<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, 2000
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, 21,128,680 SHARES
WERE OUTSTANDING AS OF AUGUST 8, 2000
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 June 30, 2000 and
December 31, 1999 1
Consolidated Statements of Operations for the Six
Months Ended June 30, 2000 and June 30, 1999 2
Consolidated Statements of Operations for the Three
Months Ended June 30, 2000 and June 30, 1999 3
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and June 30, 1999 4
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II: OTHER INFORMATION 16
SIGNATURES 17
<PAGE> 3
PACIFIC GULF PROPERTIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Real estate assets
Operating properties
Land $ 235,307 $ 232,665
Buildings 675,458 657,347
--------- ---------
910,765 890,012
Accumulated depreciation (86,800) (72,715)
--------- ---------
823,965 817,297
Properties under development, including land 48,360 52,815
--------- ---------
872,325 870,112
Cash and cash equivalents 8,598 2,177
Accounts receivable 8,358 4,005
Other assets 16,506 15,627
--------- ---------
$ 905,787 $ 891,921
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Loans payable $ 430,157 $ 418,343
Accounts payable and accrued liabilities 18,481 17,244
Dividends payable 10,561 10,366
--------- ---------
459,199 445,953
Minority partners' interest in consolidated partnerships 18,126 18,077
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 June 30, 2000 and December 31, 1999, 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; 21,157,878 and 20,685,402 shares outstanding
at June 30, 2000 and December 31, 1999, respectively 212 207
Less: Restricted stock and notes receivable issued for
common shares (9,708) (1,011)
Additional paid-in capital 434,248 424,450
Retained earnings 3,682 4,217
--------- ---------
428,462 427,891
--------- ---------
$ 905,787 $ 891,921
========= =========
</TABLE>
See accompanying notes
1
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PACIFIC GULF PROPERTIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
------------------
2000 1999
------- -------
<S> <C> <C>
REVENUES
Rental income
Industrial properties $53,480 $47,826
Multifamily properties 13,517 12,728
------- -------
66,997 60,554
EXPENSES
Rental property expenses
Industrial properties 11,566 10,691
Multifamily properties 4,502 4,499
------- -------
16,068 15,190
Depreciation 14,567 12,379
Interest (including amortization of debenture discount
and financing costs of $357 and $423, respectively) 14,524 13,553
General and administrative expenses 3,650 3,119
Minority interest in earnings of consolidated partnerships 604 593
------- -------
49,413 44,834
------- -------
INCOME BEFORE GAINS ON SALE OF REAL ESTATE 17,584 15,720
Gains on sale of real estate 3,415 4,624
------- -------
NET INCOME 20,999 20,344
Less preferred dividend requirements 2,529 2,471
------- -------
INCOME AVAILABLE TO COMMON SHAREHOLDERS $18,470 $17,873
======= =======
Earnings per share
Basic $ 0.89 $ 0.90
======= =======
Diluted $ 0.88 $ 0.88
======= =======
DIVIDENDS DECLARED PER COMMON SHARE $ 0.88 $ 0.86
</TABLE>
See accompanying notes
2
<PAGE> 5
PACIFIC GULF PROPERTIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended June 30,
------------------
2000 1999
------- -------
<S> <C> <C>
REVENUES
Rental income
Industrial properties $27,254 $24,496
Multifamily properties 6,813 6,368
------- -------
34,067 30,864
EXPENSES
Rental property expenses
Industrial properties 5,752 5,408
Multifamily properties 2,272 2,222
------- -------
8,024 7,630
Depreciation 7,306 6,319
Interest (including amortization of debenture discount
and financing costs of $185 and $210, respectively) 7,453 6,816
General and administrative expenses 1,823 1,739
Minority interest in earnings of consolidated
partnerships 302 296
------- -------
24,908 22,800
------- -------
INCOME BEFORE GAINS ON SALE OF REAL ESTATE 9,159 8,064
Gains on sale of real estate 2,524 1,273
------- -------
NET INCOME 11,683 9,337
Less preferred dividend requirements 1,265 1,235
------- -------
INCOME AVAILABLE TO COMMON SHAREHOLDERS $10,418 $ 8,102
======= =======
Earnings per share
Basic $ 0.50 $ 0.41
======= =======
Diluted $ 0.49 $ 0.40
======= =======
DIVIDENDS DECLARED PER SHARE $ 0.44 $ 0.43
======= =======
</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,
-------------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 20,999 $ 20,344
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 14,567 12,379
Amortization of financing costs 357 423
Gains on sale of real estate (3,415) (4,624)
Minority interests in earnings of consolidated
partnerships 604 593
Compensation recognized related to restricted
stock issued to employees 207 (216)
Net increase in other assets (5,178) (6,665)
Net increase (decrease) in liabilities 1,237 (1,567)
-------- --------
Net cash provided by operating activities 29,378 20,667
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and improvements to properties (6,542) (2,060)
Development expenditures (19,473) (13,826)
Proceeds from sale of real estate 13,132 16,530
-------- --------
Net cash (used in) provided by investing activities (12,883) 644
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit 14,700 18,800
Repayment of line of credit (6,000) (29,950)
Proceeds from mortgage notes payable -- 9,000
Repayment of mortgage notes payable (5,762) (1,194)
Proceeds from construction loans 8,877 4,912
Debentures converted to common shares -- (298)
Issuance of common shares 5 797
Purchase of treasury stock (586) --
Minority interest (distributions) contributions (554) (225)
Dividends paid on common shares (18,225) (17,209)
Dividends paid on preferred shares (2,529) (2,471)
-------- --------
Net cash used in financing activities (10,074) (17,838)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,421 3,473
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,177 2,276
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,598 $ 5,749
======== ========
</TABLE>
See accompanying notes
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. 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, 1999.
2. REAL ESTATE
In March 2000, the Company sold an 11,600 square foot industrial building and a
25,486 square foot industrial building, for $1,462,000 and $2,300,000
respectively. The Company recognized gains of $891,000 on the sale of the
buildings, both of which are located in South Orange County. In April 2000, the
Company sold a 107,320 square foot industrial building at its business park
located in San Bernardino, California for $2,910,000. The net gain recognized
was $274,000. In June 2000, the Company sold a 128,640 square foot industrial
park, located in Santa Fe Springs, California for $6,461,000. The net gain
recognized was $2,250,000.
During the first quarter of 2000, the Company acquired a land parcel, containing
7.80 acres, located in Rancho Santa Margarita, California, for $3,996,000. The
Company plans to develop 113,500 square feet of rentable industrial space at
this site.
During the second quarter of 2000, the Company entered into an agreement to sell
its portfolio of industrial properties to CalWest Industrial Properties, LLC.
The industrial portfolio subject to the agreement is comprised of 72 properties
encompassing an aggregate of over 15.0 million leasable square feet of space in
California, Washington, Nevada, Arizona and Oregon.
Under the terms of the agreement, the purchase price of approximately $929
million will be comprised of a cash payment and the assumption of approximately
$117 million of debt. Approximately $206 million of additional debt will be
repaid out of the sale proceeds. The terms of the transaction include the
funding of a $25 million escrow deposit by CalWest that may be refundable in
limited circumstances. The transaction is subject to the approval of the
Company's shareholders.
The Company continues to own a portfolio of 10 family-style apartment properties
consisting of 1,631 units located in Southern California. The Company has
entered into contracts with listing brokers to sell all of these properties.
The remaining 1,438 apartment units are communities designed for active seniors
age 55 and older. The Company continues to seek development opportunities for
its active senior portfolio of apartment units. The Company is considering
various alternatives to maximize the value of its active senior apartment
business, including the possible sale or spin-off of this business.
5
<PAGE> 8
3. LOANS PAYABLE
The Company's loans payable at June 30, 2000 and December 31, 1999 consist of
the following (in thousands):
2000 1999
-------- --------
Mortgage notes:
Conventional mortgage debt
Industrial $137,925 $141,519
Multifamily
Active Senior 4,522 4,556
Family 33,666 33,853
-------- --------
176,113 179,928
Tax-exempt mortgage debt
Multifamily
Active Senior 43,498 43,799
Family 20,387 20,534
-------- --------
63,885 64,333
Construction loans 57,809 50,432
Unsecured line of credit 132,350 123,650
-------- --------
$430,157 $418,343
======== ========
6
<PAGE> 9
4. SHAREHOLDERS' EQUITY
The Company has an effective shelf registration statement, on file with the
Securities and Exchange Commission, for the public issuance of securities in the
aggregate amount of $300,000,000, covering the possible future issuance of debt,
preferred or common stock securities and warrants to purchase such securities of
the Company, none of which have been issued.-
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 separately tradeable 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.
In December 1999, the Company's board of directors approved a share repurchase
program of 500,000 shares. During January 2000, the Company repurchased and
retired 30,000 shares at an average price of $19.46 per share. Retained earnings
was reduced for the excess over par value.
During the six months ended June 30, 2000, the Company issued 1,443 shares of
common stock through its Dividend Reinvestment Program.
Outstanding restricted stock represents unearned compensation expense related to
restricted shares of common stock issued to officers of the Company.
Compensation expense of $207,000 related to restricted stock was recognized
during the six months ended June 30, 2000.
Notes receivable issued for common stock result from the exercise of stock
options for notes by officers of the Company. The notes bear interest at 6.18%
to 6.46% and are payable quarterly. The principal balance of the notes is
payable in annual payments equal to 10% of the note amount with the remainder
due in 5 years. At June 30, 2000, notes receivable from officers totaled
$8,723,000. During the six months ended June 30, 2000, $8,669,000 of notes were
received from officers upon the issuance of 431,033 shares of common stock for
options exercised.
7
<PAGE> 10
5. 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 the Financial
Accounting Standards Board Statement No. 128:
<TABLE>
<CAPTION>
2000 1999
--------------------------------------- ---------------------------------------
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 $18,470,000 20,694,000 $0.89 $17,873,000 19,967,000 $0.90
===== =====
EFFECT OF DILUTIVE SECURITIES
Stock options 49,000 33,000
Restricted stock 83,000 99,000
Limited partnership units 604,000 854,000 593,000 871,000
Convertible subordinated
debentures -- -- 562,000 643,000
--
Convertible preferred stock -- -- --
----------- ---------- ----- ----------- ---------- -----
DILUTED EPS $19,074,000 21,680,000 $0.88 $19,028,000 21,613,000 $0.88
=========== ========== ===== =========== ========== =====
</TABLE>
Shares of Senior Cumulative Convertible Class A Preferred Stock, convertible
into 2,763,116 shares of common stock, were outstanding during 2000 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.
6. COMMON SHARE DISTRIBUTIONS AND PREFERRED STOCK DIVIDENDS
On June 15, 2000, the Company declared its quarterly distribution of $.44 per
common share covering shares outstanding at June 30, 2000. The distribution was
paid on July 14, 2000 to holders of record on July 1, 2000. Assuming the Board
continues to declare quarterly distributions, the estimated annual distribution
based on this amount would be $1.76.
Preferred stock dividends of $1,264,000, related to the shares of Class A
Preferred Stock outstanding in the first quarter of 2000, were paid by the
Company on May 15, 2000. Preferred stock dividends of $1,265,000 related to
2,763,116 shares of Class A Preferred Stock have been accrued through June 30,
2000 at the rate of $0.4576 per share per quarter.
8
<PAGE> 11
7. INTEREST
Interest incurred for the six months ended June 30, 2000 and 1999 consists of
the following (in thousands):
2000 1999
--------- --------
Interest incurred $ 15,630 $ 14,405
Amortization:
Debenture discount and costs -- 62
Costs related to financing assumed from
the Company's Predecessor and line of
credit costs 210 212
Long-term financing costs 147 149
Interest capitalized (1,463) (1,275)
-------- --------
Interest expense $ 14,524 $ 13,553
======== ========
8. REPORTABLE SEGMENTS
The Company complies with 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 requires public business enterprises to report
information regarding reportable operating segments.
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 $41,914,000 and $37,135,000 for the six
months ended June 30, 2000 and 1999 respectively.
NOI from multifamily properties totaled $9,015,000 and $8,229,000 for the six
months ended June 30, 2000 and 1999 respectively.
NOI from industrial properties totaled $21,502,000 and $19,088,000 for the
quarters ended June 30, 2000 and 1999 respectively.
NOI from multifamily properties totaled $4,541,000 and $4,146,000 for the
quarters ended June 30, 2000 and 1999 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 2000 or 1999. 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.
9
<PAGE> 12
9. NEW PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Statement 133 is
effective for fiscal years beginning after June 15, 2000, although earlier
implementation is allowed. The Company has not yet determined the timing and
method of adopting Statement 133 on its financial statements. However, its
impact is not expected to be material.
10
<PAGE> 13
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, 2000 and 1999, together with liquidity
and capital resources as of June 30, 2000.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2000 TO THE SIX MONTHS ENDED JUNE
30, 1999
Industrial rental income increased by $5,654,000, or 12%, from $47,826,000 in
1999 to $53,480,000 in 2000. This increase was primarily attributable to rental
rate increases, the acquisition of three industrial properties in 1999 and the
completion of two industrial properties previously under development.
Multifamily rental income increased by $789,000, or 6%, from $12,728,000 in 1999
to $13,517,000 in 2000. This increase was attributable to rental rate increases
offset by decreases related to the disposition of a multifamily property in the
first quarter of 1999.
Industrial rental property expenses increased $875,000, or 8%, from $10,691,000
in 1999 to $11,566,000 in 2000. This increase was attributable to inflation and
the acquisition and construction of the above referenced industrial parks.
Multifamily rental property expenses increased by $3,000, or .07% from
$4,499,000 in 1999 to $4,502,000 in 2000. This increase was primarily
attributable to inflation, offset by decreases related to the disposition of a
multifamily property in the first quarter of 1999.
Total depreciation increased by $2,188,000, or 18%, from $12,379,000 in 1999 to
$14,567,000 in 2000. This increase was attributable to additional depreciation
relating to the industrial properties described above and capital improvements
related to leasing.
Interest expense (including amortization of financing costs) increased by
$971,000, or 7%, from $13,553,000 in 1999 to $14,524,000 in 2000. This increase
was attributable to an increase in outstanding borrowings due to the
acquisitions and construction completed in 1999, a higher interest rate on the
Company's line of credit, offset by a decrease in the outstanding debentures in
1999.
General and administrative expenses increased by $531,000, or 17%, from
$3,119,000 in 1999 to $3,650,000 in 2000. This increase was primarily
attributable to staff additions, staff retention costs and inflation.
Minority partners' interest in earnings of consolidated partnerships increased
$11,000 from $593,000 in 1999 to $604,000 in 2000. Minority interest represents
earnings allocated to the minority partners in partnerships in which the Company
has controlling general partner interests.
A gain on the sale of real estate in the amount of $3,415,000 was recorded in
2000 for the sale of three industrial buildings at its business parks totaling
144,406 square feet and one industrial property totaling 128,640 square feet.
The gain on the sale of real estate was $4,624,000 for the 1999 period and
related to the disposition of a multifamily property, one industrial property
totaling 91,200 square feet and a 1.05 acre parcel of land.
11
<PAGE> 14
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2000 TO THE THREE MONTHS ENDED
JUNE 30, 1999
Industrial rental income increased by $2,758,000, or 11%, from $24,496,000 in
1999 to $27,254,000 in 2000. This increase was attributable to the completion of
two industrial properties previously under development and rental rate increases
in 2000, offset by the sale of two industrial properties in 1999.
Multifamily rental income increased by $445,000, or 7%, from $6,368,000 in 1999
to $6,813,000 in 2000. This increase was attributable to the rental rate
increases.
Industrial rental property expenses increased $344,000 or 6%, from $5,408,000 in
1999 to $5,752,000 in 2000. This increase was attributable primarily to
inflation and the acquisition and construction of the above referenced
industrial parks. Multifamily rental property expenses increased by $50,000, or
2% from $2,222,000 in 1999 to $2,272,000 in 2000. This increase was primarily
attributable to inflation in 2000.
Total depreciation increased by $987,000, or 16%, from $6,319,000 in 1999 to
$7,306,000 in 2000. This increase was attributable to additional depreciation
relating to the industrial properties described above and capital improvements
related to leasing.
Interest expense (including amortization of financing costs) increased by
$637,000, or 9%, from $6,816,000 in 1999 to $7,453,000 in 2000. This increase
was attributable to an increase in outstanding borrowings due to the
acquisitions and construction completed in 1999, a higher interest rate on the
Company's line of credit, offset by a decrease in the outstanding debentures in
1999.
General and administrative expenses increased by $84,000, or 5%, from $1,739,000
in 1999 to $1,823,000 in 2000. This increase was primarily attributable to staff
additions, staff retention costs and inflation.
Minority partners' interest in earnings of consolidated partnerships increased
$6,000 from $296,000 in 1999 to $302,000 in 2000. Minority interest represents
earnings allocated to the minority partners in partnerships in which the Company
has controlling general partner interests.
A gain on the sale of real estate in the amount of $2,524,000 was recorded in
2000 for the sale of three industrial buildings at its business parks totaling
144,406 square feet and one industrial property totaling 128,640 square feet.
The gain on the sale of real estate was $1,273,000 for the 1999 period and
related to the disposition of a multifamily property.
12
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
The Company has a shelf registration statement on file with the Securities and
Exchange Commission for the public issuance of securities in the aggregate
amount of $300,000,000 covering the possible future issuance of debt, preferred
or common stock securities and warrants to purchase such securities of the
Company, none of which have been issued.
At June 30, 2000, the Company had $8,598,000 of cash to meet its immediate
short-term liquidity requirements. Future short-term liquidity requirements are
anticipated to be met through the net cash flow from operations, existing
working capital and, if necessary, funding from the Company's Line of Credit.
The Company has a $150,000,000 unsecured revolving credit agreement (the "Line
of Credit") which matures in April 2001. The interest rate payable under the
Line of Credit is based on the leverage level of the Company and at June 30,
2000 was LIBOR plus 1.25%. As of June 30, 2000, the Company had borrowed
$132,350,000 under this line.
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.
In December 1999, the Company's Board of Directors approved a share repurchase
program of 500,000 shares. During January 2000, the Company repurchased and
retired 30,000 shares at an average price of $19.46 per share. The Company may
seek to fund future stock repurchases through proceeds received from a
combination of its Line of Credit, dispositions of existing properties 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.
Cash provided by operating activities increased from $20,667,000 for the period
ended June 30, 1999 to $29,378,000 for the period ended June 30, 2000. The
primary reason for the increase is related to additional rental income due to
increases in rental rates and the change in other assets, such as land deposits
and pre-acquisition costs, and liabilities, such as security deposits and
accrued payables.
Cash provided by investing activities decreased from $644,000 for the period
ended June 30, 1999 to ($12,885,000) for the period ended June 30, 2000 as a
result of increased development expenditures and lower proceeds in 2000 from
sales of real estate.
Cash provided by financing activities decreased from $17,838,000 for the period
ended June 30, 1999 to $10,074,000 for the period ended June 30, 2000 primarily
as a result of a net decrease in borrowings on the Company's Line of Credit and
mortgage loans.
During the second quarter of 2000, the Company entered into an agreement to sell
its portfolio of industrial properties to CalWest Industrial Properties, LLC.
The industrial portfolio subject to the agreement is comprised of 72 properties
encompassing an aggregate of over 15.0 million leasable square feet of space in
California, Washington, Nevada, Arizona, and Oregon.
Under the terms of the agreement, the purchase price of approximately $929
million will be comprised of a cash payment and the assumption of approximately
$117 million of debt. Approximately $206 million of additional debt will be
repaid out of the sale proceeds. The terms of the transaction include the
funding of a $25 million deposit by CalWest into an escrow account not held by
the Company that may be refundable in limited circumstances. The transaction is
expected to close in the fall of 2000, subject to the approval of the Company's
shareholders. Accordingly, there can be no assurance that the Company will
actually dispose of such properties.
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The Company continues to own a portfolio of 10 family-style apartment properties
consisting of 1,631 units located in Southern California. The Company has
entered into contracts with listing brokers to sell all of these properties.
There can be no assurance that the Company will actually dispose of such
properties, nor can there be any assurance as to the timing of any such
dispositions. Any decision by the Company will be subject to numerous factors,
including prices offered and the availability of suitable alternate investments
for the proceeds of such dispositions.
The remaining 1,438 apartment units are communities designed for active seniors
age 55 and older. The Company continues to seek development opportunities for
its active senior portfolio of apartment units. The Company is considering
various alternatives to maximize the value of its active senior apartment
business, including the possible sale or spin-off of this business.
If all of the industrial and family style multi-family properties are sold as
planned, Pacific Gulf Properties expects to make a cash distribution to
shareholders in the fourth quarter of 2000 of up to $26.00 per share from the
sale proceeds. CalWest's due diligence review may result in a reduction of the
transaction's aggregate value, or a partial deferral in its payment, as well as
Pacific Gulf Properties' expenditures to remedy identified problems. These
adjustments, deferrals and expenditures, together with the Company's
establishment of reserves for contingent liabilities, will affect the amount and
timing of distributions to Pacific Gulf's shareholders.
Subsequent additional distributions to shareholders may be made if and when
additional funds are available.
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Historical results and trends should not be taken as indicative of future
operations. Management's statements contained in this report that are not
historical facts are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Actual results may differ materially from
those included in the forward-looking statements. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995, and is including this statement for purposes of complying with
those safe harbor provisions. Forward-looking statements, which are based on
certain assumptions and describe future plans, strategies and expectations of
the Company, are generally identifiable by use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "project," "prospectus" or similar
expressions. The Company's ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors which could have a
material adverse affect on the operations and future prospects of the Company on
a consolidated basis include, but are not limited to: changes in economic
conditions generally and the real estate market specifically,
legislative/regulatory changes (including changes to laws governing the taxation
of REITs), availability of capital, interest rates, competition, supply and
demand for industrial and multifamily properties in the Company's current and
proposed market areas and general accounting principles, policies and guidelines
applicable to REITs. These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed on
such statements. Further information concerning the Company and its business,
including additional factors that could materially affect the Company's
financial results, is included herein and in the Company's other filings with
the Securities and Exchange Commission.
IMPACT OF INFLATION
Substantially all of the Company's leases on its Industrial Properties, which
have terms generally ranging from one to five years, contain provisions for
rental increases based either on fixed increases or on increases in the Consumer
Price Index. All of the Company's leases on its Multifamily Properties are for a
period of one year or less. Substantially all of the Company's leases allow at
the time of renewal, for adjustments in the rent payable thereunder.
Accordingly, management believes the provisions contained in its industrial
leases and the nature of its multifamily leases tend to mitigate the adverse
impact of inflation.
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, 1999 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, 1999.
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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, 2000, the Company filed a report
on Form 8-K, dated June 20, 2000, describing under Item 5 the
execution of an agreement to sell its portfolio of industrial
properties.
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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 14, 2000
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
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27 Financial Data Schedule
