- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER SEPTEMBER 30, 1996 Commission File Number 0-8725 PACIFIC REAL ESTATE INVESTMENT TRUST A CALIFORNIA TRUST I.R.S. Employer Identification No. 94-1572930 1010 El Camino Real, Suite 210 Menlo Park, CA 94025 Telephone: (415) 327-7147 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report. $10 Par Value, 3,706,845 shares - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PACIFIC REAL ESTATE INVESTMENT TRUST PART I - FINANCIAL INFORMATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) ITEM I - FINANCIAL STATEMENTS THREE MONTHS ENDED NINE MONTHS ENDED ------------------ ----------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- ------------- ------------- 1996 1995 1996 1995 ---- ---- ---- ---- Rental revenues. . . . . . . . . . . . . . . . . . . . . $1,371,000 $1,875,000 $4,698,000 $6,882,000 ---------- ---------- ---------- ---------- Operating expenses (including related party amounts of $113,000 three months ended September 30, 1996 and $374,000 nine months ended September 30, 1996, $152,000 three months ended September 30, 1995 and $548,000 nine months ended September 30, 1995) Operating . . . . . . . . . . . . . . . . . . . . . 468,000 525,000 1,322,000 1,635,000 Property tax. . . . . . . . . . . . . . . . . . . . 127,000 169,000 414,000 580,000 General and administrative. . . . . . . . . . . . . 127,000 141,000 386,000 508,000 Depreciation and amortization . . . . . . . . . . . 576,000 679,000 1,687,000 2,226,000 Property management fees. . . . . . . . . . . . . . 46,000 67,000 160,000 244,000 ---------- ---------- ---------- ---------- Total operating expenses . . . . . . . . . . . . 1,344,000 1,581,000 3,969,000 5,193,000 ---------- ---------- ---------- ---------- Operating income . . . . . . . . . . . . . . . . . . . . 27,000 294,000 729,000 1,689,000 ---------- ---------- ---------- ---------- Other income/(expense): Interest income . . . . . . . . . . . . . . . . . . 153,000 162,000 470,000 475,000 Interest expense. . . . . . . . . . . . . . . . . . (791,000) (1,184,000) (2,686,000) (4,179,000) Reincorporation expenses. . . . . . . . . . . . . . (9,000) (139,000) Gain(loss) on property sale . . . . . . . . . . . . (20,000) 772,000 Loss on sale of options . . . . . . . . . . . . . . (102,000) ---------- ---------- ---------- ---------- Total other income/(expense) . . . . . . . . . . (658,000) (1,031,000) (1,444,000) (3,945,000) ---------- ---------- ---------- ---------- Net loss before minority interest. . . . . . . . . . . . (631,000) (737,000) (715,000) (2,256,000) ---------- ---------- ---------- ---------- Minority interest in joint venture . . . . . . . . . . . (109,000) (83,000) (313,000) (253,000) ---------- ---------- ---------- ---------- Net loss . . . . . . . . . . . . . . . . . . . . . . . . (740,000) (820,000) (1,028,000) (2,509,000) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net loss per share of beneficial interest. . . . . . . . $ (0.20) $ (0.22) $ (0.28) $ (0.68) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- See notes to consolidated financial statements. Page 2 of 7 PACIFIC REAL ESTATE INVESTMENT TRUST CONSOLIDATED BALANCE SHEETS (UNAUDITED) ASSETS SEPTEMBER 30, DECEMBER 31, ------------- ------------ 1996 1995 ---- ---- Investment in commercial properties: Operating properties: Land . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,979,000 $ 14,308,000 Buildings and improvements . . . . . . . . . . . . . . . 42,518,000 56,345,000 Accumulated depreciation . . . . . . . . . . . . . . . . (16,940,000) (18,375,000) ------------- ------------- Operating properties - net . . . . . . . . . . . . . . . 36,557,000 52,278,000 Mortgage notes receivable. . . . . . . . . . . . . . . . . . 6,570,000 6,565,000 Tenant and other notes receivable - net. . . . . . . . . . . 184,000 246,000 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 510,000 308,000 Restricted cash. . . . . . . . . . . . . . . . . . . . . . . 1,294,000 100,000 Accounts receivable (net of allowance of $119,000 in 1996 and $125,000 in 1995) . . . . . . . . . . . . . . . . . 460,000 891,000 Deferred lease commissions - net . . . . . . . . . . . . . . 431,000 742,000 Deferred financing costs - net . . . . . . . . . . . . . . . 242,000 440,000 Other assets . . . . . . . . . . . . . . . . . . . . . . . . 1,032,000 1,305,000 ------------- ------------- Total. . . . . . . . . . . . . . . . . . . . . . . . . . 47,280,000 62,875,000 ------------- ------------- ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Mortgage loans . . . . . . . . . . . . . . . . . . . . . . $ 25,773,000 $ 36,818,000 Short-term notes . . . . . . . . . . . . . . . . . . . . . 7,245,000 11,190,000 Security deposits. . . . . . . . . . . . . . . . . . . . . 137,000 231,000 Accounts payable and other liabilities . . . . . . . . . . 1,070,000 566,000 ------------- ------------- Total liabilities. . . . . . . . . . . . . . . . . . . . 34,225,000 48,805,000 ------------- ------------- Commitments and contingencies Minority interest in joint venture . . . . . . . . . . . . . 3,334,000 3,321,000 Shareholders' Equity: Shares of beneficial interest, $10 par value, authorized: 1996 and 1995, 10,611,863; shares issued and outstanding: 1996 and 1995, 3,706,845 . . . . . . . . . 37,068,000 37,068,000 Additional paid-in capital . . . . . . . . . . . . . . . . . 11,009,000 11,009,000 Distributions in excess of net income. . . . . . . . . . . . (38,356,000) (37,328,000) ------------- ------------- Shareholders' equity - net . . . . . . . . . . . . . . . . . 9,721,000 10,749,000 ------------- ------------- Total. . . . . . . . . . . . . . . . . . . . . . . . . . $ 47,280,000 $ 62,875,000 ------------- ------------- ------------- ------------- See notes to consolidated financial statements. Page 3 of 7 PACIFIC REAL ESTATE INVESTMENT TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the nine months ended September 30, September 30, ------------- ------------- 1996 1995 ---- ---- Cash Flow from Operating Activities: Net loss. . . . . . . . . . . . . . . . . . . . . . . . . $ (1,028,000) $ (2,509,000) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation . . . . . . . . . . . . . . . . . . . . . . 1,460,000 1,912,000 Amortization of note receivable discount . . . . . . . . (17,000) (59,000) Amortization of deferred cost. . . . . . . . . . . . . . 223,000 283,000 Minority interest in joint venture's operations. . . . . 313,000 254,000 Provision for doubtful receivables . . . . . . . . . . . 77,000 79,000 Gain on sale of property . . . . . . . . . . . . . . . . (772,000) Loss on sale of options. . . . . . . . . . . . . . . . . 102,000 Changes in operating assets and liabilities Accounts payable and other liabilities . . . . . . . . . 513,000 (1,248,000) Security deposits. . . . . . . . . . . . . . . . . . . . 29,000 (65,000) Deferred lease commissions . . . . . . . . . . . . . . . (79,000) (63,000) Accounts receivable. . . . . . . . . . . . . . . . . . . 339,000 181,000 Other assets . . . . . . . . . . . . . . . . . . . . . . 199,000 (54,000) ------------- ------------- Net cash provided (used) by operating activities . . . . . 1,257,000 (1,187,000) ------------- ------------- Cash Flow from Investing Activities: Increase in restricted cash. . . . . . . . . . . . . . . (1,194,000) Construction of properties . . . . . . . . . . . . . . . (220,000) (23,000) Collection of notes receivable . . . . . . . . . . . . . 74,000 59,000 Additions to notes receivable. . . . . . . . . . . . . . (4,000) Proceeds from sale of Lakeshore. . . . . . . . . . . . . 14,043,000 Proceeds from sale of Menlo Center . . . . . . . . . . . 4,845,000 Uses from sale of options. . . . . . . . . . . . . . . . (102,000) ------------- ------------- Net cash provided by investing activities. . . . . . . . . 3,505,000 13,973,000 ------------- ------------- Cash Flow from Financing Activities: Proceeds from short-term notes . . . . . . . . . . . . . 455,000 100,000 Re-Payment of mortgage loans . . . . . . . . . . . . . . (315,000) (4,566,000) Re-Payment of short-term notes . . . . . . . . . . . . . (4,400,000) (5,045,000) Re-Payment of unsecured loans. . . . . . . . . . . . . . (3,000,000) Distributions to joint venture partner . . . . . . . . . (300,000) (300,000) ------------- ------------- Net cash used by financing activities. . . . . . . . . . . (4,560,000) (12,811,000) ------------- ------------- Increase (decrease) in cash . . . . . . . . . . . . . . . 202,000 (25,000) Cash, January 1 . . . . . . . . . . . . . . . . . . . . 308,000 666,000 ------------- ------------- Cash, September 30. . . . . . . . . . . . . . . . . . . 510,000 641,000 ------------- ------------- ------------- ------------- NON CASH TRANSACTIONS Assumption of mortgage note payable by the buyers of Lakeshore Plaza Shopping Center for $15,826,000 in 1995 and Menlo Center for $10,730,000 in 1996. See notes to consolidated financial statements. Page 4 of 7 PACIFIC REAL ESTATE INVESTMENT TRUST NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED) Basis of Presentation The accompanying unaudited financial statements include all adjustments which are, in the opinion of management, necessary for fair presentation of the Trust's financial position, including changes therein, and results of operations for the interim period reported upon. Such statements have been prepared from the Trust's accounting records in accordance with the instructions to Form 10-Q. Income Taxes Since it is the policy of the Trust to distribute amounts approximately equal to its taxable income plus depreciation, no provision for income taxes has been made in the accompanying financial statements. Sale of Menlo Center The Trust sold Menlo Center on February 29, 1996. The sale price was $16,200,000. The buyer assumed the existing financing in the amount of $10,730,102. After payment of closing costs, transfer taxes, real estate commissions and miscellaneous selling expenses, all totalling approximately $445,000, the net proceeds of approximately $4,845,000 were used to repay short-term debt and to provide working capital. Additional expenses in the second and third quarter of $180,000 represent expenses per the terms of the sale contract. Under the terms of the sale contract, the Trust is obligated to subsidize the buyer's net operating income to the extent necessary to assure the buyer of an 8.5% investment yield from the ownership and operation of Menlo Center. The Trust's liability in this respect extends to the maturity date of the existing First Trust Deed financing which the buyer assumed in the purchase. The financing expires in 2000. Monterey Plaza In August 1996, HomeBase assigned its lease to Wal-Mart, making a net payment to the Trust of $964,000 as consideration. The cash proceeds from this transaction were placed in a restricted cash account, subject to the terms of the first mortgage lender and the demand of another tenant. Under the terms of Wal-Mart's assumption, the lease was substantially modified. Reclassifications Certain 1995 amounts have been reclassified to conform with the 1996 presentation. Related Party Transactions Fees paid or payable to the Advisor and Menlo Management Company for three months and nine months ended 1996 and 1995 were as follows: Three months ended Nine months ended Sept 30, 1996 Sept 30, 1995 Sept 30, 1996 Sept 30, 1995 ------------- ------------- ------------- ------------- ADVISOR Advisory fee - .1% of Assets . . . . $ 12,000 $ 16,000 $ 38,000 $ 53,000 MENLO MANAGEMENT COMPANY Property management fees . . . . . . 46,000 66,000 160,000 243,000 Administrative services. . . . . . . 38,000 41,000 113,000 156,000 Lease commissions. . . . . . . . . . 29,000 25,000 56,000 43,000 Loan fees. . . . . . . . . . . . . . 17,000 26,000 63,000 88,000 Rent . . . . . . . . . . . . . . . . 3,000 6,000 --------- --------- --------- --------- Total. . . . . . . . . . . . . . . 142,000 177,000 430,000 589,000 --------- --------- --------- --------- --------- --------- --------- --------- Net Income Per Share of Beneficial Interest Net income per share of beneficial interest is computed by dividing net income by the weighted average number of shares outstanding for the three months and nine months ended September 30, 1996 and 1995 were as follows: 1996 1995 ---- ---- Weighted average number of shares outstanding 3,706,845 3,706,845 Page 5 of 7 PACIFIC REAL ESTATE INVESTMENT TRUST PART I - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND OF OPERATIONS. (1) LIQUIDITY AND CAPITAL RESOURCES: Cash flow provided by operating activities was $1,257,000 for the nine months ended September 30, 1996 as compared to cash used of $1,187,000 for the nine months ended September 30, 1995. The net change is primarily due to the sale of both Lakeshore Plaza Shopping Center in 1995 and Menlo Center in 1996, partially offset by establishment of an impound account for restricted cash for Monterey Plaza. Cash flow provided by investing activities was $3,505,000 for the nine months ended September 30, 1996 compared to $13,973,000 for the nine months ended September 30, 1995. The reduction in cash flow from this source results from the difference in the cash proceeds arising from the sale of Menlo Center in 1996 compared to the cash proceeds arising from the sale of Lakeshore Plaza Shopping Center in March 1995, partially offset by an increase in restricted cash for the impound account set up for Monterey Plaza. Cash flow used by financing activities was $4,560,000 for the nine months ended September 30, 1996 as compared to $12,811,000 for the nine months ended September 30, 1995. This reduction in 1996 is due to repayment of a smaller amount of short term notes payable as a result of the sale of Menlo Center as compared to the repayment of a larger value of unsecured notes payable and short term notes payable resulting from the sale of Lakeshore Plaza Shopping Center in 1995. The Trust's other sources of liquidity include: (1) extension of short-term notes payable for periods not to exceed five years; (2) approximately $6,570,000 in mortgage loans receivable which mature at various dates over the next five years. (2) MATERIAL CHANGES IN RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 1996 VS. 1995: Net loss for the nine months ended September 30, 1996 was $1,028,000 as compared to a net loss of $2,509,000 for the nine months ended September 30, 1995. During the first nine months rental revenues decreased from $6,882,000 in 1995 to $4,698,000 as a result of declining revenues at El Portal Shopping Center and the sales of both Lakeshore Plaza Shopping Center in March 1995 and Menlo Center in February 1996. Operating expenses decreased from $1,635,000 in 1995 to $1,322,000 in 1996, a decrease of $313,000 or 19% due to the sales of Lakeshore Plaza Shopping Center in 1995 and Menlo Center in 1996. This decrease was partially offset by an increase in ground lease rental expense for leased land adjacent to El Portal Shopping Center. Property taxes decreased from $580,000 in 1995 to $414,000 in 1996, a decrease of $166,000, or 29%. Property management fees decreased from $244,000 in 1995 to $160,000 in 1996, a decrease of $84,000, or 34%. Depreciation and Amortization decreased from $2,226,000 in 1995 to $1,687,000 in 1996, a decrease of $539,000, or 24%. Each of these decreases resulted from the sales of Lakeshore Plaza Shopping Center in March 1995 and of Menlo Center in February 1996. General and administrative expense decreased from $508,000 in 1995 to $386,000 in 1996, a decrease of $122,000 or 24% due to cost saving measures and reduced administrative activity. Interest expense decreased by $1,493,000, or 36%, from $4,179,000 in 1995 to $2,686,000 in 1996. Of this decrease $330,000 is due to the sale of Lakeshore Plaza Shopping Center in 1995, $604,000 is due to the sale of Menlo Center in 1996, and $463,000 is due to the repayment of an unsecured note payable and short term notes payable which were paid off in 1995 and 1996. Material changes for the three months ended September 30, 1996 vs 1995 were for the same reason in relative proportionate amounts as those shown for the nine months. ITEM 6 (b) - Report on Form 8K was filed on March 14, 1996. Page 6 of 7 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned. PACIFIC REAL ESTATE INVESTMENT TRUST Date: October 31, 1996 By: /s/ ROBERT CH. GOULD ----------------- ------------------------------------- Robert Ch. Gould VICE PRESIDENT Date: October 31, 1996 By: /s/ HARRY E. KELLOGG ----------------- ------------------------------------- Harry E. Kellogg TREASURER Page 7 of 7