PS Business Parks, Inc. (NYSE:PSB) reported operating results
for the quarter ended September 30, 2017.
Operating Results for the Three Months
Ended September 30, 2017
Net income allocable to common shareholders was
$18.1 million, or $0.66 per diluted common share, for the
three months ended September 30, 2017, a decrease of
$1.6 million, or 8.0%, from $19.7 million, or $0.72 per
diluted common share, for the same period in 2016. The decrease was
mainly due to a charge related to the redemption of preferred
securities, offset by a $2.7 million increase in net operating
income (“NOI”–described below) with respect to our real estate
facilities and reduced preferred distributions. The increase in NOI
includes a $3.3 million increase for our Same Park facilities
(described below) due primarily to higher realized rent per
occupied square foot, offset partially by reduced NOI with respect
to facilities we sold or are holding for development.
Operating Results for the Nine Months
Ended September 30, 2017
Net income allocable to common shareholders was
$69.3 million, or $2.53 per diluted common share, for the nine
months ended September 30, 2017, an increase of $19.3 million,
or 38.5%, from $50.0 million, or $1.84 per diluted common
share, for the same period in 2016. The increase was due to a $10.5
million increase in NOI with respect to our real estate facilities,
a reduction in interest expense due to the repayment of debt, and
gains on the sale of real estate facilities and development rights.
The increase in NOI includes a $12.5 million increase for our
Same-Park facilities due primarily to higher realized rent per
occupied square foot, offset partially by reduced NOI with respect
to facilities we sold or are holding for development.
Funds from Operations
Funds from operations (“FFO”) per share was $1.36 for the three
months ended September 30, 2017, as compared to $1.43 for
the same period in 2016, a decrease of $0.07 per share. FFO 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, gains and
losses from sales and impairment charges with respect to real
estate assets.
FFO per share was $4.43 for the nine months ended
September 30, 2017, an increase of $0.43 from the nine
months ended September 30, 2016 of $4.00.
We also present “Core FFO per share,” a non-GAAP measure that
represents FFO per share excluding the impact of (i) charges
related to the redemption of preferred securities, (ii) separation
settlement payments, as well as charges or reversals related to
stock based compensation, due to the departure of senior
executives, and (iii) certain other non-cash and/or nonrecurring
income or expense items. We review Core FFO per share to evaluate
our ongoing operating performance, and we believe it is used by
investors and REIT analysts in a similar manner. However, Core FFO
per share is not a substitute for net income per share. Because
other REITs may not compute Core FFO per share in the same manner
as we do, may not use the same terminology or may not present such
a measure, Core FFO per share may not be comparable among
REITs.
The following table reconciles FFO per share, as reported, to
Core FFO per share for the three and nine months ended
September 30, 2017 and 2016:
For the Three Months
For the Nine Months Ended September 30,
Ended September 30, 2017 2016
Change 2017 2016
Change FFO per share, as reported $ 1.36 $ 1.43 (4.9 %) $
4.43 $ 4.00 10.8 % Charge related to the redemption of preferred
securities 0.19 — 0.19 — Net impact due to the departure of senior
executives (0.01 ) — (0.01 ) 0.05 Lease buyout payment — (0.01 ) —
(0.01 ) Acquisition transaction costs — 0.01
— 0.01 Core FFO per share $ 1.54
$ 1.43 7.7 % $ 4.61 $ 4.05 13.8 %
Property Operations
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 operating properties acquired prior to
January 1, 2015. Operating properties acquired
subsequently are referred to as “Non-Same Park.” For the three and
nine months ended September 30, 2017 and 2016, the Same Park
facilities constitute 27.8 million rentable square feet,
representing 99.3% of the 28.0 million square feet in the
Company’s total portfolio as of September 30, 2017.
The following table presents the operating results of the
Company’s Same Park facilities for the three and nine months ended
September 30, 2017 and 2016 (unaudited, in thousands, except per
square foot amounts):
For the Three Months For the
Nine Months Ended September 30, Ended
September 30, 2017 2016
Change 2017 2016
Change Adjusted rental income (1) (4) $ 100,110 $ 95,867 4.4
% $ 299,207 $ 285,927 4.6 % Adjusted cost of operations (2) (4)
30,821 29,875 3.2 % 90,204
89,375 0.9 % Net operating income (3) (4) $
69,289 $ 65,992 5.0 % $ 209,003 $ 196,552
6.3 %
Selected Statistical Data Gross Margin
(5) 69.2 % 68.8 % 0.6 % 69.9 % 68.7 % 1.7 % Weighted average square
foot occupancy 94.0 % 94.1 % (0.1 %) 94.1 % 93.9 % 0.2 % Annualized
realized rent per occupied square foot (6) $ 15.32 $ 14.65 4.6 % $
15.25 $ 14.60 4.5 % (1) Adjusted rental
income excludes material lease buyout payments, because we believe
they are not reflective of ongoing rental income. (2)
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.
(3)
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. NOI is
defined by the Company as adjusted rental income less adjusted cost
of operations, and excludes depreciation and amortization.
Depreciation and amortization is excluded from NOI because
management and investors do not consider it important in valuing
real estate or evaluating real estate performance, because
depreciation 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.
(4) Our calculation of adjusted rental income, 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. (5) Computed by
dividing NOI by adjusted rental income. (6) Represents the
annualized adjusted rental income earned per occupied square foot.
The following table summarizes selected quarterly financial data
with respect to the Same Park facilities (unaudited):
For the Three Months Ended March
31 June 30 September 30
December 31 Adjusted rental income
2017
$ 99,654 $ 99,443 $ 100,110 $ — 2016 $ 94,908 $ 95,152 $ 95,867 $
96,457
Adjusted cost of operations 2017 $ 29,839 $
29,544 $ 30,821 $ — 2016 $ 30,777 $ 28,723 $ 29,875 $ 29,336
Snow removal 2017 $ 378 $ 103 $ — $ — 2016 $ 1,810 $ — $ — $
—
Utilities 2017 $ 5,896 $ 5,734 $ 6,331 $ — 2016 $
6,226 $ 5,472 $ 6,439 $ 5,775
Weighted average square foot
occupancy
2017 94.6 % 93.7 % 94.0 % — 2016 94.1 % 93.5 % 94.1 % 94.8 %
Annualized realized rent per occupied square foot 2017 $
15.16 $ 15.27 $ 15.32 $ — 2016 $ 14.52 $ 14.63 $ 14.65 $ 14.65
Multi-Family Development
Highgate at the Mile, the Company’s multi-family development in
Tysons, Virginia, commenced its principal operations during the
second quarter of 2017. The 435,000 square foot project includes
395 residential units and approximately 2,100 square feet of retail
space. As of September 30, 2017, all 395 units have been
completed, and 183 units, or 46.3%, have been leased. During the
three and nine months ended September 30, 2017, the Company
recorded an equity loss in the unconsolidated joint venture of
$376,000 and $758,000, respectively, comprised of net operating
income of $107,000 and net operating loss of $171,000,
respectively, and depreciation expense of $483,000 and $587,000,
respectively. As of October 23, 2017, Highgate’s
multi-family residential units were 55.2% leased.
Capital Activities
On September 21, 2017, we issued $230.0 million of our 5.25%
Cumulative Preferred Stock, Series X. We received
$222.2 million in net proceeds.
On September 28, 2017, we called for redemption at par $220.0
million of $350.0 million outstanding of our 6.0% Cumulative
Preferred Stock, Series T. The aggregate redemption amount is
scheduled to be paid on October 30, 2017. We recorded a charge of
$6.9 million related to the redemption of these preferred
securities in the three and nine months ended September 30,
2017.
Distributions Declared
On October 23, 2017, the Board of Directors declared a
quarterly dividend of $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 listed below.
Distributions are payable on December 28, 2017 to
shareholders of record on December 13, 2017.
Series
Dividend
Rate
Dividend
Declared
Series T 6.000% $0.375000 Series U 5.750% $0.359375 Series V 5.700%
$0.356250 Series W 5.200% $0.325000 Series X 5.250% $0.364583
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
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 September 30, 2017, the
Company wholly owned 28.0 million rentable square feet with
approximately 4,950 customers in six states and a 95.0% interest in
395 apartments.
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 Company’s website at psbusinessparks.com.
A conference call is scheduled for Wednesday, October 25, 2017,
at 9:00 a.m. PDT (12:00 p.m. EDT) to discuss the third quarter
results. The toll free number is (888) 299-3246; the
conference ID is 97453749. 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 30, 2017 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)
September 30, December 31,
2017 2016 (Unaudited)
ASSETS Cash and cash equivalents $ 132,658 $ 128,629
Real estate facilities, at cost Land 789,227 789,227
Buildings and improvements 2,254,663 2,224,522
3,043,890 3,013,749 Accumulated depreciation
(1,219,314 ) (1,158,054 ) 1,824,576 1,855,695 Properties
held for disposition, net — 909 Land and building held for
development 29,252 27,028 1,853,828
1,883,632 Investment in and advances to unconsolidated joint
venture 96,593 67,190 Rent receivable, net 2,203 1,945 Deferred
rent receivable, net 31,670 29,770 Other assets 8,779
8,205 Total assets $ 2,125,731 $ 2,119,371
LIABILITIES AND EQUITY Accrued and
other liabilities $ 82,618 $ 78,657 Preferred stock called for
redemption 220,000 230,000 Total
liabilities 302,618 308,657 Commitments and contingencies
Equity: PS Business Parks, Inc.’s shareholders’ equity
Preferred stock, $0.01 par value, 50,000,000 shares authorized,
35,590 and 35,190 shares issued and outstanding at September 30,
2017 and December 31, 2016, respectively 889,750 879,750 Common
stock, $0.01 par value, 100,000,000 shares authorized, 27,251,037
and 27,138,138 shares issued and outstanding at September 30, 2017
and December 31, 2016, respectively 272 271 Paid-in capital 735,714
733,671 Accumulated earnings (deficit) 60 (433
) Total PS Business Parks, Inc.’s shareholders’ equity 1,625,796
1,613,259 Noncontrolling interests 197,317
197,455 Total equity 1,823,113
1,810,714 Total liabilities and equity $ 2,125,731 $
2,119,371
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,
2017 2016 2017
2016 Rental income $ 100,481 $ 97,340 $
300,342 $ 289,272 Expenses Cost of operations 31,679 30,796
92,962 92,440 Depreciation and amortization 23,759 24,631 70,465
74,886 General and administrative 1,745 2,970
7,019 11,982 Total operating
expenses 57,183 58,397 170,446
179,308 Operating income 43,298 38,943
129,896 109,964 Interest and other income 212 206 599 940 Interest
and other expense (503 ) (155 ) (972 ) (5,507 ) Equity in loss of
unconsolidated joint venture (376 ) — (758 ) — Gain on sale of real
estate facility — — 1,209 — Gain on sale of development rights
— — 3,865 —
Net income 42,631 38,994 133,839 105,397 Allocation to
noncontrolling interests (4,866 ) (5,315 )
(18,610 ) (13,495 ) Net income allocable to PS Business
Parks, Inc. 37,765 33,679 115,229 91,902 Allocation to preferred
shareholders Preferred distributions (12,590 ) (13,833 ) (38,472 )
(41,498 ) Charge related to the redemption of preferred securities
(6,900 ) — (6,900 ) — Allocation to restricted stock unit holders
(137 ) (128 ) (582 ) (387 ) Net income
allocable to common shareholders $ 18,138 $ 19,718 $
69,275 $ 50,017 Net income per common share
Basic $ 0.67 $ 0.73 $ 2.55 $ 1.85 Diluted $ 0.66 $ 0.72 $ 2.53 $
1.84 Weighted average common shares outstanding Basic
27,226 27,103 27,192
27,076 Diluted 27,427 27,201
27,399 27,166
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 Nine
Months Ended September 30, Ended September 30,
2017 2016 2017
2016
Computation of
Funds From Operations (1)
Net income allocable to common shareholders $ 18,138 $
19,718 $ 69,275 $ 50,017 Adjustments Gain on sale of real estate
facility — — (1,209 ) — Gain on sale of development rights — —
(3,865 ) — Depreciation and amortization 23,759 24,631 70,465
74,886 Depreciation from unconsolidated joint venture 483 — 587 —
Net income allocated to noncontrolling interests 4,866 5,315 18,610
13,495 Net income allocated to restricted stock unit holders
137 128 582 387
FFO allocable to common and dilutive shares $ 47,383 $
49,792 $ 154,445 $ 138,785 Weighted
average common shares outstanding 27,226 27,103 27,192 27,076
Weighted average common operating partnership units outstanding
7,305 7,305 7,305 7,305 Weighted average restricted stock units
outstanding 179 268 188 256 Weighted average common share
equivalents outstanding 201 98
207 90 Total common and dilutive shares
34,911 34,774 34,892
34,727 Net income per common share—diluted $ 0.66 $
0.72 $ 2.53 $ 1.84 Gain on sale of real estate facility — — (0.03 )
— Gain on sale of development rights — — (0.11 ) — Depreciation and
amortization, including amounts from investment in unconsolidated
Joint Venture 0.70 0.71 2.04
2.16 FFO per share (1) $ 1.36 $ 1.43
$ 4.43 $ 4.00
Computation of
Funds Available for Distribution ("FAD") (1)
FFO allocable to common and dilutive shares $ 47,383 $
49,792 $ 154,445 $ 138,785 Adjustments Recurring capital
improvements (3,249 ) (2,621 ) (6,674 ) (5,300 ) Tenant
improvements (7,816 ) (5,259 ) (23,457 ) (13,109 ) Lease
commissions (2,017 ) (1,466 ) (5,162 ) (5,054 ) Straight-line rent
(285 ) (447 ) (1,919 ) (1,664 ) Non-cash stock compensation expense
(397 ) 1,850 3,255 8,933 Cash paid for taxes in lieu of shares upon
vesting of restricted stock units (462 ) (182 ) (3,865 ) (1,940 )
In-place lease adjustment 8 (106 ) (26 ) (437 ) Tenant improvement
reimbursements, net of lease incentives (798 ) (407 ) (1,654 )
(1,253 ) Capitalized interest — (115 ) (506 ) (854 ) Charge related
to the redemption of preferred securities 6,900
— 6,900 — FAD $ 39,267
$ 41,039 $ 121,337 $ 118,107
Distributions to common shares and units $ 29,544 $ 25,941
$ 88,575 $ 77,756 Distribution payout ratio
75.2 % 63.2 % 73.0 % 65.8 %
(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, 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
Nine Months Ended September 30, Ended
September 30, 2017 2016
Change 2017 2016
Change RENTAL INCOME Adjusted rental income Same Park $
100,110 $ 95,867 4.4 % $ 299,207 $ 285,927 4.6 % Non-Same Park 371
9
4,022.2
% 976 9
10,744.4
% Assets sold or held for development — 936 (100.0 %) 159 2,808
(94.3 %) Lease buyout payment — 528
(100.0 %) — 528 (100.0 %) Total rental
income 100,481 97,340 3.2 %
300,342 289,272 3.8 % COST OF
OPERATIONS Adjusted cost of operations Same Park 30,821 29,875 3.2
% 90,204 89,375 0.9 % Non-Same Park 294 3
9,700.0
% 918 3
30,500.0
% Assets sold or held for development — 261 (100.0 %) 73 750 (90.3
%) LTEIP amortization 564 657 (14.2 %)
1,767 2,312 (23.6 %) Total cost of
operations 31,679 30,796 2.9 %
92,962 92,440 0.6 % OPERATING INCOME
Net operating income Same Park 69,289 65,992 5.0 % 209,003 196,552
6.3 % Non-Same Park 77 6
1,183.3
% 58 6 866.7 % Assets sold or held for development — 675
(100.0
%) 86 2,058 (95.8 %) Lease buyout payment and LTEIP amortization
(564 ) (129 ) 337.2 % (1,767 ) (1,784 ) (1.0 %) Depreciation and
amortization (23,759 ) (24,631 ) (3.5 %) (70,465 ) (74,886 ) (5.9
%) General and Administrative (1,745 ) (2,970 ) (41.2
%) (7,019 ) (11,982 ) (41.4 %) Operating income $
43,298 $ 38,943 11.2 % $ 129,896 $ 109,964
18.1 %
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PS Business Parks, Inc.Maria R. Hawthorne, 818-244-8080, Ext.
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