PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PS BUSINESS PARKS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



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

Cash and cash equivalents	$	4,766	$	128,629	$	132,658	$	128,629

Real estate facilities, at cost:
Real estate facilities, at cost
Land		789,531		789,531		789,227		789,227
Buildings and improvements		2,231,748		2,226,881		2,254,663		2,224,522
		3,021,279		3,016,412		3,043,890		3,013,749
Accumulated depreciation		(1,178,909)		(1,159,808)		(1,219,314)		(1,158,054)
		1,842,370		1,856,604		1,824,576		1,855,695
Property held for disposition, net						—		909
Land and building held for development		28,276		27,028		29,252		27,028
		1,870,646		1,883,632		1,853,828		1,883,632
Investment in and advances to unconsolidated joint venture		82,104		67,190		96,593		67,190
Rent receivable, net		3,320		1,945		2,203		1,945
Deferred rent receivable, net		30,651		29,770		31,670		29,770
Other assets		5,706		8,205		8,779		8,205

Total assets	$	1,997,193	$	2,119,371	$	2,125,731	$	2,119,371

LIABILITIES AND EQUITY

Accrued and other liabilities	$	75,824	$	78,657	$	82,618	$	78,657
Credit facility		107,000		—
Preferred stock called for redemption		—		230,000		220,000		230,000
Total liabilities		182,824		308,657		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,
35,190 shares issued and outstanding at
March 31, 2017 and December 31, 2016		879,750		879,750
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,
27,186,490 and 27,138,138 shares issued and outstanding at
March 31, 2017 and December 31, 2016, respectively		271		271
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		733,266		733,671		735,714		733,671
Cumulative net income		1,542,574		1,502,643
Cumulative distributions		(1,539,444)		(1,503,076)
Accumulated earnings (deficit)						60		(433)
Total PS Business Parks, Inc.’s shareholders’ equity		1,616,417		1,613,259		1,625,796		1,613,259
Noncontrolling interests:
Common units		197,952		197,455
Total noncontrolling interests		197,952		197,455
Noncontrolling interests						197,317		197,455
Total equity		1,814,369		1,810,714		1,823,113		1,810,714
Total liabilities and equity	$	1,997,193	$	2,119,371	$	2,125,731	$	2,119,371

For The Three Months

Ended March 31,

2017

2016
Revenues:

Rental income
$
100,061

$
95,845
Facility management fees

128

128
Total operating revenues

100,189

95,973
Expenses:

Cost of operations

31,033

31,894
Depreciation and amortization

23,078

25,041
General and administrative

2,831

3,635
Total operating expenses

56,942

60,570
Other income and (expenses):

Interest and other income

105

267
Interest and other expenses

(184)

(3,190)
Total other income and (expenses)

(79)

(2,923)
Gain on sale of development rights

3,865

—
Net income
$
47,033

$
32,480

Net income allocation:

Net income allocable to noncontrolling interests:

Noncontrolling interests—common units
$
7,102

$
3,936
Total net income allocable to noncontrolling interests

7,102

3,936
Net income allocable to PS Business Parks, Inc.:

Preferred shareholders

13,291

13,833
Restricted stock unit holders

248

142
Common shareholders

26,392

14,569
Total net income allocable to PS Business Parks, Inc.

39,931

28,544
Net income
$
47,033

$
32,480

Net income per common share:

Basic
$
0.97

$
0.54
Diluted
$
0.97

$
0.54

Weighted average common shares outstanding:

Basic

27,148

27,043
Diluted

27,234

27,122

Dividends declared per common share
$
0.85

$
0.75



	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 ~~THREE~~NINE MONTHS ENDED ~~MARCH 31,~~SEPTEMBER 30, 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, 2016	35,190	$	879,750	27,138,138	$	271	$	733,671	$	1,502,643	$	(1,503,076)	$	1,613,259	$	197,455	$	1,810,714	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	—		—	48,352		—		689		—		—		689		—		689	—		—	112,899		1		3,991		—		3,992		—		3,992
Stock compensation, net	—		—	—		—		1,867		—		—		1,867		—		1,867	—		—	—		—		2,673		—		2,673		—		2,673
Cash paid for taxes in lieu of
shares upon vesting of
restricted stock units	—		—	—		—		(3,356)		—		—		(3,356)		—		(3,356)	—		—	—		—		(3,865)		—		(3,865)		—		(3,865)
Net income	—		—	—		—		—		39,931		—		39,931		7,102		47,033	—		—	—		—		—		115,229		115,229		18,610		133,839
Distributions:
Distributions
Preferred stock	—		—	—		—		—		—		(13,291)		(13,291)		—		(13,291)	—		—	—		—		—		(38,472)		(38,472)		—		(38,472)
Common stock	—		—	—		—		—		—		(23,077)		(23,077)		—		(23,077)	—		—	—		—		—		(69,364)		(69,364)		—		(69,364)
Noncontrolling interests	—		—	—		—		—		—		—		—		(6,210)		(6,210)	—		—	—		—		—		—		—		(18,629)		(18,629)
Adjustment to noncontrolling interests
in underlying operating partnership	—		—	—		—		395		—		—		395		(395)		—
Balances at March 31, 2017	35,190	$	879,750	27,186,490	$	271	$	733,266	$	1,542,574	$	(1,539,444)	$	1,616,417	$	197,952	$	1,814,369
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 Three Months				For The Nine Months
	Ended March 31,				Ended September 30,
	2017		2016		2017		2016
Cash flows from operating activities:
Cash flows from operating activities
Net income	$	47,033	$	32,480	$	133,839	$	105,397
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		23,078		25,041
In-place lease adjustment		(25)		(193)
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		(362)		(423)		(1,654)		(1,253)
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)		—		(3,865)		—
Stock compensation		2,083		2,805		3,255		8,933
Amortization of financing costs		135		126		338		391
Decrease (increase) in receivables and other assets		641		(80)
Decrease in accrued and other liabilities		(996)		(2,383)
Other, net						4,125		1,259
Total adjustments		20,689		24,893		72,213		84,216
Net cash provided by operating activities		67,722		57,373		206,052		189,613
Cash flows from investing activities:
Cash flows from investing activities
Capital expenditures to real estate facilities		(8,672)		(6,499)		(38,709)		(24,230)
Capital expenditures to land and building held for development		(1,248)		—		(2,224)		—
Investment in and advances to unconsolidated joint venture		(14,914)		(3,940)		(30,161)		(28,800)
Acquisition of real estate facilities						—		(12,628)
Proceeds from sale of real estate facilities						2,144		—
Proceeds from sale of development rights		2,400		—		2,400		—
Net cash used in investing activities		(22,434)		(10,439)		(66,550)		(65,658)
Cash flows from financing activities:
Cash flows from financing activities
Borrowings on credit facility		133,000		—		170,000		116,000
Repayment of borrowings on credit facility		(26,000)		—		(170,000)		(56,000)
Repayment of mortgage note payable						—		(250,000)
Payment of financing costs		(690)		—		(778)		—
Proceeds from the exercise of stock options		689		900		3,992		2,956
Net proceeds from the issuance of preferred stock						222,225		—
Redemption of preferred stock		(230,000)		—		(230,000)		—
Cash paid for taxes in lieu of shares upon vesting of restricted stock units		(3,356)		(1,758)		(3,865)		(1,940)
Cash paid to restricted stock unit holders		(216)		(142)		(582)		—
Distributions paid to preferred shareholders		(13,291)		(13,833)		(38,472)		(41,498)
Distributions paid to common shareholders		(23,077)		(20,280)		(69,364)		(60,932)
Distributions paid to noncontrolling interests		(6,210)		(5,479)		(18,629)		(16,437)
Net cash used in financing activities		(169,151)		(40,592)		(135,473)		(307,851)
Net (decrease) increase in cash and cash equivalents		(123,863)		6,342
Net increase (decrease) in cash and cash equivalents						4,029		(183,896)
Cash and cash equivalents at the beginning of the period		128,629		188,912		128,629		188,912
Cash and cash equivalents at the end of the period	$	4,766	$	195,254	$	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	$	(395)	$	168
Supplemental schedule of non-cash investing and financing activities
Adjustment to noncontrolling interests in OP
Noncontrolling interests					$	(119)	$	1,613
Paid-in capital	$	395	$	(168)	$	119	$	(1,613)
Preferred Redemption Allocation
Paid-in capital					$	6,900	$	—
Accumulated earnings (deficit)					$	(6,900)	$	—
Preferred stock called for redemption
Preferred stock called for redemption and reclassified to liabilities					$	220,000	$	—
Preferred stock called for redemption and reclassified from equity					$	(220,000)	$	—

See accompanying notes.

Table of Contents

PS BUSINESS PARKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~March 31,~~September 30, 2017

1. Organization and description of business

PS Business Parks, Inc. (“PSB”) was incorporated in the state of California in 1990. As of ~~March 31,~~September 30, 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 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 ~~March 31,~~September 30, 2017, the Company owned and operated ~~28.1~~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 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 ~~Operating Partnership.~~OP. All significant inter-company balances and transactions have been 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 ~~March 31,~~September 30, 2017 are not necessarily indicative of the results that may be expected for the year ended December 31, 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, 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 Company consolidates all variable interest~~We consider entities ~~(each a “VIE”~~to be Variable Interest Entities (“VIEs”) ~~for which it is the primary beneficiary. Generally, a VIE is a legal entity in which the~~when they have 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.

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~~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 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 ~~March 31,~~September 30, 2017 and December 31, 2016. Deferred rent receivable is net of an allowance for uncollectible accounts totaling ~~$907,000~~$910,000 and $916,000 at ~~March 31,~~September 30, 2017 and December 31, 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 purchase to be cash equivalents. Cash and cash equivalents, which consist primarily of money market investments,

~~Table of Contents~~

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.

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Carrying values of the Company’s unsecured Credit Facility (as defined on page ~~14)~~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 and building~~Property held for 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 March 31, 2017, the value of in-place leases resulted in net~~We have no material intangible assets ~~of $996,000, net of $9.3 million of accumulated amortization with a weighted average amortization period of 9.5 years, and net intangible~~or liabilities of $642,000, net of $10.2 million of accumulated amortization with a weighted average amortization period of 6.9 years. As of December 31, 2016, the value of in-place leases resulted in net intangible assets of $1.1 million, net of $9.2 million of accumulated amortization and net intangible liabilities of $784,000, net of $10.0 million of accumulated amortization.

~~The Company recorded net increases in rental income of $25,000 and $193,000~~ for ~~the three months ended March~~

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~~31, 2017 and 2016, 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 March 31, 2017, 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 11.

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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 REIT taxable income to its shareholders. A REIT must~~if we distribute ~~at least 90%~~100% of ~~its~~our REIT taxable income each ~~year. In addition, REITs~~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 ~~number~~reduction to paid-in capital on our consolidated balance sheets at the time the preferred securities are issued and reflect the carrying value of ~~organizational and operating requirements. The Company may be subject~~the preferred equity at its redemption value. An additional allocation of income is made from the common shareholders 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 maintainthe preferred shareholders in the amount of

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~~its REIT status during 2016 and intends to continue to meet such requirements for 2017. 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 March 31, 2017, 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 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).

~~Earnings~~The following tables set forth the calculation of the components of our basic and diluted income per share ~~has been calculated~~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 ~~follows~~well as basic and diluted weighted average shares (in thousands ~~except per share amounts~~):

For The Three Months

Ended March 31,

2017

2016
Net income allocable to common shareholders
$
26,392

$
14,569
Weighted average common shares outstanding:

Basic weighted average common shares outstanding

27,148

27,043
Net effect of dilutive stock compensation—based on

treasury stock method using average market price

86

79
Diluted weighted average common shares outstanding

27,234

27,122
Net income per common share—Basic
$
0.97

$
0.54
Net income per common share—Diluted
$
0.97

$
0.54



	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

~~No options were excluded from the computation~~

Table of ~~diluted net income per share for the three months ended March 31, 2017 and 2016 as no options were considered anti-dilutive.~~Contents

Segment reporting

The Company views its operations as one segment.

Reclassifications

Certain reclassifications have been made to the consolidated financial statements for 2016 and in order to conform to the 2017 ~~presentation.~~presentation, including reclassifying management fee income totaling $130,000 and $389,000 for the three and nine months ended September 30, 2016 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 issued two Accounting 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 is governed under ASU 2017-05.

The Lease Standard will direct how we account for payments from the 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 for the disposition of real estate facilities.

The Revenue Standard is effective on January 1, 2018, and generally requires that revenue from Non-Lease Payments be based upon the consideration expected from our tenants, and be recognized under various methods depending upon the nature of the underlying expense and the contractual reimbursement arrangement. The standard permits either the retrospective (restatement) method or cumulative effects transition method and allowed for early adoption on January 1, 2017, which we did not elect. We expect to use the cumulative effects transition method, which will result in an 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 fixed payments recognized ratably over the term of the lease. The standard also requires capitalization of only the incremental costs incurred in executing each particular lease, such as legal fees to draft a lease or 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 lessee, the 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 standard requires a modified retrospective transition approach for all leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements on the date of initial 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.

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~~Recently issued accounting standards~~

In ~~May, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,~~ ~~Revenue from Contracts with Customers,~~ which amended the existing accounting standards for revenue recognition. The core principle underlying this guidance is that entities will recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled for such exchange. The guidance also provides a model for the measurement and recognition of gains and losses on the sale of certain nonfinancial assets, such as property and equipment, including real estate. This guidance is currently effective for the Company’s fiscal year beginning January 1, 2018. Early adoption is permitted for the Company’s fiscal year beginning January 1, 2017. ASU 2014-09 allows for full retrospective adoption applied to all periods presented or modified retrospective adoption with the cumulative effect of initially applying the standard recognized at the date of initial application. The Company intends to adopt the guidance using the modified retrospective approach for the fiscal year beginning January 1, 2018. The Company anticipates no impact upon adoption of the new accounting guidance on its consolidated financial statements relating to the Company’s facility management fees for property management services provided to PS or the recognition of gains and losses on the sale of real estate assets as the Company’s current accounting for such transactions is consistent with the new guidance’s core principle. Rental income from leasing arrangements are a substantial portion of the Company’s revenue and is specifically excluded from ASU 2014-09 and will be governed by the applicable lease codification (ASU 2016-02, ~~Leases)~~. In conjunction with the adoption of the leasing guidance, the Company is currently in the process of evaluating certain variable payment terms included in these lease arrangements which are governed by ASU 2014-09.

~~In February,~~August, 2016, the FASB issued ASU ~~2016-02,~~2016-15, ~~Leases~~Classification of Certain Cash Receipts and Cash Payments, which ~~amends the existing accounting standards for lease accounting. The accounting applied by a lessor is largely unchanged under this guidance. However, the~~provides guidance ~~requires lessees to classify leases as either finance or operating leases based~~ on the ~~principle~~classification of ~~whether or~~certain specific cash receipts and cash payments in the statement of cash flows, including, but not ~~the lease is effectively a financed purchase of the leased asset by the lessee. The classification will determine whether the lease expense is recognized based on an effective interest~~limited to, cash distributions received from equity method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and related liability for most leases with a term of greater than 12 months, regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today.investees, including unconsolidated joint ventures. The new guidance is expected to result in the recognition of a right-of-use asset and related liability to account for the Company’s future obligations under the ground lease arrangements for which the Company is the lessee. As of March 31, 2017, the remaining contractual payments under the ground lease agreements aggregated $348,000. Additionally, the new guidance will require that lessees and lessors capitalize, as initial direct costs, only those costs that are incurred due to the execution of a lease. This guidancestandard is effective for ~~annual~~ periods beginning after December 15, ~~2018~~2017, with early adoption permitted and ~~interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted. The guidance must~~shall 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.~~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 November, 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) – Restricted Cash, which requires the statements of cash flows to 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 reconcile such total to amounts on the balance sheets and disclose the nature of the restrictions. The guidance is effective for public entities for fiscal years beginning after December 15, 2017 and for interim periods therein, with early adoption permitted. The guidance must be adopted using a modified retrospective approach. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.

In January, 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) - Clarifying the Definition of a Business~~, which provides guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions of assets or businesses.~~. Under the new guidance, a set of transferred assets and activities is not a business when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable ~~assets. If a set~~assets, which we believe will apply to substantially all of ~~transferred assets and activities does not meet this threshold, then an entity must evaluate whether~~our future acquisitions of real estate facilities. Previously, such acquisitions were considered the ~~set meets the requirement that~~acquisition of a business, ~~include, at a minimum, an input~~ and ~~a substantive process that together significantly contribute to~~transaction costs of such acquisitions were expensed as incurred. Under the ~~ability to create outputs. The~~ new guidance, transaction costs will instead be capitalized as part of the purchase price. This standard is effective ~~for public entities~~ for fiscal years beginning after December 15, ~~2017 and for interim periods therein. Early adoption is permitted. The guidance will be applied prospectively to any transactions occurring within the period of adoption. The Company~~2017. We early adopted the ~~guidance effective~~standard on January 1, 2017 and expects the guidance will likely result in future acquisitions of operating properties being accounted for as asset acquisitions instead of business combinations with transaction costs of such acquisitions to be capitalized as part of the purchase price of the acquisition. Prior to

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2017; however, the adoption ~~of the new guidance, the Company accounted for acquisitions of operating properties as business combinations and expensed transaction costs as acquisition-related expenses.~~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 ~~three~~nine months ended ~~March 31,~~September 30, 2017 is as follows (in thousands):



			Buildings and		Accumulated						Buildings and		Accumulated
	Land		Improvements		Depreciation		Total		Land		Improvements		Depreciation		Total
Balances at December 31, 2016	$	789,531	$	2,226,881	$	(1,159,808)	$	1,856,604	$	789,227	$	2,224,522	$	(1,158,054)	$	1,855,695
Capital expenditures		—		8,844		—		8,844		—		39,321		—		39,321
Disposals		—		(3,977)		3,977		—		—		(9,180)		9,180		—
Depreciation and amortization		—		—		(23,078)		(23,078)		—		—		(70,465)		(70,465)
Balances at March 31, 2017	$	789,531	$	2,231,748	$	(1,178,909)	$	1,842,370
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 May 1, 2017, the Company ~~did not acquire any assets or assume any liabilities during the three months ended March 31, 2017 and 2016.~~ disposed of Empire Commerce, a two-building single-story office park comprising 44,000 square feet, located in Dallas, Texas, for net proceeds of $2.1 million, which resulted in a net gain of $1.2 million.

~~During the three months ended~~On March31,2017, 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 $6.5 million. The Company had acquired the development rights as part of its 2006 acquisition of the park. The Company has received ~~$4.0~~net proceeds of $3.9 million, ~~of proceeds,~~ of which $1.5 million was received in prior years and ~~$2.5~~$2.4 million was received in March, 2017. The Company recorded a gain of $3.9 million related to the net proceeds received through ~~March 31,~~September 30, 2017, ~~less transaction costs of $135,000 as these amounts~~which are non-refundable. The Company will report an additional gain of $2.5 million 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.

In 2013, the Company entered into a joint venture known as Amherst JV LLC (the “Joint Venture”) with an unrelated real estate development company (the “JV Partner”) for the purpose of developing a 395-unit multi-family building on a five-acre site (the “Project”) within ~~The Mile~~the Company’s 628,000 square foot office park located in Tysons, Virginia ~~(the “Project”~~(known as “The Mile”). ~~PSB holds~~We hold a 95.0% interest in the Joint Venture with the remaining 5.0% held by the JV Partner. The JV Partner is responsible for the development and construction of the Project, ~~and through an affiliate will oversee~~as well as the leasing and operational management of the Project. ~~The Project~~We do not control the Joint Venture, when considering, among other factors, that the consent of our JV Partner is ~~expected to deliver its first completed units in~~required for all significant decisions. Accordingly, we account for our investment using the ~~spring of 2017, with final completion expected in early 2018.~~equity method.

On October 5, 2015 (the “Contribution Date”), the Company contributed the site ~~along with capitalized~~and improvements to the Joint Venture. ~~Subsequent to the Contribution date, demolition, site preparation and construction~~

commenced. The JV partner serves as the managing member, with mutual consent from both the Company and the managing member required for all significant decisions. As such, the Company accounts for its investment in the Joint Venture using the equity method.

~~Along with the equity capital the Company has committed to the Joint Venture, the Company has also agreed to~~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 with two one-year extension options. The Company has reflected the aggregate value of the contributed site, its’ equity contributions, capitalized interest and loan advances to date as investment in and advances to unconsolidated joint venture.

The aggregate amount of development costs are estimated to be $105.6 million (excluding unrealized land appreciation)~~, of which the~~. The Company is committed to funding $75.0 million through athe construction loan in addition to ~~capital contributions~~its equity 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 ~~$82.1~~$96.6 million and $67.2 million as of ~~March 31,~~September 30, 2017 and December 31, 2016, respectively. For the ~~three~~nine months ended ~~March 31,~~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 ~~$14.9~~$22.3 million, capital contributions of $5.7 million and capitalized ~~$279,000 of interest. For the three months ended March 31, 2016, the Company made capital contributions of $3.6 million and capitalized $394,000~~$854,000 of interest.

As of September 30, 2017, all 395 units have been completed. During the three and nine months ended September 30, 2017, the Company recorded an equity loss in the unconsolidated joint venture of $376,000 and $758,000, respectively.

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 ~~March 31,~~September 30, 2017 (in thousands):

In addition to minimum rental payments, certain tenants reimburse the Company for their pro rata share of specified operating expenses. Such reimbursements amounted to ~~$23.1~~$22.6 million and ~~$20.8~~$20.3 million for the three months ended ~~March 31,~~September 30, 2017 and 2016, respectively, and $68.4 million and $61.6 million for the nine months ended September 30, 2017 and 2016, respectively. These amounts are included as rental income in the accompanying consolidated statements of income.

Leases accounting for ~~3.6%~~3.0% of total leased square footage are subject to termination options, of which ~~2.3%~~1.2% of total leased square footage have termination options exercisable through December 31, 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.

~~In January, 2017, the Company modified and extended the terms of its~~We have a line of credit (the “Credit Facility”) ~~and the Company’s related guaranty~~ with Wells Fargo Bank, National Association (“Wells Fargo”). The Credit Facility has a borrowing limit of $250.0 million and expires January 10, 2022. The rate of interest charged on borrowings is based on the LIBOR plus 0.80% to LIBOR plus 1.55% depending on the Company’s credit ratings. Currently, the Company’s rate under the Credit Facility is LIBOR plus 0.825%. In addition, the Company is required to pay an annual facility fee ranging from 0.10% to 0.30% of the borrowing limit depending on the Company’s credit ratings (currently 0.125%). ~~In connection with the extension, the Company~~We paid $613,000 of loan origination ~~costs. As of~~

~~March 31, 2017, the Company had $107.0 million outstanding on the Credit Facility at an interest rate of 1.68%. Subsequent to March 31, 2017, the Company repaid $7.0 million on the Credit Facility.~~costs in January, 2017. The Company had no balance outstanding on the Credit Facility at September 30, 2017 and December 31, 2016. Subsequent to September 30, 2017, the Company borrowed net $80.0 million on the Credit Facility. The Company had ~~$1.1 million~~$979,000 and $539,000 of unamortized loan origination costs as of ~~March 31,~~September 30, 2017 and December 31, 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 ~~March 31,~~September 30, 2017. Interest on outstanding borrowings is payable monthly.

~~As described in Note 2,~~Noncontrolling interests represent 7,305,355 common partnership units of the ~~Company reports noncontrolling interests within equity in~~OP owned by PS. Each common partnership unit receives a cash distribution equal to the ~~consolidated financial statements, but separate from the Company’s shareholders’ equity. In addition, net income allocable to noncontrolling interests~~dividend paid on our common shares and is ~~shown as a reduction from net income in calculating net income allocable to common shareholders.~~redeemable at PS’s option.

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~~If PS exercises its right of redemption, ~~right~~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 ~~the Operating Partnership in an amount~~us for each common partnership unit generally equal to the market value of a common share (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~~. We can prevent redemptions that we believe would ~~be prohibited under the applicable~~violate either our articles of incorporation or ~~if the general partner believes that there is a risk that delivery of shares of common stock would~~securities laws, cause ~~the general partner~~PSB to no longer qualify as a REIT, ~~would cause a violation of the applicable securities laws,~~ or ~~would~~could result in the ~~Operating Partnership~~OP no longer being treated as a partnership for federal ~~income~~ tax purposes.

In allocating net income and presenting equity, we treat the common partnership units ~~owned by PS, which~~as if converted to common shares. Accordingly, they receive the same net income allocation per unit as a common share and are ~~accounted for~~adjusted each period to have the same equity per unit as ~~noncontrolling interests. Combined with PS’s existing~~a common ~~stock ownership, on a fully converted basis, PS has a combined ownership of 41.9% (or 14.5 million shares) of the Company’s common equity.~~share.

~~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 $128,000 for the three months ended March 31, 2017 and 2016.

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 ~~March 31,~~September 30, 2017 and 2016, respectively, and $69,000 and $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 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 between the Company and PS in accordance with a methodology intended to fairly allocate those costs. Costs allocated to the Company totaled $132,000 and $123,000 for the three months ended ~~March 31,~~September 30, 2017 and 2016, respectively, and $397,000 and $370,000 for the nine months ended September 30, 2017 and 2016, respectively. Costs allocated to PS totaled $8,000 and $23,000 for the three and nine months ended ~~March 31, 2017.~~September 30, 2017, respectively.

The Company had net amounts due to PS of $30,000 and due from PS of ~~$164,000 and~~ $295,000 at ~~March 31,~~September 30, 2017 and December 31, 2016, respectively, for these contracts, as well as for certain operating expenses paid by the Company on behalf of PS.

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

During September, 2017, we called for a partial redemption of 8,800,000 of our outstanding 14,000,000 depositary shares representing interests in our 6.0% Cumulative Preferred Stock, Series 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 5.25% Series X Cumulative Redeemable Preferred Units are non-callable for five years and have no mandatory redemption. We received $222.2 million in net proceeds.

On December 7, 2016, ~~the Company~~we called ~~for the redemption of its~~our 6.45% Cumulative Preferred Stock, Series S, for redemption at ~~its~~ par ~~value of $230.0 million~~ and ~~subsequently~~ completed the redemption on January 18, 2017. ~~The Company reported non-cash distributions~~We recorded a Preferred Redemption Allocation of $7.3 million ~~representing~~in the ~~original issuance costs, as a reduction of net income allocable to common shareholders and unit holders for the year~~three months ended December 31, ~~2016. As of December 31,~~ 2016

~~the Company~~ and reclassified the ~~6.45% Cumulative Preferred Stock, Series S, of $230.0 million~~shares from equity to ~~liabilities as preferred~~“preferred stock called for ~~redemption.~~redemption” on our consolidated balance sheets at December 31, 2016.

~~The Company~~We paid ~~$13.3~~$12.6 million and $13.8 million in distributions to ~~its~~our preferred shareholders for the three months ended ~~March 31,~~September 30, 2017 and 2016, respectively, and $38.5 million and $41.5 million in distributions to our preferred shareholders for the nine months ended September 30, 2017 and 2016, respectively.

The holders of 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 ~~March 31,~~September 30, 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 $28.4 million~~

During the three months ended March 31, 2017, the Board increased ~~its~~our quarterly dividends from $0.75 per common share to $0.85 per common share.

~~The Company~~We paid ~~$23.1~~$23.2 million ($0.85 per common share) and $20.3 million ($0.75 per common share) in distributions to ~~its~~our common shareholders for the three months ended ~~March 31,~~September 30, 2017 and 2016, ~~respectively.~~

~~No shares of~~respectively, and $69.4 million ($2.55 per common ~~stock were repurchased under~~share) and $60.9 million ($2.25 per common share) in distributions to our common shareholders for the ~~board-approved common stock repurchase program during either of the three~~nine months ended ~~March 31,~~September 30, 2017 and ~~2016.~~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 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~~employees.

The service period for stock options and RSUs begins when (i) the Company and the recipient reach a mutual understanding of ~~PSB’s common~~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 ~~at a price not less than~~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 ~~market~~ value of ~~the common stock~~awards at the ~~date~~beginning of ~~grant. Additionally, under~~ the ~~2003 Plan~~service period as compensation expense. For awards that are earned solely upon the passage of time and ~~2012 Plan, PSB has granted restricted shares~~continued service, the entire cost of ~~common stock to certain directors and restricted stock units to officers and key employees.~~ 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).

NoIn 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 ~~were granted~~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, 2017, respectively we recorded $53,000 and $156,000 in compensation expense related to stock options, as compared to $51,000 and $229,000 for the ~~three months ended March 31, 2017 and~~same periods in 2016.

During the nine months ended September 30, 2017, 16,000 stock options were granted and 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 ~~weighted average grant date~~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 to satisfy the grantee’s statutory tax liabilities arising from the vesting. The fair value of ~~restricted stock units granted during~~our RSUs is determined based upon the ~~three months ended March 31, 2017 and 2016 was $88.91 and $83.59, respectively. The Company calculated the fair value~~applicable closing trading price of ~~each restricted stock unit grant using the market value~~our common shares on the date of grant.

~~At March 31,~~For the three and nine months ended September 30, 2017, ~~there was~~respectively, we recorded a ~~combined~~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 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 ~~1.1 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 ~~100,150~~94,150 restricted stock units would be awarded for each of the four years assuming achievement was met and up to ~~93,400~~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 $1.8 million~~ and ~~$2.5 million related~~RSU counts with respect to the LTEIP ~~was recognized for the three months ended March 31, 2017 and 2016, respectively.~~

In connection with the LTEIP, targets for 2016 were achieved at the highest threshold total return level. As such, 100,150 restricted stock units were granted during the three months ended March 31, 2017 at a weighted average grant date fair value of $88.91.

Included in the Company’s consolidated statements of income for the three months ended March 31, 2017 and 2016, was $49,000 and $131,000, respectively, in net compensation expense related to stock options. Net

~~compensation expense of $2.0 million and $2.6 million related to restricted stock units was recognized during the three months ended March 31, 2017 and 2016, respectively.~~

As of March 31, 2017, there was $480,000 of unamortized compensation expense related to stock options expected to be recognized over a weighted average period of 3.4 years. As of March 31, 2017, there was $11.7 million of unamortized compensation expense related to restricted stock units expected to be recognized over a weighted average period of 3.4 years.

Cash received from 10,344 stock options exercised during the three months ended March 31, 2017 was $689,000. Cash received from 16,823 stock options exercised during the three months ended March 31, 2016 was $900,000. The aggregate intrinsic value of the stock options exercised was $513,000 and $723,000 during the three months ended March 31, 2017 and 2016, respectively.

During the three months ended March 31, 2017, 67,914 restricted stock units vested; in settlement of these units, 38,008 shares were issued, net of 29,906 shares applied to payroll taxes. The aggregate fair value of the shares vested for the three months ended March 31, 2017 was $7.6 million. During the three months ended March 31, 2016, 43,689 restricted stock units vested; in settlement of these units, 25,604 shares were issued, net of 18,085 shares applied to payroll taxes. The aggregate fair value of the shares vested for the three months ended March 31, 2016 was $3.6 million. In addition to the vesting of these shares, tax deposits totaling $3.4 million and $1.8 million were made during the three months ended March 31, 2017 and 2016, respectively, on behalf of employees in exchange for common shares withheld upon vesting.

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 $76,000 and $83,000 in compensation expense for the three months ended March 31, 2017 and 2016, respectively. As of March 31, 2017 and 2016, there was $811,000 and $1.1 million, respectively, of unamortized compensation expense related to these shares. No shares were issued during the three months ended March 31, 2017 and 2016.aggregate 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” 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, 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 ~~March 31,~~our existing real estate facilities, which at September 30, 2017 ~~the Company owned and operated 28.1~~are comprised of 28.0 million rentable square feet of multi-tenant flex, industrial and office properties concentrated ~~primarily~~ in six ~~states.~~states and a 95.0% interest in 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 from time to time we dispose of properties which no longer fit within the 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.

~~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, 2016.~~ each lease transaction and providing a superior level of service to our customers.

~~Effect~~Acquisitions of ~~Acquisitions, Development and Dispositions~~Real Estate Facilities: We also seek to grow our operations through acquisitions of~~Properties 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 ~~which comprise the~~aggregating 226,000 square feet ~~of Non-Same Park portfolio (defined below),~~ in Rockville, Maryland for a purchase price of $13.3 million. ~~As of March 31, 2017, the~~The occupancy rate ~~of this asset remained unchanged since~~has increased from 18.5% on the date of acquisition ~~at 18.5%.~~to 31.6% as of September 30, 2017. These buildings are located within The ~~Company had 184,000~~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 ~~vacant space spread~~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 ~~acquired buildings as of March 31, 2017.~~ fourth

quarter of 2017. The ~~buildings are located within Shady Grove Executive Park, where~~total estimated investment upon completion, including the ~~Company owns three other buildings aggregating 352,000 square feet, which were 91.8% leased as~~fair value of ~~March 31, 2017.~~existing land, will be approximately $117.2 million.

AsWhile 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 ~~November 1, 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 ~~Company transferred a~~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 ~~also~~ located within The Mile that we are seeking to demolish in ~~Tysons, Virginia~~order to ~~land and building held for development, as the Company is pursuing entitlements to develop an additional~~construct another multi-family complex on ~~this site. The scope and timing of any future development will be subject to a variety of approvals and contingencies. Prior to being classified~~the parcel. This parcel is reflected on our consolidated balance sheets as land and building held for development. The scope and timing of development ~~the building was occupied by~~of this site is subject to a ~~single user. The~~variety of contingencies, including approval of entitlement. We do not expect that development will commence prior to December 31, 2018.

Dispositions of Real Estate Facilities: In 2014, we completed a plan to exit non-strategic markets in Sacramento California, Oregon and Arizona. We do not expect to exit any additional markets. However, we may from time to time dispose of individual real estate assets 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, located in Dallas, Texas, for net ~~operating income (“NOI”) associated with the prior tenant is reflected as NOI from asset held for development.~~proceeds of $2.1 million, which resulted in a net gain of $1.2 million.

In 2013, the Company entered into a joint venture known as Amherst JV LLC (the “Joint Venture”) with an unrelated real estate development company (the “JV Partner”) for the purpose of developing a 395-unit multi-family building on a five-acre site within The Mile in Tysons, Virginia (the “Project”). PSB holds a 95.0% interest in the Joint Venture with the remaining 5.0% held by the JV Partner. The JV Partner is responsible for the development and construction of the Project and through an affiliate will oversee the leasing and management of the Project. The Project is expected to deliver its first completed units in the spring of 2017, with final completion expected in early 2018.

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

Along with the equity capital the Company has committed to the Joint Venture, the Company has also agreed to provide the Joint Venture with a construction loan in the amount of $75.0 million. The Joint Venture will pay interest under the construction loan at a rate equal to the London Interbank Offered Rate (“LIBOR”) plus 2.25%. The loan will mature on April 5, 2019 with two one-year extension options. The Company has reflected the aggregate value of the contributed site, its’ equity contributions, capitalized interest and loan advances to date as investment in and advances to unconsolidated joint venture. The aggregate amount of development costs are estimated to be $105.6 million (excluding unrealized land appreciation), of which the Company is committed to funding $75.0 million through a construction loan ($49.2 million was outstanding as of March 31, 2017) in addition to capital contributions of $28.5 million, which includes a land basis of $15.3 million, to the Joint Venture.

The Company’s investment in and advances to unconsolidated joint venture was $82.1 million and $67.2 million at March 31, 2017 and December 31, 2016, respectively. For the three months ended March 31, 2017, the Company made loan advances of $14.9 million and capitalized $279,000 of interest.

~~During the three months ended March31,2017, 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 $6.5~~million. The Company had acquired the development rights as part of its 2006 acquisition of the park. The Company has received $4.0 million of proceeds, of which $1.5 million was received in prior years and $2.5 million was received in March, 2017. The Company recorded a gain of $3.9 million related to the proceeds received through March 31, 2017 less transaction costs of $135,000 as these amounts are non-refundable. The Company will report an additional gain of $2.5~~million when the final proceeds are received in the fourth quarter of 2017 and the remaining contingencies have lapsed.~~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 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 time, while we believe the value of real estate changes based upon cash flow and other market factors.

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

Adjusted Cost of Operations represents cost of operations, excluding LTEIP amortization, which can vary significantly period to period based upon-the performance of the whole company, rather than just property operations.

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. All operating metrics discussed in this section as of and for the three months ended March 31, 2017 and 2016 exclude asset held for development. 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 asset held for development.

~~Net Operating Income:~~ Rental income, cost of operations and rental income less cost of operations, excluding depreciation and amortization, or NOI, are summarized for the three months ended March 31, 2017 and 2016. 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. 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 of the tables below, we have reconciled total NOI to net income, which we consider the most directly comparable financial measure calculated in accordance with GAAP.~~

~~To present comparative results,~~See “Analysis of operating income” below for ~~the purpose~~reconciliations of ~~computing NOI, the tables below exclude amortization~~each of ~~the Senior Management Long-Term Equity Incentive Plan (“LTEIP”) for~~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 three months ended ~~March 31,~~September 30, 2017, net income 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 ~~2016.~~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 sold or are holding for development.

~~Concentration~~For the nine months ended September 30, 2017, net income allocable to 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 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 ~~Portfolio~~debt, and gains on the sale of real estate facilities and development rights. The increase in NOI includes a $12.5 million increase for our Same-Park facilities due primarily to higher realized rent per occupied square foot, offset partially by ~~Region:~~ ~~The table below reflects the Company’s square footage based on regional concentration as of March 31, 2017. As part of the table below,~~reduced NOI with respect to facilities we ~~have reconciled total NOI to net income~~ ~~(in thousands)~~:sold or are holding for development.

Percent of

NOI

Square

Square

Occupancy at

For The Three Months

Percent
Region

Footage

Footage

March 31, 2017

Ended March 31, 2017

of Total NOI
California

Northern California

7,245

25.7%

98.2%

$
17,406

24.9%
Southern California

3,988

14.2%

95.7%

10,989

15.7%
Texas

Northern Texas

3,125

11.1%

91.2%

5,546

8.0%
Southern Texas

1,963

7.0%

93.7%

5,028

7.2%
Virginia

3,917

14.0%

90.3%

12,971

18.6%
Florida

3,866

13.8%

97.7%

7,186

10.3%
Maryland

2,578

9.2%

81.8%

7,686

11.0%
Washington

1,390

5.0%

98.6%

3,012

4.3%
Total

28,072

100.0%

94.1%

$
69,824

100.0%

Reconciliation of NOI to net income

Total NOI

$
69,824

Other income and (expenses):

LTEIP amortization:

Cost of operations

(796)

General and administrative

(973)

Facility management fees

128

Other income and (expenses)

(79)

Depreciation and amortization

(23,078)

Adjusted general and administrative (1)

(1,858)

Gain on sale of development rights

3,865

Net income

$
47,033

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 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.

The table below sets forth the various components of our operating income (in thousands):



	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

Same Park and Non-Same Park facilities, offset partially by adjusted costs of operations from assets sold or held for development, as well as lower LTEIP amortization.

Operating income increased $4.4 million and $19.9 million for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016, due primarily to higher rental income, 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:

Adjusted rental income generated by the Same Park facilities increased 4.4% and 4.6% in the three and nine months ended September 30, 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, during the 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 ~~of space (1.2 million square feet of lease renewals and 615,000 square feet of new leases) while achieving initial rental rate growth on~~to new and ~~renewed~~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 nine months ended September 30, 2017 represented renewals of leases with existing tenants. See “Analysis of ~~3.5% over expiring rents. Total portfolio occupancy percentage~~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 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, 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.

Utilities are dependent primarily upon energy prices and usage levels. Changes in usage levels are driven primarily by weather and temperature. Utilities decreased by1.7% and 1.0% for the three and nine months ended September 30, ~~basis points~~2017, respectively, as compared to ~~94.1% since December 31, 2016.~~the same periods in the prior year. It is difficult to estimate future utility costs, because weather, temperature and energy prices are volatile and not predictable.

Repairs and maintenance increased 10.6% and 3.1% during the three and nine months ended September 30, 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, 2017, and increased 1.4% during the nine months ended September 30, 2017 as compared to the same periods in 2016. These costs are comprised of 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 facilities for adjusted rental income, adjusted cost of operations, occupancies, realized rents and those expenses which have material seasonal trends:

The following tables set forth market rent, expense and occupancy trends in our Same Park 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%

The following ~~table summarizes~~tables set forth key statistical information with respect to our Same Park leasing activities during the three and nine months ended September 30, 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 nine months ended ~~March 31,~~September 30, 2017 (in thousands):

During the first ~~three~~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 ~~the~~Northern Virginia and Suburban 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~~Northern Virginia and Suburban Maryland ~~markets~~ continue to experience soft market conditions as evidenced by continued pressure on occupancy and rental rates. Given lease expirations of ~~1.4~~1.1 million square feet in Northern Virginia and ~~921,000~~712,000 square feet in Suburban Maryland through December 31, 2018, the Company may continue to experience a decrease in rental income in these ~~markets.~~ regions.

~~Scheduled Lease Expirations:~~Non-Same Park facilities: ~~The following table sets forth the lease expirations for all operating assets as of March 31, 2017~~ ~~(dollars and square feet in thousands)~~:

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.

~~Concentration of Credit Risk by Industry:~~ ~~The information below depicts the industry concentration of our tenant base as of March 31, 2017. The Company analyzes this concentration to minimize significant industry exposure risk.~~

~~The information below depicts the Company’s top 10 customers by annualized rental income as of March 31, 2017~~ ~~(in thousands)~~:

~~Comparative Analysis of the Three Months Ended March 31, 2017 to the Three Months Ended March 31, 2016~~

~~Results of Operations:~~ In order to evaluate 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, 2015. Operating properties acquired subsequently are referred to as “Non-Same Park.” For the three months ended March 31, 2017 and 2016, the SameNon-Same Park facilities ~~constitute 27.9 million~~are comprised of two office buildings in Maryland, with 226,000 rentable square feet ~~representing 99.3%~~and occupancy of ~~the 28.1 million square feet in the Company’s total portfolio as of March 31, 2017.~~

~~The following table presents the operating results of the Company’s properties for the three months ended March 31,~~31.6% at September 30, 2017 and 2016 in addition to other income and expenses items affecting net income. For comparative purposes, the Company adjusts certain items from rental income, cost of operations and general and administrative expenses ~~(in thousands, except per square foot data)~~:

~~Facility Management Fees:~~ Facility management fees, derived from Public Storage (“PS”), account for a small portion of the Company’s revenues. Revenue was recognized from facility management fees of $128,000 for the three months ended March 31, 2017 and 2016.(33.9% at October 23, 2017).

~~Cost of Operations:~~ Assets sold or held for development:~~The following table summarizes the cost of~~ 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 ~~the Company’s properties for the three months ended March 31, 2017 and 2016~~ ~~(in thousands)~~: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 ~~expense~~ was ~~$23.1~~$23.8 million for the three months ended ~~March 31,~~September 30, 2017 compared to ~~$25.0~~$24.6 million for the same period in 2016. ~~The decrease in depreciation~~Depreciation and amortization ~~expense~~ was ~~due to assets being fully depreciated.~~

~~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 $7.1 million and $3.9 million for the three months ended March 31, 2017 and 2016, respectively. The increase was primarily due to a gain on sale of development

~~rights in Silver Spring, Maryland, an~~ ~~increase in overall NOI and reduced interest expense resulting from the repayment of a $250.0 million mortgage note.~~

~~Supplemental Property Data and Trends:~~ NOI is summarized for the three months ended March 31, 2017 and 2016 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 table summarizes the Same Park and Non-Same Park operating results by region for the three months ended March 31, 2017 and 2016. In addition, the table reflects the comparative impact on the overall adjusted rental income, adjusted cost of operations and NOI from properties that have been acquired since January 1, 2015, and the impact of such is included in Non-Same Park facilities in the table below. As part of the table below, we have reconciled total NOI to net income ~~(in thousands)~~:

For the Three Months Ended March 31,

Adjusted

Adjusted

Adjusted

Adjusted

Rental

Rental

Cost of

Cost of

Income

Income

Increase

Operations

Operations

Increase

NOI

NOI

Increase
Region
2017

2016

(Decrease)

2017

2016

(Decrease)

2017

2016

(Decrease)

Same Park

Northern California
$
23,296

$
21,281

9.5%

$
5,890

$
5,463

7.8%

$
17,406

$
15,818

10.0%
Southern California

15,773

14,618

7.9%

4,784

4,555

5.0%

10,989

10,063

9.2%
Northern Texas

8,288

7,873

5.3%

2,742

2,901

(5.5%)

5,546

4,972

11.5%
Southern Texas

7,516

7,055

6.5%

2,488

2,342

6.2%

5,028

4,713

6.7%
Virginia

19,089

19,248

(0.8%)

6,118

7,184

(14.8%)

12,971

12,064

7.5%
Florida

9,937

9,391

5.8%

2,751

2,678

2.7%

7,186

6,713

7.0%
Maryland

11,860

11,775

0.7%

4,111

4,642

(11.4%)

7,749

7,133

8.6%
Washington

4,011

3,761

6.6%

999

1,052

(5.0%)

3,012

2,709

11.2%
Total Same Park

99,770

95,002

5.0%

29,883

30,817

(3.0%)

69,887

64,185

8.9%
Non-Same Park

Maryland

291

—

100.0%

354

—

100.0%

(63)

—

(100.0%)
Total Non-Same Park

291

—

100.0%

354

—

100.0%

(63)

—

(100.0%)
Total
$
100,061

$
95,002

5.3%

$
30,237

$
30,817

(1.9%)

$
69,824

$
64,185

8.8%

Reconciliation of NOI to net income

Total NOI

$
69,824

$
64,185

8.8%
Other income and (expenses):

NOI from asset held for development

—

630

(100.0%)
LTEIP amortization:

Cost of operations

(796)

(864)

(7.9%)
General and administrative

(973)

(1,604)

(39.3%)
Facility management fees

128

128

—
Other income and (expenses)

(79)

(2,923)

(97.3%)
Depreciation and amortization

(23,078)

(25,041)

(7.8%)
Adjusted general and administrative

(1,858)

(2,031)

(8.5%)
Gain on sale of development rights

3,865

—

100.0%
Net income

$
47,033

$
32,480

44.8%

The following table summarizes Same Park and Non-Same Park recurring capital expenditures (as defined below) and the related percentage of NOI by region for the three months ended March 31, 2017 and 2016 ~~(in thousands)~~:

~~The following table summarizes Same Park weighted average occupancy rates and annualized realized rent per square foot by region for the three months ended March 31, 2017 and 2016.~~

~~Tenant Credit Risk:~~ The Company historically has experienced a low level 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 April 24, 2017, the Company had 74,000 square feet of leased space occupied by three 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.

~~Cash and cash equivalents decreased $123.9 million from $128.6 million at December 31, 2016 to $4.8 million at March 31, 2017 for the reasons noted below.~~

Net cash provided by operating activities for the three months ended March 31, 2017 and 2016 was $67.7 million and $57.4 million, respectively. The increase of $10.3 million in net cash provided by operating activities was primarily due to an increase in NOI combined with a ~~reduction in interest paid tied to the repayment of a $250.0 million mortgage note in June, 2016~~. 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 $22.4 million and $10.4 million for the three months ended March 31, 2017 and 2016, respectively. The change was due to an increase in cash investment in the Joint Venture combined with an increase in cash paid related to capital improvements partially offset by proceeds received from the sale of development rights in Silver Spring, Maryland.

Net cash used in financing activities was $169.2 million and $40.6 million for the three months ended March 31, 2017 and 2016, respectively. The change was primarily due to the redemption of preferred stock of $230.0 million during the first quarter of 2017 partially offset with increased borrowings from the Credit Facility of $107.0 million.

In January, 2017, the Company modified and extended the terms of its line of credit (the “Credit Facility”) and the Company’s related guaranty with Wells Fargo Bank, National Association (“Wells Fargo”). The Credit Facility has a borrowing limit of $250.0 million and expires January 10, 2022. The rate of interest charged on borrowings is based on the LIBOR plus 0.80% to LIBOR plus 1.55% depending on the Company’s credit ratings. Currently, the Company’s rate under the Credit Facility is LIBOR plus 0.825%. In addition, the Company is required to pay an annual facility fee ranging from 0.10% to 0.30% of the borrowing limit depending on the Company’s credit ratings (currently 0.125%). In connection with the extension, the Company paid $613,000 of loan origination costs. As of March 31, 2017, the Company had $107.0 million outstanding on the Credit Facility at an interest rate of 1.68%. Subsequent to March 31, 2017, the Company repaid $7.0 million on the Credit Facility. The Company had no balance outstanding on the Credit Facility at December 31, 2016. The Company had $1.1 million and $539,000 of unamortized loan origination costs as of March 31, 2017 and December 31, 2016, 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 with as of March 31, 2017. Interest on outstanding borrowings is payable monthly.

The Company’s preferred equity outstanding decreased from 21.7% of its market capitalization at December 31, 2016 to 17.8% at March 31, 2017 primarily due to a decrease in preferred stock outstanding from $1.1 billion at December 31, 2016 to $879.8 million at March 31, 2017. 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 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~~$70.5 million for the ~~first~~nine months ended September 30, 2017 compared to $74.9 million for the same period in 2016. The three and nine month decreases in depreciation and amortization were due to the cost of certain assets reaching the end of their depreciable lives.

General and 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 ~~Company increased its quarterly dividend from $0.75 per common share to $0.85 per common share.~~ongoing LTEIP amortization ($2.3 million in 2017 versus $3.8 million in 2016), departure of senior executives in 2016 and 2017 and acquisition transaction costs incurred in 2016 noted above.

~~Redemption of Preferred Stock:~~ ~~On December 7, 2016, the Company called for the redemption of its 6.45% Cumulative Preferred Stock, Series S, at its par value of $230.0 million~~Interest and subsequently completed the redemption on January 18, 2017. The Company reported non-cash distributions of $7.3 million, representing the original issuance costs, as a reduction of net income allocable to common shareholders and unit holders for the year ended December 31, 2016. As of December 31, 2016, the Company reclassified the 6.45% Cumulative Preferred Stock, Series S, of $230.0 million from equity to liabilities as preferred stock called for redemption.

~~Repurchase of Common Stock:~~Other Expense: ~~No shares of common stock were repurchased under the board-approved common stock repurchase program during~~Interest and other expense was $503,000 for the three months ended ~~March 31,~~September 30, 2017 orcompared to $155,000 for the ~~year~~same period in 2016. Interest and other expense was $972,000 for the nine months ended ~~December 31,~~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 repayment of a $250.0 million mortgage note during the second quarter of 2016.

~~Investment~~Equity in ~~and Advances~~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 ~~Unconsolidated Joint Venture:~~ ~~The aggregate amount of development costs are estimated to be $105.6 million (excluding unrealized land appreciation), of which the Company is committed to funding $75.0 million through~~provide a construction loan ~~($49.2 million was outstanding as of March 31, 2017) in addition to capital contributions of $28.5 million, which includes a land basis of $15.3 million,~~ to the Joint ~~Venture.~~Venture, maturing in April, 2019 and having two one-year extension options, of up to $75.0 million. The ~~Company’s~~interest income we receive on the loan is eliminated against our equity in earnings. During the three and nine months ended September 30, 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 ~~unconsolidated joint venture was $82.1~~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 ~~$67.2 million as~~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, ~~and December 31, 2016, respectively. For~~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 ~~three months ended March 31, 2017, the Company made loan advances of $14.9 million and capitalized $279,000 of interest.~~sale have completed, we will have

~~For the three months ended March 31, 2016, the Company made capital contributions of $3.6 million and capitalized $394,000 of interest.~~

~~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 three months ended March 31, 2017 and 2016, the Company expended $8.7 million and $6.3 million, respectively, in recurring capital expenditures, or $0.30 and $0.23 per weighted average square foot owned, respectively. Tenant improvements exclude tenant reimbursements of $172,000 and $1.3 million for the three months ended March 31, 2017 and 2016, respectively. Nonrecurring capital improvements include property renovations and expenditures related to repositioning acquisitions.

~~Capital expenditures on~~received a ~~per square foot owned basis~~total of $6.4 million in net 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 ~~as follows:~~

~~The increase in recurring capital expenditures of $2.4 million, or 37.6%, was primarily due to large renewals and expansions~~received in the ~~Same Park portfolio during the first~~fourth quarter of 2017 ~~combined~~and the remaining contingencies have lapsed.

This section should be read in conjunction with ~~transaction costs related~~our consolidated statements of cash flows for the three and nine months ended September 30, 2017 and 2016 and the notes to our consolidated financial statements, which set forth the ~~2016 acquisition.~~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.

~~Distributions:~~ Capital Raising Strategy:~~The Company has elected and intends to qualify as~~ 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 ~~federal income tax purposes.~~ 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 shares are rated BBB by Standard and Poors and Baa2 by Moodys. Our credit profile and ratings enable us to effectively access both the public and private capital markets to raise capital.

In order to maintain ~~its status as a REIT, the Company must meet, certain organizational and operational requirements related~~access to its share ownership, sources of income and asset composition. As a REIT, the Company is not taxed on that portion of its taxable income that is distributed to its shareholders provided it meets annual minimum dividend distribution requirements.

During the first quarter of 2017, the Board of Directors of the Company (the “Board”) increased its 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.

The Company paid distributions of $35.7 million ($12.6 million to preferred shareholders and $23.1 million to common shareholders) and $34.1 million ($13.8 million to preferred shareholders and $20.3 million to common shareholders) during the three months ended March 31, 2017 and 2016, respectively. All of these distributions were REIT qualifying distributions.

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

~~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. For the three months ended March 31, 2017, the earnings to combined fixed charges and preferred distributions coverage ratio was 3.4 to 1.0. The Company targetsmarkets, 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 ~~three~~nine months ended ~~March 31,~~September 30, 2017, the FFO to combined fixed charges and preferred distributions coverage ratio was ~~4.8~~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”) is a useful supplemental measure~~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 distributions to our shareholders for the foreseeable future.

As of September 30, 2017, we had no balance outstanding on our Credit Facility. In the ~~Company’s~~last five years, we have retained an average of $40 to $50 million in operating ~~performance. The Company computes FFO~~cash flow per year. Retained operating cash flow represents cash flow provided by operating activities, less shareholder and 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 ~~accordance~~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 ~~White Paper on FFO approved by the Board~~covenants and all other requirements 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 chargesour Credit Facility.

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.

~~FFO should be analyzed in conjunction with net income. However, FFO should not be viewed~~Capital Expenditures: We define recurring capital expenditures as ~~substitute for net income as a measure of operating performance or liquidity, as it does not reflect depreciation and amortization costs or the level of capital expenditure and leasing costs~~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 ~~operating performance of the Company’s properties, which are significant economic costs~~nine months ended September 30, 2017 and ~~could materially affect the Company’s results of operations.~~2016, respectively, on an aggregate and per square foot basis:

Management believes FFO provides useful information to the investment community about the Company’s operating performance when compared to the performance of other real estate companies as FFO is generally recognized as the industry standard for reporting operations of REITs. Other REITs may use different methods for calculating FFO and, accordingly, our FFO may not be comparable to other real estate companies’ FFO.

~~FFO~~The following table summarizes Same Park and Non-Same Park recurring capital expenditures paid and the related percentage of NOI by region for the ~~Company is computed as follows (~~nine months ended September 30, 2017 and 2016 (in ~~thousands, except per share data~~thousands)):

For The Three Months

Ended March 31,

2017

2016
Net income allocable to common shareholders
$
26,392

$
14,569
Gain on sale of development rights

(3,865)

—
Depreciation and amortization

23,078

25,041
Net income allocable to noncontrolling interests—common units

7,102

3,936
Net income allocable to restricted stock unit holders

248

142
FFO allocable to common and dilutive shares

52,955

43,688
FFO allocated to noncontrolling interests—common units

(11,142)

(9,233)
FFO allocated to restricted stock unit holders

(406)

(276)
FFO allocated to common shareholders
$
41,407

$
34,179

Weighted average common shares outstanding

27,148

27,043
Weighted average common Operating Partnership units outstanding

7,305

7,305
Weighted average restricted stock units outstanding

321

223
Weighted average common share equivalents outstanding

86

79
Total common and dilutive shares

34,860

34,650

Net income per common share—diluted
$
0.97

$
0.54
Gain on sale of development rights (1)

(0.11)

—
Depreciation and amortization (1)

0.66

0.72
FFO per common and dilutive share (1)
$
1.52

$
1.26



	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%

~~____________________________~~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.

~~FFO allocable to common~~In the last five years, our recurring capital expenditures have averaged generally between $1.10 and ~~dilutive shares increased $9.3 million for the three months ended March 31, 2017 compared to 2016. The increase was due to an increase in NOI, reduced interest expense~~$1.80 per square foot, and ~~savings from lower preferred distributions.~~11.7% and 21.5% as a percentage of NOI.

~~Related Party Transactions:~~ AsRedemption of ~~March 31,~~Preferred Stock:Historically, we have reduced our cost of capital by refinancing higher coupon preferred securities with lower coupon preferred securities. During May, 2017, ~~PS owned 7.2~~our 6.0% Series T preferred shares, with a par value of $350.0 million, shares of the Company’s common stock and 7.3 million common units of the Operating Partnership (100.0% of the common units not owned by the Company). Assuming issuance of the Company’s common stock uponbecame redeemable at par. In September, 2017, we called for a partial redemption of ~~its common partnership units, PS would own 41.9% (or 14.5 million shares) of the outstanding~~$220.0 million. Funds received from our 5.25% Series X preferred shares ~~of the Company’s common stock at March 31,~~issued during September, 2017 will be used to complete this redemption on October 30, 2017. ~~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~~At September 30, 2017, our 5.75% Series U preferred shares, with a ~~director~~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 ~~Company~~holders.

Investment in and ~~also President of PS. Gary E. Pruitt,~~Advances to Unconsolidated Joint Venture: We expect to invest an ~~independent director~~additional $9.8 million in the Joint Venture, in order to fund completion of the ~~Company is also a trustee of PS.~~Highgate Development. We do not expect any significant further investment necessary following completion.

Acquisitions of real estate facilities: We have acquired real estate facilities in the past, and we continue to ~~a cost sharing~~seek to acquire additional real estate facilities, however, there is significant competition to acquire existing facilities and ~~administrative services agreement,~~there can be no assurance as to the ~~Company~~level of 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 ~~costs with PS for certain administrative services and rental~~ of ~~corporate office space. The administrative services include investor relations, legal, lease administration, corporate tax and information systems, which~~common stock were ~~allocated between~~repurchased under the ~~Company and PS in accordance with a methodology intended to fairly allocate those costs. For~~board-approved common stock repurchase program during the ~~three~~nine months ended ~~March~~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 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 ~~costs allocated~~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 ~~Company totaled $132,000~~previous quarter’s distribution.

We paid REIT qualifying distributions of $107.1 million ($37.8 million to preferred shareholders and ~~costs allocated~~$69.4 million to ~~PS totaled $8,000. In addition,~~common shareholders) and $102.4 million ($41.5 million to preferred shareholders and $60.9 million to common shareholders) during the Company provides property management services for properties owned by PS for a management fee equal to 5% of the gross revenues of such properties in addition to reimbursement of certain costs. These management fee revenues recognized under a management contract with PS totaled $128,000 for the threenine months ended March 31, 2017 and 2016. 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 March 31,September 30, 2017 and 2016, respectively.

~~The PS Business Parks name and logo are owned by PS and licensed~~Our consistent, long-term dividend policy has been to distribute our taxable income in order to maintain our REIT status. Future quarterly distributions with respect to the ~~Company under~~common shares will continue to be determined based upon our REIT distribution requirements and will be funded with cash provided by operating activities.

Funds from Operations (“FFO”) and FFO per share are non-GAAP measures defined by the National Association of Real Estate Investment Trusts and are considered helpful measures of REIT performance by REITs and many REIT analysts. FFO 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 market conditions. FFO per share represents FFO allocable to common and dilutive shares, divided by aggregate common and dilutive shares. FFO and FFO per share are not a ~~non-exclusive, royalty-free license agreement.~~ 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 helpful.

The ~~license can~~following table reconciles from net income allocable to common shareholders to FFO and net income per share to FFO per share (amounts in thousands, except per share data):

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 ~~terminated by either party for any reason with six months written notice.~~comparable among REITs.

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 ~~$50.4~~$41.4 million per year on its preferred equity outstanding as(excluding 8,800,000 depositary shares of ~~March 31, 2017.~~Series T Preferred Stock which are scheduled to be redeemed on October 30, 2017). Dividends are paid when and if declared by the Company’s Board 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 5.9%~~outstanding as of ~~March 31,~~September 30, 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 and 6 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 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 ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 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. ~~The Company also has an investment in an unconsolidated joint venture~~

and because we do not control the joint venture, our disclosure controls and procedures with respect to such joint venture are substantially more limited than those we maintain with respect to our consolidated subsidiaries.

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 ~~March 31,~~September 30, 2017 that have materially affected, or are 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, 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 ~~March 31,~~September 30, 2017, there were no shares of the Company’s common stock repurchased. As of ~~March 31,~~September 30, 2017, 1,614,721 shares remain available for purchase under the program.

See Note 9 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 ~~March 31,~~September 30, 2017 (unaudited) and December 31, 2016	3
Consolidated statements of income (unaudited) for the three and nine months ended
~~March 31,~~ September 30, 2017 and 2016	4
Consolidated statement of equity (unaudited) for the ~~three~~nine months ended ~~March 31,~~September 30, 2017	5
Consolidated statements of cash flows (unaudited) for the ~~three~~nine months ended
~~March 31,~~ September 30, 2017 and 2016	6
Notes to consolidated financial statements (unaudited)	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3. Quantitative and Qualitative Disclosures About Market Risk	3335
Item 4. Controls and Procedures	3336
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	3436
Item 1A. Risk Factors	3436
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	3436
Item 6. Exhibits	3536



Remainder of 2017	$	211,806	$	75,498
2018		228,153		267,885
2019		159,029		196,801
2020		104,012		133,240
2021		70,731		92,451
Thereafter		128,044		168,364
Total	$	901,775	$	934,239



				Weighted		Aggregate
		Weighted		Average		Intrinsic
	Number of	Average		Remaining		Value
Options:	Options	Exercise Price		Contract Life		(in thousands)
Outstanding at December 31, 2016	229,655	$	68.93
Granted	—	$	—
Exercised	(10,344)	$	66.63
Forfeited	—	$	—
Outstanding at March 31, 2017	219,311	$	69.03	5.34 Years	$	10,028
Exercisable at March 31, 2017	147,224	$	58.19	3.96 Years	$	8,329



		Weighted
	Number of	Average Grant
Restricted Stock Units:	Units	Date Fair Value
Nonvested at December 31, 2016	144,693	$	58.56
Granted	100,150	$	88.91
Vested	(67,914)	$	83.05
Forfeited	(700)	$	89.83
Nonvested at March 31, 2017	176,229	$	77.30



										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 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	5.200%	7,590		189,750	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				35,190	$	879,750				35,590	$	889,750	35,190	$	879,750



		Percent of		NOI
	Square	Square	Occupancy at	For The Three Months		Percent
Region	Footage	Footage	March 31, 2017	Ended March 31, 2017		of Total NOI
California
Northern California	7,245	25.7%	98.2%	$	17,406	24.9%
Southern California	3,988	14.2%	95.7%		10,989	15.7%
Texas
Northern Texas	3,125	11.1%	91.2%		5,546	8.0%
Southern Texas	1,963	7.0%	93.7%		5,028	7.2%
Virginia	3,917	14.0%	90.3%		12,971	18.6%
Florida	3,866	13.8%	97.7%		7,186	10.3%
Maryland	2,578	9.2%	81.8%		7,686	11.0%
Washington	1,390	5.0%	98.6%		3,012	4.3%
Total	28,072	100.0%	94.1%	$	69,824	100.0%

Reconciliation of NOI to net income

Total NOI				$	69,824
Other income and (expenses):
LTEIP amortization:
Cost of operations					(796)
General and administrative					(973)
Facility management fees					128
Other income and (expenses)					(79)
Depreciation and amortization					(23,078)
Adjusted general and administrative (1)					(1,858)
Gain on sale of development rights					3,865
Net income				$	47,033



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



				Transaction
	Leasing	Tenant		Costs per	Rental
Markets	Volume	Retention		Executed Foot	Rate Change (1)
Northern California	245	70.4%	$	1.94	20.4%
Southern California	306	56.8%	$	2.29	6.4%
Northern Texas	226	75.2%	$	2.14	2.9%
Southern Texas	80	19.5%	$	5.03	15.1%
Virginia	230	55.4%	$	7.85	(4.4%)
Florida	315	69.1%	$	2.24	2.6%
Maryland	128	74.8%	$	6.65	(14.3%)
Washington	225	96.0%	$	0.48	10.2%
Total	1,755	66.1%	$	3.15	3.5%



	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%



	For the Nine Months Ended September 30, 2017
	Square			Transaction
	Footage	Tenant		Costs per	Rental
Regions	Leased	Retention		Executed Foot	Rate Change (a)
Northern California	1,098	70.7%	$	1.64	19.2%
Southern California	1,150	66.4%	$	2.36	4.7%
Dallas	574	57.4%	$	3.40	4.2%
Austin	320	47.7%	$	2.62	14.2%
Northern Virginia	785	67.3%	$	6.08	(8.8%)
South Florida	858	64.0%	$	1.50	4.0%
Suburban Maryland	392	79.7%	$	9.14	(10.8%)
Seattle	381	79.0%	$	1.07	12.3%
Total	5,558	66.8%	$	3.12	4.3%



		~~Percent of~~
		~~Annualized~~
~~Industry~~		~~Rental Income~~
~~Business services~~		~~18.1%~~
~~Warehouse, distribution, transportation and logistics~~		~~11.0%~~
~~Health services~~		~~10.0%~~
~~Computer hardware, software and related services~~		~~9.9%~~
~~Government~~		~~7.9%~~
~~Retail, food, and automotive~~		~~7.2%~~
~~Engineering and construction~~		~~7.0%~~
~~Insurance and financial services~~		~~4.2%~~
~~Electronics~~		~~3.1%~~
~~Home furnishings~~		~~3.0%~~
~~Aerospace/defense products and services~~		~~2.8%~~
~~Communications~~		~~2.1%~~
~~Educational services~~		~~1.7%~~
~~Other~~		~~12.0%~~
~~Total~~		~~100.0%~~



				Percent of
		Annualized		Annualized
Tenants	Square Footage	Rental Income (1)		Rental Income
US Government	662	$	16,680	4.2%
Lockheed Martin Corporation	168		4,441	1.1%
Kaiser Permanente	158		4,161	1.0%
Keeco, L.L.C.	460		3,547	0.9%
Luminex Corporation	185		3,187	0.8%
MAXIMUS, Inc.	102		2,075	0.5%
KZ Kitchen Cabinet & Stone	181		2,026	0.5%
Investorplace Media, LLC	46		1,814	0.5%
Inova Health Care Services	63		1,792	0.4%
Raytheon	78		1,666	0.4%
Total	2,103	$	41,389	10.3%



	For the Three Months Ended March 31,
	Adjusted		Adjusted			Adjusted		Adjusted
	Rental		Rental			Cost of		Cost of
	Income		Income		Increase	Operations		Operations		Increase	NOI		NOI		Increase
Region	2017		2016		(Decrease)	2017		2016		(Decrease)	2017		2016		(Decrease)

Same Park
Northern California	$	23,296	$	21,281	9.5%	$	5,890	$	5,463	7.8%	$	17,406	$	15,818	10.0%
Southern California		15,773		14,618	7.9%		4,784		4,555	5.0%		10,989		10,063	9.2%
Northern Texas		8,288		7,873	5.3%		2,742		2,901	(5.5%)		5,546		4,972	11.5%
Southern Texas		7,516		7,055	6.5%		2,488		2,342	6.2%		5,028		4,713	6.7%
Virginia		19,089		19,248	(0.8%)		6,118		7,184	(14.8%)		12,971		12,064	7.5%
Florida		9,937		9,391	5.8%		2,751		2,678	2.7%		7,186		6,713	7.0%
Maryland		11,860		11,775	0.7%		4,111		4,642	(11.4%)		7,749		7,133	8.6%
Washington		4,011		3,761	6.6%		999		1,052	(5.0%)		3,012		2,709	11.2%
Total Same Park		99,770		95,002	5.0%		29,883		30,817	(3.0%)		69,887		64,185	8.9%
Non-Same Park
Maryland		291		—	100.0%		354		—	100.0%		(63)		—	(100.0%)
Total Non-Same Park		291		—	100.0%		354		—	100.0%		(63)		—	(100.0%)
Total	$	100,061	$	95,002	5.3%	$	30,237	$	30,817	(1.9%)	$	69,824	$	64,185	8.8%

Reconciliation of NOI to net income
Total NOI											$	69,824	$	64,185	8.8%
Other income and (expenses):
NOI from asset held for development												—		630	(100.0%)
LTEIP amortization:
Cost of operations												(796)		(864)	(7.9%)
General and administrative												(973)		(1,604)	(39.3%)
Facility management fees												128		128	—
Other income and (expenses)												(79)		(2,923)	(97.3%)
Depreciation and amortization												(23,078)		(25,041)	(7.8%)
Adjusted general and administrative												(1,858)		(2,031)	(8.5%)
Gain on sale of development rights												3,865		—	100.0%
Net income											$	47,033	$	32,480	44.8%



	For the Three Months Ended March 31,
				Annualized Realized
	Weighted Average Occupancy Rates			Rent Per Square Foot
Region	2017	2016	Change	2017		2016		Change

Northern California	97.8%	96.6%	1.2%	$	13.15	$	12.17	8.1%
Southern California	96.0%	94.3%	1.8%	$	16.49	$	15.55	6.0%
Northern Texas	90.5%	89.3%	1.3%	$	11.71	$	11.27	3.9%
Southern Texas	94.3%	95.9%	(1.7%)	$	16.23	$	14.99	8.3%
Virginia	90.4%	92.9%	(2.7%)	$	21.55	$	21.15	1.9%
Florida	97.6%	95.1%	2.6%	$	10.54	$	10.22	3.1%
Maryland	87.2%	88.4%	(1.4%)	$	23.13	$	22.64	2.2%
Washington	98.7%	98.2%	0.5%	$	11.70	$	11.03	6.1%
Total Same Park	94.6%	94.1%	0.5%	$	15.16	$	14.51	4.5%



	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 10.1~~	~~Third Amended and Restated Revolving Credit Agreement dated as of January 10, 2017. Filed with Registrant’s Current Report on Form 8-K dated January 11, 2017 (SEC File No. 001-10709)~~Exhibits 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 10.2~~	Third Amended and Restated Repayment Guaranty dated as of January 10, 2017. Filed with Registrant’s Current Report on Form 8-K dated January 11, 2017 (SEC File No. 001-10709) and incorporated herein by reference.

~~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: ~~April 28,~~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 ~~10.1~~3.1	~~Third Amended and Restated Revolving Credit Agreement dated~~Certificate of Determination of Preferences of 5.25% Series X Cumulative Redeemable Preferred Stock of PS Business Parks, Inc. Filed as ~~of January 10, 2017. Filed with~~exhibit 3.1 to Registrant’s Current Report on Form ~~8-K~~8- K dated ~~January 11,~~September 12, 2017 (SEC File No. 001-10709) and incorporated herein by reference.

Exhibit 4.1	Deposit Agreement Relating to 5.25% Cumulative Preferred Stock, Series X of PS Business Parks, Inc. dated as of September 12, 2017. Filed as exhibit 4.1 to Registrant’s Current Report on Form 8-K dated September 12, 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	~~Third Amended and Restated Repayment Guaranty~~Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. relating to 5.25% Series X Cumulative Preferred Units, dated as of ~~January 10,~~September 21, 2017. Filed ~~with Registrant’s Current Report on Form 8-K dated January 11, 2017 (SEC File No. 001-10709) and incorporated herein by reference.~~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.