-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MYA2FghYbIl2UYd3HWaCSIt5bE4mX7er8nLkEhCedm4Xly99B3nCbPL8h43fjron TG45a0PTeYByfyYW39RaEQ== 0000892569-99-000809.txt : 19990331 0000892569-99-000809.hdr.sgml : 19990331 ACCESSION NUMBER: 0000892569-99-000809 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PACIFIC GULF PROPERTIES INC CENTRAL INDEX KEY: 0000912597 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 330577520 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12768 FILM NUMBER: 99578096 BUSINESS ADDRESS: STREET 1: 4220 VON KARMAN STREET 2: SECOND FLOOR CITY: NEWPORT BEACH STATE: CA ZIP: 92660-2002 BUSINESS PHONE: 7142235000 MAIL ADDRESS: STREET 1: 4220 VON KARMAN STREET 2: SECOND FLOOR CITY: NEWPORT BEACH STATE: CA ZIP: 92660-2002 10-K 1 FORM 10-K FOR PERIOD ENDED DECEMBER 31, 1998 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ COMMISSION FILE NUMBER 1-12546 PACIFIC GULF PROPERTIES INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MARYLAND 33-0577520 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 4220 VON KARMAN, NEWPORT BEACH, CALIFORNIA 92660 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 223-5000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF SECURITY NAME OF EACH EXCHANGE ON WHICH REGISTERED ----------------- ----------------------------------------- COMMON STOCK, $0.01 PAR VALUE NEW YORK STOCK EXCHANGE 8.375% CONVERTIBLE SUBORDINATED DEBENTURES DUE AMERICAN STOCK EXCHANGE 2001 SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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. [ ] The aggregate market value of Common Stock held by non-affiliates of the registrant as of March 17, 1999 was approximately $380,150,000. On March 17, 1999, the registrant had 20,037,346 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement for the annual meeting of shareholders of Pacific Gulf Properties Inc. to be held on May 13, 1999 are incorporated by reference into Part III of this report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 8 Item 3. Legal Proceedings........................................... 13 Item 4. Submission of Matters to a Vote of Security Holders......... 13 PART II Item 5. Market for the Company's Common Equity and Related 13 Stockholder Matters....................................... Item 6. Selected Financial and Operating Data....................... 15 Item 7. Management's Discussion and Analysis of Financial Condition 18 and Results of Operations................................. Item 7A. Quantitative and Qualitative Disclosures About Market 24 Risk...................................................... Item 8. Financial Statements and Supplementary Data................. 25 Item 9. Changes in and Disagreements with Accountants on Accounting 25 and Financial Disclosure.................................. PART III Item 10. Directors and Management.................................... 25 Item 11. Executive Compensation...................................... 25 Item 12. Security Ownership of Certain Beneficial Owners and 25 Management................................................ Item 13. Certain Relationships and Related Transactions.............. 26 PART IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 26 8-K.......................................................
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1993, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Pacific Gulf Properties Inc. (together with its consolidated operating partnerships, PGP Inland Communities, L.P., Terrace Gardens-PGP L.P., Morning View Terrace-PGP L.P., PGP Northern Industrial L.P., PGP Southern Industrial II, L.P. and PGP Von Karman Properties, collectively the "Company") intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of complying with those safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on the operations and future prospects of the Company on a consolidated basis include, but are not limited to, changes in: economic conditions generally and the real estate market specifically, legislative/regulatory changes (including changes to laws governing the taxation of REITs), availability of capital, interest rates, competition, supply and demand for industrial and multifamily properties in the Company's current and proposed market areas and general accounting principles, policies and guidelines applicable to REITs. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included herein and in the Company's other filings with the Securities and Exchange Commission. i 3 PART I ITEM 1. BUSINESS OVERVIEW Pacific Gulf Properties Inc. operates as a self-administered and self-managed equity real estate investment trust (a "REIT") which owns, operates, leases, acquires, rehabilitates and develops primarily light industrial and business park properties in the Western United States. In addition to its Industrial Properties, the Company owns, operates, acquires and develops rental housing for active seniors age 55 and older, focusing mainly in California. The Company also owns and operates family-style apartment communities. As of December 31, 1998, the Company owned a portfolio of 73 industrial properties, containing an aggregate of 15.5 million leasable square feet, one of which is being rehabilitated containing approximately 376,000 leasable square feet and four which are being developed that will contain approximately 828,000 leasable square feet (the "Industrial Properties"). As of December 31, 1998, the Industrial Properties experienced a combined occupancy rate of 95%. As of December 31, 1998, the Company also owned a portfolio of 19 multifamily properties (the "Multifamily Properties") containing 3,265 units. Of these units, 1,438 units in eight properties are active senior rental apartment communities (the "Active Senior" properties). The remaining 11 properties are family-style apartment communities which the Company continues to operate. Following the expiration of certain contractual obligations, the Company anticipates it will market for sale all or a portion of the remaining family-style apartment communities. At year end 1998, occupancy rates at the Active Senior properties and the remaining family-style apartment communities were 95% and 94%, respectively. The Company was incorporated in August 1993 in the State of Maryland and completed its initial public offering on February 18, 1994 (the "Offering"). Prior to February 18, 1994, the Company was a wholly-owned subsidiary of Santa Anita Realty Enterprises, Inc. ("Realty"). Its executive offices are located at 4220 Von Karman Drive, Newport Beach, California 92660. BUSINESS STRATEGY The Company's primary objective is to seek investment opportunities in the industrial and active senior apartment segments of the real estate industry which may be either upgraded by capital improvements and intensive management; developed, and or acquired at or below replacement cost. The Company strives to maximize the growth potential of its portfolio to obtain the highest level of funds from operations while increasing the value of its real estate holdings for the overall benefit and profit of its shareholders. INDUSTRIAL PROPERTIES The Company focuses on multi tenant business parks and mid-size warehouse/distribution facilities. It specializes in serving small to mid-size industrial tenants ranging from 1,000 to 100,000 square feet of space. The average tenant of the Company's Industrial Properties leases approximately 6,500 square feet of space. Over 2,400 tenants currently occupy the Industrial Properties and no one tenant accounts for more than 1% of the Company's total revenue. Management believes that its properties are located in some of the fastest growing markets in the country and intends to continue to focus its activities in the Western United States. The Company believes these regions possess diverse and vibrant economies with good prospects for continued economic growth due to their Pacific Rim location, quality of life, well developed transportation infrastructures, high technology industries, well-educated employee base and excellent universities. Within these regions, the Company focuses on sub- markets within the major metropolitan areas of Orange County, San Bernardino/Riverside Counties, Sacramento, the East Bay area of Northern California, Los Angeles, San Diego, Seattle, Phoenix and Las Vegas. Industry analysts project growth in these markets to exceed the national average for at least the next five years. 1 4 In each specific local submarket in which it operates, the Company generally seeks to own a number of properties and to be one of the most significant commercial landlords in that market for the Company's product type. Through this approach, the Company can offer prospective tenants a variety of property options and can provide existing tenants, who are growing, additional space in properties owned by the Company in the same area. The Company believes that this strategy gives it a measure of control over the rental rates it charges for its properties. The Company also believes that it has achieved significant market penetration within a number of submarkets in which it operates. Such market focus enables the Company to maximize synergistic opportunities and economies of scale and allows management to concentrate its expertise on specific markets and local conditions. The Company manages all of its existing Industrial Properties in California and the Pacific Northwest using its network of eight regional offices, each of which is headed by a Regional Manager who reports directly to the Senior Vice President of Industrial Operations. The Company offers industrial leases in the one- to five-year range. Lease terms include, in most cases, annual adjustments based on changes in the consumer price index. The standard lease also includes some refurbishing and tenant improvement allowance with the amount varying depending upon the length of the lease, the size of the space leased and the use. The Company will seek tenants primarily involved in warehouse, distribution, assembly and light manufacturing activities. Standard lease terms include a stipulated due date for rent payment, late charges (typically with no grace period), no offset or withholding provisions, security deposit clause, as well as many other provisions considered favorable to the landlord. MULTIFAMILY PROPERTIES In 1998, the Company began to execute its strategy to exit the family-style apartment segment of the multifamily market and to focus only on industrial and active senior apartment properties. The Company moved out of the Pacific Northwest market when it sold its remaining portfolio of five family-style apartment communities containing 1,322 units in Washington state in December of 1998 and subsequently used the proceeds to purchase seven industrial properties encompassing approximately 1.3 million square feet in various western markets. As a continuation of its strategy, in February of 1999, the Company sold a 196 unit family-style apartment community in Orange County, California and used the proceeds to repay a portion of its line of credit. The Company intends to focus on active senior housing for individuals ages 55 and older, where seniors can be involved in activities, social gatherings and other types of entertainment with residents of their own age group. The Company offers no assisted living or related services. The Company's properties are oriented to those seniors interested in renting versus owning and who are able to care for themselves. The Company believes that the senior population will continue to grow and that the market for rental housing for active seniors will be strong. In addition, management believes that active senior housing typically has lower operating and management costs due to lower tenant turnover and maintenance cost. The Company is focusing its active senior activities primarily in the California marketplace. After the above-referenced sales, the Company continues to own a portfolio of 10 family-style apartments consisting of 1,631 units all located in Southern California. The Company intends to continue to own and operate these properties until the year 2000, at which time the Company anticipates marketing all or a portion of these properties for sale. There can be no assurance that the Company will actually dispose of such properties, nor can there be any assurance as to the timing of any such dispositions. Any such decision by the Company will be subject to numerous factors, including prices offered for the Company's family-style apartment communities and the availability of suitable alternate investment for the proceeds of such dispositions. The Company currently manages all of its Multifamily Properties in each of its regions. Each of the regions is managed by a Regional Manager who reports directly to the Senior Vice President of Operations -- Apartments. Within each region, each of the Multifamily Properties is operated by a staff of approximately six to seven individuals (three to four at the Active Senior communities), including a manager, assistant manager and/or leasing agents, and a maintenance and apartment preparation staff. The Company locates prospective 2 5 tenants for its Multifamily Properties primarily by advertising in magazines listing available rentals and by using firms that assist tenants in locating apartments. The Company also does magazine and direct mail advertising. Policies and procedures utilized at the property sites, including procedures concerning lease contracts, on-site marketing, credit collection standards and eviction standards, follow established federal and state laws. Individual property lease programs are structured to respond to local market conditions. The Company attempts to balance rent increases with high occupancy and low turnover. None of the Multifamily Properties are currently subject to rent control or rent stabilization regulations. However, certain of these properties are subject to restrictions based on tax-exempt loan requirements. Standard lease terms stipulate due dates for rent payments, late charges, no offset or withholding provisions, security deposits and damage reimbursement clauses, as well as many other provisions considered favorable to the property owner. Nonpayment of rent is generally handled at the properties within 15 days from the beginning of the month, with either commencement of collection or eviction proceedings occurring within that time period. REHABILITATION PROGRAM As part of its acquisition program, the Company seeks properties whose financial performance can be enhanced through physical renovation and rehabilitation. The Company also periodically renovates and rehabilitates the properties it already owns. Rehabilitation activity generally involves updating older properties to conform to current market standards and may include the installation of additional loading facilities, sprinkler upgrades, mezzanine level upgrades, parking lot upgrades and cosmetic rehabilitation of the property. The Company capitalizes on senior management's experience with renovation and rehabilitation projects, as well as third party expertise, to expedite the renovation and rehabilitation process. 1998 DEVELOPMENTS PROPERTY ACQUISITION ACTIVITY During 1998, the Company acquired approximately $186.9 million of industrial properties. The following table sets forth information regarding these properties. Operating Industrial Properties
NET TOTAL DATE RENTABLE ACQUISITION ESTIMATED INITIAL PROPERTY NAME LOCATION ACQUIRED SQUARE FOOTAGE COST COST(2) OCCUPANCY(3) ------------- -------- --------- -------------- ----------- --------- ------------ (000'S) (000'S) Mountain Avenue Upland, CA Jan. 1998 140,020 $ 5,148 $ 5,156 91% Lurline Chatsworth, CA Jan. 1998 124,585 7,644 7,898 90 Las Vegas Las Vegas, NV Feb. 1998 300,000 14,218 14,429 100 NW-Garden Grove(1) Garden Grove, CA Feb. 1998 168,390 9,016 9,004 100 Los Alamitos Los Alamitos, CA Mar. 1998 124,924 7,251 7,465 94 Walnut Signal Hill, CA Mar. 1998 74,453 4,834 4,977 98 Madison West Sacramento, CA Mar. 1998 147,089 5,896 6,206 74 Kodak Distribution Center Whittier, CA May 1998 214,000 14,300 22,354 100 Koll-Irvine Irvine, CA June 1998 129,015 11,267 11,432 100 Koll-Garden Grove Garden Grove, CA June 1998 208,200 11,723 11,896 98 Koll-Tustin Tustin, CA June 1998 358,807 19,069 19,268 96 Airport Business Center Portland, OR Dec. 1998 228,500 11,175 11,496 93 Contra Costa Diablo Concord, CA Dec. 1998 146,300 8,079 8,545 69
3 6
NET TOTAL DATE RENTABLE ACQUISITION ESTIMATED INITIAL PROPERTY NAME LOCATION ACQUIRED SQUARE FOOTAGE COST COST(2) OCCUPANCY(3) ------------- -------- --------- -------------- ----------- --------- ------------ (000'S) (000'S) Dublin Industrial Park Dublin, CA Dec. 1998 223,400 23,106 23,639 89 Hesperian Industrial Park Hayward, CA Dec. 1998 153,000 8,069 8,428 100 Hohokam East Tempe, AZ Dec. 1998 256,900 15,397 15,564 97 Hohokam West Phoenix, AZ Dec. 1998 65,900 4,310 4,359 95 West Sacramento Sacramento, CA Dec. 1998 214,900 6,446 6,550 80 --------- -------- -------- Total 3,278,383 $186,948 $198,666 ========= ======== ========
- --------------- (1) Owned by PGP Southern Industrial II, L.P., a limited partnership in which the Company has a minimum 49% equity interest and full management and control. (2) Total capitalized acquisition cost, including closing and anticipated rehabilitation costs. (3) Occupancy is reported as of closing date of acquisition. PROPERTY DISPOSITION ACTIVITY During 1998, the Company disposed of approximately $92 million of multifamily properties. The following table sets forth information regarding these properties.
MONTH OF SALES COST OF GAIN ON PROJECT LOCATION UNITS DISPOSITION PRICE SALE SALE ------- -------- ----- ----------- ------- ------- ------- (000'S) (000'S) (000'S) Lora Lake Apartments Burien, WA 234 September $13,525 $ 7,147 $ 6,378 Pacific Northwest Apartment Portfolio Greater Seattle Area, WA 1,322 December 78,500 49,586 28,914 ----- ------- ------- ------- Total Dispositions 1,556 $92,025 $56,733 $35,292 ===== ======= ======= =======
COMPLETION OF INDUSTRIAL PROPERTY REHABILITATION During 1998, the Company completed two rehabilitation projects: a 266,000 square foot warehouse in Algona, Washington and a 214,000 square foot warehouse in Whittier, California. The total rehabilitation cost for both properties was $2.9 million. Both projects are currently 100% occupied. During 1998, the Company also developed two buildings in Southern California on excess land adjacent to existing properties owned by the Company. A 34,000 square foot building was completed in Anaheim for a cost of $1.5 million and a 56,000 square foot building was completed in the City of Industry for a cost of $2.0 million. Both properties are 100% occupied at December 31, 1998. COMPLETION OF ACTIVE SENIOR APARTMENT During the first quarter of 1998, the Company completed a 166 unit Active Senior Apartment Community in Rancho Santa Margarita, California for a cost of $7.4 million, excluding land cost of $1.6 million. As of December 31, 1998, the project is 100% occupied. FINANCING ACTIVITY Convertible Preferred Stock In May 1998, the shareholders voted to approve an amendment to the Company's Charter that (a) increased the authorized number of shares of Preferred Stock, par value $.01 per share (the "Preferred Stock"), from 5,000,000 shares to 10,000,000 shares and (b) reclassified the issued and outstanding shares of Class B Senior Cumulative Convertible Preferred Stock (the "Class B Preferred Stock") as additional shares of Class A Senior Cumulative Convertible Preferred Stock (the "Class A Preferred Stock") and changed the 4 7 liquidation preference of the Class A Preferred Stock to reflect the economic terms of such reclassification of the Class B Preferred Stock. Debt Financing Activities In April of 1998, the Company replaced its secured line of credit and unsecured bridge loan facility with a $150 million unsecured revolving credit agreement (the "Line of Credit"). The interest rate payable under the new facility is based on the leverage level of the Company and at December 31, 1998 is LIBOR plus 1.30%. The facility matures in April 2001. In 1997, the Company established a pool agreement with the Federal National Mortgage Associations ("FNMA") to provide 30-year credit enhancement on the Company's tax-exempt projects. In 1998, upon achievement of certain lease-up and operating requirements, the Company exercised a forward commitment with FNMA to finance the Fountains senior apartment community in Rancho Santa Margarita, California. The $6.4 million in bonds have an effective interest rate, after giving effect to credit enhancement and other costs, of 6.4% for 10 years. In December 1998 in conjunction with the sale of the Company's Washington apartment communities, the Company restructured the existing indebtedness on the Hampton Bay apartment community. The lender, a life insurance company, released the Hampton Bay property as collateral and accepted a letter of credit in the amount of $9.4 million as substitution collateral. The Company intends to replace the letter of credit by providing its City of Industry industrial project as replacement collateral. 5 8 INDEBTEDNESS The following table presents information on indebtedness encumbering the Industrial and Multifamily Properties, excluding borrowings outstanding under the Company's revolving line of credit, as of December 31, 1998:
OUTSTANDING BALANCE PROPERTY (IN $000'S) MATURITY DATE INTEREST RATE -------- ------------------- -------------- --------------- INDUSTRIAL Baldwin Industrial Park.................. $ 11,469 October 2005 8.150% Etiwanda................................. 6,600 May 2000 8.745% PGBP-Tukwila............................. 11,224 December 2002 Libor + 1.5%(d) Vista(a)................................. 7,800 October 2010 8.000% Golden West(a)........................... 3,800 October 2010 8.000% Garden Grove Industrial Park(a).......... 5,300 October 2010 8.000% Horn Road Industrial..................... 2,805 February 2006 7.950% Various(b)............................... 34,000 October 2007 7.110% Eden Plaza/Eden Industrial............... 11,833 December 2002 7.050% Bell Ranch Industrial Park(c)............ 2,475 December 2012 7.750% Pacific Park(c).......................... 4,425 December 2012 7.750% North County(c).......................... 4,125 December 2012 7.750% Bay San Marcos(c)........................ 2,700 December 2012 7.750% Escondido(c)............................. 6,300 December 2012 7.750% Riverview Industrial Park(c)............. 4,475 December 2012 7.750% Miramar Village(e)....................... 9,000 August 1999 Libor + 1.5% Algona II(f)............................. 4,625 September 1999 Libor + 1.5% City of Industry......................... 7,586 April 2006 7.300% Las Vegas................................ 4,455 January 2004 8.380% Koll-Garden Grove........................ 2,374 June 2011 8.000% Lake Forest(j)........................... 9,761 March 2000 Libor + 1.5% Spectrum(k).............................. 8,593 August 2000 Libor + 1.3% -------- Total Industrial................. 165,725 -------- MULTIFAMILY Inn at Laguna............................ 4,621 August 2024 7.250% Daisy V.................................. 1,271 September 2025 7.640%(g) Daisy VII................................ 10,136 August 2000 6.780% Daisy XII................................ 3,622 September 2025 7.640%(g) Daisy XVI................................ 11,426 August 2000 6.780% Daisy XVII............................... 6,613 August 2000 6.780% Lariat................................... 1,171 September 2025 7.640%(g) Daisy XIX(h)............................. 6,532 December 2026 6.300% Daisy XX(h).............................. 7,497 December 2026 6.300% Sunnyside I(h)........................... 5,528 December 2026 6.300% Sunnyside II(h).......................... 1,784 December 2026 6.300% Sunnyside III(h)......................... 2,886 December 2026 6.300% Raintree(h).............................. 6,785 January 2026 6.400% Tyler Springs............................ 9,400 December 2016 3.850%(i) Terrace Gardens(h)....................... 7,943 January 2026 6.385% Morning View(h).......................... 10,789 January 2026 6.375% The Fountains(h)......................... 6,366 December 2026 6.400% -------- Total Multifamily................ 104,370 -------- Total............................ $270,095 ========
6 9 - --------------- (a) Vista, Golden West and Garden Grove jointly collateralize the $16,900,000 note payable. (b) PGDC-Fontana, PGDC-Chino, PGDC-Fremont, PGDC-Downey and PGDC-Rancho Bernardo jointly collateralize the $34,000,000 note payable. (c) Bell Ranch Industrial Park, Pacific Park, North County, Bay San Marcos, Escondido Business Center and Riverview Industrial Park jointly collateralize the $24,500,000 note payable. (d) The Company entered into an interest rate swap agreement that fixed the interest rate on $11,500,000 of the principal balance at 7.35% for five years commencing July 1, 1996. (e) Construction loan relating to rehabilitation of Miramar Village. The maximum loan amount under the agreement is $10,238,000. The current interest rate at December 31, 1998 is 7.06%. (f) Construction loan relating to rehabilitation of Algona II. The maximum loan amount under the agreement is $5,025,000. The current interest rate at December 31, 1998 is 7.06%. (g) Interest rate is subject to periodic adjustments beginning March 10, 1996 based on the monthly weighted average 11th District Cost of Funds plus 2.8%. (h) These tax-exempt mortgage loans are financed using tax-exempt bond financing supported by credit enhancement from FNMA. The collateral properties, which also include Applewood, not listed above, are subject to restrictions requiring that a specified percentage of the apartment units in such properties be made available to persons with lower and moderate income. As of December 31, 1998, 349 apartment units, or 11% of the total apartments owned, were required to have been made available to persons with lower or moderate income pursuant to these requirements, and the Company has complied with such requirements. In addition, state and local authorities in some cases impose certain restrictions on the amount of rent that can be charged. (i) Interest rate is subject to periodic adjustments based on the Kenny Rate Index. (j) Represents construction loan relating to development and construction of the PGBP-Lake Forest project with a maximum loan amount of $10,500,000. The current interest rate at December 31, 1998 is 7.19%. (k) Represents construction loan relating to development and construction of the Pacific Gulf Spectrum Centre with a maximum loan amount of $16,800,000. The current interest rate at December 31, 1998 is 6.43%. CORPORATE OFFICES AND EMPLOYEES The Corporate offices are located in Newport Beach, California in approximately 16,000 square feet of a 26,000 square foot office building, which is 99% owned by the Company. At December 31, 1998, the Company employed approximately 170 persons, of which 134 were onsite or property related and 36 were corporate office employees. COMPETITIVE AND OTHER CONDITIONS Competition. Within its geographic areas of operation, the Company is subject to competition from a variety of investors, including insurance companies, pension funds, corporate and individual real estate developers and investors and other REITs with investment objectives similar to those of the Company. Some of these competitors have more substantial financial resources and longer operating histories than the Company. As an owner of industrial and apartment real estate properties, the Company competes with other owners of similar properties in connection with their financing, sale, lease or other disposition and use. While the Company has not experienced material competitive pressures confined to specific geographic regions, it is possible that material adverse changes in regional economies or in the operations of major regional employers (such as Boeing in the Pacific Northwest) could have a material adverse effect on the ability of the Company to lease its properties and on the rents charged. Conversely, if any of the regional geographic areas in which the Company owns properties experiences economic growth, the Company is likely 7 10 to experience increased competition for acquisition and development projects, thereby increasing the Company's costs of acquisition and development and potentially reducing the Company's returns therefrom. Insurance. The Company carries comprehensive liability, fire, extended coverage and rental loss insurance with respect to its Industrial, Active Senior and Multifamily Properties, with policy specifications, insured limits and deductibles customarily carried for similar properties which the Company believes are adequate and appropriate under the circumstances. These are certain types of losses, such as those arising from acts of war, which are not generally insured because they are either uninsurable or not economically insurable. Presently the Company carries earthquake disaster insurance on its California properties, which comprise 82% of the Company's total portfolio (as a percentage of total revenues); however, such insurance may not be available in the future or may only be available at rates that, in the opinion of the Company, are prohibitive. In the event that an uninsured disaster or a loss in excess of insured limits should occur, the Company could suffer a substantial loss, including loss of anticipated future revenues, while remaining obligated on related mortgage indebtedness. The Company believes its properties were constructed in compliance with applicable construction standards in effect at the time of construction. The Company obtained customary title insurance insuring fee title to its properties upon their acquisition. ITEM 2. PROPERTIES The following table presents information on the composition of the Company's operating properties based on the percentage of rental revenue at December 31, 1998 and 1997
1998 1997 -------------------------- -------------------------- NUMBER PERCENTAGE OF NUMBER PERCENTAGE OF OF RENTAL OF RENTAL PROPERTIES REVENUE PROPERTIES REVENUE ---------- ------------- ---------- ------------- PROPERTY TYPE Industrial....................................... 68 67% 49 52% Active Senior.................................... 8 9 7 7 Family........................................... 11 24 17 41 -- --- -- --- Total.................................... 87 100% 73 100% == === == === GEOGRAPHIC LOCATION California....................................... 77 82% 62 72% Pacific Northwest................................ 7 16 11 28 Southwest........................................ 3 2 -- -- -- --- -- --- Total.................................... 87 100% 73 100% == === == ===
The tables below set forth certain information relating to the Company's operating Industrial and Multifamily Properties by location and type as of December 31, 1998.
NUMBER PERCENT OF OF LEASABLE INDUSTRIAL GROSS PROPERTIES SQUARE FEET RENTAL REVENUE(1) OCCUPANCY ---------- ----------- ----------------- --------- INDUSTRIAL California Inland Empire(2)............................. 7 2,129,214 12% 98% San Diego.................................... 6 1,203,606 11 96 Orange County................................ 23 3,765,333 31 94 Los Angeles.................................. 5 1,507,120 9 99 Northern California.......................... 17 3,726,354 25 92 Pacific Northwest(4)........................... 7 1,355,882 9 98 Southwest(3)................................... 3 622,800 3 95 -- ---------- --- -- Total or Weighted Average............ 68 14,310,309 100% 95% == ========== === ==
8 11
NUMBER PERCENT OF OF MULTIFAMILY GROSS PROPERTIES UNITS RENTAL REVENUE OCCUPANCY ---------- ----- ----------------- --------- MULTIFAMILY(6) California Inland Empire(2).................................. 13 1,806 41% 94% Orange County..................................... 4 908 23 94 San Diego......................................... 2 551 11 98 Pacific Northwest Greater Seattle Area, WA(5)......................... -- -- 25 -- -- ----- --- -- Total or Weighted Average................. 19 3,265 100% 95% == ===== === ==
- --------------- (1) Based on rental revenues for the fourth quarter of 1998. (2) Includes the eastern portion of Los Angeles County adjacent to the Riverside-San Bernardino metropolitan statistical area. (3) Includes Nevada and Arizona. (4) Includes Washington and Oregon. (5) As of December 23, 1998 this portfolio was sold and replaced with 1.3 million square feet of industrial properties. (6) Includes Active Senior properties. INDUSTRIAL PROPERTIES The following table presents information concerning the Industrial Properties, including the actual average rent per square foot and percentage of the leasable square footage occupied by tenants, as of December 31, 1998:
GROSS AVERAGE LEASABLE MONTHLY DATE SQUARE BASE RENT INDUSTRIAL LOCATION COMPLETED FOOTAGE PER SQ. FT. OCCUPANCY ---------- -------- -------------- ---------- ------------- --------- INLAND EMPIRE, CA Golden West Industrial Park Rancho Cucamonga, CA 1990 296,821 $0.41 98% Etiwanda Ontario, CA 1991 576,327 0.36 100 Crescent Business Center Rancho Cucamonga, CA 1981 136,066 0.42 86 Riverview Industrial Park San Bernardino, CA 1980 297,180 0.24 94 PGDC-Chino Chino, CA 1988 302,166 0.30 100 PGDC-Fontana Fontana, CA 1988 380,634 0.30 100 Mountain Ave Upland, CA 1977 140,020 0.41 99 SAN DIEGO, CA Vista Vista, CA 1990 356,800 0.41 94 Bay San Marcos San Marcos, CA 1988 121,768 0.45 100 Escondido Business Center Escondido, CA 1988 - 92 251,464 0.58 95 San Marcos Commerce Center San Marcos, CA 1985 72,050 0.46 87 MiraMar Industrial Park(1) San Diego, CA 1981 186,022 0.73 96 PGDC-Rancho Bernardo Rancho Bernardo, CA 1990 215,502 0.53 100 ORANGE COUNTY, CA Garden Grove Industrial Park Garden Grove, CA 1979 252,184 0.40 64 Pacific Gulf Business Park Garden Grove, CA 1986 189,526 0.62 81 Bell Ranch Industrial Park Santa Fe Springs, CA 1981 128,640 0.29 100 La Mirada Business Center La Mirada, CA 1975 82,010 0.61 91 Pacific Park Aliso Viejo, CA 1988 99,622 1.21 87 North County Business Park Yorba Linda, CA 1987 - 89 105,516 0.58 100 Harbor Business Park Santa Ana, CA 1974 - 76 193,136 0.62 96
9 12
GROSS AVERAGE LEASABLE MONTHLY DATE SQUARE BASE RENT INDUSTRIAL LOCATION COMPLETED FOOTAGE PER SQ. FT. OCCUPANCY ---------- -------- -------------- ---------- ------------- --------- Harbor Warner Business Park Santa Ana, CA 1974 - 76 127,836 0.63 97 Commerce Park-Anaheim Anaheim, CA 1972 145,745 0.59 97 Acacia Fullerton, CA 1980 202,551 0.42 96 611 Cerritos Anaheim, CA 1961 129,426 0.41 100 Tower Park Anaheim, CA 1986,1998 245,192 0.43 100 Fullerton Business Center Fullerton, CA 1977 110,900 0.51 90 PGDC-Anaheim Anaheim, CA 1980 91,200 0.35 100 PGBP-Irvine(1) Lake Forest, CA 1979 170,305 0.78 98 PGBP-Cerritos(1) Anaheim, CA 1985 213,755 0.54 98 Los Alamitos Los Alamitos, CA 1975 124,924 0.72 92 Walnut Ave Signal Hill, CA 1990 74,453 0.67 93 PGBC-Garden Grove II Garden Grove, CA 1973 208,200 0.59 93 PGBC-Irvine Irvine, CA 1979 129,015 0.72 100 PGBC-Tustin I&II Tustin, CA 1974 - 76 358,807 0.70 98 Whittier Whittier, CA 1959,1998 214,000 0.40 100 Hunt Ave(3) Garden Grove, CA 1979 168,390 0.48 100 LOS ANGELES, CA Baldwin Industrial Park Baldwin Park, CA 1986 567,605 0.40 100 City of Industry City of Industry,CA 1973 - 77,1998 382,245 0.38 100 PGDC-Downey Downey, CA 1988 289,294 0.35 100 PGDC-Montebello Montebello, CA 1985 143,391 0.39 100 Lurline Chatsworth, CA 1976 - 78 124,585 0.60 93 NORTHERN CALIFORNIA Eden Landing Commerce Park Hayward, CA 1972 - 74 193,358 0.71 93 PGDC-Woodland Woodland, CA 1986 570,000 0.18 100 PGDC-Fremont Fremont, CA 1980,87 344,416 0.42 92 Concord Business Park Concord, CA 1989 141,792 0.64 75 Commerce Park-Sacramento Sacramento, CA 1973 269,146 0.81 93 Commerce Park-Santa Clara Santa Clara, CA 1972 188,777 1.36 96 Commerce Park-Sunnyvale Sunnyvale, CA 1972 129,513 1.35 96 Bradshaw Business Center Sacramento, CA 1988 114,473 0.88 87 Horn Road Industrial Sacramento, CA 1988 221,300 0.46 88 Norwood Industrial Park Sacramento, CA 1988 168,292 0.33 97 Madison West North Highlands, CA 1987 - 88 147,089 0.60 85 Costa Diablo Concord, CA 1980,84 146,326 0.61 69 Dublin Dublin, CA 1985 223,371 1.03 85 Hesperian Hayward, CA 1981 - 86 152,962 0.49 100 West Sacramento Sacramento, CA 1981 214,900 0.30 80 Eden Plaza(2) Hayward, CA 1974 101,084 0.94 99 Eden Industrial(2) Hayward, CA 1973 399,555 0.35 100 PACIFIC NORTHWEST Seattle I Seattle, WA 1968 42,240 0.47 100 Seattle II Seattle, WA 1981 64,077 0.59 100 Seattle III Seattle, WA 1981 78,720 0.58 91 PGBP-Tukwila Tukwila, WA 1975 - 79 475,629 0.72 99
10 13
GROSS AVERAGE LEASABLE MONTHLY DATE SQUARE BASE RENT INDUSTRIAL LOCATION COMPLETED FOOTAGE PER SQ. FT. OCCUPANCY ---------- -------- -------------- ---------- ------------- --------- PGDC-Algona Algona, WA 1989 200,401 0.34 100 PGDC-Algona II Algona, WA 1988 266,305 0.32 100 Airport Business Center Portland, OR 1979 - 86 228,510 0.41 92 SOUTHWEST Hohokam East Tempe, AZ 1980 256,920 0.64 95 Hohokam West Phoenix, AZ 1980 65,880 0.56 96 Las Vegas Las Vegas, NV 1976 - 79 300,000 0.39 93 ---------- ----- --- Sub-Total or Weighted Average for Industrial Properties 14,310,309 $0.46 95% ========== ===== ===
The following tables present information concerning the Company's properties under rehabilitation and development as of December 31, 1998. REHABILITATION PROPERTIES
ESTIMATED RENTABLE ESTIMATED TOTAL DATE COMPLETION SQUARE ACQUISITION DEVELOPMENT ESTIMATED PROPERTY NAME LOCATION ACQUIRED DATE FOOTAGE COST COST COST ------------- -------- --------- ---------- --------- ----------- ----------- --------- (000'S) (000'S) (000'S) Whse/Distribution San Diego, CA Aug. 1997 Feb. 1998 375,919 $17,209 $2,291 $19,500
DEVELOPMENT PROPERTIES
ESTIMATED NET ESTIMATED RENTABLE ESTIMATED TOTAL DATE COMPLETION SQUARE ACQUISITION DEVELOPMENT ESTIMATED PROPERTY NAME LOCATION ACQUIRED DATE FOOTAGE COST COST COST ------------- -------- -------- ---------- --------- ----------- ----------- --------- (000'S) (000'S) (000'S) Jul. Business Park Lake Forest, CA 1997 Apr. 1999 227,000 $ 6,516 $14,564 $21,080 Whse/Distribution Lake Forest, CA May 1997 Oct. 1998 209,000 3,554 9,668 13,222 Whse/Distribution San Diego, CA Aug 1997 Dec. 1999 102,000 (4) 5,030 5,030 Whse/Distribution Whittier, CA May 1998 Dec. 1999 290,000 (4) 14,537 14,537 ------- ------- ------- ------- Total 828,000 $10,070 $43,799 $53,869 ======= ======= ======= =======
- --------------- (1) Subject to ground lease. (2) Owned by PGP Northern Industrial, L.P., a limited partnership in which the Company has an ownership interest of approximately 59%, full management and control, and the right to substantially all of the cash flow. (3) Owned by PGP Southern Industrial II, L.P., a limited partnership in which the Company has an ownership interest of approximately 49%, and full management and control. (4) No acquisition cost is reflected because the property being developed by the Company is the excess portion of a property previously acquired by the Company. 11 14 The following table shows scheduled lease expirations for all leases for the Industrial Properties (excluding properties under development) as of December 31, 1998.
PERCENTAGE LEASABLE ANNUAL BASE PERCENTAGE OF ANNUAL NUMBER OF SQUARE FEET OF RENT OF GROSS LEASABLE BASE RENT YEAR LEASES EXPIRING EXPIRING LEASES EXPIRING LEASES AREA EXPIRING EXPIRING ---- --------------- --------------- --------------- -------------- ---------- 1999................... 827 3,173,000 $21,267,000 43.0% 28.7% 2000................... 544 2,600,000 17,412,000 28.3 23.5 2001................... 339 2,277,000 14,062,000 17.6 19.0 2002................... 90 1,981,000 8,669,000 4.7 11.7 2003................... 100 1,282,000 7,211,000 5.2 9.7 2004................... 5 111,000 696,000 0.3 0.9 2005................... 9 734,000 3,521,000 0.5 4.8 2006................... 2 5,000 37,000 0.1 -- 2007................... 3 68,000 358,000 0.2 0.5 2008................... 2 168,000 877,000 0.1 1.2 ----- ---------- ----------- ----- ----- Totals....... 1,921 12,399,000(1) $74,110,000 100.0% 100.0% ===== ========== =========== ===== =====
- --------------- (1) As of December 31, 1998, 1,223,000 square feet of tenants were on month-to-month leases (which are not included above) and 688,000 square feet were unoccupied. MULTIFAMILY PROPERTIES The following table presents information concerning the Multifamily Properties, including average gross scheduled rents per unit and percentage of units occupied as of December 31, 1998:
AVERAGE AVERAGE UNIT SIZE RENT MULTIFAMILY LOCATION COMPLETED UNITS (SQ FT) PER UNIT OCCUPANCY ----------- ---------------------- --------- ----- --------- -------- --------- ACTIVE SENIOR Inn at Laguna Hills(1) Laguna Hills, CA 1994 140 500 $627 100% The Fountains(1) Rancho Santa Marg. CA 1998 166 600 597 100 Tyler Springs(1) Riverside, CA 1987 273 714 541 88 Terrace Gardens(1)(4) San Diego, CA 1985 225 780 776 98 Morning View(1)(5) San Diego, CA 1986 326 649 789 97 Sunnyside I(1)(3) San Dimas, CA 1984 164 495 539 99 Sunnyside II(1)(3) Ontario, CA 1983 60 493 497 90 Sunnyside III(1)(3) Ontario, CA 1985 84 504 504 87 FAMILY Applewood Santa Ana, CA 1972 406 801 760 93 Park Place Santa Ana, CA 1990 196 799 701 91 Raintree(2) Ontario, CA 1984 165 846 610 96 Daisy 5(2)(3) Covina, CA 1977 38 897 719 97 Daisy 7(2)(3) Diamond Bar, CA 1978 204 950 832 97 Daisy 12(2)(3) San Dimas, CA 1979 102 952 739 99 Daisy 16(2)(3) West Covina, CA 1981 250 986 753 98 Daisy 17(2)(3) San Dimas, CA 1981 156 962 732 91 Lariat(2)(3) San Dimas, CA 1981 30 970 792 100 Daisy 19(3) Ontario, CA 1983 125 1019 765 94 Daisy 20(3) Ontario, CA 1982 155 1000 695 89 ---- --- Sub-Total or Weighted Average For Multifamily Properties 3,265 95% ==== ===
12 15 - --------------- (1) Properties serving active senior tenants (individuals 55 and older). (2) Under rehabilitation. (3) Owned by PGP Inland Communities, L.P., a limited partnership in which the Company has an 82% equity interest, full management and control, and the right to 100% of cash flow until certain net operating income levels are achieved. (4) Owned by Terrace Gardens-PGP L.P., a limited partnership in which the Company has an ownership interest of approximately 58%, full management and control, and the right to substantially all of the cash flow. (5) Owned by Morning View Terrace-PGP L.P., a limited partnership in which the Company has an ownership interest of approximately 58%, full management and control, and the right to substantially all of the cash flow. ITEM 3. LEGAL PROCEEDINGS The Company is not presently subject to any litigation nor is any litigation threatened against the Company, other than routine litigation arising in the ordinary course of business. ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock of the Company has traded on the New York Stock Exchange ("NYSE") since October 29, 1996 under the symbol "PAG". Prior to that date and since its formation, the Company traded on the American Stock Exchange ("ASE"). The following table sets forth the high and low closing prices for the common stock on the respective exchange.
CASH HIGH LOW DISTRIBUTION RECORD DATE DATE PAID ------- ----- ------------ ---------------- ---------------- 1996 1st Quarter........... 18 3/4 15 7/8 .40(1) April 2, 1996 April 12, 1996 2nd Quarter........... 18 3/8 16 1/8 .40(1) July 1, 1996 July 12, 1996 3rd Quarter........... 18 3/4 16 1/2 .40(1) October 2, 1996 October 11, 1996 4th Quarter........... 20 18 1/8 .41(2) January 2, 1997 January 10, 1997 1997 1st Quarter........... 23 3/8 19 1/4 .41(2) April 1, 1997 April 11, 1997 2nd Quarter........... 22 1/8 20 1/2 .41(2) July 1, 1997 July 11, 1997 3rd Quarter........... 24 5/16 20 7/8 .41(2) October 1, 1997 October 10, 1997 4th Quarter........... 24 5/16 20 3/4 .42(3) January 1, 1998 January 9, 1998 1998 1st Quarter........... 23 5/16 22 1/8 .42(3) April 1, 1998 April 10, 1998 2nd Quarter........... 23 1/4 21 .42(3) July 1, 1998 July 10, 1998 3rd Quarter........... 22 5/16 18 3/8 .42(3) October 1, 1998 October 9, 1998 4th Quarter........... 20 1/2 16 1/4 .43 January 1, 1999 January 8, 1999
- --------------- (1) 45% of the distributions paid to beneficial owners in 1996 represented a return of capital ($.72 per share). (2) 28.6% of the distributions paid to beneficial owners in 1997 are estimated to represent a capital gain distribution. 13 16 (3) 12.6% of the distributions paid to beneficial owners in 1998 represents a return of capital ($.21 per share) The minimum distribution requirement to maintain REIT status was approximately $4,758,000 for 1996, $22,834,000 for 1997 and $31,276,000 for 1998. A regular quarterly distribution of $.43 per share was paid on January 8, 1999. The closing price of the common stock on the New York Stock Exchange on March 17, 1999 was $19 3/16 per share. As of March 17, 1999, there were approximately 13,000 beneficial owners of common stock. Future distributions by the Company will be at the discretion of the Board of Directors and will depend upon the actual Funds From Operations of the Company, its financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code, applicable legal restrictions and such other factors as the Board of Directors deems relevant. Although the Company intends to continue to make quarterly distributions to its stockholders, no assurances can be given as to the amount of distributions, if any, made in the future. The statement on the face of this Annual Report on Form 10-K regarding the aggregate market value of voting stock of the Company held by non-affiliates of the Company is based on the assumption that all directors and officers of the Company were, for purposes of this calculation only (and not for any other purpose), affiliates of the Company. 14 17 ITEM 6. SELECTED FINANCIAL AND OPERATING DATA The following table and footnotes set forth selected historical financial and operating data for the Company from February 18, 1994, the date of the Company's initial public offerings, and for the predecessor multifamily and industrial operations acquired from Realty prior to that date.
YEARS ENDED DECEMBER 31, --------------------------------------------------------- 1998 1997 1996 1995 1994(A) --------- --------- -------- -------- -------- (IN THOUSANDS, EXCEPT SHARE DATA) OPERATING DATA Rental income Industrial properties........... $ 76,271 $ 36,410 $ 20,783 $ 12,193 $ 7,207 Multifamily properties(b)....... 36,858 33,096 29,104 24,898 18,937 --------- --------- -------- -------- -------- 113,129 69,506 49,887 37,091 26,144 --------- --------- -------- -------- -------- Rental property expenses Industrial properties........... 16,746 8,212 5,308 2,567 1,541 Multifamily properties.......... 13,751 12,754 11,554 10,215 8,835 --------- --------- -------- -------- -------- 30,497 20,966 16,862 12,782 10,376 Depreciation...................... 20,386 12,008 8,236 6,081 3,721 Interest.......................... 25,758 17,337 18,411 14,066 8,164 General and administrative........ 5,903 3,159 2,974 2,423 1,725 Minority interest in earnings of partnerships.................... 1,024 172 -- -- -- Nonrecurring loss on exchange of debentures for common stock..... -- -- 3,596(c) -- -- --------- --------- -------- -------- -------- 83,568 53,642 50,079 35,352 23,986 --------- --------- -------- -------- -------- Income (loss) before gains on sale of real estate and extraordinary item............................ 29,561 15,864 (192) 1,739 2,158 Gain on sale of real estate....... 35,292 5,594 74 6,664 -- Extraordinary item................ -- -- -- -- (2,990) --------- --------- -------- -------- -------- Net income (loss)................. 64,853 21,458 (118) 8,403 (832) Less Preferred dividend requirements(g).............. 4,856 855 -- -- -- --------- --------- -------- -------- -------- Income available (loss attributable) to common shareholders.................... $ 59,997 $ 20,603 $ (118) $ 8,403 $ (832) ========= ========= ======== ======== ======== Earnings (loss) per share(d) Basic........................... $ 3.01 $ 1.51 $ (.02) $ 1.74 $ (.07)(e) Diluted......................... $ 2.76 $ 1.47 $ (.02) $ 1.68 $ (.07)(e) Weighted average common shares outstanding..................... 19,939,014 13,685,693 6,311,963 4,830,723 4,273,337(e)
15 18
YEARS ENDED DECEMBER 31, --------------------------------------------------------- 1998 1997 1996 1995 1994(A) --------- --------- -------- -------- -------- (IN THOUSANDS, EXCEPT SHARE DATA) BALANCE SHEET DATA Operating properties, net of accumulated depreciation: Industrial properties........... $ 654,004 $ 455,045 $170,731 $102,813 $ 79,751 Multifamily properties(b)....... 159,408 206,756 179,965 175,879 113,706 --------- --------- -------- -------- -------- 813,412 661,801 350,696 278,692 193,457 Properties under development...... 39,926 32,107 2,171 -- -- --------- --------- -------- -------- -------- Total real estate................. 853,338 693,908 352,867 278,692 193,457 Total assets...................... 875,127 712,471 364,640 288,591 202,519 Senior debt....................... 403,845 283,852 197,401 149,847 69,480 Convertible subordinated debentures...................... 12,244 12,592 14,227(c) 55,659 55,526 Total equity............ 415,554 388,840 139,822 71,980 70,860 PROPERTY DATA (end of period) Total industrial properties....... $ 68 $ 49 $ 21 $ 10 $ 9 Industrial leasable area (sq. ft.)............................ 14,310 10,676 4,573 2,902 2,426 Industrial -- Occupancy %......... 95% 95% 98% 96% 97% Total multifamily properties(b)... 19 24 22 21 13 Total apartment units(b).......... 3,265 4,655 4,110 3,945 3,292 Apartment -- Occupancy %.......... 95% 94% 93% 92% 93% SUPPLEMENTAL DATA Funds From Operations(f).......... $ 45,091 $ 27,017 $ 11,640 $ 7,820 $ 5,879 Cash Flow Information: Operating activities............ $ 51,166 $ 27,736 $ 8,523 $ 7,138 $ 3,950 Investing activities............ $(140,700) $(350,597) $(81,918) $(84,480) $(99,504) Financing activities............ $ 90,344 $ 322,804 $ 72,071 $ 76,674 $ 98,649 Ratio of Earnings to Fixed Charges(h)...................... 1.76 1.75 -- 1.12 1.26
- --------------- (a) Includes the combined historical operations of the Company from February 18 through December 31, 1994 and the predecessor multifamily and industrial operations acquired from Realty prior to February 18, 1994. (b) Includes Active Senior apartment properties. (c) Reflects the $3,596,000 nonrecurring loss incurred on the exchange of $42,069,000 aggregate principal amount of convertible subordinated debentures into 2,440,002 shares of common stock in December 1996. (d) Earnings per share data for all periods presented reflects basic and diluted calculations in accordance with the new standard (Statement No. 128) and has been restated from the previous accounting standard of primary and fully diluted earnings per share. (See Part IV -- Financial Statements.) (e) Per share data for 1994 was based on the weighted average common shares outstanding for the period February 18, 1994 (the closing date of the Company's initial public offerings) through December 31, 1994 and the Company's net loss for that period. (f) Management considers FFO to be an appropriate measure of the performance of an equity REIT. The National Association of Real Estate Investment Trusts ("NAREIT") currently defines FFO as net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of property, plus real estate depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures and preferred stock dividend requirements. In addition, extraordinary or unusual items, along with significant non-recurring events that materially distort the comparative measure of FFO are typically disregarded in its calculation. Prior to 16 19 March 1995 the NAREIT definition of FFO required the add back of non-real estate depreciation and amortization, such as loan cost amortization. The Company adopted the new FFO definition prescribed by NAREIT as of January 1, 1996. The Company believes that in order to facilitate a clear understanding of the consolidated historical operating results of the Company, FFO should be examined in conjunction with net income as presented in the consolidated financial statements and data included elsewhere in this report. FFO is not defined by generally accepted accounting principles. FFO should not be considered as an alternative to net income or as an indication of the Company's operating performance or to net cash provided by operating activities as a measure of the Company's liquidity. Further, FFO as disclosed by other REITs may not be comparable to the Company's calculation. CALCULATION OF FFO
YEARS ENDED DECEMBER 31, --------------------------------------------------- 1998 1997 1996 1995 1994(A) ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Income available (loss attributable) to common shareholders................... $59,997 $20,603 $ (118) $ 8,403 $ (832) Depreciation..................... 20,386 12,008 8,236 6,081 3,721 Gains on sale of real estate..... (35,292) (5,594) (74) (6,664) -- Nonrecurring loss on exchange of debentures for common stock.... -- -- 3,596 -- -- Extraordinary item............... -- -- -- -- 2,990 ------- ------- ------- ------- ------- Funds from operations............ 45,091 27,017 11,640 7,820 5,879 Preferred dividend requirements................... 4,856 855 -- -- -- Interest expense on debentures... 1,041 1,100 4,720 4,736 4,052 Amortization of debenture discount and costs............. 130 141 570 552 464 ------- ------- ------- ------- ------- Proforma funds from operations(i).................. $51,118 $29,113 $16,930 $13,108 $10,395 ======= ======= ======= ======= =======
- --------------- (g) Represents dividends on Class A Preferred Stock and Class B Preferred Stock all of which was issued during 1997. (See Part IV -- Financial Statements) (h) Earnings for the year ended December 31, 1996 were inadequate to cover fixed charges by approximately $0.2 million as a result primarily of the nonrecurring loss of $3,596,000 relating to the Company's exchange of debentures for common stock. The ratio of earnings to fixed charges excluding this $3.6 million non-cash item is 1.18 to 1. (i) Proforma funds from operations assumes the conversion of the Company's convertible subordinated debentures and preferred stock and excludes the conversion of limited partnership units. 17 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following discussion should be read in conjunction with "Selected Financial and Operating Data" and the financial statements and notes thereto of the Company appearing elsewhere in this report. Such financial statements and information have been prepared to reflect the Company's financial position as of December 31, 1998, 1997 and 1996 together with the results of its operations and its cash flows for the years then ended. Historical results and trends which might appear should not be taken as indicative of future operations. Management's representation statements contained in this report that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results may differ materially from those included in the forward-looking statements. These forward-looking statements involve risks and uncertainties including, but not limited to, the following: changes in general economic conditions in the markets that could impact demand for the Company's properties, competition, and changes in financial markets and interest rates could impact the Company's ability to meet its financing needs and obligations. The comparability of the financial information discussed below is impacted by the following: during 1998, the acquisition of 18 operating industrial properties containing approximately 3,278,000 leasable square feet, the completion of an active senior property containing 166 apartment units and three industrial projects containing 464,000 square feet previously under development, and the disposition of six multifamily properties containing 1,556 apartment units; during 1997, the acquisition of 27 operating industrial properties containing approximately 5,776,000 leasable square feet, the acquisition of three multifamily properties containing 824 apartment units, and the disposition of one multifamily property containing 279 apartment units; and during 1996, the acquisition of twelve industrial properties containing approximately 2,054,000 leasable square feet, the acquisition of one multifamily property containing 165 apartment units, the disposition of 14 acres of land and a 55,656 square foot industrial building located in the Baldwin Industrial Park project and the exchange of debentures for common stock. RESULTS OF OPERATIONS Comparison of the Year Ended December 31, 1998 to the Year Ended December 31, 1997. Industrial rental income increased by $39,861,000 or 109%, from $36,410,000 in 1997 to $76,271,000 in 1998. This increase was primarily attributable to the acquisition of 18 industrial properties in 1998. Industrial rental income for the year ended December 31, 1998 included $25,530,000 related to fourth quarter 1997 and 1998 acquisitions. Multifamily rental income increased by $3,762,000 or 11%, from $33,096,000 in 1997 to $36,858,000 in 1998. This increase was primarily attributable to an increase in rental rates and the completion of an active senior property previously under development. As a result of these changes total revenues increased by $43,623,000 or 63%, from $69,506,000 in 1997 to $113,129,000 in 1998. Industrial rental property expenses increased by $8,534,000, or 104%, from $8,212,000 in 1997 to $16,746,000 in 1998. This increase was primarily related to the Company's acquisitions in 1998. Industrial rental property expenses for the year ended December 31, 1998 included $6,282,000 related to fourth quarter 1997 and 1998 acquisitions. Multifamily rental property expenses increased by $997,000, or 8%, from $12,754,000 in 1997 to $13,751,000 in 1998. This increase was primarily related to an increase in operating expenses and the completion of an active senior property previously under development. 18 21 Depreciation increased by $8,378,000 or 70%, from $12,008,000 in 1997 to $20,386,000 in 1998. The increases relate primarily to the acquisitions described above and the capital improvements made to rehabilitate existing properties. Interest expense (including amortization of financing costs) increased by $8,421,000, or 49%, from $17,337,000 in 1997 to $25,758,000 in 1998. This increase was due to an increase in outstanding borrowings due to new acquisitions made during 1997 and 1998. Interest resulting from the amortization of financing costs increased by $302,000 or 37% from $827,000 in 1997 to $1,129,000 in 1998. This increase is attributable to the additional finance costs incurred as a result of the Company's new unsecured credit facility. General and administrative expenses increased by $2,744,000, or 87%, from $3,159,000 in 1997 to $5,903,000 in 1998. This increase was primarily attributable to personnel increases and expensing of certain costs of abandoned projects. Minority interests in earnings of consolidated partnerships increased by $852,000 from $172,000 in 1997 to $1,024,000 in 1998. Minority interest represents earnings allocated to the minority partners in four partnerships in which the Company has a controlling general partner interest. For the year ended December 31, 1998, the Company had net income of $59,997,000 compared to net income of $20,603,000 in 1997. The results in each year were impacted by non-recurring items. In 1997, a $5,594,000 net gain on sale of real estate was recognized primarily from the sale of a 279 unit apartment community in Oregon, while in 1998 a $35,292,000 net gain on sale of real estate was recognized primarily from the sale of six apartment communities with 1,556 apartment units located in Washington. Comparison of the Year Ended December 31, 1997 to the Year Ended December 31, 1996. Industrial rental income increased by $15,627,000 or 75%, from $20,783,000 in 1996 to $36,410,000 in 1997. This increase was primarily attributable to the acquisition of 27 industrial properties in 1997. Industrial rental income for the year ended December 31, 1997 included $9,128,000 related to the 27 industrial acquisitions. Multifamily rental income increased by $3,992,000 or 14%, from $29,104,000 in 1996 to $33,096,000 in 1997. This increase was primarily attributable to an increase in rental rates and to the acquisition of three active senior properties containing 824 apartment units during 1997. Multifamily rental income for the year ended December 31, 1997 included $2,150,000 related to the three active senior acquisitions. As a result of these changes total revenues increased by $19,619,000 or 39%, from $49,887,000 in 1996 to $69,506,000 in 1997. Industrial rental property expenses increased by $2,904,000, or 55%, from $5,308,000 in 1996 to $8,212,000 in 1997. This increase was primarily related to the Company's acquisitions in 1997. Industrial rental property expenses for the year ended December 31, 1997 included $1,839,000 related to the 27 industrial acquisitions. Multifamily rental property expenses increased by $1,200,000, or 10%, from $11,554,000 in 1996 to $12,754,000 in 1997. This increase was primarily related to the Company's acquisitions in 1997. Multifamily rental property expenses for the year ended December 31, 1997 included $717,000 related to the three active senior properties acquired during 1997. Depreciation increased by $3,772,000 or 46%, from $8,236,000 in 1996 to $12,008,000 in 1997. The increases relate primarily to the acquisitions described above and the capital improvements made to rehabilitate existing properties. Interest expense (including amortization of financing costs) decreased by $1,074,000, or 6%, from $18,411,000 in 1996 to $17,337,000 in 1997. This decrease was attributable to a decrease in convertible subordinated debentures outstanding (primarily associated with the exchange of $42,069,000 aggregate principal amount of debentures into 2,440,002 shares of Common Stock). This decrease was offset by an increase in outstanding borrowings due to new acquisitions made during 1996 and 1997. Interest resulting from 19 22 the amortization of financing costs decreased by $384,000 or 32% from $1,211,000 in 1996 to $827,000 in 1997. This decrease is attributable to the exchange in subordinated debentures which converted into shares of Common Stock in December 1996. General and administrative expenses increased by $185,000, or 6%, from $2,974,000 in 1996 to $3,159,000 in 1997. This increase was primarily attributable to personnel increases related to the 1996 and 1997 acquisitions. Minority interests in earnings of partnerships totaled $172,000 and represents earnings allocated to the minority partners in two partnerships in which the Company acquired a controlling general partner interest in June 1997 (Terrace Gardens-PGP L.P. and Morning View Terrace -PGP L.P.). No earnings were allocated to the minority interests in the Company's other partnerships. For the year ended December 31, 1997, the Company had net income of $20,603,000 compared with a net loss of $118,000 in 1996. The results in each year were impacted by non-recurring items. In 1996, a $3,596,000 non-recurring loss on the exchange of debentures was incurred (see Part I, Item 1 "Recent Developments-Reduction in Public Indebtedness") while in 1997 a $5,594,000 net gain on sale of real estate was recognized primarily from the sale of a 279 unit apartment community located in Oregon. LIQUIDITY AND CAPITAL RESOURCES Liquidity At December 31, 1998, the Company had $2,276,000 of cash to meet its immediate short-term liquidity requirements. Future short-term liquidity requirements are anticipated to be met through the net cash flow from operations, existing working capital and, if necessary, funding from the Company's Line of Credit. The Company anticipates that adequate cash will be available to fund its operating and administrative expenses, continuing debt service obligations and the payment of dividends in accordance with REIT requirements in the foreseeable future. Cash provided by operating activities increased from $8,523,000 for the year ended December 31, 1996 to $27,736,000 for the year ended December 31, 1997 and $51,166,000 for the year ended December 31, 1998. The primary reason for these increases related to the additional rental income contributed by properties acquired during 1996, 1997 and 1998. Cash used in investing activities increased from $81,918,000 for the year ended December 31, 1996 to $350,597,000 for the year ended December 31, 1997 and then decreased to $140,700,000 for the year ended December 31, 1998 primarily as a result of acquisitions and improvements to properties. This investment activity increased from $87,442,000 in 1996 to $332,324,000 in 1997, and then decreased to $201,160,000 in 1998, and was offset by $7,695,000 from the sale of land and an industrial building to an existing tenant in 1996, $15,115,000 from the sale of a multifamily community in Oregon in 1997, and $92,025,000 from the sale of a multifamily property and a multifamily portfolio in the Pacific Northwest in 1998. Cash provided by financing activities increased from $72,071,000 for the year ended December 31, 1996 to $322,804,000 for the year ended December 31, 1997 and then decreased to $90,344,000 for the year ended December 31, 1998. The fluctuations were primarily a result of decreased capital funding from equity offerings in 1998, increased borrowing activity associated with acquisitions in 1997 compared to 1996, the issuance of common stock in 1996 and 1997 and the issuance of preferred stock in 1997. In order to qualify as a REIT for federal income tax purposes, the Company is required to make distributions to its shareholders of at least 95% of REIT taxable income. The Company expects to use its cash flow from operating activities for distributions to shareholders and for payment of other expenditures. The Company intends to invest amounts accumulated for distribution in short-term investments. 20 23 Unsecured Line of Credit In April 1998, the Company replaced its secured line of credit and unsecured bridge loan facility with a $150,000,000 unsecured revolving credit agreement. The interest rate payable under the new facility is based on the leverage level of the Company, and at December 31, 1998, was LIBOR plus 1.30%. The facility matures in April of 2001. As of December 31, 1998, the Company had borrowed $133,750,000 under this line. Acquisitions and Improvements to Properties During 1998, the Company invested $201,160,000 in real estate assets. Proceeds for these investments were generated primarily from the sale of six of its multifamily properties which generated proceeds of $92,025,000 and borrowings from the Line of Credit. The Company intends to acquire additional properties and may seek to fund these acquisitions through proceeds received from a combination of its Line of Credit, equity offerings, debt financings or asset dispositions. Dispositions In 1998, the Company sold for a gross sales price of $92,025,000 1,556 units of multifamily properties located in the Pacific Northwest. The Company reported a gain on the sales after all costs of $35,292,000. After the above-referenced sales, the Company continues to own a portfolio of 10 family-style apartments consisting of 1,631 units all located in Southern California. The Company intends to continue to own and operate these properties until the year 2000, at which time the Company anticipates marketing all or a portion of these properties for sale. There can be no assurance that the Company will actually dispose of such properties, nor can there be any assurance as to the timing of any such dispositions. Any such decision by the Company will be subject to numerous factors, including prices offered for the Company's family-style apartment communities and the availability of suitable alternate investment for the proceeds of such dispositions. Developments During 1998, the Company completed and transferred to operating properties two rehabilitation projects; a 266,000 square foot warehouse in Algona, Washington and a 214,000 square foot warehouse in Whittier, California. The total rehabilitation cost for both properties was $2,900,000. Both of these projects are 100% occupied at December 31, 1998. During 1998, the Company also developed two buildings in Southern California on excess land adjacent to existing properties owned by the Company. A 34,000 square foot building was completed in Anaheim for a cost of $1,500,000 and a 56,000 square foot building was completed in the City of Industry for a cost of $2,000,000. Both properties are 100% occupied at December 31, 1998. As of December 1998, the Company has under development four industrial properties that will contain approximately 828,000 leasable square feet, and has under rehabilitation one industrial property containing approximately 376,000 leasable square feet, all of which are located in Southern California. Development and rehabilitation costs for these properties totaled $20,562,000 and $2,897,000, respectively through December 31, 1998 Debt Financings The Company has established a pool agreement with the Federal National Mortgage Association ("FNMA") to provide 30-year credit enhancement on the Company's tax-exempt projects. In 1998, upon achievement of certain lease-up and operating requirements, the Company exercised a forward commitment with FNMA to finance the Fountains senior apartment community in Rancho Santa Margarita, California. The $6.4 million in bonds have an effective interest rate, after giving effect to credit enhancement and other costs, of 6.4% for 10 years. 21 24 In December 1998 in conjunction with the sale of the Company's Washington apartment communities, the Company restructured the existing indebtedness on the Hampton Bay apartment community. The lender, a life insurance company, released the Hampton Bay property as collateral and accepted a letter of credit in the amount of $9.4 million as substitution collateral. The Company intends to replace the letter of credit by providing its City of Industry industrial project as replacement collateral. Convertible Subordinated Debentures At December 31, 1998 the Company's outstanding convertible subordinated debentures total $12,244,000, net of unamortized discount of $53,000. Conversion of all the outstanding debentures, which are convertible into common shares at a rate of 53.6986 shares of Common Stock per $1,000 of principal amount of debentures, would require the issuance of an additional 660,331 common shares. If the debentures were fully converted, the net income attributable to each common share would not be diluted. During 1998, $397,000 in aggregate principal amount of debentures were converted into 21,308 shares of Common Stock. The debentures can be redeemed by the Company after February 15, 1999. Shelf Registration During 1998, the Company filed a shelf registration statement with the Securities and Exchange Commission for an aggregate amount of $300,000,000, covering the proposed issuance of debt, preferred or common stock securities and warrants to purchase securities of the Company (the "1998 Shelf Registration Statement"). The 1998 Shelf Registration Statement was declared effective in April of 1998. At December 31, 1998, the Company has $300,000,000 available under the 1998 Shelf Registration Statement. Year 2000 Readiness GENERAL Any of the Company's computer programs that have time-sensitive software may not be able to distinguish the year 2000 from the year 1900, if the programs use two digits rather than four digits to define the year. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, prepare tenant invoices, or engage in similar normal business activities. COMPANY'S STATE OF READINESS The Company's Year 2000 project is divided into four general exposures: Computer hardware, applications software, operating equipment with embedded chips or software ("OE") and third party suppliers and customers. The phases common to all sections are: 1) Compiling potential Year 2000 sensitive items; 2) assigning priorities to identified items; 3) assessing the Year 2000 compliance of items determined to be material to the Company; 4) repairing or replacing material items that are determined not to be Year 2000 compliant; and 5) testing material items. Computer hardware consists of personal computers ("PCs") currently being utilized by the Company. This includes PCs utilized by employees along with PCs designated as file servers located at the corporate office. As of December 31, 1998, all computer hardware is believed to be Year 2000 compliant and over 94% of the PCs have been tested. As of March 10, 1999, 100% of all PCs had been tested. Applications software consists of software currently being utilized by the Company including but not limited to accounting, operating system, spreadsheet and word processing software. As of December 31, 1998, over 90% of the Company's application software is believed to be Year 2000 compliant. The Company expects to complete the remaining assessment and repair or replacement, including testing, during the second quarter of 1999. Operating equipment with embedded chips or software includes equipment or machinery such as elevators, security systems, lighting systems, HVAC systems and sprinkler systems used in the operation of the Company's properties. The Company expects to complete the assessment and repair or replacement of its 22 25 critical OE systems by the second quarter of 1999, with all testing scheduled to be completed by the end of the third quarter of 1999. The Company anticipates that a contingency plan will be established to address non-compliant non-critical OE systems. The third party analysis consists of identifying and prioritizing critical suppliers and communicating with them about their plans and progress in addressing the Year 2000 issue. The state of readiness of the Company's third parties is based primarily on representations from such parties. The Company has queried 100% of its significant suppliers and subcontractors that do not share information systems with the Company. The Company will review the results of this survey, assess the impact of the results on its operations and take whatever action is deemed necessary. To date, the Company is not aware of any third parties with a Year 2000 issue that would materially impact the Company's results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that third parties will be Year 2000 ready. COST TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES The Company has incurred less than $10,000 in connection with its Year 2000 remediation efforts. The Company cannot presently estimate the total cost of the remaining phases of its Year 2000 program, however, the Company does not expect its Year 2000 expenditures to be material to the Company's business, results of operations or financial condition. RISKS OF THE COMPANY'S YEAR 2000 ISSUES Management of the Company believes it has a program in place to adequately resolve the Year 2000 issue in a timely manner. As noted above, the Company has not yet completed all necessary phases of the Year 2000 project. The Company's ability to complete the Year 2000 modifications prior to any anticipated impact on its operating systems is based on numerous assumptions of future events and is dependent upon numerous factors, including the ability of third party software vendors to make necessary modifications to current versions of their products, the availability of resources to install and test the modified systems and other factors. A Year 2000 failure by one or more of the financial institutions or utility companies with which the Company does business could cause the Company to lose access to its funds or could restrict the Company's ability to borrow or operate its property. A Year 2000 failure by a trustee or transfer agent could restrict the Company's ability to pay interest on its bonds or to pay dividends on its equity securities. COMPANY'S CONTINGENCY PLANS The Company currently has no contingency plans in place in the event it does not complete all phases of the Year 2000 project, but anticipates that a contingency plan will be established to address non-compliant systems. The Company plans to periodically evaluate the status of other systems and determine whether such a plan is necessary. Capital Expenditures The Company capitalizes the direct and indirect cost of expenditures for the acquisition or rehabilitation of its multifamily and industrial properties. The Company also capitalizes the direct cost of capital expenditures that are considered revenue producing ("Revenue Producing") and other expenditures that increase the service life of the Company's properties ("Restorations"). Revenue Producing expenditures are improvements which significantly increase the revenue-producing capability of the asset including tenant improvements at industrial properties, installation of washers and dryers at multifamily properties, and other value-added additions. Rehabilitation expenditures are costs the Company determines are necessary during the due diligence phase immediately preceding the acquisition of a property. At newly acquired properties, the Company often finds it necessary to upgrade the physical appearance of such properties and to complete the maintenance and repair work that had been deferred by prior owners. 23 26 Restorations are nonrevenue-producing capital expenditures which recur on a regular basis, and have estimated useful lives of more than one year. Make ready costs incurred after a property's rehabilitation, such as carpet and appliance replacement, interior painting and window coverings are expensed as incurred. The following table summarizes capital expenditures incurred by the Company related to its operating properties for the years ended December 31, 1998 and 1997 (all amounts are in thousands):
1998 1997 -------- -------- Industrial Development.................................... $ 832 $ -- Acquisitions................................... 181,780 282,655 Revenue-Producing.............................. 5,427 3,725 Rehabilitation................................. 6,820 1,718 Restorations................................... 2,373 3,103 -------- -------- 197,232 291,201 -------- -------- Multifamily Development.................................... 1,639 -- Acquisitions................................... -- 38,766 Revenue-Producing.............................. 123 -- Rehabilitation................................. 1,955 2,184 Restorations................................... 211 173 -------- -------- 3,928 41,123 -------- -------- $201,160 $332,324 ======== ========
The Company expects such expenditures will be funded from available cash balances, revolving lines of credit, equity offerings, and proceeds from refinancing. ECONOMIC CONDITIONS Substantially all of the Company's leases on its Industrial Properties, which have terms generally ranging from one to five years, contain provisions providing for rental increases based either on fixed increases or on increases in the Consumer Price Index. All of the Company's leases on its Multifamily Properties are for a period of one year or less. Substantially all of the Company's leases allow at the time of renewal, for adjustments in the rent payable thereunder. Accordingly, management believes the provisions contained in its industrial leases and the nature of its multifamily leases tend to mitigate the adverse impact of inflation. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's exposure to market risk for changes in interest rates relates primarily to the Company's current and future debt obligations. The Company is still vulnerable, however, to significant fluctuations of interest rates on its floating rate debt, repricing on its fixed rate debt at various points in the future and future debt. 24 27 The following table provides information about the Company's financial instruments that are sensitive to changes in interest rates. The table below presents principal cash flows and related weighted-average interest rates by expected maturity dates.
INTEREST RATE SENSITIVITY PRINCIPAL AMOUNT AND AVERAGE INTEREST RATE BY EXPECTED MATURITY ------------------------------------------------------------------- 1999 2000 2001 2002 2003 THEREAFTER ------- ------------- ----------- ------- ---- ---------- (IN THOUSANDS, EXCEPT INTEREST RATES) Mortgage Notes........... $13,625 $34,775 -- $23,057 -- $114,773 Construction Loans....... -- 18,354 -- -- -- -- Tax Exempt Mortgage Debt................... -- -- -- -- -- 65,512 Line of Credit -- Unsecured.... -- -- 133,750 -- -- -- ------- ------- --- -------- Subtotal................. 13,625 53,129 133,750 23,057 -- 180,285 Convertible Subordinated Debentures............. -- -- 12,297 -- -- -- ------- ------- --- -------- Total.......... $13,625 $53,129 $146,047 $23,057 $-- $180,285 ======= ======= === ======== Weighted Average Interest Rates Mortgage Notes... 7.94% 7.15% -- 7.15% -- 7.62% Construction Loans....... -- LIBOR + 1.30, LIBOR + 1.50 -- -- -- -- or prime Tax Exempt Mortgage Debt................... -- -- -- -- -- 6.29% Line of Credit........... -- -- LIBOR +1.30 -- -- -- Convertible Subordinated Debentures............. -- -- 8.38% -- -- --
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Financial Statements for a listing of the financial statements and supplementary data filed with this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The information required by this item is hereby incorporated by reference from the Proxy Statement under the caption "Election of Directors -- Nominees" and "Officers and Key Employees." ITEM 11. EXECUTIVE COMPENSATION The information required by this item is hereby incorporated by reference from the Proxy Statement under the caption "Officers and Key Employees -- Compensation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is hereby incorporated by reference from the Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management." 25 28 ITEM 13. CERTAIN RELATIONSHIPS AND OTHER TRANSACTIONS The information required by this item is hereby incorporated by reference from the Proxy Statement under the caption "Certain Transactions." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report 1. Financial Statements. See Index to Financial Statements. 2. Financial Statement Schedule. See Index to Financial Statements. 3. Exhibits. See Exhibit Index on pages 33 and 34. (b) Reports on Form 8-K. The Company filed a report on Form 8-K, dated June 18, 1998 and Form 8-K/A, dated August 12, 1998, describing under Item 2 the acquisition of three industrial properties located in Southern California containing approximately 696,000 square feet. The Company filed a report on Form 8-K, dated December 23, 1998 and Form 8-K/A, dated March 5, 1999, describing under Item 2 the disposition of five multifamily apartment communities located in Seattle, Washington containing 1,322 apartment units and the acquisition of seven industrial properties located in the states of Arizona, California and Oregon containing approximately 1,288,900 square feet. 26 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PACIFIC GULF PROPERTIES INC. By: /s/ GLENN L. CARPENTER ------------------------------------ Glenn L. Carpenter Chairman of the Board of Directors President and Chief Executive Officer By: /s/ DONALD G. HERRMAN ------------------------------------ Donald G. Herrman Executive Vice President, Secretary, and Chief Financial Officer (Principal Financial and Accounting Officer) Date: March 17, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the date indicated.
NAME TITLE ---- ----- /s/ GLENN L. CARPENTER Chairman of the Board of Directors - ----------------------------------------------------- President, Chief Executive Officer Glenn L. Carpenter (Principal Executive Officer) /s/ PETER L. EPPINGA Director - ----------------------------------------------------- Peter L. Eppinga /s/ CHRISTINE GARVEY Director - ----------------------------------------------------- Christine Garvey /s/ CARL C. GREGORY, III Director - ----------------------------------------------------- Carl C. Gregory, III /s/ JOHN F. KOOKEN Director - ----------------------------------------------------- John F. Kooken Director - ----------------------------------------------------- Donald E. Lange /s/ ROBERT E. MORGAN Director - ----------------------------------------------------- Robert E. Morgan /s/ JAMES E. QUIGLEY, 3RD Director - ----------------------------------------------------- James E. Quigley, 3rd /s/ KEITH W. RENKEN Director - ----------------------------------------------------- Keith W. Renken
27 30 PACIFIC GULF PROPERTIES INC. INDEX TO FINANCIAL STATEMENTS AND SCHEDULE DECEMBER 31, 1998
PAGE ---- FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT Report of Independent Auditors............................ F-2 Consolidated Balance Sheets............................... F-3 Consolidated Statements of Operations..................... F-4 Consolidated Statements of Shareholders' Equity........... F-5 Consolidated Statements of Cash Flows..................... F-6 Notes to Consolidated Financial Statements................ F-7 SCHEDULE FILED AS PART OF THIS REPORT Schedule III -- Real Estate and Accumulated Depreciation........................................... F-26
F-1 31 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders Pacific Gulf Properties Inc. We have audited the accompanying consolidated balance sheets of Pacific Gulf Properties Inc. as of December 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedule listed in the Index on page F-1. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pacific Gulf Properties Inc. at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with 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. /s/ ERNST & YOUNG LLP Newport Beach, California February 10, 1999 F-2 32 PACIFIC GULF PROPERTIES INC. CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, ---------------------- 1998 1997 --------- --------- (IN THOUSANDS, EXCEPT SHARE DATA) Real estate assets Operating properties Land................................................... $229,920 $185,789 Buildings.............................................. 633,268 515,160 -------- -------- 863,188 700,949 Accumulated depreciation............................... (49,776) (39,148) -------- -------- 813,412 661,801 Properties under development, including land.............. 39,926 32,107 -------- -------- 853,338 693,908 Cash and cash equivalents................................... 2,276 1,466 Accounts and other receivables.............................. 4,984 3,399 Other assets................................................ 14,529 13,698 -------- -------- $875,127 $712,471 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Loans payable............................................. $403,845 $283,852 Accounts payable and accrued liabilities.................. 15,828 9,009 Dividends payable......................................... 9,844 8,852 Convertible subordinated debentures....................... 12,244 12,592 -------- -------- 441,761 314,305 Minority interests in consolidated partnerships............. 17,812 9,326 Commitments and contingencies Shareholders' equity Preferred shares, $.01 par value; 10,000,000 shares authorized; 2,763,116 Senior Cumulative Convertible Class A shares outstanding at December 31, 1998; and 1,351,351 Senior Cumulative Convertible Class A Shares and 1,411,765 Senior Cumulative Convertible Class B Shares outstanding at December 31, 1997................ 28 28 Preferred shares, $.01 par value; 300,000 shares authorized; Class C Junior Participating Cumulative Preferred Stock; no shares outstanding................. -- -- Common shares, $.01 par value; 100,000,000 shares authorized; 20,017,814 and 19,968,189 shares at December 31, 1998 and at December 31, 1997, respectively........................................... 201 200 Outstanding restricted stock.............................. (1,203) (818) Additional paid-in capital................................ 412,093 411,187 Retained earnings (distributions in excess of earnings)... 4,435 (21,757) -------- -------- 415,554 388,840 -------- -------- $875,127 $712,471 ======== ========
See accompanying notes. F-3 33 PACIFIC GULF PROPERTIES INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, --------------------------------- 1998 1997 1996 --------- -------- -------- (IN THOUSANDS, EXCEPT SHARE DATA) REVENUES Rental income Industrial properties.................................. $ 76,271 $36,410 $20,783 Multifamily properties................................. 36,858 33,096 29,104 -------- ------- ------- 113,129 69,506 49,887 -------- ------- ------- EXPENSES Rental property expenses Industrial properties.................................. 16,746 8,212 5,308 Multifamily properties................................. 13,751 12,754 11,554 -------- ------- ------- 30,497 20,966 16,862 Depreciation.............................................. 20,386 12,008 8,236 Interest (including amortization of debenture discount and financing costs of $1,129, $827, and $1,211, respectively).......................................... 25,758 17,337 18,411 General and administrative................................ 5,903 3,159 2,974 Minority interests in earnings of consolidated partnerships........................................... 1,024 172 -- Nonrecurring loss on exchange of debentures for common stock.................................................. -- -- 3,596 -------- ------- ------- 83,568 53,642 50,079 -------- ------- ------- INCOME (LOSS) BEFORE GAINS ON SALE OF REAL ESTATE........... 29,561 15,864 (192) Gains on sale of real estate.............................. 35,292 5,594 74 -------- ------- ------- NET INCOME (LOSS)........................................... 64,853 21,458 (118) Less preferred dividend requirements...................... 4,856 855 -- -------- ------- ------- INCOME AVAILABLE (LOSS ATTRIBUTABLE) TO COMMON SHAREHOLDERS.............................................. $ 59,997 $20,603 $ (118) ======== ======= ======= EARNINGS (LOSS) PER SHARE Basic..................................................... $ 3.01 $ 1.51 $ (0.02) ======== ======= ======= Diluted................................................... $ 2.76 $ 1.47 $ (0.02) ======== ======= =======
See accompanying notes. F-4 34 PACIFIC GULF PROPERTIES INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
COMMON STOCK PREFERRED STOCK RETAINED EARNINGS --------------- --------------- OUTSTANDING ADDITIONAL PAID-IN (DISTRIBUTIONS IN SHARES AMOUNT SHARES AMOUNT RESTRICTED STOCK CAPITAL EXCESS OF EARNINGS) ------ ------ ------ ------ ---------------- ------------------ ------------------- Balance -- December 31, 1995....................... 4,857 $ 49 -- $ -- $ (670) $ 77,979 $ (5,378) Common shares issued......... 4,880 49 -- -- -- 79,917 -- Net issuance of restricted stock...................... 21 -- -- -- (208) -- -- Dividends on common shares... -- -- -- -- -- -- (11,798) Net loss..................... -- -- -- -- -- -- (118) ------ ---- ----- ---- ------- -------- -------- Balance -- December 31, 1996....................... 9,758 98 -- -- (878) 157,896 (17,294) Common shares issued......... 10,189 102 -- -- -- 200,787 -- Preferred shares issued...... -- -- 2,763 28 -- 52,504 -- Net issuance of restricted stock...................... 21 -- -- -- 60 -- -- Dividends on common shares... -- -- -- -- -- -- (25,066) Dividends on preferred shares..................... -- -- -- -- -- -- (855) Net Income................... -- -- -- -- -- -- 21,458 ------ ---- ----- ---- ------- -------- -------- Balance -- December 31, 1997....................... 19,968 200 2,763 28 (818) 411,187 (21,757) Common shares issued......... 50 1 -- -- -- 932 -- Preferred shares issued...... -- -- -- -- -- (26) -- Net issuance of restricted stock...................... -- -- -- -- (385) -- -- Dividends on common shares... -- -- -- -- -- -- (33,805) Dividends on preferred shares..................... -- -- -- -- -- -- (4,856) Net income................... -- -- -- -- -- -- 64,853 ------ ---- ----- ---- ------- -------- -------- Balance -- December 31, 1998....................... 20,018 $201 2,763 $ 28 $(1,203) $412,093 $ 4,435 ====== ==== ===== ==== ======= ======== ======== TOTAL -------- Balance -- December 31, 1995....................... $ 71,980 Common shares issued......... 79,966 Net issuance of restricted stock...................... (208) Dividends on common shares... (11,798) Net loss..................... (118) -------- Balance -- December 31, 1996....................... 139,822 Common shares issued......... 200,889 Preferred shares issued...... 52,532 Net issuance of restricted stock...................... 60 Dividends on common shares... (25,066) Dividends on preferred shares..................... (855) Net Income................... 21,458 -------- Balance -- December 31, 1997....................... 388,840 Common shares issued......... 933 Preferred shares issued...... (26) Net issuance of restricted stock...................... (385) Dividends on common shares... (33,805) Dividends on preferred shares..................... (4,856) Net income................... 64,853 -------- Balance -- December 31, 1998....................... $415,554 ========
See accompanying notes F-5 35 PACIFIC GULF PROPERTIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ---------------------------------- 1998 1997 1996 --------- --------- -------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)...................................... $ 64,853 $ 21,458 $ (118) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation........................................ 20,386 12,008 8,236 Amortization of debenture discount and financing costs............................................. 1,129 827 1,211 Minority interests in earnings of consolidated partnerships...................................... 1,024 172 -- Nonrecurring loss on exchange of debentures for common stock...................................... -- -- 3,596 Gain on sale of real estate......................... (35,292) (5,594) (74) Compensation recognized related to restricted stock issued to employees............................... (385) 59 208 Net increase in other assets........................ (7,370) (4,532) (4,563) Net increase in liabilities......................... 6,821 3,338 27 --------- --------- -------- Net cash provided by operating activities.............. 51,166 27,736 8,523 --------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions and improvements to properties............ (201,160) (332,324) (87,442) Development expenditures............................... (31,565) (29,936) (2,171) Proceeds from sale of real estate...................... 92,025 15,115 7,695 Purchase of property and equipment, net................ -- (3,452) -- --------- --------- -------- Net cash used in investing activities.................. (140,700) (350,597) (81,918) --------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from unsecured line of credit................. 236,419 158,278 28,075 Repayment of unsecured line of credit.................. (119,869) (154,764) (29,462) Proceeds from mortgage notes payable................... 18,300 97,921 63,600 Repayment of mortgage notes payable.................... (28,411) (19,784) (14,659) Proceeds from construction loans....................... 19,515 4,800 -- Repayment of construction loans........................ (5,962) -- -- Debentures converted to common shares.................. (348) (1,635) (42,114) Issuance of common shares.............................. 907 200,891 76,370 Issuance of preferred shares........................... -- 52,531 -- Minority interests contributions....................... 7,462 5,636 -- Dividends on common shares............................. (33,583) (20,215) (9,739) Dividends on preferred shares.......................... (4,086) (855) -- --------- --------- -------- Net cash provided by financing activities.............. 90,344 322,804 72,071 --------- --------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... 810 (57) (1,324) CASH AND CASH EQUIVALENTS -- BEGINNING OF PERIOD......... 1,466 1,523 2,847 --------- --------- -------- CASH AND CASH EQUIVALENTS -- END OF PERIOD............... $ 2,276 $ 1,466 $ 1,523 ========= ========= ========
See accompanying notes. F-6 36 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Pacific Gulf Properties Inc. was incorporated in Maryland in August 1993. The Company operates as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended, which owns, operates, leases, acquires, rehabilitates and develops light industrial and business park properties and multifamily properties including active senior and family-style apartment communities. The Company commenced operations on February 18, 1994 upon the completion of its initial public offerings and consummation of certain formation transactions. Basis of Presentation The consolidated financial statements include the Company's accounts and all subsidiaries and partnerships over which it has control. The Company's controlled partnerships and subsidiaries include PGP Inland Communities, L.P., PGP -- Terrace Gardens Holdings Inc., PGP -- Morning View Terrace Holdings Inc., PGP Northern Industrial, L.P., PGP Southern Industrial II, L.P., Pacific Inland Communities LLC and PGP Von Karman Properties. Minority interests represent the ownership interests of outside limited partners in certain of the partnerships controlled by the Company. All intercompany accounts and transactions have been eliminated in consolidation. Real Estate Assets Real estate assets consist of operating properties and properties under development. Operating properties are held for investment and carried at cost less accumulated depreciation. Cost includes the cost of land and completed buildings and related improvements. Expenditures that increase the service life of properties are capitalized; the cost of maintenance and repairs is charged to expense as incurred. Depreciation is generally provided on a straight-line basis over the estimated useful lives of the buildings and improvements, ranging primarily from 15 to 40 years. When depreciable property is retired or disposed of, the related costs and accumulated depreciation are removed from the accounts and any gain or loss reflected in operations. Properties under development are carried at cost. The cost of development includes land acquisition and infrastructure costs, direct and indirect construction costs and carrying costs including interest and taxes. Land acquisition and infrastructure costs are allocated to components of properties based on relative fair value. Interest and property taxes are capitalized to properties while development activities are in progress. When a project or property under development is completed, all related holding and operating costs are expensed as incurred. Impairment losses are recorded on long-lived assets used in operations and properties under development when indicators of impairment are present and the assets' carrying amount is greater than the sum of the future undiscounted cash flows, excluding interest, estimated to be generated by those assets. As of December 31, 1998, no indicators of impairment existed and no impairment losses have been recorded. The Company adopted the provisions of EITF 97-11, Accounting for Internal Costs Related to Real Estate Property Acquisitions, effective April 1, 1998. Accordingly, the Company ceased capitalizing its internal acquisition costs incurred in conjunction with the identification and acquisition of properties to be held for operations. The Company continues capitalizing internal acquisition costs associated with properties which are under development. Cash and Cash Equivalents Certificates of deposit and short-term investments with remaining maturities of three months or less when acquired are considered cash equivalents. F-7 37 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Financing Costs Financing costs are included in other assets and consist of loan fees, other loan costs and deferred debenture costs. Loan fees and other loan costs are amortized over the term of the respective loan. Costs relating to the convertible subordinated debentures offering are amortized over the term of the debentures using a method that approximates the effective interest method. Amortization of financing costs is included in interest expense. Concentration of Credit Risk Financial instruments that potentially subject the Company to a concentration of credit risk are primarily cash investments and accounts receivable from tenants. Cash is generally invested in investment-grade short- term instruments and the amount of credit exposure to any one commercial issuer is limited. Concentration of credit risk with respect to accounts receivable from tenants is limited. The Company performs credit evaluations of prospective tenants and security deposits are also obtained. Fair Value of Financial Instruments The carrying amounts of the Company's short-term investments and loans payable approximate their fair values as of December 31, 1998. The fair value as of December 31, 1998 of the Company's convertible subordinated debentures, based on the closing price of the debentures on the last trading day in 1998 on the American Stock Exchange, was $12,912,000. Dividend Reinvestment Plan During the years ended December 31, 1998 and 1997, the Company issued 2,156 and 1,225 shares, respectively, under the Company's Dividend Reinvestment Plan. Rental Income Rental income from multifamily leases is recognized when due from tenants. Apartment units are rented under lease agreements with terms of one year or less. Rental income from industrial leases is recognized on a straight-line basis over the related lease term. As a result, deferred rent is created when rental income is recognized during free rent periods of a lease. The deferred rent is included in other assets, evaluated for collectibility and amortized over the lease term. Interest Interest incurred for the years ended December 31, 1998, 1997 and 1996 totaled $28,810,000, $19,469,000 and $18,626,000, respectively. Interest incurred in 1998, 1997 and 1996 includes $1,041,000, $1,100,000, and $4,720,000 related to the Company's convertible subordinated debentures. For the years ended December 31, 1998 and 1997, the Company capitalized $3,052,000 and $2,132,000 of interest related to properties under development. Interest paid for the years ended December 31, 1998, 1997 and 1996 totaled $27,732,000, $18,932,000 and $18,803,000, respectively. In December 1996, the Company exchanged $42,069,000 in principal amount of convertible subordinated debentures in connection with the Company's tender offer (filed on December 11, 1996 with the Securities and Exchange Commission) to induce early conversion of its convertible subordinated debentures (Note 4). As a result, $1,282,000 of interest was paid to the debenture holders upon conversion; had the conversion not occurred, such interest would have been paid to debenture holders in 1997. F-8 38 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Gain on Sale of Real Estate Gains on sale of real estate are recognized by the Company when title to the real estate passes to the buyer, an adequate down payment is received, the collectibility of notes received from buyers is reasonably assured, and all other conditions necessary for profit recognition have been satisfied. Income Taxes The Company has elected to be taxed as a REIT. As a REIT, the Company is generally not subject to income taxes. To maintain its REIT status, the Company is required to distribute annually as dividends at least 95% of its REIT taxable income, as defined by the Internal Revenue Code ("IRC"), to its shareholders, among other requirements. Per Share Data The Company reports earnings per share pursuant to Statement of Financial Accounting Standards No. 128 ("Statement No. 128"). All earnings per share amounts for all periods presented reflect basic and diluted earnings per share and have been restated from the previous standard of primary and fully diluted earnings per share. (See Note 10 for additional information.) Use of Estimates The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities as of December 31, 1998 and 1997 and revenues and expenses for each of the three years in the period ended December 31, 1998. Actual results could differ from those estimates in the near term. Recently Issued Accounting Standards The Financial Accounting Standards Board has issued Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities", which is required to be adopted on January 1, 2000. At that time, the Company will be required to report the fair value of derivatives and reflect adjustments to the carrying amount of hedged items as gains or losses. The Company does not believe the additional requirements will have a significant impact on its disclosures. Reclassifications Certain prior year financial statement amounts have been reclassified to conform to the current year presentation. F-9 39 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. REAL ESTATE ASSETS The Company's real estate assets consist of the following at December 31: OPERATING PROPERTIES
1998 1997 ------------ ------------ INDUSTRIAL PROPERTIES Land............................................... $187,416,000 $130,586,000 Buildings and improvements......................... 500,837,000 344,156,000 ------------ ------------ 688,253,000 474,742,000 Accumulated depreciation........................... (34,249,000) (19,697,000) ------------ ------------ 654,004,000 455,045,000 ------------ ------------ MULTIFAMILY PROPERTIES Active Senior Apartments Land............................................... 14,116,000 12,455,000 Buildings and improvements......................... 56,270,000 48,151,000 ------------ ------------ 70,386,000 60,606,000 Accumulated depreciation........................... (3,303,000) (1,618,000) ------------ ------------ 67,083,000 58,988,000 ------------ ------------ Family Apartments Land............................................... 28,388,000 42,748,000 Buildings and improvements......................... 76,161,000 122,853,000 ------------ ------------ 104,549,000 165,601,000 Accumulated depreciation........................... (12,224,000) (17,833,000) ------------ ------------ 92,325,000 147,768,000 ------------ ------------ TOTAL OPERATING PROPERTIES Land............................................... 229,920,000 185,789,000 Buildings and improvements......................... 633,268,000 515,160,000 ------------ ------------ 863,188,000 700,949,000 Accumulated depreciation........................... (49,776,000) (39,148,000) ------------ ------------ $813,412,000 $661,801,000 ============ ============
OPERATING PROPERTIES Industrial Properties At December 31, 1998, the Company owns and operates 68 industrial properties containing an aggregate of 14,310,000 leasable square feet located in the states of California, Washington, Nevada, Arizona and Oregon. During 1998, the Company purchased 18 industrial properties located in California, Nevada, Arizona and Oregon containing an aggregate of 3,278,000 leasable square feet. The Company's industrial properties are leased to tenants under operating leases with terms ranging from 1 to 5 years. The minimum future lease payments to be received from noncancelable industrial leases for each of the next five years ending December 31 and thereafter, are summarized as follows: 1999............................ $21,267,000 2000............................ 17,412,000 2001............................ 14,062,000 2002............................ 8,669,000 2003............................ 7,211,000 Thereafter...................... 5,489,000 ----------- $74,110,000 ===========
F-10 40 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Multifamily Properties At December 31, 1998, the Company owns and operates 19 multifamily properties containing 3,265 apartment units located in Southern California, including 8 multifamily properties with 1,438 units for active seniors. During 1998, the Company sold six family apartment properties containing 1,556 apartment units located in the state of Washington. (See Note 9.) PROPERTIES UNDER DEVELOPMENT
1998 1997 ----------- ----------- INDUSTRIAL PROPERTIES Land................................................... $16,467,000 $14,987,000 Buildings and improvements............................. 23,459,000 9,744,000 ----------- ----------- 39,926,000 24,731,000 =========== =========== MULTIFAMILY PROPERTIES Active Senior Apartments Land................................................... -- 1,642,000 Buildings and improvements............................. -- 5,734,000 ----------- ----------- -- 7,376,000 =========== =========== TOTAL PROPERTIES UNDER DEVELOPMENT Land................................................... 16,467,000 16,629,000 Buildings and improvements............................. 23,459,000 15,478,000 ----------- ----------- $39,926,000 $32,107,000 =========== ===========
PROPERTIES UNDER DEVELOPMENT Industrial Properties During 1998, the Company completed and transferred to operating properties two rehabilitation projects; a 266,000 square foot warehouse in Algona, Washington and a 214,000 square foot warehouse in Whittier, California. The total rehabilitation cost for both properties was $2,900,000. During 1998, the Company also developed two buildings in Southern California on excess land adjacent to existing properties owned by the Company. A 34,000 square foot building was completed in Anaheim for a cost of $1,500,000 and a 56,000 square foot building was completed in the City of Industry for a cost of $2,000,000. As of December 1998, the Company has under development in Southern California, four industrial properties that will contain approximately 828,000 leasable square feet including 209,000 currently being leased, and one industrial property under rehabilitation containing approximately 376,000 leasable square feet. Development and rehabilitation costs for these properties totaled $20,562,000 and $2,897,000, respectively through December 31, 1998. Multifamily Properties In April 1998, the Company completed and transferred to operating properties, a 166 unit multifamily property for active seniors located in the master planned community of Rancho Santa Margarita, California (Fountains Senior Apartments). Total development cost incurred for the project was $7,446,000. F-11 41 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. LOANS PAYABLE The Company's loans payable at December 31, 1998 and 1997 consist of the following:
1998 1997 ------------ ------------ Mortgage notes Conventional mortgage debt Industrial......................................... $141,629,000 $134,860,000 Active Senior...................................... 4,620,000 4,679,000 Family............................................. 26,355,000 48,909,000 ------------ ------------ 172,604,000 188,448,000 Tax exempt mortgage debt Industrial......................................... -- -- Active Senior...................................... 44,697,000 38,699,000 Family............................................. 20,815,000 21,080,000 ------------ ------------ 65,512,000 59,779,000 Construction loans...................................... 31,979,000 18,425,000 Unsecured line of credit................................ 133,750,000 17,200,000 ------------ ------------ $403,845,000 $283,852,000 ============ ============
Mortgage Notes At December 31, 1998, the Company's conventional mortgage debt consists of 20 notes secured by industrial properties and active senior and multifamily apartments, due in monthly installments and maturing at various dates through September 2025. Certain of the Company's conventional mortgage note agreements contain cross-collateralization provisions (see schedule III). Approximately $166,540,000 or 17 conventional mortgage notes bear fixed rates of interest ranging from 6.78% to 8.75% per annum. The remaining three conventional mortgage notes totaling $6,064,000 bear a variable rate of interest based on the Federal Home Loan Bank 11th District Rate plus 2.8%. The weighted average interest rate of the Company's conventional mortgage debt at December 31, 1998 was 7.59%. During the year ended December 31, 1998, the Federal Home Loan Bank 11th District Rate ranged from 4.76% to 4.99% and was 4.76% at December 31, 1998. At December 31, 1998, the Company's tax-exempt mortgage debt consists of eight notes totaling $65,512,000 that are secured by active senior properties and multifamily apartment properties. Seven of the tax-exempt mortgage notes totaling $56,112,000 and related bond financings are in a 30 year refunding agreement, which is backed by credit and liquidity support from guaranteed mortgage pass-through certificates issued by the Federal National Mortgage Association ("FNMA"). Standard & Poor's Rating Group assigned a rating of AAA to the bonds based on a collateral agreement with FNMA. The Company makes monthly principal and interest payments on the loans to a trustee, which in turn pays the bondholders when interest is due. The bonds are remarketed periodically and bear interest at fixed rates scheduled to increase from 3.75% to 5.20% through 2007. Principal payments on the loans are amortized based on scheduled amounts over a 30-year period. As part of the refunding agreement, the Company is required to deposit impounds with the trustee for property taxes, property and liability insurance and reserves for capital replacements on a semiannual basis. Unamortized finance costs and fees related to the refunding agreement are included in other assets and totaled $1,462,000 and $1,484,000 at December 31, 1998 and 1997, respectively. The weighted average interest rate of the Company's tax-exempt mortgage notes backed by FNMA, at December 31, 1998, was 6.35%. F-12 42 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's eighth tax-exempt mortgage note is a variable rate obligation supported by letters of credit from financial institutions. At December 31, 1998 the principal amount of the debt was $9,400,000 and the interest rate for 1998 averaged 4.77%. Construction Loans At December 31, 1998 the Company has four construction loans, which are payable to a bank, and are secured by industrial properties under development. The construction loans bear interest at LIBOR+ 1.30% to 1.50% or the reference rate payable monthly and mature between August 1999 and August 2000. Undisbursed funds on the construction loans at December 31, 1998 total $10,584,000. Upon completion of the properties, the Company has the option to convert the interest rate on the loans into a fixed rate of interest upon meeting certain conditions. At December 31, 1998, the prime rate was 7.75%. Unsecured Line of Credit In April 1998, the Company replaced its secured line of credit and unsecured bridge loan facility with a $150,000,000 unsecured revolving credit agreement (the "Line of Credit"). The interest rate payable under the new facility is LIBOR plus 1.30% or the reference rate. The facility matures in April 2001. The Company's Line of Credit contains certain debt covenants. The most significant covenants require the Company to maintain a minimum net worth, a leverage ratio based on a calculated asset value no greater than 55% (50% commencing June 1999), an interest coverage ratio in excess of 2.00 (measured on a quarterly basis) and a fixed charge coverage ratio of not less than 1.75. In addition, the Line of Credit contains a provision which limits the loan availability amount to approximately 58% of the value of the Company's unencumbered assets, less unsecured debt. As of December 31, 1998, the Company was in compliance with all debt covenants. Interest Rate Swap Agreements The Company has interest rate swap agreements that effectively convert certain floating rate mortgage notes to a fixed-rate basis, thus reducing the impact on future earnings of fluctuations in interest rates. At December 31, 1998, the Company's interest rate swap agreements have notional amounts totaling $34,500,000 under which the Company pays fixed rates of interest and receives floating rates of interest based on an index that is reset weekly. The swap counterparties are all financial institutions rated AAA by Standard & Poor's. The rate differences to be paid or received are accrued and included in interest expense as a yield adjustment and the related payable or receivable from counterparties is included in accrued liabilities or other assets. The interest rate swap agreements mature in August, 2000. Loans Payable Maturities The principal payments due on loans payable for each of the next five years ending December 31 and thereafter are summarized as follows: 1999........................... $ 13,625,000 2000........................... 53,129,000 2001........................... 133,750,000 2002........................... 23,057,000 2003........................... -- Thereafter..................... 180,284,000 ------------ $403,845,000 ============
F-13 43 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. CONVERTIBLE SUBORDINATED DEBENTURES At December 31, 1998 and 1997, outstanding convertible subordinated debentures totaled $12,244,000 and $12,592,000, net of unamortized discount of $53,000 and $102,000, respectively. The Company's debentures, which were issued in 1994 in an aggregate principal amount of $56,551,000, bear interest at 8.375% annually (payable in semiannual installments due in February and August of each year), and mature in February 2001. The Company's debentures are convertible into common shares at any time prior to maturity at the original conversion rate of 53.6986 common shares per $1,000 of debenture principal subject to certain restrictions (including ownership limits and other adjustments more fully described in the debentures' indenture agreement). The debentures are subordinate to all senior indebtedness of the Company and are redeemable by the Company, at their outstanding principal amount plus accrued interest thereon, at any time after February 15, 1999. During 1998 and 1997, $397,000 and $1,743,000 in aggregate principal amount of debentures were converted into shares of common stock, respectively. During 1996, $42,114,000 in aggregate principal amount of debentures were converted into shares of common stock, including $42,069,000 exchanged in December 1996 in connection with the Company's tender offer to induce early conversion of its convertible subordinated debentures. Pursuant to the Company's offer, the debentures tendered were exchanged at the rate of 58 shares of common stock for each $1,000 debenture principal or 4.3014 shares in excess of the original conversion rate (the "excess common shares"). As part of the exchange, the Company issued a total of 2,440,002 common shares, and recognized a nonrecurring loss of $3,596,000 for the year ended December 31, 1996. The loss was directly associated with the issuance of 180,956 excess common shares at a price of $19.875 per share, the market price of the shares on the date of the exchange. The debenture discount is amortized to expense producing an effective interest rate of 8.76%. Debenture issuance costs are carried in other assets, net of related amortization. Deferred debenture costs totaled $3,005,000 upon issuance of which $1,412,000 has been amortized to expense and $1,394,000 has been charged to additional paid-in capital in connection with conversions of debentures into common stock through December 31, 1998. At December 31, 1998, unamortized deferred debenture costs included in other assets totaled $199,000. At December 31, 1998, the Company was in compliance with the debenture covenants which impose certain restrictions on the payment of dividends by the Company in the event of certain defaults, except when the Company is required to pay such dividends in order to maintain its REIT status. 5. BENEFIT PLANS 1993 Share Option Plan The Company has a share option plan to provide incentives to attract and retain officers and employees (the "1993 Share Option Plan"). The 1993 Share Option Plan provides for grants of stock options, awards of restricted common stock and grants of stock appreciation rights. Shares available under the 1993 Share Option Plan for such purposes total 2,300,000 common shares (300,000 of which have been reserved for awards to non-employee directors). F-14 44 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Stock Options The stock options listed in the table below primarily vest in equal installments over a five-year period from the date of the grant and expire ten years from the original grant date.
NUMBER OF EXERCISE PRICE OPTIONS PER SHARE --------- --------------- Outstanding at December 31, 1995......................... 227,700 $15.00 - $18.25 Granted.................................................. 13,500 $16.75 --------- --------------- Outstanding at December 31, 1996......................... 241,200 $15.00 - $18.25 Granted.................................................. 468,000 $20.75 - $23.75 Canceled................................................. (4,000) $18.25 Exercised................................................ (13,550) $16.25 - $21.38 --------- --------------- Outstanding at December 31, 1997......................... 691,650 $15.00 - $23.75 Granted.................................................. 340,000 $19.50 - $22.56 Canceled................................................. (3,500) $18.25 Exercised................................................ (900) $21.38 --------- --------------- Outstanding at December 31, 1998......................... 1,027,250 $15.00 - $23.75 =========
Pursuant to Statement of Financial Accounting Standards No. 123 ("Statement No. 123"), Accounting and Disclosure of Stock-Based Compensation, issued in October 1995, the Company applies the methodology prescribed by APB Opinion 25 and related interpretations to account for outstanding stock options. Accordingly, no compensation cost is recognized in the financial statements related to stock options awarded to officers, directors and employees under the 1993 Share Option Plan. As required by Statement No. 123, for disclosure purposes only, the Company measures the amount of compensation cost which would have been recognized related to stock options had the fair value of the options at the date of grant been used for accounting purposes. Based on such calculations, net income and earnings per share amounts would be approximately the same as the amounts reported by the Company. The Company estimated the fair value of the stock options at date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 6.29%; a dividend yield of 7.93%; a volatility factor for the market price of the Company's common stock of 0.140; and a weighted average expected life of 10 years for the stock options. Restricted Stock Awards The Company awards restricted stock to its employees for compensation purposes. Compensation expense related to restricted stock awards is measured based on the market price of the stock on the date of the grant, and is expensed ratably over the vesting period of each award with the unamortized portion reflected as outstanding restricted stock in the shareholders' equity section in the Company's balance sheets. F-15 45 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The restricted stock awards listed in the table below were awarded to employees based on performance and vest over periods ranging between one to seven years.
NUMBER OF AWARDS --------- Outstanding at December 31, 1996.......................... 28,296 Granted................................................... 20,500 ------ Outstanding at December 31, 1997.......................... 48,796 Granted................................................... 25,261 ------ Outstanding at December 31, 1998.......................... 74,057 ------ Vested at December 31, 1998............................... 26,596 ======
At December 31, 1998 and 1997, the unamortized amount of outstanding restricted stock issued to employees which will be charged to compensation expense in future periods totaled $1,203,000 and $818,000, respectively. Thrift Plan The Company has a thrift plan under which employees may elect to contribute up to 21% of their annual compensation, excluding bonuses, on a combination before-and-after tax basis. Contributions by the employee are matched by the Company at a 75% rate with total matching contributions not exceeding 4 1/2% of the contributing employee's annual compensation up to a maximum of 6% of compensation. Matching contributions and employee contributions are invested in a fixed income fund, various growth funds, or a combination thereof, according to the employee's choice. The thrift plan provides for 20% vesting of contributions by the Company for each full year of service, increasing to 100% vesting after five years of service. Contributions made by the Company to the thrift plan for the years ended December 31, 1998, 1997 and 1996 totaled $113,000, $29,000 and $58,000 respectively. Retirement Income Plan The Company has a defined benefit retirement plan for full time employees who are at least 21 years of age with one or more years of service. Plan assets consist of investments in a life insurance group annuity contract. Plan benefits are based primarily on years of service and qualifying compensation during the final years of employment. Funding requirements comply with federal requirements that are imposed by law. The Company has adopted Statement No. 132, Employers' Disclosures About Pensions and Other Post-Retirement Benefits, in 1998. Accordingly, the following information reflects the required disclosures pursuant to that Statement. Net periodic pension cost related to the retirement income plan includes amortization of past service cost over a remaining period of 27 years. Based upon actuarial valuation dates as of December 31, 1998 and 1997, the benefit obligations were $1,878,000 and $1,598,000, respectively, and the plan's net assets available for benefits were $1,142,000 in 1998 and $704,000 in 1997. F-16 46 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's net periodic pension cost for the years ended December 31, 1998, 1997, and 1996 consists of the following components:
1998 1997 1996 -------- -------- -------- Service cost....................................... $274,000 $116,000 $101,000 Interest cost on projected benefit obligation...... 112,000 65,000 53,000 Expected return on plan assets..................... (62,000) (41,000) (42,000) Amortization of transition (Asset)/obligation...... 7,000 -- -- Amortization of unrecognized prior service costs and unrecognized net obligation.................. 24,000 1,000 6,000 -------- -------- -------- Net periodic pension cost.......................... $355,000 $141,000 $118,000 ======== ======== ========
The following table sets forth the plan's funded status for the fiscal year ending December 31, 1998 and December 31, 1997:
1998 1997 ---------- ---------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year..................... $1,598,000 $ 866,000 Service cost................................................ 275,000 116,000 Interest cost............................................... 112,000 65,000 Plan participant contributions.............................. -- -- Actuarial (gain)/loss....................................... (107,000) 420,000 Benefits paid............................................... -- -- Other....................................................... -- 131,000 ---------- ---------- Benefit obligation at end of year........................... $1,878,000 $1,598,000 ========== ========== CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year.............. 704,000 531,000 Actual return on plan assets................................ 109,000 42,000 Employer contributions...................................... 329,000 131,000 Plan participant contributions.............................. -- -- Benefits paid............................................... -- -- Other....................................................... -- -- ---------- ---------- Fair value of plan assets at end of year.................... $1,142,000 $ 704,000 ========== ========== RECONCILIATION OF FUNDED STATUS Funded status (underfunded)/overfunded...................... $ (735,000) $ (894,000) Unrecognized net actuarial (gain)/loss...................... 293,000 464,000 Unrecognized transition (asset)/obligation.................. 160,000 167,000 Unrecognized prior service cost............................. 124,000 131,000 ---------- ---------- (Accrued)/prepaid benefit cost.............................. $ (158,000) $ (132,000) ========== ========== ADDITIONAL MINIMUM LIABILITY DISCLOSURES Accrued benefit liability................................... $ -- $ (129,000) Intangible asset............................................ -- -- Other comprehensive income, not adjusted for applicable income tax................................................ $ -- $ --
F-17 47 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Assumptions used in determining the status of the Company's retirement income plan are as follows:
1998 1997 1996 ---- ---- ---- Weighted average discount rate.............................. 6.5% 7.0% 7.5% Weighted average rate of increase in compensation levels.... 4.9% 4.9% 5.0% Expected long-term rate of return on plan assets............ 7.5% 7.5% 8.5%
Deferred Compensation Agreements In conjunction with its initial public offerings, the Company assumed the deferred compensation obligations attributable to employees who were previously employed by its predecessor. Deferred compensation agreements were provided to selected management employees with a fixed benefit at retirement. Benefits were based primarily on years of service and qualifying compensation during the final years of employment. During 1995, the deferred compensation agreements were substantially replaced with restricted stock. (See "Restricted Stock Awards.") 6. CONSOLIDATED REAL ESTATE PARTNERSHIPS The Company's consolidated partnerships include the following: PGP Inland Communities, L.P. PGP Inland Communities, L.P., a Delaware limited partnership (the "Partnership") was formed by the Company in August 1995 for the purpose of acquiring and operating 11 multifamily properties consisting of 1,368 apartment units located in Southern California (the "Properties") which were contributed by unrelated parties. In exchange for contributing the Properties to the Partnership, the unrelated parties received approximately 225,452 limited partnership units representing an initial ownership interest of approximately 22%. The Company is the sole general partner in the Partnership and currently holds an ownership interest of approximately 82%. The terms of the Partnership agreement provide that all net income (and cash flow) from the Properties be allocated (distributed) to the Company until the Properties have achieved a threshold net operating income of $6,200,000 for any given year, and cumulatively for all prior years. The Partnership's results of operations since 1995 have been fully allocated to the Company. Beginning in August 1997, the Partnership's limited partnership units can be tendered for redemption on a one-for-one basis for cash or for shares of common stock at the election of the Company. As of December 31, 1998, 45,982 of these units have been tendered for cash, the cost of which has been capitalized to the properties. Terrace Gardens -- PGP L.P. and Morning View Terrace -- PGP L.P. In June 1997, the Company, through its subsidiaries, PGP Terrace Gardens Holdings Inc. and PGP Morning View Terrace Holdings Inc., acquired a controlling general partner interest in two existing limited partnerships ("Terrace Gardens" and "Morning View") that own two adjacent active seniors apartment communities located in Escondido, California. The properties contain an aggregate of 551 apartment units. Following the acquisition, the Company became the sole general partner of the existing limited partnerships (Terrace Gardens-PGP L.P. and Morning View Terrace-PGP L.P.) that own and manage the properties. The existing partners of the partnerships received an aggregate of approximately 266,000 limited partnership units in such partnerships valued at $5,596,000. Beginning in June 1999, the limited partnership units can be tendered for redemption to the Company. Upon tender, the Company, at its election, may either issue common shares for the units on a one-for-one basis (subject to certain adjustments) or pay cash for the units based on the then fair market value of the Company's common shares. During 1997, approximately 125,000 limited partnership units were tendered for cash, the cost of which was capitalized to the properties. As a result of the tender, the Company currently holds an ownership interest of approximately 58%. Net income F-18 48 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) from the partnerships is allocated to the limited partners based on an amount equal to the Company's dividend rate on common stock applied to the number of limited partnership units held by stock partners and the remaining income is allocated to the Company. Distributions are made to the extent of cash flow available. PGP Northern Industrial L.P. On October 20, 1997, the Company acquired a controlling general partner interest in PGP Northern Industrial L.P., a California limited partnership ("PGP Northern")which owns two industrial properties ("Eden Plaza/Eden Industrial") containing approximately 501,000 leasable square feet located in Hayward, California. The Company acquired such interest for a cash contribution of approximately $3,977,000. The previous owners of Eden Plaza/Eden Industrial became limited partners in PGP Northern and received 143,391 limited partnership units valued at $2,869,000 in exchange for the contribution of the two industrial properties. The limited partnership units can be tendered for redemption to the Company. Upon tender, the Company, at its election, may either issue common shares for the units on a one-for-one basis (subject to certain adjustments) or pay cash for the units based on the then fair market value of the common shares. At December 31, 1998, the Company holds an ownership interest of approximately 59%. Net income from the partnership is allocated to the limited partners based on an amount equal to the Company's dividend rate on common stock applied to the number of limited partnership units held by such partners and the remaining income is allocated to the Company. Distributions are made to the extent of cash flow available. PGP Southern Industrial II, L.P. On March 13, 1998, the company acquired a controlling general partner interest in PGP Southern Industrial II, L.P., a California limited partnership ("PGP Southern") which owns a 168,000 square foot distribution facility located in Garden Grove, California. The other partner in the partnership received an aggregate of 404,950 limited partnership units in the partnership for an aggregate value of $9,000,000. Beginning in March, 1999 the limited partnership units can be tendered for redemption to the Company. Upon tender, the Company, at its election, may either issue common shares for the units on a one-for-one basis (subject to certain adjustments) or pay cash for the units based on the then fair market value of the common shares. Net income from the partnerships is allocated to the limited partners based on an amount equal to the Company's dividend rate on common stock applied to the number of limited partnership units held by stock partners and the remaining income is allocated to the Company. Distributions are made to the extent of cash flow available. F-19 49 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Condensed unaudited combined financial information for the consolidated real estate partnerships as of December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and 1996 follows:
1998 1997 ------------ ------------ Real estate assets Land.................................................. $ 34,903,000 $ 31,983,000 Buildings and improvements............................ 96,087,000 86,453,000 ------------ ------------ 130,990,000 118,436,000 Accumulated depreciation................................ (6,886,000) (3,764,000) ------------ ------------ 124,104,000 114,672,000 Cash and other assets................................... 8,404,000 3,185,000 ------------ ------------ $132,508,000 $117,857,000 ============ ============ Liabilities (primarily tax-exempt and mortgage notes)... $ 90,749,000 $ 86,430,000 Partners' Capital Company............................................... 23,947,000 22,101,000 Minority interests.................................... 17,812,000 9,326,000 ------------ ------------ 41,759,000 31,427,000 ------------ ------------ $132,508,000 $117,857,000 ============ ============
YEARS ENDED DECEMBER 31, ----------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Revenues.................................... $18,505,000 $12,999,000 $10,415,000 Expenses.................................... 13,575,000 12,129,000 9,691,000 ----------- ----------- ----------- Net income.................................. $ 4,930,000 $ 870,000 $ 724,000 =========== =========== =========== Company's share of net income............... $ 3,906,000 $ 698,000 $ 724,000 Minority partners' interest in earnings of consolidated partnerships.............. 1,024,000 172,000 -- ----------- ----------- ----------- $ 4,930,000 $ 870,000 $ 724,000 =========== =========== ===========
7. COMMITMENTS AND CONTINGENCIES General Matters The Company's commitments and contingencies include the usual obligations of real estate owners and operators in the normal course of business. In the opinion of management, these matters will not have a material adverse effect on the Company's consolidated financial statements. As of December 31, 1998, 11% of the apartment units within the Company's multifamily properties were required to be set aside for residents within certain income levels and had limitations on the rent that could be charged to such tenants. Ground Lease Commitments One of the Company's industrial properties is subject to a ground lease that expires in July 2035 which is accounted for as an operating lease. Monthly ground lease payments total $22,000 and are subject to increases based on the Consumer Price Index, with the next adjustment in September 2000. Ground lease payments during 1998 and 1997 totaled $261,000 and $246,000, respectively. Two other ("PGBP-Irvine" and "PGBP-Cerritos") industrial properties acquired in December 1997 are subject to ground leases which expire in August 2029 and April 2034, respectively. Monthly ground lease payments total $25,000 and $38,000 and are F-20 50 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) subject to increases based on the Consumer Price Index, with the next adjustment in April 1999 and October 1999 for Irvine and Cerritos, respectively. Ground lease payments during 1998 and 1997 on the Irvine property totaled $303,000 and $6,700 respectively and ground lease payments on the Cerritos property totaled $455,000 and $9,800, respectively. During June 1998, the Company acquired a property in Tustin which is subject to a ground lease which expires in January 2044. Annual ground lease payments in the amount of $101,000 are due in January of each year; such payments are expected to increase in January 2000 based on a reappraisal of the land value. The minimum future ground lease payments to be made for each of the next five years ending December 31 and thereafter, are summarized as follows: 1999............................ $ 1,122,000 2000............................ 1,122,000 2001............................ 1,122,000 2002............................ 1,122,000 2003............................ 1,122,000 Thereafter...................... 33,232,000
Letter of Credit In December 1998 in conjunction with the sale of the Company's Washington apartment communities, the Company restructured the existing indebtedness on the Hampton Bay apartment community. The lender, a life insurance company, released the Hampton Bay property as collateral and accepted a letter of credit in the amount of $9,400 000 as substitution collateral. The Company intends to replace the letter of credit by providing its City of Industry industrial project as replacement collateral. 8. CAPITAL STOCK Common Shares In May 1998, the shareholders voted to approve an amendment to the Company's Articles of Amendment and Restatement as filed with Maryland's State Department of Assessments and Taxation (the "Charter") that increased the number of authorized shares of Common Stock, par value $.01 per share from 25,000,000 shares to 100,000,000 shares, and to eliminate the 30,000,000 of Excess Stock authorized. Shelf Registration Statements During 1997, the Company filed a shelf registration statement with the Securities and Exchange Commission for an aggregate amount of $250,000,000, covering the proposed issuance of debt, preferred or common stock securities and warrants to purchase such securities of the Company (the "1997 Shelf Registration Statement"). The 1997 Shelf Registration Statement was declared effective April 11, 1997 by the Securities and Exchange Commission. Availability under the 1997 Shelf Registration Statement at December 31, 1998 was $56,126,000. During 1998, the Company filed a shelf registration statement with the Securities and Exchange Commission for the aggregate amount of $300,000,000, covering the proposed issuance of debt, preferred or common stock securities and warrants to purchase such securities of the Company (the "1998 Shelf Registration Statement"). The 1998 Shelf Registration Statement was declared effective April 23, 1998 by the Securities and Exchange Commission. Availability under the 1998 Shelf Registration Statement at December 1998 was $300,000,000. F-21 51 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1997 Common Stock Offerings In January 1997, the Company completed a public offering of 2,000,000 shares of common stock (2,300,000 shares after exercise of overallotment option) under the 1996 Shelf Registration Statement at a price of $20.50 per share. Net proceeds from the offering totaled approximately $44,399,000 (net of fees and costs) and were used to acquire two industrial properties and to reduce outstanding indebtedness on the Company's revolving line of credit. In June 1997, the Company received net proceeds of approximately $42,224,000 (net of fees and costs) from the issuance of 2,131,700 shares of common stock under the 1997 Shelf Registration Statement (including proceeds from the issuance of 31,700 shares of common stock sold pursuant to the exercise of the underwriter's overallotment option) at a price of $21.00 per share. The Company used the proceeds to repay debt and for general corporate purposes. In November 1997, the Company received net proceeds of approximately $93,372,000 (net of fees and costs) from the issuance of 4,776,300 shares of common stock under the 1997 Shelf Registration Statement (including proceeds from the issuance of 526,300 shares of common stock sold pursuant to the exercise of the underwriter's overallotment option) at a price of $20.75 per share. The Company used the proceeds to fund the purchase of acquisitions, repay indebtedness outstanding under the Company's line of credit and general corporate purposes. In December 1997, the Company received net proceeds of approximately $18,899,000 from the issuance of 874,317 shares of common stock under the 1997 Registration Statement at a price of $22.875. The Company used the proceeds to repay indebtedness outstanding under the Company's revolving line of credit and for general corporate purposes. Preferred Stock During 1997, the Company issued 1,351,351 shares of Class A Senior Cumulative Convertible Preferred Stock (the "Class A Preferred Stock") to an investor at a price of $18.50 per share pursuant to an agreement entered in December 1996. The Class A Preferred Stock were issued under the 1996 Shelf Registration Statement. The net proceeds which totaled approximately $24,224,000 (net of fees and costs) were used to pay off a portion of a mortgage note, to purchase a portion of an industrial property portfolio, and for general corporate purposes. The Class A Preferred Stock are convertible into shares of common stock, on a one-for-one basis, subject to adjustment upon certain events. The annual dividend per share on the Class A Preferred Stock is $1.70 from the date of issuance until December 31, 1997 and thereafter, the greater of $1.70 per share or 104% of the then current dividend on the Company's common stock. At its option, the Company may redeem the Class A Preferred Stock beginning December 31, 2001 for cash at a premium of 6% over the initial $18.50 per share liquidation value, decreasing to zero % by December 31, 2009. The Class A Preferred Stock, or any shares of common stock into which such Class A Preferred Stock could be converted, were nontransferable until June 30, 1998. In May 1997, the Company entered into a second agreement with an investor to issue 1,411,765 shares of Class B Senior Cumulative Convertible Preferred Stock (the "Class B Preferred Stock") at a price of $21.25. On July 18, 1997, the Company, pursuant to this agreement, issued 470,588 shares of Class B Preferred Stock raising net proceeds of $9,014,000 (net of fees and costs). The proceeds were used together with funds from other sources to acquire an industrial portfolio consisting of five industrial properties. On October 23, 1997, the Company, pursuant to this agreement issued 235,294 additional shares of Class B Preferred Stock raising net proceeds of $4,824,000 (net of fees and costs). The net proceeds were used for general corporate purposes. On December 23, 1997, the Company issued the remaining 705,883 shares of Class B Preferred Stock pursuant to F-22 52 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the investor agreement and received net proceeds of $14,471,000 (net of fees and costs). The net proceeds were used to purchase a portion of an industrial property portfolio consisting of four industrial properties. In May 1998, the shareholders voted to approve an amendment to the Company's Charter that (a) increased the authorized number of shares of Preferred Stock, par value $.01 per share (the "Preferred Stock"), from 5,000,000 shares to 10,000,000 shares and (b) reclassified the issued and outstanding shares of Class B Preferred Stock as additional shares of Class A Preferred Stock and changed the liquidation preference of the Class A Preferred Stock to $19.91 per share to reflect the economic terms of such reclassification of the Class B Preferred Stock. 9. GAINS ON SALE OF REAL ESTATE In December 1998, the Company sold five apartment properties located in Washington consisting of 1,322 apartment units for $78,500,000 and recognized a gain on sale of $28,913,000. In September 1998, the Company sold an apartment property located in Washington consisting of 234 apartment units for $13,525,000 and recognized a gain on sale of $6,379,000. In December 1997, the Company sold an apartment property located in Oregon consisting of 279 apartment units for $15,575,000 and recognized a gain on sale of $5,705,000. In April 1997, the Company sold its 7,000 square foot Corporate office in Newport Beach, California for $850,000 and recognized a loss on the sale of $111,000. The Company has relocated to a newly acquired 26,000 square foot facility also located in Newport Beach, California. In August 1996, the Company sold an undeveloped ten-acre parcel and a 55,656 square foot industrial building to an existing tenant pursuant to purchase options contained in the tenant's lease agreements. In connection with the sale, the Company received consideration totaling $7,695,000 and recognized a gain of $74,000. The rental income received under the existing lease agreements in 1996 totaled approximately $691,000. 10. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings (loss) per share which have been restated to comply with Statement No. 128:
1998 1997 --------------------------------------- --------------------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE EARNINGS SHARES EARNINGS EARNINGS SHARES EARNINGS (NUMERATOR) (DENOMINATOR) PER SHARE (NUMERATOR) (DENOMINATOR) PER SHARE ----------- ------------- --------- ----------- ------------- --------- BASIC EPS Income available (loss attributable) to common stockholders......................... $59,997,000 19,939,000 $3.01 $20,603,000 13,686,000 $1.51 =========== ========== ===== =========== ========== ===== EFFECT OF DILUTIVE SECURITIES Stock options................................ 31,000 17,000 Restricted stock............................. 86,000 63,000 Limited partnership units.................... 1,024,000 811,000 172,000 363,000 Convertible Subordinated Debentures.......... 1,171,000 660,000 Convertible Preferred Stock.................. 4,856,000 2,763,000 DILUTED EPS.................................. $67,048,000 24,290,000 $2.76 $20,775,000 14,129,000 $1.47 =========== ========== ===== =========== ========== ===== 1996 --------------------------------------- WEIGHTED AVERAGE EARNINGS SHARES EARNINGS (NUMERATOR) (DENOMINATOR) PER SHARE ----------- ------------- --------- BASIC EPS Income available (loss attributable) to common stockholders......................... $(118,000) 6,312,000 $(0.02) ========= ========= ====== EFFECT OF DILUTIVE SECURITIES Stock options................................ 6,000 Restricted stock............................. 30,000 Limited partnership units.................... 225,000 Convertible Subordinated Debentures.......... Convertible Preferred Stock.................. DILUTED EPS.................................. $(118,000) 6,573,000 $(0.02) ========= ========= ======
Shares of senior cumulative convertible preferred stock, convertible into 2,763,116 shares of common stock, were issued and outstanding during 1997 but were not included in computing diluted earnings per share. Including these shares of preferred stock in the computations increases earnings per share $.01, and are therefore considered antidilutive. Convertible subordinated debentures, convertible into 682,000 and F-23 53 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 775,000 shares of common stock, were outstanding during 1997 and 1996, respectively but were not included in the computation of diluted earnings per share because the effect would be antidilutive. 11. REPORTABLE SEGMENTS During the fourth quarter of 1998, the Company adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information ("Statement No. 131"). Statement No. 131 superseded FASB Statement No. 14, Financial Reporting for Segments of a Business Enterprise. Statement No. 131 establishes standards for the way that public business enterprises report information regarding reportable operating segments. The adoption of Statement No. 131 did not affect the results of operations or financial position of the Company. The Company operates and develops industrial properties and multifamily properties (consisting of active senior and family apartments). The properties generate rental and other income through the leasing of industrial space and apartment units to a diverse base of tenants. The Company separately evaluates the performance of its industrial and multifamily operating segments and allocates resources primarily based on net operating income ("NOI"). NOI is defined by the Company as rental income less rental property expenses. Accordingly, NOI excludes certain expenses such as interest, depreciation and minority interests in consolidated partnerships which are included in the determination of Net Income under generally accepted accounting principles. NOI from industrial properties totaled $59,525,000, $28,198,000 and $15,475,000 for the years ended December 31, 1998, 1997 and 1996, respectively. NOI from multifamily properties totaled $23,107,000, $20,342,000 and $17,550,000 for the years ended 1998, 1997 and 1996, respectively. All revenues are from external customers and no revenues are generated from transactions between segments. There are no tenants which contributed 10% or more of the Company's total revenues during 1998, 1997 or 1996. Interest expense on debt is not allocated to the segments or individual properties even if such debt is secured by the properties. Certain items in the consolidated statements of operations such as minority interest in consolidated partnerships are not allocated to the properties. Additionally, there is no provision for income taxes as the Company is organized as a REIT under the Internal Revenue Code. F-24 54 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. SELECTED QUARTERLY DATA (UNAUDITED) The following tables set forth the quarterly results of operations of the Company for the years ended December 31, 1998 and 1997:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- 1998 Revenues.................................... $25,318 $27,799 $29,792 $30,220 Income before gains on sale of real estate.................................... $ 7,415 $ 7,643 $ 7,221 $ 7,282 Gains on sale of real estate................ -- -- $ 6,427 $28,865 Income available to common shareholders..... $ 6,208 $ 6,436 $12,441 $34,912 Earnings per share: Basic..................................... $ 0.31 $ 0.32 $ 0.62 $ 1.75 Diluted................................... $ 0.31 $ 0.32 $ 0.58 $ 1.51 1997 Revenues.................................... $14,813 $15,919 $18,457 $20,317 Income before gain on sale of real estate... $ 3,082 $ 3,597 $ 4,179 $ 5,006 Gain (loss) on sale of real estate.......... -- $ (111) -- $ 5,705 Income available to common shareholders..... $ 3,082 $ 3,371 $ 3,904 $10,246 Earnings per share: Basic..................................... $ 0.27 $ 0.27 $ 0.27 $ 0.62 Diluted................................... $ 0.26 $ 0.26 $ 0.27 $ 0.60
F-25 55 SCHEDULE III PACIFIC GULF PROPERTIES INC. REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1998
COSTS CAPITALIZED SUBSEQUENT GROSS AMOUNTS AT WHICH CARRIED INITIAL COST TO COMPANY TO AT CLOSE OF PERIOD ----------------------- ACQUISITION -------------------------------------- BUILDING LAND AND BUILDINGS AND BUILDING AND ACCUMULATED DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENT LAND IMPROVEMENTS TOTAL DEPRECIATION ----------- ------------ -------- ------------ ----------- -------- ------------ -------- ------------ INDUSTRIAL PROPERTIES California Baldwin Park........ $ 11,469 $ 999 $ 27,876 $ 625 $ 8,155 $ 21,345 $ 29,500 $ 8,983 Garden Grove........ 5,300 4,230 4,564 568 4,230 5,132 9,362 721 Ontario............. 6,600 5,310 10,801 1,878 5,310 12,679 17,989 1,643 Rancho Cucamonga.... 3,800 1,610 8,196 778 1,610 8,974 10,584 1,478 Rancho Cucamonga.... -- 1,666 3,367 621 1,666 3,988 5,654 499 Vista............... 7,800 3,465 7,896 955 3,465 8,851 12,316 1,428 Garden Grove........ -- 3,905 3,016 819 3,905 3,835 7,740 464 Santa Fe Springs (d)............... 2,475 1,725 2,041 77 1,725 2,118 3,843 152 La Mirada........... -- 1,541 2,057 368 1,541 2,425 3,966 299 Aliso Viejo (d)..... 4,425 2,760 4,142 205 2,760 4,347 7,107 331 Yorba Linda (d)..... 4,125 2,713 3,625 310 2,713 3,935 6,648 315 San Marcos (d)...... 2,700 1,827 2,907 123 1,827 3,030 4,857 247 Escondido (d)....... 6,300 3,782 6,614 808 3,782 7,422 11,204 613 Hayward............. -- 2,239 5,107 910 2,239 6,017 8,256 707 San Marcos.......... -- 825 1,838 186 825 2,024 2,849 189 San Bernardino (d)............... 4,475 1,147 5,320 588 1,147 5,908 7,055 413 City of Industry.... 7,586 5,774 2,155 8,427 6,686 9,670 16,356 963 San Diego........... -- -- 7,287 498 -- 7,785 7,785 486 Santa Ana........... -- 1,924 7,231 486 1,924 7,717 9,641 487 Santa Ana........... -- 1,299 4,257 306 1,299 4,563 5,862 293 Woodland............ -- 1,824 11,002 76 1,824 11,078 12,902 517 Chino (f)........... 34,000 2,208 8,483 187 2,208 8,670 10,878 472 Downey (f).......... -- 3,568 8,027 145 3,568 8,172 11,740 407 Fontana (f)......... -- 2,801 11,422 58 2,801 11,480 14,281 551 Fremont (f)......... -- 4,985 12,034 231 4,985 12,265 17,250 606 Rancho Bernardo (f)............... -- 4,737 9,467 256 4,737 9,723 14,460 489 San Diego (g)....... -- 5,518 10,581 763 5,516 11,346 16,862 346 Concord............. -- 1,593 6,054 140 1,593 6,194 7,787 299 Anaheim............. -- 1,589 5,333 357 1,589 5,690 7,279 180 Sacramento.......... -- 2,642 12,928 615 2,642 13,543 16,185 370 Santa Clara......... -- 6,279 14,694 564 6,279 15,258 21,537 420 Sunnyvale........... -- 2,864 11,482 140 2,864 11,622 14,486 320 Fullerton........... -- 1,967 7,141 8 1,967 7,149 9,116 273 Anaheim............. -- 2,509 3,630 51 2,509 3,681 6,190 108 Anaheim............. -- 2,069 7,515 2,602 2,069 10,117 12,186 349 Fullerton........... -- 1,197 4,336 71 1,197 4,407 5,604 120 Sacramento.......... -- 2,087 6,637 96 2,087 6,733 8,820 237 Sacramento.......... 2,805 2,788 6,739 177 2,788 6,916 9,704 246 Anaheim............. -- 946 2,376 24 946 2,400 3,346 80 Irvine.............. -- -- 7,020 299 -- 7,319 7,319 220 Cerritos............ -- -- 8,485 307 -- 8,792 8,792 298 Montebello.......... -- 2,338 2,471 117 2,338 2,588 4,926 98 Sacramento.......... -- 1,216 3,500 272 1,216 3,772 4,988 133 Hayward (e)......... 11,833 2,062 4,617 823 2,062 5,440 7,502 279 Hayward (e)......... -- 653 1,462 29 653 1,491 2,144 57 Hayward (e)......... -- 653 1,462 31 653 1,493 2,146 60 Hayward (e)......... -- 2,614 5,847 1,266 2,614 7,114 9,728 296 MAXIMUM LIFE ON WHICH DEPRECIATION IN LATEST INCOME DATE OF DATE STATEMENT DESCRIPTION CONSTRUCTION ACQUIRED IS COMPUTED ----------- ------------ -------- ------------- INDUSTRIAL PROPERTIES California Baldwin Park........ 1983,1985 1994 30 Years Garden Grove........ 1979 1994 40 Years Ontario............. 1991 1994 40 Years Rancho Cucamonga.... 1987,1990 1994 40 Years Rancho Cucamonga.... 1981 1994 40 Years Vista............... 1990 1994 40 Years Garden Grove........ 1986 1996 40 Years Santa Fe Springs (d)............... 1981 1996 40 Years La Mirada........... 1975 1996 30 Years Aliso Viejo (d)..... 1988 1996 40 Years Yorba Linda (d)..... 1987-89 1996 40 Years San Marcos (d)...... 1988 1996 40 Years Escondido (d)....... 1988-92 1996 40 Years Hayward............. 1972-74 1996 30 Years San Marcos.......... 1985 1996 30 Years San Bernardino (d)............... 1980 1996 30 Years City of Industry.... n/a 1996 n/a San Diego........... 1981 1996 30 Years Santa Ana........... 1974,1976 1997 40 Years Santa Ana........... 1974,1976 1997 40 Years Woodland............ n/a 1997 40 Years Chino (f)........... 1988 1997 30 Years Downey (f).......... 1988 1997 30 Years Fontana (f)......... 1989 1997 30 Years Fremont (f)......... 1980 1997 30 Years Rancho Bernardo (f)............... 1990 1997 30 Years San Diego (g)....... 1980,1997 1997 30 Years Concord............. 1989 1997 30 Years Anaheim............. 1972 1997 40 Years Sacramento.......... 1972 1997 40 Years Santa Clara......... 1972 1997 40 Years Sunnyvale........... 1972 1997 40 Years Fullerton........... 1980 1997 30 Years Anaheim............. 1961 1997 40 Years Anaheim............. 1951 1997 40 Years Fullerton........... 1979 1997 40 Years Sacramento.......... 1988,1989 1997 30 Years Sacramento.......... 1988 1997 30 Years Anaheim............. 1980 1997 30 Years Irvine.............. 1979 1997 40 Years Cerritos............ 1985 1997 30 Years Montebello.......... 1985 1997 30 Years Sacramento.......... 1988 1997 30 Years Hayward (e)......... 1974 1997 40 Years Hayward (e)......... 1973 1997 40 Years Hayward (e)......... 1973 1997 40 Years Hayward (e)......... 1973 1997 40 Years
F-26 56
COSTS CAPITALIZED SUBSEQUENT GROSS AMOUNTS AT WHICH CARRIED INITIAL COST TO COMPANY TO AT CLOSE OF PERIOD ----------------------- ACQUISITION -------------------------------------- BUILDING LAND AND BUILDINGS AND BUILDING AND ACCUMULATED DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENT LAND IMPROVEMENTS TOTAL DEPRECIATION ----------- ------------ -------- ------------ ----------- -------- ------------ -------- ------------ Lake Forest......... $ -- $ $ 0 $ 54 $ -- $ 54 $ 54 $ 54 Upland.............. -- 1,110 4,038 23 1,110 4,061 5,171 97 Chatsworth.......... -- 2,374 5,270 339 2,374 5,609 7,983 137 Los Alamitos........ -- 1,082 6,169 246 1,082 6,415 7,497 115 Signal Hill......... -- 1,686 3,148 84 1,686 3,232 4,918 77 North Highlands..... -- 2,107 3,789 298 2,107 4,087 6,194 97 Garden Grove........ 2,374 6,098 5,625 349 6,098 5,974 12,072 83 Irvine.............. -- 3,803 7,464 7 3,803 7,471 11,274 104 Tustin.............. -- -- 19,069 177 -- 19,246 19,246 269 Whittier............ -- 2,505 6,625 9 2,505 6,634 9,139 85 Concord............. -- 3,243 4,835 1 3,243 4,836 8,079 -- Dublin.............. -- 8,233 14,873 -- 8,233 14,873 23,106 -- Hayward............. -- 3,193 4,877 -- 3,193 4,877 8,070 -- Sacramento.......... -- 1,288 5,158 -- 1,288 5,158 6,446 -- Garden Grove........ -- 2,920 6,096 3 2,920 6,099 9,019 155 Arizona Phoenix............. -- 4,527 10,870 -- 4,527 10,870 15,397 -- Tempe............... -- 1,270 3,039 1 1,270 3,040 4,310 -- Nevada Las Vegas........... 4,455 4,707 9,511 234 4,707 9,745 14,452 212 Washington Seattle............. -- 433 1,112 44 433 1,156 1,589 418 Seattle............. -- 401 1,028 191 401 1,219 1,620 458 Seattle............. -- 974 2,497 443 974 2,940 3,914 1,125 Tukwila............. 11,224 6,684 10,677 2,413 6,684 13,090 19,774 1,576 Algona I............ -- 2,490 7,002 10 2,490 7,012 9,502 408 Algona II........... -- 2,864 5,916 2,740 2,864 8,656 11,520 237 Oregon Portland............ -- 2,910 8,265 -- 2,910 8,265 11,175 -- -------- -------- -------- -------- -------- -------- -------- ------- Total Industrial...... 133,746 179,350 471,995 36,907 187,416 500,837 688,253 34,249 Laguna Hills........ 4,621 1,798 5,981 543 1,795 6,527 8,322 737 Escondido........... 7,943 2,064 8,075 194 2,064 8,268 10,332 429 Escondido........... 10,789 4,108 11,059 418 4,182 11,403 15,585 556 Riverside........... 9,400 2,394 11,064 195 2,394 11,259 13,653 383 San Dimas........... 5,528 1,306 5,448 254 1,331 5,677 7,008 496 Ontario............. 1,784 322 2,232 132 326 2,360 2,686 213 Ontario............. 2,886 385 3,223 150 391 3,367 3,758 325 Rancho Santa Margarita......... 6,366 1,642 -- 7,445 1,642 7,446 9,087 163 Santa Ana........... -- 6,985 18,581 1,626 6,985 20,207 27,192 7,007 Santa Ana........... -- 1,488 5,764 963 1,488 6,727 8,215 825 Covina.............. 1,271 558 1,466 92 569 1,547 2,116 146 Diamond Bar......... 10,136 3,958 8,048 605 4,034 8,577 12,611 773 San Dimas........... 3,622 1,695 3,520 242 1,727 3,730 5,457 337 West Covina......... 11,426 3,856 9,848 659 3,930 10,433 14,363 941 San Dimas........... 6,613 2,390 6,123 540 2,436 6,617 9,053 596 San Dimas........... 1,171 432 1,312 133 440 1,437 1,877 132 Ontario............. 6,532 2,273 5,626 450 2,316 6,033 8,349 566 Ontario............. 7,497 2,654 5,671 476 2,705 6,096 8,801 615 Ontario............. 6,785 1,749 4,525 196 1,749 4,721 6,470 287 -------- -------- -------- -------- -------- -------- -------- ------- Total Multifamily..... 104,370 42,057 117,566 15,314 42,504 132,431 174,935 15,527 -------- -------- -------- -------- -------- -------- -------- ------- Total Portfolio..... $238,116(g) $221,407 $589,561 $ 52,219 $229,920 $633,268 $863,188 $49,776 ======== ======== ======== ======== ======== ======== ======== ======= MAXIMUM LIFE ON WHICH DEPRECIATION IN LATEST INCOME DATE OF DATE STATEMENT DESCRIPTION CONSTRUCTION ACQUIRED IS COMPUTED ----------- ------------ -------- ------------- Lake Forest......... 1998 1998 40 Years Upland.............. 1977 1998 30 Years Chatsworth.......... 1976-78 1998 30 Years Los Alamitos........ 1975 1998 30 Years Signal Hill......... 1990 1998 40 Years North Highlands..... 1987-88 1998 40 Years Garden Grove........ 1973 1998 30 Years Irvine.............. 1979 1998 30 Years Tustin.............. 1974,1976 1998 30 Years Whittier............ 1959,1998 1998 40 Years Concord............. 1980,1984 1998 40 Years Dublin.............. 1985 1998 40 Years Hayward............. 1981-86 1998 40 Years Sacramento.......... 1981 1998 40 Years Garden Grove........ 1979 1998 40 Years Arizona Phoenix............. 1980 1998 40 Years Tempe............... 1980 1998 40 Years Nevada Las Vegas........... 1976-79 1998 30 Years Washington Seattle............. 1968 1994 24 Years Seattle............. 1981 1994 24 Years Seattle............. 1981 1994 24 Years Tukwila............. 1975-79 1995 40 Years Algona I............ 1989 1997 30 Years Algona II........... 1988 1997 40 Years Oregon Portland............ 1979-86 1998 40 Years Total Industrial...... Laguna Hills........ 1987 1994 40 Years Escondido........... 1985 1997 30 Years Escondido........... 1986 1997 30 Years Riverside........... 1987 1997 30 Years San Dimas........... 1984 1995 40 Years Ontario............. 1983 1995 40 Years Ontario............. 1985 1995 40 Years Rancho Santa Margarita......... 1997-98 1998 40 Years Santa Ana........... 1972 1994 33 Years Santa Ana........... 1990 1994 40 Years Covina.............. 1978-79 1995 40 Years Diamond Bar......... 1979 1995 40 Years San Dimas........... 1981 1995 40 Years West Covina......... 1981 1995 40 Years San Dimas........... 1981 1995 40 Years San Dimas........... 1981 1995 40 Years Ontario............. 1983 1995 40 Years Ontario............. 1982 1995 40 Years Ontario............. 1984 1996 40 Years Total Multifamily..... Total Portfolio.....
F-27 57 SCHEDULE III PACIFIC GULF PROPERTIES INC. REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1998 (a) The changes in total real estate for the years ended December 31, 1998, 1997, and 1996 are as follows:
1998 1997 1996 -------- -------- -------- Balance at beginning of period..................... $700,949 $379,540 $300,153 Transfer of costs from properties under development...................................... 23,746 -- -- Sale of land and building to existing tenant....... -- -- (8,055) Acquisitions developments and improvements......... 201,160 332,324 87,442 Retirement of Washington family apartments......... (62,667) -- -- Sale of Oregon multifamily property................ -- (10,915) -- -------- -------- -------- Balance at end of period........................... $863,188 $700,949 $379,540 ======== ======== ========
(b) The changes in accumulated depreciation for the years ended December 31, 1998, 1997 and 1996 are as follows: Balance at beginning of period..................... $ 39,148 $ 28,844 $ 21,461 Additions -- depreciation expense.................. 20,386 11,809 8,236 Retirement to existing tenant...................... -- -- (603) Retirement of Oregon multifamily property.......... -- (1,505) -- Retirement of Washington family apartments......... (9,409) -- -- Other.............................................. (349) -- (250) -------- -------- -------- Balance at end of period........................... $ 49,776 $ 39,148 $ 28,844 ======== ======== ========
(c) A portion of this property is currently under development. (d) These properties collateralize borrowings under the same mortgage note payable totaling $24,500,000. (e) These properties collateralize borrowings under the same mortgage note payable totaling $11,833,000. (f) These properties collateralize borrowings under the same mortgage note payable totaling $34,000,000. (g) Excludes construction loans of $31,979,000. F-28 58 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Articles of Amendment and Restatement of Charter (1) 3.2 Bylaws(2) 4.1 Indenture between the Company and Harris Trust Company of California, as trustee.(3) 10.1 Purchase and Sale Agreement between Santa Anita Realty Enterprises, Inc. and the Company(3) 10.2 Employment Contract by and between the Company and Glenn L. Carpenter dated September 1, 1998.(1) 10.3 1993 Share Option Plan.(3) 10.4 Purchase and Sale Agreement and Joint Escrow Instructions among Golden West Equity Properties, Inc., Golden West Ontario Associates, Golden West Vista Associates and Pacific Gulf Properties Inc.(3) 10.5 Registration Rights Agreement between Santa Anita Realty Enterprises, Inc. and the Company.(3) 10.6 Amendment Nos. 1 and 2 to the Purchase and Sale Agreement and Joint Escrow Instructions among Golden West Equity Properties, Inc., Golden West Ontario Associates, Golden West Vista Associates and Pacific Gulf Properties Inc.(3) 10.7 Master Agreement, dated September 30, 1994, between Pacific Gulf Properties, Inc., PGP Baldwin, Inc., Santa Anita Realty Enterprises, Inc., Baldwin Associates, Ltd. and Wm. P. Willman & Associates regarding Baldwin Park Acquisition.(4) 10.8 Closing Agreement, dated October 1, 1994, between Pacific Gulf Properties Inc. and Santa Anita Realty Enterprises, Inc. regarding Baldwin Park Acquisition.(4) 10.9 Settlement Agreement and Mutual General Release, effective as of January 30, 1995, between Pacific Gulf Properties Inc., PGP Baldwin, Inc., Baldwin Industrial Properties, Ltd., Baldwin Associates, Ltd., W.T. Grant, et al. regarding Baldwin Park Acquisition.(4) 10.10 Award of Arbitration dated March 15, 1995 regarding Baldwin Park Acquisition.(4) 10.11 Stipulation and Order Confirming Arbitration Award dated March 22, 1995 regarding Baldwin Park Acquisition.(4) 10.12 Exchange Agreement, dated April 15, 1995, between the Company and Glenn L. Carpenter, regarding Deferred Compensation Agreement.(5) 10.13 Exchange Agreement, dated April 15, 1995, between the Company and Donald G. Herrman, regarding Deferred Compensation Agreement.(5) 10.14 Exchange Agreement, dated April 15, 1995, between the Company and Lonnie P. Nadal, regarding Deferred Compensation Agreement.(5) 10.15 Exchange Agreement, dated April 15, 1995, between the Company and Robert A. Dewey, regarding Deferred Compensation Agreement.(5) 10.16 Amended and Restated Agreement of Limited Partnership of PGP Inland Communities, L.P., dated as of August 15, 1995.(5) 10.17 Master Contribution Agreement, dated as of August 15, 1995, regarding formation of PGP Inland Communities, L.P.(5) 10.18 Purchase Agreement and Escrow Instructions, dated September 15, 1995, by and between Capitol Investment Associates Corp. and Pacific Gulf Properties Trust, regarding sale of Texas apartment portfolio.(5)
59
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.19 Dividend Reinvestment Plan of the Company dated May 9, 1995.(6) 10.20 Investment Agreement, dated December 31, 1996, between the Company and Five Arrows Realty Securities L.L.C.(7) 10.21 Articles Supplementary, dated January 1997, classifying 1,351,351 Shares of Preferred Stock as Class A Senior Cumulative Convertible Preferred Stock of the Company.(7) 10.22 Operating Agreement, dated January 1997, between the Company and Five Arrows Realty Securities L.L.C.(7) 10.23 Amendment to 1993 Share Option Plan dated May 8, 1996.(8) 10.24 Amendment to 1993 Share Option Plan dated May 7, 1997.(14) 10.25 Investment Agreement, dated May 27, 1997, between Company and Five Arrows Realty Securities L.L.C.(9) 10.26 Articles Supplementary classifying 1,411,765 Shares of Preferred Stock as Class B Senior Cumulative Convertible Preferred Stock.(9) 10.27 Form of Amended and Restated Agreement and Waiver, between the Company and Five Arrows Realty Securities L.L.C.(9) 10.28 Rights Agreement, dated December 11, 1997, between the Company and Harris Trust Company of California, as Rights Agent.(10) 10.29 Form of Change of Control Agreement.(2) 10.30 Agreement of Limited Partnership of PGP Northern Industrial, L.P.(2) 10.31 Agreement of Limited Partnership of Morning View Terrace-PGP, L.P.(2) 10.32 Agreement of Limited Partnership Terrace Gardens -- PGP, L.P.(2) 10.33 Agreement of Limited Partnership of PGP Southern Industrial II, L.P.(11) 10.34 Credit Agreement among Pacific Gulf Properties Inc., a Maryland corporation, as Borrower and Wells Fargo Bank, National Association Together with the other Lenders named herein and such other assignees becoming parties hereto pursuant to Section 11.12, as Lenders and Wells Fargo Bank, National Association, as Agent dated as of April 9, 1998.(11) 10.35 Purchase Agreement and Escrow Instructions and related amendments between Pacific Gulf Properties Inc. (as seller) and SAP II Originating LLC (as buyer) for the sale of the Northwest Multifamily Properties.(12) 10.36 Amendment to 1993 Share Option Plan dated May 13, 1998.(13) 21.01 Subsidiaries.(4) 23.01 Consent of Ernst & Young LLP 27.00 Financial Data Schedule
- --------------- (1) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. (2) Incorporated by reference from the Company's Annual Report on Form 10-K of the Company for the year ended December 31, 1997. (3) Incorporated by reference from the Company's registration statement on Form S-11 (33-69382) declared effective by the Securities and Exchange Commission on February 10, 1994. (4) Incorporated by reference from the Company's Annual Report on Form 10-K of the Company for the year ended December 31, 1994. (5) Incorporated by reference from the Company's Annual Report on Form 10-K of the Company for the year ended December 31, 1995. 60 (6) Incorporated by reference from the Company's registration statement on Form S-3 (33-92082) filed on May 9, 1995. (7) Incorporated by reference from the Company's Current Report on Form 8-K filed on January 14, 1997. (8) Incorporated by reference from the Company's Proxy Statement filed on or about April 5, 1996. (9) Incorporated by reference form the Company's Current Report on Form 8-K filed on June 26, 1997. (10) Incorporated by reference from the Company's registration statement on Form 8-A filed on December 17, 1997. (11) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. (12) Incorporated by reference from the Company's Current Report on Form 8-K filed on January 7, 1999. (13) Incorporated by reference from the Company's Proxy Statement filed on or about April 16, 1998. (14) Incorporated by reference from the Company's Proxy Statement filed on or about April 7, 1997. EX-23.1 2 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in (1) the Registration Statements (Form S-3 No. 333-23611 dated April 10, 1997 and No. 333-45597 dated February 4, 1998) and the related Prospectuses of Pacific Gulf Properties Inc. (the "Company") for the registration of $250,000,000 and $300,000,000, respectively, of the Company's common stock, preferred stock, debt securities and warrants; and (2) the Registration Statement (Form S-8, No. 33-73688) pertaining to the Pacific Gulf Properties Inc. 1993 Share Option Plan, and the Registration Statement (Form S-3 No. 33-92082) pertaining to the Pacific Gulf Properties Inc. Dividend Reinvestment Plan of our report dated February 10, 1999, with respect to the consolidated financial statements and related financial statement schedule of Pacific Gulf Properties Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1998. /s/ ERNST & YOUNG, LLP Newport Beach, California March 29, 1999 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 U.S. 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1 2,276 0 5,984 1,000 0 7,260 903,114 49,776 875,127 25,672 416,089 0 28 201 415,325 875,127 0 113,129 0 56,786 1,024 0 25,758 29,561 0 29,561 0 35,292 0 59,997 3.01 2.76
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