. Such laws and regulations could affect existing PTR properties and/or operate to reduce the number and attractiveness of investment opportunities available to PTR. The effect upon PTR of the application of such laws and regulations cannot be predicted. Such laws and regulations have not had a material effect on PTR's financial condition and results of operations to date. PTR is not aware of any environmental condition on any of its properties which is likely to have a material adverse effect on PTR's financial condition or results of operations.
EMPLOYEES
All management activities of PTR are performed by the REIT Manager. PTR has no employees.
EXECUTIVE OFFICERS
All executive functions of PTR are performed by the REIT Manager. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--REIT Management Agreement." The executive officers of the REIT Manager are:
See "--Officers of PTR and Directors and Officers of the REIT Manager and Relevant Affiliates" for descriptions of the REIT Manager's executive officers.
ITEM 2.
ITEM 2. PROPERTIES
The information in the following table is as of December 31, 1994 for properties owned at December 31, 1994 and as of March 23, 1995 for properties acquired since December 31, 1994 (dollars in thousands).
(see notes following table)
(see notes following table)
(see notes following table)
(see notes following table)
(see notes following table)
-------- *Property developed by PTR. +Property acquired by PTR in the Merger. (1) Represents percentage leased at December 31, 1994 for properties owned at December 31, 1994 and March 23, 1995 for properties acquired since December 31, 1994. (2) Represents cost, which is not in excess of net realizable value, as of December 31, 1994 for properties owned at December 31, 1994 and as of March 23, 1995 for properties acquired since December 31, 1994. (3) Represents cost, including planned renovations, for properties owned at March 23, 1995. Represents budgeted development cost, which includes the cost of land, fees, permits, payments to contractors, architectural and engineering fees and interest and property taxes to be capitalized during the construction period, for properties under development. Does not include land held for future development, which is less than 1% of assets based on cost. (4) The Silvercliff apartments are subject to a deed of trust securing long term mortgage debt of $7.6 million. (5) Phase I (120 units) was developed in 1980, Phase II (60 units) was developed in 1981 and Phase III (288 units) was developed in 1983. The entire project is subject to a deed of trust securing long term mortgage debt of $6.0 million. (6) The Spring Park apartments and the Park Place apartments are subject to deeds of trust securing long term mortgage debt aggregating $11.4 million. (7) Phase I (84 units) was developed in 1970 and Phase II (100 units) was developed in 1978. The entire project is subject to deeds of trust securing long term mortgage debt aggregating $1.0 million. (8) The Braeswood Park apartments are subject to a deed of trust securing long term mortgage debt of $7.0 million. (9) The Chasewood apartments are subject to a deed of trust securing long term mortgage debt of $9.6 million. (10) The Seahawk apartments are subject to a deed of trust securing long term mortgage debt of $5.6 million.
(11) The Apple Creek apartments are subject to a deed of trust securing long term mortgage debt of $11.1 million. (12) The Presidio at South Mountain apartments are subject to a deed of trust securing long term mortgage debt of $14.7 million. (13) The Windsail apartments are subject to a deed of trust securing long term mortgage debt of $4.9 million. (14) The Brompton Court apartments are subject to a deed of trust securing long term mortgage debt of $14.8 million. (15) Subsequent to December 31, 1994, PTR determined that current market conditions were favorable to develop this tract of land, which was acquired incidentally with and is contiguous to the land for Fox Creek Phase I. Therefore, at December 31, 1994 no cost had been allocated to this parcel. (16) 25.30 acres of undeveloped land. (17) 6.49 acres of undeveloped land. (18) 25.58 acres of undeveloped land. (19) 38.7 acres of undeveloped land. (20) 30.5 acres of undeveloped land. (21) 10.3 acres of undeveloped land. (22) PTR owns the building and land leased to Holiday Inns of America, Inc. at Fisherman's Wharf in San Francisco. The lease with Holiday Inns expires in 2018. Occupancy represents average occupancy for the one-year period ended December 31, 1994. (23) PTR owns this property through a 40% owned joint venture.
PORTFOLIO COMPOSITION
The following table indicates the composition of PTR's properties at March 23, 1995:
-------- (1) Represents cost, including planned renovations, for properties owned at March 23, 1995. Represents budgeted development cost, which includes the cost of land, fees, permits, payments to contractors, architectural and engineering fees and interest and property taxes to be capitalized during the construction period, for properties under development. Does not include land held for future development, which is less than 1% of assets based on cost.
GEOGRAPHIC DISTRIBUTION
PTR's multifamily and non-multifamily properties are located in 21 metropolitan areas in 11 states. The table below demonstrates the geographic distribution of PTR's property investments at March 23, 1995:
-------- * Less than 1%. (1) Represents cost, including planned renovations, for properties owned at March 23, 1995. Represents budgeted development cost, which includes the cost of land, fees, permits, payments to contractors, architectural and engineering fees and interest and property taxes to be capitalized during the construction period, for properties under development. Does not include land held for future development, which is less than 1% of assets based on cost.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On March 17, 1995, the United States District Court for the Western District of Texas, El Paso Division granted defendants' motion to dismiss, with prejudice, the action entitled Ferro v. C. Ronald Blankenship, et al. (Case No. EP 95 CA 004) filed on January 4, 1995 by a party alleging to be a shareholder of PTR against PTR, PACIFIC, Security Capital Group and the individual members of the Board. The lawsuit had alleged breaches of fiduciary duties and other matters pertaining to the Merger. PTR believes that the lawsuit was without merit and will not have any material adverse effect on PTR's financial condition or results of operations.
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 all claims and litigation, individually or in the aggregate, will have a material adverse effect on its business, financial position or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Shares are listed on the NYSE under the symbol "PTR." The following table sets forth the high and low sale prices of the Common Shares as reported in the New York Stock Exchange Composite Tape by CompuServe, and distributions declared, for the periods indicated.
--------
(1) Declared in the fourth quarter of 1993 for payment in the first quarter of 1994. (2) Declared in the fourth quarter of 1994 and paid February 13, 1995 to holders of record on February 2, 1995.
As of March 30, 1995, PTR had approximately 3,500 record holders of Common Shares and in excess of 22,500 record and beneficial holders of Common Shares.
PTR, in order to qualify as a REIT, 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 76 consecutive quarterly cash distributions.
PTR announces the following year's projected annual distribution level after the Board's annual budget review and approval in December of each year. At its December 6, 1994 board meeting, the Board announced a projected increase in the annual distribution level from $1.00 to $1.15 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 his or her Common Shares. To the extent that a distribution exceeds both current and accumulated earnings and profits and the shareholder's basis in his or her Common Shares, it will generally be treated as gain from the sale or exchange of that shareholder's Common Shares. PTR annually notifies shareholders of the taxability of distributions paid during the preceding year. The following summarizes the taxability of distributions paid in 1994, 1993 and 1992 in respect of the Common Shares.
On July 21, 1994, in addition to the 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 received $0.01 per shareholder purchase right. The redemption price was paid on August 12, 1994 and is taxable as ordinary income for federal income tax purposes.
No portion of the 1992 distributions constituted return of capital, due to certain acquisition and sale transactions consummated in 1992 that increased reported earnings and profits for 1992. 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 and, therefore, the taxability of distributions is subject to change. The portion of distributions characterized as return of capital results primarily from the excess of distributions over earnings, primarily because non-cash charges such as depreciation are added to earnings in determining distribution levels. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations."
For federal income tax purposes, the following summary reflects the taxability of dividends paid on Preferred Shares for the period from the date of issuance (November 29, 1993) through December 31, 1993 and the estimated taxability for 1994:
PTR's tax return for the year ended December 31, 1994 has not been filed, and the taxability information for 1994 is based upon the best available data. PTR's tax returns have not been examined by the Internal Revenue Service and, therefore, the taxability of the dividends is subject to change.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data for PTR and should be read in conjunction with the financial statements included or incorporated by reference herein (dollars in thousands, except per share data).
-------- (1) Earnings from operations for the year ended December 31, 1994 and the year ended December 31, 1993 reflect a $1.6 million and a $2.3 million provision, respectively, for possible losses relating to investments in non-multifamily properties. (2) The 1994 amount includes a distribution of $0.25 per Common Share which was declared by the Board on December 28, 1993 and paid on February 18, 1994.
(3) The 1994 amount excludes the distribution of $.2875 per Common Share which was declared by the Board on December 6, 1994 and paid on February 13, 1995 to holders of record on February 2, 1995. (4) Funds from Operations means net earnings computed in accordance with generally accepted accounting principles ("GAAP"), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and certain amortization, and after adjustments for unconsolidated partnerships and joint ventures. PTR believes that Funds from Operations is helpful in understanding a property portfolio in that such calculation reflects cash flow from operating activities and the properties' ability to support interest payments and general operating expenses before the impact of certain activities, such as gains or losses from property sales and changes in accounts receivable and accounts payable. Funds from Operations 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.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
PTR's operating results depend primarily upon income from multifamily properties, which is substantially influenced by (i) the demand for and supply of multifamily units in PTR's target market and submarkets, (ii) operating expense levels, (iii) the effectiveness of property-level operations and (iv) the pace and price at which PTR can develop and acquire additional multifamily properties. Capital and credit market conditions that affect PTR's cost of equity and debt capital also influence operating results.
PTR's target market and submarkets have benefitted substantially in recent periods from demographic trends (including job and population growth) that increase the demand for multifamily units while financing constraints (specifically, reduced availability of development capital) have limited new construction to levels substantially below construction activity prior to 1986. Consequently, rental rates for multifamily units have increased more than the inflation rate for the last two years and are expected to continue experiencing such increases for 1995. Expense levels also influence operating results, and rental expenses (other than real estate taxes) for multifamily properties have generally increased at approximately the same rate as rents for the past year and are expected to increase at a comparable rate for 1995.
REIT Management believes that development of multifamily properties from the ground up that are built for long term ownership and are designed to meet broad renter preferences and demographic trends will provide a greater source of long term cash flow growth. Therefore, while land prices are favorable, PTR has acquired and will acquire, on an unleveraged basis, prudent amounts of zoned land for future multifamily development. At March 23, 1995 land held for future development was less than 1% of assets based on cost. The REIT Manager believes PTR's ability to compete is significantly enhanced relative to other companies because of the REIT Manager's depth of development and acquisition expertise, its local market presence and PTR's access to investment capital.
MERGER AND CONCURRENT SUBSCRIPTION OFFERING
On March 23, 1995, PTR completed the Merger. In the Merger, each outstanding share of PACIFIC common stock was converted into the right to receive 0.611 of a Common Share. As a result, 8,468,460 Common Shares were issued in the Merger in exchange for all of the outstanding shares of PACIFIC common stock. Additionally, PTR changed its name from Property Trust of America to Security Capital Pacific Trust to more accurately reflect its newly expanded target market. PTR will continue to be traded on the NYSE under the symbol "PTR". The Merger expands PTR's target market to include a six-state region of the western United States with 129 submarkets. As a result, PTR is well-positioned to deploy capital in the geographic areas of the United States that the REIT Manager believes are expected to provide some of the most attractive multifamily growth opportunities.
Concurrently with the consummation of the Merger, PTR completed a subscription offering pursuant to which PTR received subscriptions for $216.6 million (13.2 million Common Shares). The subscription offering was designed to allow shareholders of PTR to purchase Common Shares at the same price PACIFIC shareholders were acquiring Common Shares in the Merger ($16.375 per Common Share). Security Capital Group purchased $50 million (3.1 million Common Shares) in the subscription offering pursuant to the oversubscription privilege.
RESULTS OF OPERATIONS
1994 COMPARED TO 1993
During 1994, PTR acquired 20 multifamily properties aggregating 6,626 units for a total purchase price, including planned renovations, of approximately $266.0 million. In addition, PTR completed development of 15 multifamily properties aggregating 3,061 units in 1994 with a completed cost of $127.9 million. At December 31, 1994 PTR had 21 multifamily properties under construction with a budgeted completed cost of $205.4 million and had in the final planning stages an estimated 4,306 multifamily units with an aggregate estimated investment cost of $215.0 million. During 1993, PTR acquired 53 multifamily properties aggregating 13,772 units for a total purchase price, including planned renovations, of approximately $453.7 million, most of which was invested in the fourth quarter of 1993. In addition, PTR completed development of three multifamily properties aggregating 732 units in 1993.
The percentage of PTR's total rental income generated by multifamily properties was 98.3% and 93.2% for the years ended December 31, 1994 and 1993, respectively. This percentage will continue to increase throughout 1995 due to the Merger, past and ongoing multifamily property developments and acquisitions and the periodic sale of non-multifamily properties.
During the period prior to a property being stabilized (see "Item 1. Business--Investment Analysis"), the REIT Manager's asset managers and the property managers begin implementing expense controls, reconfigure the resident mix, supervise renovations and implement a strategy to increase rental income. The full benefits of these changes are not reflected until after the properties are stabilized. As of March 23, 1995, 80.5% of the operating multifamily portfolio was stabilized as compared to 47% at December 31, 1993.
Property Operations
Including the newly developed and acquired assets, net earnings increased $21.2 million (83.3%) for 1994 over 1993. The increased net earnings related primarily to property revenue increases of $107.3 million (141.0%), partially offset by higher rental expenses, which increased by $48.5 million (159.2%) for the period. Depreciation expense increased $14.1 million (134.2%) for 1994 over 1993. These increases are due to multifamily acquisitions and multifamily developments placed in service and to rental rate increases. For operating multifamily properties, which comprise 97.1% of PTR's total operating properties based on cost at December 31, 1994, rental expenses were 43.6% and 42.2% of rental revenues during the year ended December 31, 1994 and 1993, respectively.
Multifamily Properties Fully Operating Throughout Both Periods
For the 29 multifamily properties that were fully operating throughout both 1994 and 1993, property level earnings before interest, income taxes, depreciation and amortization ("EBITDA") as a percentage of PTR's aggregate investment in these properties increased to 11.14% in 1994 from 10.68% in 1993. EBITDA does not represent and should not be substituted for net earnings as defined by GAAP and is not indicative of cash flows from operations or that cash flows are sufficient to fund all cash needs. This increase in return on investment, which is a function of rental rate growth, occupancy levels, expense rate growth and capital expenditure levels, is attributable primarily to growth in rental rates. This increase in return on investment was achieved at the same time that PTR increased its investment in these properties by $2.8 million (1.1% of
total investment in these properties) as a result of renovation and other capital expenditures. The 6.8% increase in rental income (the majority resulting from a 6.42% rental rate increase) for such properties for 1994 as compared to 1993 was offset by increases in rental expenses, primarily due to real estate taxes and turnover expenses.
Interest Income
Interest income for 1994 increased 15.0%, primarily resulting from the addition of 4 purchase money notes aggregating $12.4 million received in 1993 in conjunction with property sales.
Interest Expense
Interest expense increased $15.5 million (395.6%) for 1994 as compared to 1993. The increase is primarily attributable to interest expense of $12.9 million resulting from the issuance of $200 million of long term notes in February 1994, as more fully discussed under "--Liquidity and Capital Resources--Financing Activities."
Mortgage interest expense decreased $288,000 (41.6%) for 1994, compared to 1993. The decrease is attributable to interest savings resulting from prepayments and payoffs aggregating $10.5 million on mortgages during 1994 and an increase of $3.2 million (114%) in capitalized interest during 1994 over 1993 due to increased levels of multifamily development activity.
Line of credit interest expense for 1994 was $2.9 million higher than for 1993, principally because of higher average outstanding balances, higher interest rates and amortization of additional loan costs (commitment fees, title policies and legal expenses) relating to PTR's revolving credit facility which was increased from $200 million to $275 million during 1994. Average borrowings were approximately $59.9 million (with an average interest rate of 7.4%) during 1994, as compared to average borrowings of $40.6 million (with an average interest rate of 6.3%) during 1993.
General and Administrative Expense including REIT Management Fee
The REIT Management fee paid by PTR fluctuates with the level of PTR's pre- REIT Management fee cash flow and therefore increased by $6.1 million (86.4%) in 1994 as compared to 1993 because cash flow increased substantially (see "-- REIT Management Agreement" below). As PTR arranges amortizing long term debt as more fully described in "--Liquidity and Capital Resources" below, the REIT Management fee will effectively decline in proportion to PTR's earnings from operations because actual or assumed regularly scheduled principal payments, as defined in such agreement, associated with the long term debt will be deducted from the cash flow amount on which the REIT Management fee is based.
Provision for Possible Loss
PTR develops and acquires properties with a view to effective long term operation and ownership. Based upon PTR's market research and in an effort to optimize its portfolio allocation, PTR may from time to time seek to dispose of assets that in management's view do not meet PTR's long term investment criteria and redeploy the proceeds therefrom, preferably through like-kind exchanges, into assets that it believes provide better long term growth opportunities.
PTR is a minority partner with a 40% interest in a partnership that owns and operates an office building near Dallas, Texas. During the first quarter of 1994, the partnership adopted a strategy of disposing of the property rather than continuing to hold the property as a long term investment. As a result, the managing partner evaluated the building for net realizable value, which resulted in a provision for possible loss of $4 million. PTR's share of the loss provision is $1.6 million as reflected in the December 31, 1994 statement
of earnings. PTR's net carrying value after the provision is $2.8 million. This provision has no impact on cash flow from operating activities nor does PTR have any financial obligation to the partnership.
PTR focuses its investment and development activities on multifamily properties. PTR will continue to aggressively manage its non-multifamily properties in order to maximize cash flow, and dispositions of such non- multifamily properties may occur as opportunities arise. Properties are periodically evaluated for net realizable value and provisions for possible losses are made if required.
Preferred Share Dividend
In November 1993, PTR issued $230 million of Preferred Shares at $25 per share that are entitled to receive an annual dividend of $1.75 per share (7.0% annual dividend rate), which amounted to $16.1 million for 1994 compared to $1.3 million for 1993. The Preferred Share dividends do not reduce the amount PTR has budgeted for Common Share distributions but do increase the percentage of the Common Share distribution that constitutes a non-taxable return of capital.
1993 COMPARED TO 1992
During 1993, PTR acquired 53 multifamily properties aggregating 13,772 units for a total purchase price, including planned renovations, of approximately $453.7 million, most of which was invested in the fourth quarter of 1993. In addition, PTR completed development of three multifamily properties aggregating 732 units in 1993. During 1992, PTR acquired 20 multifamily properties aggregating 5,512 units for a total purchase price, including planned renovations, of approximately $183.0 million, most of which was invested after April 30, 1992. In addition, two multifamily properties aggregating 354 units then under development were completed in 1992. In addition, rental rates from multifamily assets that were stabilized (see "Item 1. Business--Investment Analysis") during the fourth quarter of 1992 and throughout 1993 increased 6.98%.
The percentage of PTR's total rental income generated by multifamily properties was 93.2% in 1993 and 76.4% in 1992. This percentage will continue to increase in future periods due to multifamily properties acquired in 1993 and 1994 as discussed above and the sale of non-multifamily properties as discussed below.
During the period prior to a property being stabilized (see "Item 1. Business--Investment Analysis"), the REIT Manager's asset managers and the property managers begin implementing expense controls, reconfigure the resident mix, supervise renovations and implement a strategy to increase rental income. The full benefits of these changes are not reflected until after the properties are stabilized. As of December 31, 1993, 47% of the operating multifamily portfolio was stabilized as compared to 59% at December 31, 1992. For operating multifamily properties, rental expenses were 42.2% of rental revenues during 1993, compared to 42.1% in 1992.
Including the newly acquired and developed assets, net earnings increased $16.5 million (184%) for 1993 over 1992. The increased net earnings related primarily to property revenue increases of $45.2 million (145.8%), partially offset by higher rental expenses, which increased by $19.0 million (165.7%) for the period. Depreciation expense increased $5.2 million (97.9%) for 1993 over 1992. This increase is due to multifamily acquisitions and multifamily developments placed in service.
Properties Fully Operating Throughout Both Periods
Multifamily. Rental income for the nine multifamily properties fully operating throughout both years increased approximately $705,800 (6.4%) for 1993, compared to 1992, partially offset by increases in rental expenses of $410,100 (9.0%) and depreciation of $72,700 (4.6%). The increase primarily related to a 5.74%
average rental rate increase. Due primarily to commencement of major renovations at one of these properties and the temporary effects of a new development in one submarket, average occupancy decreased from 94.4% in 1992 to 92.8% in 1993.
Non-Multifamily. Rental income, rental expenses and depreciation for non- multifamily properties owned throughout both years decreased $107,300 (3.1%), $420,300 (97.5%) and $44,000 (8.1%), respectively, for 1993, compared to 1992. The decrease in rental expense was primarily due to a decrease in land lease expense as a result of PTR's acquisition of the land underlying PTR's Holiday Inn building in San Francisco. Not included in these results are operating results from the eight non-multifamily properties sold during 1993.
All Properties. For multifamily properties that were fully operating throughout both years and non-multifamily properties that were owned throughout both years, taken as a whole, rental income increased $598,600 (4.2%), rental expenses decreased $10,200 (.2%), and depreciation increased $83,900 (4.0%). Net income from property operations, after depreciation, for these properties increased $524,800 (7.2%) for 1993 over 1992.
Interest Income
Interest income for 1993 increased 26.5%, primarily resulting from the addition of five purchase money notes aggregating $6.8 million received in 1992 and four purchase money notes aggregating $12.4 million received in 1993 in conjunction with property sales.
Interest Expense
Mortgage interest expense decreased $1.4 million (66.3%) for 1993, compared to 1992. The decrease is attributable to interest savings resulting from prepayments and pay offs aggregating $8.1 million on mortgages during 1993, an increase of $1.8 million (184.9%) in capitalized interest during 1993 over 1992 due to increased levels of multifamily development activity, and lower interest rates on an adjustable rate mortgage.
Line of credit interest expense for 1993 was $2.1 million higher than for 1992, principally because of higher average outstanding balances and amortization of additional loan costs (commitment fees, title policies and legal expenses) relating to PTR's revolving credit facility, which was increased from $72 million to $200 million during 1993. Average borrowings were approximately $40.6 million (with an average interest rate of 6.3%) during 1993, as compared to average borrowings of $12.7 million (with an average interest rate of 6.6%) during 1992.
General and Administrative Expense including REIT Management Fee
The REIT Management fee paid by PTR fluctuates with the level of PTR's pre- REIT Management fee cash flow and therefore increased by $4.4 million (161%) in 1993 as compared to 1992 because cash flow increased substantially. See "--REIT Management Agreement." As PTR arranges amortizing long term debt as more fully described in "--Liquidity and Capital Resources" below, the REIT Management fee will effectively decline in proportion to PTR's earnings from operations because actual or assumed regularly scheduled principal payments, as defined in such agreement, associated with the long term debt will be deducted from the cash flow amount on which the REIT Management fee is based.
Property Sales and Provisions
PTR sold eight non-multifamily properties during 1993 at an aggregate gain of $2.3 million. The overall result of these dispositions, net of provisions for possible losses ($2.3 million), was immaterial to PTR's financial position and results of operations. The provision for possible losses ($2.3 million) relates to the write-down to the lower of cost and net realizable value of two non- multifamily properties, Academy Mart Shopping Center and Ontario Industrial Building. The Academy Mart Shopping Center was sold in the third
quarter of 1993. A provision of $1.2 million to reduce the property to its net realizable value was made in the second quarter. The single tenant occupant of the Ontario Industrial Building had indicated to PTR that it was not going to renew its lease which expired in early 1994. After reviewing the market conditions, it was determined that a write-down of $1.1 million was appropriate, which was recorded in the second quarter.
ENVIRONMENTAL MATTERS
PTR does not expect any environmental condition on its properties to have a material adverse affect upon its results of operations or financial position.
LIQUIDITY AND CAPITAL RESOURCES
The REIT Manager considers PTR's liquidity and ability to generate cash to be adequate and expects it to continue to be adequate to meet PTR's development, acquisition, operating, debt service and shareholder distribution requirements.
Net cash flow provided by operating activities increased by $45.4 million (92.1%) for the year ended December 31, 1994 as compared to 1993. Net cash flow provided by operating activities increased by $29 million (143.2%) for 1993 as compared to 1992. These increases are due primarily to multifamily property acquisitions and developments as described under "--Results of Operations" above.
Investing Activities
During the year ended December 31, 1994, PTR invested $381.2 million for the development, acquisition and renovation of multifamily properties and land, net of $56.6 million in mortgages assumed. During the year ended December 31, 1993, PTR invested $536.5 million for the acquisition, development and renovation of multifamily properties and land, net of $27 million in mortgages assumed. These developments, acquisitions and renovations were financed with cash on hand and borrowings under PTR's revolving line of credit, which were repaid with the proceeds from PTR's equity and debt offerings.
PTR's investing activities used $160.6 million (30%) less cash in 1994 as compared to 1993 as a result of lower levels of multifamily property acquisitions and $299.6 million (131%) more cash in 1993 as compared to 1992 as a result of an increase in multifamily property acquisitions and developments.
At March 23, 1995, PTR had unfunded development commitments for developments under construction of $96.8 million. Additionally, the land PTR owned or controlled through letters of intent or contingent contracts at such date, subject to PTR's final due diligence, will allow for the development of 8,197 additional multifamily units, which will be an important generator of growth for PTR in 1995 and beyond. The foregoing developments are subject to a number of conditions, and PTR cannot predict with certainty that any of them will be consummated.
Financing Activities
PTR's financing activities for the year ended December 31, 1994 provided $276.5 million compared to $478.3 million in 1993 as a result of fewer acquisitions. Net proceeds of equity offerings aggregated $101.1 million in 1994 as compared to $514.2 million in 1993. PTR also received proceeds from long term debt of $200 million in 1994. PTR's 1993 financing activities provided $293.2 million (158%) more cash flow than 1992 financing activities. The increase in cash flow provided by financing activities was primarily due to increased offering proceeds: net proceeds from equity offerings aggregating $514.2 million in 1993 as compared to $143.2 million in 1992. Proceeds from these offerings were used for development, acquisition and renovation of multifamily properties or to repay revolving credit balances incurred for such purposes and, in 1992, to purchase the land under the Holiday Inn.
On August 4, 1994, PTR consummated a conversion of its $200 million revolving line of credit facility with TCB and the other participating lenders into an unsecured facility, which was increased to $275 million and extended to August 15, 1996 on October 27, 1994 and was further increased to $350 million on March 23, 1995. The line of credit may annually be extended for an additional year with the approval of TCB and the other participating lenders. Borrowings bear interest at the greater of prime or the federal funds rate plus 0.5% or, at PTR's option, LIBOR plus 1.625% (which can vary from LIBOR plus 1.25% to LIBOR plus 2.0% based upon the rating of PTR's senior unsecured debt). Additionally, there is a commitment fee, ranging from 0.125% to 0.25% per annum on the average unfunded line of credit balance. All debt incurrences are subject to covenants that PTR maintain (i) an interest coverage ratio of not less than 2:1, (ii) a debt to tangible net worth ratio no greater than 1:1, (iii) a fixed charge ratio of no less than 1.4:1 and (iv) an unencumbered pool of real estate properties of which certain properties must meet certain occupancy requirements and which have an aggregate historical cost of at least 175% of unsecured indebtedness. PTR is in compliance with all debt covenants. Giving effect to the use of the proceeds from the subscription offering that closed on March 23, 1995, there would be no borrowings outstanding under the line of credit at March 23, 1995.
PTR expects to finance developments, acquisitions and renovations with cash on hand and borrowings under its line of credit prior to arranging long term capital in order to efficiently respond to market opportunities while minimizing the amount of cash invested in short term investments at lower yields. PTR believes that its current conservative ratio of long term debt to total long term capitalization, the sum of long term debt and shareholders' equity (26% at December 31, 1994 and 22% at March 23, 1995 on a pro forma basis, giving effect to the Merger and the concurrent subscription offering and property acquisitions through March 23, 1995), provides it considerable flexibility to prudently utilize long term debt as a future financing tool. PTR intends to limit the sum of long term debt and line of credit debt to less than 50% of the sum of total book capitalization. PTR expects to fund additional growth for the foreseeable future through further issuances of unsecured long term, fixed rate amortizing debt securities similar to the Notes issued in February 1994 and through its asset optimization strategy.
Based on the Merger, its recent subscription offering, debt issuance capacity, asset optimization strategy and current real estate and debt market conditions, PTR believes it has reached an optimal level of equity capitalization. Hence, PTR has no plans to raise additional capital through the equity markets. No assurance can be given that changes in market conditions or other factors will not affect these plans.
On March 23, 1995, PTR raised $216.3 million of net proceeds from a subscription offering of 13.2 million Common Shares at a price of $16.375 per Common Share, which was the same price per Common Share on which the exchange ratio for the Merger was based. The subscription offering closed concurrently with the consummation of the Merger. The subscription offering was designed to allow shareholders the opportunity to purchase Common Shares at the same price at which PACIFIC shareholders acquired Common Shares in the Merger and to maintain PTR's balance sheet ratios. Each holder of record of Common Shares on February 21, 1995 was entitled to subscribe for one Common Share for every 1.94 Common Shares held of record on such date and was entitled to oversubscribe for additional Common Shares to the extent that other shareholders did not fully subscribe for all Common Shares to which they were entitled. Security Capital Group acquired 3,053,435 Common Shares in the subscription offering pursuant to the oversubscription privilege.
On August 16, 1994, PTR raised $101.8 million of net proceeds from a rights offering of 5,593,718 Common Shares at a price of $18.25 per Common Share. PTR's shareholders of record on July 21, 1994 received a distribution of one right for each Common Share held of record. Eight rights were required to purchase one Common Share for $18.25 in the rights offering. Security Capital Group exercised in full its rights to acquire Common Shares in the offering at the same price paid by the public ($18.25 per Common Share) and acquired additional rights in open market purchases. Proceeds from the offering were used to
fund developments and to invest in additional multifamily properties in PTR's target market and to repay borrowings under PTR's line of credit.
On February 8, 1994, PTR issued $100 million of 6.875% Senior Notes due 2008 (the "2008 Notes") and $100 million of 7.5% Senior Notes due 2014 (the "2014 Notes," together with the 2008 Notes collectively referred to as the "Notes"). The 2008 Notes bear interest at 6.875% per annum and require annual principal payments of $12.5 million, commencing February 15, 2001. The 2014 Notes bear interest at 7.5% per annum and require aggregate annual principal payments of $10 million in 2009, $12.5 million in 2010, $15 million in 2011, $17.5 million in 2012, $20 million in 2013 and $25 million in 2014. In February 1994, PTR received $1.3 million in settlement of an interest protection agreement in the form of a Forward Treasury Lock Agreement entered into with an investment banker on January 28, 1994. The agreement included a determination date of February 1, 1994 and a settlement date of February 2, 1994. The notional amounts were $100 million with a reference price of 100.90625% and $75 million with a reference price of 110.4375%. On February 2, 1994, the settlement prices were 100.32813% and 109.46875%, respectively. There are no such agreements currently outstanding. Collectively, the Notes have an average life to maturity of 14.25 years and an average effective interest cost, inclusive of offering discounts, issuance costs and an interest rate protection agreement, of 7.37% per annum. The Notes are redeemable 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 Notes being redeemed plus accrued interest thereon to the redemption date plus a yield to maturity adjustment. The Notes are governed by the terms and provisions of an indenture agreement (the "Indenture") between PTR and State Street Bank and Trust Company, as trustee.
Under the terms of the Indenture, PTR can incur additional debt only if, after giving effect to the debt being incurred and application of proceeds therefrom, (i) the ratio of debt to total assets, as defined in the Indenture, does not exceed 60%), (ii) the ratio of secured debt to total assets, as defined in the Indenture, does not exceed 40%, and (iii) PTR's pro forma interest coverage ratio, as defined in the Indenture, for the four preceding fiscal quarters is not less than 1.5. PTR is in compliance with all debt covenants.
Distributions
PTR's current distribution policy is to pay quarterly distributions to holders of Common Shares based upon what it believes to be a prudent percentage of cash flow. Because depreciation is a non-cash expense, cash flow typically will be greater than net earnings attributable to Common Shares. Therefore, quarterly distributions paid will generally be higher than quarterly net earnings attributable to Common Shares.
Distributions paid on Common Shares exceeded net earnings attributable to Common Shares by $15.5 million, $5.0 million and $4.1 million for 1994, 1993 and 1992, respectively, resulting in corresponding decreases in shareholders' equity for each of the respective periods.
PTR announces the following year's projected annual distribution level after the Board's annual budget review and approval in December of each year. At its December 6, 1994 board meeting, the Board announced a projected increase in the annual distribution level from $1.00 to $1.15 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.
Pursuant to the terms of the Preferred Shares, PTR is restricted from declaring or paying any distributions with respect to its Common Shares unless all cumulative distributions with respect to the Preferred Shares have been paid or sufficient funds have been set aside for distributions that have been declared for the then current distribution period with respect to the Preferred Shares.
Funds from Operations means net earnings computed in accordance with GAAP, excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and certain amortization, and after
adjustments for unconsolidated partnerships and joint ventures. PTR believes that Funds from Operations is helpful in understanding a property portfolio in that such calculation reflects cash flow from operating activities and the properties' ability to support interest payments and general operating expenses before the impact of certain activities, such as gains or losses from property sales and changes in accounts receivable and accounts payable. Funds from Operations attributable to Common Shares increased $21.8 million (60%) to $58.2 million for 1994 from $36.4 million for 1993, and increased from $15.3 million to $36.4 million from 1992 to 1993. The increases resulted primarily from increased properties in operation. 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.
REIT MANAGEMENT AGREEMENT
Effective March 1, 1991, PTR entered into a REIT management agreement (as amended and restated, the "REIT Management Agreement") with the REIT Manager to provide management services to PTR. All officers of PTR are employees of the REIT Manager and PTR has no employees. See "Item 1. Business--The REIT Manager" for a description of the services included in the REIT Management fee.
The REIT Management Agreement requires PTR to pay a base annual fee of $855,000 plus 16% of cash flow as defined in the REIT Management Agreement ("Cash Flow") in excess of $4,837,000. In the REIT Management Agreement, Cash Flow is calculated by reference to PTR's cash flow from operations before deducting (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 have been none since inception of the REIT Management Agreement); and, after deducting actual or assumed regularly scheduled principal and interest payments for long term debt. The REIT Management Agreement provides that the long term debt described above under "--Liquidity and Capital Resources" will be treated as having regularly scheduled principal and interest payments like a 20-year, level monthly payment, fully amortizing mortgage, and the assumed principal and interest payments will be deducted from cash flow in determining the fee for future periods. Cash Flow does not include realized gains from dispositions of investments or income from cash equivalent investments. The REIT Manager also receives a fee of .25% per year on the average daily balance of cash equivalent investments. REIT management fees aggregated $13,182,000, $7,073,000 and $2,711,000 for the years ended December 31, 1994, 1993 and 1992, respectively.
PTR is obligated to reimburse the REIT Manager for certain expenses incurred by the REIT Manager on behalf of PTR, primarily travel expenses incurred in seeking financing, property acquisitions, property sales, property development and similar activities on behalf of PTR.
The REIT Management Agreement is renewable by PTR annually, subject to a determination by the independent Trustees that the REIT Manager's performance has been satisfactory and that the compensation payable to the REIT Manager is fair. PTR may terminate the REIT Management Agreement on 60 days' notice. Because of the year-to-year nature of the agreement, its maximum effect on PTR's results of operations cannot be predicted, other than that REIT Management fees will generally increase or decrease in proportion to cash flow increases or decreases.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PTR's Balance Sheets as of December 31, 1994 and 1993, its Statements of Earnings, Shareholders' Equity and Cash Flows for each of the years in the three-year period ended December 31, 1994 and Schedule III--Real Estate and Accumulated Depreciation, together with the report of KPMG Peat Marwick LLP, independent auditors, are included under Item 14 of this report and are incorporated herein by reference. Selected quarterly financial data is presented in Note 8 of Notes to Financial Statements.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE MATTERS
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information regarding executive officers of PTR's REIT Manager, see "Item 1. Business--Officers of PTR and Directors and Officers of the REIT Manager and Relevant Affiliates." The other information required by this Item 10 is incorporated herein by reference to the description under the captions "Election of Trustees" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in PTR's definitive proxy statement for its annual meeting of shareholders scheduled to be held June 13, 1995 (the "1995 Proxy Statement").
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to the description under the captions "Trustee Compensation," "PTR Officers--Employees of the REIT Manager" and "Performance Graph" in the 1995 Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to the description under the caption "Principal Shareholders" in the 1995 Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the description under the caption "Certain Relationships and Transactions" in the 1995 Proxy Statement.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as a part of this report:
(a) Financial Statements and Schedules:
1. Financial Statements: See Index to Financial Statements on page 38 of this report.
2. Financial Statement Schedules: Schedule III.
All other schedules have been omitted since the required information is presented in the financial statements and the related notes or is not applicable.
3. Exhibits: See Index to Exhibits, which is incorporated herein by reference.
(b) Reports on Form 8-K: The following reports on Form 8-K were filed during the last quarter of the period covered by this report:
(c) Exhibits:
The Exhibits required by Item 601 of Regulation S-K are listed in the Index to Exhibits, which is incorporated herein by reference.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders SECURITY CAPITAL PACIFIC TRUST:
We have audited the financial statements of SECURITY CAPITAL PACIFIC TRUST (formerly Property Trust of America) as listed in the accompanying index. In connection with our audits of the financial statements, we also have audited the financial statement schedule listed in the accompanying index. These financial statements and financial statement schedule are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SECURITY CAPITAL PACIFIC TRUST as of December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
El Paso, Texas February 28, 1995, except as to Note 10, which is as of March 23, 1995.
SECURITY CAPITAL PACIFIC TRUST
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
The accompanying notes are an integral part of the financial statements.
SECURITY CAPITAL PACIFIC TRUST
STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The accompanying notes are an integral part of the financial statements.
SECURITY CAPITAL PACIFIC TRUST
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1992, 1993, AND 1994 (IN THOUSANDS)
The accompanying notes are an integral part of the financial statements.
SECURITY CAPITAL PACIFIC TRUST
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
The accompanying notes are an integral part of the financial statements.
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
SECURITY CAPITAL PACIFIC TRUST ("PTR"), formerly Property Trust of America, is an equity real estate investment trust, organized under the laws of the state of Maryland, which primarily owns, develops, acquires and operates income-producing multifamily properties in the western United States.
Principles of Financial Presentation
The accounts of PTR and its wholly owned subsidiaries are consolidated in the accompanying financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
PTR considers all cash on hand, demand deposits with financial institutions and short term, highly liquid investments with original maturities of three months or less to be cash equivalents.
Real Estate and Depreciation
Real estate is carried at cost, which is not in excess of net realizable value.
Costs directly related to the acquisition (including certain renovation costs identified during PTR's pre-acquisition due diligence), development or improvement of real estate, are capitalized. Costs incurred in connection with the pursuit of unsuccessful acquisitions or developments are expensed at the time the pursuit is abandoned.
Depreciation is computed over the expected useful lives of depreciable property on a straight-line basis. Properties are depreciated principally over the following useful lives:
Repairs and Maintenance
Repairs and maintenance, other than acquisition related renovation expenditures, are expensed as incurred. PTR expenses carpet and appliance repairs and replacements after any acquisition related renovation expenditures for such items have been incurred.
Interest
During 1994, 1993 and 1992, the total interest paid in cash on all outstanding debt, net of interest capitalized, was $11,949,000, $2,231,000 and $2,654,000, respectively.
PTR capitalizes interest as part of the cost of real estate properties under development. Interest capitalized during 1994, 1993 and 1992 aggregated $6,029,000, $2,818,000 and $989,000, respectively.
Cost of Raising Capital
Costs incurred in connection with the issuance of equity securities are deducted from shareholders' equity. Costs incurred in connection with the incurrence or renewal of debt are capitalized, included with
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED) other assets and amortized over the term of the related loan in the case of incurrence costs or twelve months in the case of renewal costs. Amortization of loan costs included in interest expense for the years ended December 31, 1994, 1993 and 1992 was $1,903,000, $1,845,000, and $426,000, respectively.
Revenue Recognition
Rental and interest income are recorded on the accrual method of accounting. A provision for possible loss is made when collection of receivables is considered doubtful.
Federal Income Taxes
PTR has made an election to be taxed as a real estate investment trust under the Internal Revenue Code of 1986, as amended. PTR believes it qualifies as a real estate investment trust. Accordingly, no provisions have been made for federal income taxes in the accompanying financial statements.
Per Share Data
Per share data is computed based upon the weighted average number of Common Shares of Beneficial Interest, par value $1.00 per share ("Common Shares"), outstanding during the period. Exercise of the outstanding stock options would not have a material dilutive effect on earnings per share. The assumed conversion of Cumulative Convertible Series A Preferred Shares of Beneficial Interest, par value $1.00 per share ("Preferred Shares"), is anti-dilutive in 1994 and 1993.
Reclassifications
Certain of the 1993 and 1992 financial statements and notes to financial statements amounts have been reclassified to conform to the 1994 presentation.
(2) REAL ESTATE
Investments
Investments in real estate, at cost, were as follows (dollar amounts in thousands):
At December 31, 1994 PTR had unfunded commitments for developments under construction of $115.7 million.
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The change in investments in real estate, at cost, consisted of the following (in thousands):
Gains and Losses from Sales of Real Estate
PTR develops and acquires properties with a view to effective long term operation and ownership. Based upon PTR's market research and in an effort to optimize its portfolio allocation, PTR may from time to time seek to dispose of assets that in management's view do not meet PTR's long term investment criteria and redeploy the proceeds therefrom, preferably through like kind exchanges, into assets that it believes provide better long term growth opportunities.
PTR focuses its investment and development activities on multifamily properties. PTR will continue to aggressively manage its non-multifamily properties in order to maximize cash flow, and disposition of such non- multifamily properties may occur as opportunities arise. Properties are periodically evaluated for net realizable value and provisions for possible losses are made if required.
PTR is a minority partner with a 40% interest in a partnership which owns and operates an office building near Dallas, Texas. During the first quarter of 1994, the partnership adopted a strategy of disposing of the property rather than continuing to hold the property as a long term investment. As a result, the managing partner evaluated the building for net realizable value which resulted in a provision for possible loss of $4 million. PTR's share of the loss provision is $1.6 million as reflected in the December 31, 1994 statement of earnings. PTR's net carrying value after the provision is $2.8 million. This provision has no impact on cash flow from operating activities nor does PTR have any financial obligation to the partnership.
(3) BORROWINGS
Line of Credit
During 1994, PTR converted its $200 million revolving line of credit facility with Texas Commerce Bank, National Association, as agent bank for a group of lenders ("TCB"), into an unsecured facility and increased this line of credit from $200 million to $275 million. Borrowings bear interest at the greater of prime or federal funds rate plus 1/2% or at PTR's option, LIBOR plus 1.75% to 2% (varying depending upon the rating of PTR's senior unsecured debt by Standard & Poor's Corporation--1.75% at December 31, 1994). Additionally, there is a commitment fee of .125% per annum of the unfunded line of credit balance.
The TCB line matures August 1996 and may annually be extended for an additional year with the approval of TCB. All debt incurrences are subject to covenants, as more fully described in the loan agreement. PTR was in compliance with all covenants at December 31, 1994. (See Note 10.)
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A summary of PTR's line of credit borrowings is as follows (dollars in thousands):
Long Term Debt
On February 8, 1994, PTR issued $100 million of 6.875% Senior Notes due 2008 ("the 2008 Notes") and $100 million of 7.5% Senior Notes due 2014 ("the 2014 Notes", collectively referred to as "the Notes").
The 2008 Notes bear interest at 6.875% per annum and require annual principal payments of $12.5 million, commencing February 15, 2001. The 2014 Notes bear interest at 7.5% per annum and require annual principal payments of $10 million in 2009, $12.5 million in 2010, $15 million in 2011, $17.5 million in 2012, $20 million in 2013 and $25 million in 2014. Collectively, the Notes have an average life to maturity of 14.25 years and an average effective interest cost, net of offering discounts, issuance costs and proceeds from an interest rate protection agreement, of 7.37% per annum. The Notes are redeemable any time at the option of PTR, in whole or in part, at a redemption price equal to the sum of the principal amount of the Notes being redeemed plus accrued interest thereon to the redemption date plus a yield to maturity adjustment. The Notes are governed by the terms and provisions of an indenture agreement ("the Indenture") between PTR and State Street Bank and Trust Company, as trustee.
Under the terms of the Indenture, PTR can incur additional debt only if, after giving effect to the debt being incurred and application of proceeds therefrom, (i) the ratio of debt to total assets, as defined in the Indenture, does not exceed 60%, (ii) the ratio of secured debt to total assets, as defined in the Indenture, does not exceed 40%, and (iii) PTR's pro forma interest coverage ratio, as defined in the Indenture, for the four preceding fiscal quarters is not less than 1.5. As of December 31, 1994, PTR was in compliance with all debt covenants.
Based on market borrowing rates available to PTR for long term debt with similar terms and maturities, the fair value of long term debt was approximately $175.9 million at December 31, 1994, compared to book value of $200 million.
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Mortgages Payable
Mortgages payable consisted of the following at December 31, 1994 (dollars in thousands):
-------- (1) Amortizing monthly with a balloon payment due at maturity. (2) Adjusted weekly by the remarketing agent. Weighted average daily interest rate was 5.68% for 1994. (3) In 1990, the Las Flores apartments were refinanced pursuant to multi-family 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 bonds are guaranteed by the GNMA mortgage-backed securities program.
Mortgages payable are secured by real estate with an aggregate undepreciated cost of $156,510,000 at December 31, 1994. Based on market borrowing rates available to PTR for mortgages with similar terms and average maturities, the fair value of mortgages payable was approximately $96,493,000 and $51,350,000 as compared to a book value of $93,624,000 and $48,872,000 at December 31, 1994 and 1993, respectively.
The mortgages which secure tax exempt housing bonds contain covenants which require that a minimum percentage of units (generally 20% to 30%) be rented to individuals whose income does not exceed levels specified by U.S. Government programs. The tax exempt floating rate mortgage is secured by a letter of credit of $12,195,000. The fee for this letter of credit is 1.6% per annum of the outstanding mortgage payable balance. This letter of credit contains certain covenants, all of which PTR was in compliance with at December 31, 1994.
The change in mortgages payable consisted of the following (in thousands):
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Approximate principal payments due during each of the years in the five-year period ending December 31, 1999 are as follows (in thousands):
(4) DISTRIBUTIONS
PTR's current policy is to pay distributions to shareholders based upon funds from operations and aggregating annually at least 95% of its taxable income. Funds from operations is not to be construed as a substitute for "net earnings" in evaluating operating results nor as a substitute for "cash flow" in evaluating liquidity. Funds from operations for the three years ended December 31, 1994 was as follows (dollars in thousands):
For federal income tax purposes, the following summarizes the taxability of distributions paid on Common Shares in 1993 and 1992 and the estimated taxability for 1994:
On December 6, 1994 PTR declared a distribution of $.2875 per Common Share payable on February 13, 1995 to shareholders of record as of February 2, 1995. At the same time, PTR announced that it plans to pay a total distribution of $1.15 per Common Share in 1995.
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
On July 21, 1994, in addition to the 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 is taxable as ordinary income for federal income tax purposes.
For federal income tax purposes, the following summary reflects the taxability of dividends paid on Preferred Shares for the period from the date of issuance (November 29, 1993) through December 31, 1993 and the estimated taxability for 1994:
PTR's tax return for the year ended December 31, 1994 has not been filed, and the taxability information for 1994 is based upon the best available data. PTR's tax returns have not been examined by the Internal Revenue Service and, therefore, the taxability of the dividends is subject to change.
(5) MORTGAGE NOTES RECEIVABLE
The change in investments in mortgage notes receivable, which have originated principally in connection with PTR's sale of non-multifamily properties, consisted of the following (in thousands):
Interest rates on mortgage notes receivable range from 7.5% to 11% with a weighted average rate of 9.19%. Maturity dates on mortgage notes receivable range from 1995 to 2008.
The aggregate face amount of mortgage notes receivable at December 31, 1994 was $24,176,000. Aggregate cost for federal income tax purposes was the same as the balance at December 31 for the three years shown above. The carrying value of mortgage notes receivable at December 31, 1994 and 1993 approximates fair value.
(6) SHAREHOLDERS' EQUITY
Shares of Beneficial Interest
At December 31, 1994, 150,000,000 Shares of Beneficial Interest, $1.00 par value per share, were authorized. PTR's Board of Trustees is authorized to issue, from the authorized but unissued shares of PTR, preferred shares in series and to establish from time to time the number of preferred shares to be included in
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED) such series and to fix the designation and any preferences, conversion and other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms and conditions of redemption of the shares of each series.
Preferred Shares
The Preferred Shares have a liquidation preference of $25 per share for an aggregate liquidation preference of $230,000,000 plus any accrued but unpaid distributions. The net proceeds (after underwriting commission and other offering costs) of the Preferred Shares issued was $219,670,000. Holders of the Preferred Shares are entitled only to limited voting rights under certain conditions. Each Preferred Share is convertible, in whole or in part, at the option of the holder at any time, unless previously redeemed, into 1.2162 of PTR's Common Shares (a conversion price of $20.56 per share). Distributions on the Preferred Shares are cumulative in an amount per share equal to the greater of $1.75 per annum or the annualized quarterly PTR distribution rate on the Common Shares into which the Preferred Shares are convertible, payable quarterly in arrears on the last day of March, June, September and December of each year. The Preferred Shares are redeemable at the option of PTR after November 30, 2003.
Option Plan
In January 1987, PTR adopted its Share Option Plan for Outside Trustees (the "1987 Plan"). Under the 1987 Plan, there are 126,000 Common Shares approved which can be granted to non-employee Trustees. All options granted are for a term of five years and are exercisable in whole or in part. The exercise price of the options granted may not be less than the fair market value on the date of grant. At December 31, 1994 there were 20,000 options for Common Shares outstanding and exercisable under the 1987 Plan at exercise prices ranging from $10.625 to $18.875 per Common Share.
Ownership Restrictions and Significant Shareholder
PTR's Restated Declaration of Trust and the Articles Supplementary, restrict beneficial ownership (or ownership generally attributed to a person under the REIT tax rules) of PTR's outstanding shares by a single person, or persons acting as a group, to 9.8% of the Common Shares and 25% of the Preferred Shares. The purpose of these provisions are to assist in protecting and preserving PTR's REIT status and to protect the interests 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 Internal Revenue Code of 1986, as amended, not more than 50% in value of its outstanding capital shares may be owned by five or fewer individuals at any time during the last half of PTR's taxable year. The provision permits five persons to acquire up to a maximum of 9.8% each of the Common Shares, or an aggregate of 49% of the outstanding Common Shares, and thus assists the Trustees in protecting and preserving PTR's REIT status for tax purposes.
Common Shares owned by a person or group of persons in excess of the 9.8% limit are subject to redemption by PTR. The provision does not apply where a majority of the Board of Trustees, in its sole and absolute discretion, waives such limit after determining 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.
The Board of Trustees has permitted Security Capital Group Incorporated (which reflects the imminent name change from Security Capital Realty Incorporated, referred to herein as "Security Capital Group"), the owner of the REIT Manager (see Note 7), to acquire up to 49% of PTR's outstanding Common Shares. Security Capital Group's ownership of Common Shares is attributed for tax purposes to its shareholders.
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Security Capital Group owned 31.85% of PTR's total outstanding Common Shares at December 31, 1994 (See Note 10). Pursuant to an agreement between Security Capital Group and PTR, Security Capital Group has agreed to acquire no more than 49% of the Common Shares outstanding, except pursuant to an all-cash tender offer for all Common Shares held open for 90 days. Security Capital Group would have no limitation on making a tender offer if an unrelated third party commences such a tender offer.
Shareholder Purchase Rights
On February 23, 1990, PTR declared a dividend distribution of one shareholder purchase right ("Right") for each outstanding Common Share to be distributed to all holders of record of the Common Shares on February 23, 1990. Each Right entitled the holder to purchase one Common Share for an exercise price of $32.50 per share, subject to adjustment as provided in the Rights Agreement. The Rights were exercisable only if a person or group acquired 20% or more of PTR's Common Shares (32% in the case of Security Capital Group and certain defined affiliates) or announced a tender offer for 25% or more of the Common Shares. Under certain circumstances, including a shareholder acquisition of 20% or more of the Common Shares, each Right would entitle the holder to purchase Common Shares or securities of the acquiring company, which would have a dilutive effect on the acquiring company and deter it from taking coercive actions against PTR shareholders. The Rights held by certain 20% shareholders would be exercisable.
On July 11, 1994, the Board of Trustees of PTR announced the redemption, effective at the close of business on July 21, 1994, of the shareholder purchase rights issued pursuant to the Rights Agreement, dated as of February 23, 1990, as amended. Pursuant to the redemption, each holder of record at the close of business on July 21, 1994 was entitled to receive $0.01 per shareholder purchase right. The redemption price was paid on August 12, 1994.
In addition, the Board of Trustees declared a distribution of one preferred share purchase right (a "Purchase Right") for each Common Share outstanding, payable to holders of Common Shares of record at the close of business on July 21, 1994. Each Purchase Right entitles the holder under certain circumstances to purchase from PTR one one-hundredth of a share of Series B Junior Participating Preferred Share, par value $1.00 per share (the "Participating Preferred Shares"), at a price of $60.00 per one one-hundredth of a Participating Preferred Share, subject to adjustment. Purchase Rights are exercisable when a person or group of persons acquires 20% or more of the outstanding Common Shares (49% in the case of Security Capital Group and certain defined affiliates) or announces a tender offer for 25% or more of the outstanding Common Shares. Under certain circumstances, each Purchase Right entitles the holder to purchase, at the Purchase Right's then current exercise price, a number of Common Shares having a market value of twice the Purchase Right's exercise price. The acquisition of PTR pursuant to certain mergers or other business transactions would entitle each holder to purchase, at the Purchase Right's then current exercise price, a number of the acquiring company's common shares having a market value at that time equal to twice the Purchase Right's exercise price. The Purchase Rights will expire in July 2004 and are subject to redemption in whole, but not in part, at a price of $0.01 per Purchase Right payable in cash, shares of PTR or any other form of consideration determined by PTR's Board of Trustees.
Shelf Registration
On May 13, 1994 and December 1, 1994, PTR filed additional shelf registration statements with the Securities and Exchange Commission. PTR registered an aggregate of $650 million of securities ($325 million of securities in each shelf registration statement) which can be issued in the form of debt securities, preferred shares of beneficial interest, common shares of beneficial interest, shareholder purchase rights or subscription rights for common shares of beneficial interest. As of December 31, 1994, $564.8 million in securities were available to be issued under PTR's shelf registrations. (See Note 10)
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(7) REIT MANAGEMENT AND PROPERTY MANAGEMENT AGREEMENTS
Effective March 1, 1991, PTR entered into a REIT management agreement (the "REIT Management Agreement") with Security Capital Pacific Incorporated (the "REIT Manager"), formerly Security Capital (Southwest) Incorporated to provide management services to PTR. The REIT Manager is a subsidiary of Security Capital Group (see note 6). All officers of PTR are employees of the REIT Manager and PTR has no employees. The REIT Manager provides both strategic and day-to-day management of PTR, including research, investment analysis, acquisition and development, asset management, capital markets, legal and accounting services.
The REIT Management Agreement requires PTR to pay a base annual fee of $855,000 plus 16% of cash flow as defined in the REIT Management Agreement ("Cash Flow") in excess of $4,837,000. In the REIT Management Agreement, Cash Flow is calculated by reference to PTR's cash flow from operations before deducting (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 actual or assumed regularly scheduled principal and interest payments on long term debt. The REIT Management Agreement has been amended so that the long term senior notes described in Note 3 will be treated as if they had regularly scheduled principal and interest payments like a 20-year level monthly payment, fully amortizing mortgage and the assumed principal and interest payments will be deducted from cash flow in determining the fee for future periods. Cash Flow does not include realized gains from dispositions of investments or income from cash equivalent investments. The REIT Manager also receives a fee of .25% per year on the average daily balance of cash equivalent investments.
REIT management fees aggregated $13,182,000, $7,073,000 and $2,711,000 for the years ended December 31, 1994, 1993 and 1992, respectively.
PTR is obligated to reimburse the REIT Manager for certain expenses incurred by the REIT Manager on behalf of PTR, primarily travel expenses incurred in seeking financing, property acquisitions and developments, property sales and similar activities on behalf of PTR.
The REIT Management Agreement is renewable by PTR annually, subject to a determination by the independent Trustees that the REIT Manager's performance has been satisfactory and that the compensation payable to the REIT Manager is fair. PTR may terminate the REIT Management Agreement on 60 days' notice. Because of the year-to-year nature of the agreement, its maximum effect on PTR's results of operations cannot be predicted, other than that REIT management fees will generally increase or decrease in proportion to cash flow increases or decreases.
SCG Realty Services Incorporated ("SCG Realty Services") has managed and currently manages a substantial majority of PTR's operating multifamily properties. For the years ended December 31, 1994, 1993 and 1992, PTR paid SCG Realty Services aggregate fees of $7,148,000, $3,862,000 and $1,424,000, respectively. In addition to property management, SCG Realty Services has performed certain due diligence services for PTR's acquisitions. Effective October 1, 1994, SCG Realty Services no longer performed due diligence services for PTR. Security Capital Group is the sole shareholder of SCG Realty Services. Rates for services performed by SCG Realty Services are subject to annual approval by PTR's independent Trustees (who receive an annual review from an independent third party) and are at rates prevailing in the markets in which PTR operates.
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(8) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data (in thousands except for per share amounts) for 1994 and 1993 is as follows:
(9) COMMITMENTS AND CONTINGENCIES
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 all claims and litigation, individually or in the aggregate, will have a material adverse effect on its business, financial position or results of operations.
PTR is subject to environmental regulations related to the ownership, operation, development and acquisition of real estate. As part of due diligence procedures, since 1984 PTR has conducted Phase I environmental assessments on each property prior to acquisition. The cost of complying with environmental regulations was not material to PTR's results of operations for any of the years in the three year period ended
SECURITY CAPITAL PACIFIC TRUST
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED) December 31, 1994. PTR is not aware of any environmental condition on any of its properties which is likely to have a material adverse effect on PTR's financial condition or results of operations.
(10) SUBSEQUENT EVENTS
On March 23, 1995, PTR acquired Security Capital Pacific Incorporated ("PACIFIC"). PACIFIC was a private multifamily REIT controlled by Security Capital Group, PTR's principal shareholder. Under the terms of the merger PTR issued 8,468,460 shares to PACIFIC stockholders which represented .611 Common Shares of PTR for each share of PACIFIC common stock. The exchange ratio was fixed on the date of the Merger Agreement (December 6, 1994) and was based on PTR's then trading price per Common Share of $16.375. PTR changed its name to Security Capital Pacific Trust in conjunction with the merger in order to more accurately reflect PTR's expanded target market.
Concurrently with the consummation of the merger, PTR completed a subscription offering of Common Shares pursuant to which PTR received subscriptions for $216.6 million (13.2 million Common Shares). The subscription offering was designed to allow shareholders of PTR to purchase Common Shares at the same price PACIFIC shareholders were acquiring Common Shares in the Merger ($16.375 per Common Share). Security Capital Group purchased $50 million (3.1 million) of Common Shares of the subscription offering.
Concurrent with the merger, PTR increased its unsecured revolving line of credit facility to $350 million and received a reduction in the interest rate to the greater of prime or the federal funds rate plus 0.50% or, at PTR's option, LIBOR plus 1.625% (which can vary from LIBOR plus 1.25% to LIBOR plus 2.0% based upon the rating of PTR's senior unsecured debt).
In connection with such merger, PTR paid off the balance outstanding ($51.9 million) on PACIFIC's line of credit and assumed the following mortgages relating to PACIFIC properties acquired (unaudited, dollars in thousands):
-------- (1) Amortizing monthly with a balloon payment due at maturity.
On March 17, 1995, the United States District Court for the Western District of Texas, El Paso Division granted defendants' motion to dismiss with prejudice the action entitled Ferro v. C. Ronald Blankenship, et al. (Case No. EP 95 CA 004) filed on January 4, 1995 by a party alleging to be a shareholder of PTR against PTR, PACIFIC, Security Capital Group and the individual members of the PTR Board. The lawsuit had alleged breaches of fiduciary duties and other matters pertaining to the merger of PACIFIC with and into PTR. PTR believes that the lawsuit was without merit and will not have any material adverse effect on PTR's financial condition or results of operations.
SCHEDULE III
SECURITY CAPITAL PACIFIC TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1994 (IN THOUSANDS)
(see notes following table)
(see notes following table)
(see notes following table)
------- (a) Phase I (120 units) was developed in 1980; Phase II (60 units) was developed in 1981; and Phase III (288 units) was developed in 1983. (b) As of 12/31/94, property was undergoing development. (c) The Ontario Industrial property was written down by $1,100,000 in June 1993 to more properly reflect the property's net realizable value. (d) As of December 31, 1994, the aggregate cost and net investment cost for federal income tax purposes of PTR's investment in real estate amounted to $1,283,894,000 and $1,238,634,000, respectively. (e) Other investments represent PTR's ownership percentage in a joint venture, as well as investment in a financing lease. (f) Phase I (84 units) was developed in 1970 and Phase II (100 units) was developed in 1981.
The following is a reconciliation of the carrying amount and related accumulated depreciation of PTR's investment in real estate, at cost (in thousands):
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of Security Capital Pacific Trust, a real estate investment trust, and the undersigned Trustees and officers of Security Capital Pacific Trust, hereby constitutes and appoints C. Ronald Blankenship, William Kell, Paul E. Szurek, Ariel Amir, Edward J. Schneidman and Michael T. Blair its or his true and lawful attorneys-in-fact and agents, for it or him and in its or his name, place and stead, in any and all capacities, with full power to act alone, to sign any and all amendments to this report, and to file each such amendment to this report, with all exhibits thereto, and any and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully to all intents and purposes as it or he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them may lawfully do or cause to be done by virtue hereof.
SECURITY CAPITAL PACIFIC TRUST
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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
/s/ C. Ronald Blankenship By: _________________________________ C. Ronald Blankenship Chairman (Principal Executive Officer)
Date: March 30, 1995
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED.
INDEX TO EXHIBITS
Certain of the following documents are filed herewith. Certain other of the following documents have been previously filed with the Securities and Exchange Commission and, pursuant to Rule 12b-32, are incorporated herein by reference.