PS Business Parks, Inc. Reports Results For The Second Quarter Ended June 30, 2013 And Acquisition Of A $14.8 Million Flex Park In Dallas, Texas

PS Business Parks, Inc. (NYSE:PSB) reported operating results for the second quarter ended June 30, 2013 and acquisition of a $14.8 million flex park in Dallas, Texas.

Funds from operations (“FFO”) allocable to common and dilutive shares were $38.0 million, or $1.19 per common and dilutive share for the three months ended June 30, 2013, a 0.8% per share increase from the three months ended June 30, 2012 of $37.3 million, or $1.18, as adjusted, per common and dilutive share. FFO allocable to common and dilutive shares was $76.1 million, or $2.39 per common and dilutive share for the six months ended June 30, 2013, a 1.7% per share increase from the six months ended June 30, 2012 of $74.4 million, or $2.35, as adjusted, per common and dilutive share. The increase in adjusted FFO per common and dilutive share for the three and six months ended June 30, 2013 over the same periods in 2012 was due to the increase in net operating income in both the Same Park and Non-Same Park facilities partially offset by an increase in preferred equity distributions as the Company has replaced short-term debt with perpetual preferred equity.

Rental income increased $2.3 million, or 2.7%, from $85.6 million for the three months ended June 30, 2012 to $87.9 million for the three months ended June 30, 2013 as a result of a $1.5 million increase in rental income from Non-Same Park facilities combined with a $757,000 increase from the Same Park portfolio. Rental income increased $5.7 million, or 3.4%, from $170.3 million for the six months ended June 30, 2012 to $176.1 million for the six months ended June 30, 2013 as a result of a $3.9 million increase in rental income from Non-Same Park facilities combined with a $1.8 million increase from the Same Park portfolio. The three and six month increases were driven by increases in occupancy rates and 2012 acquisitions.

Net income allocable to common shareholders increased $7.3 million, or 517.8%, from $1.4 million, or $0.06 per diluted share, for the three months ended June 30, 2012 to $8.7 million, or $0.36 per diluted share, for the three months ended June 30, 2013. Net income allocable to common shareholders increased $12.4 million, or 253.6%, from $4.9 million, or $0.20 per diluted share, for the six months ended June 30, 2012 to $17.3 million, or $0.71 per diluted share, for the six months ended June 30, 2013. These increases were due to the net impact of non-cash preferred equity transactions reported in 2012 combined with an increase in net operating income in 2013.

In order to provide a meaningful period-to-period comparison of FFO derived from the Company’s ongoing business operations, the following table reconciles reported FFO to adjusted FFO which excludes the impact of non-cash distributions related to the redemption of preferred equity on the Company’s FFO per common and dilutive share for the three and six months ended June 30, 2013 and 2012:
     

For The Three MonthsEnded June 30,
       

For The Six MonthsEnded June 30,
   
  2013       2012 Change   2013       2012 Change
 
FFO per common and dilutive share, as reported $ 1.19 $ 0.92 29.3 % $ 2.39 $ 1.92 24.5 %

Non-cash distributions related to the redemption of preferred equity
    0.26     0.43

FFO per common and dilutive share, as adjusted
$ 1.19 $ 1.18 0.8 % $ 2.39 $ 2.35 1.7 %
 

Non-cash distributions related to the redemption of preferred equity of $8.2 million and $13.5 million were included in net income allocable to preferred shareholders for the three and six months ended June 30, 2012, respectively.

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 Same Park portfolio includes all operating properties owned or acquired prior to January 1, 2011. Operating properties that the Company acquired subsequent to January 1, 2011 are referred to as “Non-Same Park.” For the three and six months ended June 30, 2013 and 2012, the Same Park facilities constitute 21.4 million rentable square feet, representing 76.0% of the 28.2 million square feet in the Company’s portfolio as of June 30, 2013.

The following table presents the operating results of the Company’s properties for the three and six months ended June 30, 2013 and 2012 in addition to other income and expense items affecting income from continuing operations (unaudited, in thousands, except per square foot amounts):
     

For The Three MonthsEnded June 30,
   

 
   

For The Six MonthsEnded June 30,
   

 
  2013         2012   Change   2013         2012   Change
Rental income:
Same Park (21.4 million rentable square feet) $ 74,572 $ 73,815 1.0 % $ 148,847 $ 147,044 1.2 %
Non-Same Park (6.8 million rentable

square feet)
  13,358     11,812   13.1 %   27,203     23,260   17.0 %
Total rental income   87,930     85,627   2.7 %   176,050     170,304   3.4 %
Cost of operations:
Same Park 24,485 24,080 1.7 % 49,645 48,562 2.2 %
Non-Same Park   4,235     3,637   16.4 %   8,459     7,270   16.4 %
Total cost of operations   28,720     27,717   3.6 %   58,104     55,832   4.1 %
Net operating income (1):
Same Park 50,087 49,735 0.7 % 99,202 98,482 0.7 %
Non-Same Park   9,123     8,175   11.6 %   18,744     15,990   17.2 %
Total net operating income   59,210     57,910   2.2 %   117,946     114,472   3.0 %
Other:
Facility management fees 157 164 (4.3 %) 315 330 (4.5 %)
Other income and expense (3,892 ) (5,133 ) (24.2 %) (8,437 ) (10,438 ) (19.2 %)
Depreciation and amortization (26,629 ) (27,198 ) (2.1 %) (53,590 ) (54,442 ) (1.6 %)
General and administrative   (2,370 )   (2,412 ) (1.7 %)   (4,769 )   (4,685 ) 1.8 %
Income from continuing operations $ 26,476   $ 23,331   13.5 % $ 51,465   $ 45,237   13.8 %
Same Park gross margin (2) 67.2 % 67.4 % (0.3 %) 66.6 % 67.0 % (0.6 %)
Same Park weighted average occupancy 91.9 % 91.4 % 0.5 % 92.0 % 91.5 % 0.5 %
Non-Same Park weighted average occupancy 82.7 % 82.8 % (0.1 %) 81.8 % 81.9 % (0.1 %)
Same Park annualized realized rent

per square foot (3)
$ 15.15 $ 15.08 0.5 % $ 15.10 $ 15.00 0.7 %
 
(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) Computed by dividing Same Park NOI by Same Park rental income.
(3) Represents the annualized Same Park rental income earned per occupied square foot.
 

Property Acquisition

On July 26, 2013, the Company acquired a 389,000 square foot multi-tenant flex park consisting of 18 single-story buildings located in Dallas, Texas, for a purchase price of $14.8 million. The park was 66.5% occupied at the time of acquisition. The acquisition was funded with cash on hand.

Personnel Announcement

Maria R. Hawthorne has been promoted to Executive Vice President, Chief Administrative Officer. Ms. Hawthorne most recently served as Executive Vice President, East Coast, with responsibility for PS Business Parks’ operations in Northern Virginia, Maryland and South Florida. This change in Maria's role is reflective of the increasing responsibilities she has assumed within the Company.

Financial Condition

The following are key financial ratios with respect to the Company’s leverage at and for the three months ended June 30, 2013:
        Ratio of FFO to fixed charges (1)         14.4x
Ratio of FFO to fixed charges and preferred distributions (1) 3.0x

Debt and preferred equity to total market capitalization (based oncommon stock price of $72.17 at June 30, 2013)
36.9%

Available balance under the $250.0 million unsecured credit facilityat June 30, 2013
$250.0 million
       

(1)
    Fixed charges include interest expense of $4.0 million.
 

Distributions Declared

The Board of Directors declared a quarterly dividend of $0.44 per common share on July 29, 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 September 30, 2013 to shareholders of record on September 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
Series V 5.700 % $ 0.356250
 

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, 2013, the Company wholly owned 28.2 million rentable square feet with approximately 4,650 customers located in eight states, concentrated in California (11.1 million sq. ft.), Virginia (4.0 million sq. ft.), Florida (3.7 million sq. ft.), Texas (3.5 million sq. ft.), Maryland (2.4 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 second quarter operating results, is available on the Internet. The Company’s website is www.psbusinessparks.com.

A conference call is scheduled for Tuesday, July 30, 2013, at 8:00 a.m. (PDT) to discuss the second quarter results. The toll free number is (888) 299-3246; the conference ID is 18551997. 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 6, 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)
             
June 30, December 31,
  2013     2012  
(Unaudited)
 
ASSETS
 
Cash and cash equivalents $ 18,762 $ 12,883
 
Real estate facilities, at cost:
Land 787,425 793,352
Buildings and equipment   2,243,149     2,235,448  
3,030,574 3,028,800
Accumulated depreciation   (988,256 )   (942,639 )
2,042,318 2,086,161
Land and building held for development   22,301     6,829  
2,064,619 2,092,990
 
Rent receivable 4,806 4,754
Deferred rent receivable 26,194 25,329
Other assets   11,899     15,861  
 
Total assets $ 2,126,280   $ 2,151,817  
 
LIABILITIES AND EQUITY
 
Accrued and other liabilities $ 65,095 $ 69,454
Term loan 90,000 200,000
Mortgage notes payable   250,000     268,102  
Total liabilities 405,095 537,556
 
Commitments and contingencies
 
Equity:
PS Business Parks, Inc.’s shareholders’ equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized,

39,800 and 35,400 shares issued and outstanding at

June 30, 2013 and December 31, 2012, respectively
995,000 885,000
Common stock, $0.01 par value, 100,000,000 shares authorized,

24,380,571 and 24,298,475 shares issued and outstanding at

June 30, 2013 and December 31, 2012, respectively
242 242
Paid-in capital 539,270 537,091
Cumulative net income 1,014,069 967,783
Cumulative distributions   (994,822 )   (944,427 )
Total PS Business Parks, Inc.’s shareholders’ equity 1,553,759 1,445,689
Noncontrolling interests:
Common units   167,426     168,572  
Total noncontrolling interests   167,426     168,572  
Total equity   1,721,185     1,614,261  
 
Total liabilities and equity $ 2,126,280   $ 2,151,817  
 

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,
  2013         2012     2013         2012  
 
Revenues:
Rental income $ 87,930 $ 85,627 $ 176,050 $ 170,304
Facility management fees   157     164     315     330  
Total operating revenues   88,087     85,791     176,365     170,634  
Expenses:
Cost of operations 28,720 27,717 58,104 55,832
Depreciation and amortization 26,629 27,198 53,590 54,442
General and administrative   2,370     2,412     4,769     4,685  
Total operating expenses   57,719     57,327     116,463     114,959  
Other income and (expense):
Interest and other income 69 80 112 123
Interest and other expense   (3,961 )   (5,213 )   (8,549 )   (10,561 )
Total other income and (expense)   (3,892 )   (5,133 )   (8,437 )   (10,438 )
Income from continuing operations   26,476     23,331     51,465     45,237  
Discontinued operations:
Income (loss) from discontinued operations       24         (37 )
Total discontinued operations       24         (37 )
 
Net income $ 26,476   $ 23,355   $ 51,465   $ 45,200  
 
Net income allocation:
Net income allocable to noncontrolling interests:
Noncontrolling interests — common units $ 2,613 $ 425 $ 5,179 $ 1,473
Noncontrolling interests — preferred units       224         323  
Total net income allocable to noncontrolling interests   2,613     649     5,179     1,796  
Net income allocable to PS Business Parks, Inc.:
Preferred shareholders 15,122 21,264 28,972 38,450
Restricted stock unit holders 30 32 63 76
Common shareholders   8,711     1,410     17,251     4,878  
Total net income allocable to PS Business Parks, Inc.   23,863     22,706     46,286     43,404  
$ 26,476   $ 23,355   $ 51,465   $ 45,200  
 
Net income per common share — basic:
Continuing operations $ 0.36 $ 0.06 $ 0.71 $ 0.20
Discontinued operations $ $ $ $
Net income $ 0.36 $ 0.06 $ 0.71 $ 0.20
 
Net income per common share — diluted:
Continuing operations $ 0.36 $ 0.06 $ 0.71 $ 0.20
Discontinued operations $ $ $ $
Net income $ 0.36 $ 0.06 $ 0.71 $ 0.20
 
Weighted average common shares outstanding:
Basic   24,358     24,234     24,333     24,195  
Diluted   24,470     24,324     24,441     24,286  
 

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,
  2013         2012     2013         2012  

Computation of Diluted Funds From Operations (“FFO”) (1):
 
Net income allocable to common shareholders $ 8,711 $ 1,410 $ 17,251 $ 4,878
Adjustments:
Depreciation and amortization 26,629 27,239 53,590 54,538
Net income allocable to noncontrolling

interests — common units
2,613 425 5,179 1,473
Net income allocable to restricted stock unit holders   30     32     63     76  
FFO allocable to common and dilutive shares $ 37,983   $ 29,106   $ 76,083   $ 60,965  
 
Weighted average common shares outstanding 24,358 24,234 24,333 24,195
Weighted average common OP units outstanding 7,305 7,305 7,305 7,305
Weighted average restricted stock units outstanding 92 111 95 110
Weighted average common share equivalents outstanding   112     90     108     91  
Total common and dilutive shares   31,867     31,740     31,841     31,701  
 
FFO per common and dilutive share $ 1.19   $ 0.92   $ 2.39   $ 1.92  
 

Computation of Funds Available for Distribution (“FAD”) (2):
 
FFO allocable to common and dilutive shares $ 37,983 $ 29,106 $ 76,083 $ 60,965
 
Adjustments:
Recurring capital improvements (2,695 ) (1,115 ) (3,604 ) (2,232 )
Tenant improvements (7,161 ) (11,337 ) (12,953 ) (18,920 )
Lease commissions (2,117 ) (1,739 ) (4,332 ) (3,008 )
Straight-line rent (258 ) (782 ) (864 ) (1,918 )
Non-cash stock compensation expense 1,205 1,412 2,628 2,677
In-place lease adjustment 49 127 121 286
Tenant improvement reimbursements, net of lease incentives (348 ) (179 ) (625 ) (349 )
Non-cash distributions related to the redemption of preferred equity       8,208         13,468  
FAD $ 26,658   $ 23,701   $ 56,454   $ 50,969  
 
Distributions to common and dilutive shares $ 13,971   $ 13,914   $ 27,914   $ 27,821  
 
Distribution payout ratio   52.4 %   58.7 %   49.4 %   54.6 %
 
(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.

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