PS Business Parks, Inc. (NYSE:PSB) reported operating results
for the third quarter ended September 30, 2014.
Funds from operations (“FFO”) were $43.2 million, or $1.26
per share, as adjusted, for the three months ended September 30,
2014, an increase of $3.7 million, or 1.6% per share, from the
three months ended September 30, 2013 of $39.5 million,
or $1.24 per share, as adjusted. FFO was $128.4 million, or
$3.74 per share, as adjusted, for the nine months ended September
30, 2014, an increase of $10.8 million, or 1.4% per share, from the
nine months ended September 30, 2013 of $117.5 million, or $3.69
per share, as adjusted. The three and nine month increases in FFO
were primarily the result of an increase in net operating income
(“NOI”). Reported FFO per share for the three months ended
September 30, 2014 compared to the same period in 2013 was flat,
while the nine months ended September 30, 2014 decreased 0.3%
compared to the same period in 2013. Both adjusted and reported FFO
per share were impacted by an increase in shares outstanding as a
result of the November, 2013 common equity offering.
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 Long-Term Equity Incentive Plan (“LTEIP”) amortization due
to the change in plans and acquisition transaction costs for the
three and nine months ended September 30, 2014 and 2013:
For the Three Months
For the Nine Months Ended September
30, Ended September 30, 2014
2013 Change 2014 2013
Change FFO per share, as reported $ 1.20 $ 1.20 — $
3.58
$ 3.59 (0.3 %) LTEIP amortization 0.05 0.03 0.15 0.09 Acquisition
transaction costs 0.01 0.01 0.01 0.01
FFO per share, as adjusted $ 1.26 $ 1.24 1.6 % $ 3.74 $ 3.69 1.4 %
Noted in the table above are the following adjustments to
reconcile adjusted FFO to reported FFO. In March, 2014, the Company
put in place a new LTEIP and recorded $1.9 million and $5.1 million
of amortization for the three and nine months ended September 30,
2014 compared to $1.0 million and $3.0 million for the three and
nine months ended September 30, 2013 related to the previous LTEIP.
Acquisition transaction costs were $124,000 and $153,000 for the
three and nine months ended September 30, 2014 and 2013,
respectively.
Same Park rental income increased $1.5 million, or 1.8%, and
$6.5 million, or 2.6%, for the three and nine months ended
September 30, 2014 compared to the same periods in 2013 as a result
of an increase in occupancy. Non-Same Park rental income increased
$4.2 million and $12.8 million for the three and nine months ended
September 30, 2014 compared to the same periods in 2013
due to a combination of an increase in occupancy and the
acquisition of additional parks during the latter half of 2013.
Same Park operating expenses increased $901,000, or 3.3%, from
$27.1 million for the three months ended September 30, 2013 to
$28.0 million for the three months ended September 30, 2014
primarily as a result of higher repairs and maintenance and utility
costs. Same Park operating expenses increased $3.6 million, or
4.5%, from $80.2 million for the nine months ended September
30, 2013 to $83.8 million for the nine months ended
September 30, 2014 primarily as a result of a $1.6 million
increase in snow removal costs due to the severe winter in Virginia
and Maryland.
Net income allocable to common shareholders increased $2.3
million, or 25.2%, from $9.0 million, or $0.37 per share, for the
three months ended September 30, 2013 to $11.3 million, or $0.42
per share, for the three months ended September 30, 2014. Net
income allocable to common shareholders increased $4.8 million, or
18.2%, from $26.3 million, or $1.07 per share, for the nine months
ended September 30, 2013 to $31.0 million, or $1.15 per share, for
the nine months ended September 30, 2014. These increases were due
to an increase in NOI combined with a decrease in interest expense,
partially offset by an increase in depreciation expense.
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, 2012 (excludes the 1.2 million square feet of
assets sold subsequent to September 30, 2014). Operating properties
that the Company acquired subsequent to January 1, 2012 are
referred to as “Non-Same Park.” For the three and nine months ended
September 30, 2014 and 2013, the Same Park facilities constitute
25.8 million rentable square feet, representing 89.5% of the
28.8 million square feet in the Company’s portfolio as of September
30, 2014.
The following table presents the operating results of the
Company’s properties for the three and nine months ended September
30, 2014 and 2013 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 Nine Months Ended
September 30, Ended September 30, 2014
2013 Change 2014
2013 Change Rental income: Same Park (25.8 million
rentable square feet) $ 84,994 $ 83,524 1.8 % $ 254,823 $ 248,333
2.6 % Non-Same Park (3.0 million rentable square feet) 6,044
1,807 234.5 % 17,074
4,288 298.2 % Total rental income 91,038
85,331 6.7 % 271,897 252,621
7.6 % Cost of operations: Same Park 28,016 27,115 3.3 %
83,786 80,213 4.5 % Non-Same Park 2,688 795
238.1 % 7,369 1,908 286.2 %
Total cost of operations 30,704 27,910
10.0 % 91,155 82,121 11.0 % Net
operating income (1): Same Park 56,978 56,409 1.0 % 171,037 168,120
1.7 % Non-Same Park 3,356 1,012 231.6 %
9,705 2,380 307.8 % Total net operating
income 60,334 57,421 5.1 %
180,742 170,500 6.0 % Other: Net operating
income from sold assets (2) 2,837 2,793 1.6 % 7,942 8,260 (3.8 %)
LTEIP amortization: Cost of operations (646 ) (343 ) 88.3 % (1,831
) (943 ) 94.2 % General and administrative (1,250 ) (681 ) 83.6 %
(3,297 ) (2,044 ) 61.3 % Facility management fees 164 162 1.2 % 495
477 3.8 % Other income and expense (3,322 ) (3,954 ) (16.0 %)
(9,944 ) (12,391 ) (19.7 %) Depreciation and amortization (26,811 )
(26,597 ) 0.8 % (83,547 ) (80,187 ) 4.2 % General and
administrative (1,828 ) (1,954 ) (6.4 %)
(5,631 ) (5,360 ) 5.1 % Income from continuing operations $
29,478 $ 26,847 9.8 % $ 84,929 $ 78,312
8.4 % Same Park gross margin (3) 67.0 % 67.5 % (0.7 %) 67.1 % 67.7
% (0.9 %) Same Park weighted average occupancy 92.8 % 91.4 % 1.5 %
92.6 % 91.1 % 1.6 % Non-Same Park weighted average occupancy 77.5 %
69.0 % 12.3 % 76.9 % 62.8 % 22.5 % Same Park annualized realized
rent per square foot (4) $ 14.19 $ 14.16 0.2 % $ 14.22 $ 14.08 1.0
%
(1) 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) The Company sold two business parks located in Beaverton,
Oregon, on October 1, 2014. These assets generated rental income of
$4.6 million and $13.0 million for the three and nine months ended
September 30, 2014, respectively, compared to $4.4
million and $13.2 million for the three and nine months ended
September 30, 2013. Cost of operations for the sold assets was $1.8
million and $5.1 million for the three and nine months ended
September 30, 2014, respectively, compared to $1.6 million and $4.9
million for the three and nine months ended September 30, 2013.
(3) Computed by dividing Same Park NOI by Same Park rental
income.
(4) Represents the annualized Same Park rental income earned per
occupied square foot.
Property Acquisitions
On August 21, 2014, the Company acquired five multi-tenant flex
buildings adjacent to its existing Springlake Business Center in
the Valwood submarket of Dallas, Texas, for $5.1 million. The
buildings, which comprise 145,000 square feet, were 35.4% leased at
the time of acquisition.
As previously announced, during the third quarter of 2014, the
Company acquired a 19,000 square foot multi-tenant flex building in
Dallas, Texas, for $1.1 million and a 149,000 square foot building
in Miami, Florida, for $12.7 million.
Financial Condition
The following are key financial ratios with respect to the
Company’s leverage as of and for the three months ended September
30, 2014:
Ratio of FFO to fixed charges (1) 16.4x Ratio
of FFO to fixed charges and preferred distributions (1) 3.2x
Debt and preferred equity to total market
capitalization (based on common stock price of $76.14 at September
30, 2014)
32.3% Available balance under the $250.0 million unsecured
credit facility at September 30, 2014 $250.0 million
(1) Fixed charges include interest expense and capitalized
interest of $3.6 million.
Regular and Special Distributions
Declared
On October 27, 2014, the Board of Directors declared a regular
quarterly dividend of $0.50 per common share. As a result of the
net taxable gains generated by the sale of two business parks in
Beaverton, Oregon, on October 1, 2014 as well as additional
anticipated asset sales, the Board of Directors declared a one-time
special cash dividend of $2.75 per common share. Combined, the
regular and special dividend will result in a total dividend of
$3.25 per common share. The dividends are payable on December 30,
2014 to shareholders of record on December 15, 2014.
Distributions were also declared on the various series of
depositary shares, each representing 1/1,000 of a share of
preferred stock listed below.
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
Distributions are payable on December 30, 2014 to shareholders
of record on December 15, 2014.
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 October 1, 2014, the Company wholly owned 28.8 million
rentable square feet with approximately 5,140 customers located in
eight states, concentrated in California (11.5 million sq. ft.),
Texas (4.8 million sq. ft.), Virginia (4.0 million sq. ft.),
Florida (3.9 million sq. ft.), Maryland (2.3 million sq. ft.),
Washington (1.5 million sq. ft.), Arizona (0.7 million sq. ft.) and
Oregon (0.1 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 third quarter operating results, is
available on the Internet. The Company’s website is
www.psbusinessparks.com.
A conference call is scheduled for Tuesday, October 28, 2014, at
10:00 a.m. (PDT) to discuss the third quarter results. The toll
free number is (888) 299-3246; the conference ID is 19314826. 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
November 4, 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)
September 30, December 31, 2014
2013 (Unaudited) ASSETS Cash and cash
equivalents $ 57,535 $ 31,481 Real estate facilities, at
cost: Land 789,217 781,541 Buildings and improvements
2,194,493 2,152,178 2,983,710 2,933,719
Accumulated depreciation (990,782 ) (918,202 )
1,992,928 2,015,517 Properties held for disposition, net 123,011
124,883 Land and building held for development 24,028
22,253 2,139,967 2,162,653 Rent receivable 3,581
5,248 Deferred rent receivable 28,036 25,903 Other assets
12,891 13,274 Total assets $ 2,242,010
$ 2,238,559
LIABILITIES AND EQUITY
Accrued and other liabilities $ 80,454 $ 73,919 Mortgage
note payable 250,000 250,000 Total
liabilities 330,454 323,919 Commitments and contingencies
Equity: PS Business Parks, Inc.’s shareholders’ equity:
Preferred stock, $0.01 par value,
50,000,000 shares authorized, 39,800 shares issued and outstanding
at September 30, 2014 and December 31, 2013
995,000 995,000
Common stock, $0.01 par value, 100,000,000
shares authorized, 26,919,161 and 26,849,822 shares issued and
outstanding at September 30, 2014 and December 31, 2013,
respectively
268 267 Paid-in capital 706,503 699,314 Cumulative net income
1,147,474 1,070,975 Cumulative distributions (1,133,332 )
(1,047,615 ) Total PS Business Parks, Inc.’s shareholders’
equity 1,715,913 1,717,941 Noncontrolling interests: Common
units 195,643 196,699 Total
noncontrolling interests 195,643 196,699
Total equity 1,911,556 1,914,640
Total liabilities and equity $ 2,242,010 $ 2,238,559
PS BUSINESS PARKS, INC. CONSOLIDATED
STATEMENTS OF INCOME (Unaudited, in thousands, except per share
amounts)
For the Three Months
For the Nine Months Ended September 30,
Ended September 30, 2014 2013
2014 2013 Revenues: Rental income $
95,627 $ 89,772 $ 284,934 $ 265,822 Facility management fees
164 162 495 477
Total operating revenues 95,791 89,934
285,429 266,299 Expenses: Cost of
operations 33,102 29,901 98,081 88,005 Depreciation and
amortization 26,811 26,597 83,547 80,187 General and administrative
3,078 2,635 8,928
7,404 Total operating expenses 62,991
59,133 190,556 175,596 Other
income and (expense): Interest and other income 90 63 247 175
Interest and other expense (3,412 ) (4,017 )
(10,191 ) (12,566 ) Total other income and (expense)
(3,322 ) (3,954 ) (9,944 ) (12,391 ) Income
from continuing operations 29,478 26,847
84,929 78,312 Net income $
29,478 $ 26,847 $ 84,929 $ 78,312
Net income allocation: Net income allocable to
noncontrolling interests: Noncontrolling interests — common units $
3,058 $ 2,696 $ 8,430 $ 7,875 Total net
income allocable to noncontrolling interests 3,058
2,696 8,430 7,875 Net
income allocable to PS Business Parks, Inc.: Preferred shareholders
15,122 15,122 45,366 44,094 Restricted stock unit holders 30 28 99
91 Common shareholders 11,268 9,001
31,034 26,252 Total net income
allocable to PS Business Parks, Inc. 26,420
24,151 76,499 70,437 $ 29,478
$ 26,847 $ 84,929 $ 78,312 Net
income per common share: Basic $ 0.42 $ 0.37 $ 1.15 $ 1.08 Diluted
$ 0.42 $ 0.37 $ 1.15 $ 1.07 Weighted average common shares
outstanding: Basic 26,914 24,386
26,892 24,351 Diluted 27,003
24,472 26,988 24,452
PS BUSINESS PARKS, INC. Computation of Diluted Funds
from Operations and Funds Available for Distribution (Unaudited, in
thousands, except per share amounts)
For the Three Months For the Nine
Months Ended September 30, Ended September 30,
2014 2013 2014
2013
Computation of
Diluted Funds From Operations (1):
Net income allocable to common shareholders $ 11,268 $ 9,001
$ 31,034 $ 26,252 Adjustments: Depreciation and amortization 26,811
26,597 83,547 80,187 Net income allocable to noncontrolling
interests — common units 3,058 2,696 8,430 7,875 Net income
allocable to restricted stock unit holders 30
28 99 91 FFO allocable to common
and dilutive shares $ 41,167 $ 38,322 $ 123,110
$ 114,405 Weighted average common shares
outstanding 26,914 24,386 26,892 24,351 Weighted average common OP
units outstanding 7,305 7,305 7,305 7,305 Weighted average
restricted stock units outstanding 55 92 54 95 Weighted average
common share equivalents outstanding 89 86
96 101 Total common and dilutive
shares 34,363 31,869 34,347
31,852 Net income per common share —
diluted $ 0.42 $ 0.37 $ 1.15 $ 1.07 Depreciation and amortization
(2) 0.78 0.83 2.43
2.52 FFO per common and dilutive share, as reported (2) $
1.20 $ 1.20 $ 3.58 $ 3.59
Computation of
Funds Available for Distribution ("FAD") (3):
FFO allocable to common and dilutive shares $ 41,167 $
38,322 $ 123,110 $ 114,405 Adjustments: Recurring capital
improvements (3,713 ) (4,590 ) (7,494 ) (8,194 ) Tenant
improvements (8,196 ) (8,804 ) (19,733 ) (21,757 ) Lease
commissions (3,136 ) (1,646 ) (8,280 ) (6,106 ) Straight-line rent
(560 ) (355 ) (2,244 ) (1,219 ) Non-cash stock compensation expense
322 363 988 1,028 Long-term equity incentive amortization 1,896
1,024 5,128 2,987 In-place lease adjustment (231 ) 27 (672 ) 148
Tenant improvement reimbursements, net of lease incentives (356 )
(370 ) (1,195 ) (995 ) Capitalized interest (240 ) —
(697 ) — FAD $ 26,953 $ 23,971
$ 88,911 $ 80,297 Distributions to
common and dilutive shares $ 17,141 $ 13,977 $ 51,408
$ 41,891 Distribution payout ratio 63.6
% 58.3 % 57.8 % 52.2 %
(1) 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) Per share amounts are computed using additional dilutive
shares related to noncontrolling interests and restricted stock
units.
(3) 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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