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: (i) the duration and severity of the COVID-19 pandemic and its impact on our business and our customers; (ii) changes in general economic and business conditions, including as a result of the economic fallout of the COVID-19 pandemic; (iii) potential regulatory actions to close our facilities or limit our ability to evict delinquent customers; (iv) decreases in rental rates or increases in vacancy rates/failure to renew or replace expiring leases; (v) tenant defaults; (vi) the effect of the recent credit and financial market conditions; (vii) our failure to maintain our status as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”); (viii) the economic health of our customers; (ix) increases in operating costs; (x) casualties to our properties not covered by insurance; (xi) the availability and cost of capital; (xii) increases in interest rates and its effect on our stock price; and (xiii) 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, 2020. 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, accounting for customer receivable balances including deferred rent receivable balances, 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 U.S. federal corporate 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 requirements. We believe we have met these REIT requirements for all periods presented herein. Accordingly, we have recorded no U.S. federal corporate 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, which are determined with the assistance of third-party valuation specialists where appropriate, are based upon many assumptions and judgments, including, but not limited to, (i) market rates of return and capitalization rates on real estate and intangible assets, (ii) building and material cost levels, (iii) estimated market rent levels, (iv) future revenue growth rates, (v) future cash flows from the real estate and the existing customer base and (vi) comparisons of the acquired underlying land parcels to recent land transactions. Others could come to materially different conclusions as to the estimated fair values, which could result in different depreciation and amortization expense, rental income, gains and losses on sale of real estate assets, and real estate and intangible assets.
Accounting for Customer Receivable Balances, including Deferred Rent Receivable Balances: 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 receivables represent the amount that the cumulative straight-line rental income recorded as of a reporting date exceeds cash rents billed through that same date under the lease agreement, inclusive of rent deferrals and abatements granted to our customers in response to the COVID-19 pandemic. The Company writes off uncollectible customer receivable balances, including deferred rent receivable balances, in the period such receivable balances are deemed uncollectible. Significant bad debt losses could materially impact our net income.
Impairment of Long-Lived Assets: The analysis of impairment of our long-lived assets involves identification of indicators of impairment, projections of future operating cash flows and estimates of fair values or selling prices, all of which require significant judgment and subjectivity. Others could come to materially different conclusions. In addition, we may not have identified all current facts and circumstances that may affect impairment. Any unidentified impairment loss, or change in conclusions, could have a material adverse impact on our net income.
Accrual for Uncertain and Contingent Liabilities: We accrue for certain contingent and other liabilities that have significant uncertain elements, such as property taxes, performance bonuses and other operating expenses, as well as other legal claims and disputes involving customers, employees, governmental agencies and other third parties. We estimate such liabilities based upon many factors such as past trends and our evaluation of likely outcomes. However, the estimates of known liabilities could be incorrect or we may not be aware of all such liabilities, in which case our accrued liabilities and net income could be materially different.
Business Overview
The Company is a fully-integrated, self-advised and self-managed REIT that owns, operates, acquires and develops commercial properties, primarily multi-tenant industrial, flex, and office space. As of March 31, 2021, the Company owned and operated 27.8 million rentable square feet of commercial space in six states consisting of 98 parks and 676 buildings. The Company’s properties are located in markets that have experienced long-term economic growth. The Company also held a 95.0% interest in a joint venture entity which owns Highgate at The Mile, a 395-unit multifamily apartment complex located in Tysons, Virginia, and a 98.2% interest in a joint venture formed to develop Brentford at The Mile, a planned 411-unit multifamily apartment complex also located in Tysons, Virginia.
We have a strong and conservative capital structure which allows us the flexibility to use debt and equity capital prudently to fund our growth initiatives, including acquiring and developing properties we believe will create long-term value. From time to time we sell properties which no longer fit the Company’s strategic objectives.
Existing Real Estate Facilities: The operating results of our existing real estate facilities are substantially influenced by demand for rental space within our properties and our markets, which impacts occupancy, rental rates and capital expenditure requirements. We strive to maintain high occupancy levels while increasing rental rates and minimizing capital expenditures when market conditions allow, although the Company may decrease rental rates in markets where conditions require. Management’s initiatives and strategies with respect to our existing real estate facilities, which include incentivizing our personnel to maximize the return on investment for each lease transaction and provide a superior level of service to our customers, are described in more detail in our Annual Report on Form 10-K for the year ended December 31, 2020.
Acquisitions of Real Estate Facilities: We seek to grow our portfolio through acquisitions of facilities generally consistent with the Company’s focus on owning concentrated business parks with easy to configure space and in markets and product types with favorable long-term return potential.
On January 10, 2020, we acquired a multi-tenant industrial park comprising approximately 73,000 rentable square feet in La Mirada, California, for a total purchase price of $13.5 million, inclusive of capitalized transaction costs. The park consists of five buildings and was 100.0% occupied at acquisition with suites ranging from 1,200 to 3,000 square feet.
We continue to seek to acquire additional properties in our existing markets and generally in close proximity to our existing portfolio; however, there can be no assurance that we will acquire additional facilities that meet our risk-adjusted return and underwriting requirements.
Development or Redevelopment of Real Estate Facilities: In certain instances, we may seek to redevelop our existing real estate or develop new buildings on excess land parcels. During the three months ended March 31, 2021, we completed the development of an 83,000 square foot shallow-bay industrial building on an excess land parcel at our Freeport Business Park in Irving, Texas for total development costs of $8.1 million. The total developed asset value inclusive of land costs of $9.1 million was placed into service on March 1, 2021 and accordingly was reflected under real estate facilities, at cost on our consolidated balance sheets at March 31, 2021.
The Mile is an office and multifamily park we own which sits on 44.5 contiguous acres of land located in Tysons, Virginia. The park consists of 628,000 square feet of office space and a 395-unit multifamily apartment community, Highgate at The Mile, which we completed in 2017 through a joint venture with the JV Partner. In 2019, we successfully rezoned The Mile allowing us to develop, at our election, up to 3,000 additional multifamily units and approximately 500,000 square feet of other commercial uses.
In August 2020, the Company entered into the Brentford Joint Venture with the JV Partner for the purpose of developing Brentford at The Mile, a planned 411-unit multifamily apartment complex. Under the Brentford Joint Venture agreement, the Company has a 98.2% controlling interest and is the managing member with the JV Partner holding the remaining 1.8% limited partnership interest. We contributed the Brentford Parcel to the Brentford Joint Venture at a value of $18.5 million, for which we received equity contribution credit in the Brentford Joint Venture. Our cost basis in the Brentford Parcel was $5.5 million as of March 31, 2021.
Construction of Brentford at The Mile commenced in August 2020 and is anticipated to be completed over a period of 24 to 36 months at an estimated development cost of $110 million to $115 million, excluding land cost. As of March 31, 2021, the development cost incurred was $20.0 million, which is reflected in land and building held for development, net on our consolidated balance sheets along with our $5.5 million cost basis in the Brentford Parcel.
While multifamily real estate was not previously a core asset class for us, we determined that multifamily real estate represented a unique opportunity and the highest and best use of the Brentford Parcel. Through joint ventures we have partnered with a local developer and operator of multifamily properties in order to leverage their development and operational expertise. The scope and timing of the future phases of development of The Mile are subject to a variety of uncertainties, including site plan approvals and building permits.
We consolidate both the joint venture that owns Highgate at The Mile and the joint venture that is developing Brentford at The Mile.
See “Analysis of Net Income – Multifamily” below and Note 3 and 4 to our consolidated financial statements for more information on Highgate at The Mile and Brentford at The Mile.
Sales of Real Estate Facilities: We may from time to time sell individual real estate facilities based on market conditions, fit with our existing portfolio, evaluation of long-term potential returns of markets or product types, or other reasons.
On January 7, 2020, the Company completed the sale of a single-tenant building totaling 113,000 square feet in Montgomery County, Maryland, for net sale proceeds of $29.3 million, which resulted in a gain on sale of $19.6 million.
The operations of this facility is presented below under “assets sold or held for sale.”
Certain Factors that May Impact Future Results
Impact of COVID-19 Pandemic: Starting in March 2020, the COVID-19 pandemic has resulted in cessation, severe curtailment, or impairment of business activities in most sectors of the economy in all markets we operate in, due to governmental “stay at home” orders, risk mitigation procedures, and closure of businesses not considered to be “essential.” This resulted in a rapid and dramatic increase in unemployment in the U.S. in the second quarter of 2020, with only a partial recovery by March 31, 2021. Since it remains unknown at this time how long the COVID-19 pandemic will continue, we cannot estimate how long these negative economic impacts will persist.
The COVID-19 pandemic has had and is expected to continue to have a negative impact on many of our customers’ businesses. During the three months ended March 31, 2021, the Company granted $0.2 million of rent deferrals and $0.1 million of rent abatements. Since the onset of the COVID-19 pandemic, the Company had granted rent relief to 398 customers (approximately 11.0% of total customers based on rental income), including $5.9 million of rent deferrals and $1.4 million of rent abatements. As of April 26, 2021, the Company had collected 98.8%1 of billed revenue during the three months ended March 31, 2021.
As of April 26, 2021, the Company had open rent relief requests from approximately 1% of its customers. It is possible that additional rent relief requests will arise in future months as a result of continued effects of the COVID-19 pandemic and related responses from state and local governments, however the timing and magnitude of such future requests cannot be easily predicted due to the inherent uncertainty of the virus and its varying regional effects. All rent relief requests to date have been, and all future rent relief requests are expected to be evaluated on a case-by-case basis. To the extent we grant additional requests for abatement, or to the extent that our customers default on their lease obligations, it will have a negative effect on our future rental income and net income.
Our ability to re-lease space as leases expire in a way that minimizes vacancy periods and maximizes market rental rates will depend upon market conditions in the specific submarkets in which each of our properties are located. Due to the uncertainty of the COVID-19 pandemic’s impact on the Company’s future ability to grow or maintain existing occupancy levels, possible decreases in rental rates on new and renewal transactions, and the potential negative effect of additional rent deferrals, rent abatements, and customer defaults, we believe the COVID-19 pandemic will continue to have adverse effects on rental income for 2021 and possibly beyond.
Impact of Inflation: Although inflation has not been significant in recent years, an increase in inflation could impact our future results, and the Company continues to seek ways to mitigate its potential impact. A substantial portion of the Company’s leases require customers 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 each lease’s respective lease period.
Regional Concentration: Our portfolio is concentrated in eight regions, in six states. We have chosen to concentrate in these regions because we believe they have characteristics which enable them to be competitive economically, such as above average population growth, job growth, higher education levels and personal income. Changes in economic conditions in these regions in the future could impact our future results.
Industry and Customer Concentrations: We seek to minimize the risk of industry or customer concentrations. As of March 31, 2021, excluding assets held for sale, leases from our top 10 customers comprised 10.9% of our annualized rental income, with only four customers, the U.S. Government (3.4%), Amazon Inc. (1.6%), KZ Kitchen Cabinet & Stone (1.3%), and Luminex Corporation (1.1%), representing more than 1%. In terms of industry concentration, 20.8% of our annualized rental income comes from business services, 13.1% from logistics, and 10.5% from technology. No other industry group represents more than 10% of our annualized rental income.
Customer Credit Risk: Historically we have experienced a low level of write-offs of uncollectible rents, with less than 0.4% of rental income written off in any single year from 2011-2019. The negative impact of the COVID-19 pandemic and its effect on our customers’ ability to pay rent resulted in accounts receivable write-offs of 0.4% of rental income in 2020, which is at the high end of the historical range noted above. The majority of write-offs occurred
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1Excludes prior year recovery billings billed to customers during the month of March 2021.
in the second quarter near the initial onset of the COVID-19 pandemic, and in the third and fourth quarters of 2020 accounts receivable write-off volume was in-line with historic levels. The first quarter of 2021 marked the third consecutive quarter of normal accounts receivable write-off volume. During the three months ended March 31, 2021, we wrote off $0.0 of accounts receivable, which is lower than the $0.1 million written off during the three months ended March 31, 2020.
The Company writes off deferred rent receivable balances as a reduction to rental income in the period such balances are no longer deemed probable of being collected. During the three months ended March 31, 2021, the Company wrote off $0.1 million of deferred rent receivable, which is comparable to the $0.1 million written off during the three months ended March 31, 2020. Similar to accounts receivable write-offs, the majority of deferred rent receivable write-offs in 2020 were recognized in the second quarter.
For the three months ended March 31, 2021, we agreed to defer and abate a total of $0.2 million and $0.1 million, respectively, to customers whose businesses were disrupted by the COVID-19 pandemic, well below amounts granted in the second and third quarters of 2020 and comparable to the amounts granted in the fourth quarter of 2020. Since the onset of the COVID-19 pandemic, the Company granted $5.9 million of rent deferrals. We are closely monitoring the collectability of such deferred rents. As of March 31, 2021, the Company had collected $3.9 million, or 98.5%, of the scheduled repayments of COVID-19 related rent deferrals billed through March 1, 2021. An additional $1.1 million of rent deferral repayments are scheduled to be repaid by customers between April 1, 2021 and December 31, 2021, with an additional $0.8 million thereafter.
As of April 26, 2021, we had 30,000 square feet of leased space occupied by two customers that are protected by Chapter 11 of the U.S. Bankruptcy Code, which have an aggregate remaining lease value of $0.3 million. From time to time, customers contact us, requesting early termination of their lease, reductions in space leased, or rent deferment or abatement, which we are not obligated to grant but will consider and grant under certain circumstances.
Net Operating Income
We utilize net operating income (“NOI”), a measure that is not defined in accordance with U.S. generally accepted accounting principles (“GAAP”), to evaluate the operating performance of our real estate. We define NOI as rental income less Adjusted Cost of Operations. Adjusted Cost of Operations, a non-GAAP measure, represents cost of operations, excluding stock compensation, which can vary significantly period to period based upon the performance of the Company.
We believe NOI assists investors in analyzing the performance of our real estate by excluding (i) corporate overhead (i.e., general and administrative expense) because it does not relate to the direct operating performance of our real estate, (ii) depreciation and amortization expense because it does not accurately reflect changes in the fair value of our real estate and (iii) stock compensation expense because this expense item can vary significantly from period to period and thus impact comparability across periods. The Company’s calculation of NOI may not be comparable to those of other companies and should not be used as an alternative to performance measures calculated in accordance with GAAP.
See “Analysis of net income” below for reconciliations of each of these measures to their closest analogous GAAP measure from our consolidated statements of income.
Operating Results Overview: Three Months Ended March 31, 2021 and 2020
For the three months ended March 31, 2021, net income allocable to common shareholders was $27.9 million, or $1.01 per diluted share, compared to $41.6 million, or $1.51 per diluted share, for the same period in 2020. The decrease was mainly due to a $19.6 million gain on sale of assets sold during the first quarter of 2020 that did not reoccur in 2021 combined with flat NOI and higher general and administrative expense partially offset by lower depreciation and amortization expense.
Our net income is comprised primarily of our real estate operations, depreciation and amortization expense, general and administrative expense, interest and other income, interest and other expenses and gain on sale of real estate facilities.
We segregate our real estate activities into (i) same park operations, generally representing all operating properties acquired prior to January 1, 2019, comprising 26.3 million rentable square feet of our total 27.8 million of rentable square feet at March 31, 2021 (the “Same Park” portfolio), (ii) non-same park operations, representing those facilities we own that were acquired after January 1, 2019 (the “Non-Same Park” portfolio), (iii) multifamily operations and (iv) assets sold or held for sale comprising 595,000 square feet, including 113,000 square feet of assets sold in January 2020, 40,000 square feet of assets sold in September 2020, and 442,000 square feet of assets held for sale. The assets held for sale represent a 244,000 square foot office business park located in Herndon, Virginia, and a 198,000 square foot office oriented flex business park located in Chantilly, Virginia.
The table below sets forth the various components of our net income (in thousands):
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For the Three Months
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Ended March 31,
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2021
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2020
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Change
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Rental income
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Same Park
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$
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99,995
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$
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99,130
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0.9%
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Non-Same Park
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3,769
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2,421
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55.7%
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Multifamily
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2,327
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2,560
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(9.1%)
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Assets sold or held for sale (1)
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1,956
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2,105
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(7.1%)
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Total rental income
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108,047
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106,216
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1.7%
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Cost of operations
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Adjusted Cost of Operations (2)
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Same Park
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29,684
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28,380
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4.6%
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Non-Same Park
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1,153
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829
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39.1%
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Multifamily
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1,067
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1,016
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5.0%
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Assets sold or held for sale (1)
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858
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764
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12.3%
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Stock compensation expense (3)
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456
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274
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66.4%
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Total cost of operations
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33,218
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31,263
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6.3%
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NOI (4)
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Same Park
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70,311
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70,750
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(0.6%)
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Non-Same Park
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2,616
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1,592
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64.3%
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Multifamily
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1,260
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1,544
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(18.4%)
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Assets sold or held for sale (1)
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1,098
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1,341
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(18.1%)
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Stock compensation expense (3)
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(456)
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(274)
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66.4%
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Depreciation and amortization expense
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(22,985)
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(26,619)
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(13.7%)
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General and administrative expense
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(4,382)
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(3,323)
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31.9%
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Interest and other income
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256
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557
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(54.0%)
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Interest and other expense
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(211)
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(161)
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31.1%
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Gain on sale of real estate facility
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—
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19,621
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(100.0%)
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Net income
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$
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47,507
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$
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65,028
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(26.9%)
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(1)Amounts shown for the three months ended March 31, 2021 include operating results attributable to assets held for sale comprising 442,000 square feet. Amounts shown for the three months ended March 31, 2020 include operating results attributable to assets held for sale comprising 442,000 square feet and assets sold in 2020 comprising 153,000 square feet. Amounts for the three months ended March 31, 2020 include rental income of $0.3 million, Adjusted Costs of Operations of $0.1 million, and NOI of $0.2 million for the two industrial buildings totaling 40,000 square feet sold in September 2020 and an 113,000 square foot asset sold in January 2020.
(2)Adjusted Cost of Operations excludes the impact of stock compensation expense.
(3)Stock compensation expense, as shown here, represents stock compensation expense for employees whose compensation expense is recorded in cost of operations. Note that stock compensation expense attributable to our executive management team (including divisional vice presidents) and other corporate employees is recorded within general and administrative expense.
(4)NOI represents rental income less Adjusted Cost of Operations.
Rental income increased $1.8 million for the three months ended March 31, 2021 as compared to the same period in 2020 due primarily to higher rental income from our Non-Same Park portfolio as a result of an acquisition acquired during the latter half of 2020 partially offset by lower occupancy.
Cost of operations increased $2.0 million for the three months ended March 31, 2021 as compared to the same period in 2020 due primarily to higher Adjusted Cost of Operations incurred by our Same Park and Non-Same Park portfolios.
Net income decreased $17.5 million for the three months ended March 31, 2021 as compared to the same period in 2020. The three month decrease was due primarily to the gain on sale of an asset sold during the first quarter of 2020 that did not reoccur in 2021 combined with flat NOI, and $1.1 million higher general and administrative expense driven by $0.7 million higher stock-compensation expense partially offset by lower depreciation and amortization expense.
Same Park Portfolio
We believe that evaluation of the Same Park portfolio provides an informative view of how the Company’s portfolio has performed over comparable periods. We believe that investors and analysts use Same Park information in a similar manner.
The following table summarizes the historical operating results of our Same Park portfolio and certain statistical information related to leasing activity in the three months ended March 31, 2021 and 2020 (in thousands, except per square foot data):
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For the Three Months
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Ended March 31,
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2021
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2020
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Change
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Rental income (1)
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$
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99,995
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$
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99,130
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0.9%
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Adjusted Cost of Operations (2)
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Property taxes
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11,424
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11,056
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3.3%
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Utilities
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4,637
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4,972
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(6.7%)
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Repairs and maintenance
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5,468
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5,364
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1.9%
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Compensation
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4,280
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4,270
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0.2%
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Snow removal
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1,019
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71
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1,335.2%
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Property insurance
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1,178
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879
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34.0%
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Other expenses
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1,678
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1,768
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(5.1%)
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Total Adjusted Cost of Operations
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29,684
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28,380
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4.6%
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NOI
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$
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70,311
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$
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70,750
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(0.6%)
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Selected Statistical Data
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NOI margin (3)
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70.3%
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71.4%
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(1.5%)
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Weighted average square foot occupancy
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92.4%
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92.8%
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(0.4%)
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Revenue per occupied square foot (4)
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$
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16.47
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$
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16.27
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1.2%
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Revenue per available foot (RevPAF) (5)
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$
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15.23
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$
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15.09
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0.9%
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(1)See table below for change in rental income.
(2)Adjusted Cost of Operations excludes the impact of stock compensation expense.
(3)NOI margin is computed by dividing NOI by rental income.
(4)Revenue per occupied square foot is computed by dividing rental income for the period by weighted average occupied square feet for the same period. Revenue per occupied square foot for the three month period shown is annualized.
(5)Revenue per Available Square Foot (RevPAF) is computed by dividing rental income for the period by weighted average available square feet for the same period. RevPAF for the three month period shown is annualized.
Analysis of Same Park Rental Income
Rental income for our Same Park portfolio increased 0.9% for the three months ended March 31, 2021 as compared to the same period in 2020. The three month increase was due primarily to higher rental rates charged to our customers, as revenue per occupied square foot increased 1.2% in the three months ended March 31, 2021 compared to the same period in 2020, partially offset by a 0.4% decrease in weighted average occupancy.
The following table details the change in Same Park rental income for the three months ended March 31, 2021 and 2020 (in thousands):
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For the Three Months
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Ended March 31,
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2021
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2020
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Change
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Rental income
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|
|
|
|
|
|
Base rental income
|
|
$
|
73,659
|
|
$
|
74,022
|
|
$
|
(363)
|
Expense recovery income
|
|
|
24,892
|
|
|
23,821
|
|
|
1,071
|
Lease buyout income
|
|
|
377
|
|
|
257
|
|
|
120
|
Rent receivable write-off
|
|
|
(9)
|
|
|
(54)
|
|
|
45
|
Abatements
|
|
|
(97)
|
|
|
—
|
|
|
(97)
|
Deferral repayments, net
|
|
|
556
|
|
|
—
|
|
|
556
|
Fee Income
|
|
|
180
|
|
|
331
|
|
|
(151)
|
Non-Cash Rental Income (1)
|
|
|
437
|
|
|
753
|
|
|
(316)
|
Total rental income
|
|
$
|
99,995
|
|
$
|
99,130
|
|
$
|
865
|
____________________________
(1)Non-cash rental income includes amortization of deferred rent receivable (net of write-offs), in-place lease intangible, tenant improvement reimbursement, and lease incentive intangible.
Our future revenue growth will come primarily from contractual rental increases as well as from potential increases in market rents allowing us to increase rent levels when leases are either renewed with existing customers or re-leased to new customers.
The following table sets forth the expirations of existing leases in our Same Park portfolio over the next five years based on lease data at March 31, 2021 (dollars and square feet in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
Rentable Square
|
|
Percent of
|
|
Annualized Rental
|
|
Annualized Rental
|
|
|
Number of
|
|
Footage Subject to
|
|
Total Leased
|
|
Income Under
|
|
Income Represented
|
Year of Lease Expiration
|
|
Customers
|
|
Expiring Leases
|
|
Square Footage
|
|
Expiring Leases
|
|
by Expiring Leases
|
Remainder of 2021
|
|
|
1,634
|
|
|
3,867
|
|
15.7%
|
|
$
|
67,943
|
|
|
15.7%
|
2022
|
|
|
1,419
|
|
|
5,899
|
|
23.9%
|
|
|
103,733
|
|
|
24.0%
|
2023
|
|
|
877
|
|
|
5,181
|
|
21.0%
|
|
|
87,999
|
|
|
20.4%
|
2024
|
|
|
427
|
|
|
3,598
|
|
14.6%
|
|
|
63,657
|
|
|
14.7%
|
2025
|
|
|
234
|
|
|
2,770
|
|
11.3%
|
|
|
48,043
|
|
|
11.1%
|
Thereafter
|
|
|
146
|
|
|
3,334
|
|
13.5%
|
|
|
61,030
|
|
|
14.1%
|
Total
|
|
|
4,737
|
|
|
24,649
|
|
100.0%
|
|
$
|
432,405
|
|
|
100.0%
|
See “Analysis of Same Park Market Trends” below for further analysis of such data on a by market basis.
Analysis of Same Park Adjusted Cost of Operations
Adjusted Cost of Operations for our Same Park portfolio increased 4.6% for the three months ended March 31, 2021 as compared to the same period in the prior year due primarily to higher snow removal costs, higher property taxes, and higher insurance costs partially offset by lower utility costs.
Property taxes increased 3.3% for the three months ended March 31, 2021 as compared to the same period in the prior year. The increase was due to higher assessed values. We expect potential property tax growth in the future due to higher assessed values.
Utilities are dependent upon energy prices and usage levels. Changes in usage levels are driven primarily by weather and temperature. Utilities decreased 6.7% during the three months ended March 31, 2021 as compared to the same period in the prior year as a result of reduced water and electricity usage due to the COVID-19 pandemic. It is difficult to estimate future utility costs, because weather, temperature and energy prices are volatile and not readily predictable. However, we expect utility costs in the future to return to pre-COVID-19 pandemic levels over time due to increased traffic and use at our parks as our customers resume operations.
Repairs and maintenance expense increased 1.9% for the three months ended March 31, 2021 as compared to the same period in the prior year. Repairs and maintenance costs are dependent upon many factors including weather conditions, which can impact repair and maintenance needs, inflation in material and labor costs and random events, and as a result are not readily predictable. We expect repairs and maintenance costs for the remainder of 2021 to be higher than our results for the three months ended March 31, 2021 and more consistent with pre-COVID-19 pandemic levels as a result of increased traffic and use at our parks as customers resume operations.
Compensation expense increased 0.2% for the three months ended March 31, 2021 as compared to the same period in the prior year. Compensation expense is comprised of on-site and supervisory personnel costs incurred in the operation of our properties. We expect compensation expense for the remainder of 2021 to be comparable to our results for the three months ended March 31, 2021.
Snow removal costs increased 1,335.2% during the three months ended March 31, 2021 as compared to the same period in the prior year. Snow removal costs are weather dependent and therefore not predictable.
Property insurance expense increased 34.0% for the three months ended March 31, 2021 as compared to the same period in the prior year. The three month increase was primarily due to an increase in our property insurance premium for the policy period June 2020 to May 2021 due to unfavorable market conditions pervasive throughout commercial real estate sectors. The three month increase was also due to insurance deductibles recorded during the first quarter of 2021 related to damages from the winter storm in Texas. We expect to experience increases in property insurance expense in the future as unfavorable market conditions pervasive throughout commercial real estate sectors persist.
Other expenses decreased 5.1% for the three months ended March 31, 2021 as compared to the same period in the prior year. Other expenses are comprised of general property expenses incurred in the operation of our properties. We expect other expenses for the remainder of 2021 to be similar to our results for the three months March 31, 2021.
Same Park Quarterly Trends
The following table sets forth historical quarterly data related to the operations of our Same Park portfolio for rental income, Adjusted Cost of Operations, weighted average occupancy, annualized revenue per occupied square foot, and RevPAF (in thousands, except per square foot data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
Rental income (1)
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
$
|
99,995
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
2020
|
$
|
99,130
|
|
$
|
94,078
|
|
$
|
97,893
|
|
$
|
97,937
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Cost of Operations (2)
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
$
|
29,684
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
2020
|
$
|
28,380
|
|
$
|
27,181
|
|
$
|
29,142
|
|
$
|
28,624
|
|
|
|
|
|
|
|
|
|
|
|
|
NOI (3)
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
$
|
70,311
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
2020
|
$
|
70,750
|
|
$
|
66,897
|
|
$
|
68,751
|
|
$
|
69,313
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average square foot occupancy
|
|
|
|
|
|
|
|
|
2021
|
|
92.4%
|
|
|
—
|
|
|
—
|
|
|
—
|
2020
|
|
92.8%
|
|
|
92.2%
|
|
|
92.3%
|
|
|
92.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue per occupied square foot (4)
|
|
|
|
|
|
|
|
|
|
2021
|
$
|
16.47
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
2020
|
$
|
16.27
|
|
$
|
15.53
|
|
$
|
16.15
|
|
$
|
16.21
|
|
|
|
|
|
|
|
|
|
|
|
|
RevPAF (5)
|
|
|
|
|
|
|
|
|
|
2021
|
$
|
15.23
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
2020
|
$
|
15.09
|
|
$
|
14.32
|
|
$
|
14.91
|
|
$
|
14.91
|
____________________________
(1)Included in the calculation of Same Park rental income are (a) lease buyout income of $0.3 million, $0.3 million, $0.3 million, $0.4 million, and $0.4 million for the three months ended March 31, 2020, June 30, 2020, September 30, 2020, December 31, 2020, and March 31, 2021, respectively, (b) accounts receivable write-offs of $0.1 million, $1.1 million, $0.2 million, $0.2 million, and $0.0 for the three months ended March 31, 2020, June 30, 2020, September 30, 2020, December 31, 2020, and March 31, 2021, respectively, and (c) deferred rent receivable write-offs of $0.1 million, $2.4 million, $0.3 million, $0.4 million, and $0.1 million for the three months ended March 31, 2020, June 30, 2020, September 30, 2020, December 31, 2020, and March 31, 2021, respectively.
(2)Adjusted Cost of Operations excludes stock compensation expense for employees whose compensation expense is recorded in cost of operations, which can vary significantly period to period based upon the performance of the Company.
(3)NOI represents rental income less Adjusted Cost of Operations.
(4)Revenue per occupied square foot is computed by dividing rental income for the period by weighted average occupied square feet for the same period. Revenue per occupied square foot for the three month period shown is annualized.
(5)RevPAF is computed by dividing rental income for the period by weighted average available square feet for the same period. RevPAF for the three month period shown is annualized.
Analysis of Same Park Market Trends
The following tables set forth historical data by region related to the operations of our Same Park portfolio for rental income, Adjusted Cost of Operations, weighted average occupancy, annualized revenue per occupied square foot, and RevPAF (in thousands, except per square foot data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
|
Ended March 31,
|
|
|
Region
|
|
2021
|
|
|
2020
|
|
Change
|
|
|
|
|
|
|
|
|
Geographic Data on Same Park
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
|
|
|
|
|
|
Northern California (7.2 million feet)
|
$
|
28,133
|
|
$
|
27,081
|
|
3.9%
|
Southern California (3.3 million feet)
|
|
14,665
|
|
|
14,239
|
|
3.0%
|
Dallas (2.9 million feet)
|
|
7,836
|
|
|
8,685
|
|
(9.8%)
|
Austin (2.0 million feet)
|
|
8,245
|
|
|
8,319
|
|
(0.9%)
|
Northern Virginia (4.5 million feet)
|
|
19,733
|
|
|
19,616
|
|
0.6%
|
South Florida (3.9 million feet)
|
|
11,706
|
|
|
11,160
|
|
4.9%
|
Seattle (1.4 million feet)
|
|
4,905
|
|
|
4,884
|
|
0.4%
|
Suburban Maryland (1.1 million feet)
|
|
4,772
|
|
|
5,146
|
|
(7.3%)
|
Total Same Park (26.3 million feet)
|
|
99,995
|
|
|
99,130
|
|
0.9%
|
|
|
|
|
|
|
|
|
Adjusted Cost of Operations
|
|
|
Northern California
|
|
6,344
|
|
|
6,166
|
|
2.9%
|
Southern California
|
|
3,692
|
|
|
3,725
|
|
(0.9%)
|
Dallas
|
|
3,109
|
|
|
3,045
|
|
2.1%
|
Austin
|
|
3,215
|
|
|
2,959
|
|
8.7%
|
Northern Virginia
|
|
7,039
|
|
|
6,463
|
|
8.9%
|
South Florida
|
|
3,184
|
|
|
2,992
|
|
6.4%
|
Seattle
|
|
1,292
|
|
|
1,277
|
|
1.2%
|
Suburban Maryland
|
|
1,809
|
|
|
1,753
|
|
3.2%
|
Total Same Park
|
|
29,684
|
|
|
28,380
|
|
4.6%
|
|
|
|
|
|
|
|
|
Net operating income
|
|
|
Northern California
|
|
21,789
|
|
|
20,915
|
|
4.2%
|
Southern California
|
|
10,973
|
|
|
10,514
|
|
4.4%
|
Dallas
|
|
4,727
|
|
|
5,640
|
|
(16.2%)
|
Austin
|
|
5,030
|
|
|
5,360
|
|
(6.2%)
|
Northern Virginia
|
|
12,694
|
|
|
13,153
|
|
(3.5%)
|
South Florida
|
|
8,522
|
|
|
8,168
|
|
4.3%
|
Seattle
|
|
3,613
|
|
|
3,607
|
|
0.2%
|
Suburban Maryland
|
|
2,963
|
|
|
3,393
|
|
(12.7%)
|
Total Same Park
|
$
|
70,311
|
|
$
|
70,750
|
|
(0.6%)
|
|
|
|
|
|
|
|
|
Weighted average square foot occupancy
|
|
|
Northern California
|
|
93.1%
|
|
|
91.4%
|
|
1.9%
|
Southern California
|
|
95.7%
|
|
|
94.7%
|
|
1.1%
|
Dallas
|
|
83.3%
|
|
|
90.3%
|
|
(7.8%)
|
Austin
|
|
95.1%
|
|
|
95.5%
|
|
(0.4%)
|
Northern Virginia
|
|
91.7%
|
|
|
91.5%
|
|
0.2%
|
South Florida
|
|
95.5%
|
|
|
94.0%
|
|
1.6%
|
Seattle
|
|
93.3%
|
|
|
99.0%
|
|
(5.8%)
|
Suburban Maryland
|
|
88.3%
|
|
|
91.1%
|
|
(3.1%)
|
Total Same Park
|
|
92.4%
|
|
|
92.8%
|
|
(0.4%)
|
|
|
|
|
|
|
|
|
Revenue per occupied square foot (1)
|
|
|
Northern California
|
$
|
16.69
|
|
$
|
16.37
|
|
2.0%
|
Southern California
|
$
|
18.69
|
|
$
|
18.33
|
|
2.0%
|
Dallas
|
$
|
13.03
|
|
$
|
13.32
|
|
(2.2%)
|
Austin
|
$
|
17.66
|
|
$
|
17.74
|
|
(0.5%)
|
Northern Virginia
|
$
|
18.99
|
|
$
|
18.91
|
|
0.4%
|
South Florida
|
$
|
12.68
|
|
$
|
12.28
|
|
3.3%
|
Seattle
|
$
|
15.57
|
|
$
|
14.62
|
|
6.5%
|
Suburban Maryland
|
$
|
18.82
|
|
$
|
19.68
|
|
(4.4%)
|
Total Same Park
|
$
|
16.47
|
|
$
|
16.27
|
|
1.2%
|
|
|
|
|
|
|
|
|
RevPAF (2)
|
|
|
Northern California
|
$
|
15.53
|
|
$
|
14.95
|
|
3.9%
|
Southern California
|
$
|
17.87
|
|
$
|
17.35
|
|
3.0%
|
Dallas
|
$
|
10.86
|
|
$
|
12.03
|
|
(9.7%)
|
Austin
|
$
|
16.80
|
|
$
|
16.95
|
|
(0.9%)
|
Northern Virginia
|
$
|
17.42
|
|
$
|
17.31
|
|
0.6%
|
South Florida
|
$
|
12.11
|
|
$
|
11.55
|
|
4.8%
|
Seattle
|
$
|
14.53
|
|
$
|
14.47
|
|
0.4%
|
Suburban Maryland
|
$
|
16.67
|
|
$
|
17.98
|
|
(7.3%)
|
Total Same Park
|
$
|
15.23
|
|
$
|
15.09
|
|
0.9%
|
____________________________
(1)Revenue per occupied square foot is computed by dividing rental income for the period by weighted average occupied square feet for the same period. Revenue per occupied square foot for the three month period shown is annualized.
(2)RevPAF is computed by dividing rental income for the period by weighted average available square feet for the same period. RevPAF for the three month period shown is annualized.
Our past revenue growth has come from contractual annual rent increases, as well as re-leasing of space at rates above outgoing rental rates. We believe the percentage difference between outgoing cash rent inclusive of estimated expense recoveries and incoming cash rent inclusive of estimated expense recoveries for leases executed (“Cash Rental Rate Change”) is useful in understanding trends in current market rates relative to our existing lease rates. The following table summarizes the Cash Rental Rate Change and other key statistical information with respect to the Company’s leasing production for its Same Park portfolio for the three months ended March 31, 2021 (square feet in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2021
|
|
|
Square
|
|
|
|
|
Transaction
|
|
|
|
|
|
|
Footage
|
|
Customer
|
|
|
Costs per
|
|
Cash Rental
|
|
Net Effective
|
Regions
|
|
Leased
|
|
Retention
|
|
|
Executed Foot
|
|
Rate Change (1)
|
|
Rent Change (2)
|
Northern California
|
|
467
|
|
78.0%
|
|
$
|
1.73
|
|
11.5%
|
|
26.4%
|
Southern California
|
|
308
|
|
74.0%
|
|
$
|
1.97
|
|
2.8%
|
|
8.2%
|
Dallas
|
|
310
|
|
93.8%
|
|
$
|
2.84
|
|
(0.6%)
|
|
0.7%
|
Austin
|
|
52
|
|
32.4%
|
|
$
|
5.61
|
|
9.0%
|
|
22.4%
|
Northern Virginia
|
|
301
|
|
72.3%
|
|
$
|
5.16
|
|
(0.5%)
|
|
4.3%
|
South Florida
|
|
297
|
|
76.1%
|
|
$
|
1.30
|
|
8.4%
|
|
24.4%
|
Seattle
|
|
101
|
|
82.6%
|
|
$
|
2.03
|
|
12.5%
|
|
25.6%
|
Suburban Maryland
|
|
59
|
|
88.7%
|
|
$
|
2.51
|
|
(1.3%)
|
|
7.3%
|
Total
|
|
1,895
|
|
78.1%
|
|
$
|
2.57
|
|
5.4%
|
|
14.7%
|
____________________________
(1)Cash Rental Rate Change is computed by taking the percentage difference between the incoming initial billed monthly cash rental rates inclusive of estimated expense recoveries (excluding the impact of certain items such as concessions or future escalators) on new leases or extensions executed in the period, and the outgoing monthly cash rental rates inclusive of estimated expense recoveries last billed on the previous lease for that space. Leases executed on spaces vacant for more than the preceding twelve months have been excluded from this measure.
(2)Net effective rent represents average rental payments for the term of a lease on a straight-line basis in accordance with GAAP, excluding operating expense reimbursements.
The COVID-19 pandemic has negatively affected occupancy levels across our portfolio. For the three months ended March 31, 2021, weighted average occupancy was 92.4%, a decrease from weighted average occupancy of 92.8% for the three months ended March 31, 2020. Weighted average cash rental rate growth on leases executed during the three months ended March 31, 2021 was 5.4% while average net effective rent growth was 14.7%. Renewals of leases with existing customers represented 67.4% of our leasing activity for the three months ended March 31, 2021. Average lease term of the leases executed during the three months ended March 31, 2021 was 3.2 years with associated average transaction costs (tenant improvements and leasing commissions) of $2.57 per square foot. For comparative purposes, average lease term and transaction costs on leases executed in the same period of 2020 were 3.8 years and $3.12 per square foot, respectively. The uncertainty of the COVID-19 pandemic’s impact on the Company’s future ability to increase or maintain existing occupancy levels, possible decreases in rental rates on new and renewal transactions, and potential additional rent deferrals, rent abatements, and customer defaults, may cause continued challenges for us as we attempt to grow Same Park rental income in the near future.
Non-Same Park Portfolio: The table below reflects the assets comprising our Non-Same Park portfolio (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
|
|
Square
|
|
Occupancy at
|
Acquired Property
|
|
Date Acquired
|
|
Location
|
|
Price
|
|
Feet
|
|
March 31, 2021
|
Pickett Industrial Park
|
|
October 2020
|
|
Alexandria, VA
|
|
$
|
46,582
|
|
246
|
|
92.2%
|
La Mirada Commerce Center
|
|
January 2020
|
|
La Mirada, CA
|
|
|
13,513
|
|
73
|
|
100.0%
|
San Tomas Business Center
|
|
December 2019
|
|
Santa Clara, CA
|
|
|
16,787
|
|
79
|
|
95.3%
|
Hathaway Industrial Park
|
|
September 2019
|
|
Santa Fe Springs, CA
|
|
|
104,330
|
|
543
|
|
100.0%
|
Walnut Avenue Business Park
|
|
April 2019
|
|
Signal Hill, CA
|
|
|
13,824
|
|
74
|
|
100.0%
|
Total acquired property
|
|
|
|
|
|
$
|
195,036
|
|
1,015
|
|
97.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
|
|
Total
|
|
Square
|
|
Occupancy at
|
Developed Property
|
|
Completed
|
|
Location
|
|
Cost
|
|
Feet
|
|
March 31, 2021
|
Freeport Industrial Building
|
|
March 2021
|
|
Irving, TX
|
|
$
|
9,052
|
|
83
|
|
15.9%
|
Total Non-Same Park
|
|
|
|
|
|
$
|
204,088
|
|
1,098
|
|
91.5%
|
We believe that our management and operating infrastructure typically allows us to generate higher NOI from newly acquired real estate facilities than was achieved by previous owners. However, it can take 24 or more months for us to fully achieve higher NOI, and the ultimate levels of NOI achieved can be affected by changes in general economic conditions. Due to the uncertainty of the COVID-19 pandemic’s impact on the Company’s ability to generate higher NOI from these newly acquired real estate facilities in the future, there can be no assurance that we will achieve our expectations with respect to newly acquired real estate facilities.
Multifamily: As of March 31, 2021, we held a 95.0% controlling interest in a joint venture that owns Highgate at The Mile, a 395-unit apartment complex. The following table summarizes the historical operating results of Highgate at The Mile and certain statistical information (in thousands, except per unit data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2021
|
|
2020
|
|
Change
|
Rental income
|
$
|
2,327
|
|
$
|
2,560
|
|
(9.1%)
|
Cost of operations
|
|
1,067
|
|
|
1,016
|
|
5.0%
|
NOI
|
$
|
1,260
|
|
$
|
1,544
|
|
(18.4%)
|
|
|
|
|
|
|
|
|
Selected Statistical Data
|
|
|
|
|
|
|
|
Weighted average square foot occupancy
|
|
94.2%
|
|
|
94.9%
|
|
(0.8%)
|
|
|
|
|
|
|
|
|
|
As of March 31, 2021
|
Total costs (1)
|
|
|
|
|
|
$
|
115,426
|
Physical occupancy
|
|
|
|
|
|
|
93.6%
|
Average rent per unit (2)
|
|
|
|
|
|
$
|
2,021
|
____________________________
(1)The project cost for Highgate at The Mile includes the underlying land at its assigned contribution value upon formation of the joint venture of $27.0 million, which includes unrealized land appreciation of $6.0 million that is not recorded on our balance sheet.
(2)Average rent per unit is defined as the total potential monthly rental revenue (actual rent for occupied apartment units plus market rent for vacant apartment units) divided by the total number of rentable apartment units.
The three month decrease in NOI was primarily due to a decline in occupancy and rental rates as a result of the COVID-19 pandemic. Due to the uncertainty of the COVID-19 pandemic’s impact on the Company’s future ability to maintain existing occupancy levels and rental rates, we may continue to experience NOI levels below those which were achieved prior to the onset of the COVID-19 pandemic in the near future.
Assets sold or held for sale: These amounts include historical operating results with respect to properties that were sold or held for sale. Amounts shown for the three months ended March 31, 2021 include operating results attributable to assets held for sale comprising 442,000 square feet. Amounts shown for the three months ended March 31, 2020 include operating results attributable to assets held for sale comprising 442,000 square feet and assets sold in 2020
comprising 153,000 square feet. Amounts for the three months ended March 31, 2020 include rental income of $0.3 million, Adjusted Costs of Operations of $0.1 million, and NOI of $0.2 million for the two industrial buildings totaling 40,000 square feet sold in September 2020 and an 113,000 square foot asset sold in January 2020.
Depreciation and Amortization Expense: Depreciation and amortization expense was $23.0 million for the three months ended March 31, 2021 compared to $26.6 million for the same period in 2020. The three month decrease was primarily due to acceleration of depreciation expense related to the building held for development in 2020.
General and Administrative Expense: General and administrative expense primarily represents executive and other compensation, audit and tax fees, legal expenses and other costs associated with being a public company. For the three months ended March 31, 2021, general and administrative expense increased $1.1 million, or 31.9%, compared to the same period in 2020. The three month increase was primarily due to higher stock compensation expense of $0.7 million and an increase in professional fees related to various corporate service projects.
Gain on Sale of Real Estate Facilities: On January 7, 2020, we sold an 113,000 square foot office building located at Metro Park North in Montgomery County, Maryland, for net sale proceeds of $29.3 million, which resulted in a gain on sale of $19.6 million.
|
Liquidity and Capital Resources
|
This section should be read in conjunction with our consolidated statements of cash flows for the three months ended March 31, 2021 and 2020 and the notes to our consolidated financial statements, which set forth the major components of our historical liquidity and capital resources. The discussion below sets forth the factors which we expect will affect our future liquidity and capital resources or which may vary substantially from historical levels.
Capital Raising Strategy: As a REIT, we are required to distribute at least 90% of our “REIT taxable income” to our shareholders each year, which relative to a taxable C corporation, limits the amount of cash flow from operations that we can retain for investment purposes. As a result, in order to grow our asset base, access to capital is important.
Our financial profile is characterized by strong credit metrics, including low leverage relative to our total capitalization and operating cash flows. We are a highly rated REIT, as determined by Moody’s and Standard & Poor’s. Our corporate credit rating by Standard and Poor’s is A-, while our preferred shares are rated BBB by Standard and Poor’s and Baa2 by Moody’s. We believe our credit profile and ratings will enable us to efficiently access both the public and private capital markets to raise capital, as necessary.
In order to maintain efficient access to the capital markets, we target a minimum ratio of FFO (as defined below) to combined fixed charges and preferred distributions of 3.0 to 1.0. Ratio of FFO to fixed charges and preferred distributions is calculated by dividing FFO excluding fixed charges and preferred distributions by fixed charges and preferred distributions paid. Fixed charges include interest expense, capitalized interest and preferred equity distributions paid. For the three months ended March 31, 2021, the ratio of FFO to combined fixed charges and preferred distributions paid was 5.8 to 1.0.
We have a $250.0 million revolving Credit Facility that can be expanded to $400.0 million and expires in January 2022. We can use the Credit Facility as necessary as temporary financing until we are able to raise longer term capital. Historically, we have funded our long-term capital requirements with retained operating cash flow and proceeds from the issuance of common and preferred securities. We will select among these sources of capital based upon availability, relative cost, the impact of constraints on our operations (such as covenants), and the desire for leverage.
The COVID-19 pandemic has had varying effects on the cost and availability of debt and equity capital and may have intensified negative impacts if resurgent outbreaks of the virus occur. Based upon our substantial current liquidity relative to our capital requirements noted below, and our strong financial profile and credit ratings, we do not expect such capital market turbulence to have a material impact upon our capital and growth plans over the next 12 months. However, there can be no assurance that it would not in the future if the COVID-19 pandemic were to persist for a long period of time or intensify.
Short-term Liquidity and Capital Resource Analysis: We believe that our net cash provided by our operating activities will continue to be sufficient to enable us to meet our ongoing requirements for debt service, capital expenditures and distributions to our shareholders for the foreseeable future.
As of March 31, 2021, we had $69.5 million in unrestricted cash. In the last five years, we have retained between $40 to $60 million in operating cash flow per year. Retained operating cash flow represents cash flow provided by operating activities, less shareholder and unit holder distributions and capital expenditures.
Required Debt Repayment: As of March 31, 2021, we have no debt outstanding on our Credit Facility. We are in compliance with all of the covenants and other requirements of our Credit Facility.
Capital Expenditures: We define recurring capital expenditures as those necessary to maintain and operate our real estate at its current economic value. Nonrecurring capital improvements generally are related to property reconfigurations and other capital expenditures related to repositioning asset acquisitions. The following table sets forth our commercial capital expenditures paid for in the three months ended March 31, 2021 and 2020, respectively, on an aggregate and per square foot basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Commercial Real Estate
|
(in thousands)
|
|
(per square foot) (1)
|
Recurring capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
Capital improvements
|
$
|
648
|
|
$
|
1,223
|
|
$
|
0.02
|
|
$
|
0.04
|
Tenant improvements
|
|
2,909
|
|
|
3,546
|
|
|
0.10
|
|
|
0.13
|
Lease commissions
|
|
1,848
|
|
|
2,082
|
|
|
0.07
|
|
|
0.08
|
Total commercial recurring capital expenditures
|
|
5,405
|
|
|
6,851
|
|
|
0.19
|
|
|
0.25
|
Nonrecurring capital improvements
|
|
411
|
|
|
93
|
|
|
0.01
|
|
|
—
|
Total commercial capital expenditures
|
$
|
5,816
|
|
$
|
6,944
|
|
$
|
0.20
|
|
$
|
0.25
|
____________________________
(1)Per square foot amounts are calculated based on capital expenditures divided by total weighted average square feet owned for the periods presented.
The following table summarizes recurring capital expenditures paid and the related percentage of NOI for Same Park, Non-Same Park, multifamily and assets sold by region for the three months ended March 31, 2021 and 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
|
Recurring
|
|
|
|
Capital Expenditures
|
|
|
Capital Expenditures
|
|
|
|
as a Percentage of NOI
|
|
|
|
2021
|
|
|
2020
|
|
Change
|
|
2021
|
|
2020
|
Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Park
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northern California
|
|
$
|
1,595
|
|
$
|
1,336
|
|
19.4%
|
|
|
7.3%
|
|
|
6.4%
|
Southern California
|
|
|
641
|
|
|
998
|
|
(35.8%)
|
|
|
5.8%
|
|
|
9.5%
|
Dallas
|
|
|
902
|
|
|
1,103
|
|
(18.2%)
|
|
|
19.1%
|
|
|
19.6%
|
Austin
|
|
|
187
|
|
|
301
|
|
(37.9%)
|
|
|
3.7%
|
|
|
5.6%
|
Northern Virginia
|
|
|
974
|
|
|
1,875
|
|
(48.1%)
|
|
|
7.7%
|
|
|
14.3%
|
South Florida
|
|
|
349
|
|
|
514
|
|
(32.1%)
|
|
|
4.1%
|
|
|
6.3%
|
Seattle
|
|
|
294
|
|
|
68
|
|
332.4%
|
|
|
8.1%
|
|
|
1.9%
|
Suburban Maryland
|
|
|
253
|
|
|
191
|
|
32.5%
|
|
|
8.5%
|
|
|
5.6%
|
Total Same Park
|
|
|
5,195
|
|
|
6,386
|
|
(18.7%)
|
|
|
7.4%
|
|
|
9.0%
|
Non-Same Park
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northern California
|
|
|
2
|
|
|
—
|
|
100.0%
|
|
|
|
|
|
|
Southern California
|
|
|
80
|
|
|
13
|
|
515.4%
|
|
|
|
|
|
|
Northern Virginia
|
|
|
42
|
|
|
—
|
|
100.0%
|
|
|
|
|
|
|
Northern Texas
|
|
|
23
|
|
|
—
|
|
100.0%
|
|
|
|
|
|
|
Total Non-Same Park
|
|
|
147
|
|
|
13
|
|
1,030.8%
|
|
|
|
|
|
|
Assets sold or held for sale
|
|
|
63
|
|
|
452
|
|
(86.1%)
|
|
|
|
|
|
|
Total
|
|
$
|
5,405
|
|
$
|
6,851
|
|
(21.1%)
|
|
|
|
|
|
|
In the last five years, our annual recurring capital expenditures have ranged between 11.5% and 16.3% as a percentage of NOI, and we expected future recurring capital expenditures to be within or near the low end of this range. While what we disclose herein with respect to capital expenditures represents our best estimates at this time, there can be no assurance that these amounts will not change substantially in the future for various reasons, including the potential impact of the COVID-19 pandemic on capital projects and leasing volume.
Redemption of Preferred Stock: Historically, we have reduced our cost of capital by refinancing higher coupon preferred securities with lower coupon preferred securities. We have one series of preferred securities that will become redeemable during 2021, at our option, with a coupon rate of 5.20% at a par value of $189.8 million (see Note 9 to our March 31, 2021 financial statements). Redemption of such preferred shares will depend upon many factors, including our cost of capital. None of our preferred securities are redeemable at the option of the holders. See Note 9 to the consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information on the earliest redemption date of our outstanding preferred securities.
Acquisitions of Real Estate Facilities: On January 10, 2020, we acquired a multi-tenant industrial park comprising approximately 73,000 rentable square feet in La Mirada, California, for a total purchase price of $13.5 million, inclusive of capitalized transaction costs. We continue to seek to acquire additional real estate facilities; however, there is significant competition to acquire existing facilities in our markets and there can be no assurance as to the volume of future acquisition activity.
Sale of Real Estate: On January 7, 2020, we sold an 113,000 square foot office building located at Metro Park North in Montgomery County, Maryland, for net sale proceeds of $29.3 million, which resulted in a gain on sale of $19.6 million.
Development of Real Estate Facilities: As noted above, during the three months ended March 31, 2021, we completed the development of an 83,000 square foot shallow-bay industrial building on an excess land parcel at our Freeport Business Park in Irving, Texas for total development costs of $8.1 million. The total developed asset value
inclusive of land costs of $9.1 million was placed into service on March 1, 2021 and accordingly was reflected under real estate facilities, at cost on our consolidated balance sheets at March 31, 2021.
In August 2020, we entered into the Brentford Joint Venture with the JV Partner for the purpose of developing Brentford at The Mile, a planned 411-unit multifamily apartment complex. We contributed the Brentford Parcel to the Brentford Joint Venture at a value of $18.5 million, for which we received equity contribution credit in the Brentford Joint Venture. Our cost basis in the Brentford Parcel was $5.5 million as of March 31, 2021.
Construction of Brentford at The Mile commenced in August 2020 and is anticipated to be completed over a period of 24 to 36 months at an estimated development cost of $110 million to $115 million, excluding land cost. As of March 31, 2021, the development cost incurred was $20.0 million, which is reflected in land and building held for development, net on our consolidated balance sheets along with our $5.5 million cost basis in the Brentford Parcel.
Repurchase of Common Stock: No shares of common stock were repurchased under the board-approved common stock repurchase program during the three months ended March 31, 2021 or the year ended December 31, 2020. As of March 31, 2021, management has the authorization to repurchase an additional 1,614,721 shares.
Requirement to Pay Distributions: Our election to be taxed as a REIT, as defined by the Code, applies to all periods presented herein. As a REIT, we do not incur U.S. federal corporate income tax on our “REIT taxable income” that is distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and we continue to meet certain organizational and operational requirements. We believe we have met these requirements in all periods presented herein, and we expect we will continue to qualify as a REIT in future periods.
We paid REIT qualifying distributions of $40.9 million ($12.0 million to preferred shareholders and $28.9 million to common shareholders) during the three months ended March 31, 2021.
We estimate the annual distribution requirements with respect to our preferred shares outstanding at March 31, 2021 to be $48.2 million per year.
Our consistent, long-term dividend policy has been to set dividend distribution amounts based on our taxable income. Future quarterly distributions with respect to common shares will continue to be determined based upon our REIT distribution requirements and, along with distributions to preferred shareholders, we expect will be funded with cash provided by operating activities.
|
Funds from Operations, Core Funds from Operations, and Funds Available for Distribution
|
Funds from Operations (“FFO”) is a non-GAAP measure defined by the National Association of Real Estate Investment Trusts and is considered a helpful measure of REIT performance by REITs and many REIT analysts. FFO represents GAAP net income before real estate depreciation and amortization expense, gains or losses on sales of operating properties and land and impairment charges on real estate assets.
We also present Core FFO and Funds Available for Distribution (“FAD”) which are both also non-GAAP measures. The Company defines Core FFO as FFO excluding the impact of (i) income allocated to preferred shareholders to the extent redemption value exceeds the related carrying value and (ii) other nonrecurring income or expense items as appropriate. FAD represents Core FFO adjusted to (i) deduct recurring capital improvements and capitalized tenant improvements and lease commissions and (ii) remove certain non-cash income or expense items such as amortization of deferred rent receivable and stock compensation expense.
FFO for the three months ended March 31, 2021 was $1.67 per share, representing a decrease of 2.5% from the same period in 2020. The decrease in FFO per share was the result of flat NOI and $1.1 million higher general and administrative expense driven by $0.7 million higher stock-compensation expense. For the three months ended March 31, 2021 and 2020, Core FFO was equal to FFO as the Company did not incur any preferred share redemption charges or any nonrecurring income or expenses in either period.
The following table reconciles net income allocable to common shareholders to FFO, Core FFO and FAD as well as net income per share to FFO per share and Core FFO per share (amounts in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
Ended March 31,
|
|
2021
|
|
2020
|
Net income allocable to common shareholders
|
$
|
27,886
|
|
$
|
41,615
|
Adjustments
|
|
|
|
|
|
Gain on sale of real estate facility
|
|
—
|
|
|
(19,621)
|
Depreciation and amortization expense
|
|
22,985
|
|
|
26,619
|
Net income allocated to noncontrolling interests
|
|
7,411
|
|
|
11,092
|
Net income allocated to restricted stock unit holders
|
|
164
|
|
|
275
|
FFO allocated to JV partner
|
|
(27)
|
|
|
(43)
|
FFO allocable to diluted common shares and units
|
$
|
58,419
|
|
$
|
59,937
|
|
|
|
|
|
|
Core FFO allocable to diluted common shares and units
|
$
|
58,419
|
|
$
|
59,937
|
Adjustments
|
|
|
|
|
|
Recurring capital improvements
|
|
(648)
|
|
|
(1,223)
|
Tenant improvements
|
|
(2,909)
|
|
|
(3,546)
|
Capitalized lease commissions
|
|
(1,848)
|
|
|
(2,082)
|
Non-cash rental income (1)
|
|
(1,307)
|
|
|
(1,064)
|
Non-cash stock compensation expense
|
|
1,780
|
|
|
942
|
Cash paid for taxes in lieu of shares upon vesting of
|
|
|
|
|
|
restricted stock units
|
|
(3,197)
|
|
|
(3,655)
|
FAD allocable to diluted common shares and units
|
$
|
50,290
|
|
$
|
49,309
|
|
|
|
|
|
|
Weighted average outstanding
|
|
|
|
|
|
Common shares
|
|
27,495
|
|
|
27,448
|
Common operating partnership units
|
|
7,305
|
|
|
7,305
|
Restricted stock units
|
|
47
|
|
|
77
|
Common share equivalents
|
|
99
|
|
|
102
|
Total common and dilutive shares
|
|
34,946
|
|
|
34,932
|
|
|
|
|
|
|
Reconciliation of Earnings per Share to FFO per Share
|
|
|
|
|
|
Net income per common share—diluted
|
$
|
1.01
|
|
$
|
1.51
|
Gain on sale of real estate facility
|
|
—
|
|
|
(0.56)
|
Depreciation and amortization expense
|
|
0.66
|
|
|
0.77
|
FFO per share
|
$
|
1.67
|
|
$
|
1.72
|
____________________________
(1)Non-cash rental income includes amortization of deferred rent receivable (net of write-offs), in-place lease intangible, tenant improvement reimbursement, and lease incentive intangible.
We believe FFO, Core FFO, and FAD assist investors in analyzing and comparing the operating and financial performance of a company’s real estate from period to period. FFO, Core FFO, and FAD are not substitutes for GAAP net income. In addition, other REITs may compute FFO, Core FFO, and FAD differently, which could inhibit comparability.
Off-Balance Sheet Arrangements: The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a material effect on the Company’s financial condition, results of operations, liquidity, capital expenditures or capital resources.
Contractual Obligations: We paid $12.0 million in distributions to our preferred shareholders for the three months ended March 31, 2021 and expect to continue to pay quarterly distributions of $12.0 million to our preferred shareholders for the foreseeable future or until such time as there is a change in the amount or composition of our series of preferred equity outstanding. Dividends on preferred equity are paid when and if declared by the Company’s Board and accumulate if not paid. Shares of preferred equity are redeemable by the Company in order to preserve its status as a REIT and are also redeemable five years after issuance, but are not redeemable at the option of the holder.
Our significant contractual obligations as of March 31, 2021 and their impact on our future cash flow and liquidity are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
Contractual Obligations
|
Total
|
|
Less than 1 year
|
|
1-3 years
|
|
4-5 years
|
|
More than 5 years
|
Transaction costs (1)
|
$
|
9,328
|
|
$
|
9,328
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
Ground lease obligations (2)
|
|
1,719
|
|
|
149
|
|
|
596
|
|
|
397
|
|
|
577
|
Total
|
$
|
11,047
|
|
$
|
9,477
|
|
$
|
596
|
|
$
|
397
|
|
$
|
577
|
____________________________
(1)Represents transaction costs, including tenant improvements and lease commissions, which we are committed to under the terms of executed leases.
(2)Represents future contractual payments on land under various operating leases.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To limit the Company’s exposure to market risk, the Company principally finances its operations and growth with permanent equity capital consisting of either common or preferred stock. The Company had no debt outstanding as of as of March 31, 2021.
Our exposure to market risk for changes in interest rates relates primarily to the Credit Facility, which is subject to variable interest rates. See Notes 2 and 6 to the consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding the terms, valuations and approximate principal maturities of the Company’s indebtedness, including the Credit Facility.
ITEM 4. CONTROLS AND PROCEDURES
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2021. These controls and procedures have been designed to ensure that information required for disclosure is recorded, processed, summarized and reported within the requisite time periods and that such information is accumulated and communicated to management. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company’s disclosure controls and procedures as of March 31, 2021, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.
There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company currently is not subject to any material legal proceedings other than ordinary routine litigation and administrative proceedings incidental to its business.
ITEM 1A. RISK FACTORS
In addition to the other information in this Quarterly Report on Form 10-Q, you should carefully consider the risks described in our Annual Report on Form 10-K for the year ended December 31, 2020, in Part I, Item 1A, Risk Factors, and in our other filings with the SEC. These factors may materially affect our business, financial condition and
operating results and could cause our actual results to differ materially from expectations. There have been no material changes to the risk factors relating to the Company disclosed in our Form 10-K for the year ended December 31, 2020.
In addition, in considering the forward-looking statements contained in this Form 10-Q and elsewhere, you should refer to the qualifications and limitations on our forward-looking statements that are described in Forward Looking Statements at the beginning of Part I, Item 2 of this Form 10-Q.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company’s Board of Directors has authorized the repurchase, from time to time, of up to 6.5 million shares of the Company’s common stock on the open market or in privately negotiated transactions. The authorization has no expiration date. Purchases will be made subject to market conditions and other investment opportunities available to the Company.
During the three months ended March 31, 2021, there were no shares of the Company’s common stock repurchased. As of March 31, 2021, 1,614,721 shares remain available for purchase under the program.
See Note 9 to the consolidated financial statements for additional information on repurchases of equity securities.
ITEM 6. EXHIBITS
*Denotes management contract or compensatory plan agreement or arrangement.
†Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Dated: April 27, 2021
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PS BUSINESS PARKS, INC.
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BY:
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/s/ Jeffrey D. Hedges
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|
|
Jeffrey D. Hedges
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|
|
Executive Vice President and Chief Financial Officer
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|
|
(Principal Financial Officer)
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