10-K

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

 

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014.

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                

Commission File Number 1-10709

PS BUSINESS PARKS, INC.

(Exact name of registrant as specified in its charter)

 

California   95-4300881

(State or other jurisdiction of

incorporation or organization)

  (I.R.S. Employer Identification No.)

701 Western Avenue, Glendale, California 91201-2349

(Address of principal executive offices) (Zip Code)

818-244-8080

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

  

Name of Each Exchange on Which Registered

Common Stock, $0.01 par value per share

   New York Stock Exchange

Depositary Shares Each Representing 1/1,000 of a Share of

6.875% Cumulative Preferred Stock, Series R, $0.01 par value per share

   New York Stock Exchange

Depositary Shares Each Representing 1/1,000 of a Share of

6.450% Cumulative Preferred Stock, Series S, $0.01 par value per share

   New York Stock Exchange

Depositary Shares Each Representing 1/1,000 of a Share of

6.000% Cumulative Preferred Stock, Series T, $0.01 par value per share

   New York Stock Exchange

Depositary Shares Each Representing 1/1,000 of a Share of

5.750% Cumulative Preferred Stock, Series U, $0.01 par value per share

   New York Stock Exchange

Depositary Shares Each Representing 1/1,000 of a Share of

5.700% Cumulative Preferred Stock, Series V, $0.01 par value per share

   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  þ    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨    No  þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§232.405) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

        Large accelerated filer þ      Accelerated filer ¨  
        Non-accelerated filer ¨      Smaller reporting company ¨  
        (Do not check if a smaller reporting company)       

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

As of June 30, 2014, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $1,625,742,494 based on the closing price as reported on that date.

Number of shares of the registrant’s common stock, par value $0.01 per share, outstanding as of February 16, 2015 (the latest practicable date): 26,919,161.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement to be filed in connection with the Annual Meeting of Shareholders to be held in 2015 are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 


PART I

ITEM 1. BUSINESS

Forward-Looking Statements

Forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, are made throughout this Annual Report on Form 10-K. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “may,” “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” “intends,” and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including but not limited to: (a) changes in general economic and business conditions; (b) decreases in rental rates or increases in vacancy rates/failure to renew or replace expiring leases; (c) tenant defaults; (d) the effect of the recent credit and financial market conditions; (e) our failure to maintain our status as a real estate investment trust (“REIT”); (f) the economic health of our tenants; (g) increases in operating costs; (h) casualties to our properties not covered by insurance; (i) the availability and cost of capital; (j) increases in interest rates and its effect on our stock price; (k) other factors discussed under the heading Item 1A, “Risk Factors”. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. Moreover, we assume no obligation to update these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements, except as required by law.

The Company

PS Business Parks, Inc. (“PSB”) is a fully-integrated, self-advised and self-managed REIT that owns, operates, acquires and develops commercial properties, primarily multi-tenant flex, office and industrial parks. PS Business Parks, L.P. (the “Operating Partnership”) is a California limited partnership, which owns directly or indirectly substantially all of our assets and through which we conduct substantially all of our business. Unless otherwise indicated or unless the context requires otherwise, all references to “the Company,” “we,” “us,” “our,” and similar references mean PS Business Parks, Inc. and its subsidiaries, including the Operating Partnership. PSB is the sole general partner of the Operating Partnership and, as of December 31, 2014, owned 77.8% of the common partnership units. The remaining common partnership units are owned by Public Storage (“PS”). Assuming issuance of PSB common stock upon redemption of the common partnership units held by PS, PS would own 42.3% (or 14.5 million shares) of the outstanding shares of the Company’s common stock. PSB, as the sole general partner of the Operating Partnership, has full, exclusive and complete responsibility and discretion in managing and controlling the Operating Partnership.

As of December 31, 2014, the Company owned and operated 28.6 million rentable square feet of commercial space, comprising 103 business parks, concentrated primarily in the following states: California, Florida, Maryland, Texas, Virginia and Washington. The Company focuses on owning concentrated business parks which provide the Company with the greatest flexibility to meet the needs of its customers. The Company also manages 1.1 million rentable square feet on behalf of PS.

History of the Company: The Company was formed in 1990 as a California corporation under the name Public Storage Properties XI, Inc. In a March 17, 1998 merger with American Office Park Properties, Inc. (“AOPP”) (the “Merger”), the Company acquired the commercial property business operated by AOPP and was renamed “PS Business Parks, Inc.” Prior to the Merger, in January, 1997, AOPP was reorganized to succeed to the commercial property business of PS, becoming a fully integrated, self-advised and self-managed REIT.

 

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From January, 2012 through December, 2014, the Company acquired 3.4 million square feet of multi-tenant flex, office and industrial parks, which comprise the Non-Same Park portfolio as defined on page 30, for an aggregate purchase price of $213.6 million. The table below reflects the assets acquired during this period (in thousands):

 

Property

   Date Acquired      Location      Purchase
Price
     Square
Feet
     Occupancy at
December 31, 2014
 

Charcot Business Park II

     December, 2014         San Jose, California       $ 16,000        119        96.7

McNeil 1

     November, 2014         Austin, Texas         10,550        246        53.3

Springlake Business Center II

     August, 2014         Dallas, Texas         5,148        145        39.6

Arapaho Business Park 9

     July, 2014         Dallas, Texas         1,134        19        100.0

MICC — Center 23

     July, 2014         Miami, Florida         12,725        149        100.0
        

 

 

    

 

 

    

Total 2014 Acquisitions

           45,557        678        69.5
        

 

 

    

 

 

    

Bayshore Corporate Center

     December, 2013         San Mateo, California         60,500        340        84.8

Valwood Business Park

     November, 2013         Dallas, Texas         12,425        245        88.3

Dallas Flex Portfolio

     October, 2013         Dallas, Texas         27,900        559        77.5

Arapaho Business Park

     July, 2013         Dallas, Texas         14,750        389        87.7
        

 

 

    

 

 

    

Total 2013 Acquisitions

           115,575        1,533        83.5
        

 

 

    

 

 

    

Austin Flex Buildings

     December, 2012         Austin, Texas         14,900        226        100.0

212th Business Park

     July, 2012         Kent Valley, Washington         37,550        958        91.6
        

 

 

    

 

 

    

Total 2012 Acquisitions

           52,450        1,184        93.2
        

 

 

    

 

 

    

Total

         $ 213,582        3,395        84.2
        

 

 

    

 

 

    

At the beginning of 2013, the Company reclassified a 125,000 square foot building located in Northern Virginia to land and building held for development as the Company intends to redevelop the property. In conjunction with the reclassification, the Company ceased depreciation of the asset. In July, 2013, the Company entered into a joint venture agreement, which it will maintain a 95.0% economic interest in, with a real estate development company to pursue a multi-family development on the property. During the entitlement phase, all costs related to the pre-development will be split evenly between the Company and its joint venture partner. Subsequent to December 31, 2014, the Company received entitlements which allow it to develop a multi-family building up to 450,000 square feet on the property. The property will be contributed to the joint venture upon commencement of construction, which will occur in 2015. The asset and capitalized development costs were $18.4 million and $16.2 million at December 31, 2014 and December 31, 2013, respectively, which includes the Company’s basis in the land. For the years ended December 31, 2014 and 2013, the Company capitalized costs of $2.2 million and $752,000, respectively, related to this development, of which $944,000 and $359,000, respectively, related to capitalized interest costs.

On November 21, 2014, the Company completed the sale of three business parks, consisting of 42 buildings aggregating 656,000 square feet, located in Phoenix, Arizona, for net proceeds of $52.2 million, resulting in a net gain of $29.6 million.

On October 1, 2014, the Company completed the sale of two business parks, Cornell Oaks Corporate Center and Creekside Corporate Park along with 11.5 acres of adjacent land, located in Beaverton, Oregon, for net proceeds of $159.9 million, resulting in a net gain of $62.8 million. The parks consist of 18 buildings aggregating 1.2 million square feet.

In October, 2012, the Company completed the sale of Quail Valley Business Park, a 66,000 square foot flex park in Houston, Texas, for a gross sales price of $2.3 million, resulting in a net gain of $935,000.

From 1998 through 2011, the Company acquired 23.7 million square feet of commercial space, developed an additional 575,000 square feet and sold 2.2 million square feet along with some parcels of land.

As of December 31, 2014, the Company has 125,000 square feet of assets held for sale which the Company expects to sell in 2015.

The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 1990. To the extent that the Company continues to qualify as a REIT, it will not be taxed, with certain limited exceptions, on the net income that is currently distributed to its shareholders.

 

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The Company’s principal executive offices are located at 701 Western Avenue, Glendale, California 91201-2349. The Company’s telephone number is (818) 244-8080. The Company maintains a website with the address www.psbusinessparks.com. The information contained on the Company’s website is not a part of, or incorporated by reference into, this Annual Report on Form 10-K. The Company makes available free of charge through its website its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after the Company electronically files such material with, or furnishes such material to, the Securities and Exchange Commission (the “SEC”).

Business of the Company: The Company is in the commercial property business, with 103 business parks consisting of multi-tenant flex, industrial and office space. The Company owns 15.1 million square feet of flex space. The Company defines “flex” space as buildings that are configured with a combination of warehouse and office space and can be designed to fit a wide variety of uses. The warehouse component of the flex space has a number of uses including light manufacturing and assembly, storage and warehousing, showroom, laboratory, distribution and research and development activities. The office component of flex space is complementary to the warehouse component by enabling businesses to accommodate management and production staff in the same facility. The Company owns 8.8 million square feet of industrial space that has characteristics similar to the warehouse component of the flex space as well as ample dock access. In addition, the Company owns 4.6 million square feet of low-rise office space, generally either in business parks that combine office and flex space or in submarkets where the market demand is more office focused.

The Company’s commercial properties typically consist of business parks with low-rise buildings, ranging from one to 49 buildings per park, located on parcels of various sizes which comprise from nearly 12,000 to 3.5 million aggregate square feet of rentable space. Facilities are managed through either on-site management or offices central to the facilities. Parking is generally open but in some instances is covered. The ratio of parking spaces to rentable square feet ranges from two to six per thousand square feet depending upon the use of the property and its location. Office space generally requires a greater parking ratio than most industrial uses. The Company may acquire properties that do not have these characteristics.

The tenant base for the Company’s facilities is diverse. The portfolio can be bifurcated into those facilities that service small to medium-sized businesses and those that service larger businesses. Approximately 35.6% of in-place rents from the portfolio are derived from facilities that serve small to medium-sized businesses. A property in this facility type is typically divided into units ranging in size from 500 to 4,999 square feet and leases generally range from one to three years. The remaining 64.4% of in-place rents from the portfolio are derived from facilities that serve larger businesses, with units greater than or equal to 5,000 square feet. The Company also has several tenants that lease space in multiple buildings and locations. The U.S. Government is the largest tenant with multiple leases encompassing approximately 845,000 square feet or 5.9% of the Company’s annualized rental income.

The Company currently owns operating properties concentrated primarily in six states and it may expand its operations to other states or reduce the number of states in which it operates. Properties are acquired for both income and potential capital appreciation; there is no limitation on the amount that can be invested in any specific property.

The Company owns land which may be used for the development of commercial properties. The Company owns approximately 14.0 acres of such land in Dallas, Texas and 6.4 acres in Northern Virginia as of December 31, 2014.

Operating Partnership

The properties in which the Company has an equity interest generally are owned by the Operating Partnership. Through this organizational structure, the Company has the ability to acquire interests in additional properties in transactions that could defer the contributors’ tax consequences by causing the Operating Partnership to issue equity interests in return for interests in properties.

The Company is the sole general partner of the Operating Partnership. As of December 31, 2014, the Company owned 77.8% of the common partnership units of the Operating Partnership, and the remainder of such common partnership units were owned by PS. The common units owned by PS may be redeemed by PS from

 

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time to time, subject to the provisions of our charter, for cash or, at our option, shares of our common stock on a one-for-one basis. Also as of December 31, 2014, in connection with the Company’s issuance of publicly traded Cumulative Preferred Stock, the Company owned 39.8 million preferred units of the Operating Partnership of various series with an aggregate redemption value of $995.0 million with terms substantially identical to the terms of the publicly traded depositary shares each representing 1/1,000 of a share of 5.700% to 6.875% Cumulative Preferred Stock of the Company.

As the general partner of the Operating Partnership, the Company has the exclusive responsibility under the Operating Partnership Agreement to manage and conduct the business of the Operating Partnership. The Board of Directors directs the affairs of the Operating Partnership by managing the Company’s affairs. The Operating Partnership is responsible for, and pays when due, its share of all administrative and operating expenses of the properties it owns.

The Company’s interest in the Operating Partnership entitles it to share in cash distributions from, and the profits and losses of, the Operating Partnership in proportion to the Company’s economic interest in the Operating Partnership (apart from tax allocations of profits and losses to take into account pre-contribution property appreciation or depreciation). The Company, since 1998, has paid per share dividends on its common and preferred stock that track, on a one-for-one basis, the amount of per unit cash distributions the Company receives from the Operating Partnership in respect of the common and preferred partnership units in the Operating Partnership that are owned by the Company.

Common Officers and Directors with PS

Ronald L. Havner, Jr., Chairman of the Company, is also the Chairman of the Board, Chief Executive Officer and President of PS. Gary E. Pruitt, an independent director of the Company is also a trustee of PS. Other employees of PS render services to the Company pursuant to the cost sharing and administrative services agreement.

Property Management Services

The Company manages commercial properties owned by PS, which are generally adjacent to self-storage facilities, for a management fee of 5% of the gross revenues of such properties in addition to reimbursement of direct costs. The property management contract with PS is for a seven-year term with the agreement automatically extending for an additional one-year period upon each one-year anniversary of its commencement (unless cancelled by either party). Either party can give notice of its intent to cancel the agreement upon expiration of its current term. Management fee revenue derived from this management contract with PS totaled $660,000, $639,000 and $649,000 for the years ended December 31, 2014, 2013 and 2012, respectively.

PS also provides property management services for the self-storage component of two assets owned by the Company. These self-storage facilities, located in Palm Beach County, Florida, operate under the “Public Storage” name. Either the Company or PS can cancel the property management contract upon 60 days’ notice. Management fee expenses under the contract were $70,000, $59,000 and $55,000 for the years ended December 31, 2014, 2013 and 2012, respectively.

Management

Joseph D. Russell, Jr. leads the Company’s senior management team. Mr. Russell is President and Chief Executive Officer of the Company. The Company’s senior management includes: John W. Petersen, Executive Vice President and Chief Operating Officer; Edward A. Stokx, Executive Vice President and Chief Financial Officer; Maria R. Hawthorne, Executive Vice President and Chief Administrative Officer; Christopher M. Auth, Vice President (Washington Metro Division); Trenton A. Groves, Vice President and Corporate Controller; Coby A. Holley, Vice President, Acquisitions and Dispositions; Robin E. Mather, Vice President (Southern California Division); Eddie F. Ruiz, Vice President and Director of Facilities; Viola I. Sanchez, Vice President (Southeast Division); Richard E. Scott, Vice President (Northern California Division); Eugene Uhlman, Vice President, Construction Management; and David A. Vicars, Vice President (Midwest Division).

 

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REIT Structure

If certain detailed conditions imposed by the Code and the related Treasury Regulations are met, an entity, such as the Company, that invests principally in real estate and that otherwise would be taxed as a corporation may elect to be treated as a REIT. The most important consequence to the Company of being treated as a REIT for federal income tax purposes is that the Company can deduct dividend distributions (including distributions on preferred stock) to its shareholders, thus effectively eliminating the “double taxation” (at the corporate and shareholder levels) that typically results when a corporation earns income and distributes that income to shareholders in the form of dividends.

The Company believes that it has operated, and intends to continue to operate, in such a manner as to qualify as a REIT under the Code, but no assurance can be given that it will at all times so qualify. To the extent that the Company continues to qualify as a REIT, it will not be taxed, with certain limited exceptions, on the taxable income that is distributed to its shareholders.

Operating Strategy

The Company believes its operating, acquisition and finance strategies combined with its diversified portfolio produces a low risk, stable growth business model. The Company’s primary objective is to grow shareholder value. Key elements of the Company’s growth strategy include:

Maximize Net Cash Flow of Existing Properties: The Company seeks to maximize the net cash flow generated by its properties by (i) maximizing average occupancy rates, (ii) achieving the highest possible levels of realized rents per occupied square foot, (iii) controlling its operating cost structure by improving operating efficiencies and economies of scale and (iv) minimizing recurring capital expenditures required to maintain and improve occupancy. The Company believes that its experienced property management personnel and comprehensive systems combined with increasing economies of scale enhance the Company’s ability to meet these goals. The Company seeks to increase occupancy rates and realized rents per square foot by providing its field personnel with incentives to lease space to credit tenants and to maximize the return on investment in each lease transaction.

Focus on Targeted Markets: The Company intends to continue investing in markets that have characteristics which enable them to be competitive economically. The Company believes that markets with some combination of above average population growth, job growth, higher education levels and personal income will produce better overall economic returns. The Company targets parks in high barrier to entry markets that are close to critical infrastructure, middle to high income housing or universities and have easy access to major transportation arteries.

Reduce Capital Expenditures and Increase Occupancy Rates by Providing Flexible Properties and Attracting a Diversified Tenant Base: By focusing on properties with easily reconfigurable space, the Company believes it can offer facilities that appeal to a wide range of potential tenants, which aids in reducing the capital expenditures associated with re-leasing space. The Company believes this property flexibility also allows it to better serve existing tenants by accommodating expansion and contraction needs. In addition, the Company believes that a diversified tenant base combined with flexible parks helps it maintain occupancy rates by enabling it to attract a greater number of potential users to its space.

Provide Superior Property Management: The Company seeks to provide a superior level of service to its tenants in order to maintain occupancy and increase rental rates, as well as minimize customer turnover. The Company’s property management offices are located either on-site or regionally, providing tenants with convenient access to management and helping the Company maintain its properties and while conveying a sense of quality, order and security. The Company has significant experience in acquiring properties managed by others and thereafter improving tenant satisfaction, occupancy levels, retention rates and rental income by implementing established tenant service programs.

 

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Financing Strategy

The Company’s primary objective in its financing strategy is to maintain financial flexibility and a low risk capital structure. Key elements of this strategy are:

Retain Operating Cash Flow: The Company seeks to retain significant funds (after funding its distributions and capital improvements) for additional investments. During the years ended December 31, 2014 and 2013, the Company distributed 42.3% and 34.3%, respectively, of its funds from operations (“FFO”) to common shareholders/unit holders. FFO is computed in accordance with the White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). The White Paper defines FFO as net income, computed in accordance with U.S. generally accepted accounting principles (“GAAP”), before depreciation, amortization, gains or losses on asset dispositions, net income allocable to noncontrolling interests — common units, net income allocable to restricted stock unit holders, impairment charges and nonrecurring items. FFO is a non-GAAP financial measure and should be analyzed in conjunction with net income. However, FFO should not be viewed as a substitute for net income as a measure of operating performance as it does not reflect depreciation and amortization costs or the level of capital expenditure and leasing costs necessary to maintain the operating performance of the Company’s properties, which are significant economic costs and could materially impact the Company’s results of operations. Other REITs may use different methods for calculating FFO and, accordingly, the Company’s FFO may not be comparable to other real estate companies’ funds from operations. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Non-GAAP Supplemental Disclosure Measure: Funds from Operations,” for a reconciliation of FFO and net income allocable to common shareholders and for additional information on why the Company presents FFO.

Perpetual Preferred Stock/Units: The primary source of leverage in the Company’s capital structure is perpetual preferred stock or equivalent preferred units in the Operating Partnership. This method of financing eliminates interest rate and refinancing risks as the dividend rate is fixed and the stated value or capital contribution is not required to be repaid. In addition, the consequences of defaulting on required preferred distributions are less severe than with debt. The preferred shareholders may elect two additional directors if six quarterly distributions go unpaid, whether or not consecutive.

Throughout this Form 10-K, we use the term “preferred equity” to mean both the preferred stock issued by the Company (including the depositary shares representing interests in that preferred stock) and the preferred partnership units issued by the Operating Partnership and the term “preferred distributions” to mean dividends and distributions on the preferred stock and preferred partnership units.

Debt Financing: The Company, from time to time, has used debt financing to facilitate real estate acquisitions and other capital allocations. The primary source of debt the Company has historically relied upon to provide short-term capital is its $250.0 million unsecured line of credit (the “Credit Facility”). In addition, during 2011, in connection with its $520.0 million portfolio acquisition in Northern California, the Company obtained a $250.0 million unsecured three-year term loan and assumed a $250.0 million mortgage note. During 2013, the Company repaid the remaining balance of $200.0 million on the unsecured three-year term loan. The $250.0 million mortgage note is an interest only mortgage that matures December, 2016.

Access to Capital: The Company targets a minimum ratio of FFO to combined fixed charges and preferred distributions paid of 3.0 to 1.0. Fixed charges include interest expense and capitalized interest while preferred distributions include amounts paid to preferred shareholders and preferred Operating Partnership unit holders. For the year ended December 31, 2014, the FFO to combined fixed charges and preferred distributions paid ratio was 3.2 to 1.0. The Company believes that its financial position enables it to access capital to finance future growth. Subject to market conditions, the Company may add leverage to its capital structure.

Competition

Competition in the market areas in which many of the Company’s properties are located is significant and has from time to time reduced the occupancy levels and rental rates of, and increased the operating expenses of, certain of these properties. Competition may be accelerated by any increase in availability of funds for investment in real estate. Barriers to entry are relatively low for those with the necessary capital and the

 

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Company competes for property acquisitions and tenants with entities that have greater financial resources than the Company. Sublease space and unleased developments are expected to continue to provide competition among operators in certain markets in which the Company operates. While the Company will have to respond to market demands, management believes that the combination of its ability to offer a variety of options within its business parks and the Company’s financial stability provide it with an opportunity to compete favorably in its markets.

The Company’s properties compete for tenants with similar properties located in its markets primarily on the basis of location, rent charged, services provided and the design and condition of improvements. The Company believes it possesses several distinguishing characteristics that enable it to compete effectively in the flex, office and industrial space markets. The Company believes its personnel are among the most experienced in these real estate markets. The Company’s facilities are part of a comprehensive system encompassing standardized procedures and integrated reporting and information networks. The Company believes that the significant operating and financial experience of its executive officers and directors combined with the Company’s capital structure, national investment scope, geographic diversity and economies of scale should enable the Company to compete effectively.

Investments in Real Estate Facilities

As of December 31, 2014, the Company owned and operated 28.6 million rentable square feet comprised of 103 business parks concentrated primarily in six states compared to 29.7 million rentable square feet at December 31, 2013.

Summary of Business Model

The Company has a diversified portfolio. It is diversified geographically primarily in six states across the country and has a diversified customer mix by size and industry concentration. The Company believes that this diversification combined with a conservative financing strategy, focus on markets with strong demographics for growth and our operating strategy gives the Company a business model that mitigates risk and provides strong long-term growth opportunities.

Restrictions on Transactions with Affiliates

The Company’s Bylaws provide that the Company may engage in transactions with affiliates provided that a purchase or sale transaction with an affiliate is (i) approved by a majority of the Company’s independent directors and (ii) fair to the Company based on an independent appraisal or fairness opinion.

Borrowings

The Company had an outstanding mortgage note payable of $250.0 million at December 31, 2014 and 2013. See Notes 5 and 6 to the consolidated financial statements included in this Form 10-K for a summary of the Company’s outstanding borrowings as of December 31, 2014.

On April 28, 2014, the Company modified and extended the terms of its line of credit (the “Credit Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”). The expiration of the Credit Facility was extended from August 1, 2015 to May 1, 2019. The Credit Facility has a borrowing limit of $250.0 million. The rate of interest charged on borrowings was modified to a rate ranging from the London Interbank Offered Rate (“LIBOR”) plus 0.875% to LIBOR plus 1.70% depending on the Company’s credit ratings. Currently, the Company’s rate under the Credit Facility is LIBOR plus 0.925%. In addition, the Company is required to pay an annual facility fee ranging from 0.125% to 0.30% of the borrowing limit depending on the Company’s credit ratings (currently 0.15%). The Company had no balance outstanding on the Credit Facility at December 31, 2014 and 2013. The Company had $1.0 million and $485,000 of unamortized commitment fees as of December 31, 2014 and 2013, respectively. The Credit Facility requires the Company to meet certain covenants, with all of which the Company was in compliance at December 31, 2014 and 2013. Interest on outstanding borrowings is payable monthly.

The Company had a term loan with Wells Fargo (the “Term Loan”) in the amount of $250.0 million that was scheduled to mature on December 31, 2014. The Term Loan was repaid in full in November, 2013. Interest

 

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on the amounts borrowed under the Term Loan was accrued based on an applicable rate ranging from LIBOR plus 1.15% to LIBOR plus 2.25% depending on the Company’s credit ratings. During 2013, the Company’s rate under the Term Loan was LIBOR plus 1.20%.

The Company has broad powers to borrow in furtherance of the Company’s objectives. The Company has incurred in the past, and may incur in the future, both short-term and long-term indebtedness to facilitate real estate acquisitions and other capital allocations.

Employees

As of December 31, 2014, the Company employed 168 individuals, primarily personnel engaged in property operations.

Insurance

The Company believes that its properties are adequately insured. Facilities operated by the Company have historically been covered by comprehensive insurance, including fire, earthquake and liability coverage from nationally recognized carriers.

Environmental Matters

Compliance with laws and regulations relating to the protection of the environment, including those regarding the discharge of material into the environment, has not had any material effect upon the capital expenditures, earnings or competitive position of the Company.

Substantially all of the Company’s properties have been subjected to Phase I environmental reviews. Such reviews have not revealed, nor is management aware of, any probable or reasonably possible environmental costs that management believes would have a material adverse effect on the Company’s business, assets or results of operations, nor is the Company aware of any potentially material environmental liability. See Item 1A, “Risk Factors” for additional information.

ITEM 1A. RISK FACTORS

In addition to the other information in our Annual Report on Form 10-K, you should consider the risks described below that we believe may be material to investors in evaluating the Company. This section contains forward-looking statements, and in considering these statements, you should refer to the qualifications and limitations on our forward-looking statements that are described in Item 1, “Business — Forward-Looking Statements.”

Since our business consists primarily of acquiring and operating real estate, we are subject to the risks related to the ownership and operation of real estate that can adversely impact our business and financial condition.

The value of our investments may be reduced by general risks of real estate ownership: Since we derive substantially all of our income from real estate operations, we are subject to the general risks of acquiring and owning real estate-related assets, including:

 

   

changes in the national, state and local economic climate and real estate conditions, such as oversupply of or reduced demand for commercial real estate space and changes in market rental rates;

 

   

how prospective tenants perceive the attractiveness, convenience and safety of our properties;

 

   

difficulties in consummating and financing acquisitions and developments on advantageous terms and the failure of acquisitions and developments to perform as expected;

 

   

our ability to provide adequate management, maintenance and insurance;

 

   

natural disasters, such as earthquakes, hurricanes and floods, which could exceed the aggregate limits of our insurance coverage;

 

   

the expense of periodically renovating, repairing and re-letting spaces;

 

   

the impact of environmental protection laws;

 

9


   

compliance with federal, state, and local laws and regulations;

 

   

increasing operating and maintenance costs, including property taxes, insurance and utilities, if these increased costs cannot be passed through to tenants;

 

   

adverse changes in tax, real estate and zoning laws and regulations;

 

   

increasing competition from other commercial properties in our market;

 

   

tenant defaults and bankruptcies;

 

   

tenants’ right to sublease space; and

 

   

concentration of properties leased to non-rated private companies with uncertain financial strength.

Certain significant costs, such as mortgage payments, real estate taxes, insurance and maintenance, generally are not reduced even when a property’s rental income is reduced. In addition, environmental and tax laws, interest rate levels, the availability of financing and other factors may affect real estate values and property income. Furthermore, the supply of commercial space fluctuates with market conditions.

If our properties do not generate sufficient income to meet operating expenses, including any debt service, tenant improvements, lease commissions and other capital expenditures, we may have to borrow additional amounts to cover fixed costs, and we may have to reduce our distributions to shareholders.

There is significant competition among commercial properties: Other commercial properties compete with our properties for tenants. Some of the competing properties may be newer and better located than our properties. Competition in the market areas in which many of our properties are located is significant and has affected our occupancy levels, rental rates and operating expenses. We also expect that new properties will be built in our markets. In addition, we compete with other buyers, some of which are larger than us, for attractive commercial properties. Therefore, we may not be able to grow as rapidly as we would like.

We may encounter significant delays and expense in re-letting vacant space, or we may not be able to re-let space at existing rates, in each case resulting in losses of income: When leases expire, we may incur expenses in retrofitting space and we may not be able to re-lease the space on the same terms. Certain leases provide tenants with the right to terminate early if they pay a fee. As of December 31, 2014, 2,318 leases representing 27.4% of the leased square footage of our total portfolio or 25.7% of annualized rental income are scheduled to expire in 2015. While we have estimated our cost of renewing leases that expire in 2015, our estimates could be wrong. If we are unable to re-lease space promptly, if the terms are significantly less favorable than anticipated or if the costs are higher, we may have to reduce our distributions to shareholders.

Tenant defaults and bankruptcies may reduce our cash flow and distributions: We may have difficulty collecting from tenants in default, particularly if they declare bankruptcy. This could affect our cash flow and our ability to fund distributions to shareholders. Since many of our tenants are non-rated private companies, this risk may be enhanced. There is inherent uncertainty in a tenant’s ability to continue paying rent if they are in bankruptcy.

We may be adversely affected if casualties to our properties are not covered by insurance: We could suffer uninsured losses or losses in excess of our insurance policy limits for occurrences such as earthquakes or hurricanes that adversely affect us or even result in loss of the property. Approximately 40.6% of our properties are located in California and are generally in areas that are subject to risks of earthquake-related damage. In the event of an earthquake, hurricane or other natural disaster, we might still remain liable on any mortgage debt or other unsatisfied obligations related to that property.

The illiquidity of our real estate investments may prevent us from adjusting our portfolio to respond to market changes: There may be delays and difficulties in selling real estate. Therefore, we cannot easily change our portfolio when economic conditions change. Also, REIT tax laws may impose negative consequences if we sell properties held for less than four years.

We may be adversely affected by changes in laws: Increases in income and service taxes may reduce our cash flow and ability to make expected distributions to our shareholders. Our properties are also subject to various federal, state and local regulatory requirements, such as state and local fire and safety codes. If we fail to

 

10


comply with these requirements, governmental authorities could fine us or courts could award damages against us. We believe our properties comply with all significant legal requirements. However, these requirements could change in a way that would reduce our cash flow and ability to make distributions to shareholders.

We may incur significant environmental remediation costs: As an owner and operator of real properties, under various federal, state and local environmental laws, we are required to clean up spills or other releases of hazardous or toxic substances on or from our properties. Certain environmental laws impose liability whether or not the owner or buyer knew of, or was responsible for, the presence of the hazardous or toxic substances. In some cases, liability may not be limited to the value of the property. The presence of these substances, or the failure to properly remediate any resulting contamination, whether from environmental or microbial issues, also may adversely affect our ability to sell, lease, operate, or encumber our facilities for purposes of borrowing.

We have conducted preliminary environmental assessments of most of our properties (and conduct these assessments in connection with property acquisitions) to evaluate the environmental condition of, and potential environmental liabilities associated with, our properties. These assessments generally consist of an investigation of environmental conditions at the property (including soil or groundwater sampling or analysis if appropriate), as well as a review of available information regarding the site and publicly available data regarding conditions at other sites in the vicinity. In connection with these property assessments, our operations and recent property acquisitions, we have become aware that prior operations or activities at some properties or from nearby locations have or may have resulted in contamination to the soil or groundwater at these properties. In circumstances where our environmental assessments disclose potential or actual contamination, we may attempt to obtain indemnifications and, in appropriate circumstances, we obtain limited environmental insurance in connection with the properties acquired, but we cannot assure you that such protections will be sufficient to cover actual future liabilities nor that our assessments have identified all such risks. Although we cannot provide any assurance, based on the preliminary environmental assessments, we are not aware of any environmental contamination of our facilities material to our overall business, financial condition or results of operations.

There has been an increasing number of claims and litigation against owners and managers of rental properties relating to moisture infiltration, which can result in mold or other property damage. When we receive a complaint concerning moisture infiltration, condensation or mold problems and/or become aware that an air quality concern exists, we implement corrective measures in accordance with guidelines and protocols we have developed with the assistance of outside experts. We seek to work proactively with our tenants to resolve moisture infiltration and mold-related issues, subject to our contractual limitations on liability for such claims. However, we can give no assurance that material legal claims relating to moisture infiltration and the presence of, or exposure to, mold will not arise in the future.

Property taxes can increase and cause a decline in yields on investments: Each of our properties is subject to real property taxes, which could increase in the future as property tax rates change and as our properties are assessed or reassessed by tax authorities. Recent local government shortfalls in tax revenue may cause pressure to increase tax rates or assessment levels or impose new taxes. Such increases could adversely impact our profitability.

We must comply with the Americans with Disabilities Act and fire and safety regulations, which can require significant expenditures: All our properties must comply with the Americans with Disabilities Act and with related regulations (the “ADA”). The ADA has separate compliance requirements for “public accommodations” and “commercial facilities,” but generally requires that buildings be made accessible to persons with disabilities. Various state laws impose similar requirements. A failure to comply with the ADA or similar state laws could lead to government imposed fines on us and/or litigation, which could also involve an award of damages to individuals affected by the non-compliance. In addition, we must operate our properties in compliance with numerous local fire and safety regulations, building codes, and other land use regulations. Compliance with these requirements can require us to spend substantial amounts of money, which would reduce cash otherwise available for distribution to shareholders. Failure to comply with these requirements could also affect the marketability of our real estate facilities.

We incur liability from tenant and employment-related claims: From time to time we have to make monetary settlements or defend actions or arbitration to resolve tenant or employment-related claims and disputes.

 

11


Global economic conditions adversely affect our business, financial condition, growth and access to capital.

There continues to be global economic uncertainty, elevated levels of unemployment and reduced levels of economic activity, and it is uncertain as to when economic conditions will improve. These negative economic conditions in the markets where we operate facilities, and other events or factors that adversely affect demand for commercial real estate, could continue to adversely affect our business. To the extent that turmoil in the financial markets returns or intensifies, it has the potential to materially affect the value of our properties, the availability or the terms of financing and may impact the ability of our customers to enter into new leasing transactions or satisfy rental payments under existing leases. The uncertainty and pace of an economic recovery could also affect our operating results and financial condition as follows:

Debt and Equity Markets: Our results of operations and share price are sensitive to volatility in the credit markets. From time to time, the commercial real estate debt markets experience volatility as a result of various factors, including changing underwriting standards by lenders and credit rating agencies. This may result in lenders increasing the cost for debt financing. Should the overall cost of borrowings increase, either by increases in the index rates or by increases in lender spreads, we will need to factor such increases into the economics of our acquisitions. In addition, the state of the debt markets could have an effect on the overall amount of capital being invested in real estate, which may result in price or value decreases of real estate assets and affect our ability to raise capital.

Our ability to issue preferred shares or obtain other sources of capital, such as borrowing, has been in the past, and may in the future, be adversely affected by challenging credit market conditions. The issuance of perpetual preferred securities historically has been a significant source of capital to grow our business. We believe that we have sufficient working capital and capacity under our credit facilities and our retained cash flow from operations to continue to operate our business as usual and meet our current obligations. However, if we were unable to issue preferred shares or borrow at reasonable rates, that could limit the earnings growth that might otherwise result from the acquisition and development of real estate facilities.

Valuations: Market volatility makes the valuation of our properties difficult. There may be significant uncertainty in the valuation, or in the stability of the value, of our properties, which could result in a substantial decrease in the value of our properties. As a result, we may not be able to recover the carrying amount of our properties, which may require us to recognize an impairment charge in earnings.

The acquisition of existing properties is a significant component of our long-term growth strategy, and acquisitions of existing properties are subject to risks that may adversely affect our growth and financial results.

We acquire existing properties, either in individual transactions or portfolios offered by other commercial real estate owners. In addition to the general risks related to real estate described above, we are also subject to the following risks which may jeopardize our realization of benefits from acquisitions.

Any failure to manage acquisitions and other significant transactions to achieve anticipated results and to successfully integrate acquired operations into our existing business could negatively impact our financial results: To fully realize anticipated earnings from an acquisition, we must successfully integrate the property into our operating platform. Failures or unexpected circumstances in the integration process, such as a failure to maintain existing relationships with tenants and employees due to changes in processes, standards, or compensation arrangements, or circumstances we did not detect during due diligence, could jeopardize realization of the anticipated earnings.

During 2014, we acquired 678,000 square feet for an aggregate purchase price of $45.6 million and average occupancy of 69.5% at the time of acquisitions, and we will continue to seek to acquire additional multi-tenant flex, industrial and office properties where they meet our criteria. Our acquisitions and developments may not perform as expected, we may be unable to quickly integrate new acquisitions and developments into our existing operations, and any costs to develop projects or redevelop acquired properties may exceed estimates. As of December 31, 2014, the aggregate occupancy of the assets acquired in 2014 was 69.5%. If we are unable to lease the vacant square footage of these properties in a reasonable period of time, we may not be able to achieve our objective of enhancing value. Further, we face significant competition for suitable acquisition properties from other real estate investors,

 

12


including other publicly traded real estate investment trusts and private institutional investors. As a result, we may be unable to acquire additional properties we desire or the purchase price for desirable properties may be significantly increased.

In addition, some of these properties may have unknown characteristics or deficiencies or may not complement our portfolio of existing properties. We may also finance future acquisitions and developments through a combination of borrowings, proceeds from equity or debt offerings by us or the Operating Partnership, and proceeds from property divestitures. These financing options may not be available when desired or required or may be more costly than anticipated, which could adversely affect our cash flow. Real property development is subject to a number of risks, including construction delays, complications in obtaining necessary zoning, occupancy and other governmental permits, cost overruns, financing risks, and the possible inability to meet expected occupancy and rent levels. If any of these problems occur, development costs for a project may increase, and there may be costs incurred for projects that are not completed. As a result of the foregoing, some properties may be worth less or may generate less revenue than, or simply not perform as well as, we believed at the time of acquisition or development, negatively affecting our operating results. Any of the foregoing risks could adversely affect our financial condition, operating results and cash flow, and our ability to pay dividends on, and the market price of, our stock. In addition, we may be unable to successfully integrate and effectively manage the properties we do acquire and develop, which could adversely affect our results of operations.

Acquired properties are subject to property tax reappraisals which may increase our property tax expense: Facilities that we acquire are subject to property tax reappraisal which can result in substantial increases to the ongoing property taxes paid by the seller. The reappraisal process is subject to judgment of governmental agencies regarding estimated real estate values and other factors, and as a result there is a significant degree of uncertainty in estimating the property tax expense of an acquired property. In connection with future or recent acquisitions of properties, if our estimates of property taxes following reappraisal are too low, we may not realize anticipated earnings from an acquisition.

We would incur adverse tax consequences if we fail to qualify as a REIT.

Our cash flow would be reduced if we fail to qualify as a REIT: While we believe that we have qualified since 1990 to be taxed as a REIT, and will continue to be so qualified, we cannot be certain. To continue to qualify as a REIT, we need to satisfy certain requirements under the federal income tax laws relating to our income, assets, distributions to shareholders and shareholder base. In this regard, the share ownership limits in our articles of incorporation do not necessarily ensure that our shareholder base is sufficiently diverse for us to qualify as a REIT. For any year we fail to qualify as a REIT, we would be taxed at regular corporate tax rates on our taxable income unless certain relief provisions apply. Taxes would reduce our cash available for distributions to shareholders or for reinvestment, which could adversely affect us and our shareholders. Also we would not be allowed to elect REIT status for five years after we fail to qualify unless certain relief provisions apply.

We may need to borrow funds to meet our REIT distribution requirements: To qualify as a REIT, we must generally distribute to our shareholders 90% of our taxable income. Our income consists primarily of our share of our Operating Partnership’s income. We intend to make sufficient distributions to qualify as a REIT and otherwise avoid corporate tax. However, differences in timing between income and expenses and the need to make nondeductible expenditures such as capital improvements and principal payments on debt could force us to borrow funds to make necessary shareholder distributions.

During 2014, the Company sold a combined total of 1.9 million square feet along with some parcels of land in Beaverton, Oregon and Phoenix, Arizona. Absent a special distribution in excess of our normal, recurring quarterly dividend, the Company would have had taxable income in excess of distributions resulting in federal income tax at the corporate level. To qualify for the dividends paid deduction for tax purposes and minimize this potential tax, on December 30, 2014, the Company paid a one-time special cash dividend of $2.75 per common share along with the fourth quarter 2014 regular dividend of $0.50 per common share. Holders of common partnership units of the Operating Partnership also received the same distribution on December 30, 2014. The Board of Directors will continue to evaluate our dividend rate in light of our actual and projected taxable income, liquidity requirements and other circumstances, and there can be no assurance that the future dividends declared by our Board of Directors will not differ materially.

 

13


PS has significant influence over us.

Assuming issuance of the Company’s common stock upon redemption of its partnership units, PS would own 42.3% (or 14.5 million shares) of the outstanding shares of the Company’s common stock at December 31, 2014. As of December 31, 2014, PS owned 7.2 million shares of the Company’s common stock and 7.3 million common units of the Operating Partnership (100.0% of the common units not owned by the Company). In addition, the PS Business Parks name and logo are owned by PS and licensed to the Company under a non-exclusive, royalty-free license agreement. The license can be terminated by either party for any reason with six months written notice. Ronald L. Havner, Jr., the Company’s chairman, is also Chairman of the Board, Chief Executive Officer and President of PS. Gary E. Pruitt, an independent director of the Company is also a trustee of PS. Consequently, PS has the ability to significantly influence all matters submitted to a vote of our shareholders, including electing directors, changing our articles of incorporation, dissolving and approving other extraordinary transactions such as mergers, and all matters requiring the consent of the limited partners of the Operating Partnership. PS’s interest in such matters may differ from other shareholders. In addition, PS’s ownership may make it more difficult for another party to take over our Company without PS’s approval.

Provisions in our organizational documents may prevent changes in control.

Our articles generally prohibit any person from owning more than 7% of our shares: Our articles of incorporation restrict the number of shares that may be owned by any other person, and the partnership agreement of our Operating Partnership contains an anti-takeover provision. No shareholder (other than PS and certain other specified shareholders) may own more than 7% of the outstanding shares of our common stock, unless our board of directors waives this limitation. We imposed this limitation to avoid, to the extent possible, a concentration of ownership that might jeopardize our ability to qualify as a REIT. This limitation, however, also makes a change of control much more difficult (if not impossible) even if it may be favorable to our public shareholders. These provisions will prevent future takeover attempts not supported by PS even if a majority of our public shareholders consider it to be in their best interests as they would receive a premium for their shares over market value or for other reasons.

Our board can set the terms of certain securities without shareholder approval: Our board of directors is authorized, without shareholder approval, to issue up to 50.0 million shares of preferred stock and up to 100.0 million shares of equity stock, in each case in one or more series. Our board has the right to set the terms of each of these series of stock. Consequently, the board could set the terms of a series of stock that could make it difficult (if not impossible) for another party to take over our Company even if it might be favorable to our public shareholders. Our articles of incorporation also contain other provisions that could have the same effect. We can also cause our Operating Partnership to issue additional interests for cash or in exchange for property.

The partnership agreement of our Operating Partnership restricts mergers: The partnership agreement of our Operating Partnership generally provides that we may not merge or engage in a similar transaction unless the limited partners of our Operating Partnership are entitled to receive the same proportionate payments as our shareholders. In addition, we have agreed not to merge unless the merger would have been approved had the limited partners been able to vote together with our shareholders, which has the effect of increasing PS’s influence over us due to PS’s ownership of operating partnership units. These provisions may make it more difficult for us to merge with another entity.

The interests of limited partners of our Operating Partnership may conflict with the interests of our common stockholders.

Limited partners of our Operating Partnership, including PS, have the right to vote on certain changes to the partnership agreement. They may vote in a way that is against the interests of our shareholders. Also, as general partner of our Operating Partnership, we are required to protect the interests of the limited partners of the Operating Partnership. The interests of the limited partners and of our shareholders may differ.

 

14


We depend on external sources of capital to grow our Company.

We are generally required under the Code to distribute at least 90% of our taxable income. Because of this distribution requirement, we may not be able to fund future capital needs, including any necessary building and tenant improvements, from operating cash flow. Consequently, we may need to rely on third-party sources of capital to fund our capital needs. We may not be able to obtain the financing on favorable terms or at all. Access to third-party sources of capital depends, in part, on general market conditions, the market’s perception of our growth potential, our current and expected future earnings, our cash flow, and the market price per share of our common stock. If we cannot obtain capital from third-party sources, we may not be able to acquire properties when strategic opportunities exist, satisfy any debt service obligations, or make cash distributions to shareholders.

We are subject to laws and governmental regulations and actions that affect our operating results and financial condition.

Our business is subject to regulation under a wide variety of U.S. federal, state and local laws, regulations and policies including those imposed by the SEC, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the New York Stock Exchange, as well as applicable labor laws. Although we have policies and procedures designed to comply with applicable laws and regulations, failure to comply with the various laws and regulations may result in civil and criminal liability, fines and penalties, increased costs of compliance and restatement of our financial statements.

There can also be no assurance that, in response to current economic conditions or the current political environment or otherwise, laws and regulations will not be implemented or changed in ways that adversely affect our operating results and financial condition, such as recently adopted legislation that expands health care coverage costs or facilitates union activity or federal legislative proposals to otherwise increase operating costs.

Terrorist attacks and the possibility of wider armed conflict may have an adverse impact on our business and operating results and could decrease the value of our assets.

Terrorist attacks and other acts of violence or war could have a material adverse impact on our business and operating results. There can be no assurance that there will not be further terrorist attacks against the U.S. Attacks or armed conflicts that directly impact one or more of our properties could significantly affect our ability to operate those properties and thereby impair our operating results. Further, we may not have insurance coverage for losses caused by a terrorist attack. Such insurance may not be available, or if it is available and we decide to obtain such terrorist coverage, the cost for the insurance may be significant in relationship to the risk overall. In addition, the adverse effects that such violent acts and threats of future attacks could have on the U.S. economy could similarly have a material adverse effect on our business and results of operations. Finally, further terrorist acts could cause the U.S. to enter into a wider armed conflict, which could further impact our business and operating results.

Developments in California may have an adverse impact on our business and financial results.

We are headquartered in, and approximately 40.6% of our properties are located in California, which has from time to time faced budgetary problems and deficits. Actions have been and may continue to be taken in response to these problems, such as increases in property taxes, changes to sales taxes or other governmental efforts to raise revenues, which could adversely impact our business and results of operations.

Holders of depositary shares, each representing 1/1,000 of a share of our outstanding preferred stock, have dividend, liquidation and other rights that are senior to the rights of the holders of shares of our common stock.

Our shares of preferred stock are entitled to cumulative dividends before any dividends may be declared or set aside on our common stock. Upon our voluntary or involuntary liquidation, dissolution or winding up, before any payment is made to holders of our common stock, shares of our preferred stock are entitled to receive a liquidation preference of $25,000 per share (or $25.00 per depositary share) plus any accrued and unpaid

 

15


distributions. This will reduce the remaining amount of our assets, if any, available to distribute to holders of our common stock. In addition, our preferred stockholders have the right to elect two additional directors to our board of directors whenever dividends are in arrears in an aggregate amount equivalent to six or more quarterly dividends, whether or not consecutive.

Future issuances by us of shares of our common stock may be dilutive to existing stockholders, and future sales of shares of our common stock may adversely affect the market price of our common stock.

Sales of substantial amounts of shares of our common stock in the public market (either by us or by PS), or issuances of shares of common stock in connection with redemptions of common units of our Operating Partnership, could adversely affect the market price of our common stock. During the year ended December 31, 2013, the Company completed a public offering of its common stock and may seek to engage in such offerings in the future. Offerings of common stock, including by us in connection with portfolio or other property acquisitions or by PS in secondary offerings, and the issuance of common units of the Operating Partnership in exchange for shares of common stock, could have an adverse effect on the market price of the shares of our common stock.

We rely on technology in our operations and failures, inadequacies or interruptions to our service could harm our business.

The execution of our business strategy is heavily dependent on the use of technologies and systems, including the Internet, to access, store, transmit, deliver and manage information and processes. Although we believe we have taken commercially reasonable steps to protect the security of our systems, there can be no assurance that such security measures will prevent failures, inadequacies or interruptions in system services, or that system security will not be breached. Disruptions in service, system shutdowns and security breaches could have a material adverse effect on our business.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

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ITEM 2. PROPERTIES

As of December 31, 2014, the Company owned 103 business parks consisting of a geographically diverse portfolio of 28.6 million rentable square feet of commercial real estate which consists of 15.1 million square feet of flex space, 8.8 million square feet of industrial space and 4.6 million square feet of office space concentrated primarily in six states consisting of California, Texas, Virginia, Florida, Maryland and Washington. The weighted average occupancy rate throughout 2014 was 91.3% and the realized rent per square foot was $14.00.

The following table reflects the geographical diversification of the 103 business parks owned by the Company as of December 31, 2014, the type of the rentable square footage and the weighted average occupancy rates throughout 2014 (except as set forth below, all of the properties are held in fee simple interest) (in thousands, except number of business parks):

 

     Number  of
Business
Parks
            Weighted
Average
Occupancy
Rate
 
        Rentable Square Footage     

State

      Flex      Industrial      Office      Total     

California (1)

     49        5,906        4,618        1,076        11,600        93.4

Texas (2)

     23        4,611        477                5,088        87.7

Virginia

     17        1,947                2,093        4,040        90.3

Florida

     3        1,074        2,780        12        3,866        94.6

Maryland

     6        970                1,382        2,352        87.8

Washington

     3        493        958        28        1,479        86.3
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     101        15,001        8,833        4,591        28,425        91.3
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Assets held for sale

     2        125                        125        97.3
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     103        15,126        8,833        4,591        28,550        91.3
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The Company has 4.8 million square feet in California that serves as collateral to a mortgage note payable. For more information, see Note 6 to the consolidated financial statements included in this Form 10-K.

 

(2) The Company owns two properties comprising of 232,000 square feet that are subject to ground leases in Las Colinas, Texas, expiring in 2019 and 2020, each with one 10 year extension option.

We currently anticipate that each of the properties listed above will continue to be used for its current purpose. Competition exists in each of the market areas in which these properties are located.

The Company renovates its properties in connection with the re-leasing of space to tenants and expects that it will pay the costs of such renovations from rental income. From time to time the Company may identify higher and better use of its assets. The Company has risks that tenants will default on leases and declare bankruptcy. Management believes these risks are mitigated through the Company’s geographic diversity and diverse tenant base.

The Company evaluates the performance of its business parks primarily based on net operating income (“NOI”). NOI is defined by the Company as rental income as defined by GAAP less cost of operations as defined by GAAP, excluding depreciation and amortization. The Company uses NOI and its components as a measurement of the performance of its commercial real estate. Management believes that these financial measures provide them, as well as the investor, the most consistent measurement on a comparative basis of the performance of the commercial real estate and its contribution to the value of the Company. Depreciation and amortization have been excluded from NOI as they are generally not used in determining the value of commercial real estate by management or the investment community. Depreciation and amortization are generally not used in determining value as they consider the historical costs of an asset compared to its current value; therefore, to understand the effect of the assets’ historical cost on the Company’s results, investors should look at GAAP financial measures, such as total operating costs including depreciation and amortization. The Company’s calculation of NOI may not be comparable to those of other companies and should not be used as an alternative to measures of performance calculated in accordance with GAAP. Following the table below, we have reconciled total NOI to income from continuing operations, which we consider the most directly comparable financial measure calculated in accordance with GAAP. The following information illustrates rental income, cost of operations and NOI generated by the Company’s total portfolio in 2014, 2013 and 2012 by state and by property classifications. As a result of acquisitions and dispositions, certain properties were not held for the full year and are reflected as assets held for sale or sold.

 

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The Company’s calculation of NOI may not be comparable to those of other companies and should not be used as an alternative to measures of performance in accordance with GAAP. In order to provide a meaningful period-to-period comparison, the tables below exclude certain lease buyout payments noted below and amortization of the Senior Management Long-Term Equity Incentive Plan (“LTEIP”) related to field leadership. The tables below also include a reconciliation of NOI to the most comparable amounts based on GAAP (in thousands):

 

     For the Year Ended December 31, 2014      For the Year Ended December 31, 2013      For the Year Ended December 31, 2012  
     Flex      Office      Industrial      Total      Flex      Office      Industrial      Total      Flex      Office      Industrial      Total  

Rental Income:

                                   

California

   $ 73,922       $ 19,890       $ 37,291       $ 131,103       $ 70,642       $ 13,184       $ 34,896       $ 118,722       $ 68,397       $ 12,773       $ 33,210       $ 114,380   

Texas

     45,881                 1,564         47,445         37,783                 1,391         39,174         32,878                 1,297         34,175   

Virginia

     32,108         49,204                 81,312         33,373         48,942                 82,315         34,341         48,096                 82,437   

Florida

     12,180         285         21,538         34,003         11,414         210         20,672         32,296         10,686         206         20,649         31,541   

Maryland

     15,667         33,585                 49,252         15,299         32,954                 48,253         15,470         33,495                 48,965   

Washington

     8,128         568         5,052         13,748         7,808         493         3,433         11,734         7,628         521         1,338         9,487   

Assets held for sale or sold

     16,654         2,738                 19,392         20,908         3,592                 24,500         20,381         3,399                 23,780   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     204,540         106,270         65,445         376,255         197,227         99,375         60,392         356,994         189,781         98,490         56,494         344,765   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cost of Operations:

                                   

California

     23,540         9,094         9,118         41,752         23,304         5,763         9,115         38,182         22,243         5,400         9,479         37,122   

Texas

     16,977                 431         17,408         13,034                 287         13,321         11,103                 406         11,509   

Virginia

     9,483         16,164                 25,647         9,191         15,947                 25,138         8,651         17,208                 25,859   

Florida

     3,895         120         6,491         10,506         3,810         141         6,070         10,021         3,868         171         5,991         10,030   

Maryland

     5,709         11,765                 17,474         4,916         10,899                 15,815         4,689         10,938                 15,627   

Washington

     2,349         202         1,652         4,203         2,380         189         1,606         4,175         2,355         193         667         3,215   

Assets held for sale or sold

     6,618         1,140                 7,758         7,926         1,494                 9,420         8,109         1,396                 9,505   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     68,571         38,485         17,692         124,748         64,561         34,433         17,078         116,072         61,018         35,306         16,543         112,867   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

NOI:

                                   

California

     50,382         10,796         28,173         89,351         47,338         7,421         25,781         80,540         46,154         7,373         23,731         77,258   

Texas

     28,904                 1,133         30,037         24,749                 1,104         25,853         21,775                 891         22,666   

Virginia

     22,625         33,040                 55,665         24,182         32,995                 57,177         25,690         30,888                 56,578   

Florida

     8,285         165         15,047         23,497         7,604         69         14,602         22,275         6,818         35         14,658         21,511   

Maryland

     9,958         21,820                 31,778         10,383         22,055                 32,438         10,781         22,557                 33,338   

Washington

     5,779         366         3,400         9,545         5,428         304         1,827         7,559         5,273         328         671         6,272   

Assets held for sale or sold

     10,036         1,598                 11,634         12,982         2,098                 15,080         12,272         2,003                 14,275   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 135,969       $ 67,785       $ 47,753       $ 251,507       $ 132,666       $ 64,942       $ 43,314       $ 240,922       $ 128,763       $ 63,184       $ 39,951       $ 231,898   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

18


The following table is provided to reconcile NOI to consolidated income from continuing operations as determined by GAAP (in thousands):

 

     For The Years Ended December 31,  
     2014     2013     2012  

Total NOI

   $ 251,507     $ 240,922     $ 231,898  

Other income and (expenses):

      

Lease buyout payments

            2,252       1,783  

LTEIP amortization:

      

Cost of operations

     (2,623     1,241       (1,241

General and administrative

     (4,802     2,652       (2,652

Facility management fees

     660       639       649  

Other income and expenses

     (13,221     (14,681     (20,377

Depreciation and amortization

     (110,357     (108,917     (109,398

General and administrative

     (8,487     (7,110     (5,917

Acquisition transaction costs

     (350     (854     (350

Gain on sale of real estate facilities

     92,373                
  

 

 

   

 

 

   

 

 

 

Income from continuing operations

   $ 204,700     $ 116,144     $ 94,395  
  

 

 

   

 

 

   

 

 

 

Portfolio Information

The table below sets forth information with respect to occupancy and rental rates of the Company’s total portfolio for each of the last five years, including discontinued operations:

 

     2014     2013(1)     2012(1)     2011(1)     2010  

Weighted average occupancy rate

     91.3     89.9     89.4     89.8     90.9

Realized rent per square foot

   $ 14.00      $ 13.91      $ 14.05      $ 15.11     $ 15.01   

 

(1) Excludes lease buyout payments of $2.3 million, $1.8 million and $2.9 million for the years ended December 31, 2013, 2012 and 2011, respectively.

The following table sets forth the lease expirations for all operating assets as of December 31, 2014 (in thousands):

Lease Expirations as of December 31, 2014

 

Year of Lease Expiration

   Number of
Tenants
     Rentable Square
Footage Subject to
Expiring Leases
     Annualized Rental
Income Under
Expiring Leases
     Percent of
Annualized Rental
Income Represented
by Expiring Leases
 

2015

     2,318        7,231      $ 99,082        25.7

2016

     1,332        6,031        87,787        22.8

2017

     703        4,340        61,317        15.9

2018

     271        2,586        41,878        10.8

2019

     246        2,796        37,988        9.8

2020

     84        1,572        23,754        6.2

2021

     28        710        9,856        2.6

2022

     20        380        9,156        2.4

2023

     11        188        2,888        0.7

2024

     10        306        5,339        1.4

Thereafter

     11        257        6,707        1.7
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     5,034        26,397      $ 385,752        100.0
  

 

 

    

 

 

    

 

 

    

 

 

 

 

19


ITEM 3. LEGAL PROCEEDINGS

We are not presently subject to material litigation nor, to our knowledge, is any material litigation threatened against us, other than routine actions for negligence and other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance or third party indemnifications and all of which collectively are not expected to have a materially adverse effect on our financial condition, results of operations, or liquidity.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Price of the Registrant’s Common Equity:

The common stock of the Company trades on the New York Stock Exchange under the symbol PSB. The following table sets forth the high and low sales prices of the common stock on the New York Stock Exchange for the applicable periods:

 

     Range      Dividends
Declared
 

Three Months Ended

   High      Low     

March 31, 2013

   $ 79.34       $ 64.70       $ 0.44  

June 30, 2013

   $ 86.94       $ 65.50       $ 0.44  

September 30, 2013

   $ 77.97       $ 70.33       $ 0.44  

December 31, 2013

   $ 82.58       $ 73.45       $ 0.44  

March 31, 2014

   $ 87.54       $ 74.85       $ 0.50  

June 30, 2014

   $ 87.15       $ 80.78       $ 0.50  

September 30, 2014

   $ 85.01       $ 74.97       $ 0.50  

December 31, 2014

   $ 84.76       $ 75.02       $ 3.25 (1) 

 

(1) Amount includes a $2.75 per common share special cash dividend.

Holders:

As of February 16, 2015, there were 348 holders of record of the common stock.

Dividends:

Holders of common stock are entitled to receive distributions when, as and if declared by the Company’s Board of Directors out of any funds legally available for that purpose. The Company is required to distribute at least 90% of its taxable income prior to the filing of the Company’s tax return to maintain its REIT status for federal income tax purposes. It is management’s intention to pay distributions of not less than these required amounts.

Effective March, 2014, the Company increased its quarterly dividend from $0.44 per common share to $0.50 per common share.

Dividends declared for the three months ended December 31, 2014 included a one-time special cash dividend of $2.75 per share (the “Special Cash Dividend”) along with the fourth quarter regular dividend of $0.50 per share. See discussion in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The Special Cash Dividend was declared to distribute a portion of the excess income attributable to gains on sales from asset dispositions during 2014, as discussed in Note 3 to the consolidated financial statements included in this Form 10-K.

 

20


The Board of Directors has established a distribution policy intended to maximize the retention of operating cash flow and distribute the amount required for the Company to maintain its tax status as a REIT.

Issuer Repurchases of Equity Securities:

The Company’s Board of Directors previously authorized the repurchase, from time to time, of up to 6.5 million shares of the Company’s common stock on the open market or in privately negotiated transactions. During the three months ended December 31, 2014, there were no shares of the Company’s common stock repurchased. As of December 31, 2014, the Company has 1,614,721 shares available for purchase under the program. The program does not expire. Purchases will be made subject to market conditions and other investment opportunities available to the Company.

Securities Authorized for Issuance Under Equity Compensation Plans:

The equity compensation plan information is provided in Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”.

ITEM 6. SELECTED FINANCIAL DATA

The following sets forth selected consolidated financial and operating information on a historical basis of the Company. The following information should be read in conjunction with the consolidated financial statements and notes thereto of the Company included in this Form 10-K. Note that historical results from 2013 through 2010 were reclassified to conform to 2014 presentation for discontinued operations. See Note 3 to the consolidated financial statements included in this Form 10-K for a discussion of income from discontinued operations.

 

     For The Years Ended December 31,  
     2014     2013     2012     2011     2010  
     (In thousands, except per share data)  

Revenues:

          

Rental income

   $ 376,255     $ 359,246     $ 346,548     $ 297,457     $ 276,276  

Facility management fees

     660       639       649       684       672  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

     376,915       359,885       347,197       298,141       276,948  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

          

Cost of operations

     127,371       114,831       114,108       99,917       89,348  

Depreciation and amortization

     110,357       108,917       109,398       84,391       78,354  

General and administrative

     13,639       5,312       8,919       9,036       9,651  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     251,367       229,060       232,425       193,344       177,353  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income and (expenses):

          

Interest and other income

     372       1,485       241       221       333  

Interest and other expenses

     (13,593     (16,166     (20,618     (5,455     (3,534
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income and (expenses)

     (13,221     (14,681     (20,377     (5,234     (3,201
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gain on sale of real estate facilities

     92,373                              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     204,700       116,144       94,395       99,563       96,394  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations:

          

Income from discontinued operations (1)

                   42       360       475  

Gain on sale of real estate facilities

                   935       2,717       5,153  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total discontinued operations

                   977       3,077       5,628  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 204,700     $ 116,144     $ 95,372     $ 102,640     $ 102,022  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

21


    For The Years Ended December 31,  
    2014     2013     2012     2011     2010  
    (In thousands, except per share data)  

Net income allocation:

         

Net income allocable to noncontrolling interests:

         

Noncontrolling interests — common units

  $ 30,729     $ 12,952     $ 5,970     $ 15,543     $ 11,594  

Noncontrolling interests — preferred units

                  323       (6,991     5,103  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net income allocable to noncontrolling interests

    30,729       12,952       6,293       8,552       16,697  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income allocable to PS Business
Parks, Inc.:

         

Preferred shareholders

    60,488       59,216       69,136       41,799       46,214  

Restricted stock unit holders

    329       125       138       127       152  

Common shareholders

    113,154       43,851       19,805       52,162       38,959  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net income allocable to PS Business Parks, Inc.

    173,971       103,192       89,079       94,088       85,325  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 204,700     $ 116,144     $ 95,372     $ 102,640     $ 102,022  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Common Share:

         

Cash Distributions (2)

  $ 4.75     $ 1.76     $ 1.76     $ 1.76     $ 1.76  

Net income — basic

  $ 4.21     $ 1.77     $ 0.82     $ 2.13     $ 1.59  

Net income — diluted

  $ 4.19     $ 1.77     $ 0.81     $ 2.12     $ 1.58  

Weighted average common shares — basic

    26,899       24,732       24,234       24,516       24,546  

Weighted average common shares — diluted

    27,000       24,833       24,323       24,599       24,687  

Balance Sheet Data:

         

Total assets

  $ 2,227,114     $ 2,238,559     $ 2,151,817     $ 2,138,619     $ 1,621,057  

Total debt

  $ 250,000     $ 250,000     $ 468,102     $ 717,084     $ 144,511  

Equity:

         

PS Business Parks, Inc.’s shareholders’ equity:

         

Preferred stock

  $ 995,000     $ 995,000     $ 885,000     $ 598,546     $ 598,546  

Common stock

  $ 718,281     $ 722,941     $ 560,689     $ 580,659     $ 594,982  

Noncontrolling interests:

         

Preferred units

  $      $      $      $ 5,583     $ 53,418  

Common units

  $ 194,928     $ 196,699     $ 168,572     $ 175,807     $ 176,179  

Other Data:

         

Net cash provided by operating activities

  $ 227,771     $ 222,294     $ 209,127     $ 180,620     $ 177,116  

Net cash provided by (used in) investing activities

  $ 113,188     $ (172,872   $ (105,729   $ (337,106   $ (326,623

Net cash (used in) provided by financing activities

  $ (219,973   $ (30,824   $ (95,495   $ 156,400     $ (53,656

Square footage owned at the end of period

    28,550       29,740       28,208       27,090       21,666  

 

(1) Prior to the current year adoption of the guidance for reporting discontinued operations and disposal of components of an entity, the operating results from assets classified as properties held for disposition prior to December 31, 2013 are included in discontinued operations for the years ended December 31, 2010 through 2013. Subsequent to the adoption, the operating results from assets classified as properties held for disposition as of January 1, 2014 are included in income from continuing operations.

 

(2) Amount includes a $2.75 per common share special cash dividend.

 

22


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the results of operations and financial condition should be read in conjunction with the selected financial data and the Company’s consolidated financial statements and notes thereto included in this Form 10-K.

Overview

As of December 31, 2014, the Company owned and operated 28.6 million rentable square feet of multi-tenant flex, industrial and office properties concentrated primarily in six states. All operating metrics discussed in this section as of and for years ended December 31, 2014, 2013 and 2012 excludes assets held for sale or sold. Management believes excluding the results of such assets provides the most relevant perspective on the ongoing operations of the Company. Please refer to “Item 15, “Exhibits and Financial Statements Schedules” for financial metrics that include results from assets held for sale or sold.

The Company focuses on increasing profitability and cash flow aimed at maximizing shareholder value. The Company strives to maintain high occupancy levels while increasing rental rates and minimizing capital expenditures when market conditions allow, although the Company may decrease rental rates in markets where conditions require. The Company also acquires properties it believes will create long-term value, and from time to time disposes of properties which no longer fit within the Company’s strategic objectives. Operating results are driven primarily by income from rental operations and are therefore substantially influenced by demand for rental space within our properties and our markets, which impacts occupancy, rental rates and capital requirements.

During 2014, the Company executed leases comprising 8.6 million square feet of space including 5.2 million square feet of renewals of existing leases and 3.4 million square feet of new leases. Overall, the change in rental rates for the Company continued to improve. See further discussion of operating results below.

Critical Accounting Policies and Estimates:

Our accounting policies are described in Note 2 to the consolidated financial statements included in this Form 10-K. We believe our most critical accounting policies relate to revenue recognition, property acquisitions, allowance for doubtful accounts, impairment of long-lived assets, depreciation, accruals of operating expenses and accruals for contingencies, each of which we discuss below.

Revenue Recognition: The Company must meet four basic criteria before revenue can be recognized: persuasive evidence of an arrangement exists; the delivery has occurred or services have been rendered; the fee is fixed or determinable; and collectability is reasonably assured. All leases are classified as operating leases. Rental income is recognized on a straight-line basis over the terms of the leases. Straight-line rent is recognized for all tenants with contractual fixed increases in rent that are not included on the Company’s credit watch list. Deferred rent receivable represents rental revenue recognized on a straight-line basis in excess of billed rents. Reimbursements from tenants for real estate taxes and other recoverable operating expenses are recognized as rental income in the period the applicable costs are incurred. Property management fees are recognized in the period earned.

Property Acquisitions: The purchase price of acquired properties is recorded to land, buildings and improvements (including tenant improvements, unamortized lease commissions, acquired in-place lease values, and tenant relationships, if any) and intangible assets and liabilities associated with the value of above-market and below-market leases based on their respective estimated fair values. Acquisition related costs are expensed as incurred.

In determining the fair value of the tangible assets of the acquired properties, management considers the value of the properties as if vacant as of the acquisition date. Management must make significant assumptions in determining the value of assets acquired and liabilities assumed. Using different assumptions in the recording of the purchase cost of the acquired properties would affect the timing of recognition of the

 

23


related revenue and expenses. Amounts recorded to land are derived from comparable sales of land within the same region. Amounts recorded to buildings and improvements, tenant improvements and unamortized lease commissions are based on current market replacement costs and other market information.

The value recorded to the above-market or below-market in-place lease values of acquired properties is determined based upon the present value (using a discount rate which reflects the risks associated with the acquired leases) of the difference between (i) the contractual rents to be paid pursuant to the in-place leases, and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The amounts recorded to above-market or below-market leases are included in other assets or other liabilities in the accompanying consolidated balance sheets and are amortized on a straight-line basis as an increase or reduction of rental income over the remaining non-cancelable term of the respective leases.

Allowance for Doubtful Accounts: Rental revenue from our tenants is our principal source of revenue. Tenant receivables consist primarily of amounts due for contractual lease payments, reimbursements of common area maintenance expenses, property taxes and other expenses recoverable from tenants. Deferred rent receivable represents the amount that the cumulative straight-line rental income recorded to date exceeds cash rents billed to date under the lease agreement. We monitor the collectability of our receivable balances including the deferred rent receivable on an ongoing basis. Based on these reviews, we maintain an allowance for doubtful accounts for estimated losses resulting from the possible inability of our tenants to make required rent payments to us. Tenant receivables and deferred rent receivable are carried net of the allowances for uncollectible tenant receivables and deferred rent. Determination of the adequacy of these allowances requires significant judgments and estimates, and our evaluation of the adequacy of the allowance for uncollectible current tenant receivables and deferred rent receivable are performed using a methodology that incorporates specific identification, aging analysis, an overall evaluation of the historical loss trends and the current economic and business environment.

Impairment of Long-Lived Assets: The Company evaluates a property for potential impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. On a quarterly basis, we evaluate our entire portfolio for impairment based on current operating information. In the event that these periodic assessments reflect that the carrying amount of a property exceeds the sum of the undiscounted cash flows (excluding interest) that are expected to result from the use and eventual disposition of the property, the Company would recognize an impairment loss to the extent the carrying amount exceeded the estimated fair value of the property. The estimation of expected future net cash flows is inherently uncertain and relies on subjective assumptions dependent upon future and current market conditions and events that affect the ultimate value of the property. Management must make assumptions related to the property such as future rental rates, tenant allowances, operating expenditures, property taxes, capital improvements, occupancy levels and the estimated proceeds generated from the future sale of the property. These assumptions could differ materially from actual results in future periods. Our intent to hold properties over the long-term directly decreases the likelihood of recording an impairment loss. If our strategy changes or if market conditions otherwise dictate an earlier sale date, an impairment loss could be recognized, and such loss could be material.

Depreciation: We compute depreciation on our buildings and improvements using the straight-line method based on estimated useful lives generally ranging from five to 30 years. A significant portion of the acquisition cost of each property is recorded to building and building components. The recording of the acquisition cost to building and building components, as well as the determination of their useful lives, are based on estimates. If we do not appropriately record to these components or we incorrectly estimate the useful lives of these components, our computation of depreciation expense may not appropriately reflect the actual impact of these costs over future periods, which will affect net income. In addition, the net book value of real estate assets could be overstated or understated. The statement of cash flows, however, would not be affected.

Accruals of Operating Expenses: The Company accrues for property tax expenses, performance bonuses and other operating expenses each quarter based on historical trends and anticipated disbursements. If these estimates are incorrect, the timing and amount of expense recognized will be affected.

 

24


Accruals for Contingencies: The Company is exposed to business and legal liability risks with respect to events that may have occurred, but in accordance with GAAP has not accrued for such potential liabilities because the loss is either not probable or not estimable. Future events could result in such potential losses becoming probable and estimable, which could have a material adverse impact on our financial condition or results of operations.

Effect of Economic Conditions on the Company’s Operations: During 2014, most markets reflected signs of improving occupancy and rental rates. Overall, new rental rates for the Company improved over expiring rental rates on executed leases as economic conditions continue to improve. However, the Virginia, Maryland and Orange County markets continue to be slower to recover than other markets as the Company continues to see rental rate declines and modest growth in occupancy. Current and future economic conditions and competition will continue to have an impact on the Company, potentially resulting in further reductions in occupancy and rental rates.

Tenant Credit Risk: The Company historically has experienced a low level of write-offs of uncollectable rents, but there is inherent uncertainty in a tenant’s ability to continue paying rent and meet its full lease obligation. The table below summarizes the impact to the Company from tenants’ inability to pay rent or continue to meet their lease obligations (in thousands):

 

     For The Years Ended
December 31,
 
     2014     2013     2012  

Annual write — offs of uncollectible rent

   $ 1,101     $ 955     $ 1,115  

Annual write — offs as a percentage of rental income

     0.3     0.3     0.3

Square footage of leases terminated prior to their scheduled expiration due to business failures/bankruptcies

     362        431        570   

Accelerated depreciation and amortization related to unamortized tenant improvements and lease commissions associated with early terminations

   $ 460     $ 2,071     $ 1,493  

As of February 16, 2015, the Company had 34,000 square feet of leased space occupied by tenants that are protected by Chapter 11 of the U.S. Bankruptcy Code. From time to time, tenants contact us, requesting early termination of their lease, a reduction in space under lease, or rent deferment or abatement. At this time, the Company cannot anticipate what impact, if any, the ultimate outcome of these discussions will have on our future operating results.

Company Performance and Effect of Economic Conditions on Primary Markets: The Company’s operations are substantially concentrated in eight regions. During the year ended December 31, 2014, initial rental rates on new and renewed leases within the Company’s total portfolio increased 0.5% over expiring rents, an improvement from the year ended December 31, 2013, in which initial rental rates on new and renewed leases declined by 0.3%. The Company’s Same Park (defined below) occupancy rate at December 31, 2014 was 93.4%, compared to 93.0% at December 31, 2013. The Company’s total portfolio occupancy rate at December 31, 2014 was 92.3%, compared to 91.2% at December 31, 2013. Each of the eight regions in which the Company owns assets is subject to its own unique market influences. See “Supplemental Property Data and Trends” below for more information on regional operating data.

Effect of Acquisitions and Dispositions of Properties on the Company’s Operations: The Company is focused on growing its operations by looking for opportunities to expand its presence in existing and new markets through strategic acquisitions that meet the Company’s focus on multi-tenant flex, industrial and office parks in markets where it has or may obtain a substantial market presence. The Company may from time to time dispose of assets based on market conditions.

On December 30, 2014, the Company acquired Charcot Business Park II, an eight-building, 119,000 square foot multi-tenant flex park in San Jose, California, for $16.0 million. The park is contiguous to the Company’s existing 164,000 square foot Charcot Business Park. On November 3, 2014, the Company acquired a 246,000 square foot multi-tenant industrial building in Austin, Texas, for a purchase price of $10.6 million. On August 21, 2014, the Company acquired a 145,000 square foot multi-tenant flex park consisting of five single-story buildings located in Dallas, Texas, for a purchase price of $5.1 million. On July 28, 2014, the Company

 

25


acquired a 19,000 square foot building in Dallas, Texas, for $1.1 million. The flex building is located in the Company’s 389,000 square foot Arapaho Business Park. On July 24, 2014, the Company acquired a 149,000 square foot building in Miami, Florida, for $12.7 million. The building is located within the Company’s 3.3 million square foot Miami Industrial Commerce Center.

As of December 31, 2014, the blended occupancy rate of the 11 assets acquired from 2012 to 2014 was 84.2% compared to a blended occupancy rate of 63.5% at the time of acquisition. As of December 31, 2014, the Company had 536,000 square feet of vacancy spread over these 11 acquisitions, which we believe provides the Company with considerable opportunity to generate additional rental income given that the Company’s Same Park assets in these same submarkets have a weighted average occupancy of 95.0% at December 31, 2014. The table below contains the assets acquired from 2012 to 2014 (in thousands):

 

Property

 

Date Acquired

 

Location

  Purchase Price     Square
Feet
    Occupancy
Acquisition
    Occupancy at
December 31, 2014
 
Charcot Business Park II   December, 2014   San Jose, California   $ 16,000       119       96.7     96.7
McNeil 1   November, 2014   Austin, Texas     10,550       246       53.3     53.3
Springlake Business Center II   August, 2014   Dallas, Texas     5,148       145       35.4     39.6
Arapaho Business Park 9   July, 2014   Dallas, Texas     1,134       19       100.0     100.0
MICC — Center 23   July, 2014   Miami, Florida     12,725       149       0.0     100.0
Bayshore Corporate Center   December, 2013   San Mateo, California     60,500       340       81.8     84.8
Valwood Business Park   November, 2013   Dallas, Texas     12,425       245       83.5     88.3
Dallas Flex Portfolio   October, 2013   Dallas, Texas     27,900       559       72.1     77.5

Arapaho Business Park

  July, 2013   Dallas, Texas     14,750       389       66.5     87.7
Austin Flex Buildings   December, 2012   Austin, Texas     14,900       226       86.1     100.0
212th Business Park   July, 2012   Kent Valley, Washington     37,550       958       52.3     91.6
     

 

 

   

 

 

     

Total

      $ 213,582       3,395       63.5     84.2
     

 

 

   

 

 

     

On November 21, 2014, the Company completed the sale of three business parks, consisting of 42 buildings aggregating 656,000 square feet, located in Phoenix, Arizona, for net proceeds of $52.2 million, resulting in a net gain of $29.6 million.

On October 1, 2014, the Company completed the sale of two business parks, Cornell Oaks Corporate Center and Creekside Corporate Park along with 11.5 acres of adjacent land, located in Beaverton, Oregon, for net proceeds of $159.9 million, resulting in a net gain of $62.8 million. The parks consist of 18 buildings aggregating 1.2 million square feet.

Subsequent to December 31, 2014, the Company completed the sale of Milwaukie Business Park located in Milwaukie, Oregon, for net proceeds of $10.6 million. The park consists of six multi-tenant flex buildings aggregating 102,000 square feet.

The Milwaukie Business Park, as well as a 23,000 square foot park in Tempe, Arizona, have been classified as properties held for disposition as of December 31, 2014 and 2013. The Company anticipates completing the sale of the Tempe asset later in 2015.

In October, 2012, the Company completed the sale of Quail Valley Business Park, a 66,000 square foot flex park in Houston, Texas, for a gross sales price of $2.3 million, resulting in a net gain of $935,000.

At the beginning of 2013, the Company reclassified a 125,000 square foot building located in Northern Virginia to land and building held for development as the Company intends to redevelop the property. In conjunction with the reclassification, the Company ceased depreciation of the asset. In July, 2013, the Company entered into a joint venture agreement, which it will maintain a 95.0% economic interest in, with a real estate development company to pursue a multi-family development of this property. During the entitlement phase, all costs related to the pre-development will be split evenly between the Company and its joint venture partner. Subsequent to December 31, 2014, the Company received entitlements which allow it to develop a multi-family building up to 450,000 square feet on the property. The property will be contributed to the joint venture upon commencement of construction, which will occur in 2015. The asset and capitalized development costs were $18.4 million and $16.2 million at December 31, 2014 and 2013, respectively, which includes the Company’s basis in the land. For the years ended December 31, 2014 and 2013, the Company capitalized costs of $2.2 million and $752,000, respectively, related to this development, of which $944,000 and $359,000, respectively, related to capitalized interest costs.

 

26


Scheduled Lease Expirations: In addition to the 2.2 million square feet, or 7.7%, of space available in our total portfolio as of December 31, 2014, 2,318 leases representing 27.4% of the leased square footage of our total portfolio or 25.7% of annualized rental income are scheduled to expire in 2015. Our ability to re-lease available space will depend upon market conditions in the specific submarkets in which our properties are located. As a result, we cannot predict with certainty the rate at which expiring leases will be re-leased.

Impact of Inflation: Although inflation has not been significant in recent years, it remains a potential factor in our economy, and the Company continues to seek ways to mitigate its potential impact. A substantial portion of the Company’s leases require tenants to pay operating expenses, including real estate taxes, utilities, and insurance, as well as increases in common area expenses, partially reducing the Company’s exposure to inflation.

Concentration of Portfolio by Region: The table below reflects the Company’s square footage from continuing operations based on regional concentration as of December 31, 2014, excluding assets held for sale or sold. As part of the table below, we have reconciled total NOI to income from continuing operations (in thousands):

 

Region

   Square
Footage
     Percent of
Square
Footage
    2014
NOI
    Percent
of NOI
 

California

         

Northern California

     7,612        26.8   $ 53,530       22.3

Southern California

     3,988        14.0     35,821       14.9

Texas

         

Northern Texas

     3,125        11.0     16,733       7.0

Southern Texas

     1,963        6.9     13,304       5.5

Virginia

     4,040        14.2     55,665       23.2

Florida

     3,866        13.6     23,497       9.8

Maryland

     2,352        8.3     31,778       13.3

Washington

     1,479        5.2     9,545       4.0
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

     28,425        100.0   $ 239,873       100.0
  

 

 

    

 

 

   

 

 

   

 

 

 

Reconciliation of NOI to income from continuing operations

                    

Total NOI

        $ 239,873    

Other income and (expenses):

         

NOI from assets held for sale or sold

          11,634    

LTEIP amortization:

         

Cost of operations

          (2,623  

General and administrative

          (4,802  

Facility management fees

          660    

Interest and other income

          372    

Interest and other expenses

          (13,593  

Depreciation and amortization

          (110,357  

General and administrative

          (8,837  

Gain on sale of real estate facilities

          92,373    
       

 

 

   

Income from continuing operations

        $ 204,700    
       

 

 

   

 

27


Concentration of Credit Risk by Industry: The information below depicts the industry concentration of our tenant base as of December 31, 2014, excluding assets held for sale. The Company analyzes this concentration to minimize significant industry exposure risk.

 

Industry

   Percent of
Annualized
Rental Income
 

Business services

     17.7

Government

     10.4

Computer hardware, software and related services

     10.2

Warehouse, distribution, transportation and logistics

     10.0

Health services

     9.9

Retail, food, and automotive

     6.3

Engineering and construction

     6.3

Insurance and financial services

     4.9

Home furnishings

     3.1

Electronics

     2.9

Aerospace/defense products and services

     2.8

Communications

     2.3

Educational services

     1.7

Other

     11.5
  

 

 

 

Total

     100.0
  

 

 

 

The information below depicts the Company’s top 10 customers by annualized rental income as of December 31, 2014, excluding assets held for sale (in thousands):

 

Tenants

   Square
Footage
     Annualized
Rental Income(1)
     Percent of
Annualized
Rental Income
 

US Government

     845      $ 21,212        5.9

Kaiser Permanente

     199        4,462        1.2

Lockheed Martin Corporation

     171        4,440        1.2

Keeco LLC

     460        3,295        0.9

Luminex Corporation

     185        3,003        0.8

Wells Fargo

     118        2,410        0.7

Salient Federal Solutions, Inc.

     58        1,959        0.5

Raytheon

     80        1,819        0.5

Investorplace Media, LLC

     46        1,736        0.5

Inova Health Care Services

     63        1,670        0.5
  

 

 

    

 

 

    

 

 

 

Total

     2,225      $ 46,006        12.7
  

 

 

    

 

 

    

 

 

 

 

(1) For leases expiring prior to December 31, 2015, annualized rental income represents income to be received under existing leases from January 1, 2015 through the date of expiration.

Comparison of 2014 to 2013

Results of Operations: Net income for the year ended December 31, 2014 was $204.7 million compared to $116.1 million for the year ended December 31, 2013. Net income allocable to common shareholders for the year ended December 31, 2014 was $113.2 million compared to $43.9 million for the year ended December 31, 2013. Net income per common share on a diluted basis was $4.19 for the year ended December 31, 2014 compared to $1.77 for the year ended December 31, 2013 (based on weighted average diluted common shares outstanding of 27,000,000 and 24,833,000, respectively). The increase in net income allocable to common shareholders was due to the gain on sale of real estate facilities of $92.4 million combined with an increase in NOI, offset by an increase in general and administrative expenses resulting primarily from non-cash stock compensation charges (discussed in more detail below and in Note 10 to the consolidated financial statements included in this Form 10-K).

 

28


Effective March, 2014, the Company entered into a performance-based restricted stock unit program, the Senior Management Long-Term Equity Incentive Program for 2014-2017 (“2014 LTEIP”), with certain employees of the Company. Net compensation expense of $7.4 million related to the 2014 LTEIP was recognized for the year ended December 31, 2014.

Effective January 1, 2012, the Company entered into a performance-based restricted stock unit program, the Senior Management Long-Term Equity Incentive Program for 2012-2015 (“2012 LTEIP”), with certian employees of the Company. While the Company saw improvements in operating metrics and delivered strong total shareholder return over 2012 and 2013, the original targets under the 2012 LTEIP were based on an assumption of a strong economic recovery starting in 2012. Given the pace of the economic recovery during those two years, the targets for 2012 and 2013 were not achieved and management determined in 2013 that it was not probable that the remaining targets under the 2012 LTEIP would be met. As such, the Company stopped recording amortization and recorded a reversal of all 2012 LTEIP amortization previously recorded in 2012 of $3.9 million during the year ended December 31, 2013. Net compensation expense of $3.9 million related to the 2012 LTEIP was recognized during the year ended December 31, 2012.

To present comparative results, the amortization of 2014 LTEIP and 2013 reversal of 2012 LTEIP in either cost of operations (for field leadership) or general and administrative expenses (for executive management) have been reflected as adjustments in the property operations tables below.

In order to evaluate the performance of the Company’s portfolio over comparable periods, management analyzes the operating performance of properties owned and operated throughout both periods (herein referred to as “Same Park”). The Same Park portfolio includes all operating properties owned or acquired prior to January 1, 2012, excluding 125,000 square feet of assets held for sale as of December 31, 2014. Therefore, Same Park rental income and cost of operations amounts exclude such assets. Operating properties that the Company acquired subsequent to January 1, 2012 are referred to as “Non-Same Park.” For the years ended December 31, 2014 and 2013, the Same Park facilities constitute 25.0 million rentable square feet, representing 87.4% of the 28.6 million square feet in the Company’s portfolio as of December 31, 2014.

 

29


The following table presents the operating results of the Company’s properties for the years ended December 31, 2014 and 2013 in addition to other income and expenses items affecting income from continuing operations (in thousands, except per square foot data):

 

     For The Years Ended
December 31,
       
     2014     2013     Change  

Rental income:

      

Same Park (25.0 million rentable square feet)

   $ 333,363     $ 324,983       2.6

Non-Same Park (3.4 million rentable square feet)

     23,500       7,511       212.9
  

 

 

   

 

 

   

Total rental income

     356,863       332,494       7.3
  

 

 

   

 

 

   

Cost of operations:

      

Same Park

     106,904       103,307       3.5

Non-Same Park

     10,086       3,345       201.5
  

 

 

   

 

 

   

Total cost of operations

     116,990       106,652       9.7
  

 

 

   

 

 

   

Net operating income:

      

Same Park

     226,459       221,676       2.2

Non-Same Park

     13,414       4,166       222.0
  

 

 

   

 

 

   

Total net operating income

     239,873       225,842       6.2
  

 

 

   

 

 

   

Other income and (expenses):

      

NOI from assets held for sale or sold (1)

     11,634       15,080       (22.9 %) 

Lease buyout payments (2)

            2,252       (100.0 %) 

LTEIP amortization (3):

      

Cost of operations

     (2,623     1,241       (311.4 %) 

General and administrative

     (4,802     2,652       (281.1 %) 

Facility management fees

     660       639       3.3

Other income and expenses

     (13,221     (14,681     (9.9 %) 

Depreciation and amortization

     (110,357     (108,917     1.3

General and administrative

     (8,487     (7,110     19.4

Acquisition transaction costs

     (350     (854     (59.0 %) 

Gain on sale of real estate facilities

     92,373              100.0
  

 

 

   

 

 

   

Income from continuing operations

   $ 204,700     $ 116,144       76.2
  

 

 

   

 

 

   

Same Park gross margin (4)

     67.9     68.2     (0.4 %) 

Same Park weighted average occupancy

     92.9     91.2     1.9

Non-Same Park weighted average occupancy

     77.7     66.5     16.8

Same Park realized rent per square foot (5)

   $ 14.34     $ 14.23       0.8

 

(1) Represents NOI from assets held for sale or sold. These assets generated rental income of $19.4 million and $24.5 million for the years ended December 31, 2014 and 2013, respectively. Cost of operations for such assets was $7.8 million and $9.4 million for the years ended December 31, 2014 and 2013, respectively.

 

(2) Represents a lease buyout payment recorded in the fourth quarter of 2013 associated with a 75,000 square foot lease in Oregon which terminated as of December 31, 2013.

 

(3) Represents the 2014 LTEIP amortization recorded in 2014 and the reversal of the 2012 LTEIP amortization in 2013 of all amounts originally expensed in 2012.

 

(4) Computed by dividing Same Park NOI by Same Park rental income.

 

(5) Represents the annualized Same Park rental income earned per occupied square foot.

Supplemental Property Data and Trends: NOI from continuing operations is summarized for the years ended December 31, 2014 and 2013 by region below. See Item 2, “Properties” above for more information on NOI, including why the Company presents NOI and how the Company uses NOI. The Company’s calculation of NOI may not be comparable to those of other companies and should not be used as an alternative to measures of performance calculated in accordance with GAAP.

 

30


The following table summarizes the Same Park and Non-Same Park operating results by region for the years ended December 31, 2014 and 2013. In addition, the table reflects the comparative impact on the overall rental income, cost of operations and NOI from properties that have been acquired since January 1, 2012, and the impact of such is included in Non-Same Park facilities in the table below. As part of the table below, we have reconciled total NOI to income from continuing operations (in thousands):

 

Region

  Rental Income
December 31,
2014
    Rental Income
December 31,
2013
    Increase
(Decrease)
    Cost of
Operations
December 31,
2014
    Cost of
Operations
December 31,
2013
    Increase
(Decrease)
    NOI
December 31,
2014
    NOI
December 31,
2013
    Increase
(Decrease)
 

Same Park

                 

Northern California

  $ 68,973      $ 64,625        6.7   $ 19,853      $ 19,956        (0.5 %)    $ 49,120      $ 44,669        10.0

Southern California

    54,864        53,897        1.8     19,043        18,128        5.0     35,821        35,769        0.1

Northern Texas

    18,666        17,963        3.9     6,022        5,750        4.7     12,644        12,213        3.5

Southern Texas

    17,681        17,329        2.0     6,055        5,928        2.1     11,626        11,401        2.0

Virginia

    81,312        82,317        (1.2 %)      25,647        25,139        2.0     55,665        57,178        (2.6 %) 

Florida

    33,920        32,297        5.0     10,259        10,022        2.4     23,661        22,275        6.2

Maryland

    49,252        48,253        2.1     17,474        15,815        10.5     31,778        32,438        (2.0 %) 

Washington

    8,695        8,302        4.7     2,551        2,569        (0.7 %)      6,144        5,733        7.2
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total Same Park

    333,363        324,983        2.6     106,904        103,307        3.5     226,459        221,676        2.2
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Non-Same Park

                 

Northern California

    7,266        197        3588.3     2,856        100        2756.0     4,410        97        4446.4

Northern Texas

    8,667        1,924        350.5     4,578        1,005        355.5     4,089        919        344.9

Southern Texas

    2,431        1,958        24.2     753        634        18.8     1,678        1,324        26.7

Florida

    83               100.0     247               100.0     (164            (100.0 %) 

Washington

    5,053        3,432        47.2     1,652        1,606        2.9     3,401        1,826        86.3
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total Non-Same Park

    23,500        7,511        212.9     10,086        3,345        201.5     13,414        4,166        222.0
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total

  $ 356,863      $ 332,494        7.3   $ 116,990      $ 106,652        9.7   $ 239,873      $ 225,842        6.2
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   
Reconciliation of NOI to income from continuing operations                                

Total NOI

  

  $ 239,873      $ 225,842        6.2

Other income and (expenses):

  

     

NOI from assets held for sale or sold

  

    11,634        15,080        (22.9 %) 

Lease buyout payments

  

           2,252        (100.0 %) 

LTEIP amortization:

  

     

Cost of operations

  

    (2,623     1,241        (311.4 %) 

General and administrative

  

    (4,802     2,652        (281.1 %) 

Facility management fees

  

    660        639        3.3

Other income and expenses

  

    (13,221     (14,681     (9.9 %) 

Depreciation and amortization

  

    (110,357     (108,917     1.3

General and administrative

  

    (8,487     (7,110     19.4

Acquisition transaction costs

  

    (350     (854     (59.0 %) 

Gain of sale of real estate facilities

  

    92,373               100.0
             

 

 

   

 

 

   

Income from continuing operations

  

  $ 204,700      $ 116,144        76.2
             

 

 

   

 

 

   

The following table summarizes Same Park weighted average occupancy rates and realized rent per square foot by region for the years ended December 31, 2014 and 2013.

 

     Weighted Average Occupancy Rates       Realized Rent Per Square Foot     

Region

   2014   2013   Change   2014    2013    Change

Northern California

   94.6%   89.4%   5.8%   $10.19    $10.11    0.8%

Southern California

   92.4%   92.3%   0.1%   $14.89    $14.65    1.6%

Northern Texas

   90.7%   90.2%   0.6%   $11.63    $11.25    3.4%

Southern Texas

   94.0%   93.9%   0.1%   $12.62    $12.38    1.9%

Virginia

   90.3%   91.0%   (0.8%)   $22.29    $22.38    (0.4%)

Florida

   95.9%   95.5%   0.4%   $9.51    $9.10    4.5%

Maryland

   87.8%   87.1%   0.8%   $23.86    $23.55    1.3%

Washington

   97.4%   94.3%   3.3%   $17.13    $16.89    1.4%

Total Same Park

   92.9%   91.2%   1.9%   $14.34    $14.23    0.8%

Rental Income: Excluding rental income of $19.4 million and $26.8 million from assets held for sale or sold and the lease buyout payment for the years ended December 31, 2014 and 2013, respectively, rental income increased $24.4 million from $332.5 million for the year ended December 31, 2013 to $356.9 million for the year ended December 31, 2014. The increase was a result of a $16.0 million increase in rental income from Non-Same

 

31


Park facilities combined with an increase in rental income from the Same Park portfolio of $8.4 million. The Same Park increase was due to an increase in occupancy, while the increase in Non-Same Park was due to a combination of an increase in occupancy and the acquisition of additional parks during the latter half of 2013. Including the assets held for sale or sold and the lease buyout payment, rental income increased $17.0 million from $359.2 million for the year ended December 31, 2013 to $376.3 million for the year ended December 31, 2014.

Facility Management Fees: Facility management fees, derived from PS, account for a small portion of the Company’s revenues. During the year ended December 31, 2014, $660,000 of revenue was recognized from facility management fees compared to $639,000 for the year ended December 31, 2013.

Cost of Operations: Excluding the adjustment for the LTEIP amortization noted above and cost of operations of $7.8 million and $9.4 million from assets held for sale or sold, cost of operations for the year ended December 31, 2014 was $117.0 million compared to $106.7 million for the year ended December 31, 2013, an increase of $10.3 million, or 9.7%. The increase was a result of a $6.7 million increase in cost of operations from Non-Same Park facilities combined with a $3.6 million or 3.5%, increase from the Same Park portfolio. The increase in Same Park cost of operation was driven by an increase in snow removal costs of $1.6 million in Maryland and Virginia as a result of severe winter storms in 2014 compared to the same period in 2013 combined with increases in utility costs and property taxes. Including the LTEIP amortization and assets held for sale or sold, cost of operations increased $12.5 million from $114.8 million for the year ended December 31, 2013 to $127.4 million for the year ended December 31, 2014.

Depreciation and Amortization Expense: Depreciation and amortization expense was $110.4 million for the year ended December 31, 2014 compared to $108.9 million for the year ended December 31, 2013. The increase in depreciation and amortization expense was due to depreciation from 2013 acquisitions, partially offset by the disposition of assets.

General and Administrative Expenses: Excluding the adjustment for the LTEIP amortization and acquisition transaction costs, for the year ended December 31, 2014, general and administrative expenses increased $1.4 million, or 19.4%, over 2013 as a result of a non-cash expense of $840,000 relating to adjustments made to outstanding stock options as a result of the Special Cash Dividend paid in December, 2014 as well as an adjustment to the shares to be granted to directors upon retirement. Including the LTEIP amortization and acquisition transaction costs, for the year ended December 31, 2014, general and administrative expenses increased $8.3 million, or 156.8%, over 2013.

Interest and Other Income: Interest and other income was $372,000 for the year ended December 31, 2014 compared to $1.5 million for the year ended December 31, 2013. During 2013, the Company sold to PS its ownership interest in STOR-Re Mutual Insurance Company, Inc. (“STOR-Re”) for $1.1 million, representing a 4.0% ownership interest, and accordingly, the Company recorded a gain on sale of the ownership interest of such amount as interest and other income. As of December 31, 2013, the Company had no ownership interest in STOR-Re.

Interest and Other Expenses: Interest and other expenses was $13.6 million for the year ended December 31, 2014 compared to $16.2 million for the year ended December 31, 2013. The decrease in interest and other expenses was primarily attributable to the repayments on the Term Loan and mortgage notes payable of $18.1 million during 2013 partially offset by an increase in interest capitalized for the joint venture development. Included in interest and other expenses for the year ended December 31, 2013 was amortization of the remaining commitment fee of $383,000 as a result of the repayment in full of the Term Loan.

Gain on Sale of Real Estate Facilities: On November 21, 2014, the Company completed the sale of three business parks, consisting of 42 buildings aggregating 656,000 square feet, located in Phoenix, Arizona, for net proceeds of $52.2 million, resulting in a net gain of $29.6 million.

On October 1, 2014, the Company completed the sale of two business parks, Cornell Oaks Corporate Center and Creekside Corporate Park along with 11.5 acres of adjacent land, located in Beaverton, Oregon, for net proceeds of $159.9 million, resulting in a net gain of $62.8 million. The parks consist of 18 buildings aggregating 1.2 million square feet.

 

32


Net Income Allocable to Noncontrolling Interests: Net income allocable to noncontrolling interests reflects the net income allocable to equity interests in the Operating Partnership that are not owned by the Company. Net income allocable to noncontrolling interests was $30.7 million and $13.0 million of allocated income to common unit holders for the years December 31, 2014 and 2013, respectively. The increase was due to the gain on sale of real estate facilities of $92.4 million combined with an increase in NOI, offset by an increase in general and administrative expenses resulting primarily from non-cash stock compensation charges.

Comparison of 2013 to 2012

Results of Operations: Net income for the year ended December 31, 2013 was $116.1 million compared to $95.4 million for the year ended December 31, 2012. Net income allocable to common shareholders for the year ended December 31, 2013 was $43.9 million compared to $19.8 million for the year ended December 31, 2012. Net income per common share on a diluted basis was $1.77 for the year ended December 31, 2013 compared to $0.81 for the year ended December 31, 2012 (based on weighted average diluted common shares outstanding of 24,833,000 and 24,323,000, respectively). The increase in net income allocable to common shareholders was due to the net impact of preferred equity transactions in 2013 and 2012 and the reversal of the 2012 LTEIP amortization (discussed in more detail below and in Note 10 to the consolidated financial statements included in this Form 10-K) combined with an increase in net operating income in 2013 and a decrease in interest expense.

As noted under the “Comparison of 2014 to 2013”, the targets for 2012 and 2013 were not achieved for the 2012 LTEIP and management determined in 2013 that it was not probable that the remaining targets under the 2012 LTEIP would be met. As such, the Company stopped recording amortization and recorded a reversal of all 2012 LTEIP amortization previously recorded in 2012 of $3.9 million during the year ended December 31, 2013. Net compensation expense of $3.9 million related to the 2012 LTEIP was recognized during the year ended December 31, 2012.

To present comparative results, the reversal and all amounts originally expensed in prior periods in either cost of operations (for field leadership) or general and administrative expenses (for executive management) have been reflected as adjustments in the property operations tables below.

For the years ended December 31, 2013 and 2012, the Same Park facilities constitute 25.0 million rentable square feet, representing 84.2% of the 29.7 million square feet in the Company’s portfolio as of December 31, 2013.

 

33


The following table presents the operating results of the Company’s properties for the years ended December 31, 2013 and 2012 in addition to other income and expenses items affecting income from continuing operations (in thousands, except per square foot data):

 

     For The Years Ended
December 31,
       
     2013     2012     Change  

Rental income:

      

Same Park (25.0 million rentable square feet)

   $ 324,983     $ 319,584       1.7

Non-Same Park (2.7 million rentable square feet)

     7,511       1,401       436.1
  

 

 

   

 

 

   

Total rental income

     332,494       320,985       3.6
  

 

 

   

 

 

   

Cost of operations:

      

Same Park

     103,307       102,679       0.6

Non-Same Park

     3,345       683       389.8
  

 

 

   

 

 

   

Total cost of operations

     106,652       103,362       3.2
  

 

 

   

 

 

   

Net operating income:

      

Same Park

     221,676       216,905       2.2

Non-Same Park

     4,166       718       480.2
  

 

 

   

 

 

   

Total net operating income

     225,842       217,623       3.8
  

 

 

   

 

 

   

Other income and (expenses):

      

NOI from assets held for sale or sold (1)

     15,080       14,275       5.6

Lease buyout payments (2)

     2,252       1,783       26.3

LTEIP amortization (3):

      

Cost of operations

     1,241       (1,241     (200.0 %) 

General and administrative

     2,652       (2,652     (200.0 %) 

Facility management fees

     639       649       (1.5 %) 

Other income and expenses

     (14,681     (20,377     (28.0 %) 

Depreciation and amortization

     (108,917     (109,398     (0.4 %) 

General and administrative

     (7,110     (5,917     20.2

Acquisition transaction costs

     (854     (350     144.0
  

 

 

   

 

 

   

Income from continuing operations

   $ 116,144     $ 94,395       23.0
  

 

 

   

 

 

   

Same Park gross margin (4)

     68.2     67.9     0.4

Same Park weighted average occupancy

     91.2     90.0     1.3

Non-Same Park weighted average occupancy

     66.5     52.7     26.2

Same Park realized rent per square foot (5)

   $ 14.23     $ 14.19       0.3

 

(1) Represents NOI from assets held for sale or sold. These assets generated rental income of $24.5 million and $23.8 million for the years ended December 31, 2013 and 2012, respectively. Cost of operations for such assets was $9.4 million and $9.5 million for the years ended December 31, 2013 and 2012, respectively.

 

(2) Represents a lease buyout payment recorded in the fourth quarter of 2013 associated with a 75,000 square foot lease in Oregon which terminated as of December 31, 2013 and a lease buyout payment recorded in the fourth quarter of 2012 associated with a 39,000 square foot lease in Virginia which terminated as of December 25, 2012.

 

(3) Represents the reversal of the 2012 LTEIP amortization in 2013 and the amortization originally recorded in 2012.

 

(4) Computed by dividing Same Park NOI by Same Park rental income.

 

(5) Represents the annualized Same Park rental income earned per occupied square foot.

 

34


Supplemental Property Data and Trends: NOI from continuing operations is summarized for the years ended December 31, 2013 and 2012 by region below. The Company’s calculation of NOI may not be comparable to those of other companies and should not be used as an alternative to measures of performance calculated in accordance with GAAP.

The following table summarizes the Same Park and Non-Same Park operating results by region for the years ended December 31, 2013 and 2012. In addition, the table reflects the comparative impact on the overall rental income, cost of operations and NOI from properties that have been acquired since January 1, 2012, and the impact of such is included in Non-Same Park facilities in the table below. As part of the table below, we have reconciled total NOI to income from continuing operations (in thousands):

 

Region

  Rental
Income
December 31,
2013
    Rental
Income
December 31,
2012
    Increase
(Decrease)
    Cost of
Operations
December 31,
2013
    Cost of
Operations
December 31,
2012
    Increase
(Decrease)
    NOI
December 31,
2013
    NOI
December 31,
2012
    Increase
(Decrease)
 

Same Park

                 

Northern California

  $ 64,625      $ 62,036        4.2   $ 19,956      $ 19,536        2.1   $ 44,669      $ 42,500        5.1

Southern California

    53,897        52,344        3.0     18,128        17,586        3.1     35,769        34,758        2.9

Northern Texas

    17,963        17,787        1.0     5,750        5,783        (0.6 %)      12,213        12,004        1.7

Southern Texas

    17,329        16,325        6.2     5,928        5,711        3.8     11,401        10,614        7.4

Virginia

    82,317        82,437        (0.1 %)      25,139        25,859        (2.8 %)      57,178        56,578        1.1

Florida

    32,297        31,541        2.4     10,022        10,030        (0.1 %)      22,275        21,511        3.6

Maryland

    48,253        48,965        (1.5 %)      15,815        15,627        1.2     32,438        33,338        (2.7 %) 

Washington

    8,302        8,149        1.9     2,569        2,547        0.9     5,733        5,602        2.3
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total Same Park

    324,983        319,584        1.7     103,307        102,679        0.6     221,676        216,905        2.2
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Non-Same Park

                 

Northern California

    197               100.0     100               100.0     97               100.0

Northern Texas

    1,924               100.0     1,005               100.0     919               100.0

Southern Texas

    1,958        63        3007.9     634        15        4126.7     1,324        48        2658.3

Washington

    3,432        1,338        156.5     1,606        668        140.4     1,826        670        172.5
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total Non-Same Park

    7,511        1,401        436.1     3,345        683        389.8     4,166        718        480.2
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total

  $ 332,494      $ 320,985        3.6   $ 106,652      $ 103,362        3.2   $ 225,842      $ 217,623        3.8
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

 

Reconciliation of NOI to income from continuing operations

                 

Total NOI

  $      225,842      $      217,623              3.8

Other income and (expenses):

     

NOI from assets held for sale or sold

    15,080        14,275        5.6

Lease buyout payments

    2,252        1,783        26.3

LTEIP amortization:

     

Cost of operations

    1,241        (1,241     (200.0 %) 

General and administrative

    2,652        (2,652     (200.0 %) 

Facility management fees

    639        649        (1.5 %) 

Other income and expenses

    (14,681     (20,377     (28.0 %) 

Depreciation and amortization

    (108,917     (109,398     (0.4 %) 

General and administrative

    (7,110     (5,917     20.2

Acquisition transaction costs

    (854     (350     144.0
 

 

 

   

 

 

   

Income from continuing operations

  $ 116,144      $ 94,395        23.0
 

 

 

   

 

 

   

The following table summarizes Same Park weighted average occupancy rates and realized rent per square foot by region for the years ended December 31, 2013 and 2012. Realized rent per square foot for Virginia and Total Same Park excludes a $1.8 million lease buyout payment for the year ended December 31, 2012.

 

     Weighted Average Occupancy Rates          

Realized Rent Per Square Foot

        

Region

   2013     2012     Change     2013      2012      Change  

Northern California

     89.4     85.5     4.6   $ 10.11       $ 10.15         (0.4 %) 

Southern California

     92.3     90.9     1.5   $ 14.65       $ 14.45         1.4

Northern Texas

     90.2     93.7     (3.7 %)    $ 11.25       $ 10.72         4.9

Southern Texas

     93.9     92.6     1.4   $ 12.38       $ 11.82         4.7

Virginia

     91.0     90.8     0.2   $ 22.38       $ 22.46         (0.4 %) 

Florida

     95.5     95.7     (0.2 %)    $ 9.10       $ 8.87         2.6

Maryland

     87.1     87.3     (0.2 %)    $ 23.55       $ 23.85         (1.3 %) 

Washington

     94.3     91.4     3.2   $ 16.90       $ 17.11         (1.2 %) 

Total Same Park

     91.2     90.0     1.3   $ 14.23       $ 14.19         0.3

 

35


Rental Income: Excluding rental income of $26.8 million and $25.6 million from assets held for sale or sold and certain lease buyout payments for the years ended December 31, 2013 and 2012, respectively, rental income increased $11.5 million from $321.0 million for the year ended December 31, 2012 to $332.5 million for the year ended December 31, 2013. The increase was a result of a $6.1 million increase in rental income from Non-Same Park facilities combined with an increase of $5.4 million from the Same Park portfolio. The Same Park increase was due to an increase in occupancy while the increase in Non-Same Park was due to a combination of an increase in occupancy and the acquisition of additional parks. Including the assets held for sale or sold and the lease buyout payments, rental income increased $12.7 million from $346.5 million for the year ended December 31, 2012 to $359.2 million for the year ended December 31, 2013.

Facility Management Fees: Facility management fees, derived from PS, account for a small portion of the Company’s revenues. During the year ended December 31, 2013, $639,000 of revenue was recognized from facility management fees compared to $649,000 for the year ended December 31, 2012.

Cost of Operations: Excluding the adjustment for the LTEIP amortization noted above and cost of operations of $9.4 million and $9.5 million from assets held for sale or sold, cost of operations for the year ended December 31, 2013 was $106.7 million compared to $103.4 million for the year ended December 31, 2012, an increase of $3.3 million, or 3.2%. The increase was a result of $2.7 million increase in cost of operations from Non-Same Park facilities combined with a $628,000 or 0.6%, increase from the Same Park portfolio. The increase in Same Park cost of operations was driven by increases in compensation and utility costs partially offset by a decrease in repairs and maintenance costs. Including the LTEIP amortization and assets held for sale or sold, cost of operations increased $723,000 from $114.1 million for the year ended December 31, 2012 to $114.8 million for the year ended December 31, 2013.

Depreciation and Amortization Expense: Depreciation and amortization expense was $108.9 million for the year ended December 31, 2013 compared to $109.4 million for the year ended December 31, 2012. The decrease was primarily due to an increase in fully depreciated assets partially offset by depreciation relating to property acquisitions.

General and Administrative Expenses: Excluding the adjustment for the LTEIP amortization and acquisition transaction costs, for the year ended December 31, 2013, general and administrative expenses increased $1.2 million, or 20.2%, over 2012 as a result of a increases in executive compensation partially offset by costs related to preferred equity redemptions reported during 2012. Including the LTEIP amortization and acquisition transaction costs, for the year ended December 31, 2013, general and administrative expenses decreased $3.6 million, or 40.4%, over 2012.

Interest and Other Income: Interest and other income was $1.5 million for the year ended December 31, 2013 compared to $241,000 for the year ended December 31, 2012. During 2013, the Company sold to PS its ownership interest in STOR-Re for $1.1 million, representing a 4.0% ownership interest, and accordingly, the Company recorded a gain on sale of the ownership interest of such amount as interest and other income. As of December 31, 2013, the Company had no ownership interest in STOR-Re.

Interest and Other Expenses: Interest and other expenses was $16.2 million for the year ended December 31, 2013 compared to $20.6 million for the year ended December 31, 2012. For the year ended December 31, 2013, interest and other expenses included amortization of the remaining commitment fee of $383,000 as a result of the repayment in full of the Term Loan. The decrease in interest and other expenses were primarily attributable to the repayments on the Term Loan and mortgage notes payable of $18.1 million during 2013 combined with no borrowings on the Credit Facility partially offset by the amortization of the remaining commitment fee.

Gain on Sale of Real Estate Facility: Included in total discontinued operations is the gain on the sale of Quail Valley Business Park, a 66,000 square foot flex park in Houston, Texas, for a gross sales price of $2.3 million, resulting in a net gain of $935,000 during October, 2012.

Net Income Allocable to Noncontrolling Interests: Net income allocable to noncontrolling interests reflects the net income allocable to equity interests in the Operating Partnership that are not owned by the Company. Net income allocable to noncontrolling interests was $13.0 million of allocated income to common unit holders for the year December 31, 2013 compared to $6.3 million allocated income ($323,000 allocated to preferred unit

 

36


holders and $6.0 million allocated to common unit holders) for the year ended December 31, 2012. The increase was due to the net impact of preferred equity transactions in 2013 and 2012 and the reversal of the 2012 LTEIP amortization combined with an increase in net operating income in 2013 and a decrease in interest expense.

Liquidity and Capital Resources

Cash and cash equivalents increased $121.0 million from $31.5 million at December 31, 2013 to $152.5 million at December 31, 2014 for the reasons noted below.

Net cash provided by operating activities for the years ended December 31, 2014 and 2013 was $227.8 million and $222.3 million, respectively. The increase of $5.5 million in net cash provided by operating activities for the year ended December 31, 2014 compared to the same period in 2013 was primarily due to an increase in net operating income of $4.5 million combined with a decrease in interest and other expenses. Management believes that the Company’s internally generated net cash provided by operating activities will be sufficient to enable it to meet its operating expenses, capital expenditures, debt service requirements and distributions to shareholders for the foreseeable future.

Net cash provided by investing activities was $113.2 million for the year ended December 31, 2014 compared to net cash used in investing activities of $172.9 million for the year ended December 31, 2013. The change was primarily due to net proceeds of $212.2 million received from the sale of assets located in Beaverton, Oregon and Phoenix, Arizona during 2014 combined with a decrease in cash paid of $68.9 million for acquisitions. The Company paid $45.0 million for acquisitions in Texas, Florida and California in 2014 compared to $113.0 million for acquisitions in Texas and California in 2013.

Net cash used in financing activities was $220.0 million and $30.8 million for the years ended December 31, 2014 and 2013, respectively. The change was primarily due to the use of net proceeds from the issuance of common and preferred equity offerings of $298.6 million to repay debt of $218.1 million during 2013 combined with an increase in common distributions as a result of the Special Cash Dividend paid in December, 2014 and common dividend increase effective March, 2014.

As described in Item 1, “Business — Borrowings,” the Company had an outstanding mortgage note payable of $250.0 million at December 31, 2014 and 2013. The Company had no balance outstanding on its $250.0 million Credit Facility at December 31, 2014 and 2013. The Company fully repaid the outstanding balance of $200.0 million on its Term Loan in November, 2013. See Notes 5 and 6 to the consolidated financial statements included in this Form 10-K for a summary of the Company’s outstanding borrowings as of December 31, 2014.

The Company’s preferred equity outstanding decreased to 25.1% of its market capitalization during the year ended December 31, 2014 primarily due to an increase in stock price from $76.42 at December 31, 2013 to $79.54 at December 31, 2014. As of December 31, 2014, the Company had one fixed-rate mortgage note totaling $250.0 million, which represented 6.3% of its total market capitalization. The Company calculates market capitalization by adding (1) the liquidation preference of the Company’s outstanding preferred equity, (2) principal value of the Company’s outstanding debt and (3) the total number of common shares and common units outstanding at December 31, 2014 multiplied by the closing price of the stock on that date. The interest rate for the mortgage note is 5.45% per annum. The Company had 21.3% of its properties, in terms of net book value, encumbered at December 31, 2014.

The Company focuses on retaining cash for reinvestment as we believe that this provides the greatest level of financial flexibility. While operating results have been negatively impacted by the slow economic conditions, we believe it is likely that as the economy recovers and operating fundamentals improve, additional increases in distributions to the Company’s common shareholders will be required. Going forward, the Company will continue to monitor its taxable income and the corresponding dividend requirements. During the first quarter of 2014, the Company increased its quarterly dividend from $0.44 per common share to $0.50 per common share, increasing quarterly distributions by approximately $2.0 million per quarter. Dividends declared for the three months ended December 31, 2014 included a one-time special cash dividend of $2.75 per share along with the fourth quarter regular dividend of $0.50 per share. The Special Cash Dividend was declared to distribute a portion of the excess income attributable to gains on sales from asset dispositions during 2014, as discussed in Note 3 to the consolidated financial statements included in this Form 10-K.

 

37


Issuance of Preferred Stock: On March 14, 2013, the Company issued $110.0 million or 4.4 million depositary shares, each representing 1/1,000 of a share of the 5.70% Cumulative Preferred Stock, Series V, at $25.00 per depositary share.

On September 14, 2012, the Company issued $230.0 million or 9.2 million depositary shares, each representing 1/1,000 of a share of the 5.75% Cumulative Preferred Stock, Series U, at $25.00 per depositary share.

On May 14, 2012, the Company issued $350.0 million or 14.0 million depositary shares, each representing 1/1,000 of a share of the 6.00% Cumulative Preferred Stock, Series T, at $25.00 per depositary share.

On January 18, 2012, the Company issued $230.0 million or 9.2 million depositary shares, each representing 1/1,000 of a share of the 6.45% Cumulative Preferred Stock, Series S, at $25.00 per depositary share.

Issuance of Common Stock: On November 7, 2013, the Company sold 1,495,000 shares of common stock in a public offering and concurrently sold 950,000 shares of common stock at the public offering price to PS. The aggregate net proceeds were $192.3 million.

Redemption of Preferred Equity: On October 9, 2012, the Company completed the redemption of its 6.70% Cumulative Preferred Stock, Series P, at its par value of $132.3 million. The Company reported the excess of the redemption amount over the carrying amount of $3.8 million, equal to the original issuance costs, as a reduction of net income allocable to common shareholders and unit holders for the year ended December 31, 2012.

On June 15, 2012, the Company completed the redemption of its 7.00% Cumulative Preferred Stock, Series H, at its par value of $158.5 million and its 6.875% Cumulative Preferred Stock, Series I, at its par value of $68.6 million. The Company reported the excess of the redemption amount over the carrying amount of $8.1 million, equal to the original issuance costs, as a reduction of net income allocable to common shareholders and unit holders for the year ended December 31, 2012.

On June 8, 2012, the Company redeemed 223,300 units of its 7.125% Series N Cumulative Redeemable Preferred Units for $5.6 million. The Company reported the excess of the redemption amount over the carrying amount of $149,000, equal to the original issuance costs, as a reduction of net income allocable to common shareholders and unit holders for the year ended December 31, 2012.

During February, 2012, the Company completed the redemption of its 7.20% Cumulative Preferred Stock, Series M, at its par value of $79.6 million and its 7.375% Cumulative Preferred Stock, Series O, at its par value of $84.6 million. The Company reported the excess of the redemption amount over the carrying amount of $5.3 million, equal to the original issuance costs, as a reduction of net income allocable to common shareholders and unit holders for the year ended December 31, 2012.

Repurchase of Common Stock: No shares of common stock were repurchased under the board approved common stock repurchase program during the years ended December 31, 2014 or 2013.

Mortgage Note Repayment: In January, 2013, the Company repaid two mortgage notes payable totaling $18.1 million with a combined weighted average stated interest rate of 5.60%.

In November, 2012, the Company repaid $13.2 million on a mortgage note with a stated interest rate of 5.73%.

 

38


Capital Expenditures: The Company defines recurring capital expenditures as those necessary to maintain and operate its commercial real estate at its current economic value. During the years ended December 31, 2014, 2013 and 2012, the Company expended $47.2 million, $49.2 million and $49.9 million, respectively, in recurring capital expenditures, or $1.59, $1.72 and $1.80 per weighted average square foot owned, respectively. Tenant improvement amounts exclude those amounts reimbursed by the tenants. Nonrecurring capital improvements include property renovations and expenditures related to repositioning acquisitions. The following table depicts capital expenditures (in thousands):

 

     For the Years Ended December 31,  
          2014                2013                2012       

Recurring capital expenditures

        

Capital improvements

   $ 8,664      $ 10,083      $ 8,394  

Tenant improvements

     27,824        29,224        34,236  

Lease commissions

     10,684        9,850        7,244  
  

 

 

    

 

 

    

 

 

 

Total recurring capital expenditures

     47,172        49,157        49,874  
  

 

 

    

 

 

    

 

 

 

Nonrecurring capital improvements

     4,614        9,018        6,898  
  

 

 

    

 

 

    

 

 

 

Total capital expenditures

   $ 51,786      $ 58,175      $ 56,772  
  

 

 

    

 

 

    

 

 

 

Capital expenditures on a per square foot owned basis are as follows:

 

     For the Years Ended December 31,  
         2014              2013              2012      

Recurring capital expenditures

        

Capital improvements

   $ 0.29      $ 0.35      $ 0.30  

Tenant improvements

     0.94        1.02        1.24  

Lease commissions

     0.36        0.35        0.26  
  

 

 

    

 

 

    

 

 

 

Total recurring capital expenditures

     1.59        1.72        1.80  
  

 

 

    

 

 

    

 

 

 

Nonrecurring capital improvements

     0.16        0.32        0.25  
  

 

 

    

 

 

    

 

 

 

Total capital expenditures

   $ 1.75      $ 2.04      $ 2.05  
  

 

 

    

 

 

    

 

 

 

For the year ended December 31, 2014, recurring capital expenditures decreased $1.9 million, or 4.0%, over the same period in 2013 primarily due to cash paid for several significant tenant improvements projects within the Same Park portfolio in 2013. The decrease in nonrecurring capital improvements of $4.4 million, or 48.8%, was due to $5.6 million of repositioning projects spent on 2012 acquisitions in 2013, partially offset by repositioning projects relating to 2014 acquisitions.

Distributions: The Company has elected and intends to qualify as a REIT for federal income tax purposes. In order to maintain its status as a REIT, the Company must meet, among other tests, sources of income, share ownership and certain asset tests. As a REIT, the Company is not taxed on that portion of its taxable income that is distributed to its shareholders provided that at least 90% of its taxable income is distributed to its shareholders prior to the filing of its tax return.

During 2014, the Company sold a combined total of 1.9 million square feet along with some parcels of land in Beaverton, Oregon and Phoenix, Arizona. Absent a special distribution in excess of our normal, recurring quarterly dividend, the Company would have had taxable income in excess of distributions resulting in federal income tax at the corporate level. To qualify for the dividends paid deduction for tax purposes and minimize this potential tax, on December 30, 2014, the Company paid a one-time special cash dividend of $2.75 per common share along with the fourth quarter 2014 regular dividend of $0.50 per common share. Holders of common partnership units of the Operating Partnership also received the same distribution on December 30, 2014. The Board of Directors will continue to evaluate our dividend rate in light of our actual and projected taxable income, liquidity requirements and other circumstances, and there can be no assurance that the future dividends declared by our Board of Directors will not differ materially.

 

39


The Company’s funding strategy has been to primarily use permanent capital, including common and preferred stock, along with internally generated retained cash flows to meet its liquidity needs. In addition, the Company may sell properties that no longer meet its investment criteria. From time to time, the Company may use its Credit Facility or other forms of debt to facilitate real estate acquisitions or other capital allocations. The Company targets a minimum ratio of FFO to combined fixed charges and preferred distributions of 3.0 to 1.0. Fixed charges include interest expense and capitalized interest while preferred distributions include amounts paid to preferred shareholders and preferred Operating Partnership unit holders. For the year ended December 31, 2014, the FFO to fixed charges and preferred distributions coverage ratio was 3.2 to 1.0.

Non-GAAP Supplemental Disclosure Measure: Funds from Operations: Management believes that FFO is a useful supplemental measure of the Company’s operating performance. The Company computes FFO in accordance with the White Paper on FFO approved by the Board of Governors of NAREIT. The White Paper defines FFO as net income, computed in accordance with GAAP, before depreciation, amortization, gains or losses on asset dispositions, net income allocable to noncontrolling interests — common units, net income allocable to restricted stock unit holders, impairment charges and nonrecurring items. Management believes that FFO provides a useful measure of the Company’s operating performance and when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses and interest costs, providing a perspective not immediately apparent from net income.

FFO should be analyzed in conjunction with net income. However, FFO should not be viewed as a substitute for net income as a measure of operating performance or liquidity as it does not reflect depreciation and amortization costs or the level of capital expenditure and leasing costs necessary to maintain the operating performance of the Company’s properties, which are significant economic costs and could materially affect the Company’s results of operations.

Management believes FFO provides useful information to the investment community about the Company’s operating performance when compared to the performance of other real estate companies as FFO is generally recognized as the industry standard for reporting operations of REITs. Other REITs may use different methods for calculating FFO and, accordingly, our FFO may not be comparable to other real estate companies.

 

40


FFO for the Company is computed as follows (in thousands, except per share data):

 

     For The Years Ended December 31,  
     2014     2013     2012     2011     2010  

Net income allocable to common shareholders

   $ 113,154     $ 43,851     $ 19,805     $ 52,162     $ 38,959  

Gain on sale of land and real estate facilities

     (92,373            (935     (2,717     (5,153

Depreciation and amortization (1)

     110,357       108,917       109,494       84,682       78,868  

Net income allocable to noncontrolling interests —common units

     30,729       12,952       5,970       15,543       11,594  

Net income allocable to restricted stock unit holders

     329       125       138       127       152  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FFO allocable to common and dilutive shares

     162,196       165,845       134,472       149,797       124,420  

FFO allocated to noncontrolling interests — common units

     (34,586     (37,755     (31,041     (34,319     (28,450

FFO allocated to restricted stock unit holders

     (256     (264     (455     (301     (374
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FFO allocated to common shares

   $ 127,354     $ 127,826     $ 102,976     $ 115,177     $ 95,596  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

     26,899       24,732       24,234       24,516       24,546  

Weighted average common Operating Partnership units outstanding

     7,305       7,305       7,305       7,305       7,305  

Weighted average restricted stock units outstanding

     69       51       107       64       96  

Weighted average common share equivalents outstanding

     101       101       89       83       141  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total common and dilutive shares

     34,374       32,189       31,735       31,968       32,088  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FFO allocable to common and dilutive shares, as reported

   $ 162,196     $ 165,845     $ 134,472     $ 149,797     $ 124,420  

LTEIP amortization

     7,425       (3,893     3,893                

Lease buyout payments

            (2,252     (1,783     (2,886       

Gain on sale of ownership interest in STOR-Re

            (1,144                     

Gain on the repurchase of preferred equity

                          (7,389       

Acquisition transaction costs

     350       854       350       3,067       3,262  

Non-cash distributions related to the redemption of preferred equity

                   17,316              4,066  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FFO allocable to common and dilutive shares, as adjusted

   $ 169,971     $ 159,410     $ 154,248     $ 142,589     $ 131,748  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FFO per common and dilutive share, as reported

   $ 4.72     $ 5.15     $ 4.24     $ 4.69     $ 3.88  

LTEIP amortization

     0.21       (0.12     0.12                

Lease buyout payments

            (0.07     (0.06     (0.09       

Gain on sale of ownership interest in STOR-Re

            (0.04                     

Gain on the repurchase of preferred equity

                          (0.23       

Acquisition transaction costs

     0.01       0.03       0.01       0.09       0.10  

Non-cash distributions related to the redemption of preferred equity

                   0.55              0.13  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FFO per common and dilutive share, as adjusted

   $ 4.94     $ 4.95     $ 4.86     $ 4.46     $ 4.11  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes depreciation from discontinued operations.

In order to provide a meaningful period-to-period comparison of FFO derived from the Company’s ongoing business operations, the table above reconciles reported FFO to adjusted FFO, which excludes the LTEIP amortization adjustments, certain lease buyout payments, gain on sale of ownership interest in STOR-Re, gain on

 

41


the repurchase of preferred equity, acquisition transaction costs and the impact of non-cash distributions related to the redemption of preferred equity on the Company’s FFO per common and dilutive share for the years ended December 31, 2010 through December 31, 2014.

Adjusted FFO allocable to common and dilutive shares increased $10.6 million for the year ended December 31, 2014 compared to 2013. The increase was due to the increase in NOI from the Same Park and Non-Same Park portfolios partially offset by a decrease in NOI resulting from asset dispositions. Both adjusted and reported FFO per share were impacted by an increase in shares outstanding as a result of the November, 2013 common equity offering.

Related Party Transactions: Assuming issuance of the Company’s common stock upon redemption of its partnership units, PS would own 42.3% (or 14.5 million shares) of the outstanding shares of the Company’s common stock at December 31, 2014. As of December 31, 2014, PS owned 7.2 million shares of the Company’s common stock and 7.3 million common units of the Operating Partnership (100.0% of the common units not owned by the Company).Ronald L. Havner, Jr., the Company’s chairman, is also the Chairman of the Board, Chief Executive Officer and President of PS. Gary E. Pruitt, an independent director of the Company is also a trustee of PS.

Pursuant to a cost sharing and administrative services agreement, the Company shares costs with PS for certain administrative services and rental of corporate office space. The administrative services include investor relations, legal, corporate tax and information systems. These costs totaled $451,000 in 2014, which were allocated to PS in accordance with a methodology intended to fairly allocate those costs. In addition, the Company provides property management services for properties owned by PS for a management fee of 5% of the gross revenues of such properties in addition to reimbursement of direct costs. These management fee revenues recognized under management contract with PS totaled $660,000 in 2014. PS also provides property management services for the self-storage component of two assets owned by the Company for a fee of 6% of the gross revenues of such properties in addition to reimbursement of certain costs. Management fee expense recognized under the management contract with PS totaled $70,000 for the year ended December 31, 2014.

Concurrently with the Company’s public offering of common stock closed on November 7, 2013, the Company sold 950,000 shares of common stock at the public offering price to PS for net proceeds of $75.3 million.

During 2013, the Company sold to PS its ownership interest in STOR-Re for $1.1 million, representing a 4.0% ownership interest, and accordingly, the Company recorded a gain on sale of the ownership interest of such amount as interest and other income. As of December 31, 2013, the Company had no ownership interest in STOR-Re.

On October 1, 2013, PS borrowed $100.0 million from the Company pursuant to the terms of a term loan agreement. The loan, which could be repaid without penalty at any point prior to its maturity date of November 29, 2013, was repaid in full on October 18, 2013. Interest on the loan was at a rate of 1.388% per annum. The loan was funded, in part, with borrowings on the Credit Facility. Interest income, under this note receivable, of $66,000 was recorded for the year ended December 31, 2013.

The PS Business Parks name and logo are owned by PS and licensed to the Company under a non-exclusive, royalty-free license agreement. The license can be terminated by either party for any reason with six months written notice.

Off-Balance Sheet Arrangements: The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a material effect on the Company’s financial condition, results of operations, liquidity, capital expenditures or capital resources.

 

42


Contractual Obligations: The table below summarizes projected payments due under our contractual obligations as of December 31, 2014 (in thousands):

 

     Payments Due by Period  

Contractual Obligations

   Total      Less than 1 year      1 - 3 years      3 - 5 years      More than 5 years  

Mortgage note payable (principal and interest)

   $ 276,122      $ 13,629      $ 262,493      $       $   

Credit Facility (principal)

                                       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 276,122      $ 13,629      $ 262,493      $       $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company is scheduled to pay cash dividends of $60.5 million per year on its preferred equity outstanding as of December 31, 2014. Dividends are paid when and if declared by the Company’s Board of Directors and accumulate if not paid. Shares and units of preferred equity are redeemable by the Company in order to preserve its status as a REIT and are also redeemable five years after issuance.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

To limit the Company’s exposure to market risk, the Company principally finances its operations and growth with permanent equity capital consisting of either common or preferred stock. The Company, from time to time, will use debt financing to facilitate acquisitions. In connection with a portfolio acquisition in 2011, the Company assumed a $250.0 million mortgage note and obtained a $250.0 million Term Loan. The outstanding balance on the Term Loan was fully repaid in November, 2013. As a result, the Company’s debt as a percentage of total equity (based on book values) was 13.1% as of December 31, 2014.

Our exposure to market risk for changes in interest rates relates primarily to the Credit Facility, which is subject to variable interest rates. See Notes 2, 5 and 6 to the consolidated financial statements included in this Form 10-K for additional information regarding the terms, valuations and approximate principal maturities of the Company’s indebtedness, including the mortgage note payable, Credit Facility and Term Loan. Based on borrowing rates currently available to the Company, the difference between the carrying amount of debt and its fair value is insignificant.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements of the Company at December 31, 2014 and 2013 and for the years ended December 31, 2014, 2013 and 2012 and the report of Ernst & Young LLP, Independent Registered Public Accounting Firm, thereon and the related financial statement schedule, are included elsewhere herein. Reference is made to the Index to Consolidated Financial Statements and Schedules in Item 15.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2014. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company’s disclosure controls and procedures as of December 31, 2014, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

 

43


Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee on Sponsoring Organizations of the Treadway Commission (2013 Framework). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2014.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2014 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their attestation report which is included herein.

Changes in Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

44


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

PS Business Parks, Inc.

We have audited PS Business Parks, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). PS Business Parks, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, PS Business Parks, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of PS Business Parks, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of income, equity, and cash flows for each of the three years in the period ended December 31, 2014 and our report dated February 20, 2015 expressed an unqualified opinion thereon.

 

/s/    Ernst & Young LLP

Los Angeles, California

February 20, 2015

 

45


ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item with respect to directors is hereby incorporated by reference to the material appearing in the Company’s definitive proxy statement to be filed in connection with the annual shareholders’ meeting to be held in 2015 (the “Proxy Statement”) under the caption “Election of Directors.”

The following is a biographical summary of the executive officers of the Company:

Joseph D. Russell, Jr., age 55, has been President since September, 2002 and was named Chief Executive Officer and elected as a Director in August, 2003. Mr. Russell joined Spieker Partners in 1990 and became an officer of Spieker Properties when it went public as a REIT in 1993. Prior to its merger with Equity Office Properties (“EOP”) in 2001, Mr. Russell was President of Spieker Properties’ Silicon Valley Region from 1999 to 2001. Mr. Russell earned a Bachelor of Science degree from the University of Southern California and a Masters of Business Administration from the Harvard Business School. Prior to entering the commercial real estate business, Mr. Russell spent approximately six years with IBM in various marketing positions. Mr. Russell has been a member and past President of the National Association of Industrial and Office Parks, Silicon Valley Chapter. Mr. Russell is also a member of the Board of Governors of NAREIT.

John W. Petersen, age 51, has been Executive Vice President and Chief Operating Officer since he joined the Company in December, 2004. Prior to joining the Company, Mr. Petersen was Senior Vice President, San Jose Region, for Equity Office Properties from July, 2001 to December, 2004, responsible for 11.3 million square feet of multi-tenant office, industrial and R&D space in Silicon Valley. Prior to EOP, Mr. Petersen was Senior Vice President with Spieker Properties, from 1995 to 2001 overseeing the growth of that company’s portfolio in San Jose, through acquisition and development of nearly three million square feet. Mr. Petersen is a graduate of The Colorado College in Colorado Springs, Colorado, and was recently the President of National Association of Industrial and Office Parks, Silicon Valley Chapter.

Edward A. Stokx, age 49, a certified public accountant, has been Chief Financial Officer and Secretary of the Company since December, 2003 and Executive Vice President since March, 2004. Mr. Stokx has overall responsibility for the Company’s finance and accounting functions. In addition, he has responsibility for executing the Company’s financial initiatives. Mr. Stokx joined Center Trust, a developer, owner, and operator of retail shopping centers in 1997. Prior to his promotion to Chief Financial Officer and Secretary in 2001, he served as Senior Vice President, Finance and Controller. After Center Trust’s merger in January, 2003 with another public REIT, Mr. Stokx provided consulting services to various entities. Prior to joining Center Trust, Mr. Stokx was with Deloitte and Touche from 1989 to 1997, with a focus on real estate clients. Mr. Stokx earned a Bachelor of Science degree in Accounting from Loyola Marymount University.

Maria R. Hawthorne, age 55, was promoted to Executive Vice President, Chief Administrative Officer of the Company in July, 2013. Ms. Hawthorne most recently served as Executive Vice President, East Coast from February, 2011 to July, 2013. Ms. Hawthorne served as Senior Vice President from March, 2004 to February, 2011, with responsibility for property operations on the East Coast, which includes Northern Virginia, Maryland and South Florida. From June, 2001 through March, 2004, Ms. Hawthorne was Vice President of the Company, responsible for property operations in Virginia. From July, 1994 to June, 2001, Ms. Hawthorne was a Regional Manager of the Company in Virginia. From August, 1988 to July, 1994, Ms. Hawthorne was a General Manager, Leasing Director and Property Manager for American Office Park Properties. Ms. Hawthorne earned a Bachelor of Arts Degree in International Relations from Pomona College.

Information required by this item with respect to the nominating process, the audit committee and the audit committee financial expert is hereby incorporated by reference to the material appearing in the Proxy Statement under the caption “Corporate Governance and Board Matters.”

 

46


Information required by this item with respect to a code of ethics is hereby incorporated by reference to the material appearing in the Proxy Statement under the caption “Corporate Governance and Board Matters.” We have adopted a code of ethics that applies to our principal executive officer, principal financial officer and principal accounting officer, which is available on our website at www.psbusinessparks.com. The information contained on the Company’s website is not a part of, or incorporated by reference into, this Annual Report on Form 10-K. Any amendments to or waivers of the code of ethics granted to the Company’s executive officers or the controller will be published promptly on our website or by other appropriate means in accordance with SEC rules.

Information required by this item with respect to the compliance with Section 16(a) of the Exchange Act is hereby incorporated by reference to the material appearing in the Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.”

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is hereby incorporated by reference to the material appearing in the Proxy Statement under the captions “Corporate Governance and Board Matters,” “Executive Compensation,” “Corporate Governance and Board Matters — Compensation Committee Interlocks and Insider Participation” and “Report of the Compensation Committee.”

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item with respect to security ownership of certain beneficial owners and management is hereby incorporated by reference to the material appearing in the Proxy Statement under the caption “Stock Ownership of Certain Beneficial Owners and Management.”

The following table sets forth information as of December 31, 2014 on the Company’s equity compensation plans:

 

Plan Category

   (a)
Number of Securities
to be Issued Upon
Exercise of
Outstanding
Options,

Warrants and
Rights
    (b)
Weighted
Average
Exercise  Price of
Outstanding
Options,
Warrants and
Rights
    (c)
Number of  Securities
Remaining Available for
Future Issuance under
Equity Compensation
Plans (Excluding
Securities Reflected in
Column (a))
 

Equity compensation plans approved by security holders

     377,022     $ 57.91        919,938  

Equity compensation plans not approved by security holders

                     
  

 

 

   

 

 

   

 

 

 

Total

     377,022   $ 57.91     919,938
  

 

 

   

 

 

   

 

 

 

 

  * Amounts include restricted stock units.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is hereby incorporated by reference to the material appearing in the Proxy Statement under the captions “Corporate Governance and Board Matters” and “Certain Relationships and Related Transactions.”

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is hereby incorporated by reference to the material appearing in the Proxy Statement under the caption “Ratification of Independent Registered Public Accountants.”

 

47


PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

a. 1. Financial Statements

The financial statements listed in the accompanying Index to Consolidated Financial Statements and Schedules are filed as part of this report.

 

  2. Financial Statements Schedule

The financial statements schedule listed in the accompanying Index to Consolidated Financial Statements and Schedules are filed as part of this report.

 

  3. Exhibits

The exhibits listed in the Exhibit Index immediately preceding such exhibits are filed with or incorporated by reference in this report.

 

b. Exhibits

The exhibits listed in the Exhibit Index immediately preceding such exhibits are filed with or incorporated by reference in this report.

 

c. Financial Statement Schedules

Not applicable.

 

48


PS BUSINESS PARKS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

(Item 15(a)(1) and Item 15(a)(2))

 

     Page  

Report of Independent Registered Public Accounting Firm

     50   

Consolidated balance sheets as of December 31, 2014 and 2013

     51   

Consolidated statements of income for the years ended December 31, 2014, 2013 and 2012

     52   

Consolidated statements of equity for the years ended December 31, 2014, 2013 and 2012

     53   

Consolidated statements of cash flows for the years ended December 31, 2014, 2013 and 2012

     54   

Notes to consolidated financial statements

     56   

Schedule:

  

III — Real estate and accumulated depreciation

     73   

All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or notes thereto.

 

49


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

PS Business Parks, Inc.

We have audited the accompanying consolidated balance sheets of PS Business Parks, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of income, equity and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of PS Business Parks, Inc. at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. 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.

As discussed in Note 2 to the consolidated financial statements, the Company changed its reporting of discontinued operations as a result of the adoption of the amendments to the FASB Accounting Standards Codification resulting from Accounting Standards Update No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), PS Business Parks, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 20, 2015 expressed an unqualified opinion thereon.

 

/s/    Ernst & Young LLP

Los Angeles, California

February 20, 2015

 

50


PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (Item 15(a)(1) and Item 15(a)(2))

PS BUSINESS PARKS, INC.

CONSOLIDATED BALANCE SHEETS

 

     December 31,  
     2014     2013  
     (In thousands, except share
data)
 
ASSETS     

Cash and cash equivalents

   $ 152,467     $ 31,481  

Real estate facilities, at cost:

    

Land

     802,949       781,541  

Buildings and improvements

     2,219,397       2,152,178  
  

 

 

   

 

 

 
     3,022,346       2,933,719  

Accumulated depreciation

     (1,014,633     (918,202
  

 

 

   

 

 

 
     2,007,713       2,015,517  

Properties held for disposition, net

     3,289       124,883  

Land and building held for development

     24,442       22,253  
  

 

 

   

 

 

 
     2,035,444       2,162,653  

Rent receivable

     2,838       5,248  

Deferred rent receivable

     26,050       25,903  

Other assets

     10,315       13,274  
  

 

 

   

 

 

 

Total assets

   $ 2,227,114     $ 2,238,559  
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Accrued and other liabilities

   $ 68,905     $ 73,919  

Mortgage note payable

     250,000       250,000  
  

 

 

   

 

 

 

Total liabilities

     318,905       323,919  

Commitments and contingencies

    

Equity:

    

PS Business Parks, Inc.’s shareholders’ equity:

    

Preferred stock, $0.01 par value, 50,000,000 shares authorized, 39,800 shares issued and outstanding at December 31, 2014 and 2013

     995,000       995,000  

Common stock, $0.01 par value, 100,000,000 shares authorized, 26,919,161 and 26,849,822 shares issued and outstanding at December 31, 2014 and, 2013, respectively

     268       267  

Paid-in capital

     709,008       699,314  

Cumulative net income

     1,244,946       1,070,975  

Cumulative distributions

     (1,235,941     (1,047,615
  

 

 

   

 

 

 

Total PS Business Parks, Inc.’s shareholders’ equity

     1,713,281       1,717,941  

Noncontrolling interests:

    

Common units

     194,928       196,699  
  

 

 

   

 

 

 

Total noncontrolling interests

     194,928       196,699  
  

 

 

   

 

 

 

Total equity

     1,908,209       1,914,640  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 2,227,114     $ 2,238,559  
  

 

 

   

 

 

 

See accompanying notes.

 

51


PS BUSINESS PARKS, INC.

CONSOLIDATED STATEMENTS OF INCOME

 

     For The Years Ended December 31,  
     2014     2013     2012  
     (In thousands, except per share data)  

Revenues:

      

Rental income

   $ 376,255     $ 359,246     $ 346,548  

Facility management fees

     660       639       649  
  

 

 

   

 

 

   

 

 

 

Total operating revenues

     376,915       359,885       347,197  
  

 

 

   

 

 

   

 

 

 

Expenses:

      

Cost of operations

     127,371       114,831       114,108  

Depreciation and amortization

     110,357       108,917       109,398  

General and administrative

     13,639       5,312       8,919  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     251,367       229,060       232,425  
  

 

 

   

 

 

   

 

 

 

Other income and (expense):

      

Interest and other income

     372       1,485       241  

Interest and other expense

     (13,593     (16,166     (20,618
  

 

 

   

 

 

   

 

 

 

Total other income and (expense)

     (13,221     (14,681     (20,377
  

 

 

   

 

 

   

 

 

 

Gain on sale of real estate facilities

     92,373                
  

 

 

   

 

 

   

 

 

 

Income from continuing operations

     204,700       116,144       94,395  
  

 

 

   

 

 

   

 

 

 

Discontinued operations:

      

Income from discontinued operations

                   42  

Gain on sale of real estate facilities

                   935  
  

 

 

   

 

 

   

 

 

 

Total discontinued operations

                   977  
  

 

 

   

 

 

   

 

 

 

Net income

   $ 204,700     $ 116,144     $ 95,372  
  

 

 

   

 

 

   

 

 

 

Net income allocation:

      

Net income allocable to noncontrolling interests:

      

Noncontrolling interests — common units

   $ 30,729     $ 12,952     $ 5,970  

Noncontrolling interests — preferred units

                   323  
  

 

 

   

 

 

   

 

 

 

Total net income allocable to noncontrolling interests

     30,729       12,952       6,293  
  

 

 

   

 

 

   

 

 

 

Net income allocable to PS Business Parks, Inc.:

      

Preferred shareholders

     60,488       59,216       69,136  

Restricted stock unit holders

     329       125       138  

Common shareholders

     113,154       43,851       19,805  
  

 

 

   

 

 

   

 

 

 

Total net income allocable to PS Business Parks, Inc.

     173,971       103,192       89,079  
  

 

 

   

 

 

   

 

 

 

Net income

   $ 204,700     $ 116,144     $ 95,372  
  

 

 

   

 

 

   

 

 

 

Net income per common share — basic:

      

Continuing operations

   $ 4.21     $ 1.77     $ 0.79  

Discontinued operations

   $      $      $ 0.03  

Net income

   $ 4.21     $ 1.77     $ 0.82  

Net income per common share — diluted:

      

Continuing operations

   $ 4.19     $ 1.77     $ 0.78  

Discontinued operations

   $      $      $ 0.03  

Net income

   $ 4.19     $ 1.77     $ 0.81  

Weighted average common shares outstanding:

      

Basic

     26,899       24,732       24,234  
  

 

 

   

 

 

   

 

 

 

Diluted

     27,000       24,833       24,323  
  

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

52


PS BUSINESS PARKS, INC.

CONSOLIDATED STATEMENTS OF EQUITY

 

    

 

Preferred Stock

    Common Stock      Paid-in
Capital
    Cumulative
Net Income
     Cumulative
Distributions
    Total PS
Business
Parks, Inc.’s
Shareholders’

Equity
    Noncontrolling
Interests
    Total
Equity
 
     Shares     Amount     Shares      Amount                
     (In thousands, except share data)  

Balances at December 31, 2011

     23,942      $ 598,546        24,128,184       $ 240       $ 534,322      $ 878,704       $ (832,607   $ 1,179,205      $ 181,390      $ 1,360,595   

Issuance of preferred stock, net of issuance costs

     32,400        810,000                        (25,608                    784,392               784,392   

Redemption of preferred stock, net of issuance costs

     (20,942     (523,546                     17,167                (17,167     (523,546            (523,546

Redemption of preferred units, net of issuance costs

                                   149                       149        (5,732     (5,583

Exercise of stock options

                   143,043         2         5,905                       5,907               5,907   

Stock compensation, net

                   27,248                 4,807                       4,807               4,807   

Net income

                                          89,079                89,079        6,293        95,372   

Distributions:

                       

Preferred stock

                                                  (51,969     (51,969            (51,969

Common stock

                                                  (42,684     (42,684            (42,684

Noncontrolling interests

                                                                (13,030     (13,030

Adjustment to noncontrolling interests in underlying operating partnership

                                   349                       349        (349       
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2012

     35,400        885,000        24,298,475         242         537,091        967,783         (944,427     1,445,689        168,572        1,614,261   

Issuance of preferred stock, net of issuance costs

     4,400        110,000                        (3,689                    106,311               106,311   

Issuance of common stock, net of issuance costs

                   2,445,000         24         192,305                       192,329               192,329   

Exercise of stock options

                   97,800         1         4,681                       4,682               4,682   

Stock compensation, net

                   8,547                 (3,043                    (3,043            (3,043

Net income

                                          103,192                103,192        12,952        116,144   

Distributions:

                       

Preferred stock

                                                  (59,216     (59,216            (59,216

Common stock

                                                  (43,972     (43,972            (43,972

Noncontrolling interests

                                                                (12,856     (12,856

Adjustment to noncontrolling interests in underlying operating partnership

                                   (28,031                    (28,031     28,031          
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2013

     39,800        995,000        26,849,822         267         699,314        1,070,975         (1,047,615     1,717,941        196,699        1,914,640   

Exercise of stock options

                   61,273         1         3,053                       3,054               3,054   

Stock compensation, net

                   8,066                 8,842                       8,842               8,842   

Net income

                                          173,971                173,971        30,729        204,700   

Distributions:

                       

Preferred stock

                                                  (60,488     (60,488            (60,488

Common stock

                                                  (127,838     (127,838            (127,838

Noncontrolling interests

                                                                (34,701     (34,701

Adjustment to noncontrolling interests in underlying operating partnership

                                   (2,201                    (2,201     2,201          
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2014

     39,800      $ 995,000        26,919,161       $ 268       $ 709,008      $ 1,244,946       $ (1,235,941   $ 1,713,281      $ 194,928      $ 1,908,209   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

53


PS BUSINESS PARKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     For The Years Ended December 31,  
     2014     2013     2012  
     (In thousands)  

Cash flows from operating activities:

      

Net income

   $ 204,700     $ 116,144     $ 95,372  

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization expense

     110,357       108,917       109,494  

In-place lease adjustment

     (901     118       501  

Tenant improvement reimbursements net of lease incentives

     (1,580     (1,414     (1,315

Gain on sale of real estate facilities

     (92,373            (935

Stock compensation

     9,580       (2,532     5,434  

Decrease (increase) in receivables and other assets

     792       (247     (5,025

Increase (decrease) in accrued and other liabilities

     (2,804     1,308       5,601  
  

 

 

   

 

 

   

 

 

 

Total adjustments

     23,071       106,150       113,755  
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     227,771       222,294       209,127  
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Capital expenditures to real estate facilities

     (51,786     (58,175     (56,772

Capital expenditures to land and building held for development

     (2,189     (752       

Acquisition of real estate facilities

     (45,021     (112,955     (51,022

Acquisition of land held for development

            (990       

Proceeds from sale of real estate facilities

     212,184              2,065  
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     113,188       (172,872     (105,729
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Borrowings on credit facility

            115,000       154,000  

Note receivable from affiliate

            (100,000       

Repayment of borrowings on credit facility

            (115,000     (339,000

Repayment of borrowings on term loan debt

            (200,000     (50,000

Repayment of note receivable from affiliate

            100,000         

Principal payments on mortgage notes payable

            (47     (828

Repayment of mortgage notes payable

            (18,055     (13,154

Net proceeds from the issuance of preferred stock

            106,311       784,392  

Net proceeds from the issuance of common stock

            192,329         

Proceeds from the exercise of stock options

     3,054       4,682       5,907  

Redemption/repurchase of preferred units

                   (5,583

Redemption/repurchase of preferred stock

                   (523,546

Distributions paid to preferred shareholders

     (60,488     (59,216     (51,969

Distributions paid to noncontrolling interests — common units

     (34,701     (12,856     (12,856

Distributions paid to noncontrolling interests — preferred units

                   (174

Distributions paid to common shareholders

     (127,838     (43,972     (42,684
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (219,973     (30,824     (95,495
  

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     120,986       18,598       7,903  

Cash and cash equivalents at the beginning of the period

     31,481       12,883       4,980  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at the end of the period

   $ 152,467     $ 31,481     $ 12,883  
  

 

 

   

 

 

   

 

 

 

Supplemental disclosures:

      

Interest paid

   $ 14,200     $ 15,934     $ 18,872  

See accompanying notes.

 

54


PS BUSINESS PARKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    For The Years Ended December 31,  
          2014                 2013                 2012        
    (In thousands)  

Supplemental schedule of non-cash investing and financing activities:

     

Adjustment to noncontrolling interests in underlying operating partnership:

     

Noncontrolling interests — common units

  $ 2,201     $ 28,031     $ (349

Paid-in capital

  $ (2,201   $ (28,031   $ 349  

Transfer to land and building held for development:

     

Land

  $      $ (5,927   $   

Buildings and improvements

  $      $ (10,270   $   

Accumulated depreciation

  $      $ 778     $   

Land and building held for development

  $      $ 15,419     $   

Issuance costs related to the redemption/repurchase of preferred equity:

     

Cumulative distributions

  $      $      $ (17,167

Noncontrolling interest — common units

  $      $      $ (149

Paid-in capital

  $      $      $ 17,316  

See accompanying notes.

 

55


PS BUSINESS PARKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2014

1. Organization and description of business

Organization

PS Business Parks, Inc. (“PSB”) was incorporated in the state of California in 1990. As of December 31, 2014, PSB owned 77.8% of the common partnership units of PS Business Parks, L.P. (the “Operating Partnership”). The remaining common partnership units are owned by Public Storage (“PS”). PSB, as the sole general partner of the Operating Partnership, has full, exclusive and complete responsibility and discretion in managing and controlling the Operating Partnership. PSB and its subsidiaries, including the Operating Partnership are collectively referred to as the “Company.” Assuming issuance of the Company’s common stock upon redemption of its partnership units, PS would own 42.3% (or 14.5 million shares) of the outstanding shares of the Company’s common stock.

Description of business

The Company is a fully-integrated, self-advised and self-managed real estate investment trust (“REIT”) that owns, operates, acquires and develops commercial properties, primarily multi-tenant flex, office and industrial space. As of December 31, 2014, the Company owned and operated 28.6 million rentable square feet of commercial space concentrated primarily in six states. The Company also manages 1.1 million rentable square feet on behalf of PS.

References to the number of properties or square footage are unaudited and outside the scope of the Company’s independent registered public accounting firm’s audit of the Company’s financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).

2. Summary of significant accounting policies

Basis of presentation

The accompanying consolidated financial statements include the accounts of PSB and the Operating Partnership. All significant inter-company balances and transactions have been eliminated in the consolidated financial statements.

Noncontrolling interests

The Company’s noncontrolling interests are reported as a component of equity separate from the parent’s equity. Purchases or sales of equity interests that do not result in a change in control are accounted for as equity transactions. In addition, net income attributable to the noncontrolling interests is included in consolidated net income on the face of the income statement and, upon a gain or loss of control, the interests purchased or sold, as well as any interests retained, is recorded at fair value with any gain or loss recognized in earnings. At the end of each reporting period, the Company determines the amount of equity (book value of net assets) which is allocable to the noncontrolling interests based upon the ownership interest, and an adjustment is made to the noncontrolling interests, with a corresponding adjustment to paid-in capital, to reflect the noncontrolling interests’ equity interest in the Company.

Use of estimates

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principle requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.

Allowance for doubtful accounts

The Company monitors the collectability of its receivable balances including the deferred rent receivable on an ongoing basis. Based on these reviews, the Company maintains an allowance for doubtful accounts for

 

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estimated losses resulting from the possible inability of tenants to make contractual rent payments to the Company. A provision for doubtful accounts is recorded during each period. The allowance for doubtful accounts, which represents the cumulative allowances less write-offs of uncollectible rent, is netted against tenant and other receivables on the consolidated balance sheets. Tenant receivables are net of an allowance for uncollectible accounts totaling $400,000 at December 31, 2014 and 2013. Deferred rent receivable is net of an allowance for uncollectible accounts totaling $841,000 and $940,000 at December 31, 2014 and 2013, respectively.

Financial instruments

The methods and assumptions used to estimate the fair value of financial instruments are described below. The Company has estimated the fair value of financial instruments using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop estimates of market value. Accordingly, estimated fair values are not necessarily indicative of the amounts that could be realized in current market exchanges. The Company determines the estimated fair value of financial assets and liabilities utilizing a hierarchy of valuation techniques based on whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. This hierarchy requires the use of observable market data when available. The following is the fair value hierarchy:

 

   

Level 1 — quoted prices for identical instruments in active markets;

 

   

Level 2 — quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and

 

   

Level 3 — fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

Financial assets that are exposed to credit risk consist primarily of cash and cash equivalents and receivables. The Company considers all highly liquid investments with a remaining maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents, which consist primarily of money market investments, are only invested in entities with an investment grade rating. Receivables are comprised of balances due from a large number of customers. Balances that the Company expects to become uncollectible are reserved for or written off. Due to the short period to maturity of the Company’s cash and cash equivalents, accounts receivable, other assets and accrued and other liabilities, the carrying values as presented on the consolidated balance sheets are reasonable estimates of fair value.

Carrying values of the Company’s mortgage notes payable, unsecured credit facility and term loan approximate fair value. The characteristics of these financial instruments, market data and other comparative metrics utilized in determining these fair values are “Level 2” inputs.

Real estate facilities

Real estate facilities are recorded at cost. Costs related to the renovation or improvement of the properties are capitalized. Expenditures for repairs and maintenance are expensed as incurred. Expenditures that are expected to benefit a period greater than two years and exceed $2,000 are capitalized and depreciated over their estimated useful life. Buildings and improvements are depreciated using the straight-line method over their estimated useful lives, which generally range from five to 30 years. Transaction costs, which include tenant improvements and lease commissions, in excess of $1,000 for leases with terms greater than one year are capitalized and depreciated over their estimated useful lives. Transaction costs less than $1,000 or for leases of one year or less are expensed as incurred.

Land and building held for development

Property taxes, insurance, interest and costs essential to the development of property for its intended use are capitalized during the period of development. Upon classification of an asset as held for development, depreciation of the asset is ceased.

 

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Properties held for disposition

An asset is classified as an asset held for disposition when it meets certain requirements, which include, among other criteria, the approval of the sale of the asset, the marketing of the asset for sale and the expectation by the Company that the sale will likely occur within the next 12 months. Upon classification of an asset as held for disposition, depreciation of the asset is ceased, and the net book value of the asset is included on the balance sheet as properties held for disposition.

In April, 2014, the Financial Accounting Standard Board (“FASB”) issued amendments to the Accounting Standards Codification resulting from Accounting Standards Update No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. The amended guidance requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity’s financial results or a business activity classified as held for sale should be reported as discontinued operations. The amendments also expand the disclosure requirements for discontinued operations and add new disclosures for individually significant dispositions that do not qualify as discontinued operations. The amendments are effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2014 (early adoption is permitted only for disposals that have not been previously reported). During the first quarter of 2014, the Company early adopted the amended guidance, which did not have a material impact on the consolidated financial position or results of operations.

Prior to the adoption of such guidance, the operating results from assets classified as properties held for disposition prior to December 31, 2013 are included in discontinued operations for the years ended December 31, 2013 and 2012. Subsequent to the adoption, the operating results from assets classified as properties held for disposition as of January 1, 2014 are included in income from continuing operations.

Intangible assets/liabilities

Intangible assets and liabilities include above-market and below-market in-place lease values of acquired properties based on the present value (using an interest rate which the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market and below-market lease values (included in other assets and accrued liabilities in the accompanying consolidated balance sheets) are amortized to rental income over the remaining non-cancelable terms of the respective leases.

The Company recorded a net increase in rental income of $901,000 during the year end December 31, 2014, related to the amortization of net intangible liabilities resulting from the above-market and below-market lease values. The Company recorded net reductions to rental income of $118,000 and $501,000 during the years ended December 31, 2013 and 2012, respectively, tied to the amortization of net intangible assets resulting from the above-market and below-market lease values.

As of December 31, 2014, the value of in-place leases resulted in net intangible assets of $2.5 million, net of $7.8 million of accumulated amortization with a weighted average amortization period of 8.0 years and net intangible liabilities of $3.9 million, net of $6.9 million of accumulated amortization with a weighted average amortization period of 4.5 years. As of December 31, 2013, the value of in-place leases resulted in net intangible assets of $3.7 million, net of $6.6 million of accumulated amortization and net intangible liabilities of $5.4 million, net of $4.8 million of accumulated amortization.

Evaluation of asset impairment

The Company evaluates its assets used in operations for impairment by identifying indicators of impairment and by comparing the sum of the estimated undiscounted future cash flows for each asset to the asset’s carrying value. When indicators of impairment are present and the sum of the estimated undiscounted future cash flows is less than the carrying value of such asset, an impairment loss is recorded equal to the difference between the asset’s current carrying value and its value based on discounting its estimated future cash flows. In addition, the

 

58


Company evaluates its assets held for disposition for impairment. Assets held for disposition are reported at the lower of their carrying value or fair value, less cost of disposition. At December 31, 2014, the Company did not consider any assets to be impaired.

Asset impairment due to casualty loss

It is the Company’s policy to record as a casualty loss or gain, in the period the casualty occurs, the differential between (a) the book value of assets destroyed and (b) any insurance proceeds that the Company expects to receive in accordance with its insurance contracts. Potential proceeds from insurance that are subject to any uncertainties, such as interpretation of deductible provisions of the governing agreements, the estimation of costs of restoration, or other such items, are treated as contingent proceeds and not recorded until the uncertainties are satisfied.

For the years ended December 31, 2014, 2013 and 2012 no material casualty losses were incurred.

Stock compensation

All share-based payments to employees, including grants of employee stock options, are recognized as stock compensation in the Company’s income statement based on their grant date fair values. See Note 10.

Revenue and expense recognition

The Company must meet four basic criteria before revenue can be recognized: persuasive evidence of an arrangement exists; the delivery has occurred or services have been rendered; the fee is fixed or determinable; and collectability is reasonably assured. All leases are classified as operating leases. Rental income is recognized on a straight-line basis over the terms of the leases. Straight-line rent is recognized for all tenants with contractual fixed increases in rent that are not included on the Company’s credit watch list. Deferred rent receivable represents rental revenue recognized on a straight-line basis in excess of billed rents. Reimbursements from tenants for real estate taxes and other recoverable operating expenses are recognized as rental income in the period the applicable costs are incurred. Property management fees are recognized in the period earned.

Costs incurred in connection with leasing (primarily tenant improvements and lease commissions) are capitalized and amortized over the lease period.

Gains from sales of real estate facilities

The Company recognizes gains from sales of real estate facilities at the time of sale using the full accrual method, provided that various criteria related to the terms of the transactions and any subsequent involvement by the Company with the properties sold are met. If the criteria are not met, the Company defers the gains and recognizes them when the criteria are met or uses the installment or cost recovery methods as appropriate under the circumstances.

General and administrative expenses

General and administrative expenses include executive and other compensation, office expenses, professional fees, acquisition transaction costs, state income taxes and other such administrative items.

Income taxes

The Company has qualified and intends to continue to qualify as a REIT, as defined in Section 856 of the Internal Revenue Code of 1986, as amended. As a REIT, the Company is not subject to federal income tax to the extent that it distributes its REIT taxable income to its shareholders. A REIT must distribute at least 90% of its taxable income each year. In addition, REITs are subject to a number of organizational and operating requirements. The Company may be subject to certain state and local taxes on its income and property and to federal income and excise taxes on its undistributed taxable income. The Company believes it met all organization and operating requirements to maintain its REIT status during 2014, 2013 and 2012 and intends to continue to meet such requirements. Accordingly, no provision for income taxes has been made in the accompanying consolidated financial statements.

 

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The Company can recognize a tax benefit only if it is “more likely than not” that a particular tax position will be sustained upon examination or audit. To the extent that the “more likely than not” standard has been satisfied, the benefit associated with a position is measured as the largest amount that is greater than 50% likely of being recognized upon settlement. As of December 31, 2014, the Company did not recognize any tax benefit for uncertain tax positions.

Accounting for preferred equity issuance costs

The Company records issuance costs as a reduction to paid-in capital on its balance sheet at the time the preferred securities are issued and reflects the carrying value of the preferred equity at the stated value. Such issuance costs are recorded as non-cash preferred equity distributions at the time the Company notifies the holders of preferred stock or units of its intent to redeem such shares or units.

Net income allocation

Net income was allocated as follows for the years ended December 31, (in thousands):

 

    2014     2013     2012  

Net income allocable to noncontrolling interests:

     

Noncontrolling interests — common units:

     

Continuing operations

  $ 30,729     $ 12,952     $ 5,744  

Discontinued operations

                  226  
 

 

 

   

 

 

   

 

 

 

Total net income allocable to noncontrolling interests — common units

    30,729       12,952       5,970  
 

 

 

   

 

 

   

 

 

 

Noncontrolling interests — preferred units:

     

Distributions to preferred unit holders

                  174  

Issuance costs related to the redemption of preferred units

                  149  
 

 

 

   

 

 

   

 

 

 

Total net income allocable to noncontrolling interests — preferred units

                  323  
 

 

 

   

 

 

   

 

 

 

Total net income allocable to noncontrolling interests

    30,729       12,952       6,293  
 

 

 

   

 

 

   

 

 

 

Net income allocable to PS Business Parks, Inc.:

     

Preferred shareholders:

     

Distributions to preferred shareholders

    60,488       59,216       51,969  

Issuance costs related to the redemption of preferred stock

                  17,167  
 

 

 

   

 

 

   

 

 

 

Total net income allocable to preferred shareholders

    60,488       59,216       69,136  
 

 

 

   

 

 

   

 

 

 

Restricted stock unit holders:

     

Continuing operations

    329       125       135  

Discontinued operations

                  3  
 

 

 

   

 

 

   

 

 

 

Total net income allocable to restricted stock unit holders

    329       125       138  
 

 

 

   

 

 

   

 

 

 

Common shareholders:

     

Continuing operations

    113,154       43,851       19,057  

Discontinued operations

                  748  
 

 

 

   

 

 

   

 

 

 

Total net income allocable to common shareholders

    113,154       43,851       19,805  
 

 

 

   

 

 

   

 

 

 

Total net income allocable to PS Business Parks, Inc.

    173,971       103,192       89,079  
 

 

 

   

 

 

   

 

 

 

Net income

  $ 204,700     $ 116,144     $ 95,372  
 

 

 

   

 

 

   

 

 

 

Net income per common share

Per share amounts are computed using the number of weighted average common shares outstanding. “Diluted” weighted average common shares outstanding includes the dilutive effect of stock options and restricted stock units under the treasury stock method. “Basic” weighted average common shares outstanding

 

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excludes such effect. The Company’s restricted stock units are participating securities and are included in the computation of basic and diluted weighted average common shares outstanding. The Company’s restricted stock unit holders are paid non-forfeitable dividends in excess of the expense recorded which results in a reduction in net income allocable to common shareholders and unit holders. Earnings per share has been calculated as follows for the years ended December 31, (in thousands, except per share amounts):

 

     2014      2013      2012  

Net income allocable to common shareholders

   $ 113,154      $ 43,851      $ 19,805  
  

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding:

        

Basic weighted average common shares outstanding

     26,899        24,732        24,234  

Net effect of dilutive stock compensation — based on treasury stock method using average market price

     101        101        89  
  

 

 

    

 

 

    

 

 

 

Diluted weighted average common shares outstanding

     27,000        24,833        24,323  
  

 

 

    

 

 

    

 

 

 

Net income per common share — Basic

   $ 4.21      $ 1.77      $ 0.82  
  

 

 

    

 

 

    

 

 

 

Net income per common share — Diluted

   $ 4.19      $ 1.77      $ 0.81  
  

 

 

    

 

 

    

 

 

 

Options to purchase 16,000, 14,000 and 51,200 shares for the years ended December 31, 2014, 2013 and 2012, respectively, were not included in the computation of diluted net income per share because such options were considered anti-dilutive.

Segment reporting

The Company views its operations as one segment.

Reclassifications

Certain reclassifications have been made to the consolidated financial statements for 2013 and 2012 in order to conform to the 2014 presentation.

Recently issued accounting standards

In May, 2014, the FASB issued new accounting guidance which amended the existing accounting standards for revenue recognition. The new accounting guidance establishes principles for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. This guidance is effective for the Company’s fiscal year beginning January 1, 2017. Early adoption is not permitted. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. The Company is currently in the process of evaluating the impact of adoption of the new accounting guidance on its consolidated financial statements.

 

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3. Real estate facilities

The activity in real estate facilities for the years ended December 31, 2014, 2013 and 2012 is as follows (in thousands):

 

     Land     Buildings and
Improvements
    Accumulated
Depreciation
    Total  

Balances at December 31, 2011

   $ 727,022       1,967,806       (742,177     1,952,651  

Acquisition of real estate facilities

     20,779       30,621              51,400  

Capital expenditures, net

            61,561              61,561  

Disposals

            (12,459     12,459         

Depreciation and amortization

                   (109,494     (109,494

Transfer to properties held for disposition

            (5,728     6,938       1,210  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2012

     747,801       2,041,801       (832,274     1,957,328  

Acquisition of real estate facilities

     39,667       76,943              116,610  

Capital expenditures, net

            60,228              60,228  

Disposals

            (15,391     15,391         

Depreciation and amortization

                   (108,917     (108,917

Transfer to properties held for disposition

            (1,133     6,820       5,687  

Transfer to land and building held for development

     (5,927     (10,270     778       (15,419
  

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2013

     781,541       2,152,178       (918,202     2,015,517  

Acquisition of real estate facilities

     21,408       24,890              46,298  

Capital expenditures, net

            54,462              54,462  

Disposals

            (10,587     10,587         

Depreciation and amortization

                   (110,357     (110,357

Transfer to properties held for disposition

            (1,546     3,339       1,793  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2014

   $ 802,949     $ 2,219,397     $ (1,014,633   $ 2,007,713  
  

 

 

   

 

 

   

 

 

   

 

 

 

The unaudited basis of real estate facilities for federal income tax purposes was approximately $2.0 billion at December 31, 2014. The Company had approximately 21.3% of its properties, in terms of net book value, encumbered by mortgage debt at December 31, 2014.

The purchase price of acquired properties is recorded to land, buildings and improvements (including tenant improvements, unamortized lease commissions, acquired in-place lease values, and tenant relationships, if any) and intangible assets and liabilities associated with the value of above-market and below-market leases based on their respective estimated fair values. Acquisition-related costs are expensed as incurred.

In determining the fair value of the tangible assets of the acquired properties, management considers the value of the properties as if vacant as of the acquisition date. Management must make significant assumptions in determining the value of assets acquired and liabilities assumed. Using different assumptions in the recording of the purchase cost of the acquired properties would affect the timing of recognition of the related revenue and expenses. Amounts recorded to land are derived from comparable sales of land within the same region. Amounts recorded to buildings and improvements, tenant improvements and unamortized lease commissions are based on current market replacement costs and other market information. The amount recorded to acquired in-place leases is determined based on management’s assessment of current market conditions and the estimated lease-up periods for the respective spaces.

On December 30, 2014, the Company acquired Charcot Business Park II, an eight-building, 119,000 square foot multi-tenant flex park in San Jose, California, for $16.0 million. The park is contiguous to the Company’s existing 164,000 square foot Charcot Business Park. On November 3, 2014, the Company acquired a 246,000 square foot multi-tenant industrial building in Austin, Texas, for a purchase price of $10.6 million. On August 21, 2014, the Company acquired a 145,000 square foot multi-tenant flex park consisting of six single-story buildings located in Dallas, Texas, for a purchase price of $5.1 million. On July 28, 2014, the Company acquired a 19,000 square foot building in Dallas, Texas, for $1.1 million. The flex building is located in the Company’s 389,000 square foot Arapaho Business Park. On July 24, 2014, the Company acquired a 149,000

 

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square foot building in Miami, Florida, for $12.7 million. The building is located within the Company’s 3.3 million square foot Miami Industrial Commerce Center. The Company incurred and expensed acquisition transaction costs of $350,000 for the year ended December 31, 2014.

On December 20, 2013, the Company acquired Bayshore Corporate Center, an eight-building, 340,000 square foot, office park in San Mateo, California, for $60.5 million. On November 8, 2013, the Company acquired nine multi-tenant flex buildings in the Valwood submarket of Dallas, Texas, aggregating 245,000 square feet for $12.4 million. On October 15, 2013, the Company acquired four multi-tenant flex parks along with a four-acre parcel of land aggregating 559,000 square feet of single-story flex buildings located in Dallas, Texas, for a purchase price of $27.9 million. On July 26, 2013, the Company acquired a 389,000 square foot multi-tenant flex park consisting of 18 single-story buildings located in Dallas, Texas, for a purchase price of $14.8 million. The Company incurred and expensed acquisition transaction costs of $854,000 for the year ended December 31, 2013.

On December 19, 2012, the Company acquired three multi-tenant flex buildings in Austin, Texas, aggregating 226,000 square feet, for a purchase price of $14.9 million. In connection with this purchase, the Company received a $592,000 credit for committed tenant improvements and lease commissions. On July 24, 2012, the Company acquired a 958,000 square foot industrial park consisting of eight single-story buildings located in Kent Valley, Washington, for a purchase price of $37.6 million. The Company incurred and expensed acquisition transaction costs of $350,000 for the year ended December 31, 2012.

The following table summarizes the assets acquired and liabilities assumed for the years ended December 31, (in thousands):

 

     2014     2013     2012  

Land

   $ 21,408     $ 39,667     $ 20,779  

Land held for development

            990         

Buildings and improvements

     24,890       76,943       30,621  

Above-market in-place lease value

            403       709  

Below-market in-place lease value

     (666     (2,428     (251
  

 

 

   

 

 

   

 

 

 

Total purchase price

     45,632       115,575       51,858  

Mortgage note assumed

                     

Net operating assets acquired and liabilities assumed

     (611     (1,630     (836
  

 

 

   

 

 

   

 

 

 

Total cash paid

   $ 45,021     $ 113,945     $ 51,022  
  

 

 

   

 

 

   

 

 

 

On November 21, 2014, the Company completed the sale of three business parks, consisting of 42 buildings aggregating 656,000 square feet, located in Phoenix, Arizona, for net proceeds of $52.2 million, resulting in a net gain of $29.6 million.

On October 1, 2014, the Company completed the sale of two business parks, Cornell Oaks Corporate Center and Creekside Corporate Park along with 11.5 acres of adjacent land, located in Beaverton, Oregon, for net proceeds of $159.9 million, resulting in a net gain of $62.8 million. The parks consist of 18 buildings aggregating 1.2 million square feet.

Subsequent to December 31, 2014, the Company completed the sale of Milwaukie Business Park located in Milwaukie, Oregon, for net proceeds of $10.6 million. The park consists of six mulit-tenant flex buildings aggregating 102,000 square feet.

The Milwaukie Business Park, as well as a 23,000 square foot park in Tempe, Arizona, have been classified as properties held for disposition as of December 31, 2014 and 2013.

In October, 2012, the Company completed the sale of Quail Valley Business Park, a 66,000 square foot flex park in Houston, Texas, for a gross sales price of $2.3 million, resulting in a net gain of $935,000.

 

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The following table summarizes the condensed results of operations for the year ended December 31, 2012 for the property sold during 2012 (in thousands):

 

Rental income

   $ 281  

Cost of operations

     (143

Depreciation

     (96
  

 

 

 

Income from discontinued operations

   $ 42  
  

 

 

 

In addition to minimum rental payments, tenants reimburse the Company for their pro rata share of specified operating expenses. The amount is included as rental income in the table presented above. No such amount was recorded for the year ended December 31, 2012.

At the beginning of 2013, the Company reclassified a 125,000 square foot building located in Northern Virginia to land and building held for development as the Company intends to redevelop the property. In conjunction with the reclassification, the Company ceased depreciation of the asset. In July, 2013, the Company entered into a joint venture agreement with a real estate development company to pursue a multi-family development on the property. During the entitlement phase, all costs related to the pre-development will be split evenly between the Company and its joint venture partner. Subsequent to December 31, 2014, the Company received entitlements for the multi-family project and the property will be contributed to the joint venture upon commencement of construction, which will occur in 2015. The asset and capitalized development costs were $18.4 million and $16.2 million at December 31, 2014 and 2013, respectively, which includes the Company’s basis in the land. For the years ended December 31, 2014 and 2013, the Company capitalized costs of $2.2 million and $752,000, respectively, related to this development, of which $944,000 and $359,000, respectively, related to capitalized interest costs.

4. Leasing activity

The Company leases space in its real estate facilities to tenants primarily under non-cancelable leases generally ranging from one to 10 years. Future minimum rental revenues, excluding recovery of operating expenses under these leases, are as follows as of December 31, 2014 (in thousands):

 

2015

   $ 252,853  

2016

     186,538  

2017

     132,987  

2018

     93,342  

2019

     64,020  

Thereafter

     111,656  
  

 

 

 

Total

   $ 841,396  
  

 

 

 

In addition to minimum rental payments, certain tenants reimburse the Company for their pro rata share of specified operating expenses. Such reimbursements amounted to $80.7 million, $75.1 million and $71.9 million for the years ended December 31, 2014, 2013 and 2012, respectively. These amounts are included as rental income in the accompanying consolidated statements of income.

Leases accounting for 3.4% of total leased square footage are subject to termination options, of which 1.3% of total leased square footage have termination options exercisable through December 31, 2015 (unaudited). In general, these leases provide for termination payments should the termination options be exercised. The future minimum rental revenues in the above table assume such options are not exercised.

5. Bank loans

On April 28, 2014, the Company modified and extended the terms of its line of credit (the “Credit Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”). The expiration of the Credit Facility was extended from August 1, 2015 to May 1, 2019. The Credit Facility has a borrowing limit of $250.0 million. The rate of interest charged on borrowings was modified to a rate ranging from the London Interbank Offered Rate

 

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(“LIBOR”) plus 0.875% to LIBOR plus 1.70% depending on the Company’s credit ratings. Currently, the Company’s rate under the Credit Facility is LIBOR plus 0.925%. In addition, the Company is required to pay an annual facility fee ranging from 0.125% to 0.30% of the borrowing limit depending on the Company’s credit ratings (currently 0.15%). The Company had no balance outstanding on the Credit Facility at December 31, 2014 and 2013. The Company had $1.0 million and $485,000 of unamortized commitment fees as of December 31, 2014 and 2013, respectively. The Credit Facility requires the Company to meet certain covenants, with all of which the Company was in compliance with at December 31, 2014. Interest on outstanding borrowings is payable monthly.

The Company had a term loan with Wells Fargo (the “Term Loan”) in the amount of $250.0 million that was scheduled to mature on December 31, 2014. The Term Loan was repaid in full in November, 2013. Interest on the amounts borrowed under the Term Loan was accrued based on an applicable rate ranging from LIBOR plus 1.15% to LIBOR plus 2.25% depending on the Company’s credit ratings. During 2013, the Company’s rate under the Term Loan was LIBOR plus 1.20%. The Company had $383,000 of unamortized commitment fees as of December 31, 2012 and amortized such amount in full in 2013 as a result of the repayment.

6. Mortgage note payable

The Company has one mortgage note payable with a fixed interest rate of 5.45%, secured by 4.8 million square feet of commercial properties with a net book value of $428.9 million. The interest is payable monthly, and the mortgage note payable has a maturity date of December, 2016. The Company had $250.0 million outstanding on the mortgage note payable as of December 31, 2014 and 2013.

In January, 2013, the Company repaid two mortgage notes payable totaling $18.1 million with a combined stated interest rate of 5.60%.

In November, 2012, the Company repaid $13.2 million on a mortgage note with a stated interest rate of 5.73%.

7. Noncontrolling interests

As described in Note 2, the Company reports noncontrolling interests within equity in the consolidated financial statements, but separate from the Company’s shareholders’ equity. In addition, net income allocable to noncontrolling interests is shown as a reduction from net income in calculating net income allocable to common shareholders.

Common partnership units

The Company presents the accounts of PSB and the Operating Partnership on a consolidated basis. Ownership interests in the Operating Partnership that can be redeemed for common stock, other than PSB’s interest, are classified as noncontrolling interests — common units in the consolidated financial statements. Net income allocable to noncontrolling interests — common units consists of the common units’ share of the consolidated operating results after allocation to preferred units and shares. Beginning one year from the date of admission as a limited partner (common units) and subject to certain limitations described below, each limited partner other than PSB has the right to require the redemption of its partnership interest.

A limited partner (common units) that exercises its redemption right will receive cash from the Operating Partnership in an amount equal to the market value (as defined in the Operating Partnership Agreement) of the partnership interests redeemed. In lieu of the Operating Partnership redeeming the common units for cash, PSB, as general partner, has the right to elect to acquire the partnership interest directly from a limited partner exercising its redemption right, in exchange for cash in the amount specified above or by issuance of one share of PSB common stock for each unit of limited partnership interest redeemed.

A limited partner (common units) cannot exercise its redemption right if delivery of shares of PSB common stock would be prohibited under the applicable articles of incorporation, or if the general partner believes that there is a risk that delivery of shares of common stock would cause the general partner to no longer qualify as a REIT, would cause a violation of the applicable securities laws, or would result in the Operating Partnership no longer being treated as a partnership for federal income tax purposes.

 

65


On December 30, 2014, the Company paid a one-time special cash dividend of $2.75 per share along with the fourth quarter regular dividend of $0.50 per share. Holders of the common partnership units received the same distribution.

At December 31, 2014, there were 7,305,355 common units owned by PS, which are accounted for as noncontrolling interests. Combined with PS’s existing common stock ownership, on a fully converted basis, PS has a combined ownership of 42.3% (or 14.5 million shares) of the Company’s common equity.

Preferred partnership units

The Company had no preferred units outstanding through the Operating Partnership, as of December 31, 2014 and 2013.

On June 8, 2012, the Company redeemed 223,300 units of its 7.125% Series N Cumulative Redeemable Preferred Units for $5.6 million. The Company reported the excess of the redemption amount over the carrying amount of $149,000, equal to the original issuance costs, as a reduction of net income allocable to common shareholders and unit holders for the year ended December 31, 2012.

8. Related party transactions

The Operating Partnership manages industrial, office and retail facilities for PS. These facilities, all located in the United States, operate under the “Public Storage” or “PS Business Parks” names. The PS Business Parks name and logo are owned by PS and licensed to the Company under a non-exclusive, royalty-free license agreement. The license can be terminated by either party for any reason with six months written notice.

Under the property management contract with PS, the Operating Partnership is compensated based on a percentage of the gross revenues of the facilities managed. Under the supervision of the property owners, the Operating Partnership coordinates rental policies, rent collections, marketing activities, the purchase of equipment and supplies, maintenance activities, and the selection and engagement of vendors, suppliers and independent contractors. In addition, the Operating Partnership assists and advises the property owners in establishing policies for the hire, discharge and supervision of employees for the operation of these facilities, including property managers and leasing, billing and maintenance personnel.

The property management contract with PS is for a seven-year term with the agreement automatically extending for an additional one-year period upon each one-year anniversary of its commencement (unless cancelled by either party). Either party can give notice of its intent to cancel the agreement upon expiration of its current term. Management fee revenues under this contract were $660,000, $639,000 and $649,000 for the years ended December 31, 2014, 2013 and 2012, respectively.

PS also provides property management services for the self-storage component of two assets owned by the Company. These self-storage facilities, located in Palm Beach County, Florida, operate under the “Public Storage” name.

Under the property management contract, PS is compensated based on a percentage of the gross revenues of the facilities managed. Under the supervision of the Company, PS coordinates rental policies, rent collections, marketing activities, the purchase of equipment and supplies, maintenance activities, and the selection and engagement of vendors, suppliers and independent contractors. In addition, PS is responsible for establishing the policies for the hire, discharge and supervision of employees for the operation of these facilities, including on-site managers, assistant managers and associate managers.

Either the Company or PS can cancel the property management contract upon 60 days’ notice. Management fee expenses under the contract were $70,000, $59,000 and $55,000 for the years ended December 31, 2014, 2013 and 2012, respectively.

Pursuant to a cost sharing and administrative services agreement, the Company shares costs with PS for certain administrative services and rental of corporate office space, which are allocated to PS in accordance with a methodology intended to fairly allocate those costs. These costs totaled $451,000, $432,000 and $441,000 for the years ended December 31, 2014, 2013 and 2012, respectively.

 

66


The Company had net amounts due from PS of $166,000 at December 31, 2014 and due to PS of $181,000 at December 31, 2013 for these contracts, as well as for certain operating expenses paid by the Company on behalf of PS.

Concurrent with the Company’s public offering of common stock in 2013, as discussed in Note 9, the company sold 950,000 shares of common stock at the public offering price to PS for net proceeds of $75.3 million.

During 2013, the Company sold to PS its ownership interest in STOR-Re Mutual Insurance Company, Inc. (“STOR-Re”) for $1.1 million, representing a 4.0% ownership interest, and accordingly, the Company recorded a gain on sale of the ownership interest of such amount as interest and other income. As of December 31, 2013, the Company had no ownership interest in STOR-Re.

On October 1, 2013, PS borrowed $100.0 million from the Company pursuant to the terms of a term loan agreement. The loan, which could be repaid without penalty at any point prior to its maturity date of November 29, 2013, was repaid in full on October 18, 2013. Interest on the loan was at a rate of 1.388% per annum. The loan was funded, in part, with borrowings on the Credit Facility. Interest income, under this note receivable, was $66,000 for the year ended December 31, 2013.

9. Shareholders’ equity

Preferred stock

As of December 31, 2014 and 2013, the Company had the following series of preferred stock outstanding:

 

Series

   Issuance Date      Earliest Potential
Redemption Date
     Dividend
Rate
    Shares
Outstanding
     Amount
(in thousands)
 

Series R

     October, 2010         October, 2015         6.875     3,000      $ 75,000  

Series S

     January, 2012         January, 2017         6.450     9,200        230,000  

Series T

     May, 2012         May, 2017         6.000     14,000        350,000  

Series U

     September, 2012         September, 2017         5.750     9,200        230,000  

Series V

     March, 2013         March, 2018         5.700     4,400        110,000  
          

 

 

    

 

 

 

Total

             39,800      $ 995,000  
          

 

 

    

 

 

 

On March 14, 2013, the Company issued $110.0 million or 4.4 million depositary shares, each representing 1/1,000 of a share of the 5.70% Cumulative Preferred Stock, Series V, at $25.00 per depositary share.

On October 9, 2012, the Company completed the redemption of its 6.70% Cumulative Preferred Stock, Series P, at its par value of $132.3 million. The Company reported the excess of the redemption amount over the carrying amount of $3.8 million, equal to the original issuance costs, as a reduction of net income allocable to common shareholders and unit holders for the year ended December 31, 2012.

On September 14, 2012, the Company issued $230.0 million or 9.2 million depositary shares, each representing 1/1,000 of a share of the 5.75% Cumulative Preferred Stock, Series U, at $25.00 per depositary share.

On June 15, 2012, the Company completed the redemption of its 7.00% Cumulative Preferred Stock, Series H, at its par value of $158.5 million and its 6.875% Cumulative Preferred Stock, Series I, at its par value of $68.6 million. The Company reported the excess of the redemption amount over the carrying amount of $8.1 million, equal to the original issuance costs, as a reduction of net income allocable to common shareholders and unit holders for the year ended December 31, 2012.

On May 14, 2012, the Company issued $350.0 million or 14.0 million depositary shares, each representing 1/1,000 of a share of the 6.00% Cumulative Preferred Stock, Series T, at $25.00 per depositary share.

During February, 2012, the Company completed the redemption of its 7.20% Cumulative Preferred Stock, Series M, at its par value of $79.6 million and its 7.375% Cumulative Preferred Stock, Series O, at its par value of $84.6 million. The Company reported the excess of the redemption amount over the carrying amount of $5.3

 

67


million, equal to the original issuance costs, as a reduction of net income allocable to common shareholders and unit holders for the year ended December 31, 2012.

On January 18, 2012, the Company issued $230.0 million or 9.2 million depositary shares, each representing 1/1,000 of a share of the 6.45% Cumulative Preferred Stock, Series S, at $25.00 per depositary share.

The Company paid $60.5 million, $59.2 million and $52.0 million in distributions to its preferred shareholders for years ended December 31, 2014, 2013 and 2012, respectively.

Holders of the Company’s preferred stock will not be entitled to vote on most matters, except under certain conditions. In the event of a cumulative arrearage equal to six quarterly dividends, the holders of the preferred stock will have the right to elect two additional members to serve on the Company’s Board of Directors until all events of default have been cured. At December 31, 2014, there were no dividends in arrears.

Except under certain conditions relating to the Company’s qualification as a REIT, the preferred stock is not redeemable prior to the previously noted redemption dates. On or after the respective redemption dates, the respective series of preferred stock will be redeemable, at the option of the Company, in whole or in part, at $25.00 per depositary share, plus any accrued and unpaid dividends. The Company had $31.8 million of deferred costs in connection with the issuance of preferred stock as of December 31, 2014 and 2013, which the Company will report as additional non-cash distributions upon notice of its intent to redeem such shares.

Common stock

Dividends declared for the three months ended December 31, 2014 included a one-time special cash dividend of $2.75 per share (the “Special Cash Dividend”) along with the fourth quarter regular dividend of $0.50 per share. The Special Cash Dividend was declared to distribute a portion of the excess income attributable to gains on sales from asset dispositions during 2014, as discussed in Note 3.

The Company paid $127.8 million ($4.75 per common share), $44.0 million ($1.76 per common share) and $42.7 million ($1.76 per common share) in distributions to its common shareholders for the years ended December 31, 2014, 2013 and 2012, respectively. The portion of the distributions classified as ordinary income was 70.5%, 98.9% and 100.0% for the years ended December 31, 2014, 2013 and 2012, respectively. The portion of the distributions classified as long-term capital gain income was 29.5% and 1.1% for the years ended December 31, 2014 and 2013. No portion of the distributions was classified as long-term capital gain income for the year ended December 31, 2012. The percentages in the two preceding sentences are unaudited.

On November 7, 2013, the Company sold 1,495,000 shares of common stock in a public offering and concurrently sold 950,000 shares of common stock at the public offering price to PS. The aggregate net proceeds were $192.3 million.

No shares of common stock were repurchased under the board approved common stock repurchase program during the years ended December 31, 2014, 2013 and 2012.

Equity stock

In addition to common and preferred stock, the Company is authorized to issue 100.0 million shares of Equity Stock. The Articles of Incorporation provide that the Equity Stock may be issued from time to time in one or more series and give the Board of Directors broad authority to fix the dividend and distribution rights, conversion and voting rights, redemption provisions and liquidation rights of each series of Equity Stock.

10. Stock compensation

PSB has a 2003 Stock Option and Incentive Plan (the “2003 Plan”) and a 2012 Equity and Performance-Based Incentive Compensation Plan (the “2012 Plan”) covering 1.5 million and 1.0 million shares of PSB’s common stock, respectively. Under the 2003 Plan and 2012 Plan, PSB has granted non-qualified options to certain directors, officers and key employees to purchase shares of PSB’s common stock at a price not less than the fair market value of the common stock at the date of grant. Additionally, under the 2003 Plan and 2012 Plan, PSB has granted restricted shares of common stock to certain directors and restricted stock units to officers and key employees.

 

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Options under the 2003 Plan and 2012 Plan vest over a five-year period from the date of grant at the rate of one fifth per year and expire 10 years after the date of grant. Generally, restricted stock units granted are subject to a six-year vesting schedule, none in year one and 20% for each of the next five years. Certain restricted stock unit grants were subjected to a three-year vesting schedule with 33.3% vesting for each of the three years.

The weighted average grant date fair value of options granted during the years ended December 31, 2014, 2013 and 2012 was $10.95 per share, $9.18 per share and $4.85 per share, respectively. The Company has calculated the fair value of each option grant on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants during the years ended December 31, 2014, 2013 and 2012, respectively: a dividend yield of 2.3%, 2.2% and 2.6%; expected volatility of 17.7%, 17.5% and 13.4%; expected life of five years; and risk-free interest rates of 1.7%, 1.0% and 0.9%.

The weighted average grant date fair value of restricted stock units granted during the years ended December 31, 2014, 2013 and 2012 was $81.47, $73.85 and $65.14, respectively. The Company calculated the fair value of each restricted stock unit grant using the market value on the date of grant.

At December 31, 2014, there was a combined total of 920,000 options and restricted stock units authorized to be granted.

In connection with the Special Cash Dividend discussed in Note 9, the number of options and exercise prices of all outstanding options were adjusted pursuant to the anti-dilution provisions of the applicable plans so that the option holders would be neither advantaged nor disadvantaged as a result of the Special Cash Dividend.

Information with respect to outstanding options granted under the 2003 Plan and 2012 Plan is as follows:

 

Options:    Number of
Options
    Weighted
Average
Exercise Price
     Weighted
Average
Remaining
Contract Life
     Aggregate
Intrinsic
Value

(in  thousands)
 

Outstanding at December 31, 2011

     567,216     $ 49.51        

Granted

     44,000     $ 66.69        

Exercised

     (143,043   $ 41.30        

Forfeited

     (13,600   $ 61.05        
  

 

 

         

Outstanding at December 31, 2012

     454,573     $ 53.41        
  

 

 

         

Granted

     24,000     $ 78.99        

Exercised

     (97,800   $ 47.87        

Forfeited

          $         
  

 

 

         

Outstanding at December 31, 2013

     380,773     $ 56.45        
  

 

 

         

Granted

     16,000     $ 82.84        

Exercised

     (61,273   $ 49.84        

Forfeited

     (4,000   $ 52.35        

Special cash dividend adjustment (1)

     10,352     $ N/A         
  

 

 

         

Outstanding at December 31, 2014

     341,852     $ 57.11        5.52 Years       $ 7,720  
  

 

 

         

Exercisable at December 31, 2014 (1)

     222,177     $ 54.14        4.82 Years       $ 5,643  
  

 

 

         

 

(1) In accordance with the applicable equity award plan documents, the number and exercise price of outstanding options have been adjusted as a result of the Special Cash Dividend so that the option holder maintains their economic position with respect to the shareholders.

 

69


Information with respect to outstanding nonvested restricted stock units granted under the 2003 Plan and 2012 Plan is as follows:

 

Restricted Stock Units:    Number of
Units
    Weighted
Average Grant
Date Fair Value
 

Nonvested at December 31, 2011

     59,224     $ 52.24  

Granted

     17,800     $ 65.14  

Vested

     (20,094   $ 51.36  

Forfeited

     (3,840   $ 53.95  
  

 

 

   

Nonvested at December 31, 2012

     53,090     $ 55.69  
  

 

 

   

Granted

     8,350     $ 73.85  

Vested

     (13,690   $ 53.84  

Forfeited

     (2,650   $ 47.96  
  

 

 

   

Nonvested at December 31, 2013

     45,100     $ 60.07  
  

 

 

   

Granted

     6,800     $ 81.47  

Vested

     (12,980   $ 53.65  

Forfeited

     (3,750   $ 69.00  
  

 

 

   

Nonvested at December 31, 2014

     35,170     $ 65.62  
  

 

 

   

Effective March, 2014, the Company entered into a performance-based restricted stock unit program, the Senior Management Long-Term Equity Incentive Program for 2014-2017 (“2014 LTEIP”), with certain employees of the Company. Under the 2014 LTEIP, the Company established three levels of targeted restricted stock unit awards for certain employees, which would be earned only if the Company achieved one of three defined targets during 2014 to 2017. The first type of award is an annual award following the end of each of the four years in the program, with the award subject to and based on the achievement of one of three defined targets during the previous year. The second type of award is an award based on achieving one of three defined targets during the cumulative four-year period 2014-2017. In the event the minimum defined target is not achieved for an annual award, the shares allocated to be awarded for such year are added to the shares that may be received if the four-year target is achieved. Both types of restricted stock unit awards vest in four equal annual installments beginning from the date of award. Up to approximately 85,542 restricted stock units would be granted for each of the four years assuming achievement was met and up to approximately 85,542 restricted stock units would be granted for the cumulative four-year period assuming achievement was met. Compensation expense is recognized based on the shares expected to be awarded based on the target level that is expected to be achieved. Net compensation expense of $7.4 million related to the 2014 LTEIP was recognized for the year ended December 31, 2014.

Effective January 1, 2012, the Company entered into a performance-based restricted stock unit program, the Senior Management Long-Term Equity Incentive Program for 2012-2015 (“2012 LTEIP”), with certain employees of the Company. The targets for 2012 and 2013 were not achieved and management determined in 2013 that it was not probable that the remaining targets under the 2012 LTEIP would be met. As such, the Company stopped recording amortization and recorded a reversal of all 2012 LTEIP amortization previously recorded in 2012 of $3.9 million during the year ended December 31, 2013. Net compensation expense of $3.9 million related to the 2012 LTEIP was recognized during the year ended December 31, 2012.

Net compensation expense of $1.1 million, $425,000 and $419,000 related to stock options was recognized during the years ended December 31, 2014, 2013 and 2012, respectively. Included in 2014 compensation expense relating to stock options was $644,000 of expense resulting from modifications made to outstanding stock options as a result of the Special Cash Dividend paid in December, 2014. Excluding the 2014 LTEIP amortization of $7.4 million, net compensation expense of $526,000 related to restricted stock units was recognized during the year ended December 31, 2014. Excluding the 2012 LTEIP reversal of $3.9 million, net compensation expense of $671,000 related to restricted stock units was recognized during the year ended December 31, 2013. Excluding the 2012 LTEIP amortization of $3.9 million, net compensation expense of $836,000 related to restricted stock units was recognized during the year ended December 31, 2012.

 

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As of December 31, 2014, there was $537,000 of unamortized compensation expense related to stock options expected to be recognized over a weighted average period of 2.8 years. As of December 31, 2014, there was $28.5 million (includes $26.7 million from the 2014 LTEIP) of unamortized compensation expense related to restricted stock units expected to be recognized over a weighted average period of 5.1 years.

Cash received from 61,273 stock options exercised during the year ended December 31, 2014 was $3.1 million. Cash received from 97,800 stock options exercised during the year ended December 31, 2013 was $4.7 million. Cash received from 143,043 stock options exercised during the year ended December 31, 2012 was $5.9 million. The aggregate intrinsic value of the stock options exercised was $2.1 million, $3.1 million and $3.4 million during the years ended December 31, 2014, 2013 and 2012, respectively.

During the year ended December 31, 2014, 12,980 restricted stock units vested; in settlement of these units, 8,066 shares were issued, net of shares applied to payroll taxes. The aggregate fair value of the shares vested for the year ended December 31, 2014 was $1.1 million. During the year ended December 31, 2013, 13,690 restricted stock units vested; in settlement of these units, 8,547 shares were issued, net of shares applied to payroll taxes. The aggregate fair value of the shares vested for the year ended December 31, 2013 was $1.0 million. During the year ended December 31, 2012, 20,094 restricted stock units vested; in settlement of these units, 13,248 shares were issued, net of shares applied to payroll taxes. The aggregate fair value of the shares vested for the year ended December 31, 2012 was $1.3 million.

In May, 2004, the shareholders of the Company approved the issuance of up to 70,000 shares of common stock under the Retirement Plan for Non-Employee Directors (the “Director Plan”). Under the Director Plan, the Company grants 1,000 shares of common stock for each year served as a director up to a maximum of 5,000 shares issued upon retirement. In December, 2011, the Director Plan was amended to increase the maximum shares from 5,000 shares to 7,000 shares, 1,000 shares of common stock for each year served as a director. In November, 2014, the Director Plan was amended to increase the maximum shares from 7,000 shares to 8,000 shares, 1,000 shares of common stock for each year served as a director. The Company recognizes compensation expense with regards to grants to be issued in the future under the Director Plan. As a result, included in the Company’s consolidated statements of income was compensation expense of $550,000, $264,000 and $287,000 for the years ended December 31, 2014, 2013 and 2012, respectively. Included in 2014 compensation expense relating to the retirement shares was $243,000 of expense resulting from the increase in maximum shares. As of December 31, 2014, 2013 and 2012, there was $1.5 million, $1.4 million and $1.2 million, respectively, of unamortized compensation expense related to these shares. In April, 2012, the Company issued 14,000 shares to two directors upon retirement with an aggregate fair value of $956,000. No shares were issued during the years ended December 31, 2014 and 2013.

11. Supplementary quarterly financial data (unaudited, in thousands, except per share data):

 

     Three Months Ended  
     March 31,
2014
     June 30,
2014
     September 30,
2014
     December 31,
2014
 

Rental income

   $ 95,321      $ 93,986      $ 95,627      $ 91,321  
  

 

 

    

 

 

    

 

 

    

 

 

 

Cost of operations

   $ 33,444      $ 31,535      $ 33,102      $ 29,290  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income allocable to common shareholders

   $ 9,940      $ 9,826      $ 11,268      $ 82,131  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share:

           

Basic

   $ 0.37      $ 0.37      $ 0.42      $ 3.05  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.37      $ 0.36      $ 0.42      $ 3.04  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

71


     Three Months Ended  
     March 31,
2013
     June 30,
2013
     September 30,
2013
     December 31,
2013
 

Rental income

   $ 88,120      $ 87,930      $ 89,772      $ 93,424  
  

 

 

    

 

 

    

 

 

    

 

 

 

Cost of operations

   $ 29,384      $ 28,720      $ 29,901      $ 26,826  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income allocable to common shareholders

   $ 8,540      $ 8,711      $ 9,001      $ 17,682  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share:

           

Basic

   $ 0.35      $ 0.36      $ 0.37      $ 0.68  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.35      $ 0.36      $ 0.37      $ 0.68  
  

 

 

    

 

 

    

 

 

    

 

 

 

12. Commitments and contingencies

The Company currently is neither subject to any other material litigation nor, to management’s knowledge, is any material litigation currently threatened against the Company other than routine litigation and administrative proceedings arising in the ordinary course of business.

13. 401(k) Plan

The Company has a 401(k) savings plan (the “Plan”) in which all eligible employees may participate. The Plan provides for the Company to make matching contributions to all eligible employees up to 4% of their annual salary dependent on the employee’s level of participation. For the years ended December 31, 2014, 2013 and 2012, $417,000, $362,000, and $345,000, respectively, was charged as expense related to this plan.

 

72


PS BUSINESS PARKS, INC.

SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION (1)

DECEMBER 31, 2014

(DOLLARS IN THOUSANDS)

 

              Initial Cost to Company     Cost
Capitalized
Subsequent to
Acquisition
    Gross Amount at Which Carried at
December 31, 2014
                 

Description

  Location   Encumbrances     Land     Buildings
and
Improvements
    Buildings
and
Improvements
    Land     Buildings
and
Improvements
    Total     Accumulated
Depreciation
    Year(s) Acquired   Depreciable
Lives
(Years)
 

Buena Park Industrial Center

  Buena Park, CA   $      $ 3,245      $ 7,703      $ 2,504      $ 3,245      $ 10,207      $ 13,452      $ 6,169      1997     5-30   

Carson

  Carson, CA            990        2,496        1,410        990        3,906        4,896        2,599      1997     5-30   

Cerritos Business Center

  Cerritos, CA            4,218        10,273        4,137        4,218        14,410        18,628        8,944      1997     5-30   

Cerritos/Edwards

  Cerritos, CA            450        1,217        1,402        450        2,619        3,069        1,687      1997     5-30   

Concord Business Park Total

  Concord, CA            12,454        20,491        727        12,454        21,218        33,672        3,302      2011     5-30   

Culver City

  Culver City, CA            3,252        8,157        6,077        3,252        14,234        17,486        9,669      1997     5-30   

Bayview Business Park

  Fremont, CA     7,300        4,990        4,831        192        4,990        5,023        10,013        1,007      2011     5-30   

Christy Business Park

  Fremont, CA     14,200        11,451        16,254        1,246        11,451        17,500        28,951        3,088      2011     5-30   

Industrial Drive Distribution Center

  Fremont, CA     5,300        7,482        6,812        724        7,482        7,536        15,018        1,140      2011     5-30   

Bay Center Business Park

  Hayward, CA     27,500        19,052        50,501        3,002        19,052        53,503        72,555        8,432      2011     5-30   

Cabot Distribution Center

  Hayward, CA     9,300        5,859        10,811        310        5,859        11,121        16,980        1,711      2011     5-30   

Diablo Business Park

  Hayward, CA            9,102        15,721        819        9,102        16,540        25,642        2,828      2011     5-30   

Eden Landing

  Hayward, CA     4,800        3,275        6,174        85        3,275        6,259        9,534        1,083      2011     5-30   

Hayward Business Park

  Hayward, CA     46,400        28,256        54,418        2,187        28,256        56,605        84,861        8,143      2011     5-30   

Huntwood Business Park

  Hayward, CA     11,600        7,391        11,819        829        7,391        12,648        20,039        2,219      2011     5-30   

Parkway Commerce

  Hayward, CA            4,398        10,433        4,525        4,398        14,958        19,356        9,435      1997     5-30   

Corporate Pointe

  Irvine, CA            6,876        18,519        6,345        6,876        24,864        31,740        15,552      2000     5-30   

Laguna Hills Commerce Center

  Laguna Hills, CA            16,261        39,559        6,513        16,261        46,072        62,333        26,726      1997     5-30   

Plaza Del Lago

  Laguna Hills, CA            2,037        5,051        3,814        2,037        8,865        10,902        5,926      1997     5-30   

Canada

  Lake Forest, CA            5,508        13,785        5,367        5,508        19,152        24,660        11,944      1997     5-30   

Dixon Landing Business Park

  Milpitas, CA     30,000        26,301        21,121        2,849        26,301        23,970        50,271        4,472      2011     5-30   

Monterey/Calle

  Monterey, CA            288        706        339        288        1,045        1,333        683      1997     5-30   

Monterey Park

  Monterey Park, CA            3,078        7,862        1,466        3,078        9,328        12,406        5,938      1997     5-30   

Port of Oakland

  Oakland, CA     10,800        5,638        11,066        645        5,638        11,711        17,349        1,929      2011     5-30   

Orangewood

  Orange County, CA            2,637        12,291        3,303        2,637        15,594        18,231        8,117      2003     5-30   

Northpointe Business Center

  Sacramento, CA            3,031        13,826        6,115        3,031        19,941        22,972        13,040      1999     5-30   

Sacramento/Northgate

  Sacramento, CA            1,710        4,567        3,026        1,710        7,593        9,303        5,364      1997     5-30   

Kearney Mesa

  San Diego, CA            2,894        7,089        2,721        2,894        9,810        12,704        6,195      1997     5-30   

Lusk

  San Diego, CA            5,711        14,049        5,340        5,711        19,389        25,100        12,431      1997     5-30   

Rose Canyon Business Park

  San Diego, CA            15,129        20,054        1,975        15,129        22,029        37,158        10,724      2005     5-30   

Charcot Business Park

  San Jose, CA     10,300        18,654        17,580        1,124        18,654        18,704        37,358        2,741      2011/2014     5-30   

Las Plumas

  San Jose, CA            4,379        12,889        6,595        4,379        19,484        23,863        13,114      1998     5-30   

Little Orchard Distribution Center

  San Jose, CA     5,900        7,725        3,846        51        7,725        3,897        11,622        834      2011     5-30   

Montague Industrial Park

  San Jose, CA     14,200        14,476        12,807        277        14,476        13,084        27,560        3,076      2011     5-30   

Oakland Road

  San Jose, CA            3,458        8,765        3,046        3,458        11,811        15,269        7,439      1997     5-30   

Rogers Ave

  San Jose, CA            3,540        4,896        516        3,540        5,412        8,952        2,303      2006     5-30   

Doolittle Business Park

  San Leandro, CA     4,500        3,929        6,231        334        3,929        6,565        10,494        1,213      2011     5-30   

Bayshore Corporate Center

  San Mateo, CA            25,108        36,891        2,141        25,108        39,032        64,140        4,277      2013     5-30   

San Ramon/Norris Canyon

  San Ramon, CA            1,486        3,642        1,260        1,486        4,902        6,388        3,102      1997     5-30   

Orange County Business Center

  Orange County, CA            9,405        35,746        17,019        9,405        52,765        62,170        38,106      2003     5-30   

Commerce Park

  Santa Clara, CA            17,218        21,914        3,548        17,218        25,462        42,680        14,836      2007     5-30   

Santa Clara Tech Park

  Santa Clara, CA            7,673        15,645        3,915        7,673        19,560        27,233        11,960      2000     5-30   

 

73


              Initial Cost to Company     Cost
Capitalized
Subsequent to
Acquisition
    Gross Amount at Which Carried at
December 31, 2014
                 

Description

  Location   Encumbrances     Land     Buildings
and
Improvements
    Buildings
and
Improvements
    Land     Buildings
and
Improvements
    Total     Accumulated
Depreciation
    Year(s) Acquired   Depreciable
Lives
(Years)
 

Walsh at Lafayette

  Santa Clara, CA     19,300        13,439        17,890        273        13,439        18,163        31,602        3,751      2011     5-30   

Signal Hill

  Signal Hill, CA            6,693        12,699        2,587        6,693        15,286        21,979        8,141      1997/2006     5-30   

Airport Boulevard

  So San Francisco, CA            899        2,387        691        899        3,078        3,977        1,927      1997     5-30   

South San Francisco/Produce

  So San Francisco, CA            776        1,886        501        776        2,387        3,163        1,457      1997     5-30   

Studio City/Ventura

  Studio City, CA            621        1,530        598        621        2,128        2,749        1,229      1997     5-30   

Kifer Industrial Park

  Sunnyvale, CA     28,600        13,227        37,874        1,319        13,227        39,193        52,420        6,266      2011     5-30   

Torrance

  Torrance, CA            2,318        6,069        3,090        2,318        9,159        11,477        5,871      1997     5-30   

Boca Commerce

  Boca Raton, FL            7,795        9,258        1,510        7,795        10,768        18,563        3,923      2006     5-30   

MICC

  Miami, FL            95,115        112,583        38,727        95,115        151,310        246,425        78,572      2003/2011/2014     5-30   

Wellington

  Wellington, FL            10,845        18,560        2,699        10,845        21,259        32,104        7,494      2006     5-30   

Ammendale

  Beltsville, MD            4,278        18,380        10,322        4,278        28,702        32,980        19,821      1998     5-30   

Gaithersburgh/Christopher

  Gaithersburg, MD            475        1,203        624        475        1,827        2,302        1,206      1997     5-30   

Metro Park

  Rockville, MD            33,995        94,463        36,267        33,995        130,730        164,725        79,196      2001     5-30   

Parklawn Business Park

  Rockville, MD            3,387        19,628        3,459        3,387        23,087        26,474        6,555      2010     5-30   

Shady Grove

  Rockville, MD            5,372        50,727        8,791        5,372        59,518        64,890        14,904      2010     5-30   

Westech Business Park

  Silver Spring, MD            25,261        74,572        15,846        25,261        90,418        115,679        46,812      2006     5-30   

Ben White

  Austin, TX            1,550        7,015        1,875        1,550        8,890        10,440        5,535      1998     5-30   

Lamar Business Park

  Austin, TX            2,528        6,596        4,256        2,528        10,852        13,380        8,833      1997     5-30   

McKalla

  Austin, TX            1,945        13,212        2,173        1,945        15,385        17,330        6,270      1998/2012     5-30   

McNeil

  Austin, TX            5,477        24,495        2,343        5,477        26,838        32,315        7,271      1999/2010/2012/2014     5-30   

Rutland

  Austin, TX            2,022        9,397        3,830        2,022        13,227        15,249        7,321      1998/1999     5-30   

Waterford

  Austin, TX            2,108        9,649        3,283        2,108        12,932        15,040        8,457      1999     5-30   

Braker Busienss Park

  Austin, TX            1,874        13,990        1,215        1,874        15,205        17,079        5,019      2010     5-30   

Mopac Business Park

  Austin, TX            719        3,579        371        719        3,950        4,669        1,249      2010     5-30   

Southpark Business Park

  Austin, TX            1,266        9,882        2,085        1,266        11,967        13,233        3,809      2010     5-30   

Valwood Business Center

  Carrolton, TX            2,510        13,859        916        2,510        14,775        17,285        1,667      2013     5-30   

Empire Commerce

  Dallas, TX            304        1,545        816        304        2,361        2,665        1,629      1998     5-30   

Northgate

  Dallas, TX            1,274        5,505        3,795        1,274        9,300        10,574        6,085      1998     5-30   

Northway Plaza

  Farmers Branch, TX            1,742        4,503        585        1,742        5,088        6,830        558      2013     5-30   

Springlake Business Center

  Farmers Branch, TX            2,607        5,715        373        2,607        6,088        8,695        550      2013/2014     5-30   

Westwood Business Park

  Farmers Branch TX            941        6,884        2,308        941        9,192        10,133        4,692      2003     5-30   

Eastgate

  Garland, TX            480        1,203        573        480        1,776        2,256        1,165      1997     5-30   

Freeport Business Park

  Irving, TX            4,564        9,506        693        4,564        10,199        14,763        1,179      2013     5-30   

NFTZ (2)

  Irving, TX            1,517        6,499        3,470        1,517        9,969        11,486        5,892      1998     5-30   

Royal Tech

  Irving, TX            13,989        54,113        21,643        13,989        75,756        89,745        45,976      1998-2000/2011     5-30   

La Prada

  Mesquite, TX            495        1,235        630        495        1,865        2,360        1,249      1997     5-30   

The Summit

  Plano, TX            1,536        6,654        4,321        1,536        10,975        12,511        7,403      1998     5-30   

Arapaho Business Park

  Richardson, TX            5,226        10,661        2,268        5,226        12,929        18,155        1,952      2013/2014     5-30   

Richardson Business Park

  Richardson, TX            799        3,568        2,700        799        6,268        7,067        4,329      1998     5-30   

Bren Mar

  Alexandria, VA            2,197        5,380        3,722        2,197        9,102        11,299        6,058      1997     5-30   

Eisenhower

  Alexandria, VA            1,440        3,635        2,309        1,440        5,944        7,384        4,239      1997     5-30   

Beaumont

  Chantilly, VA            4,736        11,051        2,083        4,736        13,134        17,870        6,363      2006     5-30   

Dulles South/Sullyfield

  Chantilly, VA            1,373        6,810        2,939        1,373        9,749        11,122        6,044      1999     5-30   

Lafayette

  Chantilly, VA            1,680        13,398        4,481        1,680        17,879        19,559        11,767      1999/2000     5-30   

Park East

  Chantilly, VA            3,851        18,029        10,000        3,851        28,029        31,880        16,442      1999     5-30   

Fair Oaks Business Campus

  Fairfax, VA            13,598        36,232        7,142        13,598        43,374        56,972        22,722      2004/2007     5-30   

Monroe

  Herndon, VA            6,737        18,911        9,668        6,737        28,579        35,316        19,055      1997/1999     5-30   

Gunston

  Lorton, VA            4,146        17,872        6,346        4,146        24,218        28,364        14,222      1998     5-30   

Westpark Business Campus

  McLean, VA            47,955        101,847        20,337        47,955        122,184        170,139        31,115      2010/2011     5-30   

Prosperity Business Campus

  Merrifield, VA            23,147        67,575        28,297        23,147        95,872        119,019        54,577      2001     5-30   

 

74


              Initial Cost to Company     Cost
Capitalized
Subsequent to
Acquisition
    Gross Amount at Which Carried at
December 31, 2014
                 

Description

  Location   Encumbrances     Land     Buildings
and
Improvements
    Buildings
and
Improvements
    Land     Buildings
and
Improvements
    Total     Accumulated
Depreciation
    Year(s) Acquired   Depreciable
Lives
(Years)
 

Alban Road

  Springfield, VA                 —        1,935        4,736        4,966        1,935        9,702        11,637        6,745      1997     5-30   

I-95

  Springfield, VA            3,535        15,672        11,335        3,535        27,007        30,542        18,987      2000     5-30   

Northpointe

  Sterling, VA            2,767        8,778        4,266        2,767        13,044        15,811        9,207      1997/1998     5-30   

Shaw Road

  Sterling, VA            2,969        10,008        4,204        2,969        14,212        17,181        10,003      1998     5-30   

Tysons Corporate Center

  Vienna, VA            9,885        25,302        9,649        9,885        34,951        44,836        10,080      2010     5-30   

Woodbridge

  Woodbridge, VA            1,350        3,398        1,810        1,350        5,208        6,558        3,571      1997     5-30   

212th Business Park

  Kent, WA            19,573        17,695        11,303        19,573        28,998        48,571        3,892      2012     5-30   

Overlake

  Redmond, WA            27,761        49,353        6,309        27,761        55,662        83,423        29,862      2007     5-30   

Renton

  Renton, WA            330        889        532        330        1,421        1,751        969      1997     5-30   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     
    $ 250,000      $ 802,949      $ 1,754,053      $ 465,344      $ 802,949      $ 2,219,397      $ 3,022,346      $ 1,014,633       
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

(1) Excludes 125,000 square feet of assets held for sale as of December 31, 2014.

 

(2) The Company owns two properties that are subject to ground leases in Las Colinas, Texas, expiring in 2019 and 2020, each with one 10 year extension option.

 

75


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: February 20, 2015
PS BUSINESS PARKS, INC.
By:   /s/ Joseph D. Russell, Jr.
  Joseph D. Russell, Jr.
  President and Chief Executive Officer

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 registrant and in the capacities and on the dates indicated.

 

Signature

  

Title

 

Date

/s/ Ronald L. Havner, Jr.

Ronald L. Havner, Jr.

   Chairman of the Board   February 20, 2015

/s/ Joseph D. Russell, Jr.

Joseph D. Russell, Jr.

   President, Director and Chief Executive Officer (principal executive officer)   February 20, 2015

/s/ Edward A. Stokx

Edward A. Stokx

   Chief Financial Officer (principal financial officer and principal accounting officer)   February 20, 2015

/s/ Jennifer Holden Dunbar

Jennifer Holden Dunbar

   Director   February 20, 2015

/s/ James H. Kropp

James H. Kropp

   Director   February 20, 2015

/s/ Sara Grootwassink Lewis

Sara Grootwassink Lewis

   Director   February 20, 2015

/s/ Michael V. McGee

Michael V. McGee

   Director   February 20, 2015

/s/ Gary E. Pruitt

Gary E. Pruitt

   Director   February 20, 2015

/s/ Robert S. Rollo

Robert S. Rollo

   Director   February 20, 2015

/s/ Peter Schultz

Peter Schultz

   Director   February 20, 2015

 

76


PS BUSINESS PARKS, INC.

EXHIBIT INDEX

(Items 15(a)(3) and 15(b))

 

  3.1    Restated Articles of Incorporation. Filed with Registrant’s Registration Statement on Form S-3 (SEC File No. 333-78627) and incorporated herein by reference.
  3.2    Restated Bylaws, as amended. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 (SEC File No. 001-10709) and incorporated herein by reference.
  3.3    Certificate of Determination of Preferences of 6.875% Cumulative Preferred Stock, Series R of PS Business Parks, Inc. Filed with Registrant’s Current Report on Form 8-K dated October 7, 2010 (SEC File No. 001-10709) and incorporated herein by reference.
  3.4    Certificate of Determination of Preferences of 6.45% Cumulative Preferred Stock, Series S of PS Business Parks, Inc. Filed with Registrant’s Current Report on Form 8-K dated January 11, 2012 (SEC File No. 001-10709) and incorporated herein by reference.
  3.5    Certificate of Determination of Preferences of 6.00% Series T Cumulative Redeemable Preferred Stock of PS Business Parks, Inc. Filed with Registrant’s Current Report on Form 8-K dated May 7, 2012 (SEC File No. 001-10709) and incorporated herein by reference
  3.6    Certificate of Determination of Preferences of 5.75% Series U Cumulative Redeemable Preferred Stock of PS Business Parks, Inc. Field with Registrant’s Current Report on Form 8-K dated September 7, 2012 (SEC File No. 001-10709) and incorporated herein by reference.
  3.7    Certificate of Determination of Preferences of 5.70% Series V Cumulative Redeemable Preferred Stock of PS Business Parks, Inc. Field with Registrant’s Current Report on Form 8-K dated March 5, 2013 (SEC File No. 001-10709) and incorporated herein by reference.
  4.1    Deposit Agreement Relating to 6.875% Cumulative Preferred Stock, Series R of PS Business Parks, Inc., dated as of October 7, 2010. Filed with Registrant’s Current Report on Form 8-K dated October 7, 2010 (SEC File No. 001-10709) and incorporated herein by reference.
  4.2    Deposit Agreement Relating to 6.45% Cumulative Preferred Stock, Series S of PS Business Parks, Inc., dated as of January 10, 2012. Filed with Registrant’s Current Report on Form 8-K dated January 11, 2012 (SEC File No. 001-10709) and incorporated herein by reference.
  4.3    Deposit Agreement Relating to 6.00% Cumulative Preferred Stock, Series T of PS Business Parks, Inc. dated as of May 3, 2012. Filed with Registrant’s Current Report on Form 8-K dated May 7, 2012 (SEC File No. 001-10709) and incorporated herein by reference.
  4.4    Deposit Agreement Relating to 5.75% Cumulative Preferred Stock, Series U of PS Business Parks, Inc. dated as of September 5, 2012. Filed with Registrant’s Current Report on Form 8-K dated September 7, 2012 (SEC File No. 001-10709) and incorporated herein by reference.
  4.5    Deposit Agreement Relating to 5.70% Cumulative Preferred Stock, Series V of PS Business Parks, Inc. dated as of March 5, 2013. Filed with Registrant’s Current Report on Form 8-K dated March 5, 2013 (SEC File No. 001-10709) and incorporated herein by reference.
10.1    Amended Management Agreement between Storage Equities, Inc. and Public Storage Commercial Properties Group, Inc. dated as of February 21, 1995. Filed with PS’s Annual Report on Form 10-K for the year ended December 31, 1994 (SEC File No. 001-08389) and incorporated herein by reference.
10.2    Agreement of Limited Partnership of PS Business Parks, L.P. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (SEC File No. 001-10709) and incorporated herein by reference.
10.3*    Offer Letter / Employment Agreement between Registrant and Joseph D. Russell, Jr., dated as of September 6, 2002. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (SEC File No. 001-10709) and incorporated herein by reference.

 

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10.4*    Form of Indemnity Agreement. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (SEC File No. 001-10709) and incorporated herein by reference.
10.5*    Form of Indemnification Agreement for Executive Officers. Filed with Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 (SEC File No. 001-10709) and incorporated herein by reference.
10.6    Cost Sharing and Administrative Services Agreement dated as of November 16, 1995 by and among PSCC, Inc. and the owners listed therein. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (SEC File No. 001-10709) and incorporated herein by reference.
10.7    Amendment to Cost Sharing and Administrative Services Agreement dated as of January 2, 1997 by and among PSCC, Inc. and the owners listed therein. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (SEC File No. 001-10709) and incorporated herein by reference.
10.8    Accounts Payable and Payroll Disbursement Services Agreement dated as of January 2, 1997 by and between PSCC, Inc. and AOPP LP. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (SEC File No. 001-10709) and incorporated herein by reference.
10.9    Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. relating to 6.875% Series R Cumulative Redeemable Preferred Units, dated as of October 15, 2010. Filed with Registrant’s Annual Report on Form 10-K for the year ended December 31, 2010 (SEC File No. 001-10709) and incorporated herein by reference.
10.10    Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. relating to 6.45% Series S Cumulative Redeemable Preferred Units, dated as of January 10, 2012. Filed with Registrant’s Annual Report on Form 10-K for the year ended December 31, 2011 (SEC File No. 001-10709) and incorporated herein by reference.
10.11    Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. relating to 6.00% Series T Cumulative Preferred Units, Series T, dated as of May 14, 2012. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 (SEC File No. 001-10709) and incorporated herein by reference.
10.12    Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. relating to 5.75% Series U Cumulative Preferred Units, dated as of September 14, 2012. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 (SEC File No. 001-10709) and incorporated herein by reference.
10.13    Amended and Restated Revolving Credit Agreement dated as of October 29, 2002 among PS Business Parks, L.P., Wells Fargo Bank, National Association, as Agent, and the Lenders named therein. Filed with Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002 (SEC File No. 001-10709) and incorporated herein by reference.
10.14    Modification Agreement, dated as of December 29, 2003. Filed with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference. This exhibit modifies the Amended and Restated Revolving Credit Agreement dated as of October 29, 2002 and filed with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002 (SEC File No. 001-10709) and incorporated herein by reference.
10.15    Modification Agreement, dated as of January 23, 2004. Filed with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference. This exhibit modifies the Modification Agreement dated as of December 29, 2003 and filed with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003 (SEC File No. 001-10709) and incorporated herein by reference.
10.16    Third Modification Agreement, dated as of August 5, 2005. Filed with the Registrant’s Current Report on Form 8-K dated August 5, 2005 (SEC File No. 001-10709) and incorporated herein by reference. This exhibit modifies the Modification Agreement dated as of January 23, 2004 and filed with the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003 (SEC File No. 001-10709) and incorporated herein by reference.

 

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10.17    Fourth Modification Agreement dated as of July 30, 2008 to Amended and Restated Revolving Credit Agreement dated October 29, 2002. Filed with Registrant’s Current Report on Form 8-K dated August 5, 2008 (SEC File No. 001-10709) and incorporated herein by reference.
10.18    Fifth Modification Agreement dated as of July 28, 2010 to Amended and Restated Revolving Credit Agreement dated October 29, 2002. Filed with Registrant’s Current Report on Form 8-K dated August 2, 2010 (SEC File No. 001-10709) and incorporated herein by reference.
10.19    Sixth Modification Agreement dated as of August 3, 2011 to Amended and Restated Revolving Credit Agreement dated October 29, 2002. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 (SEC File No. 001-10709) and incorporated herein by reference.
10.20    Loan Agreement, dated November 17, 2006, between Northern California Industrial Portfolio, Inc., a Maryland corporation, and LaSalle Bank National Association, a national banking association. Filed with the Registrant’s Current Report on Form 8-K dated December 20, 2011 (SEC File No. 001-10709) and incorporated herein by reference.
10.21    Credit Agreement dated as of December 20, 2011, by and among PS Business Parks, L.P., a California limited partnership, as borrower, and Wells Fargo Bank, National Association, as Administrative Agent for the Lenders. Filed with the Registrant’s Current Report on Form 8-K dated December 20, 2011 (SEC File No. 001-10709) and incorporated herein by reference.
10.22    Seventh Modification Agreement dated as of December 20, 2011 to Amended and Restated Revolving Credit Agreement dated October 29, 2002. Filed with the Registrant’s Current Report on Form 8-K dated December 20, 2011 (SEC File No. 001-10709) and incorporated herein by reference.
10.23    First Modification Agreement dated December 29, 2011 to Credit Agreement dated December 20, 2011 by and among PS Business Parks, L.P., a California limited partnership, as borrower, and Wells Fargo Bank, National Association, as Administrative Agent for the Lenders. Filed with the Registrant’s Current Report on Form 8-K dated January 5, 2012 (SEC File No. 001-10709) and incorporated herein by reference.
10.24    Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. relating to 5.70% Series V Cumulative Preferred Units , dated as of March 14, 2013. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 (SEC File No. 001-10709) and incorporated herein by reference.
10.25    Second Amended and Restated Revolving Credit Agreement dated as of April 28, 2014 by and among PS Business Parks, L.P., a California limited partnership, as borrower, and Wells Fargo Bank, National Association, as Administrative Agent for the Lenders. Filed with the Registrant’s Current Report on Form 8-K dated April 28, 2014 (SEC File No. 001-10709) and incorporated herein by reference.
10.26*    Registrant’s 1997 Stock Option and Incentive Plan. Filed with Registrant’s Registration Statement on Form S-8 (SEC File No. 333-48313) and incorporated herein by reference.
10.27*    Registrant’s 2003 Stock Option and Incentive Plan. Filed with Registrant’s Registration Statement on Form S-8 (SEC File No. 333-104604) and incorporated herein by reference.
10.28*    Amended and Restated Retirement Plan for Non-Employee Directors. Filed with Registrant’s Annual Report on Form 10-K for the year ended December 31, 2011 (SEC File No. 001-10709) and incorporated herein by reference.
10.29*    Form of PS Business Parks, Inc. Restricted Stock Unit Agreement. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (SEC File No. 001-10709) and incorporated herein by reference.
10.30*    Form of PS Business Parks, Inc. 2003 Stock Option and Incentive Plan Non-Qualified Stock Option Agreement. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (SEC File No. 001-10709) and incorporated herein by reference.

 

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10.31*    Form of PS Business Parks, Inc. 2003 Stock Option and Incentive Plan Stock Option Agreement. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (SEC File No. 001-10709) and incorporated herein by reference.
10.32*    Amendment to Form of Director Stock Option Agreement. Filed with Registrant’s Annual Report on Form 10-K for the year ended December 31, 2010 (SEC File No. 001-10709) and incorporated herein by reference.
10.33*    Revised Form of Director Stock Option Agreement. Filed with Registrant’s Annual Report on Form 10-K for the year ended December 31, 2010 (SEC File No. 001-10709) and incorporated herein by reference.
10.34*    Registrant’s 2012 Equity and Performance-Based Incentive Compensation Plan (2012 Plan). Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 (SEC File No. 001-10709) and incorporated herein by reference.
10.35*    Form of Registrant’s 2012 Plan Non-Qualified Stock Option Agreement. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 (SEC File No. 001-10709) and incorporated herein by reference.
10.36*    Form of Registrant’s 2012 Plan Restricted Stock Unit Agreement. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 (SEC File No. 001-10709) and incorporated herein by reference.
10.37*    Retirement Plan For Non-Employee Directors, as amended. Filed herein.
12    Statement re: Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends. Filed herewith.
21    List of Subsidiaries. Filed herewith.
23    Consent of Independent Registered Public Accounting Firm. Filed herewith.
31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
32.1    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.
101 .INS    XBRL Instance Document. Filed herewith.
101 .SCH    XBRL Taxonomy Extension Schema. Filed herewith.
101 .CAL    XBRL Taxonomy Extension Calculation Linkbase. Filed herewith.
101 .DEF    XBRL Taxonomy Extension Definition Linkbase. Filed herewith.
101 .LAB    XBRL Taxonomy Extension Label Linkbase. Filed herewith.
101 .PRE    XBRL Taxonomy Extension Presentation Link. Filed herewith.

 

* Management contract or compensatory plan or arrangement

 

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