PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PS BUSINESS PARKS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



	September 30,		December 31,		September 30,		December 31,
	2016		2015		2017		2016
	(Unaudited)				(Unaudited)
ASSETS

Cash and cash equivalents	$	5,016	$	188,912	$	132,658	$	128,629

Real estate facilities, at cost:
Real estate facilities, at cost
Land		799,207		793,569		789,227		789,227
Buildings and improvements		2,238,804		2,215,515		2,254,663		2,224,522
		3,038,011		3,009,084		3,043,890		3,013,749
Accumulated depreciation		(1,147,187)		(1,082,603)		(1,219,314)		(1,158,054)
		1,890,824		1,926,481		1,824,576		1,855,695
Land held for future development		6,081		6,081
Property held for disposition, net						—		909
Land and building held for development						29,252		27,028
		1,896,905		1,932,562		1,853,828		1,883,632
Investment in and advances to unconsolidated joint venture		55,536		26,736		96,593		67,190
Rent receivable, net		2,013		2,234		2,203		1,945
Deferred rent receivable, net		29,717		28,327		31,670		29,770
Other assets		10,597		7,887		8,779		8,205

Total assets	$	1,999,784	$	2,186,658	$	2,125,731	$	2,119,371

LIABILITIES AND EQUITY

Accrued and other liabilities	$	83,093	$	76,059	$	82,618	$	78,657
Credit facility		60,000		—
Mortgage note payable		—		250,000
Preferred stock called for redemption						220,000		230,000
Total liabilities		143,093		326,059		302,618		308,657
Commitments and contingencies
Equity:
PS Business Parks, Inc.’s shareholders’ equity:
PS Business Parks, Inc.’s shareholders’ equity
Preferred stock, $0.01 par value, 50,000,000 shares authorized,
36,800 shares issued and outstanding at
September 30, 2016 and December 31, 2015		920,000		920,000
35,590 and 35,190 shares issued and outstanding at
September 30, 2017 and December 31, 2016, respectively						889,750		879,750
Common stock, $0.01 par value, 100,000,000 shares authorized,
27,120,001 and 27,034,073 shares issued and outstanding at
September 30, 2016 and December 31, 2015, respectively		270		269
27,251,037 and 27,138,138 shares issued and outstanding at
September 30, 2017 and December 31, 2016, respectively						272		271
Paid-in capital		729,957		722,009		735,714		733,671
Cumulative net income		1,467,323		1,375,421
Cumulative distributions		(1,459,633)		(1,357,203)
Accumulated earnings (deficit)						60		(433)
Total PS Business Parks, Inc.’s shareholders’ equity		1,657,917		1,660,496		1,625,796		1,613,259
Noncontrolling interests:
Common units		198,774		200,103
Total noncontrolling interests		198,774		200,103
Noncontrolling interests						197,317		197,455
Total equity		1,856,691		1,860,599		1,823,113		1,810,714
Total liabilities and equity	$	1,999,784	$	2,186,658	$	2,125,731	$	2,119,371

For The Three Months

For The Nine Months

Ended September 30,

Ended September 30,

2016

2015

2016

2015
Revenues:

Rental income
$
97,340

$
93,322

$
289,272

$
278,585
Facility management fees

130

130

389

410
Total operating revenues

97,470

93,452

289,661

278,995
Expenses:

Cost of operations

30,796

30,448

92,440

92,251
Depreciation and amortization

24,631

25,985

74,886

79,243
General and administrative

2,970

3,276

11,982

10,172
Total operating expenses

58,397

59,709

179,308

181,666
Other income and (expense):

Interest and other income

76

154

551

406
Interest and other expense

(155)

(3,368)

(5,507)

(10,029)
Total other income and (expense)

(79)

(3,214)

(4,956)

(9,623)
Gain on sale of real estate facilities

—

15,748

—

28,235
Net income
$
38,994

$
46,277

$
105,397

$
115,941

Net income allocation:

Net income allocable to noncontrolling interests:

Noncontrolling interests—common units
$
5,315

$
6,087

$
13,495

$
14,467
Total net income allocable to noncontrolling interests

5,315

6,087

13,495

14,467
Net income allocable to PS Business Parks, Inc.:

Preferred shareholders

13,833

17,609

41,498

47,853
Restricted stock unit holders

128

97

387

237
Common shareholders

19,718

22,484

50,017

53,384
Total net income allocable to PS Business Parks, Inc.

33,679

40,190

91,902

101,474
Net income
$
38,994

$
46,277

$
105,397

$
115,941

Net income per common share:

Basic
$
0.73

$
0.83

$
1.85

$
1.98
Diluted
$
0.72

$
0.83

$
1.84

$
1.97

Weighted average common shares outstanding:

Basic

27,103

26,985

27,076

26,956
Diluted

27,201

27,049

27,166

27,034

Dividends declared per common share
$
0.75

$
0.60

$
2.25

$
1.60



	For The Three Months				For The Nine Months
	Ended September 30,				Ended September 30,
	2017		2016		2017		2016

Rental income	$	100,481	$	97,340	$	300,342	$	289,272

Expenses
Cost of operations		31,679		30,796		92,962		92,440
Depreciation and amortization		23,759		24,631		70,465		74,886
General and administrative		1,745		2,970		7,019		11,982
Total operating expenses		57,183		58,397		170,446		179,308

Operating income		43,298		38,943		129,896		109,964
Interest and other income		212		206		599		940
Interest and other expense		(503)		(155)		(972)		(5,507)
Equity in loss of unconsolidated joint venture		(376)		—		(758)		—
Gain on sale of real estate facility		—		—		1,209		—
Gain on sale of development rights		—		—		3,865		—
Net income		42,631		38,994		133,839		105,397
Allocation to noncontrolling interests		(4,866)		(5,315)		(18,610)		(13,495)
Net income allocable to PS Business Parks, Inc.		37,765		33,679		115,229		91,902
Allocation to preferred shareholders based upon
Distributions		(12,590)		(13,833)		(38,472)		(41,498)
Redemptions (Note 9)		(6,900)		—		(6,900)		—
Allocation to restricted stock unit holders		(137)		(128)		(582)		(387)
Net income allocable to common shareholders	$	18,138	$	19,718	$	69,275	$	50,017

Net income per common share
Basic	$	0.67	$	0.73	$	2.55	$	1.85
Diluted	$	0.66	$	0.72	$	2.53	$	1.84

Weighted average common shares outstanding
Basic		27,226		27,103		27,192		27,076
Diluted		27,427		27,201		27,399		27,166

Dividends declared per common share	$	0.85	$	0.75	$	2.55	$	2.25

See accompanying notes.

Table of Contents

PS BUSINESS PARKS, INC.

CONSOLIDATED STATEMENT OF EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, ~~2016~~2017

(~~Unaudited, in~~In thousands, except share data)

(Unaudited)



													Total PS																Total PS
													Business Parks,																Business Parks,
	Preferred Stock			Common Stock			Paid-in		Cumulative		Cumulative		Inc.’s Shareholders’		Noncontrolling		Total		Preferred Stock			Common Stock			Paid-in		Accumulated		Inc.’s Shareholders’		Noncontrolling		Total
	Shares	Amount		Shares	Amount		Capital		Net Income		Distributions		Equity		Interests		Equity		Shares	Amount		Shares	Amount		Capital		Earnings (Deficit)		Equity		Interests		Equity
Balances at December 31, 2015	36,800	$	920,000	27,034,073	$	269	$	722,009	$	1,375,421	$	(1,357,203)	$	1,660,496	$	200,103	$	1,860,599
Exercise of stock options	—		—	49,882		1		2,955		—		—		2,956		—		2,956
Balances at December 31, 2016																			35,190	$	879,750	27,138,138	$	271	$	733,671	$	(433)	$	1,613,259	$	197,455	$	1,810,714
Issuance of preferred stock, net of
issuance costs																			9,200		230,000	—		—		(7,775)		—		222,225		—		222,225
Redemption of preferred stock,
net of issuance costs																			(8,800)		(220,000)	—		—		6,900		(6,900)		(220,000)		—		(220,000)
Issuance of common stock in
connection with stock-based
compensation																			—		—	112,899		1		3,991		—		3,992		—		3,992
Stock compensation, net	—		—	36,046		—		6,606		—		—		6,606		—		6,606	—		—	—		—		2,673		—		2,673		—		2,673
Cash paid for taxes in lieu of
shares upon vesting of
restricted stock units																			—		—	—		—		(3,865)		—		(3,865)		—		(3,865)
Net income	—		—	—		—		—		91,902		—		91,902		13,495		105,397	—		—	—		—		—		115,229		115,229		18,610		133,839
Distributions:
Distributions
Preferred stock	—		—	—		—		—		—		(41,498)		(41,498)		—		(41,498)	—		—	—		—		—		(38,472)		(38,472)		—		(38,472)
Common stock	—		—	—		—		—		—		(60,932)		(60,932)		—		(60,932)	—		—	—		—		—		(69,364)		(69,364)		—		(69,364)
Noncontrolling interests	—		—	—		—		—		—		—		—		(16,437)		(16,437)	—		—	—		—		—		—		—		(18,629)		(18,629)
Adjustment to noncontrolling interests
in underlying operating partnership	—		—	—		—		(1,613)		—		—		(1,613)		1,613		—
Balances at September 30, 2016	36,800	$	920,000	27,120,001	$	270	$	729,957	$	1,467,323	$	(1,459,633)	$	1,657,917	$	198,774	$	1,856,691
in the OP																			—		—	—		—		119		—		119		(119)		—
Balances at September 30, 2017																			35,590	$	889,750	27,251,037	$	272	$	735,714	$	60	$	1,625,796	$	197,317	$	1,823,113

See accompanying notes.

Table of Contents

PS BUSINESS PARKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)



	For The Nine Months				For The Nine Months
	Ended September 30,				Ended September 30,
	2016		2015		2017		2016
Cash flows from operating activities:
Cash flows from operating activities
Net income	$	105,397	$	115,941	$	133,839	$	105,397
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		74,886		79,243
In-place lease adjustment		(437)		(1,004)
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization						70,465		74,886
Tenant improvement reimbursements, net of lease incentives		(1,253)		(1,418)		(1,654)		(1,253)
Gain on sale of real estate facilities		—		(28,236)
Equity in loss of unconsolidated joint venture						758		—
Gain on sale of real estate facility						(1,209)		—
Gain on sale of development rights						(3,865)		—
Stock compensation		8,933		6,949		3,255		8,933
Increase in receivables and other assets		(4,248)		(4,258)
Increase in accrued and other liabilities		4,395		11,398
Amortization of financing costs						338		391
Other, net						4,125		1,259
Total adjustments		82,276		62,674		72,213		84,216
Net cash provided by operating activities		187,673		178,615		206,052		189,613
Cash flows from investing activities:
Cash flows from investing activities
Capital expenditures to real estate facilities		(24,230)		(35,067)		(38,709)		(24,230)
Capital expenditures to land held for development		—		(2,809)
Capital expenditures to land and building held for development						(2,224)		—
Investment in and advances to unconsolidated joint venture		(28,800)		—		(30,161)		(28,800)
Acquisition of real estate facilities		(12,628)		—		—		(12,628)
Proceeds from sale of real estate facilities		—		55,160		2,144		—
Net cash (used in) provided by investing activities		(65,658)		17,284
Cash flows from financing activities:
Proceeds from sale of development rights						2,400		—
Net cash used in investing activities						(66,550)		(65,658)
Cash flows from financing activities
Borrowings on credit facility		116,000		—		170,000		116,000
Repayment of borrowings on credit facility		(56,000)		—		(170,000)		(56,000)
Repayment of mortgage note payable		(250,000)		—		—		(250,000)
Payment of financing costs						(778)		—
Proceeds from the exercise of stock options		2,956		3,987		3,992		2,956
Net proceeds from the issuance of preferred stock						222,225		—
Redemption of preferred stock						(230,000)		—
Cash paid for taxes in lieu of shares upon vesting of restricted stock units						(3,865)		(1,940)
Cash paid to restricted stock unit holders						(582)		—
Distributions paid to preferred shareholders		(41,498)		(45,366)		(38,472)		(41,498)
Distributions paid to common shareholders						(69,364)		(60,932)
Distributions paid to noncontrolling interests		(16,437)		(11,689)		(18,629)		(16,437)
Distributions paid to common shareholders		(60,932)		(43,156)
Net cash used in financing activities		(305,911)		(96,224)		(135,473)		(307,851)
Net (decrease) increase in cash and cash equivalents		(183,896)		99,675
Net increase (decrease) in cash and cash equivalents						4,029		(183,896)
Cash and cash equivalents at the beginning of the period		188,912		152,467		128,629		188,912
Cash and cash equivalents at the end of the period	$	5,016	$	252,142	$	132,658	$	5,016

Supplemental schedule of non-cash investing and financing activities:
Adjustment to noncontrolling interests in underlying operating partnership:
Noncontrolling interests—common units	$	1,613	$	2,149
Supplemental schedule of non-cash investing and financing activities
Adjustment to noncontrolling interests in OP
Noncontrolling interests					$	(119)	$	1,613
Paid-in capital	$	(1,613)	$	(2,149)	$	119	$	(1,613)
Non-cash distributions related to the redemption of preferred stock:
Preferred Redemption Allocation
Paid-in capital	$	—	$	2,487	$	6,900	$	—
Cumulative distributions	$	—	$	(2,487)
Preferred stock called for redemption:
Accumulated earnings (deficit)					$	(6,900)	$	—
Preferred stock called for redemption
Preferred stock called for redemption and reclassified to liabilities	$	—	$	75,000	$	220,000	$	—
Preferred stock called for redemption and reclassified from equity	$	—	$	(75,000)	$	(220,000)	$	—

See accompanying notes.

Table of Contents

PS BUSINESS PARKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, ~~2016~~2017

1. Organization and description of business

PS Business Parks, Inc. (“PSB”) was incorporated in the state of California in 1990. As of September 30, ~~2016,~~2017, PSB owned ~~77.9%~~78.0% of the common partnership units ~~(the “common partnership units”)~~ of PS Business Parks, L.P. (the ~~“Operating Partnership”~~“OP”). The remaining common partnership units are owned by Public Storage (“PS”). PS’s interest in the OP is referred to as the “PS OP Interest.” PSB, as the sole general partner of the ~~Operating Partnership,~~OP, has full, exclusive and complete responsibility and discretion in managing and controlling the ~~Operating Partnership.~~OP. PSB and its subsidiaries, including the ~~Operating Partnership,~~OP, are collectively referred to as the ~~“Company.~~“Company,” ~~Assuming issuance of the Company’s common stock upon redemption of its common partnership units,~~“we,” “us,” or “our.” PS would own ~~42.0%~~41.9% (or 14.5 million shares) of the outstanding shares of the Company’s common ~~stock.~~stock if it redeemed its common partnership units for common shares.

The Company is a fully-integrated, self-advised and self-managed real estate investment trust (“REIT”) that owns, operates, acquires and develops commercial properties, primarily multi-tenant flex, office and industrial space. As of September 30, ~~2016,~~2017, the Company owned and operated ~~28.2~~28.0 million rentable square feet of commercial space in six ~~states.~~states and a 95.0% interest in 395 apartments. The Company also manages ~~737,000~~684,000 rentable square feet on behalf of PS.

References to the number of properties or square footage are unaudited and outside the scope of the Company’s independent registered public accounting firm’s review of the Company’s consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).

2. Summary of significant accounting policies

Basis of presentation

The accompanying unaudited consolidated financial statements include the accounts of PSB and its subsidiaries, including the OP. All significant inter-company balances and transactions have been ~~prepared~~eliminated in the consolidated financial statements. The financial statements are presented on an accrual basis in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, ~~2016~~2017 are not necessarily indicative of the results that may be expected for the year ended December 31, ~~2016.~~2017. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2015.~~2016.

Consolidation and ~~Equity Method of Accounting~~

~~The Company accounts for its investment in a joint venture that it has significant influence over, but does not control, using the~~ equity method of accounting ~~eliminating intra-entity profits and losses as if the joint venture were a consolidated subsidiary.~~

~~The accompanying consolidated financial statements include the accounts of PSB and the Operating Partnership. All significant inter-company balances and transactions~~We consider entities to be Variable Interest Entities (“VIEs”) when they have ~~been eliminated in the consolidated financial statements.~~

~~The Company consolidates all variable interest entities (each a “VIE”) for which it is the primary beneficiary. Generally, a VIE is a legal entity in which the~~insufficient equity ~~investors do not have the characteristics of a controlling financial interest or the equity investors lack sufficient equity at risk for the entity~~ to finance ~~its~~their activities without additional subordinated financial ~~support.~~support provided by other parties, or the equity holders as a group do not have a controlling financial interest. A limited partnership ~~may be~~is also generally considered a VIE if the limited partners do not participate in operating decisions. ~~Under this criteria,~~We consolidate VIEs when we are the ~~Operating Partnership is considered~~primary beneficiary, generally defined as having (i) the power to direct the activities most significantly impacting economic performance and (ii) either the obligation to absorb losses or the right to receive benefits from the VIE.

We account for investments in entities that are not VIEs that we have significant influence over, but do not control, using the equity method of accounting. At September 30, 2017, we have an interest in a ~~VIE. The Company’s significant asset is its investment~~joint venture engaged in the ~~Operating Partnership,~~development and ~~consequently, substantially all~~operation of residential real estate, which we account for using the ~~Company’s assets and~~equity method of accounting. See Note 4 for more information on this entity.

Table of Contents

~~liabilities represent those~~PS, the sole limited partner in the OP, has no power to direct the activities of the OP. We are the primary beneficiary of the OP. Accordingly, we consider the OP a VIE and consolidate it. Substantially all of our assets and liabilities ofare held by the ~~Operating Partnership. All of the Company’s debt is an obligation of the Operating Partnership.~~OP.

Noncontrolling interests

The ~~Company’s~~PS OP Interest represents PS’s noncontrolling interests are reported as a component of equity separate from the parent’s equity. Purchases or sales of equity interests that do not result in a change in control are accounted for as equity transactions. In addition, net income attributable to the noncontrolling interests is included in consolidated net income on the face of the income statement and, upon a gain or loss of control, the interests purchased or sold, as well as any interests retained, are recorded at fair value with any gain or loss recognized in earnings. At the end of each reporting period, the Company determines the amount of equity (book value of net assets) which is allocable to the noncontrolling interests based upon the ownership interest, and an adjustment is made to the noncontrolling interests, with a corresponding adjustment to paid-in capital, to reflect the noncontrolling interests’ equity interest in the ~~Company.~~OP through its ownership of 7,305,355 common partnership units. See note 7 for further information.

Use of estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.

Allowance for doubtful accounts

The Company monitors the collectability of its receivable balances including the deferred rent receivable on an ongoing basis. Based on these reviews, the Company maintains an allowance for doubtful accounts for estimated losses resulting from the possible inability of tenants to make contractual rent payments to the Company. A provision for doubtful accounts is recorded during each period. The allowance for doubtful accounts is netted against tenant and other receivables on the consolidated balance sheets. Tenant receivables are net of an allowance for estimated uncollectible accounts totaling $400,000 at September 30, ~~2016~~2017 and December 31, ~~2015.~~2016. Deferred rent receivable is net of an allowance for uncollectible accounts totaling ~~$919,000~~$910,000 and ~~$909,000~~$916,000 at September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively.

Financial instruments

The methods and assumptions used to estimate the fair value of financial instruments are described below. The Company has estimated the fair value of financial instruments using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop estimates of market value. Accordingly, estimated fair values are not necessarily indicative of the amounts that could be realized in current market exchanges. The Company determines the estimated fair value of financial assets and liabilities utilizing a hierarchy of valuation techniques based on whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. This hierarchy requires the use of observable market data when available. The following is the fair value hierarchy:

*·

Level 1—quoted prices for identical instruments in active markets;

*·

Level 2—quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and

*·

Level 3—fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

Financial assets that are exposed to credit risk consist primarily of cash and cash equivalents and receivables. The Company considers all highly liquid investments with a remaining maturity of three months or less at the date of

~~Table of Contents~~

purchase to be cash equivalents. Cash and cash equivalents, which consist primarily of money market investments, are only invested in entities with an investment grade rating. Receivables are comprised of balances due from a large number of customers. Balances that the Company expects to become uncollectible are reserved for or written off. Due to the short period to maturity of the Company’s cash and cash equivalents, accounts receivable, other assets and accrued and other liabilities, the carrying values as presented on the consolidated balance sheets are reasonable estimates of fair value.

Table of Contents

Carrying values of the Company’s ~~mortgage note payable and~~ unsecured ~~credit facility~~Credit Facility (as defined on page 15) approximate fair value. The characteristics of these financial instruments, market data and other comparative metrics utilized in determining these fair values are “Level 2” inputs.

Real estate facilities

Real estate facilities are recorded at cost. Property taxes, insurance, interest and costs essential to the development of property for its intended use are capitalized during the period of development. Costs related to the renovation or improvement of the properties are capitalized. Expenditures for repairs and maintenance are expensed as incurred. Expenditures that are expected to benefit a period greater than two years and exceed $2,000 are capitalized and depreciated over their estimated useful life. Buildings and improvements are depreciated using the straight-line method over their estimated useful lives, which generally range from five to 30 years. Transaction costs, which include tenant improvements and lease commissions, of $1,000 or more for leases with terms greater than one year are capitalized and depreciated over their estimated useful lives. Transaction costs less than $1,000 or for leases of one year or less are expensed as incurred.

~~Land~~Property held for ~~future~~disposition or development

~~Property taxes, insurance, interest~~Real estate is classified as held for disposition when the asset is being marketed for sale and ~~costs essential~~we expect that a sale is likely to occur in the ~~development of property for its intended use are capitalized during the period of development. Upon classification of an asset~~next 12 months. Real estate is classified as held for development ~~depreciation of the asset~~when it is ~~ceased.~~

~~Properties~~likely that it will be developed to an alternate use and no longer used in its present form. Property held for development or disposition

~~An asset~~ is classified as an asset held for disposition when it meets certain requirements, which include, among other criteria, the approval of the sale of the asset, the marketing of the asset for sale and the expectation by the Company that the sale will likely occur within the next 12 months. Upon classification of an asset as held for disposition, depreciation of the asset is ceased, and the net book value of the asset is included on the balance sheet as properties held for disposition.not depreciated.

Intangible assets/liabilities

~~Intangible assets~~When we acquire facilities, an intangible asset is recorded for leases where the in-place rent is higher than market rents, and ~~liabilities include above-market and below-market~~an intangible liability is recorded where the market rents are higher than the in-place ~~lease values of acquired properties~~rents. The amounts recorded are based onupon the present value (using ~~an interest~~a discount rate which reflects the risks associated with the leases acquired) of such differences over the ~~difference between (i) the contractual~~lease term and such amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market and below-market lease values (included in other assets and accrued liabilities in the accompanying consolidated balance sheets) are amortized to rental income over the respective remaining ~~non-cancelable terms of the respective leases.~~lease term.

~~As of September 30, 2016, the value of in-place leases resulted in net~~We have no material intangible assets ~~of $1.2 million, net of $9.0 million of accumulated amortization with a weighted average amortization period of 9.2 years, and net intangible~~or liabilities of $990,000, net of $9.8 million of accumulated amortization with a weighted average amortization period of 6.3 years. As of December 31, 2015, the value of in-place leases resulted in net intangible assets of $1.7 million, net of $8.6 million of accumulated amortization and net intangible liabilities of $1.8 million, net of $9.0 million of accumulated amortization.

~~Table of Contents~~

~~The Company recorded net increases in rental income of $106,000 and $341,000~~ for the three months ended September 30, 2016 and 2015, respectively, and $437,000 and $1.0 million for the nine months ended September 30, 2016 and 2015, respectively, due to the amortization of net intangible liabilities resulting from the above-market and below-market lease values.any periods presented.

Evaluation of asset impairment

~~The Company evaluates its~~We evaluate our real estate and finite-lived intangible assets ~~used in operations~~ for impairment ~~by identifying~~each quarter. If there are indicators of impairment and ~~by comparing~~we determine that the ~~sum of the estimated~~asset is not recoverable from future undiscounted ~~future~~ cash flows ~~for each asset~~to be received through the asset’s remaining life (or, if earlier, the expected disposal date), we record an impairment charge to the ~~asset’s carrying value. When indicators of impairment are present and the sum of the estimated undiscounted future cash flows is less than~~extent the carrying amount exceeds the asset’s estimated fair value ~~of such asset,~~or net proceeds from expected disposal.

We evaluate our investment in our unconsolidated joint venture on a quarterly basis. We record an impairment ~~loss is recorded equal~~charge to the ~~difference between~~extent the ~~asset’s current~~ carrying ~~value and its value based on discounting its~~amount exceeds estimated ~~future cash flows. In addition, the Company evaluates its assets held for disposition for impairment. Assets held for disposition are reported at the lower of their carrying value or~~ fair value, ~~less cost~~when we believe any such shortfall is other than temporary.

No impairments were recorded in any of ~~disposition. At September 30, 2016, the Company did not consider~~our evaluations for any ~~assets to be impaired.~~period presented herein.

Stock compensation

All share-based payments to employees, including grants of employee stock options, are recognized as stock compensation in the Company’s consolidated statements of income ~~statement~~ based on their ~~grant date~~ fair ~~values.~~values at the beginning of the service period. See Note ~~12.~~11.

Table of Contents

Accrued and other liabilities and other assets

Accrued and other liabilities consist primarily of rents prepaid by our tenants, trade payables, property tax accruals, accrued payroll and contingent loss accruals when probable and estimable. We disclose the nature of significant unaccrued losses that are reasonably possible of occurring and, if estimable, a range of exposure. Other assets are comprised primarily of prepaid expenses. We believe the fair value of our accrued and other liabilities and other assets approximate book value, due to the short period until settlement.

Revenue ~~and expense~~ recognition

~~The Company must meet four basic criteria before revenue can be recognized:~~Revenue is recognized with respect to contractual arrangements when persuasive evidence of an arrangement exists; the delivery has occurred or services have been rendered; the fee is fixed or determinable; and collectability is reasonably assured. All leases are classified as operating leases. Rental income is recognized on a straight-line basis over the ~~terms of~~lease term, with the leases. Straight-line rent is recognized for all tenants with contractual fixed increases in rent that are not included on the Company’s credit watch list. Deferred rent receivable represents rental revenue recognized on a straight-line basis in excess of cumulative rental income recognized over the cumulative rent billed ~~rents.~~for the lease term reflected as “deferred rent receivable” on our consolidated balance sheets. Reimbursements from tenants for real estate taxes and other recoverable operating expenses are recognized as rental income in the period the applicable costs are incurred. Property management fees are recognized in the period earned.

Costs incurred in ~~connection with leasing~~acquiring tenants (primarily tenant improvements and lease commissions) are capitalized and amortized over the lease period.

Gains from sales of real estate facilities

The Company recognizes gains from sales of real estate facilities at the time of sale using the full accrual method, provided that various criteria related to the terms of the transactions and any subsequent involvement by the Company with the properties sold are met. If the criteria are not met, the Company defers the gains and recognizes them when the criteria are met or uses the installment or cost recovery methods as appropriate under the circumstances.

General and administrative expenses

General and administrative expenses include executive and other compensation, corporate office expenses, professional fees, acquisition transaction costs, state income taxes and other such ~~administrative items.~~costs that are not directly related to the operation of our real estate facilities.

Income taxes

~~The Company has qualified and intends~~We have elected to ~~continue to qualify~~be treated as a REIT, as defined in ~~Section 856 of~~ the Internal Revenue Code of 1986, as ~~amended.~~amended (the “Code”). As a REIT, ~~the Company is~~we do not ~~subject to~~incur federal income tax ~~to the extent that it distributes its~~if we distribute 100% of our REIT taxable income each year, and if we meet certain organizational and operational rules. We believe we have met these REIT requirements for all periods presented herein. Accordingly, we have recorded no federal income tax expense related to our REIT taxable income.

We recognize tax benefits of uncertain income tax positions that are subject to audit only if we believe it is more likely than not that the position would ultimately be sustained assuming the relevant taxing authorities had full knowledge of the relevant facts and circumstances of our positions. As of September 30, 2017, we did not recognize any tax benefits for uncertain positions.

Accounting for preferred equity issuance costs

We record issuance costs as a reduction to paid-in capital on our consolidated balance sheets at the time the preferred securities are issued and reflect the carrying value of the preferred equity at its ~~shareholders. A REIT must distribute at least 90%~~redemption value. An additional allocation of ~~its taxable~~ income ~~each~~is made from the common shareholders to the preferred shareholders in the amount of

Table of Contents

year. In addition, REITs are subject to a number of organizational and operating requirements. The Company may be subject to certain state and local taxes on its income and property and to federal income and excise taxes on its undistributed taxable income. The Company believes it met all organization and operating requirements to maintain its REIT status during 2015 and intends to continue to meet such requirements for 2016. Accordingly, no provision for income taxes has been made in the ~~accompanying consolidated financial statements.~~

The Company can recognize a tax benefit only if it is “more likely than not” that a particular tax position will be sustained upon examination or audit. To the extent that the “more likely than not” standard has been satisfied, the benefit associated with a position is measured as the largest amount that is greater than 50% likely of being recognized upon settlement. As of September 30, 2016, the Company did not recognize any tax benefit for uncertain tax positions.

~~Accounting for preferred equity issuance costs~~

~~The Company records~~original issuance costs, ~~as a reduction~~and we reclassify the redemption value from equity to ~~paid-in capital on its balance sheet at the time the~~liabilities when we call preferred securities are issued and reflects the carrying value of the preferred equity at the stated value. Such issuance costs are recorded as non-cash preferred equity distributions at the time the Company notifies the holders of preferred stock of its intent to redeem such shares.shares for redemption.

~~Net income allocation~~

~~Net income was allocated as follows~~ ~~(in thousands)~~:

For The Three Months

For The Nine Months

Ended September 30,

Ended September 30,

2016

2015

2016

2015
Net income allocable to noncontrolling interests:

Noncontrolling interests—common units
$
5,315

$
6,087

$
13,495

$
14,467
Total net income allocable to noncontrolling interests

5,315

6,087

13,495

14,467
Net income allocable to PS Business Parks, Inc.:

Preferred shareholders

Distributions to preferred shareholders

13,833

15,122

41,498

45,366
Non-cash distributions related to the redemption of

preferred stock

—

2,487

—

2,487
Total net income allocable to preferred shareholders

13,833

17,609

41,498

47,853
Restricted stock unit holders

128

97

387

237
Common shareholders

19,718

22,484

50,017

53,384
Total net income allocable to PS Business Parks, Inc.

33,679

40,190

91,902

101,474
Net income
$
38,994

$
46,277

$
105,397

$
115,941

Net income per common share

~~Per~~Notwithstanding the presentation of income allocations on our consolidated statements of income, net income is allocated to (a) preferred shareholders, for distributions paid, (b) preferred shareholders, to the extent redemption value exceeds the related carrying value (a “Preferred Redemption Allocation”) and (c) restricted share ~~amounts are computed using~~unit holders, for non-forfeitable dividends paid adjusted for participation rights in undistributed earnings. The remaining net income is allocated to the common partnership units and our common shareholders, respectively, based upon the pro-rata aggregate number of ~~weighted average common~~units and shares outstanding. “Diluted” weighted average common shares outstanding includes the dilutive effect of stock options and restricted stock units under the treasury stock method. “Basic” weighted average common shares outstanding excludes such effect. The Company's restricted stock units are participating securities and are included in the computation of basic

Basic and diluted ~~weighted average~~net income per common ~~shares outstanding. The Company’s restricted stock unit holders~~share are ~~paid non-forfeitable dividends in excess of the expense recorded which results in a reduction in~~each calculated based upon net income allocable to common shareholders, divided by (i) in the case of basic net income per common share, weighted average common shares and ~~unit holders.~~(ii) in the case of diluted income per share, weighted average common shares adjusted for the impact, if dilutive, of stock compensation awards outstanding (Note 11).

The following tables set forth the calculation of the components of our basic and diluted income per share that are not reflected on the face of our consolidated statements of income, including the allocation of income to common shareholders and common partnership units, the percentage of weighted average shares and common partnership units, as well as basic and diluted weighted average shares (in thousands):



	For The Three Months				For The Nine Months
	Ended September 30,				Ended September 30,
	2017		2016		2017		2016
Calculation of net income allocable to common shareholders
Net income	$	42,631	$	38,994	$	133,839	$	105,397
Less net income allocated to
Preferred shareholders based upon distributions		(12,590)		(13,833)		(38,472)		(41,498)
Preferred shareholders based upon redemptions		(6,900)		—		(6,900)		—
Restricted stock unit holders		(137)		(128)		(582)		(387)
Net income allocable to common shareholders
and noncontrolling interests		23,004		25,033		87,885		63,512
Net income allocation to noncontrolling interests		(4,866)		(5,315)		(18,610)		(13,495)
Net income allocable to common shareholders	$	18,138	$	19,718	$	69,275	$	50,017

Calculation of common partnership units as a percentage of common share equivalents
Weighted average common shares outstanding		27,226		27,103		27,192		27,076
Weighted average common partnership units outstanding		7,305		7,305		7,305		7,305
Total common share equivalents		34,531		34,408		34,497		34,381
Common partnership units as a percent of common
share equivalents		21.2%		21.2%		21.2%		21.2%

Weighted average common shares outstanding
Basic weighted average common shares outstanding		27,226		27,103		27,192		27,076
Net effect of dilutive stock compensation—based on
treasury stock method using average market price		201		98		207		90
Diluted weighted average common shares outstanding		27,427		27,201		27,399		27,166

Table of Contents

~~Earnings per share has been calculated as follows (in thousands, except per share amounts~~):

For The Three Months

For The Nine Months

Ended September 30,

Ended September 30,

2016

2015

2016

2015
Net income allocable to common shareholders
$
19,718

$
22,484

$
50,017

$
53,384
Weighted average common shares outstanding:

Basic weighted average common shares outstanding

27,103

26,985

27,076

26,956
Net effect of dilutive stock compensation—based on

treasury stock method using average market price

98

64

90

78
Diluted weighted average common shares outstanding

27,201

27,049

27,166

27,034
Net income per common share—Basic
$
0.73

$
0.83

$
1.85

$
1.98
Net income per common share—Diluted
$
0.72

$
0.83

$
1.84

$
1.97

No options were excluded from the computation of diluted net income per share for the three months ended September 30, 2016 as no options were considered anti-dilutive. Options to purchase 25,000 shares were excluded from the computation of diluted net income per share for the nine months ended September 30, 2016 as such options were considered anti-dilutive. Options to purchase 46,000 shares were excluded from the computation of diluted net income per share for the three and nine months ended September 30, 2015 as such options were considered anti-dilutive.

Segment reporting

The Company views its operations as one segment.

Reclassifications

Certain reclassifications have been made to the consolidated financial statements for ~~2015~~2016 and in order to conform to the 2017 presentation, including reclassifying management fee income totaling $130,000 and $389,000 for the three and nine months ended September 30, 2016 ~~presentation.~~into “interest and other income” on our consolidated statements of income.

Recently issued accounting standards

In May 2014 and February 2016, the Financial Accounting Standards Board ~~(“FASB”)~~ issued two Accounting ~~Standard Update~~Standards Updates (“ASU”)s), ASU 2014-09, Revenue from Contracts with Customers (the “Revenue Standard”), and ASU 2016-02, Leases (the “Lease Standard”). These standards apply to substantially all of our revenue generating activities, as well as provide a model to account for the disposition of real estate facilities to non-customers, which ~~amended~~is governed under ASU 2017-05.

The Lease Standard will direct how we account for payments from the ~~existing~~elements of our leases that are generally fixed and determinable at the inception of the lease (“Fixed Lease Payments”) while the Revenue Standard will direct how we account for the non-lease components of our lease contracts, primarily expense reimbursements (“Non-Lease Payments”) and the accounting ~~standards~~ for the disposition of real estate facilities.

The Revenue Standard is effective on January 1, 2018, and generally requires that revenue ~~recognition. The new accounting guidance establishes principles for recognizing revenue~~from Non-Lease Payments be based upon the ~~transfer~~consideration expected from our tenants, and be recognized under various methods depending upon the nature of ~~promised goods~~the underlying expense and the contractual reimbursement arrangement. The standard permits either the retrospective (restatement) method or ~~services~~cumulative effects transition method and allowed for early adoption on January 1, 2017, which we did not elect. We expect to ~~customers,~~use the cumulative effects transition method, which will result in an ~~amount that reflects~~adjustment to our retained earnings effective January 1, 2018 for the cumulative impact of the standard as of December 31, 2017. We do not expect this standard to have a material impact on our accounting for our facility management fees for property management services provided to PS or the disposition of real estate facilities as our accounting policy is consistent with the provisions of the standard. Rental income from leasing arrangements is a substantial portion of our revenues and is specifically excluded from the Revenue Standard and will be governed by the Lease Standard. In conjunction with the adoption of the Lease Standard, we are currently evaluating the impact of the standard as it relates to Non-Lease Payments.

The Lease Standard is effective on January 1, 2019. The standard provides definitional guidance of what constitutes a lease, requiring lessees to recognize most leases on the balance sheet and making certain changes to lessor accounting. For leases in which we are the lessor, we are required to account for Fixed Lease Payments on a straight-line basis, with the expected ~~consideration received~~fixed payments recognized ratably over the term of the lease. The standard also requires capitalization of only the incremental costs incurred in ~~exchange for those goods~~executing each particular lease, such as legal fees to draft a lease or ~~services. This guidance is currently effective for~~commissions based upon a particular lease. Costs that would have been incurred regardless of lease execution, such as allocated costs of internal personnel, are not capitalized. For most leases with a term of greater than 12 months, in which we are the ~~Company’s fiscal year beginning January 1, 2018. Early adoption is permitted for~~lessee, the ~~Company’s fiscal year beginning January 1, 2017.~~present value of future lease payments will be recognized on our balance sheet as a right-of-use asset and related labiality. As of September 30, 2017, the remaining contractual payments under our ground lease agreements aggregated $282,000. The ~~amendment allows for full retrospective adoption applied to all periods presented or~~standard requires a modified retrospective ~~adoption with~~transition approach for all leases existing at or entered into after the ~~cumulative effect~~beginning of ~~initially applying~~ the ~~standard recognized at~~earliest comparative period presented in the financial statements on the date of initial ~~application.~~application and allowed early adoption, which we did not elect. We do not expect that the Lease Standard will impact our accounting for Fixed Lease Payments, because our accounting policy is currently consistent with the provisions of the standard. We are currently evaluating the impact of the standard as it relates to the capitalization of costs associated with executed leases.

Table of Contents

In August, 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which provides guidance on the classification of certain specific cash receipts and cash payments in the statement of cash flows, including, but not limited to, cash distributions received from equity method investees, including unconsolidated joint ventures. The new standard is effective for periods beginning after December 15, 2017, with early adoption permitted and shall be applied retrospectively where practicable. The Company is currently in the process of evaluating the impact of adoption of the new accounting guidance on its consolidated financial statements.

In ~~August, 2014,~~November, 2016, the FASB issued ASU ~~2014-15,~~ 2016-18,~~Disclosure~~ Statement of ~~Uncertainties about an Entity’s Ability to Continue as a Going Concern~~Cash Flows (Topic 230) – Restricted Cash, which ~~is intended~~requires the statements of cash flows to ~~define management’s responsibility~~explain the change during the period in the total cash, cash equivalents, restricted cash and restricted cash equivalents. The new guidance also requires entities to ~~evaluate whether there is substantial doubt about an organization’s ability~~reconcile such total to ~~continue as a going concern for a period~~amounts on the balance sheets and disclose the nature of ~~one year after~~ the ~~date that the financial statements are issued. This~~restrictions. The guidance is effective for ~~annual periods ending after December 15, 2016 and interim periods within annual periods~~public entities for fiscal years beginning after December 15, ~~2016. Early~~2017 and for interim periods therein, with early adoption is permitted. The guidance must be adopted using a modified retrospective approach. The Company ~~anticipates no impact upon~~does not expect the adoption of ~~the new accounting guidance~~this standard to have a material impact on its consolidated financial statements.

In ~~February, 2015,~~January, 2017, the FASB issued ASU ~~2015-02,~~2017-01, ~~Consolidation – Amendments to~~Business Combinations (Topic 805) - Clarifying the ~~Consolidation Analysis~~Definition of a Business~~, which amended~~. Under the ~~existing accounting standards for consolidation under both the variable interest model~~new guidance, a set of transferred assets and ~~the voting model. On January 1, 2016, the Company adopted this guidance and as the Operating Partnership~~activities is ~~already~~

~~Table of Contents~~

~~consolidated in the balance sheets~~not a business when substantially all of the ~~Company, the identification of this entity as a VIE has no impact on the consolidated financial statements~~fair value of the ~~Company. Additionally,~~gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, which we believe will apply to substantially all of our future acquisitions of real estate facilities. Previously, such acquisitions were considered the ~~Company’s accounting for its investment in its joint venture was not impacted by~~acquisition of a business, and transaction costs of such acquisitions were expensed as incurred. Under the ~~adoption~~new guidance, transaction costs will instead be capitalized as part of ~~this guidance.~~

~~In February, 2016,~~ the ~~FASB issued ASU 2016-02,~~ ~~Leases,~~ which amends the existing accounting standards for lease accounting. The accounting applied by a lessor is largely unchanged under this guidance. However, the guidance requires lessees to recognize assets and liabilities for most leases on the balance sheet.purchase price. This ~~guidance~~standard is effective for ~~annual periods~~fiscal years beginning after December 15, ~~2018 and interim periods within annual periods beginning after December 15, 2018. Early~~2017. We early adopted the standard on January 1, 2017; however, the adoption is permitted. The guidance must be adopted using a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company is currently in the process of evaluating the impact of adoption of the new accounting guidance on its consolidated financial statements.

~~In March, 2016, the FASB issued ASU 2016-09,~~ ~~Improvements to Employee Share-Based Payment Accounting~~, to amend the accounting guidance for share-based payment accounting. The guidance is intended to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods and early adoption is permitted. The Company is currently assessing the impact of the guidance on its consolidated financial statements.had no effect because we have not acquired any facilities since January 1, 2017.

3. Real estate facilities

The activity in real estate facilities for the nine months ended September 30, ~~2016~~2017 is as follows (in thousands):

Buildings and

Accumulated

Land

Improvements

Depreciation

Total
Balances at December 31, 2015
$
793,569

$
2,215,515

$
(1,082,603)

$
1,926,481
Acquisition of real estate facilities

5,638

7,637

—

13,275
Capital expenditures, net

—

25,954

—

25,954
Disposals

—

(10,302)

10,302

—
Depreciation and amortization

—

—

(74,886)

(74,886)
Balances at September 30, 2016
$
799,207

$
2,238,804

$
(1,147,187)

$
1,890,824



			Buildings and		Accumulated
	Land		Improvements		Depreciation		Total
Balances at December 31, 2016	$	789,227	$	2,224,522	$	(1,158,054)	$	1,855,695
Capital expenditures		—		39,321		—		39,321
Disposals		—		(9,180)		9,180		—
Depreciation and amortization		—		—		(70,465)		(70,465)
Transfer to properties held for disposition		—		—		25		25
Balances at September 30, 2017	$	789,227	$	2,254,663	$	(1,219,314)	$	1,824,576

The purchase price of acquired properties is ~~recorded~~allocated to land, buildings and improvements (including tenant improvements, unamortized lease commissions, acquired in-place lease values and tenant relationships, if any) ~~and~~, intangible assets and intangible liabilities ~~associated with~~(see Note 2), based upon the ~~value of above-market and below-market leases based on their respective estimated fair values. Acquisition-related costs are expensed as incurred.~~

~~In determining the~~relative fair value of ~~the tangible assets of the acquired properties, management considers the value of the properties as if vacant as of the acquisition date. Management~~each component, which are evaluated independently.

We must make significant assumptions in determining the fair value of assets acquired and liabilities ~~assumed. Using different assumptions in the recording of the purchase cost of the acquired properties would~~assumed, which can affect the recognition and timing of ~~recognition of the related~~ revenue and ~~expenses. Amounts recorded to~~depreciation and amortization expense. The fair value of land ~~are derived from~~is estimated based upon, among other considerations, comparable sales of land within the same region. ~~Amounts recorded to~~The fair value of buildings and improvements, tenant improvements and unamortized lease commissions are based on current market replacement costs and other market information. The amount recorded to acquired in-place leases is determined based on management’s assessment of current market conditions and the estimated lease-up periods for the respective spaces.

On September 28, 2016, the Company acquired two multi-tenant office buildings aggregating 226,000 square feet in Rockville, Maryland, for a purchase price of $13.3 million. The buildings are located within Shady Grove Executive Park, where the Company owns three other buildings comprised of 352,000 square feet.

Table of Contents

~~The following table summarizes the assets acquired and liabilities assumed for the nine months ended September 30, 2016~~ ~~(in thousands)~~:



	~~2016~~
~~Land~~	$	~~5,638~~
~~Buildings and improvements~~		~~7,637~~
~~Below-market in-place lease value~~		~~(25)~~
~~Total purchase price~~		~~13,250~~
~~Net operating assets acquired and liabilities assumed~~		~~(622)~~
~~Total cash paid~~	$	~~12,628~~

~~During the nine months ended September 30, 2015,~~On May 1, 2017, the Company ~~completed the sale~~disposed of ~~assets in Tempe, Arizona, Sacramento, California, Milwaukie, Oregon and Redmond, Washington. The assets sold aggregated 574,000~~Empire Commerce, a two-building single-story office park comprising 44,000 square feet, ~~and generated~~located in Dallas, Texas, for net proceeds of ~~$55.2~~$2.1 million, which resulted in ~~an aggregate~~a net gain of ~~$28.2~~$1.2 million.

On March 31, 2017, the Company sold development rights it held to build medical office buildings on land adjacent to its Westech Business Park in Silver Spring, Maryland for $6.5million. The Company had acquired the development rights as part of its 2006 acquisition of the park. The Company has received net proceeds of $3.9 million, of which $1.5 million was received in prior years and $2.4 million was received in March, 2017. The Company recorded a gain of $3.9 million related to the net proceeds received through September 30, 2017, which are non-refundable. The Company will report an additional gain of $2.5million when the final proceeds are received in the fourth quarter of 2017 and the remaining contingencies have lapsed.

As of September 30, 2017, we have commitments, pursuant to executed leases, to spend $12.7 million in transaction costs, which include tenant improvements and lease commissions.

4. Investment in and advances to unconsolidated joint venture

In 2013, the Company entered into a joint venture known as Amherst JV LLC (the “Joint Venture”)~~, in which it has a 95.0% economic interest,~~ 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 (the “Project”) within ~~its Westpark Business Park~~the Company’s 628,000 square foot office park located in Tysons, Virginia. The Company contributed the site, along with capitalized improvements, to the Joint Venture on October 5, 2015. Demolition, site preparation and construction commenced in October, 2015. The Company’s partnerVirginia (known as “The Mile”). We hold a 95.0% interest in the Joint Venture ~~serves~~with the remaining 5.0% held by the JV Partner. The JV Partner is responsible for the development and construction of the Project, as well as the ~~managing member, with mutual~~leasing and operational management of the Project. We do not control the Joint Venture, when considering, among other factors, that the consent ~~from both the Company and the managing member~~of our JV Partner is required for all significant decisions. ~~As such, the Company accounts~~Accordingly, we account for ~~its~~our investment ~~in the Joint Venture~~ using the equity method.

~~Along with the equity capital~~On October 5, 2015 (the “Contribution Date”), the Company ~~has committed~~contributed the site and improvements to the Joint ~~Venture, the Company has also agreed to~~Venture. We provide the Joint Venture with a construction loan in the amount of $75.0 ~~million. The Joint Venture will pay~~million bearing 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. 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. 2019 with two one-year extension options.

The aggregate amount of development costs are estimated to be $105.6 million (excluding unrealized land appreciation)~~, of which the~~. The Company is committed to funding $75.0 million through athe construction loan in addition to ~~total~~its equity ~~and capital contributions~~contribution of $28.5 million, which includes a land basis of $15.3 ~~million, to~~million. The Project delivered its first completed units in May, 2017, with final completion date of the ~~Joint Venture.~~overall Project expected during the fourth quarter of 2017.

We have reflected the aggregate cost of the contributed site and improvements, our equity contributions and loan advances, as well as capitalized third party interest we incurred as investment in and advances to unconsolidated joint venture. The Company’s investment in and advances to unconsolidated joint venture was ~~$55.5~~$96.6 million and ~~$26.7~~$67.2 million as of September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively. For the nine months ended September 30, 2017, we made loan advances of $29.7 million and capitalized $506,000 of interest. For the nine months ended September 30, 2016, the Company made loan advances to the Joint Venture of $22.3 million, capital contributions of $5.7 million and capitalized $854,000 of interest. ~~For~~

As of September 30, 2017, all 395 units have been completed. During the three and nine months ended September 30, ~~2015,~~2017, the Company ~~capitalized costs~~recorded an equity loss in the unconsolidated joint venture of ~~$2.8 million related to this development, of which $813,000 was related to capitalized interest. The Company made no loan advances to the Joint Venture in 2015.~~$376,000 and $758,000, respectively.

Table of Contents

5. Leasing activity

The Company leases space in its real estate facilities to tenants primarily under non-cancelable leases generally ranging from one to 10 years. Future minimum rental revenues, excluding recovery of operating expenses under these leases, are as follows as of September 30, ~~2016~~2017 (in thousands):



2016	$	73,197
2017		257,375
Remainder of 2017			$	75,498
2018		193,217		267,885
2019		130,527		196,801
2020		84,301		133,240
2021				92,451
Thereafter		157,499		168,364
Total	$	896,116	$	934,239

In addition to minimum rental payments, certain tenants reimburse the Company for their pro rata share of specified operating expenses. Such reimbursements amounted to ~~$20.3~~$22.6 million and ~~$19.5~~$20.3 million for the three months ended September 30, ~~2016~~2017 and ~~2015,~~2016, respectively, and ~~$61.6~~$68.4 million and ~~$59.5~~$61.6 million for the nine months ended September 30, ~~2016~~2017 and ~~2015,~~2016, respectively. These amounts are included as rental income in the accompanying consolidated statements of income.

Leases accounting for ~~3.3%~~3.0% of total leased square footage are subject to termination options, of which ~~1.5%~~1.2% of total leased square footage have termination options exercisable through December 31, ~~2016.~~2017. In general, these leases provide for termination payments should the termination options be exercised. The future minimum rental revenues in the above table assume such options are not exercised.

~~The Company has~~We have a line of credit (the “Credit Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”). The Credit Facility has a borrowing limit of $250.0 million and expires ~~May 1, 2019.~~January 10, 2022. The rate of interest charged on borrowings is based on the LIBOR plus ~~0.875%~~0.80% to LIBOR plus ~~1.70%~~1.55% depending on the Company’s credit ratings. Currently, the Company’s rate under the Credit Facility is LIBOR plus ~~0.875%~~0.825%. In addition, the Company is required to pay an annual facility fee ranging from ~~0.125%~~0.10% to 0.30% of the borrowing limit depending on the Company’s credit ratings (currently 0.125%). AsWe paid $613,000 of ~~September 30, 2016, the Company had $60.0 million outstanding on the Credit Facility at an interest rate of 1.36%. Subsequent to September 30, 2016, the Company repaid the outstanding balance~~loan origination costs in ~~full.~~January, 2017. The Company had no balance outstanding on the Credit Facility at September 30, 2017 and December 31, ~~2015.~~2016. Subsequent to September 30, 2017, the Company borrowed net $80.0 million on the Credit Facility. The Company had ~~$596,000~~$979,000 and ~~$769,000~~$539,000 of unamortized ~~commitment fees~~loan origination costs as of September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively, which is included in other assets in the accompanying consolidated balance sheets. The Credit Facility requires ~~the Company~~us to meet certain covenants, all of which ~~the Company was~~we were in compliance with as of September 30, ~~2016.~~2017. Interest on outstanding borrowings is payable monthly.

~~On June 1, 2016, the Company repaid in full the $250.0 million mortgage note which had a fixed interest rate of 5.45%.~~

~~As described in Note 2,~~Noncontrolling interests represent 7,305,355 common partnership units of the ~~Company reports noncontrolling interests within equity~~OP owned by PS. Each common partnership unit receives a cash distribution equal to the dividend paid on our common shares and is redeemable at PS’s option.

If PS exercises its right of redemption, at PSB’s option (a) PS will receive one common share from us for each common partnership unit redeemed, or (b) PS will receive cash from us for each common partnership unit generally equal to the market value of a common share (as defined in the ~~consolidated financial statements, but separate from the Company’s shareholders’ equity. In addition, net income allocable~~Operating Partnership Agreement). We can prevent redemptions that we believe would violate either our articles of incorporation or securities laws, cause PSB to ~~noncontrolling interests is shown~~no longer qualify as a ~~reduction from net income~~REIT, or could result in ~~calculating net income allocable to common shareholders.~~the OP no longer being treated as a partnership for federal tax purposes.

~~Common~~In allocating net income and presenting equity, we treat the common partnership units as if converted to common shares. Accordingly, they receive the same net income allocation per unit as a common share and are adjusted each period to have the same equity per unit as a common share.

The Company presents the accounts of PSB and the Operating Partnership on a consolidated basis. Ownership interests in the Operating Partnership that can be redeemed for common stock, other than PSB’s interest, are classified as noncontrolling interests—common units in the consolidated financial statements. Net income allocable to noncontrolling interests—common units consists of the common units’ share of the consolidated operating results after allocation to preferred units and shares. Beginning one year from the date of admission as a limited partner (common units) and subject to certain limitations described below, each limited partner other than PSB has the right to require the redemption of its partnership interest.

A limited partner (common units) that exercises its redemption right will receive cash from the Operating Partnership in an amount equal to the market value (as defined in the Operating Partnership Agreement) of the partnership interests redeemed. In lieu of the Operating Partnership redeeming the common units for cash, PSB, as general partner, has the right to elect to acquire the partnership interest directly from a limited partner exercising its redemption right, in exchange for cash in the amount specified above or by issuance of one share of PSB common stock for each unit of limited partnership interest redeemed.

A limited partner (common units) cannot exercise its redemption right if delivery of shares of PSB common stock would be prohibited under the applicable articles of incorporation, or if the general partner believes that there is a risk that delivery of shares of common stock would cause the general partner to no longer qualify as a REIT, would cause a violation of the applicable securities laws, or would result in the Operating Partnership no longer being treated as a partnership for federal income tax purposes.

At September 30, 2016, there were 7,305,355 common units owned by PS, which are accounted for as noncontrolling interests. Combined with PS’s existing common stock ownership, on a fully converted basis, PS has a combined ownership of 42.0% (or 14.5 million shares) of the Company’s common equity.

~~The Operating Partnership manages~~We manage industrial, office and retail facilities ~~for PS. These facilities, all located~~ in the ~~United States, operate~~U.S. for PS under both the “Public Storage” or “PS Business Parks” ~~names.~~ names (the “PS Management Agreement”). The PS Management Agreement can be cancelled by either party with seven years notice. Under PS’s supervision, we coordinate and assist in rental and marketing activities, property maintenance and other operational activities, including the selection of vendors, suppliers, employees and independent contractors. We receive a management fee based upon a percentage of revenues. Management fee revenues were $126,000 and $130,000 for the three months ended September 30, 2017 and 2016, respectively, and $378,000 and $389,000 for the nine months ended September 30, 2017 and 2016, respectively. We allocate certain operating expenses to PS related to the management of these properties, including payroll and other business expenses, totaling $134,000 and $142,000 for the three months ended September 30, 2017 and 2016, respectively, and $401,000 and $416,000 for the nine months ended September 30, 2017 and 2016, respectively. These amounts are included in “interest and other income” on our consolidated statements of income.

The PS Business Parks name and logo are owned by PS and licensed to ~~the Company~~us under a non-exclusive, royalty-free license agreement. The license can be terminated by either party for any reason with six months written notice.

Under the property management contract with PS, the Operating Partnership is compensated based on a percentage of the gross revenues of the facilities managed. Under the supervision of the property owners, the Operating Partnership coordinates rental policies, rent collections, marketing activities, the purchase of equipment and supplies, maintenance activities, and the selection and engagement of vendors, suppliers and independent contractors. In addition, the Operating Partnership assists and advises the property owners in establishing policies for the hire, discharge and supervision of employees for the operation of these facilities, including property managers and leasing, billing and maintenance personnel.

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. Management fee revenues under this contract were $130,000 for the three months ended September 30, 2016 and 2015 and $389,000 and $410,000 for the nine months ended September 30, 2016 and 2015, respectively.

PS also provides property management services for the self-storage component of two assets ~~owned by the Company. These self-storage facilities,~~we own, that are located in ~~Palm Beach County,~~ Florida and operate under the “Public Storage” name.

Under the property management contract, PS is compensated based on a percentage of the gross revenues of the facilities managed. Under the supervision of the Company, PS coordinates rental policies, rent collections, marketing activities, the purchase of equipment and supplies, maintenance activities, and the selection and engagement of vendors, suppliers and independent contractors. In addition, PS is responsible for establishing the policies for the hire, discharge and supervision of employees for the operation of these facilities, including on-site managers, assistant managers and associate managers.

Either the Company or PS can cancel the property management contract upon 60 days’ notice. Under our supervision, PS coordinates and assists in rental and marketing activities, property maintenance and other operational activities, including the selection of vendors, suppliers, employees and independent contractors. Management fee expenses ~~under the contract~~ were ~~$22,000~~$24,000 and ~~$21,000~~$22,000 for the three months ended September 30, ~~2016~~2017 and ~~2015,~~2016, respectively, and ~~$64,000~~$69,000 and ~~$59,000~~$64,000 for the nine months ended September 30, 2017 and 2016, respectively. Additionally, PS allocated certain operating expenses to us related to the management of these properties, including payroll and ~~2015,~~other business expenses, totaling $54,000 and $156,000 for the three and nine months ended September 30, 2017, respectively, and $49,000 and $153,000 for the three and nine months ended September 30, 2016, respectively. These amounts are included under “cost of operations” on our consolidated statements of income.

Pursuant to a cost sharing and administrative services agreement, ~~the Company shares costs with~~we and PS ~~for~~share certain administrative services and ~~rental of~~ corporate office space, which are allocated tobetween the Company and PS in accordance with a methodology intended to fairly allocate those costs. ~~These costs~~Costs allocated to the Company totaled ~~$123,000~~$132,000 and ~~$117,000~~$123,000 for the three months ended September 30, ~~2016~~2017 and ~~2015,~~2016, respectively, and ~~$370,000~~$397,000 and ~~$352,000~~$370,000 for the nine months ended September 30, 2017 and 2016, respectively. Costs allocated to PS totaled $8,000 and ~~2015,~~$23,000 for the three and nine months ended September 30, 2017, respectively.

The Company had net amounts due to PS of ~~$131,000 at September 30, 2016~~$30,000 and due from PS of ~~$57,000~~$295,000 at September 30, 2017 and December 31, ~~2015,~~2016, respectively, for these contracts, as well as for certain operating expenses paid by the Company on behalf of PS.

As of September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, the Company had the following series of preferred stock outstanding:

~~On October 20, 2016, the Company issued $189.8 million or 7,590,000~~During September, 2017, we called for a partial redemption of 8,800,000 of our outstanding 14,000,000 depositary shares ~~each~~ representing ~~1/1,000 of a share of the 5.20%~~interests in our 6.0% Cumulative Preferred Stock, Series W,T, at par. The aggregate redemption amount of $220.0 million is scheduled to be paid on October 30, 2017 to the holders of the depositary shares. We recorded a Preferred Redemption Allocation of $6.9 million for the three and nine months ended September 30, 2017 and reclassified the shares from equity to “preferred stock called for redemption” on our consolidated balance sheets at September 30, 2017.

On September 21, 2017, we issued $230.0 million or 9,200,000 depositary shares representing interests in our 5.25% Cumulative Preferred Stock, Series X, at $25.00 per depositary share. The ~~5.20%~~5.25% Series WX Cumulative Redeemable Preferred Units are non-callable for five years and have no mandatory redemption. We received $222.2 million in net proceeds.

~~During~~On December 7, 2016, we called our 6.45% Cumulative Preferred Stock, Series S, for redemption at par and completed the redemption on January 18, 2017. We recorded a Preferred Redemption Allocation of $7.3 million in the three months ended ~~September 30, 2015,~~December 31, 2016 and reclassified the ~~Company~~shares from equity to “preferred stock called for ~~the redemption of its 6.875% Cumulative Preferred Stock, Series R,~~redemption” on our consolidated balance sheets at ~~its par value of $75.0~~December 31, 2016.

We paid $12.6 million and subsequently completed the redemption on October 15, 2015. The Company reported the non-cash distributions of $2.5 million, representing the original issuance costs, as a reduction of net income allocable to common shareholders and unit holders for the three and nine months ended September 30, 2015.

~~The Company recorded~~ $13.8 ~~million and $17.6~~ million in distributions to ~~its~~our preferred shareholders for the three months ended September 30, ~~2016~~2017 and ~~2015,~~2016, respectively, and ~~$41.5~~$38.5 million and ~~$47.9~~$41.5 million in distributions to ~~its~~our preferred shareholders for the nine months ended September 30, ~~2016~~2017 and ~~2015,~~2016, respectively.

our preferred stock have general preference rights with respect to liquidation, quarterly distributions and any accumulated unpaid distributions. Holders of ~~the Company’s~~our preferred stock will not be entitled to vote on most matters, except under certain conditions. In the event of a cumulative arrearage equal to six quarterly dividends, the holders of the preferred stock will have the right to elect two additional members to serve on the Company’s Board of Directors (the “Board”) until all events of default have been cured. At September 30, ~~2016,~~2017, there were no dividends in arrears.

Except under certain conditions relating to the Company’s qualification as a REIT, the preferred stock is not redeemable prior to the previously noted redemption dates. On or after the respective redemption dates, the respective series of preferred stock will be redeemable, at the option of the Company, in whole or in part, at $25.00 per depositary share, plus any accrued and unpaid dividends. ~~The Company had $29.3 million~~

~~No shares of common stock were repurchased under~~During the ~~board-approved common stock repurchase program during either of the nine~~three months ended ~~September 30, 2016 and 2015.~~March 31, 2017, the Board increased our quarterly dividends from $0.75 per common share to $0.85 per common share.

~~The Company~~We paid $23.2 million ($0.85 per common share) and $20.3 million ($0.75 per common share) ~~and $16.2 million ($0.60 per common share)~~ in distributions to ~~its~~our common shareholders for the three months ended September 30, 2017 and 2016, respectively, and ~~2015, respectively,~~$69.4 million ($2.55 per common share) and $60.9 million ($2.25 per common share) ~~and $43.2 million ($1.60 per common share)~~ in distributions to ~~its~~our common shareholders for the nine months ended September 30, ~~2016~~2017 and ~~2015,~~2016, respectively.

In addition to common and preferred stock, the Company is authorized to issue 100.0 million shares of Equity Stock. The Articles of Incorporation provide that Equity Stock may be issued from time to time in one or more series and give the Board ~~of Directors~~ broad authority to fix the dividend and distribution rights, conversion and voting rights, redemption provisions and liquidation rights of each series of Equity Stock.

The Company currently is neither subject to any other material litigation nor, to management’s knowledge, is any material litigation currently threatened against the Company other than routine litigation and administrative proceedings arising in the ordinary course of business.

Under various share-based compensation plans, PSB has a 2003 Stock Option and Incentive Plan (the “2003 Plan”) and a 2012 Equity and Performance-Based Incentive Compensation Plan (the “2012 Plan”) covering 1.5 million and 1.0 million shares of PSB’s common stock, respectively. Under the 2003 Plan and 2012 Plan, PSB has grantedgrants non-qualified options to purchase the Company’s common shares at a price not less than fair value on the date of grant, as well as restricted stock units (“RSUs”), to certain directors, officers and key employees to purchase shares of PSB’s common stock at a price not less than the fair market value of the common stock at the date of grant. Additionally, under the 2003 Plan and 2012 Plan, PSB has granted restricted shares of common stock to certain directors and restricted stock units to officers and key employees.

The ~~weighted average grant date~~service period for stock options and RSUs begins when (i) the Company and the recipient reach a mutual understanding of the key terms of the award, (ii) the award has been authorized, (iii) the recipient is affected by changes in the market price of our stock and (iv) it is probable that any performance conditions will be met, and ends when the stock option or RSU vests.

We amortize the fair value of awards at the beginning of the service period as compensation expense. For awards that are earned solely upon the passage of time and continued service, the entire cost of the award is amortized on a straight-line basis over the service period. For awards with performance conditions, the individual cost of each vesting is amortized separately over each individual service period (the “accelerated attribution” method).

In amortizing share-based compensation expense, we do not estimate future forfeitures in advance. Instead, we reverse previously amortized share-based compensation expense with respect to grants that are forfeited in the period the employee terminates employment.

Stock options ~~granted during~~vest over a five-year period, expire after the grant date and the exercise price is equal to the closing trading price of our common shares on the grant date. Employees cannot require the Company to settle their award in cash. We use the Black-Scholes option valuation model to estimate the fair value of our stock options.

For the three and nine months ended September 30, ~~2016~~2017, respectively we recorded $53,000 and ~~2015 was $9.05 per share~~$156,000 in compensation expense related to stock options, as compared to $51,000 and ~~$8.49 per share, respectively. The Company has calculated~~$229,000 for the fair value of each option grant on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants during the nine months ended September 30, 2016 and 2015, respectively: a dividend yield of 2.9% and 2.5%; expected volatility of 15.5% and 16.1%; expected life of five years; and risk-free interest rates of 1.1% and 1.4%.same periods in 2016.

~~The weighted average grant date fair value of restricted stock units granted during~~During the nine months ended September 30, ~~2016~~2017, 16,000 stock options were granted and ~~2015 was $87.45 and $82.78, respectively.~~69,676 options were exercised. A total of 175,979 options were outstanding at September 30, 2017 (229,655 at December 31, 2016).

RSUs generally vest ratably over a five-year period from the grant date. The grantee receives dividends for each outstanding RSU equal to the per-share dividends received by our common shareholders. We expense any dividends previously paid upon forfeiture of the related RSU. Upon vesting, the grantee receives common shares equal to the number of vested RSUs, less common shares withheld in exchange for tax deposits made by the Company ~~calculated~~to satisfy the grantee’s statutory tax liabilities arising from the vesting. The fair value of ~~each restricted stock unit grant using~~our RSUs is determined based upon the ~~market value~~applicable closing trading price of our common shares on the date of grant.

AtFor the three and nine months ended September 30, 2017, respectively, we recorded a net reversal of $521,000 and expense of $2.9 million in compensation expense related to RSUs, as compared to expense of $1.7 million and $8.5 million for the same periods in 2016. In conjunction with the departure of our Chief Financial Officer (“CFO”), the Company recorded a reversal of stock compensation of $1.9 million in RSU expense related to RSUs under our LTEIP (see below) during the third quarter of 2017. The 2016 ~~there was a combined~~amount includes $2.0 million in additional RSU expense related to RSUs under our LTEIP expected to be issued to our former Chief Executive Officer (“CEO”).

During the nine months ended September 30, 2017, 110,750 RSUs were granted, 15,806 RSUs were forfeited and 76,994 RSUs vested. This vesting resulted in the issuance of 43,223 common shares. In addition, tax deposits totaling $3.9 million ($1.9 million for the same period in 2016) were made on behalf of employees in exchange for 33,771 common shares withheld upon vesting. A total of ~~1.2 million options and restricted stock units authorized to be granted.~~

~~Information with respect to~~162,643 RSUs were outstanding ~~options and nonvested restricted stock units granted under the 2003 Plan and 2012 Plan is as follows:~~at September 30, 2017 (144,693 at December 31, 2016).

Effective March, 2014, the Company entered into a performance-based restricted stock unit program, the Senior Management Long-Term Equity Incentive Program for 2014-2017 (“LTEIP”), with certain employees of the Company. Under the LTEIP, the Company established three levels of targeted restricted stock unit awards for certain employees, which would be earned only if the Company achieved one of three defined targets during 2014 to 2017. Under the LTEIP there is an annual award following the end of each of the four years in the program, with the award subject to and based on the achievement of total return targets during the previous year, as well as an award based on achieving total return targets during the cumulative four-year period 2014-2017. In the event the minimum defined target is not achieved for an annual award, the restricted stock units allocated to be awarded for such year are added to the restricted stock units that may be received if the four-year target is achieved. All restricted stock unit awards under the LTEIP vest in four equal annual installments beginning from the date of award. Up to ~~99,150~~94,150 restricted stock units would be awarded for each of the four years assuming achievement was met and up to ~~92,900~~81,800 restricted stock units would be awarded for the cumulative four-year period assuming achievement was met. Compensation expense is recognized based on the restricted stock units expected to be awarded based on the target level that is expected to be achieved. ~~Net~~The compensation expense ~~of $1.6 million~~ and ~~$1.7 million related~~RSU counts with respect to the LTEIP was recognized during the three months ended September 30, 2016 and 2015, respectively, and $8.1 million and $6.2 million for the nine months ended September 30, 2016 and 2015, respectively. Included in the 2016 year to date amount, the Company recorded a net non-cash stock compensation charge of $2.0 million during the second quarter of 2016 related to a change in senior management and the future issuance of restricted stock units our former Chief Executive Officer will receive under the Company’s LTEIP.

In connection with the LTEIP, targets for 2015 were achieved at the highest threshold total return level. As such, 99,150 restricted stock units were granted during the nine months ended September 30, 2016 at a weighted average grant date fair value of $83.59.

Included in the Company’s consolidated statements of income for the three months ended September 30, 2016 and 2015, was $51,000 and $42,000, respectively, in net compensation expense related to stock options. Net compensation expense of $229,000 and $218,000 related to stock options was recognized during the nine months ended September 30, 2016 and 2015, respectively. Net compensation expense of $1.7 million and $1.8 million related to restricted stock units was recognized during the three months ended September 30, 2016 and 2015, respectively. Net compensation expense of $8.5 million and $8.7 million related to restricted stock units was recognized during the nine months ended September 30, 2016 and 2015, respectively.

As of September 30, 2016, there was $588,000 of unamortized compensation expense related to stock options expected to be recognized over a weighted average period of 3.7 years. As of September 30, 2016, there was $15.3 million of unamortized compensation expense related to restricted stock units expected to be recognized over a weighted average period of 3.9 years.

Cash received from 49,882 stock options exercised during the nine months ended September 30, 2016 was $3.0 million. Cash received from 78,790 stock options exercised during the nine months ended September 30, 2015 was $4.0 million. The aggregate intrinsic value of the stock options exercised was $2.4 million and $2.0 million during the nine months ended September 30, 2016 and 2015, respectively.

During the nine months ended September 30, 2016, 47,779 restricted stock units vested; in settlement of these units, 28,046 shares were issued, net of shares applied to payroll taxes. The aggregate fair value of the shares vested for the nine months ended September 30, 2016 was $4.7 million. During the nine months ended September 30, 2015, 25,384 restricted stock units vested; in settlement of these units, 15,734 shares were issued, net of shares applied to payroll taxes. The aggregate fair value of the shares vested for the nine months ended September 30, 2015 was $2.0 million.

In April, 2015, the shareholders of the Company approved the issuance of up to 130,000 shares of common stock under the Retirement Plan for Non-Employee Directors (the “Director Plan”). Under the Director Plan, the Company grants 1,000 shares of common stock for each year served as a director up to a maximum of 8,000 shares issued upon retirement. The Company recognizes compensation expense over the requisite service period. As a result,are included in the Company’s consolidated statements of income was $85,000 and $79,000 in compensation expense for the three months ended September 30, 2016 and 2015, respectively, and $254,000 and $237,000 for the nine months ended September 30, 2016 and 2015, respectively. As of September 30, 2016 and 2015, there was $972,000 and $1.3 million, respectively, of unamortized compensation expense related to these shares. In April, 2016, the Company issued 8,000 shares to a director upon retirement with an aggregate ~~fair value of $775,000. No shares were issued during the nine months ended September 30, 2015.~~RSU amounts disclosed above.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements: Forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, are made throughout this Quarterly Report on Form 10-Q. 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,”~~“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: (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 (“REIT”);~~REIT under the Internal Revenue Code of 1986, as amended; (f) the economic health of our tenants; (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 “Part I, Item 1A. Risk Factors” in our annual report on Form 10-K for the year ended December 31, ~~2015.~~2016. 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.

Our accounting policies are described in Note 2 to the consolidated financial statements included in this Form 10-Q. We believe the following are our critical accounting policies, because they have a material impact on the portrayal of our financial condition and results, and they require us to make judgments and estimates about matters that are inherently uncertain.

Income Tax Expense: We have elected to be treated as a REIT, as defined in the Internal Revenue Code of 1986, as amended (the “Code”). As a REIT, we do not incur federal income tax on our REIT taxable income that is fully distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and if we meet certain organizational and operational rules. We believe we have met these REIT requirements for all periods presented herein. Accordingly, we have recorded no federal income tax expense related to our REIT taxable income.

Our evaluation that we have met the REIT requirements could be incorrect, because compliance with the tax rules requires factual determinations, and circumstances we have not identified could result in noncompliance with the tax requirements in current or prior years. For any taxable year that we fail to qualify as a REIT and for which applicable statutory relief provisions did not apply, we would be taxed at the regular corporate rates on all of our taxable income for at least that year and the ensuing four years, we could be subject to penalties and interest, and our net income would be materially different from the amounts estimated in our consolidated financial statements.

Accounting for Acquired Real Estate Facilities: We estimate the fair values of the land, buildings, intangible assets and intangible liabilities for purposes of allocating the purchase price. Such estimates are based upon many assumptions and judgments, including (i) market rates of return and capitalization rates on real estate and intangible assets, (ii) building and material cost levels, (iii) comparisons of the acquired underlying land parcels to recent land transactions, (iv) estimated market rent levels and (v) future cash flows from the real estate and the existing tenant base. Others could come to materially different conclusions as to the estimated fair values, which would result in different depreciation and amortization expense, rental income, gains and losses on sale of real estate assets, and real estate and intangible assets.

Allowance for Doubtful Accounts: Tenant receivables consist primarily of amounts due for contractual lease payments, reimbursements of common area maintenance expenses, property taxes and other expenses recoverable from tenants. Deferred rent receivable represents the amount that the cumulative straight-line rental income recorded to date exceeds cash rents billed to date under the lease agreement. Determination of the adequacy of allowances for doubtful accounts requires significant judgments and estimates. Others could come to materially different conclusions regarding the adequacy of our allowance for doubtful accounts. Significant unreserved bad debt losses could materially impact our net income.

Impairment of Long-Lived Assets: The analysis of impairment of our long-lived assets involves identification of indicators of impairment, projections of future operating cash flows and estimates of fair values or selling prices, all of which require significant judgment and subjectivity. Others could come to materially different conclusions. In addition, we may not have identified all current facts and circumstances that may affect impairment. Any unidentified impairment loss, or change in conclusions, could have a material adverse impact on our net income.

Accrual for Uncertain and Contingent Liabilities: We accrue for certain contingent and other liabilities that have significant uncertain elements, such as property taxes, performance bonuses and other operating expenses, as well as other legal claims and disputes involving customers, employees, governmental agencies and other third parties. We estimate such liabilities based upon many factors such as assumptions of past and future trends and our evaluation of likely outcomes. However, the estimates of known liabilities could be incorrect or we may not be aware of all such liabilities, in which case our accrued liabilities and net income could be misstated.

AsOur overall operating results are impacted primarily by the performance of our existing real estate facilities, which at September 30, ~~2016, the Company owned and operated 28.2~~2017 are comprised of 28.0 million rentable square feet of multi-tenant flex, industrial and office properties concentrated ~~primarily~~ in six ~~states. All operating metrics discussed~~states and a 95.0% interest in ~~this section as~~395 apartments. Accordingly, a significant degree of management attention is paid to maximizing the cash flow from our existing real estate portfolio. We also acquire properties we believe will create long-term value, and ~~for~~from time to time we dispose of properties which no longer fit within the three and nine months ended September 30, 2015 exclude sold assets. Management believes excluding the results of such assets provides the most relevant perspective on the ongoing operations of the Company. Please refer to “Part I, Item 1. Financial Statements” included in this Quarterly Report on Form 10-Q for financial metrics that include results from sold assets.Company’s strategic objectives.

Existing Real Estate Facilities:The ~~Company focuses on increasing profitability~~operating results of our existing real estate facilities are substantially influenced by demand for rental space within our properties and ~~cash flow aimed at maximizing shareholder value. The Company strives~~our markets, which impacts occupancy, rental rates and capital requirements. We strive to maintain high occupancy levels while increasing rental rates and minimizing capital expenditures when market conditions allow, although the Company may decrease rental rates in markets where conditions require. ~~The Company also acquires properties it believes will create long-term value,~~Management’s initiatives and ~~from time~~strategies with respect to ~~time disposes of properties~~our existing real estate facilities which no longer fit within the Company’s strategic objectives. Operating results are driven primarily by income from rental operations and are therefore substantially influenced by demand for rental space within our properties and our markets, which impacts occupancy, rental rates and capital requirements.

During the first nine months of 2016, the Company executed leases comprising 5.5 million square feet of space including 3.8 million square feet of renewals of existing leases and 1.7 million square feet of new leases. Overall, the change in rental rates for the Company continued to improve. See further discussion of operating results below.

~~Critical Accounting Policies and Estimates:~~ ~~Our accounting policies~~ are described in Note 2 to the consolidated financial statements included in this Quarterly Report on Form 10-Q. We believe our most critical accounting policies relate to revenue recognition, property acquisitions, allowance for doubtful accounts, impairment of long-lived assets, depreciation, accruals of operating expenses and accruals for contingencies, each of which are more ~~fully described in “Part I, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”~~detail in our ~~annual report on~~December 31, 2016 Form 10-K, include incentivizing our personnel to maximize the return on investment for ~~the year ended December 31, 2015.~~ each lease transaction and providing a superior level of service to our customers.

~~Effect~~Acquisitions of ~~Economic Conditions on the Company’s Operations:~~ During the first nine months of 2016, most markets continued to reflect favorable conditions allowing for stable and improving occupancy as well as increasing rental rates. With the exception of the Virginia and Maryland markets, new rental rates for the Company improved

over expiring rental rates on executed leases as economic conditions and tenant demand remained healthy. The Virginia and Maryland markets continue to experience soft market conditions as evidenced by continued pressure on occupancy and rental rates. In these markets, rental rates on executed leases declined 7.7% and 5.2%, respectively, over expiring rents for the nine months ended September 30, 2016. Given lease expirations of 1.2 million square feet in Virginia and 418,000 square feet in Maryland through December 31, 2017, the Company may continue to experience a decrease in rental income in these markets.

~~Tenant Credit Risk:~~Real Estate Facilities: ~~The Company historically has experienced a low level~~We also seek to grow our operations through acquisitions of write-offs of uncollectable rents, but there is inherent uncertainty in a tenant’s ability to continue paying rent and meet its full lease obligation. The table below summarizes the impact to the Company from tenants’ inability to pay rent or continue to meet their lease obligations ~~(in thousands)~~:

As of October 24, 2016, the Company had 12,000 square feet of leased space occupied by tenants that are protected by Chapter 11 of the U.S. Bankruptcy Code. From time to time, tenants contact us, requesting early termination of their lease, reductions in space under lease, or rent deferment or abatement. At this time, the Company cannot anticipate what impact, if any, the ultimate outcome of these discussions will have on our future operating results.

~~Company Performance and Effect of Economic Conditions on Primary Markets:~~ During the nine months ended September 30, 2016, initial rental rates on new and renewed leases within the Company’s total portfolio increased 5.2% over expiring rents, an improvement from the year ended December 31, 2015 in which initial rental rates on new and renewed leases increased 4.4%. The Company’s Same Park (defined below) occupancy rate at September 30, 2016 was 94.5%, compared to 93.7% at September 30, 2015. The Company’s operations are substantially concentrated in eight regions. Each of the eight regions in which the Company owns assets is subject to its own unique market influences. See “Supplemental Property Data and Trends” below for more information on regional operating data.

~~Effect of Acquisitions and Dispositions ofProperties on the Company’s Operations:~~ ~~The Company is focused on growing its operations by looking for opportunities to expand its presence in existing and new markets through strategic acquisitions that meet~~facilities generally consistent with the Company’s focus on ~~multi-tenant flex, industrial and office~~owning concentrated business parks ~~in markets where it has or may obtain a substantial market presence. The Company may also from time to time dispose~~with easily configurable space. In the third quarter of ~~assets based on market conditions.~~

~~On September 28,~~ 2016, ~~the Company~~we acquired two multi-tenant office buildings aggregating 226,000 square feet in Rockville, Maryland for a purchase price of $13.3 million. The ~~buildings, which were~~occupancy rate has increased from 18.5% ~~leased at~~on the ~~time~~date of acquisition ~~are located within Shady Grove Executive Park, where the Company owns three other buildings comprised of 352,000 square feet, which were 86.4% leased~~to 31.6% as of September 30, ~~2016.~~ 2017. These buildings are located within The Grove 270 (formerly Shady Grove Executive Park) where we already owned three substantially fully-leased buildings aggregating 352,000 square feet. We continue to seek to acquire additional facilities in our existing markets and generally in proximity to our existing facilities; however, there can be no assurance that we will acquire additional facilities that meet our risk-adjusted return and underwriting requirements.

Development or redevelopment of real estate facilities: We also may seek to redevelop our existing real estate. We own a large contiguous block of real estate (628,000 rentable square feet on 44.5 acres of land) located within The Mile in Tysons, Virginia. We demolished one of our existing office buildings in The Mile and are building a multi-family building (the “Highgate Development”), with completion in stages starting in May, 2017 through the fourth

quarter of 2017. The total estimated investment upon completion, including the fair value of existing land, will be approximately $117.2 million.

While multi-family real estate is not a core asset for us, we determined that multi-family real estate represented a unique opportunity and the highest and best use of ~~September 30, 2016,~~this parcel. We have partnered through a joint venture with a local developer and operator of multi-family space in order to leverage their operational experience. See “Analysis of Items Not Included in Operating Income – Equity in loss of unconsolidated joint venture” below and Note 4 to our consolidated financial statements for more information on the ~~blended occupancy rate~~Highgate Development.

We do not consolidate the joint venture that holds the Highgate Development; accordingly, our share of net loss is reflected under “equity in loss of unconsolidated joint venture.”

We have an additional 123,000 square foot office building located within The Mile that we are seeking to demolish in order to construct another multi-family complex on the ~~six assets acquired during 2014~~parcel. This parcel is reflected on our consolidated balance sheets as land and ~~2016, which comprise the 904,000 square feet~~building held for development. The scope and timing of ~~Non-Same Park portfolio (defined below), was 78.5% compared~~development of this site is subject to a ~~blended occupancy rate~~variety of ~~39.7% at the time~~contingencies, including approval of ~~acquisition. The table below contains the assets acquired during 2014 and 2016~~ ~~(dollars and square feet in thousands)~~:entitlement. We do not expect that development will commence prior to December 31, 2018.

~~During the nine months ended September 30, 2015, the Company~~Dispositions of Real Estate Facilities: In 2014, we completed ~~the sale of assets~~a plan to exit non-strategic markets in ~~Tempe, Arizona,~~ Sacramento California, ~~Milwaukie,~~ Oregon and ~~Redmond, Washington. The~~Arizona. We do not expect to exit any additional markets. However, we may from time to time dispose of individual real estate assets ~~sold aggregated 574,000~~based on market conditions, fit with our existing portfolio or other reasons. On May 1, 2017, we disposed of Empire Commerce, a two-building single-story office park comprising 44,000 square feet, ~~and generated~~located in Dallas, Texas, for net proceeds of ~~$55.2~~$2.1 million, which resulted in ~~an aggregate~~a net gain of ~~$28.2~~$1.2 million.

In 2013, the Company entered into a joint venture, in which it will maintain 95.0% economic interest, known as Amherst JV LLC, (the “Joint Venture”) with an unrelated real estate development company for the purpose of developing a 395-unit multi-family building on a five-acre site, to be known as Highgate, within its Westpark Business Park in Tysons, Virginia. The Company contributed the site, along with capitalized improvements, to the Joint Venture on October 5, 2015. Subsequent to the contribution date, demolition, site preparation and construction commenced and is expected to be completed in late 2017.

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. 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 total equity and 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 $55.5 million and $26.7 million at September 30, 2016 and December 31, 2015, respectively. For the nine months ended September 30, 2016, the Company made loan advances of $22.3 million, capital contributions of $5.7 million and capitalized $854,000 of interest. For the nine months ended September 30, 2015, the Company capitalized costs of $2.8 million related to this development, of which $813,000 was capitalized interest. The Company made no loan advances to the Joint Venture in 2015.

~~Scheduled Lease Expirations:~~ In addition to the 1.7 million square feet, or 6.0%, of vacancy in our total portfolio as of September 30, 2016, 557 leases, representing 1.4 million square feet, or 5.3%, of the leased square footage of our total portfolio are scheduled to expire during the remainder of 2016. Our ability to re-lease available space will depend upon market conditions in the specific submarkets in which our properties are located. As a result, we cannot predict with certainty the rate at which expiring leases will be re-leased.Certain Factors that May Impact Future Results

Impact of Inflation: Although inflation has not been significant in recent years, ~~it remains a potential factor~~an increase in inflation could impact our ~~economy,~~future results, and the Company continues to seek ways to mitigate its potential impact. A substantial portion of the Company’s leases require tenants to pay operating expenses, including real estate taxes, utilities and insurance, as well as increases in common area expenses, partially reducing the Company’s exposure to ~~inflation.~~inflation during each lease’s respective lease period.

Regional Concentration: Our portfolio is concentrated in eight regions, in six states. We have chosen to concentrate in these regions because we believe they have characteristics which enable them to be competitive economically, such as above average population growth, job growth, higher education levels and personal income, which we believe will produce better overall economic returns. Changes in economic conditions in these regions in the future could impact our future results.

Industry and Tenant Concentrations: We seek to minimize the risk of industry or tenant concentrations. As of September 30, 2017, leases from our top 10 tenants comprised 10.3% of our annualized rental income, with only two tenants, Kaiser Permanente (1.0%) and the U.S. Government (4.3%), representing more than 1%. In terms of industry concentration, 18.5% of our annualized rental income comes from Business Services; 10.4% from Warehouse, Distribution, Transportation and Logistics; and 10% from Health Services. No other industry group represents more than 10% of our annualized rental income.

Tenant credit risk: We have historically experienced a low level of write-offs of uncollectible rents, with less than 0.5% of rental income written off each year over the last six years. However, there can be no assurance that write offs may not increase, because there is inherent uncertainty in a tenant’s ability to continue paying rent and meet its full lease obligation. As of October 23, 2017, we had 69,000 square feet of leased space occupied by four tenants that are protected by Chapter 11 of the U.S. Bankruptcy Code. From time to time, tenants contact us, requesting early termination of their lease, reductions in space leased, or rent deferment or abatement.

We evaluate the performance of our business parks primarily based on Net Operating Income (“NOI”), a non-GAAP financial measure, because we believe NOI is an important measure of the value and performance of our real estate. We believe investors utilize NOI in a similar manner and for similar reasons. NOI is defined by the Company as Adjusted Rental ~~income,~~Income less Adjusted Cost of Operations (described below) and excludes depreciation and amortization. Depreciation and amortization is excluded from NOI because management and investors do not consider it important in valuing real estate or evaluating real estate performance, because depreciation assumes the value of real estate declines ratably from its historical cost based upon the passage of ~~operations~~time, while we believe the value of real estate changes based upon cash flow and other market factors.

Adjusted Rental Income represents rental income, ~~less~~excluding material lease buyout payments, which we believe are not reflective of ongoing rental income.

Adjusted Cost of Operations represents cost of operations, excluding ~~depreciation and~~LTEIP amortization, ~~or net operating income (defined as “NOI” for purposes~~which can vary significantly period to period based upon-the performance of the following tables), are summarized for the three and nine months ended September 30, 2016 and 2015. NOI is a non-GAAP financial measure that is often used by investors to determine the performance and value of commercial real estate. 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. whole company, rather than just property operations.

The Company’s calculation of NOI, Adjusted Rental Income and Adjusted Cost of Operations may not be comparable to those of other companies and should not be used as an alternative to performance measures ~~of performance~~ calculated in accordance with GAAP. ~~As part~~

See “Analysis of operating income” below for reconciliations of each of these measures to their closest analogous GAAP measure on our consolidated statements of income. Adjusted Rental Income is reconciled to rental income, Adjusted Cost of Operations is reconciled to cost of operations and Net Operating Income is reconciled to operating income.

Operating Results Overview: Three and Nine Months Ended September 30, 2017 and 2016

For the ~~tables below, we have reconciled total NOI to~~three months ended September 30, 2017, net income ~~which~~allocable to common shareholders was $18.1 million or $0.66 per diluted share, compared to $19.7 million or $0.72 per diluted share for the same period in 2016. The decrease was mainly due to a $6.9 million Preferred Redemption Allocation, offset by a $2.7 million increase in NOI with respect to our real estate facilities and reduced preferred distributions. The increase in NOI includes a $3.3 million increase for our Same Park facilities (see below) due primarily to higher realized rent per occupied square foot, offset partially by reduced NOI with respect to facilities we ~~consider the most directly comparable financial measure calculated in accordance with GAAP.~~sold or are holding for development.

~~In order~~For the nine months ended September 30, 2017, net income allocable to ~~provide a meaningful period-to-period comparison,~~common shareholders was $69.3 million or $2.53 per diluted share, compared to $50.0 million or $1.84 per diluted share for the ~~purpose~~same period in 2016. The increase was due to a $10.5 million increase in NOI with respect to our real estate facilities, a reduction in interest expense due to the repayment of ~~computing~~debt, and gains on the sale of real estate facilities and development rights. The increase in NOI ~~the tables below exclude~~includes a $12.5 million increase for our Same-Park facilities due primarily to higher realized rent per occupied square foot, offset partially by reduced NOI with respect to facilities we sold or are holding for development.

We analyze our net income in this discussion analysis in two main sections: operating income and then all other components of net income.

Our operating income is comprised primarily of our real estate operations, depreciation and amortization expense and general and administrative expenses.

We segregate our real estate activities into (a) same park operations, representing all operating properties acquired prior to January 1, 2015, comprising 27.8 million rentable square feet of ~~the Senior Management Long-Term Equity Incentive Plan (“LTEIP”).~~our 28.0 million in rentable space at September 30, 2017 (the “Same Park” facilities), (b) non-same park operations, representing those facilities we own that were acquired after January 1, 2015 (the “Non-Same Park” facilities) and (c) assets sold or held for development, representing facilities whose existing operations are no longer part of our ongoing operations, because they were sold or are expected to be developed or converted to alternate use.

~~Concentration of Portfolio by Region:~~The table below ~~reflects~~sets forth the ~~Company’s square footage based on regional concentration as~~various components of ~~September 30, 2016. As part of the table below, we have reconciled total NOI to net~~our operating income ~~(in~~(in thousands):

Percent of

NOI

Square

Square

For The Nine Months

Percent
Region

Footage

Footage

Ended September 30, 2016

of Total NOI
California

Northern California

7,245

25.7%

$
47,687

24.0%
Southern California

3,988

14.1%

30,926

15.6%
Texas

Northern Texas

3,125

11.1%

15,168

7.6%
Southern Texas

1,963

7.0%

13,544

6.8%
Virginia

4,040

14.3%

39,801

20.0%
Florida

3,866

13.7%

20,384

10.3%
Maryland

2,578

9.2%

22,853

11.5%
Washington

1,390

4.9%

8,253

4.2%
Total

28,195

100.0%

$
198,616

100.0%

Reconciliation of NOI to net income

Total NOI

$
198,616

Other income and (expenses):

LTEIP amortization:

Cost of operations

(2,312)

General and administrative

(5,804)

Lease buyout payment (1)

528

Facility management fees

389

Interest and other income

551

Interest and other expenses

(5,507)

Depreciation and amortization

(74,886)

Acquisition transaction costs

(328)

Adjusted general and administrative (2)

(5,850)

Net income

$
105,397



	For The Three Months						For The Nine Months
	Ended September 30,						Ended September 30,
	2017		2016			Variance	2017		2016			Variance
RENTAL INCOME
Adjusted rental income (a)
Same Park	$	100,110	$	95,867	$	4,243	$	299,207	$	285,927	$	13,280
Non-Same Park		371		9		362		976		9		967
Assets sold or held for development		—		936		(936)		159		2,808		(2,649)
Lease buyout payment		—		528		(528)		—		528		(528)
Total rental income		100,481		97,340		3,141		300,342		289,272		11,070

COST OF OPERATIONS
Adjusted cost of operations (b)
Same Park		30,821		29,875		946		90,204		89,375		829
Non-Same Park		294		3		291		918		3		915
Assets sold or held for development		—		261		(261)		73		750		(677)
LTEIP amortization		564		657		(93)		1,767		2,312		(545)
Total cost of operations		31,679		30,796		883		92,962		92,440		522

OPERATING INCOME
Net operating income (c)
Same Park		69,289		65,992		3,297		209,003		196,552		12,451
Non-Same Park		77		6		71		58		6		52
Assets sold or held for development		—		675		(675)		86		2,058		(1,972)
Lease buyout payment and LTEIP amortization		(564)		(129)		(435)		(1,767)		(1,784)		17
Depreciation and amortization		(23,759)		(24,631)		872		(70,465)		(74,886)		4,421
General and administrative		(1,745)		(2,970)		1,225		(7,019)		(11,982)		4,963
Operating income	$	43,298	$	38,943	$	4,355	$	129,896	$	109,964	$	19,932

Rental income increased $3.1 million and $11.1 million for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016, due primarily to increases in adjusted rental income at the Same Park facilities, due primarily to higher annualized realized rental income per occupied square foot.

Cost of operations increased $883,000 and $522,000 for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016, due primarily to increased adjusted cost of operations for the

~~Concentration~~ of ~~Credit Risk by Industry:~~ ~~The information below depicts the industry concentration of our tenant base~~operations from assets sold or held for development, as ~~of September 30, 2016. The Company analyzes this concentration to minimize significant industry exposure risk.~~well as lower LTEIP amortization.

~~The information below depicts~~Operating income increased $4.4 million and $19.9 million for the ~~Company’s top 10 customers by annualized~~three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016, due primarily to higher rental income, ~~as of September 30, 2016~~ ~~(in thousands)~~:lower general and administrative expenses and lower depreciation expense.

See below for a discussion of depreciation and amortization expense and general and administrative expenses.

The Same Park facilities are those that we have owned and operated since January 1, 2015. We evaluate the operations of these facilities to more effectively evaluate the ongoing performance of our portfolio in 2015, 2016 and 2017. We believe the Same Park information is used by investors and analysts in a similar manner. The following table summarizes the historical operating results of these facilities and certain statistical information related to leasing activity:

~~Comparative~~ Analysis of ~~the Three and Nine Months Ended September 30, 2016 to the Three and Nine Months Ended September 30, 2015~~Same Park Adjusted Rental Income

~~Results of Operations:~~ ~~In order to evaluate~~Adjusted rental income generated by the performance of the Company’s portfolio over comparable periods, management analyzes the operating performance of properties owned and operated throughout both periods (herein referred to as “Same Park”). The Same Park ~~portfolio includes all operating properties acquired prior to January 1, 2014. Operating properties acquired subsequently are referred to as “Non-Same Park.” For~~facilities increased 4.4% and 4.6% in the three and nine months ended September 30, ~~2016~~2017, respectively, as compared to the same periods in the prior year. These increases were due primarily to increased annualized realized rental income per occupied square foot and, ~~2015,~~during the ~~Same Park facilities constitute 27.3~~nine month period, an increase in weighted average occupancy.

We believe that high occupancies help maximize our rental income. Accordingly, we seek to maintain a weighted average occupancy over 90%.

Our future revenue growth will come primarily from potential increases in market rents allowing us to increase rent levels when leases are either renewed with existing tenants or re-leased to new tenants. The following table sets forth the expirations of our existing leases in place at September 30, 2017 over the next five years (dollars and square feet in thousands):

During the three and nine months ended September 30, 2017, we leased approximately 1.8 million and 5.6 million, respectively, in rentable square feet ~~representing 96.8%~~to new and existing customers, with an average increase in rental rates over the previous rates of 5.7% and 4.3%. Approximately 66.8% of our leasing activity for the ~~28.2 million square feet~~nine months ended September 30, 2017 represented renewals of leases with existing tenants. See “Analysis of Market Trends” below for further analysis of such data on a by-market basis.

Our ability to re-lease space on expired leases in a way that minimizes vacancy periods and the lease rates that may be achieved are not predictable, because they will depend upon market conditions in the ~~Company’s total portfolio as~~specific submarkets in which each of our properties are located.

Property taxes increased 5.8% and 4.9% during the three and nine months ended September 30, ~~2016.~~2017, respectively, as compared to the same periods in the prior year due primarily to higher assessed values. We expect property taxes in the fourth quarter of 2017 to approximate the amount for the third quarter of 2017.

~~The following table presents the operating results of the Company’s properties~~Utilities are dependent primarily upon energy prices and usage levels. Changes in usage levels are driven primarily by weather and temperature. Utilities decreased 1.7% and 1.0% for the three and nine months ended September 30, ~~2016~~2017, respectively, as compared to the same periods in the prior year. It is difficult to estimate future utility costs, because weather, temperature and ~~2015 in addition to other income~~energy prices are volatile and ~~expenses items affecting net income~~ ~~(in thousands, except per square foot data)~~:not predictable.

For The Three Months

For The Nine Months

Ended September 30,

Ended September 30,

2016

2015

Change

2016

2015

Change
Adjusted rental income:

Same Park (27.3 million rentable square feet)
$
95,080

$
91,625

3.8%

$
283,661

$
272,189

4.2%
Non-Same Park (904,000 rentable square feet)

1,732

1,352

28.1%

5,083

3,685

37.9%
Total adjusted rental income (1)

96,812

92,977

4.1%

288,744

275,874

4.7%
Adjusted cost of operations:

Same Park

29,607

29,439

0.6%

88,564

87,637

1.1%
Non-Same Park

532

522

1.9%

1,564

1,577

(0.8%)
Total adjusted cost of operations (2)

30,139

29,961

0.6%

90,128

89,214

1.0%
Net operating income

Same Park

65,473

62,186

5.3%

195,097

184,552

5.7%
Non-Same Park

1,200

830

44.6%

3,519

2,108

66.9%
Total net operating income

66,673

63,016

5.8%

198,616

186,660

6.4%
Other income and (expenses):

NOI from sold assets

—

142

(100.0%)

—

1,469

(100.0%)
LTEIP amortization:

Cost of operations

(657)

(284)

131.3%

(2,312)

(1,795)

28.8%
General and administrative

(907)

(1,383)

(34.4%)

(5,804)

(4,383)

32.4%
Lease buyout payment

528

—

100.0%

528

—

100.0%
Facility management fees

130

130

—

389

410

(5.1%)
Other income and expenses

(79)

(3,214)

(97.5%)

(4,956)

(9,623)

(48.5%)
Depreciation and amortization

(24,631)

(25,985)

(5.2%)

(74,886)

(79,243)

(5.5%)
Adjusted general and administrative (3)

(1,735)

(1,893)

(8.3%)

(5,850)

(5,789)

1.1%
Acquisition transaction costs

(328)

—

(100.0%)

(328)

—

(100.0%)
Gain on sale of real estate facilities

—

15,748

(100.0%)

—

28,235

(100.0%)
Net income
$
38,994

$
46,277

(15.7%)

$
105,397

$
115,941

(9.1%)

Same Park gross margin (4)

68.9%

67.9%

1.5%

68.8%

67.8%

1.5%
Same Park weighted average occupancy

94.1%

93.6%

0.5%

93.9%

92.8%

1.2%
Non-Same Park weighted average occupancy

96.7%

85.6%

13.0%

95.6%

75.3%

27.0%
Same Park annualized realized rent per square foot (5)
$
14.81

$
14.35

3.2%

$
14.76

$
14.33

3.0%

~~Rental Income:~~ Rental income increased $4.0 million from $93.3 million for the three months ended September 30, 2015 to $97.3 million for the three months ended September 30, 2016. Rental income increased $10.7 million from $278.6 million for the nine months ended September 30, 2015 to $289.3 million for the nine months ended September 30, 2016. For comparative purposes, management has adjusted rental income for a material lease buyout payment of $528,000 recorded in the third quarter of 2016 and rental income from sold assets of $345,000 and $2.7 million for the three and nine months ended September 30, ~~2015, respectively. Adjusted rental income increased $3.8 million from $93.0 million for~~2017, respectively, as compared to the same periods in the prior year. Repairs and maintenance costs are dependent upon many factors including weather conditions, which can impact repair and maintenance needs, inflation in material and labor costs and random events, and as a result are not readily predictable. We expect to incur incremental repairs and maintenance costs with respect to Hurricane Irma during the fourth quarter of 2017.

Snow removal decreased 73.4% during the nine months ended September 30, 2017 as compared to the same period in 2016. Snow removal costs are weather dependent and therefore not predictable.

Other expenses decreased 2.7% during the three months ended September 30, 2015 to $96.8 million for the three months ended September 30, 2016 as a result of an increase in the Same Park portfolio of $3.5 million, or 3.8%, combined with a $380,000, or 28.1%, increase from Non-Same Park facilities. Adjusted rental income2017, and increased ~~$12.9 million from $275.9 million for~~1.4% during the nine months ended September 30, ~~2015~~2017 as compared to ~~$288.7 million for~~ the ~~nine months ended September 30, 2016 as a result~~same periods in 2016. These costs are comprised of ~~an increase~~on site and supervisory personnel, property insurance and other expenses incurred in the operation of our properties.

The following table sets forth historical quarterly trends in the operations of the Same Park ~~portfolio of $11.5 million, or 4.2%, combined with a $1.4 million, or 37.9%, increase from Non-Same Park facilities. The three and nine month increases in Same Park~~facilities for adjusted rental income, ~~were due to an increase in occupancy and executed rental rates.~~

~~Facility Management Fees:~~ Facility management fees, derived from Public Storage (“PS”), account for a small portion of the Company’s revenues. The Company recognized facility management fees of $130,000 for the three months ended September 30, 2016 and 2015. During the nine months ended September 30, 2016, the Company recognized facility management fees of $389,000 compared to $410,000 for the same period in 2015. The nine month decrease resulted from a reduction in total square footage managed on behalf of PS beginning the latter half of 2015.

~~Cost of Operations:~~ Cost of operations increased $348,000, or 1.1%, from $30.4 million for the three months ended September 30, 2015 to $30.8 million for the three months ended September 30, 2016. Cost of operations increased $189,000, or 0.2%, from $92.3 million for the nine months ended September 30, 2015 to $92.4 million for the nine months ended September 30, 2016. For comparative purposes, management has adjusted cost of operations, ~~for LTEIP amortization of $657,000~~occupancies, realized rents and $2.3 million for the three and nine months ended September 30, 2016, respectively, and $284,000 and $1.8 million for the three and nine months ended September 30, 2015, respectively, as well as, cost of operations from sold assets of $203,000 and $1.2 million for the three and nine months ended September 30, 2015, respectively. Adjusted cost of operations increased $178,000, or 0.6%, from $30.0 million for the three months ended September 30, 2015 to $30.1 million for the three months ended September 30, 2016 as a result of an increase in the Same Park portfolio of $168,000, or 0.6%, combined with a $10,000, or 1.9%, increase in the Non-Same Park facilities. The three month increase in Same Park cost of operations was due to an increase in property taxes as a result of increases in assessed values partially offset by a decrease in compensation expense. Adjusted cost of operations increased $914,000, or 1.0%, from $89.2 million for the nine months ended September 30, 2015 to $90.1 million for the nine months ended September 30, 2016 as a result of an increase in the Same Park portfolio of $927,000, or 1.1%, partially offset by a decrease in the Non-Same Park facilities of $13,000, or 0.8%. The nine month increase was due to increases in property taxes and repairs and maintenance costs partially offset by a decrease in compensation expense.those expenses which have material seasonal trends:

~~Depreciation and Amortization Expense:~~ Depreciation and amortization expense was $24.6 million for the three months ended September 30, 2016 compared to $26.0 million for the same period in 2015. Depreciation and amortization expense was $74.9 million for the nine months ended September 30, 2016 compared to $79.2 million for the same period in 2015. The three and nine month decreases in depreciation and amortization expense was due to the disposition of assets.

~~General and Administrative Expenses: General and administrative expenses~~ ~~decreased $306,000,~~ ~~or 9.3%,~~ ~~from~~ ~~$3.3~~ ~~million for the three months ended September 30, 2015 to $3.0 million for the three months ended September 30, 2016~~. General and administrative expense increased $1.8 million, or 17.8%, from $10.2 million for the nine months ended September 30, 2015 to $12.0 million for the nine months ended September 30, 2016. For comparative purposes, management has adjusted general and administrative expenses for LTEIP amortizationAnalysis of $907,000 and $5.8 million for the three and nine months ended September 30, 2016, respectively, and $1.4 million and $4.4 million for the three and nine months ended September 30, 2015, respectively, as well as, acquisition transaction costs of $328,000 recorded during the third quarter of 2016. The nine month increase in the LTEIP amortization was primarily due to a net non-cash stock compensation charge of $2.0 million recorded during the second quarter of 2016 related to a change in senior management and the future issuances of restricted stock units our former Chief Executive Officer will receive under the Company’s LTEIP. Adjusted general and administrative expenses decreased $158,000, or 8.3%, for the three months ended September 30, 2016 over the same period in 2015 due to a decrease in compensation expense resulting from a change in senior management. Adjusted general administrative expenses increased $61,000, or 1.1%, for the nine months ended September 31, 2016 over the same period in 2015 due to acquisition and development costs partially offset by a decrease in compensation expense.Same Park Market Trends

~~Net Income Allocable to Noncontrolling Interests:~~ Net income allocable to noncontrolling interests reflects the net income allocable to equity interests in PS Business Parks, L.P. (the “Operating Partnership”) that are not owned by the Company. Net income allocable to noncontrolling interests was $5.3 million and $6.1 million of allocated income to common unit holders for the three months ended September 30, 2016 and 2015, respectively. Net income allocable to noncontrolling interests was $13.5 million and $14.5 million of allocated income to common unit holders for the nine months ended September 30, 2016 and 2015, respectively. The three and nine month decreases were primarily the result of ~~the gain on sale of real estate facilities recognized in 2015 partially offset by an increase in overall NOI.~~

~~Supplemental Property Data and Trends:~~ NOI is summarized for the three and nine months ended September 30, 2016 and 2015 by region below. See above for more information on NOI, including why the Company presents NOI and how the Company uses NOI. The Company’s calculation of NOI may not be comparable to those of other companies and should not be used as an alternative to measures of performance calculated in accordance with GAAP.

The following tables ~~summarize the~~set forth market rent, expense and occupancy trends in our Same Park and Non-Same Park operating results by region for the three and nine months ended September 30, 2016 and 2015. In addition, the tables reflect the comparative impact on the overall rental income, cost of operations and NOI from properties that have been acquired since January 1, 2014, and the impact of such is included in Non-Same Park facilities in the tables below. As part of the tables below, we have reconciled total NOI to net income ~~(in thousands)~~:facilities:



		For The Three Months				For The Nine Months
		Ended September 30,				Ended September 30,
Region		2017		2016	Variance	2017			2016	Variance

Selected Geographic Data on Same Park

Adjusted rental income
Northern California (7.2 million feet)	$	22,814	$	21,640	5.4%	$	68,989	$	64,501	7.0%
Southern California (4.0 million feet)		16,298		15,487	5.2%		48,055		45,104	6.5%
Dallas (3.0 million feet)		8,128		7,924	2.6%		24,683		23,474	5.2%
Austin (2.0 million feet)		7,390		6,823	8.3%		22,179		20,596	7.7%
Northern Virginia (3.9 million feet)		19,271		18,853	2.2%		56,919		57,404	(0.8%)
South Florida (3.9 million feet)		10,269		9,678	6.1%		30,457		28,475	7.0%
Suburban Maryland (2.4 million feet)		11,953		11,694	2.2%		35,882		35,144	2.1%
Seattle (1.4 million feet)		3,987		3,768	5.8%		12,043		11,229	7.2%
Total Same Park (27.8 million feet)		100,110		95,867	4.4%		299,207		285,927	4.6%

Adjusted cost of operations
Northern California		6,011		5,773	4.1%		17,571		16,814	4.5%
Southern California		4,972		4,978	(0.1%)		14,558		14,178	2.7%
Dallas		2,765		2,817	(1.8%)		8,283		8,451	(2.0%)
Austin		2,570		2,394	7.4%		7,549		7,052	7.0%
Northern Virginia		6,034		6,471	(6.8%)		18,318		19,516	(6.1%)
South Florida		2,716		2,714	0.1%		8,144		8,091	0.7%
Suburban Maryland		4,768		3,755	27.0%		12,776		12,297	3.9%
Seattle		985		973	1.2%		3,005		2,976	1.0%
Total Same Park		30,821		29,875	3.2%		90,204		89,375	0.9%

Net operating income
Northern California		16,803		15,867	5.9%		51,418		47,687	7.8%
Southern California		11,326		10,509	7.8%		33,497		30,926	8.3%
Dallas		5,363		5,107	5.0%		16,400		15,023	9.2%
Austin		4,820		4,429	8.8%		14,630		13,544	8.0%
Northern Virginia		13,237		12,382	6.9%		38,601		37,888	1.9%
South Florida		7,553		6,964	8.5%		22,313		20,384	9.5%
Suburban Maryland		7,185		7,939	(9.5%)		23,106		22,847	1.1%
Seattle		3,002		2,795	7.4%		9,038		8,253	9.5%
Total Same Park	$	69,289	$	65,992	5.0%	$	209,003	$	196,552	6.3%

Weighted average square foot occupancy
Northern California		94.2%		96.5%	(2.4%)		95.6%		96.5%	(0.9%)
Southern California		95.3%		95.5%	(0.2%)		95.4%		94.5%	1.0%
Dallas		91.2%		91.1%	0.1%		90.7%		90.0%	0.8%
Austin		95.9%		97.7%	(1.8%)		94.8%		96.7%	(2.0%)
Northern Virginia		92.3%		91.6%	0.8%		90.9%		92.4%	(1.6%)
South Florida		97.0%		93.5%	3.7%		97.5%		93.8%	3.9%
Suburban Maryland		89.3%		87.6%	1.9%		88.3%		87.9%	0.5%
Seattle		97.3%		98.9%	(1.6%)		98.0%		98.5%	(0.5%)
Total Same Park		94.0%		94.1%	(0.1%)		94.1%		93.9%	0.2%

Annualized realized rent per square foot
Northern California	$	13.37	$	12.38	8.0%	$	13.28	$	12.30	8.0%
Southern California	$	17.16	$	16.27	5.5%	$	16.85	$	15.96	5.6%
Dallas	$	11.56	$	11.28	2.5%	$	11.77	$	11.28	4.3%
Austin	$	15.70	$	14.22	10.4%	$	15.88	$	14.47	9.7%
Northern Virginia	$	21.31	$	21.01	1.4%	$	21.31	$	21.15	0.8%
South Florida	$	10.95	$	10.71	2.2%	$	10.77	$	10.47	2.9%
Suburban Maryland	$	22.76	$	22.70	0.3%	$	23.02	$	22.67	1.5%
Seattle	$	11.79	$	10.97	7.5%	$	11.78	$	10.94	7.7%
Total Same Park	$	15.32	$	14.65	4.6%	$	15.25	$	14.60	4.5%

~~Three Months Ended~~The following tables set forth key statistical information with respect to our Same Park leasing activities during the three and nine months ended September 30, ~~2016~~2017. As noted above, our past revenue growth has come from annual inflators, as well as re-leasing of space at current market rates. The following tables summarize the Company’s leasing production by these eight regions for the three and ~~2015:~~nine months ended September 30, 2017 (in thousands):

During the first nine months of 2017, most markets continued to reflect favorable conditions allowing for stable occupancy as well as increasing rental rates. With the exception of Northern Virginia and Suburban Maryland, new rental rates for the Company improved over expiring rental rates on executed leases as economic conditions and tenant demand remained healthy. Northern Virginia and Suburban Maryland continue to experience soft market conditions as evidenced by continued pressure on occupancy and rental rates. Given lease expirations of 1.1 million square feet in Northern Virginia and 712,000 square feet in Suburban Maryland through December 31, 2018, the Company may continue to experience a decrease in rental income in these regions.

Non-Same Park facilities: Our Non-Same Park facilities are comprised of two office buildings in Maryland, with 226,000 rentable square feet and occupancy of 31.6% at September 30, 2017 (33.9% at October 23, 2017).

Adjusted

Adjusted

Adjusted

Adjusted

Rental

Rental

Cost of

Cost of

Income

Income

Operations

Operations

NOI

NOI

September 30,

September 30,

Increase

September 30,

September 30,

Increase

September 30,

September 30,

Increase
Region
2016

2015

(Decrease)

2016

2015

(Decrease)

2016

2015

(Decrease)

Same Park

Northern California
$
21,121

$
19,248

9.7%

$
5,637

$
5,461

3.2%

$
15,484

$
13,787

12.3%
Southern California

15,487

14,601

6.1%

4,978

4,903

1.5%

10,509

9,698

8.4%
Northern Texas

7,629

7,313

4.3%

2,748

2,639

4.1%

4,881

4,674

4.4%
Southern Texas

6,377

5,716

11.6%

2,217

2,103

5.4%

4,160

3,613

15.1%
Virginia

19,695

20,142

(2.2%)

6,677

6,294

6.1%

13,018

13,848

(6.0%)
Florida

9,309

8,803

5.7%

2,622

2,978

(12.0%)

6,687

5,825

14.8%
Maryland

11,694

12,124

(3.5%)

3,755

4,060

(7.5%)

7,939

8,064

(1.6%)
Washington

3,768

3,678

2.4%

973

1,001

(2.8%)

2,795

2,677

4.4%
Total Same Park

95,080

91,625

3.8%

29,607

29,439

0.6%

65,473

62,186

5.3%
Non-Same Park

Northern California

519

471

10.2%

136

132

3.0%

383

339

13.0%
Northern Texas

389

278

39.9%

124

142

(12.7%)

265

136

94.9%
Southern Texas

446

273

63.4%

177

132

34.1%

269

141

90.8%
Florida

369

330

11.8%

92

116

(20.7%)

277

214

29.4%
Maryland

9

—

100.0%

3

—

100.0%

6

—

100.0%
Total Non-Same Park

1,732

1,352

28.1%

532

522

1.9%

1,200

830

44.6%
Total
$
96,812

$
92,977

4.1%

$
30,139

$
29,961

0.6%

$
66,673

$
63,016

5.8%

Reconciliation of NOI to net income

Total NOI

$
66,673

$
63,016

5.8%
Other income and (expenses):

NOI from sold assets

—

142

(100.0%)
LTEIP amortization:

Cost of operations

(657)

(284)

131.3%
General and administrative

(907)

(1,383)

(34.4%)
Lease buyout payment

528

—

100.0%
Facility management fees

130

130

—
Other income and expenses

(79)

(3,214)

(97.5%)
Depreciation and amortization

(24,631)

(25,985)

(5.2%)
Acquisition transaction costs

(328)

—

(100.0%)
Adjusted general and administrative

(1,735)

(1,893)

(8.3%)
Gain on sale of real estate facilities

—

15,748

(100.0%)
Net income

$
38,994

$
46,277

(15.7%)

Assets sold or held for development: These amounts include historical operating results with respect to properties that have been sold, and with respect to a 123,000 rentable square foot office building which is vacant and being held for future potential development into a multi-family building. We expect no further material operations for this vacant property until development is complete; as noted above, we do not expect development activity to commence until at least December 2018.

Depreciation and Amortization Expense: Depreciation and amortization was $23.8 million for the three months ended September 30, 2017 compared to $24.6 million for the same period in 2016. Depreciation and amortization was

~~Nine Months Ended~~$70.5 million for the nine months ended September 30, ~~2016~~2017 compared to $74.9 million for the same period in 2016. The three and ~~2015:~~nine month decreases in depreciation and amortization were due to the cost of certain assets reaching the end of their depreciable lives.

Adjusted

Adjusted

Adjusted

Adjusted

Rental

Rental

Cost of

Cost of

Income

Income

Operations

Operations

NOI

NOI

September 30,

September 30,

Increase

September 30,

September 30,

Increase

September 30,

September 30,

Increase
Region
2016

2015

(Decrease)

2016

2015

(Decrease)

2016

2015

(Decrease)

Same Park

Northern California
$
62,959

$
57,176

10.1%

$
16,420

$
16,055

2.3%

$
46,539

$
41,121

13.2%
Southern California

45,104

43,741

3.1%

14,178

14,270

(0.6%)

30,926

29,471

4.9%
Northern Texas

22,565

21,778

3.6%

8,193

7,900

3.7%

14,372

13,878

3.6%
Southern Texas

19,360

15,981

21.1%

6,548

5,895

11.1%

12,812

10,086

27.0%
Virginia

59,931

60,719

(1.3%)

20,130

20,055

0.4%

39,801

40,664

(2.1%)
Florida

27,369

25,283

8.3%

7,822

7,931

(1.4%)

19,547

17,352

12.6%
Maryland

35,144

36,728

(4.3%)

12,297

12,669

(2.9%)

22,847

24,059

(5.0%)
Washington

11,229

10,783

4.1%

2,976

2,862

4.0%

8,253

7,921

4.2%
Total Same Park

283,661

272,189

4.2%

88,564

87,637

1.1%

195,097

184,552

5.7%
Non-Same Park

Northern California

1,542

1,379

11.8%

394

402

(2.0%)

1,148

977

17.5%
Northern Texas

1,190

731

62.8%

394

419

(6.0%)

796

312

155.1%
Southern Texas

1,236

669

84.8%

504

426

18.3%

732

243

201.2%
Florida

1,106

906

22.1%

269

330

(18.5%)

837

576

45.3%
Maryland

9

—

100.0%

3

—

100.0%

6

—

100.0%
Total Non-Same Park

5,083

3,685

37.9%

1,564

1,577

(0.8%)

3,519

2,108

66.9%
Total
$
288,744

$
275,874

4.7%

$
90,128

$
89,214

1.0%

$
198,616

$
186,660

6.4%

Reconciliation of NOI to net income

Total NOI

$
198,616

$
186,660

6.4%
Other income and (expenses):

NOI from sold assets

—

1,469

(100.0%)
LTEIP amortization:

Cost of operations

(2,312)

(1,795)

28.8%
General and administrative

(5,804)

(4,383)

32.4%
Lease buyout payment

528

—

100.0%
Facility management fees

389

410

(5.1%)
Other income and expenses

(4,956)

(9,623)

(48.5%)
Depreciation and amortization

(74,886)

(79,243)

(5.5%)
Adjusted general and administrative

(5,850)

(5,789)

1.1%
Acquisition transaction costs

(328)

—

(100.0%)
Gain on sale of real estate facilities

—

28,235

(100.0%)
Net income

$
105,397

$
115,941

(9.1%)

~~The following tables summarize Same Park weighted average occupancy rates~~General and ~~annualized realized rent per square foot by region~~Administrative Expenses: General and administrative expenses primarily represent compensation for senior executives, tax compliance, legal and costs associated with being a public company. For the three and nine months ended September 30, 2017, general and administrative expenses decreased $1.2 million, or 41.2%, and $5.0 million, or 41.4%, respectively, compared to the same periods in 2016. The three month decrease was primarily due to a reduction in the ongoing LTEIP amortization ($571,000 in 2017 versus $907,000 in 2016), departure of our CFO during the third quarter of 2017 and acquisition transaction costs of $328,000 incurred in 2016. The nine month decrease was primarily due to a reduction in the ongoing LTEIP amortization ($2.3 million in 2017 versus $3.8 million in 2016), departure of senior executives in 2016 and ~~2015. Annualized realized rent per square foot~~2017 and acquisition transaction costs incurred in 2016 noted above.

Interest and Other Expense: Interest and other expense was $503,000 for ~~Virginia~~the three months ended September 30, 2017 compared to $155,000 for the same period in 2016. Interest and ~~Total Same Park excludes~~other expense was $972,000 for the nine months ended September 30, 2017 compared to $5.5 million for the same period in 2016. The three month increase was due to higher interest capitalized in 2016 as the Highgate Development began operations in 2017, while the nine month decrease was primarily due to a ~~material lease buyout payment~~repayment of ~~$528,000 for~~a $250.0 million mortgage note during the second quarter of 2016.

Equity in loss of unconsolidated joint venture: Our equity in loss of unconsolidated joint venture represents our pro rata equity in the earnings of our 95% equity investment in the JV that owns the Highgate Development. We have agreed to provide a construction loan to the Joint Venture, maturing in April, 2019 and having two one-year extension options, of up to $75.0 million. The interest income we receive on the loan is eliminated against our equity in earnings. During the three and nine months ended September 30, ~~2016.~~2017, we recorded an equity loss in the unconsolidated joint venture of $376,000, comprised of $600,000 in revenue, $493,000 in cost of operations, and $483,000 in depreciation expense and $758,000, comprised of $642,000 in revenue, $813,000 in cost of operations, and $587,000 in depreciation expense.

The following table summarizes the Joint Venture’s project timeline and updates as of September 30, 2017:

Our cumulative investment in and advances to the Joint Venture, including the fair value of land we contributed, totaled $96.6 million at September 30, 2017.

Gain on sale of real estate facility and gain on sale of development rights: On May 1, 2017, we sold a two-building single-story office park comprising 44,000 square feet, located in Dallas, Texas, for net proceeds of $2.1 million. On March 31, 2017, we sold development rights we had acquired in 2006 in connection with our acquisition of a business park in Silver Spring, Maryland. When all contingencies of the sale have completed, we will have

~~Cash and cash equivalents decreased $183.9 million from $188.9 million at December 31, 2015 to $5.0 million at September 30, 2016 for the reasons noted below.~~

~~Net cash provided by operating activities for the nine months ended September 30, 2016 and 2015 was $187.7 million and $178.6 million, respectively. The increase~~received a total of ~~$9.1~~$6.4 million in net cash provided by operating activities was primarily due to an increase in NOI. Management believes that the Company’s internally generated net cash provided by operating activities will be sufficient to enable it to meet its operating expenses, capital expenditures, debt service requirements and distributions to shareholders for the foreseeable future.

Net cash used in investing activities was $65.7 million for the nine months ended September 30, 2016 compared to net cash provided by investing activities of $17.3 million for the nine months ended September 30, 2015. The change was primarily due to net proceeds of $55.2 million received from assets sold in 2015 combined with a $28.8 million increase in cash investment in the Joint Venture and $12.6 million acquisition in Rockville, Maryland, in 2016. This change was partially offset by a decrease in cash paid related to capital improvements.

Net cash used in financing activities was $305.9 million and $96.2 million for the nine months ended September 30, 2016 and 2015, respectively. The change was primarily due to repayment of a mortgage note of $250.0 million in 2016 using cash on hand and borrowings from the Credit Facility (defined below). This change was also impacted by an increase in quarterly distributions paid to common shareholders of $22.5 million (year-to-date increase from $1.60 per share to $2.25 per share).

The Company has a line of credit (the “Credit Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”). The Credit Facility has a borrowing limit of $250.0 million and expires May 1, 2019. The rate of interest charged on borrowings is based on the LIBOR plus 0.875% to LIBOR plus 1.70% depending on the Company’s credit ratings. Currently, the Company’s rate under the Credit Facility is LIBOR plus 0.875%. In addition, the Company is required to pay an annual facility fee ranging from 0.125% to 0.30% of the borrowing limit depending on the Company’s credit ratings (currently 0.125%). As of September 30, 2016, the Company had $60.0 million outstanding on the Credit Facility at an interest rate of 1.36%. Subsequent to September 30, 2016, the Company repaid the outstanding balance in full. The Company had no balance outstanding on the Credit Facility at December 31, 2015. The Company had $596,000 and $769,000 of unamortized commitment fees as of September 30, 2016 and December 31, 2015, respectively, which is included in other assets in the accompanying consolidated balance sheets. The Credit Facility requires the Company to meet certain covenants, all of which the Company was in compliance as of September 30, 2016. Interest on outstanding borrowings is payable monthly.

The Company’s preferred equity outstanding decreased from 22.0% of its market capitalization at December 31, 2015 to 18.8% at September 30, 2016 primarily due to an increase in stock price from $87.43 at December 31, 2015 to $113.57 at September 30, 2016. The Company calculates market capitalization by adding (1) the liquidation preference of the Company’s outstanding preferred equity, (2) principal value of the Company’s outstanding debt and (3) the total number of common shares and common units outstanding at September 30, 2016 multiplied by the closing price of the stock on that date.

The Company focuses on retaining cash for reinvestment, as we believe this provides us the greatest level of financial flexibility. As operating fundamentals improve, additional increases in distributions to the Company’s common shareholders may be required. The Company will continue to monitor its taxable income and the corresponding dividend requirements. During the first quarter of 2016, the Company increased its quarterly dividend from $0.60 per common share to $0.75 per common share, increasing quarterly distributions by $5.2 million per quarter.

~~Issuance of Preferred Stock:~~ Subsequent to September 30, 2016, the Company issued $189.8 million or 7,590,000 depositary shares, each representing 1/1000 of a share of the 5.20% Cumulative Preferred Stock, Series W, at $25.00 per depositary share. The Company will use the net proceeds from this issuance to pay amounts outstanding under the Company’s Credit Facility and for general corporate purposes, including the potential redemption of preferred equity.

~~Repurchase of Common Stock:~~ ~~No shares of common stock were repurchased under the board-approved common stock repurchase program during the nine months ended September 30, 2016 or the year ended December 31, 2015.~~

~~Capital Expenditures:~~ The Company defines recurring capital expenditures as those necessary to maintain and operate its commercial real estate at its current economic value. During the nine months ended September 30, 2016 and 2015, the Company expended $23.5 million and $32.1 million, respectively, in recurring capital expenditures, or $0.84 and $1.13 per weighted average square foot owned, respectively. Tenant improvement amounts exclude those amounts reimbursed by the tenants. Nonrecurring capital improvements include property renovations and expenditures related to repositioning acquisitions. The following table depicts capital expenditures ~~(in thousands)~~:

~~The decrease in recurring capital expenditures of $8.6 million, or 26.9%, was primarily due to lower tenant improvement costs and continued efforts to reduce capital expenditures.~~

~~Distributions:~~ The Company has elected and intends to qualify as a REIT for federal income tax purposes. In order to maintain its status as a REIT, the Company must meet, among other tests, sources of income, share ownership and certain asset tests. As a REIT, the Company is not taxed on that portion of its taxable income that is distributed to its shareholders provided that at least 90% of its taxable income is distributed to its shareholders prior to the filing of its tax return.

The Company’s funding strategy has been to primarily use permanent capital, including common and preferred stock, along with internally generated retained cash flows to meet its liquidity needs. In addition, the Company may sell properties that no longer meet its investment criteria. From time to time, the Company may use its Credit Facility or other forms of debt to facilitate real estate acquisitions or other capital allocations.proceeds. For the nine months ended September 30, 2017, we have recorded a combined net gain of $5.1 million related to these dispositions. We expect to report an additional gain of $2.5 million when the final proceeds for the sale of the development rights are received in the fourth quarter of 2017 and the remaining contingencies have lapsed.

This section should be read in conjunction with our consolidated statements of cash flows for the three and nine months ended September 30, 2017 and 2016 and the ~~earnings~~notes to ~~combined fixed charges~~our consolidated financial statements, which set forth the major components of our historical liquidity and capital resources. The discussion below sets forth the factors which we expect will affect our future liquidity and capital resources or which may vary substantially from historical levels.

Capital Raising Strategy: As a REIT, we generally distribute 100% of our taxable income to our shareholders, which relative to a taxable C corporation, limits the amount of cash flow from operations that we can retain for investments. As a result, in order to grow 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. We are a highly rated REIT, as rated by major rating agencies Moody’s and Standard & Poor’s. Our corporate credit rating by Standard and Poors is A-, while our preferred ~~distributions coverage ratio was 2.3~~shares are rated BBB by Standard and Poors and Baa2 by Moodys. Our credit profile and ratings enable us to ~~1.0. The Company targets~~effectively access both the public and private capital markets to raise capital.

In order to maintain access to capital markets, we target a minimum ratio of FFO (as defined below) to combined fixed charges and preferred distributions 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 nine months ended September 30, ~~2016,~~2017, the FFO to combined fixed charges and preferred distributions coverage ratio was ~~3.9~~5.0 to ~~1.0.~~1.0, excluding the Preferred Redemption Allocation.

We have a $250.0 million revolving Credit Facility that can be expanded to $400.0 million which expires in January, 2022. We use the Credit Facility along with bank term debt, as temporary “bridge” financing until we are able to raise longer term capital. Historically we have funded our long-term capital requirements with retained operating cash flow and proceeds from the issuance of common and preferred securities. We will select among these sources of capital based upon availability, relative cost, the impact of constraints of certain forms of capital on our operations (such as covenants), as well as the desire for leverage.

~~Non-GAAP Supplemental Disclosure Measure: Funds from Operations:~~Short-term Liquidity and Capital Resource Analysis: ~~Management believes~~We believe that ~~Funds from Operations (“FFO”)~~our net cash provided by our operating activities will continue to be sufficient to enable us to meet our ongoing requirements for debt service, capital expenditures and ~~FFO, as adjusted are useful supplemental measures of~~distributions to our shareholders for the Company’s operating performance. The Company computes FFO in accordance with the White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts. The White Paper defines FFO as net income, computed in accordance with GAAP, before depreciation, amortization, gains or losses on asset dispositions, net income allocable to noncontrolling interests —common units, net income allocable to restricted stock unit holders, impairment charges and nonrecurring items. Management believes that FFO provides a useful measure of the Company’s operating performance and when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses and interest costs, providing a perspective not immediately apparent from net income.foreseeable future.

~~FFO~~As of September 30, 2017, we had no balance outstanding on our Credit Facility. In the last five years, we have retained an average of $40 to $50 million in operating cash flow per year. Retained operating cash flow represents cash flow provided by operating activities, less shareholder and ~~FFO,~~unit holder distributions and capital expenditures. We expect to invest an additional $9.8 million with respect to the Highgate Development.

Potential future uses of capital in the next twelve months include the acquisition of additional real estate facilities, and potential future sources include the potential sale of real estate facilities.

Required Debt Repayment: As of September 30, 2017, we have no debt outstanding on our Credit Facility. Our Credit Facility does not expire until January, 2022. We are in compliance with the covenants and all other requirements of our Credit Facility.

Capital Expenditures: We define recurring capital expenditures as ~~adjusted should~~those necessary to maintain and operate our real estate at its current economic value. Nonrecurring capital improvements include property renovations and expenditures related to repositioning acquisitions. The following table sets forth our capital expenditures paid for the nine months ended September 30, 2017 and 2016, respectively, on an aggregate and per square foot basis:

The following table summarizes Same Park and Non-Same Park recurring capital expenditures paid and the related percentage of NOI by region for the nine months ended September 30, 2017 and 2016 (in thousands):

The increase in Same Park recurring capital expenditures of $6.9 million, or 29.2%, was primarily due to transaction costs related to large renewals and leasing production in the Same Park portfolio during 2017. Non-Same Park capital expenditures are related to the lease-up of a facility we acquired in Maryland in 2016.

In the last five years, our recurring capital expenditures have averaged generally between $1.10 and $1.80 per square foot, and 11.7% and 21.5% as a percentage of NOI.

Redemption of Preferred Stock:Historically, we have reduced our cost of capital by refinancing higher coupon preferred securities with lower coupon preferred securities. During May, 2017, our 6.0% Series T preferred shares, with a par value of $350.0 million, became redeemable at par. In September, 2017, we called for a partial redemption of $220.0 million. Funds received from our 5.25% Series X preferred shares issued during September, 2017 will be ~~analyzed~~used to complete this redemption on October 30, 2017.

At September 30, 2017, our 5.75% Series U preferred shares, with a par value of $230.0 million, were redeemable at par. Redemption of such preferred shares will depend upon many factors, including the cost of capital. None of our preferred securities are redeemable at the option of the holders.

Investment in ~~conjunction with net income. However, FFO~~ and ~~FFO, as adjusted should not be viewed as substitutes for net income as measures~~Advances to Unconsolidated Joint Venture: We expect to invest an additional $9.8 million in the Joint Venture, in order to fund completion of ~~operating performance or liquidity as they~~the Highgate Development. We do not ~~reflect depreciation~~expect any significant further investment necessary following completion.

Acquisitions of real estate facilities: We have acquired real estate facilities in the past, and ~~amortization costs or~~we continue to seek to acquire additional real estate facilities, however, there is significant competition to acquire existing facilities and there can be no assurance as to the level of ~~capital expenditure~~facilities we may acquire.

Development of real estate facilities: As noted above, we have an additional 123,000 building located within The Mile that we are seeking to develop into another multi-family complex. There can be no assurance as to the timing or amount of any investment that may occur; however, we do not expect to incur any significant development costs on this potential project until at least December 2018.

Repurchase of Common Stock: No shares of common stock were repurchased under the board-approved common stock repurchase program during the nine months ended September 30, 2017 or the year ended December 31, 2016. As of September 30, 2017, management has the authorization to repurchase an additional 1,614,721 shares. However, we have no plans at this time to repurchase additional shares.

Requirement to Pay Distributions:For all periods presented herein, we have elected to be treated as a REIT, as defined in the Code. As a REIT, we do not incur federal income tax on our REIT taxable income (generally, net rents and ~~leasing costs necessary~~gains from real property, dividends and interest) that is fully distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and if we meet certain organizational and operational rules. We believe we have met these requirements in all periods presented herein, and we expect to continue to elect and qualify as a REIT.

During the first quarter of 2017, the Board increased our quarterly dividend from $0.75 per common share to $0.85 per common share, which is an increase of $0.10 or 13.3% over the previous quarter’s distribution.

We paid REIT qualifying distributions of $107.1 million ($37.8 million to preferred shareholders and $69.4 million to common shareholders) and $102.4 million ($41.5 million to preferred shareholders and $60.9 million to common shareholders) during the nine months ended September 30, 2017 and 2016, respectively.

Our consistent, long-term dividend policy has been to distribute our taxable income in order to maintain ~~the operating performance of the Company’s properties, which are significant economic costs and could materially affect the Company’s results of operations.~~

~~Management believes FFO provides useful information~~our REIT status. Future quarterly distributions with respect to the ~~investment community about the Company’s~~common shares will continue to be determined based upon our REIT distribution requirements and will be funded with cash provided by operating ~~performance when compared to the performance of other real estate companies as FFO is generally~~activities.

Funds from Operations (“FFO”) and FFO per share are non-GAAP measures defined by the ~~industry standard for reporting operations~~National Association of ~~REITs. Management believes~~Real Estate Investment Trusts and are considered helpful measures of REIT performance by REITs and many REIT analysts. FFO ~~as adjusted provides useful information~~represents net income before real estate depreciation, gains or losses from sales and impairment charges, which are excluded because they are based upon historical real estate costs and assume that building values diminish ratably over time, while we believe that real estate values fluctuate due to ~~the investment community~~market conditions. FFO per share represents FFO allocable to common and dilutive shares, divided by adjusting FFO for certain items so as to provide more meaningful period-to-period comparisons of our operating performance. Other REITs may use different methods for calculating FFO and/or FFO, as adjustedaggregate common and ~~accordingly, our~~dilutive shares. FFO and FFO ~~as adjusted~~per share are not a substitute for net income or earnings per share. FFO is not a substitute for GAAP net cash flow in evaluating our liquidity or ability to pay dividends, because it excludes investing and financing activities presented on our consolidated statements of cash flows. In addition, other REITs may compute these measures differently, so comparisons among REITs may not be ~~comparable to other real estate companies’ FFO and/or FFO, as adjusted.~~helpful.

The following table reconciles from net income allocable to common shareholders to FFO ~~for the Company is computed as follows (~~and net income per share to FFO per share (amounts in thousands, except per share ~~data~~data)):

For The Three Months

For The Nine Months

Ended September 30,

Ended September 30,

2016

2015

2016

2015
Net income allocable to common shareholders
$
19,718

$
22,484

$
50,017

$
53,384
Gain on sale of real estate facilities

—

(15,748)

—

(28,235)
Depreciation and amortization

24,631

25,985

74,886

79,243
Net income allocable to noncontrolling interests—common units

5,315

6,087

13,495

14,467
Net income allocable to restricted stock unit holders

128

97

387

237
FFO allocable to common and dilutive shares

49,792

38,905

138,785

119,096
FFO allocated to noncontrolling interests—common units

(10,512)

(8,254)

(29,312)

(25,284)
FFO allocated to restricted stock unit holders

(279)

(160)

(827)

(512)
FFO allocated to common shares
$
39,001

$
30,491

$
108,646

$
93,300

Weighted average common shares outstanding

27,103

26,985

27,076

26,956
Weighted average common Operating Partnership units outstanding

7,305

7,305

7,305

7,305
Weighted average restricted stock units outstanding

268

124

256

115
Weighted average common share equivalents outstanding

98

64

90

78
Total common and dilutive shares

34,774

34,478

34,727

34,454

Net income per common share—diluted
$
0.72

$
0.83

$
1.84

$
1.97
Gain on sale of real estate facilities (1)

—

(0.45)

—

(0.81)
Depreciation and amortization (1)

0.71

0.75

2.16

2.30
FFO per common and dilutive shares (1)
$
1.43

$
1.13

$
4.00

$
3.46



	For The Three Months				For The Nine Months
	Ended September 30,				Ended September 30,
	2017		2016		2017		2016
Net income allocable to common shareholders	$	18,138	$	19,718	$	69,275	$	50,017
Gain on sale of real estate facility		—		—		(1,209)		—
Gain on sale of development rights		—		—		(3,865)		—
Depreciation and amortization		23,759		24,631		70,465		74,886
Depreciation from unconsolidated joint venture		483		—		587		—
Net income allocated to noncontrolling interests		4,866		5,315		18,610		13,495
Net income allocated to restricted stock unit holders		137		128		582		387
FFO allocable to common and dilutive shares	$	47,383	$	49,792	$	154,445	$	138,785

Weighted average common shares outstanding		27,226		27,103		27,192		27,076
Weighted average common operating partnership units outstanding		7,305		7,305		7,305		7,305
Weighted average restricted stock units outstanding		179		268		188		256
Weighted average common share equivalents outstanding		201		98		207		90
Total common and dilutive shares		34,911		34,774		34,892		34,727

Net income per common share—diluted	$	0.66	$	0.72	$	2.53	$	1.84
Gain on sale of real estate facility		—		—		(0.03)		—
Gain on sale of development rights		—		—		(0.11)		—
Depreciation and amortization, including amounts from investment
in unconsolidated Joint Venture		0.70		0.71		2.04		2.16
FFO per share (a)	$	1.36	$	1.43	$	4.43	$	4.00

We also present “Core FFO per share,” a non-GAAP measure that represents FFO per share excluding the net impact of (i) Preferred Redemption Allocation, (ii) separation settlement payments, as well as charges or reversals related to stock based compensation, due to the departure of senior executives and (iii) certain other non-cash and/or nonrecurring income or expense items. We review Core FFO per share to evaluate our ongoing operating performance, and we believe it is used by investors and REIT analysts in a similar manner. However, Core FFO per share is not a substitute for net income per share. Because other REITs may not compute Core FFO per share in the same manner as we do, may not use the same terminology or may not present such a measure, Core FFO per share may not be comparable among REITs.

The following table reconciles ~~reported~~ FFO per share to Core FFO as adjusted, which excludes a material lease buyout payment of $528,000 related to a 58,000 square foot lease in Virginia, non-cash distributions related to the redemption of preferred equity, acquisition transaction costs and a net non-cash stock compensation charge of $2.0 million.per share:

FFO allocable to common and dilutive shares, as adjusted, increased $8.2 million and $19.0 million for the three and nine months ended September 30, 2016 compared to the same periods in 2015. The three and nine month increases were due to an increase in NOI and savings from preferred distributions relating to the redemption of preferred equity and lower interest expense.

~~Related Party Transactions:~~ Assuming issuance of the Company’s common stock upon redemption of its common partnership units, PS would own 42.0% (or 14.5 million shares) of the outstanding shares of the Company’s common stock at September 30, 2016. As of September 30, 2016, PS owned 26.4% of the Operating Partnership (100.0% of the common units not owned by the Company). Ronald L. Havner, Jr., the Company’s chairman, is also the Chairman of the Board, 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.

Pursuant to a cost sharing and administrative services agreement, the Company shares costs with PS for certain administrative services and rental of corporate office space. The administrative services include investor relations, legal, corporate tax and information systems, which were allocated to PS in accordance with a methodology intended to fairly allocate those costs. These costs totaled $123,000 and $117,000 for the three months ended September 30, 2016 and 2015, respectively, and $370,000 and $352,000 for the nine months ended September 30, 2016 and 2015, respectively. In addition, the Company provides property management services for properties owned by PS for a management fee of 5% of the gross revenues of such properties in addition to reimbursement of direct costs. These management fee revenues recognized under a management contract with PS totaled $130,000 for the three months ended September 30, 2016 and 2015 and $389,000 and $410,000 for the nine months ended September 30, 2016 and 2015, respectively. PS also provides property management services for the self-storage component of two assets owned by the Company for a fee of 6% of the gross revenues of such properties in addition to reimbursement of certain costs. Management fee expense recognized under the management contract with PS totaled $22,000 and $21,000 for the three months ended September 30, 2016 and 2015, respectively, and $64,000 and $59,000 for the nine months ended September 30, 2016 and 2015, respectively.

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.

Off-Balance Sheet Arrangements: The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a material effect on the Company’s financial condition, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations: ~~The~~As of September 30, 2017, the Company is scheduled to pay cash dividends of ~~$55.3~~$41.4 million per year on its preferred equity outstanding as(excluding 8,800,000 depositary shares of ~~September~~Series T Preferred Stock which are scheduled to be redeemed on October 30, ~~2016.~~2017). Dividends are paid when and if declared by the Company’s Board ~~of Directors~~ and accumulate if not paid. Shares of preferred equity are redeemable by the Company in order to preserve its status as a REIT and are also redeemable five years after ~~issuance.~~issuance, but are not redeemable at the option of the holder.

Our significant contractual obligations as of September 30, 2017 and their impact on our cash flows and liquidity are summarized below (in thousands):

To limit the Company’s exposure to market risk, the Company principally finances its operations and growth with permanent equity capital consisting of either common or preferred stock. ~~As a result, the Company’s~~The Company had no debt ~~as a percentage of total equity (based on book values) was 3.2%~~outstanding as of September 30, ~~2016.~~2017.

Our exposure to market risk for changes in interest rates relates primarily to the Credit Facility, which is subject to variable interest rates. See Notes 2 6 and 76 to the consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding the terms, valuations and approximate principal maturities of the Company’s indebtedness, including the ~~mortgage note payable and~~ Credit Facility. Based on borrowing rates currently available to the Company, the difference between the carrying amount of debt and its fair value is insignificant.

The Company’s management, with the participation of the Company’s Chief Executive Officer, ~~and~~who is also serving as acting Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, ~~2016.~~2017. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company’s disclosure controls and procedures as of September 30, ~~2016,~~2017, the Company’s Chief Executive Officer, ~~and~~who is also serving as acting Chief Financial Officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

~~No change~~There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended September 30, ~~2016~~2017 that ~~has~~have materially affected, or isare reasonably likely to materially affect, the Company’s internal control over financial reporting.

The Company currently is not subject to any material litigation other than routine litigation and administrative proceedings arising in the ordinary course of business.

There have been no material changes to the risk factors included in our Annual Report on Form 10-K for the year ended December 31, ~~2015.~~2016.

The Company’s Board of Directors has authorized the repurchase, from time to time, of up to 6.5 million shares

of the Company’s common stock on the open market or in privately negotiated transactions. The authorization has no expiration date. Purchases will be made subject to market conditions and other investment opportunities available to the Company.

During the three months ended September 30, ~~2016,~~2017, there were no shares of the Company’s common stock repurchased. As of September 30, ~~2016,~~2017, 1,614,721 shares remain available for purchase under the program.

See Note 109 to the consolidated financial statements for additional information on repurchases of equity securities.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

California	95-4300881
(State or Other Jurisdiction	(I.R.S. Employer
of Incorporation)	Identification Number)



	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets as of September 30, ~~2016~~2017 (unaudited) and December 31, ~~2015~~2016	3
Consolidated statements of income (unaudited) for the three and nine months ended September 30, 2017 and 2016
~~September 30, 2016 and 2015~~	4
Consolidated statement of equity (unaudited) for the nine months ended September 30, ~~2016~~2017	5
Consolidated statements of cash flows (unaudited) for the nine months ended September 30, 2017 and 2016
~~September 30, 2016 and 2015~~	6
Notes to consolidated financial statements (unaudited)	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2120
Item 3. Quantitative and Qualitative Disclosures About Market Risk	3635
Item 4. Controls and Procedures	36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	36
Item 1A. Risk Factors	36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 6. Exhibits	3836



				Weighted		Aggregate
		Weighted		Average		Intrinsic
	Number of	Average		Remaining		Value
Options:	Options	Exercise Price		Contract Life		(in thousands)
Outstanding at December 31, 2015	258,674	$	60.76
Granted	39,000	$	102.58
Exercised	(49,882)	$	59.26
Forfeited	—	$	—
Outstanding at September 30, 2016	247,792	$	67.64	5.41 Years	$	11,380
Exercisable at September 30, 2016	169,498	$	57.69	4.00 Years	$	9,472



		Weighted
	Number of	Average Grant
Restricted Stock Units:	Units	Date Fair Value
Nonvested at December 31, 2015	78,652	$	78.44
Granted	119,950	$	87.45
Vested	(47,779)	$	80.45
Forfeited	(5,430)	$	74.79
Nonvested at September 30, 2016	145,393	$	58.71



	For The Nine Months
	Ended September 30,
	2016		2015
Write-offs of uncollectible rent	$	457	$	584
Write-offs as a percentage of rental income		0.2%		0.2%
Square footage of leases terminated prior to their scheduled expiration
due to business failures/bankruptcies		281		415
Accelerated depreciation and amortization related to unamortized tenant improvements
and lease commissions associated with early terminations	$	438	$	539



										September 30, 2017			December 31, 2016
		Earliest Potential	Dividend	Shares	Amount			Earliest Potential	Dividend	Shares	Amount		Shares	Amount
Series	Issuance Date	Redemption Date	Rate	Outstanding	(in thousands)		Issuance Date	Redemption Date	Rate	Outstanding	(in thousands)		Outstanding	(in thousands)
Series S	January, 2012	January, 2017	6.450%	9,200	$	230,000
Series T	May, 2012	May, 2017	6.000%	14,000		350,000	May, 2012	May, 2017	6.00%	5,200	$	130,000	14,000	$	350,000
Series U	September, 2012	September, 2017	5.750%	9,200		230,000	September, 2012	September, 2017	5.75%	9,200		230,000	9,200		230,000
Series V	March, 2013	March, 2018	5.700%	4,400		110,000	March, 2013	March, 2018	5.70%	4,400		110,000	4,400		110,000
Series W							October, 2016	October, 2021	5.20%	7,590		189,750	7,590		189,750
Series X							September, 2017	September, 2022	5.25%	9,200		230,000	—		—
Total				36,800	$	920,000				35,590	$	889,750	35,190	$	879,750



					Square	Occupancy at	Occupancy at
Property	Date Acquired	Location	Purchase Price		Feet	Acquisition	September 30, 2016
Shady Grove	September, 2016	Rockville, Maryland	$	13,250	226	18.5%	18.5%
Charcot Business Park II	December, 2014	San Jose, California		16,000	119	96.7%	97.3%
McNeil 1	November, 2014	Austin, Texas		10,550	246	53.3%	100.0%
Springlake Business
Center II	August, 2014	Dallas, Texas		5,148	145	35.4%	95.2%
Arapaho Business Park 9	July, 2014	Dallas, Texas		1,134	19	100.0%	100.0%
MICC—Center 23	July, 2014	Miami, Florida		12,725	149	0.0%	100.0%
Total			$	58,807	904	39.7%	78.5%



		Percent of	NOI
	Square	Square	For The Nine Months		Percent
Region	Footage	Footage	Ended September 30, 2016		of Total NOI
California
Northern California	7,245	25.7%	$	47,687	24.0%
Southern California	3,988	14.1%		30,926	15.6%
Texas
Northern Texas	3,125	11.1%		15,168	7.6%
Southern Texas	1,963	7.0%		13,544	6.8%
Virginia	4,040	14.3%		39,801	20.0%
Florida	3,866	13.7%		20,384	10.3%
Maryland	2,578	9.2%		22,853	11.5%
Washington	1,390	4.9%		8,253	4.2%
Total	28,195	100.0%	$	198,616	100.0%

Reconciliation of NOI to net income
Total NOI			$	198,616
Other income and (expenses):
LTEIP amortization:
Cost of operations				(2,312)
General and administrative				(5,804)
Lease buyout payment (1)				528
Facility management fees				389
Interest and other income				551
Interest and other expenses				(5,507)
Depreciation and amortization				(74,886)
Acquisition transaction costs				(328)
Adjusted general and administrative (2)				(5,850)
Net income			$	105,397



		~~Percent of~~
		~~Annualized~~
~~Industry~~		~~Rental Income~~
~~Business services~~		~~18.2%~~
~~Warehouse, distribution, transportation and logistics~~		~~10.4%~~
~~Computer hardware, software and related services~~		~~9.9%~~
~~Health services~~		~~9.7%~~
~~Government~~		~~8.9%~~
~~Retail, food, and automotive~~		~~7.4%~~
~~Engineering and construction~~		~~6.8%~~
~~Insurance and financial services~~		~~4.2%~~
~~Electronics~~		~~3.1%~~
~~Home furnishings~~		~~3.0%~~
~~Aerospace/defense products and services~~		~~2.7%~~
~~Communications~~		~~2.2%~~
~~Educational services~~		~~1.8%~~
~~Other~~		~~11.7%~~
~~Total~~		~~100.0%~~



				Percent of
		Annualized		Annualized
Tenants	Square Footage	Rental Income (1)		Rental Income
US Government	815	$	18,108	4.7%
Kaiser Permanente	199		4,709	1.2%
Lockheed Martin Corporation	168		4,500	1.2%
Keeco, L.L.C.	460		3,458	0.9%
Luminex Corporation	185		3,255	0.8%
MAXIMUS, Inc.	102		2,044	0.5%
KZ Kitchen Cabinet & Stone	181		1,860	0.5%
Investorplace Media, LLC	46		1,775	0.5%
Kuehne + Nagel, Inc.	163		1,775	0.5%
Inova Health Care Services	63		1,739	0.5%
Total	2,382	$	43,223	11.3%



Summary of Same Park Operations
	For The Three Months					For The Nine Months
	Ended September 30,					Ended September 30,
	2017		2016		Variance	2017		2016		Variance
Adjusted rental income	$	100,110	$	95,867	4.4%	$	299,207	$	285,927	4.6%

Adjusted cost of operations
Property taxes		10,730		10,137	5.8%		31,052		29,595	4.9%
Utilities		6,331		6,439	(1.7%)		17,961		18,137	(1.0%)
Repairs and maintenance		6,807		6,154	10.6%		19,429		18,845	3.1%
Snow removal		—		—	—		481		1,810	(73.4%)
Other expenses		6,953		7,145	(2.7%)		21,281		20,988	1.4%
Total		30,821		29,875	3.2%		90,204		89,375	0.9%

Net operating income	$	69,289	$	65,992	5.0%	$	209,003	$	196,552	6.3%

Selected Statistical Data
Gross margin (a)		69.2%		68.8%	0.6%		69.9%		68.7%	1.7%
Weighted average square foot occupancy		94.0%		94.1%	(0.1%)		94.1%		93.9%	0.2%
Annualized realized rent per occupied square foot (b)	$	15.32	$	14.65	4.6%	$	15.25	$	14.60	4.5%



								Percent of
			Rentable Square		Percent of	Annualized Rental		Annualized Rental
	Number of		Footage Subject to		Total Leased	Income Under		Income Represented
Year of Lease Expiration	Tenants		Expiring Leases		Square Footage	Expiring Leases		by Expiring Leases
Remainder of 2017		807		1,716	6.5%	$	26,771		6.4%
2018		1,562		5,863	22.2%		95,762		22.9%
2019		1,304		6,495	24.6%		96,533		23.0%
2020		672		4,757	18.1%		70,175		16.7%
2021		279		2,362	9.0%		36,469		8.7%
Thereafter		328		5,178	19.6%		93,456		22.3%
Total		4,952		26,371	100.0%	$	419,166		100.0%



	For the Three Months Ended
	March 31		June 30		September 30		December 31
Adjusted rental income
2017	$	99,654	$	99,443	$	100,110	$	—
2016	$	94,908	$	95,152	$	95,867	$	96,457

Adjusted cost of operations
2017	$	29,839	$	29,544	$	30,821	$	—
2016	$	30,777	$	28,723	$	29,875	$	29,336

Snow removal
2017	$	378	$	103	$	—	$	—
2016	$	1,810	$	—	$	—	$	—

Utilities
2017	$	5,896	$	5,734	$	6,331	$	—
2016	$	6,226	$	5,472	$	6,439	$	5,775

Weighted average square foot occupancy
2017		94.6%		93.7%		94.0%		—
2016		94.1%		93.5%		94.1%		94.8%

Annualized realized rent per occupied square foot
2017	$	15.16	$	15.27	$	15.32	$	—
2016	$	14.52	$	14.63	$	14.65	$	14.65



	For the Three Months Ended September 30, 2017
	Square			Transaction
	Footage	Tenant		Costs per	Rental
Regions	Leased	Retention		Executed Foot	Rate Change (a)
Northern California	521	88.8%	$	1.81	22.1%
Southern California	442	78.9%	$	2.62	3.3%
Dallas	175	62.1%	$	3.11	4.2%
Austin	66	70.5%	$	1.78	13.5%
Northern Virginia	260	74.4%	$	7.94	(10.3%)
South Florida	192	51.7%	$	1.20	5.4%
Suburban Maryland	111	82.8%	$	4.14	(14.5%)
Seattle	62	55.7%	$	2.61	12.1%
Total	1,829	75.8%	$	3.10	5.7%



	Adjusted		Adjusted			Adjusted		Adjusted
	Rental		Rental			Cost of		Cost of
	Income		Income			Operations		Operations			NOI		NOI
	September 30,		September 30,		Increase	September 30,		September 30,		Increase	September 30,		September 30,		Increase
Region	2016		2015		(Decrease)	2016		2015		(Decrease)	2016		2015		(Decrease)

Same Park
Northern California	$	21,121	$	19,248	9.7%	$	5,637	$	5,461	3.2%	$	15,484	$	13,787	12.3%
Southern California		15,487		14,601	6.1%		4,978		4,903	1.5%		10,509		9,698	8.4%
Northern Texas		7,629		7,313	4.3%		2,748		2,639	4.1%		4,881		4,674	4.4%
Southern Texas		6,377		5,716	11.6%		2,217		2,103	5.4%		4,160		3,613	15.1%
Virginia		19,695		20,142	(2.2%)		6,677		6,294	6.1%		13,018		13,848	(6.0%)
Florida		9,309		8,803	5.7%		2,622		2,978	(12.0%)		6,687		5,825	14.8%
Maryland		11,694		12,124	(3.5%)		3,755		4,060	(7.5%)		7,939		8,064	(1.6%)
Washington		3,768		3,678	2.4%		973		1,001	(2.8%)		2,795		2,677	4.4%
Total Same Park		95,080		91,625	3.8%		29,607		29,439	0.6%		65,473		62,186	5.3%
Non-Same Park
Northern California		519		471	10.2%		136		132	3.0%		383		339	13.0%
Northern Texas		389		278	39.9%		124		142	(12.7%)		265		136	94.9%
Southern Texas		446		273	63.4%		177		132	34.1%		269		141	90.8%
Florida		369		330	11.8%		92		116	(20.7%)		277		214	29.4%
Maryland		9		—	100.0%		3		—	100.0%		6		—	100.0%
Total Non-Same Park		1,732		1,352	28.1%		532		522	1.9%		1,200		830	44.6%
Total	$	96,812	$	92,977	4.1%	$	30,139	$	29,961	0.6%	$	66,673	$	63,016	5.8%

Reconciliation of NOI to net income
Total NOI											$	66,673	$	63,016	5.8%
Other income and (expenses):
NOI from sold assets												—		142	(100.0%)
LTEIP amortization:
Cost of operations												(657)		(284)	131.3%
General and administrative												(907)		(1,383)	(34.4%)
Lease buyout payment												528		—	100.0%
Facility management fees												130		130	—
Other income and expenses												(79)		(3,214)	(97.5%)
Depreciation and amortization												(24,631)		(25,985)	(5.2%)
Acquisition transaction costs												(328)		—	(100.0%)
Adjusted general and administrative												(1,735)		(1,893)	(8.3%)
Gain on sale of real estate facilities												—		15,748	(100.0%)
Net income											$	38,994	$	46,277	(15.7%)



				Annualized Realized
	Weighted Average Occupancy Rates			Rent Per Square Foot
Region	2016	2015	Change	2016		2015		Change

Northern California	96.5%	95.7%	0.8%	$	12.29	$	11.29	8.9%
Southern California	95.5%	94.1%	1.5%	$	16.27	$	15.57	4.5%
Northern Texas	91.0%	88.8%	2.5%	$	11.32	$	11.12	1.8%
Southern Texas	97.7%	92.7%	5.4%	$	15.20	$	14.37	5.8%
Virginia	91.8%	91.7%	0.1%	$	21.22	$	21.73	(2.3%)
Florida	93.2%	95.2%	(2.1%)	$	10.74	$	9.95	7.9%
Maryland	87.6%	90.3%	(3.0%)	$	22.70	$	22.84	(0.6%)
Washington	98.9%	98.5%	0.4%	$	10.97	$	10.74	2.1%
Total Same Park	94.1%	93.6%	0.5%	$	14.81	$	14.35	3.2%



	For The Nine Months ended September 30,
	2017		2016		2017		2016
	(in thousands)				(per square foot)
Recurring capital expenditures
Capital improvements	$	6,674	$	5,300	$	0.24	$	0.19
Tenant improvements		23,457		13,109		0.84		0.47
Lease commissions		5,162		5,054		0.18		0.18
Total recurring capital expenditures		35,293		23,463		1.26		0.84
Nonrecurring capital improvements		3,416		767		0.12		0.03
Total capital expenditures	$	38,709	$	24,230	$	1.38	$	0.87



	For the Nine Months Ended September 30,
						Recurring
	Recurring					Capital Expenditures
	Capital Expenditures					as a Percentage of NOI
Region		2017		2016	Change	2017		2016

Same Park
Northern California	$	2,052	$	2,735	(25.0%)		4.0%		5.7%
Southern California		3,787		3,708	2.1%		11.3%		12.0%
Dallas		2,874		2,933	(2.0%)		17.5%		19.5%
Austin		1,465		996	47.1%		10.0%		7.4%
Northern Virginia		10,620		6,783	56.6%		27.5%		17.9%
South Florida		1,572		1,770	(11.2%)		7.0%		8.7%
Suburban Maryland		7,355		3,730	97.2%		31.8%		16.3%
Seattle		590		808	(27.0%)		6.5%		9.8%
Total Same Park		30,315		23,463	29.2%		14.5%		11.9%
Non-Same Park
Maryland		4,978		—	100.0%		—		—
Total Non-Same Park		4,978		—	100.0%		—		—
Total	$	35,293	$	23,463	50.4%		16.9%		11.9%



	Payments Due by Period
Contractual Obligations	Total		Less than 1 year		1-3 years		4-5 years		More than 5 years
Transaction costs (a)	$	12,681	$	12,681	$	—	$	—	$	—
Joint Venture commitments (b)		9,752		9,752		—		—		—
Ground lease obligations (c)		282		145		69		68		—
Total	$	22,715	$	22,578	$	69	$	68	$	—


~~Exhibits~~

~~Exhibit 3.1~~	Certificate of Determination of Preferences of 5.20% Series W Cumulative Redeemable Preferred Stock of PS Business Parks, Inc. Field with Registrant’s Current Report on Form 8-K dated October 12, 2016Exhibits required by Item 601 of Regulation S-K are filed herewith or incorporated herein by reference and are listed in the attached Exhibit Index which is incorporated herein by reference.

~~Exhibit 4.1~~	Deposit Agreement Relating to 5.20% Cumulative Preferred Stock, Series W of PS Business Parks, Inc. dated as of October 11, 2016. Filed with Registrant’s Current Report on Form 8-K dated October 12, 2016, and incorporated herein by reference.

~~Exhibit 10.1~~	~~Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. relating to 5.20% Series W Cumulative Preferred Stock, dated as of October 20, 2016. Filed herewith.~~

~~Exhibit 12~~	~~Statement re: Computation of Ratio of Earnings to Fixed Charges. Filed herewith.~~

~~Exhibit 31.1~~	~~Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.~~

~~Exhibit 31.2~~	~~Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.~~

~~Exhibit 32.1~~	~~Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.~~

~~Exhibit 101.INS~~	~~XBRL Instance Document. Filed herewith.~~

~~Exhibit 101.SCH~~	~~XBRL Taxonomy Extension Schema. Filed herewith.~~

~~Exhibit 101.CAL~~	~~XBRL Taxonomy Extension Calculation Linkbase. Filed herewith.~~

~~Exhibit 101.DEF~~	~~XBRL Taxonomy Extension Definition Linkbase. Filed herewith.~~

~~Exhibit 101.LAB~~	~~XBRL Taxonomy Extension Label Linkbase. Filed herewith.~~

~~Exhibit 101.PRE~~	~~XBRL Taxonomy Extension Presentation Linkbase. Filed herewith.~~


~~Dated: October 28, 2016~~

	Dated: October 27, 2017

	PS BUSINESS PARKS, INC.

~~BY:/s/ Edward A. Stokx~~
~~Edward A. Stokx~~	BY:	/s/ Maria R. Hawthorne
~~Executive Vice~~		Maria R. Hawthorne
		President and Chief ~~Financial~~Executive Officer
		(Principal Executive Officer and Principal Financial Officer)


Exhibits

Exhibit 3.1	Certificate of Determination of Preferences of ~~5.20%~~5.25% Series WX Cumulative Redeemable Preferred Stock of PS Business Parks, Inc. ~~Field with~~Filed as exhibit 3.1 to Registrant’s Current Report on Form ~~8-K~~8- K dated ~~October~~September 12, ~~2016~~2017 (SEC File No. 001-10709) and incorporated herein by reference.

Exhibit 4.1	Deposit Agreement Relating to ~~5.20%~~5.25% Cumulative Preferred Stock, Series WX of PS Business Parks, Inc. dated as of ~~October 11, 2016.~~September 12, 2017. Filed ~~with~~as exhibit 4.1 to Registrant’s Current Report on Form 8-K dated ~~October~~September 12, ~~2016,~~2017 (SEC File No. 001-10709) and incorporated herein by reference.

Exhibit 10.1	Separation Agreement and General Release, dated August 14, 2017, by and between the Company and Edward A. Stokx. Filed as exhibit 10.1 to Registrant’s Current Report on Form 8- K dated August 14, 2017 (SEC File No. 001-10709) and incorporated herein by reference.

Exhibit 10.2	Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. relating to ~~5.20%~~5.25% Series WX Cumulative Preferred ~~Stock,~~Units, dated as of ~~October 20, 2016.~~September 21, 2017. Filed herewith.

Exhibit 12	Statement re: Computation of Ratio of Earnings to Fixed ~~Charges.~~Charges, Ratio of Earnings to Combined Fixed Charges and Income Allocation to Preferred Equity Holder and Ratio of Earnings to Combined Fixed Charges and Preferred Distributions. Filed herewith.

Exhibit 31.1	Certification of Chief Executive Officer ~~pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.~~

~~Exhibit 31.2~~	~~Certification of~~and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.

Exhibit 32.1	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.

Exhibit 101.INS	XBRL Instance Document. Filed herewith.

Exhibit 101.SCH	XBRL Taxonomy Extension Schema. Filed herewith.

Exhibit 101.CAL	XBRL Taxonomy Extension Calculation Linkbase. Filed herewith.

Exhibit 101.DEF	XBRL Taxonomy Extension Definition Linkbase. Filed herewith.

Exhibit 101.LAB	XBRL Taxonomy Extension Label Linkbase. Filed herewith.

Exhibit 101.PRE	XBRL Taxonomy Extension Presentation Linkbase. Filed herewith.