<PAGE> 1
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 June 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the Transition Period from _______ to _______
Commission File Number: 1-12546
PACIFIC GULF PROPERTIES INC.
(Exact name of Registrant as specified in its Charter)
MARYLAND 33-0577520
State of Incorporation (I.R.S. Employer Identification No.)
4220 VON KARMAN, SECOND FLOOR, NEWPORT BEACH
CALIFORNIA 92660-2002
(Address of principal executive offices, including zip code)
949-223-5000
(Registrant's telephone number, including area code)
COMMON STOCK, PAR VALUE $.01 PER SHARE, 19,999,655 SHARES
WERE OUTSTANDING AS OF AUGUST 12, 1998
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
--- ---
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PACIFIC GULF PROPERTIES INC.
FORM 10-Q
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
INDEX TO FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997 1
Consolidated Statements of Operations for the Six
Months ended June 30, 1998 and June 30, 1997 2
Consolidated Statements of Operations for the Three
Months ended June 30, 1998 and June 30, 1997 3
Consolidated Statements of Cash Flows for the Six
Months ended June 30, 1998 and June 30, 1997 4
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II: OTHER INFORMATION 12
SIGNATURES 13
</TABLE>
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PACIFIC GULF PROPERTIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, 1998 Dec. 31, 1997
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Real estate assets
Operating properties
Land $ 216,342 $ 185,789
Buildings 608,640 515,160
--------- ---------
824,982 700,949
Accumulated depreciation (48,230) (39,148)
--------- ---------
776,752 661,801
Properties under development, including land 38,184 32,107
--------- ---------
814,936 693,908
Cash and cash equivalents 4,831 1,466
Accounts receivable 4,037 3,399
Other assets 14,991 13,698
--------- ---------
$ 838,795 $ 712,471
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Loans payable $ 400,731 $ 283,852
Accounts payable and accrued liabilities 12,924 9,009
Dividends payable 9,606 8,852
Convertible subordinated debentures 12,360 12,592
--------- ---------
435,621 314,305
Minority interest in consolidated partnerships 18,313 9,326
Commitments and contingencies -- --
Shareholders' equity
Preferred shares, $.01 par value; 9,700,000 shares
authorized; 2,763,116 Senior Cumulative Convertible Class
A shares outstanding at June 30, 1998, and 1,351,351
Senior Cumulative Convertible Class A shares and 1,411,765
Senior Cumulative Convertible Class B shares outstanding
at December 1997 28 28
Preferred shares, $.01 par value; 300,000 shares
authorized; Class C Junior Participating Cumulative
Preferred Stock; no shares outstanding -- --
Common shares, $.01 par value; 100,000,000 shares
authorized; 19,998,911 shares outstanding at June 30, 1998
and 19,968,189 shares outstanding at December 31, 1997 200 200
Outstanding restricted stock (720) (818)
Additional paid-in capital 411,261 411,187
Distributions in excess of earnings (25,908) (21,757)
--------- ---------
384,861 388,840
--------- ---------
$ 838,795 $ 712,471
========= =========
</TABLE>
See accompanying notes
1
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PACIFIC GULF PROPERTIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30
------------------------
1998 1997
-------- -------
<S> <C> <C>
REVENUES
Rental income
Industrial properties $34,659 $15,230
Multifamily properties 18,458 15,502
------- -------
53,117 30,732
EXPENSES
Rental property expenses
Industrial properties 7,532 3,679
Multifamily properties 6,615 5,996
------- -------
14,147 9,675
Depreciation 9,272 4,934
Interest (including amortization of debenture
discount and financing costs of $679 and $443
respectively) 11,848 7,952
General and administrative 2,349 1,472
Minority partners' interest in earnings of
consolidated partnerships 443 20
------- -------
38,059 24,053
------- -------
INCOME BEFORE LOSS ON SALE OF REAL ESTATE 15,058 6,679
Loss on sale of real estate -- 111
------- -------
NET INCOME 15,058 6,568
Less preferred dividend requirements 2,414 115
------- -------
INCOME AVAILABLE TO COMMON SHAREHOLDERS $12,644 $ 6,453
======= =======
EARNINGS PER SHARE
Basic $ 0.63 $ 0.54
======= =======
Diluted $ 0.63 $ 0.52
======= =======
DIVIDENDS DECLARED PER COMMON SHARE $ 0.84 $ 0.82
======= =======
</TABLE>
See accompanying notes
2
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PACIFIC GULF PROPERTIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
June 30
----------------------
1998 1997
------- -------
<S> <C> <C>
REVENUES
Rental income
Industrial properties $18,352 $ 7,998
Multifamily properties 9,447 7,921
------- -------
27,799 15,919
EXPENSES
Rental property expenses
Industrial properties 3,749 1,863
Multifamily properties 3,377 3,078
------- -------
7,126 4,941
Depreciation 4,882 2,578
Interest (including amortization of debenture
discount and financing costs of $458 and
$221 respectively) 6,573 3,999
General and administrative 1,238 784
Minority partners' interest in earnings of
consolidated partnerships 337 20
------- -------
20,156 12,322
------- -------
INCOME BEFORE LOSS ON SALE OF REAL ESTATE 7,643 3,597
Loss on sale of real estate -- 111
-------- -------
NET INCOME 7,643 3,486
Less preferred dividend requirements 1,207 115
------- -------
INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 6,436 $ 3,371
======= =======
EARNINGS PER SHARE
Basic $ 0.32 $ 0.27
======= =======
Diluted $ 0.32 $ 0.27
======= =======
DIVIDENDS DECLARED PER COMMON SHARE $ 0.42 $ 0.41
======= =======
</TABLE>
See accompanying notes
3
<PAGE> 6
PACIFIC GULF PROPERTIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited))
<TABLE>
<CAPTION>
Six Months Ended June 30
---------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 15,058 $ 6,568
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 9,272 4,934
Amortization of debenture discount
and financing costs 679 443
Loss on sale of real estate -- 111
Minority interests in earnings of
consolidated partnerships 443 --
Compensation recognized related to
restricted stock issued to employees 88 82
Net increase in other assets (2,800) (1,924)
Net increase in liabilities 3,915 273
-------- ---------
Net cash provided by operating activities 26,665 10,487
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net additions to real estate assets (112,605) (79,334)
Development expenditures (17,505) (1,771)
Purchase of property and equipment, net -- (3,452)
--------- ---------
Net cash used in investing activities (130,110) (84,557)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving line of credit 213,669 32,033
Repayment of revolving lines of credit (94,369) (45,719)
Proceeds from mortgage notes payable 6,952 24,329
Repayment of mortgage notes payable (15,644) (12,521)
Proceeds from construction loans 6,271 1,688
Debentures converted to common shares (232) (1,267)
Issuance of common shares 73 87,883
Issuance of preferred shares -- 4,224
Minority interest contributions 8,544 4,877
Dividends on common shares (16,781) (8,972)
Dividends on preferred shares (1,673) --
--------- ---------
Net cash provided by financing activities 106,810 86,555
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS 3,365 12,485
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,466 1,523
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,831 $ 14,008
========= =========
</TABLE>
See accompanying notes
4
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS
Pacific Gulf Properties Inc. was incorporated in Maryland and operates as a
Real Estate Investment Trust ("REIT") under the Internal Revenue Code of
1986, as amended. The consolidated financial statements include the accounts
of Pacific Gulf Properties Inc. (the "Company") and its consolidated
subsidiaries and partnerships, PGP Inland Communities, L.P., PGP Von Karman
Properties, PGP-Terrace Gardens Holdings Inc., PGP-Morning View Terrace
Holdings Inc., PGP Northern Industrial, L.P. and PGP Southern Industrial II,
L.P. (the "Partnerships"). The information furnished has been prepared in
accordance with generally accepted accounting principles for interim
financial reporting and the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
Certain prior year amounts have been reclassified to conform to the current
year presentation. In the opinion of management, all adjustments considered
necessary for the fair presentation of the Company's financial position,
results of operations and cash flows have been included. These financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
2. REAL ESTATE ACQUISITIONS
During the second quarter of 1998 the Company invested $56,100,000 in real
estate assets. Second quarter acquisitions included (i) a 214,000 square
foot single tenant building in Whittier, California for $14,300,000 and (ii)
three industrial properties located in Southern California containing
approximately 696,000 square feet for $41,800,000. All of these second
quarter acquisitions were primarily financed with borrowings from the
Company's unsecured line of credit with Wells Fargo Bank.
During the first quarter of 1998 the Company invested $53,615,000 in real
estate assets. Acquisitions included (i) a 140,000 square foot industrial
park in Upland, California for $5,100,000; (ii) a 125,000 square foot
multi-tenant industrial park located in Chatsworth, California for
$7,565,000; (iii) a 300,000 square foot industrial center in Las Vegas,
Nevada for $14,100,000; (iv) a 125,000 square foot business park in Los
Alamitos, California for $7,200,000; (v) a 74,000 square foot building in
Signal Hill, California for $4,800,000; and (vi) a 147,000 square foot
industrial project in Sacramento, California for $5,850,000. All of these
1998 acquisitions were primarily financed with borrowings from the Company's
credit facilities.
Also included in the first quarter acquisitions is a 168,000 square foot
distribution facility located in Garden Grove, California in which the
Company acquired a controlling general partnership interest in a
newly-formed California limited partnership ("PGP Southern Industrial II,
L.P."). The other partner in the partnership received an aggregate of
404,950 units of limited partnership interest in the partnership for an
aggregate value of $9,000,000. The units may be tendered for redemption to
the Company any time after one year of the closing of the transaction. Upon
tender, the Company, at its election, may either issue common shares for the
units on a one-for-one basis (subject to certain adjustments) or pay cash
for the units based on the then fair market value of the common shares.
3. LOANS PAYABLE
The Company's loans payable at June 30, 1998 and December 31, 1997 consist
of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Mortgage Notes:
Conventional mortgage debt $180,053 $188,449
Tax-exempt mortgage debt 59,482 59,778
Construction loans 24,696 18,425
Revolving line of credit 136,500 17,200
-------- --------
$400,731 $283,852
======== ========
</TABLE>
5
<PAGE> 8
4. CONVERTIBLE SUBORDINATED DEBENTURES
As of June 30, 1998, the Company's outstanding convertible subordinated
debentures totaled $12,360,000, which is net of unamortized discount of
$77,000. Conversion of all the outstanding debentures, which are
convertible into common shares at a rate of 53.6986 common shares of Common
Stock per $1,000 of principal amount of debentures, would require the
issuance of an additional 667,849 common shares. If the debentures were
fully converted, the net income attributable to each common share would not
be diluted. During the six months ended June 30, 1998, $257,000 in
aggregate principal amount of debentures ($231,000 net of discount) were
converted into 13,800 common shares.
5. SHAREHOLDERS' EQUITY
On May 13, 1998 the shareholders voted to approve an amendment to the
Company's Articles of Amendment and Restatement as filed with Maryland's
State Department of Assessments and Taxation (the "Charter") that would
increase the number of authorized shares of Common Stock, par value $.01
per share from 25,000,000 shares to 100,000,000 shares, and approve an
amendment to the Company's Charter that would (a) increase the authorized
number of shares of Preferred Stock, par value $.01 per share (the
"Preferred Stock"), from 5,000,000 shares to 10,000,000 shares and (b)
reclassify the issued and outstanding shares of Class B Senior Cumulative
Convertible Preferred Stock (the "Class B Preferred Stock") as additional
shares of Class A Senior Cumulative Convertible Preferred Stock (the "Class
A Preferred Stock") and change the liquidation preference of the Class A
Preferred Stock to reflect the economic terms of such reclassification of
the Class B Preferred Stock, and approve an amendment to the Company's
Charter relating to the ownership limit to eliminate the shares of Excess
Stock (including the 5,000,000 shares currently authorized), implement a
mechanism for the automatic transfer of shares to a trust, create a
separate ownership limit for Common Stock and make conforming changes to
facilitate the Company's maintenance of its status as a REIT.
During the six months ended June 30, 1998, 767 shares of common stock were
issued through the Company's Dividend Reinvestment Program.
On February 4, 1998, the Company filed a new shelf registration statement
on Form S-3 covering a maximum aggregate offering price of $300,000,000 of
the Company's common stock, preferred stock, debt securities and warrants
to purchase such securities. This filing was declared effective on April
23, 1998.
The Company has a stock rights plan under which the holders of common stock
of the Company ("Common Shares") received a dividend of one preferred stock
purchase right (a "Right") for each Common Share held on the record date.
Currently, certificates evidencing a number of Common Shares also evidence
the same number of Rights, and the Common Shares and Rights trade in
tandem. The Rights are not currently exercisable. The Rights separate from
the Common Shares, certificates for the separated Rights will be
distributed, and the Rights shall be exercisable upon the earliest of: (a)
the tenth business day following the date of announcement that any person
has become the beneficial owner of 10% or more of the then outstanding
voting stock of the Company (such person is a "10% Stockholder" and the
date of announcement is the "10% Ownership Date"), (b) the tenth business
day following the date of commencement of, or the first public announcement
of an intention to commence, a tender offer or exchange offer, the
consummation of which would cause any person to become a 10% Stockholder,
(c) the first date, on or after the 10% Ownership Date, upon which the
Company is acquired in a merger or other business combination in which the
Company is not the surviving corporation or in which the outstanding Common
Shares are changed into or exchanged for stock or assets of another person,
or upon which 50% or more of the Company's consolidated assets or earning
power are sold. Upon distribution, the Rights shall be exercisable to
purchase at the exercise price, initially $100.00 (the "Exercise Price")
(i) one one-hundredth of a share of the Company's Class C Junior
Participating Cumulative Preferred Stock, or (ii) after the tenth business
day following the 10% Ownership Date, Common Shares with a market value
equal to two times the Exercise Price, or (iii) in the event of a merger,
business combination or sale of 50% or more of the Company's consolidated
assets or earning power, shares of common stock of the surviving company or
purchaser, respectively, with an aggregate market value equal to two times
the Exercise Price. The Rights shall expire on December 11, 2007, unless
earlier redeemed or exchanged.
6
<PAGE> 9
6. PER COMMON SHARE DATA
The following table sets forth the computation of basic and diluted
earnings per share which have been restated to comply with Statement No.
128:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------- ------------------------------------
Weighted Weighted
Average Earnings Average Earnings
Earnings Shares Per Earnings Shares Per
(Numerator) (Denominator) Share (Numerator) (Denominator) Share
----------- ------------- -------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income available to
common shareholders $12,644,000 19,935,000 .63 $6,453,000 11,981,000 .54
EFFECT OF DILUTIVE SECURITIES
Stock Options 16,000 17,000
Restricted Stock 85,000 91,000
Limited Partnership Units 443,000 745,000 20,000 250,000
------------ ---------- ---------- ---------
DILUTED EPS $13,087,000 20,781,000 .63 $6,473,000 12,339,000 .52
=========== ========== === ========== ========== ===
</TABLE>
Shares of Senior Cumulative Convertible Preferred Stock, convertible into
2,763,116 shares of Common Stock were outstanding during 1998 but were not
included in computing diluted earnings per share. Including these shares in
the computation increases earnings per share $.01, and are therefore
considered antidilutive. Convertible subordinated debentures convertible
into 668,000 and 704,000 shares of Common Stock were outstanding during 1998
and 1997, respectively, but were not included in the computation of diluted
earnings per share because the effect would be antidilutive.
7. COMMON SHARE DISTRIBUTIONS AND PREFERRED STOCK DIVIDENDS
On June 10, 1998, the Company declared its quarterly distribution of $.42
per common share covering shares outstanding at June 30, 1998. Assuming the
Board continues to declare quarterly distributions, the estimated annual
distribution based on this amount would be $1.68. The distribution was paid
on July 10, 1998 to holders of record on July 1, 1998.
Preferred stock dividends of $1,207,000 related to the shares of Class A
Preferred Stock and shares of Class B Preferred Stock outstanding in the
first quarter of 1998 were paid by the Company on May 14, 1998. Preferred
stock dividends of $1,207,000 related to 2,763,116 shares of Class A
Preferred Stock have been accrued through June 30, 1998 at the rate of
$0.4368 per share per quarter.
7
<PAGE> 10
8. INTEREST
Interest incurred for the six months ended June 30 consists of the
following (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
Interest incurred $ 12,897 $ 8,192
Amortization:
Debenture discount and costs 67 71
Costs related to financing assumed
from the Company's Predecessor and
line of credit costs 259 167
Long-term financing costs 353 205
Interest capitalized (1,547) (522)
Interest income (181) (161)
-------- --------
Interest expense $ 11,848 $ 7,952
======== ========
</TABLE>
9. RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") has issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information",
which is required to be adopted on December 31, 1998. The Company will be
required to report certain information about its operating segments, its
products and services, the geographic areas in which the Company operates
and its major customers. The Company's current financial statements include
substantial information relating to its two operating segments: industrial
and multifamily. The Company does not believe the additional requirements
will have a significant impact on its disclosures.
In March 1998, the FASB's Emerging Issues Task Force ("EITF") reached a
consensus on Issue 97-11, concluding that internal preacquisition costs
related to the purchase of an operating property should be expensed as
incurred. The Company has adopted the provisions of EITF Abstract 97-11,
and management does not believe that the Company's results of operations
will be materially impacted.
In February 1998, the FASB issued FAS 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits, which will be effective for the
year-end 1998 financial statements. FAS 132 only addresses disclosure
issues; it does not address measurement and recognition of pensions and
other postretirement benefits. FAS 132 requires the reconciliation of
changes in benefit obligation and plan assets for both pensions and other
postretirement benefits, showing the effects of the major components
separately for each reconciliation. FAS 132 will be adopted at year-end
1998 and its not expected to materially change the Company's current
pension and other postretirement disclosures.
8
<PAGE> 11
PACIFIC GULF PROPERTIES INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion addresses the consolidated financial statements of the
Company for the six months ended June 30, 1998 and 1997, together with liquidity
and capital resources as of June 30, 1998.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1998 TO THE SIX MONTHS ENDED
JUNE 30, 1997
Industrial rental income increased by $19,429,000, or 128%, from $15,230,000 in
1997 to $34,659,000 in 1998. This increase was primarily attributable to the
acquisition of thirty four industrial parks containing approximately 6,674,000
square feet of leasable area since June 1997. Multifamily rental income
increased by $2,956,000, or 19%, from $15,502,000 in 1997 to $18,458,000 in
1998. This increase was primarily attributable to an increase in rental rates
and to the acquisition of three multifamily properties containing 824 apartment
units since June 1997. As a result of these changes, total revenues increased by
$22,385,000, or 73%, from $30,732,000 in 1997 to $53,117,000 in 1998.
Industrial rental income for the six months ended June 30, 1998 totaled
$34,659,000 and included $17,421,000 related to the industrial parks acquired
since June 30, 1997.
Multifamily rental income for the six months ended June 30, 1998 totaled
$18,458,000 and included $2,772,000 related to the multifamily properties
acquired since June 30, 1997.
Industrial rental property expenses increased $3,853,000, or 105%, from
$3,679,000 in 1997 to $7,532,000 in 1998. This increase was primarily
attributable to the acquisition of the above referenced industrial parks.
Multifamily rental property expenses increased by $619,000, or 10%, from
$5,996,000 in 1997 to $6,615,000 in 1998. This increase was primarily
attributable to the acquisition of the above referenced multifamily properties.
Industrial rental property expenses for the six months ended June 30, 1998
totaled $7,532,000 and included $3,616,000 related to industrial parks acquired
since June 30, 1997.
Multifamily rental property expenses for the six months ended June 30, 1998
totaled $6,615,000 and included $980,000 related to multifamily properties
acquired since June 30, 1997.
Total depreciation increased by $4,338,000, or 88%, from $4,934,000 in 1997 to
$9,272,000 in 1998. This increase was primarily attributable to additional
depreciation relating to the acquisition of thirty four industrial parks, three
multifamily properties, and capital improvements made to rehabilitate existing
properties.
Interest expense (including amortization of debenture discount and financing
costs) increased by $3,896,000, or 49%, from $7,952,000 in 1997 to $11,848,000
in 1998. This increase was primarily attributable to an increase in outstanding
borrowings due to new acquisitions made during 1997 and 1998 and a higher
balance on the Company's line of credit in 1998.
General and administrative expenses increased by $877,000, or 60%, from
$1,472,000 in 1997 to $2,349,000 in 1998. This increase was primarily
attributable to personnel increases related to acquisitions made since June 30,
1997, the write off of $130,000 for costs incurred on projects which were not
acquired, and the accrual of anticipated bonuses for 1998.
Minority partners' interest in earnings of consolidated partnerships increased
$413,000 from $20,000 in 1997 to $443,000 in 1998. This increase was
attributable to the June 1997 acquisition of a controlling general partner
interest in the two partnerships that own senior apartments, the October 1997
acquisition of a controlling general partner interest in the partnership that
owns two industrial properties and the March 1998 acquisition of a controlling
general partner interest in the partnership that owns an industrial property.
9
<PAGE> 12
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1998 TO THE THREE MONTHS ENDED
JUNE 30, 1997
Industrial rental income increased by $10,354,000, or 129%, from $7,998,000 in
1997 to $18,352,000 in 1998. This increase was primarily attributable to the
acquisition of thirty four industrial parks containing approximately 6,674,000
square feet of leasable area since June 1997. Multifamily rental income
increased by $1,526,000, or 19%, from $7,921,000 in 1997 to $9,447,000 in 1998.
This increase was primarily attributable to an increase in rental rates and to
the acquisition of three multifamily properties containing 824 apartment units
since June 1997. As a result of these changes, total revenues increased by
$11,880,000, or 75%, from $15,919,000 in 1997 to $27,799,000 in 1998.
Industrial rental income for the three months ended June 30, 1998 totaled
$18,352,000 and included $9,531,000 related to the industrial parks acquired
since June 30, 1997.
Multifamily rental income for the three months ended June 30, 1998 totaled
$9,447,000 and included $1,399,000 related to the multifamily properties
acquired since June 30, 1997.
Industrial rental property expenses increased $1,886,000, or 101%, from
$1,863,000 in 1997 to $3,749,000 in 1998. This increase was primarily
attributable to the acquisition of the above referenced industrial parks.
Multifamily rental property expenses increased $299,000, or 10%, from $3,078,000
in 1997 to $3,377,000 in 1998. This increase was primarily attributable to the
acquisition of the above referenced multifamily properties.
Industrial rental property expenses for the three months ended June 30, 1998
totaled $3,749,000 and included $1,918,000 related to industrial parks acquired
since June 30, 1997.
Multifamily rental property expenses for the three months ended June 30, 1998
totaled $3,377,000 and included $487,000 related to multifamily properties
acquired since June 30, 1997.
Total depreciation increased by $2,304,000, or 89%, from $2,578,000 in 1997 to
$4,882,000 in 1998. This increase was primarily attributable to additional
depreciation relating to the acquisition of thirty four industrial parks, three
multifamily properties, and capital improvements made to rehabilitate existing
properties.
Interest expense (including amortization of debenture discount and financing
costs) increased by $2,574,000, or 64%, from $3,999,000 in 1997 to $6,573,000 in
1998. This increase was primarily attributable to a decrease in convertible
subordinated debentures outstanding, offset by an increase in outstanding
borrowings due to new acquisitions made during 1997 and 1998 and a higher
balance on the Company's line of credit in 1998.
General and administrative expenses increased by $454,000, or 58%, from $784,000
in 1997 to $1,238,000 in 1998. This increase was primarily attributable to
personnel increases related to acquisitions made since June 30, 1997, the write
off of $31,000 for costs incurred on projects which were not acquisitions, and
the accrual of anticipated bonuses for 1998.
Minority partners' interest in earnings of consolidated partnerships increased
$317,000 from $20,000 in 1997 to $337,000 in 1998. This increase was
attributable to the June 1997 acquisition of a controlling general partner
interest in the two partnerships that own senior apartments and the October 1997
acquisition of a controlling general partner interest in the partnership that
owns two industrial properties and the March 1998 acquisition of a controlling
general partner interest in the partnership that owns an industrial property.
10
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had $4,831,000 of cash to meet its immediate
short-term liquidity requirements. Future short-term liquidity requirements are
anticipated to be met through net cash flow from operations, existing working
capital, and, if necessary, funding from the Company's Line of Credit.
As of June 30, 1998, the Company had borrowed $136,500,000 under its unsecured
line of credit. In April 1998, the Company replaced its secured line of credit
and unsecured bridge loan facility with a $150,000,000 unsecured revolving
credit agreement (the "Line of Credit"). The interest rate payable under the new
facility is LIBOR plus 1.25%. The facility matures in April of 2001. The Company
will use the facility to finance acquisitions and for general corporate
purposes.
The Company intends to acquire additional properties and may seek to fund these
acquisitions through proceeds received from a combination of its Line of Credit,
equity offerings or debt financings, but no assurance can be given that any
acquisitions will be completed.
The Company anticipates that adequate cash will be available to fund its
operating and administrative expenses, continuing debt service obligations and
the payment of dividends in accordance with REIT requirements in the foreseeable
future.
Cash provided by operating activities increased from $10,487,000 for the period
ended June 30, 1997 to $26,665,000 for the period ended June 30, 1998. The
primary reason for these increases is related to the additional rental income
contributed by properties acquired during 1997 and 1998.
Cash used in investing activities increased from $84,557,000 for the period
ended June 30, 1997 to $130,109,000 for the period ended June 30, 1998 as a
result of acquisitions.
Cash provided by financing activities increased from $86,555,000 for the period
ended June 30, 1997 to $106,810,000 for the year ended June 30, 1998 primarily
as a result of a net increase in borrowings on the Company's lines of credit and
mortgage loans as well as the addition of minority partners' interest.
The immediately preceding paragraphs contain forward looking information
involving risks and uncertainties that could significantly impact the Company's
expected liquidity requirements in the short and long term. While it is
impossible to itemize the many factors and specific events that could affect the
Company's outlook for its liquidity requirements, such factors would include the
actual timing of and costs associated with the Company's acquisitions, the
actual capital expenditures associated therewith, and the strength of the local
economies of the submarkets in which the Company operates. Higher than expected
acquisition, rental and/or rehabilitation costs, delays in the rehabilitation of
properties, a downturn in the local economies, competition and/or the lack of
growth of such economies could reduce the Company's revenues and increase its
expenses, resulting in a greater burden on the Company's liquidity than that
which the Company has described above.
11
<PAGE> 14
PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
The Company filed a registration statement on Form S-3, as amended
on July 1, 1998, relating to 211,921 shares (the "Exchange Shares"
or the "Securities") of Common Stock, par value $.01 per share (the
"Common Stock"), of the Company that may be offered and sold from
time to time by the stockholders of the Company listed therein under
"Selling Stockholders" (the "Selling Stockholders"). The Exchange
Shares have been, or may be, issued by the Company to the Selling
Stockholders in exchange for 211,921 units ("Units") of limited
partnership interest in PGP Inland Properties, L.P., a Delaware
limited partnership (the "Inland Partnership"), pursuant to the
Company's obligations under that certain Exchange Rights Agreement,
dated as of August 15, 1995, among the Company, the Inland
Partnership, and the Limited partners of the Inland Partnership.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held May 7,
1998, for the purpose of (1) electing three members to the Board of
Directors; (2) approving an amendment to the Company's 1993 Share
Option Plan to increase the aggregate number of Common Shares
authorized for issuance under such plan by 1,250,000 shares (300,000
of which will be reserved for issuance to non-employee directors) to
2,300,000 shares (Proposal 1); (3) approving an amendment to the
Company's Articles of Amendment and Restatement as filed with
Maryland's State Department of Assessments and Taxation (the
"Charter") that would increase the number of authorized shares of
Common Stock, par value $.01 per share from 25,000,000 shares to
100,000,000 shares (Proposal 2); (4) approving an amendment to the
Company's Charter that would (a) increase the authorized number of
shares of Preferred Stock, par value $.01 per share (the "Preferred
Stock"), from 5,000,000 shares to 10,000,000 shares and (b)
reclassify the issued and outstanding shares of Class B Senior
Cumulative Convertible Preferred Stock (the "Class B Preferred
Stock") as additional shares of Class A Senior Cumulative
Convertible Preferred Stock (the "Class A Preferred Stock") and
change the liquidation preference of the Class A Preferred Stock to
reflect the economic terms of such reclassification of the Class B
Preferred Stock (Proposal 3); and (5) approving an amendment to the
Company's Charter relating to the ownership limit to eliminate the
shares of Excess Stock (including the 5,000,000 shares currently
authorized), implement a mechanism for the automatic transfer of
shares to a trust, create a separate ownership limit for Common
Stock and make conforming changes to facilitate the Company's
maintenance of its status as a REIT (Proposal 4).
Management's nominees for directors as listed in the proxy statement
were elected with the following vote:
<TABLE>
<CAPTION>
Shares Voted Shares
"For" "Withheld"
------------ ----------
<S> <C> <C>
Glenn L. Carpenter 19,371,454 81,177
Keith W. Renken 19,370,429 82,202
Carl C. Gregory, III 19,370,554 82,077
</TABLE>
Continuing directors are as follows:
Peter L. Eppinga
John F. Kooken
Robert E. Morgan
James E. Quigley, 3rd
12
<PAGE> 15
Proposal 1 was approved with the following vote:
<TABLE>
<CAPTION>
Shares Voted Shares Voted Shares Voted
"For" "Against" "Abstained" Non-Votes
------------ ------------ ------------ ---------
<S> <C> <C> <C> <C>
13,536,226 1,466,746 157,841 4,291,818
</TABLE>
Proposal 2 was approved with the following vote:
<TABLE>
<CAPTION>
Shares Voted Shares Voted Shares Voted
"For" "Against" "Abstained"
------------ ------------ ------------
<S> <C> <C> <C>
15,178,092 4,158,620 115,918
</TABLE>
Proposal 3 was approved with the following vote:
<TABLE>
<CAPTION>
Shares Voted Shares Voted Shares Voted
"For" "Against" "Abstained" Non-Votes
------------ ------------ ------------ ---------
<S> <C> <C> <C> <C>
13,919,085 1,109,835 131,893 4,291,818
</TABLE>
Proposal 4 was approved with the following vote:
<TABLE>
<CAPTION>
Shares Voted Shares Voted Shares Voted
"For" "Against" "Abstained"
------------ ------------ ------------
<S> <C> <C> <C>
18,544,225 739,724 168,682
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None.
13
<PAGE> 16
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.
PACIFIC GULF PROPERTIES INC.
/s/ GLENN L. CARPENTER /s/ DONALD G. HERRMAN
- ------------------------------------ -------------------------------------
Glenn L. Carpenter Donald G. Herrman
Chairman and Chief Executive Officer Chief Financial Officer and Secretary
DATED: August 13, 1998
14
<PAGE> 17
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 4,831
<SECURITIES> 0
<RECEIVABLES> 5,037
<ALLOWANCES> 1,000
<INVENTORY> 0
<CURRENT-ASSETS> 8,868
<PP&E> 863,166
<DEPRECIATION> 48,230
<TOTAL-ASSETS> 838,795
<CURRENT-LIABILITIES> 22,530
<BONDS> 413,091
0
28
<COMMON> 200
<OTHER-SE> 384,633
<TOTAL-LIABILITY-AND-EQUITY> 838,795
<SALES> 0
<TOTAL-REVENUES> 53,117
<CGS> 0
<TOTAL-COSTS> 25,768
<OTHER-EXPENSES> 443
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,848
<INCOME-PRETAX> 15,808
<INCOME-TAX> 0
<INCOME-CONTINUING> 15,808
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,644
<EPS-PRIMARY> 0.63
<EPS-DILUTED> 0.63
</TABLE>
