UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-K





Commission File Number 1-10709



PS BUSINESS PARKS, INC.

(Exact name of registrant as specified in its charter)





701 Western Avenue, Glendale, California 91201-2349

(Address of principal executive offices) (Zip Code)



818-244-8080

(Registrant’s telephone number, including area code)



Securities registered pursuant to Section 12(b) of the Act:





Securities registered pursuant to Section 12(g) of the Act:

None

(Title of class)



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ☑    No ☐ 



Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes ☐    No ☑ 



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes ☑    No ☐



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☑    No ☐



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§232.405) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☑



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐    No ☑ 



As of June 30, 2016,2017, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $2,082,893,848$2,614,997,862 based on the closing price as reported on that date.



Number of shares of the registrant’s common stock, par value $0.01 per share, outstanding as of February 20, 201719, 2018 (the latest practicable date): 27,138,138.27,254,607.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the definitive proxy statement to be filed in connection with the Annual Meeting of Shareholders to be held in 20172018 are incorporated by reference into Part III of this Annual Report on Form 10-K.

PART I



ITEM 1. BUSINESS 



Forward-Looking Statements



Forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, are made throughout this Annual Report on Form 10-K. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “may,” “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” “intends” and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including but not limited to:to (a) changes in general economic and business conditions; (b) decreases in rental rates or increases in vacancy rates/failure to renew or replace expiring leases; (c) tenant defaults; (d) the effect of the recent credit and financial market conditions; (e) our failure to maintain our status as a real estate investment trust (a  “REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”); (f) the economic health of our tenants;customers; (g) increases in operating costs; (h) casualties to our properties not covered by insurance; (i) the availability and cost of capital; (j) increases in interest rates and its effect on our stock price; and (k) other factors discussed under the heading Item 1A, “Risk Factors.” In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. Moreover, we assume no obligation to update these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements, except as required by law.



The Company



PS Business Parks, Inc. (“PSB”) is a fully-integrated, self-advised and self-managed REIT that owns, operates, acquires and develops commercial properties, primarily multi-tenant flex, office and industrial space. Substantially all of PSB’s assets are held, and its business conducted, through PS Business Parks, L.P. (the “Operating Partnership”“OP”) is,  a California limited partnership. PSB has full, exclusive, and complete control of the OP as the sole general partner and, as of December 31, 2017, owned 78.9% of the common partnership which owns directly or indirectly substantially allunits, with Public Storage (“PS”) owning the remainder. Assuming issuance of our assets and through which we conduct substantially allPSB common stock upon redemption of our business. the common partnership units held by PS, PS would own 41.9% (or 14.5 million shares) of the outstanding shares of the Company’s common stock.

Unless otherwise indicated or unless the context requires otherwise, all references to “the Company,” “we,” “us,” “our” and similar references mean PS Business Parks, Inc. and its subsidiaries, including the Operating Partnership. PSB is the sole general partner of the Operating Partnership and, as of December 31, 2016, owned 77.9% of the common partnership units. The remaining common partnership units are owned by Public Storage (“PS”). Assuming issuance of PSB common stock upon redemption of the common partnership units held by PS, PS would own 42.0% (or 14.5 million shares) of the outstanding shares of the Company’s common stock. PSB, as the sole general partner of the Operating Partnership, has full, exclusive and complete responsibility and discretion in managing and controlling the Operating Partnership.OP.



As of December 31, 2016, the Company2017,  we owned and operated 28.128.0 million rentable square feet of commercial space, comprising 9998 business parks, in the following states: California, Texas, Virginia, Florida, Maryland and Washington. The Company focuses on owning concentrated business parks which provide the Company with the greatest flexibility to meet the needs of its customers. Along with the commercial space, we also have a 95.0% interest in a  395-unit apartment complex.  The Company also manages 684,000 rentable square feet on behalf of PS.



History of the Company:The Company was formed in 1990 as a California corporation undercorporation. Through a series of transactions between January, 1997 to March, 1998, the name Public Storage Properties XI, Inc. In a March 17, 1998 merger with American Office Park Properties, Inc. (“AOPP”) (the “Merger”), the Company acquired the commercial property business operated by AOPP and was renamed “PS Business Parks, Inc.” Prior to the Merger, in January, 1997, AOPP was reorganized to succeed to the commercial property business of PS, becomingand became a publicly held, fully integrated, self-advised and self-managed REIT.

From January, 2014 through December, 2016, the Company acquired 904,000 square feet of multi-tenant flex, office and industrial parks, which comprise the Non-Same Park portfolio as defined on page 29, for an aggregate purchase price of $58.8 million. The Company made no acquisitions in 2015. The table below reflects the assets acquired during this period (in thousands):

In 2013, the Company entered into a joint venture known as Amherst JV LLC (the “Joint Venture”) with an unrelated real estate development company (the “JV Partner”) for the purpose of developing a 395-unit multi-family building on a five-acre site within The Mile in Tysons, Virginia (the “Project”).  PSB holds a 95.0% interest in the Joint Venture with the remaining 5.0% held by the JV Partner. The JV Partner is responsible for the development and construction of the Project and through an affiliate will oversee the leasing and management of the Project as it is completed. The aggregate amount of development costs are estimated to be $105.6 million (excluding unrealized land appreciation), of which the Company is committed to funding $75.0 million through a construction loan in addition to capital contributions of $28.5 million, which includes a land basis of $15.3 million, to the Joint Venture.  The Company’s investment in and advances to unconsolidated joint venture was $67.2 million as of December 31, 2016.  The Project is expected to deliver its first completed units in the spring of 2017, with final completion of the Project expected in early 2018.Principal Business Activities



As of November 1, 2016, the Company transferred a 123,000 square foot building also located within The Mile in Tysons, Virginia to land and building held for development, as the Company is pursuing entitlements to develop an additional multi-family complex on this site. The scope and timing of any future development will be subject to a variety of approvals and contingencies. Prior to being classified as land and building held for development, the building was occupied by a single user. The net operating income (“NOI”) associated with the prior tenant is reflected as NOI from assets sold or held for development.

During 2015, the Company sold four business parks, aggregating 492,000 square feet, in non-strategic markets for net proceeds of $41.2 million, which resulted in a gain of $23.4 million. Additionally, as part of an eminent domain process, the Company sold five buildings, aggregating 82,000 square feet, at the Company’s Overlake Business Park located in Redmond, Washington, for $13.9 million, which resulted in a gain of $4.8 million.

During 2014, the Company sold five business parks aggregating 1.9 million square feet and 11.5 acres of land in non-strategic markets, including Portland, Oregon and Phoenix, Arizona, for net proceeds of $212.2 million, which resulted in a gain of $92.4 million. With these sales the Company completed its stated objective of exiting non-strategic markets in Sacramento, California, Oregon and Arizona.

The Company has elected to be taxed as a REIT under the Code, commencing with its taxable year ended December 31, 1990. To the extent that the Company continues to qualify as a REIT, it will not be taxed, with certain limited exceptions, on the net income that is currently distributed to its shareholders.

The Company’s principal executive officesWe are located at 701 Western Avenue, Glendale, California 91201-2349. The Company’s telephone number is (818) 244-8080. The Company maintains a website with the address www.psbusinessparks.com. The information contained on the Company’s website is not a part of, or incorporated by reference into, this Annual Report on Form 10-K. The Company makes available free of charge through its website its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after the Company electronically files such material with, or furnishes such material to, the Securities and Exchange Commission (the “SEC”).

Business of the Company: The Company is in the commercial property business, with 9998 business parks consisting of multi-tenant flex, industrial and office space. The Company owns 14.6We own 14.5 million square feet of flex space, which the Company defines asrepresenting buildings that are configured with a combination of warehouse and office space and can be designed to fit a wide variety of uses. The warehouse component of the flex space has a number of uses including light manufacturing and assembly, storage and warehousing, showroom, laboratory, distribution and research and development activities. The office component of flex space is complementary to the warehouse component by enabling businesses to accommodate management and production staff in the same facility. The Company owns 8.8 million square feet of industrial space that has characteristics similar to the warehouse component of the flex space as well as ample dock access. In addition, the Company owns 4.7 million square feet of low-rise office space, generally either in business parks that combine office and flex space or in submarkets where the market demand is more office focused.

The Company’s commercial properties typically consist

We generally seek to operate in multi-tenant buildings in multi-building business parks with low-risewhich accommodate various businesses and uses. Our business parks average 10 buildings ranging from one to 49 buildingsand 750,000 rentable square feet per park, located on parcels of various sizes, which compriseranging from nearlyone to 49 buildings and 12,000 to 3.5 million aggregate square feet of rentable space. Facilities are managed through either on-site management or offices central to the facilities. Parking is generally open but in some instances is covered. The ratio of parking spaces to rentable square feet generally ranges from two to six per thousand square feet depending upon the use of the property and its location. Office space generally requires a greater parking ratio than most industrial uses.



The tenantcustomer base for the Company’sour facilities is diverse. The portfolio can be bifurcated into those facilities that service small to medium-sized businesses and those that service larger businesses. Approximately 35.9%36.1% of in-place rents from the portfolio are derived from facilities that generally serve small to medium-sized businesses. A property in this facility type is typically divided into units under 5,000 square feet and leases generally range from one to three years. The remaining 64.1%63.9% of in-place rents from the portfolio are generally derived from facilities that serve larger businesses, with units 5,000 square feet and larger. The Company also has several tenantscustomers that lease space in multiple buildings and locations. The U.S. Government is the largest tenantcustomer with multiple leases encompassing approximately 692,000642,000 square feet, or 4.6%4.5% of the Company’s annualized rental income.



The Company owns operating propertiesWe operate in six states and itwe may expand itsour operations to other states or reduce the number of states in which it operates.we operate. However, we have no current plans to expand into additional markets or exit existing markets. Properties are acquired for both income and potential capital appreciation; there is no limitation on the amount that can be invested in any specific property.



The Company owns land which may be used for the future development of commercial properties including approximately 14.0 acres in Dallas, Texas and 6.4 acres in Northern Virginia.



Operating PartnershipSee “Objectives and Strategies” below for further information. 



Our principal executive offices are located at 701 Western Avenue, Glendale, California 91201-2349, and our telephone number is (818) 244-8080. We maintain a website with the address www.psbusinessparks.com. The information contained on our website is not a part of, or incorporated by reference into, this Annual Report on Form 10-K. We make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file or furnish such material to the Securities and Exchange Commission (the “SEC”).

Recent Company Developments

Acquisition of Real Estate Facilities: In the third quarter of 2016, we acquired two multi-tenant office buildings aggregating 226,000 square feet in Rockville, Maryland for a purchase price of $13.3 million. The occupancy rate has increased from 18.5% on the date of acquisition to 43.1% as of December 31, 2017.

Development of Multi-Family Real Estate: In 2015, we demolished one of our existing office buildings located within our 628,000 square foot office park (known as “The Mile”) in Tysons, Virginia, and completed a 395-unit multi-family building (“Highgate”) in 2017, for an aggregate estimated cost of $115.6 million (including the fair value of the land). We leveraged the expertise of a well-regarded local developer and operator of multi-family real estate, who holds a 5.0% interest in the joint venture that owns this development. We are also seeking entitlements to develop an additional multi-family complex on a site held by a 123,000 square foot vacant building we own located within The Mile. See “Objectives and Strategies” below for further information regarding our development and redevelopment activities.

Dispositions of Real Estate Facilities or Development Rights: On March 31, 2017, we sold development rights to build medical office buildings on land adjacent to our Westech Business Park in Silver Spring, Maryland for $6.5million. We had acquired the development rights as part of its 2006 acquisition of the park. We received net proceeds of $6.4 million, of which $1.5 million was received in prior years and $4.9 million was received in 2017. We recorded a net gain of $6.4 million for the year ended December 31, 2017.

On May 1, 2017, we disposed of Empire Commerce, a two-building single-story office park comprising 44,000 square feet, located in Dallas, Texas, for net proceeds of $2.1 million, which resulted in a net gain of $1.2 million.

We have certain office properties located in Orange County, California, held for sale. These facilities comprised of 705,000 square feet, and generated $8.4 million in net operating income (defined below) during the year ended December 31, 2017.

Exit of non-strategic markets: During 2014 and 2015, we sold nine business parks with 2.4 million rentable square feet and 11.5 acres of land for $253.4 million, exiting non-strategic markets including Portland, Oregon, Phoenix, Arizona, and Sacramento, California. We have no plans to exit additional markets.

Tax and Corporate Structure

For all periods presented herein, we have elected REIT status under the Code. As a REIT, we generally do not incur federal income tax if we distribute substantially all of our “REIT taxable income” (generally, net rents and gains from real property, dividends, and interest) each year, and if we meet certain organizational and operational rules. To the extent that we continue to qualify as a REIT, we will not be taxed, with certain limited exceptions, on the “REIT taxable income” that is currently distributed to our shareholders. We believe we have met these requirements in all periods presented herein, and we expect to continue to elect and qualify as a REIT.

PSB is structured as an umbrella partnership REIT (“UPREIT”), with substantially all of our activities conducted through the OP. We acquired interests in certain properties from PS during PSB’s initial formation in exchange for operating partnership units, which allowed PS to defer the Company has an equity interest generally are owned by the Operating Partnership. Through this organizational structure, the Company hasrecognition of a tax gain. We have the ability to acquire interestsoffer similar tax-efficient transactions to potential sellers of real estate in additional properties in transactions that could defer the contributors’ tax consequences by causing the Operating Partnership to issue equity interests in return for interests in properties. future.



The Company isWe are the sole general partner of the Operating Partnership.OP. As of December 31, 2016, the Company2017, we owned 77.9%78.9% of the common partnership units of the Operating Partnership, andOP, with the remainder of such common partnership units were owned by PS. The common units owned by PS may be redeemed, by PS from time to time, subject to the provisions of our charter,certain limitations, for cash or, at our option, shares of our common stock on a one-for-one basis. Also asbasis or, at our option, an equivalent value in cash. The Company owns various series of December 31, 2016, in connection with the Company’s issuance of publicly traded Cumulative Preferred Stock, the Company owned 44.4 million preferred units ofissued by the Operating Partnership of various series with an aggregate redemption value of $1.1 billion withOP at terms and amounts substantially identical to the termsvarious series of the publicly traded depositary shares each representing 1/1,000 of a share of 5.20% to 6.45% Cumulative Preferred Stock of the Company. On December 7, 2016, the Company called for the redemption of its 6.45% Cumulative Preferred Stock, Series S, at its par value of $230.0 million. As of December 31, 2016, the Company reclassified the 6.45% Cumulative Preferred Stock, Series S, of $230.0 million from equity to liabilities asour preferred stock called for redemption.

As the general partner of the Operating Partnership, the Company has the exclusive responsibility under the Operating Partnership Agreement to manage and conduct the business of the Operating Partnership. The Operating Partnership is responsible for, and pays when due, its share of all administrative and operating expenses of the properties it owns.outstanding.



The Company’s interest in the Operating PartnershipOP entitles it to share in cash distributions from, and the profits and losses of, the Operating PartnershipOP in proportion to the Company’s economic interest in the Operating PartnershipOP (apart from tax allocations of profits and losses to take into account pre-contribution property appreciation or depreciation). The Company, since 1998, has paid per share dividends on its common and preferred stock that track, on a one-for-one basis, the amount of per unit cash distributions the Company receives from the Operating PartnershipOP in respect of the common and preferred partnership units in the Operating PartnershipOP that are owned by the Company.

As the general partner of the OP, the Company has the exclusive responsibility under the Operating Partnership Agreement to manage and conduct the business of the OP. The OP is responsible for, and pays when due, its share of all administrative and operating expenses of the properties it owns.



Common Officers and Directors with PS



Ronald L. Havner, Jr., Chairman of the Company, is also the Chairman of the Board of Directors of TrusteeTrustees and Chief Executive Officer of PS. Joseph D. Russell, Jr. is a director of the Company and also President of PS. Gary E. Pruitt, an independent director of the Company, is also a trustee of PS. Other employees of PS render services to the Company pursuant to thea cost sharing and administrative services agreement.



Property ManagementCommon Services Provided to and by PS



The Company manages commercial properties owned byWe manage industrial, office, and retail facilities in the United States for PS which are generally adjacent to self-storage facilities, for a management fee equal to 5%under either the “Public Storage” or “PS Business Parks” names (the “PS Management Agreement”). Under PS’s supervision, we coordinate and assist in rental and marketing activities, property maintenance and other operational activities, including the selection of the gross revenues of such properties in addition to reimbursement of certain costs. The property management contract with PS is for a seven-year term with the agreement automatically extending for an additional one-year period upon each one-year anniversary of its commencement (unless cancelled by either party). Either party can give notice of its intent to cancel the agreement upon expiration of its current term.vendors, suppliers, employees and independent contractors. Management fee revenue derived from this management contract withthe PS Management Agreement totaled $506,000,  $518,000 $540,000 and $660,000$540,000 for the years ended December 31, 2017,  2016 and 2015, and 2014, respectively. As of December 31, 2016, the Company managed 684,000 rentable square feet on behalf of PS compared to 813,000 rentable square feet as of December 31, 2015.



PS also provides property management services for the self-storage component of two assets owned by the Company. These self-storage facilities, located in Palm Beach County, Florida, operate under the “Public Storage” name. Either the Company or PS can cancel the property management contract upon 60 days’ notice. Management fee expenses under the contract were $92,000, $86,000 $79,000 and $70,000$79,000 for the years ended December 31, 2017,  2016 2015 and 2014,2015, respectively.



Pursuant to a cost sharing and administrative services agreement, we share certain administrative services, corporate office space and certain other third party costs with PS which are allocated based upon time, effort and other methodologies. We reimbursed PS $1.3 million, $1.1 million and $1.2 million, respectively, in the years ended December 31, 2017,  2016 and 2015 for costs paid on our behalf, and PS reimbursed us $31,000 and $38,000 costs we incurred on their behalf for the years ended December 31, 2017 and 2016, respectively.

Management



Maria R. Hawthorne leads the Company’s senior management team. Ms. Hawthorne becameis President and Chief Executive Officer of the Company beginning July 1, 2016.  Prior to July 1, 2016, Joseph D. Russell, Jr. was theas well as interim Chief Executive Officer of the Company.Financial Officer. The Company’s senior management includes: John W. Petersen, Executive Vice President and Chief Operating Officer; Edward A. Stokx, Executive Vice President and Chief Financial Officer; Christopher M. Auth, Vice President (Washington Metro Division); Trenton A. Groves, Vice President and Corporate Controller; Coby A. Holley, Vice President, Investments; Robin E. Mather, Vice President, Business Development; Stuart H. Hutchison, Vice President (Southern California and Pacific Northwest Divisions); Eddie F. Ruiz, Vice President and Director of Facilities; Richard E. Scott, Vice President (Northern California Division); Eugene Uhlman, Vice President, Construction Management; and David A. Vicars, Vice President (Southeast Division, which includes Florida and Texas).



REIT StructureCompetition



If certain detailed conditions imposed byOur properties compete for tenants with similar properties located in our markets primarily on the Codebasis of location, rent charged, services provided and the related Treasury Regulations are met, an entity, such asdesign and condition of improvements. Competition in the Company, that invests principallymarket areas we operate in is significant and has from time to time negatively impacted occupancy levels and rental rates of, and increased the operating expenses of, certain of our properties. Competition may be accelerated by any increase in availability of funds for investment in real estate, because barriers to entry can be relatively low for those with the necessary capital. The demand for space in our markets is impacted by general economic conditions, which can affect the local competition for tenants. Sublease space and that otherwise would be taxed as a corporation may electunleased developments have from time to be treated as a REIT. The most important consequence totime created competition among operators in certain markets in which the Company operates. We also compete for property acquisitions with entities that have greater financial resources than the Company.

We believe we possess several distinguishing characteristics and strategies, some of being treated aswhich are described below under “Objectives and Strategies,” that enable us to compete effectively. In addition, we believe our personnel are among the most experienced in these real estate markets. The Company’s facilities are part of a REIT for federal income tax purposes iscomprehensive system encompassing standardized procedures and integrated reporting and information networks.

We believe that the Company can deduct dividend distributions (including distributions on preferred stock)significant operating and financial experience of our executive officers and directors combined with the Company’s capital structure, national investment scope, geographic diversity, financial stability, and economies of scale should enable us to its shareholders, thus effectively eliminating the “double taxation” (at the corporate and shareholder levels) that typically

results when a corporation earns income and distributes that income to shareholders in the form of dividends.compete effectively.



The Company believes that it has operated,Objectives and intends to continue to operate, in such a manner as to qualify as a REIT under the Code, but no assurance can be given that it will at all times so qualify. To the extent that the Company continues to qualify as a REIT, it will not be taxed, with certain limited exceptions, on the REIT taxable income that is distributed to its shareholders.Strategies



Operating Strategy

The Company believes its operating, acquisition and finance strategies combined with its diversified portfolio produces a low risk, stable growth business model. The Company’sOur primary objective is to grow shareholder value. Key elements of the Company’s growth strategy include:

Maximize Net Cash Flow of Existing Properties: The Company seeks to maximizevalue in a low-risk, stable manner by maximizing the net cash flow generated by itsour existing properties, as well as prudently seeking growth through acquisitions and development that generate attractive returns on invested capital.  

We seek to optimize the net cash flow of our existing properties by (i) maximizing average occupancy levels and rental rates, (ii) achieving the highest possible levels of realized rent per occupied square foot, (iii) controlling its operating cost structure by improving operating efficiencies and economies of scale and (iv)while minimizing recurring capital expenditures required to maintain and improve occupancy. The Company believes that its experienced property management personnel and comprehensive systems combined with focused economiesleasehold improvements. Below are the primary elements of scale enhance the Company’s ability to meet these goals. The Company seeks to increase occupancy rates and realized rents per square foot by providing its field personnel with incentives to lease space to credit worthy tenants and to maximize the return on investment in each lease transaction.our strategy:



Focus on Targeted Markets: Concentration in favorable marketsThe Company intends to continue investing: We believe that our properties generally are located in markets that have favorable characteristics which enable them to be competitive economically. The Company believes that markets with a  combination ofsuch as above average population, job, and income growth, job growth,as well as higher education levels and personal income will produce better overall economic returns. The Company targetslevels. In addition, we believe our business parks are generally in highhigher barrier to entry markets that are close to critical infrastructure, middle to high income housing or universities and have easy access to major transportation arteries. We believe that these characteristics contribute to favorable cash flow stability and growth.



Reduce Capital ExpendituresStandard build outs and Increase Occupancy Rates by Providing FlexiblefinishesProperties: We generally seek to configure our rentable space with standard buildouts and Attractingfinishes that meet the needs of a Diversified Tenant Base:wide variety of tenants, minimizing the need for specialized and costly tenant improvements and enabling space to be “move-in ready” quickly upon vacancy. We believe this makes our space more attractive to potential tenants, allows tenants to move in more quickly and seamlessly, and reduces the cost of capital improvements, relative to real estate operators that offer specialized finishes or build outs. Also, such flexibility facilitates our ability to offer diverse sizes and configurations to meet potential customer’s needs, as well as to change space sizes for existing customers when their needs change, at the low relative cost of a standard configuration.  

By focusing on propertiesLarge, Diverse Parks: Our business parks are generally concentrated in large complexes of diverse buildings, with easily reconfigurablea variety of available space the Company believes itsizes and configurations that we can offer facilitiesto tenants. We believe that appeal to a wide range of potential tenants, which aids in reducing recurring capital expenditures associated with re-leasing space. The Company believes this property flexibility also allows it to better serve existing tenants by accommodating expansion and contraction needs. In addition, the Company believes that a diversified tenant base enables itus to attract a greater number of potential tenants to our space and minimizes the loss of existing customers when their space requirements change.

Smaller tenants and diverse tenant base with shorter-term leases: By concentrating on smaller spaces, we seek to reach the large number of smaller tenants in the market. We believe this focus gives us a competitive edge as most institutional owners focus on large users. Small users perceive more incremental value from the level of customer service that we offer. We also believe having smaller tenants improves our diversity of tenants across industries, which improves the stability of our cash flows. In addition, our lease term tends to itsbe shorter, generally an average of three and a half years, which we believe allows us to more quickly capture increases in market rents in our high-growth markets. At December 31, 2017, our average space which, combined with flexible parks, helps it maintain occupancy rates.size is 5,000 rentable square feet per tenant, and no individual tenant, other than the U.S. Government, represents more than 1% of our annualized rental income.



Provide Decentralized operating strategy: Our local market management is empowered, within a prescribed decision and metrics framework, to make many leasing rate, capital, and lease term decisions in a manner which we believe maximizes the return on investment on leasing transactions. We believe this decentralized approach allows us to be more nimble and effective in our decision making, and more effectively price and market our space, relative to a more centralized approach.

Superior Property Management:Service to Customers: The Company seeksWe seek to provide a superior level of service to its tenantsour customers in order to maintain occupancy and increase rental rates, as well as minimize customer turnover. The Company’s property management offices are located either on-site, or regionally, providing tenants with convenient access to management and helping the Company maintain its properties and providing customers with convenient access to management,  while conveying a sense of quality, order and security. We believe that our personnel are among the most experienced and effective in the real estate industry in our markets. The Company has significant experience in acquiring properties managed by others and thereafter improving tenantcustomer satisfaction, occupancy levels, retention rates and rental income by implementing established tenantcustomer service programs.

In addition, we seek to expand through acquisitions or development that generate attractive returns on invested capital, as follows:

Acquire facilities in targeted markets at prudent price levels: We have a disciplined capital allocation approach, seeking to purchase properties at prices that are not significantly in excess of the cost to develop similar facilities, which we believe reduces our risk and maximizes long term returns. We seek generally to acquire in our existing markets, which we believe have favorable growth characteristics. We also believe acquiring in our existing markets leverages our operating efficiencies. We would consider expanding to additional markets with similar favorable characteristics of our existing markets, if we could acquire sufficient scale (generally at least 2 million rentable square feet); however, we have no current plans or immediate prospects to do so.

Redevelop existing real estate facilities: Certain of our existing business parks were developed in or near areas that have been undergoing gentrification and an influx of residential development, and, as a result, certain buildings in our business parks may have better and higher uses as residential space. While residential space is generally not a core asset for us, we will seek to identify potential candidates for redevelopment in our portfolio, and plan to leverage the expertise and scale of existing operators and developers. For example, in The Mile in Tysons, Virginia, as noted above, we demolished an existing building and developed, with a joint venture partner, a 395-unit apartment building, and are seeking entitlements for another multi-family complex to be built following demolishment of an existing 123,000 square foot office building. There can be no assurance as to the level of conversion opportunities throughout our portfolio in the future.



Financing Strategy



The Company’s primary objective in itsOverview of financing strategy isand sources of capital: As a REIT, we generally distribute substantially all of our “REIT taxable income” to maintain financial flexibility andour shareholders which, relative to a low risk capital structure. Key elementstaxable C corporation, limits the amount of this strategy are:

Retain Operating Cash Flow: The Company seeks to retain significant funds (after funding its distributions and capital improvements) for additional investments. During the years ended December 31, 2016 and 2015, the Company distributed 41.4% and 31.7%, respectively, of its cash flow from operations that we can retain for investments. As a result, in order to expand our asset base, access to capital is important. 

Our financial profile is characterized by strong credit metrics, including low leverage relative to our total capitalization and operating cash flows. Our credit profile and ratings enable us to effectively access both the public and private capital markets to raise capital. We will seek to maintain our credit profile and ratings. 

Sources of capital available to us include retained cash flow, the issuance of preferred and common securities, the issuance of medium and long-term debt, joint venture financing, and the sale of properties. We view our line of credit, as well as short-term bank loans, as “bridge” capital.

Historically, we have financed our cash investment activities computed in accordanceprimarily with GAAP,retained operating cash flow and 57.7% and 46.1%, respectively,the issuance of its funds from operations (“FFO”) to common shareholders/unit holders. 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 U.S. generally accepted accounting principles (“GAAP”), before depreciation, amortization, gains or losses on asset dispositions, net income allocable to noncontrolling interests — common units,preferred securities.

net income allocable to restricted stock unit holders, impairment charges and nonrecurring items. FFO is a non-GAAP financial measure and 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 orWe select among the levelsources of capital expenditureavailable to us based upon relative cost, availability and leasing costs necessary to maintain the operating performancedesire for leverage, as well as intangible factors such as the impact of covenants in the Company’s properties, which are significant economic costs and could materially impact the Company’s resultscase of 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’ FFO. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Non-GAAP Supplemental Disclosure Measure: Funds from Operations” for a reconciliation of FFO and net income allocable to common shareholders and for additional information on why the Company presents FFO.debt.



Perpetual Retained Operating Cash Flow: Although we are required to generally distribute substantially all of our “REIT taxable income” to our shareholders, we have nonetheless been able to retain operating cash flow to the extent that our tax depreciation exceeds our maintenance capital expenditures. In recent years, we have retained an average of $40 to $50 million in operating cash flow per year.

Preferred Stock/Units:Equity: The primaryWe view preferred equity as an important source of leverage incapital over the Company’s capital structure is perpetual preferred stock or equivalent preferred units in the Operating Partnership. This method of financinglong term, because it reduces interest rate and refinancing risks as the dividend rate is fixed and the stated value or capital contribution is not required to be repaid.there are no refinancing requirements. In addition, the consequences of defaulting on required preferred distributions are less severe than with debt. The preferred shareholders may elect two additional directors if six quarterly distributions go unpaid, whether or not consecutive. However, rates and market conditions for the issuance of preferred securities can be volatile or inefficient from time to time. As of December 31, 2017, we have $959.8 million in preferred securities outstanding (excluding securities that were redeemed on January  3, 2018) with an average coupon rate of 5.40%. For a discussion regarding the January 3, 2018 redemption, see “Management’s Discussion and Analysis- Liquidity and Capital Resources- Redemption of Preferred Stock.”



Throughout this Form 10-K, we useMedium or long-term debt:  We have broad powers to borrow in furtherance of our objectives. We may consider the term “preferred equity”public issuance or private placement of senior unsecured debt in the future in an effort to mean both the preferred stock issued by the Company (including the depositary shares representing interests in that preferred stock) and the preferred partnership units issued by the Operating Partnership and the term “preferred distributions” to mean dividends and distributions on the preferred stock and preferred partnership units.diversify our sources of capital.



Debt Financing:Common equity: The Company, from time to time, has used debt financing to facilitate real estate acquisitionsWe believe that the market for our common equity is liquid and, other capital allocations. The primaryas a result, common equity is a significant potential source of debtcapital.

Tax advantaged equity: As noted above, we have the Company has historically relied uponability to offer common or preferred operating partnership units with economic characteristics that are similar to our common and preferred stock, but provide short-term capital is itsthe seller the opportunity to defer the recognition of a tax gain. 

Bridge financing: We have a $250.0 million unsecured line of credit (the “Credit Facility”). In addition, during 2011, in connection which we use as temporary “bridge” financing, along with its $520.0 million portfolio acquisition in Northern California, the Company obtained a $250.0 million unsecured three-year term loan and assumed a $250.0 million mortgage note. The unsecured three-year term loan was repaid in full during 2013 and the $250.0 million mortgage note was repaid in full on June  1, 2016. From timeshort-term bank loans, until we are able to time, the Company may also consider other sourcesraise longer-term capital. As of unsecured debt financing to meet its capital needs.

Access to Capital: The Company targets a minimum ratio of FFO to combined fixed charges and preferred distributions paid of 3.0 to 1.0. Fixed charges include interest expense and capitalized interest while preferred distributions include amounts paid to preferred shareholders and preferred Operating Partnership unit holders. For the year ended December 31, 2016, the FFO to combined fixed charges2017, there were no borrowings outstanding on our Credit Facility and preferred distributions paid ratio was 3.9 to 1.0, excluding the non-cash charge for the issuance costs related to the redemption of preferred equity. The Company believes that its financial position enables it to access capital to finance future growth. Subject to market conditions, the Company may add leverage to its capital structure.no short-term bank loans.

Competition

Competition in the market areas in which many of the Company’s properties are located is significant and has from time to time negatively impacted occupancy levels and rental rates of, and increased the operating expenses of, certain of these properties. Competition may be accelerated by any increase in availability of funds for investment in real estate. Barriers to entry are relatively low for those with the necessary capital and the Company competes for property acquisitions and tenants with entities that have greater financial resources than the Company. Sublease space and unleased developments continue to create competition among operators in certain markets in which the Company operates. While the Company will have to respond to market demands, management believes that the combination of its ability to offer a variety of options within its business parks and the Company’s financial stability provide it with an opportunity to compete favorably in its markets.

The Company’s properties compete for tenants with similar properties located in its markets primarily on the basis of location, rent charged, services provided and the design and condition of improvements. The Company believes it possesses several distinguishing characteristics that enable it to compete effectively in the flex, office and industrial space markets. The Company believes its personnel are among the most experienced in these real estate markets. The Company’s facilities are part of a comprehensive system encompassing standardized procedures and integrated reporting and information networks. The Company believes that the significant operating and financial experience of

its executive officers and directors combined with the Company’s capital structure, national investment scope, geographic diversity and economies of scale should enable the Company to compete effectively.



Investments in Real Estate Facilities



As of December 31, 2016,2017, the Company owned and operated 28.0 million rentable square feet comprised of 98 business parks in six states and a 95.0% interest in a  395-unit apartment complex compared to 28.1 million rentable square feet comprised of 99 business parks in six states compared to 28.0 million rentable square feet at December 31, 2015. 

Investment in and Advances to Unconsolidated Joint Venture

PSB holds a 95.0% interest in the Joint Venture with the remaining 5.0% held by the JV Partner. The JV Partner is responsible for the development and construction of the Project and through an affiliate will oversee the leasing and management of the Project as it is completed. The Project is expected to deliver its first completed units in the spring of 2017, with final completion of the Project expected in early 2018.

On October 5, 2015 (the “Contribution Date”), the Company contributed the site, along with capitalized improvements, to the Joint Venture. Subsequent to the Contribution Date, demolition, site preparation and construction commenced. The JV partner serves as the managing member, with mutual consent from both the Company and the managing member required for all significant decisions. As such, the Company accounts for its investment in the Joint Venture using the equity method.

Along with the equity capital the Company has committed to the Joint Venture, the Company has also agreed to provide the Joint Venture with a construction loan in the amount of $75.0 million. The Joint Venture will pay interest under the construction loan at a rate equal to the London Interbank Offered Rate (“LIBOR”) plus 2.25%. The loan will mature on April 5, 2019 with two one-year extension options. The Company has reflected the aggregate value of the contributed site, its’ equity contributions, capitalized interest and loan advances to date as investment in and advances to unconsolidated joint venture. The aggregate amount of development costs are estimated to be $105.6 million (excluding unrealized land appreciation), of which the Company is committed to funding $75.0 million through a construction loan in addition to capital contributions of $28.5 million, which includes a land basis of $15.3 million, to the Joint Venture. 

The Company’s investment in and advances to unconsolidated joint venture was $67.2 million and $26.7 million as of December 31, 2016 and 2015, respectively. For the year ended December 31, 2016, the Company made loan advances of $33.9 million, capital contributions of $5.7 million and capitalized $885,000 of interest.

Summary of Business Model

The Company has a geographically diversified portfolio in six states across the country with a diversified customer mix by both size and industry concentration. The Company believes that this diversification combined with a conservative financing strategy, a  focus on markets with strong demographics for growth and a decentralized operating strategy gives the Company a business model that mitigates risk and provides strong long-term growth opportunities.2016.  



Restrictions on Transactions with Affiliates



The Company’s Bylaws provide that the Company may engage in transactions with affiliates provided that a purchase or sale transaction with an affiliate is (i) approved by a majority of the Company’s independent directors and (ii) fair to the Company based on an independent appraisal or fairness opinion.



Borrowings

On June 1, 2016, the Company repaid in full the $250.0 million mortgage note which had a fixed interest rate of 5.45%.  See Notes 6 and 7 to the consolidated financial statements included in this Form 10-K for a summary of the Company’s outstanding borrowings as of December 31, 2016.  

The Company’s Credit Facility is with Wells Fargo Bank, National Association (“Wells Fargo”). Subsequent to December 31, 2016, the Company modified and extended the terms of its Credit Facility and the Company’s related guaranty.  The expiration date was extended from May 1, 2019 to January 10, 2022. The Credit Facility has a

borrowing limit of $250.0 million. The rate of interest charged on borrowings was modified to a rate ranging from the LIBOR plus 0.80% to LIBOR plus 1.55%, depending on the Company’s credit ratings. Currently, the Company’s rate under the  Credit Facility is LIBOR plus 0.825%, down from the previous rate of 0.875%. In addition, the Company is required to pay an annual facility fee ranging from 0.10% to 0.30% of the borrowing limit depending on the Company’s credit ratings (currently 0.125%). The Company had no balance outstanding on the Credit Facility at December 31, 2016 and 2015.  Subsequent to December 31, 2016, the Company had $85.0 million outstanding on the Credit Facility in conjunction to the redemption of its 6.45% Cumulative Preferred Stock, Series S. The Company had $539,000 and $769,000 of unamortized commitment fees as of December 31, 2016 and 2015, respectively. The Credit Facility requires the Company to meet certain covenants, all of which the Company was in compliance with at December 31, 2016. Interest on outstanding borrowings is payable monthly.

The Company has broad powers to borrow in furtherance of the Company’s objectives. The Company has incurred in the past, and may incur in the future, both short-term and long-term indebtedness to facilitate real estate acquisitions and other capital allocations.

Employees



As of December 31, 2016,2017, the Company employed 157158 individuals, primarily personnel engaged in property operations.



Insurance



The Company believes that its properties are adequately insured. Facilities operated by the Company have historically been covered by comprehensive insurance, including fire, earthquake, wind damage and liability coverage from nationally recognized carriers.carriers, subject to customary levels of deductibles.



Environmental Matters



Compliance with laws and regulations relating to the protection of the environment, including those regarding the discharge of material into the environment, has not had any material effect upon the capital expenditures, earnings or competitive position of the Company.

Substantially all of the Company’s properties have been subjected toreceived Phase I environmental reviews. Such reviews have not revealed, nor is management aware of, any probable or reasonably possible environmental costs that management believes would have a material adverse effect on the Company’s business, assets or results of operations, nor is the Company aware of any potentially material environmental liability. See Item 1A, “Risk Factors” for additional information.



ITEM 1A. RISK FACTORS



In addition to the other information in our Annual Report on Form 10-K, you should consider the risks described below that we believe may be material to investors in evaluating the Company. This section contains forward-looking statements, and in considering these statements, you should refer to the qualifications and limitations on our forward-looking statements that are described in Item 1, “Business — Forward-Looking Statements.”



We have significant exposure to real estate risk.

Since our business consists primarily of acquiring and operating real estate, we are subject to the risks related to the ownership and operation of real estate that can adversely impact our business and financial condition. Certain significant costs, such as mortgage payments, real estate taxes, insurance and maintenance, generally are not reduced even when a property’s rental income is reduced. In addition, environmental and tax laws, interest rate levels, the availability of financing and other factors may affect real estate values and property income. Furthermore, the supply of commercial space fluctuates with market conditions.



The value of our investments may be reduced by general risks of real estate ownership: Since we derive substantially all of our income from real estate operations, we are subject to the following general risks of acquiring and owning real estate-relatedestate related assets including:that could result in reduced revenues, increased expenses, increased capital expenditures, or increased borrowings, which could negatively impact our operating results, cash flow available for distribution or reinvestment and our stock price:





























Certain significant costs, such as mortgage payments, real estate taxes, insurance and maintenance, generally are not reduced even when a property’s rental income is reduced. In addition, environmental and tax laws, interest rate levels, the availability of financing and other factors may affect real estate values and property income. Furthermore, the supply of commercial space fluctuates with market conditions.

There is significant competition among commercialproperties: property operators: Other commercial properties compete with our properties for tenants. Some of the competing properties may be newer and better located than our properties. Competition in the market areas in which many of our properties are located is significant and has affected our occupancy levels, rental rates and operating expenses.  We also expect that new properties will be built in our markets. In addition, we compete with other buyers, some of which are larger than us, for attractive commercial properties. Therefore, we may not be able to grow as rapidly as we would like.



We may encounter significant delays and expense in re-letting vacant space, or we may not be able to re-let space at existing rates, in each case resulting in losses of income: When leases expire, we may incur expenses in retrofitting space and we may not be able to re-lease the space on the same terms. Certain leases provide tenantscustomers with the right to terminate early if they pay a fee. As of December 31, 2016,  2,2172017,  1,875 leases, representing 6.36.2 million, or 24.0%23.3% of the leased square footage of our total portfolio, or 22.6%23.8% of annualized rental income, are scheduled to expire in 2017.2018. While we have estimated our cost of renewing leases that expire in 2017,2018, our estimates could be wrong. If we are unable to re-lease space promptly, if the terms are significantly less favorable than anticipated or if the costs are higher, we may have to reduce our distributions to shareholders.operating results, cash available for distribution or reinvestment and stock price could be negatively impacted.



Tenant defaults and bankruptcies may reduce our cash flow and distributions: We may have difficulty collecting from tenantscustomers in default, particularly if they declare bankruptcy. This could affect our cash flow and our ability to fund distributions to shareholders. Since many of our tenantscustomers are non-rated private companies, this risk may be enhanced. There is inherent uncertainty in a tenant’scustomer’s ability to continue paying rent if they are in bankruptcy. This could negatively affect our operating results, cash available for distribution or reinvestment and stock price.



We may be adversely affected if casualtiesNatural disasters or terrorist attacks could cause damage to our properties arefacilities that is notcovered by insurance:insurance, and could increase costs, reduce revenues, and otherwise impair our operating results: While we maintain insurance coverage for the losses caused by earthquakes or hurricanes, we could suffer uninsured losses or losses in excess of our insurance policy limits for such occurrences. Approximately 39.9%40.1% of our properties are located in California and are generally in areas that are subject to risks of earthquake-related damage. In the event of an earthquake, hurricane or other natural disaster, we would remain liable on any mortgage debt or other unsatisfied obligations related to that property. In addition, we may not have sufficient insurance coverage for losses caused by a terrorist attack, or such insurance may not be available or cost-effective. Significant natural disasters, terrorist attacks, threats of future terrorist attacks, or resulting wider armed conflict could have negative impacts on the U.S. economy, reducing demand for our rental space and impairing our operating results, even if our specific losses were covered. This could negatively affect our operating results, cash available for distribution or reinvestment and stock price. 



The illiquidity of our real estate investments may prevent us from adjusting our portfolio to respond to market changes: There may be delays and difficulties in selling real estate. Therefore, we cannot easily change our portfolio when economic conditions change. In addition, when we sell properties at significant gains upon sale, it can increase our distribution requirements, thus making it difficult to retain and reinvest the sales proceeds. Also, REIT tax laws may impose negative consequences if we sell properties held for less than two years.



We may be adversely affected by changes in laws: Increases in income and service taxes may reduce our cash flow and ability to make expected distributions to our shareholders. Additionally, any changes in the tax law applicable to REITs may adversely affect taxation of us and/or our shareholders. Our properties are also subject to various federal, state and local regulatory requirements, such as state and local fire and safety codes. If we fail to comply with these requirements, governmental authorities could fine us or courts could award damages against us. We believe our properties comply with all significant legal requirements. However, these requirements could change in a way that would reducecould negatively affect our operating results, cash flowavailable for distribution or reinvestment and ability to make distributions to shareholders.stock price.



We may incur significant environmental remediation costs: As an owner and operator of real properties, under various federal, state and local environmental laws, we are required to clean up spills or other releases of hazardous or toxic substances on or from our properties. Certain environmental laws impose liability whether or not the owner or buyer knew of, or was responsible for, the presence of the hazardous or toxic substances.  In some cases, liability may not be limited to the value of the property. The presence of these substances, or the failure to properly remediate any resulting contamination, whether from environmental or microbial issues, also may adversely affect our ability to sell, lease, operate, or encumber our facilities for purposes of borrowing.facilities.



We have conducted preliminary environmental assessments of most of our properties (and conduct these assessments in connection with property acquisitions) to evaluate the environmental condition of, and potential environmental liabilities associated with, our properties. These assessments generally consist of an investigation of environmental conditions at the property (including soil or groundwater sampling or analysis if appropriate), as well as a review of available information regarding the site and publicly available data regarding conditions at other sites in the vicinity. In connection with these property assessments, our operations and recent property acquisitions, we have become aware that prior operations or activities at some properties or from nearby locations have or may have resulted in contamination to the soil or groundwater at these properties. In circumstances where our environmental assessments disclose potential or actual contamination, we may attempt to obtain indemnifications and, in appropriate circumstances, we obtain limited environmental insurance in connection with the properties acquired, but we cannot assure you that such protections will be sufficient to cover actual future liabilities nor that our assessments have identified all such risks. Although we cannot provide any assurance, based on the preliminary environmental assessments, we are not aware of any environmental contamination of our facilities material to our overall business, financial condition or results of operations.



There has been an increasing number of claims and litigation against owners and managers of rental properties relating to moisture infiltration, which can result in mold or other property damage. When we receive a complaint concerning moisture infiltration, condensation or mold problems and/or become aware that an air quality concern exists, we implement corrective measures in accordance with guidelines and protocols we have developed with the assistance of outside experts. We seek to work proactively with our tenantscustomers to resolve moisture infiltration and mold-related issues, subject to our contractual limitations on liability for such claims. However, we can give no assurance that material legal claims relating to moisture infiltration and the presence of, or exposure to, mold will not arise in the future.



Any such environmental remediation costs or issues, including any potential ongoing impacts on rent or operating expenses, could negatively impact our operating results, cash flow available for distribution or reinvestment and our stock price.

PropertyOperating costs, including property taxes, can increasecould increase: We could be subject to increases in insurance premiums, property and cause a decline in yields on investments: Eachother taxes, repair and maintenance costs, payroll, utility costs, workers compensation, and other operating expenses due to various factors such as inflation, labor shortages, commodity and energy price increases, weather, changes to governmental safety and real estate use limitations, as well as other governmental actions. Our property tax expense, which totaled $41.0 million during the year ended December 31, 2017, generally depends upon the assessed value of our properties isreal estate facilities as determined by assessors and government agencies, and accordingly could be subject to real property taxes, which could increase in the future as property tax rates change and as our propertiessubstantial increases if such agencies changed their valuation approaches or opinions or if new laws are assessed or reassessed by tax authorities. Recent local government shortfalls in tax revenue may cause pressure to increase tax rates or assessment levels or impose new taxes. Such increases could adversely impact our profitability.enacted.



We must comply with the Americans with Disabilities Act, and fire and safety regulations and zoning requirements, which can require significant expenditures: All of our properties must comply with the Americans with Disabilities Act and with related regulations (the “ADA”). The ADA has separate compliance requirements for “public accommodations” and “commercial facilities,” but generally requires that buildings be made accessible to persons with disabilities.  Various state laws impose similar requirements. A failure to comply with the ADA or similar state laws could lead to government imposed fines on us and/or litigation, which could also involve an award of damages to individuals affected by the non-compliance. In addition, we must operate our properties in compliance with numerous local fire and safety regulations, building codes, zoning requirements and other land use regulations. Complianceregulations, all of which are subject to change and could become more costly to comply with in the future.  The cost of compliance with these requirements can require us to spendbe substantial, amounts of money, which wouldand could reduce cash otherwise available for distribution to shareholders. Failure to comply with these requirements could also affect the marketability and rentability of our real estate facilities.



We incur liability from tenantcustomer and employment-related claims: From time to time we have to make monetary settlements or defend actions or arbitration to resolve tenantcustomer or employment-related claims and disputes. Settling any such liabilities could negatively impact our earnings and cash available for distribution to shareholders, and could also adversely affect our ability to sell, lease, operate, or encumber affected facilities

DevelopmentOur development of propertiesreal estate can subject us to certain risks:  As of December 31, 2016,2017,  we have a joint venture95% interest in a completed 395-unit multifamily development that is in lease-up with an aggregate estimated cost of $115.6 million (including the fair value of the land). We are also seeking entitlements for an additional multifamily development and are considering the purposepotential redevelopment of developing a 395-unit multi-family project. Developmentsother facilities in our portfolio. Development or redevelopment of this naturefacilities are subject to a number of risks, including construction delays, complications in obtaining necessary zoning, occupancy and other governmental permits, cost overruns, problems withfailures of our joint venture partner,development partners, financing risks, and the possible inability to meet expected occupancy and rent levels. If anyIn addition, we do not have experience in multifamily development and are relying to some degree on the experience of these problems occur, development costs for a project may increase, and there may be costs incurred for projects that are not completed.our joint venture partner. As a result of the foregoing, some propertiesthese risks, our development projects may be worth less or may generate less revenue than or simply not perform as well as, we believed at the time of development, negatively affecting our operating results. Any of the foregoing risks could adversely affectnegatively impact our financial condition, operating results, and cash flow available for distribution or reinvestment and our ability to pay dividends on, and the market price of, our stock.stock price. In addition, we may be unable to successfully integrate and effectively manage the properties we develop, which could adversely affect our results of operations.



Global economic conditions can adversely affect our business, financial condition, growth and access to capital. 



While there continues to be global economic uncertainty, United States unemployment levels and economic activity have improved.  Economic conditions in the markets whereareas we operate, facilities,capital markets, global economic conditions, and other events or factors could adversely affect rental demand for commercialour real estate, which could adversely affect our business. To the extent that turmoil in the financial markets returns or intensifies, it has the potentialability to materially affectgrow our business and acquire new facilities, to access capital, as well as the value of our properties, the availability or the terms of financing and mayreal estate. Such conditions, which could negatively impact the ability of our customers to enter into new leasing transactions or satisfy rental payments under existing leases. The volatility and duration of an economic recovery could also affect our operating results, cash flow available for distribution or reinvestment and financial condition as follows:our stock price, include the following:



Debt and Equity Markets:Commercial credit markets: Our results of operations and share price are sensitive to volatility in the credit markets. From time to time, the commercial real estate debt markets experience volatility as a result of various factors, including changing underwriting standards by lenders and credit rating agencies. This may result in lenders increasing the cost for debt financing. Shouldfinancing, which could affect the overall costeconomic viability of borrowingsany acquisition or development activities we may undertake or otherwise increase either by increases inour costs of borrowing. Conversely, to the index ratesextent that debt becomes cheaper or by increases in lender spreads, we will need to factor such increases into the economics of our acquisitions.underwriting terms become more favorable, it could increase In addition, the state of the debt markets could have an effect on the overall amount of capital being invested in real estate, whichallowing more competitors to bid for facilities that we may result in pricewish to acquire, reducing the potential yield from acquisitions or value decreases of real estatepreventing us from acquiring assets and affect our abilitywe might otherwise wish to raise capital.acquire.



Our ability to issue preferred shares or obtain other sources of capital, such as borrowing, has been in the past, and may in the future, be adversely affected by challenging credit market conditions.Capital markets: The issuance of perpetual preferred securities historically has been a significant source of capital to grow our business.business, and we have considered issuing unsecured debt publicly or in private transactions. We also consider issuance of our common equity a potential source of capital. Our ability to access these sources of capital can be adversely affected by challenging market conditions, which can increase the cost of issuance of preferred equity and debt, and reduce the value of our common shares, making such sources of capital less attractive or not feasible. We believe that we have sufficient working capital and capacity under our credit facilities and our retained cash flow from operations to continue to operate our business as usual and meet our current obligations. However, if we were unable to issue preferred sharespublic equity or borrow at reasonable rates, that could limit the earnings growth that might otherwise result from the acquisition and development of real estate facilities.



Valuations:Asset valuations: Market volatility makes the valuation of our properties difficult. There may be significant uncertainty in the valuation, or in the stability of the value, of our properties, which could result in a substantial decrease in the value of our properties. As a result, we may not be able to recover the carrying amount of our properties, which may require us to recognize an impairment charge in earnings.

Potential negative impacts upon demand for our space and customers’ ability to pay: We believe that our current and prospective customers are susceptible to global and local economic conditions as well as the impact of capital markets, asset valuations, and commercial credit markets, which could result in an impairment of our customers’ existing business operations or curtail plans for growth. Such impairment could reduce demand for our rental space, or make it difficult for customers to fulfill their obligations to us under their leases.



The acquisition of existing properties is a significant component of our long-term growth strategy, and acquisitions of existing properties are subject to risks that may adversely affect our growth and financial results.



We acquire existing properties, either in individual transactions or portfolios offered by other commercial real estate owners. In addition to the general risks related to real estate described above, we are also subject to the following risks which may jeopardize our realizationassociated with the acquisition of benefits from acquisitions.

Any failure to manage acquisitions and other significant transactions to achieve anticipated results and to successfully integrate acquired operations into our existing businessreal estate facilities which could negatively impact our financial results:operating results, cash flow available for distribution or reinvestment and our stock price:

Due diligence could be insufficient: To fully realizeFailure to identify all significant circumstances or conditions that affect the value, rentability, or costs of operation of an acquired facility, such as unidentified structural, environmental, zoning, or marketability issues, could jeopardize realization of anticipated earnings from an acquisition we mustand negatively impact our operating results.

We could fail to successfully integrate the propertyacquired properties into our platform: Failures to integrate acquired properties into our operating platform. Failures or unexpected circumstances in the integration process,platform, such as a failure to maintain existing relationships with tenants and employeescustomers due to changes in processes, standards, customer service, could temporarily or compensation arrangements, or circumstances we did not detect during due diligence, could jeopardize realization of the anticipated earnings.permanently impair our operating results.



During 2016, we acquired two multi-tenant office buildings aggregating 226,000 square feet in Rockville, Maryland,We compete with other real estate operators for a purchase price of $13.3 million. The buildings are located within Shady Grove Executive Park, where we own three other buildings aggregating 352,000 square feet and we will continue to seek to acquire additional multi-tenant flex, industrial and office properties where they meet our criteria. Our belief, however, is subject to risks, uncertainties and other factors, many of which are forward-looking and are uncertain in nature or are beyond our control, including the risks that our acquisitions and developments may not perform as expected, we may be unable to quickly integrate new acquisitions and developments into our existing operations, and any costs to develop projects or redevelop acquired properties may exceed estimates. Further, wefacilities: We face significant competition for suitable acquisition properties from other real estate investors, including other publicly traded real estate investment trusts and private institutional investors. As a result, we may be unable to acquire additional properties we desire or the purchase price for desirable properties may be significantly increased.

In addition, some of these properties may have unknown characteristics or deficiencies or may not complement our portfolio of existing properties. We may also finance future acquisitions and developments through a combination of borrowings, proceedsincreased, reducing potential yields from equity or debt offerings by us or the Operating Partnership, and proceeds from property divestitures. These financing options may not be available when desired or required or may be more costly than anticipated, which could adversely affect our cash flow. Real property development is subject to a number of risks, including construction delays, complications in obtaining necessary zoning, occupancy and other governmental permits, cost overruns, financing risks, and the possible inability to meet expected occupancy and rent levels. If any of these problems occur, development costs for a project may increase, and there may be costs incurred for projects that are not completed. As a result of the foregoing, some properties may be worth less or may generate less revenue than, or simply not perform as well as, we believed at the time of acquisition or development, negatively affecting our operating results. Any of the foregoing risks could adversely affect our financial condition, operating results and cash flow, and our ability to pay dividends on, and the market price of, our stock. In addition, we may be unable to successfully integrate and effectively manage the properties we do acquire and develop, which could adversely affect our results of operations.acquisitions.



Acquired properties are subject to property tax reappraisals, which may increase our property tax expense:occur following the acquisition and can be difficult to estimate: Facilities that we acquire are subject to property tax reappraisal, which can result in substantial increases to thesubstantially increase ongoing property taxes paid by the seller.taxes. The reappraisal process is subject to a significant degree of uncertainty, because it involves the judgment of governmental agencies regarding estimated real estate values and other factors, and as a result there is a significant degree of uncertainty in estimating the property tax expense of an acquired property.factors. In connection with underwriting future or recent acquisitions of properties, if our estimates of property taxes following reappraisal are too low, we may not realize anticipated earnings from an acquisition.



We would incur adverse tax consequences if we fail to qualify as a REIT. 



Our cash flow available for distribution would be reduced if we fail to qualify as a REIT: While weWe believe that we have qualified since 1990 to be taxed as a REIT and willintend to continue to maintain our REIT status. However, there can be so qualified,no assurance that we cannot be certain. Toqualify or will continue to qualify as a REIT, we need to satisfy certain requirements underbecause of the federal income tax laws relating tohighly technical nature of the REIT rules, the ongoing importance of factual determinations, the possibility of unidentified issues in prior periods or changes in our income, assets, distributions to shareholders and shareholder base. In this regard, thecircumstances, as well as share ownership limits in our articles of incorporation that do not necessarily ensure that our shareholder base is sufficiently diverse for us to qualify as a REIT.

For any year we fail to qualify as a REIT, unless certain relief provisions apply, we would not be allowed a deduction for dividends paid, we would be taxed at regularsubject to corporate tax rates on our taxable income, unless certain relief provisions apply. Taxesand generally we would not be allowed to elect REIT status until the fifth year after such a disqualification. Any taxes, interest, and penalties incurred would reduce our cash available for distributions to shareholders orand could negatively affect our stock price. However, for reinvestment,years in which could adversely affect us and our shareholders. Alsowe failed to qualify as a REIT, we would not be allowedsubject to elect REIT status for five years after we failrules which require us to qualify unless certain relief provisions apply.distribute substantially all of our taxable income to our shareholders.



We may need to borrow funds to meet our REIT distribution requirements: To qualify asAs a REIT, we must generally distribute substantially all of our “REIT taxable income” to our shareholders 90% of our REIT taxable income.shareholders. Our income consists primarily of our share of our Operating Partnership’sOP’s income. We intend to make sufficient distributions to qualify as a REIT and otherwise avoid corporate tax. However, differences in timing between income and expenses and the need to make nondeductible expenditures such as capital improvements and principal payments on debt could force us to borrow funds to make necessary shareholder distributions.



Subsequent to December 31, 2016, theThe Board of Directors of the Company (the “Board”) increased its quarterly dividend from $0.75 per common share to $0.85 per common share, increasing quarterly distributions by $3.4 million per quarter.

The Board will continue to evaluate our dividend rate in light of our actual and projected taxable income, liquidity requirements and other circumstances, and there can be no assurance that the future dividends declared by our Board willcircumstances.  Future dividend levels are not differ materially.determinable at this time.



Potential changes in tax laws could negatively impact us.



The Trump Administration and the Republican-led Congress are exploring potential changes to United States tax law, such as reducingTreasury Department and Congress frequently review federal income tax rates, reducing the deductibility of interest, changing the allowable recovery periods for acquired assets,legislation, regulations and eliminating or limiting many other deductions and credits. These potential changes, and others we may not be aware of, could have negative impacts such as reducing the value of our common stock, reducing our access to capital, or making the acquisition of real estate assets less attractive. In response, we may need to take actions such as changing our sources of capital, revising our capital allocation and asset acquisition strategy, or reconsidering our status as a REIT. Such responses could be costly, reduce cash available for distributions to shareholders, and present certain business and tax risks.guidance. We cannot predict whether, when or to what extent new federal tax laws, regulations, interpretations or rulings will be adopted. Any legislative action may prospectively or retroactively modify our tax treatment and, therefore, may adversely affect taxation of us or our shareholders. In particular, the legislation passed last December, commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”), which was signed into law on December 22, 2017 and which generally takes effect for taxable years beginning on or after January 1, 2018 (subject to certain exceptions), makes many significant changes to the federal income tax laws that will profoundly impact the taxation of individuals and corporations (both regular C corporations as well as corporations that have elected REIT status). A number of changes that affect non-corporate taxpayers will expire at the end of 2025 unless Congress acts to extend them. These changes will impact us and our shareholders in various ways, some of which are potentially adverse compared to prior law. To date, the Internal Revenue Service has issued only limited guidance with respect to certain of the new provisions, and there are numerous interpretive issues that will require guidance. It is highly

likely that technical corrections legislation will be needed to clarify certain aspects of the new law and give proper effect to Congressional intent. There can be no assurance, however, that technical corrections needed to prevent unintended or unforeseen tax consequences will be enacted by Congress in the near future or that any corrections made will not have further adverse, unintended or unforeseen tax consequences.



PS has significant influence over us.  



As of December 31, 2016,2017, PS owned 7.2 million shares of the Company’s common stock and 7.3 million common units of the Operating PartnershipOP (100.0% of the common units not owned by the Company). Assuming issuance of the Company’s common stock upon redemption of its partnership units, PS would own 42.0%41.9% (or 14.5 million shares) of the outstanding shares of the Company’s common stock at December 31, 2016.2017.  In addition, the PS Business Parks name and logo are owned by PS and licensed to the Company under a non-exclusive, royalty-free license agreement. The license can be terminated by either party for any reason with six months written notice. Ronald L. Havner, Jr., the Company’s chairman, is also Chairman of the BoardTrustees and Chief Executive Officer of PS. Joseph D. Russell, Jr. is a director and former Chief Executive Officer of the Company and also President of PS. Gary E. Pruitt, an independent director of the Company, is also a trustee of PS. Consequently, PS has the ability to significantly influence all matters submitted to a vote of our shareholders, including electing directors, changing our articles of incorporation, dissolving and approving other extraordinary transactions such as mergers, and all matters requiring the consent of the limited partners of the Operating Partnership.OP. PS’s interest in such matters may differ from other shareholders. In addition, PS’s ownership may make it more difficult for another party to take over or acquire our Company without PS’s approval.approval, even if favorable to our public shareholders.

Provisions in our organizational documents may prevent changes in control.  



Our articles generally prohibit any person from owning more than 7% of our shares: Our articles of incorporation restrict the number of shares that may be owned by any “person,” and the partnership agreement of our Operating PartnershipOP contains an anti-takeover provision. No shareholder (other than PS and certain other specified shareholders) may own more than 7% of the outstanding shares of our common stock, unless our Board waives this limitation. We imposed this limitation to avoid, to the extent possible, a concentration of ownership that might jeopardize our ability to qualify as a REIT. This limitation, however, also makes a change of control much more difficult (if not impossible) even if it may be favorable to our public shareholders.. These provisions will prevent future

takeover attempts not supported by PS even if a majority of our public shareholders consider it to be in their best interests, such as they wouldto receive a premium for their shares over market value or for other reasons.



Our Board can set the terms of certain securities without shareholder approval: Our Board is authorized, without shareholder approval, to issue up to 50.0 million shares of preferred stock and up to 100.0 million shares of equity stock, in each case in one or more series. Our Board has the right to set the terms of each of these series of stock. Consequently, the Board could set the terms of a series of stock that could make it difficult (if not impossible) for another party to take over our Company even if it might be favorable to our public shareholders. Our articles of incorporation also contain other provisions that could have the same effect. We can also cause our Operating PartnershipOP to issue additional interests for cash or in exchange for property.



The partnership agreement of our Operating PartnershipOP restricts our ability to enter into mergers:The partnership agreement of our Operating PartnershipOP generally provides that we may not merge or engage in a similar transaction unless either the limited partners of our Operating PartnershipOP are entitled to receive the same proportionate paymentsconsideration as our shareholders.shareholders, or 60% of the OP’s limited partners approve the merger. In addition, we have agreedmay not to mergeconsummate a merger unless the merger would have beenmatter is approved hadby a vote of the limitedOP’s partners, been able to vote together with our interests in the OP voted in proportion to the manner in which our shareholders which hasvoted to approve the merger. These provisions have the effect of increasing PS’s influence over us due to PS’s ownership of operating partnership units. These provisions may make it more difficult for us to merge with another entity.



The interests of limited partners of our Operating PartnershipOP may conflict with the interests of our common stockholders.



Limited partners of our Operating Partnership,OP, including PS, have the right to vote on certain changes to the partnership agreement. They may vote in a way that is against the interests of our shareholders. Also, as general partner of our Operating Partnership,OP, we are required to protect the interests of the limited partners of the Operating Partnership.OP. The interests of the limited partners and of our shareholders may differ.



We depend on external sources of capital to grow our Company.



We are generally required under the Code to annually distribute at least 90% of our REIT“REIT taxable income.” Because of this distribution requirement, we may not be able to fund future capital needs, including any necessary

building and tenant improvements, from operating cash flow. Consequently, we may need to rely on third-party sources of capital to fund our capital needs. We may not be able to obtain the financing on favorable terms or at all. Access to third-party sources of capital depends, in part, on general market conditions, the market’s perception of our growth potential, our current and expected future earnings, our cash flow, and the market price per share of our common stock. If we cannot obtain capital from third-party sources, we may not be able to acquire properties when strategic opportunities exist, satisfy any debt service obligations, or make cash distributions to shareholders.



We are subject to laws and governmental regulations and actions that affect our operating results and financial condition. 



Our business is subject to regulation under a wide variety of U.S. federal, state and local laws, regulations and policies including those imposed by the SEC, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the New York Stock Exchange (the “NYSE”), as well as applicable local, state and national labor laws. Although we have policies and procedures designed to comply with applicable laws and regulations, failure to comply with the various laws and regulations may result in civil and criminal liability, fines and penalties, increased costs of compliance and restatement of our financial statements and could also affect the marketability of our real estate facilities.



There can also be no assurance that, inIn response to current economic conditions or the current political environment or otherwise, laws and regulations will notcould be implemented or changed in ways that adversely affect our operating results and financial condition, such as recently adopted legislation that expands health care coverage costs or facilitates union activity or federal legislative proposals tocould otherwise increase operating costs.

Terrorist attacks and Such changes could also adversely affect the possibility of wider armed conflict may have an adverse impact on our business and operating results and could decrease the valueoperations of our assets.

Terrorist attackscustomers, which could affect the price and other acts of violence or war could have a material adverse impact ondemand for our business and

operating results. There can be no assurance that there will not be further terrorist attacks against the U.S. Attacks or armed conflicts that directly impact one or more ofspace as well as our properties could significantly affect ourcustomer’s ability to operate those properties and thereby impair our operating results. Further, we may not have insurance coverage for losses caused by a terrorist attack. Such insurance may not be available, or if it is available and we decide to obtain such terrorist coverage, the cost for the insurance may be significant in relationship to the risk overall. In addition, the adverse effects that such violent acts and threats of future attacks could have on the U.S. economy could similarly have a material adverse effect on our business and results of operations. Finally, further terrorist acts could cause the U.S. to enter into a wider armed conflict, which could further impact our business and operating results.pay their rent.



Holders of depositary shares, each representing 1/1,000 of a share of our outstanding preferred stock, have dividend, liquidation and other rights that are senior to the rights of the holders of shares of our common stock.



OurHolders of our shares of preferred stock are entitled to cumulative dividends before any dividends may be declared or set aside on our common stock. Upon our voluntary or involuntary liquidation, dissolution or winding up, before any payment is made to holders of our common stock, shares of our preferred stock are entitled to receive a liquidation preference of $25,000 per share (or $25.00 per depositary share) plus any accrued and unpaid distributions. This will reducedistributions before any payment is made to the remainingcommon shareholders. These preferences may limit the amount of our assets, if any, available to distribute to holders ofreceived by our common stock.shareholders for ongoing distributions or upon liquidation. In addition, our preferred stockholders have the right to elect two additional directors to our Board whenever dividends are in arrears in an aggregate amount equivalent to six or more quarterly dividends, whether or not consecutive.



Future issuances by us of shares of our common stock may be dilutive to existing stockholders, and future sales of shares of our common stock may adversely affect the market price of our common stock.



Sales of substantial amounts of shares of our common stock in the public market (either by us or by PS), or issuances of shares of common stock in connection with redemptions of common units of our Operating Partnership,OP, could adversely affect the market price of our common stock. The Company may seek to engage in common stock offerings in the future. Offerings of common stock, including by us in connection with portfolio or other property acquisitions or by PS in secondary offerings, and the issuance of common units of the Operating PartnershipOP in exchange for shares of common stock, could have an adverse effect on the market price of the shares of our common stock.



We rely on technology in our operations and failures, inadequacies or interruptions to our service could harm our business.



The execution of our business strategy is heavily dependent on the use of technologies and systems, including the Internet, to access, store, transmit, deliver and manage information and processes. We also maintain personally identifiable information about our customers and employees. Although we believe we have taken commercially reasonable steps to protect the security of our systems, there can be no assurance that suchthese systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer worms, viruses and other destructive or disruptive security measures will prevent failures, inadequacies or interruptions in system services, or that system security will not be breached.breaches, natural disasters, terrorist attacks, and other catastrophic events. Disruptions in service, system shutdowns and security breaches could impact our operations, subject us to legal liability or government enforcement actions, and otherwise have a material adverse effect on our business.



ITEM 1B. UNRESOLVED STAFF COMMENTS 



None.

ITEM 2. PROPERTIES



As of December 31, 2016, the Company2017,  we owned 9998 business parks consisting of a geographically diverse portfolio of 28.128.0 million rentable square feet of commercial real estate which consists of 14.614.5 million square feet of flex space, 8.8 million square feet of industrial space and 4.7 million square feet of office space. The weighted average occupancy rate throughout 20162017 was 94.0%93.8% and the realized rent per square foot was $14.61.

The following table reflects the geographical diversification of the 9998 business parks owned by the Company as of December 31, 2016,2017, the type of the rentable square footage and the weighted average occupancy rates throughout 20162017 (except as set forth below, all of the properties are held in fee simple interest) (in thousands, except number of business parks):



________________________________________





WhileAlong with the 28.0 million rentable square feet of commercial space, we also have a 95.0% interest in a  395-unit apartment complex.

We currently anticipate that each of theour properties listed above will continue to be used for its current purpose. ManagementHowever, we will from time to time evaluate itsour properties from a highest and best use perspective. perspective, and may identify higher and better uses for its real estate. We renovate our properties in connection with the re-leasing of space to customers and expect to fund the costs of such renovations generally from rental income.

Competition exists in each of the market areas in which these properties are located.

The Company renovates its properties in connection with the re-leasing of space to tenantslocated, and expects that it will fund the costs of such renovations from rental income. From time to time the Company may identify higher and better use of its assets. The Company haswe have risks that tenantscustomers will default on leases and declare bankruptcy. Management believesWe believe these risks are mitigated through the Company’s geographic diversity and diverse tenantcustomer base.



The Company evaluates the performancePlease refer to “Item 7. Management’s Discussion and Analysis of its business parks primarily based on NOI. NOI is defined by the Company as rental income as defined by GAAP less costFinancial Condition and Results of operations as defined by GAAP, excluding depreciation and amortization.  NOI is a non-GAAP financial measure that is often used by investors to determine the performance and value of commercial real estate.  Management believes NOI provides the most consistent measurement on a comparative basis of the performance of the commercial real estate and its contribution to the value of the Company.  Depreciation and amortization have been excluded from NOI as they are generally not used in determining the value of commercial real estate by management or the investment community. Depreciation and amortization are generally not used in determining value as they consider the historical costs of an asset compared to its current value; therefore, to understand the effect of the assets’ historical cost on the Company’s results, investors should look at GAAP financial measures, such as total operating costs including depreciation and amortization. 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 calculated in accordance with GAAP. Following the table below, we have reconciled total NOI to net income, which we consider the most directly comparable financial measure calculated in accordance with GAAP. The following information illustrates adjusted rental income, adjusted cost of operations and NOI generated by the Company’s totalOperations” for portfolio in 2016,  2015 and 2014 by state and by property classifications. Assets disposed of or transferred to development are reflected as assets sold or held for development.

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