Market Overview

PS Business Parks, Inc. Reports Results for the Quarter Ended June 30, 2018 and Increases Quarterly Common Dividend by 23.5% to $1.05 Per Share

Share:

PS Business Parks, Inc. (NYSE:PSB) reported operating results for the
three and six months ended June 30, 2018.

Operating Results for the Three Months Ended
June 30, 2018

Net income allocable to common shareholders was $70.2 million, or $2.56
per diluted common share, for the three months ended June 30, 2018, an
increase of $45.5 million, or 183.8%, from $24.7 million, or $0.90 per
diluted common share, for the same period in 2017. The increase was
mainly due to gain on sale of an office park in Orange County,
California, and an industrial park in Dallas, Texas, during the second
quarter of 2018 and an increase in net operating income ("NOI"–described
below) with respect to our real estate facilities. The increase in NOI
includes a $1.4 million increase for our Same Park facilities (described
below) due primarily to an increase in rental rates and occupancy
combined with increased NOI from our non-Same Park and multi-family
assets, partially offset by reduced NOI with respect to facilities we
sold.

Operating Results for the Six Months Ended June
30, 2018

Net income allocable to common shareholders was $116.3 million, or $4.24
per diluted common share, for the six months ended June 30, 2018, an
increase of $65.1 million, or 127.4%, from $51.1 million, or $1.87 per
diluted common share, for the same period in 2017. The increase was
mainly due to gain on sale of two office parks in Orange County,
California, and an industrial park in Dallas, Texas, during 2018 and an
increase in NOI with respect to our real estate facilities. The increase
in NOI includes a $1.9 million increase for our Same Park facilities due
primarily to an increase in rental rates and occupancy combined with
increased NOI from our non-Same Park and multi-family assets, partially
offset by reduced NOI with respect to facilities we sold.

Funds from Operations

Funds from operations ("FFO") per share was $1.59 for the three months
ended June 30, 2018, as compared to $1.55 for the same period in 2017,
an increase of $0.04 per share. FFO per share was $3.18 for the six
months ended June 30, 2018, an increase of $0.11 per share from the six
months ended June 30, 2017 of $3.07.

FFO, which is described in more detail below, is a non-GAAP (generally
accepted accounting principles) measure defined by the National
Association of Real Estate Investment Trusts and generally represents
net income before depreciation and amortization expense, gains and
losses from sales and impairment charges with respect to real estate
assets.

Property Operations–Same Park Portfolio

To evaluate the ongoing performance of the Company's portfolio over
comparable periods, management analyzes the operating performance of
properties owned and operated throughout both periods (the "Same Park"
facilities). The Same Park portfolio includes all properties we owned
and operated as of June 30, 2018 that were acquired prior to
January 1, 2016, except for an asset held for sale described below under
"Property Dispositions." For the three and six months ended June 30,
2018 and 2017, the Same Park facilities constitute 26.9 million rentable
square feet, representing 95.1% of the 28.3 million rentable square feet
in the Company's total portfolio as of June 30, 2018.

The following table presents the operating results of the Company's Same
Park facilities for the three and six months ended June 30, 2018 and
2017 (unaudited, in thousands, except per square foot amounts):

 
    For the Three Months     For The Six Months  
Ended June 30, Ended June 30,
2018     2017   Change 2018     2017   Change
Rental income $ 97,760 $ 95,464 2.4 % $ 195,782 $ 191,220 2.4 %
Adjusted cost of operations (1) (3)   28,865     28,008   3.1 %   58,900     56,222   4.8 %
Net operating income (2) (3) $ 68,895   $ 67,456   2.1 % $ 136,882   $ 134,998   1.4 %
 
Selected Statistical Data
Gross margin (4) 70.5 % 70.7 % (0.3 %) 69.9 % 70.6 % (1.0 %)
Weighted average square foot occupancy 94.6 % 93.7 % 1.0 % 94.6 % 94.1 % 0.5 %
Annualized rental income per occupied
square foot $ 15.36 $ 15.15 1.4 % $ 15.38 $ 15.10 1.9 %
 
 
(1)     Adjusted cost of operations excludes Long-Term Equity Incentive Plan
("LTEIP") amortization, which can vary significantly period to
period based upon the performance of the whole company, rather than
just property operations.
(2) We evaluate the performance of our business parks primarily based on
NOI, a non-GAAP financial measure, because we believe NOI is an
important measure of the value and performance of our real estate.
We believe investors utilize NOI in a similar manner and for similar
reasons. We define NOI as rental income less adjusted cost of
operations. NOI excludes depreciation and amortization expense
because management and investors do not consider it important in
valuing real estate or evaluating real estate performance, because
depreciation and amortization expense assumes the value of real
estate declines ratably from its historical cost based upon the
passage of time, while we believe the value of real estate changes
based upon cash flow and other market factors.
(3) Our calculation of adjusted cost of operations and NOI may not be
comparable to those of other companies and should not be used as an
alternative to measure performance calculated in accordance with
GAAP. See "Reconciliation of Selected non-GAAP Measures to Analogous
GAAP Measures" below for reconciliations of each of these measures
to their closest analogous GAAP measure on our income statements.
(4) Computed by dividing NOI by rental income.
 

The following table summarizes selected quarterly financial data with
respect to the Same Park facilities (unaudited, in thousands, except per
square foot amounts):

 
    For the Three Months Ended
March 31     June 30   September 30   December 31
Rental income      

2018

$ 98,022 $ 97,760 $ $
2017 $ 95,756 $ 95,464 $ 96,073 $ 97,211
 
Adjusted Cost of Operations

2018

$ 30,035 $ 28,865 $ $
2017 $ 28,214 $ 28,008 $ 29,191 $ 29,642
 
Snow removal
2018 $ 794 $ 40 $ $
2017 $ 378 $ 103 $ $ 63
 
Utilities
2018 $ 5,713 $ 5,242 $ $
2017 $ 5,448 $ 5,295 $ 5,798 $ 5,393
 
Weighted average square foot occupancy
2018 94.6% 94.6%
2017 94.6% 93.7% 94.1% 95.1%
 
Annualized rental income per occupied square foot
2018 $ 15.40 $ 15.36 $ $
2017 $ 15.05 $ 15.15 $ 15.18 $ 15.20
 

Property Acquisition

On June 8, 2018, we acquired two multi-tenant industrial parks
aggregating 1.1 million rentable square feet in Springfield, Virginia,
for a net purchase price of $143.8 million. The portfolio consists of 19
buildings and was 76.1% occupied as of the date of acquisition. The 19
buildings are located in the Springfield/Newington industrial submarket
where we already own three industrial parks totaling 606,000 square feet.

Property Dispositions

During the six months ended June 30, 2018, as previously announced, we
sold Corporate Pointe Business Park and Orange County Business Center
for an aggregate $115.0 million in net proceeds, and on April 30, 2018,
we sold Northgate Business Park, consisting of seven multi-tenant flex
buildings totaling 194,000 square feet located in Dallas, Texas, for net
proceeds of $11.8 million. In connection with these dispositions, we
recorded gains of $58.4 million and $85.3 million for the three and six
months ended June 30, 2018, respectively. We deferred substantially all
of the taxable gains by acquiring the Springfield, Virginia, assets
noted above.

We have one remaining facility that we are seeking to dispose of with
107,000 rentable square feet located in Orange County, California.

Distributions Declared

On July 24, 2018, the Board of Directors declared a quarterly dividend
of $1.05 per common share, an increase of 23.5% from $0.85 per common
share. Distributions were also declared on the various series of
depositary shares, each representing 1/1,000 of a share of preferred
stock. Distributions are payable on September 27, 2018 to shareholders
of record on September 12, 2018.

Company Information

PS Business Parks, Inc., a member of the S&P SmallCap 600, is a real
estate investment trust ("REIT") that acquires, develops, owns and
operates commercial properties, primarily multi-tenant industrial, flex
and office space. As of June 30, 2018, the Company wholly owned
28.3 million rentable square feet with approximately 5,000 commercial
customers in six states and a 95.0% interest in a 395-unit apartment
complex.

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 second quarter operating results, is available
on the Company's website at psbusinessparks.com.

A conference call is scheduled for Wednesday, July 25, 2018, at 9:00
a.m. PDT (12:00 p.m. EDT) to discuss the second quarter results. The
toll free number is (888) 299-3246; the conference ID is 2377708. 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 August 25,
2018 at (855) 859-2056, as well as via webcast on the Company's website.
Additional financial data attached.

 

PS BUSINESS PARKS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 
    June 30,   December 31,
2018   2017  
(Unaudited)
ASSETS
 
Cash and cash equivalents $ 7,214 $ 114,882
 
Real estate facilities, at cost
Land 816,656 769,036
Buildings and improvements   2,362,209     2,156,862  
3,178,865 2,925,898
Accumulated depreciation   (1,201,990 )   (1,161,798 )
1,976,875 1,764,100
Properties held for sale, net (1) 9,465 49,259
Land and building held for development   30,068     29,665  
2,016,408 1,843,024
Investment in and advances to unconsolidated joint venture 100,898
Rent receivable, net 1,807 1,876
Deferred rent receivable, net 31,917 32,062
Other assets   14,969     7,417  
Total assets $ 2,072,315   $ 2,100,159  
 
LIABILITIES AND EQUITY
 
Accrued and other liabilities $ 81,296 $ 80,223
Preferred stock called for redemption 130,000
Credit facility   10,000      
Total liabilities 91,296 210,223
Commitments and contingencies
Equity
PS Business Parks, Inc.'s shareholders' equity
Preferred stock, $0.01 par value, 50,000,000 shares authorized,
38,390 shares issued and outstanding at
June 30, 2018 and December 31, 2017 959,750 959,750
Common stock, $0.01 par value, 100,000,000 shares authorized,
27,331,834 and 27,254,607 shares issued and outstanding at
June 30, 2018 and December 31, 2017, respectively 272 272
Paid-in capital 733,617 735,067
Accumulated earnings (deficit)   69,448     (1,778 )
Total PS Business Parks, Inc.'s shareholders' equity 1,763,087 1,693,311
Noncontrolling interests   217,932     196,625  
Total equity   1,981,019     1,889,936  
Total liabilities and equity $ 2,072,315   $ 2,100,159  
 
 
(1)     Includes the net book value of the properties described under
"Property Dispositions" above. The amounts at December 31, 2017
include reclassifications for additional properties held for sale.
 
 

PS BUSINESS PARKS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited, in thousands, except per share amounts)

 
    For The Three Months   For The Six Months
Ended June 30, Ended June 30,
2018     2017   2018     2017  
 
Rental income $ 101,824 $ 99,800 $ 205,583 $ 199,861
 
Expenses
Cost of operations 31,256 30,250 64,256 61,283
Depreciation and amortization 24,416 23,628 48,298 46,706
General and administrative   2,368     2,443     4,674     5,274  
Total operating expenses   58,040     56,321     117,228     113,263  
 
Operating income 43,784 43,479 88,355 86,598
Interest and other income 294 154 578 387
Interest and other expense (167 ) (285 ) (332 ) (469 )
Equity in loss of unconsolidated joint venture (382 ) (382 )
Gain on sale of real estate facilities 58,448 1,209 85,283 1,209
Gain on sale of development rights               3,865  
Net income 102,359 44,175 173,884 91,208
Allocation to noncontrolling interests   (18,400 )   (6,645 )   (30,300 )   (13,746 )
Net income allocable to PS Business Parks, Inc. 83,959 37,530 143,584 77,462
Allocation to preferred shareholders (12,959 ) (12,591 ) (25,962 ) (25,882 )
Allocation to restricted stock unit holders   (779 )   (197 )   (1,353 )   (445 )
Net income allocable to common shareholders $ 70,221   $ 24,742   $ 116,269   $ 51,135  
 
Net income per common share
Basic $ 2.57 $ 0.91 $ 4.26 $ 1.88
Diluted $ 2.56 $ 0.90 $ 4.24 $ 1.87
 
Weighted average common shares outstanding
Basic   27,322     27,200     27,294     27,174  
Diluted   27,423     27,412     27,395     27,384  
 
 

PS BUSINESS PARKS, INC.

Computation of Funds from Operations and Funds Available for
Distribution

(Unaudited, in thousands, except per share amounts)

 
    For The Three Months   For The Six Months
Ended June 30, Ended June 30,
2018     2017   2018     2017  

Computation of Funds From Operations (1)

 
Net income allocable to common shareholders $ 70,221 $ 24,742 $ 116,269 $ 51,135
Adjustments
Gain on sale of real estate facilities and development rights (58,448 ) (1,209 ) (85,283 ) (5,074 )
Depreciation and amortization expense 24,416 23,628 48,298 46,706
Depreciation from unconsolidated joint venture 104 104
Net income allocated to noncontrolling interests 18,400 6,645 30,300 13,746
Net income allocated to restricted stock unit holders 779 197 1,353 445
FFO (income) loss allocated to joint venture partner   (2 )       11      
FFO allocable to common and dilutive shares $ 55,366   $ 54,107   $ 110,948   $ 107,062  
 
Weighted average outstanding:
Common shares 27,322 27,200 27,294 27,174
Operating partnership units 7,305 7,305 7,305 7,305
Restricted stock units 156 179 189 196
Common share equivalents   101     212     101     210  
Total common and dilutive shares   34,884     34,896     34,889     34,885  
 
Net income per common share—diluted $ 2.56 $ 0.90 $ 4.24 $ 1.87
Gain on sale of real estate facilities and development rights (1.67 ) (0.03 ) (2.44 ) (0.14 )
Depreciation and amortization expense, including amounts
from unconsolidated joint venture   0.70     0.68     1.38     1.34  
FFO per share (1) $ 1.59   $ 1.55   $ 3.18   $ 3.07  
 

Computation of Funds Available for
Distribution ("FAD")
(1)

 
FFO allocable to common and dilutive shares $ 55,366 $ 54,107 $ 110,948 $ 107,062
Adjustments
Recurring capital improvements (2,329 ) (2,780 ) (3,460 ) (3,425 )
Tenant improvements (3,817 ) (9,165 ) (7,757 ) (15,641 )
Lease commissions (1,834 ) (1,607 ) (3,773 ) (3,145 )
Straight-line rent (609 ) (753 ) (1,344 ) (1,634 )
Non-cash stock compensation expense 671 1,563 1,781 3,646
Cash paid for taxes in lieu of shares upon vesting of
restricted stock units (47 ) (4,529 ) (3,403 )
In-place lease adjustment 16 (9 ) 23 (34 )
Tenant improvement reimbursements, net of lease incentives (619 ) (495 ) (1,134 ) (856 )
Capitalized interest       (227 )       (506 )
FAD $ 46,845   $ 40,587   $ 90,755   $ 82,064  
Distributions to common shares and units $ 29,675   $ 29,522   $ 59,351   $ 59,025  
Distribution payout ratio   63.3 %   72.7 %   65.4 %   71.9 %
 
   
(1) FFO and FFO per share are non-GAAP measures defined by the National
Association of Real Estate Investment Trusts and, along with the
non-GAAP measure FAD, are considered helpful measures of REIT
performance by REITs and many REIT analysts. FFO represents net
income before real estate depreciation and amortization expense,
gains or losses and impairment charges, which are excluded because
they are based upon historical real estate costs and assume that
building values diminish ratably over time, while we believe that
real estate values fluctuate due to market conditions. FFO per share
represents FFO allocable to common and dilutive shares, divided by
aggregate common and dilutive shares. FAD represents FFO adjusted to
(a) deduct capital expenditures that maintain the real estate
values, tenant improvements and lease commissions and (b) eliminate
certain non-cash expenses or income such as straight-line rent and
non-cash stock compensation expense. We utilize FAD in evaluating
our ongoing cash flow available for investment, debt repayment and
common distributions. We believe investors and analysts utilize FAD
in a similar manner. FFO and FFO per share are not a substitute for
net income or earnings per share. FFO and FAD are not substitutes
for GAAP net cash flow in evaluating our liquidity or ability to pay
dividends, because they exclude investing and financing activities
presented on our statements of cash flows. In addition, other REITs
may compute these measures differently, so comparisons among REITs
may not be helpful.
 
 

PS BUSINESS PARKS, INC.

Reconciliation of Selected non-GAAP Measures to Analogous GAAP
Measures

(Unaudited, in thousands)

 
    For the Three Months     For The Six Months  
Ended June 30, Ended June 30,
2018     2017   Change 2018     2017   Change
RENTAL INCOME
Same Park $ 97,760 $ 95,464 2.4 % $ 195,782 $ 191,220 2.4 %
Non-Same Park 1,336 314 325.5 % 1,944 605 221.3 %
Multi-family 1,738 100.0 % 3,162 100.0 %
Assets sold or held for sale (1)   990     4,022   (75.4 %)   4,695     8,036   (41.6 %)
Total rental income   101,824     99,800   2.0 %   205,583     199,861   2.9 %
 
COST OF OPERATIONS
Adjusted Cost of Operations
Same Park 28,865 28,008 3.1 % 58,900 56,222 4.8 %
Non-Same Park 564 270 108.9 % 924 624 48.1 %
Multi-family 973 100.0 % 1,970 100.0 %
Assets sold or held for sale (1) 550 1,565 (64.9 %) 1,803 3,234 (44.2 %)
LTEIP amortization   304     407   (25.3 %)   659     1,203   (45.2 %)
Total cost of operations   31,256     30,250   3.3 %   64,256     61,283   4.9 %
 
OPERATING INCOME
Net operating income
Same Park 68,895 67,456 2.1 % 136,882 134,998 1.4 %
Non-Same Park 772 44 1,654.5 % 1,020 (19 ) 5,468.4 %
Multi-family 765 100.0 % 1,192 100.0 %
Assets sold or held for sale (1) 440 2,457 (82.1 %) 2,892 4,802 (39.8 %)
LTEIP amortization (304 ) (407 ) (25.3 %) (659 ) (1,203 ) (45.2 %)
Depreciation and amortization (24,416 ) (23,628 ) 3.3 % (48,298 ) (46,706 ) 3.4 %
General and administrative   (2,368 )   (2,443 ) (3.1 %)   (4,674 )   (5,274 ) (11.4 %)
Operating income $ 43,784   $ 43,479   0.7 % $ 88,355   $ 86,598   2.0 %
 
   
(1) Amounts for the three and six months ended June 30, 2018 represent
the operations of the properties described under "Property
Dispositions" above.
 

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