Company Quick10K Filing
Quick10K
PS Business Parks
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$154.87 27 $4,250
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-04-30 Earnings, Exhibits
8-K 2019-04-25 Shareholder Vote
8-K 2019-02-20 Earnings, Officers, Exhibits
8-K 2018-10-23 Earnings, Exhibits
8-K 2018-09-07 Officers, Regulation FD, Exhibits
8-K 2018-07-24 Earnings, Exhibits
8-K 2018-04-24 Earnings, Shareholder Vote, Exhibits
8-K 2018-02-20 Earnings, Exhibits
ESGR Enstar 3,170
SASR Sandy Spring Bancorp 1,240
DOMO Domo 985
NEWT Newtek Business Services 430
PCMI PCM 354
LARK Landmark Bancorp 110
BKSC Bank of South Carolina 105
ICAD iCAD 96
GIGL Giggles N' Hugs 0
TWER Towerstream 0
PSB 2019-03-31
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management’S Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 psb-20190331xex31_1.htm
EX-31.2 psb-20190331xex31_2.htm
EX-32.1 psb-20190331xex32_1.htm

PS Business Parks Earnings 2019-03-31

PSB 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 psb-20190331x10q.htm 10-Q psb-20190331 Q1



UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-Q



Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



For the quarterly period ended March 31, 2019



or



Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



For the transition period from ____________ to ____________



Commission File Number 1-10709



PS BUSINESS PARKS, INC.

(Exact name of registrant as specified in its charter)



California

95-4300881

(State or Other Jurisdiction

(I.R.S. Employer

of Incorporation)

Identification Number)



701 Western Avenue, Glendale, California 91201-2349

(Address of principal executive offices) (Zip Code)



Registrant’s telephone number, including area code: (818) 244-8080



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  No



Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes  No  



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





 

 

 

 

Large accelerated filer

 

Accelerated filer

 

Non-accelerated filer

 

Smaller reporting company

 

Emerging growth company

 



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No



As of April 29,  2019, the number of shares of the registrant’s common stock, $0.01 par value per share, outstanding was 27,417,909.




 

PS BUSINESS PARKS, INC.

INDEX









 



 



Page

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Consolidated balance sheets as of March 31, 2019 (unaudited) and December 31, 2018

3

Consolidated statements of income (unaudited) for the three months ended March 31, 2019 and 2018

4

Consolidated statement of equity (unaudited) for the three months ended March 31, 2019 and 2018

5

Consolidated statements of cash flows (unaudited) for the three months ended March 31, 2019 and 2018

6

Notes to consolidated financial statements (unaudited)

7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

Item 3. Quantitative and Qualitative Disclosures About Market Risk

35

Item 4. Controls and Procedures

35

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

35

Item 1A. Risk Factors

35

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

35

Item 6. Exhibits

36











 


 

PART I. FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



PS BUSINESS PARKS, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)





 

 

 

 

 



 

 

 

 

 



March 31,

 

December 31,



2019

 

2018



(Unaudited)

 

 

 

ASSETS

 

 

 

 

 



 

 

 

 

 

Cash and cash equivalents

$

39,356 

 

$

37,379 



 

 

 

 

 

Real estate facilities, at cost

 

 

 

 

 

Land

 

816,656 

 

 

816,656 

Buildings and improvements

 

2,382,274 

 

 

2,374,943 



 

3,198,930 

 

 

3,191,599 

Accumulated depreciation

 

(1,265,133)

 

 

(1,241,116)



 

1,933,797 

 

 

1,950,483 

Land and building held for development

 

31,273 

 

 

30,848 



 

1,965,070 

 

 

1,981,331 

Rent receivable, net

 

3,428 

 

 

1,403 

Deferred rent receivable, net

 

33,953 

 

 

33,308 

Other assets

 

14,812 

 

 

15,173 

Total assets

$

2,056,619 

 

$

2,068,594 



 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 



 

 

 

 

 

Accrued and other liabilities

$

80,344 

 

$

85,141 

Total liabilities

 

80,344 

 

 

85,141 

Commitments and contingencies

 

 

 

 

 

Equity

 

 

 

 

 

PS Business Parks, Inc.’s shareholders’ equity

 

 

 

 

 

Preferred stock, $0.01 par value, 50,000,000 shares authorized,

 

 

 

 

 

38,390 shares issued and outstanding at

 

 

 

 

 

March 31, 2019 and December 31, 2018

 

959,750 

 

 

959,750 

Common stock, $0.01 par value, 100,000,000 shares authorized,

 

 

 

 

 

27,417,909 and 27,362,101 shares issued and outstanding at

 

 

 

 

 

March 31, 2019 and December 31, 2018, respectively

 

274 

 

 

274 

Paid-in capital

 

732,955 

 

 

736,131 

Accumulated earnings

 

67,059 

 

 

69,207 

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

 

1,760,038 

 

 

1,765,362 

Noncontrolling interests

 

216,237 

 

 

218,091 

Total equity

 

1,976,275 

 

 

1,983,453 

Total liabilities and equity

$

2,056,619 

 

$

2,068,594 











See accompanying notes.

 

3


 

PS BUSINESS PARKS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except per share data)

(Unaudited)









 

 

 

 

 



 

 

 

 

 



For The Three Months



Ended March 31,

 

2019

 

2018



 

 

 

 

 

Rental income

$

107,825 

 

$

103,759 



 

 

 

 

 

Expenses

 

 

 

 

 

Cost of operations

 

33,593 

 

 

32,456 

Depreciation and amortization

 

24,875 

 

 

23,882 

General and administrative

 

3,233 

 

 

2,850 

Total operating expenses

 

61,701 

 

 

59,188 



 

 

 

 

 

Interest and other income

 

618 

 

 

284 

Interest and other expense

 

(167)

 

 

(165)

Gain on sale of real estate facility

 

 

 

26,835 

Net income

 

46,575 

 

 

71,525 

Allocation to noncontrolling interests

 

(7,027)

 

 

(11,900)

Net income allocable to PS Business Parks, Inc.

 

39,548 

 

 

59,625 

Allocation to preferred shareholders

 

(12,959)

 

 

(13,003)

Allocation to restricted stock unit holders

 

(268)

 

 

(574)

Net income allocable to common shareholders

$

26,321 

 

$

46,048 



 

 

 

 

 

Net income per common share

 

 

 

 

 

Basic

$

0.96 

 

$

1.69 

Diluted

$

0.96 

 

$

1.69 



 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

Basic

 

27,373 

 

 

27,267 

Diluted

 

27,479 

 

 

27,318 







 

See accompanying notes.

 

4


 

PS BUSINESS PARKS, INC.

CONSOLIDATED STATEMENT OF EQUITY

(Amounts in thousands, except share data)

(Unaudited)







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total PS

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Business Parks,

 

 

 

 

 

 

For the three months ended

Preferred Stock

 

Common Stock

 

Paid-in

 

Accumulated

 

Inc.’s Shareholders’

 

Noncontrolling

 

Total

March 31, 2019

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Earnings (Deficit)

 

Equity

 

Interests

 

Equity

Balances at December 31, 2018

38,390 

 

$

959,750 

 

27,362,101 

 

$

274 

 

$

736,131 

 

$

69,207 

 

$

1,765,362 

 

$

218,091 

 

$

1,983,453 

Issuance of common stock in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

connection with stock-based

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

compensation

 

 

 

55,808 

 

 

 

 

405 

 

 

 

 

405 

 

 

 

 

405 

Stock compensation, net

 

 

 

 

 

 

 

703 

 

 

 

 

703 

 

 

 

 

703 

Cash paid for taxes in lieu of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

shares upon vesting of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

restricted stock units

 

 

 

 

 

 

 

(5,494)

 

 

 

 

(5,494)

 

 

 

 

(5,494)

Net income

 

 

 

 

 

 

 

 

 

39,548 

 

 

39,548 

 

 

7,027 

 

 

46,575 

Distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock (Note 8)

 

 

 

 

 

 

 

 

 

(12,959)

 

 

(12,959)

 

 

 

 

(12,959)

Common stock ($1.05 per share)

 

 

 

 

 

 

 

 

 

(28,737)

 

 

(28,737)

 

 

 

 

(28,737)

Noncontrolling interests—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common units

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,671)

 

 

(7,671)

Adjustment to noncontrolling interests—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common units in the OP

 

 

 

 

 

 

 

1,210 

 

 

 

 

1,210 

 

 

(1,210)

 

 

Balances at March 31, 2019

38,390 

 

$

959,750 

 

27,417,909 

 

$

274 

 

$

732,955 

 

$

67,059 

 

$

1,760,038 

 

$

216,237 

 

$

1,976,275 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2017

38,390 

 

$

959,750 

 

27,254,607 

 

$

272 

 

$

735,067 

 

$

(1,778)

 

$

1,693,311 

 

$

196,625 

 

$

1,889,936 

Issuance of common stock in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

connection with stock-based

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

compensation

 

 

 

62,091 

 

 

 

 

253 

 

 

 

 

253 

 

 

 

 

253 

Stock compensation, net

 

 

 

 

 

 

 

814 

 

 

 

 

814 

 

 

 

 

814 

Cash paid for taxes in lieu of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

shares upon vesting of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

restricted stock units

 

 

 

 

 

 

 

(4,529)

 

 

 

 

(4,529)

 

 

 

 

(4,529)

Consolidation of joint venture (see Note 3)

 

 

 

 

 

 

 

 

 

 

 

 

 

4,032 

 

 

4,032 

Net income

 

 

 

 

 

 

 

 

 

59,625 

 

 

59,625 

 

 

11,900 

 

 

71,525 

Distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock (Note 8)

 

 

 

 

 

 

 

 

 

(13,003)

 

 

(13,003)

 

 

 

 

(13,003)

Common stock ($0.85 per share)

 

 

 

 

 

 

 

 

 

(23,171)

 

 

(23,171)

 

 

 

 

(23,171)

Noncontrolling interests—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common units

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,210)

 

 

(6,210)

Adjustment to noncontrolling interests—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common units in the OP

 

 

 

 

 

 

 

969 

 

 

 

 

969 

 

 

(969)

 

 

Balances at March 31, 2018

38,390 

 

$

959,750 

 

27,316,698 

 

$

272 

 

$

732,574 

 

$

21,673 

 

$

1,714,269 

 

$

205,378 

 

$

1,919,647 



 

See accompanying notes.

 

5


 

PS BUSINESS PARKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, amounts in thousands)









 

 

 

 

 



 

 

 

 

 

 

For The Three Months



Ended March 31,

 

2019

 

2018

Cash flows from operating activities

 

 

 

 

 

Net income

$

46,575 

 

$

71,525 

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

 

 

 

 

 

Depreciation and amortization expense

 

24,875 

 

 

23,882 

Tenant improvement reimbursement amortization, net of lease incentive amortization

 

(378)

 

 

(515)

Gain on sale of real estate facility

 

 

 

(26,835)

Stock compensation expense

 

971 

 

 

1,109 

Amortization of financing costs

 

136 

 

 

127 

Other, net

 

(7,424)

 

 

(5,355)

Total adjustments

 

18,180 

 

 

(7,587)

Net cash provided by operating activities

 

64,755 

 

 

63,938 

Cash flows from investing activities

 

 

 

 

 

Capital expenditures to real estate facilities

 

(7,551)

 

 

(7,042)

Capital expenditures to land and building held for development

 

(425)

 

 

(146)

Consolidation of joint venture

 

 

 

1,082 

Proceeds from sale of real estate facility

 

 

 

41,671 

Net cash (used in) provided by investing activities

 

(7,976)

 

 

35,565 

Cash flows from financing activities

 

 

 

 

 

Borrowings on credit facility

 

 

 

35,000 

Repayment of borrowings on credit facility

 

 

 

(32,500)

Payment of financing costs

 

(78)

 

 

(69)

Proceeds from the exercise of stock options

 

405 

 

 

253 

Redemption of preferred stock

 

 

 

(130,000)

Cash paid for taxes in lieu of shares upon vesting of restricted stock units

 

(5,494)

 

 

(4,529)

Cash paid to restricted stock unit holders

 

(268)

 

 

(295)

Distributions paid to preferred shareholders

 

(12,959)

 

 

(13,696)

Distributions paid to common shareholders

 

(28,737)

 

 

(23,171)

Distributions paid to noncontrolling interests—common units

 

(7,671)

 

 

(6,210)

Net cash used in financing activities

 

(54,802)

 

 

(175,217)

Net increase (decrease) in cash and cash equivalents

 

1,977 

 

 

(75,714)

Cash, cash equivalents and restricted cash at the beginning of the period

 

38,467 

 

 

115,970 

Cash, cash equivalents and restricted cash at the end of the period

$

40,444 

 

$

40,256 



 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities

 

 

 

 

 

Adjustment to noncontrolling interests—common units in the OP

 

 

 

 

 

Noncontrolling interests—common units

$

(1,210)

 

$

(969)

Paid-in capital

$

1,210 

 

$

969 

Consolidation of joint venture

 

 

 

 

 

Land

$

 

$

21,814 

Buildings and improvements

$

 

$

85,436 

Other, net

$

 

$

(2,320)

Investment in and advances to unconsolidated joint venture

$

 

$

(100,898)

Noncontrolling interest — joint venture

$

 

$

(4,032)





 

See accompanying notes.

 

6


 

PS BUSINESS PARKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2019



1. Organization and description of business



Organization



PS Business Parks, Inc. (“PSB”) was incorporated in the state of California in 1990. As of March 31, 2019, PSB owned 79.0% of the common partnership units of PS Business Parks, L.P. (the “OP”). The remaining common partnership units are owned by Public Storage (“PS”). PS’s interest in the OP is referred to as the “PS OP Interests.” PSB, as the sole general partner of the OP, has full, exclusive and complete responsibility and discretion in managing and controlling the OP. PSB and its subsidiaries, including the OP and our consolidated joint venture that owns a 395-unit multifamily apartment complex in Tysons, Virginia, are collectively referred to as the “Company,” “we,” “us,” or “our.” PS would own 41.7% (or 14.5 million shares) of the outstanding shares of the Company’s common stock if it redeemed its common partnership units for common shares.



Description of Business



The Company is a fully-integrated, self-advised and self-managed real estate investment trust (“REIT”) that owns, operates, acquires and develops commercial properties, primarily multi-tenant industrial, flex and office space. As of March 31, 2019, the Company owned and operated 28.2 million rentable square feet of commercial space in six states and held a  95.0% interest in a 395-unit multifamily apartment complex in Tysons, Virginia. The Company also manages for a fee approximately 450,000 rentable square feet on behalf of PS.





2. Summary of significant accounting policies



Basis of presentation



The accompanying unaudited consolidated financial statements include the accounts of PSB and its subsidiaries, including the OP and our consolidated joint venture. All significant inter-company balances and transactions have been eliminated in the consolidated financial statements. The financial statements are presented on an accrual basis in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ended December 31, 2019. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.  



Consolidation and equity method of accounting



We consider entities to be Variable Interest Entities (“VIEs”) when they have insufficient equity to finance their activities without additional subordinated financial support provided by other parties, or the equity holders as a group do not have a controlling financial interest. A limited partnership is also generally considered a VIE if the limited partners do not participate in operating decisions. We consolidate VIEs when we are the primary beneficiary, generally defined as having (i) the power to direct the activities most significantly impacting economic performance and (ii) either the obligation to absorb losses or the right to receive benefits from the VIE.



We account for investments in entities that are not VIEs that we have significant influence over, but do not control, using the equity method of accounting and for investment in entities that we control, we consolidate. On January 1, 2018, we began to consolidate our joint venture due to changes to the joint venture agreement that gave the Company control of the joint venture. See Note 3 for more information on this entity.

 

7


 

PS, the sole limited partner in the OP, has no power to direct the activities of the OP. We are the primary beneficiary of the OP. Accordingly, we consider the OP a VIE and consolidate it. Substantially all of our assets and liabilities are held by the OP.



Noncontrolling interests



Noncontrolling interests represent (i) PS’s noncontrolling interest in the OP through its ownership of 7,305,355 common partnership units and (ii) a third-party 5.0% interest in our consolidated joint venture owning a 395-unit multifamily apartment complex. See Note 6 for further information on noncontrolling interests.



Use of estimates



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



Allowance for doubtful accounts



The Company monitors the collectability of its receivable balances, including deferred rent receivables, on an ongoing basis. Customer receivable balances are net of an allowance for estimated uncollectible accounts totaling $400,000 at March 31, 2019 and December 31, 2018. Deferred rent receivable balances are net of an allowance for uncollectible accounts totaling $989,000 and $876,000 at March 31, 2019 and December 31, 2018, respectively.



Financial instruments



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



·

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

·

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

·

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



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



 

8


 

The following table provides a reconciliation of cash, cash equivalents and restricted cash per the consolidated statements of cash flow to the corresponding financial statement line items in the consolidated balance sheets as of March 31, 2019 and 2018 (in thousands):



 

 

 

 

 



 

 

 

 

 



March 31,



2019

 

2018

Consolidated balance sheets

 

 

 

 

 

Cash and cash equivalents

$

39,356 

 

$

39,168 

Restricted cash included in

 

 

 

 

 

Land and building held for development

 

1,088 

 

 

1,088 

Consolidated statements of cash flows

$

40,444 

 

$

40,256 



The characteristics of these financial instruments, market data and other comparative metrics utilized in determining these fair values are “Level 2” inputs.



Real estate facilities



Real estate facilities are recorded at cost. Property taxes, insurance, interest and costs essential to the development of property for its intended use are capitalized during the period of development. Direct costs related to the renovation or improvement of the properties are capitalized. Expenditures for repairs and maintenance are expensed as incurred. Expenditures that are expected to benefit a period greater than two years are capitalized and depreciated over their estimated useful life. Buildings and improvements are depreciated using the straight-line method over their estimated useful lives, which generally range from five to 30 years. Transaction costs, which include tenant improvements and lease commissions, for leases with terms greater than one year are capitalized and depreciated over their estimated useful lives.



Property held for sale or development



Real estate is classified as held for sale when the asset is being marketed for sale and we expect that a sale is likely to occur in the next 12 months. Real estate is classified as held for development when it is no longer used in its original form and likely that it will be developed to an alternate use. Property held for development or sale is not depreciated.



Intangible assets/liabilities



When we acquire real estate facilities, an intangible asset is recorded as other assets for leases where the in-place rent is higher than market rents, and an intangible liability is recorded as other liabilities where the market rents are higher than the in-place rents. The amounts recorded are based upon the present value (using a discount rate which reflects the risks associated with the leases acquired) of such differences over the lease term and such amounts are amortized to rental income over the respective remaining lease term. As of March 31, 2019, the value of above-market in-place rents resulted in net intangible assets of $1.6 million, net of $10.1 million of accumulated amortization and the value of below-market in-place rents resulted in net intangible liabilities of $1.7 million, net of $11.0 million of accumulated amortization. As of December 31, 2018, the value of above-market in-place rents resulted in net intangible assets of $1.8 million, net of $10.0 million of accumulated amortization and the value of below-market in-place rents resulted in net intangible liabilities of $1.8 million, net of $10.8 million of accumulated amortization.



Additionally, when we acquire real estate facilities, the value of in-place leases (i.e., customer lease-up costs) is recorded as other assets and is amortized to depreciation and amortization expense over the respective remaining lease term. As of March 31, 2019, the value of acquired in-place leases resulted in net intangible assets of $4.2 million, net of $1.8 million of accumulated amortization. As of December 31, 2018, the value of acquired in-place leases resulted in net intangible assets of $4.7 million, net of $1.3 million of accumulated amortization.

 

9


 

Evaluation of asset impairment



We evaluate our real estate and finite-lived intangible assets for impairment each quarter. If there are indicators of impairment and we determine that the carrying value of the asset is not recoverable from estimated future undiscounted cash flows to be received through the asset’s remaining life (or, if earlier, the expected disposal date), we record an impairment charge to the extent the carrying amount exceeds the asset’s estimated fair value or net proceeds from expected disposal.



We evaluate our investment in our unconsolidated joint venture on a quarterly basis. We record an impairment charge to the extent the carrying amount exceeds estimated fair value, when we believe any such shortfall is other than temporary.



No impairment charges were recorded in any period presented herein.



Stock compensation



Share-based payments to employees, including grants of employee stock options, are recognized as stock compensation expense in the Company’s consolidated statements of income based on their grant date fair values, except for performance-based grants, which are accounted for based on their fair values at the beginning of the service period. See Note 10.



Accrued and other liabilities



Accrued and other liabilities consist primarily of rents prepaid by our customers, trade payables, property tax accruals, accrued payroll and contingent loss accruals when probable and estimable, as well as the intangible liabilities discussed above. We disclose the nature of significant unaccrued losses that are reasonably possible of occurring and, if estimable, a range of exposure.



Other assets



Other assets are comprised primarily of prepaid expenses, as well as the intangible assets discussed above.



Revenue recognition



We recognize the aggregate rent to be collected (including the impact of escalators and concessions) under leases ratably throughout the non-cancellable lease term on a “straight-line” basis, commencing when the customer takes control of the leased space. Cumulative straight-line rent recognized in excess of amounts billed per the lease term is presented as “deferred rent receivable” on our consolidated balance sheets. We present reimbursements from customers for real estate taxes and other recoverable operating expenses under a single lease component presentation as the timing and pattern of transfer of such reimbursements are the same as the lease term, and the combined single component of such leases are classified as operating leases. Accordingly, we recognize such variable lease payments resulting from the reimbursements from customers for real estate taxes and other recoverable operating expenses as rental income in the period the applicable costs are incurred.  Property management fees are recognized in the period earned as other income.



Costs incurred in acquiring customers (primarily tenant improvements and lease commissions) are capitalized and amortized over the lease period for leases with terms greater than one year.



Sales of real estate facilities



Sales of real estate facilities are not part of our ordinary activities, and as a result, we consider such sales as contracts with non-customers. We recognize sales of real estate when we have collected payment and the attributes of ownership, such as possession and control of the asset, have been transferred to the buyer. If a contract for sale includes

 

10


 

obligations to provide goods or services to the buyer, an allocated portion of the contract price is recognized as revenue as the related goods or services are transferred to the buyer.



General and administrative expense



General and administrative expense includes executive and other compensation, corporate office expenses, professional fees, state income taxes and other such costs that are not directly related to the operation of our real estate facilities.



Income taxes



We have elected to be treated as a REIT, as defined in the Internal Revenue Code of 1986, as amended (the “Code”). As a REIT, we do not incur federal income tax if we distribute substantially all of our “REIT taxable income” each year, and if we meet certain organizational and operational rules. We believe we have met these REIT requirements for all periods presented herein. Accordingly, we have recorded no federal income tax expense related to our “REIT taxable income.”



We recognize tax benefits of uncertain income tax positions that are subject to audit only if we believe it is more likely than not that the position would ultimately be sustained assuming the relevant taxing authorities had full knowledge of the relevant facts and circumstances of our positions. As of March 31, 2019 and December 31, 2018,  we did not recognize any tax benefit for uncertain tax positions.



Accounting for preferred equity issuance costs



We record issuance costs as a reduction to paid-in capital on our consolidated balance sheets at the time the preferred securities are issued and reflect the carrying value of the preferred equity at its redemption value. An additional allocation of income is made from the common shareholders to the preferred shareholders in the amount of the original issuance costs, and we reclassify the redemption value from equity to liabilities when we call preferred shares for redemption.



Net income per common share



Notwithstanding the presentation of income allocations on our consolidated statements of income, net income is allocated to (a) preferred shareholders, for distributions paid or payable, (b) preferred shareholders, to the extent redemption value exceeds the related carrying value, (c) our joint venture partner, to the extent the consolidated joint venture produce net income or loss during the period and (d) restricted stock unit (“RSU”) holders, for non-forfeitable dividends paid adjusted for participation rights in undistributed earnings. The remaining net income is allocated to the common partnership units and our common shareholders, respectively, based upon the pro-rata aggregate number of units and shares outstanding.



Basic and diluted net income per common share are each calculated based upon net income allocable to common shareholders, divided by (i) in the case of basic net income per common share, weighted average common shares and (ii) in the case of diluted income per share, weighted average common shares adjusted for the impact of stock compensation awards outstanding (Note 10) using the treasury stock method.

 

11


 

The following tables set forth the calculation of the components of our basic and diluted income per share that are not reflected on the face of our consolidated statements of income, including the allocation of income to common shareholders and common partnership units, the percentage of weighted average shares and common partnership units, as well as basic and diluted weighted average shares (in thousands):







 

 

 

 

 



 

 

 

 

 



For The Three Months



Ended March 31,

 

2019

 

2018

Calculation of net income allocable to common shareholders

 

 

 

Net income

$

46,575 

 

$

71,525 

Net (income) loss allocated to

 

 

 

 

 

Preferred shareholders based upon distributions

 

(12,959)

 

 

(13,003)

Noncontrolling interests—joint venture

 

(3)

 

 

436 

Restricted stock unit holders

 

(268)

 

 

(574)

Net income allocable to common shareholders

 

 

 

 

 

and noncontrolling interests—common units

 

33,345 

 

 

58,384 

Net income allocation to noncontrolling interests—

 

 

 

 

 

common units

 

(7,024)

 

 

(12,336)

Net income allocable to common shareholders

$

26,321 

 

$

46,048 



 

 

 

 

 

Calculation of common partnership units as a percentage of common share equivalents

Weighted average common shares outstanding

 

27,373 

 

 

27,267 

Weighted average common partnership units outstanding

 

7,305 

 

 

7,305 

Total common share equivalents

 

34,678 

 

 

34,572 

Common partnership units as a percentage of common

 

 

 

 

 

share equivalents

 

21.1% 

 

 

21.1% 



 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

Basic weighted average common shares outstanding

 

27,373 

 

 

27,267 

Net effect of dilutive stock compensation—based on

 

 

 

 

 

treasury stock method using average market price

 

106 

 

 

51 

Diluted weighted average common shares outstanding

 

27,479 

 

 

27,318 



Segment reporting



We have two operating segments: (i) the acquisition, development, ownership and management of commercial real estate and (ii) the acquisition, development, ownership and management of multifamily real estate, but have one reportable segment as the multifamily segment does not meet the quantitative thresholds necessary to require reporting as a separate segment.  



Reclassifications



We have reclassified our divisional vice presidents’ compensation costs totaling $544,000 for the three months ended March 31, 2018 from cost of operations into general and administrative expense on our consolidated statements of income in the three months ended March 31, 2018 in order to conform to the current period presentation.  



Recently issued accounting standards



In May 2014 and February 2016, the Financial Accounting Standards Board (“FASB”) issued two Accounting Standards Updates (“ASU”s), ASU 2014-09, Revenue from Contracts with Customers (the “Revenue Standard”), and ASU 2016-02, Leases (the “Lease Standard”). These standards apply to substantially all of our revenue generating activities, as well as provide a model to account for the disposition of real estate facilities to non-customers.



 

12


 

Lessor accounting



The Lease Standard directs how we account for payments from the elements of our leases that are generally fixed and determinable at the inception of the lease (“Fixed Lease Payments”) while the Revenue Standard directs how we account for the non-lease components of our lease contracts, primarily expense reimbursements (“Non-Lease Payments”).



The Lease Standard requires us to identify Fixed Lease Payments and Non-Lease Payments of a lease agreement and governs the recognition of revenue for the Fixed Lease Payments. Revenue related to Non-Lease Payments under our lease arrangements is subject to the Revenue Standard effective upon adoption of the Lease Standard. See further discussion below on Fixed Lease Payments and Non-Lease Payments.



Under the Lease Standard, a set of practical expedients for implementation, which must be elected as a package and for all leases, was elected as part of our adoption of the Lease Standard. These practical expedients include (i) relief from re-assessing whether an expired or existing contract meets the definition of a lease, (ii) relief from re-assessing the classification of expired or existing leases at the adoption date and (iii) allowing previously capitalized initial direct leasing costs to continue to be amortized.



We adopted the Lease Standard on its effective date of January 1, 2019. In addition to the package of practical expedients noted above, we also elected the practical expedient not to allocate the total consideration to Fixed Lease Payments and Non-Lease Payments based on their relative standalone selling prices. This practical expedient allows lessors to elect a combined single component presentation if (i) the timing and pattern of the revenue recognition for the Fixed Lease Payments and Non-Lease Payments are the same, and (ii) the combined single component of the lease would continue to be classified as an operating lease. We have assessed and believe the two conditions have been met for Non-Lease Payments as (i) the timing and pattern of transfer of the Fixed Lease Payments and Non-Lease Payments are the same, and (ii) the combined single component of the lease would be classified as an operating lease. The adoption of the Leasing Standard did not result in a material impact to our consolidated financial statements.



We recognized revenue from our lease arrangements aggregating $107.8 million and $103.8 million for the three months ended March 31, 2019 and 2018, respectively.  This revenue consisted primarily of rental income from operating leases and the related variable lease payments resulting from reimbursements of property operating expenses of $82.8 million and $25.0 million, respectively, for three months ended March 31, 2019 and $80.6 million and $23.2 million, respectively, for the three months ended March 31, 2018.  



Costs to execute leases



The Lease Standard also provides updated guidance on the requirements for the capitalization of the incremental costs incurred in executing leases, such as legal fees and commissions. Under the Lease Standard, any costs that would have been incurred regardless of successful lease execution, such as allocated costs of internal personnel, are to be expensed and may not be capitalized. As we have historically not capitalized any such costs, the adoption of the Lease Standard did not result in a material impact to our consolidated financial statements.



Lessee accounting



Under the Lease Standard, lessees are required to apply a dual approach by classifying leases as either finance or operating leases based on the principle whether the lease is effectively a finance purchase of the leased asset by the lessee. This classification determines whether the lease expense is recognized based on an effective interest method or a straight-line basis over the term of the lease. For most leases with a term of greater than 12 months, in which we are the lessee, the present value of future lease payments is recognized on our balance sheet as a right-of-use (“ROU”) asset and related liability. On January 1, 2019, the Company recorded a ROU asset of $1.7 million, included in “other assets” on our consolidated balance sheets and a corresponding liability of $1.7 million under “accrued and other liabilities”, relating to our existing ground lease arrangements. These operating leases were recognized based on the present value of the future minimum lease payments over the lease term. As these leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available in determining the present

 

13


 

value of future payments. The discount rate used to determine the present value of these operating leases’ future payments was 4.20%. These ground leases expire in 2029 and 2030 and do not have an option to extend. As of March 31, 2019, the remaining lease terms ranged from 10.5 years to 10.8 years. Lease expense for minimum lease payments is recognized in the period the applicable costs are incurred as monthly rent for these operating leases are constant without increases through the remaining terms of these leases. The adoption of the Lease Standard did not result in a material impact to our consolidated financial statements from the initial recognition of each lease liability or from the pattern of recognition subsequent to adoption.



3. Real estate facilities



The activity in real estate facilities for the three months ended March 31, 2019 was as follows (in thousands):





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

Buildings and

 

Accumulated

 

 

 

 

Land

 

Improvements

 

Depreciation

 

Total

Balances at December 31, 2018

$

816,656 

 

$

2,374,943 

 

$

(1,241,116)

 

$

1,950,483 

Capital expenditures

 

 

 

7,653 

 

 

 

 

7,653 

Disposals (1)

 

 

 

(322)

 

 

322 

 

 

Depreciation and amortization expense

 

 

 

 

 

(24,339)

 

 

(24,339)

Balances at March 31, 2019

$

816,656 

 

$

2,382,274 

 

$

(1,265,133)

 

$

1,933,797 

____________________________

(1)

Disposals primarily represent the book value of tenant improvements that have been removed upon the customer vacating their space.



As of March 31, 2019, we have commitments, pursuant to executed leases throughout our portfolio, to spend $10.2 million on transaction costs, which include tenant improvements and lease commissions.



The purchase price of acquired properties is allocated to land, buildings and improvements (including tenant improvements, unamortized lease commissions, acquired in-place lease values and customer relationships, if any), intangible assets and intangible liabilities (see Note 2), based upon the relative fair value of each component, which are evaluated independently.



We must make significant assumptions in determining the fair value of assets acquired and liabilities assumed, which can affect the recognition and timing of revenue and depreciation and amortization expense. The fair value of land is estimated based upon, among other considerations, comparable sales of land within the same region. The fair value of buildings and improvements, tenant improvements and unamortized lease commissions are based on current market replacement costs and other available market information. The amount recorded to acquired in-place leases is determined based on management’s assessment of current market conditions and the estimated lease-up periods for the respective spaces. Transaction costs related to asset acquisitions are capitalized.



Subsequent to March 31, 2019, we acquired a multi-tenant industrial park comprised of approximately 74,000 rentable square feet in Signal Hill, California, for a total purchase price of $13.8 million. The portfolio consists of eight buildings and was 98.4% occupied as of the date of the acquisition.



We have a 95.0% interest in a 395-unit multifamily apartment complex on a five-acre site within the Company’s 628,000 square foot office park located in Tysons, Virginia. An unrelated real estate development company (the “JV Partner”) holds the remaining 5.0%.  On January 1, 2018, we began to consolidate our joint venture due to changes to the joint venture agreement that gave the Company control of the joint venture.



 

14


 

The following table summarizes the assets acquired and liabilities assumed related to the consolidation of the joint venture, which was accounted for as an asset acquisition, as of January 1, 2018 (in thousands):





 

 



 

 



2018

Land

$

21,814 

Buildings and improvements

 

84,903 

Other assets (in-place lease value)

 

1,199 

Total consolidated joint venture

 

107,916 

Noncontrolling interest in consolidated joint venture

 

(4,032)

Net book value of joint venture at consolidation

$

103,884 



Properties Sold



On March 5, 2018, we sold Corporate Pointe Business Park, a park consisting of five multi-tenant office buildings totaling 161,000 square feet located in Orange County, California, for net sale proceeds of $41.7 million, which resulted in a gain of $26.8 million. We determined that the sale did not meet the criteria for discontinued operations presentation, as the plan to sell did not represent a strategic shift that will have a major effect on our operations and financial results.



4. Leasing activity



The Company leases space in its commercial real estate facilities to customers primarily under non-cancelable leases generally ranging from one to 10 years. Future minimum rental income, excluding recovery of operating expenses under these leases, is as follows as of March 31, 2019 (in thousands):







 

 



 

 

Remainder of 2019

$

223,456 

2020

 

241,023 

2021

 

179,033 

2022

 

122,903 

2023

 

82,752 

Thereafter

 

122,572 

Total

$

971,739 



In addition to minimum rental payments, certain customers reimburse the Company for their pro rata share of specified property operating expenses. Such reimbursements amounted to $25.0 million and $23.2 million for the three months ended March 31, 2019 and 2018, respectively. These variable lease payment amounts are included as rental income in the accompanying consolidated statements of income.



Leases accounting for 3.0% of total leased square footage are subject to termination options, of which 1.3% of total leased square footage have termination options exercisable through December 31, 2019. In general, these leases provide for termination payments to us should the termination options be exercised.  Certain leases also have an option to extend the terms of the lease. The future minimum rental income in the above table assumes termination options and lease extensions  options are not exercised.

 

15


 

5. Bank loans



We have a revolving line of credit (the “Credit Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”). The Credit Facility has a borrowing limit of $250.0 million and expires January 10, 2022. The rate of interest charged on borrowings is based on LIBOR plus 0.80% to LIBOR plus 1.55% depending on the Company’s credit ratings. Currently, the Company’s rate under the Credit Facility is LIBOR plus 0.825%. In addition, the Company is required to pay an annual facility fee ranging from 0.10% to 0.30% of the borrowing limit depending on the Company’s credit ratings (currently 0.125%). We had no balance outstanding on our Credit Facility at March 31, 2019 and December 31, 2018. The Company had $633,000 and $691,000 of total unamortized loan origination costs as of March 31, 2019 and December 31, 2018, respectively, which is included in other assets in the accompanying consolidated balance sheets. The Credit Facility requires us to meet certain covenants, all of which we were in compliance with as of March 31, 2019. Interest on outstanding borrowings is payable monthly.



6. Noncontrolling interests



Noncontrolling interests represent (i) PS’s noncontrolling interest in the OP through its ownership of 7,305,355 common partnership units, totaling $213.2 million and $215.1 million at March 31, 2019 and December 31, 2018, respectively, and (ii) the JV Partner’s 5.0% interest in a joint venture owning a 395-unit multifamily apartment complex, totaling $3.0 million at both March 31, 2019 and December 31, 2018.



PS OP Interests



Each common partnership unit receives a cash distribution equal to the dividend paid on our common shares and is redeemable at PS’s option.



If PS exercises its right of redemption, at PSB’s option (a) PS will receive one common share from us for each common partnership unit redeemed, or (b) PS will receive cash from us for each common partnership unit redeemed generally equal to the market value of a common share (as defined in the Operating Partnership Agreement). We can prevent redemptions that we believe would violate either our articles of incorporation or securities laws, cause PSB to no longer qualify as a REIT, or could result in the OP no longer being treated as a partnership for federal tax purposes.



In allocating net income and presenting equity, we treat the common partnership units as if converted to common shares. Accordingly, they receive the same net income allocation per unit as a common share and are adjusted each period to have the same equity per unit as a common share, totaling $7.0 million and $12.3 million for the three months ended March 31, 2019 and 2018, respectively.  



JV Partner



In conjunction with consolidating the joint venture on January 1, 2018, we recorded noncontrolling interest of $4.0 million related to the JV Partner’s 5.0% interest in a joint venture owning a 395-unit multifamily apartment complex. A total of $3,000 in income and $436,000 in loss was allocated to the JV Partner during the three months ended March 31, 2019 and 2018, respectively, and no distributions were paid to the JV Partner.  



7. Related party transactions



We manage certain industrial, office and retail facilities in the United States for PS under either the “Public Storage” or “PS Business Parks” names (the “PS Management Agreement”). Under PS’s supervision, we coordinate and assist in rental and marketing activities, property maintenance and other operational activities, including the selection of vendors, suppliers, employees and independent contractors. We receive a management fee based upon a percentage of revenues, which is included in “interest and other income” on our consolidated statements of income. Management fee revenues were $78,000 and $127,000 for the three months ended March 31, 2019 and 2018, respectively. We allocate certain operating expenses to PS related to the management of these properties, including payroll and other business expenses, totaling $102,000 and $154,000 for the three months ended March 31, 2019 and 2018, respectively.

 

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



PS provides us property management services for the self-storage component of two assets we own and operates them under the “Public Storage” name. Either the Company or PS can cancel the property management contract upon 60 days’ notice. Under our supervision, PS coordinates and assists in rental and marketing activities, and property maintenance and other operational activities, including the selection of vendors, suppliers, employees and independent contractors. Management fee expenses were $24,000 for each of the three months ended March 31, 2019 and 2018. Additionally, PS allocated certain operating expenses to us related to the management of these properties totaling $19,000 and $17,000 for the three months ended March 31, 2019 and 2018, respectively. These amounts are included under “cost of operations” on our consolidated statements of income.



Pursuant to a cost sharing agreement, we share certain administrative services, corporate office space, and certain other third party costs with PS which are allocated based upon fair and reasonable estimates of the cost of the services expected to be provided. We reimbursed PS $252,000 and  $230,000 for costs PS incurred on our behalf for the three months ended March 31, 2019 and 2018, respectively. PS reimbursed us $9,000 and $10,000 for costs we incurred on their behalf for the three months ended March 31, 2019 and 2018, respectively.



The Company had net amounts due to PS of $152,000 at March 31, 2019 and due from PS of $43,000 at December 31, 2018, respectively for these contracts, as well as certain operating expenses paid by the Company on behalf of PS.



8. Shareholders’ equity



Preferred stock



As of both March 31, 2019 and December 31, 2018, the Company had the following series of preferred stock outstanding:







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

Earliest Potential

 

Dividend

 

Shares

 

Amount

Series 

 

Issuance Date

 

Redemption Date

 

Rate

 

Outstanding

 

(in thousands)

Series U

 

September, 2012

 

September, 2017

 

5.75% 

 

9,200 

 

$

230,000 

Series V

 

March, 2013

 

March, 2018

 

5.70% 

 

4,400 

 

 

110,000 

Series W

 

October, 2016

 

October, 2021

 

5.20% 

 

7,590 

 

 

189,750 

Series X

 

September, 2017

 

September, 2022

 

5.25% 

 

9,200 

 

 

230,000 

Series Y

 

December, 2017

 

December, 2022

 

5.20% 

 

8,000 

 

 

200,000 

Total

 

 

 

 

 

 

 

38,390 

 

$

959,750 



On January 3, 2018, we completed the redemption of our remaining 6.00% Cumulative Preferred Stock, Series T, at par of $130.0 million.



We paid $13.0 million and $13.7 million in distributions to our preferred shareholders for the three months ended March 31, 2019 and 2018, respectively.



The holders of our preferred stock have general preference rights with respect to liquidation, quarterly distributions and any accumulated unpaid distributions. Holders of our preferred stock will not be entitled to vote on most matters, except under certain conditions. In the event of a cumulative arrearage equal to six quarterly dividends, the holders of the preferred stock will have the right to elect two additional members to serve on the Company’s Board of Directors (the “Board”) until all events of default have been cured. At March 31, 2019, there were no dividends in arrears.



Except under certain conditions relating to the Company’s qualification as a REIT, the preferred stock is not redeemable prior to the redemption dates noted above. On or after the respective redemption dates, the respective series of preferred stock will be redeemable, at the option of the Company, in whole or in part, at $25.00 per depositary share, plus any accrued and unpaid dividends.



 

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Common stock and units



We paid $28.7 million ($1.05 per common share) and $23.2 million ($0.85 per common share) in distributions to our common shareholders for the three months ended March 31, 2019 and 2018, respectively.



We paid $7.7 million ($1.05 per common unit) and $6.2 million ($0.85 per common unit) in distributions to our common unit holders for the three months ended March 31, 2019 and 2018, respectively.





Equity stock



The Company is authorized to issue 100.0 million shares of Equity Stock. The Articles of Incorporation provide that Equity Stock may be issued from time to time in one or more series and give the Board broad authority to fix the dividend and distribution rights, conversion and voting rights, redemption provisions and liquidation rights of each series of Equity Stock. As of March 31, 2019 and December 31, 2018,  no equity stock had been issued.



9. Commitments and contingencies



We are a party to various legal proceedings and subject to various claims and complaints; however, we believe that the likelihood of these contingencies resulting in a material loss to the Company, either individually or in the aggregate, is remote.



10. Stock compensation



Under various share-based compensation plans, PSB grants non-qualified options to purchase the Company’s common shares at a price not less than fair value on the date of grant, as well as RSUs, to certain directors, officers and key employees.



The service period for stock options and RSUs begins when (i) the Company and the recipient reach a mutual understanding of the key terms of the award, (ii) the award has been authorized, (iii) the recipient is affected by changes in the market price of our stock and (iv) it is probable that any performance conditions will be met, and ends when the stock option or RSUs vests.



We account for forfeitures of share-based payments as they occur by reversing previously amortized share-based compensation expense with respect to grants that are forfeited in the period the employee terminates employment.



We amortize the fair value of awards starting at the beginning of the service period as compensation expense. For awards that are earned solely upon the passage of time and continued service, the entire cost of the award is amortized on a straight-line basis over the service period. For awards with performance conditions, the individual cost of each vesting is amortized separately over each individual service period (the “accelerated attribution” method).



Stock Options



Stock options expire 10 years after the grant date and the exercise price is equal to the closing trading price of our common shares on the grant date. Employees cannot require the Company to settle their award in cash. We use the Black-Scholes option valuation model to estimate the fair value of our stock options on the date of grant.



For the three months ended March 31, 2019, respectively, we recorded $57,000 in compensation expense related to stock options as compared to $53,000 for the same period in 2018.



During the three months ended March 31, 2019,  no stock options were granted and 7,379 options were exercised. A total of 136,036 and 143,415 options were outstanding at March 31, 2019 and December 31, 2018, respectively.  



 

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Restricted Stock Units



RSUs granted prior to 2016 are subject to a six-year vesting, with 20% vesting after year two, and 20% vesting after each of the next four years. RSUs granted during and subsequent to 2016 are subject to a five-year vesting at the rate of 20% per year. The grantee receives dividends for each outstanding RSU equal to the per share dividend received by common shareholders. We expense any dividends previously paid upon forfeiture of the related RSU. Upon vesting, the grantee receives common shares equal to the number of vested RSUs, less common shares withheld in exchange for tax withholdings made by the Company to satisfy the grantee’s statutory tax liabilities arising from the vesting. The fair value of our RSUs is determined based upon the applicable closing trading price of our common shares on the date of grant.



Effective March, 2014, the Company entered into a performance-based RSU program, the Senior Management Long-Term Equity Incentive Program for 2014-2017 (“LTEIP”), with certain employees of the Company. Under the LTEIP, the Company established three levels of targeted RSU awards, which would be earned only if the Company achieved one of three defined targets during 2014 to 2017. Under the LTEIP there was an annual award following the end of each of the four years in the program, with the award subject to and based on the achievement of total return targets during the previous year, as well as an award based on achieving total return targets during the cumulative four-year period 2014-2017. In the event the minimum defined target was not achieved for an annual award, the RSUs allocated to be awarded for such year were added to the RSUs that may be received if the four-year target was achieved. All RSU awards under the LTEIP vest in four equal annual installments beginning from the date of award. Compensation expense is recognized based on the RSUs expected to be awarded based on the target level that is expected to be achieved. The compensation expense and RSU counts with respect to the LTEIP are included in the aggregate RSU amounts disclosed above. Senior management earned 145,350 shares of RSUs granted in March, 2018 as the maximum targets were achieved for both the year ended December 31, 2017 and for the cumulative four-year period.



For the three months ended March 31, 2019, respectively, we recorded $857,000 in compensation expense related to RSUs as compared to $999,000 for the same period in 2018.  



During the three months ended March 31, 2019,  1,000 RSUs were granted, 83,800 RSUs vested and 1,160 RSUs were forfeited. Tax withholdings totaling $5.5 million were made on behalf of employees in exchange for 35,371 common shares withheld upon vesting for the three months ended March 31, 2019 resulting in the issuance of 48,429 common shares. Tax withholdings totaling $4.5 million were made on behalf of employees in exchange for 40,092 common shares withheld upon vesting for the three months ended March 31, 2018 resulting in the issuance of 57,091 common shares. A total of 159,330 and 243,290 RSUs were outstanding at March 31, 2019 and December 31, 2018, respectively.



 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Forward-Looking Statements: Forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, are made throughout this Quarterly Report on Form 10-Q. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “may,” “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” “intends” and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including but not limited to: (a) changes in general economic and business conditions; (b) decreases in rental rates or increases in vacancy rates/failure to renew or replace expiring leases; (c) tenant defaults; (d) the effect of the recent credit and financial market conditions; (e) our failure to maintain our status as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”); (f) the economic health of our customers; (g) increases in operating costs; (h) casualties to our properties not covered by insurance; (i) the availability and cost of capital; (j) increases in interest rates and its effect on our stock price; and (k) other factors discussed under the heading “Part I, Item 1A. Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2018. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. Moreover, we assume no obligation to update these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements, except as required by law.



Critical Accounting Policies and Estimates: 



Our accounting policies are described in Note 2 to the consolidated financial statements included in this Form 10-Q. We believe our critical accounting policies relate to income tax expense, accounting for acquired real estate facilities, allowance for doubtful accounts, impairment of long-lived assets, and accrual for uncertain and contingent liabilities, each of which are more fully discussed below.



Income Tax Expense: We have elected to be treated as a REIT, as defined in the Code. As a REIT, we do not incur federal income tax on our “REIT taxable income” that is fully distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and if we meet certain organizational and operational rules. We believe we have met these REIT requirements for all periods presented herein. Accordingly, we have recorded no federal income tax expense related to our “REIT taxable income.”



Our evaluation that we have met the REIT requirements could be incorrect, because compliance with the tax rules requires factual determinations, and circumstances we have not identified could result in noncompliance with the tax requirements in current or prior years. For any taxable year that we fail to qualify as a REIT and for which applicable statutory relief provisions did not apply, we would be taxed at the regular corporate rates on all of our taxable income for at least that year and the ensuing four years, we could be subject to penalties and interest, and our net income would be materially different from the amounts shown in our consolidated financial statements.



Accounting for Acquired Real Estate Facilities: We estimate the fair value of land, buildings, intangible assets and intangible liabilities for purposes of allocating purchase price. Such estimates are based upon many assumptions and judgments, including (i) market rates of return and capitalization rates on real estate and intangible assets, (ii) building and material cost levels, (iii) comparisons of the acquired underlying land parcels to recent land transactions, (iv) estimated market rent levels and (v) future cash flows from the real estate and the existing customer base. Others could come to materially different conclusions as to the estimated fair values, which would result in different depreciation and amortization expense, rental income, gains and losses on sale of real estate assets, and real estate and intangible assets.



Allowance for Doubtful Accounts: Customer receivables consist primarily of amounts due for contractual lease payments, reimbursements of common area maintenance expenses, property taxes and other expenses recoverable from customers. Deferred rent receivable represents the amount that the cumulative straight-line rental income recorded to date exceeds cash rents billed to date under the lease agreement. Determination of the adequacy of

 

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