PS Business Parks, Inc. (NYSE:PSB) reported operating results
for the three and six months ended June 30, 2018.
Operating Results for the Three Months
Ended June 30, 2018
Net income allocable to common shareholders was
$70.2 million, or $2.56 per diluted common share, for the
three months ended June 30, 2018, an increase of
$45.5 million, or 183.8%, from $24.7 million, or $0.90
per diluted common share, for the same period in 2017. The increase
was mainly due to gain on sale of an office park in Orange County,
California, and an industrial park in Dallas, Texas, during the
second quarter of 2018 and an increase in net operating income
(“NOI”–described below) with respect to our real estate facilities.
The increase in NOI includes a $1.4 million increase for our Same
Park facilities (described below) due primarily to an increase in
rental rates and occupancy combined with increased NOI from our
non-Same Park and multi-family assets, partially offset by reduced
NOI with respect to facilities we sold.
Operating Results for the Six Months
Ended June 30, 2018
Net income allocable to common shareholders was
$116.3 million, or $4.24 per diluted common share, for the six
months ended June 30, 2018, an increase of $65.1 million, or
127.4%, from $51.1 million, or $1.87 per diluted common share,
for the same period in 2017. The increase was mainly due to gain on
sale of two office parks in Orange County, California, and an
industrial park in Dallas, Texas, during 2018 and an increase in
NOI with respect to our real estate facilities. The increase in NOI
includes a $1.9 million increase for our Same Park facilities due
primarily to an increase in rental rates and occupancy combined
with increased NOI from our non-Same Park and multi-family assets,
partially offset by reduced NOI with respect to facilities we
sold.
Funds from Operations
Funds from operations (“FFO”) per share was $1.59 for the three
months ended June 30, 2018, as compared to $1.55 for the same
period in 2017, an increase of $0.04 per share. FFO per share was
$3.18 for the six months ended June 30, 2018, an increase of
$0.11 per share from the six months ended June 30, 2017 of
$3.07.
FFO, which is described in more detail below, 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 and amortization expense,
gains and losses from sales and impairment charges with respect to
real estate assets.
Property Operations–Same Park
Portfolio
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 properties we owned and operated as of June 30, 2018
that were acquired prior to January 1, 2016, except for
an asset held for sale described below under “Property
Dispositions.” For the three and six months ended June 30, 2018 and
2017, the Same Park facilities constitute 26.9 million
rentable square feet, representing 95.1% of the 28.3 million
rentable square feet in the Company’s total portfolio as of June
30, 2018.
The following table presents the operating results of the
Company’s Same Park facilities for the three and six months ended
June 30, 2018 and 2017 (unaudited, in thousands, except
per square foot amounts):
For the Three Months
For The Six Months Ended June 30, Ended
June 30, 2018 2017
Change 2018 2017
Change Rental income $ 97,760 $ 95,464 2.4 % $ 195,782 $
191,220 2.4 % Adjusted cost of operations (1) (3) 28,865
28,008 3.1 % 58,900
56,222 4.8 % Net operating income (2) (3) $ 68,895 $
67,456 2.1 % $ 136,882 $ 134,998 1.4 %
Selected Statistical Data Gross margin (4) 70.5 % 70.7 %
(0.3 %) 69.9 % 70.6 % (1.0 %) Weighted average square foot
occupancy 94.6 % 93.7 % 1.0 % 94.6 % 94.1 % 0.5 % Annualized rental
income per occupied square foot $ 15.36 $ 15.15 1.4 % $ 15.38 $
15.10 1.9 % (1) 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. (2) 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 rental income less adjusted cost of operations. NOI excludes
depreciation and amortization expense because management and
investors do not consider it important in valuing real estate or
evaluating real estate performance, because depreciation and
amortization expense 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. (3) Our calculation of 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. (4) Computed by
dividing NOI by rental income.
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 Rental income
2018
$ 98,022 $ 97,760 $ — $ — 2017 $ 95,756 $ 95,464 $ 96,073 $ 97,211
Adjusted Cost of Operations
2018
$ 30,035 $ 28,865 $ — $ — 2017 $ 28,214 $ 28,008 $ 29,191 $ 29,642
Snow removal 2018 $ 794 $ 40 $ — $ — 2017 $ 378 $ 103
$ — $ 63
Utilities 2018 $ 5,713 $ 5,242 $ — $ — 2017
$ 5,448 $ 5,295 $ 5,798 $ 5,393
Weighted average square
foot occupancy 2018 94.6% 94.6% — — 2017 94.6% 93.7% 94.1%
95.1%
Annualized rental income per occupied square
foot 2018 $ 15.40 $ 15.36 $ — $ — 2017 $ 15.05 $ 15.15 $ 15.18
$ 15.20
Property Acquisition
On June 8, 2018, we acquired two multi-tenant industrial parks
aggregating 1.1 million rentable square feet in Springfield,
Virginia, for a net purchase price of $143.8 million. The portfolio
consists of 19 buildings and was 76.1% occupied as of the date of
acquisition. The 19 buildings are located in the
Springfield/Newington industrial submarket where we already own
three industrial parks totaling 606,000 square feet.
Property Dispositions
During the six months ended June 30, 2018, as previously
announced, we sold Corporate Pointe Business Park and Orange County
Business Center for an aggregate $115.0 million in net proceeds,
and on April 30, 2018, we sold Northgate Business Park, consisting
of seven multi-tenant flex buildings totaling 194,000 square feet
located in Dallas, Texas, for net proceeds of $11.8 million. In
connection with these dispositions, we recorded gains of $58.4
million and $85.3 million for the three and six months ended
June 30, 2018, respectively. We deferred substantially
all of the taxable gains by acquiring the Springfield, Virginia,
assets noted above.
We have one remaining facility that we are seeking to dispose of
with 107,000 rentable square feet located in Orange County,
California.
Distributions Declared
On July 24, 2018, the Board of Directors declared a
quarterly dividend of $1.05 per common share, an increase of 23.5%
from $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
September 27, 2018 to shareholders of record on September 12,
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
industrial, flex and office space. As of June 30, 2018, the Company
wholly owned 28.3 million rentable square feet with
approximately 5,000 commercial 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 second quarter operating results, is
available on the Company’s website at psbusinessparks.com.
A conference call is scheduled for Wednesday, July 25, 2018, at
9:00 a.m. PDT (12:00 p.m. EDT) to discuss the second quarter
results. The toll free number is (888) 299-3246; the conference ID
is 2377708. 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 25, 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)
June 30, December 31,
2018 2017 (Unaudited)
ASSETS Cash and cash equivalents $ 7,214 $ 114,882
Real estate facilities, at cost Land 816,656 769,036
Buildings and improvements 2,362,209 2,156,862
3,178,865 2,925,898 Accumulated depreciation
(1,201,990 ) (1,161,798 ) 1,976,875 1,764,100 Properties
held for sale, net (1) 9,465 49,259 Land and building held for
development 30,068 29,665 2,016,408
1,843,024 Investment in and advances to unconsolidated joint
venture — 100,898 Rent receivable, net 1,807 1,876 Deferred rent
receivable, net 31,917 32,062 Other assets 14,969
7,417 Total assets $ 2,072,315 $ 2,100,159
LIABILITIES AND EQUITY Accrued and
other liabilities $ 81,296 $ 80,223 Preferred stock called for
redemption — 130,000 Credit facility 10,000 —
Total liabilities 91,296 210,223 Commitments and
contingencies Equity PS Business Parks, Inc.’s shareholders’ equity
Preferred stock, $0.01 par value, 50,000,000 shares authorized,
38,390 shares issued and outstanding at June 30, 2018 and December
31, 2017 959,750 959,750 Common stock, $0.01 par value, 100,000,000
shares authorized, 27,331,834 and 27,254,607 shares issued and
outstanding at June 30, 2018 and December 31, 2017, respectively
272 272 Paid-in capital 733,617 735,067 Accumulated earnings
(deficit) 69,448 (1,778 ) Total PS Business
Parks, Inc.’s shareholders’ equity 1,763,087 1,693,311
Noncontrolling interests 217,932 196,625
Total equity 1,981,019 1,889,936
Total liabilities and equity $ 2,072,315 $ 2,100,159
(1) Includes the net book value of the
properties described under “Property Dispositions” above. The
amounts at December 31, 2017 include reclassifications for
additional properties held for sale.
PS BUSINESS PARKS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except per share
amounts)
For The Three Months For The
Six Months Ended June 30, Ended June 30,
2018 2017 2018
2017 Rental income $ 101,824 $ 99,800 $
205,583 $ 199,861 Expenses Cost of operations 31,256 30,250
64,256 61,283 Depreciation and amortization 24,416 23,628 48,298
46,706 General and administrative 2,368 2,443
4,674 5,274 Total operating
expenses 58,040 56,321 117,228
113,263 Operating income 43,784 43,479
88,355 86,598 Interest and other income 294 154 578 387 Interest
and other expense (167 ) (285 ) (332 ) (469 ) Equity in loss of
unconsolidated joint venture — (382 ) — (382 ) Gain on sale of real
estate facilities 58,448 1,209 85,283 1,209 Gain on sale of
development rights — — —
3,865 Net income 102,359 44,175 173,884 91,208
Allocation to noncontrolling interests (18,400 )
(6,645 ) (30,300 ) (13,746 ) Net income allocable to
PS Business Parks, Inc. 83,959 37,530 143,584 77,462 Allocation to
preferred shareholders (12,959 ) (12,591 ) (25,962 ) (25,882 )
Allocation to restricted stock unit holders (779 )
(197 ) (1,353 ) (445 ) Net income allocable to common
shareholders $ 70,221 $ 24,742 $ 116,269 $
51,135 Net income per common share Basic $ 2.57 $
0.91 $ 4.26 $ 1.88 Diluted $ 2.56 $ 0.90 $ 4.24 $ 1.87
Weighted average common shares outstanding Basic 27,322
27,200 27,294 27,174
Diluted 27,423 27,412
27,395 27,384
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
Six Months Ended June 30, Ended June 30,
2018 2017 2018
2017
Computation of
Funds From Operations (1)
Net income allocable to common shareholders $ 70,221 $
24,742 $ 116,269 $ 51,135 Adjustments Gain on sale of real estate
facilities and development rights (58,448 ) (1,209 ) (85,283 )
(5,074 ) Depreciation and amortization expense 24,416 23,628 48,298
46,706 Depreciation from unconsolidated joint venture — 104 — 104
Net income allocated to noncontrolling interests 18,400 6,645
30,300 13,746 Net income allocated to restricted stock unit holders
779 197 1,353 445 FFO (income) loss allocated to joint venture
partner (2 ) — 11 —
FFO allocable to common and dilutive shares $ 55,366
$ 54,107 $ 110,948 $ 107,062 Weighted
average outstanding: Common shares 27,322 27,200 27,294 27,174
Operating partnership units 7,305 7,305 7,305 7,305 Restricted
stock units 156 179 189 196 Common share equivalents 101
212 101 210 Total
common and dilutive shares 34,884 34,896
34,889 34,885 Net income
per common share—diluted $ 2.56 $ 0.90 $ 4.24 $ 1.87 Gain on sale
of real estate facilities and development rights (1.67 ) (0.03 )
(2.44 ) (0.14 ) Depreciation and amortization expense, including
amounts from unconsolidated joint venture 0.70
0.68 1.38 1.34 FFO per share (1)
$ 1.59 $ 1.55 $ 3.18 $ 3.07
Computation of
Funds Available for Distribution ("FAD") (1)
FFO allocable to common and dilutive shares $ 55,366 $
54,107 $ 110,948 $ 107,062 Adjustments Recurring capital
improvements (2,329 ) (2,780 ) (3,460 ) (3,425 ) Tenant
improvements (3,817 ) (9,165 ) (7,757 ) (15,641 ) Lease commissions
(1,834 ) (1,607 ) (3,773 ) (3,145 ) Straight-line rent (609 ) (753
) (1,344 ) (1,634 ) Non-cash stock compensation expense 671 1,563
1,781 3,646 Cash paid for taxes in lieu of shares upon vesting of
restricted stock units — (47 ) (4,529 ) (3,403 ) In-place lease
adjustment 16 (9 ) 23 (34 ) Tenant improvement reimbursements, net
of lease incentives (619 ) (495 ) (1,134 ) (856 ) Capitalized
interest — (227 ) — (506
) FAD $ 46,845 $ 40,587 $ 90,755 $ 82,064
Distributions to common shares and units $ 29,675 $
29,522 $ 59,351 $ 59,025 Distribution payout
ratio 63.3 % 72.7 % 65.4 % 71.9 %
(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 and amortization expense, 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 Six Months Ended June 30, Ended
June 30, 2018 2017
Change 2018 2017
Change RENTAL INCOME Same Park $ 97,760 $ 95,464 2.4 % $
195,782 $ 191,220 2.4 % Non-Same Park 1,336 314 325.5 % 1,944 605
221.3 % Multi-family 1,738 — 100.0 % 3,162 — 100.0 % Assets sold or
held for sale (1) 990 4,022 (75.4 %)
4,695 8,036 (41.6 %) Total rental
income 101,824 99,800 2.0 %
205,583 199,861 2.9 % COST OF
OPERATIONS Adjusted Cost of Operations Same Park 28,865 28,008 3.1
% 58,900 56,222 4.8 % Non-Same Park 564 270 108.9 % 924 624 48.1 %
Multi-family 973 — 100.0 % 1,970 — 100.0 % Assets sold or held for
sale (1) 550 1,565 (64.9 %) 1,803 3,234 (44.2 %) LTEIP amortization
304 407 (25.3 %) 659
1,203 (45.2 %) Total cost of operations 31,256
30,250 3.3 % 64,256
61,283 4.9 % OPERATING INCOME Net operating income
Same Park 68,895 67,456 2.1 % 136,882 134,998 1.4 % Non-Same Park
772 44 1,654.5 % 1,020 (19 ) 5,468.4 % Multi-family 765 — 100.0 %
1,192 — 100.0 % Assets sold or held for sale (1) 440 2,457 (82.1 %)
2,892 4,802 (39.8 %) LTEIP amortization (304 ) (407 ) (25.3 %) (659
) (1,203 ) (45.2 %) Depreciation and amortization (24,416 ) (23,628
) 3.3 % (48,298 ) (46,706 ) 3.4 % General and administrative
(2,368 ) (2,443 ) (3.1 %) (4,674 ) (5,274 )
(11.4 %) Operating income $ 43,784 $ 43,479 0.7 % $
88,355 $ 86,598 2.0 % (1)
Amounts for the three and six months ended June 30, 2018 represent
the operations of the properties described under “Property
Dispositions” above.
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PS Business Parks, Inc.Maria R. Hawthorne818-244-8080, Ext.
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