PS Business Parks, Inc. (NYSE:PSB) reported operating results
for the fourth quarter ended December 31, 2013.
Funds from operations (“FFO”) were $41.9 million, or $1.26,
as adjusted, per share for the three months ended December 31,
2013, a 1.6% per share increase from the three months ended
December 31, 2012 of $39.3 million, or $1.24, as adjusted, per
share. FFO was $159.4 million, or $4.95, as adjusted, per
share for the year ended December 31, 2013, a 1.9% per share
increase from the year ended December 31, 2012 of $154.2 million,
or $4.86, as adjusted, per share. The increase in adjusted FFO per
share for the three months and year ended
December 31, 2013 over the same periods in 2012 was due
to the increase in net operating income partially offset by an
increase in preferred equity distributions as the Company replaced
short-term debt with perpetual preferred equity combined with an
increase in share count as a result of the November, 2013 common
equity offering.
At the beginning of 2012, the Company put in place a Long-Term
Equity Incentive Plan (“LTEIP”) designed to grant restricted stock
units to management based on the Company’s ability to achieve
certain defined goals over a four-year period. While the Company
has continued to see improved operating metrics and delivered
strong total shareholder returns over the past two years, the
original targets under the LTEIP were based on an assumption of a
strong economic recovery starting in 2012. Given the current pace
of the economic recovery, management has determined that it is not
probable that the targets under the LTEIP will be met. As such, the
Company stopped recording amortization as of September 30, 2013 and
recorded a reversal of all previously recorded LTEIP amortization
of $6.9 million during the three months ended December 31, 2013.
Additionally, to present comparative results, the reversal and all
amounts originally expensed in prior periods in either cost of
operations (for field leadership) or general and administrative
expenses (for executive management) have been reflected as
adjustments in the FFO and Property Operations tables below.
In order to provide meaningful period-to-period comparisons of
FFO derived from the Company’s ongoing business operations, the
following table reconciles reported FFO to adjusted FFO, which
excludes the LTEIP amortization adjustments, certain lease buyout
payments, gain on sale of ownership interest in Stor-RE Mutual
Insurance Company, Inc. ("Stor-RE"), acquisition transaction costs
and the impact of non-cash distributions related to the redemption
of preferred equity for the three months and years ended December
31, 2013 and 2012:
For the Three Months For the Years Ended December
31, Ended December 31, 2013 2012
Change 2013 2012 Change FFO per share,
as reported $ 1.54 $ 1.25 23.2 % $ 5.15 $ 4.24 21.5 % LTEIP
amortization (0.20 ) 0.03 (0.12 ) 0.12 Lease buyout payments (0.07
) (0.05 ) (0.07 ) (0.06 ) Gain on sale of ownership interest in
Stor-RE (0.03 ) — (0.04 ) — Acquisition transaction costs 0.02 0.01
0.03 0.01
Non-cash distributions related to the
redemption of preferred equity
— — — 0.55
FFO per share, as adjusted $ 1.26 $ 1.24 1.6 % $ 4.95
$ 4.86 1.9 %
The following are adjustments to reconcile adjusted FFO to
reported FFO as noted above. The reversal of LTEIP amortization was
$6.9 million and $3.9 million for the three months and year ended
December 31, 2013, respectively. The $1.0 million and $3.9 million
originally expensed for the three months and year ended December
31, 2012, respectively, have been added back for comparative
purposes. The excluded lease buyout payments were $2.3 million and
$1.8 million for the three months and years ended December 31, 2013
and 2012, respectively. During the three months ended December 31,
2013, the Company sold its ownership interest in Stor-RE, an
insurance captive primarily owned by Public Storage, resulting in a
gain of $1.1 million. Acquisition transaction costs were
$701,000 and $192,000 for the three months ended December 31, 2013
and 2012, respectively, and $854,000 and $350,000 for the years
ended December 31, 2013 and 2012, respectively. Non-cash
distributions related to the redemption of preferred equity of
$17.3 million were included in net income allocable to preferred
shareholders for the year ended December 31, 2012.
Excluding the two lease buyout payments noted above, rental
income increased $3.7 million, or 4.3%, from $87.4 million for
the three months ended December 31, 2012 to $91.2 million for the
three months ended December 31, 2013 as a result of a $3.3
million increase in rental income from Non-Same Park facilities,
and a $421,000 increase from the Same Park portfolio. Excluding the
two lease buyout payments noted above, rental income increased
$12.2 million, or 3.5%, from $344.8 million for the year ended
December 31, 2012 to $357.0 million for the year ended
December 31, 2013 as a result of an $8.8 million increase in rental
income from Non-Same Park facilities combined with a $3.5 million
increase from the Same Park portfolio. The Same Park increases were
due to an increase in occupancy and rental rates while the
increases in Non-Same Park were due to a combination of an increase
in occupancy and the acquisition of additional parks. In December,
2013, the Company received a net lease buyout payment of $2.3
million in connection with the termination of a 75,000 square foot
lease in Beaverton, Oregon. The space was immediately re-leased
with no down time.
Net income allocable to common shareholders increased $7.9
million, or 81.2%, from $9.8 million, or $0.40 per share, for the
three months ended December 31, 2012 to $17.7 million, or $0.68 per
share, for the three months ended December 31, 2013. Net income
allocable to common shareholders increased $24.0 million, or
121.4%, from $19.8 million, or $0.81 per share, for the year ended
December 31, 2012 to $43.9 million, or $1.77 per share, for
the year ended December 31, 2013. These increases were due to the
net impact of preferred equity transactions in 2013 and 2012 and
the reversal of the LTEIP amortization combined with an increase in
net operating income in 2013 and a decrease in interest expense.
The three-month increase was also impacted by the gain on the sale
of the Company’s ownership interest in Stor-RE of $1.1 million.
All per share amounts noted above are presented on a diluted
basis.
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 months and years ended December 31, 2013 and
2012, the Same Park facilities constitute 21.4 million
rentable square feet, representing 72.0% of the 29.7 million square
feet in the Company’s portfolio as of December 31, 2013.
The following table presents the operating results of the
Company’s properties for the three months and years ended December
31, 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 Months For the Years Ended
December 31, Ended December 31, 2013 2012
Change 2013 2012 Change Rental income:
Same Park (21.4 million rentable square feet) $ 75,362 $ 74,941 0.6
% $ 299,524 $ 296,062 1.2 %
Non-Same Park (8.3 million rentable square
feet)
15,810 12,500 26.5 % 57,470 48,703 18.0 % Total rental income
91,172 87,441 4.3 % 356,994
344,765 3.5 % Cost of operations: Same Park
23,731 24,384 (2.7 %) 97,813 97,184 0.6 % Non-Same Park
5,279 4,311 22.5 % 18,259
15,683 16.4 % Total cost of operations 29,010
28,695 1.1 % 116,072 112,867
2.8 %
Net operating income (1):
Same Park 51,631 50,557 2.1 % 201,711 198,878 1.4 % Non-Same Park
10,531 8,189 28.6 % 39,211
33,020 18.7 % Total net operating income
62,162 58,746 5.8 % 240,922
231,898 3.9 % Other: Lease buyout payments (2)
2,252 1,783 26.3 % 2,252 1,783 26.3 %
LTEIP amortization (3):
Cost of operations
2,184 (287 ) (861.0 %) 1,241 (1,241 ) (200.0 %)
General and administrative
4,695 (718 ) (753.9 %) 2,652 (2,652 ) (200.0 %) Facility management
fees 162 160 1.3 % 639 649 (1.5 %) Other income and expense (2,290
) (4,804 ) (52.3 %) (14,681 ) (20,377 ) (28.0 %) Depreciation and
amortization (28,730 ) (28,072 ) 2.3 % (108,917 ) (109,398 ) (0.4
%) General and administrative (1,902 ) (1,084 ) 75.5 % (7,110 )
(5,917 ) 20.2 % Acquisition transaction costs (701 )
(192 ) 265.1 % (854 ) (350 ) 144.0 % Income from
continuing operations $ 37,832 $ 25,532 48.2 % $
116,144 $ 94,395 23.0 % Same Park gross margin (4)
68.5 % 67.5 % 1.5 % 67.3 % 67.2 % 0.1 % Same Park weighted average
occupancy 92.0 % 92.2 % (0.2 %) 92.0 % 91.7 % 0.3 % Non-Same Park
weighted average occupancy 86.0 % 79.4 % 8.3 % 83.6 % 81.0 % 3.2 %
Same Park annualized realized rent per
square foot (5)
$
15.29
$
15.18 0.7 %
$
15.20
$
15.07 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 2013 associated with a
75,000 square foot lease in Oregon which terminated as of December
31, 2013 and 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. (3)
Represents the reversal of the LTEIP
amortization in 2013 and the amortization originally recorded in
2012.
(4) Computed by dividing Same Park NOI by Same Park rental income.
(5) Represents the annualized Same Park rental income earned per
occupied square foot.
Common Stock Offering
On November 7, 2013, the Company closed the sale of 1,495,000
shares of common stock in a public offering and concurrently sold
950,000 shares of common stock to Public Storage. The aggregate net
proceeds were $192.3 million.
Property Acquisitions
On December 20, 2013, the Company acquired Bayshore Corporate
Center, an eight-building, 340,000 square foot, office park in San
Mateo, California, for $60.5 million. The occupancy for the park
was 81.8% at the time of acquisition.
During the fourth quarter, the Company also acquired, in two
separate transactions, four multi-tenant flex parks and a four-acre
parcel of land aggregating 804,000 square feet of single-story flex
buildings located in Dallas, Texas, for a combined purchase price
of $40.3 million. The combined occupancy for the parks was 75.6% 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 December 31,
2013:
Ratio of FFO to fixed charges
(1) 17.8x Ratio of FFO to fixed charges and preferred
distributions (1) 3.7x Debt and preferred equity to total
market capitalization (based on common stock price of $76.42 at
December 31, 2013) 32.3% Available balance under the $250.0
million unsecured credit facility at December 31, 2013 $250.0
million
(1)
Fixed charges include interest expense and capitalized
interest of $3.9 million.
Distributions Declared
On February 18, 2014, the Board of Directors declared a
quarterly dividend of $0.50 per common share, an increase of 13.6%,
from $0.44 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 listed below. Distributions are
payable March 31, 2014 to shareholders of record on
March 14, 2014.
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 December 31, 2013, the Company wholly owned 29.7 million
rentable square feet with approximately 5,050 customers located in
eight states, concentrated in California (11.5 million sq. ft.),
Texas (4.7 million sq. ft.), Virginia (4.0 million sq. ft.),
Florida (3.7 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 19, 2014,
at 10:00 a.m. (PST) to discuss the fourth quarter results. The toll
free number is (888) 299-3246; the conference ID is 31383721. 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 26, 2014 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, 2013 2012
(Unaudited) ASSETS Cash and cash equivalents $
31,481 $ 12,883 Real estate facilities, at cost: Land
827,092 793,352 Buildings and improvements 2,346,958
2,235,448 3,174,050 3,028,800 Accumulated
depreciation (1,035,387 ) (942,639 ) 2,138,663
2,086,161 Land and building held for development 23,990
6,829 2,162,653 2,092,990 Rent
receivable 5,248 4,754 Deferred rent receivable 25,903 25,329 Other
assets 13,274 15,861 Total
assets $ 2,238,559 $ 2,151,817
LIABILITIES
AND EQUITY Accrued and other liabilities $ 73,919 $
69,454 Term loan — 200,000 Mortgage notes payable 250,000
268,102 Total liabilities 323,919 537,556
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 December 31, 2013 and December 31, 2012,
respectively 995,000 885,000 Common stock, $0.01 par value,
100,000,000 shares authorized, 26,849,822 and 24,298,475 shares
issued and outstanding at December 31, 2013 and December 31, 2012,
respectively 267 242 Paid-in capital 699,314 537,091 Cumulative net
income 1,070,975 967,783 Cumulative distributions (1,047,615
) (944,427 ) Total PS Business Parks, Inc.’s shareholders’
equity 1,717,941 1,445,689 Noncontrolling interests: Common
units 196,699 168,572 Total
noncontrolling interests 196,699 168,572
Total equity 1,914,640 1,614,261
Total liabilities and equity $ 2,238,559 $ 2,151,817
PS BUSINESS PARKS, INC.
CONSOLIDATED STATEMENTS OF
INCOME
(Unaudited, in thousands, except per
share amounts)
For the Three Months For the
Years Ended December 31, Ended December 31,
2013 2012 2013 2012 Revenues: Rental
income $ 93,424 $ 89,224 $ 359,246 $ 346,548 Facility management
fees 162 160 639
649 Total operating revenues 93,586
89,384 359,885 347,197 Expenses:
Cost of operations 26,826 28,982 114,831 114,108 Depreciation and
amortization 28,730 28,072 108,917 109,398 General and
administrative (2,092 ) 1,994 5,312
8,919 Total operating expenses 53,464
59,048 229,060 232,425
Other income and (expense): Interest and other income 1,310
81 1,485 241 Interest and other expense (3,600 )
(4,885 ) (16,166 ) (20,618 ) Total other income and
(expense) (2,290 ) (4,804 ) (14,681 )
(20,377 ) Income from continuing operations 37,832
25,532 116,144 94,395
Discontinued operations: Income from discontinued operations — 10 —
42 Gain on sale of real estate facility — 935
— 935 Total discontinued
operations — 945 —
977 Net income $ 37,832 $ 26,477 $ 116,144
$ 95,372 Net income allocation: Net income
allocable to noncontrolling interests: Noncontrolling interests —
common units $ 4,994 $ 2,935 $ 12,952 $ 5,970 Noncontrolling
interests — preferred units — —
— 323 Total net income allocable to
noncontrolling interests 4,994 2,935
12,952 6,293 Net income allocable to PS
Business Parks, Inc.: Preferred shareholders 15,122 13,750 59,216
69,136 Restricted stock unit holders 34 32 125 138 Common
shareholders 17,682 9,760 43,851
19,805 Total net income allocable to PS
Business Parks, Inc. 32,838 23,542
103,192 89,079 $ 37,832 $ 26,477
$ 116,144 $ 95,372 Net income per
common share — basic: Continuing operations $ 0.68 $ 0.37 $ 1.77 $
0.79 Discontinued operations $ — $ 0.03 $ — $ 0.03 Net income $
0.68 $ 0.40 $ 1.77 $ 0.82 Net income per common share —
diluted: Continuing operations $ 0.68 $ 0.37 $ 1.77 $ 0.78
Discontinued operations $ — $ 0.03 $ — $ 0.03 Net income $ 0.68 $
0.40 $ 1.77 $ 0.81 Weighted average common shares
outstanding: Basic 25,864 24,288
24,732 24,234 Diluted 25,961
24,361 24,833 24,323
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 For the
Years Ended December 31, Ended December 31,
2013 2012 2013 2012
Computation of
Diluted Funds From Operation (FFO) (1):
Net income allocable to common shareholders $ 17,682 $ 9,760
$ 43,851 $ 19,805 Adjustments: Gain on sale of real estate facility
— (935 ) — (935 ) Depreciation and amortization 28,730 28,072
108,917 109,494 Net income allocable to noncontrolling interests —
common units 4,994 2,935 12,952 5,970 Net income allocable to
restricted stock unit holders 34 32
125 138 FFO allocable to common and
dilutive shares $ 51,440 $ 39,864 $ 165,845 $
134,472 Weighted average common shares outstanding
25,864 24,288 24,732 24,234 Weighted average common OP units
outstanding 7,305 7,305 7,305 7,305 Weighted average restricted
stock units outstanding 55 102 51 107 Weighted average common share
equivalents outstanding 97 73
101 89 Total common and dilutive shares
33,321 31,768 32,189
31,735 FFO per common and dilutive share $ 1.54
$ 1.25 $ 5.15 $ 4.24
Computation of
Funds Available for Distribution (FAD) (2):
FFO allocable to common and dilutive shares $ 51,440 $
39,864 $ 165,845 $ 134,472 Adjustments Recurring capital
improvements (1,889 ) (1,857 ) (10,083 ) (8,394 ) Tenant
improvements (7,467 ) (6,155 ) (29,224 ) (34,236 ) Lease
commissions (3,744 ) (2,258 ) (9,850 ) (7,244 ) Straight-line rent
(238 ) (3 ) (1,457 ) (2,686 ) Non-cash stock compensation expense
332 368 1,361 1,541 Long-term equity incentive amortization (6,879
) 1,005 (3,893 ) 3,893 In-place lease adjustment (30 ) 99 118 501
Tenant improvement reimbursements, net of lease incentives (419 )
(754 ) (1,414 ) (1,315 ) Capitalized interest (359 ) — (359 ) —
Non-cash distributions related to the
redemption of preferred equity
— — —
17,316
FAD $ 30,747 $ 30,309 $ 111,044 $
103,848 Distributions to common and dilutive shares $
15,062 $ 13,935 $ 56,953 $ 55,678
Distribution payout ratio 49.0 % 46.0 %
51.3 % 53.6 % (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,
in-place lease adjustment, amortization of lease incentives and
tenant improvement reimbursements, capitalized interest 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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