Company Quick10K Filing
Quick10K
PS Business Parks
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$146.73 27 $4,010
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
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
UDR UDR
CPT Camden Property Trust
VICI Vici Properties
MPW Medical Properties Trust
ACC American Campus Communities
APLE Apple Hospitality REIT
CTRE Caretrust REIT
PMT Pennymac Mortgage Investment Trust
RC Ready Capital
DX Dynex Capital
PSB 2018-09-30
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-12 psb-20180930xex12.htm
EX-31.1 psb-20180930xex31_1.htm
EX-31.2 psb-20180930xex31_2.htm
EX-32.1 psb-20180930xex32_1.htm

PS Business Parks Earnings 2018-09-30

PSB 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 psb-20180930x10q.htm 10-Q psb-20180930 Q3



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 September 30, 2018



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 October 22, 2018, the number of shares of the registrant’s common stock, $0.01 par value per share, outstanding was 27,347,032.




 

PS BUSINESS PARKS, INC.

INDEX









 



 



Page

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Consolidated balance sheets as of September 30, 2018 (unaudited) and December 31, 2017

3

Consolidated statements of income (unaudited) for the three and nine months ended September 30, 2018 and 2017

4

Consolidated statement of equity (unaudited) for the nine months ended September 30, 2018

5

Consolidated statements of cash flows (unaudited) for the nine months ended September 30, 2018 and 2017

6

Notes to consolidated financial statements (unaudited)

8

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

23

Item 3. Quantitative and Qualitative Disclosures About Market Risk

39

Item 4. Controls and Procedures

39

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

39

Item 1A. Risk Factors

39

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

40

Item 6. Exhibits

40











 


 

PART I. FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



PS BUSINESS PARKS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)







 

 

 

 

 



 

 

 

 

 



September 30,

 

December 31,



2018

 

2017



(Unaudited)

 

 

 

ASSETS

 

 

 

 

 



 

 

 

 

 

Cash and cash equivalents

$

8,687 

 

$

114,882 



 

 

 

 

 

Real estate facilities, at cost

 

 

 

 

 

Land

 

816,656 

 

 

769,036 

Buildings and improvements

 

2,366,032 

 

 

2,156,862 



 

3,182,688 

 

 

2,925,898 

Accumulated depreciation

 

(1,219,249)

 

 

(1,161,798)



 

1,963,439 

 

 

1,764,100 

Properties held for sale, net

 

9,682 

 

 

49,259 

Land and building held for development

 

30,182 

 

 

29,665 



 

2,003,303 

 

 

1,843,024 

Investment in and advances to unconsolidated joint venture

 

 

 

100,898 

Rent receivable, net

 

2,092 

 

 

1,876 

Deferred rent receivable, net

 

32,903 

 

 

32,062 

Other assets

 

16,392 

 

 

7,417 

Total assets

$

2,063,377 

 

$

2,100,159 



 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 



 

 

 

 

 

Accrued and other liabilities

$

85,978 

 

$

80,223 

Preferred stock called for redemption

 

 

 

130,000 

Total liabilities

 

85,978 

 

 

210,223 

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

 

 

 

 

 

September 30, 2018 and December 31, 2017

 

959,750 

 

 

959,750 

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

 

 

 

 

 

27,346,562 and 27,254,607 shares issued and outstanding at

 

 

 

 

 

September 30, 2018 and December 31, 2017, respectively

 

273 

 

 

272 

Paid-in capital

 

734,341 

 

 

735,067 

Accumulated earnings (deficit)

 

66,107 

 

 

(1,778)

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

 

1,760,471 

 

 

1,693,311 

Noncontrolling interests

 

216,928 

 

 

196,625 

Total equity

 

1,977,399 

 

 

1,889,936 

Total liabilities and equity

$

2,063,377 

 

$

2,100,159 



See accompanying notes.

 

3


 

PS BUSINESS PARKS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except per share data)

(Unaudited)









 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



For The Three Months

 

For The Nine Months



Ended September 30,

 

Ended September 30,

 

2018

 

2017

 

2018

 

2017



 

 

 

 

 

 

 

 

 

 

 

Rental income

$

103,808 

 

$

100,481 

 

$

309,391 

 

$

300,342 



 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

Cost of operations

 

31,654 

 

 

31,679 

 

 

95,910 

 

 

92,962 

Depreciation and amortization

 

25,207 

 

 

23,759 

 

 

73,505 

 

 

70,465 

General and administrative

 

2,425 

 

 

1,745 

 

 

7,099 

 

 

7,019 

Total operating expenses

 

59,286 

 

 

57,183 

 

 

176,514 

 

 

170,446 



 

 

 

 

 

 

 

 

 

 

 

Operating income

 

44,522 

 

 

43,298 

 

 

132,877 

 

 

129,896 

Interest and other income

 

488 

 

 

212 

 

 

1,066 

 

 

599 

Interest and other expense

 

(167)

 

 

(503)

 

 

(499)

 

 

(972)

Equity in loss of unconsolidated joint venture

 

 

 

(376)

 

 

 

 

(758)

Gain on sale of real estate facilities

 

 

 

 

 

85,283 

 

 

1,209 

Gain on sale of development rights

 

 

 

 

 

 

 

3,865 

Net income

 

44,843 

 

 

42,631 

 

 

218,727 

 

 

133,839 

Allocation to noncontrolling interests

 

(6,514)

 

 

(4,866)

 

 

(36,814)

 

 

(18,610)

Net income allocable to PS Business Parks, Inc.

 

38,329 

 

 

37,765 

 

 

181,913 

 

 

115,229 

Allocation to preferred shareholders based upon

 

 

 

 

 

 

 

 

 

 

 

Distributions

 

(12,959)

 

 

(12,590)

 

 

(38,921)

 

 

(38,472)

Redemption

 

 

 

(6,900)

 

 

 

 

(6,900)

Allocation to restricted stock unit holders

 

(239)

 

 

(137)

 

 

(1,592)

 

 

(582)

Net income allocable to common shareholders

$

25,131 

 

$

18,138 

 

$

141,400 

 

$

69,275 



 

 

 

 

 

 

 

 

 

 

 

Net income per common share

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.92 

 

$

0.67 

 

$

5.18 

 

$

2.55 

Diluted

$

0.92 

 

$

0.66 

 

$

5.16 

 

$

2.53 



 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

Basic

 

27,339 

 

 

27,226 

 

 

27,310 

 

 

27,192 

Diluted

 

27,442 

 

 

27,427 

 

 

27,412 

 

 

27,399 



 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

$

1.05 

 

$

0.85 

 

$

2.75 

 

$

2.55 







 

See accompanying notes.

 

4


 

PS BUSINESS PARKS, INC.

CONSOLIDATED STATEMENT OF EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018

(In thousands, except share data)

(Unaudited)









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total PS

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Business Parks,

 

 

 

 

 

 



Preferred Stock

 

Common Stock

 

Paid-in

 

Earnings

 

Inc.’s Shareholders’

 

Noncontrolling

 

Total

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

(Deficit)

 

Equity

 

Interests

 

Equity

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

 

 

 

91,955 

 

 

 

 

1,678 

 

 

 

 

1,679 

 

 

 

 

1,679 

Stock compensation, net

 

 

 

 

 

 

 

2,098 

 

 

 

 

2,098 

 

 

 

 

2,098 

Cash paid for taxes in lieu of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

shares upon vesting of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

restricted stock units

 

 

 

 

 

 

 

(4,955)

 

 

 

 

(4,955)

 

 

 

 

(4,955)

Consolidation of joint venture (see Note 3)

 

 

 

 

 

 

 

 

 

 

 

 

 

4,032 

 

 

4,032 

Net income

 

 

 

 

 

 

 

 

 

181,913 

 

 

181,913 

 

 

36,814 

 

 

218,727 

Distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock

 

 

 

 

 

 

 

 

 

(38,921)

 

 

(38,921)

 

 

 

 

(38,921)

Common stock

 

 

 

 

 

 

 

 

 

(75,107)

 

 

(75,107)

 

 

 

 

(75,107)

Noncontrolling interests—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common units

 

 

 

 

 

 

 

 

 

 

 

 

 

(20,090)

 

 

(20,090)

Adjustment to noncontrolling interests—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common units in the OP

 

 

 

 

 

 

 

453 

 

 

 

 

453 

 

 

(453)

 

 

Balances at September 30, 2018

38,390 

 

$

959,750 

 

27,346,562 

 

$

273 

 

$

734,341 

 

$

66,107 

 

$

1,760,471 

 

$

216,928 

 

$

1,977,399 





 

See accompanying notes.

 

5


 

PS BUSINESS PARKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)









 

 

 

 

 



 

 

 

 

 

 

For The Nine Months



Ended September 30,

 

2018

 

2017

Cash flows from operating activities

 

 

 

 

 

Net income

$

218,727 

 

$

133,839 

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

 

 

 

 

 

Depreciation and amortization expense

 

73,505 

 

 

70,465 

Tenant improvement reimbursements, net of lease incentives

 

(1,690)

 

 

(1,654)

Equity in loss of unconsolidated joint venture

 

 

 

758 

Gain on sale of real estate facilities and development rights

 

(85,283)

 

 

(5,074)

Stock compensation

 

2,933 

 

 

3,255 

Amortization of financing costs

 

400 

 

 

338 

Other, net

 

(4,823)

 

 

4,125 

Total adjustments

 

(14,958)

 

 

72,213 

Net cash provided by operating activities

 

203,769 

 

 

206,052 

Cash flows from investing activities

 

 

 

 

 

Capital expenditures to real estate facilities

 

(25,817)

 

 

(38,709)

Capital expenditures to land and building held for development

 

(517)

 

 

(1,136)

Investment in and advances to unconsolidated joint venture

 

 

 

(30,161)

Acquisition of real estate facility

 

(142,399)

 

 

Consolidation of joint venture

 

1,082 

 

 

Proceeds from sale of real estate facilities

 

126,836 

 

 

2,144 

Proceeds from sale of development rights

 

 

 

2,400 

Net cash used in investing activities

 

(40,815)

 

 

(65,462)

Cash flows from financing activities

 

 

 

 

 

Borrowings on credit facility

 

50,000 

 

 

170,000 

Repayment of borrowings on credit facility

 

(50,000)

 

 

(170,000)

Payment of financing costs

 

(227)

 

 

(778)

Proceeds from the exercise of stock options

 

1,679 

 

 

3,992 

Net proceeds from the issuance of preferred stock

 

 

 

222,225 

Redemption of preferred stock

 

(130,000)

 

 

(230,000)

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

 

(4,955)

 

 

(3,865)

Cash paid to restricted stock unit holders

 

(835)

 

 

(582)

Distributions paid to preferred shareholders

 

(39,614)

 

 

(38,472)

Distributions paid to common shareholders

 

(75,107)

 

 

(69,364)

Distributions paid to noncontrolling interests—common units

 

(20,090)

 

 

(18,629)

Net cash used in financing activities

 

(269,149)

 

 

(135,473)

Net (decrease) increase in cash and cash equivalents

 

(106,195)

 

 

5,117 

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

 

115,970 

 

 

128,629 

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

$

9,775 

 

$

133,746 



See accompanying notes.

 

6


 

PS BUSINESS PARKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

(Continued)







 

 

 

 

 



 

 

 

 

 

 

For The Nine Months



Ended September 30,

 

2018

 

2017



 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities

 

 

 

 

 

Adjustment to noncontrolling interests—common units in the OP

 

 

 

 

 

Noncontrolling interests—common units

$

(453)

 

$

(119)

Paid-in capital

$

453 

 

$

119 

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)

 

$

Preferred Redemption Allocation

 

 

 

 

 

Paid-in capital

$

 —

 

$

6,900 

Accumulated earnings (deficit)

$

 —

 

$

(6,900)

Preferred stock called for redemption

 

 

 

 

 

Preferred stock called for redemption and reclassified to liabilities

$

 

$

220,000 

Preferred stock called for redemption and reclassified from equity

$

 

$

(220,000)

 

See accompanying notes.

 

7


 

PS BUSINESS PARKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018



1. Organization and description of business



PS Business Parks, Inc. (“PSB”) was incorporated in the state of California in 1990. As of September 30, 2018, PSB owned 78.9% 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, 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.



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 September 30, 2018, the Company owned and operated 28.3 million rentable square feet of commercial space in six states and held a  95.0% interest in a 395-unit multifamily apartment complex. The Company also manages for a fee 504,000 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 and with 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 complete 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 and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ended December 31, 2018. 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, 2017.



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. Prior to January 1, 2018, we had an interest in a joint venture engaged in the development and operation of residential real estate, which we accounted for using the equity method of accounting. On January 1, 2018, we began to consolidate the joint venture in our consolidated financial statements, due to changes to the joint venture agreement that gave the Company control of the joint venture. See Note 4 for more information on this entity.

 

8


 

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 a joint venture owning a 395-unit multifamily apartment complex. See Note 7 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 the deferred rent receivable on an ongoing basis. Customer receivables are net of an allowance for estimated uncollectible accounts totaling $400,000 at September 30, 2018 and December 31, 2017. Deferred rent receivable is net of an allowance for uncollectible accounts totaling $878,000 and $867,000 at September 30, 2018 and December 31, 2017, 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.



 

9


 

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 September 30, 2018 and 2017 (in thousands):



 

 

 

 

 



 

 

 

 

 



September 30,



2018

 

2017

Consolidated Balance Sheets

 

 

 

 

 

Cash and cash equivalents

$

8,687 

 

$

132,658 

Restricted Cash

 

 

 

 

 

Land and building held for development

 

1,088 

 

 

1,088 

Consolidated Statements of Cash Flows

$

9,775 

 

$

133,746 



During 2017, in conjunction with seeking entitlements to develop our multifamily projects in Tysons, Virginia, we contributed $1.1 million into an escrow account for the future development of an athletic field.



Carrying values of the Company’s unsecured Credit Facility (as defined below) approximate fair value. The characteristics of these financial instruments, market data and other comparative metrics utilized in determining these fair values are “Level 2” inputs.



Real estate facilities



Real estate facilities are recorded at cost. 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 September 30, 2018, the value of above-market in-place rents resulted in net intangible assets of $1.9 million, net of $9.8 million of accumulated amortization and the value of below-market in-place rents resulted in net intangible liabilities of $1.9 million, net of $10.7 million of accumulated amortization. As of December 31, 2017, the value of above-market in-place rents resulted in net intangible assets of $731,000, net of $9.5 million of accumulated amortization and the value of below-market in-place rents resulted in net intangible liabilities of $383,000, net of $10.4 million of accumulated amortization.



Additionally, when we acquire real estate facilities, the value of in-place leases (i.e. customer origination costs) is recorded as other assets and is amortized to depreciation and amortization expense over the respective remaining lease term. As of September 30, 2018, the value of acquired in-place leases resulted in net intangible assets of $5.6 million,

 

10


 

net of $1.7 million of accumulated amortization. As of December 31, 2017, we had no in-place lease values on our consolidated balance sheet.



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 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 11.



Accrued and other liabilities and other assets



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. We disclose the nature of significant unaccrued losses that are reasonably possible of occurring and, if estimable, a range of exposure. Other assets are comprised primarily of prepaid expenses. We believe the fair value of our accrued and other liabilities and other assets approximate book value, due to the short period until settlement.



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 terms is presented as “deferred rent receivable” on our consolidated balance sheets. Reimbursements from customers for real estate taxes and other recoverable operating expenses are recognized as rental income in the period the applicable costs are incurred. Property management fees are recognized in the period earned 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 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.



 

11


 

General and administrative expenses



General and administrative expenses include 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 September 30, 2018 and December 31, 2017, 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 (a “Preferred Redemption Allocation”) and (c) 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 11) using the treasury stock method.

 

12


 

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

 

For The Nine Months



Ended September 30,

 

Ended September 30,

 

2018

 

2017

 

2018

 

2017

Calculation of net income allocable to common shareholders

 

 

 

 

 

 

 

 

 

Net income

$

44,843 

 

$

42,631 

 

$

218,727 

 

$

133,839 

Net (income) loss allocated to

 

 

 

 

 

 

 

 

 

 

 

Preferred shareholders based upon distributions

 

(12,959)

 

 

(12,590)

 

 

(38,921)

 

 

(38,472)

Preferred shareholders based upon redemptions

 

 

 

(6,900)

 

 

 

 

(6,900)

Noncontrolling interests—joint venture

 

189 

 

 

 

 

1,008 

 

 

Restricted stock unit holders

 

(239)

 

 

(137)

 

 

(1,592)

 

 

(582)

Net income allocable to common shareholders

 

 

 

 

 

 

 

 

 

 

 

and noncontrolling interests—common units

 

31,834 

 

 

23,004 

 

 

179,222 

 

 

87,885 

Net income allocation to noncontrolling interests—

 

 

 

 

 

 

 

 

 

 

 

common units

 

(6,703)

 

 

(4,866)

 

 

(37,822)

 

 

(18,610)

Net income allocable to common shareholders

$

25,131 

 

$

18,138 

 

$

141,400 

 

$

69,275 



 

 

 

 

 

 

 

 

 

 

 

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

 

Weighted average common shares outstanding

 

27,339 

 

 

27,226 

 

 

27,310 

 

 

27,192 

Weighted average common partnership units outstanding

 

7,305 

 

 

7,305 

 

 

7,305 

 

 

7,305 

Total common share equivalents

 

34,644 

 

 

34,531 

 

 

34,615 

 

 

34,497 

Common partnership units as a percentage of common

 

 

 

 

 

 

 

 

 

 

 

share equivalents

 

21.1% 

 

 

21.2% 

 

 

21.1% 

 

 

21.2% 



 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

27,339 

 

 

27,226 

 

 

27,310 

 

 

27,192 

Net effect of dilutive stock compensation—based on

 

 

 

 

 

 

 

 

 

 

 

treasury stock method using average market price

 

103 

 

 

201 

 

 

102 

 

 

207 

Diluted weighted average common shares outstanding

 

27,442 

 

 

27,427 

 

 

27,412 

 

 

27,399 



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.  



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, which is governed under ASU 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.



The Lease Standard will direct 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 will direct how we account for the non-lease components of our lease contracts, primarily expense reimbursements (“Non-Lease Payments”). The adoption of the Revenue Standard and its impact on our accounting for the disposition of real estate facilities is described below.

 

13


 

The Lease Standard



The Lease Standard requires us to identify Fixed Lease Payments and Non-Lease Payments of a lease agreement and will govern the recognition of revenue for the Fixed Lease Payments. Revenue related to Non-Lease Payments under our lease arrangements will be subject to the Revenue Standard effective upon adoption of the Lease Standard.



We will implement the Lease Standard on its effective date of January 1, 2019 using the required modified retrospective transition approach (with certain transition relief that is available to us). The modified retrospective approach will require us to first record an adjustment to the January 1, 2017 balance of accumulated earnings (deficit) for the cumulative impact of the Lease Standard on all leases existing at January 1, 2017. Then, we will have to restate the financial statements for the years ended December 31, 2017 and 2018 for the Lease Standard impact on all leases that were in force at any time during those periods. In July, 2018, the FASB issued an amendment to the transition method that allows adoption on January 1, 2019 with a cumulative effect adjustment as of January 1, 2019, with no restatement of prior periods. We expect to adopt this transition method upon adoption of the Lease Standard on January 1, 2019.



Lessor Accounting



We recognized revenue from our lease arrangements aggregating $103.8 million and $309.4 million for the three and nine months ended September 30, 2018, respectively. The revenue consisted primarily of rental income and expense reimbursements of $80.9 million and $22.9 million, respectively, for the three-month period and $240.3 million and $69.1 million, respectively, for the nine-month period.



Under the current accounting standards, we are required to account for Fixed Lease Payments on a straight-line basis, with the expected fixed payments recognized ratably over the term of the lease. Payments for expense reimbursements received under these lease arrangements related to our customer’s pro rata share of real estate taxes, insurance, utilities, repairs and maintenance, common area expense and other operating expenses are considered Fixed Lease Payments. We recognize these reimbursements as revenue when the related contractually recoverable operating expenses are incurred.



Under the Lease Standard, the total consideration in each lease agreement will be allocated to the Fixed Lease Payment and Non-Lease Payments based on their relative standalone selling prices. Lessors will continue to recognize the Fixed Lease Payments on a straight-line basis, which is consistent with existing guidance for operating leases. The issued amendment to the Lease Standard noted above also allows lessors to elect, as a 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 do not expect that the Lease Standard will impact our accounting for Fixed Lease Payments, because our accounting policy is currently consistent with the provisions of the standard. Upon adoption of the Lease Standard, we expect to adopt the practical expedient, specifically related to payments for expense reimbursements that qualify as Non-Lease Payments to be presented under a single lease component presentation, which would otherwise be accounted for under the Revenue Standard. We 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.  



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 do not currently capitalize any such costs, we do not expect this component of the Lease Standard to have a material effect to our consolidated financial statements.

 

14


 

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 lease asset by the lessee. This classification will determine 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 will be recognized on our balance sheet as a right-of-use asset and related liability. We do not expect a material impact on our consolidated financial statement from the initial recognition of each lease liability upon the adoption and the pattern of recognition subsequent to adoption.



The Revenue Standard



In May, 2014, the FASB issued the Revenue Standard on recognition of revenue arising from contracts with customers, as well as the accounting for the disposition of real estate facilities, and subsequently, issued additional guidance that further clarified the standard. Rental income from leasing arrangements is a substantial portion of our revenues and is specifically excluded from the Revenue Standard and will be governed by the Lease Standard (discussed above).



The core principle underlying this guidance is that entities will recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled for such exchange.



The Revenue Standards permit either the full retrospective or modified retrospective transition method. We adopted the Revenue Standards effective January 1, 2018 utilizing the modified retrospective transition method applied to contracts not completed as of January 1, 2018 and the adoption did not result in a material impact to our consolidated financial statements.



Revenue within the scope of the Revenue Standard



Sales of Real Estate Facilities



Under the Revenue Standard, which includes guidance on recognition of gains and losses arising from the derecognition of nonfinancial assets in a transaction with non-customers, the derecognition model is based on the transfer of control of nonfinancial assets or in substance nonfinancial assets that do not meet the definition of a business. Generally, our sales of real estate facilities would be considered a sale of a nonfinancial asset to non-customers. If we determine we do not have a controlling financial interest in the entity that holds the asset and the arrangement meets the criteria to be accounted for as a contract, we would derecognize the asset and recognize a gain or loss on the sale of the real estate facilities accounted under the revenue recognition principles under the Revenue Standard.



The adoption of the Revenue Standard had no material impact on recognition of $85.3 million in gain on sale of real estate facilities during the nine months September 30, 2018.



Other recently issued accounting standards



In November, 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) – Restricted Cash, which requires the statements of cash flows to explain the change during the period in the total cash, cash equivalents, restricted cash and restricted cash equivalents. The new guidance also requires entities to reconcile such total to amounts on the balance sheets and disclose the nature of the restrictions. The standard is effective on January 1, 2018, with early adoption permitted and requires the use of the retrospective transition method. We early adopted the new guidance during the fourth quarter of 2017 and, accordingly, net cash used in investing activities decreased by $1.1 million for the nine months ended September 30, 2017, in the previous presentation, as compared to the current presentation.



 

15


 

3. Real estate facilities



The activity in real estate facilities for the nine months ended September 30, 2018 is as follows (in thousands):





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

Buildings and

 

Accumulated

 

 

 

 

Land

 

Improvements

 

Depreciation

 

Total

Balances at December 31, 2017 (1)

$

769,036 

 

$

2,156,862 

 

$

(1,161,798)

 

$

1,764,100 

Acquisition of real estate facility

 

25,806 

 

 

112,230 

 

 

 

 

138,036 

Consolidation of joint venture

 

21,814 

 

 

85,436 

 

 

 

 

107,250 

Capital expenditures

 

 

 

26,405 

 

 

 

 

26,405 

Disposals (2)

 

 

 

(14,333)

 

 

14,333 

 

 

Depreciation and amortization expense

 

 

 

 

 

(71,853)

 

 

(71,853)

Transfer to properties held for sale

 

 

 

(568)

 

 

69 

 

 

(499)

Balances at September 30, 2018

$

816,656 

 

$

2,366,032 

 

$

(1,219,249)

 

$

1,963,439 

____________________________

(1)

Land, building and improvements, and accumulated depreciation, respectively, totaling $1.3 million, $9.7 million, and $7.2 million were reclassified as of December 31, 2017 to “properties held for sale, net,” representing a 194,000 rentable square foot flex business park located in Dallas, Texas.

(2)

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



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 market information. The amount recorded to acquired in-place leases is determined based on management’s assessment of current market conditions and the estimated lease-up periods for the respective spaces.



On June 8, 2018, we acquired two multi-tenant industrial parks aggregating 1.1 million rentable square feet in Springfield, Virginia, for a net purchase price of $143.8 million. The following table summarizes the assets and liabilities assumed related to the asset acquisition during the nine months ended September 30, 2018 (in thousands):





 

 



 

 

Land

$

25,806 

Buildings and improvements

 

112,230 

Other assets (above-market in-place rents)

 

1,487 

Accrued and other liabilities (below-market in-place rents)

 

(1,790)

Other assets (in-place lease value)

 

6,033 

Total purchase price

 

143,766 

Net operating assets acquired and liabilities assumed

 

(1,367)

Total cash paid

$

142,399 



 

16


 

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 (see Note 4 below) (in thousands):





 

 



 

 

Land

$

21,814 

Buildings and improvements

 

85,436 

Other assets (in-place lease value)

 

1,199 

Total consolidated joint venture

 

108,449 

Noncontrolling interest in consolidated joint venture

 

(4,032)

Net book value of joint venture at consolidation

$

104,417 



On March 31, 2017, the Company sold development rights it held to build medical office buildings on land adjacent to its Westech Business Park in Silver Spring, Maryland for $6.5 million. We received net proceeds of $3.9 million, of which $1.5 million was received in prior years and $2.4 million was received in March, 2017. The Company recorded a gain of $3.9 million related to the net proceeds received through September 30, 2017, which are non-refundable. The Company reported an additional gain of $2.5 million when the final proceeds were received in the fourth quarter of 2017 and the remaining contingencies had lapsed.



As of September 30, 2018, we have commitments, pursuant to executed leases, to spend $10.5 million on transaction costs, which include tenant improvements and lease commissions.



Properties Sold and Held for Sale



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 proceeds of $41.7 million, which resulted in a gain of $26.8 million.



On April 18, 2018, we sold Orange County Business Center, a park consisting of five multi-tenant office buildings totaling 437,000 square feet located in Orange County, California, for net proceeds of $73.3 million, which resulted in a gain of $50.6 million.



On April 30, 2018, we sold Northgate Business Park, a park consisting of seven multi-tenant flex buildings totaling 194,000 square feet located in Dallas, Texas, for net proceeds of $11.8 million, which resulted in a gain of $7.9 million.



Each of these facilities sold during the nine months ended September 30, 2018 were included in “properties held for sale, net” as of December 31, 2017. 



As of September 30, 2018, we have 107,000 rentable square feet of office product located in Orange County, California, included in “properties held for sale, net”, which we expect to sell during the fourth quarter of 2018.



4. Investment in and advances to unconsolidated joint venture



In 2013, the Company entered into a joint venture known as Amherst JV LLC with an unrelated real estate development company (the “JV Partner”) for the purpose of developing a 395-unit multifamily building on a five-acre site (the “Project”) within the Company’s 628,000 square foot office park located in Tysons, Virginia (known as “The Mile”). We hold a 95.0% interest in the joint venture with the remaining 5.0% held by the JV Partner. The JV Partner was responsible for the development and construction of the Project, and has been and continues to be responsible for the leasing and operational management of the Project. Prior to January 1, 2018, we did not control the joint venture, when considering, among other factors, that the consent of the JV Partner was required for all significant decisions. Accordingly, we previously accounted for our investment using the equity method. On January 1, 2018, we began to consolidate the joint venture due to changes to the joint venture agreement that gave the Company control of the joint venture.



 

17


 

On October 5, 2015, the Company contributed the site and improvements to the joint venture. We also provided the joint venture with a construction loan in the amount of $75.0 million bearing interest at the London Interbank Offered Rate (“LIBOR”) plus 2.25%. The loan will mature on April 5, 2019 with two one-year extension options.



The aggregate amount of development costs were $105.4 million (excluding unrealized land appreciation). The Project delivered its first completed units in May, 2017 and was substantially completed during the fourth quarter of 2017.



At December 31, 2017, we reflected the aggregate cost of the contributed site and improvements, our equity contributions and loan advances, as well as capitalized third party interest we incurred as investment in and advances to unconsolidated joint venture. The Company’s investment in and advances to unconsolidated joint venture was $100.9 million as of December 31, 2017.



During the three and nine months ended September 30, 2017, the Company recorded an equity loss in the unconsolidated joint venture of $376,000,  comprised of net operating income of $107,000 and depreciation expense of $483,000, and $758,000, comprised of net operating loss of $171,000 and depreciation expense of $587,000, respectively.



5. 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 September 30, 2018 (in thousands):







 

 



 

 

Remainder of 2018

$

75,923 

2019

 

269,194 

2020

 

198,197 

2021

 

142,675 

2022

 

99,385 

Thereafter

 

155,272 

Total (1)

$

940,646 

____________________________

(1)

Excludes future minimum rental income from an asset held for sale.



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 $22.9 million and $22.6 million for the three months ended September 30, 2018 and 2017, respectively, and $69.1 million and $68.4 million for the nine months ended September 30, 2018 and 2017, respectively. These amounts are included as rental income in the accompanying consolidated statements of income.



Leases accounting for 2.7% of total leased square footage are subject to termination options, of which 1.0% of total leased square footage have termination options exercisable through December 31, 2018. In general, these leases provide for termination payments to us should the termination options be exercised. The future minimum rental income in the above table assumes such options are not exercised.



6. 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 September 30, 2018 and December 31, 2017. The Company had $749,000 and $921,000 of unamortized loan origination costs as of September 30, 2018 and December 31, 2017, respectively, which is included in other assets in the accompanying

 

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consolidated balance sheets. The Credit Facility requires us to meet certain covenants, all of which we were in compliance with as of September 30, 2018. Interest on outstanding borrowings is payable monthly.



7. Noncontrolling interests



Noncontrolling interests represent (i) PS’s noncontrolling interest in the OP through its ownership of 7,305,355 common partnership units, totaling $213.9 million and $196.6 million at September 30, 2018 and December 31, 2017, 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 and none at September 30, 2018 and December 31, 2017, respectively.



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 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 $6.7 million and $4.9 million for the three months ended September 30, 2018 and 2017, respectively, and $37.8 million and $18.6 million for the nine months ended September 30, 2018 and 2017, 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 $189,000 and $1.0 million in loss was allocated to the JV Partner during the three and nine months ended September 30, 2018, respectively, and no distributions were paid to the JV Partner.  



8. Related party transactions



We manage 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 $93,000 and $126,000 for the three months ended September 30, 2018 and 2017, respectively, and $331,000 and $378,000 for the nine months ended September 30, 2018 and 2017, respectively. We allocate certain operating expenses to PS related to the management of these properties, including payroll and other business expenses, totaling $101,000 and $134,000 for the three months ended September 30, 2018 and 2017, respectively, and $376,000 and $401,000 for the nine months ended September 30, 2018 and 2017, respectively.



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

 

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contractors. Management fee expenses were $24,000 each for the three months ended September 30, 2018 and 2017, and $72,000 and $69,000 for the nine months ended September 30, 2018 and 2017, respectively. Additionally, PS allocated certain operating expenses to us related to the management of these properties totaling $16,000 and $14,000 for the three months ended September 30, 2018 and 2017, respectively, and $51,000 and $44,000 for the nine months ended September 30, 2018 and 2017, 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 $170,000 and $159,000 for costs PS incurred on our behalf for the three months ended September 30, 2018 and 2017, respectively, and $586,000 and $476,000 for the nine months ended September 30, 2018 and 2017, respectively. PS reimbursed us $10,000 and $8,000 for costs we incurred on their behalf for the three months ended September 30, 2018 and 2017, respectively and $29,000 and $23,000 for the nine months ended September 30, 2018 and 2017, respectively.



The Company had net amounts due to PS of $102,000 and $245,000 at September 30, 2018 and December 31, 2017, respectively.



9. Shareholders’ equity



Preferred stock



As of September 30, 2018 and December 31, 2017, 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