PS Business Parks, Inc. Reports Results for the Fourth Quarter Ended December 31, 2012

GLENDALE, Calif.--(BUSINESS WIRE)--

PS Business Parks, Inc. PSB reported operating results for the fourth quarter ended December 31, 2012.

Funds from operations (“FFO”) allocable to common and dilutive shares before non-cash and other adjustments were $38.3 million, or $1.20 per common and dilutive share for the three months ended December 31, 2012, a 6.2% per share increase from the three months ended December 31, 2011 of $35.6 million, or $1.13 per common and dilutive share before non-cash and other adjustments. FFO allocable to common and dilutive shares before non-cash and other adjustments was $150.4 million, or $4.74 per common and dilutive share for the year ended December 31, 2012, a 6.3% per share increase from the year ended December 31, 2011 of $142.6 million, or $4.46 per common and dilutive share before non-cash and other adjustments. The increase in FFO per common and dilutive share before non-cash and other adjustments for the three months and year ended December 31, 2012 over the same periods in 2011 was primarily due to the increase in net operating income from Non-Same Park facilities, which includes the 5.3 million square foot portfolio acquired in December 2011, partially offset by increases in interest expense, preferred equity distributions and general and administrative expenses.

FFO allocable to common and dilutive shares was $39.9 million, or $1.25 per common and dilutive share for the three months ended December 31, 2012, a 20.2% per share increase from the three months ended December 31, 2011 of $32.8 million, or $1.04 per common and dilutive share. FFO allocable to common and dilutive shares was $134.5 million, or $4.24 per common and dilutive share for the year ended December 31, 2012, a 9.6% per share decrease from the year ended December 31, 2011 of $149.8 million, or $4.69 per common and dilutive share.

In order to provide a meaningful period-to-period comparison, the following table summarizes the impact of non-cash and other adjustments which include non-cash distributions related to the redemption of preferred equity, the gain on the below par repurchase of preferred equity, lease buyout payments and acquisition transaction costs on the Company's FFO per common and dilutive share for the three months and years ended December 31, 2012 and 2011:

	For The Three Months Ended December 31,								For The Years Ended December 31,
		2012			2011		Change			2012			2011		Change

FFO per common and dilutive share, before non-cash and other adjustments	$	1.20		$	1.13		6.2	%	$	4.74		$	4.46		6.3	%
Non-cash distributions related to the redemption of preferred equity		—			—					(0.55	)		—
Gain on the repurchase of preferred equity		—			—					—			0.23
Lease buyout payments ⁽¹⁾		0.06			—					0.06			0.09
Acquisition transaction costs		(0.01	)		(0.09	)				(0.01	)		(0.09	)
FFO per common and dilutive share, as reported	$	1.25		$	1.04		20.2	%	$	4.24		$	4.69		(9.6	%)

⁽¹⁾

Represents a lease buyout payment recorded in the fourth quarter of 2012 associated with a 39,000 square foot lease in Virginia which terminated as of December 25, 2012 and a lease buyout payment recorded in the third quarter of 2011 associated with a 53,000 square foot lease in Maryland which terminated as of August 31, 2011.

Property Operations

To evaluate the performance of the Company's portfolio over comparable periods, management analyzes the operating performance of properties owned and operated throughout both periods (herein referred to as “Same Park”). The Company defines Same Park to include all operating properties owned or acquired prior to January 1, 2010. Operating properties that the Company acquired subsequent to January 1, 2010 are referred to as “Non-Same Park.” For the three months and years ended December 31, 2012 and 2011, the Same Park facilities constitute 19.2 million rentable square feet, representing 67.7% of the 28.3 million square feet in the Company's portfolio as of December 31, 2012.

The following table presents the operating results of the Company's properties for the three months and years ended December 31, 2012 and 2011 in addition to other income and expense items affecting income from continuing operations (unaudited, in thousands, except per square foot amounts):

	For The Three Months Ended December 31,								For The Years Ended December 31,
		2012			2011		Change			2012			2011		Change
Rental income:
Same Park (19.2 million rentable square feet)	$	63,489		$	62,816		1.1	%	$	253,303		$	253,194		—
Non-Same Park (9.2 million rentable square feet)		23,952			11,747		103.9	%		91,462			41,377		121.0	%
Total rental income		87,441			74,563		17.3	%		344,765			294,571		17.0	%
Cost of operations:
Same Park		20,779			20,696		0.4	%		82,920			83,997		(1.3	%)
Non-Same Park		8,203			4,632		77.1	%		31,188			15,920		95.9	%
Total cost of operations		28,982			25,328		14.4	%		114,108			99,917		14.2	%
Net operating income ⁽¹⁾:
Same Park		42,710			42,120		1.4	%		170,383			169,197		0.7	%
Non-Same Park		15,749			7,115		121.3	%		60,274			25,457		136.8	%
Total net operating income		58,459			49,235		18.7	%		230,657			194,654		18.5	%
Other:
Lease buyout payments ⁽²⁾		1,783			—		100.0	%		1,783			2,886		(38.2	%)
Facility management fees		160			167		(4.2	%)		649			684		(5.1	%)
Other income and expense		(4,804	)		(1,787	)	168.8	%		(20,377	)		(5,234	)	289.3	%
Depreciation and amortization		(28,072	)		(21,291	)	31.8	%		(109,398	)		(84,391	)	29.6	%
General and administrative		(1,802	)		(1,557	)	15.7	%		(8,569	)		(5,969	)	43.6	%
Acquisition transaction costs		(192	)		(2,796	)	(93.1	%)		(350	)		(3,067	)	(88.6	%)
Income from continuing operations	$	25,532		$	21,971		16.2	%	$	94,395		$	99,563		(5.2	%)
Same Park gross margin ⁽³⁾		67.3	%		67.1	%	0.3	%		67.3	%		66.8	%	0.7	%
Same Park weighted average occupancy		92.3	%		91.8	%	0.5	%		92.1	%		91.2	%	1.0	%
Non-Same Park weighted average occupancy		81.7	%		76.6	%	6.7	%		81.9	%		75.3	%	8.8	%
Same Park annualized realized rent per square foot ⁽⁴⁾	$	14.34		$	14.27		0.5	%	$	14.34		$	14.47		(0.9	%)

⁽¹⁾				Net operating income (“NOI”) is an important measurement in the commercial real estate industry for determining the value of the real estate generating the NOI. The Company's calculation of NOI may not be comparable to those of other companies and should not be used as an alternative to measures of performance in accordance with generally accepted accounting principles (“GAAP”).
⁽²⁾				Represents a lease buyout payment recorded in the fourth quarter of 2012 associated with a 39,000 square foot lease in Virginia which terminated as of December 25, 2012 and a lease buyout payment recorded in the third quarter of 2011 associated with a 53,000 square foot lease in Maryland which terminated as of August 31, 2011.
⁽³⁾				Same Park gross margin is computed by dividing Same Park NOI by Same Park rental income.
⁽⁴⁾				Same Park annualized realized rent per square foot represents the annualized Same Park rental income earned per occupied square foot.

Excluding the lease buyout payment noted above, rental income increased $12.9 million, or 17.3%, from $74.6 million for the three months ended December 31, 2011 to $87.4 million for the three months ended December 31, 2012 primarily as a result of a $12.2 million increase in rental income from Non-Same Park facilities, which includes the 5.3 million square foot portfolio acquired in December 2011, combined with a $673,000 increase from the Same Park portfolio driven by an increase in occupancy rates. Including the lease buyout payment noted above, rental income increased $14.7 million from $74.6 million for the three months ended December 31, 2011 to $89.2 million for the three months ended December 31, 2012. Net income allocable to common shareholders increased $959,000, or 10.9%, from $8.8 million, or $0.36 per diluted share, for the three months ended December 31, 2011 to $9.8 million, or $0.40 per diluted share, for the three months ended December 31, 2012. The increase in net income allocable to common shareholders for the three months was primarily due to an increase in net operating income, partially offset by increases in depreciation and amortization, preferred equity distributions and interest expense.

Excluding the lease buyout payments noted above, rental income increased $50.2 million, or 17.0%, from $294.6 million for the year ended December 31, 2011 to $344.8 million for the year ended December 31, 2012 as a result of a $50.1 million increase in rental income from Non-Same Park facilities, which includes the 5.3 million square foot portfolio acquired in December 2011, combined with an increase in rental income from the Same Park portfolio of $109,000 due to an increase in occupancy rates, partially offset by a decrease in rental rates. Including the lease buyout payments, rental income increased $49.1 million from $297.5 million for the year ended December 31, 2011 to $346.5 million for the year ended December 31, 2012. Net income allocable to common shareholders decreased $32.4 million, or 62.0%, from $52.2 million, or $2.12 per diluted share, for the year ended December 31, 2011 to $19.8 million, or $0.81 per diluted share, for the year ended December 31, 2012. The decrease in net income allocable to common shareholders for the year was primarily due to the net impact of non-cash distributions and gain related to preferred equity transactions and increases in depreciation and amortization, interest expense and preferred equity distributions, partially offset by an increase in net operating income.

Preferred Equity Transaction

On October 9, 2012, the Company completed the redemption of its 6.70% Cumulative Preferred Stock, Series P, at its par value of $132.3 million.

Property Acquisition

On December 19, 2012, the Company acquired three multi-tenant flex buildings in Austin, Texas, aggregating 226,000 square feet for $14.9 million. The park was 86.1% occupied at the time of acquisition.

Property Disposition

On October 11, 2012, the Company completed the sale of Quail Valley Business Park, a 66,000 square foot flex park in Houston, Texas, for $2.3 million, resulting in a net gain of $935,000.

Financial Condition

The following are key financial ratios with respect to the Company's leverage at and for the three months ended December 31, 2012:

							Ratio of FFO to fixed charges ⁽¹⁾			12.0x
							Ratio of FFO to fixed charges and preferred distributions ⁽¹⁾			3.1x
							Debt and preferred equity to total market capitalization (based on common stock price of $64.98 at December 31, 2012)			39.7%
							Available balance under the $250.0 million unsecured credit facility at December 31, 2012			$250.0 million

⁽¹⁾

Fixed charges include interest expense of $4.9 million.

Distributions Declared

The Board of Directors declared a quarterly dividend of $0.44 per common share on February 19, 2013. Distributions were also declared on the various series of depositary shares, each representing 1/1,000 of a share of preferred stock listed below. Distributions are payable March 28, 2013 to shareholders of record on March 13, 2013.

Series	Dividend Rate		Dividend Declared
Series R	6.875	%	$	0.429688
Series S	6.450	%	$	0.403125
Series T	6.000	%	$	0.375000
Series U	5.750	%	$	0.359375

Company Information

PS Business Parks, Inc., a member of the S&P SmallCap 600, is a 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. The Company defines “flex” space as buildings that are configured with a combination of office and warehouse space and can be designed to fit a number of uses (including office, assembly, showroom, laboratory, light manufacturing and warehouse space). As of December 31, 2012, the Company wholly owned 28.3 million rentable square feet with approximately 4,600 customers located in eight states, concentrated in California (11.1 million sq. ft.), Virginia (4.2 million sq. ft.), Florida (3.7 million sq. ft.), Texas (3.5 million sq. ft.), Maryland (2.3 million sq. ft.), Washington (1.5 million sq. ft.), Oregon (1.3 million sq. ft.) and Arizona (0.7 million sq. ft.).

Forward-Looking Statements

When used within this press release, the words “may,” “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” “intends” and similar expressions are intended to identify “forward-looking statements.” Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results and performance of the Company to be materially different from those expressed or implied in the forward-looking statements. Such factors include the impact of competition from new and existing commercial facilities which could impact rents and occupancy levels at the Company's facilities; the Company's ability to evaluate, finance and integrate acquired and developed properties into the Company's existing operations; the Company's ability to effectively compete in the markets that it does business in; the impact of the regulatory environment as well as national, state and local laws and regulations including, without limitation, those governing REITs; the impact of general economic conditions upon rental rates and occupancy levels at the Company's facilities; the availability of permanent capital at attractive rates, the outlook and actions of Rating Agencies and risks detailed from time to time in the Company's SEC reports, including quarterly reports on Form 10-Q, reports on Form 8-K and annual reports on Form 10-K.

Additional information about PS Business Parks, Inc., including more financial analysis of the fourth quarter operating results, is available on the Internet. The Company's website is www.psbusinessparks.com.

A conference call is scheduled for Wednesday, February 20, 2013, at 10:00 a.m. (PST) to discuss the fourth quarter results. The toll free number is (888) 299-3246; the conference ID is 95910222. The call will also be available via a live webcast on the Company's website. A replay of the conference call will be available through February 28, 2013 at (855) 859-2056. A replay of the conference call will also be available on the Company's website.

Additional financial data attached.

PS BUSINESS PARKS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

	December 31,			December 31,
		2012			2011
	(Unaudited)

ASSETS

Cash and cash equivalents	$	12,883		$	4,980

Real estate facilities, at cost:
Land		793,352			772,573
Buildings and equipment		2,235,448			2,155,772
		3,028,800			2,928,345
Accumulated depreciation		(942,639	)		(845,700	)
		2,086,161			2,082,645
Properties held for disposition, net		—			1,218
Land held for development		6,829			6,829
		2,092,990			2,090,692

Rent receivable		4,754			3,198
Deferred rent receivable		25,329			23,388
Other assets		15,861			16,361

Total assets	$	2,151,817		$	2,138,619

LIABILITIES AND EQUITY

Accrued and other liabilities	$	69,454		$	60,940
Credit facility		—			185,000
Term loan		200,000			250,000
Mortgage notes payable		268,102			282,084
Total liabilities		537,556			778,024

Commitments and contingencies

Equity:
PS Business Parks, Inc.'s shareholders' equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized, 35,400 and 23,942 shares issued and outstanding at December 31, 2012 and December 31, 2011, respectively		885,000			598,546
Common stock, $0.01 par value, 100,000,000 shares authorized, 24,298,475 and 24,128,184 shares issued and outstanding at December 31, 2012 and December 31, 2011, respectively		242			240
Paid-in capital		537,091			534,322
Cumulative net income		967,783			878,704
Cumulative distributions		(944,427	)		(832,607	)
Total PS Business Parks, Inc.'s shareholders' equity		1,445,689			1,179,205
Noncontrolling interests:
Preferred units		—			5,583
Common units		168,572			175,807
Total noncontrolling interests		168,572			181,390
Total equity		1,614,261			1,360,595

Total liabilities and equity	$	2,151,817		$	2,138,619

PS BUSINESS PARKS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except per share amounts)

	For The Three Months Ended December 31,						For The Years Ended December 31,
		2012			2011			2012			2011

Revenues:
Rental income	$	89,224		$	74,563		$	346,548		$	297,457
Facility management fees		160			167			649			684
Total operating revenues		89,384			74,730			347,197			298,141
Expenses:
Cost of operations		28,982			25,328			114,108			99,917
Depreciation and amortization		28,072			21,291			109,398			84,391
General and administrative		1,994			4,353			8,919			9,036
Total operating expenses		59,048			50,972			232,425			193,344
Other income and (expense):
Interest and other income		81			47			241			221
Interest expense		(4,885	)		(1,834	)		(20,618	)		(5,455	)
Total other income and (expense)		(4,804	)		(1,787	)		(20,377	)		(5,234	)
Income from continuing operations		25,532			21,971			94,395			99,563
Discontinued operations:
Income from discontinued operations		10			63			42			360
Gain on sale of real estate facilities		935			—			935			2,717
Total discontinued operations		945			63			977			3,077

Net income	$	26,477		$	22,034		$	95,372		$	102,640

Net income allocation:
Net income allocable to noncontrolling interests:
Noncontrolling interests — common units	$	2,935		$	2,664		$	5,970		$	15,543
Noncontrolling interests — preferred units		—			100			323			(6,991	)
Total net income allocable to noncontrolling interests		2,935			2,764			6,293			8,552
Net income allocable to PS Business Parks, Inc.:
Preferred shareholders		13,750			10,450			69,136			41,799
Restricted stock unit holders		32			19			138			127
Common shareholders		9,760			8,801			19,805			52,162
Total net income allocable to PS Business Parks, Inc.		23,542			19,270			89,079			94,088
	$	26,477		$	22,034		$	95,372		$	102,640

Net income per common share — basic:
Continuing operations	$	0.37		$	0.36		$	0.79		$	2.03
Discontinued operations	$	0.03		$	—		$	0.03		$	0.10
Net income	$	0.40		$	0.36		$	0.82		$	2.13

Net income per common share — diluted:
Continuing operations	$	0.37		$	0.36		$	0.78		$	2.02
Discontinued operations	$	0.03		$	—		$	0.03		$	0.10
Net income	$	0.40		$	0.36		$	0.81		$	2.12

Weighted average common shares outstanding:
Basic		24,288			24,128			24,234			24,516
Diluted		24,361			24,209			24,323			24,599

PS BUSINESS PARKS, INC.
Computation of Diluted Funds from Operations (“FFO”) and Funds Available for Distribution (“FAD”)
(Unaudited, in thousands, except per share amounts)

	For The Three Months Ended December 31,						For The Years Ended December 31,
		2012			2011			2012			2011
Computation of Diluted Funds From Operations (“FFO”) ⁽¹⁾:

Net income allocable to common shareholders	$	9,760		$	8,801		$	19,805		$	52,162
Adjustments:
Gain on sale of real estate facilities		(935	)		—			(935	)		(2,717	)
Depreciation and amortization		28,072			21,342			109,494			84,682
Net income allocable to noncontrolling interests — common units		2,935			2,664			5,970			15,543
Net income allocable to restricted stock unit holders		32			19			138			127
FFO allocable to common and dilutive shares	$	39,864		$	32,826		$	134,472		$	149,797

Weighted average common shares outstanding		24,288			24,128			24,234			24,516
Weighted average common OP units outstanding		7,305			7,305			7,305			7,305
Weighted average restricted stock units outstanding		102			60			107			64
Weighted average common share equivalents outstanding		73			81			89			83
Total common and dilutive shares		31,768			31,574			31,735			31,968

FFO per common and dilutive share	$	1.25		$	1.04		$	4.24		$	4.69

Computation of Funds Available for Distribution (“FAD”) ⁽²⁾:

FFO allocable to common and dilutive shares	$	39,864		$	32,826		$	134,472		$	149,797

Adjustments:
Recurring capital improvements		(1,857	)		(2,830	)		(8,394	)		(8,173	)
Tenant improvements		(6,155	)		(9,536	)		(34,236	)		(27,292	)
Lease commissions		(2,258	)		(3,361	)		(7,244	)		(8,089	)
Straight-line rent		(3	)		(569	)		(2,686	)		(1,228	)
Non-cash stock compensation expense		1,373			763			5,434			1,965
In-place lease adjustment		99			200			501			843
Tenant improvement reimbursements, net of lease incentives		(754	)		(154	)		(1,315	)		(769	)
Non-cash distributions related to the redemption of preferred equity		—			—			17,316			—
Gain on repurchase of preferred equity, net of issuance costs		—			—			—			(7,389	)
FAD	$	30,309		$	17,339		$	103,848		$	99,665

Distributions to common and dilutive shares	$	13,935		$	13,854		$	55,678		$	56,005

Distribution payout ratio		46.0	%		79.9	%		53.6	%		56.2	%

⁽¹⁾				Funds From Operations (“FFO”) is computed in accordance with the White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). The White Paper defines FFO as net income, computed in accordance with GAAP, before depreciation, amortization, gains or losses on asset dispositions, net income allocable to noncontrolling interests — common units, net income allocable to restricted stock unit holders, impairment charges and nonrecurring items. FFO should be analyzed in conjunction with net income. However, FFO should not be viewed as a substitute for net income as a measure of operating performance or liquidity as it does not reflect depreciation and amortization costs or the level of capital expenditure and leasing costs necessary to maintain the operating performance of the Company's properties, which are significant economic costs and could materially impact the Company's results from operations. Other REITs may use different methods for calculating FFO and, accordingly, the Company's FFO may not be comparable to other real estate companies.

⁽²⁾				Funds Available for Distribution (“FAD”) is computed by adjusting consolidated FFO for recurring capital improvements, which the Company defines as those costs incurred to maintain the assets' value, tenant improvements, lease commissions, straight-line rent, stock compensation expense, amortization of lease incentives and tenant improvement reimbursements, in-place lease adjustment and the effect of redemption/repurchase of preferred equity. Like FFO, the Company considers FAD to be a useful measure for investors to evaluate the operations and cash flows of a REIT. FAD does not represent net income or cash flow from operations as defined by GAAP.

PS Business Parks, Inc.
Edward A. Stokx
(818) 244-8080, Ext. 1649

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