PS Business Parks, Inc. Reports Results for the Third Quarter Ended September 30, 2012

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PS Business Parks, Inc. Reports Results for the Third Quarter Ended September 30, 2012

GLENDALE, Calif.--(BUSINESS WIRE)-- PS Business Parks, Inc. (NYS: PSB) reported operating results for the third quarter ended September 30, 2012.

Funds from operations ("FFO") allocable to common and dilutive shares before non-cash and other adjustments were $37.6 million, or $1.19 per common and dilutive share for the three months ended September 30, 2012, a 6.3% per share increase from the three months ended September 30, 2011 of $35.9 million, or $1.12 per common and dilutive share before non-cash and other adjustments. FFO allocable to common and dilutive shares before non-cash and other adjustments was $112.1 million, or $3.53 per common and dilutive share for the nine months ended September 30, 2012, a 6.0% per share increase from the nine months ended September 30, 2011 of $107.0 million, or $3.33 per common and dilutive share before non-cash and other adjustments. The increase in FFO per common and dilutive share before non-cash and other adjustments for the three and nine months ended September 30, 2012 over the same periods in 2011 was primarily due to the increase in net operating income from Non-Same Park facilities, which includes the 5.3 million square foot portfolio acquired in December 2011, partially offset by increases in interest expense, preferred equity distributions and general and administrative expenses.


FFO allocable to common and dilutive shares was $33.6 million, or $1.06 per common and dilutive share for the three months ended September 30, 2012, a 12.4% per share decrease from the three months ended September 30, 2011 of $38.8 million, or $1.21 per common and dilutive share. FFO allocable to common and dilutive shares was $94.6 million, or $2.98 per common and dilutive share for the nine months ended September 30, 2012, an 18.1% per share decrease from the nine months ended September 30, 2011 of $117.0 million, or $3.64 per common and dilutive share.

In order to provide a meaningful period-to-period comparison, the following table summarizes the impact of non-cash and other adjustments which include non-cash distributions related to the redemption of preferred equity, the gain on the below par repurchase of preferred equity, lease buyout income and acquisition transaction costs on the Company's FFO per common and dilutive share for the three and nine months ended September 30, 2012 and 2011:

  For The Three Months

Ended September 30,

    For The Nine Months

Ended September 30,

  
2012  2011Change2012  2011Change
 
FFO per common and dilutive share, before non-cash and other adjustments$1.19$1.126.3%$3.53$3.336.0%
Non-cash distributions related to the redemption of preferred equity(0.12)(0.54)
Gain on the repurchase of preferred equity0.23
Lease buyout income (1)0.090.09
Acquisition transaction costs (0.01)  (0.01) (0.01)
FFO per common and dilutive share, as reported$1.06 $1.21(12.4%)$2.98 $3.64 (18.1%)
 
(1)  Represents a lease buyout payment received in the third quarter of 2011 associated with a 53,000 square foot lease in Maryland which terminated as of August 31, 2011.
 

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"). Effective January 1, 2012, the Company revised its Same Park definition to include all operating properties owned or acquired prior to January 1, 2010. We believe that this will provide the most meaningful perspective on how our assets are performing period to period, while not inflating comparative growth results with the continued lease-up of recently acquired assets. Operating properties that the Company acquired subsequent to January 1, 2010 are referred to as "Non-Same Park." For the three and nine months ended September 30, 2012 and 2011, the Same Park facilities constitute 19.2 million rentable square feet, representing 68.1% of the 28.2 million square feet in the Company's portfolio as of September 30, 2012.

The following table presents the operating results of the Company's properties for the three and nine months ended September 30, 2012 and 2011 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
Ended September 30,

 

 

 

For The Nine Months
Ended September 30,

 

 

2012 2011Change2012 2011Change
Rental income:
Same Park (19.2 million rentable square feet)$63,342$63,0390.5%$189,814$190,378(0.3%)
Non-Same Park (8.9 million rentable

square feet)

 23,678  10,538 124.7% 67,510  29,630 127.8%
Total rental income 87,020  73,577 18.3% 257,324  220,008 17.0%
Cost of operations:
Same Park21,19020,9251.3%62,14163,301(1.8%)
Non-Same Park 8,104  3,853 110.3% 22,985  11,288 103.6%
Total cost of operations 29,294  24,778 18.2% 85,126  74,589 14.1%
Net operating income (1):
Same Park42,15242,1140.1%127,673127,0770.5%
Non-Same Park 15,574  6,685 133.0% 44,525  18,342 142.7%
Total net operating income 57,726  48,799 18.3% 172,198  145,419 18.4%
Other:
Lease buyout income (2)2,886(100.0%)2,886(100.0%)
Facility management fees159170(6.5%)489517(5.4%)
Other income and expense(5,135)(1,224)319.5%(15,573)(3,447)351.8%
Depreciation and amortization(26,884)(21,382)25.7%(81,326)(63,100)28.9%
General and administrative(2,082)(1,313)58.6%(6,767)(4,413)53.3%
Acquisition transaction costs (158) (52)203.8% (158) (270)(41.5%)
Income from continuing operations$23,626 $27,884 (15.3%)$68,863 $77,592 (11.2%)
Same Park gross margin (3)66.5%66.8%(0.4%)67.3%66.7%0.9%
Same Park weighted average occupancy91.9%90.9%1.1%92.0%91.0%1.1%
Non-Same Park weighted average occupancy82.0%76.1%82.0%74.8%
Same Park annualized realized rent

per square foot (4)

$14.37$14.46(0.6%)$14.34$14.54(1.4%)
 
(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 received in the third quarter of 2011 associated with a 53,000 square foot lease in Maryland which terminated as of August 31, 2011.

(3)

Same Park gross margin is computed by dividing Same Park NOI by Same Park rental income.

(4)

Same Park annualized realized rent per square foot represents the annualized Same Park rental income earned per occupied square foot.

 

Total rental income, including the lease buyout income noted above, increased $10.6 million, or 13.8%, from $76.5 million for the three months ended September 30, 2011 to $87.0 million for the three months ended September 30, 2012 primarily as a result of a $13.1 million increase in rental income from Non-Same Park facilities, which includes the 5.3 million square foot portfolio acquired in December 2011, partially offset by a $2.6 million decrease from the Same Park portfolio. Excluding the lease buyout income, rental income from the Same Park portfolio increased $303,000 due to an increase in occupancy rates, partially offset by a decrease in rental rates. Net income allocable to common shareholders decreased $10.3 million, or 66.5%, from $15.4 million, or $0.63 per diluted share, for the three months ended September 30, 2011 to $5.2 million, or $0.21 per diluted share, for the three months ended September 30, 2012.

Total rental income, including the lease buyout income noted above, increased $34.4 million, or 15.4%, from $222.9 million for the nine months ended September 30, 2011 to $257.3 million for the nine months ended September 30, 2012 as a result of a $37.9 million increase in rental income from Non-Same Park facilities, which includes the 5.3 million square foot portfolio acquired in December 2011, partially offset by a $3.5 million decrease from the Same Park portfolio. Excluding the lease buyout income, rental income from the Same Park portfolio decreased $564,000 due to a decrease in rental rates, partially offset by an increase in occupancy rates. Net income allocable to common shareholders decreased $33.3 million, or 76.8%, from $43.4 million, or $1.75 per diluted share, for the nine months ended September 30, 2011 to $10.0 million, or $0.41 per diluted share, for the nine months ended September 30, 2012. The decrease in net income allocable to common shareholders for the three and nine months was primarily due to the net impact of non-cash preferred equity transactions and increases in interest expense, depreciation and amortization and preferred equity distributions, partially offset by an increase in net operating income.

Preferred Equity Transactions

On September 14, 2012, the Company issued $230.0 million or 9.2 million depositary shares, each representing 1/1,000 of a share of the 5.75% Cumulative Preferred Stock, Series U, at $25.00 per depositary share. The Company used the proceeds from this issuance to redeem, on October 9, 2012, $132.3 million, or 5,290,000 depositary shares, each representing 1/1,000 of a share of the 6.70% Cumulative Preferred Stock, Series P. The remaining net proceeds were used to reduce the Company's unsecured debt.

In connection with the Series P redemption, the Company reported the excess of the redemption amount over the carrying amount of $3.8 million, representing the original issuance costs, as a reduction of net income allocable to common shareholders and unit holders for the three and nine months ended September 30, 2012.

Property Acquisition

On July 24, 2012, the Company acquired a 958,000 square foot industrial park consisting of eight single-story buildings located in Kent Valley, Washington, for a purchase price of $37.6 million. The park was 52.3% occupied at the time of acquisition.

Property Disposition

Subsequent to September 30, 2012, the Company completed the sale of Quail Valley Business Park, a 66,000 square foot flex park in Houston, Texas, for $2.3 million.

Financial Condition

The following are key financial ratios with respect to the Company's leverage at and for the three months ended September 30, 2012:

    Ratio of FFO to fixed charges (1)   10.8x
Ratio of FFO to fixed charges and preferred distributions (1)3.1x

Debt and preferred equity to total market capitalization (based on common stock price of $66.82 at September 30, 2012)

39.3%
Available balance under the $250.0 million unsecured credit facility at September 30, 2012$250.0 million
 

(1) Fixed charges include interest expense of $5.2 million.

 

Distributions Declared

The Board of Directors declared a quarterly dividend of $0.44 per common share on October 29, 2012. 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 December 27, 2012 to shareholders of record on December 12, 2012.

        

Series

    

Dividend Rate

    

Dividend Declared

Series R6.875%$0.429688
Series S6.450%$0.403125
Series T6.000%$0.375000
Series U5.750%$0.427257
 

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 29, 2012, the Company wholly owned 28.1 million rentable square feet with approximately 4,600 customers located in eight states, concentrated in California (11.1 million sq. ft.), Virginia (4.2 million sq. ft.), Florida (3.7 million sq. ft.), Texas (3.3 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 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 30, 2012, at 10:00 a.m. (PDT) to discuss the third quarter results. The toll free number is (888) 299-3246; the conference ID is 40159229. 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 6, 2012 at (855) 859-2056. A replay of the conference call will also be available on the Company's website.

Additional financial data attached.

    
 
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