PS Business Parks a Hold

PS Business Parks, Inc. (PSB) reported good 4Q07 and full year 2007 results primarily due to better performance at current properties and new acquisitions. Same-store occupancy and rental income increased from the year earlier levels and fundamentals in the company's major markets are holding up relatively well. The increase in FFO [funds from operations] in 2007 was due to improved property operating results and new acquisitions.

Same-store revenue and NOI increased 4.4% in 4Q07 compared to the year earlier period. For the full year, SS revenue and NOI increased 3.4% and 3.5% respectively compared to 2006. Occupancy (in terms of net absorption) increased 100 basis points in 4Q07 to 94.2% for the total portfolio versus 3Q07, and by 70 basis points from 4Q06.

We rate the shares a Hold due to the company's exposure to some weaker markets in addition to macro economic factors affecting the US economy. National office and industrial vacancies are on the rise and we believe rent growth will be flat to negative in 2008. We expect job losses to continue, which will soften demand at the company's office and flex properties.

At 12.3x our 2008 FFO estimates, PSB trades at a significant discount (18%) to office REIT average 2008 FFO estimates. Additionally, the company trades at an approximate 6% discount to industrial REITs that we cover. National office and industrial markets are holding up for now, although we are in the midst of a declining economy with substantial job losses.

Due to its suburban asset base, PSB does not have the growth potential compared to urban office and gateway industrial competitors. We would stick with more defensive REITs in this type of environment. After a sustained sell-off over the past year, the company is fairly valued at the low end of its peer group. We are setting our target price at $55 per share or approximately12x 2008 FFO estimates.

Questions Regarding Phase Forward

Phase Forward Incorporated (PFWD) finished the year strong with $195.8 million (+42.9% year-over-year) in bookings and ending a backlog of $276 million (+28.6% year-over-year). During the fourth quarter, the company won a multi-million dollar contract with PAREXEL and also added six new CROs [computer resource offices]. Bookings were up 43% from 2006 to $195.8 million.

The company reiterated its decision to no longer provide bookings guidance and backlog metrics and indicated that 75% of 2008 revenues will come from beginning backlog. Going forward, management expects Q1 revenues to come around $37 $37.6 million. For 2008, Phase Forward expects revenue in the range of $165 million (+22.9% year-over-year) to $169 million (+25.8% year-over-year), non-GAAP operating margin between 16% and 17%, and non-GAAP EPS between $0.46 and $0.49.

While the company guided revenues above consensus, we believe that conservative interest income assumptions by the company led to the shortfall in company's EPS forecast relative to consensus/our forecast. The company indicated that it is forecasting $7.5 million in interest income, assuming $200 million in cash balance and 3.75% in interest rate.

While the interest rate assumption seems reasonable, we find the cash balance assumption somewhat inexplicable given that the company has $183 million in cash balance as of 2007, and it is likely to generate $30+ million in FCF in 2008. We believe that it is more likely that the cash balance assumption may be taking into consideration potential acquisition-related payments this year. We are maintaining our target price at $20, reflecting near-term growth potential, which implies a P/E multiple of 38.5 times our 2008 EPS estimate.