Document and Entity Information
v2.2.0.7
Document and Entity Information
6 Months Ended
Jun. 30, 2010
Jul. 31, 2010
Document Type 10-Q
Document Period End Date 2010-06-30
Amendment Flag false
Document Fiscal Year Focus 2010
Document Fiscal Period Focus Q2
Entity Registrant Name PS BUSINESS PARKS INC/CA
Entity Central Index Key 0000866368
Current Fiscal Year End Date --12-31
Entity Filer Category Large Accelerated Filer
Entity Common Stock, Shares Outstanding 24,602,613

CONSOLIDATED BALANCE SHEETS
v2.2.0.7
CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands
6 Months Ended 12 Months Ended
Jun. 30, 2010
Dec. 31, 2009
ASSETS
Cash and cash equivalents $ 43,696 $ 208,229
Real estate facilities, at cost:
Land 507,531 493,709
Buildings and equipment 1,649,153 1,528,044
Real estate investment property, gross 2,156,684 2,021,753
Accumulated depreciation (740,725) (707,209)
Real Estate Investment Property, net 1,415,959 1,314,544
Property held for disposition, net 4,260
Land held for development 6,829 6,829
Real Estate Investments, Total 1,422,788 1,325,633
Rent receivable 2,458 2,313
Deferred rent receivable 22,010 21,596
Other assets 10,782 7,051
Total assets 1,501,734 1,564,822
LIABILITIES AND EQUITY
Accrued and other liabilities 49,937 46,298
Mortgage notes payable 52,207 52,887
Total liabilities 102,144 99,185
Commitments and contingencies    
PS Business Parks, Inc.'s shareholders' equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized, 22,877 and 25,042 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively 571,921 626,046
Common stock, $0.01 par value, 100,000,000 shares authorized, 24,600,560 and 24,399,509 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively 245 243
Paid-in capital 556,240 548,393
Cumulative net income 744,227 699,291
Cumulative distributions (703,738) (658,294)
Total PS Business Parks, Inc.'s shareholders' equity 1,168,895 1,215,679
Noncontrolling interests:
Preferred units 53,418 73,418
Common units 177,277 176,540
Total noncontrolling interests 230,695 249,958
Total equity 1,399,590 1,465,637
Total liabilities and equity $ 1,501,734 $ 1,564,822

CONSOLIDATED BALANCE SHEETS PARENTHETICAL
v2.2.0.7
CONSOLIDATED BALANCE SHEETS PARENTHETICAL (USD $)
Jun. 30, 2010
Dec. 31, 2009
Preferred stock, par value $ 0.01 $ 0.01
Preferred stock, shares authorized 50,000,000 50,000,000
Preferred stock, shares issued 22,877 25,042
Preferred stock, shares outstanding 22,877 25,042
Common stock, par value $ 0.01 $ 0.01
Common stock, shares authorized 100,000,000 100,000,000
Common stock, shares issued 24,600,560 24,399,509
Common stock, shares outstanding 24,600,560 24,399,509

CONSOLIDATED STATEMENTS OF INCOME
v2.2.0.7
CONSOLIDATED STATEMENTS OF INCOME (USD $)
In Thousands, except Share data
3 Months Ended 6 Months Ended
Jun. 30, 2010
Jun. 30, 2009
Jun. 30, 2010
Jun. 30, 2009
Revenues:
Rental income $ 69,878 $ 67,375 $ 137,010 $ 136,507
Facility management fees 163 173 336 350
Total operating revenues 70,041 67,548 137,346 136,857
Expenses:
Cost of operations 21,720 21,251 44,686 43,687
Depreciation and amortization 18,666 21,970 36,856 44,584
General and administrative 2,400 1,538 5,149 3,514
Total operating expenses 42,786 44,759 86,691 91,785
Other income and expenses:
Interest and other income 91 68 200 247
Interest expense (856) (881) (1,711) (1,811)
Total other income and expenses (765) (813) (1,511) (1,564)
Income from continuing operations 26,490 21,976 49,144 43,508
Discontinued operations:
Income from discontinued operations   176 34 343
Gain on sale of land and real estate facility   1,488 5,153 1,488
Total discontinued operations   1,664 5,187 1,831
Net income 26,490 23,640 54,331 45,339
Net income allocable to noncontrolling interests:
Noncontrolling interests -- common units 2,749 2,900 6,261 14,523
Noncontrolling interests -- preferred units 1,752 1,381 3,134 (5,333)
Total net income allocable to noncontrolling interests 4,501 4,281 9,395 9,190
Net income allocable to PS Business Parks, Inc.:
Common shareholders 9,229 8,152 20,974 40,757
Preferred shareholders 12,723 11,155 23,878 (4,871)
Restricted stock unit holders 37 52 84 263
Total net income allocable to PS Business Parks, Inc. 21,989 19,359 44,936 36,149
Net income $ 26,490 $ 23,640 $ 54,331 $ 45,339
Net income per common share -- basic:
Continuing operations $ 0.38 $ 0.34 $ 0.69 $ 1.92
Discontinued operations $ 0.06 $ 0.16 $ 0.07
Net income $ 0.38 $ 0.4 $ 0.86 $ 1.99
Net income per common share -- diluted:
Continuing operations $ 0.37 $ 0.34 $ 0.69 $ 1.91
Discontinued operations $ 0.06 $ 0.16 $ 0.07
Net income $ 0.37 $ 0.39 $ 0.85 $ 1.98
Weighted average common shares outstanding:
Basic 24,524 20,531 24,469 20,501
Diluted 24,669 20,652 24,611 20,605

CONSOLIDATED STATEMENT OF EQUITY
v2.2.0.7
CONSOLIDATED STATEMENT OF EQUITY (USD $)
In Thousands, except Share data
Preferred stock [Member]
Common stock [Member]
Paid-in Capital [Member]
Cumulative Net Income [Member]
Cumulative Distributions [Member]
Total PS Business Parks, Inc.'s Shareholders' Equity [Member]
Noncontrolling Interests [Member]
Total
Beginning Balance, value at Dec. 31, 2009 $ 626,046 $ 243 $ 548,393 $ 699,291 $ (658,294) $ 1,215,679 $ 249,958 $ 1,465,637
Beginning Balance, shares at Dec. 31, 2009 25,042 24,399,509
Redemption of preferred units 582 582 (20,582) (20,000)
Redemption of preferred stock, value (54,125) 1,854 (1,854) (54,125) (54,125)
Redemption of preferred stock, shares (2,165)
Exercise of stock options, value 2 5,894 5,896 5,896
Exercise of stock options, shares 181,036
Stock compensation, net, value 421 421 421
Stock compensation, net, shares 20,015
Net income 44,936 44,936 9,395 54,331
Distributions:
Preferred stock (22,024) (22,024) (22,024)
Common stock (21,566) (21,566) (21,566)
Noncontrolling interests (8,980) (8,980)
Adjustment to noncontrolling interests in underlying operating partnership (904) (904) 904 (904)
Ending Balance, value at Jun. 30, 2010 $ 571,921 $ 245 $ 556,240 $ 744,227 $ (703,738) $ 1,168,895 $ 230,695 $ 1,399,590
Ending Balance, shares at Jun. 30, 2010 22,877 24,600,560

CONSOLIDATED STATEMENTS OF CASH FLOWS
v2.2.0.7
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands
6 Months Ended
Jun. 30, 2010
Jun. 30, 2009
Cash flows from operating activities:
Net income $ 54,331 $ 45,339
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense 36,856 44,840
In-place lease adjustment 98 (161)
Lease incentives net of tenant improvement reimbursements (265) (174)
Amortization of mortgage premium (140) (134)
Gain on sale of land and real estate facility (5,153) (1,488)
Stock compensation 1,135 1,713
Decrease in receivables and other assets 587 2,019
Increase in accrued and other liabilities 1,467 1,332
Total adjustments 34,585 47,947
Net cash provided by operating activities 88,916 93,286
Cash flows from investing activities:
Capital improvements to real estate facilities (17,709) (11,367)
Acquisition of real estate facilities (123,582)
Proceeds from sale of land and real estate facility 9,181 2,557
Net cash used in investing activities (132,110) (8,810)
Cash flows from financing activities:
Principal payments on mortgage notes payable (540) (527)
Repayment of mortgage note payable (5,128)
Proceeds from the exercise of stock options 5,896 678
Shelf registration costs (75)
Redemption of preferred stock (54,125)
Redemption of preferred units (20,000)
Repurchase of preferred stock (50,199)
Repurchase of preferred units (12,335)
Distributions paid to common shareholders (21,566) (18,044)
Distributions paid to preferred shareholders (22,024) (22,351)
Distributions paid to noncontrolling interests - common units (6,428) (6,428)
Distributions paid to noncontrolling interests - preferred units (2,552) (3,084)
Net cash used in financing activities (121,339) (117,493)
Net decrease in cash and cash equivalents (164,533) (33,017)
Cash and cash equivalents at the beginning of the period 208,229 55,015
Cash and cash equivalents at the end of the period 43,696 21,998
Adjustment to noncontrolling interests in underlying operating partnership:
Noncontrolling interests - common units 904 9,645
Paid-in capital (904) (9,645)
Gain on repurchase of preferred equity:
Preferred stock   (30,005)
Preferred units   (8,997)
Paid-in capital   39,002
Effect of redemption/repurchase of preferred equity:
Cumulative distributions (1,854) (2,783)
Noncontrolling interest - common units (582) (580)
Paid-in capital $ 2,436 $ 3,363

Organization and description of business
v2.2.0.7
Organization and description of business
6 Months Ended
Jun. 30, 2010
Organization and description of business

1.   Organization and description of business

 

PS Business Parks, Inc. ("PSB") was incorporated in the state of California in 1990. As of June 30, 2010, PSB owned 77.1% 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 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 acquires, develops, owns and operates commercial properties, primarily multi-tenant flex, office and industrial space. As of June 30, 2010, the Company owned and operated 20.7 million rentable square feet of commercial space located in eight states. The Company also manages 1.4 million rentable square feet on behalf of PS and its affiliated entities.

 

References to the number of properties or square footage are unaudited and outside the scope of the Company's independent registered public accounting firm's review of the Company's financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).


Summary of significant accounting policies
v2.2.0.7
Summary of significant accounting policies
6 Months Ended
Jun. 30, 2010
Summary of significant accounting policies

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 and six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ended December 31, 2010. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2009.

 

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 Company's noncontrolling interests are reported as a component of equity separate from the parent's 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 interest is included in consolidated net income on the face of the income statement and, upon a gain or loss of control, the interest purchased or sold, as well as any interest retained, is recorded at fair value with any gain or loss recognized in earnings.

 

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 June 30, 2010 and December 31, 2009.

 

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 considers all highly liquid investments with a remaining maturity of three months or less at the date of purchase to be cash equivalents. Due to the short period to maturity of the Company's cash and cash equivalents, accounts receivable, other assets and accrued and other liabilities, the carrying values as presented on the consolidated balance sheets are reasonable estimates of fair value. Based on borrowing rates currently available to the Company, the carrying amount of debt approximates fair value.

 

Financial assets that are exposed to credit risk consist primarily of cash and cash equivalents and receivables. 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.

 

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 the estimated useful life. Buildings and equipment are depreciated on the straight-line method over the estimated useful lives, which are generally 30 and five years, respectively. Transaction costs in excess of $1,000 for leases with terms greater than one year are capitalized and depreciated over their estimated useful lives. Transaction costs for leases of one year or less or less than $1,000 are expensed as incurred.

 

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) management's estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The 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 net amortization of $136,000 and $75,000 of intangible assets and liabilities resulting from the above-market and below-market lease values during the three months ended June 30, 2010 and 2009, respectively. Amortization was $98,000 and $161,000 for each of the six months ended June 30, 2010 and 2009, respectively. As of June 30, 2010, the value of in-place leases resulted in a net intangible asset of $5.3 million, net of $1.4 million of accumulated amortization, and a net intangible liability of $1.5 million, net of $1.3 million of accumulated amortization. As of December 31, 2009, the value of in-place leases resulted in a net intangible asset of $94,000, net of $1.1 million of accumulated amortization, and a net intangible liability of $247,000, net of $1.1 million of accumulated amortization.

 

Evaluation of asset impairment

 

The Company evaluates its assets used in operations by identifying indicators of impairment and by comparing the sum of the estimated undiscounted future cash flows for each asset to the asset's carrying value. When indicators of impairment are present and the sum of the undiscounted future cash flows is less than the carrying value of such asset, an impairment loss is recorded equal to the difference between the asset's 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 June 30, 2010, the Company did not consider any assets to be impaired.

 

Stock compensation

 

All share-based payments to employees, including grants of employee stock options, are recognized as stock compensation in the Company's income statement based on their 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 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 Company's credit watch list. Deferred rent receivable represents rental revenue recognized on a straight-line basis in excess of billed rents. Reimbursements from tenants for real estate taxes and other recoverable operating expenses are recognized as rental income in the period the applicable costs are incurred. Property 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 using the installment or cost recovery methods as appropriate under the circumstances.

 

General and administrative expense

 

General and administrative expense includes executive and other compensation, office expense, professional fees, state income taxes and other such administrative items.

 

Income taxes

 

The Company qualified and intends to continue to qualify as a REIT, as defined in Section 856 of the Internal Revenue Code. As a REIT, the Company is not subject to federal income tax to the extent that it distributes its 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. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax (including any applicable alternative minimum tax) based on its taxable income using corporate income tax rates. Even if the Company qualifies for taxation as a REIT, 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 2009 and intends to continue to meet such requirements for 2010. 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 June 30, 2010, the Company did not recognize any tax benefit for uncertain tax positions.

 

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):

 

 

    For the Three Months

           Ended June 30,        

       For the Six Months

           Ended June 30,        

 

       2010     

       2009     

       2010     

       2009     

Net income allocable to noncontrolling interests:

 

 

 

 

Noncontrolling interests — common units:

 

 

 

 

Continuing operations

  $     2,749

  $     2,465

  $     5,072

  $  14,044

Discontinued operations

              

            435

         1,189

            479

Total net income allocable to noncontrolling interests — common units

         2,749

         2,900

         6,261

       14,523

Noncontrolling interests — preferred units:

 

 

 

 

Distributions to preferred unit holders

         1,170

         1,381

         2,552

         3,084

Issuance costs related to the redemption of preferred units

            582

 

            582

              

Gain on repurchase of preferred units, net of issuance costs

              

              

              

        (8,417)

Total net income allocable to noncontrolling interests — preferred units

         1,752

         1,381

         3,134

        (5,333)

Total net income allocable to noncontrolling interests

         4,501

         4,281

         9,395

         9,190

Net income allocable to PS Business Parks, Inc.:

 

 

 

 

Common shareholders:

 

 

 

 

Continuing operations

         9,229

         6,931

       16,993

       39,414

Discontinued operations

              

         1,221

         3,981

         1,343

Total net income allocable to common shareholders

         9,229

         8,152

       20,974

       40,757

Preferred shareholders:

 

 

 

 

Distributions to preferred shareholders

       10,869

       11,155

       22,024

       22,351

Issuance costs related to the redemption of preferred stock

         1,854

 

         1,854

              

Gain on repurchase of preferred stock, net of issuance costs

              

              

              

     (27,222)

Total net income allocable to preferred shareholders

       12,723

       11,155

       23,878

        (4,871)

Restricted stock unit holders:

 

 

 

 

Continuing operations

               37

               44

               67

            254

Discontinued operations

              

                 8

               17

                 9

Total net income allocable to restricted stock unit holders

               37

               52

               84

            263

Total net income allocable to PS Business Parks, Inc.

       21,989

       19,359

       44,936

       36,149

 

  $  26,490

  $  23,640

  $  54,331

  $  45,339

 

 

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 Company's restricted stock units are participating securities and included in the computation of basic and diluted weighted average common shares outstanding. The Company's allocation of net income to the 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):

 

 

    For the Three Months

          Ended June 30,             

       For the Six Months

          Ended June 30,             

 

       2010     

       2009      

       2010     

       2009      

Net income allocable to common shareholders

  $     9,229

  $     8,152

  $  20,974

  $  40,757

Weighted average common shares outstanding:

 

 

 

 

Basic weighted average common shares outstanding

       24,524

       20,531

       24,469

       20,501

Net effect of dilutive stock compensation — based on treasury stock method using average market price

            145

            121

            142

            104

Diluted weighted average common shares outstanding

       24,669

       20,652

       24,611

       20,605

Net income per common share — Basic

  $       0.38

  $       0.40

  $       0.86

  $       1.99

Net income per common share — Diluted

  $       0.37

  $       0.39

  $       0.85

  $       1.98

 

Options to purchase 78,000 and 210,000 shares for the three months ended June 30, 2010 and 2009, respectively, were not included in the computation of diluted net income per share because such options were considered anti-dilutive. Options to purchase 78,000 and 220,000 shares for the six months ended June 30, 2010 and 2009, respectively, were not included in the computation of diluted net income per share because such options were considered anti-dilutive.

 

Segment reporting

 

The Company views its operations as one segment.

 

Reclassifications

 

Certain reclassifications have been made to the consolidated financial statements for 2009 in order to conform to the 2010 presentation.


Real estate facilities
v2.2.0.7
Real estate facilities
6 Months Ended
Jun. 30, 2010
Real estate facilities

3.   Real estate facilities

 

The activity in real estate facilities for the six months ended June 30, 2010 is as follows (in thousands):

 

 

 

      Land    

   Buildings and

    Equipment 

  Accumulated

  Depreciation

 

        Total     

Balances at December 31, 2009

                 $     493,709

$  1,528,044

  $  (707,209)

$  1,314,544

Acquisition of real estate facilities

       13,822

        106,740

                 

        120,562

Capital improvements

              

          17,709

                 

          17,709

Disposals

              

           (3,340)

            3,340

                  

Depreciation expense

                                  

                  

         (36,856)

         (36,856)

Balances at June 30, 2010

                 $     507,531

$  1,649,153

  $  (740,725)

$  1,415,959

 

On June 30, 2010, the Company acquired a two-building multi-tenant office park, known as Tycon II and Tycon III, aggregating 270,000 square feet in Tysons Corner, Virginia, for $35.4 million.

 

On June 18, 2010, the Company acquired Parklawn Business Park, a 232,000 square foot multi-tenant office and flex business park located in Rockville, Maryland, for $23.4 million.

 

On April 21, 2010, the Company acquired a portfolio of assets in Austin, Texas, aggregating 704,000 square feet of multi-tenant flex business parks for $42.9 million. In connection with the purchase, the Company received a $256,000 credit for committed tenant improvements.

 

On March 16, 2010, the Company acquired Shady Grove Executive Center, a 350,000 square foot multi-tenant office business park located in Rockville, Maryland, for $60.0 million. In connection with the purchase, the Company received a $1.6 million credit for committed tenant improvements and leasing commissions.

 

In connection with the 2010 acquisitions, the Company incurred acquisition transaction costs of $787,000 and $1.9 million for the three and six months ended June 30, 2010, respectively. The Company did not acquire any assets or assume any liabilities during the six months ended June 30, 2009.

 

The following table summarizes the assets acquired and liabilities assumed during the six months ended June 30, 2010 (in thousands):

 

Land

$        13,822

Buildings and equipment

        106,740

Above-market in-place lease value

             5,468

Below-market in-place lease value

           (1,404)

Total purchase price

        124,626

Net operating assets acquired and liabilities assumed

           (1,044)

Total cash paid

$      123,582

 

The purchase price of acquired properties is allocated to land, buildings and equipment and intangible assets and liabilities associated with in-place leases (including tenant improvements, unamortized lease commissions, value of above-market and below-market leases, acquired in-place lease values, and tenant relationships, if any) based on their respective estimated fair values. In addition, beginning January 1, 2009, acquisition-related costs are recognized separately and 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 allocation of the purchase cost of the acquired properties would affect the timing of recognition of the related revenue and expenses. Amounts allocated to land are derived from comparable sales of land within the same region. Amounts allocated to buildings and improvements, tenant improvements and unamortized lease commissions are based on current market replacement costs and other market information. The amount allocated to acquired in-place leases is determined based on management's assessment of current market conditions and the estimated lease-up periods for the respective spaces.

 

During January, 2010, the Company completed the sale of a 131,000 square foot office building located in Houston, Texas, for a gross sales price of $10.0 million, resulting in a net gain of $5.2 million.

 

The following summarizes the condensed results of operations for the property sold during the first quarter of 2010 (in thousands):

 

 

    For the Three Months

          Ended June 30,             

       For the Six Months

          Ended June 30,             

 

       2010     

       2009      

       2010     

       2009      

Rental income

  $          

  $        601

  $          91

  $     1,216

Cost of operations

              

           (298)

             (57)

           (617)

Depreciation

              

           (127)

              

           (256)

Income from discontinued operations

  $          

  $        176

  $          34

  $        343

      In addition to minimum rental payments, tenants reimburse the Company for their pro rata share of specified operating expenses, which amounted to $16,000 for the six months ended June 30, 2010. Reimbursements were $66,000 and $153,000 for the three and six months ended June 30, 2009, respectively. These amounts are included as rental income in the table presented above.

During May, 2009, the Company sold 3.4 acres of land held for development in Portland, Oregon, for a gross sales price of $2.7 million, resulting in a net gain of $1.5 million.

 

As of June 30, 2010, the Company has a development in progress on a parcel within its Miami International Commerce Center in Miami, Florida, which upon completion is expected to comprise 75,000 square feet of leasable small-bay industrial space. As of June 30, 2010, $3.8 million of the estimated $5.4 million has been expended for the development. The construction is scheduled to be completed in the third quarter of 2010.

 


Leasing activity
v2.2.0.7
Leasing activity
6 Months Ended
Jun. 30, 2010
Leasing activity

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 as of June 30, 2010 under these leases are as follows (in thousands):

 

 

 

2010

 $  105,933

2011

     178,380

2012

     127,257

2013

       83,926

2014

       51,949

Thereafter

     107,858

Total

 $   655,303

 

In addition to minimum rental payments, certain tenants reimburse the Company for their pro rata share of specified operating expenses. Such reimbursements amounted to $14.2 million and $13.7 million for the three months ended June 30, 2010 and 2009, respectively and $28.6 million and $27.5 million for the six months ended June 30, 2010 and 2009, respectively. These amounts are included as rental income in the accompanying consolidated statements of income.

 

Leases accounting for 5.7% of total leased square footage are subject to termination options which include leases accounting for 2.2% of total leased square footage having termination options exercisable through December 31, 2010. In general, these leases provide for termination payments should the termination options be exercised. The above table is prepared assuming such options are not exercised.

 


Bank loans
v2.2.0.7
Bank loans
6 Months Ended
Jun. 30, 2010
Bank loans

5.   Bank loans

 

Subsequent to June 30, 2010, the Company extended the term of its line of credit (the "Credit Facility") with Wells Fargo Bank to August 1, 2012. The Credit Facility has a borrowing limit of $100.0 million. Interest on outstanding borrowings is payable monthly. The rate of interest charged is equal to a rate ranging from the London Interbank Offered Rate ("LIBOR") plus 1.60% to LIBOR plus 2.60% depending on the Company's credit ratings and coverage ratios, as defined (currently LIBOR plus 2.00%). In addition, the Company is required to pay an annual commitment fee ranging from 0.15% to 0.40% of the borrowing limit (currently 0.25%). The Company had no balance outstanding on its Credit Facility at June 30, 2010 or December 31, 2009. The Credit Facility requires the Company to meet certain covenants, with which the Company was in compliance at June 30, 2010.

 


Mortgage notes payable
v2.2.0.7
Mortgage notes payable
6 Months Ended
Jun. 30, 2010
Mortgage notes payable

6.   Mortgage notes payable

 

Mortgage notes consist of the following (in thousands):

 

 

 

June 30,

        2010        

December 31,

         2009       

5.73% mortgage note, secured by one commercial property with a net book value of $28.7 million, principal and interest payable monthly,
due March, 2013

$       13,868

    $  14,006

6.15% mortgage note, secured by one commercial property with a net book value of $27.5 million, principal and interest payable monthly,
due November, 2031 (1)

           16,201

         16,446

5.52% mortgage note, secured by one commercial property with a net book value of $15.6 million, principal and interest payable monthly,
due May, 2013

             9,697

           9,819

5.68% mortgage note, secured by one commercial property with a net book value of $17.3 million, principal and interest payable monthly,
due May, 2013

             9,717

           9,836

5.61% mortgage note, secured by one commercial property with a net book value of $5.7 million, principal and interest payable monthly,
due January, 2011 (2)

            2,724

           2,780

Total

$       52,207

    $  52,887

____________

(1)             The mortgage note has a stated principal balance of $15.9 million and a stated interest rate of 7.20%. Based on the fair market value at the time of assumption, a mortgage premium was computed based on an effective interest rate of 6.15%. The unamortized premiums were $320,000 and $427,000 as of June 30, 2010 and December 31, 2009, respectively. This mortgage is repayable without penalty beginning November, 2011.

 

(2)             The mortgage note has a stated principal balance of $2.7 million and a stated interest rate of 7.61%. Based on the fair market value at the time of assumption, a mortgage premium was computed based on an effective interest rate of 5.61%. The unamortized premiums were $40,000 and $73,000 as of June 30, 2010 and December 31, 2009, respectively.

 

At June 30, 2010, mortgage notes payable had a weighted average interest rate of 5.8% and a weighted average maturity of 8.5 years with principal payments as follows (in thousands):

 

2010

$        696

2011

       3,984

2012

       1,174

2013

     31,573

2014

          371

Thereafter

     14,409

Total

$  52,207


Noncontrolling interests
v2.2.0.7
Noncontrolling interests
6 Months Ended
Jun. 30, 2010
Noncontrolling interests

7.   Noncontrolling interests

 

As described in Note 2, the Company reports noncontrolling interests within equity in the consolidated financial statements, but separate from the Company's 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 PSB's 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 partner 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.

 

At June 30, 2010, there were 7,305,355 common units owned by PS, which are accounted for as noncontrolling interests. On a fully converted basis, assuming all 7,305,355 noncontrolling interests — common units were converted into shares of common stock of PSB at June 30, 2010, the noncontrolling interests — common units would convert into 22.9% of the common shares outstanding. Combined with PS's common stock ownership, on a fully converted basis, PS has a combined ownership of 41.1% of the Company's common equity. 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 interest based upon the ownership interest, and an adjustment is made to the noncontrolling interest, with a corresponding adjustment to paid-in capital, to reflect the noncontrolling interests' equity interest in the Company.

 

Preferred partnership units

 

Through the Operating Partnership, the Company had the following preferred units outstanding as of June 30, 2010 and December 31, 2009:

 

 

 

 

 

                        June 30, 2010                 

                 December 31, 2009              

 

Series 

 

       Issuance Date       

Earliest Potential

Redemption Date     

    Dividend

        Rate       

              Units

       Outstanding    

       Amount      

(in thousands)              

            Units

     Outstanding     

       Amount      

(in thousands)              

Series J

May & June, 2004

May, 2009

       7.500%

         1,710,000

$      42,750

       1,710,000

   $      42,750

Series N

December, 2005

December, 2010

       7.125%

             223,300

           5,583

           223,300

              5,583

Series Q

March, 2007

March, 2012

       6.550%

             203,400

           5,085

           203,400

              5,085

Series G

October, 2002

October, 2007

       7.950%

                        

                 

           800,000

            20,000

Total

 

 

 

         2,136,700

$      53,418

       2,936,700

   $      73,418

 

On May 12, 2010, the Company redeemed 800,000 units of its 7.950% Series G Cumulative Redeemable Preferred Units for $20.0 million. The Company reported the excess of the redemption amount over the carrying amount of $582,000, equal to the original issuance costs, as a reduction of net income allocable to common shareholders for the three and six months ended June 30, 2010.

 

During the first quarter of 2009, the Company paid $12.3 million to repurchase 853,300 units of various series of Cumulative Redeemable Preferred Units for a weighted average purchase price of $14.46 per unit. The purchase price discount, equaling the liquidation value of $25.00 per unit over the weighted average purchase price of $14.46 per unit, was added to net income allocable to common shareholders, net of the original issue discount.
 

The Operating Partnership has the right to redeem preferred units on or after the fifth anniversary of the applicable issuance date at the original capital contribution plus the cumulative priority return, as defined, to the redemption date to the extent not previously distributed. The preferred units are exchangeable for Cumulative Redeemable Preferred Stock of the respective series of PSB on or after the tenth anniversary of the date of issuance at the option of the Operating Partnership or a majority of the holders of the respective preferred units. The Cumulative Redeemable Preferred Stock will have the same distribution rate and par value as the corresponding preferred units and will otherwise have equivalent terms to the other series of preferred stock described in Note 9. As of June 30, 2010, the Company had $1.5 million of deferred costs in connection with the issuance of preferred units, which the Company will report as additional distributions upon notice of redemption.


Related party transactions
v2.2.0.7
Related party transactions
6 Months Ended
Jun. 30, 2010
Related party transactions

8.   Related party transactions

 

Concurrent with the public offering, as discussed in Note 9, the Company sold 383,333 shares of common stock to PS for net proceeds of $17.8 million in 2009.

 

Pursuant to a cost sharing and administrative services agreement, the Company shares costs with PS and its affiliated entities for certain administrative services, which are allocated among PS and its affiliates in accordance with a methodology intended to fairly allocate those costs. These costs totaled $112,000 and $93,000 for the three months ended June 30, 2010 and 2009, respectively and $319,000 and $186,000 for the six months ended June 30, 2010 and 2009, respectively.

 

The Operating Partnership manages industrial, office and retail facilities for PS and its affiliated entities. 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 contracts, 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 these contracts were $163,000 and $173,000 for the three months ended June 30, 2010 and 2009, respectively and $336,000 and $350,000 for the six months ended June 30, 2010 and 2009, respectively.

 

In December, 2006, PS began providing property management services for the mini storage component of two assets owned by the Company. These mini storage facilities, located in Palm Beach County, Florida, operate under the "Public Storage" name.

 

Under the property management contracts, 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 assists and advises the Company in establishing 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 $12,000 and $10,000 for the three months ended June 30, 2010 and 2009, respectively and $23,000 and $27,000 for the six months ended June 30, 2010 and 2009, respectively.

 

The Company had amounts due from PS of $134,000 and $396,000 at June 30, 2010 and December 31, 2009, respectively, for these contracts, as well as for certain operating expenses paid by the Company on behalf of PS.


Shareholders' equity
v2.2.0.7
Shareholders' equity
6 Months Ended
Jun. 30, 2010
Shareholders' equity

9.   Shareholders' equity

 

Preferred stock

 

As of June 30, 2010 and December 31, 2009, the Company had the following series of preferred stock outstanding:

 

 

 

 

 

             June  30, 2010               

          December 31, 2009         

 

Series 

 

               Issuance Date          

Earliest Potential

Redemption Date                  

Dividend

     Rate   

       Shares

Outstanding            

     Amount    

(in thousands)            

       Shares

Outstanding            

     Amount    

(in thousands)            

Series H

January & October, 2004

January, 2009

   7.000%

       6,340,776

$       158,520

      6,340,776

$       158,520

Series I

April, 2004

April, 2009

   6.875%

       2,745,050

            68,626

      2,745,050

            68,626

Series L

August, 2004

August, 2009

   7.600%

       1,935,000

            48,375

      1,935,000

            48,375

Series M

May, 2005

May, 2010

   7.200%

       3,182,000

            79,550

      3,182,000

            79,550

Series O

June & August, 2006

June, 2011

   7.375%

       3,384,000

            84,600

      3,384,000

            84,600

Series P

January, 2007

January, 2012

   6.700%

       5,290,000

         132,250

      5,290,000

         132,250

Series K

June, 2004

June, 2009

   7.950%

                     

                    

      2,165,000

            54,125

Total

 

 

 

    22,876,826

$       571,921

    25,041,826

$       626,046

 

On June 7, 2010, the Company redeemed 2,165,000 depositary shares, each representing 1/1,000 of a share of 7.950% Cumulative Preferred Stock, Series K, for $54.1 million. The Company reported the excess of the redemption amount over the carrying amount of $1.9 million, equal to the original issuance costs, as a reduction of net income allocable to common shareholders for the three and six months ended June 30, 2010.

 

During the first quarter of 2009, the Company paid $50.2 million to repurchase 3,208,174 depositary shares, each representing 1/1,000 of a share of various series of Cumulative Redeemable Preferred Stock for a weighted average purchase price of $15.65 per depositary share. The purchase price discount, equaling the liquidation value of $25.00 per depositary share over the weighted average purchase price per depositary share of $15.65, was added to net income allocable to common shareholders, net of the original issue discount.

 

The Company paid $10.9 million and $11.2 million in distributions to its preferred shareholders for the three months ended June 30, 2010 and 2009, respectively. The Company paid $22.0 million and $22.4 million in distributions to its preferred shareholders for the six months ended June 30, 2010 and 2009, respectively.

 

Holders of the Company's 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 Company's Board of Directors until all events of default have been cured.

 

Except under certain conditions relating to the Company's 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. As of June 30, 2010, the Company had $18.8 million of deferred costs in connection with the issuance of preferred stock, which the Company will report as additional non-cash distributions upon notice of its intent to redeem such shares.

 

Common stock

 

On August 14, 2009, the Company closed the sale of 3,450,000 shares of common stock in a public offering and concurrently sold 383,333 shares of common stock to PS. The aggregate net proceeds were $171.2 million.

 

The Company's Board of Directors previously authorized the repurchase, from time to time, of up to 6.5 million shares of the Company's common stock on the open market or in privately negotiated transactions. Since inception of the program, the Company has repurchased an aggregate of 4.3 million shares of common stock at an aggregate cost of $152.8 million or an average cost per share of $35.84. Under existing board authorizations, the Company can repurchase an additional 2.2 million shares. No shares of common stock were repurchased under this program during the six months ended June 30, 2010 and 2009.

 

The Company paid $10.8 million ($0.44 per common share) and $9.0 million ($0.44 per common share) in distributions to its common shareholders for the three months ended June 30, 2010 and 2009, respectively and $21.6 million ($0.88 per common share) and $18.0 million ($0.88 per common share) for the six months ended June 30, 2010 and 2009, respectively.

 

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.


Commitments and contingencies
v2.2.0.7
Commitments and contingencies
6 Months Ended
Jun. 30, 2010
Commitments and contingencies

10. Commitments and contingencies

 

The Company currently is neither subject to any material litigation nor, to management's knowledge, is any material litigation currently threatened against the Company other than routine litigation and administrative proceedings arising in the ordinary course of business.


Stock compensation
v2.2.0.7
Stock compensation
6 Months Ended
Jun. 30, 2010
Stock compensation

11. Stock compensation

 

PSB has a 1997 Stock Option and Incentive Plan (the "1997 Plan") and a 2003 Stock Option and Incentive Plan (the "2003 Plan"), each covering 1.5 million shares of PSB's common stock. Under the 1997 Plan and 2003 Plan, PSB has granted non-qualified options to certain directors, officers and key employees to purchase shares of PSB's common stock at a price no less than the fair market value of the common stock at the date of grant. Additionally, under the 1997 Plan and 2003 Plan, PSB has granted restricted stock units to officers and key employees.

 

The weighted average grant date fair value of options granted during the six months ended June 30, 2010 and 2009 was $6.08 per share and $4.14 per share, respectively. The Company has calculated the fair value of each option grant on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants during the six months ended June 30, 2010 and 2009, respectively: a dividend yield of 3.3% and 4.4%; expected volatility of 17.5% and 19.4%; expected life of five years; and risk-free interest rates of 2.4% and 2.0%.

 

The weighted average grant date fair value of restricted stock units granted during the six months ended June 30, 2010 and 2009 was $52.35 and $35.00, respectively. The Company calculated the fair value of each restricted stock unit grant using the market value on the date of grant.


At June 30, 2010, there were a combined total of 887,000 options and restricted stock units authorized to grant. Information with respect to outstanding options and nonvested restricted stock units granted under the 1997 Plan and 2003 Plan is as follows:

 

 

 

 

Options:

 

 

  Number of

    Options   

 

      Weighted

       Average

  Exercise Price 

     Weighted

      Average

    Remaining

  Contract Life 

     Aggregate

       Intrinsic

         Value

  (in thousands) 

Outstanding at December 31, 2009

   542,752

      $  39.43

 

 

Granted

   281,000

      $  52.68

 

 

Exercised

(181,036)

      $  32.56

 

 

Forfeited

      (2,000)

      $  68.90

 

 

Outstanding at June 30, 2010

   640,716

      $  47.09

6.61 Years

     $     6,152

Exercisable at June 30, 2010

   301,716

      $  40.94

3.61 Years

     $     4,773

 

 

 

Restricted Stock Units:

 

  Number of

      Units   

      Weighted

Average Grant

Date Fair Value

Nonvested at December 31, 2009

   119,091

      $  53.64

Granted

       6,500

      $  52.35

Vested

    (31,797)

      $  56.37

Forfeited

             

               

Nonvested at June 30, 2010

     93,794

      $  52.63

 

Included in the Company's consolidated statements of income for the three months ended June 30, 2010 and 2009, was $147,000 and $142,000, respectively, in net compensation expense related to stock options. Net compensation expense of $241,000 and $264,000 related to stock options was recognized during the six months ended June 30, 2010 and 2009, respectively. Net compensation expense of $334,000 and $415,000 related to restricted stock units was recognized during the three months ended June 30, 2010 and 2009, respectively. Net compensation expense of $813,000 and $1.3 million related to restricted stock units was recognized during the six months ended June 30, 2010 and 2009, respectively.

 

As of June 30, 2010, there was $1.9 million of unamortized compensation expense related to stock options expected to be recognized over a weighted average period of 4.3 years. As of June 30, 2010, there was $3.2 million of unamortized compensation expense related to restricted stock units expected to be recognized over a weighted average period of 3.3 years.

 

Cash received from 181,036 stock options exercised during the six months ended June 30, 2010 was $5.9 million. Cash received from 22,100 stock options exercised during the six months ended June 30, 2009 was $678,000. The aggregate intrinsic value of the stock options exercised during the six months ended June 30, 2010 and 2009 was $3.7 million and $312,000, respectively.

 

During the six months ended June 30, 2010, 31,797 restricted stock units vested; in settlement of these units, 20,015 shares were issued, net of shares applied to payroll taxes. The aggregate fair value of the shares vested for the six months ended June 30, 2010 was $1.7 million. During the six months ended June 30, 2009, 101,817 restricted stock units vested; in settlement of these units, 63,495 shares were issued, net of shares applied to payroll taxes. The aggregate fair value of the shares vested for the six months ended June 30, 2009 was $3.6 million.

 

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. 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 Company's consolidated statements of income was $39,000 and $68,000 in compensation expense for the three months ended June 30, 2010 and 2009, respectively and $81,000 and $99,000 for the six months ended June 30, 2010 and 2009, respectively. As of June 30, 2010 and 2009, there was $411,000 and $321,000, respectively, of unamortized compensation expense related to these shares.