UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _______________
Commission File Number 1-10709
PS BUSINESS PARKS, INC.
-----------------------
(Exact name of registrant as specified in its charter)
California 95-4300881
---------- ----------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation) Identification Number)
701 Western Avenue, Glendale, California 91201-2397
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 244-8080
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Number of shares outstanding of each of the issuer's classes of common stock, as
of May 11, 2000:
Common Stock, $0.01 par value, 23,418,478 shares outstanding
<PAGE>
PS BUSINESS PARKS, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2000
and December 31, 1999......................................... 2
Condensed Consolidated Statements of Income for the Three
Months Ended March 31, 2000 and 1999........................... 3
Condensed Consolidated Statement of Shareholders' Equity for
the Three Months Ended March 31, 2000.......................... 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2000 and 1999........................... 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 - 22
Item 3. Quantitative and Qualitative Disclosures about Market Risk..... 22
PART II. OTHER INFORMATION
Item 6. Exhibits & Reports on Form 8-K................................. 23
<PAGE>
PS BUSINESS PARKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------------- ----------------
(unaudited)
ASSETS
------
<S> <C> <C>
Cash and cash equivalents............................... $ 41,572,000 $ 74,220,000
Real estate facilities, at cost:
Land............................................... 201,813,000 194,140,000
Buildings and equipment............................ 657,643,000 636,261,000
---------------- ----------------
859,456,000 830,401,000
Accumulated depreciation........................... (59,277,000) (50,976,000)
---------------- ----------------
800,179,000 779,425,000
Properties held for disposition, net.................... 14,235,000 14,235,000
Construction in progress................................ 13,793,000 8,616,000
---------------- ----------------
828,207,000 802,276,000
Receivables............................................. 203,000 771,000
Deferred rent receivables............................... 6,063,000 5,493,000
Intangible assets, net.................................. 1,207,000 1,282,000
Other assets............................................ 20,176,000 19,699,000
---------------- ----------------
Total assets.............................. $ 897,428,000 $ 903,741,000
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accrued and other liabilities.............................. $ 22,468,000 $ 21,195,000
Mortgage notes payable..................................... 31,552,000 37,066,000
---------------- ----------------
Total liabilities................................. 54,020,000 58,261,000
Minority interest:
Preferred units................................... 132,750,000 132,750,000
Common units...................................... 156,047,000 157,199,000
Shareholders' equity:
Preferred stock, $0.01 par value, 50,000,000 shares
authorized, 2,200 shares issued and outstanding at
March 31, 2000 and December 31, 1999.................. 55,000,000 55,000,000
Common stock, $0.01 par value, 100,000,000 shares
authorized, 23,432,078 shares issued and outstanding
at March 31, 2000 (23,645,461 shares issued and
outstanding at December 31, 1999)..................... 234,000 236,000
Paid-in capital......................................... 474,377,000 478,889,000
Cumulative net income................................... 84,552,000 73,809,000
Cumulative distributions................................ (59,552,000) (52,403,000)
---------------- ----------------
Total shareholders' equity........................ 554,611,000 555,531,000
---------------- ----------------
Total liabilities and shareholders' equity... $ 897,428,000 $ 903,741,000
================ ================
</TABLE>
See accompanying notes.
2
<PAGE>
PS BUSINESS PARKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
------------------------------------------
2000 1999
-------------------- --------------------
<S> <C> <C>
Revenues:
Rental income.................................................... $ 34,053,000 $ 29,117,000
Facility management fees from affiliates......................... 123,000 114,000
Interest and other income........................................ 1,688,000 20,000
-------------------- --------------------
35,864,000 29,251,000
-------------------- --------------------
Expenses:
Cost of operations................................................ 9,552,000 8,376,000
Cost of facility management....................................... 25,000 23,000
Depreciation and amortization..................................... 8,376,000 6,733,000
General and administrative........................................ 883,000 802,000
Interest expense.................................................. 374,000 909,000
-------------------- --------------------
19,210,000 16,843,000
-------------------- --------------------
Income before minority interest..................................... 16,654,000 12,408,000
Minority interest in income - preferred units..................... (2,920,000) -
Minority interest in income - common units........................ (2,991,000) (2,966,000)
-------------------- --------------------
Net income.......................................................... $ 10,743,000 $ 9,442,000
==================== ====================
Net income allocation:
Allocable to preferred shareholders............................... $ 1,272,000 $ -
Allocable to common shareholders.................................. 9,471,000 9,442,000
-------------------- --------------------
$ 10,743,000 $ 9,442,000
==================== ====================
Net income per common share:
Basic............................................................. $ 0.40 $ 0.40
==================== ====================
Diluted........................................................... $ 0.40 $ 0.40
==================== ====================
Weighted average common shares outstanding:
Basic............................................................. 23,592,000 23,637,000
==================== ====================
Diluted........................................................... 23,643,000 23,705,000
==================== ====================
</TABLE>
See accompanying notes.
3
<PAGE>
PS BUSINESS PARKS, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the three months ended March 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
-------------------- -------------------- Paid-in Cumulative Cumulative Shareholders'
Shares Amount Shares Amount Capital Net Income Distributions Equity
-------- ----------- ---------- -------- ------------ ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1999... 2,200 $55,000,000 23,645,461 $236,000 $478,889,000 $73,809,000 $(52,403,000) $555,531,000
Conversion of common OP units.. - - 107,517 1,000 2,189,000 - - 2,190,000
Repurchase of common stock..... - - (320,900) (3,000) (6,771,000) - - (6,774,000)
Net income..................... - - - - - 10,743,000 - 10,743,000
Distributions paid:
Preferred stock............. - - - - - - (1,272,000) (1,272,000)
Common stock................ - - - - - - (5,877,000) (5,877,000)
Adjustment to reflect minority
interest to underlying
ownership interest........... - - - - 70,000 - - 70,000
-------- ----------- ---------- -------- ------------ ----------- -------------- -------------
Balances at March 31, 2000...... 2,200 $55,000,000 23,432,078 $234,000 $474,377,000 $84,552,000 $(59,552,000) $554,611,000
======== =========== ========== ======== ============ =========== ============== =============
</TABLE>
See accompanying notes.
4
<PAGE>
PS BUSINESS PARKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-----------------------------------------
2000 1999
------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income....................................................... $ 10,743,000 $ 9,442,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization expense........................ 8,376,000 6,733,000
Minority interest in income.................................. 5,911,000 2,966,000
(Increase) decrease in receivables and other assets.......... 21,000 (832,000)
Increase (decrease) in accrued and other liabilities......... 1,251,000 (1,900,000)
------------------- -------------------
Total adjustments....................................... 15,559,000 6,967,000
------------------- -------------------
Net cash provided by operating activities.................. 26,302,000 16,409,000
------------------- -------------------
Cash flows from investing activities:
Other investments............................................ (500,000) -
Acquisition of real estate facilities........................ (25,386,000) (22,269,000)
Capital improvements to real estate facilities............... (3,669,000) (2,204,000)
Construction in progress..................................... (5,177,000) (3,877,000)
------------------- -------------------
Net cash used in investing activities...................... (34,732,000) (28,350,000)
------------------- -------------------
Cash flows from financing activities:
Borrowings from an affiliate................................. - 41,200,000
Repayment of borrowings from an affiliate.................... - (13,500,000)
Loans to an affiliate........................................ (77,000,000) -
Repayment of loans to an affiliate........................... 77,000,000 -
Borrowings from line of credit............................... - 14,000,000
Repayment of borrowings from line of credit.................. - (26,500,000)
Principal payments on mortgage notes payable................. (5,514,000) (305,000)
Net proceeds from the issuance of common stock............... - 40,000
Repurchase of common stock................................... (6,774,000) -
Distributions paid to preferred shareholders................. (1,272,000) -
Distributions paid to minority interests - preferred units... (2,920,000) -
Distributions paid to common shareholders.................... (5,877,000) (5,909,000)
Distributions paid to minority interests - common units...... (1,861,000) (1,854,000)
------------------- -------------------
Net cash (used in) provided by financing activities........ (24,218,000) 7,172,000
------------------- -------------------
Net decrease in cash and cash equivalents........................... (32,648,000) (4,769,000)
Cash and cash equivalents at the beginning of the period............ 74,220,000 6,068,000
------------------- -------------------
Cash and cash equivalents at the end of the period.................. $ 41,572,000 $ 1,299,000
=================== ===================
</TABLE>
See accompanying notes.
5
<PAGE>
PS BUSINESS PARKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-----------------------------------------
2000 1999
------------------- -------------------
<S> <C> <C>
Supplemental schedule of non cash investing and financing
activities:
Acquisitions of real estate facilities in exchange for minority
interests and mortgage notes payable:
Real estate facilities....................................... $ - $ (2,520,000)
Minority interest - common units............................. - 333,000
Mortgage notes payable....................................... - 2,187,000
Conversion of common OP units into shares of common stock:
Minority interest - common units............................. (2,190,000) -
Common stock................................................. 1,000 -
Paid-in capital.............................................. 2,189,000 -
Adjustment to reflect miniority interest to underlying ownership
interest:
Minority interest - common units............................. (70,000) 395,000
Paid-in capital.............................................. 70,000 (395,000)
</TABLE>
See accompanying notes.
6
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
1. Organization and description of business
PS Business Parks, Inc. ("PSB") was incorporated in the state of California
in 1990. As of March 31, 2000, PSB owned an approximate 73% general and
limited partnership interest in PS Business Parks, L.P. (the "Operating
Partnership" or "OP"). 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. PSB and the
Operating Partnership are collectively referred to as the "Company."
The Company is a fully-integrated, self-advised and self-managed real
estate investment trust ("REIT") that acquires, develops, owns and operates
commercial properties containing commercial and industrial rental space. As
of March 31, 2000, the Company owned and operated 126 commercial properties
(approximately 12.5 million net rentable square feet) located in 11 states.
In addition, the Company managed, on behalf of Public Storage, Inc. ("PSI")
and affiliated entities, 37 commercial properties (approximately 1.0
million net rentable square feet).
2. Summary of significant accounting policies
Basis of presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted
in the United States 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
accounting principles generally accepted in the United States for complete
financial statements. The preparation of the condensed consolidated
financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and
assumptions that affect the amounts reported in the condensed consolidated
financial statements and accompanying notes. Actual results could differ
from estimates. In the opinion of management, all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation have been
included. Operating results for the three months ended March 31, 2000 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2000. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1999.
The condensed consolidated financial statements include the accounts of PSB
and the Operating Partnership. All significant intercompany balances and
transaction have been eliminated in the condensed consolidated financial
statements.
Cash and cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less at the date of purchase to be cash
equivalents. The carrying amount of cash and cash equivalents approximates
fair value.
Real estate facilities
Real estate facilities are recorded at cost. Costs related to the
renovation or improvement of the properties are capitalized. Expenditures
for repair and maintenance are expensed as incurred. Buildings and
equipment are depreciated on the straight-line method over the estimated
useful lives, which are generally 30 and 5 years, respectively.
Interest cost and property taxes incurred during the period of construction
of real estate facilities are capitalized. Construction in progress and
developed projects include $1,655,000 and $1,257,000 of interest costs
capitalized at March 31, 2000 and December 31, 1999, respectively. The
Company capitalized $398,000 and $185,000 during the three months ended
March 31, 2000 and 1999, respectively.
7
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
Intangible assets
Intangible assets consist of property management contracts for properties
managed, but not owned, by the Company. The intangible assets are being
amortized over seven years. Intangible assets are net of accumulated
amortization of $949,000 and $874,000 at March 31, 2000 and December 31,
1999, respectively.
Evaluation of asset impairment
The Company evaluates its assets used in operations, by identifying
indicators of impairment and by comparing the sum of the estimated
undiscounted future cash flows for each asset to the asset's carrying
amount. When indicators of impairment are present and the sum of the
undiscounted future cash flows is less than the carrying value of such
asset, an impairment loss is recorded equal to the difference between the
asset's current carrying value and its value based on discounting its
estimated future cash flows. At March 31, 2000, no such indicators of
impairment have been identified.
Assets held for disposition are reported at the lower of carrying amount or
fair value less selling costs.
Borrowings from and loans to affiliate
The Company borrowed an aggregate of $41.2 million from PSI and paid
$266,000 in interest expense during the three months ended March 31, 1999.
The notes bore interest at 5.5% (per annum) and were repaid as of April 30,
1999.
The Company loaned an aggregate of $77 million to PSI and received $153,000
in interest income during the period of January 5, 2000 through March 8,
2000. The notes bore interest at 5.9% (per annum) and were repaid as of
March 20, 2000.
Revenue and expense recognition
All leases are classified as operating leases. Rental income is recognized
on a straight-line basis over the terms of the leases. Reimbursements from
tenants for real estate taxes and other recoverable operating expenses are
recognized as revenue in the period the applicable costs are incurred.
Costs incurred in connection with leasing (primarily tenant improvements
and leasing commissions) are capitalized and amortized over the lease
period.
Property management fees are recognized in the period earned.
General and administrative expense
General and administrative expense includes executive compensation, office
expense, professional fees, state income taxes, cost of acquisition
personnel and other such administrative items. Such amounts include amounts
incurred by PSI on behalf of the Company, which were subsequently charged
to the Company in accordance with the allocation methodology pursuant to
the cost allocation and administrative service agreement between the
Company and PSI.
Acquisition costs
Internal acquisition costs are expensed as incurred.
Income taxes
During 1997, the Company qualified and intends to continue to qualify as a
REIT, as defined in Section 856 of the Internal Revenue Code. As a REIT,
the Company is not subject to federal income tax to the extent that it
distributes at least 95% of its taxable income to its shareholders. In
addition, REIT's are subject to a number of organizational and operating
requirements. If the Company fails to qualify as a REIT in any taxable
year, the Company will be subject to federal income tax (including any
applicable alternative minimum tax) based on its taxable income using
corporate income tax rates. Even if the Company qualifies for taxation as a
8
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
REIT, the Company may be subject to certain state and local taxes on its
income and property and to federal income and excise taxes on its
undistributed taxable income. The Company believes it met all organization
and operating requirements to maintain its REIT status during 1999 and
intends to continue to meet such requirements for 2000. Accordingly, no
provision for income taxes has been made in the accompanying financial
statements.
Net income per common share
Per share amounts are computed using the weighted average common shares
outstanding. "Diluted" weighted average common shares outstanding include
the dilutive effect of stock options under the treasury stock method.
"Basic" weighted average common shares outstanding excludes such effect.
Earnings per share has been calculated as follows:
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-------------------------------------------
2000 1999
------------------- ---------------------
<S> <C> <C>
Net income allocable to common shareholders........................... $ 9,471,000 $ 9,442,000
=================== =====================
Weighted average common shares outstanding:
Basic weighted average common shares outstanding................... 23,592,000 23,637,000
Net effect of dilutive stock options - based on treasury stock
method using average market price................................ 51,000 68,000
------------------- ---------------------
Diluted weighted average common shares outstanding................. 23,643,000 23,705,000
=================== ======================
Basic earnings per common share....................................... $ 0.40 $ 0.40
=================== =====================
Diluted earnings per common share..................................... $ 0.40 $ 0.40
=================== =====================
</TABLE>
9
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
3. Real estate facilities
The activity in real estate facilities for the three months ended March 31,
2000 is as follows:
<TABLE>
<CAPTION>
Accumulated
Land Buildings Depreciation Total
---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Balances at December 31, 1999...... $ 194,140,000 $ 636,261,000 $ (50,976,000) $ 779,425,000
Property acquisitions.............. 7,673,000 17,713,000 - 25,386,000
Capital improvements............... - 3,669,000 - 3,669,000
Depreciation expense............... - - (8,301,000) (8,301,000)
---------------- ---------------- ----------------- ----------------
Balances at March 31, 2000......... $ 201,813,000 $ 657,643,000 $ (59,277,000) $ 800,179,000
================ ================ ================= ================
</TABLE>
Certain properties have been identified as not meeting the Company's
ongoing investment strategy and have been designated as properties held for
disposition at December 31, 1999. These properties are currently being
marketed and the Company anticipates a gain on the sale during this fiscal
year. The following summarizes the condensed results of operations of the
properties held for disposition which are included in the condensed
consolidated statements of income:
For the Three Ended March 31,
---------------------------------------
2000 1999
----------------- ----------------
Rental income...................... $1,015,000 $1,076,000
Cost of operations................. 434,000 458,000
Depreciation....................... 89,000 89,000
----------------- ----------------
Net operating income.............. $ 492,000 $ 529,000
================= ================
4. Leasing activity
The Company leases space in its real estate facilities to tenants under
non-cancelable leases generally ranging from one to ten years. Future
minimum rental revenues excluding recovery of expenses as of March 31, 2000
under these leases are as follows:
2000 (April - December)............. $ 81,527,000
2001................................ 87,171,000
2002................................ 62,601,000
2003................................ 42,182,000
2004................................ 27,415,000
Thereafter.......................... 46,125,000
----------------
$ 347,021,000
================
In addition to minimum rental payments, tenants pay reimbursements for
their pro rata share of specified operating expenses, which amount to
$4,054,000 and $3,441,000 for the three months ended March 31, 2000 and
1999, respectively. These amounts are included as rental income and cost of
operations in the accompanying condensed consolidated statements of income.
5. Revolving line of credit
In August 1999, the Company extended its unsecured line of credit (the
"Credit Facility") with Wells Fargo Bank. The Credit Facility has a
borrowing limit of $100 million and an expiration date of August 6, 2002.
10
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
The expiration date may be extended by one year on each anniversary of the
Credit Facility. Interest on outstanding borrowings is payable monthly. At
the option of the Company, the rate of interest charged is equal to (i) the
prime rate or (ii) a rate ranging from the London Interbank Offered Rate
("LIBOR") plus 0.75% to 1.35% depending on the Company's credit ratings and
coverage ratios, as defined (currently LIBOR plus 1.00%). In addition, the
Company is required to pay an annual commitment fee of 0.25%. The Company
had no outstanding balance and $100 million available on its line of credit
at March 31, 2000 and December 31, 1999.
The Credit Facility requires the Company to meet certain covenants
including (i) maintain a balance sheet leverage ratio (as defined) of less
than 0.50 to 1.00, (ii) maintain interest and fixed charge coverage ratios
(as defined) of not less than 2.25 to 1.0 and 1.75 to 1.0, respectively,
(iii) maintain a minimum total shareholders' equity (as defined) and (iv)
limit distributions to 95% of funds from operations. In addition, the
Company is limited in its ability to incur additional borrowings (the
Company is required to maintain unencumbered assets with an aggregate book
value equal to or greater than two times the Company's unsecured recourse
debt) or sell assets. The Company was in compliance with the covenants of
the Credit Facility at March 31, 2000.
6. Mortgage notes payable
Mortgage notes consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------------- -----------------
<S> <C> <C>
7.125% mortgage note, principal and interest payable monthly, due
May 2006...................................................... $ 8,707,000 $ 8,751,000
8.190% mortgage note, principal and interest payable monthly, due
March 2007.................................................... 6,621,000 6,666,000
7.290% mortgage note, principal and interest payable monthly, due
February 2009................................................. 6,348,000 6,372,000
8.125% mortgage note............................................... - 5,327,000
7.280% mortgage note, principal and interest payable monthly, due
February 2003................................................. 4,275,000 4,304,000
8.000% mortgage note, principal and interest payable monthly, due
April 2003.................................................... 2,087,000 2,108,000
8.500% mortgage note, principal and interest payable monthly, due
July 2007..................................................... 1,886,000 1,898,000
8.000% mortgage note, principal and interest payable monthly, due
April 2003.................................................... 1,628,000 1,640,000
----------------- -----------------
$31,552,000 $37,066,000
================= =================
</TABLE>
11
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
At March 31, 2000, approximate principal maturities of mortgage notes
payable are as follows:
2000 (April - December)............. $ 580,000
2001................................ 829,000
2002................................ 895,000
2003................................ 7,871,000
2004................................ 696,000
Thereafter.......................... 20,681,000
----------------
$ 31,552,000
================
7. Minority interests
Common units
The Company presents the accounts of PSB and the Operating Partnership on a
consolidated basis. Ownership interests in the Operating Partnership, other
than PSB's interest, are classified as minority interest in the condensed
consolidated financial statements. Minority interest in income consists of
the minority interests' share of the condensed consolidated operating
results.
Beginning one year from the date of admission as a limited partner and
subject to certain limitations described below, each limited partner other
than PSB has the right to require the redemption of its partnership
interest.
A limited partner that exercises its redemption right will receive cash
from the Operating Partnership in an amount equal to the market value (as
defined in the Operating Partnership Agreement) of the partnership
interests redeemed. In lieu of the Operating Partnership redeeming the
partner for cash, PSB, as general partner, has the right to elect to
acquire the partnership interest directly from a limited partner exercising
its redemption right, in exchange for cash in the amount specified above or
by issuance of one share of PSB common stock for each unit of limited
partnership interest redeemed.
A limited partner cannot exercise its redemption right if delivery of
shares of PSB common stock would be prohibited under the applicable
articles of incorporation, if the general partner believes that there is a
risk that delivery of shares of common stock would cause the general
partner to no longer qualify as a REIT, would cause a violation of the
applicable securities laws, or would result in the Operating Partnership no
longer being treated as a partnership for federal income tax purposes.
At March 31, 2000, there were 7,335,839 OP units owned by minority
interests (7,305,355 were owned by PSI and affiliated entities and 30,484
were owned by unaffiliated third parties). On a fully converted basis,
assuming all 7,335,839 minority interest OP units were converted into
shares of common stock of PSB at March 31, 2000, the minority interests
would own approximately 23.8% of the common shares outstanding. At the end
of each reporting period, PSB determines the amount of equity (book value
of net assets) which is allocable to the minority interest based upon the
ownership interest and an adjustment is made to the minority interest, with
a corresponding adjustment to paid-in capital, to reflect the minority
interests' equity in the Company.
Preferred units
On April 23, 1999, the Operating Partnership completed a private placement
of 510,000 preferred units with a preferred distribution rate of 8 7/8%.
The net proceeds from the placement of preferred units were approximately
$12.5 million and were used to repay borrowings from an affiliate.
12
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
On September 3, 1999, the Operating Partnership completed a private
placement of 3,200,000 preferred units with a preferred distribution rate
of 8 3/4%. The net proceeds from the placement of preferred units were
approximately $78 million and part of the proceeds was used to prepay a
mortgage note payable of approximately $8.5 million.
On September 7 and 23, 1999, the Operating Partnership completed private
placements of 1,200,000 and 400,000 preferred units, respectively, with a
preferred distribution rate of 8 7/8%. The net proceeds from the placement
of preferred units were approximately $39.2 million.
The Operating Partnership has the right to redeem the preferred units on or
after the fifth anniversary of the issuance date at the original capital
contribution plus the cumulative priority return, as defined, to the
redemption date to the extent not previously distributed. The preferred
units are exchangeable for Cumulative Redeemable Preferred Stock of the
respective series of PS Business Parks, Inc. on or after the tenth
anniversary of the date of issuance at the option of the Operating
Partnership or majority of the holders of the preferred units. The
Preferred Stock will have the same distribution rate and par value as the
respective units and will have equivalent terms to those described in Note
9.
8. Property management contracts
The Operating Partnership manages industrial, office and retail facilities
for PSI and entities affiliated with PSI. These facilities, all located in
the United States, operate under the "Public Storage" or "PS Business
Parks" name.
The property management contracts provide for compensation of five percent
of the gross revenue of the facilities managed. Under the supervision of
the property owners, the Operating Partnership coordinates rental policies,
rent collections, marketing activities, the purchase of equipment and
supplies, maintenance activities, and the selection and engagement of
vendors, suppliers and independent contractors. In addition, the Operating
Partnership assists and advises the property owners in establishing
policies for the hire, discharge and supervision of employees for the
operation of these facilities, including property managers, leasing,
billing and maintenance personnel.
The property management contract with PSI is for a seven year term with the
term being extended one year each anniversary. The property management
contracts with affiliates of PSI are cancelable by either party upon sixty
days notice.
9. Shareholders' equity
Preferred stock
On April 30, 1999, the Company issued 2,200,000 depositary shares each
representing 1/1,000 of a share of 9 1/4% Cumulative Preferred Stock,
Series A. Net proceeds from the public perpetual preferred stock offering
were approximately $53.1 million and were used to repay borrowings from an
affiliate and a mortgage note payable of approximately $11 million. The
remaining proceeds were used for investment in real estate.
Holders of the Company's preferred stock will not be entitled to vote on
most matters, except under certain conditions. In the event of a cumulative
arrearage equal to six quarterly dividends, the holders of the preferred
stock will have the right to elect two additional members to serve on the
Company's Board of Directors until all events of default have been cured.
At March 31, 2000, there were no dividends in arrears.
Except under certain conditions relating to the Company's qualification as
a REIT, the preferred stock is not redeemable prior to April 30, 2004. On
or after April 30, 2004, the preferred stock will be redeemable, at the
option of the Company, in whole or in part, at $25 per depositary share,
plus any accrued and unpaid dividends.
13
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
The Company paid $1,272,000 ($0.578125 per depositary share) in
distributions to its preferred shareholders for the three months ended
March 31, 2000. No preferred distributions were paid during the three
months ended March 31, 1999.
Common stock
On March 2, 2000, the Board of Directors authorized the repurchase from
time to time of up to 1,000,000 shares of the Company's common stock on the
open market or in privately negotiated transactions. As of March 31, 2000,
the Company repurchased 320,900 shares of common stock at an aggregate cost
of approximately $6,774,000.
On March 31, 2000, a holder of common OP units exercised its option and
converted its 107,517 common 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
$2,190,000 representing the book value of the OP units at the time of
conversion.
The Company paid $5,877,000 ($0.25 per common share) and $5,909,000 ($0.25
per common share) in distributions to its common shareholders for the three
months ended March 31, 2000 and 1999, respectively. Pursuant to
restrictions on the Credit Facility, distributions may not exceed 95% of
funds from operations, as defined.
Equity stock
In addition to common and preferred stock, the Company 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.
10. Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 2000. This
statement provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. The
Company is studying this statement to determine its effect on the
consolidated financial statements and will adopt this statement in the year
ending December 31, 2001.
11. Commitments and contingencies
The Company is subject to the risks inherent in the ownership and operation
of commercial real estate. These include, among others, the risks normally
associated with changes in the general economic climate, trends in the real
estate industry, creditworthiness of tenants, competition, changes in tax
laws, interest rate levels, the availability of financing and potential
liability under environmental and other laws.
Substantially all of the properties have been subjected to Phase I
environmental reviews. Such reviews have not revealed, nor is management
aware of, any probable or reasonably possible environmental costs that
management believes would be material to the consolidated financial
statements except as discussed below.
The Company acquired a property in Beaverton, Oregon ("Creekside Corporate
Park") in May 1998. A property adjacent to Creekside Corporate Park is
currently the subject of an environmental remedial
investigation/feasibility study that is being conducted by the current and
past owners of the property, pursuant to an order issued by the Oregon
Department of Environmental Quality ("ODEQ"). As part of that study, ODEQ
ordered the property owners to sample soil and groundwater on the Company's
14
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
property to determine the nature and extent of contamination resulting from
past industrial operations at the property subject to the study. The
Company, which is not a party of the Order on Consent, executed separate
Access Agreements with the property owners to allow access to its property
to conduct the required sampling and testing. The sampling and testing is
ongoing, and preliminary results from one area indicate that the
contamination from the property subject to the study may have migrated onto
a portion of Creekside Corporate Park owned by the Company.
There is no evidence that any past or current use of the Creekside
Corporate Park property contributed in any way to the contamination that is
the subject of the current investigation. Nevertheless, upon completion of
the study, it is likely that removal or remedial measures will be required
to address any contamination detected during the current investigation,
including any contamination on or under the Creekside Corporate Park
property. Because of the preliminary nature of the investigation, the
Company cannot predict the outcome of the investigation, nor can it
estimate the costs of any remediation or removal activities that may be
required.
The Company believes that it bears no responsibility or liability for the
contamination. In the event the Company is ultimately deemed responsible
for any costs relating to this matter, the Company believes that the party
from whom the property was purchased will be responsible for any expenses
or liabilities that the Company may incur as a result of this
contamination.
On November 3, 1999, the Company filed an action in the Los Angeles
Superior Court seeking damages in excess of $1 million, as well as
equitable relief. The complaint alleges that Mr. Howard and entities
controlled by him engaged in unfair trade practices, including (1)
negotiating kickbacks, secret rebates and/or unearned discounts from third
party suppliers for "providing" Company business to those suppliers and (2)
disrupting the Company's relationship with various suppliers.
On or about February 14, 2000, Mr. Howard and entities controlled by him
filed a cross-complaint against the Company, Public Storage, Inc., and
several other cross-defendants alleging, among other things, (1)
interference with Mr. Howard's contractual relations with various third
party suppliers, (2) violation of Title VII of the Civil Rights Act and (3)
abuse of process. None of the cross-complainants assigned any dollar amount
in the cross-complaint to the claims. The Company intends to vigorously
contest the claims in the cross-complaint.
The Company currently is neither subject to any other material litigation
nor, to management's knowledge, is any material litigation currently
threatened against the Company other than routine litigation and
administrative proceedings arising in the ordinary course of business.
Based on consultation with counsel, management believes that these items
will not have a material adverse impact on the Company's consolidated
financial position or results of operations.
15
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------------
Operations
- ----------
Forward-Looking Statements: When used within this document, the words
"expects," "believes," anticipates," "should," "estimates," and similar
expressions are intended to identify "forward-looking statements" within the
meaning of that term in Section 27A of the Securities Exchange Act of 1933, as
amended, and in Section 21F of the Securities Exchange Act of 1934, as amended.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors. Actual results could differ materially from those set forth
in the forward-looking statements as a result of various factors. 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, general real estate investment risks, competition, risks associated
with acquisition and development activities and debt financing, environmental
matters, general uninsured losses and seismic activity. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Overview: During 2000 and 1999, the Company focused on increasing cash flow
from its existing core portfolio of properties, expanded its presence in
existing markets through strategic acquisitions and developments and
strengthened its balance sheet primarily through the issuance of common and
preferred stock/units at reasonable prices. By maintaining low leverage, the
Company believes that future growth is facilitated.
During the first quarter of 2000, the Company acquired 178,000 square feet
in Northern California for approximately $23.3 million. In addition, the Company
acquired 21 acres of land in Texas for approximately $3.7 million for the
development of two 100,000 square feet flex buildings.
During 1999, the Company added approximately 1.3 million square feet to its
portfolio at an aggregate cost of approximately $103 million. The Company
acquired 483,000 square feet in Texas for approximately $32 million, 405,000
square feet in Northern Virginia/Maryland market for approximately $41 million,
211,000 square feet in Northern California for approximately $17 million and
200,000 square feet in Arizona for approximately $13 million.
Results of Operations: Net income for the three months ended March 31, 2000
was $10,743,000 compared to $9,442,000 for the same period in 1999. Net income
allocable to common shareholders (net income less preferred stock dividends) for
the three months ended March 31, 2000 was $9,471,000 compared to $9,442,000 for
the same period in 1999. Net income per common share on a diluted basis was
$0.40 for the three months ended March 31, 2000 and 1999 (based on weighted
average diluted common shares outstanding of 23,643,000 and 23,705,000,
respectively).
16
<PAGE>
The Company's property operations account for almost all of the net
operating income earned by the Company. The following table presents the
pre-depreciation operating results of the properties:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------
2000 1999 Change
---------------- ---------------- -------------
<S> <C> <C> <C>
Rental income:
"Same Park" facilities (110 facilities, 10.8 million net
rentable square feet)................................... $29,332,000 $27,700,000 5.9%
Facilities acquired subsequent to December 1998 (16
facilities, 1.7 million net rentable square feet)....... 4,721,000 1,417,000 233.2%
---------------- ---------------- -------------
Total rental income.......................................... $34,053,000 $29,117,000 17.0%
================ ================ =============
Cost of operations (excluding depreciation):
"Same Park" facilities....................................... $8,172,000 $7,918,000 3.2%
Facilities acquired subsequent to December 1998.............. 1,380,000 458,000 201.3%
---------------- ---------------- -------------
Total cost of operations..................................... $9,552,000 8,376,000 14.0%
================ ================ =============
Net operating income (rental income less cost of operations):
"Same Park" facilities....................................... $21,160,000 $19,782,000 7.0%
Facilities acquired subsequent to December 1998.............. 3,341,000 959,000 248.4%
---------------- ---------------- -------------
Total net operating income................................... $24,501,000 $20,741,000 18.1%
================ ================ =============
</TABLE>
Rental income and rental income less cost of operations or net operating
income ("NOI") prior to depreciation are summarized for the three months ended
March 31, 2000 by major geographic regions below:
<TABLE>
<CAPTION>
Square Percent Rental Percent Percent
Region Footage of Total Income of Total NOI of Total
- ------------------------- -------------- ----------- -------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Southern California...... 3,093,000 24.7% $8,793,000 25.8% $6,758,000 27.6%
Northern California...... 1,495,000 11.9% 3,662,000 10.8% 2,710,000 11.1%
Southern Texas........... 1,031,000 8.2% 2,594,000 7.6% 1,538,000 6.3%
Northern Texas........... 2,003,000 16.0% 4,451,000 13.1% 2,966,000 12.1%
Virginia................. 1,612,000 12.9% 5,361,000 15.7% 3,929,000 16.0%
Maryland................. 1,104,000 8.8% 3,352,000 9.8% 2,332,000 9.5%
Oregon................... 1,169,000 9.3% 3,723,000 10.9% 2,968,000 12.1%
Other................... 1,032,000 8.2% 2,117,000 6.3% 1,300,000 5.3%
-------------- ----------- -------------- ------------ -------------- -------------
12,539,000 100.0% $34,053,000 100.0% $24,501,000 100.0%
============== =========== ============== ============ ============== =============
</TABLE>
Supplemental Property Data and Trends: In order to evaluate the performance
of the Company's overall portfolio, management analyzes the operating
performance of a consistent group of 110 properties (10.8 million net rentable
square feet). These 110 properties (herein referred to as the "Same Park"
facilities) have been owned and operated by the Company for the comparable
periods and will provide a more comprehensive analysis of the portfolio's
operations. The "Same Park" facilities represent approximately 86% of the square
footage of the Company's portfolio at March 31, 2000.
17
<PAGE>
The following table summarizes the pre-depreciation historical operating
results of the "Same Park" facilities excluding the effects of accounting for
rental revenues on a straight-line basis.
"Same Park" Facilities (110 Properties)
---------------------------------------
Three Months Ended
March 31,
-------------------------------
2000 1999 Change
-------------- --------------- ------------
Rental income (1)............... $28,789,000 $26,986,000 6.7%
Cost of operations.............. 8,172,000 7,918,000 3.2%
-------------- --------------- ------------
Net operating income............ $20,617,000 $19,068,000 8.1%
============== =============== ============
Gross margin (2)................ 71.6% 70.7% 0.9%
Weighted average for period:
---------------------------
Occupancy....................... 96.7% 96.4% 0.3%
Annualized realized rent per
square feet (3)................ 11.05 $10.39 6.4%
(1) Rental income does not include the effect of straight-line accounting.
(2) Gross margin is computed by dividing property net operating income by rental
income.
(3) Realized rent per square foot represents the actual revenues earned per
occupied square foot.
The following tables summarize the "Same Park" operating results by major
geographic region for the three months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Revenues Revenues NOI NOI Increase
Region 2000 1999 Increase 2000 1999 (Decrease)
- ------------------------ ------------- ------------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Southern California..... $8,631,000 $7,839,000 10.1% $6,514,000 $5,663,000 15.0%
Northern California..... 2,929,000 2,658,000 10.2% 2,186,000 1,960,000 11.5%
Southern Texas.......... 2,257,000 2,153,000 4.8% 1,296,000 1,375,000 (5.7%)
Northern Texas.......... 3,646,000 3,462,000 5.3% 2,383,000 2,237,000 6.5%
Virginia................ 3,809,000 3,601,000 5.8% 2,721,000 2,494,000 9.1%
Maryland................ 2,380,000 2,343,000 1.6% 1,722,000 1,721,000 0.1%
Arizona................. 3,654,000 3,540,000 3.2% 2,921,000 2,768,000 5.5%
Other................... 1,483,000 1,390,000 6.7% 874,000 850,000 2.8%
------------- ------------- ----------- -------------- ------------ ------------
$28,789,000 $26,986,000 6.7% $20,617,000 $19,068,000 8.1%
============== ============= =========== ============== ============ ============
</TABLE>
The increases noted above reflect the performance of the Company's existing
markets. All major markets reflected increases in rental rates due to average to
strong market conditions. The Company experienced growth in rental rates in
Southern and Northern California due to a strong economic climate. In Southern
Texas, increases in operating expenses in excess of revenue increases resulted
in a decrease in NOI. The increases are primarily related to property tax
expenses.
Facility Management Operations: The Company's facility management accounts
for a small portion of the Company's net operating income. During the three
18
<PAGE>
months ended March 31, 2000, $98,000 in net operating income was recognized from
facility management operations compared to $91,000 for the same period in 1999.
Facility management fees have increased due to the increase in rental rates of
the properties managed by the Company.
Interest and Other Income: Interest and other income reflect earnings on
cash balances and other investments. Interest and other income was $1,688,000
for the three months ended March 31, 2000 compared to $20,000 for the same
period in 1999. The increase is attributable to increased average cash balances
and higher interest rates in addition to dividends earned on marketable
securities. Average cash balances for the three months ended March 31, 2000 were
approximately $81.2 million compared to $1.6 million for the same period in
1999.
Cost of Operations: Cost of operations for the three months ended March 31,
2000 was $9,552,000 compared to $8,376,000 for the same period in 1999. The
increase is due primarily to the growth in the total square footage of the
Company's portfolio of properties. Cost of operations as a percentage of rental
income decreased from 28.8% to 28.1% as a result of economies of scale achieved
through the acquisition of properties in existing markets. Cost of operations
for the three months ended March 31, 2000 consists primarily of property taxes
($3,120,000), property maintenance ($1,788,000), utilities ($1,612,000) and
direct payroll ($1,469,000).
Depreciation and Amortization Expense: Depreciation and amortization
expense for the three months ended March 31, 2000 was $8,376,000 compared to
$6,733,000 for the same period in 1999. The increase is due to the acquisition
and development of real estate facilities during 1999.
General and Administrative Expense: General and administrative expense was
$883,000 for the three months ended March 31, 2000 compared to $802,000 for the
same period in 1999. The increase is due primarily to the increased size and
activities of the Company. Included in general and administrative costs are
acquisition costs and abandoned transaction costs. Acquisition expenses for the
three months ended March 31, 2000 and 1999 were $131,000 and $90,000,
respectively. Abandoned transaction costs were $7,000 and $2,000 for the three
months ended March 31, 2000 and 1999, respectively.
Interest Expense: Interest expense was $374,000 for the three months ended
March 31, 2000 compared to $909,000 for the same period in 1999. The decrease is
attributable to decreased average debt balances during the period. Interest
expense of $398,000 and $185,000 was capitalized as part of building costs
associated with properties under development during the three months ended March
31, 2000 and 1999, respectively.
Minority Interest in Income: Minority interest in income reflects the
income allocable to equity interests in the Operating Partnership that are not
owned by the Company. Minority interest in income for the three months ended
March 31, 2000 was $5,911,000 ($2,920,000 allocated to preferred unitholders and
$2,991,000 allocated to common unitholders) compared to $2,966,000 allocated to
common unitholders for the same period in 1999. The increase in minority
interest in income is due primarily to the issuance of preferred operating
partnership units in April and September of 1999.
Liquidity and Capital Resources
- -------------------------------
Net cash provided by operating activities for the three months ended March
31, 2000 and 1999 was $26,302,000 and $16,409,000, 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 maintain the current level
of distribution to shareholders.
The following table summarizes the Company's ability to make capital
improvements to maintain its facilities through the use of cash provided by
operating activities. The remaining cash flow is available to the Company to pay
distributions to shareholders, make principal payments on debt and to make
investments in real estate.
19
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Net income.......................................................... $ 10,743,000 $ 9,442,000
Depreciation and amortization....................................... 8,376,000 6,733,000
Change in working capital........................................... 1,272,000 (2,732,000)
Minority interest in income......................................... 5,911,000 2,966,000
-------------- --------------
Net cash provided by operating activities........................... 26,302,000 16,409,000
Maintenance capital expenditures.................................... (532,000) (209,000)
Tenant improvements................................................. (1,030,000) (1,234,000)
Capitalized lease commissions....................................... (665,000) (517,000)
-------------- --------------
Funds available for distributions to shareholders, minority interests,
acquisitions and other corporate purposes......................... 24,075,000 14,449,000
Cash distributions to shareholders and minority interests........... (11,930,000) (7,763,000)
-------------- --------------
Excess funds available for principal payments on debt, investments in
real estate and other corporate purposes.......................... $ 12,145,000 $ 6,686,000
============== ==============
</TABLE>
The Company's capital structure is characterized by a low level of
leverage. As of March 31, 2000, the Company had seven fixed rate mortgage notes
payable totaling $31,552,000 which represented 3.6% of its total capitalization
(based on book value, including minority interests and debt). The weighted
average interest rate for the mortgage notes is 7.59%.
In August 1999, the Company extended its unsecured line of credit (the
"Credit Facility") with Wells Fargo Bank. The Credit Facility has a borrowing
limit of $100 million and an expiration date of August 6, 2002. The expiration
date may be extended by one year on each anniversary of the Credit Facility.
Interest on outstanding borrowings is payable monthly. At the option of the
Company, the rate of interest charged is equal to (i) the prime rate or (ii) a
rate ranging from the London Interbank Offered Rate ("LIBOR") plus 0.75% to
1.35% depending on the Company's credit ratings and coverage ratios, as defined
(currently LIBOR plus 1.00%). In addition, the Company is required to pay an
annual commitment fee of 0.25%.
The Company expects to fund its growth strategies with permanent capital,
including issuances of common and preferred stock and internally generated
retained cash flows. In addition, the Company may sell properties that no longer
meet its investment criteria. The Company may finance acquisitions on a
temporary basis with borrowings from its line of credit. The Company intends to
repay amounts borrowed under the Credit Facility from undistributed cash flow
or, as market conditions permit and as determined to be advantageous, from the
public or private placement of preferred and common stock or formation of joint
ventures. The Company targets a leverage ratio of 40% and Funds from Operations
("FFO") to combined fixed charges and preferred distributions ratio of 3.0 to
1.0. As of March 31, 2000 and for the three months then ended, the leverage
ratio was 26% and the FFO to fixed charges and preferred distributions coverage
ratio was 5.0 to 1.0.
In April 1999, the Company completed a private placement of preferred OP
units and a public offering of depositary shares representing fractional
interest in perpetual preferred stock resulting in net proceeds totaling $65.6
million. The net proceeds from the placement of preferred OP units, completed
April 23, 1999 were approximately $12.5 million. The preferred OP units have a
preferred distribution rate of 8 7/8% on a stated value of $12.75 million. The
preferred OP units have equivalent terms to those of perpetual preferred stock.
Net proceeds from the public perpetual preferred stock offering completed April
30, 1999 were $53.1 million. The preferred stock has a dividend rate of 9 1/4%
on a stated value of $55 million. Proceeds from the issuances were used to pay
off borrowings from an affiliate and a portion was used to repay a mortgage note
payable of approximately $11 million. The remaining proceeds were used for
investment in real estate.
On September 3, 1999, the Operating Partnership completed a private
placement of 3,200,000 preferred units with a preferred distribution rate of 8
3/4%. The net proceeds from the placement of preferred units were approximately
20
<PAGE>
$78 million. A portion of the proceeds was used to prepay a mortgage note
payable of approximately $8.5 million. On September 7 and 23, 1999, the
Operating Partnership completed private placements of 1,200,000 and 400,000
preferred units, respectively, with a preferred distribution rate of 8 7/8%. The
net proceeds from the placement of preferred units were approximately $39.2
million.
Funds from Operations: FFO is defined as net income, computed in accordance
with generally accepted accounting principles ("GAAP"), before depreciation,
amortization, minority interest in income, straight line rent adjustments and
extraordinary or non-recurring items. FFO is presented because the Company
considers FFO to be a useful measure of the operating performance of a REIT
which, together with net income and cash flows provides investors with a basis
to evaluate the operating and cash flow performances of a REIT. FFO does not
represent net income or cash flows from operations as defined by GAAP. FFO does
not take into consideration scheduled principal payments on debt and capital
improvements. Accordingly, FFO is not necessarily a substitute for cash flow or
net income as a measure of liquidity or operating performance or ability to make
acquisitions and capital improvements or ability to pay distributions or debt
principal payments. Also, FFO as computed and disclosed by the Company may not
be comparable to FFO computed and disclosed by other REITs.
FFO for the Company is computed as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------
2000 1999
----------------- ----------------
<S> <C> <C>
Net income allocable to common shareholders........................ $ 9,471,000 $ 9,442,000
Depreciation and amortization.................................... 8,376,000 6,733,000
Minority interest in income - common units....................... 2,991,000 2,966,000
Less effects of straight-line rents.............................. (630,000) (751,000)
----------------- ----------------
Consolidated FFO allocable to common shareholders and minority
interests.......................................................... 20,208,000 18,390,000
FFO allocated to common minority interest - common units........... (4,810,000) (4,404,000)
----------------- ----------------
FFO allocated to common shareholders............................... $ 15,398,000 $ 13,986,000
================= ================
</TABLE>
Capital Expenditures: During the first quarter of 2000, the Company
incurred $2.2 million in maintenance capital expenditures, tenant improvements
and capitalized lease commissions. On a recurring annual basis, the Company
expects $0.90 to $1.20 per square foot in recurring capital expenditures (an
aggregate of $11 - $15 million based on square footage at March 31, 2000) and
expects to make $1 million in renovations on a property in Southern California
during the remainder of 2000.
Distributions: The Company has elected and intends to qualify as a REIT for
federal income tax purposes. As a REIT, the Company must meet, among other
tests, sources of income, share ownership and certain asset tests. In addition,
the Company is not taxed on that portion of its taxable income which is
distributed to its shareholders provided that at least 95% of its taxable income
is so distributed to its shareholders prior to filing of its tax return.
The Board of Directors declared a quarterly dividend of $0.25 per common
share on May 9, 2000. In addition, the Board of Directors declared a quarterly
dividend of $0.578125 per share on the depositary shares each representing
1/1000 of a share of 9 1/4% Cumulative Preferred Stock, Series A. Distributions
are payable on June 30, 2000 to shareholders of record as of the close of
business on June 15, 2000.
21
<PAGE>
Impact of Year 2000 ("Y2K")
- ---------------------------
The "Y2K Issue" arises because many computerized systems use two digits
rather than four to identify a year. Any of the Company's computer programs or
hardware with the Y2K issue that have date sensitive applications or embedded
chips could recognize a date using "00" as the year 1900 rather than the year
2000. The same issue has been faced by the Company's outside vendors, including
those vendors in the banking and payroll processing areas. Any failure in these
areas could result in disruptions of operations.
As a result of the Company's assessment and remediation activities
conducted in recent years, the Company experienced no significant disruptions in
its operations, and believes that its information systems responded successfully
to the Y2K date change.
At this time, the Company is not aware of any material problems that
resulted from the Y2K date change at any of its outside vendors, including those
vendors in the banking and payroll processing areas.
The Company will continue to monitor its information systems and those of
its outside vendors throughout the year 2000 to ensure that any latent Y2K
Issues that may arise are addressed promptly.
There can be no assurance that the Company has identified all potential Y2K
Issues either within the Company's information systems, at its outside vendors
or at external agents. In addition, the impact of any unresolved or unidentified
Y2K Issues on governmental entities and utility providers and the resulting
impact upon the Company, as well as disruptions in the general economy, may be
material but cannot be reasonable determined or quantified.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
To limit the Company's exposure to market risk, the Company principally
finances its operations and growth with permanent equity capital consisting of
either common or preferred stock. At March 31, 2000, the Company's debt as a
percentage of shareholders' equity (based on book values) was 5.7%.
The Company's market risk sensitive instruments include mortgage notes
payable which totaled $31,552,000 at March 31, 2000. Substantially all of the
Company's mortgage notes payable bear interest at fixed rates. See Note 6 of the
Notes to Consolidated Financial Statements for terms, valuations and approximate
principal maturities of the mortgage notes payable as of March 31, 2000. Based
on borrowing rates currently available to the Company, the carrying amount of
debt approximates fair value.
22
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Amended and Restated Agreement and Plan of Reorganization among
Registrant, American Office Park Properties, Inc. ("AOPP") and
Public Storage, Inc. ("PSI") dated as of December 17, 1997. Filed
with Registrant's Registration Statement No. 333-45405 and
incorporated herein by reference.
3.1 Restated Articles of Incorporation. Filed with Registrant's
Registration Statement No. 333-78627 and incorporated herein by
reference.
3.2 Certificate of Determination of Preferences of 8 3/4% Series C
Cumulative Redeemable Preferred Stock of PS Business Parks, Inc.
Filed with Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999 and incorporated herein by
reference.
3.3 Certificate of Determination of Preferences of 8 7/8% Series X
Cumulative Redeemable Preferred Stock of PS Business Parks, Inc.
Filed with Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999 and incorporated herein by
reference.
3.4 Amendment to Certificate of Determination of Preferences of 8 7/8%
Series X Cumulative Redeemable Preferred Stock of PS Business Parks,
Inc. Filed with Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999 and incorporated herein by
reference.
3.5 Restated Bylaws. Filed with Registrant's Current Report on Form 8-K
dated March 17, 1998 and incorporated herein by reference.
10.1 Amended Management Agreement between Storage Equities, Inc. and
Public Storage Commercial Properties Group, Inc. dated as of
February 21, 1995. Filed with PSI's Annual Report on Form 10-K for
the year ended December 31, 1994 and incorporated herein by
reference.
10.2 Registrant's 1997 Stock Option and Incentive Plan. Filed with
Registrant's Registration Statement No. 333-48313 and incorporated
herein by reference.
10.3 Agreement of Limited Partnership of PS Business Parks, L.P. Filed
with Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1998 and incorporated herein by reference.
10.4 Merger and Contribution Agreement dated as of December 23, 1997
among Acquiport Two Corporation, Acquiport Three Corporation, New
York State Common Retirement Fund, American Office Park Properties,
L.P., AOPP and AOPP Acquisition Corp. Three. Filed with Registrant's
Registration Statement No. 333-45405 and incorporated herein by
reference.
10.5 Agreement Among Shareholders and Company dated as of December 23,
1997 among Acquiport Two Corporation, AOPP, American Office Park
Properties, L.P. and PSI. Filed with Registrant's Registration
Statement No. 333-45405 and incorporated herein by reference.
10.6 Amendment to Agreement Among Shareholders and Company dated as of
January 21, 1998 among Acquiport Two Corporation, AOPP, American
Office Park Properties, L.P. and PSI. Filed with Registrant's
Registration Statement No. 333-45405 and incorporated herein by
reference.
10.7 Non-Competition Agreement dated as of December 23, 1997 among PSI,
AOPP, American Office Park Properties, L.P. and Acquiport Two
Corporation. Filed with Registrant's Registration Statement No.
333-45405 and incorporated herein by reference.
23
<PAGE>
10.8 Employment Agreement between AOPP and Ronald L. Havner, Jr. dated as
of December 23, 1997. Filed with Registrant's Registration Statement
No. 333-45405 and incorporated herein by reference.
10.9 Employment Agreement between Registrant and J. Michael Lynch dated
as of May 20, 1998. Filed with Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1998 and incorporated
herein by reference.
10.10 Common Stock Purchase Agreement dated as of January 23, 1998 among
AOPP and the Investors signatory thereto. Filed with Registrant's
Registration Statement No. 333-45405 and incorporated herein by
reference.
10.11 Registration Rights Agreement dated as of January 30, 1998 among
AOPP and the Investors signatory thereto. Filed with Registrant's
Registration Statement No. 333-45405 and incorporated herein by
reference.
10.12 Registration Rights Agreement dated as of March 17, 1998 between
Registrant and Acquiport Two Corporation ("Acquiport Registration
Rights Agreement"). Filed with Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1998 and incorporated
herein by reference.
10.13 Letter dated May 20, 1998 relating to Acquiport Registration Rights
Agreement. Filed with Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1998 and incorporated herein by
reference.
10.14 Revolving Credit Agreement dated August 6, 1998 among PS Business
Parks, L.P., Wells Fargo Bank, National Association, as Agent, and
the Lenders named therein. Filed with Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1998 and
incorporated herein by reference.
10.15 First Amendment to Revolving Credit Agreement dated as of August 19,
1999 among PS Business Parks, L.P., Wells Fargo Bank, National
Association, as Agent, and the Lenders named therein. Filed with
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1999 and incorporated herein by reference.
10.16 Form of Indemnity Agreement. Filed with Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 1998
and incorporated herein by reference.
10.17 Cost Sharing and Administrative Services Agreement dated as of
November 16, 1995 by and among PSCC, Inc. and the owners listed
therein. Filed with Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 1998 and incorporated herein by
reference.
10.18 Amendment to Cost Sharing and Administrative Services Agreement
dated as of January 2, 1997 by and among PSCC, Inc. and the owners
listed therein. Filed with Registrant's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1998 and incorporated
herein by reference.
10.19 Accounts Payable and Payroll Disbursement Services Agreement dated
as of January 2, 1997 by and between PSCC, Inc. and American Office
Park Properties, L.P. Filed with Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1998 and
incorporated herein by reference.
10.20 Amendment to Agreement of Limited Partnership of PS Business Parks,
L.P. Relating to 8 7/8% Series B Cumulative Redeemable Preferred
Units, dated as of April 23, 1999. Filed with Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 1999
and incorporated herein by reference.
10.21 Amendment to Agreement of Limited Partnership of PS Business Parks,
L.P. Relating to 9 1/4% Series A Cumulative Redeemable Preferred
Units, dated as of April 30, 1999. Filed with Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 1999
and incorporated herein by reference.
24
<PAGE>
10.22 Amendment to Agreement of Limited Partnership of PS Business Parks,
L.P. Relating to 8 3/4% Series C Cumulative Redeemable Preferred
Units, dated as of September 3, 1999. Filed with Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1999 and incorporated herein by reference.
10.23 Amendment to Agreement of Limited Partnership of PS Business Parks,
L.P. Relating to 8 7/8% Series X Cumulative Redeemable Preferred
Units, dated as of September 7, 1999. Filed with Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1999 and incorporated herein by reference.
10.24 Amendment to Agreement of Limited Partnership of PS Business Parks,
L.P. Relating to Additional 8 7/8% Series X Cumulative Redeemable
Preferred Units, dated as of September 23, 1999. Filed with
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1999 and incorporated herein by reference.
11 Statement re: Computation of Earnings per Share. Filed herewith.
12 Statement re: Computation of Ratio of Earnings to Fixed Charges.
Filed herewith.
27 Financial Data Schedule. Filed herewith.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated December 30, 1999
(filed January 10, 2000), as amended by Form 8-K/A dated December 30,
1999 (filed March 13, 2000) pursuant to Item 5, which filed Combined
Statements of Certain Revenues and Certain Expenses for the
Monroe/Lafayette Properties for the nine months ended September 30,
1999 and for the year ended December 31, 1998, Combined Statements of
Certain Revenues and Certain Expenses for the Kohm Properties for the
nine months ended September 30, 1999 and for the year ended December
31, 1998, Statements of Certain Revenues and Certain Operating Expenses
for the Northpointe Property for the nine months ended September 30,
1999 and for the year ended December 31, 1998 and Combined Statements
of Certain Revenues and Certain Operating Expenses for the R&B
Properties for the nine months ended September 30, 1999 and for the
year ended December 31, 1998.
The Company filed a Current Report on Form 8-K dated March 7, 2000
(filed March 8, 2000) pursuant to Item 5, relating to PS Business
------------
Parks, Inc. v. Larry Howard, et al.
-----------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 12, 2000
PS BUSINESS PARKS, INC.
BY: /s/ Jack Corrigan
-----------------
Jack Corrigan
Vice President and Chief Financial Officer
25
PS BUSINESS PARKS, INC.
EXHIBIT 11
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------------------------
Basic and Diluted Earnings Per Share: 2000 1999
----------------------- -----------------------
<S> <C> <C>
Net income allocable to common shareholders........................... $ 9,471,000 $ 9,442,000
======================= =======================
Weighted average common shares outstanding:
Basic weighted average common shares outstanding................... 23,592,000 23,637,000
Net effect of dilutive stock options - based on treasury stock
method using average market price................................ 51,000 68,000
----------------------- -----------------------
Diluted weighted average common shares outstanding................. 23,643,000 23,705,000
======================= =======================
Basic earnings per common share....................................... $ 0.40 $ 0.40
======================= =======================
Diluted earnings per common share..................................... $ 0.40 $ 0.40
======================= =======================
</TABLE>
PS BUSINESS PARKS, INC.
EXHIBIT 12:
STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------------------------
2000 1999
----------------------- -----------------------
<S> <C> <C>
Net income...................................................... $ 10,743,000 $ 9,442,000
Minority interest............................................... 5,911,000 2,966,000
Interest expense................................................ 374,000 909,000
----------------------- -----------------------
Earnings available to cover fixed charges....................... $ 17,028,000 $ 13,317,000
======================= =======================
Fixed charges (1)............................................... 772,000 1,094,000
Preferred distributions......................................... 4,192,000 -
----------------------- -----------------------
Combined fixed charges and preferred distributions.............. $ 4,964,000 $ 1,094,000
======================= =======================
Ratio of earnings to fixed charges.............................. 22.06 12.17
======================= =======================
Ratio of earnings to combined fixed charges and preferred
distributions................................................... 3.43 12.17
======================= =======================
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- --------------- --------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Net income.......................... $ 41,255,000 $ 29,400,000 $ 3,836,000 $ 519,000 $ 1,192,000
Minority interest................... 16,049,000 11,208,000 8,566,000 - -
Interest expense.................... 3,153,000 2,361,000 1,000 - -
---------------- --------------- --------------- ---------------- ------------------
Earnings available to cover fixed
charges.......................... $ 60,457,000 $ 42,969,000 $ 12,403,000 $ 519,000 $ 1,192,000
================ =============== =============== ================ ==================
Fixed charges (1)................... $ 4,142,000 $ 2,629,000 $ 1,000 $ - $ -
Preferred distributions............. 7,562,000 - - - -
---------------- --------------- --------------- ---------------- ------------------
Combined fixed charges and preferred
distributions.................... $ 11,704,000 $ 2,629,000 $ 1,000 $ - $ -
================ =============== =============== ================ ==================
Ratio of earnings to fixed charges.. 14.60 16.34 12,403 N/A N/A
================ =============== =============== ================ ==================
Ratio of earnings to combined fixed
charges and preferred
distributions.................... 5.17 16.34 12,403 N/A N/A
================ =============== =============== ================ ==================
</TABLE>
(1) Fixed charges include interest expense plus capitalized interest.
PS BUSINESS PARKS, INC.
EXHIBIT 12
STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Supplemental disclosure of Ratio of Funds from Operations ("FFO") to fixed
charges:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------------------
2000 1999
--------------------- ---------------------
<S> <C> <C>
FFO............................................................. $ 20,208,000 $ 18,390,000
Interest expense................................................ 374,000 909,000
Minority interest in income - preferred units................... 2,920,000 -
Preferred dividends............................................. 1,272,000 -
--------------------- ---------------------
Adjusted FFO available to cover fixed charges................... $ 24,774,000 $ 19,299,000
===================== =====================
Fixed charges (1)............................................... 772,000 1,094,000
Preferred distributions......................................... 4,192,000 -
--------------------- ---------------------
Combined fixed charges and preferred distributions.............. $ 4,964,000 $ 1,094,000
===================== =====================
Ratio of FFO to fixed charges................................... 32.09 17.64
===================== =====================
Ratio of FFO to combined fixed charges and preferred
distributions................................................... 4.99 17.64
===================== =====================
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997 1996 1995
---------------- --------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
FFO................................ $ 76,353,000 $ 57,430,000 $ 17,597,000 $ 303,000 $ 720,000
Interest expense................... 3,153,000 2,361,000 1,000 - -
Minority interest in income -
preferred units.................... 4,156,000 - - - -
Preferred dividends................ 3,406,000 - - - -
---------------- --------------- --------------- ---------------- --------------
Adjusted FFO available to cover
fixed charges................... $ 87,068,000 $ 59,791,000 $ 17,598,000 $ 303,000 $ 720,000
================ =============== =============== =============== ===============
Fixed charges (1).................. $ 4,142,000 $ 2,629,000 $ 1,000 $ - $ -
Preferred distributions............ 7,562,000 - - - -
---------------- --------------- --------------- ---------------- --------------
Combined fixed charges and preferred
distributions................... $ 11,704,000 $ 2,629,000 $ 1,000 $ - $ -
================ =============== =============== ================ ==============
Ratio of FFO to fixed charges...... 21.02 22.74 17,598 N/A N/A
================ =============== =============== ================ ==============
Ratio of FFO to combined fixed
charges and preferred
distributions................... 7.44 22.74 17,598 N/A N/A
================ =============== =============== ================ ==============
</TABLE>
(1) Fixed charges include interest expense plus capitalized interest.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27
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> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 41,572,000
<SECURITIES> 0
<RECEIVABLES> 203,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 41,572,000
<PP&E> 859,456,000
<DEPRECIATION> (59,277,000)
<TOTAL-ASSETS> 897,428,000
<CURRENT-LIABILITIES> 22,468,000
<BONDS> 0
0
55,000,000
<COMMON> 234,000
<OTHER-SE> 499,377,000
<TOTAL-LIABILITY-AND-EQUITY> 897,428,000
<SALES> 0
<TOTAL-REVENUES> 35,864,000
<CGS> 0
<TOTAL-COSTS> 9,577,000
<OTHER-EXPENSES> 9,259,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 374,000
<INCOME-PRETAX> 10,743,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 10,743,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,743,000
<EPS-BASIC> 0.40
<EPS-DILUTED> 0.40
</TABLE>
