PS Business Parks, Inc. Reports Results For The Second Quarter Ended June 30, 2012

PS Business Parks, Inc. (NYSE:PSB) reported operating results for the second quarter ended June 30, 2012.

Funds from operations (“FFO”) allocable to common and dilutive shares before non-cash and other adjustments were $37.3 million, or $1.18 per common and dilutive share for the three months ended June 30, 2012, a 5.4% per share increase from the three months ended June 30, 2011 of $36.0 million, or $1.12 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 $74.4 million, or $2.35 per common and dilutive share for the six months ended June 30, 2012, a 6.3% per share increase from the six months ended June 30, 2011 of $71.0 million, or $2.21 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 and six months ended June 30, 2012 over the same periods in 2011 was primarily due to the increase in net operating income from Non-Same Park facilities partially offset by increases in interest expense, preferred equity distributions and general and administrative expenses.

FFO allocable to common and dilutive shares was $29.1 million, or $0.92 per common and dilutive share for the three months ended June 30, 2012, a 17.1% per share decrease from the three months ended June 30, 2011 of $35.8 million, or $1.11 per common and dilutive share. FFO allocable to common and dilutive shares was $61.0 million, or $1.92 per common and dilutive share for the six months ended June 30, 2012, a 21.0% per share decrease from the six months ended June 30, 2011 of $78.2 million, or $2.43 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 and acquisition transaction costs on the Company’s FFO per common and dilutive share for the three and six months ended June 30, 2012 and 2011:
                       
For The Three Months

Ended June 30,
For The Six Months

Ended June 30,
2012       2011 Change 2012       2011 Change
 
FFO per common and dilutive share, before non-cash and other adjustments $ 1.18 $ 1.12 5.4 % $ 2.35 $ 2.21 6.3 %
Acquisition transaction costs (0.01 ) (0.01 )
Non-cash distributions related to the redemption of preferred equity (0.26 ) (0.43 )
Gain on the repurchase of preferred equity               0.23  
FFO per common and dilutive share, as reported $ 0.92   $ 1.11   (17.1 %) $ 1.92   $ 2.43   (21.0 %)
 

Rental income increased $12.7 million, or 17.3%, from $73.0 million for the three months ended June 30, 2011 to $85.6 million for the three months ended June 30, 2012 primarily as a result of a $12.4 million increase in rental income from Non-Same Park facilities. Net income allocable to common shareholders decreased $10.0 million, or 87.6%, from $11.4 million, or $0.46 per diluted share, for the three months ended June 30, 2011 to $1.4 million, or $0.06 per diluted share, for the three months ended June 30, 2012. Rental income increased $23.9 million, or 16.3%, from $146.4 million for the six months ended June 30, 2011 to $170.3 million for the six months ended June 30, 2012 as a result of a $24.7 million increase in rental income from Non-Same Park facilities, partially offset by an $866,000 decrease from the Same Park portfolio. Net income allocable to common shareholders decreased $23.1 million, or 82.5%, from $27.9 million, or $1.13 per diluted share, for the six months ended June 30, 2011 to $4.9 million, or $0.20 per diluted share, for the six months ended June 30, 2012. The decrease in net income allocable to common shareholders for the three and six months was primarily due to the net impact of non-cash preferred equity transactions and increases in interest expense, depreciation and amortization and preferred equity distributions, partially offset by an increase in net operating income.

Property Operations

In order 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”). Effective January 1, 2012, the Company revised its Same Park definition to include all operating properties owned or acquired prior to January 1, 2010. We believe that this will provide the most meaningful perspective on how our assets are performing period to period, while not inflating comparative growth results with the continued lease-up of recently acquired assets. Operating properties that the Company acquired subsequent to January 1, 2010 are referred to as “Non-Same Park.” For the three months ended June 30, 2012 and 2011, the Same Park facilities constitute 19.2 million rentable square feet, representing 70.7% of the 27.1 million square feet in the Company’s portfolio as of June 30, 2012.

The following table presents the operating results of the Company’s properties for the three and six months ended June 30, 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 June 30,

 

For The Six Months

Ended June 30,

 
2012       2011 Change 2012       2011 Change
Rental income:
Same Park (19.2 million rentable square feet) (1) $ 63,457 $ 63,245 0.3 % $ 126,472 $ 127,338 (0.7 %)

Non-Same Park (8.0 million rentable square feet) (2)
  22,170     9,725   128.0 %   43,832     19,093   129.6 %
Total rental income   85,627     72,970   17.3 %   170,304     146,431   16.3 %
Cost of operations:
Same Park 20,218 20,497 (1.4 %) 40,951 42,376 (3.4 %)
Non-Same Park   7,499     3,659   104.9 %   14,881     7,435   100.1 %
Total cost of operations   27,717     24,156   14.7 %   55,832     49,811   12.1 %
Net operating income (3):
Same Park (1) 43,239 42,748 1.1 % 85,521 84,962 0.7 %
Non-Same Park   14,671     6,066   141.9 %   28,951     11,658   148.3 %
Total net operating income   57,910     48,814   18.6 %   114,472     96,620   18.5 %
Other:
Facility management fees 164 169 (3.0 %) 330 347 (4.9 %)
Other income and expense (5,133 ) (1,102 ) 365.8 % (10,438 ) (2,223 ) 369.5 %
Depreciation and amortization (27,198 ) (20,988 ) 29.6 % (54,442 ) (41,718 ) 30.5 %
General and administrative (2,412 ) (1,530 ) 57.6 % (4,685 ) (3,100 ) 51.1 %
Acquisition transaction costs       (218 ) (100.0 %)       (218 ) (100.0 %)
Income from continuing operations $ 23,331   $ 25,145   7.2 % $ 45,237   $ 49,708   (9.0 %)
Same Park gross margin (4) 68.1 % 67.6 % 0.7 % 67.6 % 66.7 % 1.3 %
Same Park weighted average occupancy 91.9 % 90.9 % 1.1 % 92.1 % 91.0 % 1.2 %
Non-Same Park weighted average occupancy 82.8 % 75.0 % 82.0 % 74.0 %

Same Park annualized realized rent per square foot (5)
$ 14.40 $ 14.51 (0.8 %) $ 14.32 $ 14.59 (1.9 %)
 
      (1)     See above for a definition of Same Park.
(2) See above for a definition of Non-Same Park.
(3) 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”).
(4) Same Park gross margin is computed by dividing Same Park NOI by Same Park rental income.
(5) Same Park annualized realized rent per square foot represents the annualized Same Park rental income earned per occupied square foot.
 

Preferred Equity Transactions

On May 14, 2012, the Company issued $350.0 million or 14.0 million depositary shares, each representing 1/1,000 of a share of the 6.00% Cumulative Preferred Stock, Series T, at $25.00 per depositary share. The Company used the proceeds from this issuance to redeem $158.5 million, or 6,340,776 depositary shares, each representing 1/1,000 of a share of the 7.00% Cumulative Preferred Stock, Series H; $68.6 million, or 2,745,050 depositary shares, each representing 1/1,000 of a share of the 6.875% Cumulative Preferred Stock, Series I; and $5.6 million, or 223,300 units of its 7.125% Series N Cumulative Redeemable Preferred Units during June, 2012. The remaining net proceeds were used to reduce the Company’s unsecured debt.

In connection with the Series H, I and N redemptions, the Company reported the excess of the redemption amount over the carrying amount of $8.2 million, representing the original issuance costs, as a reduction of net income allocable to common shareholders and unit holders for the three months ended June 30, 2012.

Property Acquisition

On July 24, 2012, the Company acquired a 958,000 square foot industrial park consisting of eight single-story buildings located in Kent Valley, Washington, for a purchase price of $37.6 million. The park was 52.3% occupied at the time of acquisition.

Financial Condition

The following are key financial ratios with respect to the Company’s leverage at and for the three months ended June 30, 2012:
               
Ratio of FFO to fixed charges (1) 10.7x
Ratio of FFO to fixed charges and preferred distributions (1) 3.0x

Debt and preferred equity to total market capitalization (based on common stock price of $67.72 at June 30, 2012)
38.0%
Available balance under the $250.0 million unsecured credit facility at June 30, 2012 $250.0 million
 
      (1)     Fixed charges include interest expense of $5.2 million.
 

Distributions Declared

The Board of Directors declared a quarterly dividend of $0.44 per common share on July 30, 2012. 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 September 27, 2012 to shareholders of record on September 12, 2012.
                                   

Series

Dividend Rate

Dividend Declared
Series P 6.700 % $ 0.418750
Series R 6.875 % $ 0.429688
Series S 6.450 % $ 0.403125
Series T 6.000 % $ 0.375000
 

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 June 30, 2012, the Company wholly owned 27.2 million rentable square feet with approximately 4,500 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 (3.3 million sq. ft.), Maryland (2.4 million sq. ft.), Oregon (1.3 million sq. ft.), Arizona (0.7 million sq. ft.) and Washington (0.5 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 second quarter operating results, is available on the Internet. The Company’s website is www.psbusinessparks.com.

A conference call is scheduled for Thursday, August 2, 2012, at 8:00 a.m. (PDT) to discuss the second quarter results. The toll free number is (888) 299-3246; the conference ID is 99166002. 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 9, 2012 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)
 
June 30, December 31,
2012 2011
(Unaudited)
 
ASSETS
 
Cash and cash equivalents $ 3,036 $ 4,980
 
Real estate facilities, at cost:
Land 772,573 772,573
Buildings and equipment   2,178,330     2,155,772  
2,950,903 2,928,345
Accumulated depreciation   (893,883 )   (845,700 )
2,057,020 2,082,645
Properties held for disposition, net 1,195 1,218
Land held for development   6,829     6,829  
2,065,044 2,090,692
 
Rent receivable 5,415 3,198
Deferred rent receivable 25,078 23,388
Other assets   14,806     16,361  
 
Total assets $ 2,113,379   $ 2,138,619  
 
LIABILITIES AND EQUITY
 
Accrued and other liabilities $ 68,348 $ 60,940
Credit facility 185,000
Term loan 240,000 250,000
Mortgage notes payable   281,662     282,084  
Total liabilities 590,010 778,024
 
Commitments and contingencies
 
Equity:
PS Business Parks, Inc.’s shareholders’ equity:

Preferred stock, $0.01 par value, 50,000,000 shares authorized, 31,490 and 23,942 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively
787,250 598,546

Common stock, $0.01 par value, 100,000,000 shares authorized, 24,247,428 and 24,128,184 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively
241 240
Paid-in capital 535,712 534,322
Cumulative net income 922,108 878,704
Cumulative distributions   (892,374 )   (832,607 )
Total PS Business Parks, Inc.’s shareholders’ equity 1,352,937 1,179,205
Noncontrolling interests:
Preferred units 5,583
Common units   170,432     175,807  
Total noncontrolling interests   170,432     181,390  
Total equity   1,523,369     1,360,595  
 
Total liabilities and equity $ 2,113,379   $ 2,138,619  
 
 
           

PS BUSINESS PARKS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited, in thousands, except per share amounts)
 
For The Three Months

Ended June 30,
For The Six Months

Ended June 30,
2012       2011 2012       2011
 
Revenues:
Rental income $ 85,627 $ 72,970 $ 170,304 $ 146,431
Facility management fees   164     169     330     347  
Total operating revenues   85,791     73,139     170,634     146,778  
Expenses:
Cost of operations 27,717 24,156 55,832 49,811
Depreciation and amortization 27,198 20,988 54,442 41,718
General and administrative   2,412     1,748     4,685     3,318  
Total operating expenses   57,327     46,892     114,959     94,847  
Other income and (expense):
Interest and other income 80 43 123 137
Interest expense   (5,213 )   (1,145 )   (10,561 )   (2,360 )
Total other income and (expense)   (5,133 )   (1,102 )   (10,438 )   (2,223 )
Income from continuing operations   23,331     25,145     45,237     49,708  
Discontinued operations:
Income (loss) from discontinued operations   24     162     (37 )   272  
Total discontinued operations   24     162     (37 )   272  
 
Net income $ 23,355   $ 25,307   $ 45,200   $ 49,980  
 
Net income allocation:
Net income allocable to noncontrolling interests:
Noncontrolling interests — common units $ 425 $ 3,362 $ 1,473 $ 8,262
Noncontrolling interests — preferred units   224     100     323     (7,190 )
Total net income allocable to noncontrolling interests   649     3,462     1,796     1,072  
Net income allocable to PS Business Parks, Inc.:
Common shareholders 1,410 11,374 4,878 27,937
Preferred shareholders 21,264 10,449 38,450 20,899
Restricted stock unit holders   32     22     76     72  
Total net income allocable to PS Business Parks, Inc.   22,706     21,845     43,404     48,908  
$ 23,355   $ 25,307   $ 45,200   $ 49,980  
 
Net income per common share — basic:
Continuing operations $ 0.06 $ 0.46 $ 0.20 $ 1.12
Discontinued operations $ $ 0.01 $ $ 0.01
Net income $ 0.06 $ 0.46 $ 0.20 $ 1.13
 
Net income per common share — diluted:
Continuing operations $ 0.06 $ 0.45 $ 0.20 $ 1.12
Discontinued operations $ $ 0.01 $ $ 0.01
Net income $ 0.06 $ 0.46 $ 0.20 $ 1.13
 
Weighted average common shares outstanding:
Basic   24,234     24,715     24,195     24,700  
Diluted   24,324     24,807     24,286     24,800  
 
 
           

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 June 30,
For The Six Months

Ended June 30,
2012       2011 2012       2011

Computation of Diluted Funds From Operations (“FFO”) (1) :
 
Net income allocable to common shareholders $ 1,410 $ 11,374 $ 4,878 $ 27,937
Adjustments:
Depreciation and amortization 27,239 21,058 54,538 41,917

Net income allocable to noncontrolling interests — common units
425 3,362 1,473 8,262
Net income allocable to restricted stock unit holders   32     22     76     72  
FFO allocable to common and dilutive shares $ 29,106   $ 35,816   $ 60,965   $ 78,188  
 
Weighted average common shares outstanding 24,234 24,715 24,195 24,700
Weighted average common OP units outstanding 7,305 7,305 7,305 7,305
Weighted average restricted stock units outstanding 111 58 110 67
Weighted average common share equivalents outstanding   90     92     91     100  
Total common and dilutive shares   31,740     32,170     31,701     32,172  
 
FFO per common and dilutive share $ 0.92   $ 1.11   $ 1.92   $ 2.43  
 

Computation of Funds Available for Distribution (“FAD”) (2) :
 
FFO allocable to common and dilutive shares $ 29,106 $ 35,816 $ 60,965 $ 78,188
 
Adjustments:
Recurring capital improvements (1,115 ) (1,458 ) (2,231 ) (2,314 )
Tenant improvements (11,337 ) (6,189 ) (18,920 ) (10,877 )
Lease commissions (1,739 ) (1,405 ) (3,008 ) (2,885 )
Straight-line rent (782 ) (102 ) (1,918 ) (383 )
Non-cash stock compensation expense 1,412 363 2,677 822
In-place lease adjustment 127 212 286 421
Tenant improvement reimbursements, net of lease incentives (179 ) (237 ) (349 ) (432 )
Non-cash distributions related to the redemption of preferred equity 8,208 13,468
Gain on repurchase of preferred equity, net of issuance costs               (7,389 )
FAD $ 23,701   $ 27,000   $ 50,969   $ 55,151  
 
Distributions to common and dilutive shares $ 13,914   $ 14,111   $ 27,821   $ 28,225  
 
Distribution payout ratio   58.7 %   52.3 %   54.6 %   51.2 %
 
(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 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, impairment charges, 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.

Copyright Business Wire 2010

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