PS Business Parks, Inc. Reports Results for the Second Quarter Ended June 30, 2009

Wednesday, August 05, 2009 5:14 PM

PS Business Parks, Inc. (NYSE:PSB) reported operating results for the second quarter ended June 30, 2009.

Net income allocable to common shareholders for the three months ended June 30, 2009 was $8.7 million, or $0.42 per diluted share, on revenues of $68.1 million compared to $4.6 million, or $0.22 per diluted share, on revenues of $70.6 million for the same period in 2008. Net income allocable to common shareholders for the six months ended June 30, 2009 was $41.5 million, or $2.01 per diluted share, on revenues of $138.1 million compared to $8.3 million, or $0.40 per diluted share, on revenues of $140.9 million for the same period in 2008.

Revenues for the three months ended June 30, 2009 decreased $2.5 million, or 3.5%, over the same period in 2008. Net income allocable to common shareholders for the three months ended June 30, 2009 increased $4.1 million over the same period in 2008 primarily as a result of a decrease in depreciation expense of $3.7 million, a decrease in preferred equity distributions of $2.0 million and a $1.5 million gain on the sale of a parcel of land in Oregon partially offset by a decrease in net operating income of $2.1 million due to a decrease in occupancy combined with an increase in net income allocable to noncontrolling interest — common units of $1.4 million.

Revenues for the six months ended June 30, 2009 decreased $2.9 million, or 2.0%, over the same period in 2008. Net income allocable to common shareholders for the six months ended June 30, 2009 increased $33.2 million over the same period in 2008 primarily as a result of a net gain of $35.6 million on the repurchase of preferred equity, a $1.5 million gain on the sale of a parcel of land in Oregon, a decrease in depreciation expense of $6.8 million and a decrease in preferred equity distributions of $3.6 million partially offset by an increase in net income allocable to noncontrolling interests — common units of $11.8 million and a decrease in net operating income of $2.7 million due to a decrease in occupancy.

Supplemental Measures

Funds from operations (“FFO”) allocable to common and dilutive shares for the three months ended June 30, 2009 and 2008 were $31.7 million, or $1.13 per common and dilutive share, and $31.4 million, or $1.12 per common and dilutive share, respectively. The increase in FFO for the three months ended June 30, 2009 over the same period in 2008 was primarily due to a decrease in preferred equity distributions as a result of the preferred equity repurchased during the first quarter of 2009 combined with a decrease in general and administrative expense partially offset by a decrease in net operating income. FFO allocable to common and dilutive shares for the six months ended June 30, 2009 was $98.9 million, or $3.53 per common and dilutive share, compared to $62.0 million, or $2.21 per common and dilutive share, for the same period in 2008. The increase in FFO for the six months ended June 30, 2009 over the same period in 2008 was primarily due to a net gain of $35.6 million on the repurchase of preferred equity combined with a decrease in preferred equity distributions and a decrease in general and administrative expense partially offset by a decrease in net operating income. Excluding the $35.6 million net gain, FFO allocable to common and dilutive shares would have been $63.3 million, or $2.26 per common and dilutive share, for the six months ended June 30, 2009.

Property Operations

In order to evaluate the performance of the Company’s overall portfolio over two comparable periods, management analyzes the operating performance of a consistent group of properties owned and operated throughout both periods (herein referred to as “Same Park”). As the Company has had no acquisitions or dispositions since January 1, 2008, for the three and six months ended June 30, 2009 and 2008, the Same Park portfolio constitutes 19.6 million rentable square feet, which includes 100.0% of the assets of the Company.

The Company’s property operations account for substantially all of the net operating income earned by the Company. The following table presents the operating results of the Company’s properties for the three and six months ended June 30, 2009 and 2008 in addition to other income and expense items affecting net income (unaudited, in thousands, except per square foot amounts):

	For the Three Months Ended June 30,								For the Six Months Ended June 30,
	2009			2008			Change		2009			2008			Change
Rental income:
Same Park ⁽¹⁾	$	67,976		$	70,446		(3.5	%)	$	137,723		$	140,557		(2.0	%)
Cost of operations:
Same Park		21,549			21,939		(1.8	%)		44,304			44,429		(0.3	%)
Net operating income ⁽²⁾:
Same Park		46,427			48,507		(4.3	%)		93,419			96,128		(2.8	%)
Other income and expenses:
Facility management fees		173			177		(2.3	%)		350			372		(5.9	%)
Interest and other income		68			282		(75.9	%)		247			610		(59.5	%)
Interest expense		(881	)		(990	)	(11.0	%)		(1,811	)		(1,983	)	(8.7	%)
Depreciation and amortization		(21,412	)		(25,120	)	(14.8	%)		(43,803	)		(50,567	)	(13.4	%)
General and administrative		(1,538	)		(2,085	)	(26.2	%)		(3,514	)		(4,131	)	(14.9	%)
Gain on sale of land		1,488			—		100.0	%		1,488			—		100.0	%
Net income	$	24,325		$	20,771		17.1	%	$	46,376		$	40,429		14.7	%
Same Park gross margin ⁽³⁾		68.3	%		68.9	%	(0.9	%)		67.8	%		68.4	%	(0.9	%)
Same Park weighted average for the period:
Occupancy		89.9	%		93.5	%	(3.9	%)		90.7	%		93.7	%	(3.2	%)
Annualized realized rent per square foot ⁽⁴⁾	$	15.47		$	15.41		0.4	%	$	15.53		$	15.34		1.2	%

(1) See above for a definition of Same Park.
(2) 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”).
(3) Same Park gross margin is computed by dividing NOI by rental income.
(4) Same Park realized rent per square foot represents the annualized revenues earned per occupied square foot.

Financial Condition

The following are key financial ratios with respect to the Company’s leverage at and for the three months ended June 30, 2009:

	Ratio of FFO to fixed charges ⁽¹⁾	51.2x
	Ratio of FFO to fixed charges and preferred distributions ⁽¹⁾	3.4x
	Debt and preferred equity to total market capitalization (based on common stock price of $48.44 at June 30, 2009)	35.8%
	Available under line of credit at June 30, 2009	$100.0 million

(1) Fixed charges include interest expense of $881,000.

Land Disposition

During May, 2009, the Company sold 3.4 acres of land held for development in Portland, Oregon, for a gross sales price of $2.7 million, resulting in a net gain of $1.5 million.

Distributions Declared

The Board of Directors declared a quarterly dividend of $0.44 per common share on August 4, 2009. 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 September 30, 2009 to shareholders of record on September 15, 2009.

Series	Dividend Rate		Dividend Declared
Series H	7.000	%	$	0.437500
Series I	6.875	%	$	0.429688
Series K	7.950	%	$	0.496875
Series L	7.600	%	$	0.475000
Series M	7.200	%	$	0.450000
Series O	7.375	%	$	0.460938
Series P	6.700	%	$	0.418750

Company Information

PS Business Parks, Inc., a member of the S&P SmallCap 600, is a self-advised and self-managed equity real estate investment trust (“REIT”) that acquires, develops, owns and operates commercial properties, primarily flex, multi-tenant 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 June 30, 2009, PSB wholly owned 19.6 million rentable square feet with approximately 3,750 customers located in eight states, concentrated in California (5.8 million sq. ft.), Florida (3.6 million sq. ft.), Virginia (3.0 million sq. ft.), Texas (2.9 million sq. ft.), Maryland (1.8 million sq. ft.), Oregon (1.3 million sq. ft.), Arizona (0.7 million sq. ft.) and Washington (0.5 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 second quarter operating results, is available on the Internet. The Company’s website is www.psbusinessparks.com.

A conference call is scheduled for Thursday, August 6, 2009, at 10:00 a.m. (PDT) to discuss the second quarter results. The toll free number is (888) 299-3246; the conference ID is 18886527. 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 13, 2009 at (800) 642-1687. A replay of the conference call will also be available 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,
	2009			2008
	(Unaudited)

ASSETS

Cash and cash equivalents	$	21,998		$	55,015

Real estate facilities, at cost:
Land		494,849			494,849
Buildings and equipment		1,527,091			1,517,484
		2,021,940			2,012,333
Accumulated depreciation		(679,991	)		(637,948	)
		1,341,949			1,374,385
Land held for development		6,829			7,869
		1,348,778			1,382,254

Rent receivable		1,849			2,055
Deferred rent receivable		21,817			21,633
Other assets		6,015			8,366

Total assets	$	1,400,457		$	1,469,323

LIABILITIES AND EQUITY

Accrued and other liabilities	$	48,793		$	46,428
Mortgage notes payable		53,519			59,308
Total liabilities		102,312			105,736

Commitments and contingencies

Equity:
PS Business Parks, Inc.’s shareholders’ equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized, 25,042 and 28,250 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively		626,046			706,250
Common stock, $0.01 par value, 100,000,000 shares authorized, 20,545,511 and 20,459,916 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively		205			204
Paid-in capital		396,930			363,587
Cumulative net income		659,028			622,113
Cumulative distributions		(614,518	)		(571,340	)
Total PS Business Parks, Inc.’s shareholders’ equity		1,067,691			1,120,814
Noncontrolling interests:
Preferred units		73,418			94,750
Common units		157,036			148,023
Total noncontrolling interests		230,454			242,773
Total equity		1,298,145			1,363,587

Total liabilities and equity	$	1,400,457		$	1,469,323

PS BUSINESS PARKS, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited, in thousands, except per share amounts)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2009			2008			2009			2008
Revenues:
Rental income	$	67,976		$	70,446		$	137,723		$	140,557
Facility management fees		173			177			350			372
Total operating revenues		68,149			70,623			138,073			140,929
Expenses:
Cost of operations		21,549			21,939			44,304			44,429
Depreciation and amortization		21,412			25,120			43,803			50,567
General and administrative		1,538			2,085			3,514			4,131
Total operating expenses		44,499			49,144			91,621			99,127
Other income and expenses:
Interest and other income		68			282			247			610
Interest expense		(881	)		(990	)		(1,811	)		(1,983	)
Gain on sale of land		1,488			—			1,488			—
Total other income and expenses		675			(708	)		(76	)		(1,373	)

Net income	$	24,325		$	20,771		$	46,376		$	40,429

Net income allocation:
Net income allocable to noncontrolling interests:
Noncontrolling interests — common units	$	3,080		$	1,639		$	14,794		$	2,987
Noncontrolling interests — preferred units		1,381			1,752			(5,333	)		3,504
Total net income allocable to noncontrolling interests		4,461			3,391			9,461			6,491
Net income allocable to PS Business Parks, Inc.:
Common shareholders		8,657			4,561			41,518			8,310
Preferred shareholders		11,155			12,757			(4,871	)		25,513
Restricted stock unit holders		52			62			268			115
Total net income allocable to PS Business Parks, Inc.		19,864			17,380			36,915			33,938
	$	24,325		$	20,771		$	46,376		$	40,429

Net income per common share:
Basic	$	0.42		$	0.22		$	2.03		$	0.41
Diluted	$	0.42		$	0.22		$	2.01		$	0.40

Weighted average common shares outstanding:
Basic		20,531			20,430			20,501			20,432
Diluted		20,652			20,639			20,605			20,620

PS BUSINESS PARKS, INC. Computation of Diluted Funds from Operations (“FFO”) and Funds Available for Distribution (“FAD”) (Unaudited, in thousands, except per share amounts)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2009			2008			2009			2008
Computation of Diluted Funds From Operations (“FFO”) ⁽¹⁾:

Net income allocable to common shareholders	$	8,657		$	4,561		$	41,518		$	8,310
Adjustments:
Gain on sale of land		(1,488	)		—			(1,488	)		—
Depreciation and amortization		21,412			25,120			43,803			50,567
Net income allocable to noncontrolling interests — common units		3,080			1,639			14,794			2,987
Net income allocable to restricted stock unit holders		52			62			268			115
FFO allocable to common and dilutive shares	$	31,713		$	31,382		$	98,895		$	61,979

Weighted average common shares outstanding		20,531			20,430			20,501			20,432
Weighted average common OP units outstanding		7,305			7,305			7,305			7,305
Weighted average restricted stock units outstanding		133			157			139			158
Weighted average common share equivalents outstanding		121			209			104			188
Total common and dilutive shares		28,090			28,101			28,049			28,083

FFO per common and dilutive share	$	1.13		$	1.12		$	3.53		$	2.21

Computation of Funds Available for Distribution (“FAD”) ⁽²⁾:

FFO allocable to common and dilutive shares	$	31,713		$	31,382		$	98,895		$	61,979

Adjustments:
Recurring capital improvements		(1,352	)		(3,016	)		(2,137	)		(4,950	)
Tenant improvements		(3,692	)		(5,200	)		(6,974	)		(9,654	)
Lease commissions		(1,117	)		(1,966	)		(1,988	)		(4,234	)
Straight-line rent		161			(11	)		(184	)		83
Stock compensation expense		625			1,018			1,713			2,030
In-place lease adjustment		(75	)		(48	)		(161	)		(96	)
Lease incentives net of tenant improvement reimbursements		(93	)		(38	)		(174	)		(69	)
Gain on repurchase of preferred equity, net of issuance costs		—			—			(35,639	)		—
FAD	$	26,170		$	22,121		$	53,351		$	45,089

Distributions to common and dilutive shares	$	12,307		$	12,269		$	24,582		$	24,518

Distribution payout ratio		47.0	%		55.5	%		46.1	%		54.4	%

(1) Funds From Operations (“FFO”) is computed in accordance with the White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). The White Paper defines FFO as net income, computed in accordance with GAAP, before depreciation, amortization, gains or losses on asset dispositions and nonrecurring items. FFO should be analyzed in conjunction with net income. However, FFO should not be viewed as a substitute for net income as a measure of operating performance or liquidity as it does not reflect depreciation and amortization costs or the level of capital expenditure and leasing costs necessary to maintain the operating performance of the Company’s properties, which are significant economic costs and could materially impact the Company’s results from operations. Other REITs may use different methods for calculating FFO and, accordingly, the Company’s FFO may not be comparable to other real estate companies.

(2) Funds available for distribution (“FAD”) is computed by adjusting consolidated FFO for recurring capital improvements, which the Company defines as those costs incurred to maintain the assets’ value, tenant improvements, lease commissions, straight-line rent, stock compensation expense, impairment charges, amortization of lease incentives and tenant improvement reimbursements, in-place lease adjustment and the impact of EITF Topic D-42. Like FFO, the Company considers FAD to be a useful measure for investors to evaluate the operations and cash flows of a REIT. FAD does not represent net income or cash flow from operations as defined by GAAP.

PS Business Parks, Inc.
Edward A. Stokx
818-244-8080, Ext. 1649

(Source: Business Wire )

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