PS BUSINESS PARKS, INC. The following discussion and analysis of the results of operations and financial condition should be read in conjunction with the selected financial data and the Company's consolidated financial statements and notes thereto included in this Form 10-K.
Critical Accounting Policies and Estimates:
Our accounting policies are described in Note 2 to the consolidated financial
statements included in this Form 10-K. 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 federal income tax on our "REIT taxable income"
that is fully distributed each year (for this purpose, certain distributions
paid in a subsequent year may be considered), and if we meet certain
organizational and operational requirements. We believe we have met these REIT
requirements for all periods presented herein. Accordingly, we have recorded no
federal income tax expense related to our "REIT taxable income."
Our evaluation that we have met the REIT requirements could be incorrect,
because compliance with the tax rules requires factual determinations, and
circumstances we have not identified could result in noncompliance with the tax
requirements in current or prior years. For any taxable year that we fail to
qualify as a REIT and for which applicable statutory relief provisions did not
apply, we would be taxed at the regular corporate rates on all of our taxable
income for at least that year and the ensuing four years, we could be subject to
penalties and interest, and our net income would be materially different from
the amounts shown in our consolidated financial statements.
Accounting for Acquired Real Estate Facilities: We estimate the fair value of
land, buildings, intangible assets and intangible liabilities for purposes of
allocating purchase price. Such estimates, 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 to
date exceeds cash rents billed to date under the lease agreement. 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.
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Business Overview
Our overall operating results are impacted primarily by the performance of our existing real estate facilities, which atDecember 31, 2019 were comprised of 27.6 million rentable square feet of primarily multi-tenant industrial, flex and office properties concentrated in six states and a 95.0% interest in a 395-unit multifamily apartment complex. Our portfolio of multi-tenant commercial properties are located in markets that have experienced long-term economic growth with a particular concentration on small- and medium-size customers. Accordingly, a significant degree of management attention is paid to maximizing the cash flow from our existing real estate portfolio. Also, our strong and conservative capital structure allows us the flexibility to use debt and equity capital prudently to fund our growth, which allows us to acquire 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 include incentivizing our personnel to maximize the return on investment for each lease transaction and providing a superior level of service to our customers. 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 easily configurable space and in markets and product types with favorable long-term return potential. Subsequent toDecember 31, 2019 , we acquired a multi-tenant industrial park comprised of approximately 73,000 rentable square feet inLa 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.
On
OnSeptember 5, 2019 , we acquired a multi-tenant industrial park comprised of approximately 543,000 rentable square feet inSanta Fe Springs, California , for a total purchase price of$104.3 million , inclusive of capitalized transaction costs. The park consists of ten buildings and was 100.0% occupied at acquisition with suites ranging from 5,000 to 288,000 square feet.
On
OnJune 8, 2018 , we acquired two multi-tenant industrial parks aggregating 1.1 million rentable square feet inSpringfield, Virginia , for a total purchase price of$143.8 million , inclusive of capitalized transaction costs. The portfolio consists of 19 buildings and was 76.1% occupied at acquisition with suites ranging from 100 to 32,000 square feet. The 19 buildings are located in theSpringfield /Newington industrial submarket where we already own three industrial parks totaling 606,000 square feet. We continue to seek to acquire additional facilities in our existing markets and generally in close proximity to our existing facilities; 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: We may seek to redevelop our existing real estate. We own a large contiguous block of real estate (628,000 rentable square feet on 44.5 acres of land) located within an area known as The Mile in Tysons,Virginia . In 2015, we demolished one of our existing office buildings at The Mile and built Highgate, a 395-unit apartment complex, at a cost, including the estimated fair value of existing land, of$115.4 million . 21
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While multifamily real estate was not a core asset class for us, we determined that multifamily real estate represented a unique opportunity and the highest and best use of that parcel. We have partnered through a joint venture with a local developer and operator of multifamily properties in order to leverage their development and operational experience. See "Analysis of Net Income - Multifamily", "Analysis of Net Income - Equity in loss of unconsolidated joint venture" below and Notes 3 and 4 to our consolidated financial statements for more information on Highgate. OnJanuary 1, 2018 , we began to consolidate the joint venture due to changes to the joint venture agreement that gave us control of the joint venture. Prior toJanuary 1, 2018 , we accounted for our investment in the joint venture using the equity method and accordingly, reflected our share of net loss under "equity in loss of unconsolidated joint venture." In 2019, we successfully rezoned our 628,000 square foot office park located at The Mile in Tysons,Virginia . The rezoning will allow us to develop, at our election, up to 3,000 additional multifamily units and approximately 500,000 square feet of other commercial uses. In 2017, we completed Highgate at The Mile, a 395-unit multifamily property which is owned by a joint venture that we consolidate. We are currently seeking to demolish a 123,000 square foot vacant office building in order to construct another multifamily property on the parcel. This parcel is reflected on our consolidated balance sheets as land and building held for development. The scope and timing of the future phases of development of The Mile are subject to a variety of contingencies, including site plan approvals and building permits. We expect that commencement of the next phase of redevelopment will commence in mid-2020. 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. Subsequent toDecember 31, 2019 , the Company completed the sale of a single-tenant building totaling 113,000 square feet inMontgomery County, Maryland , for a gross sales price of$30.0 million . The building had been marketed previously as part of a broader portfolio of suburbanMaryland office properties in 2019, but was excluded from the 1.3 million square feet of flex and office business parks sale which closedOctober 8, 2019 and as such was the Company's only remaining office asset atMetro Park North . The asset sold has been classified as held for sale for the year endedDecember 31, 2019 and all comparable periods. OnOctober 8, 2019 , we sold three business parks located inMontgomery County, Maryland :Metro Park North ,Meadow Business Park andWesTech Business Park . The parks, consisting of 28 buildings totaling approximately 1.3 million rentable square feet sold for net sale proceeds of$144.6 million , which resulted in a gain of$16.6 million . OnMarch 5, 2018 , we soldCorporate Pointe Business Park , a park consisting of five multi-tenant office buildings totaling 161,000 square feet located inOrange County, California , for net sale proceeds of$41.7 million , which resulted in a gain of$26.8 million . OnApril 18, 2018 , we soldOrange County Business Center , a park consisting of five multi-tenant office buildings totaling 437,000 square feet located inOrange County, California , for net sale proceeds of$73.3 million , which resulted in a gain of$50.6 million . OnApril 30, 2018 , we soldNorthgate Business Park , a park consisting of seven multi-tenant flex buildings totaling 194,000 square feet located inDallas, Texas , for net sale proceeds of$11.8 million , which resulted in a gain of$7.9 million . OnOctober 31, 2018 , we soldOrangewood Office Park , a park consisting of two multi-tenant office buildings totaling 107,000 square feet located inOrange County, California , for net sale proceeds of$18.3 million , which resulted in a gain of$8.2 million . OnMay 1, 2017 , we sold Empire Commerce, a two-building single-story office park comprising 44,000 square feet, located inDallas, Texas , for net sale proceeds of$2.1 million , which resulted in a net gain of$1.2 million .
The operations of these facilities are presented below under "assets sold or held for sale."
Certain Factors that May Impact Future Results
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
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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 ofDecember 31, 2019 , excluding the asset held for sale, industry concentration that represented more than 10% of our annualized rental income comes from business services, warehouse, distribution, transportation and logistics and computer hardware software and related services. No other industry group represents more than 10% of our annualized rental income as depicted in the following table. Percent of Annualized Industry Rental Income Business services 19.0%
Warehouse, distribution, transportation and logistics 12.5% Computer hardware, software and related services
10.8%
Retail, food, and automotive 7.9%
Health services 7.8%
Engineering and construction 7.7%
Government 6.1%
Insurance and financial services 3.2%
Electronics 2.9%
Home furnishings 2.6%
Communications 1.9%
Aerospace/defense products and services 1.8%
Educational services 1.0%
Other 14.8%
Total 100.0%
As of December 31, 2019 , excluding the asset held for sale, leases from our top
10 customers comprised 8.6% of our annualized rental income, with only one
customer, the U.S. Government (3.1%), representing more than 1% as depicted in
the following table (in thousands).
Percent of
Annualized Annualized
Customers Square Footage Rental Income (1) Rental Income
U.S. Government 521,000 $ 12,806 3.1%
Luminex Corporation 199,000 4,348 1.0%
Amazon Inc. 213,000 2,718 0.7%
KZ Kitchen Cabinet & Stone 191,000 2,599 0.6%
Lockheed Martin Corporation 124,000 2,554 0.6%
CentralColo, LLC 96,000 2,313 0.6%
Applied Materials, Inc. 162,000 2,313 0.6%
Carbel, LLC 207,000 2,143 0.5%
Quanta Computer Inc. 179,000 1,874 0.5%
ECS Federal, LLC 81,000 1,840 0.4%
Total 1,973,000 $ 35,508 8.6%
____________________________
(1)For leases expiring prior to
Customer credit risk: We have historically experienced a low level of write-offs of uncollectible rents, with less than 0.5% of rental income written off in any year over the last eight years. However, there can be no assurance that write-offs may not increase because there is inherent uncertainty in a customer's ability to continue paying rent and meet its full lease obligation. As ofFebruary 17, 2020 , we did not have any customers that are protected by Chapter 11 of theU.S. Bankruptcy Code. 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 under certain circumstances. ? 23
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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 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.
Beginning January 1, 2019 , the Company has recorded our divisional vice
presidents' compensation costs within general and administrative expense, as we
determined that the nature of these individuals' responsibilities is more
consistent with corporate oversight as opposed to direct property operations. As
a result of this change, we have reclassified our divisional vice presidents'
compensation costs totaling $1.9 million for the year ended December 31, 2018 ,
consisting of $1.3 million of compensation costs and $617,000 of stock
compensation expense, and compensation costs totaling $3.0 million for the year
ended December 31, 2017 , consisting of $1.6 million of compensation costs and
$1.4 million of stock compensation expense, from cost of operations into general
and administrative expense on our consolidated statements of income in the years
ended December 31, 2018 and 2017 in order to conform to the current periods'
presentation.
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.
Results of Operations
Operating Results for 2019 and 2018
For the year endedDecember 31, 2019 , net income allocable to common shareholders was$108.7 million or$3.95 per diluted share, compared to$172.9 million or$6.31 per diluted share for the year endedDecember 31, 2018 . The decrease was mainly due to higher gain on sale of real estate facilities sold in 2018 than 2019, and the charge related to the redemption of preferred stock incurred during 2019 that did not occur in 2018, partially offset by an increase in NOI with respect to the Company's real estate facilities. The increase in NOI includes a$12.7 million , or 4.9%, increase attributable toSame Park facilities (defined below) driven by an increase in rental rates, combined with increased NOI fromNon-Same Park and multifamily assets, partially offset by reduced NOI from facilities sold in 2018 and 2019.
Operating Results for 2018 and 2017
For the year endedDecember 31, 2018 , net income allocable to common shareholders was$172.9 million or$6.31 per diluted share, compared to$90.4 million or$3.30 per diluted share for the year endedDecember 31, 2017 . The increase was mainly due to the gain on the sale of three office parks inOrange County, California , and an industrial park inDallas, Texas , during 2018, charges related to the redemption of preferred stock incurred in 2017 that did not recur in 2018 and an increase in NOI with respect to the Company's real estate facilities. The increase in NOI includes a$9.1 million increase from ourSame-Park facilities due primarily to increases in occupancy and rental rates combined with increased NOI from ourNon-Same Park and multifamily assets, partially offset by reduced NOI from facilities we sold in 2018.
Analysis of Net Income
Our net income is comprised primarily of our real estate operations, depreciation and amortization expense, general and administrative expense, interest and other income, interest and other expenses and gain on sale of real estate facilities and development rights.
We segregate our real estate activities into (i) same park operations,
representing all operating properties acquired prior to
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December 31, 2019 (the "Same Park " facilities), (ii) non-same park operations, representing those facilities we own that were acquired afterJanuary 1, 2017 (the "Non-Same Park " facilities), (iii) multifamily operations and (iv) assets sold or held for sale, representing a 113,000 square foot asset held for sale as ofDecember 31, 2019 , operating results related to 1.3 million square feet of assets sold in 2019, 899,000 square feet of assets sold in 2018, and 44,000 square feet of assets sold during 2017. The table below sets forth the various components of our net income (in thousands): For the Years For the Years Ended December 31, Ended December 31, 2019 2018 Variance 2018 2017 Variance Rental income Same Park (1)$ 382,823 $ 364,811 $ 18,012 $ 364,811 $ 354,393 $ 10,418 Non-Same Park 14,276 5,532 8,744 5,532 - 5,532 Multifamily 10,075 7,353 2,722 7,353 - 7,353 Assets sold or held for sale 22,672 35,820 35,820 47,786 (2) (13,148) (11,966) Total rental income 429,846 413,516 16,330 413,516 402,179 11,337 Cost of operations (3) Adjusted cost of operations (4) Same Park 109,708 104,380 5,328 104,380 103,038 1,342 Non-Same Park 4,899 1,884 3,015 1,884 - 1,884 Multifamily 4,137 4,054 83 4,054 - 4,054 Assets sold or held for sale 8,465 12,866 12,866 17,679 (2) (4,401) (4,813) Stock compensation expense 1,134 1,446 1,446 1,631 (5) (312) (185) Total cost of operations 128,343 124,630 3,713 124,630 122,348 2,282 NOI (6) Same Park 273,115 260,431 12,684 260,431 251,355 9,076 Non-Same Park 9,377 3,648 5,729 3,648 - 3,648 Multifamily 5,938 3,299 2,639 3,299 - 3,299 Assets sold or held for sale (2) (7) 14,207 22,954 (8,747) 22,954 30,107 (7,153) Stock compensation expense (5) (1,134) (1,446) 312 (1,446) (1,631) 185 Depreciation and amortization (104,249) (99,242) (99,242) (94,270) expense (5,007) (4,972) General and administrative (13,761) (12,072) (12,072) (12,671) expense (3) (1,689) 599
Interest and other income 4,492 1,510 2,982 1,510 942 568 Interest and other expense (657) (665)
8 (665) (1,285) 620
Equity in loss of - - - (805)
unconsolidated joint venture - 805
Gain on sale of real estate 16,644 93,484 93,484 1,209
facilities (76,840) 92,275
Gain on sale of development - - - 6,365
rights - (6,365)
Net income $ 203,972 $ 271,901 $ (67,929) $ 271,901 $ 179,316 $ 92,585 ____________________________
(1)
(2)Amounts for the year endedDecember 31, 2019 reflect the operating results related to 1.3 million square feet of assets sold in 2019 and a 113,000 square foot building held for sale as ofDecember 31, 2019 ; amounts shown for the year endedDecember 31, 2018 reflect the operating results related to 1.3 million square feet of assets sold in 2019, a 113,000 square foot building held for sale as ofDecember 31, 2019 , and 899,000 square feet of assets sold in 2018; amounts shown for the year endedDecember 31, 2017 reflect the operating results related to 1.3 million square feet of assets sold in 2019, a 113,000 square foot building held for sale as ofDecember 31, 2019 , 899,000 square feet of assets sold in 2018, and 44,000 square feet of assets sold in 2017. (3)We have reclassified our divisional vice presidents' compensation costs totaling$1.9 million and$3.0 million for the years endedDecember 30, 2018 and 2017, respectively, from cost of operations into general and administrative expense on our consolidated statements of income in the years endedDecember 31, 2018 and 2017 in order to conform to the current periods' presentation. Of this amount,$617,000 and$1.4 million of stock compensation expense for the years endedDecember 31, 2018 and 2017, respectively, had previously been excluded from NOI.
(4)Adjusted cost of operations excludes the impact of stock compensation expense.
(5)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.
(6)NOI represents rental income less adjusted cost of operations.
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(7)NOI from assets sold and held for sale in 2019 was
Rental income increased$16.3 million in 2019 compared to 2018 and by$11.3 million in 2018 compared to 2017 due primarily to increases in rental income at ourSame Park andNon-Same Park facilities and an increase in rental income from our multifamily asset, offset partially by rental income from assets sold. The increase in rental income at ourSame Park facilities in 2019 was due primarily to higher revenue per occupied square foot, while the 2018 increase was due primarily to higher revenue per occupied square foot and increased occupancy. Cost of operations increased$3.7 million in 2019 compared to 2018 and by$2.3 million in 2018 compared to 2017 due primarily to increases in adjusted cost of operations for ourSame Park andNon-Same Park facilities, offset partially by adjusted costs of operations from assets sold. The 2018 increase was also attributable to an increase in cost of operations from our multifamily asset. The 2019 and 2018 increases in adjusted cost of operations were partially offset by lower stock compensation expense. Net income decreased$67.9 million in 2019 compared to 2018 and increased by$92.6 million in 2018 compared to 2017. The 2019 decrease was mainly due to higher gain on sale of real estate facilities sold in 2018 than 2019 combined with higher depreciation and amortization expense and higher general and administrative expense partially offset by higher NOI. The 2018 increase in net income was primarily due to the gain on the sale of three office parks inOrange County, California , and an industrial park inDallas, Texas , during 2018 combined with higher NOI partially offset by higher depreciation and amortization expense.
Same Park Facilities
We believe that evaluation of theSame Park facilities provide an informative view of how the Company's portfolio has performed over comparable periods. We believe that investors and analysts useSame Park information in a similar manner.
The following table summarizes the historical operating results of these facilities and certain statistical information related to leasing activity in 2019, 2018 and 2017 (in thousands, except per square foot data):
For the Years For the Years
Ended December 31, Ended December 31,
2019 2018 Variance 2018 2017 Variance
Rental income (1) $ 382,823 $ 364,811 4.9% $ 364,811 $ 354,393 2.9%
Adjusted cost of operations
(2)
Property taxes 40,061 38,076 5.2% 38,076 36,969 3.0%
Utilities 19,521 19,535 (0.1%) 19,535 19,043 2.6%
Repairs and maintenance 23,521 21,693 8.4% 21,693 22,470 (3.5%)
Snow removal 1,046 713 46.7% 713 400 78.3%
Other expenses 25,559 24,363 4.9% 24,363 24,156 0.9%
Total 109,708 104,380 5.1% 104,380 103,038 1.3%
NOI $ 273,115 $ 260,431 4.9% $ 260,431 $ 251,355 3.6%
Selected Statistical Data
NOI margin (3) 71.3% 71.4% (0.1%) 71.4% 70.9% 0.7%
Weighted average square foot 94.5% 94.9% (0.4%) 94.9% 94.0% 1.0%
occupancy
Revenue per occupied square $ 15.76 $ 14.96 5.3% $ 14.96 $ 14.67 2.0%
foot (4)
Revenue per available foot $ 14.90 $ 14.20 4.9% $ 14.20 $ 13.79 3.0%
(RevPAF) (5)
____________________________
(1)
(2)We have reclassified divisional vice presidents' compensation costs totaling$1.2 million and$1.5 million for the years endedDecember 31, 2018 and 2017, respectively, from adjusted cost of operations into general and administrative expense in order to conform to the current periods' presentation. Stock compensation expense for our divisional vice presidents, which totaled$585,000 and$1.3 million for the years endedDecember 31, 2018 and 2017, respectively, had previously been excluded from adjusted cost of operations.
(3)NOI margin is computed by dividing NOI by rental income.
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(4)Revenue per occupied square foot is computed by dividing rental income during the period by weighted average occupied square feet during the same period.
(5)Revenue per available square foot is computed by dividing rental income during the period by weighted average available square feet.
Analysis of Same Park Rental Income
Rental income generated by ourSame Park facilities increased 4.9% in 2019 compared to 2018 and by 2.9% in 2018 compared to 2017. The 2019 increase was due primarily to higher rental rates, as revenue per occupied square foot increased 5.3%, partially offset by a 0.4% decrease in weighted average occupancy in 2019 compared to the year prior. The 2018 increase was due primarily to higher rental rates combined with higher occupancy. Revenue per occupied square foot and weighted average occupancy increased 2.0% and 1.0%, respectively, in 2018 compared to the year prior.
We believe that high occupancy levels help maximize our rental income. Accordingly, we seek to maintain a weighted average occupancy over 90%.
During 2019 and 2018, most markets continued to reflect conditions favorable to landlords allowing for stable occupancy as well as increasing cash rental rates. With the exception ofNorthern Virginia and Suburban Maryland markets, new cash rental rates for the Company improved over expiring cash rental rates on executed leases as economic conditions and tenant demand remained robust. 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 ourSame Park portfolio over the next 10 years based on lease data atDecember 31, 2019 (dollars and square feet in thousands): Percent of Rentable Square Percent of Annualized Rental Annualized Rental Footage Number of Subject to Total Leased Income Under Income Represented Year of Lease Expiring Expiration Customers Leases Square Footage Expiring Leases by Expiring Leases 2020 1,916 5,787 23.8% $ 92,159 22.0% 2021 1,356 4,916 20.2% 84,293 20.1% 2022 699 4,567 18.7% 82,052 19.5% 2023 346 3,004 12.3% 51,254 12.2% 2024 290 2,467 10.1% 43,628 10.4% 2025 54 1,802 7.3% 31,854 7.5% 2026 23 677 2.8% 11,539 2.8% 2027 14 134 0.6% 3,311 0.8% 2028 7 388 1.6% 6,703 1.6% 2029 10 287 1.2% 6,953 1.7% Thereafter 6 334 1.4% 5,833 1.4% Total 4,721 24,363 100.0% $ 419,579 100.0% During the year endedDecember 31, 2019 , we leased approximately 7.1 million in rentable square feet to new and existing customers at an average 8.3% increase in cash rental rates over the previous rates. Renewals of leases with existing customers represented 64.3% of our leasing activity for the year endedDecember 31, 2019 . See "Analysis of Same Park Market Trends" below for further analysis of such data on a by-market basis. 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.
Analysis of Same Park Adjusted Cost of Operations
Adjusted cost of operations for ourSame Park facilities increased 5.1% in 2019 compared to 2018 due to higher property tax expense, higher repairs and maintenance costs, higher other expenses and an increase in snow removal costs. Adjusted costs of operations increased by 1.3% in 2018 compared to 2017 due primarily to increased property taxes, higher utility costs and snow removal costs, partially offset by lower repairs and maintenance expense.
Property taxes increased 5.2% in 2019 compared to 2018 and by 3.0% in 2018 compared to 2017 due to higher assessed values. We expect property tax growth in the future due primarily to higher assessed values.
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Utilities are dependent upon energy prices and usage levels. Changes in usage levels are driven primarily by weather and temperature. Utilities decreased 0.1% in 2019 compared to 2018 and increased 2.6% in 2018 compared to 2017. It is difficult to estimate future utility costs, because weather, temperature and energy prices are volatile and not predictable. However, based upon current trends and expectations regarding commercial electricity rates, we expect inflationary increases in rates in the future. Repairs and maintenance increased 8.4% in 2019 resulting from higher roof and landscaping repairs compared to 2018 and decreased by 3.5% in 2018 compared to 2017 due to incremental costs in 2017 relating to Hurricane Irma. 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. Snow removal increased 46.7% in 2019 compared to 2018 and increased by 78.3% in 2018 compared to 2017. Snow removal costs are weather dependent and therefore not predictable. Other expenses increased 4.9% in 2019 compared to 2018 and 0.9% in 2018 compared to 2017. Other expenses are comprised of on-site and supervisory personnel, property insurance and other expenses incurred in the operation of our properties. The increase in 2019 was primarily due to an increase in our property insurance premium for the policy period,June 2019 toMay 2020 , and higher than average professional fees related to ordinary course tenant related matters. We expect increases in other expenses to be similar to the increases in prior years. Same Park Quarterly Trends
The following table sets forth historical quarterly data related to the
operations of our
For the Three Months Ended
March 31 June 30 September 30 December 31 Full Year
Rental income
2019 $ 94,813 $ 95,016 $ 95,358 $ 97,636 $ 382,823
2018 $ 90,821 $ 90,980 $ 91,446 $ 91,564 $ 364,811
2017 $ 88,178 $ 87,707 $ 88,628 $ 89,880 $ 354,393
Adjusted cost of
operations (1)
2019 $ 28,177 $ 26,727 $ 27,494 $ 27,310 $ 109,708
2018 $ 26,954 $ 26,140 $ 26,033 $ 25,253 $ 104,380
2017 $ 25,471 $ 25,045 $ 25,796 $ 26,726 $ 103,038
NOI (1)
2019 $ 66,636 $ 68,289 $ 67,864 $ 70,326 $ 273,115
2018 $ 63,867 $ 64,840 $ 65,413 $ 66,311 $ 260,431
2017 $ 62,707 $ 62,662 $ 62,832 $ 63,154 $ 251,355
Weighted average square foot
occupancy
2019 94.7% 94.2% 94.7% 94.4% 94.5%
2018 94.5% 94.5% 95.1% 95.4% 94.9%
2017 94.2% 93.2% 93.7% 94.8% 94.0%
Annualized revenue per occupied
square foot
2019 $ 15.58 $ 15.69 $ 15.67 $ 16.10 $ 15.76
2018 $ 14.97 $ 14.99 $ 14.97 $ 14.94 $ 14.96
2017 $ 14.56 $ 14.64 $ 14.73 $ 14.76 $ 14.67
RevPAF
2019 $ 14.76 $ 14.79 $ 14.84 $ 15.20 $ 14.90
2018 $ 14.14 $ 14.16 $ 14.24 $ 14.25 $ 14.20
2017 $ 13.73 $ 13.65 $ 13.80 $ 13.99 $ 13.79
____________________________
(1)To conform to current period presentation, we have reclassified divisional
vice presidents' compensation costs totaling $364,000 , $288,000 , $280,000 and
$280,000 for each of the three months ended March 31, 2018 , June 30, 2018 ,
September 30, 2018 and December 31, 2018 , respectively, and $386,000 for each of
the three months ended March 31, 2017 , June 30, 2017 , September 30, 2017 and
December 31, 2017 from adjusted cost of operations into general and
administrative expense. Stock compensation expense for our divisional vice
presidents had previously been excluded from adjusted cost of operations.
?
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Analysis of Same Park Market Trends
The following tables set forth rental income, adjusted cost of operations,
weighted average occupancy, revenue per occupied square foot, and RevPaf data in
our
For the Years For the Years
Ended December 31, Ended December 31,
Region 2019 2018 Variance 2018 2017 Variance
Geographic Data on
Rental income Northern California (7.2$ 108,046 $ 99,610 8.5%$ 99,610 $ 93,032 7.1% million feet) Southern California (3.3 55,080 52,873 4.2% 52,873 50,269 5.2% million feet) Dallas (2.9 million feet) 33,789 30,899 9.4% 30,899 31,398 (1.6%) Austin (2.0 million feet) 30,679 29,608 3.6% 29,608 29,240 1.3% Northern Virginia (3.9 73,734 73,818 (0.1%) 73,818 75,590 (2.3%) million feet) South Florida (3.9 million 43,601 41,824 4.2% 41,824 41,082 1.8% feet) Suburban Maryland (1.1 19,876 18,975 4.7% 18,975 17,631 7.6% million feet) Seattle (1.4 million feet) 18,018 17,204 4.7% 17,204 16,151 6.5%Total Same Park (25.7 4.9% 2.9% million feet) 382,823 364,811 364,811 354,393 Adjusted cost of operations Northern California 24,313 22,653 7.3% 22,653 22,988 (1.5%) Southern California 14,215 13,349 6.5% 13,349 13,025 2.5% Dallas 11,488 10,896 5.4% 10,896 10,435 4.4% Austin 10,843 10,352 4.7% 10,352 9,734 6.3% Northern Virginia 25,488 25,128 1.4% 25,128 24,672 1.8% South Florida 11,977 10,733 11.6% 10,733 11,043 (2.8%) Suburban Maryland 7,126 6,989 2.0% 6,989 7,178 (2.6%) Seattle 4,258 4,280 (0.5%) 4,280 3,963 8.0%Total Same Park 109,708 104,380 5.1% 104,380 103,038 1.3% Net operating income Northern California 83,733 76,957 8.8% 76,957 70,044 9.9% Southern California 40,865 39,524 3.4% 39,524 37,244 6.1% Dallas 22,301 20,003 11.5% 20,003 20,963 (4.6%) Austin 19,836 19,256 3.0% 19,256 19,506 (1.3%) Northern Virginia 48,246 48,690 (0.9%) 48,690 50,918 (4.4%) South Florida 31,624 31,091 1.7% 31,091 30,039 3.5% Suburban Maryland 12,750 11,986 6.4% 11,986 10,453 14.7% Seattle 13,760 12,924 6.5% 12,924 12,188 6.0%Total Same Park $ 273,115 $ 260,431 4.9%$ 260,431 $ 251,355 3.6% Weighted average square foot occupancy Northern California 96.1% 97.8% (1.7%) 97.8% 95.9% 2.0% Southern California 95.0% 97.6% (2.7%) 97.6% 96.4% 1.2% Dallas 92.4% 89.7% 3.0% 89.7% 90.3% (0.7%) Austin 91.8% 92.5% (0.8%) 92.5% 94.9% (2.5%) Northern Virginia 94.1% 92.8% 1.4% 92.8% 91.4% 1.5% South Florida 95.4% 96.4% (1.0%) 96.4% 97.5% (1.1%) Suburban Maryland 89.3% 83.1% 7.5% 83.1% 74.5% 11.6% Seattle 96.2% 98.2% (2.0%) 98.2% 98.1% 0.1%Total Same Park 94.5% 94.9% (0.4%) 94.9% 94.0% 1.0% Revenue per occupied square foot Northern California$ 15.52 $ 14.06 10.4%$ 14.06 $ 13.39 5.0% Southern California$ 17.67 $ 16.50 7.1%$ 16.50 $ 15.90 3.8% Dallas$ 12.66 $ 11.92 6.2%$ 11.92 $ 12.03 (0.9%) Austin$ 17.02 $ 16.29 4.5%$ 16.29 $ 15.69 3.8% Northern Virginia$ 20.01 $ 20.31 (1.5%)$ 20.31 $ 21.10 (3.7%) South Florida$ 11.82 $ 11.23 5.3%$ 11.23 $ 10.90 3.0% Suburban Maryland$ 19.39 $ 19.89 (2.5%)$ 19.89 $ 20.62 (3.5%) Seattle$ 13.49 $ 12.60 7.1%$ 12.60 $ 11.84 6.4%Total Same Park $ 15.76 $ 14.96 5.3%$ 14.96 $ 14.67 2.0% RevPAF Northern California$ 14.91 $ 13.75 8.4%$ 13.75 $ 12.84 7.1% Southern California$ 16.78 $ 16.11 4.2%$ 16.11 $ 15.31 5.2% Dallas$ 11.70 $ 10.70 9.3%$ 10.70 $ 10.88 (1.7%) Austin$ 15.63 $ 15.08 3.6%$ 15.08 $ 14.90 1.2% Northern Virginia$ 18.82 $ 18.85 (0.2%)$ 18.85 $ 19.30 (2.3%) South Florida$ 11.28 $ 10.82 4.3%$ 10.82 $ 10.63 1.8% Suburban Maryland$ 17.36 $ 16.57 4.8%$ 16.57 $ 15.40 7.6% Seattle$ 12.96 $ 12.38 4.7%$ 12.38 $ 11.62 6.5%Total Same Park $ 14.90 $ 14.20 4.9%$ 14.20 $ 13.79 3.0% 29
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Supplemental Same Park Data by Product Type
The following supplemental tables provide further detail of ourSame Park rental income, adjusted cost of operations and net operating income by region, further segregated by industrial, flex and office for each of the three years endedDecember 31, 2019 , 2018 and 2017. For the Year Ended December 31, 2019 For the Year Ended December 31, 2018 For the Year
Ended
Industrial Flex Office Total Industrial Flex Office Total Industrial Flex Office Total
In thousands
Rental Income:
Northern $ 86,088 $ 9,801 $ 12,157 $ 108,046 $ 78,721 $ 9,442 $ 11,447 $ 99,610 $ 72,878 $ 9,364 $ 10,790 $ 93,032
California
Southern 35,387 18,932 761 55,080 34,272 17,954 647 52,873 32,516 17,083 670 50,269
California
Dallas 12,412 21,377 - 33,789 11,566 19,333 - 30,899 11,406 19,992 - 31,398
Austin 8,317 22,362 - 30,679
7,863 21,745 - 29,608 7,316 21,924 - 29,240
7,350 24,755 41,713 73,818 6,978 25,715 42,897 75,590
41,543 1,916 142 43,601 39,810 1,931 83 41,824 38,963 1,911 208 41,082
Suburban Maryland 4,396 - 15,480 19,876 4,464 - 14,511 18,975 4,528 - 13,103 17,631
Seattle 10,950 6,342 726 18,018 10,474 6,003 727 17,204 9,901 5,675 575 16,151
Total 206,561 105,350 70,912 382,823 194,520 101,163 69,128 364,811 184,486 101,664 68,243 354,393
Adjusted Cost of
Operations:
Northern 18,526 2,602 3,185 24,313 17,207 2,512 2,934 22,653 17,680 2,440 2,868 22,988
California
Southern 8,869 5,063 283 14,215 8,397 4,685 267 13,349 8,132 4,627 266 13,025
California
Dallas 3,702 7,786 - 11,488 3,666 7,230 - 10,896 3,446 6,989 - 10,435
Austin 2,778 8,065 - 10,843 2,637 7,715 - 10,352 2,485 7,249 - 9,734
Northern Virginia 2,104 7,557 15,827 25,488 1,998 7,314 15,816 25,128 1,936 7,148 15,588 24,672
South Florida 11,262 602 113 11,977 10,162 509 62 10,733 10,401 576 66 11,043
Suburban Maryland 1,427 - 5,699 7,126 1,349 - 5,640 6,989 1,446 - 5,732 7,178
Seattle 2,566 1,492 200 4,258 2,612 1,446 222 4,280 2,308 1,468 187 3,963
Total 51,234 33,167 25,307 109,708 48,028 31,411 24,941 104,380 47,834 30,497 24,707 103,038
NOI:
Northern 83,733 76,957 70,044
California 67,562 7,199 8,972 61,514 6,930 8,513 55,198 6,924 7,922
Southern 40,865 39,524 37,244
California 26,518 13,869 478 25,875 13,269 380 24,384 12,456 404
Dallas 8,710 13,591 - 22,301 7,900 12,103 - 20,003 7,960 13,003 - 20,963
Austin 5,539 14,297 - 19,836
5,226 14,030 - 19,256 4,831 14,675 - 19,506
5,352 17,441 25,897 48,690 5,042 18,567 27,309 50,918
30,281 1,314 29 31,624 29,648 1,422 21 31,091 28,562 1,335 142 30,039
Suburban Maryland 2,969 - 9,781 12,750 3,115 - 8,871 11,986 3,082 - 7,371 10,453
Seattle 8,384 4,850 526 13,760 7,862 4,557 505 12,924 7,593 4,207 388 12,188
Total $ 155,327 $ 72,183 $ 45,605 $ 273,115 $
146,492
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As noted above, 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 (the "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 itsSame Park facilities, on a regional basis, for the year endedDecember 31, 2019 (square feet in thousands): For the Year Ended December 31, 2019 Square Transaction Footage Customer Costs per Rental Regions Leased Retention Executed Foot Rate Change (1) Northern California 1,777 64.6% $ 2.43 18.3% Southern California 1,214 69.2% $ 1.83 8.1% Dallas 838 60.9% $ 4.97 5.7% Austin 529 77.5% $ 5.49 5.6% Northern Virginia 1,154 75.0% $ 8.04 (2.8%) South Florida 941 49.7% $ 1.67 12.7% Suburban Maryland 216 73.9% $ 6.40 (3.5%) Seattle 382 64.9% $ 1.22 15.8% Total 7,051 65.8% $ 3.73 8.3%
____________________________
(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. During 2019 and 2018, most markets, with the exception ofNorthern Virginia and Suburban Maryland, continued to reflect favorable conditions allowing for stable occupancy as well as increasing cash rental rates. InNorthern Virginia and Suburban Maryland, cash rental rates on executed leases declined 2.8% and 3.5%, respectively, for the year endedDecember 31, 2019 , reflecting continued soft market conditions that have persisted for several years due to, among other factors, federal government downsizing. To the extent that such trends continue in these markets, which comprised 24.5% of ourSame Park rental income for the year endedDecember 31, 2019 and 19.2% of square feet expiring throughDecember 31, 2020 , we may continue to face reduced rental income in these markets.
Purchase Occupancy
Square Occupancy at at
Property Date Acquired Location Price Feet Acquisition December
31, 2019
San Tomas December, 2019 Santa Clara, $ 16,787 79 95.6% 95.6%
Business Center CA
Hathaway September, 2019 Santa Fe 104,330 543 100.0% 100.0%
Industrial Park Springs, CA
98.4% 96.7%
Business Park CA
Northern Virginia June, 2018 Lorton and
and Fullerton Springfield,
Road Industrial VA 143,766 1,057 76.1% 91.3%
Parks
Total $ 278,707 1,753 85.4% 94.4%
NOI from the Non-Same Park facilities included $1.7 million of NOI from the 2019
acquisitions for the year ended December 31, 2019 . Excluding the results from
the 2019 acquisitions, the NOI increase from prior year was tied to an increase
in occupancy at our 2018 acquisition.
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 the previous owners. However, it can take 24 or more months for us
to fully achieve higher NOI, and the ultimate levels of NOI to be achieved can
be affected by changes in general economic conditions. As a result, there can be
no assurance that we will achieve our expectations with respect to newly
acquired real estate facilities.
Multifamily: As of
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Company control of the joint venture. Prior toJanuary 1, 2018 , we accounted for our investment in the joint venture using the equity method and accordingly, reflected our share of net loss under "equity in loss of unconsolidated joint venture." Highgate began leasing activities during the second quarter of 2017. During the year endedDecember 31, 2019 , Highgate generated$5.9 million of NOI, consisting of$10.1 million in rental income and$4.1 million in cost of operations compared to$3.3 million of NOI, consisting of$7.4 million in rental income and$4.1 million in cost of operations for the same period in 2018. The following table summarizes certain statistics for Highgate as ofDecember 31, 2019 : As of December 31, 2019 Weighted Average Occupancy Total Costs (1) For the years ended December Apartment Physical Average Rent 31, Units (in thousands) Occupancy per Unit (2) 2019 2018 395$ 115,426 94.7%$ 2,133 95.4% 78.2% ____________________________ (1)The project cost for Highgate 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.
Assets sold or held for sale: These amounts include historical operating results with respect to properties that we sold or intend to sell. Amounts for the year endedDecember 31, 2019 reflect the operating results related to 1.3 million square feet of assets sold in 2019 and a 113,000 square foot building held for sale as ofDecember 31, 2019 ; amounts for the year endedDecember 31, 2018 reflect the operating results related to 1.3 million square feet of assets sold during 2019, a 113,000 square foot building held for sale as ofDecember 31, 2019 and 899,000 square feet of assets sold in 2018; amounts shown for the year endedDecember 31, 2017 reflect the operating results related to 1.3 million square feet of assets sold in 2019, a 113,000 square foot building held for sale as ofDecember 31, 2019 , 899,000 square feet of assets sold in 2018 and 44,000 square feet of assets sold in 2017. Depreciation and Amortization Expense: Depreciation and amortization expense increased 5.0% in 2019 compared to 2018 and increased by 5.3% in 2018 compared to 2017. The increase in 2019 over 2018 was primarily due to depreciation and amortization expense from theNon-Same Park facilities combined with depreciation expense related to the building held for development. The increase in 2018 over 2017 was primarily due to depreciation and amortization expense of our multifamily asset as we consolidated its operations effectiveJanuary 1, 2018 in addition to depreciation and amortization expense from the 2018 acquisition. 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. General and administrative expense increased$1.7 million , or 14.0%, in 2019 compared to 2018 and decreased$599,000 , or 4.7%, in 2018 compared to 2017. The increase in 2019 over 2018 was primarily due to an increase in stock compensation expense tied to a modification of the Director Retirement Plan during 2019 as well as an increase in compensation costs relating to the chief financial officer who started during the latter half of 2018. The decrease in 2018 over 2017 was primarily due to a decrease in compensation costs relating to the chief financial officer position being filled during the latter half of 2018. Equity loss from investment in and advances to unconsolidated joint venture: Prior toJanuary 1, 2018 , we accounted for our joint venture investment using the equity method and recorded our pro-rata share of the net loss in the joint venture. The Company recorded an equity loss in the unconsolidated joint venture of$805,000 , comprised of our proportionate share of$1.8 million in revenue,$1.5 million in cost of operations, and$1.2 million in depreciation expense for the year endedDecember 31, 2017 . Gain on sale of real estate facilities and gain on sale of development rights: Subsequent toDecember 31, 2019 , we sold a 113,000 square foot building located inRockville, Maryland for a gross sales price of$30.0 million . We expect to record a gain on the sale of real estate in connection with the sale during the first quarter of 2020.
On
OnMarch 5, 2018 , we soldCorporate Pointe Business Park , a park consisting of five multi-tenant office buildings totaling 161,000 square feet located inOrange County, California , for net sale proceeds of$41.7 million , which resulted in a gain of$26.8 million . OnApril 18, 2018 , we soldOrange County Business Center , a park consisting of 32
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five multi-tenant office buildings totaling 437,000 square feet located inOrange County, California , for net sale proceeds of$73.3 million , which resulted in a gain of$50.6 million . OnApril 30, 2018 , we soldNorthgate Business Park , a park consisting of seven multi-tenant flex buildings totaling 194,000 square feet located inDallas, Texas , for net sale proceeds of$11.8 million , which resulted in a gain of$7.9 million . OnOctober 31, 2018 , we soldOrangewood Office Park , a park consisting of two multi-tenant office buildings totaling 107,000 square feet located inOrange County, California , for net sale proceeds of$18.3 million , which resulted in a gain of$8.2 million . OnMay 1, 2017 , we sold Empire Commerce, a two-building single-story office park comprising 44,000 square feet, located inDallas, Texas , for net sale proceeds of$2.1 million , which resulted in a net gain of$1.2 million . OnMarch 31, 2017 , we sold development rights we held to build medical office buildings on land adjacent to ourWestech Business Park inSilver Spring, Maryland for$6.5 million . We received net sale proceeds of$6.4 million , of which$4.9 million was received in 2017 and$1.5 million was received in prior years. We recorded a net gain of$6.4 million for the year endedDecember 31, 2017 .
Liquidity and Capital Resources
This section should be read in conjunction with our consolidated statements of cash flows for the years endedDecember 31, 2019 , 2018 and 2017 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 generally distribute substantially all of our "REIT taxable income" to our shareholders, 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 andStandard & 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 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. Fixed charges include interest expense, capitalized interest and preferred distributions paid to preferred shareholders. For the year endedDecember 31, 2019 , the ratio to FFO to combined fixed charges and preferred distributions paid was 5.3 to 1.0. We have a$250.0 million revolving Credit Facility that can be expanded to$400.0 million which 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), as well as the desire for leverage. 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 ofDecember 31, 2019 , we had$62.8 million in unrestricted cash. In the last five years, we have retained approximately$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 ofDecember 31, 2019 , 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 renovations and expenditures related to repositioning asset acquisitions. The following table sets forth our commercial capital expenditures paid for in the years endedDecember 31, 2019 , 2018 and 2017 on an aggregate and per square foot basis: 33
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For the Years Ended December 31,
2019 2018 2017 2019 2018 2017
Commercial Real Estate (in thousands) (per total weighted average
square foot)
Recurring capital
expenditures
Capital improvements $ 11,224 $ 10,738 $ 10,069 $ 0.40 $ 0.38 $ 0.36
(1)
Tenant improvements 17,360 18,688 28,294 0.62 0.67 1.01
Lease commissions 8,267 8,048 7,477 0.29 0.29 0.27
Total commercial
recurring
capital expenditures
(1) 36,851 37,474 45,840 1.31 1.34 1.64
Nonrecurring capital 2,494 1,176 4,379 0.09 0.05 0.16
improvements
Total commercial
capital
expenditures (1) $ 39,345 $ 38,650 $ 50,219 $ 1.40 $ 1.39 $ 1.80
____________________________
(1)Excludes
The following table summarizesSame Park ,Non-Same Park , multifamily and assets sold or held for sale recurring capital expenditures paid and the related percentage of NOI by region for the years endedDecember 31, 2019 , 2018 and 2017 (in thousands): For the Years Ended December 31, Recurring Capital Expenditures Recurring Capital Expenditures as a Percentage of NOI Region 2019 2018 Change 2018 2017 Change 2019 2018 2017Same Park Northern $ $ 22.5% $ $
(1.1%)
California 4,411 3,602 3,602 3,642 5.3% 4.7% 5.2% Southern 42.5%
4.7%
California 4,514 3,167 3,167 3,025 11.0% 8.0% 8.1% Dallas 4,623 5,027 (8.0%) 5,027 3,813 31.8% 20.7% 25.1% 18.2% Austin 4,539 2,362 92.2% 2,362 1,726 36.8% 22.9% 12.3% 8.8% Northern (4.1%) (19.2%) Virginia 10,366 10,810 10,810 13,379 21.5% 22.2% 26.3% South Florida 2,191 3,149 (30.4%) 3,149 2,055 53.2% 6.9% 10.1% 6.8% Suburban (24.4%) (68.0%) Maryland 2,051 2,714 2,714 8,474 16.1% 22.6% 81.1% Seattle 927 968 (4.2%) 968 763 26.9% 6.7% 7.5% 6.3% Total Same 5.7% (13.8%) Park 33,622 31,799 31,799 36,877 12.3% 12.2% 14.7%Non-Same Park Southern 100.0% California 54 - - - - - - - Northern 250.2% 100.0% Virginia 2,154 615 615 - - - - Total 259.0% 100.0% Non-Same Park 2,208 615 615 - - - - Assets sold or held for sale 1,021 5,060 (79.8%) 5,060 8,963 (43.5%) 7.2% 22.0% 29.8% Total commercial recurring capital expenditures 36,851 37,474 (1.7%) 37,474 45,840 (18.3%) - - - Multifamily 20 13 53.8% 13 - 100.0% - - - Total$ 36,871 $ 37,487 (1.6%)$ 37,487 $ 45,840 (18.2%) 12.2% 12.9% 16.3%
In the last five years, our recurring capital expenditures have averaged
generally between
Redemption of Preferred Stock: Historically, we have reduced our cost of capital by refinancing higher coupon preferred securities with lower coupon preferred securities. OnDecember 30, 2019 , we completed the redemption of our 5.75% Cumulative Preferred Stock, Series U, at par of$230.0 million as well as our 5.70% Cumulative Preferred Stock, Series V, at par of$110.0 million using funds received from our 4.875% Series Z preferred stock issued during November, 2019, which effectively lowered the Company's weighted average coupon rate from 5.40% to 5.10%. Acquisitions of real estate facilities: Subsequent toDecember 31, 2019 , we acquired a multi-tenant industrial park comprised of approximately 73,000 rentable square feet inLa Mirada, California , for a total purchase price of$13.5 million , inclusive of capitalized transaction costs. OnDecember 20, 2019 , we acquired a multi-tenant flex park comprised of approximately 79,000 rentable square feet inSanta Clara, California , for a total purchase price of$16.8 million , inclusive of capitalized transaction costs. OnSeptember 5, 2019 , we acquired a multi-tenant industrial park comprised of approximately 543,000 rentable square feet inSanta Fe Springs, California , for a total purchase price of 34
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$104.3 million , inclusive of capitalized transaction costs. OnApril 18, 2019 , we acquired a multi-tenant industrial park comprised of approximately 74,000 rentable square feet inSignal Hill, California , for a total purchase price of$13.8 million , inclusive of capitalized transaction costs. OnJune 8, 2018 , we acquired two multi-tenant industrial parks aggregating 1.1 million rentable square feet inSpringfield, Virginia , for a total purchase price of$143.8 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 and there can be no assurance as to the volume of future acquisition activity. Sale of real estate: Subsequent toDecember 31, 2019 , we sold a 113,000 square foot building located atMetro Park North inRockville, Maryland , that was held for sale as ofDecember 31, 2019 , for a gross sales price of$30.0 million . During the year endedDecember 31, 2019 , we sold 1.3 million rentable square feet of flex and office business parks located inRockville andSilver Spring, Maryland , for net sale proceeds of$144.6 million , which resulted in a gain of$16.6 million . During the year endedDecember 31, 2018 , we sold 899,000 rentable square feet of real estate facilities located inOrange County, California , andDallas, Texas , for net sale proceeds of$145.1 million , which resulted in a gain of$93.5 million . OnMay 1, 2017 , we sold a two-building single-story office park comprising 44,000 square feet, located inDallas, Texas , for net sale proceeds of$2.1 million , which resulted in a net gain of$1.2 million . Development of real estate facilities: As noted above, we have a 123,000 square foot vacant building located within The Mile that we are seeking to redevelop into a multifamily property. There can be no assurance as to the timing or amount of any investment that may occur; however, we expect to incur any significant development costs on this potential project any earlier than mid-2020. Repurchase of Common Stock: No shares of common stock were repurchased under the board-approved common stock repurchase program during the years endedDecember 31, 2019 , 2018 and 2017. As ofDecember 31, 2019 , 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 federal 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
We estimate the annual distribution requirements with respect to our preferred
shares outstanding at
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, after taking into consideration distributions to the 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
We also present Core FFO and Funds Available for Distribution ("FAD"). Core FFO,
which the Company defines as FFO excluding the net impact of (i) income
allocated to preferred shareholders to the extent redemption value exceeds the
related carrying value (a "Preferred Redemption Allocation") and (ii) other
nonrecurring income or expense items as appropriate. FAD, a non-GAAP measure,
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 expenses such as straight-line rent and stock compensation
expense.
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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 Years Ended
2019 2018 2017 2016 2015
Net income allocable to common $ 108,703 $ 172,899 $ 90,425 $ 62,872 $ 68,291
shareholders
Adjustments
Gain on sale of land, real estate
facilities and
development rights (16,644) (93,484) (7,574) - (28,235)
Depreciation and amortization 104,249 99,242 94,270 99,486 105,394
expense
Depreciation from unconsolidated - - 1,180 - -
joint venture
Net income allocated to
noncontrolling interests 29,006 45,199 24,279 16,955 18,495
Net income allocated to
restricted stock
unit holders 910 1,923 761 569 299
FFO allocated to joint venture (149) (13) - - -
partner
FFO allocable to diluted common 226,075 225,766 203,341 179,882 164,244 shares and units Preferred Redemption Allocation 11,007 - 10,978 7,312 2,487 Other nonrecurring income or - - (414) 1,818 - expense items Core FFO allocable to diluted common shares and units$ 237,082 $ 225,766 $ 213,905 $ 189,012 $ 166,731 Recurring capital expenditures (36,871) (37,487) (45,840) (30,952) (39,846) Cash paid for taxes in lieu of shares upon vesting of restricted stock units (6,350) (4,981) (3,865) (1,940) (767) Non-cash items 1,020 (1,056) 174 4,276 1,909 FAD allocable to diluted common$ 194,881 $ 182,242 $ 164,374 $ 160,396 $ 128,027 shares and units Weighted average outstanding Common shares 27,418 27,321 27,207 27,089 26,973 Common operating partnership 7,305 7,305 7,305 7,305 7,305 units Restricted stock units 124 182 187 290 130 Common share equivalents 108 101 205 90 78 Total diluted common shares and 34,955 34,909 34,904 34,774 34,486 units Net income per common share -$ 3.95 $ 6.31 $ 3.30 $ 2.31 $ 2.52 diluted Gain on sale of land, real estate facilities and development rights (0.47) (2.68) (0.21) - (0.82) Depreciation and amortization expense, including amounts from investments in unconsolidated joint venture 2.99 2.84 2.74 2.86 3.06 FFO per share 6.47 6.47 5.83 5.17 4.76 Preferred Redemption Allocation 0.31 - 0.31 0.21 0.07 Other nonrecurring income or - - (0.01) 0.06 - expense items Core FFO per share$ 6.78 $ 6.47 $ 6.13 $ 5.44 $ 4.83 We believe FFO, Core FFO and FAD assist investors in analyzing and comparing the operating and financial performance of a company's real estate between periods. 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: As ofDecember 31, 2019 , we expect 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. ? 36
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Our significant contractual obligations as of
Payments Due by Period
Contractual Obligations Total Less than 1 year 1 - 3 years
4 - 5 years More than 5 years
Transaction costs (1) $ 9,604 $ 9,604 $ - $ - $ -
Ground lease obligations (2) 1,965 196 596 397 776
Total $ 11,569 $ 9,800 $ 596 $ 397 $ 776
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(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.
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