-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Uo1RJuf+k09zE3Gnh9os52pdQVaJt+4liS/w9UW48OF7XKrtAfSrsimgDn6AQAWN 2zRkqQVqEKXPSaF74hsRNg== 0000912057-00-014095.txt : 20000329 0000912057-00-014095.hdr.sgml : 20000329 ACCESSION NUMBER: 0000912057-00-014095 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESTERN PROPERTIES TRUST CENTRAL INDEX KEY: 0000106135 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 946100058 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-08723 FILM NUMBER: 581478 BUSINESS ADDRESS: STREET 1: 2200 POWELL STREET STREET 2: SUITE 600 CITY: EMERYVILLE STATE: CA ZIP: 94608 BUSINESS PHONE: 5105970160 MAIL ADDRESS: STREET 1: 2200 POWELL STREET STREET 2: SUITE 600 CITY: EMERYVILLE STATE: CA ZIP: 94608 FORMER COMPANY: FORMER CONFORMED NAME: WESTERN INVESTMENT REAL ESTATE TRUST DATE OF NAME CHANGE: 19920703 10-K405 1 10-K405 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 001-08723 WESTERN PROPERTIES TRUST - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) CALIFORNIA 94-6100058 - --------------------------------------- -------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2200 POWELL ST., STE. 600, EMERYVILLE, CA 94608 - --------------------------------------------------- --------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (510) 597-0160 --------------------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ------------------- None None - ------------------------------------- -------------------------------------- Securities registered pursuant to Section 12(g) of the Act: SHARES OF BENEFICIAL INTEREST, WITHOUT PAR VALUE - ------------------------------------------------------------------------------- (Title of class) 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. [X] The aggregate market value of the voting shares held by nonaffiliates of the registrant on March 1, 2000, based on the reported closing sales price of the Company's shares of beneficial interest on the American Stock Exchange on such date, was $175,000,000. (The Company defines affiliates as those required to report under Section 16 of the Securities Exchange Act of 1934). Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Shares of Beneficial Interest, No Par Value - 17,297,250 shares as of March 1, 2000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's proxy statement with respect to its 2000 Annual Meeting of Shareholders which will be filed with the Commission regarding the fiscal year covered by this Form 10-K are incorporated by reference in Part III, Items 10, 11 and 12. 2 WESTERN PROPERTIES TRUST INDEX TO 10-K
Page ---- PART I Item 1 Business 4-18 Item 2 Properties 18-21 Item 3 Legal Proceedings 22 Item 4 Submission of Matters to a Vote of Security Holders 22 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 22 Item 6 Selected Financial Data 23 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 24-33 Item 7A Quantitative and Qualitative Disclosures About Market Risk 33-34 Item 8 Consolidated Financial Statements 35-60 Consolidated Financial Statement Schedule 61-62 Additional Information: 1999 Building Improvement and Leasing Related Cost Additions (unaudited) 63 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 64 PART III Item 10 Directors and Executive Officers of the Registrant 64 Item 11 Executive Compensation 64 Item 12 Security Ownership of Certain Beneficial Owners and Management 64 Item 13 Certain Relationships and Related Transactions 65 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 65-67 Signatures 68
3 PART I ITEM 1. BUSINESS. (a) GENERAL DEVELOPMENT OF BUSINESS. Western Properties Trust ("Western") is a real estate investment trust ("REIT") and qualifies as such under Section 856 of the Internal Revenue Code. Western was organized under the laws of the State of California in 1962 and commenced real estate operations in 1964. On August 19, 1999, Western changed its name from Western Investment Real Estate Trust to Western Properties Trust. In order that Western may continue to qualify as a REIT: (i) it must be taxable as a domestic entity, (ii) beneficial ownership must be held by 100 or more persons, (iii) at least 95% of its gross income must be derived from real estate assets, dividends and interest, (iv) at least 75% of its gross income must be derived from real estate assets, (v) at the close of each quarter of the taxable year, at least 75% of the value of its total assets must be represented by real estate assets, cash and government securities, and (vi) it must distribute annually to its shareholders an amount equal to or exceeding 95% of its REIT taxable income. Under the terms of its Declaration of Trust, Western is permitted to invest its funds in the ownership of real estate, mortgages, deeds of trust and certain financial instruments as permitted by law. Substantially all of Western's funds have been invested in the ownership of real estate. On January 8, 2000, Western engaged Donaldson, Lufkin and Jenrette ("DLJ") to act as its financial advisor to undertake a review of a broad range of strategic alternatives available to Western in light of the current and prospective market conditions facing Western and the REIT industry. Senior management and the Board is communicating regularly with DLJ in furtherance of considering alternatives to enhance shareholder value. These alternatives include a merger, sale, recapitalization, among other alternatives. In the event of a transaction, Western would pay to DLJ a customary and significant professional fee. (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS. Western evaluates performance and makes resource-allocation decisions on an individual property basis. For financial reporting purposes, Western has grouped its properties into four segments: shopping centers, shopping centers under development, single-tenant retail and other commercial properties. Investments principally consist of real estate, but also include real estate secured loans (three) and a real estate joint venture (one). (c) NARRATIVE DESCRIPTION OF BUSINESS. The following entities: Western; Western/Kienow's L.P., a Delaware limited partnership; Western Pinecreek L.P., a Delaware limited partnership; GW100, a general partnership; and Western's wholly owned subsidiary, WIRET Asset Management Services (a California corporation and a licensed real estate broker in the State of California) (collectively, "the Company"), are in the business of acquiring, managing, leasing and developing retail, commercial and industrial properties. Western is the sole general partner in Western/Kienow's L.P. and owned a 60% interest therein as of December 31, 4 1999. Western is also the sole general partner in Western Pinecreek L.P. and owned a 75% interest therein as of December 31, 1999. The Company employed 57 people at December 31, 1999. Through an unconsolidated real estate subsidiary, Western owns 11 properties comprising approximately 465,497 square feet of retail gross leasable area ("GLA"). Throughout this Form 10-K reference to the unconsolidated real estate subsidiary is a reference to this 11 property portfolio. The combined GLA of Western and its unconsolidated real estate subsidiary at December 31, 1999 was approximately 5.6 million square feet. The Company's executive office is located in the San Francisco Bay Area at 2200 Powell Street, Suite 600, Emeryville California, 94608, and Western's telephone number is (510) 597-0160. Additionally, the Company maintains regional offices in Granite Bay and Fresno, California and Portland, Oregon. THE PROPERTIES As of December 31, 1999, the Company (and its unconsolidated real estate subsidiary) had 62 real estate investments which were comprised of 46 properties owned directly, one investment in a joint venture, one shopping center development-in-progress, three promissory notes in favor of Western, secured by real estate and 11 properties owned by its unconsolidated real estate subsidiary. Effective October 30, 1998 the Company completed the acquisition of an interest in Kienow's Food Stores, Inc. ("Kienow's"), a Portland, Oregon-based corporation, which is described in the Company's financial statements as the unconsolidated real estate subsidiary. (See Note 5 to the Consolidated Financial Statements.). The acquisition was accomplished using a newly formed downREIT limited partnership structure. The Company consolidates the downREIT limited partnership (which accounts for its investment in Kienow's) on the equity basis. The following information, unless otherwise indicated, includes the 11 property Kienow's portfolio. The portfolio at December 31, 1999, is as follows: 5
--------------------------------- ------------------------------------- ---------------------------- Unconsolidated Real The Company Estate Subsidiary Combined --------------------------------- ------------------------------------- ---------------------------- No. of Gross No of Gross No. of Gross Investments Leasable Area Investments Leasable Area Investments Leasable Area ----------------------------------------------------------------------------------------------------- Shopping centers 39 4,719,389 (1) 6 381,743 45 5,101,132 Single-tenant retail 3 228,822 4 83,754 7 312,576 -- ------- -- ------- -- --------- Sub-total 42 4,948,211 10 465,497 52 5,413,708 Shopping center under development 1 25,128 --- --- 1 25,128 Commercial and other 8 150,387 1 --- 9 150,387 ----------------------------------------------------------------------------------------------------- Total 51 5,123,726 11 465,497 (2) 62 5,589,223 ----------------------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------------------------
(1) Included in shopping center gross leasable area is approximately 153,175 of square feet relating to a property under master lease. During 1998, the Company entered into a master leasehold interest in this property located in Dublin, California, that includes an option to purchase the property in favor of Western at a fixed price during the first quarter of 2001. Under the master lease, Western has full control of all leasing, management and capital expenditure decisions for the property. As part of the transaction, Western funded an $8.2 million, 8.5% per annum fixed-rate first trust-deed loan secured by the property. (2) This total does not include two non-core properties and two leaseholds held by unconsolidated real estate subsidiary. The average size of neighborhood and community shopping centers and other retail properties owned by the Company and its subsidiary at December 31, 1999, was approximately 100,000 square feet of GLA. The Company (and its unconsolidated real estate subsidiary) leases a substantial portion of its total GLA on a long-term, triple net basis. As of December 31, 1999, approximately 61% of the Company's total retail GLA was leased to anchor tenants. Of this space, 71% was leased to anchor tenant grocery or drugstores. Exclusive of the unconsolidated real estate subsidiary as of December 31, 1999, approximately 66% of the Company's total retail GLA was leased to anchor tenants. Additionally, as of that date, approximately 74% of the Company's (and its unconsolidated real estate subsidiary's) Annualized Base Rent (as herein defined) was derived from national or regional retail tenants. The following tables set forth, as of December 31, 1999, certain information with respect to the properties owned by the Company (and its unconsolidated real estate subsidiary): 6 Shopping Centers and Retail - Anchor/Non-Anchor
Unconsolidated Real Estate Company Company Subsidiary Percentage Portfolio Portfolio Portfolio Combined of Monthly Type of Tenant Space (4) GLA GLA (1) GLA (1) GLA (1) Base Rent(2) - ---------------------------------------------------------------------------------------------------------------------------------- Anchor 3,066,459 231,291 3,297,750 61% $1,808,777 Non-anchor 1,583,711 148,116 1,731,827 32% 1,926,414 - ---------------------------------------------------------------------------------------------------------------------------------- Sub-total 4,650,170 379,407 5,029,577 93% 3,735,191 - ---------------------------------------------------------------------------------------------------------------------------------- Unleased 298,041 86,090 384,131 7% - -------------------------------------------------------------------------------------------------------------- Total 4,948,211 465,497 5,413,708 100% - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- Unconsolidated Real Annualized Estate Base Rent Subsidiary Combined Monthly Annualized Base Rent Percentage of Per Leased Portfolio Base Rent Leased Annualized Square Type of Tenant Space (4) Monthly Base Rent (1)(2) (1)(2) Space (3) Base Rent Foot - --------------------------------------------------------------------------------------------------------------------------------- Anchor $212,473 $2,021,250 $24,255,000 50% $ 7.36 Non-anchor 86,676 2,013,090 $24,157,080 50% $13.95 - --------------------------------------------------------------------------------------------------------------------------------- Sub-total 299,149 4,034,340 $48,412,080 100% $ 9.63 - --------------------------------------------------------------------------------------------------------------------------------- Unleased - ---------------------------- Total - ---------------------------- - ----------------------------
Shopping Centers and Retail - National/Regional/Local
Unconsolidated Real Estate Company Company Subsidiary Portfolio Portfolio Portfolio Combined Percentage Monthly Base Type of Tenant Space (5) GLA GLA (1) GLA (1) of GLA (1) Rent (2) - --------------------------------------------------------------------------------------------------------------------------------- National 2,960,122 150,361 3,110,483 58% $2,060,476 Regional 840,825 78,526 919,351 17% 717,202 Local 849,223 150,520 999,743 18% 957,513 - --------------------------------------------------------------------------------------------------------------------------------- Sub-total 4,650,170 379,407 5,029,577 93% 3,735,191 - --------------------------------------------------------------------------------------------------------------------------------- Unleased 298,041 86,090 384,131 7% - ---------------------------------------------------------------------------------------------------------- Total 4,948,211 465,497 5,413,708 100% - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- Unconsolidated real Annualized Base estate Subsidiary Percentage of Rent Portfolio Monthly Combined Monthly Annualized Base Rent Annualized Base Per Leased Type of Tenant Space (5) Base Rent (1)(2) Base Rent (1)(2) Leased Space (3) Rent Square Foot - ------------------------------------------------------------------------------------------------------------------------------ National $ 147,760 $2,208,236 $26,498,832 55% $ 8.52 Regional 45,766 762,968 9,155,616 19% $ 9.96 Local 105,623 1,063,136 12,757,632 26% $12.76 - ------------------------------------------------------------------------------------------------------------------------------ Sub-total 299,149 4,034,340 $48,412,080 100% $ 9.63 - ------------------------------------------------------------------------------------------------------------------------------ Unleased - -------------------------------- Total - -------------------------------- - --------------------------------
(1) Excludes two non-core properties and two leaseholds held by the Company's unconsolidated real estate subsidiary. (2) "Monthly base rent" represents the minimum monthly rent in effect on December 31, 1999. (3) "Annualized Base Rent" represents the annualized minimum monthly rent in effect on December 31, 1999. (4) "Anchor" tenants means those tenants leasing 10,000 square feet or more. (5) "National" tenants means those tenants with locations in multiple states. "Regional" tenants means those tenants with three or more locations in one state, and "Local" tenants means those tenants with fewer than three locations and operate exclusively within one state. 7 The combined portfolios of the Company (and its unconsolidated real estate subsidiary) of 62 properties at December 31, 1999, is summarized as follows: Shopping Centers, Retail and Commercial
Unconsolidated Real Estate Company Subsidiary Company Portfolio Portfolio Combined Percentage Portfolio Total Portfolio GLA GLA (1) GLA(1) of GLA(1) Monthly Base rent(2) - ---------------------------------------------------------------------------------------------------------------------------------- Shopping Centers 4,719,389 381,743 5,101,132 91% $3,598,742 Shopping Center space under development 25,128 --- 25,128 --- 36,814 Single Tenant Retail 228,822 83,754 312,576 6% 136,449 Commercial and other 150,387 --- 150,387 3% 198,323 - ---------------------------------------------------------------------------------------------------------------------------------- Total 5,123,726 465,497 5,589,223 100% $3,970,328 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Unconsolidated Real Estate Subsidiary Annualized Percentage of Annualized Base Portfolio Monthly Combined Monthly Base Rent Annualized Per Leased Total Portfolio Base Rent (1)(2) Base Rent (1)(2) Leased Space (3) Base Rent Square Foot - -------------------------------------------------------------------------------------------------------------------------------- Shopping Centers $ 194,733 $3,793,475 $45,521,700 89% $8.92 Shopping Center space under development --- 36,814 441,768 1% $17.58 Single Tenant Retail 104,416 240,865 2,890,380 5% $9.25 Commercial and other --- 198,323 2,379,876 5% $15.83 - -------------------------------------------------------------------------------------------------------------------------------- Total $299,149 $4,269,477 $51,233,724 100% $9.17 - -------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------
(1) Excludes two non-core portfolio and two leaseholds held by unconsolidated real estate subsidiary. (2) "Monthly base rent" represents the minimum monthly rent in effect on December 31, 1999. (3) "Annualized Base Rent" represents the annualized minimum monthly rent in effect on December 31, 1999. 8 The following table summarizes the composition of the real estate investments owned by the Company and its unconsolidated real estate subsidiary as of December 31, 1999, by type based on amounts invested:
Company Portfolio ------------------------------------------------------------ Number of Amount of Percentage of Investments Investments(1) Investment - ----------------------------------------------------------------------------------------------------------- Property Types Real Estate Investments Shopping Centers (2) 31 $355,660 94% Single Tenant Retail 2 3,930 1% Commercial 1 1,411 --- Mortgage Notes 3 17,229 5% - ----------------------------------------------------------------------------------------------------------- 37 $378,230 100% - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- Real Estate Properties Held for Sale Shopping Centers 8 $63,388 78% Single Tenant Retail 1 4,220 5% Commercial 5 14,089 17% - ----------------------------------------------------------------------------------------------------------- 14 $81,697 100% - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- Total Portfolios Shopping Centers (2) 39 $419,048 91% Single Tenant Retail 3 8,150 2% Commercial 6 15,500 3% Mortgage Notes 3 17,229 4% - ----------------------------------------------------------------------------------------------------------- 51 $459,927 100% - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- Unconsolidated Real Estate Subsidiary Portfolio ------------------------------------------------------- Number of Amount of Percentage of Investments Investments(1) Investments(1) - ------------------------------------------------------------------------------------------------- Property Types Real Estate Investments Shopping Centers (2) 8 (3) $27,850 66% Single Tenant Retail 3 11,594 27% Commercial 1 2,936 7% Mortgage Notes --- --- --- - ------------------------------------------------------------------------------------------------- 12 $42,380 100% - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- Real Estate Properties Held for Sale Shopping Centers --- --- --- Single Tenant Retail 1 895 44% Commercial 2 1,163 56% - ------------------------------------------------------------------------------------------------- 3 $ 2,058 100% - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- Total Portfolios Shopping Centers (2) 8 $27,850 63% Single Tenant Retail 4 12,489 28% Commercial 3 4,099 9% Mortgage Notes --- --- --- - ------------------------------------------------------------------------------------------------- 15(4) $44,438 100% - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
(1) Reflects the original cost plus capital improvements, before depreciation and amortization. (2) Includes the shopping center under development in Walnut Creek, California. (3) Includes the subsidiary investment in two leasehold properties. (4) These 15 properties are comprised of 10 "core" properties (six shopping centers and four single tenant retail properties, one of which is currently held for sale); one non-GLA real property investment on which there are no improvements; two non-core commercial properties held for sale; and two leaseholds. 9 The following table summarizes the composition of Leasable Square Feet and Occupancy Percentage as of December 31, 1999, "Same Store" properties versus real estate acquired between January 1, 1998 and December 31, 1999.
-------------------------------------------------- Company Portfolio -------------------------------------------------- Property Types Number of Leasable Square Occupancy Investments Feet Percentage(1) - ---------------------------------------------------------------------------------------------------------- "Same Store" Real Estate Investments (2) Shopping centers 35 4,097,370 94.5% Single-tenant retail 3 228,822 100.0% Commercial & other (3) 7 150,387 93.9% - ---------------------------------------------------------------------------------------------------------- 45 4,476,579 94.8% - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- Real Estate Investments Acquired January 1, 1998 through December 31, 1999 Shopping centers 4 622,019 88.0% Single Tenant retail --- --- --- Commercial and other 1 --- --- Shopping center under development 1 25,128 66.2% - ---------------------------------------------------------------------------------------------------------- 6 647,147 87.2% - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- Combined 51 5,123,726 93.8% - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- -------------------------------------------------- Company Portfolio -------------------------------------------------- Property Types Number of Leasable Square Occupancy Investments Feet Percentage(1) - ---------------------------------------------------------------------------------------------------------- "Same Store" Real Estate Investments (2) Shopping centers --- --- --- Single-tenant retail --- --- --- Commercial & other --- --- --- - ---------------------------------------------------------------------------------------------------------- --- --- --- - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- Real Estate Investments Acquired January 1, 1998 through December 31, 1999 Shopping centers 6 381,743 77.4% Single Tenant retail 4 83,754 100.0% Commercial and other (4) 1) --- --- Shopping center under developmen 0 --- --- - ---------------------------------------------------------------------------------------------------------- (5) 11 465,497 81.5% - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- Combined (5) 11 465,497 81.5% - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
(1) Once a space is subject to an executed lease, the space is then included in occupied space. Square footage continues to be incorporated into our occupied space category until: (a) the related lease expires and the tenant is no longer in legal possession of the premises; or (b) the related lease is terminated and the tenant is no longer in legal possession of the premises. (2) "Same Store" real estate investments refer to those investments owned for the entire two-year period commencing January 1, 1998 and ending December 31, 1999. (3) Count includes one non-GLA investment in Concord, California. (4) Count includes one non-GLA investment in Lodi, California. (5) Excludes two "non-core" properties and two leasehold properties held by the unconsolidated real estate subsidiary. 10 Weighted Average Age of the Company's Real Estate Properties
Weighted Property umber of Average Age Type Investments (1) (in years) (2) -------------------------------------------------------------------- Shopping centers................. 38 15.6 Single-tenant retail............. 3 23.9 Commercial.. 6 22.8 -------------------------------------------------------------------- Total/Weighted Average....... 47 16.2 -------------------------------------------------------------------- --------------------------------------------------------------------
(1) This table does not include the Company's three investments in mortgages, properties under development, or assests held by the unconsolidated real estate subsidiary. (2) This calculation is weighted by Gross Leasable Area and is based on the original construction date of the applicable property. As such, any expansion or renovation occurring subsequent to the original construction date is not reflected in this calculation. COMPETITION There is considerable competition for the consumer dollar in most of the areas where the Company's community shopping center properties are located. The Company believes that its major anchor tenants are strong competitors and will continue to draw consumers to its shopping centers. The Company competes for quality properties with other investors and engages in a continuing effort to identify desirable properties for acquisition. If the number of prospective buyers for the types of properties the Company considers acquiring increases, the prices of such properties may increase and the yields may decrease. The Company believes it can continue to compete effectively in the current real estate environment because of its experienced staff and management team. The Company competes for tenants primarily on the basis of location, rental rates, services provided and the design and condition of the properties. In some of the geographic areas in which the Company owns properties, the available supply of space for lease exceeds the demand by prospective tenants. In order to compete effectively, the Company employs experienced property managers and leasing agents. MAJOR TENANTS The Company's principal tenants include substantial, well-recognized retailers such as Food-4-Less, Pak `N Save, Raley's, Rite Aid (Thrifty-Payless), Safeway and Save Mart Supermarkets. At December 31, 1999, Raley's (including its subsidiary, Nob Hill Foods) was the Company's most significant tenant. Raley's is a grocery and drug retailer, and as of December 31, 1999, it was a lessee in 20 of the Company's properties and accounted for 18% of the Company's 1999 total revenues. Raley's, a privately owned company, currently operates 149 stores in California, Nevada and New Mexico. The Raley's organization has provided audited financial statements to the Company indicating that its sales exceeded $2.6 billion in its fiscal year ending June 26, 1999. In addition to the audited financial statements which the Company uses to monitor Raley's financial position and results of operations, the Company receives monthly sales reports for properties leased to Raley's and uses this information to monitor store performance. Additionally, the Company is 11 authorized to provide Raley's audited financial statements to Moody's Investors Service and Standard & Poor's Rating Services, the Company's rating agencies. As of December 31, 1999, the Company's Senior Notes carry "investment grade" ratings from Moody's Investors Service (Baa3) and Standard & Poor's Rating Services (BBB-). The following table provides the location, size and expiration of the Raley's and Nob Hill leases:
Lease Location Gross Leasable Area Expiration Date -------------- ------------------- --------------- 1. Fallon, NV 0 (1) 6/30/03 2. Modesto, CA 49,800 5/31/04 3. Fair Oaks, CA 59,231 3/31/06 4. Yuba City, CA 61,842 9/01/08 5. Carson City, NV 59,018 8/31/12 6. Redding, CA 60,000 5/31/14 7. Yreka, CA 60,000 11/30/14 8. Chico, CA 61,046 4/30/15 9. Winnemucca, NV 63,024 12/31/15 10. Fallon, NV 60,114 2/28/16 11. Reno, NV 61,046 3/31/16 12. Ukiah, CA 61,046 6/30/16 13. Elko, NV 61,000 1/31/17 14. Vallejo, CA 60,114 9/30/17 15. Folsom, CA 60,114 12/31/17 16. Turlock, CA 60,114 2/28/18 17. Grass Valley, CA 60,114 4/30/18 18. Granite Bay, CA 60,114 6/30/18 19. Suisun City, CA 60,114 5/31/19 20. Oroville, CA 59,885 6/01/19
(1) Although Raley's no longer occupies this Fallon, Nevada, property, it guarantees the J.C. Penney and Stage Store leases for 45,051 of square foot of GLA, and makes lease payments to the Company based upon the rental short-fall of the tenants in occupancy. 12 The following table summarizes information on the Company's ten most significant tenants during the year ended December 31, 1999:
Percentage Tenant Number Company GLA Percentage of of Total ------ of Stores (Square Feet) Company GLA Revenue -------- ------------- ------------ ------- Raley's................................. 22 (1) 1,215,396 22% 18% Safeway/Pak `N Save..................... 5 193,493 4% 4% Rite Aid(Thrifty-PayLess ).............. 11 273,512 5% 3% Save Mart............................... 7 228,678 4% 3% Washington Mutual....................... 6 76,193 1% 3% Food-4-Less (Fleming Foods)............. 3 142,625 3% 2% Ross.................................... 3 81,428 1% 1% Blockbuster Video....................... 8 56,463 1% 1% Scolari's Supermarkets.................. 1 50,451 1% 1% Hollywood Video......................... 6 37,194 1% 1% ----------- ------ ------ Total.............................. 2,355,433 42% 39% ----------- ------ ------ ----------- ------ ------
(1) As of December 31, 1999, 20 of the Company's properties were subject to leases with Raley's (and its subsidiary Nob Hill Foods). During the 12 months ended December 31, 1999, the Company received rental income from this tenant in connection with leases covering 22 of the Company's properties. During 1999, the Company disposed of two of the properties (Nob Hill Foods properties located in Hollister and Watsonville, California). No single property investment accounted for more than 4.0% of the Company's total revenues in 1999. The Company receives sales and other information on a monthly, quarterly or annual basis from its retail tenants, including Raley's, pursuant to leases which provide for such reports. The Company uses this information to monitor performance and where applicable the payment of percentage rents. Virtually all of the Company's existing leases include at least one of the following provisions for payment of additional rent: (1) scheduled rent increases, (2) percentage rent based on tenants' gross sales, or (3) CPI-based escalation clauses. The Company endeavors to structure leases on a triple-net basis with the lessees being responsible for most operating expenses, such as real estate taxes, certain types of insurance, utilities, normal repairs and maintenance. To the extent such provisions cannot be negotiated and incorporated into a lease, the Company pays such expenses from current operating income. 13 INSURANCE COVERAGE Most of the Company's leases require the tenant to be responsible for, or reimburse the Company for, liability and building insurance coverage on the properties. The Company maintains umbrella liability insurance on all of its properties and monitors tenant compliance with liability insurance coverage requirements. While the Company believes its properties are adequately insured, the Company does not carry earthquake (except in the case of the Windsor, California property, where the secured lender requires earthquake insurance), flood or pollution coverage. However, most major anchor tenants are required to rebuild or repair their leased premises if damaged or destroyed, regardless of the cause. Most of the Company's properties are located in areas of California and Nevada where earthquakes have been known to occur. In the event of a major earthquake, Company properties in the area of any such earthquake could suffer substantial damage or destruction. Since it commenced real estate operations in 1964, the Company has not incurred any material expense nor, to its knowledge, have any of its properties incurred any material damage from earthquakes or floods. The Company periodically considers the merits of purchasing earthquake insurance for its properties. To date, the Company has not purchased earthquake insurance because of: (i) the high premiums and deductible; and (ii) the Company's geographically diversified portfolio, which reduces the likelihood of material loss as a consequence of earthquakes. Furthermore, the majority of properties in the portfolio principally consist of relatively new, single-story buildings. 14 TENANT LEASE EXPIRATIONS FOR ALL PROPERTIES The tables on the following pages set forth information with respect to anchor and non-anchor tenant lease expirations as of December 31, 1999:
ANCHOR TENANTS (1) OF THE COMPANY - ----------------------------------------------------------------------------------------------------------------------- Average Base Gross Percentage of Annualized Base Rent Per Number of Leasable Total Leased Rent Under Square Foot of Lease Year Leases Area Gross Leasable Expiring Leases Expiration Expiring (2) Expiring Area Expiring Leases (3) Expiring - ------------ ------------ ----------- -------------- --------------- -------------- 2000................................ 6 105,212 3.3% $ 1,165,668 $11.08 2001................................ 5 172,978 5.4% 599,484 3.47 2002................................ 4 66,610 2.1% 186,324 2.80 2003................................ 10 242,728 7.6% 1,668,096 6.87 2004................................ 7 156,242 4.9% 1,420,044 9.09 2005................................ 1 26,368 0.8% 204,348 7.75 2006................................ 5 220,186 6.9% 1,645,128 7.47 2007................................ 2 43,904 1.4% 479,016 10.91 2008................................ 5 154,687 4.8% 1,505,964 9.74 2009................................ 0 0 0.0% 0 0.00 Thereafter.......................... 45 2,007,131 62.8% 16,163,641 8.05 ------------ ----------- -------------- --------------- -------------- Total/Weighted Average................. 90 3,196,046 100.0% $25,037,713 $7.83 ------------ ----------- -------------- --------------- -------------- ------------ ----------- -------------- --------------- -------------- NON-ANCHOR TENANTS OF THE COMPANY - --------------------------------------------------------------------------------------------------------------- Average Base Gross Percentage of Annualized Base Rent Per Number of Leasable Total Leased Rent Under Square Foot Lease Year Leases Area Gross Leasable Expiring of Leases Expiration Expiring (2) Expiring Area Expiring Leases (3) Expiring - ----------- ------------ ---------- --------------- ---------------- ------------ Month-to-month.................... 37 67,929 4.2% $1,000,000 $14.72 2000 ............................. 103 180,438 11.2% 2,623,574 14.54 2001 ............................. 129 233,300 14.5% 3,384,468 14.51 2002 ............................. 114 252,155 15.6% 3,672,781 14.57 2003 ............................. 122 273,912 17.0% 4,532,232 16.55 2004 ............................. 91 205,079 12.7% 3,176,244 15.49 2005 ............................. 27 94,227 5.8% 1,306,848 13.87 2006 ............................. 13 43,735 2.7% 961,308 21.9% 2007 ............................. 14 48,277 3.0% 1,066,320 22.90 2008 ............................. 14 59,121 3.7% 1,039,728 17.59 2009 ............................. 12 47,452 2.9% 860,676 18.14 Thereafter........................ 34 106,299 6.6% 2,302,440 21.66 ------------ ---------- --------------- ---------------- ------------ Total/Weighted Average............ 710 1,611,924 100.0% $25,926,619 $16.08 ------------ ---------- --------------- ---------------- ------------ ------------ ---------- --------------- ---------------- ------------
(1) Anchor tenants are defined as tenants leasing 10,000 square feet or more of leasable area. (2) Does not reflect extension options granted to certain tenants. (3) Annualized Base Rent at lease expiration. 15
LEASE EXPIRATION DATA FOR ANCHOR (1) AND NON-ANCHOR TENANTS OF THE COMPANY ------------------------------------------------------------------------------------------------------- Average Base Percentage of Annualized Base Rent Per Number of Gross Total Leased Rent Under Square Foot Lease Year Leases Leasable Area Gross Leasable Expiring of Leases Expiration Expiring (2) Expiring Area Expiring Leases (3) Expiring - -------------- ------------- -------------- -------------- ---------------- ------------- Month-to-month ............... 37 67,929 1.41% $ 1,000,000 $14.72 2000 ......................... 109 285,650 5.94% 3,789,242 13.27 2001 ......................... 134 406,278 8.45% 3,983,952 9.81 2002 ......................... 118 318,765 6.63% 3,859,105 12.11 2003 ......................... 132 516,640 10.75% 6,200,328 12.00 2004 ......................... 98 361,321 7.52% 4,596,288 12.72 2005 ......................... 28 120,595 2.51% 1,511,196 12.53 2006 ......................... 18 263,921 5.49% 2,606,436 9.88 2007 ......................... 16 92,181 1.92% 1,545,336 16.76 2008 ......................... 19 213,808 4.45% 2,545,692 11.91 2009 ......................... 12 47,452 0.99% 860,676 18.14 Thereafter ................... 79 2,113,430 43.96% 18,466,081 8.74 ------------- -------------- -------------- ---------------- ------------- Total/Weighted Average ....... 800 4,807,970(4) 100.00% $50,964,332 $10.60 ------------- -------------- -------------- ---------------- ------------- ------------- -------------- -------------- ---------------- -------------
LEASE EXPIRATION DATA FOR ANCHOR (1) AND NON-ANCHOR TENANTS OF THE UNCONSOLIDATED REAL ESTATE SUBSIDIARY ------------------------------------------------------------------------------------------------------- Average Base Percentage of Annualized Base Rent Per Number of Gross Total Leased Rent Under Square Foot Lease Year Leases Leasable Area Gross Leasable Expiring of Leases Expiration Expiring (2) Expiring Area Expiring Leases (3) Expiring - -------------- ------------- -------------- -------------- ---------------- ------------- Month-to-month ............... 20 45,879 12.09% $ 297,385 $ 6.48 2000 ......................... 16 37,497 9.88% 252,386 6.73 2001 ......................... 4 19,873 5.24% 105,400 5.30 2002 ......................... 7 47,600 12.55% 242,172 5.09 2003 ......................... 2 7,465 1.97% 31,488 4.22 2004 ......................... 4 10,237 2.70% 103,584 10.12 2005 ......................... 1 3,021 0.80% 14,556 4.82 2006 ......................... 1 25,845 6.81% 219,420 8.49 2007 ......................... 1 8,967 2.36% 21,720 2.42 2008 ......................... 0 0 0.00% 0 0.00 2009 ......................... 1 19,437 5.12% 130,620 6.72 Thereafter ................... 8 153,586 40.48% 2,765,149 18.00 ------------- -------------- -------------- ---------------- ------------- Total/Weighted Average ....... 65 379,407 (5) 100.00% $4,183,880 $11.03 ------------- -------------- -------------- ---------------- ------------- ------------- -------------- -------------- ---------------- -------------
(1) Anchor tenants are defined as tenants leasing 10,000 square feet or more of leasable area. (2) Does not reflect extension options granted to certain tenants. (3) Annualized Base Rent at lease expiration. (4) Total does not include 315,756 square feet GLA of unleased space. (5) Total does not include 86,090 square feet GLA of unleased space. 16 PROPERTY OPERATIONS The Company is a fully integrated REIT that provides full property operation services to all but two of its properties. Property services include property management and leasing services. Direct property management provides for regular interaction between the Company and its tenants and close supervision of its properties. The Company believes the cost of direct property management and leasing is generally less expensive than employing independent property management and leasing firms due to lower commissions and fees, as well as the benefits of certain economies of scale. In order to facilitate its present and future property operating activities, the Company maintains three branch offices which are centrally located to the properties. The offices are located in Granite Bay and Fresno, California; and Portland, Oregon. One of the Company's properties is managed by an independent property manager and one property is managed by the Company's joint venture partner. Commercial Real Estate Service (CRES) provides management services with respect to Serra Center, located in Colma, California, for fees equal to 3.5% of gross rents. CRES is an affiliate of the co-owner of Serra Center and has been managing the property for approximately 20 years. Gramor Development Washington, LLC, provides management services for the partnership's shopping center located in Blaine, Washington, for fees equal to 4% of gross rents. In the event the operating return of the Blaine property is not adequate to provide the Company with its preferential return, management fees to Gramor Development are limited to $2,000 per month for such period. With the exception of Gramor Development, none of the above-named property managers are affiliated with the Company, its trustees, officers or any shareholder owning 5% or more of the Company's shares. Repairs and maintenance of the Company's properties not undertaken by tenants under the terms of the Company's triple-net leases are performed by independent contractors not affiliated with the Company, its trustees or officers, or any shareholder owning 5% or more of the Company's shares. POTENTIAL ENVIRONMENTAL RISKS Investments in real property create a potential for environmental liability on the part of the current owner and potentially on the part of the prior owner of such real property. If hazardous substances are discovered on or emanating from any of the Company's properties, the Company and/or others may be held strictly liable for all costs and liabilities relating to the clean-up of such hazardous substances. 17 In order to seek to mitigate environmental risks, in 1989 the Company adopted a policy of obtaining at least a Phase I environmental study (a preliminary site assessment which does not include invasive environmental sampling, monitoring or laboratory analysis) on each property it seeks to acquire. From time to time, when the Company deems it appropriate, it has obtained independent environmental analyses on properties acquired prior to 1989. Although the Company is aware of contamination on certain properties, except for one property (the Walnut Creek development project), the Company has received "closure" letters (letters indicating no further action is necessary) from the local city and state environmental agencies, or has received indemnification agreements from third parties respecting such potential liabilities. On the development project, the Company has determined the cost of clean-up to be approximately $150,000, which was anticipated when the Company acquired the property. The Company carries no insurance coverage for the type of environmental risk described above. ITEM 2. PROPERTIES. Property information is presented on the following pages. 18 Item 2: Properties
Minimum Rent -------------- 12/31/99 Year Year Last Name Location 1999 1998 Occupancy (1) Completed Renovated - ---- ---------- ------ ------ ------------- --------- --------- (in thousands) Minimum Rents SHOPPING CENTER/RETAIL Anderson Square Anderson, CA $411 $370 95.33% 1979 Angel's Camp Town Center Angel's Camp, CA 580 598 98.51% 1986 Skypark Plaza Shopping Center Chico, CA 1,494 1,372 93.64% 1985 1991 Coalinga Shopping Center (2) Coalinga, CA 306 298 73.34% 1977 Serra Center (30% interest) Colma, CA 592 531 100.00% 1972 Mercantile Row Shopping Center Dinuba, CA 804 745 98.93% 1990 Dublin Shopping Center Dublin, CA 848 288 69.14% 1970 Laguna 99 Shopping Center Elk Grove, CA 1,398 1,424 98.12% 1993 Northridge Shopping Center Fair Oaks, CA 778 714 94.12% 1958 1986 Commonwealth Square Shopping Center Folsom, CA 1,819 1,822 98.55% 1988 Victorian Walk Shopping Center (2) Fresno, CA 785 775 93.38% 1982 1994 Country Gables Shopping Center Granite Bay, CA 1,474 1,413 100.00% 1988 Pinecreek Shopping Center Grass Valley, CA 1,176 1,000 96.97% 1988 Heritage Oak Shopping Center (2) Gridley, CA 349 374 70.98% 1981 Centennial Plaza Shopping Center Hanford, CA 1,261 1,211 99.09% 1991 Plaza 580 Shopping Center Livermore, CA 1,635 1,492 96.13% 1993/1996 Canal Farms Shopping Center Los Banos, CA 762 868 95.73% 1988 Mission Ridge Shopping Center Manteca, CA 1,199 1,149 98.80% 1993 Century Center Modesto, CA 1,612 1,544 98.37% 1979 Currier Square Shopping Center (2) Oroville, CA 856 773 90.61% 1969 1989 Eastridge Plaza Shopping Center Porterville, CA 501 458 88.83% 1985 Belle Mill Landing (2) Red Bluff, CA 739 690 95.83% 1982 1995 Cobblestone Shopping Center Redding, CA 927 901 89.41% 1981 Kmart Center Sacramento, CA 403 403 93.62% 1964 1986 Elverta Crossing Shopping Center Sacramento, CA 1,332 1,282 100.00% 1991 1993 Heritage Park Shopping Center Suisun, CA 1,458 1,517 86.73% 1989 Heritage Place Shopping Center Tulare, CA 999 968 98.08% 1986 Blossom Valley Plaza Turlock, CA 1,094 1,086 97.69% 1988 1991 Ukiah Crossroads Shopping Center (2) Ukiah, CA 1,027 911 98.12% 1986 Park Place Shopping Center Vallejo, CA 1,470 1,546 90.78% 1987 Olympic Place Shopping Center Walnut Creek, CA 66 - 66.20% 1979 Lakewood Village Windsor, CA 1,843 1,675 94.66% 1995 Yreka Junction Yreka, CA 860 851 100.00% 1984 Raley's Shopping Center Yuba City, CA 1,024 922 96.89% 1963 1995 Eagle Station Shopping Center Carson City, NV 959 907 95.40% 1982 Elko Junction Shopping Center Elko, NV 1,544 1,515 95.23% 1979/1994/1996 Caughlin Ranch Shopping Center Reno, NV 1,083 1,132 92.48% 1990 1991 North Hills Shopping Center (2) Reno, NV 892 898 95.76% 1986 West Town Winnemuca, NV 462 462 100.00% 1978 1991 Blaine International Center Blaine, WA 969 243 86.78% 1991 ------- ------- Sub-total - Shopping Center/Retail $39,791 $37,128 ------- ------- SINGLE TENANT/RETAIL Luckys (3) El Cerrito, CA $0 $241 SOLD 1964 1983 Nob Hill General Store (4) Hollister, CA 415 480 SOLD 1994 Kmart Center (6) Napa, CA 606 - 100.00% 1964 Nob Hill General Store (3) Newman, CA - 305 SOLD 1995 Nob Hill General Store (4) Watsonville, CA 137 195 SOLD 1982 Dodge Center (2) Fallon, NV 280 270 100.00% 1976 1995
19 Item 2: Properties (continued)
Minimum Rent ------------ 12/31/99 Year Year Last Name Location 1999 1998 Occupancy (1) Completed Renovated - ---- -------- ---- ---- ------------- --------- --------- (in thousands) Raley's Supermarket (2) Fallon, NV 401 401 100.00% 1991 ----- ------ Sub-total - Single Tenant/Retail $1,839 $1,892 ------- ------ COMMERCIAL & OTHER Old Dominion (3) Commerce City, CO $0 $102 SOLD 1984 1995 Coast Savings & Loan (4) Cupertino, CA 72 216 SOLD 1980 Heald Business College (4) Milpitas, CA 170 513 SOLD 1987 1995 Coast Savings & Loan (2) Monterey,CA 490 490 100.00% 1963 Redwood II (2) Petaluma, CA 460 99 77.90% 1985 Coast Savings & Loan (4) Salinas, CA 88 336 SOLD 1937 Coast Savings & Loan (Market St) (4) San Francisco, CA 273 317 SOLD 1964 Coast Savings & Loan (Taraval St) (2) San Francisco, CA 357 356 100.00% 1975 3450 California St (2) San Francisco, CA 343 253 100.00% 1957 1987 Viking Freight Systems (7) Santa Clara, CA 485 454 100.00% 1978 Coast Savings & Loan (2) Santa Cruz, CA 199 194 100.00% 1980 ------- ------ Sub-total - Commercial & Other $2,937 $3,330 ------- ------ Total Minimum Rent $44,567 $42,350 ------- ------ ------- ------ Percentage Rents ------------------ 1999 1998 (in thousands) Percentage Rents SHOPPING CENTER/RETAIL Anderson Square Anderson, CA $16 $47 95.33% 1979 Skypark Plaza Shopping Center Chico, CA 2 1 93.64% 1985 Coalinga Shopping Center (2) Coalinga, CA 37 37 73.34% 1977 Mercantile Row Shopping Center Dinuba, CA 1 - 98.93% 1990 Laguna 99 Shopping Center Elk Grove, CA 1 - 98.12% 1993 Northridge Shopping Center Fair Oaks, CA 39 25 94.12% 1958 1986 Commonwealth Square Shopping Center Folsom, CA - 1 98.55% 1988 Country Gables Shopping Center Granite Bay, CA - 38 100.00% 1988 Pinecreek Shopping Center Grass Valley, CA 12 3 96.97% 1988 Heritage Oak Shopping Center (2) Gridley, CA 27 31 70.98% 1981 Century Center Modesto, CA 469 144 98.37% 1979 Cobblestone Shopping Center Redding, CA 5 5 89.41% 1981 Kmart Center Sacramento, CA 52 41 93.62% 1964 1986 Heritage Park Shopping Center Suisun, CA - 1 86.73% 1989 Blossom Valley Plaza Turlock, CA 17 11 97.69% 1988 Ukiah Crossroads Shopping Center (2) Ukiah, CA 13 5 98.12% 1986 Park Place Shopping Center Vallejo, CA 6 6 90.78% 1987 Eagle Station Shopping Center Carson City, NV 38 13 95.40% 1982 Elko Junction Shopping Center Elko, NV 42 - 95.23% 1982 Dodge Center (2) Fallon, NV - 5 100.00% 1976 1995 Caughlin Ranch Shopping Center Reno, NV - - 95.76% 1990 1991 Blaine International Center Blaine, WA 63 13 86.78% 1991 ----- ----- Sub-total - Shopping Center/Retail $840 $427 SINGLE TENANT/RETAIL Kmart Center (6) Napa, CA ($5) $57 100.00% 1964 Nob Hill General Store (4) Watsonville, CA 51 55 SOLD 1982 ----- ----- Sub-total - Single Tenant/Retail $46 $112 ----- ----- Total Percentage Rent Income $886 $539 ----- ----- ----- -----
20 Item 2: Properties (continued)
Direct Financing Leases (5) -------------------------- 1999 1998 ---- ---- (in thousands) Direct Financing Leases Kmart Center (6) Napa, CA Single Tenant Retail $0 $27 100.00% 1964 Viking Freight Systems (7) Santa Clara, CA Industrial 66 78 100.00% 1978 ----- ----- $66 $105 ----- ----- ----- -----
(1) Once a space is subject to an executed lease, the space is then included in occupied space. A space continues to be incorporated in our occupied space until: 1) the related lease expires and the tenant is no longer in legal possession, or 2) the related lease is formally terminated and the tenant is no longer in legal possession. (2) Property is being held for sale. (3) Sold in 1998. (4) Sold in 1999 (5) Included in Other Income. (6) Kmart Center, Napa, California, is accounted for as a direct financing lease. During 1999, the Company received $23,000 in minimum lease payments, all of which is a non-revenue receipt accounted as principal reduction. During 1998, the Company received $281,000 in minimum lease payments, of which $27,000 comprised direct financing income and $254,000 is a non-revenue receipt accounted as principal reduction. This lease expired January 1999. On November 19, 1999, the Company entered into a 20-year lease agreement with Wal-Mart. Wal-Mart will construct and pay for an entirely new 103,000-square foot building, with completion anticipated for the summer of 2000. (7) Viking Freight Systems, Santa Clara, California, is accounted for as a direct financing lease. During 1999, the Company received $189,000 in minimum lease payments, of which $66,000 comprised direct financing income and $123,000 is a non-revenue receipt accounted as principal reduction. During 1998, the Company received $189,000 in minimum lease payments, of which $78,000 comprised direct financing income and $111,000 is a non-revenue receipt accounted as principal reduction. This lease expires September 2003. 21 ITEM 3. LEGAL PROCEEDINGS. The Company is involved in various legal actions arising in the normal course of business. After evaluation of these matters, including consideration of legal counsel's evaluation, management is of the opinion that the outcome of such litigation if determined adversely to the Company will not have a material adverse effect on the Company's financial position, results of operations or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Principal Market: The shares of beneficial interest of the Company, without par value, are listed on the American Stock Exchange under the symbol "WIR." The following table sets forth the high and low closing prices of the shares as reported by the American Stock Exchange:
Quarter Ended High Low Dividends - ------------- ---- --- --------- March 31, 1998 $15 5/16 $13 1/2 $0.28 June 30, 1998 $15 1/16 $12 5/8 $0.28 September 30, 1998 $14 $10 7/8 $0.28 December 31, 1998 $13 $11 1/16 $0.28 March 31, 1999 $12 7/16 $ 9 15/16 $0.28 June 30, 1999 12 11/16 10 5/8 0.28 September 30, 1999 11 3/4 10 9/16 0.28 December 31, 1999 11 9 3/8 0.28 Through February 29, 2000 $10 5/8 $ 9 11/16 $0.28(1) (1) Paid March 15, 2000
Approximate number of equity security holders:
Title of Class Number of Record Holders -------------- ------------------------- (as of December 31, 1999) Shares of Beneficial Interest, without par value 1,830
The Company estimates that there were over 18,000 beneficial owners of shares, including owners whose shares were held in brokerage and trust accounts. 22 ITEM 6. SELECTED FINANCIAL DATA
1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------ (In thousands, except per share and share data) OPERATING DATA: Revenues (1)......................................... $58,698 $53,354 $47,551 $47,789 $46,290 Income before extraordinary item..................... 19,814 13,616 14,500 12,231 10,304 Extraordinary item................................... --- --- (1,620) --- --- Net income .......................................... 19,814 13,616 12,880 12,231 10,304 Funds from operations (2) - Diluted.................. 26,129 23,435 22,392 22,274 21,017 Cash flows from operating activities................. 24,347 23,978 23,277 21,956 20,203 Cash dividends paid ................................. 19,337 19,300 19,207 19,102 18,882 Cash distributions paid to minority interest......... 1,604 --- --- --- --- BASIC AND DILUTED EARNINGS PER SHARE DATA: Income before extraordinary item - Basic....................................... $ 1.15 $ 0.79 $ 0.84 $ 0.72 $ 0.61 Extraordinary item - Basic.......................... --- --- (0.09) --- --- Net income - Basic................................... 1.15 0.79 0.75 0.72 0.61 Income before extraordinary item - Diluted..................................... $ 1.15 $ 0.78 $ 0.84 $ 0.72 $ 0.61 Extraordinary item - Diluted......................... --- --- (0.09) --- --- Net income - Diluted................................. 1.15 0.78 0.75 0.72 0.61 Cash dividends paid.................................. 1.12 1.12 1.12 1.12 1.12 Weighted average number of shares outstanding -Basic.....................17,225,468 17,206,868 17,144,674 17,055,496 16,861,324 Weighted average number of shares outstanding -Diluted...................18,699,731 17,487,443 17,158,292 17,068,701 16,861,324 BALANCE SHEET DATA: Real estate investments (3)..........................$ 506,890 $ 501,195 $ 399,144 $ 400,711 $ 395,800 Total assets......................................... 427,266 426,891 337,521 339,629 344,571 Fixed-rate debt...................................... 134,630 134,803 124,766 111,207 114,609 Bank line............................................ 84,520 85,700 19,100 32,250 29,250 Shareholders' equity................................. 180,629 179,624 186,249 191,948 196,799
(1) Revenues include minimum rents, percentage rents, recoveries from tenants, interest income, income from unconsolidated real estate subsidiary and other income. (2) The Company considers Funds From Operations (FFO) to be an alternative measure of an equity REIT's performance since FFO does not recognize depreciation and amortization of real estate assets as reductions of income from operations. For a further discussion of FFO, please refer to Management's Discussion and Analysis on page 26. (3) Real estate investments reflects acquisition costs and capitalized costs of improvements before depreciation and amortization, investment in the unconsolidated real estate subsidiary of the Company and mortgage notes receivable. 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following discussion and analysis of the consolidated financial condition and results of operations of Western Properties Trust and its subsidiaries (the "Company") should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this report on Form 10-K. Historical results and percentage relationships set forth herein are not necessarily indicative of future operations. CAUTIONARY STATEMENTS The discussions in Management's Discussion and Analysis of Financial Condition and Results of Operations contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect management's current views with respect to future events and financial performance. The matters described in such forward-looking statements are subject to risks and uncertainties including, but not limited to: the effects of future events on the Company's financial performance; the risk that the Company may be unable to finance its planned acquisition and development activities; risks related to the retail or commercial businesses in which the Company's properties compete, including the potential adverse impact of external factors, such as inflation, consumer confidence, unemployment rates, consumer tastes and preferences, and the e-commerce environment; risks associated with the Company's development activities, such as the potential for cost overruns, delays and lack of predictability with respect to the financial returns associated with these development activities; the risk of potential increase in market interest rates from current rates; and risks associated with real estate ownership, such as the potential adverse impact of environmental contamination or changes in the local economic climate on the revenues and the value of the Company's properties. OVERVIEW Founded in 1962, Western Properties Trust ("Western") and its subsidiaries own and operate community and neighborhood shopping centers located in the western United States. At December 31, 1999, Western and its subsidiaries had investments in 62 properties, primarily anchored by supermarkets and drug stores, containing approximately 5.6 million square feet of gross leasable area. The corporate office of this self-administered equity real estate investment trust is located in the San Francisco Bay Area city of Emeryville, California. Its shares are traded on the American Stock Exchange under the symbol "WIR." On August 19, 1999, Western changed its name from Western Investment Real Estate Trust to Western Properties Trust. 24 The accompanying Consolidated Financial Statements include the accounts of Western, Western/Kienow's L.P., Western Pinecreek L.P. and GW100, a general partnership (collectively, "the Company"). Western is the sole general partner in Western/Kienow's L.P. and owned a 60% interest therein as of December 31, 1999 and 1998. Western is also the sole general partner in Western Pinecreek L.P. and owned a 75% interest therein as of December 31, 1999. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $24,347,000, $23,978,000 and $23,277,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Operating cash flows exceeded dividends and distributions paid of $20,941,000, $19,300,000 and $19,207,000 for 1999, 1998 and 1997, respectively, by $3,406,000, $4,678,000 and $4,070,000 for 1999, 1998 and 1997, respectively. Net cash used in investing activities was $1,028,000 and net cash used in financing activities was $22,612,000 for the year ended December 31, 1999. As of December 31, 1999, the Company's aggregate outstanding indebtedness of $219,150,000 consisted of $124,822,000 in fixed-rate, long-term unsecured senior notes, $84,520,000 of borrowings under the Company's variable-rate credit facility (the "Bank Line") and $9,808,000 under a mortgage note assumed in the acquisition of the Windsor, California property. Incurrence of debt by the Company, in excess of the Bank Line of $100,000,000 and the above-mentioned senior notes, would be subject to limitations imposed under the Company's senior notes and Bank Line. The purpose of the Company's variable-rate Bank Line is to provide working capital to facilitate the funding of operating cash needs of the Company and property acquisitions and development. The Bank Line bears interest at the London Interbank Offered Rate ("LIBOR") plus 1.15%. The Company intends to renew or replace the Bank Line before it expires on September 30, 2001. The Company's ratio of debt to undepreciated cost of real estate on December 31, 1999 was 43%. The Company's interest coverage ratio for the year ended December 31, 1999 was 2.8 times. As of December 31, 1999, the Company was the obligor under a loan for $9,808,000, which is secured by one property. However, if amounts due under the Bank Line are not paid at maturity, the lender, at its option, can require the Company to provide security interests in Company properties. The Company has an ownership interest in one property where the co-owner is obligated under a promissory note that is secured by the property. The Company anticipates that cash flows provided by operations will continue to provide adequate funds for all current principal and interest payments as well as dividend payments required to maintain its status as a real estate investment trust under the Internal Revenue Code. Cash on hand, proceeds from the sale of properties held for sale and borrowings under the Bank Line, as well as other debt and equity alternatives, are expected to provide sufficient funds to finance the Company's future operations. At December 31, 1999, the Company owned 14 properties that were held for sale. These properties total approximately 966,000 leasable square feet and have a net aggregate carrying value of $58,858,000. 25 FUNDS FROM OPERATIONS Industry analysts and the Company consider Funds From Operations ("FFO") to be an alternative measure of an equity REIT's performance since such measure does not recognize depreciation and amortization of real estate assets as reductions of income from operations. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Yet, since real estate values have historically risen or fallen with market conditions, the Company, along with most industry investors, considers presentation of operating results for real estate companies that use historical cost accounting to be less than fully informative. The National Association of Real Estate Investment Trusts ("NAREIT") defines FFO as net income calculated in accordance with generally accepted accounting principles ("GAAP") plus depreciation and amortization of assets uniquely significant to the real estate industry, reduced by gains and increased by losses on (i) sales of property and (ii) extraordinary and "unusual items." Effective January 1, 2000, net income will not be adjusted for unusual items unless they qualify as extraordinary items under GAAP in calculating FFO. This new interpretation will not have a significant impact on the Company. FFO does not represent cash flows from operations as defined by GAAP and should not be considered a substitute for net income as an indicator of the Company's operating performance, or for cash flows as a measure of liquidity. Furthermore, FFO as disclosed by other REITs may not be comparable to the Company's calculation of FFO. The table below provides a reconciliation of net income in accordance with GAAP to FFO as calculated under NAREIT guidelines for the years ended December 31, 1999, 1998 and 1997 (in thousands):
Year Ended December 31, --------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- Net income......................................................... $19,814 $13,616 $12,880 Less: Gains on sales of real estate investments................. (6,854) (2,475) (4,898) Plus: Real property depreciation................................ 10,038 10,763 9,799 Real property depreciation unconsolidated real estate..... 185 --- --- Amortization of tenant improvement costs.................. 950 1,152 826 Amortization of leasing commission costs.................. 335 379 323 Cumulative effect of change in accounting principle....... 57 --- --- Loss on early extinguishment of debt...................... --- --- 1,620 Management restructuring charge .......................... --- --- 1,842 --------------------------------------------- Funds From Operations, basic....................................... $24,525 $23,435 $22,392 Plus: Minority interest......................................... 1,604 --- --- --------------------------------------------- Funds From Operations, diluted..................................... $26,129 $23,435 $22,392 --------------------------------------------- ---------------------------------------------
The dividend payout ratio for the years ended December 31, 1999, 1998 and 1997 (calculated as dividend distributions made by the Company for the applicable period divided by diluted FFO) was 80%, 82% and 86%, respectively. 26 Diluted FFO increased $2,694,000 to $26,129,000 in 1999 from $23,435,000 in 1998. The 1999 increase of 11% is primarily the result of increased revenues partially offset by increased interest and other operating expenses. FFO increased $1,043,000 to $23,435,000 in 1998 from $22,392,000 in 1997. RESULTS OF OPERATIONS COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998 Net income increased $6,198,000 to $19,814,000, or $1.15 per diluted share, in 1999, from $13,616,000, or $0.78 per diluted share, in 1998. This 46% increase in net income is principally due to $4,379,000 of increased gains on sales of properties in 1999. Additional significant contributions to this increase resulted from increased revenues (minimum rents, recoveries from tenants and interest income) and reduced depreciation and amortization, partially offset by increased interest and other operating expenses. DISPOSITIONS The Company continually assesses its portfolio for possible dispositions of properties that no longer fit its investment strategy criteria due to limited prospects for growth in income, property type or for other reasons. During 1999, four office buildings, two single-tenant grocery stores and one parcel of undeveloped land were sold, resulting in gains on sales of properties of $6,854,000. - On April 1, 1999, the Company sold an 18,253 square foot office building located in Salinas, California, for $1,900,000, at a gain of $68,000. - On April 28, 1999, the Company sold a 47,150 square foot office building located in Milpitas, California, for $6,726,000, at a gain of $923,000. - On April 29, 1999, the Company sold a 6,495 square foot office building located in Cupertino, California, for $2,250,000, at a gain of $1,122,000. - On August 17, 1999, the Company sold a 35,326 square foot parcel of undeveloped land located in Elko, Nevada, for $280,000, at a gain of $189,000. - On September 13, 1999, the Company sold a 26,500 square foot single-tenant grocery store located in Watsonville, California, for $3,000,000, at a gain of $2,124,000. - On November 12, 1999, the Company sold a 44,420 square foot single-tenant grocery store located in Hollister, California, for $5,500,000, at a gain of $946,000. - Also on November 12, 1999, the Company sold a 12,700 square foot office building located on Market Street in San Francisco, California, for $3,050,000, at a gain of $1,482,000. ACQUISITIONS AND SIGNIFICANT LEASE During 1999, the Company acquired (i) land that it intends to develop into a shopping center and (ii) a shopping center interest. Also during 1999, the Company entered into a lease on its Napa, California, property. These transactions, along with a 12-month recognition of income generated 27 from the 1998 investments, partially offset by the 1998 and 1999 dispositions, are the primary factors for increased revenues, interest expense and property-related expenses. Certain 1999 transactions are summarized below: - On November 16, 1999, the Company acquired two parcels of land in the downtown area of Walnut Creek, California, which will be part of a retail development project. These parcels are located immediately north of the Plaza Escuela (formerly Simon Hardware site) property on which the Company is providing financing in the form of a participating mortgage loan and development services. Total project costs for this development project are expected to be approximately $33 million. The Company expects to commence construction in the third or fourth quarter of 2000. The Company anticipates financing the project through a joint venture, property disposition proceeds, funding from the Bank Line and/or through a third-party construction loan. - On November 18, 1999, the Company acquired substantially all of the remaining 50% interest of the Pine Creek Shopping Center in Grass Valley, California, in a transaction valued at approximately $10 million. The Company acquired the other 50% ownership interest in 1989. The 213,000 square foot shopping center is anchored by Raley's Supermarket and J.C. Penney.The Company funded the purchase by using approximately $4,500,000 from the Bank Line, $4,300,000 of proceeds from tax deferred exchanges and by issuing 88,498 downREIT limited partnership units valued at $1,283,000. The limited partnership units are exchangeable into Western shares on a one for one basis after certain conditions are met. The number of limited partnership units issued was determined using a $14.50 share price for Western's shares. The acquisition has been accounted for by the purchase method. The Company consolidates the downREIT limited partnership. The interests of the limited partners in the downREIT limited partnership are presented as minority interests in the accompanying Consolidated Financial Statements. - On November 19, 1999, the Company entered into a 20-year lease agreement with Wal-Mart for its Napa, California property, which was previously leased to Kmart under a lease that expired in January 1999. Wal-Mart will construct and pay for an entirely new 103,000-square-foot building, with completion anticipated for the summer of 2000. Interest income increased $823,000 to $1,756,000 in 1999 from $933,000 in 1998, primarily due to mortgage notes receivable, which were originated in 1998 and were outstanding for the full year in 1999. Income from the unconsolidated real estate subsidiary increased to $466,000 in 1999 from $12,000 in 1998. This increase reflects the benefit of redevelopment and retenanting of eight of the Kienow's ten core properties. The Company anticipates that the remaining two core properties will be leased and generating rental income during 2000. (See Note 5 to the Consolidated Financial Statements). Other income increased $356,000 to $1,325,000 in 1999 from $969,000 in 1998. This increase reflects development fees earned from third parties, partially offset by decreased lease termination fee income in 1999 compared to 1998. 28 The average occupancy for all property types (exclusive of the portfolio of the unconsolidated real estate subsidiary, i.e., the Kienow's portfolio) was 93.8% at December 31, 1999 and 1998. Interest expense for the years ending December 31, 1999, 1998 and 1997, was as follows:
Year Ended December 31, ------------------------------------------------------ INTEREST EXPENSE ON DEBT 1999 1998 1997 ------------------------------------------------------ Interest on unsecured Bank Line $5,381,000 $3,578,000 $1,884,000 Interest on unsecured senior notes 9,496,000 9,485,000 5,480,000 Interest on unsecured convertible debentures --- --- 4,159,000 Interest on mortgage loan payable 755,000 626,000 --- Capitalized interest (1,307,000) (275,000) (12,000) ----------------------------------------------------- Total interest expense $14,325,000 $13,414,000 $11,511,000 ----------------------------------------------------- -----------------------------------------------------
The average balance outstanding on the Bank Line and weighted average interest rate for the years ending December 31, 1999, 1998 and 1997, was as follows:
Year Ended December 31, ------------------------------------------------------ BANK LINE DATA 1999 1998 1997 ------------------------------------------------------ Average balance outstanding for the year $77,077,000 $49,275,000 $24,207,000 ------------------------------------------------------ Weighted average interest rate 6.52% 6.83% 7.27% ------------------------------------------------------ ------------------------------------------------------
Interest expense increased $911,000 to $14,325,000 in 1999 due to increased borrowings on the Bank Line during 1999. These balances largely resulted from the fourth quarter 1998 acquisition of the unconsolidated real estate subsidiary. This amount was offset in part by capitalized interest related to projects under development. Other operating expense increased $455,000 to $4,867,000 in 1999 from $4,412,000 in 1998. The primary factors resulting in this increase are the master lease payments on the Dublin property the Company entered into during the third quarter of 1998, partially offset by capitalizing certain development project costs in connection with the development and redevelopment of properties. General and administrative expense increased $515,000 to $3,248,000 in 1999 from $2,733,000 in 1998. This increase is primarily due to increased compensation costs from the full year effect of the increased employee count in 1998, the implementation of an employee performance bonus program and higher executive compensation. Minority interest expense was $1,604,000 in 1999. There was no minority interest in income from consolidated subsidiaries in the year ended December 31, 1998. "Minority interest" refers to the earnings allocatable to the outside partners in the Company's consolidated subsidiaries. COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997 Net income increased $736,000 to $13,616,000, or $0.78 per share (calculated using diluted weighted average shares outstanding), in 1998, from $12,880,000, or $0.75 per share (calculated using diluted weighted average shares outstanding), in 1997. This 6% increase in net income is principally due to (i) increased revenues, (ii) the absence, in 1998, of the management restructuring charge and loss on early extinguishment of debt incurred in 1997, partially offset by (iii) the 29 reduction in gains on sales of properties of $2,423,000 between the years and increased interest and other operating expenses. During 1998, the Company entered into agreements to acquire or control the operations of several shopping centers. These transactions are the primary contributing factors for increased revenues, increased interest expense and property related-expenses: - On January 21, 1998, the Company acquired a 214,770 square foot shopping center located in Modesto, California, for $17.5 million. - On February 9, 1998, the Company acquired a 126,500 square foot shopping center located in Windsor, California, for $20.9 million. - On May 29, 1998, the Company entered into agreements to redevelop and finance, by originating a $22.2 million participating mortgage, a shopping center located in Walnut Creek, California. On February 24, 1999, the participating mortgage was amended to $26.5 million and on December 31, 1999, the participating mortgage was amended to provide financing up to $42 million. Separate agreements also grant the Company a right of first offer to purchase the property and to receive development, leasing and management fees. The participating mortgage, secured by the property, is expected to earn a fixed interest rate of 9.0% per annum on fundings up to $26.5 million and 10.5% per annum on fundings over $26.5 million, up to $42 million. In addition, the agreement provides for the Company to participate in 25% of the property's cash flow after debt service, as defined. - On September 9, 1998, the Company entered into a master lease agreement on a 154,000 square foot shopping center located in Dublin, California, that provides the Company with an option to purchase the property at a fixed price during the first quarter of 2001. Under the master lease, the Company has full control of all leasing, management and capital-expenditure decisions for the property and receives all income from the property. As part of the transaction, the Company funded an $8.2 million, 8.5% per annum fixed-rate first trust-deed loan secured by the property. - On September 25, 1998, through a joint venture agreement, the Company acquired a 127,600 square foot shopping center located in Blaine, Washington, for $7.6 million. - On October 30, 1998, the Company completed the acquisition of an interest in Kienow's Food Stores, Inc., a Portland, Oregon-based corporation, which is described in the Company's financial statements as the unconsolidated real estate subsidiary. (See Note 5 to the Consolidated Financial Statements.) Also during 1998, the Company sold two single-tenant retail properties, one industrial property and one parcel of undeveloped land. The sale of these properties resulted in partial offsets to increases in revenues, interest and property-related expenses: - On June 23, 1998, the Company sold a 58,704 square foot parcel of undeveloped land located in North Reno, Nevada, for $292,000, at a loss of $30,000. 30 - On November 19, 1998, the Company sold a 20,300 square foot industrial property located in Commerce City, Colorado, for $1,100,000, at a loss of $19,000. - On December 23, 1998, the Company sold a 41,013 square foot freestanding grocery store located in Newman, California, for $3,536,000, at a gain of $445,000. - On December 29, 1998, the Company sold a 34,400 square foot freestanding grocery store located in El Cerrito, California, for $2,752,000, at a gain of $2,079,000. The average occupancy for all property types (exclusive of the portfolio of the unconsolidated real estate subsidiary) at December 31, 1998 was 93.8% as compared to 92.2% at December 31, 1997. Other income increased $264,000 to $969,000 in 1998 from $705,000 in 1997, primarily due to fees earned on the Walnut Creek development. Other operating expense increased $1,401,000 during 1998 to $4,412,000 from $3,011,000 in 1997. This increase is due primarily to (i) increased compensation costs for increased staffing associated with the Company's enhanced acquisition, development and property operations capabilities, and (ii) the master lease payment on the Dublin shopping center (see above). General and administrative expense increased $992,000 during 1998 to $2,733,000 from $1,741,000 in 1997. This increase is primarily due to increased compensation costs. INFLATION Substantially all of the Company's leases with tenants contain provisions that partially mitigate the impact of inflation. These provisions include, but are not limited to, clauses providing for increases in base rent and/or clauses enabling the Company to receive percentage rent based on tenants' gross sales. Additionally, substantially all leases require the tenants to pay their proportionate share of operating expenses, including common area maintenance and real estate taxes, thereby reducing the Company's exposure to increased costs and operating expenses resulting from inflation. POTENTIAL FACTORS AFFECTING FUTURE OPERATING RESULTS At December 31, 1999, the Company had total debt outstanding with a carrying value of $219,150,000, including $84,520,000 outstanding under its Bank Line. The Bank Line represents approximately 39% of the Company's total debt and approximately 17% of the Company's historical cost of real estate owned. At the present time, borrowings under the Company's Bank Line bear interest at a floating rate. The weighted average interest rate on the Bank Line for the year ended December 31, 1999 was 6.52% per annum. The Company recognizes that its results from operations may be impacted negatively by future increases in interest rates. While the Company has historically been successful in renewing and reletting space, the Company is subject to the risk that certain leases expiring in 2000 and beyond may not be renewed or the terms of renewal may be less favorable to the Company than current lease terms. The Company expects to incur costs in making improvements or repairs to its portfolio of properties required by new or renewing tenants and expects to incur costs associated with brokerage commissions payable in connection with the reletting of space. 31 Many other factors affect the Company's actual financial performance and may cause the Company's future results to be markedly outside of the Company's current expectations. COMPUTER SYSTEMS AND THE MILLENNIUM As a result of computer programs being written using two digits (rather than four digits) to define the applicable year, many computer systems will not be able to process information beyond December 31, 1999. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. At December 31, 1999, a significant portion of the Company's Local Area Network and Wide Area Network are Year 2000 compliant. Those nonessential systems, which are not Year 2000 compliant and are destined to be retired soon, were simply shut-down temporarily during the 1999 year-end. This did not result in any miscalculations or system failures. At this writing (mid-March 2000), the Company knows of no miscalculations or system failures, which occurred when the date passed December 31, 1999. The Company spent approximately $480,000 during 1999 on the conversion and upgrade of its management information systems. It is anticipated that the new systems will support planned future growth and increase efficiencies relating to property operations. These costs were recorded as assets and are being amortized. Additionally, the Company undertook a survey of the key tenants, vendors, banks and other parties it has significant business dealings with to determine if reliance on these external sources could interrupt Company operations. Based on the results of this survey, the Company does not expect its operations to be significantly impacted. However, contingency plans were considered in order to attempt to mitigate any potential disruption to business operations as a result of noncompliant systems utilized by third parties. INCOME TAX STATUS AND TAXABILITY OF DIVIDENDS The Company has elected to be taxed as a real estate investment trust under the applicable provisions of the Internal Revenue Code and the comparable California statutes. Under such provisions, the Company will not be taxed on that portion of its taxable income currently distributed to shareholders, provided that at least 95% of its real estate investment trust taxable income is so distributed. Management believes that the Company has qualified, and will continue to qualify, for tax purposes as a real estate investment trust. As the Company intends to make distributions in excess of taxable income, no provision is required to be made for federal or state income taxes in the accompanying Consolidated Financial Statements. Federal taxable income of the Company prior to the dividend-paid deductions for the three years ended December 31, was: $13,600,000 in 1999; $14,619,000 in 1998; and $14,327,000 in 1997. The difference between net income for financial reporting purposes and taxable income results primarily from different methods of accounting for leases, depreciation of investment properties and gains on property dispositions. 32 The following table summarizes the taxability of distributions and dividends paid during the years ended December 31, 1999, 1998 and 1997.
Year Ended December 31, ---------------------------- 1999 1998 1997 - ------------------------------------------------------------------- Ordinary income................... 76.3% 78.1% 67.5% Return of capital................. --- 20.3% 23.2% Capital gains..................... 23.7% 1.6% 9.3% ---------------------------- Total............................. 100.0% 100.0% 100.0% ---------------------------- ----------------------------
No assurances can be made that future dividends and distributions will be treated similarly. Each holder of stock may have a different basis in its stock and, accordingly, each holder is advised to consult its tax advisors. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is exposed to interest rate changes primarily as a result of its Bank Line and long-term debt used to maintain liquidity and fund capital expenditures and expansion of the Company's real estate portfolio and operations. The Company's interest rate risk-management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. The Company's objective with regard to long-term debt is to borrow primarily at fixed rates. Interest rate risk is monitored using a variety of techniques. The following table presents the principal amounts, weighted average interest rates, fair values and other terms required by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes (in thousands except for percentages):
Fair 2000 2001 2002 2003 2004 Thereafter Total Value - --------------------------- --------- --------- --------- --------- ---------- ----------- --------- --------- Variable rate Bank Line -- $84,520 -- -- -- -- $84,520 $84,520 Average interest rate* 7.28% Fixed rate senior notes -- -- -- -- $49,940 $74,882 $124,822 $114,930 Average interest rate* 7.92% 7.21% Fixed rate mortgage note $217 $234 $252 $272 $8,833 -- $9,808 $9,808 Average interest rate* 7.61% 7.61% 7.61% 7.61% 7.61% -- *(per annum)
33 As the preceding table incorporates only those exposures that exist as of December 31, 1999, it does not consider those exposures or positions that could arise after that date. Moreover, because current and future funding commitments are not presented in the table above, the information presented therein has limited predictive value. As a result, the impact on the Company's operating results with respect to interest rate fluctuations will depend on the exposures that arise during the period, the Company's interest rate risk management strategies at that time and interest rates. This discussion of the Company's risk-management activities includes "forward-looking statements" that involve risk and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. 34 WESTERN PROPERTIES TRUST Consolidated Financial Statements and Financial Statement Schedule Form 10-K Item 8 December 31, 1999 35 WESTERN PROPERTIES TRUST INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report 37 Consolidated Balance Sheets - December 31, 1999 and 1998 38 Consolidated Statements of Income - For the Years Ended December 31, 1999, 1998 and 1997 39 Consolidated Statements of Shareholders' Equity - For the Years Ended December 31, 1999, 1998 and 1997 40 Consolidated Statements of Cash Flows - For the Years Ended December 31, 1999, 1998 and 1997 41 Notes to Consolidated Financial Statements 42 Financial Statement Schedule III: Real Estate and Accumulated Depreciation 61
36 Independent Auditors' Report To the Trustees and Shareholders Western Properties Trust: We have audited the consolidated financial statements of Western Properties Trust (formerly Western Investment Real Estate Trust) (a California real estate investment trust) and subsidiaries as listed in the accompanying index. In connection with our audit of the consolidated financial statements, we have also audited the financial statement schedule listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Western Properties Trust and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP San Francisco, California February 8, 2000 37
CONSOLIDATED BALANCE SHEETS WESTERN PROPERTIES TRUST - ---------------------------------------------------------------------------------------------------------------------------- December 31, ASSETS 1999 1998 ---------------------- ------------------- (In thousands, except share data) Real estate investments: Real estate properties....................................................... $ 361,001 $ 410,183 Less accumulated depreciation and amortization............................... (73,189) (82,660) ----------- ---------- 287,812 327,523 Real estate properties held for sale......................................... 81,697 30,288 Less accumulated depreciation and amortization............................... (22,839) (7,452) ----------- ----------- 58,858 22,836 Unconsolidated real estate subsidiary (Note 5)............................... 46,963 44,564 Mortgage notes receivable.................................................... 17,229 16,160 ---------- ---------- Net real estate investments............................................... 410,862 411,083 Cash and cash equivalents....................................................... 2,219 1,512 Accounts receivable, acquisition deposits, and other assets..................... 13,055 12,994 Deferred debt issuance costs, net............................................... 1,130 1,302 ----------- ----------- $ 427,266 $ 426,891 ----------- ---------- ----------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Bank line (Note 9).............................................................. $ 84,520 $ 85,700 Senior notes, net (Note 9)...................................................... 124,822 124,794 Mortgage payable................................................................ 9,808 10,009 ----------- ---------- 219,150 220,503 Interest payable................................................................ 3,561 3,670 Prepaid rents and security deposits............................................. 2,288 2,161 Other liabilities............................................................... 2,939 3,517 ----------- ---------- 8,788 9,348 ----------- ---------- Total liabilities............................................................ 227,938 229,851 ----------- ---------- Minority interest (Note 10)..................................................... 18,699 17,416 Shareholders' equity: Preferred stock, 2,000,000 shares authorized; Shares issued or outstanding.............................................. --- Shares of beneficial interest, no par value, Unlimited share authorization. Issued and outstanding: December 31, 1999 - 17,236,470 shares............. December 31, 1998 - 17,216,550 shares............. 242,269 241,741 Accumulated dividends in excess of net income................................ (61,640) (62,117) ----------- ---------- Commitments and contingencies (Notes 4, 6, 9 and 18) Total shareholders' equity................................................... 180,629 179,624 ----------- ---------- $427,266 $426,891 ----------- ---------- ----------- ----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 38
CONSOLIDATED BALANCE SHEETS WESTERN PROPERTIES TRUST - ---------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ------------------------- 1999 1998 1997 ---------- ---------- ---------- (In thousands, except per share and share data) REVENUES: Minimum rents....................................................... $44,567 $42,350 $37,845 Percentage rents.................................................... 886 539 552 Recoveries from tenants............................................. 9,698 8,551 8,088 Interest income..................................................... 1,756 933 361 Income from unconsolidated real estate subsidiary................... 466 12 --- Other income........................................................ 1,325 969 705 ---------- ---------- ---------- Total revenues......................................................... 58,698 53,354 47,551 ---------- ---------- ---------- EXPENSES: Interest............................................................ 14,325 13,414 11,511 Property operating costs............................................ 10,171 9,253 8,798 Depreciation and amortization....................................... 11,523 12,401 11,046 Other operating expenses............................................ 4,867 4,412 3,011 General and administrative.......................................... 3,248 2,733 1,741 Management restructuring charge..................................... --- --- 1,842 ---------- ---------- ---------- Total expenses......................................................... 44,134 42,213 37,949 ---------- ---------- ---------- Income before gains on sales of real estate investments, minority interest and extraordinary item............ 14,564 11,141 9,602 Gains on sales of real estate investments........................... 6,854 2,475 4,898 Minority interest................................................... (1,604) --- --- ---------- ---------- ---------- Income before extraordinary item.................................... 19,814 13,616 14,500 Extraordinary item - loss on early extinguishments of debt.......... --- --- (1,620) ---------- ---------- ---------- Net income.......................................................... $19,814 $13,616 $12,880 ---------- ---------- ---------- ---------- ---------- ---------- Basic earnings per share data: Income before extraordinary item.................................... $ 1.15 $ 0.79 $ 0.84 Extraordinary item -loss on early extinguishments of debt........... --- --- (0.09) ---------- ---------- ---------- Net income.......................................................... $ 1.15 $ 0.79 $ 0.75 ---------- ---------- ---------- ---------- ---------- ---------- Diluted earnings per share data: Income before extraordinary item.................................... $ 1.15 $ 0.78 $ 0.84 Extraordinary item - loss on early extinguishment of debt........... --- --- (0.09) ---------- ---------- ---------- Net income.......................................................... $ 1.15 $ 0.78 $ 0.75 ---------- ---------- ---------- ---------- ---------- ---------- Cash dividends paid.................................................... $ 1.12 $ 1.12 $ 1.12 ---------- ---------- ---------- ---------- ---------- ---------- Weighted average number of shares outstanding-Basic.................... 17,225,468 17,206,868 17,144,674 ---------- ---------- ---------- ---------- ---------- ---------- Weighted average number of shares outstanding-Diluted.................. 18,699,731 17,487,443 17,158,292 ---------- ---------- ---------- ---------- ---------- ----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 39
CONSOLIDATED BALANCE SHEETS WESTERN PROPERTIES TRUST - ---------------------------------------------------------------------------------------------------------------------------- Years Ended December 31, 1999, 1998 and 1997 (In thousands, except share data) Accumulated Dividends Total Shares of in Excess of Share- Beneficial Interest Net holders' Number Amount Income Equity ---------------------------------------------------------------------- Balances, January 1, 1997 17,138,432 $ 242,054 $ (50,106) $ 191,948 Net proceeds from issuance of shares........... 53,160 622 --- 622 Debenture redemptions.......................... 268 6 --- 6 Net income..................................... --- --- 12,880 12,880 Cash dividends paid............................ --- --- (19,207) (19,207) ---------- --------- --------- --------- Balances, December 31, 1997 17,191,860 242,682 (56,433) 186,249 Net proceeds from issuance of shares........... 12,453 182 --- 182 Shares issued under restricted stock plan...... 12,237 176 --- 176 Loans to officers.............................. --- (1,299) --- (1,299) Net income..................................... --- --- 13,616 13,616 Cash dividends paid............................ --- --- (19,300) (19,300) ---------- --------- --------- --------- Balances, December 31, 1998 17,216,550 241,741 (62,117) 179,624 SHARES ISSUED UNDER RESTRICTED STOCK PLAN...... 19,920 268 --- 268 FORGIVENESS OF LOANS TO OFFICERS............... --- 260 --- 260 NET INCOME..................................... --- --- 19,814 19,814 CASH DIVIDENDS PAID............................ --- --- (19,337) (19,337) ---------- --------- --------- --------- BALANCES, DECEMBER 31, 1999 17,236,470 $ 242,269 $ (61,640) $ 180,629 ---------- --------- --------- --------- ---------- --------- --------- ---------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 40
CONSOLIDATED BALANCE SHEETS WESTERN PROPERTIES TRUST - -------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1999 1998 1997 -------------------------------------------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................................ $ 19,814 $ 13,616 $ 12,880 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest...................................................... 1,604 --- --- Depreciation and amortization.......................................... 11,523 12,401 11,046 Amortization of deferred debt issuance costs........................... 490 373 369 Gains on sales of real estate investments.............................. (6,855) (2,475) (4,898) Earned compensation on restricted stock plan........................... 268 176 --- Loss on early extinguishment of debt................................... --- --- 1,620 Loan forgiveness....................................................... 260 --- --- Increase in accounts receivable and other assets....................... (1,561) (1,640) (418) Increase in accrued rent receivable.................................... (636) (379) (471) (Decrease) increase in interest payable................................ (109) 753 1,440 (Decrease) increase in prepaid rents, security deposits and other liabilities............................................................ (451) 1,153 1,709 -------- -------- -------- Net cash provided by operating activities.............................. 24,347 23,978 23,277 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of real estate investments............................ 21,556 7,237 10,135 Proceeds from sale of marketable securities............................... --- 48 --- Investment in mortgage note receivable.................................... (1,069) (14,869) (1,300) Acquisition of real estate investments.................................... (15,999) (35,843) (283) Investment in unconsolidated real estate subsidiary....................... (2,399) (27,148) --- Funds released from escrow................................................ 2,625 7,117 --- Funds escrowed pending acquisition........................................ --- (2,625) (7,117) Improvements of real estate investments: Build-to-suit developments............................................. (1,207) (335) (1,561) New leases............................................................. (2,217) (2,725) (3,264) General................................................................ (1,663) (668) (666) Recovery of investment in direct financing leases......................... 145 364 316 Investment in unsecured note.............................................. (800) --- --- -------- -------- -------- Net cash used in investing activities.................................. (1,028) (69,447) (3,740) -------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Advances on Bank Line..................................................... 50,600 107,350 50,050 Principal payments on Bank Line........................................... (51,780) (40,750) (63,200) Principal payments on real estate loan payable............................ (201) (156) --- Loans to officers......................................................... --- (1,299) --- Redemption of convertible debentures...................................... --- --- (61,310) Net proceeds from issuance of shares...................................... --- 182 628 Net proceeds from senior notes offering................................... --- --- 74,851 Deferred long-term debt issuance costs.................................... (290) (509) (838) Cash distributions to minority interest................................... (1,604) --- --- Cash dividends paid....................................................... (19,337) (19,300) (19,207) -------- -------- -------- Net cash (used in) provided by financing activities.................... (22,612) 45,518 (19,026) -------- -------- -------- Net increase in cash and cash equivalents............................. 707 49 511 Cash and cash equivalents, at beginning of period......................... 1,512 1,463 952 -------- -------- -------- Cash and cash equivalents, at end of period............................... $ 2,219 $ 1,512 $ 1,463 -------- -------- -------- -------- -------- -------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for interest net of capitalized interest of $1,307,000, $275,000 and $12,000, in 1999, 1998 and 1997, respectively............................................................ $ 13,945 $ 12,287 $ 9,702 -------- -------- -------- -------- -------- -------- NON CASH FINANCING ACTIVITY: Real estate acquisition debt assumed...................................... $ --- $ 10,164 $ --- -------- -------- -------- -------- -------- -------- Acquisitions through the issuance of partnership units.................... $ 1,283 $ 17,416 $ --- -------- -------- -------- -------- -------- --------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 41 WESTERN PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: ORGANIZATION AND BASIS OF PRESENTATION Founded in 1962, Western Properties Trust ("Western") and its affiliates own and operate community and neighborhood shopping centers located in the western United States. At December 31, 1999, Western and its affiliates had investments in 62 properties, primarily anchored by supermarkets and drug stores, containing approximately 5.6 million square feet of gross leasable area. The corporate office of the self-administered equity real estate investment trust is in the San Francisco Bay Area city of Emeryville, California. Its shares are traded on the American Stock Exchange under the symbol "WIR." On August 19, 1999, pursuant to authority granted the Board of Trustees under Western's Declaration of Trust, Western changed its name from Western Investment Real Estate Trust to Western Properties Trust. The accompanying Consolidated Financial Statements include the accounts of Western, Western/Kienow's L.P., Western Pinecreek L.P. and GW100, a general partnership in which Western has a controlling financial interest as of December 31, 1999 (collectively, the Company). Western is the sole general partner in Western/Kienow's L.P. and owned a 60% interest as of December 31, 1999 and 1998. Western is also the sole general partner in Western Pinecreek L.P. and owned a 75% interest as of December 31, 1999. Western and its affiliates use the equity method of accounting to account for investments that do not qualify for consolidation. All significant intercompany accounts and transactions have been eliminated. Note 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REAL ESTATE INVESTMENTS Properties comprising real estate investments are carried at the lower of depreciated cost or fair value. Acquisition and development costs, which include fees and costs incurred in acquiring or developing new properties, are capitalized as incurred. Upon completion of acquisition or construction, these costs are depreciated over the useful lives of the properties on a straight-line basis. The estimated useful lives for properties range from 23 to 40 years for buildings and 2 to 31 years for improvements. When the Company decides to dispose of a property, it will assess the recoverability of the net recorded value of the property and discontinue the periodic depreciation of that property. Additionally, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, the recoverability of the carrying value of that property is evaluated. If the sum of the undiscounted, expected future cash flows, exclusive of interest, is less than the carrying value of that asset, a determination of fair value of that asset is made. If the fair value is less than the carrying value of that asset, an impairment charge is recognized. No impairment losses have been recorded in the years ended December 31, 1999, 1998 or 1997. 42 Included in real estate investments is a net investment in one direct financing lease. This investment is carried at the aggregate minimum lease payments to be received over the term of the lease, plus an estimated residual value, less unearned income. Expenditures for ordinary maintenance and repairs are expensed as incurred. Significant renovations and improvements that enhance and/or extend the useful life of a property are capitalized and depreciated over its estimated useful life. LEASING COMMISSIONS AND LEASING-RELATED COSTS Direct incremental leasing commissions and leasing-related costs are capitalized and amortized over the terms of the associated leases. The following table provides a reconciliation of leasing commissions and leasing-related costs (in thousands):
Year Ended December 31, -------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------------------- Balance at beginning of year.............. $1,975 $1,630 $1,587 Additions............................. 315 761 366 Dispositions.......................... (129) (37) --- Amortization.......................... (335) (379) (323) -------------------------------- Balance at end of year.................... $1,826 $1,975 $1,630 -------------------------------- --------------------------------
RENTAL INCOME The Company accrues base rental income (minimum contractual lease payments) as earned. Certain of the Company's leases provide for additional rent based on specified percentages of the lessee's store sales. Such percentage-based rental income was recognized during 1996, 1997 and the first two quarters of 1998, based on estimates. Commencing on July 1, 1998, for the last two quarters of 1998, the Company recognized percentage-based rental income in accordance with EITF 98-9 issued in May 1998. EITF 98-9 permits revenue recognition of percentage-based rental income only when tenants' sales exceed the level at which such rents are contractually due. The Company recognizes rental income and related accrued rental receivable in accordance with FASB No. 13, ACCOUNTING FOR LEASES. Accrued rent receivable (straight-line rental revenues in excess of contractually required payments) included in income was $636,000 in 1999, $379,000 in 1998, and $471,000 in 1997. INCOME TAX STATUS AND TAXABILITY OF DIVIDENDS The Company has elected to be taxed as a real estate investment trust under the applicable provisions of the Internal Revenue Code and the comparable California statutes. Under such provisions, the Company will not be taxed on that portion of its taxable income currently distributed to shareholders, provided that at least 95% of its real estate investment trust taxable income is so distributed. Management believes that the Company has qualified, and will continue to qualify, for tax purposes as a real estate investment trust. As the Company intends to make distributions in excess of taxable income, no provision is required to be made for federal or state income taxes in the accompanying Consolidated Financial Statements. 43 The following table summarizes the taxability of distributions and dividends paid during the years ended December 31, 1999, 1998 and 1997.
Year Ended December 31, -------------------------------- 1999 1998 1997 - ---------------------------------------------------------------------------------- Ordinary income................... 76.3% 78.1% 67.5% Return of capital................. --- 20.3% 23.2% Capital gains..................... 23.7% 1.6% 9.3% -------------------------------- Total............................. 100.0% 100.0% 100.0% -------------------------------- --------------------------------
No assurances can be made that future dividends and distributions will be treated similarly. Each holder of stock may have a different basis in its stock and accordingly, each holder is advised to consult its tax advisors. CASH EQUIVALENTS Cash equivalents comprise certain highly liquid investments with original maturities of less than three months. DEFERRED DEBT ISSUANCE COSTS Deferred debt issuance costs incurred in connection with the issuance of debt are amortized over the term of the associated debt arrangements using a method that approximates the interest method. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATION Certain prior-year financial statement amounts and related footnote information for 1998 and 1997 have been reclassified to conform with the 1999 presentation. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Financial Accounting Statement No. 133 (FASB 133), ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The Company will adopt FASB 133 for interim periods beginning in 2001, the effective date of FASB 133, as amended. Management believes that the adoption of this Statement will not have a material impact on the Company's financial statements. 44 Note 3: REAL ESTATE INVESTMENTS The following table provides a reconciliation of real estate properties, properties held for sale and the related accumulated depreciation and amortization for each (in thousands):
YEAR ENDED DECEMBER 31, 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- REAL ESTATE PROPERTIES: Balance at beginning of year........................................ $ 410,183 $ 392,470 $ 384,550 Increases: Acquisitions ........................................ 17,282 46,064 288 Improvements......................................... 4,714 2,967 4,878 Properties reclassified from held for sale........... 1,533 --- 3,070 Decreases: Properties reclassified as held for sale............. (72,495) (30,593) --- Dispositions......................................... (71) (304) --- Recovery of acquisition costs........................ --- (57) --- Amortization of direct financing leases.............. (145) (364) (316) --------- --------- --------- Balance at end of year.............................................. $ 361,001 $ 410,183 $ 392,470 --------- --------- --------- --------- --------- --------- ACCUMULATED DEPRECIATION AND AMORTIZATION: Balance at beginning of year........................................ $ 82,660 $ 77,642 $ 66,271 Increases: Depreciation expense................................. 10,988 11,915 10,625 Accumulated depreciation of properties reclassified from held for sale................... --- --- 746 Decreases: Dispositions......................................... --- --- --- Accumulated depreciation of properties held for sale..................................... (20,459) (6,897) --- --------- --------- --------- Balance at end of year.............................................. $ 73,189 $ 82,660 $ 77,642 --------- --------- --------- --------- --------- --------- REAL ESTATE PROPERTIES HELD FOR SALE: Balance at beginning of year........................................ $ 30,288 $ 5,382 $ 16,161 Increases: Improvements......................................... 58 --- 29 Properties reclassified as held for sale............. 72,495 30,593 -- Decreases: Properties no longer held for sale................... (1,533) --- (3,070) Dispositions......................................... (19,611) (5,687) (7,738) --------- --------- --------- Balance at end of year.............................................. $ 81,697 $ 30,288 $ 5,382 --------- --------- --------- --------- --------- --------- ACCUMULATED DEPRECIATION AND AMORTIZATION: Balance at beginning of year........................................ $ 7,452 $ 1,861 $ 5,525 Increases: Accumulated depreciation of properties reclassified as held for sale..................... 20,459 6,897 --- Decreases: Accumulated depreciation of properties removed from market............................... --- --- (746) Dispositions......................................... (5,072) (1,306) (2,918) --------- --------- --------- Balance at end of year.............................................. $ 22,839 $ 7,452 $ 1,861 --------- --------- --------- --------- --------- ---------
At December 31, 1999, the Company owned 14 properties that were held for sale. These properties total 966,000 leasable square feet and have a net aggregate carrying value of $58,858,000. The Company has determined that these properties do not meet the Company's long-term strategic objectives, therefore, the Company has developed disposition plans and is marketing the properties for sale. Estimated fair values for these properties are in excess of recorded carrying values. The Company ceases depreciation on assets classified as held for sale. The net operating income from these properties included in 1999 operations was $5,677,000. It is anticipated that these properties will be sold in 2000. 45 As of December 31, 1999, only one of the Company's properties was security for a mortgage. However, if amounts due under the Bank Line are not paid at maturity, the lender, at its option, can require the Company to provide security interests in Company properties. The Company has an ownership interest in one property where the co-owner is obligated under a note that is secured by the property. Most of the Company's leases require the tenant to be responsible for, or reimburse the Company for, liability insurance coverage on the properties. The Company maintains umbrella liability insurance on all of its properties and monitors tenant compliance with liability insurance coverage requirements. While the Company believes its properties are adequately insured, the Company does not carry earthquake (except for the Windsor, California property, where the secured lender requires earthquake insurance), flood or pollution coverage. However, most major anchor tenants are required to rebuild or repair their leased premises if damaged or destroyed, regardless of the cause. Most of the Company's properties are located in areas of California and Nevada where earthquakes have been known to occur. In the event of a major earthquake, Company properties could suffer substantial damage or destruction. Since it commenced real estate operations in 1964, the Company has not incurred any material expense nor, to its knowledge, have any of its properties incurred any material damage from earthquakes or floods. The Company periodically considers the merits of purchasing earthquake insurance for its properties. To date, the Company has not purchased earthquake insurance because of (i) the high premiums and deductibles, and (ii) the Company's geographically diversified portfolio that reduces the likelihood of material loss as a consequence of earthquakes. Furthermore, the majority of properties in the portfolio principally consist of relatively new, single-story buildings. Note 4: CAPITAL EXPENDITURES It is the Company's practice to capitalize costs that exceed $4,000 and are associated with the improvement and rental of real estate investments. Capitalized costs include leasing-related costs and property improvements. Capital expenditures for the 12 months ended December 31, 1999, and 1998 are as follows (in thousands):
TWELVE MONTHS ENDED DECEMBER 31, 1999 1998 - ----------------------------------------------------------------------------------------------------- "Build to Suit" capital improvements................................ $ 1,207 $ 335 Capitalized costs incurred in connection with leasing previously UNLEASED space.................................................. 99 78 Capitalized costs incurred in connection with leasing previously LEASED space.................................................... 2,118 2,647 Capitalized costs that relate to improvements to common areas........................................................... 1,663 668 ------- ------ Total capitalized expenditures...................................... $ 5,087 $3,728 ------- ------ ------- ------ Improvements........................................................ $ 4,772 $2,967 Leasing-related costs............................................... 315 761 ------- ------ Total capitalized expenditures...................................... $ 5,087 $3,728 ------- ------ ------- ------
46 During the year ended December 31, 1999, the Company entered into new leases that obligate the Company to fund leasing commissions, tenant improvements and build-to-suit developments. These obligations relate both to new leases and lease renewals, a portion of which were funded during 1999 and are reflected in the preceding table. In addition, a portion remains an obligation of the Company at December 31, 1999 (See Note 18). The aggregate and per square foot information representing expenditures associated with leasing for the year ended December 31, 1999, is as follows:
- ------------------------------------------------------------------------------------------------------------------------- New Leases - ------------------------------------------------------------------------------------------------------------------------- TENANT IMPROVEMENTS Capitalized Costs All Expenditures -------------------------------------- -------------------------------------- Per Per Aggregate Square Square Aggregate Square Square PROPERTY TYPE Amount Feet Foot Amount Feet Foot ------------- --------- ---- ---- --------- ---- ----- Shopping centers and single-tenant retail properties $ 1,972,640 202,401 $9.75 $ 2,011,525 260,869 $ 7.71
- ------------------------------------------------------------------------------- LEASING COMMISSIONS
Capitalized Costs All Expenditures -------------------------------------- -------------------------------------- Per Per Aggregate Square Square Aggregate Square Square PROPERTY TYPE Amount Feet Foot Amount Feet Foot ------------- --------- ---- ---- --------- ---- ----- Shopping centers and single-tenant retail properties $ 315,998 156,498 $2.02 $ 324,030 260,869 $ 1.24
- ------------------------------------------------------------------------------------------------------------------------- Lease Renewals - ------------------------------------------------------------------------------------------------------------------------- TENANTS IMPROVEMENTS Capitalized Costs All Expenditures -------------------------------------- -------------------------------------- Per Per Aggregate Square Square Aggregate Square Square PROPERTY TYPE Amount Feet Foot Amount Feet Foot ------------- --------- ---- ---- --------- ---- ----- Shopping centers and single-tenant retail properties $ 176,975 7,553 $ 23.43 $ 185,695 197,351 $ 0.94
47 Minimum rents per square foot data for new and renewal leases executed during the 12 months ended December 31, 1999, is represented in the following table:
Old New Old New Coupon (1) to Coupon (2) Coupon (1) to Effective (3) ---------- ---------- ---------- ------------- New leases $0.64 $0.93 $0.64 $0.97 Lease renewals $1.08 $1.13 $1.08 $1.18 Never before leased --- $1.19 --- $1.24
(1) Old Coupon represents the LAST minimum monthly rent in effect under the previous lease. (2) New Coupon represents the INITIAL minimum monthly rent in effect under the new lease. (3) New Effective represents the AVERAGE minimum monthly rent in effect under the new lease for the entire term of the lease. Note 5: UNCONSOLIDATED REAL ESTATE SUBSIDIARY In October 1998, the Company acquired Kienow's Food Stores, Inc. ("Kienow's"), a Portland, Oregon-based grocery wholesaler and retailer, whose principal assets were its real estate properties, in a transaction valued at approximately $55 million. Following an agreed-upon $11,000,000 stock redemption from Kienow's cash on hand, the purchase price was paid $26,240,000 in cash and by issuance of 1,432,364 units in a newly formed downREIT limited partnership valued at $17,416,000. The limited partnership units are exchangeable into Western shares on a one-for-one basis. The number of limited partnership units issued was determined using a $12.16 share price for Western's shares. The acquisition has been accounted for by the purchase method. The Company consolidates the downREIT limited partnership, which accounts for its investment in the newly formed parent company of Kienow's, on the equity basis of accounting. The interests of the limited partners in the downREIT limited partnership are presented as minority interests in the accompanying Consolidated Financial Statements. The Kienow's real estate portfolio included six shopping centers, four freestanding stores (the "10 core properties"), seven non-core properties and two leasehold properties. With this purchase, the Company intended to discontinue the wholesale and retail grocery operations, retenant the anchor-store space of the 10 core properties and dispose of non-core properties. During 1999, the wholesale and retail grocery operations of the 10 core properties were discontinued; four freestanding stores and four shopping centers were redeveloped and retenanted and all but two of the seven non-core properties were sold. As of December 31, 1999, the summarized balance sheet information of Kienow's is as follows (in thousands): Net assets (primarily consisting of real estate properties)... $ 47,531 --------- --------- Other shareholders' equity.................................... $ (568) --------- Company's share of equity..................................... $ 46,963 --------- ---------
For the 12 months ended December 31, 1999, the Company capitalized $1,299,000 of interest cost. Additionally, during the first quarter of 2000, the retail grocery operations were discontinued at two locations under lease. 48 Note 6: INVESTMENTS IN MORTGAGE LOANS
December 31, Interest Rate - ----------------------------------------------------------------------------------------------------------------------------- 1999 1998 ---- ---- (In thousands) Loan on a retail property in Concord, California, secured by a first deed of trust on the property. Mortgage is due August 2007............. $1,236 $1,265 8.5% through August 31, 2002 9.0% after August 31, 2002 Loan on a shopping center in Dublin, California, secured by a first deed of trust on the property. Interest only is payable monthly. Mortgage is due August 2004................. 8,200 8,200 8.5% Participating loan on a shopping center under development in Walnut Creek, California, secured by a first deed of trust on the property. Total loan commitment is $42 million. Mortgage is due December 2008......................................... 7,793 6,695 9.0% on balances up to $26.5 million --- --- 10.5% on balances above $26.5 million ------- -------- $17,229 $ 16,160 ------- -------- ------- --------
Note 7: LEASES OPERATING LEASE-RECEIVABLE Future minimum lease payments scheduled to be received under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 1999, are as follows (in thousands): 2000............................. $ 44,289 2001............................. 41,536 2002............................. 38,311 2003............................. 33,533 2004............................. 27,659 Thereafter....................... 197,213 -------- Total............................ $382,541 -------- --------
49 DIRECT FINANCING LEASE - RECEIVABLE At December 31, 1999, future minimum lease payments scheduled to be received under a direct financing lease, range from $189,000 in 2000 to $142,000 in 2002. At December 31, 1999, the Company's investment in one direct financing lease was $863,000, and was determined by adding the estimated residual value of $275,000 to the total remaining minimum lease payments of $708,000, less unearned income of $120,000. The original cost of the property subject to the direct financing lease was $1,644,000. Included in other income is income recorded under direct financing leases of $66,000, $105,000 and $155,000 in 1999, 1998 and 1997, respectively. OPERATING LEASE - PAYABLE Future minimum lease payments scheduled to be paid that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 1999, are as follows (in thousands): 2000............................. $ 853 2001............................. 1,489 2002............................. 1,529 2003............................. 1,577 2004............................. 1,476 Thereafter....................... 13,764 -------- Total............................ $ 20,688 -------- --------
Note 8: MAJOR TENANT Raley's (including its subsidiary, Nob Hill Foods) leases 22 anchor store properties from the Company. Rental revenues from these properties, which are dispersed throughout California and Nevada, were $10,837,000, $10,413,000 and $9,178,000 in 1999, 1998 and 1997, respectively. These amounts represented 18%, 20% and 19% of total revenues during 1999, 1998 and 1998, respectively. During 1999, two properties leased to Raley's were sold. Rental revenue in 1999 from Raley's relating to the sold properties amounted to $678,000. Note 9: BANK LINE, NOTES AND MORTGAGE PAYABLE BANK LINE OF CREDIT At December 31, 1999, the Company had $84,520,000 outstanding under its $100,000,000 unsecured bank line of credit (the "Bank Line"). Interest on funds drawn under the Bank Line is LIBOR plus 1.15% and is payable at the maturity of each LIBOR contract. At December 31, 1999 and 1998, the weighted average interest rate was 7.28% and 6.38% per annum, respectively. In addition, the Company pays an annual fee of one quarter of one percent (0.25%) of the total commitment. The Company is not required to pledge any assets or maintain compensating balances for this Bank Line, although the Company has agreed to certain covenants that impose limitations on the incurrence of debt and other restrictions. Additionally, if amounts due under the Bank Line are not paid at maturity, the lender, at its 50 option, can require the Company to provide security interests in Company properties. The Company intends to renew or replace this facility before it expires on September 30, 2001. In connection with the redevelopment of a property located in Walnut Creek, California, the Company has obtained an irrevocable standby letter of credit in the amount of $3,336,000 from one of the lenders with which the Company has its Bank Line. The amount available under the Bank Line is reduced by the amount of the letter of credit. This letter of credit expires April 30, 2006. SENIOR NOTES In February 1994, the Company sold $50,000,000 of unsecured senior notes (the "1994 Notes") in a public offering. The 1994 Notes are due in 2004 and contain certain covenants that impose limitations on the incurrence of debt and other restrictions. These restrictions include a cap on total borrowings, minimum shareholders' equity and income-coverage requirements. The 1994 Notes are not redeemable prior to maturity. In September 1997, the Company sold $75,000,000 of unsecured senior notes (the "1997 Notes") in a public offering, comprising $25,000,000 due 2006, $25,000,000 due 2008 and $25,000,000 due 2010. The 1997 Notes were issued under the Company's $150,000,000 shelf registration. All senior notes outstanding at December 31, 1999 are summarized in the following table (in thousands, except for interest rate and year data):
Net Amount Coupon Interest Rate Due Date Years to Maturity -------------------------------------------------------------------------------------------------------------- $49,940 7.875% February 15, 2004 4 24,974 7.100% September 15, 2006 7 24,953 7.200% September 15, 2008 9 24,955 7.300% September 15, 2010 11 -------- ------ -- Total/Weighted Average $124,822 7.470% 7 -------- ------ -- -------- ------ --
As of December 31, 1999, the senior notes carried "investment grade" ratings from Moody's Investor Service (Baa3) and Standard & Poor's Rating Services (BBB-). MORTGAGES PAYABLE At December 31, 1999, the Company assumed a $9,808,000 mortgage note in its acquisition of the Windsor, California shopping center. The note bears a fixed rate of interest of 7.61% per annum, which is due May 2004 with a balloon payment of $8,737,000. Future minimum principal payments scheduled to be paid under the mortgage payable as of December 31, 1999, are as follows (in thousands): 2000.............................. $ 217 2001.............................. 234 2002.............................. 252 2003.............................. 272 2004.............................. 8,833 ------- Total............................. $ 9,808 ------- -------
51 Note 10: MINORITY INTEREST
Recorded Value of Indicated Value Minority Interest No. of Units per Unit - ----------------------------------------------------------------------------------------------------------------------------------- 1999 1998 ---- ---- (In thousands) Minority interest in limited partnership established October 1998 to acquire Kienow's in Portland, Oregon. Units are exchangeable into Western shares on a one-for-one basis......................... $ 17,416 $ 17,416 1,432,364 $12.16 ------ Minority interest in limited partnership established November 1999 to acquire interest in shopping center in Grass Valley, California. Units are exchangeable into Western shares on a one-for-one basis after certain conditions have been met............................. 1,283 -- 88,498 $14.50 -------- -------- --------- ------ $ 18,699 $ 17,416 1,520,862 -------- -------- --------- -------- -------- ---------
Note 11: LOANS TO RELATED PARTIES In 1998, the Board of Trustees approved loans totaling $1.3 million to the Company's Chief Executive Officer; Chief Financial Officer; Senior Vice President, Investments; and Senior Vice President, Operations. The loan proceeds were used to fund the purchase of Company shares of beneficial ownership by these individuals in order to increase their ownership in the Company and to more closely align their interests with those of shareholders. The loans bear interest at a rate of 5.5% per annum (equal to the Applicable Federal Rate in effect on the date the promissory notes were issued), are recourse and are secured by a pledge of certain shares of beneficial ownership of the Company. Because of the fulfillment of certain Company and individual goals, during February 1999, the Board of Trustees forgave $260,000 of those loans granted to such officers during 1998. The Board of Trustees also approved loans to the Company's Chief Executive Officer and Chief Financial Officer to fund their acquisition of the common stock of Western Real Estate Services, Inc. (WRESI), in which the Company has a 97% economic interest. WRESI was formed to facilitate the acquisition of Kienow's (see Note 5). The amount loaned to each individual was $283,750, with interest at 7.5% per annum and maturity dates of October 30, 2008. 52 Note 12: DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS FASB No. 107 requires disclosure of fair value for all financial instruments. The Company believes that the carrying amount approximates fair value for cash and cash equivalents; accounts receivable, acquisition deposits, and other assets; interest payable; security deposits; and other liabilities as of December 31, 1999 and 1998, due to the short-term nature of these instruments. The Company further believes that the carrying amounts of the mortgage notes receivable, Bank Line and mortgage payable approximate fair value as of December 31, 1999 and 1998 because interest rates and terms for these instruments are consistent with those currently available to the Company. The estimated fair values of the Company's senior notes based on quoted market prices as of December 31 are stated in the following table (in thousands):
1999 1998 ------------------------- ------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------------------- ------------------------- Senior notes ................ $ 124,822 $ 114,930 $ 124,794 $ 114,130
Note 13: SEGMENT DISCLOSURE FASB No. 131 requires disclosure about segments of the Company and related information. The Company evaluates performance and makes resource-allocation decisions on an individual property basis. For financial reporting purposes, the Company has grouped its properties into three segments: shopping centers (including shopping centers under-development), single-tenant retail and other commercial properties. Investments principally consist of real estate, but also include real estate secured loans (three) and a real estate joint venture (one). Nonsegment revenue consists of mainly interest income. Nonsegment assets include cash, accounts receivable and deferred financing costs. The accounting policies of the segments are the same as those described in Note 1. The Company assesses and measures segment operating results based on a performance measure referred to as Funds From Operations ("FFO"). The National Association of Real Estate Investment Trusts defines FFO as net income, calculated in accordance with generally accepted accounting principles ("GAAP"), plus depreciation and amortization of assets uniquely significant to the real estate industry reduced by gains and increased by losses on (i) sales of property and (ii) extraordinary and "unusual items." Effective January 1, 2000, net income will not be adjusted for unusual items unless they qualify as extraordinary items under GAAP in calculating FFO. This new interpretation will not have a significant impact on the Company. FFO does not represent cash flows from operations as defined by GAAP and should not be considered a substitute for net income as an indicator of the Company's operating performance, nor for cash flows as a measure of liquidity. Furthermore, FFO as disclosed by other REITs may not be comparable to the Company's calculation of FFO. 53 The revenues, profit (loss), assets and real estate investment capital expenditures for each of the reportable segments are summarized as follows for the years ended and as of December 31, 1999, 1998 and 1997 (in thousands):
YEAR ENDED DECEMBER 31, 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- REVENUES Shopping centers.............................................. $ 51,787 $ 46,803 $ 41,121 Single-tenant retail.......................................... 2,079 2,320 2,722 Other commercial.............................................. 4,626 4,131 3,360 Nonsegment.................................................... 206 100 348 --------- --------- --------- Total revenue.......................................... $ 58,698 $ 53,354 $ 47,551 --------- --------- --------- --------- --------- --------- PROFIT (LOSS) Funds from operations: Shopping centers...................................... $ 40,996 $ 37,166 $ 32,310 Single-tenant retail.................................. 1,927 2,185 2,591 Other commercial ..................................... 4,306 3,851 3,035 --------- --------- --------- Total segment contribution to FFO............ 47,229 43,202 37,936 Interest income....................................... 187 90 359 Other income.......................................... 19 10 (11) Interest expense...................................... (14,325) (13,414) (11,511) Other operating expenses.............................. (3,590) (3,612) (2,542) Personal property depreciation........................ (200) (108) (98) General and administrative............................ (3,191) (2,733) (1,741) --------- --------- --------- Consolidated FFO............................. 26,129 23,435 22,392 Depreciation and amortization........................ (11,323) (12,294) (10,948) Depreciation and amortization, unconsolidated real estate.............................................. (185) --- --- Minority interest.................................... (1,604) --- --- Cumulative effect of change in accounting principle.. (57) --- --- Gains on sales of real estate investments............ 6,854 2,475 4,898 Loss on early extinguishment of debt................. --- --- (1,620) Management restructuring charges..................... --- --- (1,842) --------- --------- --------- Net income.................................................... $ 19,814 $ 13,616 $ 12,880 --------- --------- --------- --------- --------- ---------
YEAR ENDED DECEMBER 31, 1999 1998 - ----------------------------------------------------------------------------------------------------------- ASSETS Shopping centers.............................................. $ 387,075 $ 374,672 Single-tenant retail.......................................... 8,512 10,371 Other commercial.............................................. 22,343 28,146 Nonsegment.................................................... 9,336 13,702 --------- --------- Total assets......................................... $ 427,266 $ 426,891 --------- --------- --------- ---------
54
YEAR ENDED DECEMBER 31, 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- REAL ESTATE INVESTMENT CAPITAL EXPENDITURES: Acquisitions................................................. Shopping centers..................................... $ 17,282 $ 35,843 $ 283 Single-tenant retail................................. --- --- --- Other commercial..................................... --- --- --- -------- -------- ------ Total acquisitions.............................. $ 17,282 $ 35,843 $ 283 ======== ======== ====== Developments................................................. Shopping centers..................................... $ 4,582 $ 2,691 $ 5,442 Single-tenant retail................................. 454 --- --- Other commercial..................................... 51 1,037 49 -------- -------- ------- Total developments.............................. $ 5,087 $ 3,728 $ 5,491 -------- -------- ------- -------- -------- -------
Note 14: STOCK OPTION PLAN 1988 STOCK OPTION PLAN In May 1988, the Company adopted a nonqualified stock option plan (the "1988 Plan"). The purchase price of shares of beneficial interest purchased pursuant to this plan is to be not less than the fair market value of the shares on the date of grant. Options granted under the plan, which expire six years from the grant date if not exercised, vest and become exercisable at a rate of 20% per year from the date of grant until completely vested. A total of 300,000 shares of beneficial interest have been authorized under the Plan. In 1998, as part of adopting a new Equity Incentive Plan, the 1988 Plan was terminated; consequently, no further options will be granted under the 1988 Plan. Activity in the Company's 1988 share option plan during the three years ended December 31, 1999, is summarized in the following table:
Shares Available Options Weighted for Future Granted and Average Options Grants Outstanding Exercise Price - ----------------------------------------------------------------------------------------------------------------------- 12/31/96 Balance 27,840 272,000 $12.67 - ----------------------------------------------------------------------------------------------------------------------- Exercised --- (53,160) $11.72 Expired 9,040 (9,040) $12.45 Granted (36,300) 36,300 $13.59 - ----------------------------------------------------------------------------------------------------------------------- 12/31/97 Balance 580 246,100 $13.02 - ----------------------------------------------------------------------------------------------------------------------- Exercised --- (1,400) $11.46 Expired 8,300 (8,300) $12.76 Plan terminated (8,880) --- --- - ----------------------------------------------------------------------------------------------------------------------- 12/31/98 Balance --- 236,400 $13.03 - ----------------------------------------------------------------------------------------------------------------------- Exercised --- --- --- Expired --- (66,800) $13.69 - ----------------------------------------------------------------------------------------------------------------------- 12/31/99 Balance --- 169,600 $12.77 - -----------------------------------------------------------------------------------------------------------------------
55 The following table summarizes information about the Company's 1988 Plan outstanding at December 31, 1999:
- ----------------------------------------------------------------------------------------- ----------------------------- Options Outstanding Options Exercisable - ----------------------------------------------------------------------------------------- ----------------------------- Number of Weighted Weighted Weighted Options Average Average Average Range of Outstanding at Remaining Exercise Exercise Exercise Prices December 31, 1999 Contractual life Price Options Price - --------------------- -------------------------- ---------------------- ---------------- -------------- ------------- $11.00-$13.88 169,600 1.8 years $12.77 144,140 $12.69
1998 EQUITY INCENTIVE PLAN In May 1998, the Company adopted the 1998 Equity Incentive Plan (the "1998 Plan"). This Plan permits the Company to grant incentive stock options, restricted stock, unrestricted stock, stock appreciation rights and nonqualified stock options. A total of 850,000 shares of beneficial interest have been authorized under the 1998 Plan. Activity in the Company's 1999 Equity Incentive Plan is summarized in the following table:
- --------------------------- --------------- ---------------- ------------ --------------- ---------------- ------------ ----------- Shares Weighted Available Non Stock Incentive Average for Future -Qualified Restricted Unrestricted Appreciation Stock Exercise Grants Stock Options Stock Stock Rights Options Price - ---------------------------- -------------- ---------------- ------------- -------------- ---------------- ------------ ----------- 12/31/1997 Balance -0- -0- -0- -0- -0- -0- $ -0- - ---------------------------- -------------- ---------------- ------------- -------------- ---------------- ------------ ----------- Plan adopted 850,000 --- --- --- --- --- $ --- Options granted (532,000) 532,000 $13.92 Options expired 1,500 (1,500) $13.00 Restricted stock granted (41,500) 41,500 $14.36 Restricted stock issued (12,237) $14.40 - ---------------------------- -------------- ---------------- ------------- -------------- ---------------- ------------ ----------- 12/31/1998 Balance 278,000 530,500 29,263 -0- -0- -0- $13.95 - ---------------------------- -------------- ---------------- ------------- -------------- ---------------- ------------ ----------- Options granted (215,400) 215,400 $11.15 Options expired 15,500 (15,500) $13.00 Restricted stock granted (20,000) 20,000 $11.25 Restricted stock issued (19,920) $13.40 - ---------------------------- -------------- ---------------- ------------- -------------- ---------------- ------------ ----------- 12/31/1999 BALANCE 58,100 730,400 29,343 -0- -0- -0- $12.91 - ---------------------------- -------------- ---------------- ------------- -------------- ---------------- ------------ -----------
The following table summarizes information about the Company's 1998 Equity Incentive Plan grants outstanding at December 31, 1999:
- --------------------------------------------------------------------------------------------------- Grants Outstanding - --------------------------------------------------------------------------------------------------- Number of Weighted Weighted Grants Average Average Range of Outstanding at Remaining Exercise Exercise Prices December 31, 1999 Contractual life Price ----------------------- ---------------------- ----------------------- --------------------- $10.56-$14.78 759,743 4.4 years $12.91
56 ACCOUNTING FOR STOCK-BASED COMPENSATION Under FASB No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company has elected to continue to follow Accounting Principles Board Opinion 25 to account for stock-based compensation and to make the disclosures set forth below as required by FASB No. 123. Consequently, the Company has recorded no compensation costs related to its stock options granted during 1999, 1998 and 1997. The proforma effects on net income and net income per share data as if the Company had elected to use the fair value approach to account for its employee stock-based compensation plans are as follows (in thousands, except for per share data):
Year Ended December 31, 1999 1998 1997 ------------------------------ -------------------------------- ---------------------------- AS Adjusted As Adjusted As Adjusted Reported Pro-Forma Reported Pro-Forma Reported Pro-Forma -------------- --------------- --------------- ---------------- -------------- ------------- Net income................... $ 19,814 $ 19,516 $ 13,616 $ 13,299 $ 12,880 $ 12,852 Per share net income-Basic... $ 1.15 $ 1.13 $ 0.79 $ 0.77 $ 0.75 $ 0.75 Per share net income-Diluted $ 1.15 $ 1.13 $ 0.78 $ 0.76 $ 0.75 $ 0.75
The weighted average fair value per option granted during the year ended December 31, 1999, 1998 and 1997 was estimated on the date of grant using an option-pricing model that approximates the Black-Scholes method.
1999 1998 1997 -------------------------------------------- Fair value, per option....... $0.95 $1.48 $1.58
The following assumptions were used for the options granted in 1999, 1998 and 1997. (The exercise price of options granted was the market price of the stock on the date of grant.):
1999 1998 1997 -------------------------------------------- Risk-free interest rate...... 5.19% 4.67% 5.86% Forfeiture rate.............. 3.48% 2.34% 8.63% Share-volatility rate........ 21.10% 20.90% 21.10% Dividend yield............... 10.04% 8.05% 8.18%
Note 15: DIVIDEND REINVESTMENT PLAN In accordance with the Dividend Reinvestment and Share Purchase Plan adopted by the Company in 1990, dividend reinvestment proceeds of $551,000 were used to purchase shares in the open market for participating shareholders during 1999. During 1998, the Company received $166,000 net of issuance costs and issued 11,053 shares of beneficial interest. Additionally, $495,000 in dividend reinvestment proceeds were used to purchase shares in the open market for participating shareholders in 1998. During 1997, dividend reinvestment proceeds of $699,000 were used to purchase shares in the open market for participating shareholders. 57 Note 16: EARNINGS PER SHARE In February 1997, the FASB issued FASB No. 128, EARNINGS PER SHARE. The purpose of this pronouncement is to show the effect of the exercise of certain options and other convertible securities on earnings per share. A reconciliation of the denominator used in the calculation of DILUTED EARNINGS PER SHARE for the years ended December 31, 1999, 1998 and 1997 is shown below:
Year Ended December 31, ---------------------------------------------------- 1999 1998 1997 ---------------------------------------------------- Weighted average shares outstanding - Basic....................... 17,225,468 17,206,868 17,144,674 Plus: Options with exercise prices below year-end market price of shares of beneficial interest ...... 1,645 11,931 13,618 Stock issued under restricted stock plan................ 29,343 29,263 --- OP units convertible into shares of beneficial interest.. 1,443,275 239,381 --- ---------------------------------------------------- Adjusted weighted average shares outstanding - Diluted............ 18,699,731 17,487,443 17,158,292
Additionally, during 1997 the Company had convertible debentures outstanding. The principal balance of all debentures outstanding was redeemed during October 1997. The principal balance of the debentures at December 31, 1996 was $61,310,000 and was convertible prior to maturity at a conversion price equal to $22.23 per share. Conversion of these debentures would have had the effect of increasing earnings per share for 1997, and as such, conversion was not assumed in the above calculation. The following stock options are not included in the diluted earnings per share calculation because the options' exercise price was greater than the average market price of the common shares for the year and, therefore, the effect would be antidilutive:
1999 1998 1997 --------------------------------------------------------- Number of options.................... 848,000 563,000 86,000 Range of exercise prices............. $11.25-$14.78 $13.31-$14.78 $13.81-$13.88
58 Note 17: QUARTERLY RESULTS OF OPERATIONS The following is a summary of quarterly financial information for the last two years:
Unaudited Quarters ------------------------------------------------------------- (In thousands, except per share and share data) First Second Third Fourth - ---------------------------------------------------------------------------------------------------------------------------- 1999 - ---- TOTAL REVENUES................................................ $ 13,653 $ 14,696 $ 14,177 $ 16,172 --------- --------- --------- --------- --------- --------- --------- --------- INCOME BEFORE GAINS ON SALES OF REAL ESTATE INVESTMENTS, MINORITY INTEREST AND EXTRAORDINARY ITEM..................................... $ 3,224 $ 3,440 $ 3,318 $ 4,582 --------- --------- --------- --------- --------- --------- --------- --------- NET INCOME.................................................... $ 2,821 $ 5,154 $ 5,230 $ 6,609 --------- --------- --------- --------- --------- --------- --------- --------- BASIC EARNINGS PER SHARE...................................... $ 0.17 $ 0.30 $ 0.30 $ 0.38 DILUTED EARNINGS PER SHARE.................................... $ 0.17 $ 0.30 $ 0.30 $ 0.38 DIVIDENDS..................................................... $ 0.28 $ 0.28 $ 0.28 $ 0.28 WEIGHTED AVERAGE NUMBER OF SHARES-BASIC....................... 17,217,894 17,222,814 17,227,916 17,233,056 WEIGHTED AVERAGE NUMBER OF SHARES-DILUTED..................... 18,696,046 18,703,739 18,695,086 18,739,012 1998 - ---- Total revenues................................................ $ 11,872 $ 13,333 $ 12,969 $ 15,180 --------- --------- --------- --------- --------- --------- --------- --------- Income before gains on sales of real estate investments, minority interest and extraordinary item..................................... $ 2,391 $ 2,659 $ 2,737 $ 3,354 --------- --------- --------- --------- --------- --------- --------- --------- Net income.................................................... $ 2,391 $ 2,629 $ 2,737 $ 5,859 --------- --------- --------- --------- --------- --------- --------- --------- Basic earnings per share...................................... $ 0.14 $ 0.15 $ 0.16 $ 0.34 Diluted earnings per share.................................... $ 0.14 $ 0.15 $ 0.16 $ 0.33 Dividends..................................................... $ 0.28 $ 0.28 $ 0.28 $ 0.28 Weighted average number of shares-Basic....................... 17,194,402 17,204,313 17,210,772 17,214,244 Weighted average number of shares-Diluted..................... 17,266,092 17,269,357 17,249,265 18,195,271
Note 18: COMMITMENTS AND CONTINGENCIES In connection with the redevelopment of a property located in Walnut Creek, California, at December 31, 1999, the Company was committed to fund $34,207,000 on its $42 million note secured by a first deed of trust on the property under development. As of December 31, 1999, the Company has entered into several new leases that call for approximately $1,515,000 in future real estate improvements and leasing commissions. The Company is routinely involved in various legal actions arising in the normal course of business. After taking into consideration legal counsel's evaluation of such actions, management is of the opinion that such outcomes will not have a material adverse effect on the Company's financial position, results of operations or liquidity. 59 Investments in real property create a potential for environmental liability on the part of the owner of such real property. If hazardous substances are discovered on or emanating from any of the Company's properties, the Company and/or others may be held strictly liable for all costs and liabilities relating to the clean-up of such hazardous substances. The Company carries no insurance coverage expressly for this type of environmental risk. 60 Western Properties Trust Schedule III - Real Estate and Accumulated Depreciation December 31, 1999 (In thousands except for dates of construction and acquisition and depreciable lives)
- ------------------------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D - ------------------------------------------------ --------------- -------------------------- ----------------------------- Cost capitalized/(sold) Initial cost to company subsequent to acquisition ------------------------- ----------------------------- Buildings and Property Name Encumbrances Land Improvements Land Improvements - ------------------------------------------------ --------------- ----------- -------------- ----------- ----------------- SHOPPING CENTER/RETAIL Anderson Square, Anderson, CA $1,145 $2,125 $0 $450 Angel's Camp Town Center, Angels Camp, CA 580 4,447 0 148 Skypark Plaza Shopping Center, Chico, CA 2,854 10,454 0 2,292 Coalinga Shopping Center, Coalinga, CA (2) 816 2,144 0 977 Serra Center, Colma, CA (30% interest)(1) 433 914 0 459 Mercantile Row Shopping Center, Dinuba, CA 1,440 6,208 0 61 Dublin Shopping Center, Dublin, CA 0 0 0 66 Laguna 99 Shopping Center, Elk Grove, CA 2,791 11,194 0 20 Northridge Shopping Center, Fair Oaks, CA 1,666 6,830 0 661 Commonwealth Square Shopping Center, Folsom, CA 3,312 13,022 0 866 Victorian Walk Shopping Center, Fresno, CA (2) 1,120 7,356 0 234 Country Gables Shopping Center, Granite Bay, CA 2,704 12,684 0 919 Pinecreek Shopping Center, Grass Valley, CA 2,725 16,741 0 145 Heritage Oak Shopping Center, Gridley, CA (2) 1,603 3,597 0 367 Centennial Plaza Shopping Center, Hanford, CA 2,225 8,935 0 83 Plaza 580 Shopping Center, Livermore, CA 2,941 11,768 403 773 Canal Farms Shopping Center, Los Banos, CA 1,180 6,904 0 594 Mission Ridge Shopping Center, Manteca, CA 2,373 9,552 0 161 Century Center, Modesto, CA 2,950 14,568 0 80 Currier Square Shopping Center, Oroville, CA (2) 2,025 7,203 0 967 Eastridge Plaza Shopping Center, Porterville, CA 939 4,390 0 386 Belle Mill Landing, Red Bluff, CA (2) 2,247 6,043 0 1,957 Cobblestone Shopping Center, Redding, CA 2,375 7,969 0 236 On Broadway, Redwood City, CA 0 0 0 455 Kmart Center, Sacramento, CA 1,875 3,116 0 665 Elverta Crossing Shopping Center, Sacramento, CA 3,370 7,477 0 698 Heritage Park Shopping Center, Suisun, CA 3,575 12,187 0 772 Heritage Place Shopping Center, Tulare, CA 1,427 7,117 0 531 Blossom Valley Plaza, Turlock, CA 2,448 8,315 0 465 Ukiah Crossroads Shopping Center, Ukiah, CA (2) 1,925 8,119 0 362 Park Place Shopping Center, Vallejo, CA 3,850 11,291 109 1,123 Former Cal Fed Site, Walnut Creek, CA 5,659 2,818 0 101 Lakewood Village, Windsor, CA 9,808 4,175 16,761 0 23 Yreka Junction, Yreka, CA 1,350 5,846 288 2,087 Raley's Shopping Center, Yuba City, CA 2,101 5,151 0 1,823 Eagle Station Shopping Center, Carson City, NV 1,735 7,585 0 378 Elko Junction Shopping Center, Elko, NV 2,516 7,631 (184) 6,524 continued on next page ------------------------------------------------------------------------------- Column E Column F Column G ---------------------------------------------------- ------------- ------------ Gross amount at which carried at close of period. ---------------------------------------------------- Properties Operating under Direct Buildings and Financing Accumulated Date of Land Improvements Leases Total Depreciation Construction -------------- --------------- ------------- ------- ------------- ------------ SHOPPING CENTER/RETAIL Anderson Square, Anderson, CA $1,145 $2,575 $3,720 $1,018 1979 Angel's Camp Town Center, Angels Camp, CA 580 4,595 5,175 1,982 1986 Skypark Plaza Shopping Center, Chico, CA 2,854 12,746 15,600 4,548 1985/1991 Coalinga Shopping Center, Coalinga, CA (2) 816 3,121 3,937 1,359 1977 Serra Center, Colma, CA (30% interest)(1) 433 1,373 1,806 813 1972 Mercantile Row Shopping Center, Dinuba, CA 1,440 6,269 7,709 1,866 1990 Dublin Shopping Center, Dublin, CA 0 66 66 0 1990 Laguna 99 Shopping Center, Elk Grove, CA 2,791 11,214 14,005 2,038 1993 Northridge Shopping Center, Fair Oaks, CA 1,666 7,491 9,157 1,347 1958/1986 Commonwealth Square Shopping Center, Folsom, CA 3,312 13,888 17,200 4,289 1988/1997 Victorian Walk Shopping Center, Fresno, CA (2) 1,120 7,590 8,710 2,683 1988 Country Gables Shopping Center, Granite Bay, CA 2,704 13,603 16,307 3,924 1988 Pinecreek Shopping Center, Grass Valley, CA 2,725 16,886 19,611 2,889 1988 Heritage Oak Shopping Center, Gridley, CA (2) 1,603 3,964 5,567 1,461 1981 Centennial Plaza Shopping Center, Hanford, CA 2,225 9,018 11,243 1,636 1991 Plaza 580 Shopping Center, Livermore, CA 3,344 12,541 15,885 2,223 1993/1996 Canal Farms Shopping Center, Los Banos, CA 1,180 7,498 8,678 2,927 1988 Mission Ridge Shopping Center, Manteca, CA 2,373 9,713 12,086 1,768 1993 Century Center, Modesto, CA 2,950 14,648 17,598 942 1979 Currier Square Shopping Center, Oroville, CA (2) 2,025 8,170 10,195 2,732 1969/1989 Eastridge Plaza Shopping Center, Porterville, CA 939 4,776 5,715 1,878 1985 Belle Mill Landing, Red Bluff, CA (2) 2,247 8,000 10,247 2,937 1982/1987/1994 Cobblestone Shopping Center, Redding, CA 2,375 8,205 10,580 3,113 1984 On Broadway, Redwood City, CA 0 455 455 0 Kmart Center, Sacramento, CA 1,875 3,781 5,656 1,638 1964/1986 Elverta Crossing Shopping Center, Sacramento, CA 3,370 8,175 11,545 2,245 1991/1993 Heritage Park Shopping Center, Suisun, CA 3,575 12,959 16,534 4,007 1989 Heritage Place Shopping Center, Tulare, CA 1,427 7,648 9,075 3,177 1986 Blossom Valley Plaza, Turlock, CA 2,448 8,780 11,228 2,659 1988/1991 Ukiah Crossroads Shopping Center, Ukiah, CA (2) 1,925 8,481 10,406 2,911 1986 Park Place Shopping Center, Vallejo, CA 3,959 12,414 16,373 3,978 1987 Former Cal Fed Site, Walnut Creek, CA 5,659 2,919 8,578 4 1993/1995 Lakewood Village, Windsor, CA 4,175 16,784 20,959 1,039 1993/1995 Yreka Junction, Yreka, CA 1,638 7,933 9,571 2,347 1984/1997 Raley's Shopping Center, Yuba City, CA 2,101 6,974 9,075 2,391 1963/1984 Eagle Station Shopping Center, Carson City, NV 1,735 7,963 9,698 2,637 1982 1986/1991/1994 Elko Junction Shopping Center, Elko, NV 2,332 14,155 16,487 3,394 1996/1997 continued on next page --------- --------------- Column H Column I --------- --------------- Life on which depreciation in the latest income Date statement is Acquired computed --------- ---------------- SHOPPING CENTER/RETAIL Anderson Square, Anderson, CA 1987 5 to 31 Angel's Camp Town Center, Angels Camp, CA 1985 5 to 31 Skypark Plaza Shopping Center, Chico, CA 1988 3 to 31 Coalinga Shopping Center, Coalinga, CA (2) 1987 3 to 31 Serra Center, Colma, CA (30% interest)(1) 1973/1988 6 to 31 Mercantile Row Shopping Center, Dinuba, CA 1990 3 to 31 Dublin Shopping Center, Dublin, CA 1990 10 Laguna 99 Shopping Center, Elk Grove, CA 1994 3 to 32 Northridge Shopping Center, Fair Oaks, CA 1994 5 to 31 Commonwealth Square Shopping Center, Folsom, CA 1990 3 to 31 Victorian Walk Shopping Center, Fresno, CA (2) 1988 5 to 31 Country Gables Shopping Center, Granite Bay, CA 1991 3 to 31 Pinecreek Shopping Center, Grass Valley, CA 1989 3 to 31 Heritage Oak Shopping Center, Gridley, CA (2) 1987 1 to 31 Centennial Plaza Shopping Center, Hanford, CA 1994 3 to 31 Plaza 580 Shopping Center, Livermore, CA 1994/1996 4 to 31 Canal Farms Shopping Center, Los Banos, CA 1986 3 to 32 Mission Ridge Shopping Center, Manteca, CA 1994 5 to 31 Century Center, Modesto, CA 1998 1 to 31 Currier Square Shopping Center, Oroville, CA (2) 1989 2 to 31 Eastridge Plaza Shopping Center, Porterville, CA 1985 3 to 35 Belle Mill Landing, Red Bluff, CA (2) 1987 3 to 31 Cobblestone Shopping Center, Redding, CA 1988 3 to 31 On Broadway, Redwood City, CA Kmart Center, Sacramento, CA 1986 3 to 31 Elverta Crossing Shopping Center, Sacramento, CA 1990 3 to 31 Heritage Park Shopping Center, Suisun, CA 1990 3 to 31 Heritage Place Shopping Center, Tulare, CA 1987 2 to 31 Blossom Valley Plaza, Turlock, CA 1990 3 to 31 Ukiah Crossroads Shopping Center, Ukiah, CA (2) 1989 2 to 31 Park Place Shopping Center, Vallejo, CA 1990 3 to 31 Former Cal Fed Site, Walnut Creek, CA 1998 31 Lakewood Village, Windsor, CA 1998 5 to 31 Yreka Junction, Yreka, CA 1990/1997 5 to 31 Raley's Shopping Center, Yuba City, CA 1986 3 to 40 Eagle Station Shopping Center, Carson City, NV 1989 3 to 31 Elko Junction Shopping Center, Elko, NV 1988/1993 3 to 31 continued on next page
61
- ------------------------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D - ------------------------------------------------ --------------- -------------------------- ----------------------------- Cost capitalized/(sold) Initial cost to company subsequent to acquisition ------------------------- ----------------------------- Buildings and Property Name Encumbrances Land Improvements Land Improvements - ------------------------------------------------ --------------- ----------- -------------- ----------- ----------------- SHOPPING CENTER/RETAIL Dodge Center, Fallon, NV (2) 405 1,595 0 32 Caughlin Ranch Shopping Center, Reno, NV 2,950 7,123 0 468 North Hills Shopping Center, Reno, NV (2) 5,406 6,911 (304) 282 Blaine International Center, Blaine, WA 1,509 6,102 0 131 ----------------------------------------------------------------------- Total Shopping Center/Retail 9,808 88,720 300,193 312 29,822 SINGLE TENANT/RETAIL Kmart, Napa, CA 415 Raley's Supermarket, Fallon, NV (2) 1,000 3,220 0 0 West Town, Winnemuca, NV 130 3,386 0 0 ----------------------------------------------------------------------- Total Single Tenant/Retail 0 1,130 6,606 0 415 COMMERCIAL Coast Savings & Loan, Monterey, CA (2) 911 2,189 0 0 Redwood II, Petaluma, CA (2) 1,017 3,052 0 814 Coast Savings & Loan (Taraval St), San Francisco, CA (2) 366 1,824 0 0 3450 California St., San Francisco, CA (2) 1,450 1,159 0 279 Viking Freight Systems, Santa Clara, CA 548 0 0 0 Coast Savings & Loan, Santa Cruz, CA (2) 205 823 0 0 ----------------------------------------------------------------------- Total Commercial 0 4,497 9,047 0 1,093 ----------------------------------------------------------------------- Total All Properties $9,808 $94,347 $315,846 $312 $31,330 ----------------------------------------------------------------------- ----------------------------------------------------------------------- ------------------------------------------------------------------------------- Column E Column F Column G ---------------------------------------------------- ------------- ------------ Gross amount at which carried at close of period. ---------------------------------------------------- Properties Operating under Direct Buildings and Financing Accumulated Date of Land Improvements Leases Total Depreciation Construction -------------- --------------- ------------- ------- ------------- ------------ SHOPPING CENTER/RETAIL Dodge Center, Fallon, NV (2) 405 1,627 2,032 1,224 1976 Caughlin Ranch Shopping Center, Reno, NV 2,950 7,591 10,541 2,215 1990/1991 North Hills Shopping Center, Reno, NV (2) 5,102 7,193 12,295 2,605 1986 Blaine International Center, Blaine, WA 1,509 6,233 7,742 253 1991 -------------------------------------------------------------- Total Shopping Center/Retail 89,032 330,015 0 419,047 89,097 SINGLE TENANT/RETAIL Kmart, Napa, CA 0 415 0 415 0 1964 Raley's Supermarket, Fallon, NV (2) 1,000 3,220 4,220 805 1991 West Town, Winnemuca, NV 130 3,386 3,516 2,003 1978/1991 -------------------------------------------------------------- Total Single Tenant/Retail 1,130 7,021 0 8,151 2,808 COMMERCIAL Coast Savings & Loan, Monterey, CA (2) 911 2,189 3,100 1,182 1963 Redwood II, Petaluma, CA (2) 1,017 3,866 4,883 952 1985 Coast Savings & Loan (Taraval St), San Francisco, CA (2) 366 1,824 2,190 985 1975 3450 California St., San Francisco, CA (2) 1,450 1,438 2,888 735 1957/1987 Viking Freight Systems, Santa Clara, CA 548 0 863 1,411 N/A 1978 Coast Savings & Loan, Santa Cruz, CA (2) 205 823 1,028 269 1980 -------------------------------------------------------------- Total Commercial 4,497 10,140 863 15,500 4,123 -------------------------------------------------------------- Total All Properties $94,659 $347,176 $863 $442,698 $96,028 -------------------------------------------------------------- -------------------------------------------------------------- --------- --------------- Column H Column I --------- --------------- Life on which depreciation in the latest income Date statement is Acquired computed --------- ---------------- SHOPPING CENTER/RETAIL Dodge Center, Fallon, NV (2) 1977 31 Caughlin Ranch Shopping Center, Reno, NV 1990 3 to 31 North Hills Shopping Center, Reno, NV (2) 1988/1993 3 to 31 Blaine International Center, Blaine, WA 1998 31 Total Shopping Center/Retail SINGLE TENANT/RETAIL Kmart, Napa, CA 1966 N/A Raley's Supermarket, Fallon, NV (2) 1991 31 West Town, Winnemuca, NV 1978 25 to 31 Total Single Tenant/Retail COMMERCIAL Coast Savings & Loan, Monterey, CA (2) 1985 25 Redwood II, Petaluma, CA (2) 1989 5 to 31 Coast Savings & Loan (Taraval St), San Francisco, 1985 25 3450 California St., San Francisco, CA (2) 1987 10 to 31 Viking Freight Systems, Santa Clara, CA 1978 N/A Coast Savings & Loan, Santa Cruz, CA (2) 1986 40 Total Commercial Total All Properties
(1) Serra Center is encumbered by a note and deed of trust under which the 70% co-owner is the borrower. (2) Western is holding this property for sale. (3) The aggregate cost or adjusted basis of rental property for federal income tax purposes reconciles to the amount reflected in the financial statements at December 31, 1999 as follows: Basis for federal income tax purposes 336,842 Direct financing leases capitalized for financial reporting purposes (3,153) Reduction in tax basis for deferred gains on condemnation and other sales and discharge of indebtedness 7,164 Miscellaneous differences (21) ------------- Financial statement reporting basis 340,832 ------------- ------------- 62 WESTERN PROPERTIES TRUST 1999 BUILDING IMPROVEMENT AND LEASING RELATED COST ADDITIONS (Unaudited)
NAME LOCATION BUILDING LEASING - ---- -------- IMPROVEMENT RELATED COST ----------- ------------ SHOPPING CENTERS / RETAIL ------------------------- ANDERSON SQUARE ANDERSON, CA $75 $0 BLAINE INTERNATIONAL CENTER BLAINE, WA 17 20 EAGLE STATION CARSON CITY, NV 155 13 SKYPARK PLAZA CHICO, CA 32 - COALINGA COALINGA, CA 18 - MERCANTILE ROW DINUIBA, CA (3) - DUBLIN DUBLIN, CA 66 - LAGUNA 99 PLAZA ELK GROVE, CA 4 - ELKO JUNCTION ELKO, NV 21 - NORTHRIDGE FAIR OAKS, CA 486 - COMMONWEALTH SQUARE FOLSOM, CA 20 - VICTORIAN WALK FRESNO, CA 12 - COUNTRY GABLES GRANITE BAY, CA 109 7 PINECREEK GRASS VALLEY, CA 21 5 HERITAGE OAK GRIDLEY, CA 249 20 CENTENNIAL PLAZA HANFORD, CA - 14 PLAZA 580 LIVERMORE, CA 7 5 CENTURY CENTER MODESTO, CA 119 4 NAPA NAPA, CA 305 150 CURRIER SQUARE OROVILLE, CA 6 4 EASTRIDGE PLAZA PORTERVILLE, CA 321 7 BELLE MILL LANDING RED BLUFF, CA 30 14 COBBLESTONE REDDING, CA 8 - ON BROADWAY REDWOOD CITY 455 - NORTH HILLS RENO, NV 192 7 CAUGHLIN RANCH RENO, NV 25 16 KMART CENTER SACRAMENTO, CA 15 5 ELVERTA CROSSING SACRAMENTO, CA 21 - HERITAGE PARK SUISUN, CA 360 4 HERITAGE PLACE TULARE, CA 7 - BLOSSOM VALLEY PLAZA TURLOCK, CA 26 - CROSSROADS UKIAH, CA 14 - PARK PLACE VALLEJO, CA 10 1 OLYMPIC PLACE WALNUT CREEK 71 - LAKEWOOD VILLAGE WINDSOR 23 - YREKA JUNCTION YREKA, CA 1,016 19 RALEY'S CENTER YUBA CITY, CA 408 - -------- ------- SUBTOTAL - SHOPPING CENTERS / RETAIL $ 4,721 $ 315 -------- ------- COMMERCIAL ---------- PETALUMA OFFICE BUILDING PETALUMA, CA $1 $0 HEALD COLLEGE MILPITAS, CA 50 - -------- ------- SUBTOTAL - COMMERCIAL $ 51 $ - -------- ------- TOTAL $ 4,772 $ 315 -------- ------- -------- -------
63 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES. There have been no disagreements with the independent accountants on the Company's accounting and financial disclosure. Additionally, there has been no change of the independent accountant engaged to audit the Company's financial statements. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information with respect to the trustees and executive officers of the Company is incorporated by reference to the section entitled "Trustees and Executive Officers" of the Company's definitive Proxy Statement in connection with the Annual Meeting of Shareholders to be held May 11, 2000, which will be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K, pursuant to General Instruction G to this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION. Information with respect to executive compensation is incorporated by reference to the sections entitled "Compensation of Trustees", "Compensation of Executive Officers", "Compensation Pursuant to Plans or Arrangements", "Stock Option Grants and Exercises" and "Report of Compensation Committee on Executive Compensation" of the Company's definitive Proxy Statement in connection with the Annual Meeting of Shareholders to be held May 11, 2000, which will be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K, pursuant to General Instruction G to this Form 10-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information with respect to security ownership of certain beneficial owners and management is incorporated by reference to the section entitled "Ownership of Shares" of the Company's definitive Proxy Statement in connection with the Annual Meeting of Shareholders to be held May 11, 2000, which will be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K, pursuant to General Instruction G to this Form 10-K. 64 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The following table details Officer loans with the Company as of December 31, 1999:
Name Amounts Maturity Date Interest Rate ----------------------------------------------------------------------------- Brad Blake $ 399,831 (1) February 28, 2001 5.58% Dennis Ryan 240,000 (1) February 28, 2001 5.58% Josh Smith 199,959 (1) February 28, 2001 5.58% Jerry Hunt 200,000 (1) February 28, 2001 5.58% Brad Blake 283,750 (2) October 30, 2008 7.50% Dennis Ryan 283,750 (2) October 30, 2008 7.50% ----------------------------------------------------------------------------- $1,607,290 ----------------------------------------------------------------------------- -----------------------------------------------------------------------------
(1) The loan proceeds were used to fund the purchase of Company shares of beneficial ownership by these individuals in order to increase their ownership in the Company and to more closely align their interests with those of the shareholders. The loans bear interest at a rate of 5.58% per annum (equal to the Applicable Federal Rate in effect on the date the promissory notes were issued), are recourse and are secured by a pledge of certain shares of beneficial ownership of the Company. (2) The loan proceeds were used to fund their acquisition of the common stock of Western Real Estate Services, Inc. (WRESI), in which the Company has a 97% economic interest. WRESI was formed to facilitate the acquisition of Kienow's (see Note 5 to the consolidated financial statements). PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Consolidated Financial Statements - Included in Item 8 PAGE ---- Independent Auditors' Report 37 Consolidated Balance Sheets - December 31, 1999 and 1998 38 For the Years Ended December 31, 1999, 1998 and 1997: Consolidated Statements of Income 39 Consolidated Statements of Shareholders' Equity 40 Consolidated Statements of Cash Flows 41 Notes to Consolidated Financial Statements 42 2. Financial Statement Schedule III: Real Estate and Accumulated Depreciation 61-62 3. Additional Information: 1999 Building Improvement and Leasing Related Cost Additions (unaudited) 63 65 (b) 1. Reports on Form 8-K. PAGE ---- Form 8-K dated August 19, 1999 contained an Item 5 disclosure announcing the Company's name change from Western Investment Real Estate Trust to Western Properties Trust. (c) Exhibits. (3) Declaration of Trust, as amended (filed as Exhibit 3 to Registrant's 10-Q for the quarter ended September 30, 1998, and incorporated herein by reference. (4.1) Form of Indenture relating to the Senior Notes (filed as Exhibit 4.1 to Registration Statement on Form S-3 No. 33-71270 and incorporated herein by reference). (4.2) Form of Senior Notes (filed as Exhibit 4.2 to Registration Statement on Form S-3 No. 33-71270 and incorporated herein by reference). (4.3) Form of Supplemental Indenture relating to the 7.1% Senior Notes (filed as Exhibit 4.5 on Form 8-K, dated September 24, 1997, and incorporated herein by reference). (4.4) Form of Supplemental Indenture relating to the 7.2% Senior Notes (filed as Exhibit 4.6 on Form 8-K, dated September 24, 1997, and incorporated herein by reference). (4.5) Form of Supplemental Indenture relating to the 7.3% Senior Notes (filed as Exhibit 4.7 on Form 8-K, dated September 24, 1997, and incorporated herein by reference). (10.1) Company's Nonqualified Stock Option Plan (filed as Exhibit 4.2 to Registration Statement on Form S-8 No. 33-27016 and incorporated herein by reference). 66 PAGE ---- (10.2)** Compensation Agreement (filed as Exhibit 10.3 to Registrant's 10-K for the fiscal year ended December 31, 1997, and incorporated herein by reference). (10.3)** Management Contracts (filed as Exhibit 10.4 to Registrant's 10-Q for the quarter ended March 31, 1998, and incorporated herein by reference). (10.4)** Company's 1998 Equity Incentive Plan (filed as Exhibit 10.4 to Registrant's 10-Q for the quarter ended June 30, 1998, and incorporated herein by reference). (10.5)** Stock Purchase and Contribution agreement dated September 29, 1998 (filed as Exhibit 10.5 to Registrant's 10-Q for the quarter ended September 30, 1998, and incorporated herein by reference). (10.6) Agreement of Limited Partnership of Western/Kienow's, LP dated October 30,1998 (filed as Exhibit 10.6 to Registrant's 10-Q for the quarter ended September 30, 1998, and incorporated herein by reference). (10.7)** Management Contract (filed as Exhibit 10.7 to Registrant's 10-Q for the quarter ended September 30, 1999, and incorporated herein by reference. (10.8)* Agreement of Limited Partnership of Western Pinecreek, L.P. dated November 17, 1999. (12)* Computation of Ratio of Earnings to Fixed Charges for the year ended December 31, 1999, 1998, 1997, 1996, 1995. 69 (23) * Consent of Independent Certified Public Accountants 70 (27) * Financial Data Schedule
- ---------- * Filed with this report. ** Management contract or compensatory plan or arrangement. 67 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 there unto duly authorized. WESTERN PROPERTIES TRUST (Registrant) By: s/ Dennis D. Ryan ------------------------------------- Dennis D. Ryan Executive Vice President, Chief Financial Officer Dated: March 27, 2000 and Trustee --------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------- ----- ---- s/Bradley N. Blake Chairman, President, March 27, 2000 - ------------------------- Chief Executive Bradley N. Blake Officer and Trustee s/Dennis D. Ryan Executive Vice President, March 27, 2000 - ------------------------- Chief Financial Officer Dennis D. Ryan and Trustee s/Joseph Colmery Trustee March 27, 2000 - ------------------------- Joseph Colmery s/L. Michael Foley Trustee March 27, 2000 - ------------------------- L. Michael Foley s/Reginald B. Oliver Trustee March 27, 2000 - ------------------------- Reginald B. Oliver s/James L. Stell Trustee March 27, 2000 - ------------------------- James L. Stell
68 EX-10.8 2 EXHIBIT 10.8 AGREEMENT OF LIMITED PARTNERSHIP OF WESTERN/PINECREEK, L.P. THIS AGREEMENT OF LIMITED PARTNERSHIP OF WESTERN/PINECREEK, L.P. (this "Agreement"), dated as of November ____, 1999, is entered into by and between WESTERN PROPERTIES TRUST, a California business trust, as general partner (in its capacity as General Partner) (the "General Partner"), and each person who is a signatory hereto, as limited partner (each, a "Limited Partner" and collectively, the "Limited Partners"). THE PARTIES ENTER THIS AGREEMENT on the basis of the following facts, understandings and intentions: A. WESTERN/PINECREEK, L.P. (the "Partnership") was formed as a limited partnership under the laws of the State of Delaware by a Certificate of Limited Partnership filed with the Secretary of State of Delaware on November 10, 1999. B. On the date hereof, pursuant to that certain Contribution Agreement dated as of November __, 1999 (the "Contribution Agreement") among the General Partner, the Partnership and each Partner, the Partners are making certain capital contributions to the Partnership as described in EXHIBIT A hereto (the "Initial Capital Contributions"). C. Upon completion of the Initial Capital Contributions and related transactions under the Contribution Agreement, the Partnership will be the holder, directly or indirectly, and will be the sole owner of the Contributed Properties (as defined in the Contribution Agreement). D. Upon completion of the Initial Capital Contributions, the Limited Partners will be admitted to the Partnership as Limited Partners with rights and obligations as set forth herein. NOW, THEREFORE, in consideration of the foregoing, and the covenants and agreements between the parties hereto, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I. DEFINED TERMS The following defined terms used in this Agreement shall have the meanings specified below: "ACT" means the Delaware Revised Uniform Limited Partnership Act, as it may be amended from time to time. 1 "ADDITIONAL LIMITED PARTNER" means a Person admitted to this Partnership as a Limited Partner pursuant to Section 4.2 hereof. "ADMINISTRATIVE EXPENSES" means (i) all administrative and operating costs and expenses incurred by the Partnership and (ii) a management fee, in an amount not to exceed the greater of (A) five percent (5%) of the gross revenues of the Property to the extent that such management fees are reimbursable pursuant to the terms of tenant leases of the Property or (B) three percent (3%) of gross revenues of the Property. "AFFILIATE" means, (i) any Person that, directly or indirectly, controls or is controlled by or is under common control with such Person, (ii) any other Person that owns, beneficially, directly or indirectly, 5 % or more of the outstanding capital stock, shares or equity interests. of such Person, or (iii) any officer, director, employee, partner or trustee of such Person or any Person controlling, controlled by or under common control with such Person (excluding trustees and persons serving in similar capacities who are not otherwise an Affiliate of such Person). For the purposes of this definition, "control" (including the correlative meanings of the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, through the ownership of voting securities, partnership interests or other equity interests. "AGREEMENT" means this Agreement of Limited Partnership of the Partnership. "CAPITAL ACCOUNT" has the meaning provided in Section 4.4 hereof. "CAPITAL CONTRIBUTION" means, with respect to any Partner, the amount of money and the initial Gross Asset Value of any Contributed Property that such Partner contributes to the Partnership pursuant to Section 4.2 or 4.3 hereof, including the Initial Capital Contributions. Any reference to the Capital Contribution of a Partner shall include the Capital Contribution made by a predecessor holder of the Partnership Interest of such Partner. "CAPITAL TRANSACTION" means the refinancing, sale, exchange, condemnation, recovery of a damage award or insurance proceeds (other than business or rental interruption insurance proceeds not reinvested in the repair or reconstruction of Properties), or other disposition of any Property (or the Partnership's interest therein). "CASH AMOUNT" means an amount of cash per Limited Partnership Unit equal to the value of the Common Shares Amount on the date of receipt by the General Partner of a Notice of Conversion of Common Shares. The value of the Common Shares Amount shall be based on the average of the daily market price of Common Shares for the ten consecutive trading days immediately preceding the date of receipt by the General Partner of a Notice of Conversion of Common Shares. The market price for each such trading day shall be: (i) if the Common Shares are listed or admitted to trading on any securities exchange, the sale price, regular way, on such day, or if no such sale takes place on such day, the average of the closing bid and asked prices, regular way, on such day, (ii) if the Common Shares are not listed or admitted to trading on any securities exchange, the last reported sale price on such day or, if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or (iii) if the Common Shares are not listed or admitted to trading on any securities exchange and no such last reported sale price or closing bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reliable 2 quotation source designated by the General Partner, or if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than 10 days prior to the date in question) for which prices have been so reported; provided that if there are no bid and asked prices reported during the ten days prior to the date in question, the value of the Common Shares shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate. In the event the Common Shares Amount includes rights that a holder of Common Shares would be enttled to receive, then the value of such rights shall be determined by the Company acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate. "CERTIFICATE" means any instrument or document that is required under the laws of the State of Delaware, or any other jurisdiction in which the Partnership conducts business, to be signed and sworn to by the Partners of the Partnership (either by themselves or pursuant to the power-of-attorney granted to the General Partner in Section 8.2 hereof) and filed for recording in the appropriate public offices within the State of Delaware or such other jurisdiction to perfect or maintain the Partnership as a limited partnership, to effect the admission, withdrawal, or substitution of any Partner of the Partnership, or to protect the limited liability of the Limited Partners as limited partners under the laws of the State of Delaware or such other jurisdiction. "CODE" means the Internal Revenue Code of 1986, as amended, and as hereafter amended from time to time. Reference to any particular provision of the Code shall mean that provision in the Code at the date hereof and any succeeding provision of the Code. "COMMISSION" means the U.S. Securities and Exchange Commission. "COMPANY" means Western Properties Trust, a California business trust. "COMMON SHARE" means a share of beneficial interest in the Company. "COMMON SHARES AMOUNT" shall mean a number of Common Shares equal to the number of Limited Partnership Units offered for conversion by a Converting Partner, multiplied by the Conversion Factor; provided that in the event the Company issues to all holders of Common Shares rights, options, warrants or convertible or exchangeable securities entitling the shareholders to subscribe for or purchase Common Shares, or any other securities or property (collectively, the "rights"), then the Common Shares Amount shall also include such rights that a holder of that number of Common Shares would be entitled to receive. "CONTRIBUTED PROPERTY" means each item of Property or other asset, in such form as may be permitted by the Act, but excluding cash, contributed or deemed contributed to the Partnership (or deemed contributed to a "new" partnership pursuant to Code Section 708). "CONVERSION AMOUNT" means either the Cash Amount, or the Common Shares Amount, as determined pursuant to Section 8.4(b) hereof. 3 "CONVERSION FACTOR" means 1.0, PROVIDED THAT in the event that the Company (i) declares or pays a dividend on its outstanding Common Shares in Common Shares or makes a distribution to all holders of its outstanding Common Shares in Common Shares, (ii) subdivides its outstanding Common Shares, or (iii) combines its outstanding Common Shares into a smaller number of Common Shares, the Conversion Factor shall be adjusted by multiplying the Conversion Factor by a fraction, the numerator of which shall be the number of Common Shares issued and outstanding on the record date for such dividend, distribution, subdivision or combination (assuming for such purposes that such dividend, distribution, subdivision or combination has occurred as of such time), and the denominator of which shall be the actual number of Common Shares (determined without the above assumption) issued and outstanding on such date. Any adjustment to the Conversion Factor shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event; PROVIDED, HOWEVER, that if the Company receives a Notice of Conversion after the record date, but prior to the effective date of such dividend, distribution, subdivision or combination, the Conversion Factor shall be determined as if the Company had received the Notice of Conversion immediately prior to the record date for such dividend, distribution, subdivision or combination. "CONVERSION RIGHT" has the meaning provided in Section 8.4(a) hereof. "CONVERSION SHARES" has the meaning provided in Section 8.5(a) hereof. "CONVERTING PARTNER" has the meaning provided in Section 8.4(a) hereof. "CURRENT GENERAL DISTRIBUTION AMOUNT" for any a fiscal period shall mean Three Hundred Seventy-Nine Thousand Two Hundred Fifty Dollars ($379,250) per fiscal year, as such amount may be proportionately reduced or increased for fiscal periods shorter or longer than a full fiscal year. "CURRENT LIMITED DISTRIBUTION AMOUNT" for any a fiscal period shall mean One and 45/100 Dollars ($1.45) per fiscal year, as such amount may be proportionately reduced or increased for fiscal periods shorter or longer than a full fiscal year. "DEBT" means, as to any Person, as of any date of determination, (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services; (ii) all amounts owed by such Person to banks or other Persons in respect of reimbursement obligations under letters of credit, surety bonds and other similar instruments guaranteeing payment or other performance of obligations by such Person; (iii) all indebtedness for borrowed money or for the deferred purchase price of property or services secured by any lien on any property owned by such Person, to the extent attributable to such Person's interest in such property, even though such Person has not assumed or become liable for the payment thereof; and (iv) lease obligations of such Person that, in accordance with generally accepted accounting principles, should be capitalized. "DEFAULTING LIMITED PARTNER" has the meaning provided in Section 5.2(b) hereof. "EFFECTIVE DATE" means the date of this Agreement. 4 "EVENT OF BANKRUPTCY" as to any Person means the filing of a petition for relief as to such Person as debtor or bankrupt under the Bankruptcy Code of 1978 or similar provision of law of any jurisdiction (except if such petition is contested by such Person and has been dismissed within 90 days); insolvency or bankruptcy of such Person as finally determined by a court proceeding; filing by such Person of a petition or application to accomplish the same or for the appointment of a receiver or a trustee for such Person or a substantial part of his assets; commencement of any proceedings relating to such Person as a debtor under any other reorganization, arrangement, insolvency, adjustment of debt or liquidation law of any jurisdiction, whether now in existence or hereinafter in effect, either by such Person or by another, provided that if such proceeding is commenced by another, such Person indicates his approval of such proceeding, consents thereto or acquiesces therein, or such proceeding is contested by such Person and has not been finally dismissed within 90 days. "FUNDING LOAN" has the meaning provided in Section 4.3 hereof. "GAAP" means generally accepted accounting principles, consistently applied. "GENERAL PARTNER" means the Company, any successor-in-interest to the Company, as permitted under the terms hereof, and any Person who becomes a substitute or additional General Partner as provided herein, and any of their successors as General Partner. "GENERAL PARTNERSHIP INTEREST" means the Partnership Interest held by the General Partner. "GROSS ASSET VALUE" means, with respect to any asset, the asset's adjusted basis for federal income tax purposes, except as follows: (a) The initial Gross Asset Value of any asset contributed by a Partner to the Partnership shall be the gross fair market value of such asset as determined by the General Partner and agreed to by the contributing Partner. The gross fair market value of the assets which constitute the Initial Capital Contributions shall be as set forth on EXHIBIT A hereto. (b) The Gross Asset Values of all Partnership assets immediately prior to the occurrence of any event described in clause (i), clause (ii), cause (iii), clause (iv) or clause (v) hereof shall be adjusted to equal their respective gross fair market value, as determined by the General Partner using such reasonable method of valuation as it may adopt, as of the following times: (i) the acquisition of an additional interest in the Partnership (other than in connection with the execution of this Agreement but including, without limitation, acquisitions pursuant to Section 4.2 hereof or contributions by the General Partner pursuant to such Section) by a new or existing Partner in exchange for more than a DE MINIMIS Capital Contribution, if the General Partner reasonably determines that such adjustment is necessary or appropriate to reflect the relative economic interests of the Partners in the partnership; (ii) the distribution by the Partnership to a Partner of more than a DE MINIMIS amount of Partnership property as consideration for an interest in the 5 Partnership, if the General Partnership reasonably determines that such adjustment is necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership; (iii) the liquidation of the Partnership within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g); (iv) upon the admission of a successor General Partner pursuant to Section 7.2 hereof; and (v) at such other times as the General Partner shall reasonably determine necessary or advisable in order to comply with Regulations Sections 1.704-1(b) and 1.704-2. (c) The Gross Asset Value of any Partnership asset distributed to a Partner shall be the gross fair market value of such asset on the date of distribution as determined by the distributee and the General Partner provided that, if the distributee is the General Partner or if the distributee and the General Partner cannot agree on such a determination, such gross fair market value shall be determined by Appraisal. (d) The Gross Asset Values of Partnership assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.7041 (b)(2)(iv)(m); PROVIDED, HOWEVER, that Gross Asset Values shall not be adjusted pursuant to this subsection (d) to the extent that the General Partner reasonably determines that an adjustment pursuant to subsection (b) above is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this subsection (d). (e) If the Gross Asset Value of a Partnership asset has been determined or adjusted pursuant to subsection (a), subsection (b) or subsection (d) above, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Profits and Losses. "HOLDER" means either (a) a Partner or (b) any permitted assignee thereof, owning a Partnership Unit, that is treated as a member of the Partnership for federal income tax purposes. "INDEMNITEE" means (i) any Person made a party to a proceeding by reason of his status as the General Partner, a Limited Partner or an affiliate of either of the foregoing, or a director or officer of the Partnership, a Limited Partner or the General Partner or an affiliate of any of the foregoing and (ii) such other Persons as the General Partner may designate in good faith from time to time, in its reasonable discretion, giving consideration to the interest of the Partnership. "INITIAL CAPITAL CONTRIBUTIONS" has the meaning provided in the recitals hereto. "LIMITED PARTNER" means any Person named as a Limited Partner on EXHIBIT A attached hereto, and any Person who becomes a Substitute Limited Partner, in such Person's capacity as a Limited Partner in the Partnership. 6 "LIMITED PARTNERSHIP INTEREST" means the ownership interest of a Limited Partner in the Partnership at any particular time, including the right of such Limited Partner to any and all benefits to which such Limited Partner may be entitled as provided in this Agreement and in the Act, together with the obligations of such Limited Partner to comply with all the provisions of this Agreement and of such Act. A Limited Partnership Interest may be expressed as a number of Limited Partnership Units. "LIMITED PARTNERSHIP UNIT" means an interest in the Partnership representing a portions of the Limited Partnership Interests issued pursuant to Sections 4.1 or 4.2 hereof. The initial allocation of Limited Partnership Units among the Partners is as set forth on EXHIBIT A, as may be amended for time. to time. "LOSS" has the meaning provided in Section 5.1(h) hereof. "NOTICE OF CONVERSION" means the Notice of Exercise of Conversion Right substantially in the form attached as EXHIBIT B hereto. "PARTNER" means any General Partner or Limited Partner. "PARTNER NONRECOURSE DEBT MINIMUM GAIN" has the meaning set forth in Regulations Section 1.704-2(i). A Partner's share of Partner Nonrecourse Debt Minimum Gain shall be determined in accordance with Regulations Section 1.704-2(i)(5). "PARTNERSHIP INTEREST" means an ownership interest in the Partnership by either a Limited Partner or the General Partner and includes any and all benefits to which the holder of such a Partnership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. "PARTNERSHIP MINIMUM GAIN" has the meaning set forth in Regulations Section 1.704-2(d). In accordance with Regulations Section 1.704-2(d), the amount of Partnership Minimum Gain is determined by first computing, for each Partnership nonrecourse liability, any gain the Partnership would realize if it disposed of the property subject to that liability for no consideration other than full satisfaction of the liability, and then aggregating the separately computed gains. A Partner's share of Partnership Minimum Gain shall be determined in accordance with Regulations Section 1.704-2(g)(1). "PARTNERSHIP RECORD DATE" means the record date established by the General Partner for the distribution of cash pursuant to Section 5.2 hereof, which record date shall be the same as the record date established by the Company for a distribution to its shareholders of some or all of its portion of such distribution. "PERCENTAGE INTEREST" means, as to each Limited Partner, its interest in the Limited Partnership Units as determined by dividing the Limited Partnership Units owned by such Limited Partner by the total number of Limited Partnership Units then outstanding. The initial Percentage Interest of each Limited Partner is as set forth opposite its respective name on EXHIBIT A, as may be amended from time to time. All Partnership allocations and distributions to the Limited Partners will be made in accordance with each Limited Partner's Percentage Interest. 7 "PERSON" means any individual, partnership, corporation, joint venture, trust or other entity. "PREFERRED INVESTMENT" has the meaning provided in Section 4.3 hereof. "PRIOR GENERAL DISTRIBUTION DEFICIENCY" on any date shall mean the excess, if any, of the aggregate Current Distribution Amounts for all prior periods (beginning with the date the Initial Capital Contributions are made) over the aggregate amount theretofore distributed to the General Partner under Sections 5.2(a)(i) and (iii) hereof. "PRIOR LIMITED DISTRIBUTION DEFICIENCY" on any date shall mean the excess, if any, of the aggregate Current Distribution Amounts for all prior periods (beginning with the date the Initial Capital Contributions are made) over the aggregate amount theretofore distributed to the Limited Partners under Sections 5.2(a)(ii) and (iii) hereof. "PROFIT" has the meaning provided in Section 5.1(h) hereof. "PROPERTY" means any investment in which the Partnership holds an ownership interest. "PROPERTY DEBT" shall mean (i) that certain Debt existing as of the date that the Limited Partners make their Initial Capital Contribution, the repayment of which is secured by the lien of a mortgage or a deed of trust encumbering Contributed Property that constitutes the Limited Partners' Initial Capital Contribution, or (ii) any replacement or refinancing of such Debt; provided, however, Property Debt shall be limited to Three Million Seven Hundred Ninety-Two Thousand Five Hundred Dollars ($3,792,500), and any Debt in excess of said amount shall not be considered Property Debt. "REGULATIONS" means the Federal Income Tax Regulations issued under the Code, as amended and as hereafter amended from time to time. Reference to any particular provision of the Regulations shall mean that provision of the Regulations on the date hereof and any succeeding provision of the Regulations. "REIT" means a real estate investment trust under Sections 856 through 860 of the Code. "RESERVED CASH" means cash reasonably determined by the General Partner as necessary to pay contemplated tenant improvements, leasing commissions, unreimbursed maintenance expenses and capital expenditures, and other costs of operating the Property; provided that Reserved Cash in an amount equal to fifteen percent (15%) of revenues of the Property, up to an aggregate reserved sum of _____________ dollars ($______) shall be deemed reasonable. "RULE 144" has the meaning set forth in Section 8.5(a) hereof. "SEC" means the United States Securities and Exchange Commission. "SECURITIES ACT" has the meaning set forth in Section 8.4(a) hereof. 8 "SERVICE" means the Internal Revenue Service. "SPECIFIED CONVERSION DATE" means 30 days after the receipt by the Company of the Notice of Conversion. "SUBSIDIARY" means, with respect to any Person, any corporation or other entity of which a majority of (i) the voting power of the voting equity securities or (ii) the outstanding equity interests is owned, directly or indirectly, by such Person. "SUBSTITUTE LIMITED PARTNER" means any Person admitted to the Partnership as a Limited Partner pursuant to Section 9.3 hereof. "TRANSFER" has the meaning set forth in Section 9.2(a) hereof. ARTICLE II. PARTNERSHIP CONTINUATION AND IDENTIFICATION 2.1 CONTINUATION. The Partners hereby agree to continue the Partnership pursuant to the Act and upon the terms and conditions set forth in this Agreement. 2.2 NAME, OFFICE AND REGISTERED AGENT. The name of the Partnership shall be WESTERN/PINECREEK, L.P. The specified office and place of business of the Partnership shall be 2200 Powell Street, Suite 600, Emeryville, California 94608. The General Partner may at any time change the location of such office, provided the General Partner gives notice to the Partners of any such change. The name and address of the Partnership's registered agent is _________________. The sole duty of the registered agent as such is to forward to the Partnership any notice that is served on him as registered agent. 2.3 PARTNERS. (a) As of the date hereof, the General Partner of the Partnership is Western Properties Trust, a California business trust. Its principal place of business shall be the same as that of the Partnership. (b) The Limited Partners shall be those Persons identified as Limited Partners in Exhibit A hereto, as amended from time to time. 2.4 TERM AND DISSOLUTION. (a) The term of the Partnership shall continue in full force and effect until June 15, 2049 except that the Partnership shall be dissolved upon the happening of any of the following events: (i) The occurrence of an Event of Bankruptcy as to a General Partner or the dissolution, death or withdrawal of a General Partner unless the business of the Partnership is continued pursuant to Section 7.3(b) hereof; provided that if a General Partner is on the date of such occurrence a partnership, the dissolution of such General Partner as a result of the dissolution, death, withdrawal, removal or 9 Event of Bankruptcy of a partner in such partnership shall not be an event of dissolution of the Partnership if the business of such General Partner is continued by the remaining partner or partners, either alone or with additional partners, and such General Partner and such partners comply with any other applicable requirements of this Agreement; (ii) The passage of 90 days after the sale or other taxable disposition of all or substantially all the assets of the Partnership; provided that if the Partnership receives an installment obligation as consideration for such sale or other disposition, the Partnership shall continue, unless sooner dissolved under the provisions of this Agreement, until such time as such note or notes are paid in full; (iii) The conversion of all Limited Partnership Interests; or (iv) The election by the General Partner that the Partnership should be dissolved. (b) Upon dissolution of the Partnership (unless the business of the Partnership is continued pursuant to Section 7.3(b) hereof), the General Partner (or its trustee, receiver, successor or legal representative) shall amend or cancel the Certificate and liquidate the Partnership's assets and apply and distribute the proceeds thereof in accordance with Section 5.6 hereof. Notwithstanding the foregoing, the liquidating General Partner may either (i) defer liquidation of, or withhold from distribution, for a reasonable time, any assets of the Partnership (including those necessary to satisfy the Partnership's debts and obligations), or (ii) distribute the assets to the Partners in kind. 2.5 FILING OF CERTIFICATE AND PERFECTION OF LIMITED PARTNERSHIP. The General Partner shall execute, acknowledge, record and file at the expense of the Partnership, the Certificate and any and all amendments thereto and all requisite fictitious name statements and notices in such places and jurisdictions as may be necessary to cause the Partnership to be treated as a limited partnership under, and otherwise to comply with, the laws of each state or other jurisdiction in which the Partnership conducts business. ARTICLE III. BUSINESS OF THE PARTNERSHIP 3.1 BUSINESS PURPOSE. The purpose and nature of the business to be conducted by the Partnership is to conduct any business that may be lawfully conducted by a limited partnership organized pursuant to the Act; provided, however, that such business shall be limited to and conducted in such a manner as to permit the General Partner at all times to qualify as a REIT, unless the Company otherwise ceases to qualify as a REIT. The General Partner shall also be empowered to do any and all acts and things necessary or prudent to ensure that the Partnership will not be classified as a "publicly traded partnership" for purposes of Section 7704 of the Code. 10 3.2 REPRESENTATIONS AND WARRANTIES BY THE PARTIES. (a) Each Partner (including, without limitation, each Additional Limited Partner or Substituted Limited Partner as a condition to becoming an Additional Limited Partner or a Substituted Limited Partner) that is an individual represents and warrants to each other Partner(s) that (i) the consummation of the transactions contemplated by this Agreement to be performed by such Partner will not result in a breach or violation of, or a default under, any material agreement by which such Partner or any of such Partner's property is bound, or any statute, regulation, order or other law to which such Partner is subject, (ii) subject to the last sentence of this Section 3.2(a), such Partner is neither a "foreign person" within the meaning of Code Section 1445(f) nor a "foreign partner" within the meaning of Code Section 1446(e), (iii) this Agreement is binding upon, and enforceable against, such Partner in accordance with its terms. Notwithstanding anything contained herein to the contrary, in the event that the representation contained in clause (ii) foregoing would be inaccurate if given by a Partner, such Partner (w) shall not be required to make and shall not be deemed to have made such representation, (x) shall deliver to the General Partner in connection with or prior to its execution of this Agreement written notice that it may not truthfully make such representation, (y) hereby agrees that it is subject to, and hereby authorizes the General Partner to withhold, all withholdings to which such a "foreign person" or "foreign partner", as applicable, is subject under the Code and (z) hereby agrees to cooperate fully with the General Partner with respect to such withholdings, including by effecting the timely completion and delivery to the General Partner of all internal revenue forms required in connection therewith. (b) Each Partner (including, without limitation, each Additional Limited Partner or Substituted Limited Partner as a condition to becoming an Additional Limited Partner or a Substituted Limited Partner) that is not an individual represents and warrants to each other Partner(s) that (i) all transactions contemplated by this Agreement to be performed by it have been duly authorized by all necessary action, including, without limitation, that of its general partner(s), committee(s), trustee(s), beneficiaries, directors and/or shareholder(s), as the case may be, as required, (ii) the consummation of such transactions shall not result in a breach or violation of, or a default under, its partnership or operating agreement, trust agreement, articles, charter or by-laws, as the case may be, any material agreement by which such Partner or any of such Partner's properties or any of its partners, members, beneficiaries, trustees or shareholders, as the case may be, is or are bound, or any statute, regulation, order or other law to which such Partner or any of its partners, members, trustees, beneficiaries or shareholders, as the case may be, is or are subject, (iii) subject to the last sentence of this Section 3.2(b), such Partner is neither a "foreign person" within the meaning of the Code Section 1445(f) nor a "foreign partner" within the meaning of Code Section 1446(e), and (iv) this Agreement is binding upon, and enforceable against, such Partner in accordance with its terms. Notwithstanding anything contained herein to the contrary, in the event that the representation contained in clause (iii) foregoing would be inaccurate if given by a Partner, such Partner (w) shall not be required to make and shall not be deemed to have made such representation, (x) shall deliver to the General Partner in connection with or prior to its execution of this Agreement written notice that it may not truthfully make such representation, (y) hereby agrees that it is subject to, and hereby authorizes the General Partner to withhold, all withholdings to which such a "foreign person" or "foreign partner", as applicable, is subject under the Code and (z) hereby agrees to cooperate fully with the General 11 Partner with respect to such withholdings, including by effecting the timely completion and delivery to the General Partner of all internal revenue forms required in connection therewith. (c) Each Partner (including, without limitation, each Substituted Limited Partner as a condition to becoming a Substituted Limited Partner) represents, warrants and agrees that it has acquired and continues to hold its interest in the Partnership for its own account for investment purposes only and not for the purpose of, or with a view toward, the resale or distribution of all or any part thereof, and not with a view toward selling or otherwise distributing such interest or any part thereof at any particular time or under any predetermined circumstances. Each Partner further represents and warrants that it is a sophisticated investor, able and accustomed to handling sophisticated financial matters for itself, particularly real estate investments, and that is has a sufficiently high net worth that it does not anticipate a need for the funds that it has invested in the Partnership in what it understands to be a highly speculative and liquid investment. (d) The representations and warranties contained in Sections 3.2(a), 3.2(b), and 3.2(c) hereof shall survive the execution and delivery of this Agreement by each Partner (and, in the case of an Additional Limited Partner or a Substituted Limited Partner, the admission of such Additional Limited Partner or Substituted Limited Partner as a Limited Partner in the Partnership) and the dissolution, liquidation and termination of the Partnership. (e) Each Partner (including, without limitation, each Substituted Limited Partner as a condition to becoming a Substituted Limited Partner) hereby acknowledges that no representations as to potential profit, cash flows, funds from operations or yield, if any, in respect of the Partnership or General Partner have been made by any Partner or any employee or representative or Affiliate of any Partner, and that projections and any other information, including, without limitation, financial and descriptive information and documentation, that may have been in any manner submitted to such Partner shall not constitute any representation or warranty of any kind or nature, express or implied. ARTICLE IV. CAPITAL CONTRIBUTIONS AND ACCOUNTS 4.1 CAPITAL CONTRIBUTIONS. The Partners shall make the Initial Capital Contributions to the Partnership, whereupon the General Partner shall own the sole General Partnership Interest in the Partnership with the rights and obligations set forth herein, and each Limited Partner shall own Limited Partnership Units in the amount set forth for such Partner on Exhibit A (as the same may be amended from time to time by the General Partner to the extent necessary to reflect accurately sales, exchanges or other transfers, redemptions, Capital Contributions, the issuance of additional Partnership Units, or similar events having an effect on a Partner's ownership of Partnership Units), with the rights and obligations set forth herein. The Initial Capital contributions shall be valued for Capital account purposes in the manner set forth on Exhibit A. Any transfer tax owed as a result of the Initial Capital Contributions shall be the responsibility of, and shall be paid by, the Partnership. 4.2 ADDITIONAL CAPITAL CONTRIBUTIONS AND ISSUANCES OF ADDITIONAL PARTNERSHIP INTERESTS. Except as provided in this Section 4.2, or in Section 4.3 or Section 5.6(b), the Partners 12 shall have no right or obligation to make any additional Capital Contributions, loans or preferred equity investments to the Partnership. (a) ADDITIONAL GENERAL PARTNER CONTRIBUTIONS. Except as provided in Article VII hereof, the Company shall at all times be the sole General Partner of the Partnership. The General Partner may, but shall not be obligated to, contribute additional capital to the Partnership, from time to time, as determined by the General Partner in its sole discretion. (b) ADDITIONAL LIMITED PARTNERSHIP INTERESTS. The General Partner may not admit additional Limited Partners or issue additional Limited Partnership Interests without the consent of a majority-in-interest of the Limited Partners, such consent not to be unreasonably withheld. Upon the issuance of any additional Limited Partnership Interest, the General Partner shall amend Article V, Exhibit A and such other provisions hereof as may be necessary or appropriate to reflect such issuance. 4.3 GENERAL PARTNER LOANS AND ADDITIONAL INVESTMENTS. The General Partner may, but shall not be obligated to, from time to time advance funds to the Partnership for any proper Partnership purpose as reasonably determined by the General Partner, as a loan ("Funding Loan") or a preferred equity investment ("Preferred Investment"), which shall provide a return at a rate of ten percent (10%) per annum on such terms and conditions as the General Partner it shall determine in its good faith discretion. 4.4 CAPITAL ACCOUNTS. A separate capital account (a "Capital Account") shall be established and maintained for each Partner in accordance with Regulations Section 1.704-1(b)(2)(iv). If (i) a new or existing Partner acquires an additional Partnership Interest in exchange for more than a DE MINIMIS Capital Contribution, (ii) the Partnership distributes to a Partner more than a DE MINIMIS amount of Partnership property as consideration for a Partnership Interest, or (iii) the Partnership is liquidated within the meaning of Regulation Section 1.704-1(b)(2)(ii)(g), the General Partner shall revalue the property of the Partnership to its fair market value (as determined by the General Partner and taking into account Section 7701(g) of the Code) in accordance with Regulations Section 1.704-1(b)(2)(iv)(f). When the Partnership's property is revalued by the General Partner, the Capital Accounts of the Partners shall be adjusted in accordance with Regulations Sections 1.704-1(b)(2)(iv)(f) and (g), which generally require such Capital Accounts to be adjusted to reflect the manner in which the unrealized gain or loss inherent in such property (that has not been reflected in the Capital Accounts previously) would be allocated among the Partners pursuant to Section 5.1 if there were a taxable disposition of such property for its fair market value (as determined by the General Partner and taking into account Section 7701(g) of the Code) on the date of the revaluation. 4.5 PERCENTAGE INTERESTS. If the number of outstanding Limited Partnership Units increases or decreases during a taxable year, each Limited Partner's Percentage Interest shall be adjusted to a percentage equal to the number of Limited Partnership Units held by such Limited Partner divided by the aggregate number of Limited Partnership Units outstanding after giving effect to such increase or decrease. If the Limited Partners' Percentage Interests are adjusted pursuant to this Section 4.5, the Profits and Losses for the taxable year in which the adjustment occurs shall be allocated between the part of the year ending on the day of the adjustment and the part of the year beginning on the following day either (i) as if the taxable year had ended on the 13 date of the adjustment or (ii) based on the number of days in each part. The General Partner, in its sole discretion, shall determine which method shall be used to allocate Profits and Losses for the taxable year in which the adjustment occurs. The allocation of Profits and Losses for the earlier part of the year shall be based on the Percentage Interests before adjustment, and the allocation of Profits and Losses for the later part shall be based on the adjusted Percentage Interests. 4.6 NO INTEREST ON CONTRIBUTIONS. No Partner shall be entitled to interest on its Capital Contribution. 4.7 RETURN OF CAPITAL CONTRIBUTIONS. Except as specifically provided in this Agreement, no Partner shall be entitled to withdraw any part of its Capital Contribution or its Capital Account or to receive any distribution from the Partnership. Except as otherwise provided herein, there shall be no obligation to return to any Partner or withdrawn Partner any part of such Partner's Capital Contribution for so long as the Partnership continues in existence. 4.8 NO THIRD PARTY BENEFICIARY. No creditor or other third party having dealings with the Partnership shall have the right to enforce the right or obligation of any Partner to make Capital Contributions or loans or to pursue any other right or remedy hereunder or at law or in equity, it being understood and agreed that the provisions of this Agreement shall be solely for the benefit of, and may be enforced solely by, the parties hereto and their respective successors and assigns. None of the rights or obligations of the Partners herein set forth to make Capital Contributions or loans to the Partnership shall be deemed an asset of the Partnership for any purpose by any creditor or other third party, nor may such rights or obligations be sold, transferred or assigned by the Partnership or pledged or encumbered by the Partnership to secure any debt or other obligation of the Partnership or of any of the Partners. In addition, it is the intent of the parties hereto that no distribution to any Limited Partner shall be deemed a return of money or other property in violation of the Act. ARTICLE V. PROFITS AND LOSSES; DISTRIBUTIONS 5.1 ALLOCATION OF PROFIT AND LOSS. Except as otherwise provided in this Section 5.1 or in Section 5.6, Profit and Loss of the Partnership for each fiscal year of the Partnership shall be allocated as follows: (a) LOSS. Loss shall be charged 99% to the Capital Account of the Limited Partners, in proportion to their Percentage Interests, and 1% to the Capital Account of the General Partner. (b) PROFIT. (i) First, to the Partners' Capital Accounts, until Profit Allocations under this Section 5.1(b)(i) are equal to the total amount of Loss Allocations to such Partner under Section 5.1(a) and in the same proportion thereof. (ii) Second, to the Capital Account of the General Partner until all Profits allocated under this clause (b)(ii) shall equal the amounts theretofore 14 distributed to the General Partner under Section 5.2(a)(i), plus the amounts theretofore of Partnership principal payments on Property Debt that were subtracted in computing distributions to the General Partner under Section 5.2(a)(i); (iii) Third, to the Capital Accounts of the Limited Partners, in proportion to their Percentage Interests, until all Profits allocated under this clause (b)(iii) with respect to each Limited Partnership Unit shall equal the amounts theretofore distributed with respect to such Limited Partnership Unit under Section 5.2(a)(ii) hereof; (iv) Fourth, to the Capital Account of the General Partner and the Capital Accounts of the Limited Partners (the Limited Partners in proportion to their Percentage Interests) until all Profits allocated under this clause (b)(iv) shall equal the amounts theretofore distributed with respect to such General Partner's Interest and Limited Partnership Unit, as the case may be, under Section 5.2(a)(iii). (v) Finally, 74.72% to the Capital Account of General Partner and 25.28% to the Capital Account of the Limited Partner (in proportion to their Percentage Interests). (c) NONRECOURSE DEDUCTIONS, MINIMUM GAIN CHARGEBACK. Notwithstanding any provision to the contrary, (i) any expense of the Partnership that is a "nonrecourse deduction" within the meaning of Regulations Section 1.704-2(b)(1), or a cost recovery deduction (depreciation and amortization) under Sections 167 and 197 of the Code, shall be allocated 100% to the Capital Account of the Limited Partners, in proportion to their Percentage Interests, (ii) any expense of the Partnership that is a "partner nonrecourse deduction" within the meaning of Regulations Section 1.704-2(i)(2) shall be allocated to the Capital Accounts of the Partner in accordance with Regulations Section 1.704-2(i)(1), (iii) if there is a net decrease in Partnership Minimum Gain within the meaning of Regulations Section 1.704-2(f)(1) for any Partnership taxable year, items of gain and income shall be allocated among the Partners in accordance with Regulations Section 1.704-2(f) and the ordering rules contained in Regulations Section 1.704-2(j), and (iv) if there is a net decrease in Partner Nonrecourse Debt Minimum Gain within the meaning of Regulations Section 1.704-2(i)(4) for any Partnership taxable year, items of gain and income shall be allocated among the Partners in accordance with Regulations Section 1.704-2(i)(4) and the ordering rules contained in Regulations Section 1.704-2(j). For purposes of determining its share of the nonrecourse liabilities of the Partnership within the meaning of Regulations Section 1.752-3(a)(3), the deductions attributable to Partnership nonrecourse liabilities shall be considered to be allocated 100% to the Limited Partners. (d) QUALIFIED INCOME OFFSET. If a Limited Partner receives in any taxable year an adjustment, allocation, or distribution described in subparagraphs (4), (5), or (6) of Regulations Section 1.704-1(b)(2)(ii)(d) that causes or increases a negative balance in such Partner's Capital Account that exceeds the sum of such Partner's shares of Partnership Minimum Gain and Partner Nonrecourse Debt Minimum Gain, as determined in accordance with Regulations Sections 1.704-2(g) and 1.704-2(i), such Partner shall be allocated specially for such 15 taxable year (and, if necessary, later taxable years) items of income and gain in an amount and manner sufficient to eliminate such negative Capital Account balance as quickly as possible as provided in Regulations Section 1.704-1(b)(2)(ii)(d). After the occurrence of an allocation of income or gain to a Limited Partner in accordance with this Section 5.1(d), to the extent permitted by Regulations Section 1.704-1(b), items of expense or loss shall be allocated to such Partner in an amount necessary to offset the income or gain previously allocated to such Partner under this Section 5.1(d). (e) CAPITAL ACCOUNT DEFICITS. During such period that the Partnership has Nonrecourse Debt, loss shall not be allocated to the General Partner to the extent that such allocation would cause a deficit in such Partner's Capital Account (after reduction to reflect the items described in Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6)) to exceed the sum of such Partner's shares of Partnership Minimum Gain and Partner Nonrecourse Debt Minimum Gain and liabilities allocated to such Partner under Regulation Section 1.752-3(a). Any Loss in excess of that limitation shall be allocated to the Limited Partners in accordance with their Percentage Interests. After the occurrence of an allocation of Loss to the General Partner in accordance with this Section 5.1(e), to the extent permitted by Regulations Section 1.704-1(b), Profit shall be allocated to such Partner in an amount necessary to offset the Loss previously allocated to such Partner under this Section 5.1(e). (f) CURATIVE ALLOCATIONS. The allocations set forth in Section 5.1(b), (c), (d), and (e) hereof (the "Regulatory Allocations") are intended to comply with certain regulatory requirements, including the requirements of Regulations Section 1.704-1(b) and 1.704-2. The Regulatory Allocations shall be taken into account in allocating other items of income, gain, loss, and deduction among the Partners so that to the extent possible without violating the requirements giving rise to the Regulatory Allocations, the net amount of such allocations of other items and the Regulatory Allocations to each Holder of a Partnership Common Unit shall be equal to the net amount that would have been allocated to each such Holder if the Regulatory Allocations had not been applied. (g) ALLOCATIONS BETWEEN TRANSFEROR AND TRANSFEREE. If a Partner transfers any part or all of its Partnership Interest, and the transferee is admitted as a substitute Partner as provided herein, the distributive shares of the various items of Profit and Loss allocable among the Partners during such fiscal year of the Partnership shall be allocated between the transferor and the substitute Partner either (i) as if the Partnership's fiscal year had ended on the date of the transfer, or (ii) based on the number of days of such fiscal year that each was a Partner without regard to the results of Partnership activities in the respective portions of such fiscal year in which the transferor and the transferee were Partners. The General Partner, in its sole discretion, shall determine which method shall be used to allocate the distributive shares of the various items of Profit and Loss between the transferor and the substitute Partner. (h) DEFINITION OF PROFIT AND LOSS. "Profit" and "Loss" and any items of income, gain, expense, or loss referred to in this Agreement shall be determined in accordance with federal income tax accounting principles, as modified by Regulations Section 1.704-1(b)(2)(iv), except that Profit and Loss shall not include items of income, gain and expense that are specially allocated pursuant to Section 5.1(c), 5.1(d), or 5.1(e). All allocations of income, Profit, gain, Loss, and expense (and all items contained therein) for federal income tax purposes 16 shall be identical to all allocations of such items set forth in this Section 5.1, except as otherwise required by Section 704(c) of the Code and Regulations Section 1.704-1(b)(4). The General Partner shall have the authority to elect the method to be used by the Partnership for allocating items of income, gain, and expense as required by Section 704(c) of the Code and such election shall be binding on all Partners. (i) RECOURSE DEBT. Notwithstanding anything in this Agreement to the contrary, in the event the Partnership refinances the Property Debt with debt of the General Partner or its affiliate or incurs any other recourse Property Debt, the Limited Partners shall absolutely and unconditionally guaranty the entire amount of such Property Debt, without right of indemnification, subrogation, contribution, or reimbursement from the General Partner or the Partnership. Each Limited Partner shall enter into a direct agreement with the lender consistent therewith, it being the intention of the Partners that 100% of the liability will be treated as recourse debt to the Limited Partners and the liability allocated 100% to the Limited Partners under Regulation Section 1.752-2 in proportion to their Partnership Interests. 5.2 DISTRIBUTION OF CASH. (a) On such dates as determined by the General Partner, but not less frequently than quarterly, the General Partner shall cause the Partnership to distribute such cash in excess of the Reserved Cash, as the General Partner, in its reasonable discretion, considers available for distribution on such date, to the Holders of Partnership Interests on the Partnership Record Date with respect to such distribution period. Following payment of any amounts due with respect to Funding Loans and/or Preferred Investments, such Distributions shall be made as follows: (i) First, to the General Partner in an amount equal to the sum of (A) the Current General Distribution Amount, plus (B) any Prior General Distribution Deficiency, MINUS any interest or principal payments made by the Partnership with respect to any Property Debt since the prior cash distribution of the Partnership; (ii) Second, to the Limited Partners, in an amount equal to the sum of (A) Current Limited Distribution Amount, plus (B) the Prior Limited Distribution Deficiency per each Limited Partnership Unit; (iii) Thereafter, Seventy-Four and Seventy-Two One- Hundredths percent (74.72%) to the General Partner and Twenty- Five and Twenty-Eight One-Hundredths percent (25.28%) to the Limited Partners, as such percentage may be adjusted based upon variation from an aggregate number of Eighty-Eight Thousand Four Hundred Ninety-Eight (88,498) outstanding Limited Partnership Units (each Limited Partnership Unit representing 0.00028566%). (b) Notwithstanding any other provision of this Agreement, the General Partner is authorized to take any action that it determines to be necessary or appropriate to cause the Partnership to comply with any withholding requirements established under the Code or any other federal, state or local law including, without limitation, pursuant to Sections 1441, 1442, 17 1445 and 1446 of the Code. To the extent that the Partnership is required to withhold and pay over to any taxing authority any amount resulting from the allocation or distribution of income to a Partner or assignee (including by reason of Section 1446 of the Code), either (i) if the actual amount to be distributed to the Partner or assignee equals or exceeds the amount required to be withheld by the Partnership, the amount withheld shall be treated as a distribution of cash in the amount of such withholding to such Partner or assignee, or (ii) if the actual amount to be distributed to the Partner or assignee is less than the amount required to be withheld by the Partnership, the amount required to be withheld shall be treated as a loan (a "Partnership Loan") from the Partnership to the Partner on the day the Partnership pays over such amount to the applicable taxing authority. A Partnership Loan shall be repaid through withholding by the Partnership with respect to subsequent distributions to the applicable Partner or assignee. In the event that a Limited Partner or assignee (either, a "Defaulting Limited Partner") fails to pay any amount owed to the Partnership with respect to a Partnership Loan within 15 days after demand for payment thereof is made by the Partnership on the Defaulting Limited Partner, the General Partner, in its sole discretion, may elect to make the payment to the Partnership on behalf of such Defaulting Limited Partner. In such event, on the date of payment, the General Partner shall be deemed to have extended a Funding Loan to the Defaulting Limited Partner in the amount of the payment made by the General Partner. Any amounts treated as a Partnership Loan or a General Partner Loan pursuant to this Section 5.2(b) shall bear interest at the lesser of (i) the base rate on corporate loans at large United States money center commercial banks, as published from time to time in THE WALL STREET JOURNAL, or (ii) the maximum lawful rate of interest on such obligation, such interest to accrue from the date the Partnership or the General Partner, as applicable, is deemed to extend the loan until such loan is repaid in full. (c) In no event may a Partner receive a distribution of cash with respect to a Limited Partnership Unit if such Partner is entitled to receive a dividend with respect to a Common Share for which all or part of such Limited Partnership Unit has been or will be exchanged. 5.3 NO RIGHT TO DISTRIBUTIONS IN KIND; GENERAL PARTNER'S RIGHT OF SUBSTITUTION. (a) Except as provided in paragraph (b) hereof, no Partner shall be entitled to demand property other than cash in connection with any distributions by the Partnership. (b) The General Partner shall be permitted, without obtaining the consent of any other Partner, to cause any item of real property now owned or hereafter acquired by the Partnership (including, without limitation, those items of real property included in the Initial Capital Contributions) to be distributed in-kind to the General Partner; provided, however, that no such distribution shall be permitted unless, concurrently with such distribution, the General Partner shall contribute to the Partnership one or more properties which the General Partner reasonably expects will generate cash available for distribution in an amount at least equal to the amount of cash expected to be generated by the Property or Properties distributed for the remainder of the period described in Section 8.7 hereof. 18 5.4 LIMITATIONS ON RETURN OF CAPITAL CONTRIBUTIONS. Notwithstanding any of the provisions of this Article V, no Partner shall have the right to receive, and the General Partner shall not have the right to make, a distribution which includes a return of all or part of Partner's Capital Contributions, unless after giving effect to the return of a Capital Contribution, the sum of all liabilities of the Partnership, other than the liabilities to a Partner for the return of his Capital Contribution, does not exceed the fair market value of the Partnership's assets. 5.5 REIT DISTRIBUTION REQUIREMENTS. The General Partner shall use its reasonable efforts to cause the Partnership to distribute amounts sufficient to enable the General Partner (i) to meet its distribution requirement for qualification as a REIT as set forth in Section 857(a)(i) of the Code and (ii) to avoid any federal income or excise tax liability imposed by the Code. 5.6 DISTRIBUTIONS UPON LIQUIDATION. (a) Upon liquidation of the Partnership, after payment of, or adequate provision for, debts and obligations of the Partnership, including any Partner loans, any remaining assets of the Partnership shall be distributed to all Partners with positive Capital Accounts in accordance with their respective positive Capital Account balances. For purposes of the preceding sentence, the Capital Account of each Partner shall be determined after all adjustments made in accordance with Sections 5.1 and 5.2 resulting from Partnership operations. Gain or loss resulting from any disposition of Partnership assets in connection with such liquidation (including, without limitation, attributable to any in-kind distributions undertaken in connection therewith) shall be credited or charged to the Capital Accounts of the Partners so as to result, as nearly as possible, in liquidating distributions with respect to each Partner to equal the amount of the Partners' positive Capital Accounts. Any distributions pursuant to this Section 5.6 should be made by the end of the Partnership's taxable year in which the liquidation occurs (or, if later, within 90 days after the date of the liquidation). To the extent deemed advisable by the General Partner, appropriate arrangements (including the use of a liquidating trust) may be made to assure that adequate funds are available to pay any contingent debts or obligations. (b) NEGATIVE CAPITAL ACCOUNTS - If any Partner has a negative balance in its Capital Account following a liquidation of the Partnership, as determined after taking into account all Capital Account adjustments in accordance with this Article V resulting from Partnership operations and from all sales and dispositions of all or any part of the Partnership's assets, such Partner shall contribute to the Partnership an amount of cash equal to the negative balance in its Capital Account and such cash shall be paid or distributed by the Partnership to creditors, if any, and then to the Partners with positive Capital Accounts, pro rata in proportion thereto, in accordance with Section 5.6(a). Such contribution by a Partner shall be made by the end of the Partnership's taxable year in which the liquidation occurs (or, if later, within 90 days after the date of the liquidation). 5.7 SUBSTANTIAL ECONOMIC EFFECT. It is the intent of the Partners that the allocations of Profit and Loss under the Agreement have substantial economic effect (or be consistent with the Partners' interests in the Partnership in the case of the allocation of losses attributable to nonrecourse debt) within the meaning of Section 704(b) of the Code as interpreted by the 19 Regulations promulgated pursuant thereto. Article V and other relevant provisions of this Agreement shall be interpreted in a manner consistent with such intent. ARTICLE VI. RIGHTS, OBLIGATIONS AND POWERS OF THE GENERAL PARTNER 6.1 MANAGEMENT OF THE PARTNERSHIP. (a) Except as otherwise expressly provided in this Agreement, the General Partner shall have full, complete and exclusive discretion to manage and control the business of the Partnership for the purposes herein stated, and shall make all decisions affecting the business and assets of the Partnership. Subject to the restrictions specifically contained in this Agreement, the powers of the General Partner shall include, without limitation, the authority to take the following actions on behalf of the Partnership: (i) to acquire, purchase, own, lease and dispose of any real property and any other property or assets that the General Partner determines are necessary or appropriate or in the best interests of the business of the Partnership, provided that the Partnership shall provide thirty (30) days prior written notice to the Limited Partners of the sale of all or substantially all of the Partnership Property; (ii) subject to the terms of any applicable lease, to construct buildings and make other improvements on the properties owned or leased by the Partnership; (iii) to borrow money for the Partnership, issue evidences of indebtedness in connection therewith, refinance, guarantee, increase the amount of, modify, amend or change the terms of, or extend the time for the payment of, any indebtedness or obligation to the Partnership, and secure such indebtedness by mortgage, deed of trust, pledge or other lien on the Partnership's assets; (iv) to pay, either directly or by reimbursement, for all Administrative Expenses as set forth in this Agreement, whether to the Company, the General Partner, an Affiliate of the General Partner or to third parties; (v) to lease all or any portion of any of the Partnership's assets, whether or not the terms of such leases extend beyond the termination date of the Partnership and whether or not any portion of the Partnership's assets so leased are to be occupied by the lessee, or, in turn, subleased in whole or in part to others, for such consideration and on such terms as the General Partner may determine; (vi) to prosecute, defend, arbitrate, or compromise any and all claims or Liabilities in favor of or against the Partnership, on such terms and in such manner as the General Partner may reasonably determine, and similarly to prosecute, settle or defend litigation with respect to the Partners, the Partnership, or the Partnership's assets; PROVIDED, HOWEVER, that the General Partner may not, 20 without the consent of all of the Partners, confess a judgment against the Partnership; (vii) to file applications, communicate, and otherwise deal with any and all governmental agencies having jurisdiction over, or in any way affecting, the Partnership's assets or any other aspect of the Partnership business; (viii) to make or revoke any election permitted or required of the Partnership by any taxing authority; (ix) to maintain such insurance coverage for public liability, fire and casualty, and any and all other insurance for the protection of the Partnership, for the conservation of Partnership assets, or for any other purpose convenient or beneficial to the Partnership, in such amounts and such types, as it shall determine from time to time; (x) to determine whether or not to apply any insurance proceeds for any property to the restoration of such property or to distribute the same; (xi) to retain legal counsel, accountants, consultants, real estate brokers, and such other persons, as the General Partner may deem necessary or appropriate in connection with the Partnership business and to pay therefor such reasonable remuneration as the General Partner may deem reasonable and proper; (xii) to retain other services of any kind or nature in connection with the Partnership business, and to pay therefor such remuneration as the General Partner may deem reasonable and proper; (xiii) to negotiate and conclude agreements on behalf of the Partnership with respect to any of the rights, powers and authority conferred upon the General Partner; (xiv) to maintain accurate accounting records and to file promptly all federal, state and local income tax returns on behalf of the Partnership; (xv) to distribute Partnership cash or other Partnership assets in accordance with this Agreement; (xvi) to form or acquire an interest in, and contribute property to, any further limited or general partnerships, joint ventures or other relationships that it deems desirable (including, without limitation, the acquisition of interests in, and the contributions of property to, its Subsidiaries and any other Person in which it has an equity interest from time to time); (xvii) to establish Partnership reserves for working capital, capital expenditures, contingent liabilities, or any other valid Partnership purpose; 21 (xviii) to take such other action, execute, acknowledge, swear to or deliver such other documents and instruments, and perform any and all other acts the General Partner deems necessary or appropriate for the formation, continuation and conduct of the business and affairs of the Partnership (including, without limitation, all actions consistent with allowing the Company at all times to qualify as a REIT unless the Company voluntarily terminates its REIT status) and to possess and enjoy all of the rights and powers of a general partner as provided by the Act; and (xix) to reimburse the General Partner and/or the Limited Partners for reasonable out-of-pocket expenses incurred in connection with the formation of the Partnership. (b) Except as otherwise provided herein, to the extent the duties of the General Partner require expenditures of funds to be paid to third parties, the General Partner shall not have any obligations hereunder except to the extent that Partnership funds are reasonably available to it for the performance of such duties, and nothing herein contained shall be deemed to authorize or require the General Partner, in its capacity as such, to expend its individual funds for payment to third parties or to undertake any individual liability or obligation on behalf of the Partnership. 6.2 DELEGATION OF AUTHORITY. The General Partner may delegate any or all of its powers, rights and obligations hereunder, and may appoint, employ, contract or otherwise deal with any Person for the transaction of the business of the Partnership, which Person may, under supervision of the General Partner, perform any acts or services for the Partnership as the General Partner may approve. 6.3 INDEMNIFICATION AND EXCULPATION OF INDEMNITEES. (a) To the fullest extent permitted by applicable law, unless otherwise provided in this Agreement, the Partnership shall indemnify each Indemnitee from and against any and all losses, claims, damages, liabilities (joint or several), expenses (including, without limitation, attorney's fees and other legal fees and expenses), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, that relate to the operations of the Partnership as set forth in this Agreement in which such Indemnitee may be involved, or is threatened to be involved, as a party or otherwise; provided, however, that the Partnership shall not indemnify an Indemnitee: (i) for willful misconduct or a knowing violation of the law or (ii) for any transaction for which such Indemnitee received an improper personal benefit in violation or breach of any provision of this Agreement. Unless otherwise provided in this Agreement, the foregoing indemnity shall extend to any liability of any Indemnitee, pursuant to a loan guarantee or otherwise, for any indebtedness of the Partnership or any Subsidiary of the Partnership (including, without limitation, any indebtedness which the Partnership or any Subsidiary of the Partnership has assumed or taken subject to), and the General Partner is hereby authorized to and empowered, on behalf of the Partnership, to enter into one or more indemnity agreements consistent with the provisions of this Section 6.3 in favor of Indemnitee having or potentially having liability for any such indebtedness. It is the intention of this Section 6.3 that the 22 Partnership indemnify each Indemnitee to the fullest extent permitted by law, unless otherwise provided in this Agreement. The termination of any proceeding by judgment, order or settlement does not create a presumption that the Indemnitee did not meet the requisite standard of conduct set forth in this Section 6.3. The termination of any proceeding by conviction of an Indemnitee or upon a plea of nolo contendere or its equivalent by an Indemnitee, or an entry of an order of probation against an Indemnitee prior to judgment, does not create a presumption that such Indemnitee acted in a manner contrary to that specified in this Section 6.3. Any indemnification pursuant to this Section 6.3 shall be made only out of the assets of the Partnership, and neither the General Partner nor any Limited Partner shall have any obligation to contribute to the capital of the Partnership or otherwise provide funds to enable the Partnership to fund its obligations under this Section 6.3. Notwithstanding anything in this Section 6.3 to the contrary, the Partnership shall not indemnify a Limited Partner against any liability for recourse Property Debt as provided in Section 5.1(i). (b) To the fullest extent permitted by law, unless otherwise provided in this Agreement, expenses incurred by an Indemnitee who is a party to a proceeding or otherwise subject to or the focus of or is involved in any proceeding shall be paid or reimbursed by the Partnership as incurred by the Indemnitee in advance of the final disposition of the proceeding upon receipt by the Partnership of (i) a written affirmation by the Indemnitee of the Indemnitee's good faith belief that the standard of conduct necessary for indemnification by the Partnership as authorized in this Section 6.3 has been met, and (ii) a written undertaking by or on behalf of the Indemnitee to repay the amount if it shall ultimately be determined that the standard of conduct has not been met. (c) The indemnification provided by this Section 6.3 shall be in addition to any other rights to which an Indemnitee or any other Person may be entitled under any agreement, pursuant to any vote of the Partners, as a matter of law or otherwise, and shall continue as to an Indemnitee who has ceased to serve in such capacity. (d) The Partnership may, but shall not be obligated to, purchase and maintain insurance, on behalf of the Indemnitees and such other Persons as the General Partner shall determine, against any liability that may be asserted against or expenses that may be incurred by such Person in connection with the Partnership's activities, regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement. (e) For purposes of this Section 6.3, the Partnership shall be deemed to have requested an Indemnitee to serve as fiduciary of an employee benefit plan whenever the performance by it of its duties to the Partnership also imposes duties on, or otherwise involves services by, it to the plan or participants or beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect to an employee benefit plan pursuant to applicable law shall constitute fines within the meaning of this Section 6.3; and actions taken or omitted by the Indemnitee with respect to an employee benefit plan in the performance of its duties for a purpose reasonably believed by it to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the Partnership. 23 (f) In no event may an Indemnitee subject the Limited Partners to personal liability by reason of the indemnification provisions set forth in this Agreement. (g) An Indemnitee shall not be denied indemnification in whole or in part under this Section 6.3 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement. (h) The provisions of this Section 6.3 are for the benefit of the Indemnitees, their heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Persons. 6.4 LIABILITY OF THE GENERAL PARTNER. (a) Notwithstanding anything to the contrary set forth in this Agreement, the General Partner shall not be liable for monetary damages to the Partnership or any Partners for losses sustained or liabilities incurred as a result of errors in judgment or of any act or omission if the General Partner acted in good faith. Additionally, the General Partner shall not be in breach of any duty that the General Partner may owe to the Limited Partners or the Partnership or any other Persons under this Agreement or of any duty stated or implied by law or equity, provided the General Partner, acting in good faith, abides by the terms of this Agreement. (b) The Limited Partners expressly acknowledge that the General Partner is acting on behalf of the Partnership, the Company and the Company's shareholders collectively, and that the General Partner is under no obligation to consider the separate interests of the Limited Partners (including, without limitation, the tax consequences to the Limited Partners, except as otherwise provided in Section 8.7 hereof) in deciding whether to cause the Partnership to take (or decline to take) any actions. In the event of a conflict between the interests of the shareholders of the Company on one hand and the Limited Partners on the other, the General Partner shall endeavor in good faith to resolve the conflict in a manner not adverse to either the shareholders of the Company or the Limited Partners; provided the General Partner shall not be liable for monetary damages for losses sustained, liabilities incurred, or benefits not derived by Limited Partners in connection with such decisions, provided that the General Partner has acted in good faith. (c) Subject to its obligations and duties as General Partner set forth in Section 6.1 hereof, the General Partner may exercise any of the powers granted to it under this Agreement and perform any of the duties imposed upon it hereunder either directly or by or through its agents. The General Partner shall not be responsible for any misconduct or negligence on the part of any such agent appointed by it in good faith. (d) Notwithstanding any other provisions of this Agreement or the Act, any action of the General Partner on behalf of the Partnership or any decision of the General Partner to refrain from acting on behalf of the Partnership, undertaken in the good faith belief that such action or omission is necessary or advisable in order (i) to protect the ability of the Company to continue to qualify as a REIT or (ii) to prevent the Company from incurring any taxes under 24 Section 857, Section 4981, or any other provision of the Code, is expressly authorized under this Agreement and is deemed approved by all of the Limited Partners. (e) Any amendment, modification or repeal of this Section 6.4 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the General Partner's liability to the Partnership and the Limited Partners under this Section 6.4 as in effect immediately prior to such amendment, modification or repeal with respect to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when claims relating to such matters may arise or be asserted. 6.5 EXPENDITURES BY THE PARTNERSHIP. (a) The General Partner shall not be compensated for its services as general partner of the Partnership except as provided in this Agreement (including the provisions of Article 4 hereof regarding distributions, payments, and allocations to which it may be entitled in its capacity as the General Partner). (b) The General Partner is hereby authorized to pay compensation for accounting, administrative, legal, technical, management and other services rendered to the Partnership. All of the aforesaid expenditures (including Administrative Expenses) shall be obligations of the Partnership, and the General Partner shall be entitled to reimbursement by the Partnership for any expenditure (including Administrative Expenses) incurred by it on behalf of the Partnership which shall be made other than out of the funds of the Partnership. (c) To the extent practicable, Partnership expenses shall be billed directly to and paid by the Partnership and reimbursements to the General Partner or any of its Affiliates by the Partnership pursuant to this Section 6.5 shall be treated as non-income reimbursements, and not as "guaranteed payments" within the meaning of Code Section 707(c) or other forms of gross income. 6.6 OUTSIDE ACTIVITIES. Subject to Section 6.7 hereof, it is expressly understood and agreed that the General Partner, and any officer, director, employee, agent, trustee, Affiliate or shareholder of the General Partner, shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Partnership, including business interests and activities substantially similar or identical to those of the Partnership. Neither the Partnership nor any of the Limited Partners shall have any rights by virtue of this Agreement in any such business ventures, interests or activities. None of the Limited Partners nor any other Person shall have any rights by virtue of this Agreement or the partnership relationship established hereby in any such business ventures, interests or activities, and the General Partner shall have no obligation pursuant to this Agreement to offer any interest in any such business ventures, interests and activities to the Partnership or any Limited Partner, even if such opportunity is of a character which, if presented to the Partnership or any Limited Partner, could be taken by such Person. 6.7 EMPLOYMENT OR RETENTION OF AFFILIATES. (a) Any Affiliate of the General Partner may be employed or retained by the Partnership and may otherwise deal with the Partnership (whether as a buyer, lessor, lessee, 25 manager, furnisher of goods or services, broker, agent, lender or otherwise) and may receive from the Partnership any compensation, price, or other payment therefor which the General Partner determines to be fair and reasonable. (b) The Partnership may transfer assets to joint ventures, other partnerships, corporations or other business entities in which it is or thereby becomes a participant upon such terms and subject to such conditions as the General Partner deems are consistent with this Agreement and applicable law. (c) Except as expressly permitted by this Agreement, neither the General Partner nor any of its Affiliates shall sell, transfer or convey any property to, or purchase any property from, the Partnership, directly or indirectly, except pursuant to transactions that are on terms that are fair and reasonable to the Partnership. 6.8 TITLE TO PARTNERSHIP ASSETS. Title to Partnership assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner, individually or collectively, shall have any ownership interest in such Partnership assets or any portion thereof. Title to any or all of the Partnership assets may be held in the name of the Partnership, the General Partner or one or more nominees, as the General Partner may determine, including Affiliates of the General Partner. The General Partner hereby declares and warrants that any Partnership assets for which legal title is held in the name of the General Partner or any nominee or Affiliate of the General Partner shall be held by the General Partner for the use and benefit of the Partnership in accordance with the provisions of this Agreement; PROVIDED, HOWEVER, that the General Partner shall use its best efforts to cause beneficial and record title to such assets to be vested in the Partnership as soon as reasonably practicable. All Partnership assets shall be recorded as the property of the Partnership in its books and records, irrespective of the name in which legal title to such Partnership assets is held. ARTICLE VII. CHANGES IN GENERAL PARTNER 7.1 TRANSFER OF THE GENERAL PARTNER'S PARTNERSHIP INTEREST. The General Partner may not transfer any of its General Partnership Interest or withdraw as General Partner except (i) for transfers to a wholly-owned subsidiary of the General Partner, or to a partnership or limited liability company controlled by the General Partner, or (ii) in connection with a merger, consolidation or other combination with or into another Person or a sale of all or substantially all of its assets. In any such circumstance, such transferee shall be admitted as a substitute General Partner hereunder. 7.2 ADMISSION OF A SUBSTITUTE OR ADDITIONAL GENERAL PARTNER. Except in connection with a transaction described in Section 7.1, a Person shall be admitted as a substitute or successor General Partner of the Partnership only if the following terms and conditions are satisfied: (a) a majority in interest of the Limited Partners shall have consented in writing to the admission of the substitute or successor General Partner; (b) the Person to be admitted as a substitute or additional General Partner shall have accepted and agreed to be bound by all the terms and provisions of this Agreement by 26 executing a counterpart thereof and such other documents or instruments as may be required or appropriate in order to effect the admission of such Person as a General Partner, and a certificate evidencing the admission of such Person as a General Partner shall have been filed for recordation and all other actions required by Section 2.5 hereof in connection with such admission shall have been performed; (c) if the Person to be admitted as a substitute or additional General Partner is a corporation or a partnership it shall have provided the Partnership with evidence satisfactory to counsel for the Partnership of such Person's authority to become a General Partner and to be bound by the terms and provisions of this Agreement; and (d) counsel for the Partnership shall have rendered an opinion (relying on such opinions from other counsel and the state or any other jurisdiction as may be necessary) that the admission of the person to be admitted as a substitute or additional General Partner is in conformity with the Act, that none of the actions taken in connection with the admission of such Person as a substitute or additional General Partner will cause (i) the Partnership to be classified other than as a partnership for federal income tax purposes, or (ii) the loss of any Limited Partner's limited liability. 7.3 EFFECT OF BANKRUPTCY, WITHDRAWAL, DEATH OR DISSOLUTION OF A GENERAL PARTNER. (a) Upon the occurrence of an Event of Bankruptcy as to a General Partner (and its removal pursuant to Section 7.4(a) hereof) or the withdrawal, death or dissolution of a General Partner (except that, if a General Partner is on the date of such occurrence a partnership, the withdrawal, death, dissolution, Event of Bankruptcy as to, or removal of a partner in, such partnership shall be deemed not to be a dissolution of such General Partner if the business of such General Partner is continued by the remaining partner or partners), the Partnership shall be dissolved and terminated unless the Partnership is continued pursuant to Section 7.3(b) hereof. (b) Following the occurrence of an Event of Bankruptcy as to a General Partner (and its removal pursuant to Section 704(a) hereof) or the death, withdrawal, removal or dissolution of a General Partner (except that, if a General Partner is on the date of such occurrence a partnership, the withdrawal, death, dissolution, Event of Bankruptcy as to, or removal of a partner in, such partnership shall be deemed not to be a dissolution of such General Partner if the business of such General Partner is continued by the remaining partner or partners), the Limited Partners, within 90 days after such occurrence, may elect to reconstitute the Partnership and continue the business of the Partnership for the balance of the term specified in Section 2.4 hereof by selecting, subject to Section 7.2 hereof and any other provisions of this Agreement, a substitute General Partner by unanimous consent of the Limited Partners. If the Limited Partners elect to reconstitute the Partnership and admit a substitute General Partner, the relationship with the Partners and of any Person who has acquired an interest of a Partner in the Partnership shall be governed by this Agreement. 7.4 REMOVAL OF A GENERAL PARTNER. (a) Upon the occurrence of an Event of Bankruptcy as to, or the dissolution of, a General Partner, such General Partner shall be deemed to be removed automatically; 27 provided, however, that if a General Partner is on the date of such occurrence a partnership, the withdrawal, death, dissolution, Event of Bankruptcy as to or removal of a partner in such partnership shall be deemed not to be a dissolution of the General Partner if the business of such General Partner is continued by the remaining partner or partners. (b) If a General Partner has been removed pursuant to this Section 7.4 and the Partnership is continued pursuant to Section 7.3 hereof, such General Partner shall promptly transfer and assign its General Partnership Interest in the Partnership to the substitute General Partner approved by a majority in interest of the Limited Partners in accordance with Section 7.3(b) hereof and otherwise admitted to the Partnership in accordance with Section 7.2 hereof. At the time of assignment, the removed General Partner shall be entitled to receive from the substitute General Partner the fair market value of the General Partnership Interest of such removed General Partner as reduced by any damages caused to the Partnership Interest of such removed General Partner. Such fair market value shall be determined by an appraiser mutually agreed upon by the General Partner and a majority in interest of the Limited Partners within 10 days following the removal of the General Partner. In the event that the parties are unable to agree upon an appraiser, the removed General Partner and a majority in interest of the Limited Partners each shall select an appraiser. Each such appraiser shall complete an appraisal of the fair market value of the removed General Partner's General Partnership Interest within 30 days of the General Partner's removal, and the fair market value of the removed General Partner's General Partnership Interest shall be the average of the two appraisals; provided, however, that if the higher appraisal exceeds the lower appraisal by more than 20% of the amount of the lower appraisal, the two appraisers, no later than 40 days after the removal of the General Partner, shall select a third appraiser who shall complete an appraisal of the fair market value of the removed General Partner's General Partnership Interest no later than 60 days after the removal of the General Partner. In such case, the fair market value of the removed General Partner's General Partnership Interest shall be the average of the two appraisals closest in value. (c) The General Partnership Interest of a removed General Partner, during the time after default until transfer under Section 7.4(b), shall be converted to that of a special Limited Partner; provided, however, such removed General Partner shall not have any rights to participate in the management and affairs of the Partnership, and shall not be entitled to any portion of the income, expense, profit, gain or loss allocations or cash distributions allocable or payable, as the case may be, to the Limited Partners. Instead, such removed General Partner shall receive and be entitled only to retain distributions or allocations of such items that it would have been entitled to receive in its capacity as General Partner, until the transfer is effective pursuant to Section 7.4(b). (d) All Partners shall have given and hereby do give such consents, shall take such actions and shall execute such documents as shall be legally necessary and sufficient to effect all the foregoing provisions of this Section. ARTICLE VIII. RIGHTS AND OBLIGATIONS OF THE LIMITED PARTNERS 8.1 MANAGEMENT OF THE PARTNERSHIP. The Limited Partners shall not participate in the management or control of Partnership business nor shall they transact any business for the 28 Partnership, nor shall they have the power to sign for or bind the Partnership, such powers being vested solely and exclusively in the General Partner. 8.2 POWER OF ATTORNEY. Each Limited Partner hereby irrevocably appoints the General Partner his true and lawful attorney-in-fact, who may act for each Limited Partner and in his name, place and stead, and for his use and benefit, to sign, acknowledge, swear to, deliver, file and record, at the appropriate public offices, any and all documents, certificates, and instruments as may be deemed necessary or desirable by the General Partner to carry out fully the provisions of this Agreement and the Act in accordance with their terms, which power of attorney is coupled with an interest and shall survive the death, dissolution or legal incapacity of the Limited Partner, or the transfer by the Limited Partner of any part or all of his Partnership Interest. 8.3 LIMITATION ON LIABILITY OF LIMITED PARTNERS. Except as otherwise provided in Sections 5.1(i) and 5.6(b), no Limited Partner shall be liable for any debts, liabilities, contracts or obligations of the Partnership. After his Capital Contribution is fully paid, no Limited Partner shall, except as provided in Sections 5.1(i) and 5.6(b) or otherwise required by the Act, be required to make any further Capital Contributions or other payments or lend any funds to the Partnership. 8.4 CONVERSION RIGHT. (a) Subject to Sections 8.4(b)-(f), on or after the date which is one (1) year after the Effective Date, each Limited Partner shall have the right (the "Conversion Right") to require the General Partner to convert on a Specified Conversion Date all or a portion of the Limited Partnership Units held by such Limited Partner at a price equal to and in the form of the Conversion Amount; provided that if any Common Shares are to be issued in connection therewith they shall have been registered pursuant to a registration statement declared effective under the Securities Act of 1933, as amended (the "Securities Act"). The Conversion Right shall be exercised pursuant to a Notice of Conversion delivered to the General Partner by the Limited Partner who is exercising the Conversion Right (the "Converting Partner"); provided, however, that the Partnership shall not be obligated to satisfy such Conversion Right if the Company and/or the General Partner elects to purchase the Limited Partnership Units subject to the Notice of Conversion pursuant to Section 8.4(b) provided, however, that no Limited Partner may deliver to the General Partner more than four (4) Notices of Conversion during each calendar year; and further provided that such Conversion Right shall terminate upon the sale of all or substantially all of the Partnership Property where such sale is pursuant to the planned liquidation of the Partnership. In addition to the restrictions on conversion set forth in Section 8.5(h), a Limited Partner may not exercise the Conversion Right for less than twenty thousand (20,000) Limited Partnership Units or, if such Limited Partner holds less than twenty thousand (20,000) Limited Partnership Units, all of the Limited Partnership Units held by such Partner. The Converting Partner shall have no right, with respect to any Limited Partnership Units so converted, to receive any distribution paid with respect to Limited Partnership Units (including without limitation any Prior Limited Distribution Deficiency) if the record date for such distribution is on or after the Specified Conversion Date. (b) Notwithstanding the provisions of Section 8.5(a), the General Partner may, in its sole and absolute discretion, elect to purchase directly and acquire Limited Partnership 29 Units with respect to which the Conversion Right has been exercised by paying to the Converting Partner either the Cash Amount, or, provided that the Common Shares have been registered pursuant to a registration statement declared effective under the Securities Act, the Common Shares Amount, as elected by the General Partner (in its sole and absolute discretion), on the Specified Conversion Date, whereupon the General Partner shall acquire the Limited Partnership Units offered for conversion by the Converting Partner, which shall upon such acquisition become a part of the General Partnership Interest (and shall no longer be considered Limited Partnership Units hereunder). Each Converting Partner agrees to execute such documents as the General Partner may reasonably require in connection with the issuance of Common Shares upon exercise of the Conversion Right. (c) Any Cash Amount to be paid to a Converting Partner pursuant to this Section 8.5 shall be paid within 30 days after the initial date of receipt by the Company of the Notice of Conversion relating to the Limited Partnership Units to be converted. (d) In the event that the General Partner permits the pledge of a Limited Partner's Partnership Units to a lender, the General Partner may agree, in its sole discretion, to allow such lender, upon foreclosure of such Limited Partnership Units, to convert such Limited Partnership Units prior to the expiration of the one-year period described in Section 8.5(a); provided, that any such conversion shall be effected in the form of the Cash Amount. (e) Notwithstanding any other provision of this Agreement, the General Partner shall place appropriate restrictions on the ability of the Limited Partners to exercise their Conversion Rights as and if deemed necessary to ensure that the Partnership does not constitute a "publicly traded partnership" under Section 7704 of the Code. (f) Without limiting the obligations of the General Partner to deliver registered shares as provided in Section 8.5(b), each certificate, if any, evidencing Common Shares that may be issued in redemption of Limited Partnership Units under Section 8.5 above (the "Conversion Shares") shall, to the extent such shares have not been registered pursuant to a registration statement declared effective under the Securities Act, bear a restrictive legend in substantially the following form: The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended (the "Act"), or any state securities law. No transfer of the Shares represented by this certificate shall be valid or effective unless (A) such transfer is made pursuant to an effective registration statement under the Act, or (B) the holder of the securities proposed to be transferred shall have delivered to the Company either a no-action letter from the Securities and Exchange Commission or an opinion of counsel (who may be an employee of such holder) experienced in securities matters to the effect that such proposed transfer is exempt from the registration requirements of the Act which opinion shall be reasonably satisfactory to the Company. 8.5 REGISTRATION. 30 (a) SHELF REGISTRATION. Prior to or on the first date upon which the Limited Partnership Units owned by any Limited Partner may be converted, at the request of a Limited Partner, the Company agrees to file with the Commission, a shelf registration statement on Form S-3 under Rule 415 of the Securities Act, or any similar rule that may be adopted by the Commission (the "Shelf Registration"), with respect to all of the Common Shares issued or issuable to the Limited Partners pursuant to Section 8.4(b) hereof (the "Conversion Shares"). The Company will use its best efforts to have the Shelf Registration declared effective under the Securities Act and to keep the Shelf Registration continuously effective until a date agreed upon by the Company and a majority in interest of the Limited Partners or until such time as all of the shares registered pursuant to such Shelf Registration (i) have been disposed of pursuant to such Shelf Registration, (ii) have otherwise been distributed pursuant to Rule 144 promulgated under the Securities Act ("Rule 144"), or (iii) may be sold in the market without restriction under Rule 144. The Company further agrees to supplement or make amendments to the Shelf Registration, if required by the rules, regulations or instructions applicable to the registration form utilized by the Company or by the Securities Act or rules and regulations thereunder for the Shelf Registration. No provision of this Agreement shall require the Company to file a registration statement on any form other than Form S-3. The Company, in the exercise of its reasonable judgment, shall have the right to delay the filing of the Shelf Registration for up to 120 days. (b) REGISTRATION AND QUALIFICATION PROCEDURES. The Company, upon the written request of a Limited Partner, is required by the provisions of Section 8.5(a) hereof to use its best efforts to have the Shelf Registration declared effective under the Securities Act. Accordingly, the Company will: (i) prepare and file with the Commission a registration statement, including amendments thereof and supplements relating thereto, with respect to the Conversion Shares; (ii) use its best efforts to cause the Shelf Registration to be declared effective by the Commission; (iii) keep the Shelf Registration effective and the related prospectus current as described in Section 8.5(a) hereof; provided, however, that the Company shall have no obligation to file any amendment or supplement at its own expense or the Partnership's expense more than 90 days after the effective date of the Shelf Registration; (iv) furnish to each holder of Conversion Shares such numbers of copies of prospectuses, and supplements or amendments thereto, and such other documents as such holder reasonably requests; (v) register or qualify the securities covered by the registration statement under the securities or blue sky laws of such jurisdictions within the United States as any holder of Conversion Shares shall reasonably request, and do such other reasonable acts and things as may be required of it to enable such holders to consummate the sale or other disposition in such jurisdictions of the 31 Conversion Shares; provided, however, that the Company shall not be required to (i) qualify as a foreign corporation or consent to a general and unlimited service or process in any jurisdictions in which it would not otherwise be required to be qualified or so consent or (ii) qualify as a dealer in securities; and (vi) keep the holders of Conversion Shares advised as to the initiation and progress of the registration. (c) ALLOCATION OF EXPENSES. The Company and the Partnership shall each pay its proportionate share of all expenses in connection with the Shelf Registration, including without limitation (i) all expenses incident to filing with the National Association of Securities Dealers, Inc., (ii) registration fees, (iii) printing expenses, (iv) accounting and legal fees and expenses, except to the extent holders of Conversion Shares elect to engage accountants or attorneys in addition to the accountants and attorneys engaged by the Partnership or the Company, (v) accounting expenses incident to or required by any such registration or qualification and (vi) expenses of complying with the securities or blue sky laws of any jurisdictions in connection with such registration or qualification; provided, however, neither Company nor the Partnership shall not be liable for (A) any discounts or commissions to any broker attributable to the sale of Conversion Shares, (B) any direct out-of-pocket costs incurred by any Limited Partner in connection with the registration of Conversion Shares, including but not limited to the Limited Partner's attorney and accountant's fees, travel expenses and any consulting fees or (C) any other fees or expenses incurred by holders of Conversion Shares in connection with such registration which, according to the written instructions of any regulatory authority, either such person is not permitted to pay. (d) SALE OF CONVERSION SHARES. The Company may require in its sole discretion that the Conversion Shares be sold in block trades through underwriters or broker-dealers or that the sale of the Conversion Shares be underwritten by investment banking firms selected by the Company. (e) LISTING ON SECURITIES EXCHANGE. If the Company shall list or maintain the listing of any Common Shares on any securities exchange or national market system, it will at its expense and as necessary to permit the registration and sale of the Conversion Shares hereunder, list thereon, maintain and, when necessary, increase such listing to include such Conversion Shares. 8.6 "PIGGYBACK" REGISTRATION RIGHTS. (a) NOTICE OF REGISTRATION. If, at any time commencing upon the date upon which all or any portion of the Limited Partnership Units shall have been converted into Conversion Shares (but not if such Limited Partnership Units shall have been exchanged for cash in accordance with the provisions hereof), the Company files a registration statement under the Securities Act with respect to a firm commitment underwritten public offering of any securities of the Company, the Company shall give thirty (30) days prior written notice thereof to each Limited Partner and shall, upon the written request of any or all of the Limited Partners, include in the underwritten public offering the number of Conversion Shares that each such Limited Partner may request (except as set forth in Section 8.6(b) below). The Company will keep such 32 registration statement effective and current under the Securities Act permitting the sale of Conversion Shares covered thereby for the same period that the registration statement is maintained effective for the other persons (including the Company) selling thereunder. In any underwritten offering, however, the Conversion Shares to be included will be sold at the same time and at the same price as the Company's securities. In the event that the Company fails to receive a written request from a Limited Partner within thirty (30) days of its written notice, then the Company shall have no obligation to include any of the Conversion Shares in the offering. In connection with any registration statement or subsequent amendment or similar document filed pursuant to this Section 8.6, the Company shall take all reasonable steps to make the securities covered thereby eligible for public offering and sale under the securities or blue sky laws of the applicable jurisdictions by the effective date of such registration statement; provided that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not so qualified at the time of filing such documents or to take any action which would subject it to unlimited service of process in any jurisdiction where it is not so subject at such time. The Company shall keep such filing current for the length of time it must keep any registration statement, post-effective amendment, prospectus or offering circular effective pursuant hereto. (b) UNDERWRITING. In the event of an offering by the Company in which one or more Limited Partners wishes to include Conversion Shares under this Section 8.6, and it is determined in good faith by the managing underwriter of such offering, giving effect to the number of Conversion Shares to be offered by the Company, that the total number of Conversion Shares that would consequently be offered is in excess of the number of Conversion Shares that can be sold at the proposed price, then the number of Conversion Shares of the Limited Partners to be offered will be reduced ratably, based upon the number of Conversion Shares each Limited Partner has requested to include in such registration. (c) OBLIGATION OF LIMITED PARTNERS UPON REGISTRATION. To include Conversion Shares in any registration, each Limited Partner shall: (i) Cooperate with the Company in preparing each such registration and execute all such agreements as any underwriter may deem reasonably necessary in favor of such underwriter; (ii) Promptly supply the Company with all information, documents, representations and agreements as such underwriter may deem reasonably necessary in connection with such registration; and (iii) Agree in writing not to sell or transfer any share of the Conversion Shares not included in such underwritten offering for a period of seven (7) days prior to and thirty (30) days after the effective date of such registration without the underwriters' consent, but no Limited Partner shall be required to make such agreement unless the other Limited Partners included in any offering covered by such registration shall similarly agree. (d) COMPANY'S OBLIGATIONS UPON REGISTRATION. If and whenever the Company is obligated by the provisions of this Section 8.6 to effect the registration of any offering of 33 Common Shares under the Securities Act, as expeditiously as possible the Company will, or will use its best efforts to, as the case may be: (i) Prepare and file with the SEC a registration statement with respect to such Common Shares and, use its best efforts to cause such registration statement to become effective; (ii) Furnish to each Limited Partner so many copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents, as such Limited Partner may reasonably request; and (iii) Register or qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as such Limited Partner shall reasonably request, and do any and all other acts and things that may be reasonably necessary or advisable to enable the Limited Partners to consummate the disposition in such jurisdictions of such securities. (e) EXPENSES. In connection with any filing or other registration hereunder the Partnership shall bear its proportionate share of all the expenses and professional fees which arise in connection with such filings or registration (except for the Limited Partner's pro rata share of any underwriters' discount) and all expenses incurred in making such filings and keeping them effective and correct as provided hereunder and shall also provide each Limited Partner with a reasonable number of printed copies of the prospectus, offering circulars and/or supplemental prospectuses or amended prospectuses in final and preliminary form; provided, however, each Limited Partner will pay its own direct out-of-pocket costs incurred with the registration of Common Shares, including but not limited to Limited Partner's attorney and accountants fees, travel expenses and any consulting fees. (f) INDEMNIFICATION BY THE COMPANY. The Company will indemnify each Limited Partner, each of its officers and directors, and each person controlling the Limited Partner, with respect to which registration, qualification or compliance has been effected pursuant to this Section 8.6, against all claims, losses, damages, costs, expenses and liabilities whatsoever (or actions in respect thereof) arising out of or based on (i) any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other similar document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made or (ii) any violation by the Company of the Securities Act or any state securities law or of any rule or regulation promulgated under the Securities Act or any state securities law applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse the Limited Partner, each of its officers and directors, and each person controlling the Limited Partner, for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, provided, however, that (x) the Company will not be liable in any such case to the extent that any such claim, loss, 34 damage, liability, or action arises out of or is based on any untrue statement (or alleged untrue statement) or omission (or alleged omission) based upon written information furnished to the Company by an instrument duly executed by the Limited Partner and stated to be specifically for use therein or furnished by the Limited Partner to the Company in response to a request by the Company stating specifically that such information will be used by the Company therein, and (y) such indemnity agreement shall not inure to the benefit of the Limited Partner, insofar as it relates to any such untrue statement (or alleged untrue statement) or omission (or alleged omission) made in the preliminary prospectus or prospectus but eliminated or remedied in the amended prospectus on file with the Commission at the time the registration statement becomes effective or in the amended prospectus filed with the Commission pursuant to Rule 424(b) under the Securities Act or in any subsequent amended prospectus filed with the Commission prior to the written confirmation of the sale of the Registrable Securities at issue (collectively, the "Final Prospectus"), if a copy of the Final Prospectus was not furnished to the person or entity asserting the loss, liability, claim or damage at or prior to the time such action is required by the Securities Act. (g) INDEMNIFICATION BY THE LIMITED PARTNERS. The Limited Partners will, if Conversion Shares held by or issuable to such Limited Partners are included in the Common Shares to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers, each underwriter, if any, of the Common Shares covered by such registration statement, and each person who controls the Company within the meaning of the Securities Act against all claims, losses, damages, costs, expenses and liabilities whatsoever (or actions in respect thereof) arising out of or based on any untrue Statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other similar document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made, and will reimburse the Company, such directors, officers, persons or underwriters for any legal or any other expenses reasonably incurred in connection with investigation or defending any such claim, loss, damage, costs, expense, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by the Limited Partners and stated to be specifically for use therein or furnished by any Limited Partner to the Company in response to a request by the Company stating specifically that such information will be used by the Company therein, provided, however, that the foregoing indemnity agreement is subject to the condition that, such indemity agreement shall not inure to the benefit of the Company or any underwriter insofar as it relates to any such untrue statements (or alleged untrue statements) or omission (or alleged omission) made in the preliminary prospectus or prospectus but eliminated or remedied in the Final Prospectus, if a copy of the Final Prospectus was not furnished to the person or entity asserting the loss, liability, claim or damage at or prior to the time such action is required by the Securities Act. (h) INDEMNIFICATION PROCEDURES. Each party entitled to indemnification under this Section 8.6 (the "Indemnified Party") shall give notice to the party required to provide 35 indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld). The failure of any Indemnified Party to give notice as provided herein shall relieve the Indemnifying Party of its obligations under this Agreement only to the extent that such failure to give notice shall materially prejudice the Indemnifying Party in the defense of any such claim or any such litigation. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement that attributes any liability to the Indemnified Party, unless the settlement includes as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. If any such Indemnified Party shall have been advised by counsel chosen by it that there may be one or more legal defenses available to such Indemnified Party that are different from or additional to those available to the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense of such action on behalf of such Indemnified Party and will reimburse such Indemnified Party and any person controlling such Indemnified Party for the reasonable fees and expenses of any counsel retained by the Indemnified Party, it being understood that the Indemnifying Party shall not, in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys for each Indemnified Party or controlling person (and all other Indemnified Parties and controlling persons which may be represented without conflict by one counsel), which firm shall be designated in writing by the Indemnified Party (or Indemnified Parties, if more than one Indemnified Party is to be represented by such counsel) to the Indemnifying Party. The Indemnifying Party shall not be subject to any liability for any settlement made without its consent, which shall not be unreasonably withheld. If the indemnification provided for in this Section 8.6 from the Indemnifying Party is unavailable to an Indemnified Party hereunder in respect of any losses, claims, damages, liabilities or expenses referred to therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Parties in connection with the actions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Parties shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such Indemnifying Party or Indemnified Parties, and the parties, relative intent, knowledge, access to information and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the losses claims, damages, liabilities and expenses referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with any investigation or proceeding. 36 The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 8.6 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. No person guilty of fraudulent misrepresentation (within the meaning of section 11 (f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 8.7 SALE OF 704(c) ASSETS. Notwithstanding anything herein to the contrary, if, prior to the fifth anniversary hereof, the Partnership sells or otherwise disposes of all or a portion of the Contributed Properties contributed by the Limited Partner(s) and, as a result of such disposition, the Limited Partner recognizes gain under Section 704(c) or 737 of the Code (including, without limitation, pursuant to a liquidation of the Partnership on or before such date), then the General Partner will indemnify and hold harmless the Limited Partner, on an after-tax basis, from and against the excess of (i) any federal or state income taxes owed by such Limited Partner as a result of such disposition (including any penalties and interest relating thereto) over (ii) the then-present value (utilizing then-prevailing tax rates and a discount rate equal to 120 percent of the relevant "applicable federal rate" then in effect under Section 1274 of the Code) of the Federal and state income taxes that would have been owed by such Limited Partner if such disposition had occurred on the fifth anniversary hereof. The General Partner shall have the right to participate in any contest with a governmental authority relating to whether any gain was recognized or any such taxes are owed. ARTICLE IX. TRANSFERS OF LIMITED PARTNERSHIP INTERESTS 9.1 PURCHASE FOR INVESTMENT. (a) Each Limited Partner hereby represents and warrants to the General Partner and to the Partnership that the acquisition of his Partnership Interest is made as a principal for his account for investment purposes only and not with a view to the resale or distribution of such Partnership Interest. (b) Each Limited Partner agrees that he will not sell, assign or otherwise transfer his Partnership Interest or any fraction thereof, whether voluntarily or by operation of law or at judicial sale or otherwise, to any Person who does not make the representations and warranties to the General Partner set forth in Section 9.1(a) above and similarly agree not to sell, assign or transfer such Partnership Interest or fraction thereof to any Person who does not similarly represent, warrant and agree. 9.2 RESTRICTIONS ON TRANSFER OF LIMITED PARTNERSHIP INTERESTS. (a) Except as otherwise provided in Section 9.2(d) hereof and except for the pledge rights contained in Section 9.2(f) hereof, no Limited Partner may offer, sell, assign, hypothecate, pledge or otherwise transfer his Limited Partnership Interest, in whole or in part, whether voluntarily or by operation of law or at judicial sale or otherwise (collectively, a "Transfer") without the written consent of the General Partner, which consent may be withheld in the sole discretion of the General Partner. The General Partner may require, as a condition of 37 any Transfer, that the transferor assume all costs incurred by the Partnership in connection therewith. (b) No Limited Partner may effect a Transfer of his Limited Partnership Interest, in whole or in part, if, in the opinion of legal counsel for the Partnership, such proposed Transfer would require the registration of the Limited Partnership Interest under the Securities Act or would otherwise violate any applicable federal or state securities or "Blue Sky" law (including investment suitability standards). (c) No transfer by a Limited Partner of his Limited Partnership Interest in whole or in part, may be made to any Person if such transfer is effectuated through an "established securities market" or a "secondary market (or the substantial equivalent thereof)" within the meaning of Section 7704 of the Code. (d) Section 9.2(a) shall not apply to the following transactions, except that the General Partner may require that the transferor assume all costs incurred by the Partnership in connection therewith: (i) any Transfer by a Limited Partner pursuant to the exercise of its Conversion Right under Section 8.4 hereof; (ii) any Transfer by a Limited Partner that is a corporation or other business entity to any of its Affiliates or subsidiaries or to any successor in interest of such Limited Partner; or (iii) any donative Transfer by an individual Limited Partner to his immediate family members or any trust in which the individual or his immediate family members own, collectively, 100 % of the beneficial interests. For purposes of this Section 9.2(d)(iii), the term "immediate family member" shall be deemed to include only an individual Limited Partner's spouse, children and grandchildren. (e) Any Transfer in contravention of any of the provisions of this Article IX shall be void and ineffectual and shall not be binding upon, or recognized by, the Partnership. (f) No transfer of any Limited Partnership Interest may be made to a lender to the Partnership or to any Person who is related (within the meaning of Regulations Section 1.752-4(b)) to any lender to the Partnership whose loan constitutes a non-recourse liability (within the meaning of Regulations Section 1.752-1(a)(2)), without the consent of the General Partner, which may be withheld in its sole and absolute discretion; provided, however, that as a condition to such consent the lender will be required to enter into an arrangement with the Partnership and the General Partner to exchange or redeem for the Cash Amount any Limited Partnership Units in which a security interest is held simultaneously with the time at which liabilities to such lender would be deemed to be a partner in the Partnership for purposes of allocating liabilities to such lender under Section 752 of the Code. 9.3 ADMISSION OF SUBSTITUTE LIMITED PARTNER. 38 (a) Subject to the other provisions of this Article IX, an assignee of the Limited Partnership Interest of a Limited Partner (which shall be understood to include any purchaser, transferee, donee, or other recipient of any disposition of such Limited Partnership Interest) shall be deemed admitted as a Limited Partner of the Partnership only upon the satisfactory completion of the following: (i) The assignee shall have accepted and agreed to be bound by the terms and provisions of this Agreement by executing a counterpart or an amendment thereof, including a revised EXHIBIT A, and such other documents or instruments as the General Partner may require in order to effect the admission of such Person as a Limited Partner. (ii) To the extent required, an amended Certificate evidencing the admission of such Person as a Limited Partner shall have been signed, acknowledged and filed for record in accordance with the Act. (iii) The assignee shall have delivered a letter containing the representation set forth in Section 9.1(a) hereof and the agreement set forth in Section 9.1(b) hereof. (iv) If the assignee is a corporation, partnership or trust, the assignee shall have provided the General Partner with evidence satisfactory to counsel for the Partnership of the assignee's authority to become a Limited Partner under the terms and provisions of this Agreement. (v) The assignee shall have executed a power of attorney containing the terms and provisions set forth in Section 8.2 hereof. (vi) The assignee shall have paid all reasonable legal fees of the Partnership and the General Partner and filing and publication costs in connection with his substitution as a Limited Partner. (vii) The assignee has obtained the prior written consent of the General Partner to its admission as a Substitute Limited Partner, which consent may be given or denied in the exercise of General Partner's sole and absolute discretion. (b) For the purpose of allocating profits and losses and distributing cash received by the Partnership, a Substitute Limited Partner shall be treated as having become, and appearing in the records of the Partnership as, a Partner upon the filing of the Certificate described in Section 9.3(a)(ii) hereof or, if no such filing is required, the later of the date specified in the transfer documents or the date on which the General Partner has received all necessary instruments of transfer and substitution. (c) The General Partner shall cooperate with the Person seeking to become a Substitute Limited Partner by preparing the documentation required by this Section and making all official filings and publications. The Partnership shall take all such action as promptly as practicable after the satisfaction of the conditions in this Article IX to the admission of such Person as a Limited Partner of the Partnership. 39 9.4 RIGHTS OF ASSIGNEES OF PARTNERSHIP INTERESTS. (a) Subject to the provisions of Sections 9.1 and 9.2 hereof, except as required by operation of law, the Partnership shall not be obligated for any purposes whatsoever to recognize the assignment by any Limited Partner of his Partnership Interest until the Partnership has received notice thereof. (b) Any Person who is the assignee of all or any portion of a Limited Partner's Limited Partnership Interest, but does not become a Substitute Limited Partner and desires to make a further assignment of such Limited Partnership Interest, shall be subject to all the provisions of this Article IX to the same extent and in the same manner as any Limited Partner desiring to make an assignment of his Limited Partnership Interest. 9.5 EFFECT OF BANKRUPTCY, DEATH, INCOMPETENCE OR TERMINATION OF A LIMITED PARTNER. The occurrence of an Event of Bankruptcy as to a Limited Partner, the death of a Limited Partner or a final adjudication that a Limited Partner is incompetent (which term shall include, but not be limited to, insanity) shall not cause the termination or dissolution of the Partnership, and the business of the Partnership shall continue. If an order for relief in a bankruptcy proceeding is entered against a Limited Partner, the trustee or receiver of his estate or, if he dies, his executor, administrator or trustee, or, if he is finally adjudicated incompetent, his committee, guardian or conservator, shall have the rights of such Limited Partner for the purpose of settling or managing his estate property and such power as the bankrupt, deceased or incompetent Limited Partner possessed to assign all or any part of his Partnership Interest and to join with the assignee in satisfying conditions precedent to the admission of the assignee as a Substitute Limited Partner. 9.6 JOINT OWNERSHIP OF INTERESTS. A Partnership Interest may be acquired by two individuals as joint tenants with right of survivorship, provided that such individuals either are married or are related and share the same home as tenants in common. The written consent or vote of both owners of any such jointly held Partnership Interest shall be required to constitute the action of the owners of such Partnership Interest; provided, however, that the written consent of only one joint owner will be required if the Partnership has been provided with evidence satisfactory to the counsel for the Partnership that the actions of a single joint owner can bind both owners under the applicable laws of the state of residence of such joint owners. Upon the death of one owner of a Partnership Interest held in a joint tenancy with a right of survivorship, the Partnership Interest shall become owned solely by the survivor as a Limited Partner and not as an assignee. The Partnership need not recognize the death of one of the owners of a jointly held Partnership Interest until it shall have received notice of such death. ARTICLE X. BOOKS AND RECORDS; ACCOUNTING; TAX MATTERS 10.1 BOOKS AND RECORDS. At all times during the continuance of the Partnership, the Partners shall keep or cause to be kept at the Partnership's specified office true and complete books of account in accordance with generally accepted accounting principles, including: (a) a current list of the full name and last known business address of each Partner, (b) a copy of the Certificate of Limited Partnership and all certificates of amendment thereto, (c) copies of the 40 Partnership's federal, state and local income tax returns and reports, (d) copies of the Agreement and any financial statements of the Partnership for the three most recent years and (e) all documents and information required under the Act. Any Partner or his duly authorized representative, upon paying the costs of collection, duplication and mailing, shall be entitled to inspect or copy such records during ordinary business hours. 10.2 CUSTODY OF PARTNERSHIP FUNDS; BANK ACCOUNTS. (a) All funds of the Partnership not otherwise invested shall be deposited in one or more accounts maintained in such banking or brokerage institutions as the General Partner shall determine, and withdrawals shall be made only on such signature or signatures as the General Partner may, from time to time, determine. (b) All deposits and other funds not needed in the operation of the business of the Partnership may be invested by the General Partner in investment grade instruments (or investment companies whose portfolio consists primarily thereof), government obligations, certificates of deposit, bankers' acceptances and municipal notes and bonds. The funds of the Partnership shall not be commingled with the funds of any other Person except for such commingling as may necessarily result from an investment in those investment companies permitted by this Section 10.2(b). 10.3 FISCAL AND TAXABLE YEAR. The fiscal and taxable year of the Partnership shall be the calendar year. 10.4 ANNUAL TAX INFORMATION AND REPORT. Within 75 days after the end of each fiscal year of the Partnership, the General Partner shall furnish to each person who was a Limited Partner at any time during such year the tax information necessary to file such Limited Partner's individual tax returns as shall be reasonably required by law. 10.5 TAX MATTERS PARTNER; TAX ELECTIONS; SPECIAL BASIS ADJUSTMENTS. (a) The General Partner shall be the Tax Matters Partner of the Partnership within the meaning of Section 6231(a)(7) of the Code. As Tax Matters Partner, the General Partner shall have the right and obligation to take all actions authorized and required, respectively, by the Code for the Tax Matters Partner. The General Partner shall have the right to retain professional assistance in respect of any audit of the Partnership by the Service and all out-of-pocket expenses and fees incurred by the General Partner on behalf of the Partnership as Tax Matters Partner shall constitute Partnership expenses. In the event the General Partner receives notice of a final Partnership adjustment under Section 6223(a)(2) of the Code, the General Partner shall either (i) file a court petition for judicial review of such final adjustment within the period provided under Section 6226(a) of the Code, a copy of which petition shall be mailed to all Limited Partners on the date such petition is filed, or (ii) mail a written notice to all Limited Partners, within such period, that describes the General Partner's reasons for determining not to file such a petition. The taking of any action and the incurring of any expense by the Tax Matters Partner in connection with any such matter, except to the extent required by law, is a matter in the sole and absolute discretion of the Tax Matters Partner and the provisions relating 41 to indemnification of the General Partner set forth in Section 6.3 hereof shall be fully applicable to the Tax Matters Partner in its capacity as such. (b) All elections required or permitted to be made by the Partnership under the Code or under any applicable state law shall be made by the General Partner in its sole discretion. (c) In the event of a transfer of all or any part of the Partnership Interest of any Partner, the Partnership, at the option of the General Partner, may elect pursuant to Section 754 of the Code to adjust the basis of the Properties. Notwithstanding anything contained in Article V of this Agreement, any adjustments made pursuant to Section 754 shall affect only the successor in interest to the transferring Partner and in no event shall be taken into account in establishing, maintaining or computing Capital Accounts for the other Partners for any purpose under this Agreement. Each Partner will furnish the Partnership with all information necessary to give effect to such election. 10.6 REPORTS TO LIMITED PARTNERS. (a) As soon as practicable after the close of each fiscal quarter, but in no event later than 45 days (other than the last quarter of the fiscal year), the General Partner shall cause to be mailed to each Limited Partner a quarterly report containing financial statements of the Partnership, or of the Company if such statements are prepared solely on a consolidated basis with the Company, for such fiscal quarter, presented in accordance with generally accepted accounting principles. As soon as practicable after the close of each fiscal year, the General Partner shall cause to be mailed to each Limited Partner an annual report containing financial statements of the Partnership, prepared in accordance with generally accepted accounting principles. The annual financial statements shall be audited by accountants selected by the General Partner. (b) Any Partner shall further have the right to a private audit of the books and records of the Partnership, provided such audit is made for Partnership purposes, at the expense of the Partner desiring it and is made during normal business hours. ARTICLE XI. AMENDMENT OF AGREEMENT 11.1 AMENDMENT OF AGREEMENT. The General Partner, without the consent of the Limited Partners, may amend this Agreement in any respect; provided, however, that the following amendments shall require the consent of Limited Partners holding at least one half (1/2) of the Percentage Interests of the Limited Partners: (a) any amendment affecting the operation of the Conversion Factor or Conversion Right (except as provided in Section 8.5(e) hereof) in a manner adverse to the Limited Partners; 42 (b) any amendment that would adversely affect the rights of the Limited Partners to receive the distributions payable to them hereunder other than with respect to the issuance of additional Limited Partnership Units pursuant to Section 4.2 of this Agreement; (c) any amendment that would alter the Partnership's allocations of Profit and Loss to the Limited Partners in a manner adverse to Limited Partners, other than with respect to the issuance of additional Limited Partnership Units pursuant to Section 4.2 of this Agreement; (d) any amendment that would impose on the Limited Partners any obligation to make additional Capital Contributions to the Partnership other than as provided in Section 4.2; (e) any amendment to Section 8.6 above in a manner adverse to any Limited Partner; (f) any amendment to one or more of the following provisions, in each case in a manner adverse to any Limited Partner: Sections 6.5(a), 6.7(c), 6.8, 7.2, 8.5, 8.7, 10.4 or 10.6 hereof; and (g) any amendment to this Article X1. ARTICLE XII. GENERAL PROVISIONS 12.1 NOTICES. All communications required or permitted under this Agreement shall be in writing and shall be deemed to have been given when delivered personally or upon deposit in the United States mail, registered, postage prepaid return receipt requested, to the Partners at the addresses set forth in EXHIBIT A attached hereto; provided, however, that any Partner may specify a different address by notifying the General Partner in writing of such different address. Notices to the Partnership shall be delivered at or mailed to its specified office. 12.2 SURVIVAL OF RIGHTS. Subject to the provisions hereof limiting transfers, this Agreement shall be binding upon and inure to the benefit of the Partners and the Partnership and their respective legal representatives, successors, transferees and assigns. 12.3 ADDITIONAL DOCUMENTS. Each Partner agrees to perform all further reasonable acts and execute, swear to, acknowledge and deliver all further documents which may be reasonably necessary, appropriate or desirable to carry out the provisions of this Agreement or the Act. 12.4 SEVERABILITY. If any provision of this Agreement shall be declared illegal, invalid, or unenforceable in any jurisdiction, then such provision shall be deemed to be severable from this Agreement (to the extent permitted by law) and in any event such illegality, invalidity or unenforceability shall not affect the remainder hereof. 12.5 ENTIRE AGREEMENT. This Agreement and exhibits attached hereto constitute the entire Agreement of the Partners and supersede all prior written agreements and prior and contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. 43 12.6 PRONOUNS AND PLURALS. When the context in which words are used in the Agreement indicates that such is the intent, words in the singular number shall include the plural and the masculine gender shall include the neuter or female gender as the context may require. 12.7 HEADINGS. The Article headings or Sections in this Agreement are for convenience only and shall not be used in construing the scope of this Agreement or any particular Article. 12.8 COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original copy and all of which together shall constitute one and the same instrument binding on all parties hereto, notwithstanding that all parties shall not have signed the same counterpart. 12.9 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. IN WITNESS WHEREOF, the parties hereto have hereunder affixed their signatures to this Agreement of Limited Partnership, all as of date first set forth above. LIMITED PARTNERS: GENERAL PARTNER: PENDOLA FAMILY TRUST WESTERN PROPERTIES TRUST, a PARTNERSHIP, a California general California business trust Partnership By:________________________________ By: __________________________ Title: _______________________ Its: _______________________________ By: __________________________ Title: ________________________ 44 EXHIBIT A SCHEDULE OF PARTNERS, ALLOCATION OF PARTNERSHIP UNITS, LIMITED PARTNER PERCENTAGE INTERESTS AND THE AGREED VALUE OF NON-CASH CAPITAL CONTRIBUTIONS
Approximate Adjusted Tax Basis of Value of Non- Limited Limited Partner Date Non-Cash Capital Cash Capital Partnership Percentage Admitted Name and Address of Partner Contribution Contribution Units Issued Interest - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Total . . . . . . . . . . . . . . . . . . . . . . . - ----------------------------------------------------------------------------------------------------------------------------------
Exhibit A-1 EXHIBIT B NOTICE OF EXERCISE OF CONVERSION RIGHT In accordance with Section 8.4 of the Agreement of Limited Partnership (the "Agreement") of WESTERN/PINECREEK, L.P., the undersigned hereby irrevocably (i) presents for Conversion ___ units of limited partnership interest ("Units") in WESTERN/PINECREEK, L.P. (the "Partnership") in accordance with the terms of the Agreement and the "Conversion Right" referred to in Section 8.5 thereof, (ii) surrenders such Units and all right, title and interest therein, (iii) surrenders herewith any certificate or other writing evidencing the Units (and requests that any Units so evidenced that are not redeemed be evidenced by the issuance of a new certificate or writing) and (iv) directs that the "Cash Amount" or "Common Shares Amount") (as determined by the General Partner), as defined in the Agreement, deliverable upon exercise of the Conversion Rights be delivered to the address specified below, and if Common Shares are to be delivered, such Common Shares be registered or placed in the name(s) and at the address(es) specified below. Dated: _____________ Name of Limited Partner: ________________________ (Signature of Limited Partner) ________________________ (Mailing Address) ________________________ (City) (State) (Zip Code) Signature Guaranteed by: ________________________ If Common Shares are to be issued, issue to: ________________________ ________________________ ________________________ Please insert social security or identifying number: ________________________ Exhibit B-1 EX-12 3 EXHIBIT 12 Exhibit 12 Western Properties Trust Computation of Ratio of Earnings to Fixed Charges
------------------------------------------------------------------ Year ended December 31, ------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------ Net income.............................................. $19,814 $13,616 $12,880 $12,231 $10,304 Fixed charges - interest and amortization of loan fees.. 14,325 13,414 11,511 11,289 11,537 ------- ------- ------- ------- ------- Earnings before interest and amortization of loan fees.. $34,139 $27,030 $24,391 $23,520 $21,841 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Fixed charges - interest capitalized.................... 1,307 275 12 128 29 ------- ------- ------- ------- ------- --- -- -- Total fixed charges..................................... $15,632 $13,689 $11,523 $11,417 $11,566 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Ratio of earnings to fixed charges...................... 2.18 1.97 2.12 2.06 1.89 ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
EX-23 4 EXHIBIT 23 Exhibit 23 Consent of Independent Certified Public Accountants The Trustees Western Properties Trust: We consent to incorporation by reference in the registration statement (No. 33-71270) on Form S-3/A, the registration statement (No. 333-32721) on Form S-3, the registration statement (No. 33-27016) on Form S-8, and the registration statement (No. 33-60777) on Form S-8 of Western Properties Trust of our report dated February 8, 2000; relating to the consolidated balance sheets of Western Properties Trust as of December 31, 1999 and 1998, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999, and the related financial statement schedule, which report appears in the December 31, 1999, annual report on Form 10-K of Western Properties Trust. KPMG LLP San Francisco, California February 8, 2000 EX-27 5 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S STATEMENT OF INCOME FOR THE MONTH ENDED DECEMBER 31, 1999 AND THE BALANCE SHEET AT DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 2219 0 0 0 0 0 361001 73189 427266 0 219150 0 0 242269 (61640) 427266 0 58698 0 15038 14771 0 14325 19814 0 19814 0 0 0 19814 1.15 1.15 AMOUNT INSIGNIFICANT. BALANCE SHEET IS NOT CLASSIFIED. AMOUNT REPRESENTS ACCUMULATED DIVIDENDS IN EXCESS OF NET INCOME. AMOUNT COMPRISED OF PROPERTY OPERATING COST (10,171) AND OTHER OPERATING EXPENSES (4,867). AMOUNT COMPRISED OF DEPRECIATION EXPENSE (11,523) AND GENERAL AND ADMINISTRATIVE EXPENSE (3,248).
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