News Release

PS Business Parks, Inc.

701 Western Avenue

Glendale,  CA 91201-2349

psbusinessparks.com





PS Business Parks, Inc. Reports Results for the Quarter and Year Ended December 31, 2017



GLENDALE, California—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.



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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:







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):









(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.

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The following table summarizes selected quarterly financial data with respect to the Same Park facilities (unaudited, in thousands, except per square foot amounts):





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 million 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.







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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.



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PS BUSINESS PARKS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)







(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.”





 

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PS BUSINESS PARKS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited, in thousands, except per share amounts)







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PS BUSINESS PARKS, INC.

Computation of Funds from Operations and Funds Available for Distribution

(Unaudited, in thousands, except per share amounts)







(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.  

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PS BUSINESS PARKS, INC.

Reconciliation of Selected non-GAAP Measures to Analogous GAAP Measures

(Unaudited, in thousands)







(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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