ITEM 1. BUSINESS
OVERVIEW
Pacific Gulf Properties Inc. operates as a self-administered and self-managed equity real estate investment trust (a "REIT") which owns, operates, leases, acquires, rehabilitates and develops primarily light industrial and business park properties ("Industrial Properties") in the Western United States. In addition to its Industrial Properties, the Company owns, operates, acquires and develops rental housing for active seniors age 55 and older, focusing mainly in California. The Company also owns and operates family-style apartment communities.
As of December 31, 1999, the Company owned a portfolio of 74 industrial properties, including five properties under development and rehabilitation, containing an aggregate of 15.6 million leasable square feet, one of which is being rehabilitated containing approximately 118,000 leasable square feet and four which are being developed that will contain approximately 709,000 leasable square feet (the "Industrial Properties"). As of December 31, 1999, the Industrial Properties experienced a combined occupancy rate of 96%.
As of December 31, 1999, the Company also owned a portfolio of 18 multifamily properties (the "Multifamily Properties") containing 3,069 units. Of these units, 1,438 units in eight properties are active senior rental apartment communities (the "Active Senior" properties). The remaining 10 properties are family-style apartment communities which the Company continues to operate. The Company is negotiating contracts with listing brokers for the sale of the remaining family-style apartment communities. At year end 1999, occupancy rates at the Active Senior properties and the remaining family-style apartment communities were 94% and 96%, respectively.
The Company was incorporated in August 1993 in the State of Maryland and completed its initial public offering on February 18, 1994 (the "Offering"). Prior to February 18, 1994, the Company was a wholly-owned subsidiary of Santa Anita Realty Enterprises, Inc. ("Realty"). Its executive offices are located at 4220 Von Karman Drive, Newport Beach, California 92660.
BUSINESS STRATEGY
The Company's primary objective is to seek investment opportunities in the industrial and active senior apartment segments of the real estate industry which may be either upgraded by capital improvements and intensive management; developed, and or acquired at or below replacement cost. The Company strives to maximize the growth potential of its portfolio to obtain the highest level of funds from operations while increasing the value of its real estate holdings for the overall benefit and profit of its shareholders.
INDUSTRIAL PROPERTIES
The Company focuses on multi tenant business parks and mid-size warehouse/distribution facilities. It specializes in serving small to mid-size industrial tenants ranging from 1,000 to 100,000 square feet of space. The average tenant of the Company's Industrial Properties leases approximately 6,500 square feet of space. Over 2,300 tenants currently occupy the Industrial Properties and no one tenant accounts for more than 1% of the Company's total revenue.
Management believes that its properties are located in strong markets and intends to continue to focus its activities in the Western United States. The Company believes these regions possess diverse and vibrant economies with good prospects for continued economic growth due to their Pacific Rim location, quality of life, well developed transportation infrastructures, high technology industries, well-educated employee base and excellent universities. Within these regions, the Company focuses on sub-markets within the major metropolitan areas of Orange County, San Bernardino/Riverside Counties, Sacramento, the East Bay area of Northern California, Los Angeles, San Diego, Seattle, Phoenix and Las Vegas.
In each specific local submarket in which it operates, the Company generally seeks to own a number of properties and to be a significant commercial landlord in that market for the Company's product type. Through this approach, the Company can offer prospective tenants a variety of property options and can provide existing tenants, who are growing, additional space in properties owned by the Company in the same area. The Company believes that this strategy gives it a measure of control over the rental rates it charges for its properties. The Company also believes that it has achieved significant market penetration within a number of submarkets in which it operates. Such market focus enables the Company to maximize synergistic opportunities and economies of scale and allows management to concentrate its expertise on specific markets and local conditions.
The Company manages all of its existing Industrial Properties in California, Nevada and the Pacific Northwest using its network of eight regional offices, each of which is headed by a Regional Manager who reports directly to the Senior Vice President of Industrial Operations. The Company offers industrial leases in the one- to five-year range. Lease terms include, in most cases, annual adjustments based on changes in the consumer price index. The standard lease also includes some refurbishing and tenant improvement allowance with the amount varying depending upon the length of the lease, the size of the space leased and the use. The Company will seek tenants primarily involved in warehouse, distribution, assembly and light manufacturing activities. Standard lease terms include a stipulated due date for rent payment, late charges (typically with no grace period), no offset or withholding provisions, security deposit clause, as well as many other provisions considered favorable to the landlord.
MULTIFAMILY PROPERTIES
In 1998, the Company began to execute its strategy to exit the family-style apartment segment of the multifamily market and to focus only on industrial and active senior apartment properties. The Company exited out of the Pacific Northwest market when it sold its portfolio of five family-style apartment communities containing 1,322 units in Washington state in December of 1998 and subsequently used the proceeds to purchase seven industrial properties encompassing approximately 1.3 million square feet in various western markets. As a continuation of its strategy, in February of 1999, the Company sold a 196 unit family-style apartment community in Orange County, California and used the proceeds to repay a portion of its line of credit.
After the above-referenced sales, the Company continues to own a portfolio of 10 family-style apartments consisting of 1,631 units all located in Southern California. The Company is negotiating 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 such decision by the Company will be subject to numerous factors, including prices offered for the Company's family-style apartment communities and the availability of suitable alternate investment for the proceeds of such dispositions.
The Company intends to focus on active senior housing for individuals ages 55 and older, where seniors can be involved in activities, social gatherings and other types of entertainment with residents of their own age group. The Company offers no assisted living or related services. The Company's properties are oriented to those seniors interested in renting versus owning and who are able to care for themselves. The Company believes that the senior population will continue to grow and that the market for rental housing for active seniors will be strong. In addition, management believes that active senior housing typically has lower operating and management costs due to lower tenant turnover and maintenance cost. The Company is focusing its active senior activities primarily in the California marketplace.
The Company currently manages all of its Multifamily Properties in each of its regions. Each of the regions is managed by a Regional Manager who reports directly to the Senior Vice President of Operations -- Apartments. Within each region, each of the Multifamily Properties is operated by a staff of approximately six to seven individuals (three to four at the Active Senior communities), including a manager, assistant manager and/or leasing agents, and a maintenance and apartment preparation staff. The Company locates prospective tenants for its Multifamily Properties primarily by advertising in magazines listing available rentals and by
using firms that assist tenants in locating apartments. The Company also does magazine and direct mail advertising. Policies and procedures utilized at the property sites, including procedures concerning lease contracts, on-site marketing, credit collection standards and eviction standards, follow established federal and state laws.
Individual property lease programs are structured to respond to local market conditions. The Company attempts to balance rent increases with high occupancy and low turnover. None of the Multifamily Properties are currently subject to rent control or rent stabilization regulations. However, certain of these properties are subject to restrictions based on tax-exempt loan requirements. Standard lease terms stipulate due dates for rent payments, late charges, no offset or withholding provisions, security deposits and damage reimbursement clauses, as well as many other provisions considered favorable to the property owner. Nonpayment of rent is generally handled at the properties within 15 days from the beginning of the month, with either commencement of collection or eviction proceedings occurring within that time period.
REHABILITATION PROGRAM
As part of its acquisition program, the Company seeks properties whose financial performance can be enhanced through physical renovation and rehabilitation. The Company also periodically renovates and rehabilitates the properties it already owns. Rehabilitation activity generally involves updating older properties to conform to current market standards and may include the installation of additional loading facilities, sprinkler upgrades, mezzanine level upgrades, parking lot upgrades and cosmetic rehabilitation of the property. The Company capitalizes on senior management's experience with renovation and rehabilitation projects, as well as third party expertise, to expedite the renovation and rehabilitation process.
1999 DEVELOPMENTS
PROPERTY ACQUISITION ACTIVITY
During 1999, the Company acquired approximately $11.5 million of industrial operating properties. The Company also acquired $4.7 million and $9.0 million of industrial development and rehabilitation and active senior apartment development properties, respectively. The following table sets forth information regarding these properties.
- --------------- (1) Total capitalized acquisition cost, including closing and anticipated development or rehabilitation costs.
(2) Occupancy is reported as of closing date of acquisition.
PROPERTY DISPOSITION ACTIVITY
During 1999, the Company disposed of approximately $15.7 million of industrial properties and $7.6 million of multifamily properties. The following table sets forth information regarding these properties and does not include a deferred gain of $.9 million related to collection of a note receivable.
- --------------- (1) Sale of excess acreage at development site.
(2) Sale of single building in a multi-building project.
COMPLETION OF INDUSTRIAL PROPERTY REHABILITATION
During 1999, the Company completed rehabilitation on a 382,000 square foot warehouse in San Diego, California. The total rehabilitation cost for the property was $2.6 million. The project is 100% occupied at December 31, 1999.
During 1999, the Company also completed development of a 209,000 square foot industrial park in Lake Forest, California for a cost of $11.8 million, excluding land costs of $3.6 million. The property is 97% occupied at December 31, 1999.
FINANCING ACTIVITY
The Company has a $150.0 million 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 December 31, 1999 is LIBOR plus 1.30%.
In 1997, the Company established a pool agreement with the Federal National Mortgage Associations ("FNMA") to provide 30-year credit enhancement on the Company's tax-exempt projects. In 1999, the Company replaced the existing credit enhancement which was maturing with FNMA to finance Tyler Springs senior apartment community in Riverside, California. The $9.0 million in bonds secured by Tyler Springs have a variable interest rate, after giving effect to credit enhancement and other costs, of 5.04% as of December 31, 1999.
In December 1998 in conjunction with the sale of the Company's Washington apartment communities, the Company restructured the existing indebtedness on the Hampton Bay apartment community. The lender, a life insurance company, released the Hampton Bay property as collateral and accepted a letter of credit in the amount of $9.4 million as substitution collateral. The Company replaced the letter of credit by providing its City of Industry industrial project as replacement collateral in May 1999.
In February 1999, the Company borrowed $9.0 million at an interest rate of LIBOR + 1.375% for a term of one year. The proceeds of this loan were used to repay $9.0 million of indebtedness under the Company's Line of Credit. The loan is secured by a 359,000 square foot industrial property acquired in June 1998.
In November 1999, the Company borrowed $6.5 million at an interest rate of LIBOR + 1.65% for a term of one year. The proceeds of this loan were used to acquire a 156,000 square foot industrial property located in Mesa, Arizona. The loan is secured by this property.
INDEBTEDNESS
The following table presents information on indebtedness encumbering the Industrial and Multifamily Properties, excluding borrowings outstanding under the Company's Line of Credit, as of December 31, 1999:
- --------------- (a) Vista Distribution Center, PGBP -- Rancho Cucamonga and Garden Grove Industrial Center jointly collateralize the $16,900,000 note payable.
(b) PGDC -- Fontana, PGDC -- Chino, Pacific Gulf Warm Springs Industrial, PGDC -- Downey and PGDC -- Rancho Bernardo jointly collateralize the $34,000,000 note payable.
(c) PGDC -- Bell Ranch Road, PGBP -- Pacific Park, PGBP -- North County, PGBP -- Bay San Marcos, PGBC -- Escondido and PGBP -- Riverview Industrial Park jointly collateralize the $24,500,000 note payable.
(d) The Company entered into an interest rate swap agreement that fixed the interest rate on $11,500,000 of the principal balance at 7.35% for five years commencing July 1, 1996.
(e) Construction loan relating to rehabilitation of PGDC -- Miramar Village. The maximum loan amount under the agreement was modified to $13,930,000. The current interest rate at December 31, 1999 is 7.88%.
(f) Construction loan relating to rehabilitation of PGDC -- Algona 2. The maximum loan amount under the agreement was modified to $4,625,000. The current interest rate at December 31, 1999 is 7.25%.
(g) Interest rate is subject to periodic adjustments beginning March 10, 1996 based on the monthly weighted average 11th District Cost of Funds plus 2.8%.
(h) These tax-exempt mortgage loans are financed using tax-exempt bond financing supported by credit enhancement from FNMA. The collateral properties, which also include Applewood, not listed above, are subject to restrictions requiring that a specified percentage of the apartment units in such properties be made available to persons with lower and moderate income. As of December 31, 1999, 349 apartment units, or 11% of the total apartments owned, were required to have been made available to persons with lower or moderate income pursuant to these requirements, and the Company has complied with such requirements. In addition, state and local authorities in some cases impose certain restrictions on the amount of rent that can be charged.
(i) Interest rate is subject to periodic adjustments based on the pass through interest rate in addition to a set rate interest component.
(j) Represents construction loan relating to development and construction of the PGBP -- Lake Forest project with a maximum loan amount of $10,500,000. The current interest rate at December 31, 1999 is 8.00%. An option to extend the loan for one year was exercised in March of 2000.
(k) Represents construction loan relating to development and construction of the Pacific Gulf Spectrum Center with a maximum loan amount of $16,800,000. The current interest rate at December 31, 1999 is 7.80%.
(l) Construction loan relating to the development and construction of the PGDC -- Whittier project with a maximum loan amount of $10,250,000. The current interest rate at December 31, 1999 is 8.03%.
(m) Construction loan relating to the development and construction of the Fountains at Anaheim Hills senior apartments with a maximum loan amount of $16,350,000. The current interest rate at December 31, 1999 is 8.03%.
(n) In February 2000, this loan was extended to February 2001.
CORPORATE OFFICES AND EMPLOYEES
The Corporate offices are located in Newport Beach, California in approximately 16,000 square feet of a 26,000 square foot office building, which is owned by the Company. At December 31, 1999, the Company employed approximately 166 persons, of which 116 were onsite or property related and 50 were corporate office employees.
COMPETITIVE AND OTHER CONDITIONS
Competition. Within its geographic areas of operation, the Company is subject to competition from a variety of investors, including insurance companies, pension funds, corporate and individual real estate developers and investors and other REITs with investment objectives similar to those of the Company. Some of these competitors have more substantial financial resources and longer operating histories than the Company. As an owner of industrial and apartment real estate properties, the Company competes with other owners of similar properties in connection with their financing, sale, lease or other disposition and use.
While the Company has not experienced material competitive pressures confined to specific geographic regions, it is possible that material adverse changes in regional economies or in the operations of major regional employers (such as Boeing in the Pacific Northwest) could have a material adverse effect on the ability of the Company to lease its properties and on the rents charged. Conversely, if any of the regional geographic areas in which the Company owns properties experiences economic growth, the Company is likely to experience increased competition for acquisition and development projects, thereby increasing the Company's costs of acquisition and development and potentially reducing the Company's returns therefrom.
Insurance. The Company carries comprehensive liability, fire, extended coverage and rental loss insurance with respect to its Industrial, Active Senior and Multifamily Properties, with policy specifications, insured limits and deductibles customarily carried for similar properties which the Company believes are adequate and appropriate under the circumstances. These are certain types of losses, such as those arising from acts of war, which are not generally insured because they are either uninsurable or not economically insurable. Currently the Company carries earthquake disaster insurance on its California properties, which comprise 89% of the Company's total portfolio (as a percentage of total revenues); however, such insurance is also subject to deductible amounts that must be paid by the Company in the event of such an occurrence, and may not be available in the future or may only be available at rates that, in the opinion of the Company, are prohibitive. In the event that an uninsured disaster or a loss in excess of insured limits should occur, the Company could suffer a substantial loss, including loss of anticipated future revenues, while remaining obligated on related mortgage indebtedness. The Company believes its properties were constructed in compliance with applicable construction standards in effect at the time of construction. The Company obtained customary title insurance insuring fee title to its properties upon their acquisition.
ITEM 2.
ITEM 2. PROPERTIES
The following table presents information on the composition of the Company's operating properties based on the percentage of rental revenue at December 31, 1999 and 1998.
The tables below set forth certain information relating to the Company's operating Industrial and Multifamily Properties by location and type as of December 31, 1999.
- --------------- (1) Based on rental revenues for the fourth quarter of 1999.
(2) Includes the eastern portion of Los Angeles County adjacent to the Riverside-San Bernardino metropolitan statistical area.
(3) Includes Nevada and Arizona.
(4) Includes Washington and Oregon.
(5) Includes Active Senior properties.
INDUSTRIAL PROPERTIES
The following table presents information concerning the Industrial Operating Properties, including the actual average rent per square foot and percentage of the leasable square footage occupied by tenants, as of December 31, 1999:
- --------------- (1) Subject to ground lease.
(2) Owned by PGP Northern Industrial, L.P., a limited partnership in which the Company has an ownership interest of approximately 59%, full management and control, and the right to substantially all of the cash flow.
(3) Owned by PGP Southern Industrial II, L.P., a limited partnership in which the Company has an ownership interest of approximately 49%, and full management and control.
The following tables present information concerning the Company's Industrial Properties under rehabilitation and development as of December 31, 1999.
REHABILITATION AND DEVELOPMENT PROPERTIES
REHABILITATION PROPERTIES
DEVELOPMENT PROPERTIES
- --------------- (1) Includes rehabilitation of existing building and development of excess land.
(2) No acquisition cost is reflected because the property being developed by the Company is the excess portion of a property previously acquired by the Company.
The following table shows scheduled lease expirations for all leases for the Industrial Operating Properties (excluding properties under development) as of December 31, 1999.
- --------------- (1) As of December 31, 1999, 608,000 square feet of tenants were on month-to-month leases (which are not included above) and 570,000 square feet were unoccupied.
MULTIFAMILY PROPERTIES
The following table presents information concerning the Multifamily Operating Properties, including average gross scheduled rents per unit and percentage of units occupied as of December 31, 1999:
- --------------- (1) Properties serving active senior tenants (individuals 55 and older).
(2) Under rehabilitation.
(3) Owned by PGP Inland Communities, L.P., a limited partnership in which the Company has a 84% equity interest, full management and control, and the right to 100% of cash flow until certain net operating income levels are achieved.
(4) Owned by Terrace Gardens -- PGP L.P., a limited partnership in which the Company has an ownership interest of approximately 58%, full management and control, and the right to substantially all of the cash flow.
(5) Owned by Morning View Terrace -- PGP L.P., a limited partnership in which the Company has an ownership interest of approximately 59%, full management and control, and the right to substantially all of the cash flow.
DEVELOPMENT PROPERTIES
The following table presents information concerning the Company's Multifamily Properties under development as of December 31, 1999:
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently subject to any litigation nor is any litigation threatened against the Company, other than routine litigation arising in the ordinary course of business.
ITEM 4.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company has traded on the New York Stock Exchange ("NYSE") since October 29, 1996 under the symbol "PAG". Prior to that date and since its formation, the Company traded on the American Stock Exchange ("ASE"). The following table sets forth the high and low closing prices for the common stock on the respective exchange.
- --------------- (1) 28.6% of the distributions paid to beneficial owners in 1997 are estimated to represent a capital gain distribution.
(2) 12.6% of the distributions paid to beneficial owners in 1998 represents a return of capital ($.21 per share)
(3) 2.1% of the distributions paid to beneficial owners in 1999 represents a return of capital ($.01 per share), 9.1% represent capital gains ($.04 per share).
The minimum distribution requirement to maintain REIT status was approximately $22,834,000 for 1997, $31,276,000 for 1998 and $36,426,000 for 1999.
A regular quarterly distribution of $.44 per share was paid on January 14, 2000. The closing price of the common stock on the New York Stock Exchange on March 17, 2000 was $20 7/16 per share. As of March 17, 2000, there were approximately 10,366 beneficial owners of common stock.
Future distributions by the Company will be at the discretion of the Board of Directors and will depend upon the actual Funds From Operations of the Company, its financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code, applicable legal restrictions and such other factors as the Board of Directors deems relevant. Although the Company intends to continue to make quarterly distributions to its stockholders, no assurances can be given as to the amount of distributions, if any, made in the future.
The statement on the face of this Annual Report on Form 10-K regarding the aggregate market value of voting stock of the Company held by non-affiliates of the Company is based on the assumption that all directors and officers of the Company were, for purposes of this calculation only (and not for any other purpose), affiliates of the Company.
ITEM 6.
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
The following table and footnotes set forth selected historical financial and operating data for the Company:
- --------------- (a) Includes Active Senior apartment properties.
(b) Reflects the $3,596,000 nonrecurring loss incurred on the exchange of $42,069,000 aggregate principal amount of convertible subordinated debentures into 2,440,002 shares of common stock in December 1996.
(c) Earnings per share data for all periods presented reflects basic and diluted calculations in accordance with Statement No. 128 and has been restated from the previous accounting standard of primary and fully diluted earnings per share. (See Part IV -- Financial Statements.)
(d) Represents dividends on Class A Preferred Stock which was issued during 1997. (See Part IV -- Financial Statements)
- --------------- (a) Includes Active Senior apartment properties.
(b) Reflects the exchange of $42,069,000 aggregate principal amount of convertible subordinated debentures into 2,440,002 shares of common stock in December 1996.
(c) We consider funds from operations, as defined by the National Association of Real Estate Investment Trusts, or NAREIT to be a useful financial measure of our operating performance. We believe that funds from operations provides investors with an additional basis to evaluate our ability to service debt and to fund acquisitions and other capital expenditures. Funds from operations should not be considered an alternative to net income determined in accordance with GAAP, as an indicator of our financial performance or as a substitute for cash flow from operating activities determined in accordance with GAAP as a measure of our liquidity. Funds from operations also is not necessarily indicative of funds available to fund our cash needs, including our ability to service our debt.
The White Paper on funds from operations approved by the Board of Governors of NAREIT in October 1999 defines funds from operations as net income or loss computed in accordance with GAAP, excluding gains or losses from extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property plus real estate-related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. We compute funds from operations in accordance with standards established by the White Paper which may differ from the standards used by other real estate companies and, accordingly, our funds from operations may not be comparable to those companies' funds from operations.
(d) Earnings for the year ended December 31, 1996 were inadequate to cover fixed charges by approximately $0.2 million as a result primarily of the nonrecurring loss of $3,596,000 relating to the Company's exchange of debentures for common stock. The ratio of earnings to fixed charges excluding this $3.6 million non-cash item is 1.18 to 1.
CALCULATION OF FFO
- --------------- (a) Proforma funds from operations assumes the conversion of the Company's convertible subordinated debentures and preferred stock and excludes the conversion of limited partnership units.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the financial statements and notes thereto of the Company and the "Selected Financial and Operating Data" appearing elsewhere in this report. Such financial statements and information have been prepared to reflect the Company's financial position as of December 31, 1999, 1998 and 1997 together with the results of its operations and its cash flows.
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," "prospects" 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.
The comparability of the financial information discussed below is impacted by a significant amount of property acquisitions, developments, rehabilitations and dispositions, as follows: during 1999, the acquisitions
of three industrial properties totaling 304,000 leasable square feet, the completion of two industrial projects containing 591,000 square feet previously under development or rehabilitation, the disposition of two industrial properties containing 133,000 square feet, the disposition of two individual buildings located within existing projects totaling 319,000 square feet, the disposition of 1.05 acres of improved land, the disposition of a multifamily property containing 196 apartment units and the redemption of debentures for common stock and cash; during 1998, the acquisition of 18 operating industrial properties containing approximately 3,278,000 leasable square feet, the completion of an active senior property containing 166 apartment units and three industrial projects containing 464,000 square feet previously under development, and the disposition of six multifamily properties containing 1,556 apartment units; and during 1997, the acquisition of 27 operating industrial properties containing approximately 5,776,000 leasable square feet, the acquisition of three multifamily properties containing 824 apartment units, and the disposition of one multifamily property containing 279 apartment units.
RESULTS OF OPERATIONS
Comparison of the Year Ended December 31, 1999 to the Year Ended December 31, 1998.
Industrial rental income increased by $22,017,000 or 29%, from $76,271,000 in 1998 to $98,288,000 in 1999. This increase was primarily attributable to the acquisition of seven industrial properties in the fourth quarter of 1998 and three industrial properties in 1999. Industrial rental income for the year ended December 31, 1999 included $10,041,000 related to fourth quarter 1998 and 1999 acquisitions.
Multifamily rental income decreased by $10,978,000 or 30%, from $36,858,000 in 1998 to $25,880,000 in 1999. This decrease was primarily attributable to the sale of six multifamily properties at the end of 1998 and one multifamily property in 1999, offset partially by an increase in rental rates.
As a result of these changes total revenues increased by $11,039,000 or 10%, from $113,129,000 in 1998 to $124,168,000 in 1999.
Industrial rental property expenses increased by $4,824,000, or 29%, from $16,746,000 in 1998 to $21,570,000 in 1999. This increase was primarily related to the Company's acquisitions in the fourth quarter of 1998 and the three acquisitions in 1999. Industrial rental property expenses for the year ended December 31, 1999 included $2,265,000 related to fourth quarter 1998 and 1999 acquisitions.
Multifamily rental property expenses decreased by $4,417,000, or 32%, from $13,751,000 in 1998 to $9,334,000 in 1999. This decrease was primarily related to the disposition of six multifamily properties at the end of 1998 and one multifamily property in 1999.
Depreciation increased by $5,731,000 or 28%, from $20,386,000 in 1998 to $26,117,000 in 1999. The increases relate primarily to the acquisitions described above and the capital improvements made to rehabilitate existing properties.
Interest expense (including amortization of financing costs) increased by $1,484,000, or 6%, from $25,758,000 in 1998 to $27,242,000 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 and November 1999 redemptions. Interest resulting from the amortization of financing costs decreased by $328,000 or 29% from $1,129,000 in 1998 to $801,000 in 1999. This decrease is attributable to the redemptions of the Company's outstanding debentures offset by the write off of deferred financing costs in August and November 1999.
General and administrative expenses increased by $1,262,000, or 21%, from $5,903,000 in 1998 to $7,165,000 in 1999. This increase was primarily attributable to staff additions, staff retention costs and inflation.
Minority interests in earnings of consolidated partnerships increased by $318,000 or 31% from $1,024,000 in 1998 to $1,342,000 in 1999. Minority interest represents earnings allocated to the minority partners in the partnerships in which the Company has a controlling general partner interest.
For the year ended December 31, 1999, the Company had income available to common shareholders of $34,899,000 compared to income of $59,997,000 in 1998. The results in each year were impacted by the sale of real estate. In 1998, a $35,292,000 net gain on sale of real estate was recognized primarily from the sale of six apartment communities with 1,556 apartment units located in Washington, while in 1999 an $8,472,000 net gain on sale of real estate was recognized as described in Note 9 to the financial statements.
Comparison of the Year Ended December 31, 1998 to the Year Ended December 31, 1997.
Industrial rental income increased by $39,861,000 or 109%, from $36,410,000 in 1997 to $76,271,000 in 1998. This increase was primarily attributable to the acquisition of 18 industrial properties in 1998. Industrial rental income for the year ended December 31, 1998 included $25,530,000 related to fourth quarter 1997 and 1998 acquisitions.
Multifamily rental income increased by $3,762,000 or 11%, from $33,096,000 in 1997 to $36,858,000 in 1998. This increase was primarily attributable to 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 $43,623,000 or 63%, from $69,506,000 in 1997 to $113,129,000 in 1998.
Industrial rental property expenses increased by $8,534,000, or 104%, from $8,212,000 in 1997 to $16,746,000 in 1998. This increase was primarily related to the Company's acquisitions in 1998. Industrial rental property expenses for the year ended December 31, 1998 included $6,282,000 related to fourth quarter 1997 and 1998 acquisitions.
Multifamily rental property expenses increased by $997,000, or 8%, from $12,754,000 in 1997 to $13,751,000 in 1998. This increase was primarily related to an increase in operating expenses and the completion of an active senior property previously under development.
Depreciation increased by $8,378,000 or 70%, from $12,008,000 in 1997 to $20,386,000 in 1998. The increases relate primarily to the acquisitions described above and the capital improvements made to rehabilitate existing properties.
Interest expense (including amortization of financing costs) increased by $8,421,000, or 49%, from $17,337,000 in 1997 to $25,758,000 in 1998. This increase was due to an increase in outstanding borrowings due to new acquisitions made during 1997 and 1998. Interest resulting from the amortization of financing costs increased by $302,000 or 37% from $827,000 in 1997 to $1,129,000 in 1998. This increase is attributable to the additional finance costs incurred as a result of the Company's new unsecured credit facility.
General and administrative expenses increased by $2,744,000, or 87%, from $3,159,000 in 1997 to $5,903,000 in 1998. This increase was primarily attributable to personnel increases and expensing of certain costs of abandoned projects.
Minority interests in earnings of consolidated partnerships increased by $852,000 from $172,000 in 1997 to $1,024,000 in 1998. Minority interest represents earnings allocated to the minority partners in four partnerships in which the Company has a controlling general partner interest.
For the year ended December 31, 1998, the Company had net income of $59,997,000 compared to net income of $20,603,000 in 1997. The results in each year were impacted by non-recurring items. In 1997, a $5,594,000 net gain on sale of real estate was recognized primarily from the sale of a 279 unit apartment community in Oregon, while in 1998 a $35,292,000 net gain on sale of real estate was recognized primarily from the sale of six apartment communities with 1,556 apartment units located in Washington.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
At December 31, 1999, the Company had $2,177,000 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 anticipates that adequate cash will be available to fund its operating and administrative expenses, continuing debt service obligations and the payment of dividends in accordance with REIT requirements in the foreseeable future.
Cash provided by operating activities increased from $27,736,000 for the year ended December 31, 1997 to $50,701,000 for the year ended December 31, 1998 and $56,149,000 for the year ended December 31, 1999. The primary reason for this increase relates to the additional rental income contributed by properties acquired during 1997, 1998 and 1999.
Cash used in investing activities decreased from $350,597,000 for the year ended December 31, 1997 to $140,700,000 for the year ended December 31, 1998 and then decreased to $31,488,000 for the year ended December 31, 1999 primarily as a result of the reduction on acquisitions and improvements to properties. Acquisitions and improvements decreased from $332,324,000 in 1997 to $201,160,000 in 1998, and then decreased to $32,265,000 in 1999, and were offset by $15,115,000 from the sale of a multifamily community in Oregon in 1997, and $92,025,000 from the sale of a multifamily property and a multifamily portfolio in the Pacific Northwest in 1998 and $31,840,000 from the sale of two industrial properties, two individual industrial buildings, a multifamily property and a parcel of improved land in 1999.
Cash provided by financing activities decreased from $322,804,000 for the year ended December 31, 1997 to $90,809,000 for the year ended December 31, 1998 and then decreased to $24,760,000 for the year ended December 31, 1999. The fluctuations were primarily a result of decreased capital funding from equity offerings in 1998 as compared to 1997, and decreased borrowing activity associated with acquisitions in 1999 as compared to 1998.
In order to qualify as a REIT for federal income tax purposes, the Company is required to make distributions to its shareholders of at least 95% of REIT taxable income. The Company expects to use its cash flow from operating activities for distributions to shareholders and for payment of other expenditures. The Company intends to invest amounts accumulated for distribution in short-term investments.
Unsecured 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 December 31, 1999 is LIBOR plus 1.30%. As of December 31, 1999, the Company had borrowed $123,650,000 under this line.
Acquisitions and Improvements to Properties
During 1999 the Company invested $32,265,000 in real estate assets. Proceeds for these investments were generated primarily from the sale of two industrial properties, two individual industrial buildings, a multifamily property and a parcel of improved land in 1999 which generated proceeds of $30,990,000 and borrowings from the Line of Credit.
The Company intends to acquire additional properties and may seek to fund these acquisitions through proceeds received from a combination of its Line of Credit, equity offerings, debt financings or asset dispositions.
Dispositions
In 1999, the Company sold for a gross sales price of $30,990,000 -- a 91,200 square foot industrial property, a 302,020 square foot individual industrial building, a 1.05 acre parcel of improved land and a 196 unit multifamily property all located in Southern California, a 42,240 square foot industrial property in Washington, and a 16,848 square foot individual industrial building located in Northern California. The Company also 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. The Company reported a gain on the sales after all costs of $8,472,000.
After the above-referenced sales, the Company continues to own a portfolio of 10 family-style apartments consisting of 1,631 units all 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 such decision by the Company will be subject to numerous factors, including prices offered for the Company's family-style apartment communities and the availability of suitable alternate investment for the proceeds of such dispositions.
Developments
During 1999, the Company completed and transferred to operating properties a 382,000 square foot warehouse in San Diego, California. The total rehabilitation cost for the property was $2,600,000. The project is currently 100% occupied at December 31, 1999.
During 1999, the Company also developed a 209,000 square foot industrial park in Lake Forest, California for a cost of $11,800,000, excluding land costs of $3,600,000. The property is 97% occupied at December 31, 1999.
As of December 1999, the Company has under development four industrial properties that will contain approximately 709,000 leasable square feet. Three of the properties are located in Southern California and one is located in Washington. The Company also has one industrial property which upon rehabilitation and development will contain approximately 118,000 leasable square feet located in Arizona. Development and rehabilitation costs for these properties totaled $27,105,000 through December 31, 1999.
As of December 1999, the Company has under development three multifamily apartment properties for active seniors containing 669 units. Two are located in Southern California and one is located in Northern California. Development costs, excluding land costs of $8,992,000, for these properties totaled $3,505,000 through December 31, 1999.
Debt Financings
In 1997, the Company established a pool agreement with the Federal National Mortgage Associations ("FNMA") to provide 30-year credit enhancement on the Company's tax-exempt projects. In 1999, the Company replaced the existing credit enhancement which was maturing with FNMA to finance Tyler Springs senior apartment community in Riverside, California. The $9.0 million in bonds secured by Tyler Springs have a variable interest rate, after giving effect to credit enhancement and other costs, of 5.00% as of December 31, 1999.
In December 1998 in conjunction with the sale of the Company's Washington apartment communities, the Company restructured the existing indebtedness on the Hampton Bay apartment community. The lender, a life insurance company, released the Hampton Bay property as collateral and accepted a letter of credit in the amount of $9.4 million as substitution collateral. The Company to replaced the letter of credit by providing its City of Industry industrial project as replacement collateral in May 1999.
Convertible Subordinated Debentures
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.
The Company called for redemption of the remaining outstanding debenture of $5,273,000 on November 10, 1999. As of that date, $5,110,000 of the debentures called had converted into 274,373 shares of Common Stock. The Company redeemed the remaining $163,000 for cash.
Shelf Registration
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 "1998 Shelf Registration Statement"). The 1998 Shelf Registration Statement was declared effective in April of 1998. At December 31, 1999, the Company has $300,000,000 available under the 1998 Shelf Registration Statement.
Year 2000 Readiness
In 1999, we completed our remediation and testing of systems with respect to the Year 2000 date change. As a result of our planning and implementation efforts, we experienced no disruptions in mission critical information technology and non-information technology systems and believe those systems successfully responded to the Year 2000 date change. We incurred costs of less than $100,000 during 1999 in connection with remediating our systems. We are not aware of any material problems resulting from Year 2000 issues, either with our products, our internal systems or the products and services of third parties. We will continue to monitor our mission critical computer applications and those of our suppliers and vendors throughout the year to ensure that any latent Year 2000 matters that may arise are addressed promptly.
Capital Expenditures
The Company capitalizes the direct and indirect cost of expenditures for the acquisition of development properties or rehabilitation of its multifamily and industrial properties. The Company also capitalizes the direct cost of capital expenditures that are considered revenue producing ("Revenue Producing") and other expenditures that increase the service life of the Company's properties ("Restorations").
Revenue Producing expenditures are improvements which significantly increase the revenue-producing capability of the asset including tenant improvements at industrial properties, installation of washers and dryers at multifamily properties, and other value-added additions.
Rehabilitation expenditures are costs the Company determines are necessary during the due diligence phase immediately preceding the acquisition of a property. At newly acquired properties, the Company often finds it necessary to upgrade the physical appearance of such properties and to complete the maintenance and repair work that had been deferred by prior owners.
Restorations are nonrevenue-producing capital expenditures which recur on a regular basis, and have estimated useful lives of more than one year.
Make ready costs incurred after a property's rehabilitation, such as carpet and appliance replacement, interior painting and window coverings are expensed as incurred.
The following table summarizes capital expenditures incurred by the Company related to its operating properties for the years ended December 31, 1999 and 1998 (all amounts are in thousands):
The Company expects such expenditures will be funded from available cash balances, revolving lines of credit, equity offerings, and proceeds from refinancing.
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 providing 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 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates relates primarily to the Company's current and future debt obligations. The Company is vulnerable to significant fluctuations of interest rates on its floating rate debt, repricing on its fixed rate debt at various points in the future and future debt.
The following table provides information about the Company's financial instruments that are sensitive to changes in interest rates. The table below presents principal cash flows and related weighted-average interest rates by expected maturity dates.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements for a listing of the financial statements and supplementary data filed with this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item is hereby incorporated by reference from the Company's proxy statement for the Year 2000 Annual Meeting ("Proxy Statement") under the caption "Election of Directors -- Nominees" and "Officers and Key Employees."
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by reference from the Proxy Statement under the caption "Officers and Key Employees -- Compensation."
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is hereby incorporated by reference from the Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management."
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND OTHER TRANSACTIONS
The information required by this item is hereby incorporated by reference from the Proxy Statement under the caption "Certain Transactions."
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report
1. Financial Statements. See Index to Financial Statements.
2. Financial Statement Schedule. See Index to Financial Statements.
3. Exhibits. See Exhibit Index on pages and.
(b) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PACIFIC GULF PROPERTIES INC.
By: /s/ GLENN L. CARPENTER
------------------------------------ Glenn L. Carpenter Chairman of the Board of Directors President and Chief Executive Officer
By: /s/ DONALD G. HERRMAN
------------------------------------ Donald G. Herrman Executive Vice President, Secretary, and Chief Financial Officer (Principal Financial and Accounting Officer)
Date: March 17, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the date indicated.
PACIFIC GULF PROPERTIES INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE DECEMBER 31, 1999
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders Pacific Gulf Properties Inc.
We have audited the accompanying consolidated balance sheets of Pacific Gulf Properties Inc. as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedule listed in the Index on page. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pacific Gulf Properties Inc. at December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Newport Beach, California February 10, 2000
PACIFIC GULF PROPERTIES INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
See accompanying notes.
PACIFIC GULF PROPERTIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes.
PACIFIC GULF PROPERTIES INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
See accompanying notes.
PACIFIC GULF PROPERTIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes.
PACIFIC GULF PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Pacific Gulf Properties Inc. was incorporated in Maryland in August 1993. The Company operates as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended, which owns, operates, leases, acquires, rehabilitates and develops light industrial and business park properties and multifamily properties including active senior and family-style apartment communities. The Company commenced operations on February 18, 1994 upon the completion of its initial public offerings and consummation of certain formation transactions.
BASIS OF PRESENTATION
The consolidated financial statements include the Company's accounts and all subsidiaries and partnerships over which it has control. The Company's controlled partnerships and subsidiaries include PGP Inland Communities, L.P., PGP -- Terrace Gardens Holdings Inc., PGP -- Morning View Terrace Holdings Inc., PGP Northern Industrial, L.P., PGP Southern Industrial II, L.P., Pacific Inland Communities LLC and PGP Von Karman Properties. Minority interests represent the ownership interests of outside limited partners in certain of the partnerships controlled by the Company. All intercompany accounts and transactions have been eliminated in consolidation.
REAL ESTATE ASSETS
Real estate assets consist of operating properties and properties under development. Operating properties are held for investment and carried at cost less accumulated depreciation. Cost includes the cost of land and completed buildings and related improvements. Expenditures that increase the service life of properties are capitalized; the cost of maintenance and repairs is charged to expense as incurred. Depreciation is generally provided on a straight-line basis over the estimated useful lives of the buildings and improvements, ranging primarily from 15 to 40 years. When depreciable property is retired or disposed of, the related costs and accumulated depreciation are removed from the accounts and any gain or loss reflected in operations.
Properties under development are carried at cost. The cost of development includes land acquisition and infrastructure costs, direct and indirect construction costs and carrying costs including interest and taxes. Land acquisition and infrastructure costs are allocated to components of properties based on relative fair value. Interest and property taxes are capitalized to properties while development activities are in progress. When a project or property under development is completed, all related holding and operating costs are expensed as incurred.
Impairment losses are recorded on long-lived assets used in operations and properties under development when indicators of impairment are present and the assets' carrying amount is greater than the sum of the future undiscounted cash flows, excluding interest, estimated to be generated by those assets. As of December 31, 1999, no indicators of impairment existed and no impairment losses have been recorded.
The Company follows the provisions of EITF 97-11, Accounting for Internal Costs Related to Real Estate Property Acquisitions. Accordingly, effective April 1, 1998, the Company ceased capitalizing its internal acquisition costs incurred in conjunction with the identification and acquisition of properties to be held for operations. The Company continues capitalizing internal acquisition costs associated with properties which are under development.
CASH AND CASH EQUIVALENTS
Certificates of deposit and short-term investments with remaining maturities of three months or less when acquired are considered cash equivalents.
PACIFIC GULF PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
Accounts receivable are net of an allowance for uncollectible accounts totaling $1,012,000 and $298,000 at December 31, 1999 and 1998, respectively.
FINANCING COSTS
Financing costs are included in other assets and consist of loan fees, other loan costs and deferred debenture costs. Loan fees and other loan costs are amortized over the term of the respective loan. Costs relating to the convertible subordinated debentures offering are amortized over the term of the debentures using a method that approximates the effective interest method. Amortization of financing costs is included in interest expense.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a concentration of credit risk are primarily cash investments and accounts receivable from tenants. Cash is generally invested in investment-grade short- term instruments and the amount of credit exposure to any one commercial issuer is limited. Concentration of credit risk with respect to accounts receivable from tenants is limited. The Company performs credit evaluations of prospective tenants and security deposits are also obtained.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's short-term investments and loans payable approximate their fair values as of December 31, 1999.
DIVIDEND REINVESTMENT PLAN
During the years ended December 31, 1999 and 1998, the Company issued 3,330 and 2,156 shares, respectively, under the Company's Dividend Reinvestment Plan.
RENTAL INCOME
Rental income from multifamily leases is recognized when due from tenants. Apartment units are rented under lease agreements with terms of one year or less.
Rental income from industrial leases is recognized on a straight-line basis over the related lease term. As a result, deferred rent is created when rental income is recognized during free rent periods of a lease. The deferred rent is included in other assets, evaluated for collectibility and amortized over the lease term.
INTEREST
Interest incurred for the years ended December 31, 1999, 1998 and 1997 totaled $29,757,000, $28,810,000 and $19,469,000, respectively. Interest incurred in 1999, 1998 and 1997 includes $615,000, $1,041,000 and $1,100,000 related to the Company's convertible subordinated debentures.
For the years ended December 31, 1999, 1998 and 1997, the Company capitalized $2,515,000, $3,052,000 and $2,132,000 of interest related to properties under development
Interest paid for the years ended December 31, 1999, 1998 and 1997 totaled $29,448,000, $27,732,000 and $18,932,000, respectively.
PACIFIC GULF PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
GAINS ON SALE OF REAL ESTATE
Gains on sale of real estate are recognized by the Company when title to the real estate passes to the buyer, an adequate down payment is received, the collectibility of notes received from buyers is reasonably assured, and all other conditions necessary for profit recognition have been satisfied.
INCOME TAXES
The Company has elected to be taxed as a REIT. As a REIT, the Company is generally not subject to income taxes. To maintain its REIT status, the Company is required to distribute annually as dividends at least 95% of its REIT taxable income, as defined by the Internal Revenue Code ("IRC"), to its shareholders, among other requirements.
PER SHARE DATA
The Company reports earnings per share pursuant to Statement of Financial Accounting Standards No. 128 ("Statement No. 128"). All earnings per share amounts for all periods presented reflect basic and diluted earnings per share and have been restated from the previous standard of primary and fully diluted earnings per share. (See Note 10 for additional information.)
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities as of December 31, 1999 and 1998 and revenues and expenses for each of the three years in the period ended December 31, 1999. Actual results could differ from those estimates in the near term.
STOCK-BASED COMPENSATION
During 1999, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which establishes a fair value method of accounting for stock-based compensation plans. The Company follows SFAS No. 123 for all plans adopted after January 1, 1999. For stock-based compensation plans established prior to January 1, 1999, the Company continues to follow the intrinsic value method set forth in APB Opinion 25, "Accounting for Stock Issued to Employees." The adoption of this Standard in 1999 had no material effect on the Company's financial statements (see Note 5).
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities as amended", which is required to be adopted on June 15, 2000. At that time, the Company will be required to report the fair value of derivatives and reflect adjustments to the carrying amount of hedged items as gains or losses. The Company does not believe the additional requirements will have a significant impact on its financial position or results of operations.
RECLASSIFICATIONS
Certain prior year financial statement amounts have been reclassified to conform to the current year presentation.
PACIFIC GULF PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. REAL ESTATE ASSETS
The Company's real estate assets consist of the following at December 31:
OPERATING PROPERTIES
OPERATING PROPERTIES
Industrial Properties
At December 31, 1999, the Company owns and operates 69 operating industrial properties containing an aggregate of 14,684,000 leasable square feet located in the states of California, Washington, Nevada, Arizona and Oregon. During 1999, the Company purchased three industrial properties located in Nevada and Arizona containing an aggregate of 304,000 leasable square feet.
PACIFIC GULF PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's industrial properties are leased to tenants under operating leases with terms ranging from 1 to 5 years. The minimum future lease payments to be received from noncancelable industrial leases for each of the next five years ending December 31 and thereafter, are summarized as follows:
Multifamily Properties
At December 31, 1999, the Company owns and operates 18 multifamily properties containing 3,069 apartment units located in Southern California, including 8 multifamily properties with 1,438 units for active seniors. During 1999, the Company sold a multifamily property containing 196 apartment units located in Southern California. (See Note 9.)
PROPERTIES UNDER DEVELOPMENT
PROPERTIES UNDER DEVELOPMENT
Industrial Properties
During 1999, the Company completed and transferred to operating properties one rehabilitation project; a 382,000 square foot warehouse in San Diego, California. The total rehabilitation cost for the property was $2,572,000. The project is 100% occupied at December 31, 1999.
During 1999, the Company also completed development of a 209,000 square foot industrial park in Lake Forest, California for a cost of $11,793,000, excluding land costs of $3,554,000. The property is 97% occupied at December 31, 1999.
As of December 1999, the Company has under development in Southern California and Washington, four industrial properties that will contain approximately 709,000 leasable square feet, and one industrial
PACIFIC GULF PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
property in Arizona under rehabilitation containing approximately 118,000 leasable square feet. Development costs, excluding land costs of $8,992,000, for these properties totaled $27,105,000 through December 31, 1999.
Multifamily Properties
As of December 1999, the Company has under development three multifamily properties for active seniors in California (two in Southern California and one in Northern California) that will contain 669 units. Development costs for these properties totaled $3,505,000.
3. LOANS PAYABLE
The Company's loans payable at December 31, 1999 and 1998 consist of the following:
MORTGAGE NOTES
At December 31, 1999, the Company's conventional mortgage debt consists of 21 notes secured by industrial properties and active senior and multifamily apartments, due in monthly installments and maturing at various dates through September 2025. Certain of the Company's conventional mortgage note agreements contain cross-collateralization provisions (see schedule III). Approximately $173,951,000 or 18 conventional mortgage notes bear fixed rates of interest ranging from 6.78% to 8.50% per annum. The remaining three conventional mortgage notes totaling $5,977,000 bear a variable rate of interest based on the Federal Home Loan Bank 11th District Rate plus 2.8%. The weighted average interest rate of the Company's conventional mortgage debt at December 31, 1999 was 7.51%. During the year ended December 31, 1999, the Federal Home Loan Bank 11th District Rate ranged from 4.48% to 4.69% and was 4.67% at December 31, 1999.
At December 31, 1999, the Company's tax-exempt mortgage debt consists of eight notes totaling $64,333,000 that are secured by active senior properties and multifamily apartment properties. Seven of the tax-exempt mortgage notes totaling $55,352,000 and related bond financings are in a 30 year refunding agreement, which is backed by credit and liquidity support from guaranteed mortgage pass-through certificates issued by the Federal National Mortgage Association ("FNMA"). Standard & Poor's Rating Group assigned a rating of AAA to the bonds based on a collateral agreement with FNMA. The Company makes monthly principal and interest payments on the loans to a trustee, which in turn pays the bondholders when interest is due. The bonds are remarketed periodically and bear interest at fixed rates scheduled to increase from 3.75% to 5.20% through 2007. Principal payments on the loans are amortized based on
PACIFIC GULF PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
scheduled amounts over a 30-year period. As part of the refunding agreement, the Company is required to deposit impounds with the trustee for property taxes, property and liability insurance and reserves for capital replacements on a semiannual basis. Unamortized finance costs and fees related to the refunding agreement are included in other assets and totaled $2,976,000 and $1,462,000 at December 31, 1999 and 1998, respectively. The weighted average interest rate of the Company's tax-exempt mortgage notes backed by FNMA, at December 31, 1999, was 6.35%.
The Company's eighth tax-exempt mortgage note is a variable rate obligation supported by letters of credit from financial institutions. In 1999, the Company replaced the existing credit enhancement which was maturing with FNMA. At December 31, 1999 the principal amount of the debt was $8,981,000 and the interest rate was 5.04% at December 31, 1999.
CONSTRUCTION LOANS
At December 31, 1999 the Company has six construction loans, which are payable to a bank, and are secured by industrial properties under development. The construction loans bear interest at LIBOR + 1.30% to 1.525% or the reference rate payable monthly and mature between March 2000 and October 2001. Undisbursed funds on the construction loans at December 31, 1999 total $22,023,000. Upon completion of the properties, the Company has the option to convert the interest rate on the loans into a fixed rate of interest upon meeting certain conditions. At December 31, 1999, LIBOR was 5.835%.
UNSECURED 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 December 31, 1999 is LIBOR plus 1.30%.
The Company's Line of Credit contains certain debt covenants. The most significant covenants require the Company to maintain a minimum net worth, a leverage ratio based on a calculated asset value no greater than 50%, an interest coverage ratio in excess of 2.00 (measured on a quarterly basis) and a fixed charge coverage ratio of not less than 1.75. In addition, the Line of Credit contains a provision which limits the loan availability amount to approximately 58% of the value of the Company's unencumbered assets, less unsecured debt. As of December 31, 1999, the Company was in compliance with all debt covenants.
INTEREST RATE SWAP AGREEMENTS
The Company has interest rate swap agreements that effectively convert certain floating rate mortgage notes to a fixed-rate basis, thus reducing the impact on future earnings of fluctuations in interest rates. At December 31, 1999, the Company's interest rate swap agreements have notional amounts totaling $34,500,000 under which the Company pays fixed rates of interest and receives floating rates of interest based on an index that is reset weekly. The swap counterparties are all financial institutions rated AAA by Standard & Poor's. The rate differences to be paid or received are accrued and included in interest expense as a yield adjustment and the related payable or receivable from counterparties is included in accrued liabilities or other assets. The interest rate swap agreements mature in August, 2000.
PACIFIC GULF PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LOANS PAYABLE MATURITIES
The principal payments due on loans payable for each of the next five years ending December 31 and thereafter are summarized as follows:
4. CONVERTIBLE SUBORDINATED DEBENTURES
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.
The Company called for redemption of its remaining outstanding debenture of $5,273,000 on November 10, 1999. As of that date, $5,110,000 of the debentures called had converted into 274,373 shares of Common Stock. The Company redeemed the remaining $163,000 for cash.
5. BENEFIT PLANS
SHARE OPTION PLANS
The Company has stock options outstanding under share option plans as more fully described in the Company's proxy filed with the Securities and Exchange Commission. The Company's stock options consist of fixed and variable stock options as listed below. Fixed options vest over a specified period. Variable options are subject to performance based vesting criteria. Available shares under the Company's share option plans totaled 3,145,000 (including 300,000 reserved for non-employee directors). Approximately 845,000 of the Company's options, at an exercise price of $20.75 per share, were granted under a plan approved by the Board of Directors and is subject to shareholder approval.
PACIFIC GULF PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIXED STOCK OPTIONS
The stock options listed in the table below, except as noted, primarily vest in equal installments over a five-year period from the date of the grant and expire ten years from the original grant date.
- --------------- (a) 210,000 of options vest in equal installments over a three-year period from the date of the grant and expire ten years from the original grant date.
VARIABLE STOCK OPTIONS
A summary of the status of the Company's variable stock options as of December 31, 1999 and changes during the year is presented below:
Variable stock options will vest depending on achieving certain specified performance measures of the Company during the period July 1, 1999 through December 31, 2001. Subject to the shareholders approval discussed above vesting of such options will occur after December 31, 2001 (subject to earlier vesting in the event of a change in control of the Company or the death or disability of a participant). Measurement of the specified performance criteria and the determination of the number of options that will vest, if any, will occur at the end of 2001. Any variable options that do not vest will expire.
As described in Note 1, the Company adopted Statement SFAS No. 123 effective January 1, 1999. Accordingly, the Company accounts for all options granted after January 1, 1999 using the fair value method which resulted in compensation expense totaling $182,000 for the year ended December 31, 1999. Stock options granted after January 1, 1999 and accounted under SFAS No. 123 totaled 920,000, all of which are outstanding at December 31, 1999.
PACIFIC GULF PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company continues to account for options granted prior to January 1, 1999 using the previous standard (APB No. Opinion 25) which has resulted in no compensation costs being recorded. Stock options granted prior to January 1, 1999 and accounted under this Opinion No. 25 totaled 1,070,700, of which 1,000,914 are outstanding at December 31, 1999.
For disclosure purposes only, the Company has measured the compensation cost which would have been recognized had the fair value of the these pre-1999 options been used at the date of their grant for accounting purposes in accordance with SFAS No. 123. Based on such calculations, net income and earnings per share amounts would be approximately the same as the amounts reported by the Company. The fair value of all options at date of grant was estimated using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest of 5.51%; a dividend yield of 8.60%; a volatility factor for the price of the Company's common shares of .210 and expected lives for the options of ten years.
RESTRICTED STOCK AWARDS
The Company awards restricted stock to its employees for compensation purposes. Compensation expense related to restricted stock awards is measured based on the market price of the stock on the date of the grant, and is expensed ratably over the vesting period of each award with the unamortized portion reflected as outstanding restricted stock in the shareholders' equity section in the Company's balance sheets.
The restricted stock awards listed in the table below were awarded to employees based on performance and vest over periods ranging between one to seven years.
At December 31, 1999 and 1998, the unamortized amount of outstanding restricted stock issued to employees which will be charged to compensation expense in future periods totaled $1,193,000 and $1,203,000, respectively.
THRIFT PLAN
The Company has a thrift plan under which employees may elect to contribute up to 21% of their annual compensation, excluding bonuses, on a combination before-and-after tax basis. Contributions by the employee are matched by the Company at a 75% rate with total matching contributions not exceeding 4 1/2% of the contributing employee's annual compensation up to a maximum of 6% of compensation. Matching contributions and employee contributions are invested in a fixed income fund, various growth funds, or a combination thereof, according to the employee's choice. The thrift plan provides for 20% vesting of contributions by the Company for each full year of service, increasing to 100% vesting after five years of service. Contributions made by the Company to the thrift plan for the years ended December 31, 1999, 1998 and 1997 totaled $107,000, $113,000, and $29,000 respectively.
PACIFIC GULF PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RETIREMENT INCOME PLAN
The Company has a defined benefit retirement plan for full time employees who are at least 21 years of age with one or more years of service. Plan assets consist of investments in a life insurance group annuity contract. Plan benefits are based primarily on years of service and qualifying compensation during the final years of employment. Funding requirements comply with federal requirements that are imposed by law. The Company has adopted Statement No. 132, Employers' Disclosures About Pensions and Other Post-Retirement Benefits, in 1998. Accordingly, the following information reflects the required disclosures pursuant to that Statement.
Net periodic pension cost related to the retirement income plan includes amortization of past service cost over a remaining period of 26 years. Based upon actuarial valuation dates as of December 31, 1999 and 1998, the benefit obligations were $2,040,000 and $1,878,000, respectively, and the plan's net assets available for benefits were $1,392,000 in 1999 and $1,142,000 in 1998.
The Company's net periodic pension cost included in general and administrative expenses for the years ended December 31, 1999, 1998, and 1997 consists of the following components:
PACIFIC GULF PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the plan's funded status for the fiscal years ending December 31, 1999 and 1998:
Assumptions used in determining the status of the Company's retirement income plan are as follows:
DEFERRED COMPENSATION AGREEMENTS
In conjunction with its initial public offerings, the Company assumed the deferred compensation obligations attributable to employees who were previously employed by its predecessor. Deferred compensation agreements were provided to selected management employees with a fixed benefit at retirement. Benefits were based primarily on years of service and qualifying compensation during the final years of employment. During 1995, the deferred compensation agreements were substantially replaced with restricted stock.
PACIFIC GULF PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. CONSOLIDATED REAL ESTATE PARTNERSHIPS
The Company's consolidated partnerships include the following:
PGP Inland Communities, L.P.
PGP Inland Communities, L.P., a Delaware limited partnership (the "Partnership") was formed by the Company in August 1995 for the purpose of acquiring and operating 11 multifamily properties consisting of 1,368 apartment units located in Southern California (the "Properties") which were contributed by unrelated parties. In exchange for contributing the Properties to the Partnership, the unrelated parties received approximately 225,452 limited partnership units representing an initial ownership interest of approximately 22%. The Company is the sole general partner in the Partnership and currently holds an ownership interest of approximately 84%. The terms of the Partnership agreement provide that all net income (and cash flow) from the Properties be allocated (distributed) to the Company until the Properties have achieved a threshold net operating income of $6,200,000 for any given year, and cumulatively for all prior years. The Partnership's results of operations since 1995 have been fully allocated to the Company. Beginning in August 1997, the Partnership's limited partnership units can be tendered for redemption on a one-for-one basis for cash or for shares of common stock at the election of the Company. As of December 31, 1999, 55,920 of these units have been tendered for cash, the cost of which has been capitalized to the properties.
Terrace Gardens -- PGP L.P. and Morning View Terrace -- PGP L.P.
In June 1997, the Company, through its subsidiaries, PGP Terrace Gardens Holdings Inc. and PGP Morning View Terrace Holdings Inc., acquired a controlling general partner interest in two existing limited partnerships ("Terrace Gardens" and "Morning View") that own two adjacent active seniors apartment communities located in Escondido, California. The properties contain an aggregate of 551 apartment units. Following the acquisition, the Company became the sole general partner of the existing limited partnerships (Terrace Gardens -- PGP L.P. and Morning View Terrace -- PGP L.P.) that own and manage the properties. The existing partners of the partnerships received an aggregate of approximately 266,000 limited partnership units in such partnerships valued at $5,596,000. Beginning in June 1999, the limited partnership units can be tendered for redemption to the Company. Upon tender, the Company, at its election, may either issue common shares for the units on a one-for-one basis (subject to certain adjustments) or pay cash for the units based on the then fair market value of the Company's common shares. Since 1997, approximately 129,000 limited partnership units were tendered for cash, the cost of which was capitalized to the properties. As a result of the tender, the Company currently holds an ownership interest of approximately 58% and 59% in Terrace Gardens -- PGP L.P and Morning View Terrace -- PGP L.P., respectively. Net income from the partnerships is allocated to the limited partners based on an amount equal to the Company's dividend rate on common stock applied to the number of limited partnership units held by stock partners and the remaining income is allocated to the Company. Distributions are made to the extent of cash flow available.
PGP Northern Industrial L.P.
On October 20, 1997, the Company acquired a controlling general partner interest in PGP Northern Industrial L.P., a California limited partnership ("PGP Northern")which owns two industrial properties ("Eden Plaza/Eden Industrial") containing approximately 501,000 leasable square feet located in Hayward, California. The Company acquired such interest for a cash contribution of approximately $3,977,000. The previous owners of Eden Plaza/Eden Industrial became limited partners in PGP Northern and received 143,391 limited partnership units valued at $2,869,000 in exchange for the contribution of the two industrial properties. The limited partnership units can be tendered for redemption to the Company. Upon tender, the Company, at its election, may either issue common shares for the units on a one-for-one basis (subject to certain adjustments) or pay cash for the units based on the then fair market value of the common shares. At
PACIFIC GULF PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, the Company holds an ownership interest of approximately 59%. Net income from the partnership is allocated to the limited partners based on an amount equal to the Company's dividend rate on common stock applied to the number of limited partnership units held by such partners and the remaining income is allocated to the Company. Distributions are made to the extent of cash flow available.
PGP Southern Industrial II, L.P.
On March 13, 1998, the company acquired a controlling general partner interest in PGP Southern Industrial II, L.P., a California limited partnership ("PGP Southern") which owns a 168,000 square foot distribution facility located in Garden Grove, California. The other partner in the partnership received an aggregate of 404,950 limited partnership units in the partnership for an aggregate value of $9,000,000. Beginning in March, 1999 the limited partnership units can be tendered for redemption to the Company. Upon tender, the Company, at its election, may either issue common shares for the units on a one-for-one basis (subject to certain adjustments) or pay cash for the units based on the then fair market value of the common shares. Net income from the partnerships is allocated to the limited partners based on an amount equal to the Company's dividend rate on common stock applied to the number of limited partnership units held by stock partners and the remaining income is allocated to the Company. Distributions are made to the extent of cash flow available.
Condensed unaudited combined financial information for the consolidated real estate partnerships as of December 31, 1999 and 1998 and for the years ended December 31, 1999, 1998 and 1997 follows:
PACIFIC GULF PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
GENERAL MATTERS
The Company's commitments and contingencies include the usual obligations of real estate owners and operators in the normal course of business. In the opinion of management, these matters will not have a material adverse effect on the Company's consolidated financial statements.
As of December 31, 1999, 11% of the apartment units within the Company's multifamily properties were required to be set aside for residents within certain income levels and had limitations on the rent that could be charged to such tenants.
GROUND LEASE COMMITMENTS
One of the Company's industrial properties is subject to a ground lease that expires in July 2035 which is accounted for as an operating lease. Monthly ground lease payments total $22,000 and are subject to increases based on the Consumer Price Index, with the next adjustment in September 2000. Ground lease payments during 1999 and 1998 totaled $261,000 in each year. Two other ("PGBP -- Irvine" and "PGBP -- Cerritos") industrial properties acquired in December 1997 are subject to ground leases which expire in August 2029 and April 2034, respectively. Monthly ground lease payments total $36,000 and $43,000 and are subject to increases based on the Consumer Price Index, with the next adjustment in April 2009 and October 2004 for Irvine and Cerritos, respectively. Ground lease payments during 1999 and 1998 on the Irvine property totaled $430,000 and $303,000 respectively and ground lease payments on the Cerritos property totaled $473,000 and $455,000, respectively. During June 1998, the Company acquired a property in Tustin which is subject to a ground lease which expires in January 2044. Annual ground lease payments in the amount of $101,000 are due in January of each year; such payments are expected to increase in January 2001 based on a reappraisal of the land value.
The minimum future ground lease payments to be made for each of the next five years ending December 31 and thereafter, are summarized as follows:
LETTER OF CREDIT
In December 1998 in conjunction with the sale of the Company's Washington apartment communities, the Company restructured the existing indebtedness on the Hampton Bay apartment community. The lender, a life insurance company, released the Hampton Bay property as collateral and accepted a letter of credit in the amount of $9,400 000 as substitution collateral. The Company replaced the letter of credit by providing its City of Industry industrial project as replacement collateral in May 1999.
8. CAPITAL STOCK
COMMON SHARES
In May 1998, the shareholders voted to approve an amendment to the Company's Articles of Amendment and Restatement as filed with Maryland's State Department of Assessments and Taxation (the "Charter") that increased the number of authorized shares of Common Stock, par value $.01 per share from 25,000,000 shares to 100,000,000 shares, and to eliminate the 30,000,000 of Excess Stock authorized.
PACIFIC GULF PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SHELF REGISTRATION STATEMENT
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 December 1999 was $300,000,000.
During 1997, the Company filed a shelf registration statement with the Securities and Exchange Commission for an aggregate amount of $250,000,000, covering the proposed issuance of debt, preferred or common stock securities and warrants to purchase such securities of the Company (the "1997 Shelf Registration Statement"). The 1997 Shelf Registration Statement was declared effective April 11, 1997 by the Securities and Exchange Commission. Availability under the 1997 Shelf Registration Statement at December 31, 1999 was $56,126,000.
PREFERRED STOCK
In May 1998, the shareholders voted to approve an amendment to the Company's Charter that (a) increased the authorized number of shares of Preferred Stock, par value $.01 per share (the "Preferred Stock"), from 5,000,000 shares to 10,000,000 shares and (b) reclassified the issued and outstanding shares of Class B Preferred Stock as additional shares of Class A Preferred Stock and changed the liquidation preference of the Class A Preferred Stock to $19.91 per share to reflect the economic terms of such reclassification of the Class B Preferred Stock.
The Class A Preferred Stock are convertible into shares of common stock, on a one-for-one basis, subject to adjustment upon certain events. The annual dividend per share on the Class A Preferred Stock is $1.70 from the date of issuance until December 31, 1997 and thereafter, the greater of $1.70 per share or 104% of the then current dividend on the Company's common stock. At its option, the Company may redeem the Class A Preferred Stock beginning December 31, 2001 for cash at a premium of 6% over the initial $18.50 per share liquidation value, decreasing to zero % by December 31, 2009. The Class A Preferred Stock, or any shares of common stock into which such Class A Preferred Stock could be converted, were nontransferable until June 30, 1998.
9. GAINS ON SALE OF REAL ESTATE
In December 1999, the Company sold a 16,848 square foot industrial property located in Concord, California for $1,400,000. The net gain recognized was $106,000.
In October 1999, the Company sold a 302,020 square foot industrial property located in Ontario, California for $11,160,000. The net gain recognized was $2,514,000.
In August 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 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 locate 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 February 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.
PACIFIC GULF PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In December 1998, the Company sold five apartment properties located in Washington consisting of 1,322 apartment units for $78,500,000 and recognized a gain on sale of $28,913,000.
In September 1998, the Company sold an apartment property located in Washington consisting of 234 apartment units for $13,525,000 and recognized a gain on sale of $6,379,000.
In December 1997, the Company sold an apartment property located in Oregon consisting of 279 apartment units for $15,575,000 and recognized a gain on sale of $5,705,000.
In April 1997, the Company sold its 7,000 square foot Corporate office in Newport Beach, California for $850,000 and recognized a loss on the sale of $111,000. The Company has relocated to a newly acquired 26,000 square foot facility also located in Newport Beach, California.
10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings (loss) per share which have been restated to comply with Statement No. 128:
Shares of senior cumulative convertible preferred stock, convertible into 2,763,116 shares of common stock, were issued and outstanding during 1999 and 1997 but were not included in computing diluted earnings per share. Including these shares of preferred stock in the computations increases earnings per share $.01, and are therefore considered antidilutive. Convertible subordinated debentures, convertible into 682,000 shares of common stock, were outstanding during 1997, but were not included in the computation of diluted earnings per share because the effect would be antidilutive.
11. 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.
PACIFIC GULF PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 both 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 $76,718,000, $59,525,000 and $28,198,000 for the years ended December 31, 1999, 1998 and 1997, respectively. NOI from multifamily properties totaled $16,546,000, $23,107,000 and $20,342,000 for the years ended 1999, 1998 and 1997, respectively.
All revenues are from external customers and no revenues are generated from transactions between segments. There are no tenants which contributed 10% or more of the Company's total revenues during 1999, 1998 or 1997. 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.
12. SELECTED QUARTERLY DATA (UNAUDITED)
The following tables set forth the quarterly results of operations of the Company for the years ended December 31, 1999 and 1998:
SCHEDULE III
PACIFIC GULF PROPERTIES INC. REAL ESTATE AND ACCUMULATED DEPRECIATION
SCHEDULE III
PACIFIC GULF PROPERTIES INC. REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
SCHEDULE III
PACIFIC GULF PROPERTIES INC. REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
(a) The changes in total real estate for the years ended December 31, 1999, 1998 and 1997 area as follows:
(b) The changes in accumulated depreciation for the years ended December 31, 1999, 1998 and 1997 are as follows:
(c) A portion of this property is currently under development.
(d) These properties collateralize borrowings under the same mortgage note payable totaling $24,500,000.
(e) These properties collateralize borrowings under the same mortgage note payable totaling $11,639,000.
(f) These properties collateralize borrowings under the same mortgage note payable totaling $33,973,000.
(g) Excludes construction loans of $50,432,000.
EXHIBIT INDEX
- --------------- (1) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
(2) Incorporated by reference from the Company's Annual Report on Form 10-K of the Company for the year ended December 31, 1997.
(3) Incorporated by reference from the Company's Annual Report on Form 10-K of the Company for the year ended December 31, 1995.
(4) Incorporated by reference from the Company's registration statement on Form S-3 (33-92082) filed on May 9, 1995.
(5) Incorporated by reference from the Company's Current Report on Form 8-K filed on January 14, 1997.
(6) Incorporated by reference from the Company's Proxy Statement filed on or about April 5, 1996.
(7) Incorporated by reference form the Company's Current Report on Form 8-K filed on June 26, 1997.
(8) Incorporated by reference from the Company's registration statement on Form 8-A filed on December 17, 1997.
(9) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
(10) Incorporated by reference from the Company's Current Report on Form 8-K filed on January 7, 1999.
(11) Incorporated by reference from the Company's Proxy Statement filed on or about April 16, 1998.
(12) Incorporated by reference from the Company's Proxy Statement filed on or about April 7, 1997.