UNITED STATES
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 quarterly period ended March 31, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from __________ to __________
Commission File Number 1-10709
-------
PS BUSINESS PARKS, INC.
(Exact name of registrant as specified in its charter)
California 95-4300881
(State or Other Jurisdiction I.R.S. Employer
- ---------------------------- ----------------------
of Incorporation) Identification Number)
701 Western Avenue, Glendale, California 91201-2397
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 244-8080
--------------
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
Number of shares outstanding of each of the issuer's classes of common stock, as
- --------------------------------------------------------------------------------
of May 11, 1999: Common Stock, $0.01 par value, 23,637,410 shares outstanding
- --------------------------------------------------------------------------------
PS BUSINESS PARKS, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets as of March 31, 1999 and December 31, 1998....... 2
Condensed consolidated statements of income for the three months ended March 31, 1999 and
1998................................................................................... 3
Condensed consolidated statement of shareholders' equity for the three months ended March
31, 1999............................................................................... 4
Condensed consolidated statements of cash flows for the three months ended March 31, 1999 5 - 6
Notes to condensed consolidated financial statements................................... 7 - 16
Item 2. Management's discussion and analysis of financial condition and results of
operations............................................................................... 17 - 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 24
Item 6. Exhibits & Reports on Form 8-K.................................................. 24
PS BUSINESS PARKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1999 1998
---------------- ---------------
(unaudited)
ASSETS
------
Cash and cash equivalents............................... $ 1,299,000 $ 6,068,000
Real estate facilities, at cost:
Land............................................... 180,245,000 176,241,000
Buildings and equipment............................ 559,686,000 536,697,000
--------------- ---------------
739,931,000 712,938,000
Accumulated depreciation........................... (29,175,000) (22,517,000)
--------------- ---------------
710,756,000 690,421,000
Construction in progress................................ 11,593,000 7,716,000
--------------- ---------------
722,349,000 698,137,000
Intangible assets, net.................................. 1,508,000 1,583,000
Other assets............................................ 4,458,000 3,626,000
--------------- ---------------
Total assets.............................. $ 729,614,000 $ 709,414,000
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accrued and other liabilities.............................. $ 14,050,000 $ 15,953,000
Line of credit............................................. - 12,500,000
Note payable to affiliate.................................. 27,700,000 -
Mortgage notes payable..................................... 39,923,000 38,041,000
--------------- ---------------
Total liabilities................................. 81,673,000 66,494,000
Minority interest.......................................... 154,858,000 153,015,000
Shareholders' equity:
Preferred Stock, $0.01 par value, 50,000,000 shares
authorized, none outstanding at March 31, 1999 and
December 31, 1998........................................ - -
Common stock, $0.01 par value, 100,000,000 shares
authorized, 23,637,410 shares issued and outstanding at
March 31, 1999 (23,635,650 shares issued and outstanding
at December 31, 1998).................................... 236,000 236,000
Paid-in capital......................................... 482,116,000 482,471,000
Cumulative net income................................... 41,996,000 32,554,000
Cumulative distributions................................ (31,265,000) (25,356,000)
--------------- ---------------
Total shareholders' equity........................ 493,083,000 489,905,000
--------------- ---------------
Total liabilities and shareholders' equity... $ 729,614,000 $ 709,414,000
=============== ===============
See accompanying notes.
2
PS BUSINESS PARKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the three months
ended March 31,
--------------------------------
1999 1998
-------------- --------------
Revenues:
Rental income................................. $ 29,117,000 $ 14,353,000
Facility management fees from affiliates...... 114,000 202,000
Interest income............................... 20,000 233,000
-------------- --------------
29,251,000 14,788,000
-------------- --------------
Expenses:
Cost of operations............................. 8,376,000 4,627,000
Cost of facility management.................... 23,000 25,000
Depreciation and amortization.................. 6,733,000 2,300,000
General and administrative..................... 802,000 445,000
Interest expense.............................. 909,000 247,000
-------------- --------------
16,843,000 7,644,000
-------------- --------------
Income before minority interest.................. 12,408,000 7,144,000
Minority interest in income.................... (2,966,000) (2,814,000)
-------------- --------------
Net income....................................... $ 9,442,000 $ 4,330,000
============== ==============
Net income per share:
Basic.......................................... $ 0.40 $ 0.38
============== ==============
Diluted........................................ $ 0.40 $ 0.38
============== ==============
Weighted average shares outstanding:
Basic.......................................... 23,637,000 11,314,000
============== ==============
Diluted........................................ 23,705,000 11,357,000
============== ==============
See accompanying notes.
3
PS BUSINESS PARKS, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the three months ended March 31, 1999
(Unaudited)
Preferred Stock Common Stock
Shares Amount Shares Amount Paid-in Capital Net Income
------ ------ ---------- ----------- --------------- ------------
Balances at December 31, 1998............. - $ - 23,635,650 $ 236,000 $ 482,471,000 $ 32,554,000
Issuance of common stock............... - - 1,760 - 40,000 -
Net income............................. - - - - - 9,442,000
Distributions paid..................... - - - - - -
Adjustment to reflect minority interest to
underlying ownership interest.......... - - - - (395,000) -
-------- ------- ---------- ----------- --------------- ------------
Balances at March 31, 1999................ - $ - 23,637,410 $ 236,000 $ 482,116,000 $ 41,996,000
======== ======= ========== =========== =============== ============
Total
Cumulative Shareholders'
Distributions Equity
------------- ------------
Balances at December 31, 1998 $(25,356,000) $489,905,000
Issuance of common stock............... - 40,000
Net income............................. - 9,442,000
Distributions paid..................... (5,909,000 (5,909,000)
Adjustment to reflect minority interest
to underlying ownership interest..... - (395,000)
------------ ------------
Balances at March 31, 1999................. $(31,265,000) $493,083,000
============ ============
See accompanying notes.
4
PS BUSINESS PARKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the three months ended March 31,
--------------------------------------
1999 1998
-------------- --------------
Cash flows from operating activities:
Net income........................................................ $ 9,442,000 $ 4,330,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization expense......................... 6,733,000 2,300,000
Minority interest in income................................... 2,966,000 2,814,000
Increase in other assets...................................... (832,000) (521,000)
Increase (decrease) in accrued and other liabilities.......... (1,900,000) 371,000
-------------- --------------
Total adjustments........................................ 6,967,000 4,964,000
-------------- --------------
Net cash provided by operating activities................... 16,409,000 9,294,000
-------------- --------------
Cash flows from investing activities:
Acquisition of real estate facilities......................... (22,269,000) (38,754,000)
Acquisition cost of business combination...................... - (424,000)
Capital improvements to real estate facilities................ (2,204,000) (857,000)
Construction in progress...................................... (3,877,000) -
-------------- --------------
Net cash used in investing activities....................... (28,350,000) (40,035,000)
-------------- --------------
Cash flows from financing activities:
Borrowings from an affiliate.................................. 41,200,000 -
Repayment of borrowings from an affiliate..................... (13,500,000) (3,500,000)
Borrowings from line of credit................................ 14,000,000 -
Repayment of borrowings from line of credit................... (26,500,000) -
Principal payments on mortgage notes payable.................. (305,000) -
Net proceeds from the issuance of common stock................ 40,000 48,251,000
Distributions paid to shareholders............................ (5,909,000) (4,079,000)
Distributions paid to minority interests...................... (1,854,000) (2,556,000)
-------------- --------------
Net cash provided by financing activities................... 7,172,000 38,116,000
-------------- --------------
Net increase (decrease) in cash and cash equivalents................. (4,769,000) 7,375,000
Cash and cash equivalents at the beginning of the period............. 6,068,000 3,884,000
-------------- --------------
Cash and cash equivalents at the end of the period................... $ 1,299,000 $ 11,259,000
============== ==============
See accompanying notes.
5
PS BUSINESS PARKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the three months ended March 31,
--------------------------------------
1999 1998
-------------- --------------
Supplemental schedule of non cash investing and financial activities:
Acquisitions of real estate facilities and associated assets and
liabilities in exchange for minority interests and mortgage notes
payable:
Real estate facilities........................................ $ (2,520,000) $ (16,680,000)
Other assets (deposits on real estate acquisitions)........... - 800,000
Accrued and other liabilities................................. - 149,000
Minority interest............................................. 333,000 1,205,000
Mortgage notes payable........................................ 2,187,000 14,526,000
Business combination:
Real estate facilities........................................ - (48,000,000)
Other assets ................................................. - (452,000)
Accrued and other liabilities................................. - 1,218,000
Common stock.................................................. - 23,000
Paid-in capital............................................... - 46,787,000
Conversion of OP units into shares of common stock:
Minority interest............................................. - (33,023,000)
Common stock.................................................. - 18,000
Paid-in capital............................................... 33,005,000
Adjustment to reflect minority interest to underlying ownership
interest:
Minority interest............................................. 395,000 3,799,000
Paid-in capital............................................... (395,000) (3,799,000)
Adjustment to acquisition cost (see Note 2):
Real estate facilities........................................ - (1,315,000)
Intangible assets............................................. - 1,315,000
See accompanying notes.
6
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
1. Organization and description of business
Organization
PS Business Parks, Inc. (PSB or the Company), a California corporation, is
the successor to American Office Park Properties, Inc. (AOPP) which merged
with and into Public Storage Properties XI, Inc. (PSP 11) on March 17, 1998
(the Merger). The name of the Company was changed to PS Business Parks, Inc.
in connection with the Merger. See Note 3 for a description of the Merger and
its terms.
Based upon the terms of the Merger, the transaction for financial reporting
and accounting purposes has been accounted for as a reverse acquisition
whereby AOPP is deemed to have acquired PSP11. However, PSP11 is the
continuing legal entity and registrant for both Securities and Exchange
filing purposes and income tax reporting purposes. All subsequent references
to PSB or the Company for periods prior to March 17, 1998 shall refer to
AOPP.
Description of business
PSB is a fully-integrated, self-managed real estate investment trust (REIT)
that acquires, owns, operates and develops commercial properties containing
commercial and industrial rental space. PSB is the sole general partner of PS
Business Parks, L.P. (the "Operating Partnerships)through which the Company
conducts most of its activities. From 1986 through 1996, PSB's sole business
activity consisted of the management of commercial properties owned primarily
by Public Storage, Inc. (PSI) and affiliated entities.
Commencing in 1997, PSB began to own and operate commercial properties for
its own behalf. At March 31, 1999, PSB and the Operating Partnership
collectively owned and operated 114 commercial properties (approximately 11.3
million net rentable square feet) located in 11 states. In addition, the
Operating Partnership managed, on behalf of PSI and affiliated entities, 36
commercial properties (approximately 1.0 million net rentable square feet).
2. Summary of significant accounting policies
Basis of presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. The preparation of the condensed consolidated
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the amounts reported in the condensed consolidated financial statements and
accompanying notes. Actual results could differ from estimates. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation have been included. Operating
results for the three months ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ended December
31, 1999. For further information, refer to the consolidated financial
statements and footnotes thereto included in PSB's annual report on Form 10-K
for the year ended December 31, 1998.
The condensed consolidated financial statements include the accounts of PSB
and the Operating Partnership. At March 31, 1999, PSB owned approximately 73%
of the OP units of the Operating Partnership. PSB, as the sole general
partner of the Operating Partnership, has full, exclusive and complete
responsibility and discretion in managing and controlling the Operating
Partnership. Historical financial data of PSP11 have not been included in the
historical financial statements of PSB.
7
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
Cash and cash equivalents
PSB considers all highly liquid investments with an original maturity of
three months or less at the date of purchase to be cash equivalents. The
carrying amount of cash and cash equivalents approximates fair value.
Real estate facilities
Costs related to the improvements of properties are capitalized. Expenditures
for repair and maintenance are charged to expense when incurred. Buildings
and equipment are depreciated on the straight-line method over the estimated
useful lives, which are generally 30 and 5 years, respectively.
Interest cost incurred during the period of construction of real estate
facilities is capitalized. Construction in progress includes $453,000 and
$268,000 of capitalized interest costs at March 31, 1999 and December 31,
1998, respectively. The Company capitalized $185,000 during the three months
ended March 31, 1999. No interest was capitalized during the three months
ended March 31, 1998.
Intangible assets
Intangible assets consist of property management contracts for properties
managed, but not owned, by PSB. The intangible assets are being amortized
over seven years. As properties managed have been subsequently acquired by
PSB, the unamortized basis of intangible assets related to such property is
included in the cost of acquisition of such property. In connection with the
Merger, PSB acquired 13 properties and included in the cost of such
properties is $1,315,000 (which was net of accumulated amortization of
$194,000) of costs previously classified as intangible assets. Intangible
assets are net of accumulated amortization of $648,000 and $573,000 at March
31, 1999 and December 31, 1998, respectively.
Evaluation of asset impairment
PSB evaluates its assets used in operations, by identifying indicators of
impairment and by comparing the sum of the estimated undiscounted future cash
flows for each asset to the asset's carrying amount. When indicators of
impairment are present and the sum of the undiscounted future cash flows is
less than the carrying value of such asset, an impairment loss is recorded
equal to the difference between the asset's current carrying value and its
value based on discounting its estimated future cash flows. At March 31,
1999, no such indicators of impairment have been identified.
Note payable to affiliate
Note payable to affiliate at March 31, 1999 reflects amounts borrowed from
PSI on that date. The note bore interest at 5.5% (per annum). The note was
repaid as of April 30, 1999.
Revenue and expense recognition
All leases are classified as operating leases. Rental income is recognized on
a straight-line basis over the terms of the leases. Reimbursements from
tenants for real estate taxes and other recoverable operating expenses are
recognized as revenue in the period the applicable costs are incurred.
Costs incurred in connection with leasing (primarily tenant improvements and
leasing commissions) are capitalized and amortized over the lease period.
Property management fees are recognized in the period earned.
General and administrative expense
General and administrative expense includes executive compensation, office
expense, professional fees, state income taxes, cost of acquisition personnel
8
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
and other such administrative items. Such amounts include amounts incurred by
PSI on behalf of PSB, which were subsequently charged to PSB in accordance
with the allocation methodology pursuant to the cost allocation and
administrative service agreement between PSB and PSI.
Acquisition costs
Internal acquisition costs are expensed as incurred.
Income taxes
During 1997, PSB qualified and intends to continue to qualify as a real
estate investment trust (REIT), as defined in Section 856 of the Internal
Revenue Code. As a REIT, PSB is not subject to federal income tax to the
extent that it distributes at least 95% of its taxable income to its
shareholders. In addition, REITs are subject to a number of organizational
and operating requirements. If the Company fails to qualify as a REIT in any
taxable year, the Company will be subject to federal income tax (including
any applicable alternative minimum tax) based on its taxable income using
corporate income tax rates. Even if the Company qualifies for taxation as a
REIT, the Company may be subject to certain state and local taxes on its
income and property and to federal income and excise taxes on its
undistributed taxable income. The Company believes it met all organization
and operating requirements to maintain its REIT status during 1998 and
intends to continue to meet such requirements for 1999. Accordingly, no
provision for income taxes has been made in the accompanying financial
statements.
Net income per common share
Per share amounts are computed using the weighted average common shares
outstanding. Diluted weighted average common shares outstanding include the
dilutive effect of stock options under the treasury stock method. Basic
weighted average common shares outstanding excludes such effect. Earnings per
share has been calculated as follows:
Three Months Ended
March 31,
----------------------------
1999 1998
------------ ------------
Net income and net income allocable to common shareholders (same for
Basic and Diluted computations)................................... $ 9,442,000 $ 4,330,000
============ ============
Weighted average common shares outstanding:
Basic weighted average common shares outstanding.................. 23,637,000 11,314,000
Net effect of dilutive stock options - based on treasury stock
method using average market price............................... 68,000 43,000
------------ ------------
Diluted weighted average common shares outstanding................ 23,705,000 11,357,000
============ ============
Basic earnings per common share...................................... $ 0.40 $ 0.38
============ ============
Diluted earnings per common share.................................... $ 0.40 $ 0.38
============ ============
9
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
Comprehensive Income
Effective January 1, 1998, PSB adopted SFAS No. 130, REPORTING COMPREHENSIVE
INCOME. SFAS No. 130 requires a separate statement to report the components
of comprehensive income for each period reported. The adoption of SFAS No.
130 did not have an impact on PSB's reporting presentation.
Segment Reporting
Effective January 1, 1998, PSB adopted SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 established
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. SFAS 131 also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. As management views the Company as operating in a single segment
as described in Note 1, the adoption of SFAS No. 131 did not affect PSB's
disclosure of segment information.
Reclassifications
Certain reclassifications have been made to the financial statements for 1998
in order to conform to the 1999 presentation.
3. Business combination
On March 17, 1998, AOPP merged into PSP11, a publicly traded real estate
investment trust and an affiliate of PSI. Upon consummation of the Merger of
AOPP into PSP11, the surviving corporation was renamed "PS Business Parks,
Inc." (PSB as defined in Note 1). In connection with the Merger:
* Each outstanding share of PSP11 common stock, which did not elect
cash, continued to be owned by current holders. A total of 106,155
PSP11 common shares elected to receive cash of $20.50 per share.
* Each share of PSP11 common stock Series B and each share of PSP11
common stock Series C converted into .8641 shares of PSP11 common
stock.
* Each share of AOPP common stock converted into 1.18 shares of PSP11
common stock.
* Concurrent with the Merger, PSP11 exchanged 11 mini-warehouses and
two properties that combine mini-warehouse and commercial space for
11 commercial properties owned by PSI. The fair value of each group
of real estate facilities was approximately $48 million.
The Merger has been accounted for as a reverse merger whereby PSB is treated
as the accounting acquirer using the purchase method. This has been
determined based upon the following: (i) the former shareholders and
unitholders of PSB owned in excess of 80% of the merged companies and (ii)
the business focus post-Merger will continue to be that of PSB's which
includes the acquisition, ownership and management of commercial properties.
Prior to the Merger, PSP11's business focus had been primarily on the
ownership and operation of its self-storage facilities which represented
approximately 81% of its portfolio.
10
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
Allocations of the total acquisition cost to the net assets acquired were
made based upon the fair value of PSP11's assets and liabilities as of the
date of the Merger. The acquisition cost and the fair market values of the
assets acquired and liabilities assumed in the Merger are summarized as
follows:
Acquisition cost:
-----------------
Issuance of common stock......... $46,810,000
Cash............................. 424,000
-----------
Total acquisition cost....... $47,234,000
===========
Allocation of acquisition cost:
-------------------------------
Real estate facilities........... $48,000,000
Other assets..................... 452,000
Accrued and other liabilities.... (1,218,000)
-----------
Total allocation............. $47,234,000
===========
The historical operating results of PSP11 prior to the Merger have not been
included in PSB's historical operating results. Pro forma data for the three
months ended March 31, 1998 as though the Merger and related exchange of
properties have been effective at the beginning of fiscal 1998 is as follows:
Three months ended
March 31, 1998
-------------------
Revenues...................................................... $16,666,000
Net income.................................................... $ 5,115,000
Net income per share - basic.................................. $ 0.39
Net income per share - diluted................................ $ 0.39
The pro forma data does not purport to be indicative either of the results of
operations that would have occurred had the Merger occurred at the beginning
of fiscal 1998 or of the future results of PSB.
11
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
4. Real estate facilities
The activity in real estate facilities for the three months ended March 31,
1999 is as follows:
Accumulated
Land Buildings Depreciation Total
--------------- --------------- --------------- ---------------
Balances at December 31, 1998...... $ 176,241,000 $ 536,697,000 $ (22,517,000) $ 690,421,000
Property acquisitions.............. 4,004,000 20,785,000 - 24,789,000
Capital improvements............... - 2,204,000 - 2,204,000
Depreciation expense............... - - (6,658,000) (6,658,000)
--------------- --------------- --------------- ---------------
Balances at March 31, 1999......... $ 180,245,000 $ 559,686,000 $ (29,175,000) $ 710,756,000
=============== =============== =============== ===============
5. Leasing activity
The Company leases space in its real estate facilities to tenants under
non-cancelable leases generally ranging from one to seven years. Future
minimum rental revenues excluding recovery of expenses as of March 31, 1999
under these leases are as follows:
1999 (April - December)............. $ 69,398,000
2000................................ 69,848,000
2001................................ 47,851,000
2002................................ 30,913,000
2003................................ 19,121,000
Thereafter.......................... 26,721,000
--------------
$ 263,852,000
==============
In addition to minimum rental payments, tenants pay reimbursements for their
pro rata share of specified operating expenses, which amount to $3,441,000
and $1,359,000 for the three months ended March 31, 1999 and 1998,
respectively. These amounts are included as rental income and cost of
operations in the accompanying condensed consolidated statements of income.
6. Revolving line of credit
The Company has an unsecured line of credit (the "Credit Facility") with
Wells Fargo Bank. The Credit Facility has a borrowing limit of $100 million
and an expiration date of August 5, 2000. The expiration date may be extended
by one year on each anniversary of the Credit Facility. Interest on
outstanding borrowings is payable monthly. At the option of the Company, the
rate of interest charged is equal to (i) the prime rate or (ii) a rate
ranging from the London Interbank Offered Rate ("LIBOR") plus 0.55% to LIBOR
plus 0.95% depending on the Company's credit ratings and coverage ratios, as
defined (currently LIBOR plus 0.80%). In addition, the Company is required to
pay an annual commitment fee of 0.25%.
Under covenants of the Credit Facility, the Company is required to (i)
maintain a balance sheet leverage ratio (as defined) of less than 0.50 to
1.00, (ii) maintain interest and fixed charge coverage ratios (as defined) of
not less than 2.25 to 1.0 and 2.0 to 1.0, respectively, (iii) maintain a
minimum total shareholders' equity (as defined) and (iv) limit distributions
12
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
to 95% of funds from operations. In addition, the Company is limited in its
ability to incur additional borrowings (the Company is required to maintain
unencumbered assets with an aggregate book value equal to or greater than two
times the Company's unsecured recourse debt) or sell assets. The Company was
in compliance with the covenants of the Credit Facility at March 31, 1999.
7. Mortgage notes payable
Mortgage notes at March 31, 1999 consist of the following:
7.625% mortgage note, secured by one commercial property with an
approximate carrying amount of $21,507,000, principal and
interest payable monthly, repaid May 14, 1999................... $11,236,000
7.125% mortgage note, secured by one commercial property with an
approximate carrying amount of $19,794,000, principal and
interest payable monthly, due May 2006.......................... 8,877,000
8.4% mortgage note, secured by six commercial properties with
approximate carrying amounts totaling $21,014,000, principal
and interest payable monthly, due November 2001................. 8,634,000
8.125% mortgage note, secured by one commercial property with an
approximate carrying amount of $12,557,000, principal and
interest payable monthly, due July 2005......................... 5,400,000
8% mortgage note, secured by one commercial property with an
approximate carrying amount of $5,753,000, principal and
interest payable monthly, due April 2003........................ 2,168,000
8.5% mortgage note, secured by one commercial property with an
approximate carrying amount of $3,701,000, principal and
interest payable monthly, due July 2007......................... 1,932,000
8% mortgage note, secured by one commercial property with an
approximate carrying amount of $3,576,000, principal and
interest payable monthly, due April 2003........................ 1,676,000
-----------
$39,923,000
===========
At March 31, 1999, approximate principal maturities of mortgage notes payable
are as follows:
1999 (April - December)............. $ 11,675,000
2000................................ 643,000
2001................................ 8,846,000
2002................................ 549,000
2003................................ 3,735,000
Thereafter.......................... 14,475,000
--------------
$ 39,923,000
==============
13
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
8. Minority interests
The Company presents the accounts of PSB and the Operating Partnership on a
consolidated basis. Ownership interest in the Operating Partnership, other
than PSB's interest, are classified as minority interest in the condensed
consolidated financial statements. Minority interest in income consists of
the minority interests' share of the condensed consolidated operating
results.
Beginning one year from the date of admission as a limited partner and
subject to certain limitations described below, each limited partner other
than PSB has the right to require the redemption of its partnership interest.
A limited partner that exercises its redemption right will receive cash from
the Operating Partnership in an amount equal to the market value (as defined
in the Operating Partnership Agreement) of the partnership interests
redeemed. In lieu of the Operating Partnership redeeming the partner for
cash, PSB, as general partner, has the right to elect to acquire the
partnership interest directly from a limited partner exercising its
redemption right, in exchange for cash in the amount specified above or by
issuance of one share of PSB common stock for each unit of limited
partnership interest redeemed.
A limited partner cannot exercise its redemption right if delivery of shares
of PSB common stock would be prohibited under the applicable articles of
incorporation, if the general partner believes that there is a risk that
delivery of shares of common stock would cause the general partner to no
longer qualify as a REIT, would cause a violation of the applicable
securities laws, or would result in the Operating Partnership no longer being
treated as a partnership for federal income tax purposes.
At March 31, 1999, there were 7,414,620 OP units owned by minority interests
(7,305,355 were owned by PSI and affiliated entities and 109,265 were owned
by unaffiliated third parties). On a fully converted basis, assuming all
7,414,620 minority interest OP units were converted into shares of common
stock of PSB at March 31, 1999, the minority interests would own
approximately 23.9% of the common shares outstanding. At the end of each
reporting period, PSB determines the amount of equity (book value of net
assets) which is allocable to the minority interest based upon the ownership
interest and an adjustment is made to the minority interest, with a
corresponding adjustment to paid-in capital, to reflect the minority
interests' equity in the Company.
See Note 13 for disclosure of subsequent issuance of Preferred Operating
Partnership Units.
9. Property management contracts
The Operating Partnership manages industrial, office and retail facilities
for PSI and entities affiliated with PSI. These facilities, all located in
the United States, operate under the "Public Storage" or "PS Business Parks"
name.
The property management contracts provide for compensation of five percent of
the gross revenue of the facilities managed. Under the supervision of the
property owners, the Operating Partnership coordinates rental policies, rent
collections, marketing activities, the purchase of equipment and supplies,
maintenance activities, and the selection and engagement of vendors,
suppliers and independent contractors. In addition, the Operating Partnership
assists and advises the property owners in establishing policies for the
hire, discharge and supervision of employees for the operation of these
facilities, including property managers, leasing, billing and maintenance
personnel.
The property management contract with PSI is for a seven year term with the
term being extended one year each anniversary. The property management
contracts with affiliates of PSI are cancelable by either party upon sixty
days notice.
14
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
10.Shareholders' equity
In addition to common and preferred stock, PSB is authorized to issue
100,000,000 shares of Equity Stock. The Articles of Incorporation provide
that the Equity Stock may be issued from time to time in one or more series
and gives the Board of Directors broad authority to fix the dividend and
distribution rights, conversion and voting rights, redemption provisions and
liquidation rights of each series of Equity Stock.
On March 31, 1999, PSB paid a quarterly distribution to its common
shareholders totaling $5,909,000 or $0.25 per common share.
See Note 13 for disclosure of subsequent issuance of preferred stock.
11.Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 1999. Management
anticipates that the adoption of SFAS No. 133 will have no effect on earnings
or the financial position of PSB since no derivatives are currently being
used.
12.Commitments and contingencies
PSB is subject to the risks inherent in the ownership and operation of
commercial real estate. These include, among others, the risks normally
associated with changes in the general economic climate, trends in the real
estate industry, creditworthiness of tenants, competition, changes in tax
laws, interest rate levels, the availability of financing and potential
liability under environmental and other laws.
Substantially all of the properties have been subjected to Phase I
environmental reviews. Such reviews have not revealed, nor is management
aware of, any probable or reasonably possible environmental costs that
management believes would be material to the condensed consolidated financial
statements except as discussed below.
The Company acquired a property in Beaverton, Oregon ("Creekside Corporate
Park") in May 1998. A property adjacent to Creekside Corporate Park is
currently the subject of an environmental remedial investigation/feasibility
study that is being conducted by the current and past owners of the property,
pursuant to an order issued by the Oregon Department of Environmental Quality
("ODEQ"). As part of that study, ODEQ ordered the property owners to sample
soil and groundwater on the Company's property to determine the nature and
extent of contamination resulting from past industrial operations at the
property subject to the study. The Company, which is not a party of the Order
on Consent, executed separate Access Agreements with the property owners to
allow access to its property to conduct the required sampling and testing.
The sampling and testing is ongoing, and preliminary results from one area
indicate that the contamination from the property subject to the study may
have migrated onto a portion of Creekside Corporate Park owned by the
Company.
There is no evidence that any past or current use of the Creekside Corporate
Park property contributed in any way to the contamination that is the subject
of the current investigation. Nevertheless, upon completion of the study, it
is likely that removal or remedial measures will be required to address any
contamination detected during the current investigation, including any
contamination on or under the Creekside Corporate Park property. Because of
the preliminary nature of the investigation, the Company cannot predict the
outcome of the investigation, nor can it estimate the costs of any
remediation or removal activities that may be required.
15
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
The Company believes that it bears no responsibility or liability for the
contamination. In the event the Company is ultimately deemed responsible for
any costs relating to this matter, the Company believes that the party from
whom the property was purchased will be responsible for any expenses or
liabilities that the Company may incur as a result of this contamination.
PSB currently is neither subject to any other material litigation nor, to
management's knowledge, is any material litigation currently threatened
against PSB other than routine litigation and administrative proceedings
arising in the ordinary course of business. Based on consultation with
counsel, management believes that these items will not have a material
adverse impact on the Company's condensed consolidated financial position or
results of operations.
13.Subsequent events
In April 1999, the Company completed a private placement of preferred OP
units and a public offering of depositary shares representing fractional
interests in perpetual preferred stock resulting in net proceeds totaling
$65.7 million. The net proceeds from the placement of preferred OP units,
completed April 23, 1999 were approximately $12.5 million and the preferred
OP units have a preferred distribution rate of 8 7/8% on a stated value of
$12.75 million. The preferred OP units have equivalent terms to those of
perpetual preferred stock. Net proceeds from the public perpetual preferred
stock offering completed April 30, 1999 were $53.2 million, and the preferred
stock has a dividend rate of 9 1/4% on a stated value of $55 million.
Proceeds from the issuances were used to repay borrowings from an affiliate
and a mortgage note payable of approximately $11 million. The remaining
proceeds will be used for investment in real estate.
16
Management's Discussion and Analysis of Financial Condition and Results of
- -----------------------------------------------------------------------------
Operations
- ----------
General: Private Securities Litigation Reform Act Safe Harbor
Statement. In addition to historical information, management's discussion and
analysis includes certain forward-looking statements regarding events and
financial trends which may affect the Company's future operating results and
financial position. Such forward-looking statements are often identified by the
words "estimate," "project," "intend," "plan," "expect," "believe," or similar
expressions. Such statements are subject to risks and uncertainties that could
cause the Company's actual results and financial position to differ materially
from that indicated by the forward-looking statement. Such factors include, but
are not limited to a change in economic conditions in the various markets served
by the Company's operations which would adversely affect the level of demand for
rental of commercial space and the cost structure of the Company. Readers are
cautioned not to place undue reliance on these 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 these forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Overview: Comparisons between the three months ended March 31, 1999 and
1998 will reflect significant level of acquisitions during 1998 and the first
three months of 1999.
During 1998, the Company added 4.9 million square feet to its
portfolio. The cost of these acquisitions was approximately $378 million. The
acquisitions added square footage to each of the Company's existing core
markets. The Company acquired 1,687,000 square feet in Texas at an aggregate
cost of approximately $102 million; 1,001,000 square feet in Portland, Oregon at
an aggregate cost of approximately $115 million; 1,442,000 square feet in the
Northern Virginia/Maryland market at an aggregate cost of approximately $108
million; 422,000 square feet in Southern California at an aggregate cost of
approximately $25 million and 307,000 square feet in Northern California at an
aggregate cost of approximately $25 million. In addition, the Company acquired
62,000 square feet in the Merger at an aggregate cost of approximately $3
million in a market the Company does not consider a core market.
The Company acquired approximately 338,000 square feet of commercial
space at an aggregate cost of approximately $24 million during the first quarter
of 1999. These acquisitions increased the Company's presence in existing
markets, which the Company believes have characteristics necessary for long-term
growth. These acquisitions were comprised of 230,000 square feet adjacent to the
Company's existing park in Austin, Texas and 108,000 square feet in Northern
Virginia and a 9.2 acre parcel of land in Northern Virginia which the Company
may develop into a 136,000 square feet flex building.
Net income for the three months ended March 31, 1999 was $9,442,000
compared to $4,330,000 for the same period in 1998. Net income per common share
on a diluted basis was $0.40 (based on weighted average diluted shares
outstanding of 23,705,000) for the three months ended March 31, 1999 compared to
net income per common share on a diluted basis of $0.38 (based on diluted
weighted average shares outstanding of 11,357,000) for the same period in 1998,
representing an increase of 5.3%. The increases in net income and net income per
share reflects PSB's significant growth in its asset base through the
acquisition of commercial properties and increase in net operating income from
the consistent group of properties.
17
Results of Operations: The Company's property operations account for
almost all of the net operating income earned by the Company. The following
table presents the pre-depreciation operating results of the properties for the
three months ended March 31, 1999 and 1998:
Three Months Ended March 31,
----------------------------
1999 1998 Change
------------- ------------ ---------
Rental income:
Facilities owned throughout each period (50 facilities, 6.4
million net rentable square feet)...................... $15,233,000 $13,787,000 10.5%
Facilities acquired subsequent to January 1998 (64
facilities, 4.9 million net rentable square feet)...... 13,884,000 566,000 2,353.0%
----------- ----------- --------
Total rental income......................................... $29,117,000 $14,353,000 102.9%
=========== =========== ========
Cost of operations (excluding depreciation):
Facilities owned throughout each period..................... $4,542,000 $4,444,000 2.2%
Facilities acquired subsequent to January 1998.............. 3,834,000 183,000 1,995.1%
----------- ----------- --------
Total cost of operations.................................... $8,376,000 4,627,000 81.0%
=========== =========== ========
Net operating income (rental income less cost of operations):
Facilities owned throughout each period..................... $10,691,000 $9,343,000 14.4%
Facilities acquired subsequent to January 1998.............. 10,050,000 383,000 2,524.0%
----------- ---------- --------
Total net operating income.................................. $20,741,000 $9,726,000 113.3%
=========== ========== ========
Rental income and rental income less cost of operations or net
operating income ("NOI") prior to depreciation are summarized for the three
months ended March 31, 1999 by major geographic region below:
Square Percent Rental Percent Percent
Region Footage of Total Income of Total NOI of Total
- ---------------------------- ---------- -------- ----------- -------- ---------- --------
Southern California 3,085,000 27.4% $7,904,000 27.1% $5,898,000 28.4%
Northern California 1,105,000 9.8% 3,270,000 11.2% 2,038,000 9.8%
Virginia 1,316,000 11.7% 3,943,000 13.5% 2,850,000 13.7%
Maryland 1,107,000 9.8% 3,270,000 11.2% 2,378,000 11.5%
Texas 2,721,000 24.1% 5,758,000 19.8% 3,812,000 18.4%
Oregon 1,102,000 9.8% 3,349,000 11.5% 2,717,000 13.1%
Other 833,000 7.4% 1,623,000 5.6% 1,048,000 5.1%
---------- ------ ----------- ------ ----------- ------
Total 11,269,000 100.0% $29,117,000 100.0% $20,741,000 100.0%
========== ====== =========== ====== =========== ======
Supplemental Property Data and Trends: In order to evaluate the
performance of the Company's overall portfolio, management analyzes the
operating performance of a consistent group of 62 properties (7.2 million net
rentable square feet). These 62 properties in which the Company currently has an
ownership interest (herein referred to as the "Same Park" facilities) have been
managed by the Company since January 1998. The following table summarizes the
pre-depreciation historical operating results of the "Same Park" facilities
excluding the effects of accounting for rental revenues on a straight-line
basis. Beginning with this quarter, the Company has added 11 properties operated
throughout 1998 totaling approximately three million square feet to its "Same
Park" facilities. These additional properties have been operated for the
comparable periods and will provide a more comprehensive analysis of the
portfolio's operations. The "Same Park" facilities now represent approximately
64% of the square footage of the Company's portfolio at March 31, 1999.
18
Three months ended March 31,
-----------------------------------------------
1999 1998 (1) Change
----------- ----------- ------
Rental income (2)...................................... $17,489,000 $16,174,000 8.1%
Cost of operations..................................... 5,378,000 5,236,000 2.7%
----------- ----------- -----
Net operating income................................. $12,111,000 $10,938,000 10.7%
=========== =========== =====
Gross margin (3)................................... 69.2% 67.6% 1.6%
Annualized realized rent per occupied square foot (4).. $10.10 $9.56 5.6%
Weighted average occupancy for the period.............. 96.4% 94.1% 2.3%
(1) Operations for the three months ended March 31, 1998 represent the
historical operations of the 62 properties; however, the Company did not
own all of the properties throughout all periods presented and therefore
such operations are not reflected in the Company's historical operating
results. All such properties were owned effective March 17, 1998.
(2) Rental income does not include the effect of straight line accounting.
(3) Gross margin is computed by dividing property net operating income by
rental income.
(4) Realized rent per square foot represents the actual revenue earned per
occupied square foot.
The following tables summarize the "Same Park" operating results by major
geographic region for the three months ended March 31, 1999 and 1998:
Revenues Revenues Percent NOI NOI Percent
1999 1998 Increase 1999 1998 Increase
------------ ----------- -------- ----------- ----------- --------
Southern California $7,702,000 $6,988,000 10.2% $5,630,000 $4,866,000 15.7%
Northern California 1,986,000 1,821,000 9.1% 1,457,000 1,380,000 5.6%
Texas 1,732,000 1,593,000 8.7% 944,000 786,000 20.1%
Virginia 2,228,000 2,108,000 5.7% 1,489,000 1,383,000 7.7%
Maryland 2,259,000 2,116,000 6.8% 1,590,000 1,545,000 2.9%
Arizona 694,000 665,000 4.4% 453,000 431,000 5.1%
Other 888,000 883,000 0.6% 548,000 547,000 0.2%
----------- ----------- ----- ----------- ----------- -----
Total $17,489,000 $16,174,000 8.1% $12,111,000 $10,938,000 10.7%
=========== =========== ===== =========== =========== =====
There was tremendous growth in the strong Southern California market
accentuated by rising occupancies in the New York Common portfolio acquired in
December 1997 which rose from 90.1% in the first quarter of 1998 to 98.9% for
the same period in 1999. Texas benefited from increased occupancy at the Austin
facility in addition to economies of scale created by substantial square
footage added to the Texas market over the last twelve months.
Facility Management Operations: The Company's facility management
accounts for a small portion of the Company's net operating income. During the
three months ended March 31, 1999, $91,000 in net operating income was
recognized from facility management operations compared to $177,000 for the
same period in 1998. Facility management fees have decreased due to the
Company's acquisition of properties previously managed.
Interest Income: Interest income reflects earnings on cash balances.
Interest income was $20,000 for the three months ended March 31, 1999 compared
to $233,000 for the same period in 1998. The decrease is attributable to
decreased average cash balances. Average cash balances for the three months
ended March 31, 1999 were approximately $1.6 million compared to $18.6 million
for the same period in 1998.
Cost of Operations: Cost of operations for the three months ended
March 31, 1999 was $8,376,000 compared to $4,627,000 for the same period in
1998. The increase is due primarily to the growth in the total square footage
of the Company's portfolio of properties. Cost of operations as a percentage or
19
rental income decreased from 32.2% to 28.8% as a result of economies of scale
achieved through the acquisition of properties in existing markets. Cost of
operations for the three months ended March 31, 1999 consists primarily of
property taxes ($2,601,000), property maintenance ($1,255,000), utilities
($1,190,000) and direct payroll ($1,088,000).
Depreciation and Amortization Expense: Depreciation and amortization
expense for the three months ended March 31, 1999 was $6,733,000 compared to
$2,300,000 for the same period in 1998. The increase is due to the acquisition
of real estate facilities in 1998 and 1999.
General and Administrative Expense: General and administrative expense
was $802,000 for the three months ended March 31, 1999 compared to $445,000 for
the same period in 1998. The increase is due to the increased size and
acquisition activities of the Company. Included in general and administrative
costs are acquisition costs and abandoned transaction costs. Acquisition
expenses for the three months ended March 31, 1999 and 1998 were $90,000 and
$82,000, respectively. Abandoned transaction costs were $2,000 for the three
months ended March 31, 1999 and none for the three months ended March 31, 1998.
Interest Expense: Interest expense was $909,000 for the three months
ended March 31, 1999 compared to $247,000 for the same period in 1998. The
increase is attributable to mortgage notes assumed in connection with the
acquisition of real estate facilities ($693,000 in interest expense) and
temporary financing in connection with acquisitions ($401,000) net of $185,000
of interest expense capitalized to ongoing construction projects.
Minority Interest in Income: Minority interest in income reflects the
income allocable to equity interests in the Operating Partnership which are not
owned by the Company. Minority interest in income for the three months ended
March 31, 1999 was $2,966,000 compared to $2,814,000 for the same period in
1998. The increase in minority interest in income is due to improved operating
results and the issuance of additional Operating Partnership units in
connection with the acquisition of real estate facilities.
Liquidity and Capital Resources
-------------------------------
Net cash provided by operating activities for the three months ended
March 31, 1999 and 1998 was $16,409,000 and $9,294,000, respectively.
Management believes that the Company's internally generated net cash provided
by operating activities will continue to be sufficient to enable it to meet its
operating expenses, capital improvements, debt service requirements and
maintain the current level of distribution to shareholders.
The following table summarizes the Company's ability to make capital
improvements to maintain its facilities through the use of cash provided by
operating activities. The remaining cash flow is available to the Company to
pay distributions to shareholders and acquire property interests.
Three months ended March 31,
-----------------------------
1999 1998
------------ -----------
Net income.......................................................... $ 9,442,000 $ 4,330,000
Depreciation and amortization....................................... 6,733,000 2,300,000
Change in working capital........................................... (2,732,000) (150,000)
Minority interest in income......................................... 2,966,000 2,814,000
------------ -----------
Net cash provided by operating activities........................... 16,409,000 9,294,000
Maintenance capital expenditures.................................... (209,000) (247,000)
Tenant improvements................................................. (1,234,000) (333,000)
Capitalized lease commissions....................................... (517,000) (277,000)
------------ -----------
Funds available for distributions to shareholders, minority interests,
acquisitions and other corporate purposes......................... 14,449,000 8,437,000
Cash distributions to shareholders and minority interests........... (7,763,000) (6,635,000)
------------ -----------
Excess funds available for acquisitions and other corporate purposes $ 6,686,000 $ 1,802,000
============ ===========
The Company's capital structure is characterized by a low level of
leverage. As of March 31, 1999, the Company had seven fixed rate mortgage notes
20
payable totaling $39,923,000 and $27,700,000 in borrowings from PSI, which
represented 9.5% of its total capitalization (based on book value, including
minority interests and debt). The weighted average interest rate for the
mortgage notes is 7.83%. Borrowings from PSI bear interest at 5.5%.
On August 6, 1998, The Company entered into an unsecured line of
credit (the "Credit Agreement") with Wells Fargo Bank. The Credit Agreement has
a borrowing limit of $100 million and an expiration date of August 5, 2000. The
expiration date may be extended by one year on each anniversary of the Credit
Agreement. Interest on outstanding borrowings is payable monthly. At the option
of the Company, the rate of interest charged is equal to (i) the prime rate or
(ii) a rate ranging from the London Interbank Offered Rate ("LIBOR") plus 0.55%
to LIBOR plus 0.95% depending on the Company's credit ratings and interest
coverage ratios, as defined (currently LIBOR plus 0.80%). In addition, the
Company is required to pay an annual commitment fee of 0.25%.
The Company expects to fund its growth strategies with permanent
capital, including issuances of common and preferred stock and internally
generated retained cash flows. The Company may finance acquisitions on a
temporary basis with borrowings from its line of credit. The Company intends to
repay amounts borrowed under the credit facility from undistributed cash flow
or, as market conditions permit and as determined to be advantageous, from the
public or private placement of preferred and common stock or formation of joint
ventures. The Company targets a leverage ratio of 40% and a FFO to fixed
charges ratio of 3.0 to 1.0. As of March 31, 1999 and for the three months then
ended, the leverage ratio was 8.9% and the Funds from Operations ("FFO") to
fixed charges coverage ratio was 17.6 to 1.0.
In April 1999, the Company completed a private placement of preferred
OP units and a public offering of depositary shares representing fractional
interests in perpetual preferred stock resulting in net proceeds totaling $65.7
million. The net proceeds from the placement of preferred OP units, completed
April 23, 1999 were approximately $12.5 million and the preferred OP units have
a preferred distribution rate of 8 7/8% on a stated value of $12.75 million.
The preferred OP units have equivalent terms to those of perpetual preferred
stock. Net proceeds from the public perpetual preferred stock offering
completed April 30, 1999 were $53.2 million, and the preferred stock has a
dividend rate of 9 1/4% on a stated value of $55 million. Proceeds from the
issuances were used to repay borrowings from an affiliate and a mortgage note
payable of approximately $11 million. The remaining proceeds will be used for
investment in real estate.
Funds from Operations: FFO is defined as net income, computed in
accordance with generally accepted accounting principles ("GAAP"), before
depreciation, amortization, minority interest in income, straight line rent
adjustments and extraordinary or non-recurring items. FFO is presented because
the Company considers FFO to be a useful measure of the operating performance
of a REIT which, together with net income and cash flows provides investors
with a basis to evaluate the operating and cash flow performances of a REIT.
FFO does not represent net income or cash flows from operations as defined by
GAAP. FFO does not take into consideration scheduled principal payments on debt
and capital improvements. Accordingly, FFO is not necessarily a substitute for
cash flow or net income as a measure of liquidity or operating performance or
ability to make acquisitions and capital improvements or ability to pay
distributions or debt principal payments. Also, FFO as computed and disclosed
by the Company may not be comparable to FFO computed and disclosed by other
REITs.
FFO for the Company is computed as follows:
Three months ended March 31,
------------------------------
1999 1998
------------- ------------
Net income......................................................... $ 9,442,000 $ 4,330,000
Minority interest in income...................................... 2,966,000 2,814,000
Depreciation and amortization.................................... 6,733,000 2,300,000
Less effects of straight-line rents.............................. (751,000) -
------------ ------------
Subtotal......................................................... 18,390,000 9,444,000
FFO allocated to minority interests................................ (4,404,000) (3,765,000)
------------ ------------
FFO allocated to shareholders...................................... $ 13,986,000 $ 5,679,000
============ ============
21
Capital Expenditures: During the first quarter of 1999, the Company
incurred $2.0 million in maintenance capital expenditures, tenant improvements
and capitalized lease commissions. In addition, the Company made $0.2 million
of renovation expenditures. On a recurring annual basis, the Company expects
$0.90 to $1.20 per square foot in recurring capital expenditures and during the
remainder of 1999 expects to make $2.8 million in additional expenditures to
continue renovation on two properties in Texas.
Distributions: The Company has elected and intends to qualify as a
REIT for federal income tax purposes. As a REIT, the Company must meet, among
other tests, sources of income, share ownership and certain asset tests. In
addition, the Company is not taxed on that portion of its taxable income which
is distributed to its shareholders provided that at least 95% of its taxable
income is so distributed to its shareholders prior to filing of its tax return.
The Board of Directors declared a quarterly dividend of $0.25 per
common share on May 10, 1999. The Board of Directors has established a
distribution policy to maximize the retention of cash flow and only distribute
the minimum amount required for the Company to maintain its tax status as a
REIT. In addition, the Board of Directors declared a prorated dividend of
$0.39184 per share on the 2,200,000 depositary shares each representing 1/1000
of a share of 9 1/4% Cumulative Preferred Stock, Series A. Distributions are
payable on June 30, 1999 to shareholders of record as of the close of business
on June 15, 1999.
22
Impact of Year 2000
-------------------
The Company utilizes PSI's information systems in connection with a
cost sharing and administrative services agreement. The Company and PSI have
completed an assessment of all of its hardware and software applications
including those affecting the Company to identify susceptibility to what is
commonly referred to as the "Y2K Issue" whereby certain computer programs have
been using two digits rather than four to define the applicable year. Certain
computer programs or hardware with the Y2K Issue have date-sensitive
applications or embedded chips that may recognize a date using "00" as the year
1900 rather than the year 2000, resulting in miscalculations or system failure
causing disruptions to operations.
The Company in conjunction with PSI has an implementation in process
for critical applications, including its general ledger and related systems,
that are believed to have Y2K issues. PSI and the Company expect the
implementation to be complete by June 1999. Contingency plans have been
developed for use in case the implementations are not completed on a timely
basis. The Company presently believes that the impact of the Y2K Issue on its
system can be mitigated. However, if the plan for ensuring Y2K compliance and
the related contingency plans were to fail, be insufficient, or not be
implemented on a timely basis, operations of the Company could be materially
impacted.
Certain of the Company's other non-computer related systems that may
be impacted by the Y2K Issue, such as security systems, are currently being
evaluated, and the Company expects the evaluation to be complete by June 1999.
The Company expects the implementation of any required solutions to be complete
in advance of December 31, 1999. The Company has not fully evaluated the impact
of lack of Y2K compliance on these systems, but has no reason to believe that
lack of compliance would materially impact its operations.
The Company exchanges electronic data with certain outside vendors in
the banking and payroll processing areas. The Company has been advised by these
vendors that their systems are or will be Y2K compliant and has requested a Y2K
compliance certification from these entities. The Company is not aware of any
other vendors, suppliers, or other external agents with a Y2K Issue that would
materially impact the Company's results of operations, liquidity, or capital
resources. However, the Company has no means of ensuring that external agents
will be Y2K compliant, and there can be no assurance that the Company has
identified all such external agents. The inability of external agents to
complete their Year 2000 compliance process in a timely fashion could
materially impact the Company. The effect of non-compliance by external agents
is not determinable.
The total cost of PSI's Y2K compliance activities (which primarily
consists of the costs of implementing new systems) will be allocated to all
entities that use the PSI computer systems. The amount to be allocated to the
Company is estimated at approximately $250,000.
The costs of the projects and the date on which PSI and the Company
believe that it will be Y2K compliant are based upon management's best
estimates, and were derived utilizing numerous assumptions of future events.
There can be no assurance that these estimates will be achieved, and actual
results could differ materially from those anticipated. There can be no
assurance that PSI and the Company have identified all potential Y2K Issues
either within the Company or at external agents. In addition, the impact of the
Y2K issue on governmental entities and utility providers and the resultant
impact on the Company, as well as disruptions in the general economy, may be
material but cannot be reasonably determined or quantified.
23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
PS Business Parks, L.P. v. Principal Mutual Life Insurance Company, et
-----------------------------------------------------------------------
al, Circuit Court of Washington County, Oregon (filed April 29, 1999)
- --
In May 1998, the Company acquired a property in Beaverton, Oregon. An
adjacent property is the subject of an environmental remedial investigation. For
additional information on the investigation, please refer to the Company's 1998
annual report on Form 10-K under "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Risk Factors - Our Business
Could Be Subject to Environmental Liabilities."
In April 1999, the Company commenced an action against the sellers of
the property seeking indemnification for any damages and expenses that may be
incurred by the Company in this matter and for other relief. The Company is not
currently able to quantify the extent of such damages and expenses.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
(10.1) Amendment to Agreement of Limited Partnership of PS Business Parks,
L.P. Relating to 8 7/8% Series B Cumulative Redeemable Preferred
Units, dated as of April 23, 1999.
(10.2) Amendment to Agreement of Limited Partnership of PS Business Parks,
L.P. Relating to 9 1/4% Series A Cumulative Redeemable Preferred
Units, dated as of April 30, 1999.
(11) Statement re: Computation of Earnings per Share
(12) Statement re: Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
(b) Reports on Form 8-K
The Registrant filed a Current Report on Form 8-K dated December
31, 1998 (filed January 13, 1999) pursuant to Item 5 which reported
the acquisition of properties from various third parties. The
Registrant filed a Current Report on Form 8-K/A dated December 31,
1998 amending Form 8-K dated December 31, 1998 (filed February 17,
1999) pursuant to Items 5 and 7 which filed financial statements
for those properties.
SIGNATURES
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.
Dated: May 14, 1999
PS BUSINESS PARKS, INC.
BY: /s/ Jack Corrigan
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Jack Corrigan
Vice President and Chief Financial Officer
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