MISSION WEST PROPERTIES, INC.
10050 Bandley Drive, Cupertino, CA 95014
Ph. 408-725-0700 Fax 408-725-1626
September 15, 2005
Mr. Josh Forgione
Staff Accountant
United States Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: Mission West Properties, Inc.
Response to Comments from the SEC on Form 10-K for Fiscal Year Ended
December 31, 2004
Filed March 16, 2005
File No. 0-25235
Dear Mr. Forgione:
This letter sets forth responses of Mission West Properties, Inc. (the
"Company") to your comments relating to the Company's Annual Report on Form 10-K
contained in your letter dated August 31, 2005. The Staff comment is repeated in
capitalized letters below, and the Company's response appears immediately
beneath each comment.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2004
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - FUNDS FROM OPERATIONS, PAGE 44
1. WE NOTE THAT YOU USE FFO AS A MEASURE OF PERFORMANCE. YOU ALSO INDICATE
THAT, "ALONG WITH CASH FLOWS FROM OPERATING ACTIVITIES, FINANCING
ACTIVITIES AND INVESTING ACTIVITIES, IT PROVIDES INVESTORS WITH AN
UNDERSTANDING OF OUR ABILITY TO INCUR AND SERVICE DEBT AND MAKE CAPITAL
EXPENDITURES" WHICH SUGGESTS THAT YOU ALSO USE FFO AS A LIQUIDITY MEASURE.
PLEASE TELL US AND IN FUTURE FILINGS REVISE YOUR DISCLOSURE TO CLARIFY
WHETHER YOU USE FFO AS A MEASURE OF OPERATING PERFORMANCE OR LIQUIDITY AND
EXPLAIN WHY YOU BELIEVE FFO IS A USEFUL INDICATOR OF OPERATING PERFORMANCE
OR LIQUIDITY. FURTHER, IF YOU CONSIDER FFO TO BE A MEASURE OF LIQUIDITY,
PLEASE ALSO REVISE YOUR RECONCILIATION OF FFO TO THE MOST COMPARABLE
FINANCIAL MEASURE PRESENTED IN ACCORDANCE WITH GAAP. REFER TO ITEM 10(e)(i)
OF REGULATION S-K.
We believe the REIT industry has established FFO as a standard of measure
of operating performance for the REIT industry and acknowledge that FFO is
not a GAAP measure of financial performance. In future filings we will
delete the sentence, "Management considers FFO an appropriate measure of
performance of an equity REIT because, along with cash flows from operating
activities, financing activities and investing activities, it provides
investors with an understanding of our ability to incur and service debt
and make capital expenditures."
Because we intend to cease describing FFO as a measure of the Company's
liquidity, we do not believe it will be necessary to provide a
reconciliation of FFO to a related GAAP measure of liquidity.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK, PAGE 48
2. YOUR DISCLOSURE HERE AND IN NOTE 2 ON PAGE 61 IS NOT CONSISTENT WITH
RESPECT TO THE FAIR VALUE OF YOUR FIXED RATE DEBT. PLEASE REVISE YOUR
DISCLOSURE IN FUTURE FILINGS TO CORRECTLY DISCLOSE THE FAIR VALUE OF FIXED
RATE DEBT AND UPDATE YOUR RELATED DISCUSSION, AS NECESSARY.
We will revise our disclosure in future filings to disclose the fair value
of fixed rate debt consistently in Item 7A. Quantitative and Qualitative
Disclosures About Market Risk and Note 2 to the Consolidated Financial
Statements.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - IMPAIRMENT OF LONG-LIVED
ASSETS, PAGE 57
3. WE NOTE FROM YOUR DISCLOSURE ON PAGE 16 THAT YOU HAVE NUMEROUS PROPERTIES
WITH AVERAGE 2004 OCCUPANCIES OF 0%, 0% OCCUPANCY AS OF DECEMBER 31, 2004,
OR BOTH. WE ALSO NOTE THAT YOU RECOGNIZED AN IMPAIRMENT LOSS RELATED TO THE
ONE ASSET HELD FOR SALE AT DECEMBER 31, 2004. PLEASE TELL US HOW YOU
DETERMINED THE FAIR VALUE OF THE REMAINING PROPERTIES WITH MINIMAL OR NO
OCCUPANCY AT DECEMBER 31, 2004 WHEN MEASURING ANY IMPAIRMENT LOSS UNDER
SFAS 144. PLEASE ALSO TELL US WHETHER ANY OF THESE PROPERTIES ARE SUBJECT
TO THE RESTRICTION DISCLOSED ON PAGE 11 AND HOW THIS RESTRICTION WAS
CONSIDERED IN DETERMINING THE FAIR VALUE OF SUCH PROPERTY. REFER TO
PARAGRAPHS 22-24 OF SFAS 144.
The analysis that we prepare in connection with determining if there may be
any asset impairment loss under SFAS 144 considers several factors,
including the specific guidance in of SFAS 144. Properties selected for
evaluation included those that were vacant as of December 31, 2004 as well
as properties scheduled to become vacant during 2005. The individual
properties are tested for impairment based upon a comparison of the
carrying value to the sum of the undiscounted cash flows expected to result
from a disposition of the property. For purposes of the undiscounted cash
flow calculation, the Company assumed an overall 10 year hold period,
consisting
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of up to a 36 month period to lease the vacant space, which represents
management's estimate of the time to lease vacant space under market
conditions as of December 31, 2004, and an 84 month leased period. Cash
inflows during the leased period are based upon estimated market rents for
comparable leases of like kind space within the various submarkets in the
Silicon Valley of the San Francisco Bay Area. The assumptions include 3%
annual increases in the rent during the projected leased term. Cash
outflows during the lease up period are based upon the costs associated
with the vacant portion of the building which includes property taxes,
landscaping and insurance (the "Common Area Cost or CAC"). The CAC are
generally 100% recovered from the tenant during the leased period under the
terms of the Company's triple net ("NNN") leases, and therefore, the CAC
and other related reimbursement income are excluded from the cash flow
calculation during the leased period. Cash outflows relating to deferred
maintenance have historically been minimal (but have been considered on a
property by property basis) due to provisions in the Company's NNN lease
agreements that require a tenant to maintain the property during the term
of the lease in "Good Condition and Repair" which minimizes the amount of
deferred maintenance and repair costs incurred by the Company to re-lease a
property. The cash inflows relating to the gross terminal value at the end
of the leased period are based on the average net operating income of the
property during the hold period, divided by the appropriate market
capitalization rate (ranging from 8% to 9% as of December 31, 2004) based
on comparable sales data for like kind buildings in the market. The gross
terminal value was reduced by estimated selling costs of 5%. The net
terminal value (gross terminal value less 5% selling costs) was then
evaluated for overall reasonableness by comparing it to relevant market
sales data.
Based on the factors outlined above, our analysis determined that the sum
of the undiscounted cash flows expected to result from the use and eventual
disposition of each respective vacant property was in excess of its net
book value as of December 31, 2004.
There is a requirement set forth in the limited partnership agreement for
each Operating Partnership that owns certain properties originally
contributed by Carl E. Berg, Clyde J. Berg or John Kontrabecki that the
Company obtain consent before selling one of the properties that one or
more of them had contributed to the Company because all of these properties
have substantial unrealized tax gain that would be taxable to the
contributing limited partner(s). This requirement has not impeded the
Company's operations to date because the Company invests in commercial real
estate for rental value and for long term holding periods. The Company's
objective is to pay substantial dividends from operations and to increase
the value of its outstanding equity interests, not to sell properties at a
gain and distribute the proceeds to shareholders. Where the Company has
identified opportunities to sell a particular property, the Company has
been able to complete a tax
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deferred exchange in accordance with Section 1031 of the Internal Revenue
Code in order to roll the existing investment into a new income producing
property. Therefore, we have not discounted the value of a property subject
to this restriction in determining the fair value of our properties under
SFAS 144.
ITEM 9A. REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING, PAGE
85
4. IN FUTURE FILINGS, PLEASE DISCLOSE THE CONCLUSIONS OF YOUR PRINCIPAL
EXECUTIVE AND PRINCIPAL FINANCIAL OFFICERS REGARDING THE EFFECTIVENESS OF
YOUR DISCLOSURE CONTROLS AND PROCEDURES AS OF THE END OF THE PERIOD COVERED
BY THE REPORT. REFER TO ITEM 307 OF REGULATION S-K.
We will comply with this comment in future filings.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K, PAGE
88
5. PLEASE REVISE YOUR CERTIFICATIONS FILED AS EXHIBITS 31.1, 31.2 AND 31.3 TO
REFLECT THE LANGUAGE EXACTLY AS SET FORTH IN ITEM 601(b)(31) OF REGULATION
S-K.
The wording for the matters required to be certified under Rule 13a-14(a)
as set forth in the referenced exhibits is exactly the same as Item
601(b)(31). We acknowledge that these 10-K exhibits do use "the Company"
instead of "registrant" to identify the Company, do refer to this "Annual
Report" rather than any report generally, and do unintentionally omit the
parenthetical reference to Rule 15d-15(f), (which definition is, in any
event, identical to the cited Rule 13a-15(f)). We respectfully propose to
eliminate these immaterial discrepancies in future filings in lieu of
filing amended exhibits.
In connection with the foregoing responses to your comments, the Registrant
acknowledges:
- - Company is responsible for the adequacy and accuracy of the disclosure in
the filing;
- - SEC staff comments or changes to disclosure in response to SEC staff
comments do not foreclose the SEC from taking any action with respect to
the filing; and
- - Company may not assert SEC staff comments as a defense in any proceeding
initiated by the SEC or any person under the federal securities laws of the
United States.
Sincerely,
Mission West Properties, Inc.
/s/ Carl E. Berg
Carl E. Berg
Chairman and CEO
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