PS Business Parks, Inc. (NYSE:PSB) reported operating results
for the quarter and year ended December 31, 2017.
Operating Results for the Three Months
Ended December 31, 2017
Net income allocable to common shareholders was
$21.2 million, or $0.77 per diluted common share, for the
three months ended December 31, 2017, an increase of
$8.3 million, or 64.5%, from $12.9 million, or $0.47 per
diluted common share, for the same period in 2016. The increase was
mainly due to a reduction in charges related to the redemption of
preferred securities combined with a $2.4 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 $2.7 million increase for our Same Park
facilities (described below) due primarily to higher realized rent
per occupied square foot and increased occupancy, offset partially
by reduced NOI with respect to facilities we sold or are holding
for sale or development.
Operating Results for the Year Ended
December 31, 2017
Net income allocable to common shareholders was
$90.4 million, or $3.30 per diluted common share, for the year
ended December 31, 2017, an increase of $27.6 million, or
43.8%, from $62.9 million, or $2.31 per diluted common share,
for the same period in 2016. The increase was due to a $12.9
million increase in NOI with respect to our real estate facilities,
gains on the sale of real estate facilities and development rights,
a reduction in preferred distributions and a reduction in interest
expense due to the repayment of debt, partially offset by an
increase in charges related to the redemption of preferred
securities. The increase in NOI includes a $14.5 million increase
for our Same-Park facilities due primarily to higher realized rent
per occupied square foot and increased occupancy, offset partially
by reduced NOI with respect to facilities we sold or are holding
for sale or development.
Funds from Operations
Funds from operations (“FFO”) per share was $1.40 for the three
months ended December 31, 2017, as compared to $1.18 for the same
period in 2016, an increase of $0.22 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 $5.83 for the year ended December 31, 2017, an
increase of $0.66 from the year ended December 31, 2016 of
$5.17.
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 believe our presentation of Core FFO assists
investors and analysts in evaluating our comparative operating
performance between reporting periods. 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 months and years ended
December 31, 2017 and 2016:
For the Three
Months For the Years Ended December 31, Ended
December 31, 2017 2016
Change 2017 2016
Change FFO per share, as reported $ 1.40 $ 1.18 18.6 % $
5.83 $ 5.17 12.8 %
Charge related to the redemption of
preferred securities
0.12 0.21 0.31 0.21 Net impact due to the departure of senior
executives — — (0.01 ) 0.06 Lease buyout payment — — — (0.01 )
Acquisition transaction costs — — —
0.01 Core FFO per share $ 1.52 $ 1.39 9.4 % $ 6.13
$ 5.44 12.7 %
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, except for 705,000 square feet of office
product in Orange County, California, held for sale as of December
31, 2017. Operating properties acquired subsequently are referred
to as “Non-Same Park.” For the three months and years ended
December 31, 2017 and 2016, the Same Park facilities constitute
27.1 million rentable square feet, representing 96.8% of the
28.0 million square feet in the Company’s total portfolio as
of December 31, 2017.
The following table presents the operating results of the
Company’s Same Park facilities for the three months and years ended
December 31, 2017 and 2016 (unaudited, in thousands, except per
square foot amounts):
For the Three
Months For the Years Ended December 31, Ended
December 31, 2017 2016
Change 2017 2016
Change Adjusted rental income (1) (4) $ 97,634 $
92,962 5.0 % $ 386,133 $ 369,000 4.6 % Adjusted cost of operations
(2) (4) 29,810 27,879 6.9 %
115,574 112,929 2.3 % Net operating income (3)
(4) $ 67,824 $ 65,083 4.2 % $ 270,559 $
256,071 5.7 %
Selected Statistical Data Gross
Margin (5) 69.5 % 70.0 % (0.7 %) 70.1 % 69.4 % 1.0 % Weighted
average square foot occupancy 95.1 % 94.8 % 0.3 % 94.4 % 94.2 % 0.2
%
Annualized realized rent per occupied
square foot (6)
$ 15.16 $ 14.47 4.8 % $ 15.10 $ 14.45 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.
We define NOI as adjusted rental income less adjusted cost of
operations. NOI excludes depreciation and amortization 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, in thousands,
except per square foot amounts):
For the Three
Months Ended March 31 June 30 September 30
December 31 Full Year Adjusted rental income
2017 $ 96,203 $ 95,849 $ 96,447 $ 97,634 $ 386,133 2016 $ 91,634 $
91,938 $ 92,466 $ 92,962 $ 369,000
Adjusted cost of
operations 2017 $ 28,328 $ 28,118 $ 29,318 $ 29,810 $ 115,574
2016 $ 29,496 $ 27,210 $ 28,344 $ 27,879 $ 112,929
Snow
removal 2017 $ 378 $ 103 $ — $ 63 $ 544 2016 $ 1,810 $ — $ — $
— $ 1,810
Utilities 2017 $ 5,458 $ 5,309 $ 5,810 $
5,410 $ 21,987 2016 $ 5,855 $ 5,007 $ 5,884 $ 5,332 $ 22,078
Weighted average square foot occupancy 2017 94.6 % 93.7 %
94.1 % 95.1 % $ 94.4 % 2016 94.2 % 93.7 % 94.2 % 94.8 % $ 94.2 %
Annualized realized rent per occupied square foot
2017 $ 15.01 $ 15.10 $ 15.13 $ 15.16 $ 15.10 2016 $ 14.36 $ 14.48 $
14.49 $ 14.47 $ 14.45
Multi-Family Development
Update
Highgate at the Mile, the Company’s multi-family development in
Tysons, Virginia, began leasing activities during the second
quarter of 2017 and as of December 31, 2017 was 58.5% occupied. The
435,000 square foot project includes 395 residential units and
approximately 2,100 square feet of retail space. During the three
months and year ended December 31, 2017, the Company recorded an
equity in loss of the unconsolidated joint venture of $47,000 and
$805,000, respectively, comprised of our proportionate share of net
operating income of $546,000 and $375,000, respectively, and
depreciation expense of $593,000 and $1.2 million,
respectively.
Capital Activities
We have 705,000 rentable square feet of office product in Orange
County, California, held for sale. These assets were removed from
the Same Park portfolio, as they are no longer expected to remain
part of our ongoing business operations. While there can be no
assurance of a completed sale, we expect to complete the sale of
these assets during 2018.
On December 7, 2017, we issued $200.0 million of our 5.20%
Cumulative Preferred Stock, Series Y. We received
$193.6 million in net proceeds.
On January 3, 2018, we redeemed $130.0 million of our
outstanding 6.00% Cumulative Preferred Stock, Series T called for
redemption at par on December 4, 2017. We recorded a charge
totaling $4.1 million during the three months ended
December 31, 2017 as a result of this redemption.
During 2017, we raised $430.0 million in gross proceeds from the
issuance of preferred stock with an average coupon rate of 5.23%,
and we called for redemption a total of $350.0 in preferred stock
with a coupon rate of 6.00%.
Distributions Declared
On February 19, 2018, 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. Distributions
are payable on March 29, 2018 to shareholders of record
on March 14, 2018.
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 December 31, 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
a 395-unit apartment complex.
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 Company’s website at psbusinessparks.com.
A conference call is scheduled for Tuesday, February 20, 2018,
at 9:00 a.m. PST (12:00 p.m. EST) to discuss the fourth quarter
results. The toll free number is (888) 299-3246; the
conference ID is 8266629. 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 March 20, 2018 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)
December
31, December 31, 2017
2016 (Unaudited) ASSETS Cash and
cash equivalents $ 114,882 $ 128,629 Real estate facilities,
at cost (1) Land 770,310 770,310 Buildings and improvements
2,166,579 2,128,828 2,936,889 2,899,138
Accumulated depreciation (1,168,980 ) (1,090,979 )
1,767,909 1,808,159 Properties held for disposition, net (1) 45,450
48,445 Land and building held for development 29,665
27,028 1,843,024 1,883,632 Investment in and advances
to unconsolidated joint venture 100,898 67,190 Rent receivable, net
1,876 1,945 Deferred rent receivable, net 32,062 29,770 Other
assets 7,417 8,205 Total assets $
2,100,159 $ 2,119,371
LIABILITIES AND
EQUITY Accrued and other liabilities $ 80,223 $ 78,657
Preferred stock called for redemption 130,000
230,000 Total liabilities 210,223 308,657 Commitments
and contingencies Equity: PS Business Parks, Inc.’s
shareholders’ equity
Preferred stock, $0.01 par value,
50,000,000 shares authorized, 38,390 and 35,190 shares issued and
outstanding at December 31, 2017 and 2016, respectively
959,750 879,750
Common stock, $0.01 par value, 100,000,000
shares authorized, 27,254,607 and 27,138,138 shares issued and
outstanding at December 31, 2017 and 2016, respectively
272 271 Paid-in capital 735,067 733,671 Accumulated deficit
(1,778 ) (433 ) Total PS Business Parks, Inc.’s
shareholders’ equity 1,693,311 1,613,259 Noncontrolling interests
196,625 197,455 Total equity
1,889,936 1,810,714 Total liabilities and
equity $ 2,100,159 $ 2,119,371 (1)
Land, building, and accumulated
depreciation for the 705,000 square feet of office space in Orange
County, California, has been reclassified at December 31, 2017 and
2016 to “Properties held for disposition, net.”
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,
2017 2016
2017 2016 Rental income $
101,837 $ 97,599 $ 402,179 $ 386,871 Expenses Cost of
operations 32,378 30,668 125,340 123,108 Depreciation and
amortization 23,805 24,600 94,270 99,486 General and administrative
2,660 2,880 9,679
14,862 Total operating expenses 58,843
58,148 229,289 237,456
Operating income 42,994 39,451 172,890 149,415 Interest and other
income 343 293 942 1,233 Interest and other expense (313 ) (157 )
(1,285 ) (5,664 ) Equity in loss of unconsolidated joint venture
(47 ) — (805 ) — Gain on sale of real estate facility — — 1,209 —
Gain on sale of development rights 2,500 —
6,365 — Net income 45,477 39,587
179,316 144,984 Allocation to noncontrolling interests
(5,669 ) (3,461 ) (24,279 ) (16,955 ) Net
income allocable to PS Business Parks, Inc. 39,808 36,126 155,037
128,029 Allocation to preferred shareholders Preferred
distributions (14,401 ) (15,778 ) (52,873 ) (57,276 ) Charge
related to the redemption of preferred securities (4,078 ) (7,312 )
(10,978 ) (7,312 ) Allocation to restricted stock unit holders
(179 ) (182 ) (761 ) (569 ) Net income
allocable to common shareholders $ 21,150 $ 12,854 $
90,425 $ 62,872 Net income per common share
Basic $ 0.78 $ 0.47 $ 3.32 $ 2.32 Diluted $ 0.77 $ 0.47 $ 3.30 $
2.31 Weighted average common shares outstanding Basic
27,255 27,128 27,207
27,089 Diluted 27,442 27,213
27,412 27,179
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 Years Ended
December 31, Ended December 31, 2017
2016 2017
2016
Computation of
Funds From Operations (1)
Net income allocable to common shareholders $ 21,150 $
12,854 $ 90,425 $ 62,872 Adjustments Gain on sale of real estate
facility — — (1,209 ) — Gain on sale of development rights (2,500 )
— (6,365 ) — Depreciation and amortization 23,805 24,600 94,270
99,486 Depreciation from unconsolidated joint venture 593 — 1,180 —
Net income allocated to noncontrolling interests 5,669 3,461 24,279
16,955 Net income allocated to restricted stock unit holders
179 182 761 569
FFO allocable to common and dilutive shares $ 48,896 $
41,097 $ 203,341 $ 179,882 Weighted
average common shares outstanding 27,255 27,128 27,207 27,089
Weighted average common operating partnership units outstanding
7,305 7,305 7,305 7,305 Weighted average restricted stock units
outstanding 174 322 186 290 Weighted average common share
equivalents outstanding 187 85
205 90 Total common and dilutive shares
34,921 34,840 34,903
34,774 Net income per common share—diluted $ 0.77 $
0.47 $ 3.30 $ 2.31 Gain on sale of real estate facility — — (0.03 )
— Gain on sale of development rights (0.07 ) — (0.18 ) —
Depreciation and amortization, including
amounts from investment in unconsolidated joint venture
0.70 0.71 2.74
2.86 FFO per share (1) $ 1.40 $ 1.18 $ 5.83
$ 5.17
Computation of
Funds Available for Distribution ("FAD") (1)
FFO allocable to common and dilutive shares $ 48,896 $
41,097 $ 203,341 $ 179,882 Adjustments Recurring capital
improvements (3,395 ) (3,036 ) (10,069 ) (8,336 ) Tenant
improvements (4,837 ) (2,977 ) (28,294 ) (16,086 ) Lease
commissions (2,315 ) (1,476 ) (7,477 ) (6,530 ) Straight-line rent
(392 ) (82 ) (2,311 ) (1,746 ) Non-cash stock compensation expense
1,529 1,979 4,777 10,912
Cash paid for taxes in lieu of shares upon
vesting of restricted stock units
— — (3,865 ) (1,940 ) In-place lease adjustment 8 (83 ) (18 ) (520
) Tenant improvement reimbursements, net of lease incentives (528 )
(414 ) (2,182 ) (1,667 ) Capitalized interest — (31 ) (506 ) (885 )
Charge related to the redemption of preferred securities
4,078 7,312 10,978 7,312
FAD $ 43,044 $ 42,289 $ 164,374 $
160,396 Distributions to common shares and units $ 29,555
$ 26,014 $ 118,130 $ 103,770
Distribution payout ratio 68.7 % 61.5 % 71.9 %
64.7 % (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 Years Ended December 31,
Ended December 31, 2017
2016 Change 2017
2016 Change RENTAL INCOME Adjusted rental
income Same Park $ 97,634 $ 92,962 5.0 % $ 386,133 $ 369,000 4.6 %
Non-Same Park 519 287 80.8 % 1,495 296 405.1 % Assets sold or held
for sale or development (1) 3,684 4,350 (15.3 %) 14,551 17,047
(14.6 %) Lease buyout payment — — 0.0 %
— 528 (100.0 %) Total rental income
101,837 97,599 4.3 % 402,179
386,871 4.0 % COST OF OPERATIONS
Adjusted cost of operations Same Park 29,810 27,879 6.9 % 115,574
112,929 2.3 % Non-Same Park 455 286 59.1 % 1,373 289 375.1 % Assets
sold or held for sale or development (1) 1,549 1,812 (14.5 %) 6,062
6,887 (12.0 %) LTEIP amortization 564 691
(18.4 %) 2,331 3,003 (22.4 %)
Total cost of operations 32,378 30,668
5.6 % 125,340 123,108 1.8 %
OPERATING INCOME Net operating income Same Park 67,824 65,083 4.2 %
270,559 256,071 5.7 % Non-Same Park 64 1 6,300.0 % 122 7 1,642.9 %
Assets sold or held for sale or development (1) 2,135 2,538 (15.9
%) 8,489 10,160 (16.4 %) Lease buyout payment and LTEIP
amortization (564 ) (691 ) (18.4 %) (2,331 ) (2,475 ) (5.8 %)
Depreciation and amortization (23,805 ) (24,600 ) (3.2 %) (94,270 )
(99,486 ) (5.2 %) General and Administrative (2,660 )
(2,880 ) (7.6 %) (9,679 ) (14,862 ) (34.9 %)
Operating income $ 42,994 $ 39,451 9.0 % $ 172,890
$ 149,415 15.7 % (1)
The operations for “assets sold or held
for sale or development” is primarily comprised of the historical
operations of the 705,000 rentable square feet of office product
held for sale and are therefore not expected to remain part of our
ongoing operations. These assets were removed from the Same Park
portfolio in the current quarter’s presentation. For the three
months and year ended December 31, 2016, “assets sold or held for
sale or development” also includes operations from a 123,000 square
foot office building held for development.
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