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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
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 of Incorporation) (I.R.S. Employer Identification No.)
1631-B SOUTH MELROSE DRIVE,
VISTA, CALIFORNIA 92083
(Address of Principal Executive Offices) (zip code)
Registrant's telephone number, including area code: (760) 727-1002
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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 [ ].
As of October 29, 2001, the number of shares of the registrant's common
stock outstanding was 32,319,746.
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PAN PACIFIC RETAIL PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- -----------
(unaudited)
ASSETS:
Properties, at cost:
Land $ 348,840 $ 350,604
Buildings and improvements (including related party
development and acquisition fees of $1,235) 907,390 887,353
Tenant improvements 34,179 30,762
----------- -----------
1,290,409 1,268,719
Less accumulated depreciation and amortization (91,857) (73,895)
----------- -----------
1,198,552 1,194,824
Investments in unconsolidated partnerships 6,967 6,816
Cash and cash equivalents 225 1,601
Restricted cash 292 331
Accounts receivable (net of allowance for doubtful
accounts of $1,559 and $1,404, respectively) 7,005 7,107
Accrued rent receivable (net of allowance for doubtful
accounts of $1,847 and $1,588, respectively) 16,619 14,288
Notes receivable 57,005 37,944
Deferred lease commissions (including unamortized
related party amounts of $3,963 and $2,978,
respectively, and net of accumulated amortization
of $3,089 and $2,415, respectively) 5,988 4,836
Prepaid expenses 10,496 9,133
Other assets 4,134 20,810
----------- -----------
$ 1,307,283 $ 1,297,690
=========== ===========
LIABILITIES AND EQUITY:
Notes payable $ 230,897 $ 233,911
Line of credit and term loan payable 135,600 267,650
Senior notes 273,764 124,850
Accounts payable, accrued expenses and other
liabilities (including related party amounts
of $315 and $663, respectively) 28,930 22,527
----------- -----------
669,191 648,938
Minority interests 29,299 41,754
----------- -----------
Stockholders' equity:
Common stock par value $.01 per share,
100,000,000 authorized shares, 32,196,686
and 32,074,368 shares issued and outstanding
at September 30, 2001 and December 31, 2000,
respectively 322 321
Paid in capital in excess of par value 702,879 705,265
Accumulated deficit (94,408) (98,588)
----------- -----------
608,793 606,998
----------- -----------
$ 1,307,283 $ 1,297,690
=========== ===========
See accompanying notes to consolidated financial statements.
2
PAN PACIFIC RETAIL PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2001 2000 2001 2000
-------- --------- --------- --------
(unaudited) (unaudited)
REVENUE:
Base rent $ 34,913 $ 22,163 $ 104,429 $ 65,241
Percentage rent 253 135 1,822 435
Recoveries from tenants 8,226 5,011 24,009 14,635
Net gain on sale of real estate 926 -- 3,344 --
Income from unconsolidated partnerships 187 77 597 226
Other 2,128 658 6,151 1,935
-------- --------- --------- --------
46,633 28,044 140,352 82,472
-------- --------- --------- --------
EXPENSES:
Property operating 4,946 3,330 15,620 9,685
Property taxes 3,376 2,054 10,286 6,083
Depreciation and amortization 7,106 4,992 21,871 14,418
Interest 11,562 7,627 35,337 21,943
General and administrative 2,132 812 6,815 3,301
Other 332 32 969 118
-------- --------- --------- --------
29,454 18,847 90,898 55,548
-------- --------- --------- --------
INCOME BEFORE MINORITY INTERESTS 17,179 9,197 49,454 26,924
Minority interests (663) (473) (2,043) (1,476)
-------- --------- --------- --------
NET INCOME $ 16,516 $ 8,724 $ 47,411 $ 25,448
======== ========= ========= ========
Basic earnings per share $ 0.52 $ 0.41 $ 1.50 $ 1.20
Diluted earnings per share $ 0.50 $ 0.41 $ 1.47 $ 1.20
See accompanying notes to consolidated financial statements.
3
PAN PACIFIC RETAIL PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30,
---------------------
2001 2000
--------- --------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 47,411 $ 25,448
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 21,871 14,418
Restricted stock amortization 647 --
Amortization of prepaid financing costs 742 508
Net gain on sale of real estate (3,344) --
Income from unconsolidated partnerships (597) (226)
Minority interests 2,043 1,476
Changes in assets and liabilities:
Decrease in restricted cash 39 421
Decrease (increase) in accounts receivable 102 (713)
Increase in accrued rent receivable (2,331) (1,539)
Increase in deferred lease commissions (2,035) (1,333)
(Increase) decrease in prepaid expenses (480) 525
Increase in other assets (822) (1,673)
Increase (decrease) in accounts payable,
accrued expenses and other liabilities 6,513 (631)
--------- --------
Net cash provided by operating activities 69,759 36,681
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of and additions to operating properties (32,556) (47,010)
Proceeds from sale of real estate 27,825 --
(Decrease) increase in construction accounts
payable and accrued expenses (110) 83
Distributions from unconsolidated partnerships 446 207
Redemption of operating subsidiary units (2,203) --
Acquisition of Western (1,952) --
Acquisition of minority interests -- (533)
Increase in other assets -- (11)
Collections of notes receivable 2,732 442
Increase in notes receivable (19,393) (285)
--------- --------
Net cash used in investing activities (25,211) (47,107)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit proceeds 123,750 63,700
Line of credit payments (255,800) (24,000)
Notes payable payments (2,937) (2,564)
Issuance of senior notes, net 148,837 --
Prepaid financing costs (1,625) (31)
Repurchase of common shares (20,850) --
Issuance of common shares 8,499 --
Distributions paid (45,798) (27,776)
--------- --------
Net cash (used in) provided by financing activities (45,924) 9,329
--------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,376) (1,097)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,601 1,097
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 225 $ --
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest (net of amounts capitalized
of $847 and $50, respectively) $ 33,416 $ 21,226
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Distributions payable $ -- $ 9,408
Transfer of other assets to property $ 19,057 $ --
Conversion of operating subsidiary units to common stock $ 9,308 $ --
Note receivable issued upon sale of property $ 2,400 $ --
Issuance of restricted stock $ 647 $ 262
See accompanying notes to consolidated financial statements.
4
PAN PACIFIC RETAIL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2001 (UNAUDITED) AND DECEMBER 31, 2000,
AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER, 2001 AND 2000 (UNAUDITED)
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA)
1. MANAGEMENT STATEMENT AND GENERAL
The consolidated financial statements of Pan Pacific Retail Properties,
Inc. (the "Company") were prepared from the books and records of the Company
without audit and in the opinion of management include all adjustments
(consisting of only normal recurring accruals) necessary to present a fair
statement of results for the interim periods presented. Readers of this
quarterly report should refer to the audited consolidated financial statements
of the Company for the year ended December 31, 2000, which are included in the
Company's 2000 Annual Report on Form 10-K, as certain disclosures which would
substantially duplicate those contained in the audited consolidated financial
statements have been omitted from this report.
2. STOCK OPTION PLAN
In March 2001 and 2000, the Company granted 416,000 and 173,000 stock
options, respectively, under the 2000 Stock Incentive Plan of Pan Pacific Retail
Properties, Inc. and the 1997 Stock Option and Incentive Plan. During the first
quarter of 2001, the Company also granted 212,800 shares of restricted stock
under these plans.
3. EARNINGS PER SHARE
The following is a reconciliation of the numerator and denominator for the
calculation of basic and diluted earnings per share for the three and nine
months ended September 30, 2001 and 2000:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS
SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- ---------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Income available to common stockholders:
Basic $ 16,516 $ 8,724 $ 47,411 $ 25,448
Add-back income allocated to dilutive
operating partnership and LLC units
(minority interests) 663 473 1,528 1,463
----------- ----------- ----------- -----------
Diluted $ 17,179 $ 9,197 $ 48,939 $ 26,911
=========== =========== =========== ===========
Weighted average shares:
Basic 32,056,489 21,252,512 31,627,417 21,252,512
Incremental shares from assumed:
Exercise of dilutive stock options 326,166 72,510 178,325 24,496
Conversion of dilutive operating
partnership and LLC units 1,639,486 1,147,204 1,570,164 1,147,204
----------- ----------- ----------- -----------
Diluted 34,022,141 22,472,226 33,375,906 22,424,212
=========== =========== =========== ===========
For the three months ended September 30, 2001, all stock options and
operating subsidiary units were dilutive and included in the calculation of
diluted weighted-average shares. For the nine months ended September 30, 2001,
314,587 operating subsidiary units were excluded from the calculation of diluted
weighted-average shares because they were antidilutive. For the three and nine
months ended September 30, 2000, 310,167 and 1,182,834 stock options,
respectively, were excluded from the calculation of diluted weighted-average
shares because they were antidilutive.
5
PAN PACIFIC RETAIL PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2001 (UNAUDITED) AND DECEMBER 31, 2000,
AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER, 2001 AND 2000 (UNAUDITED)
(TABULAR AMOUNTS ARE IN THOUSANDS, EXCEPT OPTION AND SHARE DATA)
4. SENIOR NOTES
In April 2001, the Company issued $150,000,000 in aggregate principal
amount of 7.95% senior notes due April 2011. The Company sold these notes at
99.225% of the principal amount. The Company used the net proceeds from the
offering to repay borrowings under its term loan and line of credit.
5. NET GAIN ON SALE OF REAL ESTATE
The Company recorded a net gain on sale of real estate of $3,344,000 during
the nine months ended September 30, 2001. This gain related to the sale of a
non-core shopping center, five single tenant assets and a parcel of land. The
total sales proceeds of $30,225,000, were paid in cash and a note receivable.
6. RELATED PARTY TRANSACTIONS
(a) On January 4, 2001, the Company purchased 1,000,000 shares of its
common stock from Revenue Properties (U.S.), Inc., an affiliate of the Company.
The Company purchased the stock at a price of $20.85 per share and financed the
transaction through a draw under its line of credit.
(b) Distributions on common stock paid to Revenue Properties (U.S.), Inc.
were $7,004,000 and $13,402,000 during the nine months ended September 30, 2001
and 2000, respectively. At September 30, 2001 and 2000, $0 and $4,539,000,
respectively, were payable as distributions to Revenue Properties (U.S.), Inc.
(c) The Company received $15,000 and $55,000 for the nine months ended
September 30, 2001 and 2000, respectively. These amounts represent a
reimbursement of costs incurred by the Company in providing financial services
to Revenue Properties (U.S.), Inc. and are included as a reduction of general
and administrative expenses.
(d) The Company had notes receivable of $723,000 and $687,000 due from
executive officers at September 30, 2001 and December 31, 2000, respectively.
These notes were part of the acquisition of Western and replaced notes
previously held by officers of Western. These notes bear interest at 7.50% and
mature in October 2008. In addition, the Company had notes receivable of
$122,000 and $116,000 due from executive officers at September 30, 2001 and
December 31, 2000, respectively. These notes, which bear interest at 7.00%, were
scheduled to mature in August 2001 and have been extended.
7. COMMITMENTS AND CONTINGENCIES
Various claims and legal proceedings arise in the ordinary course of
business. The ultimate amount of liability from all claims and actions cannot be
determined with certainty, but in the opinion of management, the ultimate
liability from all pending and threatened legal claims will not materially
affect the consolidated financial statements taken as a whole.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY LANGUAGE
The discussions in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 which
reflect management's current views with respect to future events and financial
performance. Forward-looking statements are subject to risks and uncertainties.
Factors that could cause actual results to differ materially from expectations
include market valuations of our stock, financial performance and operations of
our shopping centers, real estate conditions, execution of shopping center
development programs, successful completion of renovations, completion of
pending acquisitions, changes in the availability of additional acquisitions,
changes in local or national economic conditions, acts of terrorism or war and
other risks detailed from time to time in reports filed with the Securities and
Exchange Commission including our Annual Report on Form 10-K for the year ended
December 31, 2000.
OVERVIEW
The following discussion should be read in connection with the consolidated
financial statements of Pan Pacific Retail Properties, Inc. and its
subsidiaries, and the notes thereto, appearing elsewhere in this report.
We receive income primarily from rental revenue from shopping center
properties, including recoveries from tenants, offset by operating and overhead
expenses. Primarily as a result of our acquisition program, including the
acquisition of Western Properties Trust described below, which included
interests in 50 shopping centers, the financial data show increases in total
revenue and total expenses from period to period.
During the current year six non-core assets and a parcel of land were sold.
The cash proceeds were used towards the purchase of three shopping center
assets.
On November 13, 2000, we acquired Western Properties Trust, a California
real estate investment trust. The transaction was a stock for stock exchange
whereby Western common shares and units were exchanged into newly issued common
shares and operating subsidiary units, based upon a fixed exchange ratio of 0.62
of a share of our common stock per Western share or operating subsidiary unit.
As a result, we issued 10,754,256 shares of our common stock to holders of
Western common shares. We are also currently obligated to issue 352,173 shares
of our common stock upon the exchange of operating subsidiary units held by
limited partners of Pan Pacific (Kienows), L.P., formerly Western/Kienow, L.P.,
and Pan Pacific (Pinecreek), L.P., formerly Western/Pinecreek, L.P., or pay a
cash amount, at our discretion. In connection with this transaction, we assumed
$135,000,000 of Western's debt obligations.
We expect that the more significant part of our growth in the next year or
two will come from additional acquisitions, rent increases from re-leasing and
re-tenanting initiatives of the assets acquired in the Western acquisition and
the benefit of the stabilization of other properties acquired during 2001 and
2000.
RESULTS OF OPERATIONS
Comparison of the nine months ended September 30, 2001 to the nine months
ended September 30, 2000.
Total revenue increased by $57,880,000 or 70.2% to $140,352,000 from
$82,472,000 for the nine months ended September 30, 2001, compared to the nine
months ended September 30, 2000.
Rental revenue increased by $40,575,000 or 61.8% to $106,251,000 from
$65,676,000 for the nine months ended September 30, 2001, compared to the nine
months ended September 30, 2000. The increase in rental revenue resulted
principally from four properties acquired in 2000 and the properties acquired as
a result of our acquisition of Western in November 2000.
Recoveries from tenants increased by $9,374,000 or 64.1% to $24,009,000
from $14,635,000 for the nine months ended September 30, 2001, compared to the
nine months ended September 30, 2000. The increase resulted principally from
four properties acquired in 2000 and the acquisition of Western in November
2000. Recoveries from tenants were 92.7% of property operating expenses and
property taxes for the nine months ended September 30, 2001 compared to 92.8% of
the same expenses for the same period in 2000.
7
Net gain on sale of real estate totaling $3,344,000 resulted from the sale
of six non-core assets and a parcel of land during the nine months ended
September 30, 2001. There were no sales of assets during the comparable period
in the prior year.
Other income increased by $4,216,000 or 217.9% to $6,151,000 from
$1,935,000 for the nine months ended September 30, 2001, compared to the nine
months ended September 30, 2000. The increase resulted principally from interest
income on corporate notes receivable related to real estate activities.
Property expenses include property operating expenses and property taxes.
Property operating expenses increased by $5,935,000 or 61.3% to $15,620,000 from
$9,685,000 for the nine months ended September 30, 2001, compared to the nine
months ended September 30, 2000. The increase resulted principally from four
properties acquired in 2000 and the acquisition of Western in November 2000.
Property taxes increased by $4,203,000 or 69.1% to $10,286,000 from $6,083,000
for the nine months ended September 30, 2001, compared to the nine months ended
September 30, 2000. The increase in property taxes was also primarily the result
of four properties acquired in 2000 and the acquisition of Western in November
2000.
Depreciation and amortization increased by $7,453,000 or 51.7% to
$21,871,000 from $14,418,000 for the nine months ended September 30, 2001
compared to the nine months ended September 30, 2000. The increase resulted
principally from four properties acquired in 2000 and the acquisition of Western
in November 2000.
Interest expense increased by $13,394,000 or 61.0% to $35,337,000 from
$21,943,000 for the nine months ended September 30, 2001, compared to the nine
months ended September 30, 2000, primarily as a result of the debt obligations
assumed upon the acquisition of Western and interest expense relating to funds
drawn on our Revolving Credit Agreement to finance the four other properties
acquired during 2000. Interest expense also increased as a result of our
issuance of $150,000,000, in aggregate principal amount, of senior notes in
April 2001. The interest rate of 7.95% on the senior notes is higher than our
cost to borrow funds under the Revolving Credit Agreement and Term Credit
Agreement which were paid down with the net proceeds of the notes offering.
These increases were partially offset by a reduction in the LIBOR component of
our borrowing cost under the Revolving Credit Agreement and Term Credit
Agreement over the comparable period in the prior year.
General and administrative expenses increased by $3,514,000 or 106.5% to
$6,815,000 from $3,301,000 for the nine months ended September 30, 2001,
compared to the nine months ended September 30, 2000. The increase resulted
primarily from an increase in salaries and benefits and other related expenses
resulting from the acquisition of Western as well as annual compensation
increases in the first quarter of 2001. As a percentage of total revenue,
general and administrative expenses were 4.9% and 4.0% for the nine months ended
September 30, 2001 and 2000, respectively.
Comparison of the three months ended September 30, 2001 to the three months
ended September 30, 2000.
Total revenue increased by $18,589,000 or 66.3% to $46,633,000 from
$28,044,000 for the three months ended September 30, 2001, compared to the three
months ended September 30, 2000.
Rental revenue increased by $12,868,000 or 57.7% to $35,166,000 from
$22,298,000 for the three months ended September 30, 2001, compared to the three
months ended September 30, 2000. The increase in rental revenue resulted
principally from three properties acquired in 2000 and the properties acquired
as a result of our acquisition of Western in November 2000.
Recoveries from tenants increased by $3,215,000 or 64.2% to $8,226,000 from
$5,011,000 for the three months ended September 30, 2001, compared to the three
months ended September 30, 2000. The increase resulted principally from three
properties acquired in 2000 and the acquisition of Western in November 2000.
Recoveries from tenants were 98.8% of property operating expenses and property
taxes for the three months ended September 30, 2001 compared to 93.1% of the
same expenses for the same period in 2000.
Net gain on sale of real estate totaling $926,000 resulted from the sale of
one non-core asset during the three months ended September 30, 2001. There were
no sales of assets during the comparable period in the prior year.
Other income increased by $1,470,000 or 223.4% to $2,128,000 from $658,000
for the three months ended September 30, 2001, compared to the three months
ended September 30, 2000. The increase resulted principally from interest income
on corporate notes receivable related to real estate activities.
Property expenses include property operating expenses and property taxes.
Property operating expenses increased by $1,616,000 or 48.5% to $4,946,000 from
$3,330,000 for the three months ended September 30, 2001, compared to the three
months ended September 30, 2000. The increase resulted principally from three
properties acquired in 2000 and the acquisition
8
of Western in November 2000. Property taxes increased by $1,322,000 or 64.4% to
$3,376,000 from $2,054,000 for the three months ended September 30, 2001,
compared to the three months ended September 30, 2000. The increase in property
taxes was also primarily the result of three properties acquired in 2000 and the
acquisition of Western in November 2000.
Depreciation and amortization increased by $2,114,000 or 42.3% to
$7,106,000 from $4,992,000 for the three months ended September 30, 2001
compared to the three months ended September 30, 2000. The increase resulted
principally from three properties acquired in 2000 and the acquisition of
Western in November 2000.
Interest expense increased by $3,935,000 or 51.6% to $11,562,000 from
$7,627,000 for the three months ended September 30, 2001, compared to the three
months ended September 30, 2000, primarily as a result of the debt obligations
assumed upon the acquisition of Western and interest expense relating to funds
drawn on our Revolving Credit Agreement to finance the three other properties
acquired during 2000. Interest expense also increased as a result of our
issuance of $150,000,000, in aggregate principal amount, of senior notes in
April 2001. The interest rate of 7.95% on the senior notes is higher than our
cost to borrow funds under the Revolving Credit Agreement and Term Credit
Agreement which were paid down with the net proceeds of the notes offering.
These increases were partially offset by a reduction in the LIBOR component of
our borrowing cost under the Revolving Credit Agreement and Term Credit
Agreement over the comparable period in the prior year.
General and administrative expenses increased by $1,320,000 or 162.6% to
$2,132,000 from $812,000 for the three months ended September 30, 2001, compared
to the three months ended September 30, 2000. The increase resulted primarily
from an increase in salaries and benefits and other related expenses resulting
from the acquisition of Western as well as annual compensation increases in the
first quarter of 2001. As a percentage of total revenue, general and
administrative expenses were 4.6% and 2.9% for the three months ended September
30, 2001 and 2000, respectively.
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. We consider Funds from Operations an appropriate measure of
performance of an equity REIT because it is predicated on cash flow analyses. We
compute 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 these other REITs.
Funds from Operations should not be considered as an alternative to net income
(determined in accordance with GAAP) as a measure of our liquidity, nor is it
indicative of funds available to fund our cash needs, including our ability to
make distributions.
The following table presents the Company's Funds from Operations (assuming
dilution) for the three and nine months ended September 30, 2001 and the three
and nine months ended September 30, 2000:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net income $ 16,516,000 $ 8,724,000 $ 47,411,000 $ 25,448,000
Add:
Depreciation and amortization 7,106,000 4,992,000 21,871,000 14,418,000
Depreciation of unconsolidated
partnerships 32,000 2,000 88,000 6,000
Depreciation of non-real estate
corporate assets (147,000) (106,000) (393,000) (312,000)
DownREIT minority interests 663,000 473,000 2,043,000 1,463,000
Less:
Net gain on sale of real estate (926,000) -- (3,344,000) --
------------ ------------ ------------ ------------
Funds from Operations $ 23,244,000 $ 14,085,000 $ 67,676,000 $ 41,023,000
============ ============ ============ ============
Weighted average number of shares
of common stock outstanding
(assuming dilution) 34,022,141 22,472,226 33,690,493 22,424,212
9
CASH FLOWS
Comparison of the nine months ended September 30, 2001 to the nine months
ended September 30, 2000.
Net cash provided by operating activities increased by $33,078,000 to
$69,759,000 for the nine months ended September 30, 2001, as compared to
$36,681,000 for the nine months ended September 30, 2000. The increase was
primarily the result of increases in operating income before depreciation and
amortization due to property acquisitions and the acquisition of Western as well
as accounts payable, accrued expenses and other liabilities offset by a net gain
on sale of real estate.
Net cash used in investing activities decreased by $21,896,000 to
$25,211,000 for the nine months ended September 30, 2001, compared to
$47,107,000 for the nine months ended September 30, 2000. The decrease was
primarily the result of a decrease in acquisitions of and additions to operating
properties and an increase in proceeds from sale of real estate offset by an
increase in notes receivable and the redemption of operating subsidiary units
over the comparable period in the prior year.
Net cash used in financing activities increased by $55,253,000 to
$45,924,000 for the nine months ended September 30, 2001, compared to net cash
provided by financing activities of $9,329,000 for the nine months ended
September 30, 2000. The increase resulted primarily from an increase in line of
credit payments, the repurchase of shares of common stock and an increase in
distributions paid offset by an issuance of senior notes, an increase in line of
credit proceeds and the issuance of common shares.
LIQUIDITY AND CAPITAL RESOURCES
Our total market capitalization at September 30, 2001, was approximately
$1,528,152,000, based on the market closing price of our common stock at
September 30, 2001 of $26.35 per share (assuming the conversion of 1,499,377
operating subsidiary units) and debt outstanding of approximately $640,261,000
(exclusive of accounts payable and accrued expenses). As a result, our debt to
total market capitalization ratio was approximately 41.9% at September 30, 2001.
Our board of directors has adopted a policy of limiting our indebtedness to
approximately 50% of our total market capitalization. However, we may from time
to time modify our debt policy in light of current economic or market conditions
including but not limited to the relative costs of debt and equity capital,
market conditions for debt and equity securities and fluctuations in the market
price of our common stock. Accordingly, we may increase or decrease our debt to
market capitalization ratio beyond the limit described above.
In connection with our acquisition of Western in November 2000, we entered
into a new financing arrangement including a $300,000,000 Revolving Credit
Agreement and a $100,000,000 Term Credit Agreement. The Revolving Credit
Agreement matures in January 2004 and the Term Credit Agreement was scheduled to
mature in November 2001. At September 30, 2001, we had $164,400,000 available
under our Revolving Credit Agreement and the Term Credit Agreement had been
repaid in full. At our option, amounts borrowed under the Revolving Credit
Agreement bear interest at either LIBOR plus 1.10% or a reference rate. At our
option, amounts borrowed under the Term Credit Agreement bore interest at either
LIBOR plus 1.20% or a reference rate. The weighted average interest rate for
short-term LIBOR contracts under the Revolving Credit Agreement at September 30,
2001 was 4.21%. We will continue to use the Revolving Credit Agreement to take
advantage of select acquisition opportunities as well as to provide funds for
general corporate purposes. In April 2001, we issued $150,000,000 of 7.95%
senior notes due April 15, 2011. The net proceeds were used to repay borrowings
under the Revolving Credit Agreement and the Term Credit Agreement.
Our indebtedness outstanding at September 30, 2001 includes balloon
payments and scheduled senior note redemptions of $198,342,000 in 2004,
$7,395,000 in 2005, $55,520,000 in 2006, $74,644,000 in 2007, $25,000,000 in
2008, $46,355,000 in 2009, $48,191,000 in 2010, $150,000,000 in 2011 and
$5,836,000 in 2012. The payments due in the year 2004 include the balance drawn
on the Revolving Credit Agreement at September 30, 2001 of $135,600,000. With
regard to the payments noted above, it is likely that we will not have
sufficient funds on hand to repay these amounts at maturity. Therefore, we
expect to refinance this debt either through additional debt financings secured
by individual properties or groups of properties, by unsecured private or public
debt offerings or by additional equity offerings.
We expect to make distributions from net cash provided by operations.
Operating cash flows in excess of amounts to be used for distributions will be
invested by us primarily in short-term investments such as collateralized
securities of the United States government or its agencies, high-grade
commercial paper and bank deposits or will be used to pay down outstanding
balances on our Revolving Credit Agreement, if any.
10
The following table provides recent historical distribution information:
Distribution
Quarter Ended Date Declared Record Date Date Paid Per Share
------------- ------------- ----------- --------- ------------
March 31, 1999 February 10, 1999 March 17, 1999 April 16, 1999 $0.4000
June 30, 1999 June 15, 1999 June 28, 1999 July 16, 1999 $0.4000
September 30, 1999 September 9, 1999 September 24, 1999 October 22, 1999 $0.4000
December 31, 1999 December 9, 1999 December 22, 1999 January 21, 2000 $0.4000
March 31, 2000 February 9, 2000 March 17, 2000 April 14, 2000 $0.4200
June 30, 2000 June 13, 2000 June 26, 2000 July 21, 2000 $0.4200
September 30, 2000 September 15, 2000 September 25, 2000 October 20, 2000 $0.4200
December 31, 2000 October 30, 2000 November 3, 2000 November 15, 2000 $0.2800(1)
March 31, 2001 January 30, 2001 February 16, 2001 March 15, 2001 $0.4550
June 30, 2001 May 16, 2001 May 25, 2001 June 15, 2001 $0.4550
September 30, 2001 August 14, 2001 August 31, 2001 September 14, 2001 $0.4550
-------------
(1) During the fourth quarter of 2000 we distributed a special, two-month
dividend of $0.28 a share. This dividend was in connection with the Western
acquisition, and was paid to our stockholders of record before the merger
transaction was closed to address the two-month shift in timing for the
payment of our normal quarterly dividend in future periods.
We expect to meet our short-term liquidity requirements generally through
our current working capital and net cash provided by operations. We believe that
our net cash provided by operations will be sufficient to allow us to make the
distributions necessary to enable us to continue to qualify as a REIT. We also
believe that the foregoing sources of liquidity will be sufficient to fund our
short-term liquidity needs for the foreseeable future.
We expect to meet certain long-term liquidity requirements such as property
acquisition and development, scheduled debt maturities, renovations, expansions
and other non-recurring capital improvements through long-term secured and
unsecured indebtedness, the issuance of additional equity or debt securities and
the use of net proceeds from the disposition of non-strategic assets. We also
expect to use funds available under the Revolving Credit Facility to finance
acquisition and development activities and capital improvements on an interim
basis.
INFLATION
Substantially all of the leases provide for the recovery of real estate
taxes and operating expenses incurred by us. In addition, many of the leases
provide for fixed base rent increases or indexed escalations (based on the
consumer price index or other measures) and percentage rent. We believe that
inflationary increases in expenses will be substantially offset by expense
reimbursements, contractual rent increases and percentage rent described above.
The Revolving Credit Agreement bears interest at a variable rate, which
will be influenced by changes in short-term interest rates, and will be
sensitive to inflation.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and equity prices. The
primary market risk to which we are exposed is interest rate risk, which is
sensitive to many factors, including governmental monetary and tax policies,
domestic and international economic and political considerations and other
factors that are beyond our control.
Interest Rate Risk
As of September 30, 2001, we had $135,600,000 of outstanding floating rate
debt under the Revolving Credit Agreement. In order to modify and manage the
interest characteristics of outstanding debt and limit the effects of changes in
interest rates on operations, we may use a variety of financial instruments. We
were not a party to any hedging agreements with respect to our floating rate
debt as of September 30, 2001. We do not enter into any transactions for
speculative or trading purposes. We do not believe that our weighted average
interest rate of 7.7% on our fixed rate debt is materially different from
current fair market interest rates for debt instruments with similar risks and
maturities. Additionally, we do not believe that the interest rate risk
represented by our floating rate debt is material as of that date in relation to
total assets of $1,307,283,000 and a market capitalization of $887,891,000 of
our common stock and operating subsidiary units.
11
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------------------------------------------------
3.1 Articles of Amendment and Restatement of the Company
(previously filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-11 (Registration No.
333-28715) and incorporated herein by reference).
3.2 Amended and Restated Bylaws of the Company (previously
filed as Exhibit 3.2 to the Company's Registration
Statement on Form S-11 (Registration No. 333-28715)
and incorporated herein by reference).
4.1 Form of Certificate of Common Stock (previously filed
as Exhibit 4.1 to Pan Pacific Retail Properties,
Inc.'s Registration Statement on Form S-11
(Registration No. 333-28715) and incorporated herein
by this reference).
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on October 31, 2001.
PAN PACIFIC RETAIL PROPERTIES, INC.
By: /s/ Stuart A. Tanz By: /s/ Joseph B. Tyson
--------------------------- -----------------------------
Stuart A. Tanz Joseph B. Tyson, CPA
President and Chief Executive Vice President,
Executive Officer Chief Financial Officer
and Secretary
(Principal Financial and
Accounting Officer)
13