NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2014
1. Organization and description of business
PS Business Parks, Inc. (PSB) was incorporated in the state of California in 1990. As of March 31, 2014,
PSB owned 77.8% of the common partnership units of PS Business Parks, L.P. (the Operating Partnership). The remaining common partnership units are owned by Public Storage (PS). PSB, as the sole general partner of the
Operating Partnership, has full, exclusive and complete responsibility and discretion in managing and controlling the Operating Partnership. PSB and its subsidiaries, including the Operating Partnership are collectively referred to as the
Company.
The Company is a fully-integrated, self-advised and self-managed real estate investment trust (REIT)
that owns, operates, acquires and develops commercial properties, primarily multi-tenant flex, office and industrial space. As of March 31, 2014, the Company owned and operated 29.7 million rentable square feet of commercial space located
in eight states. The Company also manages 1.2 million rentable square feet on behalf of PS.
References to the number of properties
or square footage are unaudited and outside the scope of the Companys independent registered public accounting firms review of the Companys financial statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States).
2. Summary of significant accounting policies
Basis of presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting
principles (GAAP) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2014 are not necessarily indicative
of the results that may be expected for the year ended December 31, 2014. For further information, refer to the consolidated financial statements and footnotes thereto included in the Companys Annual Report on Form 10-K for the year ended
December 31, 2013.
The accompanying consolidated financial statements include the accounts of PSB and the Operating Partnership. All
significant inter-company balances and transactions have been eliminated in the consolidated financial statements.
Noncontrolling Interests
The Companys noncontrolling interests are reported as a component of equity separate from the parents equity. Purchases or sales of
equity interests that do not result in a change in control are accounted for as equity transactions. In addition, net income attributable to the noncontrolling interests is included in consolidated net income on the face of the income statement and,
upon a gain or loss of control, the interests purchased or sold, as well as any interests retained, are recorded at fair value with any gain or loss recognized in earnings. At the end of each reporting period, the Company determines the amount of
equity (book value of net assets) which is allocable to the noncontrolling interests based upon the ownership interest, and an adjustment is made to the noncontrolling interests, with a corresponding adjustment to paid-in capital, to reflect the
noncontrolling interests equity interest in the Company.
7
Use of estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.
Allowance for doubtful accounts
The
Company monitors the collectability of its receivable balances including the deferred rent receivable on an ongoing basis. Based on these reviews, the Company maintains an allowance for doubtful accounts for estimated losses resulting from the
possible inability of tenants to make contractual rent payments to the Company. A provision for doubtful accounts is recorded during each period. The allowance for doubtful accounts, which represents the cumulative allowances less write-offs of
uncollectible rent, is netted against tenant and other receivables on the consolidated balance sheets. Tenant receivables are net of an allowance for uncollectible accounts totaling $400,000 at March 31, 2014 and December 31, 2013.
Deferred rent receivable is net of an allowance for uncollectible accounts totaling $861,000 and $940,000 at March 31, 2014 and December 31, 2013, respectively.
Financial instruments
The methods and
assumptions used to estimate the fair value of financial instruments are described below. The Company has estimated the fair value of financial instruments using available market information and appropriate valuation methodologies. Considerable
judgment is required in interpreting market data to develop estimates of market value. Accordingly, estimated fair values are not necessarily indicative of the amounts that could be realized in current market exchanges. The Company determines the
estimated fair value of financial assets and liabilities utilizing a hierarchy of valuation techniques based on whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. Observable inputs
reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. This hierarchy requires the use of observable market data when available. The following is the fair value hierarchy:
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Level 1
quoted prices for identical instruments in active markets;
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Level 2
quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs
and significant value drivers are observable in active markets; and
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Level 3
fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable
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Financial assets that are exposed to credit risk consist primarily of cash and cash equivalents and receivables. The Company considers all
highly liquid investments with a remaining maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents, which consist primarily of money market investments, are only invested in entities with an
investment grade rating. Receivables are comprised of balances due from a large number of customers. Balances that the Company expects to become uncollectible are reserved for or written off. Due to the short period to maturity of the Companys
cash and cash equivalents, accounts receivable, other assets and accrued and other liabilities, the carrying values as presented on the consolidated balance sheets are reasonable estimates of fair value.
Carrying values of the Companys mortgage notes payable, unsecured credit facility and term loan approximate fair value. The
characteristics of these financial instruments, market data and other comparative metrics utilized in determining these fair values are Level 2 inputs.
Real estate facilities
Real estate
facilities are recorded at cost. Costs related to the renovation or improvement of the properties are capitalized. Expenditures for repairs and maintenance are expensed as incurred. Expenditures that are expected to benefit a period greater than two
years and exceed $2,000 are capitalized and depreciated over their estimated useful life. Buildings and improvements are depreciated using the straight-line method over their estimated useful lives, which generally range from five to 30 years.
Transaction costs, which include tenant improvements and lease commissions, in excess of $1,000 for leases with terms greater than one year are capitalized and depreciated over their estimated useful lives. Transaction costs less than $1,000 or for
leases of one year or less are expensed as incurred.
8
Land and building held for development
Property taxes, insurance, interest and costs essential to the development of property for its intended use are capitalized during the period
of development. Upon classification of an asset as held for development, depreciation of the asset is ceased.
Properties held for disposition
An asset is classified as an asset held for disposition when it meets certain requirements, which include, among other criteria, the approval
of the sale of the asset, the marketing of the asset for sale and the expectation by the Company that the sale will likely occur within the next 12 months. Upon classification of an asset as held for disposition, depreciation of the asset is ceased,
the operating results of the asset are included in discontinued operations for all periods presented and the net book value of the asset is included on the balance sheet as properties held for disposition.
Intangible assets/liabilities
Intangible
assets and liabilities include above-market and below-market in-place lease values of acquired properties based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between
(i) the contractual amounts to be paid pursuant to the in-place leases and (ii) managements 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 capitalized above-market and below-market lease values (included in other assets and accrued liabilities in the accompanying consolidated balance sheets) are amortized to rental income over the remaining non-cancelable terms of the
respective leases. The Company recorded a net increase in rental income of $197,000 due to the amortization of net intangible liabilities resulting from the above-market and below-market lease values during the three months ended March 31,
2014. During the three months ended March 31, 2013, the Company recorded a net reduction to rental income of $72,000 due to the amortization of net intangible assets resulting from the above-market and below-market lease values. As of
March 31, 2014, the value of in-place leases resulted in net intangible assets of $3.3 million, net of $6.9 million of accumulated amortization with a weighted average amortization period of 7.4 years, and net intangible liabilities of $4.8
million, net of $5.3 million of accumulated amortization with a weighted average amortization period of 4.5 years. As of December 31, 2013, the value of in-place leases resulted in net intangible assets of $3.7 million, net of $6.6 million of
accumulated amortization and net intangible liabilities of $5.4 million, net of $4.8 million of accumulated amortization.
Evaluation of asset
impairment
The Company evaluates its assets used in operations for impairment by identifying indicators of impairment and by comparing
the sum of the estimated undiscounted future cash flows for each asset to the assets carrying value. When indicators of impairment are present and the sum of the estimated undiscounted future cash flows is less than the carrying value of such
asset, an impairment loss is recorded equal to the difference between the assets current carrying value and its value based on discounting its estimated future cash flows. In addition, the Company evaluates its assets held for disposition for
impairment. Assets held for disposition are reported at the lower of their carrying value or fair value, less cost of disposition. At March 31, 2014, the Company did not consider any assets to be impaired.
9
Stock compensation
All share-based payments to employees, including grants of employee stock options, are recognized as stock compensation in the Companys
income statement based on their grant date fair values. See Note 11.
Revenue and expense recognition
The Company must meet four basic criteria before revenue can be recognized: persuasive evidence of an arrangement exists; the delivery has
occurred or services have been rendered; the fee is fixed or determinable; and collectability 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 fixed increases in rent that are not included on the Companys 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 management fees are recognized in the period
earned.
Costs incurred in connection with leasing (primarily tenant improvements and lease commissions) are capitalized and amortized
over the lease period.
Gains from sales of real estate facilities
The Company recognizes gains from sales of real estate facilities at the time of sale using the full accrual method, provided that various
criteria related to the terms of the transactions and any subsequent involvement by the Company with the properties sold are met. If the criteria are not met, the Company defers the gains and recognizes them when the criteria are met or uses the
installment or cost recovery methods as appropriate under the circumstances.
General and administrative expenses
General and administrative expenses include executive and other compensation, office expense, professional fees, acquisition transaction costs,
state income taxes and other such administrative items.
Income taxes
The Company has qualified and intends to continue to qualify as a REIT, as defined in Section 856 of the Internal Revenue Code of 1986, as
amended. As a REIT, the Company is not subject to federal income tax to the extent that it distributes its REIT taxable income to its shareholders. A REIT must distribute at least 90% of its taxable income each year. In addition, REITs are subject
to a number of organizational and operating requirements. The Company may be subject to certain state and local taxes on its income and property and to federal income and excise taxes on its undistributed taxable income. The Company believes it met
all organization and operating requirements to maintain its REIT status during 2013 and intends to continue to meet such requirements for 2014. Accordingly, no provision for income taxes has been made in the accompanying consolidated financial
statements.
The Company can recognize a tax benefit only if it is more likely than not that a particular tax position will be
sustained upon examination or audit. To the extent that the more likely than not standard has been satisfied, the benefit associated with a position is measured as the largest amount that is greater than 50% likely of being recognized
upon settlement. As of March 31, 2014, the Company did not recognize any tax benefit for uncertain tax positions.
10
Accounting for preferred equity issuance costs
The Company records issuance costs as a reduction to paid-in capital on its balance sheet at the time the preferred securities are issued and
reflects the carrying value of the preferred equity at the stated value. The Company records issuance costs as non-cash preferred equity distributions at the time it notifies the holders of preferred stock or units of its intent to redeem such
shares or units.
Net income allocation
Net income was allocated as follows
(in thousands)
:
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For The Three Months
Ended March 31,
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2014
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2013
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Net income allocable to noncontrolling interests:
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Noncontrolling interests common units
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$
|
2,703
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|
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$
|
2,566
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|
|
|
|
|
|
|
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Total net income allocable to noncontrolling interests
|
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2,703
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|
|
|
2,566
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|
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|
|
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Net income allocable to PS Business Parks, Inc.:
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Preferred shareholders
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15,122
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13,850
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Restricted stock unit holders
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36
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33
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Common shareholders
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9,940
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8,540
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Total net income allocable to PS Business Parks, Inc.
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25,098
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22,423
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Net income
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$
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27,801
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$
|
24,989
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Net income per common share
Per share amounts are computed using the number of weighted average common shares outstanding. Diluted weighted average common
shares outstanding includes the dilutive effect of stock options and restricted stock units under the treasury stock method. Basic weighted average common shares outstanding excludes such effect. The Companys restricted stock units
are participating securities and are included in the computation of basic and diluted weighted average common shares outstanding. The Companys restricted stock unit holders are paid non-forfeitable dividends in excess of the expense recorded
which results in a reduction in net income allocable to common shareholders and unit holders. Earnings per share has been calculated as follows (
in thousands, except per share amounts
):
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For The Three Months
Ended March 31,
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2014
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|
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2013
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Net income allocable to common shareholders
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$
|
9,940
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$
|
8,540
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Weighted average common shares outstanding:
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Basic weighted average common shares outstanding
|
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26,863
|
|
|
|
24,308
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Net effect of dilutive stock compensation based on treasury stock method using average market price
|
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|
98
|
|
|
|
103
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|
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|
|
|
|
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Diluted weighted average common shares outstanding
|
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26,961
|
|
|
|
24,411
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|
|
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|
|
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Net income per common share Basic
|
|
$
|
0.37
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|
|
$
|
0.35
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|
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|
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Net income per common share Diluted
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|
$
|
0.37
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|
|
$
|
0.35
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Options to purchase 14,000 shares for the three months ended March 31, 2014 were not included in the
computation of diluted net income per share because such options were considered anti-dilutive. No such options were excluded from the computation of diluted net income per share for the three months ended March 31, 2013.
11
Segment reporting
The Company views its operations as one segment.
Reclassifications
Certain
reclassifications have been made to the consolidated financial statements for 2013 in order to conform to the 2014 presentation.
Recently Issued
Accounting Standards
In April 2014, the FASB issued amendments to guidance for reporting discontinued operations and disposals of
components of an entity. The amended guidance requires that a disposal representing a strategic shift that has (or will have) a major effect on an entitys financial results or a business activity classified as held for sale should be reported
as discontinued operations. The amendments also expand the disclosure requirements for discontinued operations and add new disclosures for individually significant dispositions that do not qualify as discontinued operations. The amendments are
effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2014 (early adoption is permitted only for disposals that have not been previously reported). The implementation of the
amended guidance is not expected to have a material impact on our consolidated financial position or results of operations.
3. Real estate facilities
The activity in real estate facilities for the three months ended March 31, 2014 is as follows
(in thousands)
:
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Buildings and
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Accumulated
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Land
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Improvements
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Depreciation
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Total
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Balances at December 31, 2013
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$
|
827,092
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|
|
$
|
2,346,958
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$
|
(1,035,387
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)
|
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$
|
2,138,663
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Capital improvements, net
|
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|
|
|
|
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10,534
|
|
|
|
|
|
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|
10,534
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Disposals
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(1,868
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)
|
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1,868
|
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Depreciation and amortization
|
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|
|
|
|
|
|
|
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(28,441
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)
|
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|
(28,441
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)
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|
|
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|
|
|
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|
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Balances at March 31, 2014
|
|
$
|
827,092
|
|
|
$
|
2,355,624
|
|
|
$
|
(1,061,960
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)
|
|
$
|
2,120,756
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The purchase price of acquired properties is recorded to land, buildings and improvements 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. Acquisition-related costs are expensed as incurred.
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 recording of the purchase cost of the acquired properties would affect the timing of recognition of the related revenue and expenses. Amounts recorded to land are derived from comparable sales of land within the same
region. Amounts recorded to buildings and improvements, tenant improvements and unamortized lease commissions are based on current market replacement costs and other market information. The amount recorded to acquired in-place leases is determined
based on managements assessment of current market conditions and the estimated lease-up periods for the respective spaces.
On
December 20, 2013, the Company acquired Bayshore Commons, an eight-building, 340,000 square foot, office park in San Mateo, California, for $60.5 million. On November 8, 2013, the Company acquired nine multi-tenant flex buildings in the
Valwood submarket of Dallas, Texas, aggregating 245,000 square feet for $12.4 million. On October 15, 2013, the Company acquired four multi-tenant flex parks along with a four-acre parcel of land aggregating 559,000 square feet of single-story
flex buildings located in Dallas, Texas, for a purchase price of $27.9 million. On July 26, 2013, the Company acquired a 389,000 square foot multi-tenant flex park consisting of 18 single-story buildings located in Dallas, Texas, for a purchase
price of $14.8 million.
12
At the beginning of 2013, the Company reclassified a 125,000 square foot building located in
Northern Virginia to land and building held for development as the Company intends to redevelop the property. In conjunction with the reclassification, the Company ceased depreciation of the asset. In July, 2013, the Company entered into a joint
venture agreement with a real estate development company to pursue a multifamily development on the property. During the entitlement phase, all costs related to the pre-development will be split evenly between the Company and its joint venture
partner. The Company will contribute the property to the joint venture upon completion of the entitlement phase. The asset and capitalized development costs were $16.8 million and $16.2 million at March 31, 2014 and December 31, 2013,
respectively. For the three months ended March 31, 2014, the Company capitalized costs of $628,000 related to this development, of which $224,000 related to capitalized interest costs.
4. Leasing activity
The Company leases space in its real estate facilities to tenants primarily under non-cancelable leases generally ranging
from one to 10 years. Future minimum rental revenues, excluding recovery of operating expenses under these leases, are as follows as of March 31, 2014
(in thousands)
:
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|
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|
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2014
|
|
$
|
203,000
|
|
2015
|
|
|
210,089
|
|
2016
|
|
|
147,258
|
|
2017
|
|
|
99,082
|
|
2018
|
|
|
66,446
|
|
Thereafter
|
|
|
114,628
|
|
|
|
|
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Total
|
|
$
|
840,503
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|
|
|
|
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|
In addition to minimum rental payments, certain tenants reimburse the Company for their pro rata share of
specified operating expenses. Such reimbursements amounted to $21.0 million and $18.2 million for the three months ended March 31, 2014 and 2013, respectively. These amounts are included as rental income in the accompanying consolidated
statements of income.
Leases accounting for 3.7% of total leased square footage are subject to termination options which include leases
accounting for 1.4% of total leased square footage having termination options exercisable through December 31, 2014. In general, these leases provide for termination payments should the termination options be exercised. The future minimum
rental revenues in the above table assume such options are not exercised.
5. Bank loans
Subsequent to March 31, 2014, the Company modified and extended the terms of its line of credit (the Credit
Facility) with Wells Fargo Bank, National Association (Wells Fargo). The expiration of the Credit Facility was extended from August 1, 2015 to May 1, 2019. The Credit Facility has a borrowing limit of $250.0 million. The
rate of interest charged on borrowings was modified to a rate ranging from the London Interbank Offered Rate (LIBOR) plus 0.875% to LIBOR plus 1.70% depending on the Companys credit ratings. Currently, the Companys rate under
the Credit Facility is LIBOR plus 0.925% (revised from 1.10%). In addition, the Company is required to pay an annual facility fee ranging from 0.125% to 0.30% of the borrowing limit depending on the Companys credit ratings (currently 0.15%).
The Company had no balance outstanding on the Credit Facility at March 31, 2014 and December 31, 2013. The Company had $408,000 and $485,000 of unamortized commitment fees as of March 31, 2014 and December 31, 2013, respectively.
The Credit Facility requires the Company to meet certain covenants, with all of which the Company was in compliance as of March 31, 2014. Interest on outstanding borrowings is payable monthly.
13
The Company had a term loan with Wells Fargo (the Term Loan). Pursuant to the Term
Loan, the Company borrowed $250.0 million for a three year term maturing December 31, 2014. The Term Loan was repaid in full in November, 2013. Interest on the amounts borrowed under the Term Loan accrued based on an applicable rate ranging
from LIBOR plus 1.15% to LIBOR plus 2.25% depending on the Companys credit ratings. During 2013, the Companys rate under the Term Loan was LIBOR plus 1.20%.
6. Mortgage notes payable
Mortgage notes payable consist of the following
(in thousands)
:
|
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|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
5.45% mortgage note, secured by 4.8 million square feet of commercial properties with a net book value of $435.6 million, interest
payable monthly, due December, 2016
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
|
|
|
|
|
|
|
|
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Total
|
|
$
|
250,000
|
|
|
$
|
250,000
|
|
|
|
|
|
|
|
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|
The 5.45% mortgage note of $250.0 million is payable in full in December, 2016.
In January, 2013, the Company repaid two mortgage notes payable totaling $18.1 million with a combined stated interest rate of 5.60%.
7. Noncontrolling interests
As described in Note 2, the Company reports noncontrolling interests within equity in the consolidated financial statements,
but separate from the Companys shareholders equity. In addition, net income allocable to noncontrolling interests is shown as a reduction from net income in calculating net income allocable to common shareholders.
Common partnership units
The Company
presents the accounts of PSB and the Operating Partnership on a consolidated basis. Ownership interests in the Operating Partnership that can be redeemed for common stock, other than PSBs interest, are classified as noncontrolling interests
common units in the consolidated financial statements. Net income allocable to noncontrolling interests common units consists of the common units share of the consolidated operating results after allocation to preferred units and
shares. Beginning one year from the date of admission as a limited partner (common units) and subject to certain limitations described below, each limited partner other than PSB has the right to require the redemption of its partnership interest.
A limited partner (common units) that exercises its redemption right will receive cash from the Operating Partnership in an amount equal
to the market value (as defined in the Operating Partnership Agreement) of the partnership interests redeemed. In lieu of the Operating Partnership redeeming the common units for cash, PSB, as general partner, has the right to elect to acquire the
partnership interest directly from a limited partner exercising its redemption right, in exchange for cash in the amount specified above or by issuance of one share of PSB common stock for each unit of limited partnership interest redeemed.
A limited partner (common units) cannot exercise its redemption right if delivery of shares of PSB common stock would be prohibited under the
applicable articles of incorporation, or if the general partner believes that there is a risk that delivery of shares of common stock would cause the general partner to no longer qualify as a REIT, would cause a violation of the applicable
securities laws, or would result in the Operating Partnership no longer being treated as a partnership for federal income tax purposes.
14
At March 31, 2014, there were 7,305,355 common units owned by PS, which are accounted for as
noncontrolling interests. Combined with PSs existing common stock ownership, on a fully converted basis, PS has a combined ownership of 42.3% of the Companys common equity.
Preferred partnership units
The Company
had no preferred units outstanding through the Operating Partnership as of March 31, 2014 and December 31, 2013.
8. Related party transactions
The Operating Partnership manages industrial, office and retail facilities for PS. These facilities, all located in the
United States, operate under the Public Storage or PS Business Parks names. The PS Business Parks name and logo is owned by PS and licensed to the Company under a non-exclusive, royalty-free license agreement. The license can
be terminated by either party for any reason with six months written notice.
Under the property management contract with PS, the
Operating Partnership is compensated based on a percentage of the gross revenues of the facilities managed. Under the supervision of the property owners, the Operating Partnership coordinates rental policies, rent collections, marketing activities,
the purchase of equipment and supplies, maintenance activities, and the selection and engagement of vendors, suppliers and independent contractors. In addition, the Operating Partnership assists and advises the property owners in establishing
policies for the hire, discharge and supervision of employees for the operation of these facilities, including property managers and leasing, billing and maintenance personnel.
The property management contract with PS is for a seven-year term with the agreement automatically extending for an additional one-year period
upon each one-year anniversary of its commencement (unless cancelled by either party). Either party can give notice of its intent to cancel the agreement upon expiration of its current term. Management fee revenues under this contract were $166,000
and $158,000 for the three months ended March 31, 2014 and 2013, respectively.
PS also provides property management services for the
self-storage component of two assets owned by the Company. These self-storage facilities, located in Palm Beach County, Florida, operate under the Public Storage name.
Under the property management contract, PS is compensated based on a percentage of the gross revenues of the facilities managed. Under the
supervision of the Company, PS coordinates rental policies, rent collections, marketing activities, the purchase of equipment and supplies, maintenance activities, and the selection and engagement of vendors, suppliers and independent contractors.
In addition, PS is responsible in establishing the policies for the hire, discharge and supervision of employees for the operation of these facilities, including on-site managers, assistant managers and associate managers.
Either the Company or PS can cancel the property management contract upon 60 days notice. Management fee expenses under the contract
were $16,000 and $14,000 for the three months ended March 31, 2014 and 2013, respectively.
Pursuant to a cost sharing and
administrative services agreement, the Company shares costs with PS for certain administrative services and rental of corporate office space, which are allocated to PS in accordance with a methodology intended to fairly allocate those costs. These
costs totaled $108,000 for the three months ended March 31, 2014 and 2013.
The Company had net amounts due to PS of $514,000 and
$181,000 at March 31, 2014 and December 31, 2013, respectively, for these contracts, as well as for certain operating expenses paid by the Company on behalf of PS.
15
9. Shareholders equity
Preferred stock
As of March 31,
2014 and December 31, 2013, the Company had the following series of preferred stock outstanding:
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Earliest Potential
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Dividend
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Shares
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Amount
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Series
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Issuance Date
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Redemption Date
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Rate
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Outstanding
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(in thousands)
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Series R
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October, 2010
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October, 2015
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6.875
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%
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3,000
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$
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75,000
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Series S
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January, 2012
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January, 2017
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6.450
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%
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9,200
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230,000
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Series T
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May, 2012
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May, 2017
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6.000
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%
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14,000
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350,000
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Series U
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September, 2012
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September, 2017
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5.750
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%
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9,200
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230,000
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Series V
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March, 2013
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March, 2018
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5.700
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%
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4,400
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110,000
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Total
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39,800
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$
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995,000
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On March 14, 2013, the Company issued $110.0 million or 4.4 million depositary shares, each
representing 1/1,000 of a share of the 5.70% Cumulative Preferred Stock, Series V, at $25.00 per depositary share.
The Company recorded
$15.1 million and $13.9 million in distributions to its preferred shareholders for the three months ended March 31, 2014 and 2013, respectively.
Holders of the Companys preferred stock will not be entitled to vote on most matters, except under certain conditions. In the event of a
cumulative arrearage equal to six quarterly dividends, the holders of the preferred stock will have the right to elect two additional members to serve on the Companys Board of Directors until all events of default have been cured. At
March 31, 2014, there were no dividends in arrears.
Except under certain conditions relating to the Companys qualification as
a REIT, the preferred stock is not redeemable prior to the previously noted redemption dates. On or after the respective redemption dates, the respective series of preferred stock will be redeemable, at the option of the Company, in whole or in
part, at $25.00 per depositary share, plus any accrued and unpaid dividends. The Company had $31.8 million of deferred costs in connection with the issuance of preferred stock as of March 31, 2014 and December 31, 2013, which the Company
will report as additional non-cash distributions upon notice of its intent to redeem such shares.
Common stock
On November 7, 2013, the Company sold 1,495,000 shares of common stock in a public offering and concurrently sold 950,000 shares of common
stock at the public offering price to PS. The aggregate net proceeds were $192.3 million.
The Companys Board of Directors
previously authorized the repurchase, from time to time, of up to 6.5 million shares of the Companys common stock on the open market or in privately negotiated transactions. Since inception of the program, the Company has repurchased an
aggregate of 4.9 million shares of common stock at an aggregate cost of $183.9 million or an average cost per share of $37.64. Under existing board authorizations, the Company can repurchase an additional 1.6 million shares. No shares of
common stock were repurchased under this program during the three months ended March 31, 2014 and 2013.
The Company paid $13.4
million ($0.50 per common share) and $10.7 million ($0.44 per common share) in distributions to its common shareholders for the three months ended March 31, 2014 and 2013, respectively.
16
Equity stock
In addition to common and preferred stock, the Company is authorized to issue 100.0 million shares of Equity Stock. The Articles of
Incorporation provide that the Equity Stock may be issued from time to time in one or more series and give the Board of Directors broad authority to fix the dividend and distribution rights, conversion and voting rights, redemption provisions and
liquidation rights of each series of Equity Stock.
10. Commitments and contingencies
The Company currently is neither subject to any other material litigation nor, to managements knowledge, is any
material litigation currently threatened against the Company other than routine litigation and administrative proceedings arising in the ordinary course of business.
11. Stock compensation
PSB has a 2003 Stock Option and Incentive Plan (the 2003 Plan) covering 1.5 million shares of PSBs
common stock. PSB has a 2012 Equity and Performance-Based Incentive Compensation Plan (the 2012 Plan) covering 1.0 million shares of PSBs common stock. Under the 2003 Plan and 2012 Plan, PSB has granted non-qualified options
to certain directors, officers and key employees to purchase shares of PSBs common stock at a price not less than the fair market value of the common stock at the date of grant. Additionally, under the 2003 Plan and 2012 Plan, PSB has granted
restricted shares of common stock to certain directors and restricted stock units to officers and key employees.
No options or restricted
stock units were granted for the three months ended March 31, 2014 and 2013.
At March 31, 2014, there was a combined total of
946,000 options and restricted stock units authorized to be granted. Information with respect to outstanding options and nonvested restricted stock units granted under the 2003 Plan and 2012 Plan is as follows:
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Options:
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Number of
Options
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Weighted
Average
Exercise Price
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Weighted
Average
Remaining
Contract Life
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Aggregate
Intrinsic
Value (in
thousands)
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Outstanding at December 31, 2013
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380,773
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$
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56.45
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Granted
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$
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Exercised
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(40,973
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)
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$
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49.63
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Forfeited
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$
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Outstanding at March 31, 2014
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339,800
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$
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57.27
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5.81 Years
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$
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8,954
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Exercisable at March 31, 2014
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220,000
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$
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54.70
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5.42 Years
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$
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6,363
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Restricted Stock Units:
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Number of
Units
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Weighted
Average Grant
Date Fair Value
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Nonvested at December 31, 2013
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45,100
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$
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60.07
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Granted
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$
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Vested
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(8,430
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)
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$
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51.73
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Forfeited
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(1,100
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)
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$
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71.93
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Nonvested at March 31, 2014
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35,570
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$
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61.67
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17
Effective March, 2014, the Company entered into a performance-based restricted stock unit
program, the Senior Management Long-Term Equity Incentive Program for 2014-2017 (LTEIP), with selected employees of the Company. Under the LTEIP, the Company established three levels of targeted restricted stock unit awards for selected
employees, which would be earned only if the Company achieved one of three defined targets during 2014 to 2017. The first type of award is an annual award following the end of each of the four years in the program, with the award subject to and
based on the achievement of one of three defined targets during the previous year. The second type of award is an award based on achieving one of three defined targets during the cumulative four-year period 2014-2017. In the event the minimum
defined target is not achieved for an annual award, the shares allocated to be awarded for such year are added to the shares that may be received if the four-year target is achieved. Both types of restricted stock unit awards vest in four equal
annual installments beginning from the date of award. Up to approximately 103,600 restricted stock units would be granted for each of the four years assuming achievement was met and up to approximately 103,600 restricted stock units would be granted
for the cumulative four-year period assuming achievement was met. Compensation expense is recognized based on the shares expected to be awarded based on the target level that is expected to be achieved. Net compensation expense of $858,000,
representing one month of amortization related to the LTEIP was recognized during the three months ended March 31, 2014.
Effective
January 1, 2012, the Company entered into a performance-based restricted stock unit program, the Senior Management Long-Term Equity Incentive Program for 2012-2015 (2012 LTEIP), with selected employees of the Company. The targets
for 2012 and 2013 were not achieved and management determined in 2013 that it was not probable that the targets under the 2012 LTEIP will be met. As such, the Company stopped recording amortization as of September 30, 2013. Net compensation of
$1.0 million related to the 2012 LTEIP was recognized during the three months ended March 31, 2013 and was reversed during the three months ended December 31, 2013.
Included in the Companys consolidated statements of income for the three months ended March 31, 2014 and 2013, was $122,000 and
$115,000, respectively, in net compensation expense related to stock options. Excluding the LTEIP amortization of $858,000 and $1.0 million, respectively, net compensation expense of $175,000 and $195,000 related to restricted stock units was
recognized during the three months ended March 31, 2014 and 2013, respectively.
As of March 31, 2014, there was $652,000 of
unamortized compensation expense related to stock options expected to be recognized over a weighted average period of 2.4 years. As of March 31, 2014, there was $38.9 million (includes $37.1 million from the LTEIP) of unamortized compensation
expense related to restricted stock units expected to be recognized over a weighted average period of 5.6 years.
Cash received from
40,973 stock options exercised during the three months ended March 31, 2014 was $2.0 million. Cash received from 31,000 stock options exercised during the three months ended March 31, 2013 was $1.6 million. The aggregate intrinsic value of
the stock options exercised was $1.4 million and $735,000 during the three months ended March 31, 2014 and 2013, respectively.
During the three months ended March 31, 2014, 8,430 restricted stock units vested; in settlement of these units, 5,341 shares were
issued, net of shares applied to payroll taxes. The aggregate fair value of the shares vested for the three months ended March 31, 2014 was $708,000. During the three months ended March 31, 2013, 8,910 restricted stock units vested; in
settlement of these units, 5,661 shares were issued, net of shares applied to payroll taxes. The aggregate fair value of the shares vested for the three months ended March 31, 2013 was $679,000.
In May of 2004, the shareholders of the Company approved the issuance of up to 70,000 shares of common stock under the Retirement Plan for
Non-Employee Directors (the Director Plan). Under the Director Plan, the Company grants 1,000 shares of common stock for each year served as a director up to a maximum of 5,000 shares issued upon retirement. In December of 2011, the
Director Plan was amended to increase the maximum shares from 5,000 shares to 7,000 shares, 1,000 shares of common stock for each year served as a director. The Company recognizes compensation expense with regards to grants to be issued in the
future under the Director Plan. As a result, included in the Companys consolidated statements of income was $75,000 and $67,000 in compensation expense for the three months ended March 31, 2014 and 2013, respectively. As of March 31,
2014 and 2013, there was $1.4 million and $1.1 million, respectively, of unamortized compensation expense related to these shares. No shares were issued during the three months ended March 31, 2014 and 2013.
18