10-Q 1 a2030083z10-q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter ended SEPTEMBER 30, 2000 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 ----------------------------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Shares of Beneficial Interest, No Par Value - 17,347,250 shares as of October 26, 2000 WESTERN PROPERTIES TRUST INDEX TO 10-Q

2 PART I. FINANCIAL INFORMATION The financial statements included in this report have been prepared by the Company, without audit, pursuant to the rules of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules. Interim results are not necessarily indicative of results for a full year. The interim financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented in accordance with the instructions to Form 10-Q. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's latest annual report on Form 10-K. When necessary, reclassifications have been made to prior period balances to conform to current period presentation. When used in the discussion in this Form 10-Q, the words "believes," "expects," "intends," "anticipates" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those discussed, including, but not limited to, those set forth in the section entitled "Potential Factors Affecting Future Operating Results," in "Management's Discussion and Analysis of Financial Condition and Results of Operations". Readers are cautioned not to place undue reliance on the forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to the forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. 3

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 4

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 5 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY WESTERN PROPERTIES TRUST ----------------------------------------------- ------------------------ (Unaudited. In thousands, except share data) Nine Months Ended September 30, 2000, and Year Ended December 31, 1999 (In thousands, except share data)

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 6

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 WESTERN PROPERTIES TRUST Notes to Consolidated Financial Statements September 30, 2000 (Unaudited) Note A: ORGANIZATION, BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS (1) DESCRIPTION OF ORGANIZATION AND PRINCIPLES OF CONSOLIDATION Founded in 1962, Western Properties Trust ("WPT") and its affiliates own and operate community and neighborhood shopping centers located in the western United States. The corporate office of the self-administered equity real estate investment trust is in the San Francisco Bay Area city of Emeryville, California. WPT shares are traded on the American Stock Exchange under the symbol "WIR". Western Properties Trust's consolidated financial statements include the accounts of the following entities: WPT; Western/Kienow's L.P., a Delaware limited partnership; Western Pinecreek L.P., a Delaware limited partnership; GW100, a general partnership; and WPT's wholly owned subsidiary, WIRET Asset Management Services (a California corporation and a licensed real estate broker in the State of California) (collectively, "Western"). These entities comprise all of the subsidiaries over which WPT exercises direct or indirect voting control. Western is in the business of acquiring, managing, leasing and developing retail and commercial properties. WPT is the sole general partner in Western/Kienow's L.P. and owned a 60% interest therein as of September 30, 2000. WPT is also the sole general partner in Western Pinecreek L.P. and owned a 75% interest therein as of September 30, 2000. Through an unconsolidated real estate subsidiary, Western controls 11 properties comprising approximately 457,222 square feet of retail gross leasable area ("GLA"). Throughout this Form10-Q reference to the unconsolidated real estate subsidiary is a reference to the entity holding this 11 property portfolio. The properties in this portfolio generally consist of the remaining Kienow's Food Stores, Inc. properties, which were acquired by the unconsolidated real estate subsidiary in 1998. The combined GLA of Western and its unconsolidated real estate subsidiary at September 30, 2000 was approximately 5.1 million square feet of GLA. At September 30, 2000, Western and its unconsolidated real estate subsidiary's real estate portfolio was comprised of 55 investments, 49 of which were retail properties. (2) BASIS OF PRESENTATION AND USE OF ESTIMATES The consolidated financial statements included in this report have been prepared by Western, without audit, pursuant to the rules of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant to such rules. Interim results are not necessarily indicative of results for a full year. The interim 8 consolidated financial statements reflect all adjustments which are, in the opinion of management, normal and recurring and necessary to a fair presentation of the results for interim periods. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Western's latest annual report on Form 10-K. When necessary, reclassifications have been made to prior period balances to conform to current period presentation. (3) RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Financial Accounting Statement No. 133 (FASB 133), "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES." Western 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 Western's consolidated financial statements. In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101, "REVENUE RECOGNITION IN FINANCIAL STATEMENTS." Prior to the contemplated merger (discussed below) Western intended to adopt SAB 101 during the fourth quarter of 2000, the effective date of SAB 101, and did not contemplate that the adoption of this Bulletin would have a material impact on Western's consolidated financial statements. Note B: PROPOSED MERGER WITH PAN PACIFIC The board of directors of Pan Pacific Retail Properties, Inc. and the board of trustees of Western Properties Trust have each unanimously approved a definitive agreement under which Pan Pacific will acquire Western in a stock-for-stock merger, subject to Pan Pacific Retail Properties, Inc. and Western Properties Trust shareholder approval. Pan Pacific's existing senior management team will manage the combined company. Management anticipates that the merger will be completed in November, 2000. When the merger is completed, each Western Properties shareholder shall receive 0.62 of a share of newly issued Pan Pacific common stock for each Western Properties Trust share that he or she owns. Pan Pacific will issue up to approximately 11.7 million shares of Pan Pacific common stock to Western Properties' shareholders in the merger. These newly issued shares of Pan Pacific common stock would represent 34.2% of the Pan Pacific common stock outstanding after the merger, assuming the exchange of each company's subsidiary securities. 9 Note C: REAL ESTATE INVESTMENTS At September 30, 2000, Western and its unconsolidated real estate subsidiary owned 55 investments, totaling 5.1 million square feet of GLA. Included in this total are 4 properties, which were held for sale and total 255,000 square feet of GLA. Occupancy percentages for Western's portfolios for the applicable periods are as follows:

Occupancy percentage is based on square footage of GLA leased as a percent of total available square footage of GLA for lease. (1) The Single-tenant retail occupancy rate reflects the January, 1999 expiration of the Kmart/Napa lease of 103,284 square feet, and vacancy thereof, until this property was leased to Wal Mart in November, 1999. Western's shopping center development-in-progress, Olympic Place, located in Walnut Creek, California, is not included in the above occupancy percentages. Additionally, the 11 retail properties which are held through an unconsolidated real estate subsidiary are not included in the above occupancy percentages due to the extensive re-tenanting and redevelopment currently taking place at these properties. Including the portfolio in the unconsolidated real estate subsidiary, overall occupancy would be 92.4%, 92.8% and 90.5% for September 30, 2000, December 31, 1999 and September 30, 1999, respectively. During the third quarter of 2000, Western sold the following properties: - On July 25, 2000, Western sold a 102,555 square foot shopping center located in Gridley, California for $3,275,000, at a small loss. The net sales proceeds were used to reduce the balance on the bank line. - On August 16, 2000, Western sold a 28,743 square foot parcel of land located in Reno, Nevada for $219,000, at a small gain. The net sales proceeds were used to reduce the balance on the bank line. - On September 13, 2000, Western sold a 87,020 square foot shopping center located in Coalinga, California for $2,625,000, at a small loss. The net sales proceeds were used to reduce the balance on the bank line. - On September 13, 2000, Western sold a 103,702 square foot shopping center located in Reno, Nevada for $9,250,000, at a gain of approximately $3,229,000. The net sales proceeds were used to reduce the balance on the bank line. 10 - On September 28, 2000, Western sold a 58,022 square foot commercial building located in Santa Clara, California for $8,850,000, at a gain of approximately $7,213,000. The net sales proceeds were used to (a) acquire a shopping center in Sacramento, California, through a tax-deferred exchange and (b) reduce the balance on the bank line. During the quarter ended September 30, 2000, Western completed the acquisition of a 62,435 shopping center located in Sacramento, California for $6,125,000. Western acquired this shopping center through a tax-deferred exchange. Lastly, during the quarter ended September 30, 2000, Western removed seven properties from the held for sale category. These properties have a gross book value of approximately $72.7 million. As of September 30, 2000, Western had four properties held for sale with a gross book value of $23.0 million. Note D: UNCONSOLIDATED REAL ESTATE SUBSIDIARY In October 1998, Western acquired, through its unconsolidated real estate subsidiary, an interest in Kienow's Food Stores, Inc. ("Kienow's"), a Portland, Oregon-based grocery wholesaler and retailer, whose principal assets were its real estate properties comprising six shopping centers and four free-standing stores, which comprise the "10 core retail properties" and eight non-core properties. During 1999 and the first three quarters of 2000, Western's unconsolidated real estate subsidiary caused Kienow's to sell the eight non-core properties as well as one core free-standing store. The net proceeds from these sales were reinvested using tax-deferred exchange rules into two properties -- a free standing grocery store, located in Portland, Oregon, and land located in Lodi, California. The land in Lodi is subject to a ground lease. Over the past 24 months, Western has been redeveloping and re-tenanting the core retail properties, located in the greater Portland area. From inception to September 30, 2000, Western's unconsolidated real estate subsidiary has capitalized $ 2,034,000 ($255,000 in 1998, $1,299,000 in 1999, $480,000 in 2000) of interest in connection with the redevelopment and re-tenanting of the retail properties. 11 Note E: INVESTMENTS IN MORTGAGE LOANS The following table provides information summarizing Western's investment in mortgage loans:

12 Note F: CAPITAL EXPENDITURES It is Western's practice to capitalize certain expenditures that exceed $4,000 and which are associated with the improvement and rental of real estate investments. Capitalized costs include leasing and legal costs and property improvements. Capital expenditures for the three and nine months ended September 30, 2000, and 1999 are as follows:

During the three months ended September 30, 2000, Western entered into leases that obligate Western to fund certain leasing commissions and property improvements. These obligations relate to new leases, a portion of which was paid and capitalized during the quarter ended September 30, 2000, and is reflected in the preceding table. 13 The aggregate and per square foot information representing expenditures associated with leasing for the quarter ended September 30, 2000, is as follows:

14 Note G: SEGMENT DISCLOSURE FASB No. 131 requires disclosure about segments of Western and related information. Western evaluates performance and makes resource-allocation decisions on an individual property basis. For financial reporting purposes, Western has grouped its properties into three segments: (i) shopping centers (including shopping centers under development); (ii) single-tenant retail; and (iii) other commercial properties. Investments principally consist of real estate, but also include real estate secured loans (four) and real estate joint ventures (three). Non-segment assets include cash, accounts receivable and deferred financing costs. The accounting policies of the segments are the same as those described in Note 2 to Western's annual report on Form 10-K for the year ended December 31, 1999. Western assesses and measures segment operating results based on a performance measure referred to as Funds From Operations ("FFO"). Prior to January 1, 2000, the National Association of Real Estate Investment Trusts defined FFO as net income, calculated in accordance with generally accepted accounting principles (GAAP) plus depreciation and amortization of real estate rental property (a) reduced by gains and increased by losses on (i) sales of property and (ii) extraordinary and unusual items, and (b) after adjustments for unconsolidated partnerships and joint ventures. Effective January 1, 2000, net income is not adjusted for unusual items unless they qualify as extraordinary items under GAAP in calculating FFO. This new interpretation did not have a significant impact on Western. 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 Western's operating performance, or for cash flows as a measure of liquidity. Furthermore, FFO as disclosed by other REITS may not be comparable to Western's calculation of FFO for itself. 15 The revenues and profit (loss), for each of the reportable segments are summarized as follows:

16 The assets for each of the reportable segments are summarized as follows as of September 30, 2000 and December 31, 1999, respectively:

17 Note H: EARNINGS PER SHARE In February 1997, the FASB issued FAS 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 three and nine months ended September 30, 2000 and 1999 is shown below:

During the nine-months ended September 30, 1999, conversion of the Western/Kienow, L.P. OP units would have had the effect of increasing earnings per share, and as such, conversion was not assumed in the above calculation. During August, 2000, one of the limited partners of the Western/Kienow, L.P. partnership elected to convert 50,000 OP Units into Western shares. 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 shares of beneficial interest for the three and nine-months ended September 30, 2000 and, therefore, the effect would be to increase earnings.

Note I: COMMITMENTS AND CONTINGENCIES In connection with the redevelopment of a property located in Walnut Creek, California (Plaza Escuela), Western committed to fund $42 million on a participating note secured by a first deed of trust on the property under development. At September 30, 2000, Western had funded a total of $14.3 million relating to this investment. 18 As of September 30, 2000, Western had commitments under several new and renewal leases which will result in expenditures of approximately $660,000 in real estate improvements and leasing commissions. Note J: SUBSEQUENT EVENTS During October 2000, Western sold a 98,520 square foot shopping center located in Dinuba, California, for $7,170,000, at a gain of approximately $1,100,000. In connection with the sale, Western received a $5,377,500, 10.5% interest per annum, promissory note secured by a first deed of trust on the property. This note is due ninety days from the note date of October 3, 2000. The net cash sales proceeds of $1,611,000 were used to reduce the balance on the bank line. 19 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION INTRODUCTION The following discussion and analysis of the consolidated financial condition and results of operations of Western Properties Trust and its subsidiaries ("Western") should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this report on Form 10-Q. 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 Operation" 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 Western's financial performance; the risk that Western may be unable to finance its planned acquisition and development activities; risks related to the retail or commercial businesses in which Western'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 Western'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 increases in market interest rates from current rates; risks associated with real estate ownership, such as the potential adverse impact of earthquakes, environmental contamination or changes in the local economic climate on the revenues and the value of Western's properties; and the risks of the failure of the contemplated merger with Pan Pacific Retail Properties, Inc. (discussed below). OVERVIEW Founded in 1962, Western Properties Trust ("WPT") and its affiliates own and operate community and neighborhood shopping centers located in the western United States. 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". Western Properties Trust's consolidated financial statements include the accounts of the following entities: WPT; Western/Kienow, L.P., a Delaware limited partnership; Western/Pinecreek, L.P., a Delaware limited partnership; GW100, a general partnership; and WPT's wholly owned subsidiary, WIRET Asset Management Services (a California corporation and a licensed real estate broker in the State of California) (collectively, "Western"). These entities comprise all of the subsidiaries over which WPT exercises direct or indirect voting control. Western is in the business of acquiring, managing, leasing and developing retail, commercial and industrial properties. WPT is the sole 20 general partner in Western/Kienow's L.P. and owned a 60% interest therein as of September 30, 2000. WPT is also the sole general partner in Western Pinecreek L.P. and owned a 75% interest therein as of September 30, 2000. Through an unconsolidated real estate subsidiary, Western controls 11 properties comprising approximately 457,000 square feet of retail gross leasable area ("GLA"). Throughout this Form 10-Q reference to the unconsolidated real estate subsidiary is a reference to the entity holding this 11 property portfolio. The combined GLA of Western and its unconsolidated real estate subsidiary at September 30, 2000 was approximately 5.1 million square feet of GLA. At September 30, 2000, Western and its unconsolidated real estate subsidiary's real estate portfolio was comprised of 55 properties, 49 of which were retail properties. PROPOSED MERGER WITH PAN PACIFIC The board of directors of Pan Pacific Retail Properties, Inc. and the board of trustees of Western Properties Trust have each unanimously approved a definitive agreement under which Pan Pacific will acquire Western in a stock-for-stock merger, subject to Pan Pacific Retail Properties, Inc. and Western Properties Trust shareholder approval. Pan Pacific's existing senior management team will manage the combined company. Management anticipates that the merger will be completed in November, 2000. When the merger is completed, each Western Properties shareholder shall receive 0.62 of a share of newly issued Pan Pacific common stock for each Western Properties Trust share that he or she owns. Pan Pacific will issue up to approximately 11.7 million shares of Pan Pacific common stock to Western Properties' shareholders in the merger. These newly issued shares of Pan Pacific common stock would represent 34.2% of the Pan Pacific common stock outstanding after the merger, assuming the exchange of each company's subsidiary securities. LIQUIDITY AND CAPITAL RESOURCES Western anticipates that cash flows provided by operations and other sources available to Western 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, net proceeds from the sale of properties held for sale and borrowings under the existing bank line, as well as other debt and equity alternatives, are expected to provide the necessary funds to achieve future growth. At September 30, 2000, four properties comprising 255,387 square feet of GLA were held for sale. The book value of these properties (before deduction for depreciation) was $22,964,000. The agreements executed in connection with Western's senior notes and its bank line contain certain covenants (including minimum shareholder's equity, maximum ratio of debt to net worth and income coverage requirements) which impose certain limitations on the incurrence of additional debt and other restrictions on Western. As of September 30, 2000, Western's aggregate outstanding indebtedness of $197,990,000 consisted of $134,490,000 in fixed rate, long-term debt and $63,500,000 of borrowings under Western's variable rate, unsecured bank line. 21 As of September 30, 2000, Western had $33 million available under its $100 million bank line. The availability on the $100 million bank line is net of a $3.5 million outstanding letter of credit which is related to Western's investment in the Walnut Creek development. In the event the merger with Pan Pacific is not completed, Western intends to replace or renew the bank line before it expires on September 30, 2001. COMMITMENTS AND CONTINGENCIES In connection with the redevelopment of a property located in Walnut Creek, California, Western committed to fund $42 million on a note secured by a first deed of trust on the property under development. At September 30, 2000, Western had funded a total of $14.3 million relating to this investment. As of September 30, 2000, Western had commitments under several new and renewal leases which will result in expenditures of approximately $660,000 in real estate improvements and leasing commissions. FUNDS FROM OPERATIONS Industry analysts and Western 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, Western, along with many other industry investors, considers presentation of operating results for real estate companies that use historical cost accounting to be less than fully informative. Prior to January 1, 2000, the National Association of Real Estate Investment Trusts defined FFO as net income, calculated in accordance with generally accepted accounting principles (GAAP) plus depreciation and amortization of real estate rental property (a) reduced by gains and increased by losses on (i) sales of property and (ii) extraordinary and unusual items, and (b) after adjustments for unconsolidated partnerships and joint ventures. Effective January 1, 2000, net income is not adjusted for unusual items unless they qualify as extraordinary items under GAAP in calculating FFO. This new interpretation did not have a significant impact on Western. 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 Western's operating performance, or for cash flows as a measure of liquidity. Furthermore, FFO as disclosed by other REITs may not be comparable to Western's calculation of FFO for itself. 22 The table below provides a reconciliation of net income in accordance with GAAP to FFO as calculated under NAREIT guidelines for the three month period ended September 30, 2000 and 1999 (in thousands):

23 RESULTS OF OPERATIONS COMPARISON OF QUARTER ENDED SEPTEMBER 30, 2000 AND 1999 Net income increased $7,677,000 to $12,907,000 for the quarter ended September 30, 2000 from $5,230,000 for the comparable quarter in 1999. On a per share basis (calculated using diluted weighted average shares outstanding), net income increased $0.41 to $0.71 for the quarter ended September 30, 2000 from $0.30 for the comparable quarter in 1999. This increase in net income is principally due to gains of $10,061,000 realized from the sale of four properties in the third quarter of 2000, an increase of $7,748,000 over the third quarter 1999 gains realized of $2,313,000. Other factors contributing to the increase include increased interest income, and income from the unconsolidated real estate subsidiary, as well as decreased other operating expenses, partially offset by increased interest expense, depreciation and amortization expense and general and administrative expense. Interest income increased $192,000 to $617,000 for the quarter ended September 30, 2000 from $425,000 for the comparable 1999 quarter. This increase primarily results from interest earned in connection with increased funding on the note secured by a first deed of trust on the Plaza Escuela development. Income from the unconsolidated real estate subsidiary increased $816,000 to $929,000 for the quarter ended September 30, 2000 from $113,000 for the quarter ended September 30, 1999. Most of this increase reflects the benefit of redevelopment and re-tenanting of eight of the Kienow's core properties. Western anticipates that the remaining two core properties will be leased and generating rental income during the first quarter of 2001. Other operating expenses decreased $120,000 from $1,437,000 for the three-month period ended September 30, 1999 to $1,317,000 for the same period in 2000. This decrease is primarily due to reduced costs associated with expensing of certain costs relating to unconsummated acquisitions and dispositions in 2000 compared to 1999. Interest expense increased $213,000 from $3,500,000 for the quarter ended September 30, 1999 to $3,713,000 for the quarter ended September 30, 2000. This increase is primarily due to increased interest rates on Western's variable rate bank line of credit in 2000. The average interest rate for the third quarter of 2000 was 8.0% per annum compared with 6.5% per annum in the same period of 1999. Depreciation expense is $826,000 higher in the three-month period ended September 30, 2000 from the same period in 1999. This increase is primarily due to the nine properties removed from the market and the incurrence of associated depreciation expense which had been discontinued while these properties were being marketed. General and administrative expense increased $316,000 to $1,028,000 for the quarter ended September 30, 2000 as compared with $712,000 for the comparable quarter in 1999. This increase primarily results from the expensing of costs associated with the pending merger with Pan Pacific. 24 COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 Net income increased $8,862,000 to $22,067,000 for the nine months ended September 30, 2000 as compared to $13,205,000 for the same period in 1999. On a per share basis (calculated using diluted weighted average shares outstanding), net income increased $0.47 from $0.77 for the nine-month period ended September 30, 1999 to $1.24 for the comparable period in 2000. This increase primarily results from the sale of seven properties in 2000 resulting in gains of $14,316,000, as compared with the 1999 sale of five properties resulting in gains of $4,426,000, an increase of $9,890,000 of gains over 1999. This was partially offset by the $1,745,000 provision for loss on real estate investment recorded earlier this year. Other factors contributing to the higher net income are increased income from Western's unconsolidated real estate subsidiary, which were partially offset by increased interest expense, general and administrative and other operating expenses. Income from the unconsolidated real estate subsidiary increased $1,329,000 to $1,587,000 for the nine-months ended September 30, 2000 from $258,000 for the nine-months ended September 30, 1999. Most of this increase reflects the benefit of redevelopment and re-tenanting of eight of the Kienow's core properties. Western anticipates that the remaining two core properties will be leased and generating rental income during the first quarter of 2001. Interest expense increased $670,000 from $10,550,000 for the nine-months ended September 30, 1999 to $11,220,000 for the nine-months ended September 30, 2000. This increase is primarily due to increased interest rates on Western's variable rate bank line of credit in 2000. The average interest rate for the nine-month period ending September 30, 2000 was 7.6% per annum compared with 6.3% per annum in the same period of 1999. General and administrative expense increased $630,000 to $2,856,000 for the nine-months ended September 30, 2000 as compared with $2,226,000 for the comparable period in 1999. Other operating expenses increased $288,000 from $3,872,000 for the nine-months ended September 30, 1999 to $4,160,000 for the same period in 2000. This increase primarily results from costs associated with the pending merger with Pan Pacific, in addition to increased accounting and compensation costs, as well as reduced capitalization of development personnel compensation expense in the current year. 25 ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Western is exposed to interest rate changes primarily through its bank line and long-term debt used to maintain liquidity and fund capital expenditures and expansion of Western's real estate portfolio and operations. Western'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. Western's objective with regard to long-term debt is to borrow primarily at fixed rates. At September 30, 2000, the outstanding balance on Western's variable rate bank line was $63,500,000, and the weighted average interest rate was 7.8% per annum. The bank line facility matures on September 30, 2001. At September 30, 2000, the outstanding balance of Western's fixed rate senior notes was $124,843,000 and the weighted average coupon interest rate for all senior notes was 7.47% per annum. The senior notes mature in February 2004 ($49,951,000), September 2006 ($24,977,000), September 2008 ($24,957,000) and September 2010 ($24,958,000). At September 30, 2000, the outstanding principle balance of Western's fixed rate mortgage note was $9,647,000, which bears an interest rate of 7.61% per annum. This amortizing note is due May 2004 with a balloon payment of $8,737,000 due at that time. The preceding information incorporates only those exposures that exist as of September 30, 2000, and 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 preceding paragraph, the information presented therein has limited predictive value. As a result, the impact on Western's operating results with respect to interest rate fluctuations will depend on the exposures that arise during the period, Western' interest rate risk management strategies at that time and interest rates. This discussion of Western'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. 26 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On November 8, 2000, a class action lawsuit was filed in the Superior Court of the State of California, County of Alameda against Western Properties Trust, some of its executive officers and trustees, Pan Pacific Retail Properties, Inc. and one of its officers. We received notice of the lawsuit on November 9, 2000, shortly before a special meeting of our shareholders held to vote upon our proposed merger with Pan Pacific Retail Properties, Inc. At the meeting, the merger was approved. The lawsuit was brought by the Bennett Family Trust, one of our shareholders, on behalf of all of our shareholders who held our shares on the record date for the special meeting, (I.E., September 29, 2000), and on behalf of the subclass of those shareholders who voted against the merger. The lawsuit seeks damages in an unspecified amount, together with attorneys' fees and costs. The lawsuit's principal allegation is that our board of trustees breached its fiduciary duties to our shareholders in approving the merger with Pan Pacific and in recommending the merger to our shareholders. The lawsuit also alleges that Western Properties' proxy statement for the special meeting was materially false or misleading for failing to disclose the alleged inadequacy of the terms of the merger with Pan Pacific. This lawsuit was filed one day before this form 10-Q was filed with the SEC and is currently being evaluated by Western Properties' attorneys. Western has not determined whether the lawsuit is likely to delay the closing of its merger with Pan Pacific. Western expects to vigorously defend the lawsuit. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not Applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On November 9, 2000, Western Properties held a special meeting of shareholders to consider a proposal pursuant to which Western Properties would incorporate as WPT, Inc. and then merge with and into Pan Pacific Retail Properties, Inc. at which time each outstanding share of Western Properties would be converted into 0.62 of a share of Pan Pacific common stock. The proposal was approved by 67.5% of the shares eligible to vote and 94.9% of the shares represented at the meeting by person or proxy. The vote was as follows: For: 11,713,278 votes Against: 458,003 votes At the meeting there were 177,859 abstentions each of which had the effect of a vote against the merger. ITEM 5. OTHER INFORMATION None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (numbered in accordance with Item 601 of Regulation S-K) (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). (10.2)** Compensation Agreement (filed as Exhibit 10.3 to Registrant's 10-K for the quarter 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, 27 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, L.P. 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 Contracts (27)+ Financial Data Schedule (b) Reports on Form 8-K None -------------------------------------------------------------------------------- + Filed with this report ** Management contract or compensatory plan or arrangement. 28 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WESTERN PROPERTIES TRUST ------------------------- (Registrant) Dated: NOVEMBER 8, 2000 By: /s/ BRADLEY N. BLAKE -------------------------- ------------------------------ Bradley N. Blake Chairman of the Board, President, Chief Executive Officer and Trustee Dated: NOVEMBER 8, 2000 By: /s/ DENNIS D. RYAN -------------------------- -------------------------------- Dennis D. Ryan Executive Vice President, Chief Financial Officer and Trustee 29

WESTERN PROPERTIES TRUST 10-Q