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 September 30, 1998
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 November 16, 1998: Common Stock, $0.01 par value, 23,635,650 shares
- --------------------------------------------------------------------------------
outstanding
- -----------
<PAGE>
PS BUSINESS PARKS, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets at September 30, 1998
and December 31, 1997 2
Condensed consolidated statements of income for the three
and nine months ended September 30, 1998 and 1997 3
Condensed consolidated statement of shareholders' equity for
the nine months ended September 30, 1998 4
Condensed consolidated statements of cash flows for the
nine months ended September 30, 1998 and 1997 5-6
Notes to condensed consolidated financial statements 7-15
Item 2. Management's discussion and analysis of
financial condition and results of operations 16-24
PART II. OTHER INFORMATION
Item 6. Exhibits & Reports on Form 8-K 25
<PAGE>
<TABLE>
<CAPTION>
PS BUSINESS PARKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1998 1997
---------------- -----------------
(unaudited)
ASSETS
------
<S> <C> <C>
Cash and cash equivalents......................................... $ 32,747,000 $ 3,884,000
Real estate facilities, at cost:
Land......................................................... 175,326,000 91,754,000
Buildings and equipment...................................... 484,472,000 226,466,000
---------------- -----------------
659,798,000 318,220,000
Accumulated depreciation..................................... (15,104,000) (3,982,000)
---------------- -----------------
644,694,000 314,238,000
Intangible assets, net............................................ 1,658,000 3,272,000
Other assets...................................................... 4,332,000 2,060,000
---------------- -----------------
Total assets........................................ $ 683,431,000 $ 323,454,000
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accrued and other liabilities..................................... $ 13,794,000 $ 8,331,000
Mortgage notes payable............................................ 29,632,000 -
Note payable to affiliate......................................... - 3,500,000
---------------- -----------------
Total liabilities.............................................. 43,426,000 11,831,000
Minority interest................................................. 152,611,000 168,665,000
Shareholders' equity:
Preferred Stock, $0.01 par value, 50,000,000
shares authorized, none outstanding at
September 30, 1998 and December 31, 1997..................... - -
Common stock, $0.01 par value, 100,000,000 shares
authorized, 23,635,650 shares issued and outstanding
at September 30, 1998 (7,728,309 shares issued and
outstanding at December 31, 1997)............................ 236,000 77,000
Paid-in capital................................................ 482,327,000 143,277,000
Cumulative net income.......................................... 24,278,000 3,154,000
Cumulative distributions....................................... (19,447,000) (3,550,000)
---------------- -----------------
Total shareholders' equity............................... 487,394,000 142,958,000
---------------- -----------------
Total liabilities and shareholders' equity......... $ 683,431,000 $ 323,454,000
================ =================
See accompanying notes.
2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PS BUSINESS PARKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the three months For the nine months
ended September 30, ended September 30,
------------------------------- -------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
Revenues:
<S> <C> <C> <C> <C>
Rental income................................. $ 25,635,000 $ 8,256,000 $ 61,459,000 $ 21,039,000
Facility management fees primarily from
affiliates.................................. 109,000 221,000 440,000 696,000
Interest and other income..................... 533,000 183,000 1,077,000 322,000
------------- ------------- ------------- -------------
26,277,000 8,660,000 62,976,000 22,057,000
------------- ------------- ------------- -------------
Expenses:
Cost of operations............................. 7,379,000 3,250,000 18,361,000 8,269,000
Cost of facility management.................... 12,000 48,000 49,000 157,000
Depreciation and amortization.................. 4,865,000 1,395,000 11,421,000 3,410,000
General and administrative..................... 593,000 382,000 1,589,000 767,000
Interest expense.............................. 667,000 - 1,736,000 -
------------- ------------- ------------- -------------
13,516,000 5,075,000 33,156,000 12,603,000
------------- ------------- ------------- -------------
Income before minority interest.................. 12,761,000 3,585,000 29,820,000 9,454,000
Minority interest in income.................... (3,013,000) (2,403,000) (8,696,000) (6,795,000)
------------- ------------- ------------- -------------
Net income....................................... $ 9,748,000 $ 1,182,000 $ 21,124,000 $ 2,659,000
============= ============= ============= =============
Net income per share:
Basic.......................................... $ 0.41 $ 0.33 $ 1.18 $ 1.00
============= ============= ============= =============
Diluted........................................ $ 0.41 $ 0.33 $ 1.17 $ 1.00
============= ============= ============= =============
Weighted average shares outstanding:
Basic.......................................... 23,635,650 3,555,777 17,920,028 2,652,109
============= ============= ============= =============
Diluted........................................ 23,695,747 3,555,777 17,989,772 2,652,109
============= ============= ============= =============
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
PS BUSINESS PARKS, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the nine months ended September 30, 1998
(Unaudited)
Preferred Stock Common Stock
------------------- -------------------------
Shares Amount Shares Amount
-------- -------- --------- -----------
<S> <C> <C> <C> <C>
Balances at December 31, 1997............. - $ - 7,728,309 $ 77,000
Issuances of common stock:
Conversion of OP Units............. - - 1,785,008 18,000
Private offerings, net of costs.... - - 6,774,074 68,000
Exercise of stock options.......... - - 39,021 -
In connection with a business
combination...................... - - 2,283,438 23,000
Public offerings, net of costs..... - - 5,025,800 50,000
Net income............................. - - - -
Distributions paid..................... - - - -
Adjustment to reflect minority
interest to underlying ownership
interest............................. - - - -
-------- -------- --------- -----------
Balances at September 30, 1998............ - $ - 23,635,650 $ 236,000
======== ======== ========== ===========
</TABLE>
<TABLE>
PS BUSINESS PARKS, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the nine months ended September 30, 1998
(Unaudited)
Total
Cumulative Cumulative Shareholders'
Paid-in Capital Net Income Distributions Equity
-------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Balances at December 31, 1997............. $ 143,277,000 $ 3,154,000 $ (3,550,000) $ 142,958,000
Issuances of common stock:
Conversion of OP Units............. 33,005,000 - - 33,023,000
Private offering, net of costs..... 152,533,000 - - 152,601,000
Exercise of stock options.......... 651,000 - - 651,000
In connection with a business
combination...................... 46,787,000 - - 46,810,000
Public offerings, net of costs..... 118,810,000 - - 118,860,000
Net income............................. - 21,124,000 - 21,124,000
Distributions paid..................... - - (15,897,000) (15,897,000)
Adjustment to reflect minority
interest to underlying ownership
interest............................. (12,736,000) - - (12,736,000)
-------------- ------------ -------------- --------------
Balances at September 30, 1998............ $ 482,327,000 $ 24,278,000 $ (19,447,000) $ 487,394,000
============== ============ ============== ==============
</TABLE>
See accompanying notes.
4
<PAGE>
<TABLE>
<CAPTION>
PS BUSINESS PARKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the nine months ended September 30,
---------------------------------------
1998 1997
---------------- ----------------
Cash flows from operating activities:
<S> <C> <C>
Net income................................................. $ 21,124,000 $ 2,659,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization expense.................. 11,421,000 3,410,000
Minority interest in income............................ 8,696,000 6,795,000
(Increase) decrease in other assets.................... (2,620,000) 289,000
Increase in accrued and other liabilities.............. 3,221,000 1,170,000
---------------- ----------------
Total adjustments................................. 20,718,000 11,664,000
---------------- ----------------
Net cash provided by operating activities............ 41,842,000 14,323,000
---------------- ----------------
Cash flows from investing activities:
Acquisition of real estate facilities.................. (252,649,000) (43,360,000)
Acquisition cost of business combination............... (424,000) -
Capital improvements to real estate facilities......... (6,030,000) (2,321,000)
Payment received from PSI and affiliates for net
property operating liabilities assumed............. - 2,233,000
---------------- ----------------
Net cash used in investing activities................ (259,103,000) (43,448,000)
---------------- ----------------
Cash flows from financing activities:
Borrowings from an affiliate........................... 179,000,000 -
Repayment of borrowings from an affiliate.............. (182,500,000) -
Principal payments on mortgage notes payable........... (343,000) -
Decrease in receivable from affiliate.................. - 781,000
Proceeds from the issuance of common stock, net........ 272,112,000 33,880,000
Distributions paid to shareholders..................... (15,897,000) -
Distributions to minority interests.................... (6,248,000) -
---------------- ----------------
Net cash provided by financing activities............ 246,124,000 34,661,000
---------------- ----------------
Net increase in cash and cash equivalents..................... 28,863,000 5,536,000
Cash and cash equivalents at the beginning of the period...... 3,884,000 919,000
---------------- ----------------
Cash and cash equivalents at the end of the period............ $ 32,747,000 $ 6,455,000
================ ================
</TABLE>
See accompanying notes.
5
<PAGE>
<TABLE>
<CAPTION>
PS BUSINESS PARKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the nine months ended September 30,
---------------------------------------
1998 1997
---------------- ----------------
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCIAL ACTIVITIES:
Acquisitions of real estate facilities and associated assets and
liabilities in exchange for preferred stock, minority interests,
and mortgage notes payable:
<S> <C> <C>
Real estate facilities................................................. $(33,584,000) $(141,480,000)
Other assets (deposits on real estate acquisitions).................... 800,000 -
Accrued and other liabilities.......................................... 1,245,000 -
Minority interest...................................................... 1,564,000 120,750,000
Preferred stock........................................................ - 100,000
Paid in capital........................................................ - 19,900,000
Mortgage notes payable................................................. 29,975,000 -
Intangible assets...................................................... - 730,000
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...................................................... 12,736,000 -
Paid in capital........................................................ (12,736,000) -
Exchange of preferred stock for common stock:
Preferred stock........................................................ - (175,000)
Common stock........................................................... - 175,000
Adjustment to acquisition cost (see Note 2):
Real estate facilities................................................. (1,315,000) (7,146,000)
Accumulated depreciation............................................... - (820,000)
Intangible assets...................................................... 1,315,000 (4,395,000)
Paid in capital........................................................ - 12,361,000
</TABLE>
See accompanying notes.
6
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
ORGANIZATION
PS Business Parks, Inc. ("PSB"), 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 for periods prior to March 17, 1998 shall refer to AOPP.
PSB was organized in California in 1986 as a wholly-owned subsidiary of
Public Storage Management, Inc. ("PSMI"), a privately owned company of B.
Wayne Hughes and his family (collectively "Hughes").
On November 16, 1995, Public Storage, Inc. ("PSI") acquired PSMI in a
business combination accounted for using the purchase method. In connection
with the transaction, PSI exchanged its common stock for all of the
non-voting participating preferred stock of PSB, representing a 95%
economic interest, and Hughes purchased all the voting common stock of PSB,
representing the remaining 5% economic interest. During December 1996,
Ronald L. Havner, Jr. (then an executive officer of PSI) acquired all of
Hughes' common stock in PSB.
On January 2, 1997, in connection with the reorganization of the commercial
property operations of PSI and affiliated entities, PSB formed a
partnership (the "Operating Partnership") whereby PSB became the general
partner. Concurrent with the formation of the Operating Partnership, PSI
and affiliated entities contributed commercial properties to the Operating
Partnership in exchange for limited partnership units ("OP Units"). In
addition, PSI contributed commercial properties to PSB in exchange for
shares of non-voting participating preferred stock, and such properties
were immediately contributed by PSB along with its commercial property
management operations and cash to the Operating Partnership for OP Units.
Subject to certain limitations as described in Note 8, holders of OP Units,
other than PSB, have the right to require PSB to redeem such holders' OP
Units at any time or from time to time beginning on the date that is one
year after the date on which such limited partner is admitted to the
Operating Partnership.
On March 31, 1997, PSI exchanged its non-voting participating preferred
stock into common shares of PSB. As a result of the exchange, PSI owned a
majority of the voting common stock and effectively gained control of PSB
at that time.
DESCRIPTION OF BUSINESS
PSB is a fully-integrated, self-managed real estate investment trust
("REIT") that acquires, owns and operates commercial properties containing
commercial and industrial rental space. From 1986 through 1996, PSB's sole
business activity consisted of the management of commercial properties
owned primarily by PSI and affiliated entities.
Commencing in 1997, PSB began to own and operate commercial properties for
its own behalf. At September 30, 1998, PSB and the Operating Partnership
collectively owned and operated 98 commercial properties (approximately
10.3 million net rentable square feet) located in 11 states. In addition,
the Operating Partnership managed, on behalf of PSI and affiliated
entities, 35 commercial properties (approximately 1.0 million net rentable
square feet).
7
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
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 and nine months ended September
30, 1998 are not necessarily indicative of the results that may be expected
for the year ended December 31, 1998. For further information, refer to the
consolidated financial statements and footnotes of PSB for the year ended
December 31, 1997 filed on Form 8-K/A dated April 17, 1998 (amending Form
8-K dated March 17, 1998).
The condensed consolidated financial statements include the accounts of PSB
and the Operating Partnership. At September 30, 1998, 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.
On March 31, 1997, PSB and PSI agreed to exchange the non-voting
participating preferred stock held by PSI for 2,098,288 shares of voting
common stock of PSB. After the exchange, PSI owned in excess of 95% of the
outstanding common voting common stock of PSB and PSB accounted for the
transaction as if PSI acquired PSB in a transaction accounted for as a
purchase. Accordingly, PSB reflected PSI's cost of its investment in PSB in
accordance with Accounting Principles Board Opinion No. 16. As a result of
PSI attaining control of PSB, the carrying value of PSB's assets and
liabilities were adjusted to reflect PSI's acquisition cost of its
controlling interest in PSB of approximately $35 million. As a result, the
carrying value of real estate facilities was increased approximately $8.0
million, intangible assets increased approximately $4.4 million and paid in
capital increased approximately $12.4 million.
STOCK SPLIT AND STOCK DIVIDEND:
On January 1, 1997, the number of outstanding shares of preferred and
common stock increased as a result of a 10 for 1 stock split. In March
1997, the preferred stock of PSB was converted into common stock on a share
for share basis. In December 1997, PSB declared a common stock dividend at
a rate of .01583 shares for each common share outstanding. Similarly, the
Operating Partnership's outstanding OP Units were adjusted to reflect the
stock dividend. No adjustment was made to the outstanding OP Units for the
January 1997 stock split, as the issuance of OP Units during 1997 already
reflected the stock split.
On March 17, 1998, in connection with the merger, PSB's common shares were
converted into 1.18 shares of PSP11. Similarly, holders of OP Units
received an additional 0.18 OP Units for each outstanding OP Unit held at
the time of the merger.
References in the condensed consolidated financial statements and notes
thereto with respect to shares of preferred stock, common stock, stock
options, and OP Units and the related per share/per unit amounts have been
retroactively adjusted to reflect the January 1997 stock split, the
December 1997 stock dividend and the March 1998 conversion in connection
with the Merger.
8
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
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.
REAL ESTATE FACILITIES:
Costs related to the improvements of properties are capitalized.
Expenditures for repair and maintenance are charged to expense when
incurred. After March 31, 1997, acquisition of facilities from PSI and
entities controlled by PSI have been recorded at the predecessor's basis.
Buildings and equipment are depreciated on the straight line method over
the estimated useful lives, which is generally 25 and 5 years,
respectively.
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 are subsequently acquired by PSB,
the unamortized basis of intangible assets related to such property is
included in the cost of acquisition of such property. During April 1997,
PSB acquired four properties from PSI and included in the cost of real
estate facilities for such properties is $730,000 of cost previously
classified as intangible assets. 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 at September
30, 1998 are net of accumulated amortization of $497,000.
EVALUATION OF ASSET IMPAIRMENT:
In 1995, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" which requires impairment losses to be recorded on long-lived assets.
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. SFAS
No. 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. Such assets are to be reported at the lower of
their carrying amount or fair value, less cost to sell. PSB adopted SFAS
No. 121 in 1996 and the adoption had no effect. PSB's subsequent
evaluations have indicated no impairment in the carrying amount of its
assets.
NOTE PAYABLE TO AND BORROWINGS FROM AFFILIATE:
Note payable to affiliate at December 31, 1997 of $3,500,000 reflects
amounts borrowed from PSI on that date. The note bore interest at 6.97% and
was repaid on January 31, 1998. On May 1, 1998, PSB borrowed $179,000,000
from PSI to fund a portion of the acquisition cost of real estate
facilities. On May 6, 1998, $105.0 million was repaid and the remaining
balance was repaid on May 27, 1998. The borrowings bore interest at 6.91%
(per annum).
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.
9
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
NET INCOME PER COMMON SHARE:
In 1997, the FASB issued SFAS No. 128, "Earnings per Share." SFAS No. 128
replaced the calculation of "primary" and "fully diluted" earnings per
share with "basic" and "diluted" earnings per share.
"Diluted" shares include the dilutive effect of stock options, while
"basic" shares exclude such effect. In addition, weighted average shares
utilized in computing basic and diluted earnings per share includes the
weighted average participating preferred shares, because such shares were
allocated income (subject to certain preferences upon liquidation described
below) on an equal per share basis with the common shares.
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 taxed on that portion of its taxable
income which is distributed to its shareholders provided that PSB meets
certain tests. PSB believes it met these tests during 1997. In addition,
PSP11 (the legal entity for income tax reporting purposes subsequent to the
March 17, 1998 merger) believes it has also met the REIT tests during 1997
and for the nine months ended September 30, 1998. Accordingly, no provision
for income taxes has been made in the accompanying financial statements.
GENERAL AND ADMINISTRATIVE EXPENSE:
General and administrative expense includes legal and office expense, state
income taxes, executive salaries, cost of acquisition personnel 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 services agreement between PSB and PSI.
ACQUISITION COSTS:
Internal acquisition costs are expensed as incurred.
RECLASSIFICATIONS:
Certain reclassifications have been made to the financial statements for
1997 in order to conform to the 1998 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.
10
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
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 has been primarily on the ownership and operation of its
self-storage facilities which represented approximately 81% of its portfolio.
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 nine
months ended September 30, 1998 and 1997 as though the Merger and related
exchange of properties have been effective at the beginning of fiscal 1997 are
as follows:
Nine months ended September 30,
1998 1997
------------ ------------
Revenues.................................... $ 64,853 $ 28,445
Net income.................................. $ 21,908 $ 4,787
Net income per share - basic................ $ 1.18 $ 0.97
Net income per share - diluted.............. $ 1.18 $ 0.97
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 1997 or of the future results of PSB.
11
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
4. REAL ESTATE FACILITIES
The activity in real estate facilities for the nine months ended September 30,
1998 is as follows:
<TABLE>
<CAPTION>
Accumulated
Land Buildings Depreciation Total
------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Balances at December 31, 1997........ $ 91,754,000 $ 226,466,000 $ (3,982,000) $ 314,238,000
Property acquisitions................ 69,172,000 217,061,000 - 286,233,000
Acquired in connection with the
Merger.......................... 14,400,000 33,600,000 - 48,000,000
Adjustment from intangible assets.... - 1,315,000 - 1,315,000
Capital improvements................. - 6,030,000 - 6,030,000
Depreciation expense................. - - (11,122,000) (11,122,000)
------------- ------------- --------------- ---------------
Balances at September 30, 1998....... $175,326,000 $ 484,472,000 $ (15,104,000) $ 644,694,000
============= ============= ================ ===============
</TABLE>
On January 13, 1998, PSB acquired a commercial property (approximately 308,000
net rentable square feet) from an unaffiliated third party for approximately
$22,518,000, consisting of cash totaling $22,325,000 (of which $500,000 was paid
before December 31, 1997) and the issuance of 8,428 OP Units having a value of
approximately $193,000.
In March 1998, PSB acquired two commercial properties (approximately 403,000
net rentable square feet) from unaffiliated third parties for an aggregate cost
of approximately $32,916,000, consisting of cash totaling $17,377,000 (of which
$300,000 was paid before December 31, 1997), the issuance of 44,250 OP Units
having a value of approximately $1,013,000 and the assumption of mortgage notes
payable of $14,526,000.
On May 4, 1998, PSB acquired 29 commercial properties (approximately 2.3 million
net rentable square feet) from an unaffilated third party for an aggregate cost
of approximately $190 million in cash.
In June 1998, PSB acquired three properties (approximately 343,000 net rentable
square feet) from unaffiliated third parties for an aggregate cost of
approximately $29,101,000, consisting of cash totaling $13,449,000, the issuance
of 8,882 OP Units having a value of approximately $203,000 and the assumption of
mortgage notes payable of $15,449,000.
On September 30, 1998, PSB acquired a commercial property (approximately 125,000
net rentable square feet) from an unaffiliated third party for approximately
$8,473,000, consisting of cash totaling $8,317,000 and the issuance of 6,540 OP
Units having a value of approximately $156,000.
5. LEASING ACTIVITY
Future minimum rental revenues under non-cancelable leases as of September 30,
1998 with tenants for the above real estate facilities are as follows:
1998 (October - December) $ 20,727,000
1999 73,934,000
2000 52,696,000
2001 35,247,000
2002 23,586,000
Thereafter 31,710,000
--------------
$ 237,900,000
==============
12
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
6. REVOLVING LINE OF CREDIT
On August 6, 1998, PSB entered into an unsecured line of credit (the
"Credit Agreement") with a commercial 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 coverage ratios, as defined (currently LIBOR plus 0.80%). In
addition, the Company is required to pay a commitment fee of 0.25% (per
annum).
7. MORTGAGE NOTES PAYABLE
Mortgage notes at September 30, 1998 consist of the following:
<TABLE>
<CAPTION>
<S> <C>
7.125% mortgage note, secured by one commercial property, principal
and interest payable monthly, due May 2006 $ 8,945,000
8.125% mortgage note, secured by one commercial property, principal
and interest payable monthly, due July 2005 5,439,000
8.5% mortgage note, secured by one commercial property, principal and
interest payable monthly, due July 2007. 1,950,000
8% mortgage note, secured by one commercial property, principal and
interest payable monthly, due April 2003 1,702,000
7.625% mortgage note, secured by one commercial property, principal
and interest payable monthly, due May 2004 11,596,000
------------
$29,632,000
============
</TABLE>
13
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
At September 30, 1998, approximate principal maturities of mortgage notes
payable are as follows:
1998 (October - December) $ 263,000
1999 1,103,000
2000 1,190,000
2001 1,285,000
2002 1,386,000
Thereafter 24,405,000
---------------
$ 29,632,000
===============
8. MINORITY INTERESTS
In consolidation, PSB classifies ownership interests in the Operating
Partnership, other than its own, as minority interest on the consolidated
financial statements. Minority interest in income consists of the minority
interests' share of the consolidated operating results.
Subject to certain limitations described below, each limited partner other
than PSB has the right to require the redemption of such limited partner's
partnership interests at any time or from time to time beginning on the
date that is one year after the date on which such limited partner is
admitted to the Operating Partnership.
Unless PSB, as general partner, elects to assume and perform the Operating
Partnership's obligation with respect to a redemption right, as described
below, 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 September 30, 1998, there were 7,400,951 OP Units owned by minority
interests (7,305,355 were owned by PSI and affiliated entities and 95,596
were owned by unaffiliated third parties). On a fully converted basis,
assuming all 7,400,951 minority interest OP Units were converted into
shares of common stock of PSB at September 30, 1998, the minority interests
would own approximately 23.8% of the pro forma 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 this pro forma 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.
9. PROPERTY MANAGEMENT CONTRACTS
The Operating Partnership manages industrial, office and retail facilities
for PSI and entities affiliated with PSI, and third party owners. These
facilities, all located in the United States, operate under the "Public
Storage" or "PS Business Parks" name.
14
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
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.
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 January 7, 1998, a holder of OP Units exercised its option and converted
its 1,785,008 OP Units into an equal number of shares of PSB common stock.
The conversion resulted in an increase in shareholders' equity and a
corresponding decrease in minority interest of approximately $33,023,000
representing the book value of the OP Units at the time of conversion.
In January 1998, PSB entered into an agreement with a group of
institutional investors under which PSB agreed to issue up to 6,774,074
shares of common stock at $22.88 per share in cash (an aggregate of $155
million) in separate tranches. The first tranche, representing 2,185,189
shares or $50 million, was issued in January 1998. PSB incurred $2,499,000
in costs associated with the issuance. The remainder of the common shares
(4,588,885 common shares) were issued on May 6, 1998 and the net proceeds
($105 million) were used to fund a portion of the cost to acquire
commercial properties in May 1998.
In May 1998, PSB completed two common stock offerings, raising net proceeds
in aggregate totaling $118.9 million through the issuance of 5,025,800
common shares. A portion of the net proceeds were used in connection with a
$190 million property portfolio acquisition.
On March 31, 1998, June 30, 1998 and September 30, 1998, PSB paid quarterly
distributions to its common shareholders totaling $4,079,000 ($0.347 per
common share), $5,909,000 ($0.25 per common share) and $5,909,000 ($0.25
per common share), respectively.
15
<PAGE>
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.
HISTORICAL OVERVIEW: PS Business Parks, Inc. ("PSB" or the "Company") is a
self-managed, self-advised real estate investment trust that acquires, owns and
operates commercial properties. The Company is the sole general partner of PS
Business Parks, L.P. (the "Operating Partnership") through which the Company
conducts most of its activities and owned, as of September 30, 1998, an
approximate 73% partnership interest. Substantially all of the remaining
partnership interest is owned by Public Storage, Inc. ("PSI") and its
affiliates.
The commercial properties owned by the Company and the Operating Partnership
generally include both business park (industrial/flex space) and office space.
The industrial space is used for, among other things, light manufacturing and
assembly, storage and warehousing, distribution and research and development
activities. Most of the office space is occupied by tenants who are also renting
industrial space. The commercial properties typically consist of one to ten
one-story buildings located on three to 20 acres and contain from approximately
10,000 to 500,000 square feet of rentable space (more than 50,000 square feet in
the case of the free-standing properties). A property is typically divided into
units ranging in size from 500 to 50,000 square feet. Leases generally range
from one to seven years and some tenants have options to extend the original
terms of their leases.
During 1997 and the first nine months of fiscal 1998, the Company completed a
number of business transactions which have had a significant impact to the
Company's comparative operating results for the three and nine months ended
September 30, 1998 and 1997:
* MERGER: PSB 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 surviving
company was changed to "PS Business Parks, Inc." in connection with
the merger.
Based upon the terms of the Merger, the transaction for financial
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 Commission 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.
In connection with the Merger, PSP11 exchanged eleven mini-warehouses and two
properties that combine mini-warehouse and commercial space for eleven
commercial properties owned by PSI. The fair value of the real estate facilities
owned by PSP11 and the commercial facilities received by PSP11 was approximately
$48 million. As a result of this transaction, PSB acquired 13 properties with a
total of approximately 815,000 net rentable square feet.
16
<PAGE>
* PROPERTY ACQUISITIONS: Prior to January 2, 1997, the Company and its
Operating Partnership did not have an ownership interest in any
properties.
On January 2, 1997, the Company acquired 35 commercial properties
(approximately 3.0 million net rentable square feet) from PSI and
affiliated entities in exchange for 1,198,680 shares of non-voting
participating preferred stock and 5,824,383 units of the Operating
Partnership ("OP Units").
On April 1, 1997, the Company acquired four commercial properties from
PSI (approximately 370,000 net rentable square feet) in
exchange for 1,480,968 OP Units.
On July 31, 1997, the Company acquired two commercial properties
(approximately 435,000 net rentable square feet) from an unaffiliated
third party for an aggregate cost of approximately $33,310,000 in
cash.
On September 24, 1997, the Company acquired a commercial property
(approximately 150,000 net rentable square feet) from an unaffiliated
third party for approximately $10,283,000, consisting of cash totaling
$9,959,000 and the issuance of 14,384 OP Units.
On December 10, 1997, the Company acquired a commercial property
(approximately 51,000 net rentable square feet) from an unaffiliated
third party for approximately $3,854,000, consisting of cash
totaling $3,554,000 and the issuance of 13,111 OP Units.
On December 24, 1997, the Company acquired six commercial properties
(approximately 2.0 million net rentable square feet) valued at
$118,655,000 and $1,000,000 in cash from a subsidiary of a state
pension plan through a merger and contribution. In connection with the
transaction, the Company issued 3,504,758 common shares of the Company
and 1,785,007 OP Units to the subsidiary of the state pension plan.
The Company incurred approximately $3,300,000 in costs in connection
with the transaction.
On January 13, 1998, the Company acquired a commercial property
(approximately 308,000 net rentable square feet) from an unaffiliated
third party for approximately $22,518,000, consisting of cash totaling
$22,325,000 and the issuance of 8,428 OP Units having a value of
approximately $193,000.
In March 1998, the Company acquired two commercial properties
(approximately 403,000 net rentable square feet) from unaffiliated
third parties for an aggregate cost of approximately $32,916,000,
consisting of cash totaling $17,377,000, the issuance of 44,250 OP
Units having a value of approximately $1,013,000 and the assumption of
mortgage notes payable of $14,526,000.
On May 4, 1998, the Company acquired 29 commercial properties
(approximately 2.3 million net rentable square feet) from an
unaffiliated third party for an aggregate cost of approximately $190
million in cash.
In June 1998, the Company acquired three properties (approximately
343,000 net rentable square feet) from unaffiliated third parties for
an aggregate cost of approximately $29,101,000, consisting of cash
totaling $13,449,000, the issuance of 8,882 OP Units having a value of
approximately $203,000 and the assumption of mortgage notes payable of
$15,449,000.
On September 30, 1998, the Company acquired a commercial property
(approximately 125,000 net rentable square feet) from an unaffiliated
third party for approximately $8,473,000, consisting of cash totaling
$8,317,000 and the issuance of 6,540 OP Units having a value of
approximately $156,000.
* COMMON STOCK ISSUANCES FOR CASH: In connection with the Company's July
1997 acquisition of properties, the Company issued 2,025,769 shares of
common stock primarily to PSI for cash totaling $33,800,000.
In January 1998, the Company entered into an agreement with a group of
institutional investors under which the Company agreed to issue up to
6,774,074 shares of common stock at $22.88 per share in separate
tranches. The first tranche, representing 2,185,189 shares or $50
million was issued in January 1998. The remainder of the shares were
issued on May 6, 1998 for $105 million.
17
<PAGE>
In May 1998, the Company completed two common stock offerings, raising
net proceeds totaling $118.9 million. In the first offering, the
Company sold 4,000,000 shares of common stock to an underwriter,
resulting in approximately $95.2 million of net proceeds. These shares
were resold to various institutional investors. A portion of the
proceeds were used to retire debt incurred with a $190 million
property portfolio acquisition. In the second common stock offering,
the Company sold 1,025,800 common shares to an underwriter, resulting
in net proceeds of $23.7 million.
* EXCHANGE OF NON-VOTING PREFERRED STOCK FOR VOTING COMMON STOCK: On
March 31, 1997, PSI exchanged its non-voting common stock for voting
common stock of the Company in a transaction accounted for as a
purchase of PSB by PSI. As a result of PSI attaining a 95% ownership
interest in PSB voting common stock, PSB reflected PSI's cost of its
investment in PSB in accordance with Accounting Principles Board
Opinion No. 16. As a result of PSI attaining control of PSB, the
carrying value of PSB's assets and liabilities were adjusted to
reflect PSI's acquisition cost of its controlling interest in PSB of
approximately $35 million. As a result, the carrying value of real
estate facilities was increased at March 31, 1997 by approximately
$8.0 million, intangible assets increased by approximately $4.4
million and paid in capital increased by approximately $12.4 million.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1997: Net income for the three months ended September
30, 1998 was $9,748,000 compared to $1,182,000 for the same period in 1997. Net
income for the nine months ended September 30, 1998 was $21,124,000 compared to
$2,659,000 for the same period in 1997. Net income per common share on a diluted
basis was $0.41 (based on weighted average diluted shares outstanding of
23,695,747) for the three months ended September 30, 1998 compared to net income
per common share on a diluted basis of $0.33 (based on diluted weighted average
shares outstanding of 3,555,777) for the three months ended September 30, 1997,
representing an increase of 24.2%. Net income per common share on a diluted
basis was $1.17 (based on weighted average diluted shares outstanding of
17,989,772) for the nine months ended September 30, 1998 compared to net income
per common share on a diluted basis of $1.00 (based on diluted weighted average
shares outstanding of 2,652,109) for the nine months ended September 30, 1997,
representing an increase of 17.0%. The increases in net income and net income
per share reflects the Company'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.
18
<PAGE>
PROPERTY OPERATIONS: The Company's property operations account for almost all of
the net operating income earned by the Company. The following table presents the
operating results of the properties for the three and nine months ended
September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
------------------------------------- -------------------------------------
1998 1997 Change 1998 1997 Change
------------- ----------- --------- ------------- ----------- ---------
Rental income:
Facilities owned throughout each period
(35 facilities, 3.0 million net
<S> <C> <C> <C> <C> <C> <C>
rentable square feet)................. $ 6,314,000 $6,032,000 4.7% $18,695,000 $17,896,000 4.5%
Facilities acquired between March 31,
1997 and June 30, 1998 (62
facilities, 7.2 million net rentable
square feet).......................... 19,321,000 2,224,000 768.8% 42,764,000 3,143,000 1,260.6%
------------- ----------- --------- ------------- ----------- ---------
Total rental income..................... $25,635,000 $8,256,000 210.5% $61,459,000 $21,039,000 192.1%
============= =========== ========= ============= =========== =========
Cost of operations (excluding
depreciation):
Facilities owned throughout each period. $2,599,000 $2,576,000 0.9% $ 7,560,000 $ 7,439,000 1.6%
Facilities acquired between March 31,
1997 and June 30, 1998................ 4,780,000 674,000 609.2% 10,801,000 830,000 1,201.3%
------------- ----------- --------- ------------- ----------- ---------
Total cost of operations................ $7,379,000 $3,250,000 127.0% $18,361,000 $8,269,000 122.0%
============= =========== ========= ============= =========== =========
Net operating income (rental income
less cost of operations):
Facilities owned throughout each period. $3,715,000 $3,456,000 7.5% $11,135,000 $10,457,000 6.5%
Facilities acquired between March 31,
1997 and June 30, 1998................ 14,541,000 1,550,000 838.1% 31,963,000 2,313,000 1,281.9%
------------- ----------- --------- ------------- ----------- ---------
Total net operating income.............. $18,256,000 $5,006,000 264.7% $43,098,000 $12,770,000 237.5%
============= =========== ========= ============= =========== =========
Other operating data:
---------------------
For the facilities owned throughout
each period:
Annualized realized rent per occupied
square foot........................... $8.85 $8.52 3.9% $ 8.77 $8.41 4.3%
Weighted average occupancy for the
period................................ 94.7% 94.0% 0.7% 94.1% 93.9% 0.2%
</TABLE>
<TABLE>
<CAPTION>
Rental income and net operating income ("NOI") are summarized for the three
months ended September 30, 1998 by major geographical region below:
Rental Percentage Percentage
Region Income of Total NOI of Total
- ------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Southern California $7,676,000 29.9% $5,540,000 30.3%
Northern California 2,013,000 7.9% 1,455,000 8.0%
Virginia/Maryland 6,640,000 25.9% 4,817,000 26.4%
Texas 4,347,000 17.0% 2,749,000 15.1%
Oregon 3,558,000 13.9% 2,851,000 15.6%
Other 1,401,000 5.4% 844,000 4.6%
------------- ------------- ------------- ---------
Total $25,635,000 100.0% $18,256,000 100.0%
============= ============= ============= =========
</TABLE>
SUPPLEMENTAL PROPERTY DATA AND TRENDS: In order to evaluate how the Company's
overall portfolio has performed, management analyzes the operating performance
of a consistent group of 51 properties (4.2 million net rentable square feet).
These 51 properties represent a mature group of properties which have been
managed by the Company for at least three years and, as of March 17, 1998, were
owned by the Company. The table below summarizes the historical operations of
the 51 properties for the three and nine months ended September 30, 1998 and
1997; however, the Company did not own all of the properties throughout the
periods presented and therefore, such operations are not all reflected in the
Company's historical operating results.
19
<PAGE>
<TABLE>
<CAPTION>
The following table summarizes the pre-depreciation historical operating results
of these "Same Park" facilities:
Three months ended September 30,
-----------------------------------------------
1998 (1) 1997 (1) Change
------------- ---------------- --------------
<S> <C> <C> <C>
Rental income (2)...................................... $9,820,000 $9,275,000 5.9%
Cost of operations..................................... 3,934,000 3,920,000 0.4%
------------- ---------------- --------------
Net operating income................................. $5,886,000 $5,355,000 9.9%
============= ================ ==============
Gross margin (3)................................... 59.9% 57.7% 2.2%
Annualized realized rent per occupied square foot (4).. $9.85 $9.26 6.4%
Weighted average occupancy for the period.............. 95.7% 95.8% (0.1)%
Nine months ended September 30,
-----------------------------------------------
1998 (1) 1997 (1) Change
------------- ---------------- --------------
Rental income (2)...................................... $28,977,000 $27,451,000 5.6%
Cost of operations .................................... 11,155,000 11,160,000 -%
------------- ---------------- --------------
Net operating income................................. $17,822,000 $16,291,000 9.4%
============= ================ ==============
Gross margin (3)................................... 61.5% 59.3% 2.2%
Annualized realized rent per occupied square foot (3).. $9.67 $9.12 6.0%
Weighted average occupancy for the period.............. 95.4% 95.8% (0.4)%
</TABLE>
(1) Operations for the three and nine months ended September 30, 1998 represent
the historical operations of the 51 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.
<TABLE>
The following tables summarize by major geographic region the operating results
displayed above:
THREE MONTH RESULTS
- -------------------
<CAPTION>
Revenues Revenues Percentage NOI NOI Percentage
1998 1997 Increase 1998 1997 Increase
----------- ----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Southern California $3,767,000 $3,613,000 4.3% $2,382,000 $2,200,000 8.3%
Northern California 1,430,000 1,315,000 8.7% 949,000 839,000 13.1%
Texas 1,670,000 1,632,000 2.3% 795,000 780,000 1.9%
Virginia/Maryland 1,359,000 1,231,000 10.4% 839,000 698,000 20.2%
Arizona 692,000 632,000 9.5% 373,000 331,000 12.7%
Other 902,000 852,000 5.9% 548,000 507,000 8.1%
----------- ----------- ---------- ---------- ---------- -----------
Total $9,820,000 $9,275,000 5.9% $5,886,000 $5,355,000 9.9%
=========== =========== ========== ========== ========== ===========
</TABLE>
20
<PAGE>
<TABLE>
NINE MONTH RESULTS
- ------------------
<CAPTION>
Revenues Revenues Percentage NOI NOI Percentage
1998 1997 Increase 1998 1997 Increase
----------- ------------ ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Southern California $11,150,000 $10,675,000 4.4% $7,131,000 $6,600,000 8.0%
Northern California 4,224,000 3,900,000 8.3% 2,860,000 2,599,000 10.0%
Texas 4,938,000 4,845,000 1.9% 2,476,000 2,444,000 1.3%
Virginia/Maryland 3,940,000 3,697,000 6.6% 2,459,000 2,060,000 19.4%
Arizona 2,027,000 1,851,000 9.5% 1,225,000 1,101,000 11.3%
Other 2,698,000 2,483,000 8.7% 1,671,000 1,487,000 12.4%
----------- ------------ ---------- ----------- ----------- -----------
Total $28,977,000 $27,451,000 5.6% $17,822,000 $16,291,000 9.4%
=========== ============ ========== =========== =========== ===========
</TABLE>
The increases noted above reflect the strength of our existing markets. All
major markets except Dallas, Texas have shown increases in occupancy and rental
rates without corresponding increases in expenses. Texas has underperformed the
rest of the portfolio due to temporary vacancies in our "Same Park" Dallas
facilities. In addition, the Texas properties incurred higher utility costs due
to unusually hot weather during the third quarter.
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 September 30, 1998, $97,000 in net operating income was recognized from
facility management operations compared to $173,000 for the same period in 1997.
During the nine months ended September 30, 1998, $391,000 in net operating
income was recognized from facility management operations compared to $539,000
for the same period in 1997. Facility management fees have decreased due to the
Company's acquisition of properties previously managed.
INTEREST AND OTHER INCOME: Interest and other income primarily reflect earnings
on cash balances. Interest income was $533,000 for the three months ended
September 30, 1998 compared to $183,000 for the same period in 1997. Interest
income was $1,077,000 for the nine months ended September 30, 1998 compared to
$322,000 for the same period in 1997. The increases are attributable to
increased average cash balances primarily due to the Company's issuance of
common stock in January and May 1998 and the timing of investing these funds in
newly acquired real estate facilities. Average cash balances for the three and
nine months ended September 30, 1998 were approximately $28 million and $41
million, respectively, compared to $8 million and $13 million for the same
periods in 1997.
DEPRECIATION AND AMORTIZATION EXPENSE: Depreciation and amortization expense for
the three months ended September 30, 1998 was $4,865,000 compared to $1,395,000
for the same period in 1997. Depreciation and amortization expense for the nine
months ended September 30, 1998 was $11,421,000 compared to $3,410,000 for the
same period in 1997. The increases are due to the acquisition of real estate
facilities in 1997 and 1998.
GENERAL AND ADMINISTRATIVE EXPENSE: General and administrative expense was
$593,000 for the three months ended September 30, 1998 compared to $382,000 for
the same period in 1997. General and administrative expense was $1,589,000 for
the nine months ended September 30, 1998 compared to $767,000 for the same
period in 1997. The increase is due to the increased scope and acquisition
activities of the Company.
INTEREST EXPENSE: Interest expense was $667,000 and $1,736,000 for the three and
nine months ended September 30, 1998 (none for the same periods in 1997).
Interest expense for 1998 is attributable to mortgage notes assumed in
connection with the acquisition of real estate facilities in March and June
1998, short-term borrowings in connection with an acquisition and the
amortization of line of credit facility costs.
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 September
30, 1998 was $3,013,000 compared to $2,403,000 for the same period in 1997.
Minority interest in income for the nine months ended September 30, 1998 was
$8,696,000 compared to $6,795,000 for the same period in 1997. The increases in
minority interest in income are due to improved operating results and the
issuance of additional Operating Partnership units, primarily in connection with
the acquisition of real estate facilities on April 1, 1997.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the nine months ended September
30, 1998 and 1997 was $41,842,000 and $14,323,000, respectively. Management
believes that its 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 distributions to
shareholders and holders of OP Units for the foreseeable
future.
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.
<TABLE>
<CAPTION>
Nine months ended September 30,
1998 1997
------------- --------------
<S> <C> <C>
Net income.......................................................... $ 21,124,000 $ 2,659,000
Depreciation and amortization....................................... 11,421,000 3,410,000
Change in working capital........................................... 601,000 1,459,000
Minority interest in income......................................... 8,696,000 6,795,000
------------- --------------
Net cash provided by operating activities........................... 41,842,000 14,323,000
Maintenance capital expenditures.................................... (2,117) (1,143)
Tenant improvements................................................. (2,588) (891)
Capitalized lease commissions....................................... (1,325) (287)
------------- --------------
Funds available for distributions to shareholders, minority 35,812,000 12,002,000
interests, acquisitions and other corporate purposes..............
Cash distributions to shareholders and minority interests........... (22,145,000) -
------------- --------------
Excess funds available for acquisitions and other corporate purposes $ 13,667,000 $12,002,000
============= ==============
</TABLE>
The Company's capital structure is characterized by a low level of leverage. As
of September 30, 1998, the Company had five fixed rate mortgage notes payable
totaling $29,632,000, which represented 4% of its total capitalization (based on
book value, including minority interests and debt). The weighted average
interest rate is 7.6%.
On August 6, 1998, PSB entered into an unsecured line of credit (the "Credit
Agreement") with a commercial 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 coverage ratios,
as defined (currently LIBOR plus 0.80%). In addition, the Company is required to
pay a commitment fee of 0.25% (per annum).
The Company expects to fund its growth strategies with cash on hand, internally
generated retained cash flows and temporary 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.
In January 1998, the Company entered into an agreement with institutional
investors whereby the Company agreed to issue 6,774,074 shares of its common
stock for cash ($155 million) in separate tranches. The first tranche,
representing 2,185,189 shares or $50 million, was issued in January 1998. The
Company incurred $2,400,000 in costs associated with the issuance. The remainder
of the common shares (4,588,885 common shares) were issued on May 6, 1998 and
the net proceeds ($105 million) were used to repay short-term borrowings.
In May 1998, the Company completed two common stock offerings, raising net
proceeds totaling $118.9 million. In the first offering, the Company sold
4,000,000 shares of common stock to an underwriter, resulting in approximately
$95.2 million of net proceeds. These shares were resold to various institutional
investors. A portion of the proceeds were used to retire debt incurred with a
$190 million property portfolio acquisition. In the second common stock
offering, the Company sold 1,025,800 common shares to an underwriter, resulting
in net proceeds of $23.7 million.
22
<PAGE>
FUNDS FROM OPERATIONS: Funds from operations ("FFO") is defined by the Company
as net income, computed in accordance with generally accepted accounting
principles ("GAAP"), before depreciation, amortization, 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.
Funds from operations for the Company is computed as follows:
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1998 1997
------------- --------------
<S> <C> <C>
Net income......................................................... $ 21,124,000 $ 2,659,000
Minority interest in income........................................ 8,696,000 6,795,000
Depreciation and amortization...................................... 11,421,000 3,410,000
Effects of straight line rents..................................... (924,000) -
------------- --------------
Subtotal......................................................... 40,317,000 12,864,000
FFO allocated to minority interests................................ (11,757,000) (9,246,000)
------------- --------------
Funds from operations allocated to shareholders.................... $ 28,560,000 $ 3,618,000
============= ===============
</TABLE>
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.
On November 5, 1998, the Company declared a regular dividend of $0.25 per share
payable on December 31, 1998 to shareholders of record on December 15, 1998. The
Board of Directors has established a distribution policy to maximize the
retention of operating cash flow and only distribute the minimum amount required
for the Company to maintain its tax status as a REIT.
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 written 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 systems can be
mitigated. However, if the plan for ensuring Year 2000 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
Year 2000 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 Year 2000 compliant and has requested
a Year 2000 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 Year 2000 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 year 2000 compliance activities (which primarily
consists of the costs of 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 $500,000. These costs are or will be capitalized.
The costs of the projects and the date on which PSI and the Company believe that
it will be Year 2000 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
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
(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 September 30, 1998
(filed October 13, 1998) 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 September 30, 1998 amending Form 8-K dated September 30, 1998
(filed November 13, 1998) 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: November 16, 1998
PS BUSINESS PARKS, INC.
BY: /s/ Jack Corrigan
--------------------
Jack Corrigan
Vice President and Chief Financial Officer
24
PS BUSINESS PARKS, INC.
Exhibit 11: Statement re: Computation of Earnings per Share
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ------------ ----------- -----------
BASIC AND DILUTED EARNINGS PER SHARE:
Net income and net income allocable to
common shareholders (same for Basic and
<S> <C> <C> <C> <C>
Diluted computations)..................................... $9,748,000 $1,182,000 $21,124,000 $2,659,000
=========== ============ =========== ===========
Weighted average common shares outstanding:
Basic weighted average common shares outstanding.......... 23,635,650 3,555,777 17,920,028 2,652,109
Net effect of dilutive stock options - based on treasury
stock method using average market price................. 60,097 - 69,744 -
----------- ------------ ----------- -----------
Diluted weighted average common shares outstanding........ 23,695,747 3,555,777 17,989,772 2,652,109
=========== ============ =========== ===========
Basic earnings per common share.............................. $ 0.41 $ 0.33 $ 1.18 $ 1.00
=========== ============ =========== ===========
Diluted earnings per common share............................ $ 0.41 $ 0.33 $ 1.17 $ 1.00
=========== ============ =========== ===========
</TABLE>
Exhibit 11
PS BUSINESS PARKS, INC.
Exhibit 12: Statement re: Computation of Ratio of Earnings
to Fixed Charges
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------------
1998 1997
------------------ ----------------
(Amounts in thousands, except ratios)
<S> <C> <C>
Net income $ 21,124,000 $ 2,659,000
Add: minority interest 8,696,000 6,795,000
Less: minority interest that does not have fixed
charges - (6,795,000)
------------------ ----------------
29,820,000 2,659,000
Add: Interest expense 1,736,000 -
------------------ ----------------
Earnings available to cover fixed charges $ 31,556,000 $ 2,659,000
================== ================
Fixed charges (interest expense) $ 1,736,000 $ -
================== ================
Ratio of earnings to fixed charges 18.18 NA
================== ================
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ -------------- ------------- -------------- -------------
(Amounts in thousands, except ratios)
<S> <C> <C> <C> <C> <C>
Net income before taxes $ 3,836 $ 519 $ 1,192 $ 1,245 $ 1,517
Minority interest 8,566 - - - -
------------ -------------- ------------- -------------- -------------
12,402 519 1,192 1,245 1,517
Interest expense 1 - - - -
------------ -------------- ------------- -------------- -------------
Earnings available to cover
fixed charges $ 12,403 $ 519 $ 1,192 $ 1,245 $ 1,517
============ ============== ============= ============== =============
Fixed charges - interest expense $ 1 $ - $ - $ - $ -
============ ============== ============= ============== =============
Ratio of earnings to fixed
charges 12,403 NA NA NA NA
============ ============== ============= ============== =============
Exhibit 12
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
PS BUSINESS PARKS. INC.
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
ARTICLE 5 OF REGULATION S-X
</LEGEND>
<CIK> 0000866368
<NAME> PS Business Parks, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. $
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 32,747,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 32,747,000
<PP&E> 659,798,000
<DEPRECIATION> (15,104,000)
<TOTAL-ASSETS> 683,431,000
<CURRENT-LIABILITIES> 13,794,000
<BONDS> 0
0
0
<COMMON> 236,000
<OTHER-SE> 487,158,000
<TOTAL-LIABILITY-AND-EQUITY> 683,431,000
<SALES> 0
<TOTAL-REVENUES> 62,976,000
<CGS> 0
<TOTAL-COSTS> 18,410,000
<OTHER-EXPENSES> 14,746,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,736,000
<INCOME-PRETAX> 21,124,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 21,124,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,124,000
<EPS-PRIMARY> 1.18
<EPS-DILUTED> 1.17
</TABLE>
