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| PSB > SEC Filings for PSB > Form 10-K/A on 17-Jun-2009 | All Recent SEC Filings |
17-Jun-2009
Annual Report
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.
Overview
As of December 31, 2008, the Company owned and operated approximately
19.6 million rentable square feet of multi-tenant flex, industrial and office
properties located in eight states.
The Company focuses on increasing profitability and cash flow aimed at
maximizing shareholder value. The Company strives to maintain high occupancy
levels while increasing rental rates when market conditions allow. The Company
also acquires properties it believes will create long-term value, and from time
to time disposes of properties which no longer fit within the Company's
strategic objectives or in situations where the Company believes it can optimize
cash proceeds. Operating results are driven by income from rental operations and
are therefore substantially influenced by rental demand for space within our
properties.
The Company successfully leased or re-leased 5.1 million square feet of space
in 2008 and achieved an overall weighted average occupancy of 93.5% for 2008.
During 2008, the Company experienced a modest increase in effective rental rates
compared to 2007. Total net operating income increased by $8.6 million or 4.6%
from the year ended December 31, 2007 to 2008. See further discussion of
operating results below.
Critical Accounting Policies and Estimates:
Our accounting policies are described in Note 2 to the consolidated financial
statements included in this Form 10-K/A. We believe our most critical accounting
policies relate to revenue recognition, allowance for doubtful accounts,
impairment of long-lived assets, depreciation, accruals of operating expenses
and accruals for contingencies, each of which we discuss below.
Revenue Recognition: We recognize revenue in accordance with Staff Accounting
Bulletin No. 104 of the Securities and Exchange Commission, Revenue Recognition
in Financial Statements ("SAB 104"), as amended. SAB 104 requires that the
following four basic criteria must be met before revenue can be recognized:
persuasive evidence of an arrangement exists; the delivery has occurred or
services rendered; the fee is fixed or determinable; and collectibility is
reasonably assured. All leases are classified as operating leases. Rental income
is recognized on a straight-line basis over the terms of the leases.
Straight-line rent is recognized for all tenants with contractual increases in
rent that are not included on the Company's credit watch list. Deferred rent
receivable represents rental revenue recognized on a straight-line basis in
excess of billed rents. Reimbursements from tenants for real estate taxes and
other recoverable operating expenses are recognized as rental income in the
period the applicable costs are incurred.
Property Acquisitions: In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations," we allocate the purchase
price of acquired properties to land, buildings and equipment and identified
tangible and intangible assets and liabilities associated with in-place leases
(including tenant improvements, unamortized lease commissions, value of
above-market and below-market leases, acquired in-place lease values, and tenant
relationships, if any) based on their respective estimated fair values.
In determining the fair value of the tangible assets of the acquired
properties, management considers the value of the properties as if vacant as of
the acquisition date. Management must make significant assumptions in
determining the value of assets acquired and liabilities assumed. Using
different assumptions in the allocation of the purchase cost of the acquired
properties would affect the timing of recognition of the related revenue and
expenses. Amounts allocated to land are derived from comparable sales of land
within the same region. Amounts allocated to buildings and improvements, tenant
improvements and unamortized lease commissions are based on current market
replacement costs and other market rate information.
The value allocable to the above-market or below-market in-place lease values
of acquired properties is determined based upon the present value (using a
discount rate which reflects the risks associated with the acquired leases) of
the difference between (i) the contractual rents to be paid pursuant to the
in-place leases, and (ii) management's estimate of fair market lease rates for
the corresponding in-place leases, measured over a
period equal to the remaining non-cancelable term of the lease. The amounts
allocated to above-market or below-market leases are included in other assets or
other liabilities in the accompanying consolidated balance sheets and are
amortized on a straight-line basis as an increase or reduction of rental income
over the remaining non-cancelable term of the respective leases.
Allowance for Doubtful Accounts: Rental revenue from our tenants is our
principal source of revenue. We monitor the collectibility of our receivable
balances including the deferred rent receivable on an ongoing basis. Based on
these reviews, we maintain an allowance for doubtful accounts for estimated
losses resulting from the possible inability of our tenants to make required
rent payments to us. Tenant receivables and deferred rent receivables are
carried net of the allowances for uncollectible tenant receivables and deferred
rent. As discussed below, determination of the adequacy of these allowances
requires significant judgments and estimates. Our estimate of the required
allowance is subject to revision as the factors discussed below change and is
sensitive to the effect of economic and market conditions on our tenants.
Tenant receivables consist primarily of amounts due for contractual lease
payments, reimbursements of common area maintenance expenses, property taxes and
other expenses recoverable from tenants. Determination of the adequacy of the
allowance for uncollectible current tenant receivables is performed using a
methodology that incorporates specific identification, aging analysis, an
overall evaluation of the historical loss trends and the current economic and
business environment. The specific identification methodology relies on factors
such as the age and nature of the receivables, the payment history and financial
condition of the tenant, the assessment of the tenant's ability to meet its
lease obligations, and the status of negotiations of any disputes with the
tenant. The allowance also includes a reserve based on historical loss trends
not associated with any specific tenant. This reserve as well as the specific
identification reserve is reevaluated quarterly based on economic conditions and
the current business environment.
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. Given the long-term nature of these types of
receivables, determination of the adequacy of the allowance for unbilled
deferred rent receivable is based primarily on historical loss experience.
Management evaluates the allowance for unbilled deferred rent receivable using a
specific identification methodology for significant tenants designed to assess
their financial condition and ability to meet their lease obligations.
Impairment of Long-Lived Assets: The Company evaluates a property for
potential impairment whenever events or changes in circumstances indicate that
its carrying amount may not be recoverable. On a quarterly basis we evaluate our
entire portfolio for impairment based on current operating information. In the
event that these periodic assessments reflect that the carrying amount of a
property exceeds the sum of the undiscounted cash flows (excluding interest)
that are expected to result from the use and eventual disposition of the
property, the Company would recognize an impairment loss to the extent the
carrying amount exceeded the estimated fair value of the property. The
estimation of expected future net cash flows is inherently uncertain and relies
on subjective assumptions dependent upon future and current market conditions
and events that affect the ultimate value of the property. Management must make
assumptions related to the property such as future rental rates, tenant
allowances, operating expenditures, property taxes, capital improvements,
occupancy levels and the estimated proceeds generated from the future sale of
the property. These assumptions could differ materially from actual results in
future periods. Since SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," provides that the future cash flows used in this analysis
be considered on an undiscounted basis, our intent to hold properties over the
long-term directly decreases the likelihood of recording an impairment loss. If
our strategy changes or if market conditions otherwise dictate an earlier sale
date, an impairment loss could be recognized, and such loss could be material.
Depreciation: We compute depreciation on our buildings and equipment using
the straight-line method based on estimated useful lives of generally 30 and
five years, respectively. A significant portion of the acquisition cost of each
property is allocated to building and building components. The allocation of the
acquisition cost to building and building components, as well as the
determination of their useful lives, are based on estimates. If we do not
appropriately allocate to these components or we incorrectly estimate the useful
lives of these components, our computation of depreciation expense may not
appropriately reflect the actual impact of these costs over future periods,
which will affect net income. In addition, the net book value of real estate
assets could
be overstated or understated. The statement of cash flows, however, would not be
affected.
Accruals of Operating Expenses: The Company accrues for property tax
expenses, performance bonuses and other operating expenses each quarter based on
historical trends and anticipated disbursements. If these estimates are
incorrect, the timing and amount of expense recognized will be affected.
Accruals for Contingencies: The Company is exposed to business and legal
liability risks with respect to events that may have occurred, but in accordance
with GAAP has not accrued for such potential liabilities because the loss is
either not probable or not estimable. Future events and the result of pending
litigation could result in such potential losses becoming probable and
estimable, which could have a material adverse impact on our financial condition
or results of operations.
Effect of Economic Conditions on the Company's Operations: During 2008, the
weakening economic conditions were reflected in commercial real estate as the
Company experienced a decrease in new rental rates over expiring rental rates as
well as declining occupancy levels in the second half of 2008. It is uncertain
what impact the current recession will have on the Company's ability to maintain
current occupancy levels and rental rates. A continued weakening in the economy
may have a significant impact on the Company, potentially resulting in lower
occupancy and reduced rental rates.
While the Company historically has experienced a low level of write-offs due
to bankruptcy, there is inherent uncertainty in a tenant's ability to continue
paying rent when in bankruptcy. As of December 31, 2008, the Company had
approximately 33,000 square feet occupied by tenants that are protected by
Chapter 11 of the U.S. Bankruptcy Code. Several other tenants have contacted us,
requesting early termination of their lease, reduction in space under lease,
rent deferment or abatement. At this time, the Company cannot anticipate what
impact, if any, the ultimate outcome of these discussions will have on our
operating results.
Company Performance and Effect of Economic Conditions on Primary Markets: The
Company has concentrated its operations in 10 regions. The Company's assessment
of these regions as of December 31, 2008 is summarized below. During the year
ended December 31, 2008, rental rates on new and renewed leases within the
Company's overall portfolio decreased 0.9% over expiring rents. Each of the 10
regions in which the Company owns assets is subject to its own unique market
influences. The Company has outlined the various market influences for each
specific region below. In addition, the Company has compiled market occupancy
information using third party reports for each of the respective markets. These
sources are deemed to be reliable by the Company, but there can be no assurance
that these reports are accurate.
The Company owns approximately 4.0 million square feet in Southern California
in Los Angeles, Orange and San Diego Counties. Market vacancies have increased
due to the continued weakening in the economy combined with the lack of credit
availability and its effect on businesses. These factors have also created
significantly more competition for tenants. Vacancy rates in Southern California
range from 2.2% to 15.4%. The Company's vacancy rate in this region at
December 31, 2008 was 8.5%. For the year ended December 31, 2008, the overall
market experienced negative net absorption of 0.6% for the reasons noted above
as well as the completion of newly constructed space in 2008. The Company's
weighted average occupancy for the region decreased from 94.8% in 2007 to 93.8%
in 2008. Realized rent per square foot increased 2.3% from $17.06 per square
foot in 2007 to $17.46 per square foot in 2008.
The Company owns approximately 1.8 million square feet in Northern California
with concentrations in Sacramento, the East Bay (Hayward and San Ramon) and
Silicon Valley (San Jose and Santa Clara). Vacancy rates in these submarkets are
16.6%, 19.4% and 14.7%, respectively. The Company's vacancy rate in its Northern
California portfolio at December 31, 2008 was 8.7%. Demand in these submarkets
slowed measurably in the second half of 2008. The time necessary to execute a
transaction has lengthened as tenants weigh their options and negotiate on
concessions. During the second half of 2008, lease renewals and short-term
leases were the most common leasing activity in the market as firms are seeking
ways of reducing costs. For the year ended December 31, 2008, the combined
submarkets noted above experienced negative net absorption of 0.1%. The
Company's weighted average occupancy in this region increased from 90.9% in 2007
to 92.0% in 2008. Realized rent per square foot increased 3.1% from $13.89 per
square foot in 2007 to $14.32 per square foot in 2008.
The Company owns approximately 1.2 million square feet in Southern Texas,
specifically in the Austin and Houston markets. Market vacancy rates are 11.0%
in the Austin market and 11.8% in the Houston market. The Company's vacancy rate
for these combined markets at December 31, 2008 was 7.5%. During the first half
of 2008, job growth in both the Austin and Houston markets along with the strong
oil and gas industry in the Houston market increased leasing activity. However,
during the second half of 2008, demand eased in these markets. For the year
ended December 31, 2008, the combined markets experienced positive net
absorption of 1.0%. The Company's weighted average occupancy in this region
increased from 94.1% in 2007 to 94.6% in 2008. Realized rent per square foot
increased 5.8% from $10.85 per square foot in 2007 to $11.48 per square foot in
2008.
The Company owns approximately 1.7 million square feet in Northern Texas,
primarily located in the Dallas Metroplex market. The market vacancy rate in Las
Colinas, where significant concentrations of the Company's properties are
located, is 10.1%. The Company's vacancy rate at December 31, 2008 in this
market was 5.4%. For the year ended December 31, 2008, the market experienced
positive net absorption of 1.2% as the result of modest job growth. During 2008,
modest new construction continued, which included both speculative construction,
as well as owner-user construction. Despite the new construction, the Company
has experienced a modest level of leasing activity during 2008 generating rental
rate growth and higher occupancy. The Company's weighted average occupancy for
the region increased from 86.3% in 2007 to 93.3% in 2008. Realized rent per
square foot increased 3.6% from $10.40 per square foot in 2007 to $10.77 per
square foot in 2008 as rental rates increased modestly over expiring leases.
However, new construction schedule to be completed in 2009 and the broad
economic recession could have an impact on the Company's ability to maintain
occupancy and generate rental rate growth within the Company's portfolio.
The Company owns approximately 3.6 million square feet in South Florida,
which consists of MICC business park located in the Airport West submarket of
Miami-Dade County and two multi-tenant flex parks located in Palm Beach County.
While the saturation of the condominium and housing markets in Miami has
negatively impacted its overall economy, it has had little impact on
international trade-based assets, such as industrial and flex space, which
constitutes the majority of the Company's South Florida portfolio. MICC is
located less than one mile from the cargo entrance of the Miami International
Airport, which is one of the most active ports in the United States. The Company
acquired two assets in Palm Beach County at the end of 2006, comprising 398,000
square feet. The downturn in the housing market and slowing economy have
adversely affected Palm Beach County. Market vacancy rates for Miami-Dade County
and Palm Beach County are 6.8% and 8.4%, respectively, compared with the
Company's South Florida vacancy rate of 3.2% at December 31, 2008. For the year
ended December 31, 2008, the combined markets experienced negative net
absorption of 0.7%. The Company's weighted average occupancy in this region
outperformed the market and remained strong, decreasing from 97.7% in 2007 to
96.4% in 2008. Realized rent per square foot increased 4.7% from $8.97 per
square foot in 2007 to $9.39 per square foot in 2008 as a result of higher
rental rates on leases executed in 2007 and early 2008 over in-place rents.
The Company owns approximately 3.0 million square feet in the Northern
Virginia submarket of Washington D.C., where the average market vacancy rate is
12.0%. The Company's vacancy rate at December 31, 2008 was 5.7%. Vacancy rates
in this market increased as new supply outpaced demand coupled with tenants
downsizing their existing space due to the economic recession. The increase in
sublease space and decrease in demand has lengthened the time of lease
negotiation as tenants weigh their options and negotiate on tenant improvements.
Higher concessions are more prevalent as landlords entice prospective tenants.
Despite the recent trends and slowdown, the market experienced positive net
absorption of 0.8%. The Company's realized rent per square foot increased 4.2%
from $19.49 per square foot in 2007 to $20.30 per square foot in 2008. The
Company's weighted average occupancy increased from 94.4% in 2007 to 96.6% in
2008.
The Company owns approximately 1.8 million square feet in the Maryland
submarket of Washington D.C. The Company's vacancy rate in the region at
December 31, 2008 was 6.1% compared to 11.5% for the market as a whole. The
market vacancy rate increased as new developments are completed with limited
preleasing activities combined with more companies contracting and reorganizing
business operations. For the year ended December 31, 2008, the market
experienced negative net absorption of 0.5%, which is attributed to a decrease
in demand for large blocks of space due to the slowing economy. The Company's
weighted average occupancy decreased from 94.7% in 2007 to 91.8% in 2008. The
decrease in occupancy was primarily related to a 67,000 square foot tenant
vacating its space at the end of 2007. Realized rent per square foot increased
0.8% from $23.18 per square foot in 2007 to $23.36 per square foot in 2008.
The Company owns approximately 1.3 million square feet in the Beaverton
submarket of Portland, Oregon. The market vacancy rate in this region is 17.7%.
The Company's vacancy rate in the market was 17.6% at December 31, 2008. Recent
economic trends and the economic recession have resulted in increases in both
vacancy rates and rent concessions in the market. For the year ended
December 31, 2008, the market experienced negative net absorption of 3.7%. The
Company's weighted average occupancy decreased from 89.0% in 2007 to 84.0% in
2008 primarily related to a 120,000 square foot tenant vacating its space during
the second quarter of 2008. Despite the recent trends and slowdown, realized
rent per square foot increased 7.1% from $15.63 per square foot in 2007 to
$16.74 per square foot in 2008. The increase was primarily the result of the
impact on 2007 realized rent per foot from write-offs related to business
failures during the year ended December 31, 2007.
The Company owns approximately 679,000 square feet in the Phoenix and Tempe
submarkets of Arizona. Market vacancies increased significantly due in part to
the number of housing-related tenants who have vacated space combined with
companies contracting and reorganizing business operations, creating
significantly more competition for tenants. During 2008, significant
construction of buildings has impacted the Company's portfolio and may result in
higher lease concessions while limiting the Company's ability to generate rental
rate growth. The market vacancy rate is 11.1% compared to the Company's vacancy
rate of 12.7% at December 31, 2008. For the year ended December 31, 2008,
despite the decrease in demand, the market experienced positive net absorption
of 0.3%. Although demand for space has subsided, realized rent per square foot
increased 3.4% from $11.49 per square foot in 2007 to $11.88 per square foot in
2008. The Company's weighted average occupancy in the region decreased from
89.4% in 2007 to 86.9% in 2008.
The Company owns approximately 521,000 square feet in the state of
Washington. In 2007, the Company acquired Overlake Business Center, a 493,000
square foot multi-tenant office and flex business park located in Redmond,
Washington. The weakened aerospace manufacturing industry and global economic
slowdown has resulted in fewer imports and exports resulting in a softened
demand in this market. Despite these factors, this market experienced positive
net absorption of 0.8% for the year ended December 31, 2008 primarily due to the
steady technology industry in the first half of 2008. The Company's vacancy rate
in this region at December 31, 2008 was 7.4% compared to 8.9% for the market as
a whole. The Company's weighted average occupancy increased from 89.5% in 2007
to 94.2% in 2008. Realized rent per square foot increased 9.5% from $17.62 per
square foot in 2007 to $19.30 per square foot in 2008.
Growth of the Company's Operations and Acquisitions and Dispositions of
Properties: The Company is focused on maximizing cash flow from its existing
portfolio of properties by expanding its presence in existing and new markets
through strategic acquisitions and the disposition of non-strategic assets. The
Company has historically maintained a low-leverage-level approach intended to
provide the Company with the flexibility for future growth.
The Company made no acquisitions during the year ended December 31, 2008.
In 2007, the Company acquired 870,000 square feet for an aggregate cost of
$140.6 million. The Company acquired Overlake Business Center, a 493,000 square
foot multi-tenant office and flex business park located in Redmond, Washington,
for $76.0 million; Commerce Campus, a 252,000 square foot multi-tenant office
and flex business park located in Santa Clara, California, for $39.2 million;
and Fair Oaks Corporate Center, a 125,000 square foot multi-tenant office park
located in Fairfax, Virginia, for $25.4 million.
In 2006, the Company added 1.2 million square feet to its portfolio at an
aggregate cost of $180.3 million. The Company acquired WesTech Business Park, a
366,000 square foot office and flex park in Silver Spring, Maryland, for
$69.3 million; 88,800 square feet of multi-tenant flex buildings in Signal Hill,
California, for $10.7 million; a 107,300 square foot multi-tenant flex park in
Chantilly, Virginia, for $15.8 million; Meadows Corporate Park, a 165,000 square
foot multi-tenant office park in Silver Spring, Maryland, for $29.9 million;
Rogers Avenue, a 66,500 square foot multi-tenant industrial and flex park in San
Jose, California, for $8.4 million; and Boca Commerce Park and Wellington
Commerce Park, two multi-tenant industrial, flex and storage parks, aggregating
398,000 square feet, located in Palm Beach County, Florida, for $46.2 million.
In connection with the Meadows Corporate Park purchase, the Company assumed a
$16.8 million mortgage with a fixed interest rate of 7.20% through November,
2011, at which time it can be prepaid without penalty. In addition, in
connection with the Palm Beach County purchases, the Company assumed three
mortgages with a combined total of $23.8 million with a weighted average
fixed interest rate of 5.84%.
During 2006, the Company sold a 30,500 square foot building located in
Beaverton, Oregon, for $4.4 million, resulting in a net gain of $1.5 million.
Additionally in 2006, the Company sold 32,400 square feet in Miami for a
combined total of $3.7 million, resulting in a gain of $865,000.
Scheduled Lease Expirations: In addition to the 1.4 million square feet, or
7.3%, of currently available space in our total portfolio, leases representing
approximately 24.1% of the leased square footage of our total portfolio are
scheduled to expire in 2009. Our ability to re-lease available space depends
upon the market conditions in the specific submarkets in which our properties
are located.
Impact of Inflation: Although inflation has not been significant in recent
years, it remains a factor in our economy, and the Company continues to seek
ways to mitigate its potential impact. A substantial portion of the Company's
leases require tenants to pay operating expenses, including real estate taxes,
utilities, and insurance, as well as increases in common area expenses,
partially reducing the Company's exposure to inflation. During 2007 and 2008,
the Company experienced modest increases in certain operating costs, including
repairs and maintenance, property insurance and utility costs affecting the
Company's overall profit margin.
Concentration of Portfolio by Region: Rental income, cost of operations and
. . .
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