<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, 1999
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, 20,060,021 SHARES
WERE OUTSTANDING AS OF AUGUST 10, 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 __
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PACIFIC GULF PROPERTIES INC.
FORM 10-Q
PART I: FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
Item 1. Financial Statements
INDEX TO FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998 1
Consolidated Statements of Operations for the Six
Months ended June 30, 1999 and June 30, 1998 2
Consolidated Statements of Operations for the Three
Months ended June 30, 1999 and June 30, 1998 3
Consolidated Statements of Cash Flows for the Six
Months ended June 30, 1999 and June 30, 1998 4
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risks 12
PART II: OTHER INFORMATION 13
SIGNATURES 14
</TABLE>
<PAGE> 3
PACIFIC GULF PROPERTIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, 1999 Dec. 31, 1998
------------- -------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Real estate assets
Land $ 227,485 $ 229,920
Buildings 632,715 633,268
--------- ---------
860,200 863,188
Accumulated depreciation (60,630) (49,776)
--------- ---------
799,570 813,412
Properties under development, including land 50,363 39,926
--------- ---------
849,933 853,338
Cash and cash equivalents 5,749 2,276
Accounts receivable 5,626 4,984
Other assets 15,138 14,529
--------- ---------
$ 876,446 $ 875,127
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Loans payable $ 405,413 $ 403,845
Accounts payable and accrued liabilities 14,263 15,828
Dividends payable 9,875 9,844
Convertible subordinated debentures 11,946 12,244
--------- ---------
441,497 441,761
Minority interest in consolidated partnerships 18,181 17,812
Commitments and contingencies -- --
Shareholders' equity
Preferred shares, $.01 par value; 10,000,000 shares authorized; 2,763,116
shares Senior Cumulative Convertible Class A outstanding at
June 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; 20,054,862 and
20,017,814 shares outstanding at June 30, 1999 and
December 31, 1998, respectively 201 201
Outstanding restricted stock (1,419) (1,203)
Additional paid-in capital 412,890 412,093
Retained earnings 5,068 4,435
--------- ---------
416,768 415,554
--------- ---------
$ 876,446 $ 875,127
========= =========
</TABLE>
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
-------------------------
1999 1998
------- -------
<S> <C> <C>
REVENUES
Rental income
Industrial properties $47,826 $34,659
Multifamily properties 12,728 18,458
------- -------
60,554 53,117
EXPENSES
Rental property expenses
Industrial properties 10,691 7,532
Multifamily properties 4,499 6,615
------- -------
15,190 14,147
Depreciation 12,379 9,272
Interest (including amortization of debenture discount and
financing costs of $423 and $679 respectively) 13,553 11,848
General and administrative expenses 3,119 2,349
Minority partners' interest in earnings of consolidated partnerships 593 443
------- -------
44,834 38,059
------- -------
INCOME BEFORE GAINS ON SALE OF REAL ESTATE 15,720 15,058
Gains on sale of real estate 4,624 --
------- -------
NET INCOME 20,344 15,058
Less preferred dividend requirements 2,471 2,414
------- -------
INCOME AVAILABLE TO COMMON SHAREHOLDERS $17,873 $12,644
======= =======
EARNINGS PER SHARE
Basic $ 0.90 $ 0.63
======= =======
Diluted $ 0.88 $ 0.63
======= =======
DIVIDENDS DECLARED PER COMMON SHARE $ 0.86 $ 0.84
======= =======
</TABLE>
See accompanying notes
2
<PAGE> 5
PACIFIC GULF PROPERTIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30
--------------------------
1999 1998
------- -------
<S> <C> <C>
REVENUES
Rental income
Industrial properties $24,496 $18,352
Multifamily properties 6,368 9,447
------- -------
30,864 27,799
EXPENSES
Rental property expenses
Industrial properties 5,408 3,749
Multifamily properties 2,222 3,377
------- -------
7,630 7,126
Depreciation 6,319 4,882
Interest (including amortization of debenture discount and
Financing costs of $210 and $458 respectively) 6,816 6,573
General and administrative expenses 1,739 1,238
Minority partners' interest in earnings of consolidated partnerships 296 337
------- -------
22,800 20,156
------- -------
INCOME BEFORE GAINS ON SALE OF REAL ESTATE 8,064 7,643
Gains on sale of real estate 1,273 --
------- -------
NET INCOME 9,337 7,643
Less preferred dividend requirements 1,235 1,207
------- -------
INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 8,102 $ 6,436
======= =======
EARNINGS PER SHARE
Basic $ 0.41 $ 0.32
======= =======
Diluted $ 0.40 $ 0.32
======= =======
DIVIDENDS DECLARED PER COMMON SHARE $ 0.43 $ 0.42
======= =======
</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
-------------------------
1999 1998
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 20,344 $ 15,058
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 12,379 9,272
Amortization of debenture discount
and financing costs 423 679
Minority interests in earnings of consolidated partnerships 593 443
Gains on sale of real estate (4,624) --
Compensation recognized related to restricted stock issued to
employees (216) 98
Net increase in other assets (6,665) (2,800)
Net increase (decrease) in liabilities (1,567) 3,915
--------- ---------
Net cash provided by operating activities 20,667 26,665
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and improvements to properties (2,060) (112,605)
Development expenditures (13,826) (17,505)
Proceeds from sale of real estate 16,530 --
--------- ---------
Net cash provided by (used in) investing activities 644 (130,110)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit 18,800 213,669
Repayment of line of credit (29,950) (94,369)
Proceeds from mortgage notes payable 9,000 6,952
Repayment of mortgage notes payable (1,194) (15,644)
Proceeds from construction loans 4,912 6,271
Debentures converted to common shares (298) (232)
Issuance of common shares 797 73
Minority interest contributions (distributions) (225) 8,544
Dividends on common shares (17,209) (16,781)
Dividends on preferred shares (2,471) (1,673)
--------- ---------
Net cash (used in) provided by financing activities (17,838) 106,810
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS 3,473 3,365
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,276 1,466
========= =========
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,749 $ 4,831
========= =========
</TABLE>
4
<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.
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, 1998.
2. REAL ESTATE ACQUISITIONS AND DISPOSITIONS
During the second quarter 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 $1,273,000.
In March 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.
3. LOANS PAYABLE
The Company's loans payable at June 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 $142,146 $133,745
Multifamily
Active Senior 4,588 4,620
Family 34,048 34,239
-------- --------
180,782 172,604
Tax exempt mortgage debt
Multifamily
Active Senior 44,463 44,697
Family 20,677 20,815
-------- --------
65,140 65,512
Construction loans 36,891 31,979
Unsecured line of credit 122,600 133,750
======== ========
$405,413 $403,845
======== ========
</TABLE>
5
<PAGE> 8
4. CONVERTIBLE SUBORDINATED DEBENTURES
As of June 30, 1999, the Company's outstanding convertible subordinated
debentures totaled $11,946,000, which is net of unamortized discount of
$26,000. 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
642,879 common shares. During the six months ended June 30, 1999, $325,000 in
aggregate principal amount of debentures ($298,000 net of discount) were
converted into 17,447 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 has called for redemption of $6,500,000 of its outstanding
debentures on August 18, 1999. The trustee selected by lot the debentures to
be redeemed. Holders of the debentures to be redeemed may elect one of the
following alternatives: 1) conversion into Common stock - holders may convert
the debentures into the Company's Common stock at the rate of 53.6986 shares
per $1,000 principal amount of debentures prior to 5:00p.m. Pacific daylight
time on August 18, 1999; 2) redemption for cash - holders may surrender the
debentures called for redemption at the total redemption price of $1,000.70
per $1,000 principal amount of debentures, which includes accrued and unpaid
interest through August 18, 1999; 3) sale of debentures - holders of the
debentures have the right to sell their debentures on the open market through
their own brokers prior to August 18, 1999.
The Company anticipates that it will call the remaining debentures for
redemption before December 31, 1999.
5. SHAREHOLDERS' EQUITY
During 1998, the Company filed a shelf registration statement with the
Securities and Exchange Commission 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 (the "1998 Shelf
Registration Statement"). The 1998 Shelf Registration Statement was declared
effective April 23, 1998 by the Securities and Exchange Commission.
Availability under the 1998 Shelf Registration Statement at June 1999 was
$300,000,000.
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 six months ended June 30, 1999, 1,601 shares of Common stock were
issued through the Company's Dividend Reinvestment Program.
6
<PAGE> 9
6. PER COMMON SHARE DATA
The following table sets forth the computation of basic and diluted earnings
per share for the six months ended June 30, in accordance with Statement No.
128:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------- ------------------------------------------
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 $17,873,000 19,967,000 .90 $12,644,000 19,935,000 .63
===== ====
EFFECT OF DILUTIVE SECURITIES
Stock options 33,000 16,000
Restricted stock 99,000 85,000
Limited partnership units 593,000 871,000 443,000 745,000
Convertible subordinated 562,000 643,000 -- --
debentures
DILUTED EPS $19,028,000 21,613,000 .88 $13,087,000 20,781,000 .63
=========== =========== ===== =========== =========== ====
</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. Convertible subordinated debentures
convertible into 668,000 shares of Common Stock were outstanding during 1998,
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, 1999, the Company declared its quarterly distribution of $.43 per
common share covering shares outstanding at June 30, 1999. Assuming the Board
continues to declare quarterly distributions, the estimated annual
distribution based on this amount would be $1.72. The distribution was paid
on July 9, 1999 to holders of record on July 1, 1999.
Preferred stock dividends of $1,236,000, related to the shares of Class A
Preferred Stock outstanding in the first quarter of 1999, were paid by the
Company on May 14, 1999. Preferred stock dividends of $1,236,000 related to
2,763,116 shares of Class A Preferred Stock have been accrued through June
30, 1999 at the rate of $0.44720 per share per quarter.
7
<PAGE> 10
8. INTEREST
Interest incurred for the six months ended June 30, 1999 consists of the
following (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Interest incurred $ 14,591 $ 12,897
Amortization:
67
Debenture discount and costs 62
Costs related to financing assumed from the Company's Predecessor
and line of credit costs 212 259
Long-term financing costs 149 353
Interest capitalized (1,275) (1,547)
Interest income (186) (181)
-------- --------
Interest expense $ 13,553 $ 11,848
======== ========
</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 $37,135,000 and $27,127,000 for the
six months ended June 30, 1999 and 1998, respectively. NOI from multi-family
properties totaled $8,229,000 and $11,843,000 for the six months ended June
30, 1999 and 1998, respectively.
NOI from industrial properties totaled $19,088,000 and $14,603,000 for the
quarters ended June 30, 1999 and 1998 respectively. NOI from multifamily
properties totaled $4,146,000, and $6,070,000 for the quarters ended June 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.
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, 1999 and 1998, together with liquidity
and capital resources as of June 30, 1999.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1999 TO THE SIX MONTHS ENDED JUNE
30, 1998
Industrial rental income increased by $13,167,000, or 38%, from $34,659,000 in
1998 to $47,826,000 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 six
months ended June 30, 1999 totaled $47,826,000 and included $8,166,000 related
to the industrial parks acquired since March 31, 1998. Multifamily rental income
decreased by $5,730,000, or 31%, from $18,458,000 in 1998 to $12,728,000 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 $7,437,000, or 14%, from $53,117,000 in 1998 to
$60,554,000 in 1999.
Industrial rental property expenses increased $3,159,000, or 42%, from
$7,532,000 in 1998 to $10,691,000 in 1999. This increase was primarily
attributable to the acquisition of the above referenced industrial parks.
Industrial rental property expenses for the six months ended June 30, 1999
totaled $10,691,000 and included $1,887,000 related to industrial parks acquired
since March 31, 1998. Multifamily rental property expenses decreased by
$2,116,000, or 32%, from $6,615,000 in 1998 to $4,499,000 in 1999. This decrease
was primarily attributable to the disposition of the above referenced
multifamily properties.
Total depreciation increased by $3,107,000, or 34%, from $9,272,000 in 1998 to
$12,379,000 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 $1,705,000, or 14%, from $11,848,000 in 1998 to $13,553,000
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.
General and administrative expenses increased by $770,000, or 33%, from
$2,349,000 in 1998 to $3,119,000 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
$150,000 from $443,000 in 1998 to $593,000 in 1999. This increase was
attributable to the March 1998 acquisition of a controlling general partner
interest in the partnership that owns an industrial property.
A gain on the sale of real estate in the amount of $4,624,000 was recorded in
1999 for the sale of a 196-unit multifamily property, a 91,200 square foot
industrial property, and a 1.05 acre parcel of land. All properties are located
in southern California. There was no corresponding income in the comparable
period for 1998.
9
<PAGE> 12
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1999 TO THE THREE MONTHS ENDED
JUNE 30, 1998
Industrial rental income increased by $6,144,000, or 33%, from $18,352,000 in
1998 to $24,496,000 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 June 30, 1999 totaled $24,496,000 and included $4,176,000 related
to the industrial parks acquired since March 31, 1998. Multifamily rental income
decreased by $3,079,000, or 33%, from $9,447,000 in 1998 to $6,368,000 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 $3,065,000, or 11%, from $27,799,000 in 1998 to $30,864,000 in
1999.
Industrial rental property expenses increased $1,659,000, or 44%, from
$3,749,000 in 1998 to $5,408,000 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 June 30, 1999
totaled $5,408,000 and included $1,026,000 related to industrial parks acquired
since March 31, 1998. Multifamily rental property expenses decreased by
$1,155,000, or 34%, from $3,377,000 in 1998 to $2,222,000 in 1999. This decrease
was primarily attributable to the disposition of the above referenced
multifamily properties.
Total depreciation increased by $1,437,000, or 29%, from $4,882,000 in 1998 to
$6,319,000 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 $243,000, or 4%, from $6,573,000 in 1998 to $6,816,000 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.
General and administrative expenses increased by $501,000, or 40%, from
$1,238,000 in 1998 to $1,739,000 in 1999. This increase was primarily
attributable to increased staffing due to growth in the portfolio.
Minority partners' interest in earnings of consolidated partnerships decreased
$41,000 from $337,000 in 1998 to $296,000 in 1999.
A gain on the sale of real estate in the amount of $1,273,000 was recorded in
1999 for the sale of a 91,200 square foot industrial property and a 1.05 acre
parcel of land. Both properties are located in southern California. There was no
corresponding income in the comparable period for 1998.
10
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had $5,749,000 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
defined below).
As of June 30, 1999, the Company had borrowed $122,600,000 under its unsecured
Line of Credit, which is a $150 million revolving credit agreement entered into
in April 1998, to replace the Company's prior secured line of credit and
unsecured bridge loan facility (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 facility to finance acquisitions and for general corporate
purposes.
During 1998, the Company filed a shelf registration statement with the
Securities and Exchange Commission for an aggregate amount of $300,000,000,
covering the proposed issuance of debt, preferred or common stock securities and
warrants to purchase securities of the Company (the "Shelf Registration
Statement"). The Shelf Registration Statement was declared effective in April of
1998. At June 30, 1999, the Company has $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,
equity offerings, dispositions of existing properties, or debt financings, but
no assurance can be given that any of these acquisitions or transactions 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 decreased from $26,665,000 for the period
ended June 30, 1998 to $20,667,000 for the period ended June 30, 1999. The
primary reason for this 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 $130,110,000 for the period
ended June 30, 1998 to $644,000 for the period ended June 30, 1999 as a result
of fewer acquisitions.
Cash provided by financing activities decreased from $106,810,000 for the period
ended June 30, 1998 to ($17,838,000) for the period ended June 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 the 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, prepare 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.
11
<PAGE> 14
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 June 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 June 30, 1999, the Company substantially
completed the remaining 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 share
information systems with the Company. The Company will review the results of
this survey, assess the impact of the results on its operations and take
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 $50,000 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 currently has no contingency plans in place in the event it does not
complete all phases of the Year 2000 project, but anticipates that a contingency
plan will be established 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.
12
<PAGE> 15
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K
During the quarter ended June 30, 1999, the Company filed a report on
Form 8-K, dated June 23, 1999, describing under Item 5 the call for
redemption of $6,500,000 of its outstanding debentures on August 18,
1999.
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, 1999
--------------------------
14
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<C> <S>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,749
<SECURITIES> 0
<RECEIVABLES> 6,626
<ALLOWANCES> 1,000
<INVENTORY> 0
<CURRENT-ASSETS> 11,375
<PP&E> 910,563
<DEPRECIATION> 60,630
<TOTAL-ASSETS> 876,446
<CURRENT-LIABILITIES> 24,138
<BONDS> 417,359
0
28
<COMMON> 201
<OTHER-SE> 416,539
<TOTAL-LIABILITY-AND-EQUITY> 876,446
<SALES> 0
<TOTAL-REVENUES> 60,554
<CGS> 0
<TOTAL-COSTS> 30,688
<OTHER-EXPENSES> 593
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,553
<INCOME-PRETAX> 15,720
<INCOME-TAX> 0
<INCOME-CONTINUING> 15,720
<DISCONTINUED> 0
<EXTRAORDINARY> 4,624
<CHANGES> 0
<NET-INCOME> 17,873
<EPS-BASIC> .90
<EPS-DILUTED> .88
</TABLE>
