<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 September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period from ___________________ to ___________________
Commission File Number: 1-12546
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, 20,460,044 SHARES
WERE OUTSTANDING AS OF November 9, 1999
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
--- ---
================================================================================
<PAGE> 2
PACIFIC GULF PROPERTIES INC.
FORM 10-Q
Page
----
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
INDEX TO FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998 3
Consolidated Statements of Operations for the Nine
Months ended September 30, 1999 and September 30, 1998 4
Consolidated Statements of Operations for the Three
Months ended September 30, 1999 and September 30, 1998 5
Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 1999 and September 30, 1998 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II: OTHER INFORMATION 16
SIGNATURES 17
2
<PAGE> 3
PACIFIC GULF PROPERTIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Real estate assets
Operating properties
Land $ 232,126 $ 229,920
Buildings 649,700 633,268
--------- ---------
881,826 863,188
Accumulated depreciation
(66,882) (49,776)
--------- ---------
814,944 813,412
Properties under development, including land 44,418 39,926
--------- ---------
859,362 853,338
Cash and cash equivalents 1,242 2,276
Accounts receivable 4,501 4,984
Other assets 16,368 14,529
--------- ---------
$ 881,473 $ 875,127
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Loans payable $ 407,405 $ 403,845
Accounts payable and accrued liabilities 18,423 15,828
Dividends payable 10,011 9,844
Convertible subordinated debentures 5,260 12,244
--------- ---------
441,099 441,761
Minority partners' interest in consolidated partnerships 18,124 17,812
Commitments and contingencies -- --
Shareholders' equity
Preferred shares, $.01 par value; 10,000,000 shares
authorized; 2,763,116 Senior Cumulative Convertible Class A
shares outstanding at September 30, 1999 and December 31,
1998, respectively 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;
20,406,020 and 20,017,814 shares outstanding at September 30,
1999 and December 31,1998, respectively 204 201
Outstanding restricted stock (1,296) (1,203)
Additional paid-in capital 419,345 412,093
Retained earnings 3,969 4,435
--------- ---------
422,250 415,554
--------- ---------
$ 881,473 $ 875,127
========= =========
</TABLE>
See accompanying notes
3
<PAGE> 4
PACIFIC GULF PROPERTIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1999 1998
--------- ----------
<S> <C> <C>
REVENUES
Rental income
Industrial properties $72,812 $54,993
Multifamily properties 19,299 27,916
------- -------
92,111 82,909
EXPENSES
Rental property operating expenses
Industrial properties 16,187 11,979
Multifamily properties 6,941 10,290
------- -------
23,128 22,269
Depreciation 19,067 14,751
Interest (including amortization of debenture discount
and financing costs of $633 and $896, respectively) 20,518 18,965
General and administrative expenses 5,026 3,912
Minority partners' interest in earnings of consolidated
partnerships 967 733
------- -------
68,706 60,630
------- -------
INCOME BEFORE GAIN ON SALE OF REAL ESTATE 23,405 22,279
Gain on sale of real estate 5,852 6,427
------- -------
NET INCOME 29,257 28,706
Less: preferred dividend requirements 3,707 3,621
------- -------
INCOME AVAILABLE TO COMMON SHAREHOLDERS $25,550 $25,085
======= =======
Earnings per share
Basic $ 1.28 $ 1.26
======= =======
Diluted $ 1.26 $ 1.24
======= =======
Dividends declared per common share $ 1.29 $ 1.26
======= =======
</TABLE>
See accompanying notes
4
<PAGE> 5
PACIFIC GULF PROPERTIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------
1999 1998
--------- ------------
<S> <C> <C>
REVENUES
Rental income
Industrial properties $24,986 $20,334
Multifamily properties 6,571 9,458
------- -------
31,557 29,792
EXPENSES
Rental property operating expenses
Industrial properties 5,496 4,447
Multifamily properties 2,442 3,675
------- -------
7,938 8,122
Depreciation 6,688 5,479
Interest (including amortization of debenture
discount and financing costs of $210 and $217,
respectively) 6,965 7,117
General and administrative expenses 1,907 1,563
Minority partners' interest in earnings of
consolidated partnerships 374 290
------- -------
23,872 22,571
------- -------
INCOME BEFORE GAIN ON SALE OF REAL ESTATE 7,685 7,221
Gain on sale of real estate 1,228 6,427
------- -------
NET INCOME 8,913 13,648
Less: preferred dividend requirements 1,236 1,207
------- -------
INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 7,677 $12,441
======= =======
Earnings per share
Basic $ 0.38 $ 0.62
======= =======
Diluted $ 0.38 $ 0.58
======= =======
Dividends declared per common share $ 0.43 $ 0.42
======= =======
</TABLE>
See accompanying notes
5
<PAGE> 6
PACIFIC GULF PROPERTIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited))
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1999 1998
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 29,257 $ 28,706
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 19,067 14,751
Amortization of debenture discount and financing costs 633 896
Gain on sale of real estate (5,852) (6,427)
Minority interests in earnings of consolidated
partnerships 967 733
Compensation recognized related to restricted stock
issued to employees (93) (464)
Net increase in other assets (6,322) (4,046)
Net increase in liabilities 1,357 6,871
--------- ---------
Net cash provided by operating activities 39,014 41,020
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and improvements to properties (11,518) (108,494)
Development expenditures (22,666) (33,833)
Proceeds from sale of real estate 19,280 13,525
--------- ---------
Net cash used in investing activities (14,904) (128,802)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit 27,300 219,269
Repayment of line of credit (36,950) (119,869)
Proceeds from mortgage notes payable 9,000 18,300
Repayment of mortgage notes payable (1,805) (22,170)
Proceeds from construction loans 6,015 15,658
Issuance of common shares 271 540
Minority interest (distributions) contributions (655) 7,762
Dividends paid on common shares (25,848) (25,181)
Dividends paid on preferred shares (2,472) (2,879)
--------- ---------
Net cash (used in) provided by financing activities (25,144) 91,430
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,034) 3,648
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,276 1,466
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,242 $ 5,114
========= =========
</TABLE>
See accompanying notes
6
<PAGE> 7
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. 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, 1998.
2. REAL ESTATE
During the third quarter of 1999, the Company sold a 42,240 square foot
industrial property located in Seattle, Washington for $1,900,000. The net
gain recognized was $492,000.
In August 1999, the Company acquired a land parcel, containing 11.71 acres,
located in Temecula, California for $2,388,000. The Company plans to develop
a 244-unit active senior apartment community on this site.
In August 1999, the Company acquired a 68,134 square foot industrial park in
Tempe, Arizona for $3,100,000.
Also in August 1999 the Company recognized a deferred gain of $850,000 as a
result of the collection of a note receivable relating to the sale of the
Company's Texas properties in 1995.
During the second quarter of 1999, the Company sold a 91,200 square foot
single-tenant industrial property located in Anaheim, California, and a 1.05
acre parcel of land in Lake Forest, California, for $4,680,000 and $850,000,
respectively. The net gain recognized from these sales was $1,159,000.
In March of 1999, the Company acquired a land parcel, containing 8.65 acres,
located in Anaheim Hills, California for $5,400,000. The Company plans to
develop a 259-unit active senior apartment community on this site.
During the first quarter of 1999, the Company sold a multifamily apartment
property located in Santa Ana, California, consisting of 196 apartment units
for $11,000,000 and recognized a gain on sale of $3,351,000.
7
<PAGE> 8
3. LOANS PAYABLE
The Company's loans payable at September 30, 1999 and December 31, 1998
consist of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Mortgage notes:
Conventional mortgage debt
Industrial $141,842 $133,745
Multifamily
Active Senior 4,572 4,620
Family 33,948 34,239
-------- --------
180,362 172,604
Tax-exempt mortgage debt
Multifamily
Active Senior 44,343 44,697
Family 20,606 20,815
-------- --------
64,949 65,512
Construction loans 37,994 31,979
Unsecured line of credit 124,100 133,750
-------- --------
$407,405 $403,845
======== ========
</TABLE>
4. CONVERTIBLE SUBORDINATED DEBENTURES
As of September 30, 1999, the Company's outstanding convertible subordinated
debentures totaled $5,260,000, which is net of unamortized discount of
$13,000. Conversion of all the outstanding debentures, which are convertible
into common shares at a rate of 53.6986 shares of Common Stock per $1,000 of
principal amount of debentures, would require the issuance of an additional
283,152 common shares. During the nine months ended September 30, 1999,
$6,824,000 in aggregate principal amount of debentures ($6,785,000 net of
discount) were converted into 366,396 common shares.
Per the terms of the debentures, the Company may call all or a portion of the
remaining outstanding debentures at par.
The Company called for redemption of $6,500,000 of its outstanding debentures
on August 18, 1999. As of that date, $6,300,000 of the debentures called had
converted into 338,301 shares of Common Stock. The Company redeemed the
remaining $200,000 for cash.
In October, 1999 the Company announced the redemption of the remaining
$5,273,000 million of its convertible subordinated debentures. This call
occurred November 10, 1999 and $5,110,000 of debentures converted into
274,399 shares of Common Stock. The Company redeemed the remaining $163,000
for cash.
8
<PAGE> 9
5. SHAREHOLDERS' EQUITY
The Company has an effective shelf registration statement approved by the
Securities and Exchange Commission on April 25, 1998 for the aggregate amount
of $300,000,000, covering the proposed issuance of debt, preferred or common
stock securities and warrants to purchase such securities of the Company.
Availability under this shelf registration statement at September 1999 is
$300,000,000, subject to market conditions.
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. The
Rights shall be distributed and 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.
During the nine months ended September 30, 1999, the Company issued 2,321
shares of Common Stock through its Dividend Reinvestment Program.
9
<PAGE> 10
6. PER COMMON SHARE DATA
The following table sets forth the computation of basic and diluted earnings
per share for the nine months ended September 30, in accordance with the
Financial Accounting Standards Board Statement No. 128:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------- ---------------------------------------
Weighted Weighted
Average Average
Earnings Shares Earnings Earnings Shares Earnings
(Numerator) (Denominator) Per Share (Numerator) (Denominator) Per Share
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income available to common
shareholders $25,550,000 20,037,000 1.28 $25,085,000 19,936,000 1.26
==== ====
EFFECT OF DILUTIVE SECURITIES
Stock options 35,000 12,000
Restricted stock 98,000 87,000
Limited partnership units 967,000 870,000 733,000 791,000
----------- ----------- ----------- -----------
DILUTED EPS $26,517,000 $21,040,000 1.26 $25,818,000 $20,826,000 1.24
=========== =========== ==== =========== =========== ====
</TABLE>
Shares of Senior Cumulative Convertible Preferred Stock, convertible into
2,763,116 shares of Common Stock, were outstanding during 1999 and 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. Weighted average subordinated debentures
convertible into 468,000 and 671,000 shares of Common Stock were outstanding
during 1999 and 1998, 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 September 9, 1999, the Company declared its quarterly distribution of $.43
per common share covering shares outstanding at September 30, 1999. The
distribution was paid on October 15, 1999 to holders of record on October 1,
1999. Assuming the Board continues to declare quarterly distributions, the
estimated annual distribution based on this amount would be $1.72.
Preferred stock dividends of $2,472,000, related to the shares of Class A
Preferred Stock outstanding in the first and second quarters of 1999, were
paid by the Company on May 14, 1999 and August 14, 1999, respectively.
Preferred stock dividends of $1,236,000 related to 2,763,116 shares of Class
A Preferred Stock have been accrued through September 30, 1999 at the rate of
$0.44720 per share per quarter.
10
<PAGE> 11
8. INTEREST
Interest incurred for the nine months ended September 30 consists of the
following (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Interest incurred $ 22,001 $ 20,640
Amortization:
Debenture discount and costs 83 100
Costs related to financing assumed from
the Company's Predecessor and line of
credit costs 327 382
Long-term financing costs 222 414
Interest capitalized (1,852) (2,293)
Interest income (263) (278)
-------- --------
Interest expense $ 20,518 $ 18,965
======== ========
</TABLE>
9. REPORTABLE SEGMENTS
During the fourth quarter of 1998, the Company adopted the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
131, Disclosures About Segments of an Enterprise and Related Information
("Statement No. 131"). Statement No. 131 superseded FASB Statement No. 14,
Financial Reporting for Segments of a Business Enterprise. Statement No. 131
establishes standards for the way that public business enterprises report
information regarding reportable operating segments. The adoption of
Statement No. 131 did not affect the results of operations or financial
position of the Company.
The Company operates and develops industrial properties and multifamily
properties (consisting of active senior and family apartments). The
properties generate rental and other income through the leasing of industrial
space and apartment units to a diverse base of tenants.
The Company separately evaluates the performance of its industrial and
multifamily operating segments and allocates resources primarily based on Net
Operating Income ("NOI"). NOI is defined by the Company as rental income less
rental property expenses. Accordingly, NOI excludes certain expenses such as
interest, depreciation and minority interests in consolidated partnerships
which are included in the determination of Net Income under generally
accepted accounting principles.
NOI from industrial properties totaled $56,625,000 and $43,014,000 for the
nine months ended September 30, 1999 and 1998, respectively. NOI from
multifamily properties totaled $12,358,000 and $17,626,000 for the nine
months ended September 30, 1999 and 1998, respectively.
NOI from industrial properties totaled $19,490,000 and $15,887,000 for the
quarters ended September 30, 1999 and 1998, respectively. NOI from
multifamily properties totaled $4,129,000 and $5,783,000 for the quarters
ended September 30, 1999 and 1998, respectively.
All revenues are from external customers and no revenues are generated from
transactions between segments. There are no tenants who contributed 10% or
more of the Company's total revenues during 1999 or 1998. Interest expense on
debt is not allocated to the segments or individual properties even if such
debt is secured by the properties. Certain items in the consolidated
statements of operations such as minority interest in consolidated
partnerships are not allocated to the properties. Additionally, there is no
provision for income taxes as the Company is organized as a REIT under the
Internal Revenue Code.
11
<PAGE> 12
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 nine months ended September 30, 1999 and 1998, together with
liquidity and capital resources as of September 30, 1999.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1999 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
Industrial rental income increased by $17,819,000, or 32%, from $54,993,000 in
1998 to $72,812,000 in 1999. This increase was primarily attributable to the
acquisition of eleven industrial parks containing approximately 2,197,000 square
feet of leasable area since March 1998. Industrial rental income for the nine
months ended September 30, 1999 included $12,543,000 related to industrial parks
acquired since March 31, 1998.
Multifamily rental income decreased by $8,617,000, or 31%, from $27,916,000 in
1998 to $19,299,000 in 1999. This decrease was primarily attributable to the
sale of six apartment properties located in Washington, during the third and
fourth quarters of 1998, and one apartment property located in California, in
the first quarter of 1999, offset by an increase in revenue resulting from
rental rate increases and the completion of an active senior property previously
under development. Multifamily rental income for the nine months ended September
30, 1998 included $10,192,000 related to the seven apartment properties sold in
1998 and 1999. As a result of these changes, total revenues increased by
$9,202,000, or 11%, from $82,909,000 in 1998 to $92,111,000 in 1999.
Industrial rental property expenses increased $4,208,000, or 35%, from
$11,979,000 in 1998 to $16,187,000 in 1999. This increase was primarily
attributable to the acquisition of the above referenced industrial parks.
Industrial rental property expenses for the nine months ended September 30, 1999
included $2,828,000 related to industrial parks acquired since March 31, 1998.
Multifamily rental property expenses decreased by $3,349,000, or 33% from
$10,290,000 in 1998 to $6,941,000 in 1999. This decrease was primarily
attributable to the disposition of the above referenced multifamily properties.
Total depreciation increased by $4,316,000, or 29%, from $14,751,000 in 1998 to
$19,067,000 in 1999. This increase was primarily attributable to additional
depreciation relating to the acquisition of eleven industrial parks, the
completion of an active senior property previously under development, and
capital improvements made to rehabilitate existing properties, offset by the
disposition of seven multifamily properties.
Interest expense (including amortization of debenture discount and financing
costs) increased by $1,553,000, or 8%, from $18,965,000 in 1998 to $20,518,000
in 1999. This increase was primarily attributable to an increase in outstanding
borrowings due to new acquisitions made during 1998, offset by a lower interest
rate on the Company's line of credit and a decrease in the outstanding
debentures due to the August 1999 redemption.
General and administrative expenses increased by $1,114,000, or 28%, from
$3,912,000 in 1998 to $5,026,000 in 1999. This increase was primarily
attributable to increased staffing due to growth in the portfolio.
Minority partners' interest in earnings of consolidated partnerships increased
234,000 from $733,000 in 1998 to $967,000 in 1999. This increase is primarily
attributable to earnings allocated to the minority interest partners in a
partnership formed in 1995, who recently exceeded an earnings threshold
entitling these partners to an allocation of earnings.
A gain on the sale of real estate in the amount of $5,852,000 was recorded in
1999 for the sale of a 196-unit multifamily property, a 91,200 square foot
industrial property, a 1.05-acre parcel of land, all located in Southern
California, a 42,240 square foot industrial property located in Seattle,
Washington and the recognition of a deferred gain on the collection of a note
receivable relating to the sale of the Company's Texas properties in 1995. The
gain on sale of real estate was $6,427,000 for the 1998 period.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1999 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1998
Industrial rental income increased by $4,652,000, or 23% from $20,334,000 in
1998 to $24,986,000 in 1999. This increase was primarily attributable to the
acquisition of eleven industrial parks containing approximately 2,197,000 square
feet of leasable area since March 1998. Industrial rental income for the three
months ended September 30, 1999 included $4,376,000 related to the industrial
parks acquired since March 31, 1998.
12
<PAGE> 13
Multifamily rental income decreased by $2,887,000, or 31% from $9,458,000 in
1998 to $6,571,000 in 1999. This decrease was primarily attributable to the sale
of six apartment properties located in Washington, during the third and fourth
quarters of 1998 and one apartment property located in California in the first
quarter of 1999, offset by an increase in rental rates and the completion of an
active senior property previously under development.
As a result of these changes, total revenues increased by $1,765,000, or 6%,
from $29,792,000 in 1998 to $31,557,000 in 1999.
Industrial rental property expenses increased $1,049,000, or 24% from $4,447,000
in 1998 to $5,496,000 in 1999. This increase was primarily attributable to the
acquisition of the above referenced industrial parks. Industrial rental property
expenses for the three months ended September 30, 1999 included $941,000 related
to industrial parks acquired since March 31, 1998. Multifamily rental property
expenses decreased by $1,233,000, or 34% from $3,675,000 in 1998 to $2,442,000
in 1999. This decrease was primarily attributable to the disposition of the
above referenced multifamily properties.
Total depreciation increased by $1,209,000, or 22% from $5,479,000 in 1998 to
$6,688,000 in 1999. This increase was primarily attributable to additional
depreciation relating to the acquisition of eleven industrial parks, the
completion of an active senior property previously under development, and
capital improvements made to rehabilitate existing properties, offset by the
disposition of seven multifamily properties.
Interest expense (including amortization of debenture discount and financing
costs) decreased by $152,000, or 2% from $7,117,000 in 1998 to $6,965,000 in
1999. This decrease was primarily attributable to a lower interest rate on the
Company's line of credit and a decrease in the outstanding debentures due to the
August 1999 redemption.
General and administrative expenses increased by $344,000, or 22% from
$1,563,000 in 1998 to $1,907,000 in 1999. This increase was primarily
attributable to increased staffing due to growth in the portfolio.
Minority partners' interest in earnings of consolidated partnerships increased
$84,000 from $290,000 in 1998 to $374,000 in 1999 due to the minority interest
partners in a partnership formed in 1995, who recently exceeded an earnings
threshold entitling these partners to an allocation of earnings.
A gain on the sale of real estate in the amount of $1,228,000 was recorded in
1999 for the sale of a 42,240 square foot industrial property in Seattle,
Washington and the recognition of a deferred gain on the collection of a note
receivable relating to the sale of the Company's Texas properties in 1995. The
gain on sale of real estate was $6,427,000 for the 1998 period.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had $1,242,000 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 September 30, 1999, the Company had borrowed $124,100,000 under its $150
million unsecured line of credit, a revolving credit agreement entered into in
April, 1998, which replaced the Company's prior secured line of credit (the
"Line of Credit"). The interest rate payable under the facility is LIBOR plus
1.30%. The facility matures in April of 2001. The Company uses the Line of
Credit to finance acquisitions, interim development needs and for general
corporate purposes.
The Company has a shelf registration statement with the Securities and Exchange
Commission for an aggregate amount of $300,000,000 available under the 1998
Shelf Registration Statement.
The Company may acquire additional properties and may seek to fund these
acquisitions through proceeds received from a combination of its Line of Credit,
dispositions of existing properties, equity offerings or debt financings, but no
assurance can be given that any of these transactions will be completed.
The Company anticipates that adequate cash will be available to fund its
operating and administrative expenses, meeting debt service obligations and the
payment of dividends in accordance with REIT requirements in the foreseeable
future.
13
<PAGE> 14
Cash provided by operating activities decreased from $41,020,000 for the period
ended September 30, 1998 to $39,014,000 for the period ended September 30, 1999.
The primary reason for the decrease is related to the change in other assets,
such as land deposits and pre-acquisition costs, and liabilities, such as
security deposits and accrued payables, offset by the additional rental income
contributed by properties acquired during 1998 and 1999.
Cash used in investing activities decreased from $128,802,000 for the period
ended September 30, 1998 to $14,904,000 for the period ended September 30, 1999
as a result of fewer acquisitions.
Cash provided by financing activities decreased from $91,430,000 for the period
ended September 30, 1998 to ($25,144,000) for the period ended September 30,
1999 primarily as a result of a net decrease in borrowings on the Company's Line
of Credit and mortgage loans.
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 future liquidity, 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.
YEAR 2000 READINESS
General
Any of the Company's computer programs that have time-sensitive software may not
be able to distinguish the year 2000 from the year 1900, if those programs use
two digits rather than four digits to define the year. This could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send tenant
invoices, or engage in similar normal business activities.
Company's State of Readiness
The Company's Year 2000 project is divided into four general exposures: Computer
hardware, applications software, operating equipment with embedded chips or
software ("OE") and third party suppliers and customers. The phases common to
all sections are: 1) Compiling potential Year 2000 sensitive items; 2) assigning
priorities to identified items; 3) assessing the Year 2000 compliance of items
determined to be material to the Company; 4) repairing or replacing material
items that are determined not to be Year 2000 compliant; and 5) testing material
items.
Computer hardware consists of personal computers ("PCs") currently being
utilized by the Company. This includes PCs utilized by employees along with PCs
designated as file servers located at the corporate office. As of September 30,
1999 all computer hardware is believed to be Year 2000 compliant and 100% of the
PCs have been tested.
Applications software consists of software currently being utilized by the
Company, including but not limited to, accounting, operating system, spreadsheet
and word processing software. As of October 31, 1999, the Company has completed
100% of the assessment and repair or replacement, including testing, of its
application software.
Operating equipment with embedded chips or software includes equipment or
machinery such as elevators, security systems, lighting systems, HVAC systems
and sprinkler systems used in the operation of the Company's properties. The
Company completed the assessment and repair or replacement of its critical OE
systems in the second quarter of 1999. The Company anticipates that a
contingency plan will be established to address non-compliant non-critical OE
systems.
The third party analysis consists of identifying and prioritizing critical
suppliers and communicating with them about their plans and progress in
addressing the Year 2000 issue. The state of readiness of the Company's third
parties is based primarily on representations from such parties. The Company has
queried 100% of its significant suppliers and subcontractors that do not
14
<PAGE> 15
share information systems with the Company. The Company has reviewed the results
of this survey, has assessed the impact of the results on its operations and has
a contingency plan to address whatever action is deemed necessary. To date, the
Company is not aware of any third parties with a Year 2000 issue that would
materially impact the Company's results of operations, liquidity, or capital
resources. However, the Company has no means of ensuring that third parties will
be Year 2000 ready.
Cost to Address the Company's Year 2000 Issues
The Company has incurred less than $100,000 in connection with its Year 2000
remediation efforts. The Company cannot presently estimate the total cost of the
remaining phases of its Year 2000 program. However, the Company does not expect
its Year 2000 expenditures to be material to the Company's business, results of
operations or financial condition.
Risks of the Company's Year 2000 Issues
Management of the Company believes it has a program in place to adequately
resolve the Year 2000 issue in a timely manner. The Company's ability to address
Year 2000's anticipated impact on its operating systems is based on numerous
assumptions of future events and is dependent upon numerous factors. A Year 2000
failure by one or more of the financial institutions or utility companies with
which the Company does business could cause the Company to lose access to its
funds or could restrict the Company's ability to borrow or operate its property.
A Year 2000 failure by a trustee or transfer agent could restrict the Company's
ability to pay interest on its debentures or to pay dividends on its equity
securities.
Company's Contingency Plans
The Company has developed a contingency plan to address non-compliant
non-critical OE systems.
IMPACT ON INFLATION
The Company's business is affected by general economic conditions, including the
impact of inflation and interest rates. Substantially all of the Company's
leases allow, at time of renewal, for adjustments in the rent payable
thereunder, and thus may enable the Company to seek increases in rents. For
construction, the Company enters into various contracts for the development and
construction of new properties. These are fixed-fee contracts and thus partially
insulate the Company from inflationary risk.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to the Company's Annual Report on Form 10-K for the year ended December
31, 1998 for detailed disclosure about quantitative and qualitative disclosures
about market risk. Quantitative and qualitative disclosures about market risk
have not materially changed since December 31, 1998.
15
<PAGE> 16
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 -- Financial Data Schedule
(b) Reports on Form 8-K
None.
16
<PAGE> 17
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: November 15, 1999
17
<PAGE> 18
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,242
<SECURITIES> 0
<RECEIVABLES> 4,501
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,743
<PP&E> 926,244
<DEPRECIATION> 66,882
<TOTAL-ASSETS> 881,473
<CURRENT-LIABILITIES> 28,434
<BONDS> 412,665
0
28
<COMMON> 204
<OTHER-SE> 422,018
<TOTAL-LIABILITY-AND-EQUITY> 881,473
<SALES> 0
<TOTAL-REVENUES> 92,111
<CGS> 0
<TOTAL-COSTS> 47,221
<OTHER-EXPENSES> 967
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,518
<INCOME-PRETAX> 23,405
<INCOME-TAX> 0
<INCOME-CONTINUING> 23,405
<DISCONTINUED> 0
<EXTRAORDINARY> 5,852
<CHANGES> 0
<NET-INCOME> 25,550
<EPS-BASIC> 1.28
<EPS-DILUTED> 1.26
</TABLE>
