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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15d
OF THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER: 001-13243
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PAN PACIFIC RETAIL PROPERTIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
MARYLAND 33-0752457
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) No.)
1631-B SOUTH MELROSE DRIVE, 92083
VISTA, CALIFORNIA (zip code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (760) 727-1002
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $0.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the shares of common stock held by
non-affiliates was approximately $178,613,400 based upon the closing price on
the New York Stock Exchange for such shares of $22.188 on March 17, 1998.
As of March 17, 1998, the number of shares of the Registrant's common stock
outstanding was 16,814,012.
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DOCUMENTS INCORPORATED BY REFERENCE
Part III of this report on Form 10-K incorporates by reference information
from the Registrant's definitive proxy statement to be filed with the Securities
and Exchange Commission within 120 days of the close of the Registrant's fiscal
year.
PAN PACIFIC RETAIL PROPERTIES, INC.
TABLE OF CONTENTS
PART I
PAGE
----
ITEM 1. BUSINESS.................................................... 1
ITEM 2. PROPERTIES.................................................. 9
ITEM 3. LEGAL PROCEEDINGS........................................... 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 17
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA........................ 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 26
ITEM 11. EXECUTIVE COMPENSATION...................................... 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K....................................................... 27
PART I
ITEM 1. BUSINESS
Pan Pacific Retail Properties, Inc. (the "Company"), a self-administered and
self-managed real estate investment trust (a "REIT"), was formed in April 1997
to continue and expand the acquisition, ownership, management, leasing and
development business of Pan Pacific Development (U.S.) Inc. and its affiliates
(collectively, "PPD"). The Company's portfolio consists principally of community
and neighborhood shopping centers predominantly located in four key western U.S.
markets. On August 13, 1997, the Company completed its initial public offering
(the "IPO") of 7,000,000 shares of common stock, par value $.01 per share (the
"Common Stock") at $19.50 per share. On September 8, 1997, the Company issued an
additional 1,050,000 shares of Common Stock at $19.50 upon the Company's
underwriters full exercise of their over-allotment option.
As of December 31, 1997, the Company owned or controlled a portfolio of 32
shopping center properties (collectively, the "Properties"), of which 28 are
located in the western United States including seven in Northern California,
eight in Southern California, six in Las Vegas, Nevada and seven in the Pacific
Northwest (Washington and Oregon).
The Company employed 65 people as of December 31, 1997, including five
executive officers and senior personnel in the areas of administration,
accounting services, property management, maintenance, design, leasing,
acquisitions and business development. The Company's executives offices are
located at 1631-B South Melrose Drive, Vista, California, and its telephone
number is (760) 727-1002. In addition to personnel located at its executive
offices, the Company operates regional offices in Las Vegas, Nevada; Kent,
Washington; Chino, California; and Sacramento, California. Each of the regional
offices is responsible for property maintenance, management and leasing.
The Company plans to make an election to be taxed as a REIT under Sections
856 through 860 of the Internal Revenue Code (the "Code") commencing with its
taxable year ended December 31, 1997. The Company believes that, commencing with
its taxable year ended December 31, 1997, it has been organized and operated in
such a manner so as to qualify for taxation as a REIT under the Code, and the
Company intends to continue to operate in such a manner, but no assurance can be
given that it will continue to operate in such a manner so as to qualify or
remain qualified. Even if the Company qualifies for taxation as a REIT, the
Company may be subject to certain federal, state and local taxes on its revenue
and property.
BUSINESS STRATEGIES
The Company's business strategies involve three fundamental practices: (i)
owning and operating shopping centers in select key markets with strong economic
and demographic characteristics in order to establish and maintain a portfolio
of real estate assets with stable income and the potential for long-term growth;
(ii) developing local and regional market expertise through the hands-on
participation of senior management in property operations and leasing in order
to capitalize on market trends, retailing trends and acquisition opportunities;
and (iii) establishing and maintaining a diversified and complementary tenant
mix with an emphasis on tenants that provide day-to-day consumer necessities in
order to provide steady rental revenue.
GROWTH STRATEGIES
The Company's growth strategy is to acquire shopping centers that provide an
opportunity to expand in current markets or to establish a presence in targeted
markets with favorable economic and demographic characteristics. The Company
seeks to acquire properties that can benefit from its hands-on management, that
may require repositioning, redevelopment or renovation or which can be purchased
at attractive capitalization rates and are consistent in terms of quality and
location with the Company's existing portfolio.
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The Company seeks to continue to utilize its in-depth market knowledge
within its four key markets to pursue its strategy of opportunistic acquisitions
of shopping centers for long-term investment. The Company believes that
significant opportunities exist within these markets to acquire shopping center
properties that are consistent with its existing portfolio in terms of quality
of construction, positive submarket demographics and location attributes and
that provide attractive initial capitalization rates with potential for growth
in cash flow. The Company further believes it has certain competitive advantages
which enhance its ability to identify and capitalize on acquisition
opportunities, including: (i) long-standing relationships with institutional and
other owners of shopping center properties in the Company's four primary
regions; (ii) fully integrated real estate operations which enable the Company
to respond quickly to acquisition opportunities and to capitalize on the
resulting economies of scale; and (iii) access to capital as a public company.
Since the closing of the Company's IPO on August 13, 1997 through December
31, 1997, the Company has acquired seven shopping centers totaling 861,857
square feet for approximately $104.8 million. All of the properties are located
in the Company's four key markets, and five of the shopping centers are anchored
by grocery stores. Management believes that all of the centers are located in
markets with strong demographic characteristics. Management intends to add value
to such retail properties through the application of its active, hands-on
management and aggressive leasing strategies.
Although the Company believes that current market conditions generally favor
acquisitions, management intends to continue developing quality shopping center
properties when it believes market conditions and tenant opportunities support
favorable risk-adjusted returns. Management completed the development of Phase
II of Laguna Village during the third quarter of 1997. Phase II encompasses
60,020 square feet and was 84.7% leased as of December 31, 1997.
The Company also seeks to maximize the cash flow from its existing
Properties by continuing to enhance the operating performance of each Property
through its in-house leasing and property management programs. The Company
aggressively pursues: (i) the leasing of currently available space; (ii) the
renewal or releasing of expiring leases at higher rental rates which management
believes currently are available based on improving market conditions and its
recent leasing activity; and (iii) economies of scale in the management and
leasing of properties that may be realized by focusing its acquisition and
development activities within its four primary regions.
FINANCING STRATEGIES
The Company's financing strategy is to maintain a strong and flexible
financial position by maintaining a prudent level of leverage, maintaining a
large pool of unencumbered assets and managing its variable interest rate
exposure. The Company intends to finance future acquisitions with the most
advantageous sources of capital available to the Company, which may include the
sale of common stock, preferred stock or debt securities through public
offerings or private placements and the incurrence of additional indebtedness
through secured or unsecured borrowings.
RECENT DEVELOPMENTS
Since January 1, 1998 the Company has acquired the following six shopping
centers:
- On January 20, 1998, the Company purchased Bear Creek Plaza, a 183,990
square foot community shopping center located in Medford, Oregon. Bear
Creek Plaza is anchored by Albertsons, Bi-Mart and T.J. Maxx. The purchase
price was $13,100,000.
- On January 21, 1998, the Company purchased San Dimas Marketplace, a
271,150 square foot community shopping center (154,150 square feet are
owned) located in San Dimas, California. San Dimas Marketplace is anchored
by Target, Ross Stores, Office Max, Trader Joes and PetCo. The purchase
price was $22,800,000.
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- On February 18, 1998, the Company purchased a four-property portfolio,
including Milwaukie Marketplace, Pioneer Plaza, Powell Valley Junction and
Shute Park Plaza, all located in the state of Oregon. The purchase price
of Milwaukie Marketplace, a 266,928 square foot community shopping center
which is anchored by Albertsons, Rite Aid and Jo-Ann Fabrics and Crafts,
was $12,735,000. The purchase price of Pioneer Plaza, a 96,027 square foot
neighborhood shopping center which is anchored by Safeway and Fashion Bug,
was $7,455,000. The purchase price of Powell Valley Junction, a 103,023
square foot neighborhood shopping center which is anchored by Food 4 Less
and Cascade Athletic, was $6,185,000. The purchase price of Shute Park
Plaza, a 58,560 square foot neighborhood shopping center which is anchored
by True Value Hardware, was $3,975,000. All of these properties were
financed primarily by draws under the Company's line of credit.
DISPOSITIONS
The Company has no current intention to cause the disposition of any of the
Properties, although it reserves the right to do so if, after taking into
account the tax consequences of any disposition, including the Company's
continued ability to qualify as a REIT, it determines that such action would be
in its best interests.
CERTAIN CAUTIONARY STATEMENTS
REAL ESTATE INVESTMENT ASSOCIATED RISKS. Real property investments are
subject to varying degrees of risk. The yields available from equity investments
in real estate depend in large part on the amount of income generated and
expenses incurred. If the Properties do not generate revenue sufficient to meet
operating expenses, including debt service, tenant improvements, leasing
commissions and other capital expenditures, the Company may have to borrow
additional amounts to cover fixed costs and the Company's cash flow and ability
to make distributions to its stockholders will be adversely affected.
The Company's revenue and the value of its properties may be adversely
affected by a number of factors, including the national economic climate; the
local economic climate; local real estate conditions; changes in retail
expenditures by consumers; the perceptions of prospective tenants of the
attractiveness of the property; the ability of the Company to manage and
maintain the Properties and secure adequate insurance; and increased operating
costs (including real estate taxes and utilities). In addition, real estate
values and income from properties are also affected by such factors as
applicable laws, including tax laws, interest rate levels and the availability
of financing.
POTENTIAL INABILITY OF COMPANY TO RETAIN TENANTS AND RELET SPACE. The
Company will be subject to the risks that upon expiration or in certain limited
circumstances or termination, leases may not be renewed, the space may not be
relet or the terms of renewal or reletting (including the cost of required
renovations) may be less favorable than current lease terms. Leases covering a
total of approximately 6.11% and 38.7% of the leased gross leasable area ("GLA")
of the Properties will expire through the end of 1998 and 2002, respectively.
The Company budgets for renovation and reletting expenses, which take into
consideration its views of both the current and expected market conditions in
the geographic regions in which the Properties are located, but no assurance can
be given that these reserves will be sufficient to cover such costs. If the
Company is unable to promptly relet or renew leases for all or a substantial
portion of this space, if the rental rates upon such renewal or reletting are
significantly lower than expected or if the Company's reserves for these
purposes prove inadequate, the Company's cash flow and ability to make expected
distributions to stockholders could be adversely affected.
DEPENDENCE ON MARKET CONDITIONS IN THE GEOGRAPHIC REGIONS. Seven Properties
are located in Northern California, eight Properties are located in Southern
California, six are located in Las Vegas, Nevada and seven are located in the
Pacific Northwest. To the extent that general economic or other relevant
conditions in these regions decline and result in a decrease in consumer demand
in these regions, the Company's performance may be adversely affected.
3
POTENTIAL ILLIQUIDITY OF REAL ESTATE. Equity real estate investments are
relatively illiquid. Such illiquidity will tend to limit the ability of the
Company to vary its portfolio promptly in response to changes in economic or
other conditions. In addition, the Code limits a REIT's ability to sell
properties held for fewer than four years, which may affect the Company's
ability to sell properties without adversely affecting returns to holders of
Common Stock.
COMPETITION WITH OTHER DEVELOPERS AND REAL ESTATE COMPANIES. There are
numerous commercial developers and real estate companies that compete with the
Company in seeking land for development, properties for acquisition and tenants
for properties. There are numerous shopping facilities that compete with the
Properties in attracting retailers to lease space. In addition, retailers at the
Properties face increasing competition from outlet stores, discount shopping
clubs, and other forms of marketing of goods, such as direct mail, internet
advertising and telemarketing. Such competition may reduce properties available
for acquisition or development, reduce percentage rents payable to the Company
and may, through the introduction of competition, contribute to lease defaults
or insolvency of tenants. Thus, competition could materially affect the
Company's ability to generate net income and to make distributions to its
stockholders.
COST OF COMPLIANCE WITH CHANGES IN LAWS. Because increases in income,
service or transfer taxes are generally not passed through to tenants under
leases, such increases may adversely affect the Company's cash flow and its
ability to make distributions to stockholders. The Properties are also subject
to various federal, state and local regulatory requirements, such as
requirements of the Americans with Disabilities Act of 1990 (the "ADA") and
state and local fire and life safety requirements. Failure to comply with these
requirements could result in the imposition of fines by governmental authorities
or awards of damages to private litigants. The Company believes that the
Properties are currently in substantial compliance with all such regulatory
requirements and the Company expects to maintain compliance with such regulatory
requirements. However, there can be no assurance that these requirements will
not be changed or that new requirements will not be imposed which would require
significant unanticipated expenditures by the Company and could have an adverse
effect on the Company's cash flow and expected distributions.
RELIANCE ON CERTAIN TENANTS AND ANCHORS. The Company's income and funds
from operations could be adversely affected in the event of the bankruptcy or
insolvency, or a downturn in the business, of any anchor store, or if any anchor
tenant does not renew its lease when it expires. If the tenant sales at the
Properties were to decline, tenants might be unable to pay their rent or other
occupancy costs. In the event of default by a tenant, delays and costs in
enforcing the lessor's rights could be experienced. In addition, the closing of
one or more anchor-occupied stores or lease termination by one or more anchor
tenants of a shopping center whose leases may permit termination could adversely
impact that Property and result in lease terminations or reductions in rent by
other tenants whose leases may permit termination or rent reduction in those
circumstances and adversely affect the Company's ability to re-lease the space
that is vacated. Each of these developments could adversely affect the Company's
funds from operations and its ability to make expected distributions to
shareholders.
LIMITATIONS ON CONTROL OF PARTIALLY-OWNED PROPERTIES. The Company owns a
91% partnership interest in the limited partnership that owns Chino Town Square
and a 50% managing general partnership interest in the limited partnership that
owns Melrose Village Plaza. The Company may have certain fiduciary
responsibilities to third parties which it will need to consider when making
decisions relating to these Properties. The Company will not have sole control
of certain major decisions relating to these Properties and will need to seek
the consent of such third parties under certain circumstances such as sales,
refinancings, the timing and amount of additional capital contributions thereto
and the transfer, assignment or pledge of the Company's partnership interests in
the partnerships owning these Properties. In addition, the Company may also
participate with other entities in property ownership through joint ventures or
partnerships in the future. Partnership or joint venture investments may, under
certain circumstances, involve risks not otherwise present, including the
possibility that the Company's partners or
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co-venturers might become bankrupt, that such partners or co-venturers might at
any time have economic or other business interests or goals which are
inconsistent with the business interests or goals of the Company, and that such
partners or co-venturers may be in a position to take action contrary to the
Company's instructions or requests or contrary to the Company's policies or
objectives, including the Company's policy with respect to maintaining its
qualification as a REIT.
LACK OF OPERATING HISTORY WITH RESPECT TO THE RECENT ACQUISITION AND
DEVELOPMENT OF PROPERTIES. At December 31, 1997, the Company owned and operated
32 Properties, consisting of over 5.3 million square feet. Thirteen of the
Properties have been acquired since January 1, 1997, and may have
characteristics or deficiencies currently unknown to the Company that affect
their valuation or revenue potential, and it is also possible that the operating
performance of these Properties may decline under the Company's management. As
the Company acquires additional properties, the Company will be subject to risks
associated with managing new properties, including lease-up and tenant
retention. In addition, the Company's ability to manage its growth effectively
will require it to successfully integrate its new acquisitions into its existing
management structure. No assurances can be given that the Company will be able
to succeed with such integration or to effectively manage additional properties
or that newly acquired properties will perform as expected.
INFLUENCE OF CERTAIN AFFILIATES. Stuart Tanz, the Company's Chairman,
President and Chief Executive Officer, and Russell Tanz, a director of the
Company, through their and their families' ownership interests in Revenue
Properties Company Limited ("RPC") and RPC's ownership of PPD, own or control
approximately over 50% of the total outstanding shares of Common Stock of the
Company as of March 15, 1998. In addition, PPD has the right to nominate certain
of the directors of the Company. Under the terms of the Company's Charter, no
other stockholder presently is permitted to own in excess of 6.25% of the Common
Stock. Consequently, although the Tanz family will not be able to take action on
behalf of the Company without the concurrence of other members of the Company's
Board of Directors, they may be able to exert substantial influence over the
Company's affairs, which influence might not be consistent with the interest of
other stockholders. In addition, there may be conflicts between the interests of
the public stockholders of RPC and the public stockholders of the Company.
DEPENDENCE ON KEY MANAGEMENT PERSONNEL. The executive officers of the
Company have substantial experience in owning, operating, managing, acquiring
and developing shopping centers. The Company believes that its success will
depend in large part upon the efforts of such persons. The Company has entered
into employment agreements with certain of its executive officers which provide
for their continued employment with the Company for up to three years and
contain certain non-compete provisions. There can be no assurance that these
executive officers will remain in the employ of the Company, notwithstanding
their potential liability for damages to the Company if they should terminate
their employment. In the event key management personnel do not remain in the
employ of the Company, the Company could be adversely affected.
DEBT FINANCING AND EXISTING DEBT MATURITIES. The Company is subject to
risks normally associated with debt financing, including the risk that the
Company's cash flow will be insufficient to meet required payments of principal
and interest, the risk that existing indebtedness on the Properties (which in
all cases will not have been fully amortized at maturity) will not be able to be
refinanced or that the terms of such refinancing will not be as favorable as the
terms of existing indebtedness. At December 31, 1997, the Company had
outstanding indebtedness of approximately $170,766,000, which will mature over
10 years. Since the Company anticipates that only a small portion of the
principal of the indebtedness will be repaid prior to maturity, and the Company
will not have funds on hand sufficient to repay the balance of the indebtedness
in full at maturity, it will be necessary for the Company to refinance the debt
either through additional borrowings or equity or debt offerings. If principal
payments due at maturity cannot be refinanced, extended or paid with proceeds of
other capital transactions, the Company expects that its cash flow will not be
sufficient in all years to pay distributions at expected levels and to repay all
such maturing
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debt. Furthermore, if prevailing interest rates or other factors at the time of
refinancing (such as the reluctance of lenders to make commercial real estate
loans) result in higher interest rates upon refinancing, the interest expense
relating to such refinanced indebtedness would increase, which could adversely
affect the Company's cash flow and its ability to make expected distributions to
its stockholders. In addition, in the event the Company is unable to refinance
the indebtedness on acceptable terms, the Company might dispose of properties
upon disadvantageous terms, which might result in losses to the Company and
might adversely affect funds available for distribution to stockholders.
POTENTIAL DEFAULTS UNDER MORTGAGE FINANCING. At December 31, 1997, the
Company had approximately $108,316,000 in principal amount of mortgage
financing. The payment and other obligations under certain of the mortgage
financing is secured by cross-collateralized, and cross-defaulted first mortgage
liens in the aggregate amount of approximately $53,836,000 on four Properties.
If the Company is unable to meet its obligations under the mortgage financing,
the Properties securing such debt could be foreclosed upon, which could have a
material adverse effect on the Company and its ability to make expected
distributions and could threaten the continued viability of the Company.
RISING INTEREST RATES AND VARIABLE RATE DEBT. Advances under the Company's
unsecured credit facility (the "Unsecured Credit Facility") may bear interest at
a variable rate. In addition, the Company may incur other variable rate
indebtedness in the future. Increases in interest rates on such indebtedness
would increase the Company's interest expense, which could adversely affect the
Company's cash flow and its ability to pay expected distributions to
stockholders. Accordingly, the Company may in the future engage in other
transactions to further limit its exposure to rising interest rates as
appropriate and cost effective.
TAX LIABILITIES AS A CONSEQUENCE OF FAILURE TO QUALIFY AS A
REIT. Commencing with its taxable year ended December 31, 1997, the Company
believes it qualifies as a REIT under the Code. Qualification as a REIT involves
the satisfaction of numerous requirements (some on an annual and some on a
quarterly basis) established under highly technical and complex Code provisions
for which there are only limited judicial and administrative interpretations,
and involve the determination of various factual matters and circumstances not
entirely within the Company's control. No assurance can be given that
legislation, new regulations, administrative interpretations or court decisions
will not significantly change the tax laws with respect to qualification as a
REIT or the federal income tax consequences of such qualification.
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates.
Moreover, unless entitled to relief under certain statutory provisions, the
Company also would be disqualified from treatment as a REIT for the four taxable
years following the year during which qualification was lost. This treatment
would significantly reduce the net earnings of the Company available for
distribution to stockholders because of the additional tax liability to the
Company for the years involved. In addition, distributions to stockholders would
no longer be required to be made.
ACQUISITION AND DEVELOPMENT INVESTMENTS MAY NOT PERFORM AS EXPECTED. The
Company intends to continue acquiring, developing and redeveloping shopping
center properties. Acquisitions of retail properties entail risks that
investments will fail to perform in accordance with expectations. Estimates of
development costs and costs of improvements to bring an acquired property up to
standards established for the market position intended for that property may
prove inaccurate.
The Company intends to expand or renovate its Properties from time to time.
Expansion and renovation projects generally require expenditure of capital as
well as various government and other approvals, the receipt of which cannot be
assured. While policies with respect to expansion and renovation activities are
intended to limit some of the risks otherwise associated with such activities,
the Company will nevertheless incur certain risks, including expenditures of
funds on, and devotion of management's time to, projects which may not be
completed.
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The Company anticipates that future acquisitions, development and
renovations will be financed through a combination of advances under its
unsecured credit facility, other lines of credit and other forms of secured or
unsecured financing. If new developments are financed through construction
loans, there is a risk that, upon completion of construction, permanent
financing for newly developed properties may not be available or may be
available only on disadvantageous terms.
It is possible that the Company will in the future expand its business to
new geographic markets. The Company will not initially possess the same level of
familiarity with new markets outside of the geographic areas in which the
Properties are currently located, which could adversely affect its ability to
acquire, develop, manage or lease properties in any new localities.
The Company also intends to develop and construct shopping centers in
accordance with the Company's development and business strategies. Risks
associated with the Company's development and construction activities may
include: abandonment of development opportunities; construction costs of a
property exceeding original estimates, possibly making the property
uneconomical; occupancy rates and rents at a newly completed property may not be
sufficient to make the property profitable; financing may not be available on
favorable terms for development of a property; and construction and lease-up may
not be completed on schedule, resulting in increased debt service expense and
construction costs. In addition, new development activities, regardless of
whether they would ultimately be successful, typically require a substantial
portion of management's time and attention. Development activities would also be
subject to risks relating to the inability to obtain, or delays in obtaining,
all necessary zoning, land use, building, occupancy, and other required
governmental permits and authorizations.
THE PROPERTIES MAY BE SUBJECT TO UNKNOWN ENVIRONMENTAL LIABILITIES. Under
various federal, state and local environmental laws, ordinances and regulations,
a current or previous owner or operator of real estate may be required to
investigate and clean up hazardous or toxic substances or petroleum product
releases at such property and may be held liable to a governmental entity or to
third parties for property damage and for investigation and clean-up costs
incurred by such parties in connection with the contamination. Such laws
typically impose clean-up responsibility and liability without regard to whether
the owner knew of or caused the presence of the contaminants, even when the
contaminants were associated with previous owners or operators and the liability
under such laws has been interpreted to be joint and several unless the harm is
divisible and there is a reasonable basis for allocation of responsibility. The
costs of investigation, remediation or removal of such substances may be
substantial, and the presence of such substances, or the failure properly to
remediate the contamination on such property, may adversely affect the owner's
ability to sell or rent such property or to borrow using such property as
collateral. The presence of contamination at a property can impair the value of
the property even if the contamination is migrating onto the property from an
adjoining property. Persons who arrange for the disposal or treatment of
hazardous or toxic substances at a disposal or treatment facility also may be
liable for the costs of removal or remediation of a release of hazardous or
toxic substances at such disposal or treatment facility, whether or not such
facility is owned or operated by such person. In addition, some environmental
laws create a lien on the contaminated site in favor of the government for
damages and costs incurred in connection with the contamination. Sometimes, the
remedy to remediate contamination may include deed restriction or institutional
control, which can restrict how the property may be used. Finally, the owner of
a site may be subject to common law claims by third parties based on damages and
costs resulting from environmental contamination emanating from such site.
Certain federal, state and local laws, regulations and ordinances govern the
removal, encapsulation or disturbance of asbestos containing materials (a "ACM")
when such materials are in poor condition or in the event of construction,
remodeling, renovation or demolition of a building. Such laws may impose
liability for release of ACM and may provide for third parties to seek recovery
from owners or operators of real properties for personal injury associated with
ACM. In connection with its ownership and operation of the Properties, the
Company may be potentially liable for such costs.
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Shopping centers may have businesses such as dry cleaners and auto repair or
servicing businesses which handle, store and generate small quantities of
hazardous wastes. The operation may result in spills or releases from
time-to-time that can result in soil or groundwater contamination. Independent
environmental consultants have recently conducted or updated Phase I
Environmental Assessments (the "Phase I Assessments") at the Properties. These
Phase I Assessments have included, among other things, a visual inspection of
the Properties and the surrounding area and a review of relevant state, federal
and historical documents.
The Company's Phase I Assessments of the Properties have not revealed any
environmental liability that the Company believes would have a material adverse
effect on the Company's business, assets or results of operations taken as a
whole, nor is the Company aware of any such material environmental liability.
Nevertheless, it is possible that the Company's Phase I Assessments do not
reveal all environmental liabilities or that there are material environmental
liabilities of which the Company is unaware. Moreover, there can be no assurance
that (i) future laws, ordinances or regulations will not impose any material
environmental liability or (ii) the current environmental condition of the
Properties will not be affected by tenants, by the condition of land or
operations in the vicinity of the Properties (such as the presence of
underground storage tanks), or by third parties unrelated to the Company.
The Company believes that the Properties are in substantial compliance in
all material respects with all federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances or petroleum products. The
Company has not been notified by any governmental authority, and is not
otherwise aware of any material noncompliance, liability or claim relating to
hazardous or toxic substances or petroleum products in connection with any of
its Properties, other than as noted above.
NO LIMITATION ON AMOUNT OF INDEBTEDNESS THE COMPANY MAY INCUR. At December
31, 1997, the Company's debt to total market capitalization ratio was
approximately 32.2%. The Company currently has a policy of incurring debt only
if upon such incurrence the debt to total market capitalization ratio would be
50% or less, but the organizational documents of the Company do not contain any
limitation on the amount of indebtedness the Company may incur. Accordingly, the
Board of Directors could alter or eliminate this policy. If this policy were
changed, the Company could become more highly leveraged, resulting in an
increase in debt service that could adversely affect the Company's cash flow
and, consequently, the amount available for distribution to stockholders, and
could increase the risk of default on the Company's indebtedness.
CERTAIN TYPES OF LOSSES MAY EXCEED INSURANCE COVERAGE. The Company carries
comprehensive liability, public area liability, fire, earthquake, flood, boiler
and machinery, extended coverage and rental loss insurance covering the
Properties, with policy specifications and insured limits which the Company
believes are adequate and appropriate under the circumstances. There are,
however, certain types of losses that are not generally insured because it is
not economically feasible to insure against such losses. Should an uninsured
loss or a loss in excess of insured limits occur, the Company could lose its
capital invested in the Property, as well as the anticipated future revenue from
the Property and, in the case of debt which is with recourse to the Company,
would remain obligated for any mortgage debt or other financial obligations
related to the Property. Any such loss would adversely affect the Company.
DISPOSITION OF PROPERTIES WITH BUILT-IN GAIN. In connection with the
formation of the Company, certain subsidiaries taxable as "C" corporations were
merged either into the Company or into subsidiaries of the Company which will
qualify as "qualified REIT subsidiaries". Certain of these subsidiaries held 13
properties with built-in gain at the time the subsidiaries were merged into the
Company or into subsidiaries of the Company. Pursuant to Treasury Regulations
which have not yet been promulgated, if these properties are sold within 10
years of the date they were acquired by the Company, the Company will be
required to pay taxes on the built-in gain that would have been realized if the
merging "C" corporation had
8
liquidated on the day before the date of the mergers. Therefore, with respect to
managing its portfolio, the Company may have less flexibility in determining
whether or not to dispose of these properties, and if it desires to do so at
some future date, it may be subject to tax on the built-in gain as a result of
any disposition of these properties to the extent the gain exceeds any available
net operating loss carry forwards for any property.
ITEM 2. PROPERTIES
GENERAL
As of December 31, 1997, the Properties consist of 32 neighborhood/community
shopping centers containing 5.3 million square feet of which 4.5 million square
feet is owned by the Company. The Properties are primarily situated in four key
western U.S. markets including Northern California, Southern California, Las
Vegas, Nevada and the Pacific Northwest, each of which the Company believes has
attractive economic and demographic characteristics. The largest concentration
of Properties, consisting of 40% of the total GLA, is located in California (21%
of which is located in Northern California and 19% is located in Southern
California). Another 30% of the total GLA is located in Las Vegas, Nevada and
24% of the total GLA is located in the Pacific Northwest primarily in the
Seattle, Washington and Portland, Oregon metropolitan areas. In addition,
Properties consisting of the remaining 6% of the total GLA are located in New
Mexico, Tennessee, Kentucky and Florida. As of December 31, 1997, 98% of the
Properties' total GLA was occupied by 749 tenants, of which 75% were national
tenants and 10% were regional tenants (together representing 85% of the total
leased GLA).
The Properties are regionally managed under active central control by the
Company's executive officers. Property management, leasing, capital
expenditures, construction and aquisition decisions are centrally administered
at the Company's corporate office. The Company employs property managers at each
of its regional offices to oversee and direct the day-to-day operations of the
Properties, as well as the on-site personnel. Property managers communicate
daily with the Company's corporate offices to implement the Company's policies
and procedures.
As a result of management's in-house leasing program, the Properties benefit
from a stable, diversified merchandising mix. At December 31, 1997, 75.2% of the
total leased GLA was leased to national tenants, 9.5% leased to regional
tenants, and 15.3% to local tenants. To promote stability and attract non-anchor
tenants, the Company generally enters into long-term leases (typically 15 to 20
years) with major or anchor tenants which usually contain provisions permitting
tenants to renew their leases at rates which often include fixed rent increases
or CPI adjustments from the prior base rent. At December 31, 1997, anchor
tenants leased 59.3% of the total leased GLA with only 34.4% of anchor-leased
GLA (20.4% of the total leased GLA) scheduled to expire within the next 10
years. To take advantage of improving market conditions and changing retail
trends, the Company generally enters into shorter term leases (typically three
to five years) with non-anchor tenants. The Company's leases are generally on a
triple-net basis, which require the tenants to pay their PRO RATA share of all
real property taxes, insurance and property operating expenses.
9
PROPERTIES
The following table sets forth certain information about each of the
Properties at December 31, 1997:
GROSS LEASABLE AREA
------------------- TOTAL
YEAR ANCHOR % OCCUPIED NUMBER OF
COMPLETED/ OWNED OWNED TOTAL AS OF TENANTS AS
PROPERTY AND LOCATION RENOVATED (SQ. FT.) (SQ.FT) (SQ.FT.) 12/31/97 OF 12/31/97
- ----------------------------------- ---------- --------- ------- --------- ---------- -----------
NORTHERN CALIFORNIA
Chico Crossroads .................. 1988/1994 267,735 0 267,735 100.0 18
CHICO, CA
Monterey Plaza .................... 1990 183,180 49,500 232,680 98.1 29
SAN JOSE, CA
Brookvale Center .................. 1968/1989 128,224 0 128,224 96.6 16
FREMONT, CA
Laguna Village .................... 1996/1997 108,203 0 108,203 91.5 10
SACRAMENTO, CA
Lakewood Shopping Center . 1988 107,769 0 107,769 97.4 27
WINDSOR, CA
Fairmont Shopping Center . 1988 104,281 0 104,281 100.0 29
PACIFICA, CA
Rosewood Village .................. 1988 50,248 0 50,248 95.8 19
SANTA ROSA, CA
--------- ------- --------- ----- ---
TOTAL/WEIGHTED AVERAGE............. 949,640 49,500 999,140 97.7 148
--------- ------- --------- ----- ---
SOUTHERN CALIFORNIA
Chino Town Square(2) .............. 1987 337,001 188,060 525,061 99.3 53
CHINO, CA
Melrose Village Plaza(2) .......... 1990 132,674 0 132,674 89.4 27
VISTA, CA
Tustin Heights .................... 1983 131,518 0 131,518 91.0 15
TUSTIN, CA
Laurentian Center ................. 1988 97,131 0 97,131 100.0 25
ONTARIO, CA
Palmdale Center ................... 1975 81,050 0 81,050 100.0 14
PALMDALE, CA
Vineyard Village East ............. 1992 45,200 0 45,200 100.0 4
ONTARIO, CA
Foothill Center ................... 1990 19,636 0 19,636 72.7 8
RIALTO, CA
Arlington Courtyard ............... 1991 12,221 0 12,221 90.0 5
RIVERSIDE, CA
--------- ------- --------- ----- ---
TOTAL/WEIGHTED AVERAGE............. 856,431 188,060 1,044,491 95.9 151
--------- ------- --------- ----- ---
ANNUALIZED BASE RENT IN PLACE AT 12/31/97(1)
---------------------------------------------
ANN. BASE
ANN. BASE RENT/LEASED
PROPERTY AND LOCATION RENT(1)($) SQ.FT.(4)($) MAJOR RETAILERS
- ----------------------------------- ---------- ----------- -------------------
NORTHERN CALIFORNIA
Chico Crossroads .................. 2,045,405 7.64 HomeBase,
CHICO, CA Food-4-Less, Barnes
& Noble, Office
Depot,
Monterey Plaza .................... 2,546,092 14.17 Wal-Mart, Lucky(3),
SAN JOSE, CA Walgreens
Brookvale Center .................. 1,089,793 8.80 Lucky, Longs Drugs,
FREMONT, CA World Gym
Laguna Village .................... 1,659,031 16.75 United Artists
SACRAMENTO, CA Theatres, 24 Hour
Fitness
Lakewood Shopping Center . 998,571 9.51 Raley's
WINDSOR, CA Supermarket, U.S.
Post Office
Fairmont Shopping Center . 1,195,607 11.47 Lucky, Rite Aid
PACIFICA, CA
Rosewood Village .................. 745,697 15.49 Lad's Supermarket,
SANTA ROSA, CA Bradley Video
---------- -----
TOTAL/WEIGHTED AVERAGE............. 10,280,196 11.08
---------- -----
SOUTHERN CALIFORNIA
Chino Town Square(2) .............. 4,482,403 13.40 Target(3),
CHINO, CA Wal-Mart,
Mervyn's(3),
Nordstrom Rack, AMC
Theaters
Melrose Village Plaza(2) .......... 1,322,585 11.14 Lucky, Sav-On Drug
VISTA, CA
Tustin Heights .................... 1,411,996 11.79 Ralphs, Longs
TUSTIN, CA Drugs, Michael's
Arts & Crafts
Laurentian Center ................. 1,195,143 12.30 Pep Boys, 24 Hour
ONTARIO, CA Fitness, A-1
Hardware
Palmdale Center ................... 505,317 6.23 Smart & Final, Rite
PALMDALE, CA Aid, Pic 'N' Save
Vineyard Village East ............. 366,945 8.12 Sears, Dunn Edwards
ONTARIO, CA Paints
Foothill Center ................... 130,709 9.15 PIP Printing
RIALTO, CA
Arlington Courtyard ............... 131,666 11.97 Harvest Christian
RIVERSIDE, CA Bookstore
---------- -----
TOTAL/WEIGHTED AVERAGE............. 9,546,764 11.62
---------- -----
- ----------------------------------
(1) Annualized base rent for all leases in place in which tenants are in
occupancy at December 31, 1997, calculated as follows: total base rent,
calculated in accordance with GAAP, to be received during the entire term of
each lease, divided by the terms in months of such leases, multiplied by 12.
(2) The company owns a 91.5% interest in Chino Town Square and 50% interest in
Melrose Village Plaza. Table reflects 100% of Property data.
(3) These retailers own their space and are not tenants of the Company.
(4) Annualized base rent divided by the owned GLA occupied at December 31, 1997.
10
GROSS LEASABLE
AREA
------------------
YEAR ANCHOR % OCCUPIED
COMPLETED/ OWNED OWNED TOTAL AS OF
PROPERTY AND LOCATION RENOVATED (SQ. FT.) (SQ.FT) (SQ.FT.) 12/31/97
- ----------------------------------- ---------- --------- ------- --------- ----------
LAS VEGAS, NEVADA
Cheyenne Commons .................. 1992 362,758 0 362,758 99.7
LAS VEGAS, NV
Sahara Pavilion North ............. 1989 333,679 0 333,679 97.3
LAS VEGAS, NV
Rainbow Promenade ................. 1995/1997 228,279 0 228,279 99.0
LAS VEGAS, NV
Sahara Pavilion South ............. 1990 160,682 0 160,682 99.3
LAS VEGAS, NV
Green Valley Town &
Country.......................... 1990 130,722 0 130,722 100.0
HENDERSON, NV
Winterwood Pavilion ............... 1990 127,975 0 127,975 96.1
LAS VEGAS, NV
--------- ------- --------- -----
TOTAL/WEIGHTED AVERAGE............. 1,344,095 0 1,344,095 98.6
--------- ------- --------- -----
PACIFIC NORTHWEST
Sunset Square ..................... 1989 352,523 11,943 364,466 97.5
BELLINGHAM, WA
Tacoma Central .................... 1987/1994 134,868 165,519 300,387 99.4
TACOMA, WA
Tanasbourne Village(8) . 1990 210,692 1,209 211,901 100.0
HILLSBORO, OR
Olympia Square .................... 1988 167,721 0 167,721 95.3
OLYMPIA, WA
Claremont Village ................. 1955/1994 88,706 0 88,706 95.6
EVERETT, WA
Canyon Ridge Plaza ................ 1995 81,678 181,300 262,978 92.7
KENT, WA
Olympia West Center ............... 1980/1995 69,212 3,800 73,012 91.5
OLYMPIA, WA
--------- ------- --------- -----
TOTAL/WEIGHTED AVERAGE............. 1,105,400 363,771 1,469,171 97.0
--------- ------- --------- -----
OTHER MARKETS
Maysville Marketsquare . 1991/1993 126,507 89,612 216,119 100.0
MAYSVILLE, KY
Ocoee Plaza ....................... 1990 52,242 0 52,242 89.6
OCOEE, FL
Sports Unlimited .................. 1990 51,542 40,000 91,542 100.0
MEMPHIS, TN
Country Club Center ............... 1988 46,850 63,000 109,850 100.0
ALBUQUERQUE, NM
--------- ------- --------- -----
TOTAL/WEIGHTED AVERAGE............. 277,141 192,612 469,753 98.0
--------- ------- --------- -----
PORTFOLIO
TOTAL/WEIGHTED AVERAGE............. 4,532,707 793,943 5,326,650 97.5
--------- ------- --------- -----
--------- ------- --------- -----
ANNUALIZED BASE RENT IN PLACE AT 12/31/97(1)
TOTAL ----------------------------------------------
NUMBER OF ANN. BASE
TENANTS AS ANN. BASE RENT/LEASED
PROPERTY AND LOCATION OF 12/31/97 RENT(1)($) SQ.FT.(4)($) MAJOR RETAILERS
- ----------------------------------- ----------- ---------- ----------- --------------------
LAS VEGAS, NEVADA
Cheyenne Commons .................. 45 4,189,339 11.58 Wal-Mart, 24 Hour
LAS VEGAS, NV Fitness, Ross Dress
For Less
Sahara Pavilion North ............. 68 4,114,576 12.67 Vons, Longs Drugs,
LAS VEGAS, NV TJMaxx, Sheplers,
Border's Books
Rainbow Promenade ................. 25 3,210,448 14.21 United Artists
LAS VEGAS, NV Theatres, Linens N'
Things, Office Max,
Barnes & Noble, Cost
Plus
Sahara Pavilion South ............. 23 2,218,479 13.91 Sports Authority,
LAS VEGAS, NV Office Max,
Michael's Arts &
Crafts
Green Valley Town &
Country.......................... 37 1,759,455 13.46 Lucky/Sav-On
HENDERSON, NV Superstore
Winterwood Pavilion ............... 24 1,065,959 8.67 Vons, Heilig-Meyer
LAS VEGAS, NV Furniture
--- ---------- -----
TOTAL/WEIGHTED AVERAGE............. 222 16,558,256 12.49
--- ---------- -----
PACIFIC NORTHWEST
Sunset Square ..................... 39 2,678,815 7.79 K-Mart, Ennen's
BELLINGHAM, WA Food, Fabricland,
Rite Aid
Tacoma Central .................... 21 2,080,582 15.52 Target(3), Top Food
TACOMA, WA & Drug(3), Future
Shop, Office Depot,
TJ Maxx, Cineplex
Odeon
Tanasbourne Village(8) . 40 2,576,071 12.23 Safeway, Rite Aid,
HILLSBORO, OR Jo-Ann Fabrics, Pier
1 imports
Olympia Square .................... 37 1,938,000 12.12 Albertsons, Ross
OLYMPIA, WA Dress For Less
Claremont Village ................. 12 1,156,276 13.63 QFC Supermarket
EVERETT, WA
Canyon Ridge Plaza ................ 14 778,925 10.29 Target(3), Top
KENT, WA Foods(3), Ross Dress
For Less
Olympia West Center ............... 5 1,166,639 18.42 Barnes & Noble, Good
OLYMPIA, WA Guys, Petco, Boaters
World
--- ---------- -----
TOTAL/WEIGHTED AVERAGE............. 168 12,375,308 11.54
--- ---------- -----
OTHER MARKETS
Maysville Marketsquare . 19 873,003 6.90 Wal-Mart(3), Kroger
MAYSVILLE, KY Company, J.C. Penney
Ocoee Plaza ....................... 11 331,084 7.07 Food Lion, Family
OCOEE, FL Dollar
Sports Unlimited .................. 13 614,805 11.93 Sports Unlimited(3),
MEMPHIS, TN Rich-Well Bedding
Co., Hancock Fabrics
Country Club Center ............... 17 563,172 12.02 Furr's Foods(3)
ALBUQUERQUE, NM
--- ---------- -----
TOTAL/WEIGHTED AVERAGE............. 60 2,382,064 8.77
--- ---------- -----
PORTFOLIO
TOTAL/WEIGHTED AVERAGE............. 749 51,142,588 11.57
--- ---------- -----
--- ---------- -----
- ----------------------------------
(1) Annualized base rent for all leases in place in which tenants are in
occupancy at December 31, 1997, calculated as follows: total base rent,
calculated in accordance with GAAP, to be received during the entire term of
each lease, divided by the terms in months of such leases, multiplied by 12.
(2) The company owns a 91.5% interest in Chino Town Square and 50% interest in
Melrose Village Plaza. Table reflects 100% of Property data.
(3) These retailers own their space and are not tenants of the Company.
(4) Annualized base rent divided by the owned GLA occupied at December 31, 1997.
11
NATIONAL, REGIONAL AND LOCAL TENANT SUMMARY
The following table sets forth certain information regarding the Company's
national, regional and local tenants at each Property at December 31, 1997:
NATIONAL TENANTS(1) REGIONAL TENANTS(1) LOCAL TENANTS(1)
----------------------------- -------------------------- --------------------------
% OF PROPERTY % OF PROPERTY % OF % OF PROPERTY % OF % OF PROPERTY
LEASED ANN. PROPERTY ANN. BASE PROPERTY ANN.
PROPERTY GLA BASE RENT(2) LEASED GLA RENT(2) LEASED GLA BASE RENT(2)
- ----------------------------------- ------------- ------------- ---------- ------------- ---------- -------------
NORTHERN CALIFORNIA
Chico Crossroads................. 98.62% 97.67% 0% 0% 1.38% 2.33%
Monterey Plaza................... 78.86 64.11 1.66 3.02 19.48 32.87
Brookvale Center................. 88.46 78.3 0 0 11.54 21.69
Laguna Village................... 85.10 82.98 4.34 5.26 10.56 11.76
Lakewood Shopping Center......... 81.49 70.91 3.07 5.92 15.44 23.17
Fairmont Shopping Center......... 62.37 44.59 0 0 37.63 55.41
Rosewood Village................. 9.97 14.68 43.02 35.54 47.01 49.78
----- ----- ----- ----- ---------- ------
WEIGHTED AVERAGE................... 81.42% 70.22% 3.37% 4.76% 15.21% 25.02%
SOUTHERN CALIFORNIA
Chino Town Square................ 82.61% 75.65% 6.22% 9.33% 11.17% 15.02%
Melrose Village Plaza............ 79.43 72.36 1.13 1.56 19.44 26.08
Tustin Heights................... 82.37 70.49 6.31 7.38 11.32 22.13
Laurentian Center................ 47.94 47.27 21.06 19.34 31.00 33.39
Palmdale Center.................. 86.76 69.99 0 0 13.24 30.01
Vineyard Village East............ 57.52 42.51 42.48 57.49 0 0
Foothill Center.................. 0 0 0 0 100.00 100.00
Arlington Courtyard.............. 12.12 21.27 50.89 37.44 36.99 41.29
----- ----- ----- ----- ---------- ------
WEIGHTED AVERAGE................... 75.28% 67.87% 9.13% 10.84% 15.59% 21.29%
LAS VEGAS, NEVADA
Cheyenne Commons................. 89.76% 81.69% 0.69% 1.47% 9.55% 16.84%
Sahara Pavilion North............ 70.18 58.61 10.82 12.02 19.00 29.37
Rainbow Promenade................ 90.98 85.30 1.77 3.15 7.25 11.55
Sahara Pavilion South............ 80.76 75.38 6.43 7.33 12.81 17.29
Green Valley Town & Country...... 49.08 37.30 3.59 5.43 47.33 57.27
Winterwood Pavilion.............. 69.43 59.71 13.85 10.05 16.72 30.24
----- ----- ----- ----- ---------- ------
WEIGHTED AVERAGE................... 78.19% 69.17% 5.54% 6.17% 16.27% 24.16%
PACIFIC NORTHWEST
Sunset Square.................... 63.77% 48.98% 29.42% 39.33% 6.81% 11.69%
Tacoma Central................... 67.76 50.47 25.92 41.91 6.32 7.62
Tanasbourne Village.............. 62.35 51.05 12.34 18.55 25.31 30.40
Olympia Square................... 74.02 64.05 14.18 21.25 11.80 14.70
Claremont Village................ 69.08 72.13 4.91 5.39 26.01 22.48
Canyon Ridge Plaza............... 82.39 80.45 11.01 11.95 6.60 7.60
Olympia West Center.............. 71.95 75.13 28.05 24.87 0 0
----- ----- ----- ----- ---------- ------
WEIGHTED AVERAGE................... 67.76% 58.76% 20.07% 26.31% 12.17% 14.93%
OTHER
Maysville Marketsquare........... 88.81% 86.63% 4.11% 4.30% 7.08% 9.07%
Ocoee Plaza...................... 86.44 84.57 0 0 13.36 15.43
Sports Unlimited................. 38.44 38.72 32.47 33.79 29.09 27.49
Country Club Center.............. 28.07 44.38 6.40 6.72 65.53 48.90
----- ----- ----- ----- ---------- ------
WEIGHTED AVERAGE................... 68.37% 63.99% 9.18% 11.88% 22.45% 24.13%
----- ----- ----- ----- ---------- ------
PORTFOLIO WEIGHTED AVERAGE......... 75.17% 66.52% 9.53% 11.94% 15.30% 21.54%
----- ----- ----- ----- ---------- ------
----- ----- ----- ----- ---------- ------
- ------------------------------
(1) The Company defines national tenants as any tenant that operates in at least
four metropolitan areas located in more than one region (i.e. northwest,
northeast, midwest, southwest or southeast); regional tenants as any tenant
that operates in two or more metropolitan areas located within the same
region; local tenants as any tenant that operates stores only within the
same metropolitan area as the shopping center.
(2) Annualized base rent for all leases in place at December 31, 1997 calculated
as follows: total base rent, calculated in accordance with GAAP, to be
received during the entire term of each lease, divided by the terms in
months for such leases, multiplied by 12.
12
ANCHOR AND NON-ANCHOR TENANT SUMMARY
The following table sets forth certain information regarding anchor and
non-anchor tenants at December 31, 1997:
ANCHOR TENANTS(1) NON-ANCHOR TENANTS(1)
-------------------------- --------------------------
% OF % OF
% OCCUPIED PROPERTY ANN. % OCCUPIED PROPERTY ANN.
PROPERTY GLA BASE RENT(2) GLA BASE RENT(2)
- --------------------------------------------------- ----------- ------------- ----------- -------------
NORTHERN CALIFORNIA
Chico Crossroads................................. 85.18% 75.86% 14.82% 24.14%
Monterey Plaza................................... 56.48 29.90 43.52 70.10
Brookvale Center................................. 75.74 49.93 24.26 50.07
Laguna Village................................... 84.05 81.89 15.95 18.11
Lakewood Shopping Center......................... 55.82 35.79 44.18 64.21
Fairmont Shopping Center......................... 51.02 28.31 48.98 71.69
Rosewood Village................................. 0 0 100.00 100.00
----- ----- ----------- ------
WEIGHTED AVERAGE................................... 66.73% 47.90% 33.27% 52.10%
SOUTHERN CALIFORNIA
Chino Town Square................................ 61.48% 52.58% 38.52% 47.42%
Melrose Village Plaza............................ 58.12 44.50 41.88 55.50
Tustin Heights................................... 68.50 46.97 31.50 53.03
Laurentian Center................................ 37.98 32.61 62.02 67.39
Palmdale Center.................................. 76.70 47.63 23.30 52.37
Vineyard Village East............................ 57.52 42.51 42.48 57.49
Foothill Center.................................. 0 0 100.00 100.00
Arlington Courtyard.............................. 0 0 100.00 100.00
----- ----- ----------- ------
WEIGHTED AVERAGE................................... 59.11% 46.29% 40.89% 53.71%
LAS VEGAS NEVADA
Cheyenne Commons................................. 68.16% 47.07% 31.84% 52.93%
Sahara Pavilion North............................ 49.83 31.16 50.17 68.84
Rainbow Promenade................................ 65.78 56.62 34.22 43.38
Sahara Pavilion South............................ 59.51 39.50 40.49 60.50
Green Valley Town & Country...................... 37.56 21.46 62.44 78.54
Winterwood Pavilion.............................. 55.90 34.14 44.10 65.86
----- ----- ----------- ------
WEIGHTED AVERAGE................................... 58.07% 40.41% 41.93% 59.59%
PACIFIC NORTHWEST
Sunset Square.................................... 75.21% 55.27% 24.79% 44.73%
Tacoma Central................................... 66.34 62.51 33.66 37.49
Tanasbourne Village.............................. 47.68 31.19 52.32 68.81
Olympia Square................................... 47.56 31.69 52.44 68.31
Claremont Village................................ 46.68 46.75 53.32 33.25
Canyon Ridge Plaza............................... 35.94 23.97 64.06 76.03
Olympia West Center.............................. 56.65 61.20 43.35 38.80
----- ----- ----------- ------
WEIGHTED AVERAGE................................... 58.43% 45.66% 41.57% 54.34%
OTHER
Maysville Marketsquare........................... 62.72% 57.58% 37.28% 42.42%
Ocoee Plaza...................................... 53.42 51.35 46.58 48.65
Sports Unlimited................................. 29.56 31.02 70.44 68.98
Country Club Center.............................. 0 0 100.00 100.00
----- ----- ----------- ------
WEIGHTED AVERAGE................................... 44.01% 36.24% 55.99% 63.76%
----- ----- ----------- ------
PORTFOLIO WEIGHTED AVERAGE......................... 59.30% 44.09% 40.70% 55.91%
----- ----- ----------- ------
----- ----- ----------- ------
- ------------------------
(1) Anchors defined as single tenants which lease 15,000 square feet or more;
non-anchors defined as tenants which lease less than 15,000 square feet.
(2) Annualized base rent for all leases in place in which tenants are in
occupancy at December 31, 1997 calculated as follows: total base rent,
calculated in accordance with GAAP, to be received during the entire term of
each lease, divided by the terms in months for such leases, multiplied by
12.
13
MAJOR TENANTS
At December 31, 1997, 98% of the total GLA was leased to 749 tenants. The
Company's largest tenant, Wal-Mart, accounted for 5.57% of the total annualized
base rent in place at December 31, 1997. Including Wal-Mart, all tenants which
individually accounted for 1.0% or more of the annualized base rent at December
31, 1997 collectively accounted for 22.8% of the total annualized base rent and
the 721 remaining tenants accounted for 77.2% of the total annualized base rent.
The following table summarizes certain information regarding tenants which
individually accounted for 1.0% or more of the annualized base rent at December
31, 1997:
ANNUALIZED BASE RENT IN PLACE AT
12/31/97
LEASED -----------------------------------
GLA AS OF ANNUAL % OF TOTAL
NUMBER OF 12/31/97 % OF TOTAL TOTAL ANN. BASE RENT/ ANNUAL.
TENANT LEASES (SQ. FT.) LEASED GLA BASE RENT SQ.FT. BASE RENT
- ----------------------------------- ------------- --------- ---------- ---------- ---------- ----------
Wal-Mart........................... 3 316,588 7.58% $2,836,372 $ 8.96 5.57%
24 Hour Fitness.................... 3 97,143 2.33 1,373,011 14.13 2.70
United Artists Theatre............. 2 88,196 2.11 1,361,109 15.43 2.67
Lucky.............................. 4 173,119 4.15 1,275,795 7.37 2.51
Barnes & Noble..................... 3 70,573 1.69 999,250 14.16 1.96
Ennen's Foods...................... 1 67,070 1.61 589,855 8.79 1.16
Vons/Safeway....................... 2 94,737 2.27 583,779 6.16 1.15
Quality Food Center................ 1 39,603 0.95 540,598 13.65 1.06
HomeBase........................... 1 103,904 2.49 535,432 5.15 1.05
Ross Dress for Less................ 3 72,487 1.74 513,327 7.08 1.01
PayLess Drugs...................... 3 74,562 1.79 512,586 6.87 1.01
Office Max......................... 2 51,050 1.22 507,855 9.95 1.00
--
--------- ----- ---------- ---------- -----
TOTAL.............................. 28 1,249,032 29.91% $11,628,969 $ 9.31 22.84%
--
--
--------- ----- ---------- ---------- -----
--------- ----- ---------- ---------- -----
14
LEASE EXPIRATIONS
The following schedules set forth certain information regarding lease
expirations for the Properties for each of the ten years beginning with 1998,
assuming that none of the tenants exercise renewal options or termination
rights, if any, at or prior to the scheduled expirations.
LEASE EXPIRATION ANALYSIS
ALL LEASES
NUMBER OF SQUARE FOOTAGE % OF TOTAL
LEASE EXPIRATION LEASES UNDER PORTFOLIO
TENANT YEAR EXPIRING EXPIRING LEASES EXPIRING GLA
- ----------------------------------- ---------------- --------- --------------- ------------
1.................................. 1998 98 269,122 6.11
2.................................. 1999 95 376,916 8.58
3.................................. 2000 139 353,307 8.03
4.................................. 2001 98 313,099 7.11
5.................................. 2002 128 388,732 8.83
6.................................. 2003 39 216,321 4.91
7.................................. 2004 12 84,597 1.92
8.................................. 2005 19 161,014 3.66
9.................................. 2006 18 240,650 5.47
10................................. 2007 16 128,843 2.93
11 and after....................... 2008 75 1,869,933 42.47
--- --------------- -----
TOTAL/WEIGHTED
AVERAGE.......................... 737 4,402,534 100.0
--- --------------- -----
--- --------------- -----
ANNUALIZED BASE RENT IN PLACE AT
12/31/97
-----------------------------------
% OF TOTAL
PORTFOLIO ANN.
TOTAL ANN. ANN. BASE RENT/
TENANT BASE RENT BASE RENT SQ. FT.
- ----------------------------------- ---------- ---------- ----------
1.................................. 3,294,626 6.47 $12.24
2.................................. 3,475,550 6.82 9.22
3.................................. 5,210,965 10.23 14.75
4.................................. 4,303,475 8.45 13.74
5.................................. 5,739,220 11.27 14.76
6.................................. 2,489,720 4.89 11.51
7.................................. 991,975 1.95 11.73
8.................................. 2,089,911 4.10 12.98
9.................................. 2,952,922 5.80 12.27
10................................. 1,685,777 3.31 13.06
11 and after....................... 18,704,652 36.72 10.00
---------- ---------- ----------
TOTAL/WEIGHTED
AVERAGE.......................... 50,938,793 100.00 $11.57
---------- ---------- ----------
---------- ---------- ----------
ALL ANCHOR LEASES
NUMBER OF SQUARE FOOTAGE % OF TOTAL
LEASE EXPIRATION LEASES UNDER PORTFOLIO
TENANT YEAR EXPIRING EXPIRING LEASES EXPIRING GLA
- ----------------------------------- ---------------- ----------- --------------- ------------
1.................................. 1998 3 66,398 2.54
2.................................. 1999 5 188,945 7.24
3.................................. 2000 3 66,375 2.54
4.................................. 2001 3 84,078 3.22
5.................................. 2002 3 74,225 2.84
6.................................. 2003 4 99,652 3.82
7.................................. 2004 2 42,119 1.61
8.................................. 2005 3 63,462 2.43
9.................................. 2006 3 150,352 5.76
10................................. 2007 3 63,584 2.44
11 and after....................... 2008 43 1,711,346 65.56
--
--------------- ------
TOTAL/WEIGHTED AVERAGE............. 75 2,610,536 100.00
--
--
--------------- ------
--------------- ------
ANNUALIZED BASE RENT IN PLACE AT 12/31/97
-------------------------------------------------
% OF TOTAL
% OF ANCHOR PORTFOLIO ANN.
TOTAL ANN. ANN. ANN. BASE RENT/
TENANT BASE RENT BASE RENT BASE RENT SQ. FT.
- ----------------------------------- ---------- ----------- ---------- ----------
1.................................. 522,814 2.3 1.03 $7.87
2.................................. 701,443 3.1 1.38 3.71
3.................................. 523,022 2.3 1.03 7.88
4.................................. 562,135 2.5 1.10 6.69
5.................................. 725,406 3.2 1.42 9.77
6.................................. 779,071 3.6 1.53 7.82
7.................................. 300,414 1.3 0.59 7.13
8.................................. 670,687 3.0 1.32 10.57
9.................................. 1,691,004 7.6 3.32 11.26
10................................. 526,128 2.3 1.03 8.27
11 and after....................... 15,456,624 68.8 30.34 9.03
---------- ----- ----- -----
TOTAL/WEIGHTED AVERAGE............. 22,458,748 100 44.09 $8.60
---------- ----- ----- -----
---------- ----- ----- -----
15
ALL NON-ANCHOR LEASES
NUMBER OF SQUARE FOOTAGE % OF TOTAL
LEASE EXPIRATION LEASES UNDER PORTFOLIO
TENANT YEAR EXPIRING EXPIRING LEASES EXPIRING GLA
- ----------------------------------- ---------------- ---------- --------------- ------------
1.................................. 1998 95 202,724 11.31
2.................................. 1999 90 187,971 10.49
3.................................. 2000 136 286,932 16.01
4.................................. 2001 95 229,021 12.78
5.................................. 2002 125 314,507 17.55
6.................................. 2003 35 116,669 6.51
7.................................. 2004 10 42,476 2.37
8.................................. 2005 16 97,552 5.44
9.................................. 2006 15 90,298 5.04
10................................. 2007 13 65,259 3.64
11 and after....................... 2008 32 158,587 8.85
--- --------------- ------
TOTAL/WEIGHTED AVERAGE............. 662 1,791,996 100.00
--- --------------- ------
--- --------------- ------
ANNUALIZED BASE RENT IN PLACE AT 12/31/97
-------------------------------------------------
% OF TOTAL
% OF NON- PORTFOLIO ANN.
TOTAL ANN. ANCHOR ANN. ANN. BASE RENT/
TENANT BASE RENT BASE RENT BASE RENT SQ. FT.
- ----------------------------------- ---------- ----------- ---------- ----------
1.................................. 2,771,812 9.7 5.44 $13.67
2.................................. 2,774,107 9.7 5.45 14.76
3.................................. 4,687,963 16.5 9.20 16.34
4.................................. 3,741,340 13.1 7.34 16.34
5.................................. 5,013,814 17.6 9.84 15.94
6.................................. 1,710,649 6.0 3.36 14.66
7.................................. 691,561 2.4 1.36 16.28
8.................................. 1,419,223 5.0 2.78 14.55
9.................................. 1,261,919 4.4 2.48 13.96
10................................. 1,159,649 4.1 2.28 17.77
11 and after....................... 3,248,008 11.4 6.38 20.48
---------- ----- ----- ----------
TOTAL/WEIGHTED AVERAGE............. 28,480,045 100 55.91 $15.89
---------- ----- ----- ----------
---------- ----- ----- ----------
- ------------------------
Note: Number of leases expiring does not include 13 tenants on a month-to-month
agreement, whose combined occupancy does not exceed 22,000 sq.ft.
CAPITAL EXPENDITURES
The following table sets forth information relating to historical capital
expenditures of the Company's Properties:
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
Total capital expenditures(1)(2).................. $ 12,956 $ 18,545 $ 7,082
Average number of square feet(3).................. 3,581,287 2,770,216 2,446,630
Capital expenditures per square foot.............. $ .004 $ .007 $ .003
- ------------------------
(1) Includes capital expenditures other than leasing commissions and tenant
improvements.
(2) The 1997 amount excludes approximately $110,000 incurred to renovate
Foothill Center.
(3) Represents the average aggregate amount of square feet owned by the Company
during the year.
OTHER ASSETS
The Company owns a 50% interest in a general partnership that owns an
interest in a 93,400 square foot medical office complex located in Encinitas,
California. The Company also holds notes receivable with a net book value as of
December 31, 1997 of $2,981,000. Certain of these notes with a net book value of
$1,926,540 are secured by various deeds of trust and partnership interests or
other security on three shopping centers, all of which are located in Northern
California. The notes have a weighted monthly interest rate of approximately
8.72% and have maturity dates in June 2000.
16
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to legal proceedings that arise in the normal course
of business, which matters are generally covered by insurance. The resolution of
these matters cannot be predicted with certainty. However, in the opinion of
management, based upon currently available information, liability under such
proceedings, either individually or in the aggregate, will not have a materially
adverse affect on the Company's consolidated financial statements taken as a
whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1997, no matters were submitted to a vote of
stockholders of the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading on the New York Stock Exchange
("NYSE") on August 8, 1997, under the symbol "PNP." On March 13, 1998 the
Company had approximately 47 stockholders of record and approximately 2,711
beneficial owners. The following table sets forth for the periods indicated the
high and low sales prices as reported by the NYSE and the distributions declared
by the Company.
DISTRIBUTIONS
HIGH LOW DECLARED
--------- --------- -------------
Third Quarter, 1997 (from August 8, 1997).................. $ 20.75 $ 19.75 $ .2128
Fourth Quarter, 1997....................................... $ 22.00 $ 19.875 $ .3625
The fourth quarter 1997 dividend on an annualized basis amounts to $1.45 per
share. All distributions will be made by the Company at the discretion of the
Board of Directors and will depend upon the earnings of the Company, its
financial condition and such other factors as the Board of Directors deem
relevant. In order to qualify for the beneficial tax treatment accorded to real
estate investment trusts under the Code, the Company is required to make
distributions to holders of its shares in an amount at least equal to 95% of the
Company's "real estate investment trust taxable income," as defined in Section
857 of the Code.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial data for the Company on a
historical basis. The following data should be read in connection with
management's discussion and analysis of financial condition and results of
operations and the consolidated financial statements and notes thereto located
elsewhere in this report.
17
SELECTED CONSOLIDATED FINANCIAL DATA(1)
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
STATEMENTS OF OPERATIONS DATA
Total revenue.................................. $ 46,452 $ 35,105 $ 29,735 $ 26,748 $ 28,124
Operating and G&A expenses..................... 13,939 12,126 11,656 12,473 10,840
Total revenue less operating and G&A
expenses..................................... 32,513 22,979 18,079 14,275 17,284
Depreciation and amortization.................. 8,928 7,693 6,340 6,129 6,255
Interest expense............................... 14,057 14,671 12,262 11,405 10,880
Income (loss) before extraordinary item........ 9,356 449 (615) (3,216) 158
Net income (loss).............................. 8,313 449 (615) (3,216) 158
Per share data:
Income before extraordinary item(2).......... 0.55 -- -- -- --
Net income (2)............................... 0.49 -- -- -- --
Distributions................................ 0.58 -- -- -- --
AS OF DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
BALANCE SHEET DATA
Properties, net........................... $ 455,514 $ 264,017 $ 251,423 $ 214,554 $ 168,280
Total assets.............................. 487,220 293,186 275,690 247,101 190,551
Notes payable............................. 108,316 192,915 191,302 160,465 138,181
Line of credit payable.................... 62,450 -- -- -- --
Advances from related party............... -- 32,113 16,482 10,790 --
Minority interest......................... 1,521 1,539 1,347 1,373 (100)
Shareholders' equity...................... 301,055 -- -- -- --
Owner's equity............................ -- 61,808 61,359 61,974 47,696
- ------------------------
(1) The financial data as of and for the periods prior to August 13, 1997
represents the combined financial data of Pan Pacific Development
Properties. See Note 1 to the Company's 1997 consolidated financial
statements.
(2) The 1997 data is calculated as if the shares were outstanding for the entire
year based on the diluted number of shares assumed to be outstanding (see
Note 2(i) to the consolidated financial statements). The years prior to 1997
had no outstanding shares of common stock and therefore the information is
not relevant or included here.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion should be read in connection with the consolidated
financial statements of Pan Pacific Retail Properties, Inc. and subsidiaries
(the "Company"), and the notes thereto, appearing elsewhere in this report.
The Company receives income primarily from rental revenue (including
recoveries from tenants) from shopping center properties. As a result of the
Company's acquisition and development program, the financial data show increases
in total revenue from period to period, largely attributable to: (i) the
acquisitions; (ii) a property placed into operation during the period; and (iii)
the benefit of a full period of rental and other revenue from a property placed
into operation in the preceding period.
18
The Company believes that overhead costs will decrease as a percentage of
revenue as the Company achieves economies of scale through increases in its
portfolio's revenue base. For example, during the year ended December 31, 1997,
the Company owned properties comprising a weighted average GLA of 3,581,000
square feet. Total expenses, excluding interest, depreciation and amortization
for the year ended December 31, 1997 were $13,939,000 or $3.89 per square foot.
By comparison, during the year ended December 31, 1996, the Company owned
properties comprising a weighted average GLA of 2,770,000 square feet. Total
expenses, excluding interest, depreciation and amortization, for the year ended
December 31, 1996 were $12,126,000 or $4.38 per square foot.
The Company expects that the more significant part of its revenue growth in
the next year or two will come from additional acquisitions and rent increases
from re-leasing and re-tenanting initiatives.
RESULTS OF OPERATIONS
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 TO THE YEAR ENDED DECEMBER
31, 1996.
Total revenue increased by $11,347,000 or 32.3% to $46,452,000 for the year
ended December 31, 1997 as compared to $35,105,000 for the year ended December
31, 1996.
Rental revenue increased by $8,767,000 or 30.9% to $37,117,000 from
$28,350,000 for the year ended December 31, 1997, compared to the year ended
December 31, 1996. The increase in rental revenue resulted principally from the
acquisition of Chico Crossroads in February 1997, Monterey Plaza in April 1997,
Fairmont Shopping Center in May 1997, Lakewood Shopping Center in June 1997,
Green Valley Town & Country in August 1997, Rainbow Promenade in September 1997,
Claremont Village, Olympia West Center and Tacoma Central in November 1997 and
Tustin Heights and Palmdale Center in December 1997 (collectively, the "1997
Acquisitions"). In addition, the inclusion in operations of Laguna Village Phase
I in May 1996 and Phase II in the third quarter of 1997 added to this increase.
Rental revenue also increased as a result of increased occupancy levels,
primarily at Canyon Ridge Plaza, Sahara Pavilion North, Chino Town Square and
Tanasbourne Village.
Recoveries from tenants increased by $1,828,000 or 29.4% to $8,042,000 for
the year ended December 31, 1997, compared to $6,214,000, for the year ended
December 31, 1996. This increase resulted primarily from the 1997 Acquisitions.
In addition, 1997 included a full period of recoveries for Laguna Village Phase
I. Recoveries from tenants were 87.4% of property operating expenses and
property taxes for the year ended December 31, 1997 as compared to 85.0% of the
same expenses for the same period in 1996.
Property expenses include property operating expenses, property taxes and
property management fees. Property operating expenses increased by $946,000 or
18.7% from $5,070,000 to $6,016,000 for the year ended December 31, 1997,
compared to the year ended December 31, 1996. The increase in property operating
expenses was primarily attributable to the 1997 Acquisitions. In addition, 1997
included a full year of property operating expenses for Laguna Village Phase I
and a full quarter of operating expenses for Laguna Village Phase II. Property
taxes increased by $943,000 or 42.0% for the year ended December 31, 1997,
compared to the year ended December 31, 1996. The increase in property taxes was
primarily the result of the completion of Laguna Village Phase I in 1996, the
transfer of Laguna Village Phase II to operations at September 30, 1997 and the
1997 Acquisitions.
Depreciation and amortization increased by $1,235,000 or 16.1% to $8,928,000
from $7,693,000 for the year ended December 31, 1997 compared to the year ended
December 31, 1996. This was primarily due to the May 1996 completion of Laguna
Village Phase I, the completion of Laguna Village Phase II in September 1997 and
the 1997 Acquisitions.
Interest expense decreased by $614,000 or 4.2% to $14,057,000 from
$14,671,000 for the year ended December 31, 1997, compared to the year ended
December 31, 1996, primarily as a result of decreased interest expense relating
to the repayment of debt of approximately $134,000,000 in August 1997 in
19
connection with the Company's initial public offering. This decrease was
partially offset by interest expense related to the debt assumed pursuant to the
acquisition of Monterey Plaza in April 1997 which was subsequently repaid in
August 1997, the interest expense associated with the new unsecured credit
facility, the net impact of the December 1996 refinancing of variable rate debt
to fixed rate debt and construction loan interest related to the development of
Laguna Village Phase I.
General and administrative expenses increased by $695,000 or 21.5% to
$3,923,000 from $3,228,000 for the year ended December 31, 1997, compared to the
year ended December 31, 1996. This increase was primarily attributable to annual
salary increases and costs associated with additional staffing necessitated by
the 1997 Acquisitions. Expenses for tax and audit services were also increased
as a result of new public reporting requirements. These increases were partially
offset by a decrease in the management fee paid to Revenue Properties Company
Limited ("RPC") as that fee is no longer being charged effective with the
completion of the initial public offering. As a percentage of total revenue,
general and administrative expenses were 8.4% and 9.2% for the years ended
December 31, 1997 and 1996, respectively. The Company expects that general and
administrative expenses will continue to decrease as a percentage of total
revenue in future periods due to economies of scale which the Company
anticipates should be realized as additional properties are acquired.
Other expenses, net, consist primarily of loan guaranty fees and the
expensing of due diligence costs for acquisitions that are not completed. Other
expenses decreased by $846,000 or 55.2% to $687,000 from $1,533,000 for the year
ended December 31, 1997, compared to the year ended December 31, 1996. The
decrease was primarily due to loan guaranty fees paid to RPC which are no longer
being charged as the debt which was guaranteed was paid off in August 1997 in
connection with the initial public offering. This decrease was partially offset
by the expensing of due diligence costs in 1997 related to potential
acquisitions which were not consummated.
As part of the Formation Transactions (see footnote 1 to the consolidated
financial statements located elsewhere in this report), $134,217,000 of notes
payable were repaid. In connection with the early pay off of these notes, an
extraordinary loss of $1,043,000 was recorded which includes prepayment
penalties and the write off of unamortized financing costs and loan premium.
The following table compares the operating data for the properties ("Same
Store Properties") that were owned and in operation for the entirety of both
years ended December 31, 1997 and 1996:
1997 1996
------------- -------------
Revenue:
Rental....................................................... $ 26,755,000 $ 26,088,000
Recoveries from tenants...................................... 6,265,000 5,842,000
Income from unconsolidated partnerships...................... 409,000 109,000
Other........................................................ 458,000 432,000
------------- -------------
$ 33,887,000 $ 32,471,000
Operating expenses:
Property operating, property taxes and property management
fees....................................................... 6,420,000 6,138,000
------------- -------------
Operating income............................................... $ 27,467,000 $ 26,333,000
------------- -------------
------------- -------------
Operating income for the Same Store Properties for the year ended December
31, 1997 increased over the same period in the prior year by $1,134,000 or 4.3%.
This increase was attributable to increased rental revenue due to increased
occupancy levels primarily at Canyon Ridge Plaza, Cheyenne Commons, Sahara
Pavilion North, Chino Town Square and Tanasbourne Village. In addition, there
were approximately $153,000 of lease termination fees received at Canyon Ridge
Plaza and Sahara Pavilion North in 1997. Property operating expenses for these
Same Store Properties increased by $282,000 or 4.6% for the
20
year ended December 31, 1997, over the same period in the prior year due
primarily to increased property tax expense and center enhancement costs such as
painting, new awnings, signage and landscaping at Cheyenne Commons as well as
increased bad debt expense at Sunset Square.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 TO THE YEAR ENDED DECEMBER
31, 1995.
Total revenue increased by $5,370,000 or 18.1% to $35,105,000 for the year
ended December 31, 1996, as compared to $29,735,000 for the year ended December
31, 1995.
Rental revenue increased $4,881,000 or 20.8% to $28,350,000 for the year
ended December 31, 1996, as compared to $23,469,000 for the year ended December
31, 1995. The increase in rental revenue resulted primarily from a full year of
rental revenue from Cheyenne Commons, which was acquired in September 1995, the
completion of Canyon Ridge in December 1995, the completion of Laguna Village
Phase I in May 1996 and the acquisition of the remaining 98% ownership interest
in Laurentian Center effective January 1996.
Recoveries from tenants increased to $6,214,000 for the year ended December
31, 1996, an increase of $736,000 or 13.4%, as compared to $5,478,000 for the
year ended December 31, 1995. This increase resulted principally from a full
year of recoveries from tenants of Cheyenne Commons and Canyon Ridge, partial
year recoveries from the tenant in Laguna Village Phase I and the acquisition of
the remaining ownership interests in Laurentian Center. Recoveries from tenants
for 1996 represent 85.0% of property operating expenses and property taxes as
compared to 81.2% for 1995. This increase was due to the sale in 1995 of the
Richardson Mall, a mixed use residential property located in Hartford,
Connecticut. Increases in vacant space prior to this disposition decreased
significantly the rate of recovery of expenses relating to this property.
The Company recognized a gain of $501,000 in 1995 on the sale of the
Richardson Mall. There was no comparable gain in 1996.
Property expenses include property operating expenses, property taxes and
property management fees. Property operating expenses for the year ended
December 31, 1996 increased to $5,070,000, an increase of $308,000 or 6.5%, from
$4,762,000 for the year ended December 31, 1995. This increase was primarily
attributable to a full year of ownership in 1996 of Cheyenne Commons, the
completion in 1996 of Laguna Village Phase I and Canyon Ridge and their
subsequent operations, as well as the acquisition of the ownership interests in
Laurentian Center. Property taxes increased by $263,000 or 13.3% to $2,244,000
for the year ended December 31, 1996, compared to $1,981,000 for the year ended
December 31, 1995. The increase in property taxes was primarily the result of a
full year of ownership of Cheyenne Commons, the completion of Laguna Village
Phase I and Canyon Ridge and their subsequent operations, and the acquisition of
the remaining ownership interests in Laurentian Center.
Depreciation and amortization increased by $1,353,000 or 21.3% to $7,693,000
from $6,340,000 primarily due to the 1996 acquisition and the full year effect
of the properties acquired or developed during 1995.
Interest expense for the year ended December 31, 1996 increased by
$2,409,000 or 19.6% to $14,671,000, as compared to $12,262,000 for the year
ended December 31, 1995, primarily as a result of the increase in mortgage loans
incurred to acquire Cheyenne Commons, to finance the development of Laguna
Village Phase I and Canyon Ridge and the loan assumed in the acquisition of the
ownership interests in Laurentian Center. Interest rates on variable rate debt
were relatively unchanged for 1996 as compared to 1995.
21
General and administrative expenses decreased by $392,000 or 10.8% for the
year ended December 31, 1996, compared to the year ended December 31, 1995,
primarily due to a reduction in payroll costs related to the relocation of the
Company's administrative offices in the spring of 1995. General and
administrative expenses as a percentage of total revenue decreased to 9.2%
during 1996 from 12.2% during 1995 as the Company was able to utilize its
personnel and other overhead costs over a greater revenue base.
Other expenses, net, consist primarily of loan guaranty fees, miscellaneous
income and expenses, and the write off of capitalized leasing commissions and
tenant improvements. Other expenses amounted to $1,533,000 for the year ended
December 31, 1996, an increase of $286,000 when compared to other expenses of
$1,247,000 for the year ended December 31, 1995. The change resulted from (i)
reduced interest income and (ii) increased write off of capitalized leasing
commissions and tenant improvements in 1996 resulting from lease terminations in
that year.
The following table compares the operating data for the properties ("Same
Store Properties") that were owned and in operation for the entirety of both
years ended December 31, 1996 and 1995:
1996 1995
------------- -------------
Revenue:
Rental....................................................... $ 22,094,000 $ 21,901,000
Recoveries from tenants...................................... 5,139,000 5,223,000
Income (loss) from uncombined partnerships................... 109,000 (32,000)
Other........................................................ 345,000 305,000
------------- -------------
$ 27,687,000 $ 27,397,000
Operating expenses:
Property operating, property taxes and property management
fees....................................................... 6,087,000 5,985,000
------------- -------------
Operating income............................................... $ 21,600,000 $ 21,412,000
------------- -------------
------------- -------------
Operating income for the Same Store Properties for the year ended December
31, 1996 increased over the prior year by $188,000. This increase was
attributable to increased rental revenue due to increased occupancy levels at
Rosewood Village. In addition, a lease termination fee of approximately $171,000
was received at Tanasbourne Village. Also, Winterwood Pavilion had an increase
of approximately $56,000 in percentage rent. Operating expenses for these Same
Store Properties increased by $102,000 for the year ended December 31, 1996 over
the prior year primarily due to an increase in property tax expense of
approximately $50,000 at Olympia Square, increased center enhancement costs such
as painting, new awnings and signage at Sunset Square of approximately $30,000
and an increase in marketing, landscaping and general maintenance expenses at
Sahara Pavilion South of approximately $35,000.
FUNDS FROM OPERATIONS
The White Paper on Funds from Operations approved by the Board of Governors
of the National Association of Real Estate Investment Trusts ("NAREIT") in March
1995 (the "White Paper") defines Funds from Operations as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of property, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. Management considers Funds from Operations an appropriate measure of
performance of an equity REIT because it is predicated on cash flow analyses.
The Company computes Funds from Operations in accordance with standards
established by the White Paper. The Company's computation of Funds from
Operations may, however, differ from the methodology for calculating Funds from
Operations utilized by other equity REITs and, therefore, may not be comparable
to such other REITs. Funds from Operations should not be considered
22
as an alternative to net income (determined in accordance with GAAP) as a
measure of the Company's liquidity, nor is it indicative of funds available to
fund the Company's cash needs, including its ability to make distributions.
The following table presents the Company's actual and pro forma Funds from
Operations for the years ended December 31, 1997 and 1996 (see footnote 13 to
the consolidated financial statements located elsewhere in this report):
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------- ---------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
---------- ---------- --------- ----------
Net income................................. $8,313,000 $17,537,000 $ 449,000 $16,361,000
Add:
Extraordinary loss....................... 1,043,000 -- -- --
Depreciation and amortization............ 8,928,000 9,484,000 7,693,000 8,738,000
Depreciation of unconsolidated
partnerships........................... 208,000 208,000 214,000 214,000
Depreciation of non-real estate corporate
assets................................. (204,000) (204,000) (174,000) (174,000)
---------- ---------- --------- ----------
Funds from Operation