Table of Contents

 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-Q



Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



For the quarterly period ended JuneSeptember 30, 2017



or



Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



For the transition period from ____________ to ____________



Commission File Number 1-10709



PS BUSINESS PARKS, INC.

(Exact name of registrant as specified in its charter)



California

95-4300881

(State or Other Jurisdiction

(I.R.S. Employer

of Incorporation)

Identification Number)



701 Western Avenue, Glendale, California 91201-2397

(Address of principal executive offices) (Zip Code)



Registrant’s telephone number, including area code: (818) 244-8080



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes  No



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  No  



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





 

 

 

 

Large accelerated filer

 

Accelerated filer

 

Non-accelerated filer

 

Smaller reporting company

 

Emerging growth company

 



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



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No



As of July 24,October 23, 2017, the number of shares of the registrant’s common stock, $0.01 par value per share, outstanding was 27,214,977.27,251,037.




 

Table of Contents

 

PS BUSINESS PARKS, INC.

INDEX







 



 



Page

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Consolidated balance sheets as of JuneSeptember 30, 2017 (unaudited) and December 31, 2016

3

Consolidated statements of income (unaudited) for the three and sixnine months ended

June September 30, 2017 and 2016

4

Consolidated statement of equity (unaudited) for the sixnine months ended JuneSeptember 30, 2017

5

Consolidated statements of cash flows (unaudited) for the sixnine months ended

June 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

2120

Item 3. Quantitative and Qualitative Disclosures About Market Risk

3835

Item 4. Controls and Procedures

3836

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

3836

Item 1A. Risk Factors

3836

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

3836

Item 6. Exhibits

3936











 


 

Table of Contents

 

PART I. FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



PS BUSINESS PARKS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

September 30,

 

December 31,

2017

 

2016

2017

 

2016

(Unaudited)

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

5,408 

 

$

128,629 

$

132,658 

 

$

128,629 

 

 

 

 

 

 

 

 

 

 

Real estate facilities, at cost:

 

 

 

 

 

Real estate facilities, at cost

 

 

 

 

 

Land

 

789,227 

 

 

789,227 

 

789,227 

 

 

789,227 

Buildings and improvements

 

2,241,558 

 

 

2,224,522 

 

2,254,663 

 

 

2,224,522 

 

3,030,785 

 

 

3,013,749 

 

3,043,890 

 

 

3,013,749 

Accumulated depreciation

 

(1,198,020)

 

 

(1,158,054)

 

(1,219,314)

 

 

(1,158,054)

 

1,832,765 

 

 

1,855,695 

 

1,824,576 

 

 

1,855,695 

Property held for disposition, net

 

 

 

909 

 

 

 

909 

Land and building held for development

 

28,616 

 

 

27,028 

 

29,252 

 

 

27,028 

 

1,861,381 

 

 

1,883,632 

 

1,853,828 

 

 

1,883,632 

Investment in and advances to unconsolidated joint venture

 

91,259 

 

 

67,190 

 

96,593 

 

 

67,190 

Rent receivable, net

 

2,014 

 

 

1,945 

 

2,203 

 

 

1,945 

Deferred rent receivable, net

 

31,385 

 

 

29,770 

 

31,670 

 

 

29,770 

Other assets

 

6,611 

 

 

8,205 

 

8,779 

 

 

8,205 

 

 

 

 

 

 

 

 

 

 

Total assets

$

1,998,058 

 

$

2,119,371 

$

2,125,731 

 

$

2,119,371 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued and other liabilities

$

77,643 

 

$

78,657 

$

82,618 

 

$

78,657 

Credit facility

 

101,000 

 

 

Preferred stock called for redemption

 

 

 

230,000 

 

220,000 

 

 

230,000 

Total liabilities

 

178,643 

 

 

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

 

 

 

 

 

June 30, 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,

 

 

 

 

 

 

 

 

 

 

27,214,021 and 27,138,138 shares issued and outstanding at

 

 

 

 

 

June 30, 2017 and December 31, 2016, respectively

 

272 

 

 

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

 

735,591 

 

 

733,671 

 

735,714 

 

 

733,671 

Cumulative net income

 

1,580,105 

 

 

1,502,643 

Cumulative distributions

 

(1,575,165)

 

 

(1,503,076)

Accumulated earnings (deficit)

 

60 

 

 

(433)

Total PS Business Parks, Inc.’s shareholders’ equity

 

1,620,553 

 

 

1,613,259 

 

1,625,796 

 

 

1,613,259 

Noncontrolling interests:

 

 

 

 

 

Common units

 

198,862 

 

 

197,455 

Total noncontrolling interests

 

198,862 

 

 

197,455 

Noncontrolling interests

 

197,317 

 

 

197,455 

Total equity

 

1,819,415 

 

 

1,810,714 

 

1,823,113 

 

 

1,810,714 

Total liabilities and equity

$

1,998,058 

 

$

2,119,371 

$

2,125,731 

 

$

2,119,371 



See accompanying notes.

 

3


 

Table of Contents

 

PS BUSINESS PARKS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited,Amounts in thousands, except per share data)

(Unaudited)







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



For The Three Months

 

For The Six Months



Ended June 30,

 

Ended June 30,

 

2017

 

2016

 

2017

 

2016

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Rental income

$

99,800 

 

$

96,087 

 

$

199,861 

 

$

191,932 

Facility management fees

 

124 

 

 

131 

 

 

252 

 

 

259 

Total operating revenues

 

99,924 

 

 

96,218 

 

 

200,113 

 

 

192,191 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of operations

 

30,250 

 

 

29,750 

 

 

61,283 

 

 

61,644 

Depreciation and amortization

 

23,628 

 

 

25,214 

 

 

46,706 

 

 

50,255 

General and administrative

 

2,443 

 

 

5,377 

 

 

5,274 

 

 

9,012 

Total operating expenses

 

56,321 

 

 

60,341 

 

 

113,263 

 

 

120,911 

Other income and (expenses):

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

30 

 

 

208 

 

 

135 

 

 

475 

Interest and other expenses

 

(285)

 

 

(2,162)

 

 

(469)

 

 

(5,352)

Total other income and (expenses)

 

(255)

 

 

(1,954)

 

 

(334)

 

 

(4,877)

Equity in loss of unconsolidated joint venture

 

(382)

 

 

 

 

(382)

 

 

Gain on sale of real estate facility

 

1,209 

 

 

 

 

1,209 

 

 

Gain on sale of development rights

 

 

 

 

 

3,865 

 

 

Net income

$

44,175 

 

$

33,923 

 

$

91,208 

 

$

66,403 



 

 

 

 

 

 

 

 

 

 

 

Net income allocation:

 

 

 

 

 

 

 

 

 

 

 

Net income allocable to noncontrolling interests:

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling interests—common units

$

6,645 

 

$

4,243 

 

$

13,746 

 

$

8,179 

Total net income allocable to noncontrolling interests

 

6,645 

 

 

4,243 

 

 

13,746 

 

 

8,179 

Net income allocable to PS Business Parks, Inc.:

 

 

 

 

 

 

 

 

 

 

 

Preferred shareholders

 

12,591 

 

 

13,832 

 

 

25,882 

 

 

27,665 

Restricted stock unit holders

 

197 

 

 

117 

 

 

445 

 

 

259 

Common shareholders

 

24,742 

 

 

15,731 

 

 

51,135 

 

 

30,300 

Total net income allocable to PS Business Parks, Inc.

 

37,530 

 

 

29,680 

 

 

77,462 

 

 

58,224 

Net income

$

44,175 

 

$

33,923 

 

$

91,208 

 

$

66,403 



 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.91 

 

$

0.58 

 

$

1.88 

 

$

1.12 

Diluted

$

0.90 

 

$

0.58 

 

$

1.87 

 

$

1.12 



 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

27,200 

 

 

27,082 

 

 

27,174 

 

 

27,063 

Diluted

 

27,412 

 

 

27,172 

 

 

27,384 

 

 

27,149 



 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

$

0.85 

 

$

0.75 

 

$

1.70 

 

$

1.50 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



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.

 

4


 

Table of Contents

 

PS BUSINESS PARKS, INC.

CONSOLIDATED STATEMENT OF EQUITY

FOR THE SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2017

(Unaudited, inIn 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

 

 

 

75,883 

 

 

 

 

2,156 

 

 

 

 

 

 

2,157 

 

 

 

 

2,157 

 

 

 

112,899 

 

 

 

 

3,991 

 

 

 

 

3,992 

 

 

 

 

3,992 

Stock compensation, net

 

 

 

 

 

 

 

3,247 

 

 

 

 

 

 

3,247 

 

 

 

 

3,247 

 

 

 

 

 

 

 

2,673 

 

 

 

 

2,673 

 

 

 

 

2,673 

Cash paid for taxes in lieu of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

shares upon vesting of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

restricted stock units

 

 

 

 

 

 

 

(3,403)

 

 

 

 

 

 

(3,403)

 

 

 

 

(3,403)

 

 

 

 

 

 

 

(3,865)

 

 

 

 

(3,865)

 

 

 

 

(3,865)

Net income

 

 

 

 

 

 

 

 

 

77,462 

 

 

 

 

77,462 

 

 

13,746 

 

 

91,208 

 

 

 

 

 

 

 

 

 

115,229 

 

 

115,229 

 

 

18,610 

 

 

133,839 

Distributions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock

 

 

 

 

 

 

 

 

 

 

 

(25,882)

 

 

(25,882)

 

 

 

 

(25,882)

 

 

 

 

 

 

 

 

 

(38,472)

 

 

(38,472)

 

 

 

 

(38,472)

Common stock

 

 

 

 

 

 

 

 

 

 

 

(46,207)

 

 

(46,207)

 

 

 

 

(46,207)

 

 

 

 

 

 

 

 

 

(69,364)

 

 

(69,364)

 

 

 

 

(69,364)

Noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,419)

 

 

(12,419)

 

 

 

 

 

 

 

 

 

 

 

 

 

(18,629)

 

 

(18,629)

Adjustment to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in underlying operating partnership

 

 

 

 

 

 

 

(80)

 

 

 

 

 

 

(80)

 

 

80 

 

 

Balances at June 30, 2017

35,190 

 

$

879,750 

 

27,214,021 

 

$

272 

 

$

735,591 

 

$

1,580,105 

 

$

(1,575,165)

 

$

1,620,553 

 

$

198,862 

 

$

1,819,415 

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.

 

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Table of Contents

 

PS BUSINESS PARKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For The Six Months

For The Nine Months

Ended June 30,

Ended September 30,

2017

 

2016

2017

 

2016

Cash flows from operating activities:

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net income

$

91,208 

 

$

66,403 

$

133,839 

 

$

105,397 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization expense

 

46,706 

 

 

50,255 

In-place lease adjustment

 

(34)

 

 

(331)

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

 

(856)

 

 

(846)

 

(1,654)

 

 

(1,253)

Equity in loss of unconsolidated joint venture

 

382 

 

 

 

758 

 

 

Gain on sale of real estate facility

 

(1,209)

 

 

 

(1,209)

 

 

Gain on sale of development rights

 

(3,865)

 

 

 

(3,865)

 

 

Stock compensation

 

3,646 

 

 

7,083 

 

3,255 

 

 

8,933 

Amortization of financing costs

 

226 

 

 

263 

 

338 

 

 

391 

Decrease (increase) in receivables and other assets

 

97 

 

 

(2,130)

Increase (decrease) in accrued and other liabilities

 

1,213 

 

 

(1,866)

Other, net

 

4,125 

 

 

1,259 

Total adjustments

 

46,306 

 

 

52,428 

 

72,213 

 

 

84,216 

Net cash provided by operating activities

 

137,514 

 

 

118,831 

 

206,052 

 

 

189,613 

Cash flows from investing activities:

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Capital expenditures to real estate facilities

 

(23,363)

 

 

(14,463)

 

(38,709)

 

 

(24,230)

Capital expenditures to land and building held for development

 

(1,588)

 

 

 

(2,224)

 

 

Investment in and advances to unconsolidated joint venture

 

(24,451)

 

 

(13,240)

 

(30,161)

 

 

(28,800)

Proceeds from sale of real estate facility

 

2,144 

 

 

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

 

(44,858)

 

 

(27,703)

 

(66,550)

 

 

(65,658)

Cash flows from financing activities:

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Borrowings on credit facility

 

168,000 

 

 

64,000 

 

170,000 

 

 

116,000 

Repayment of borrowings on credit facility

 

(67,000)

 

 

(10,000)

 

(170,000)

 

 

(56,000)

Repayment of mortgage note payable

 

 

 

(250,000)

 

 

 

(250,000)

Payment of financing costs

 

(724)

 

 

 

(778)

 

 

Proceeds from the exercise of stock options

 

2,157 

 

 

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

 

(3,403)

 

 

(1,758)

 

(3,865)

 

 

(1,940)

Cash paid to restricted stock unit holders

 

(399)

 

 

(259)

 

(582)

 

 

Distributions paid to preferred shareholders

 

(25,882)

 

 

(27,665)

 

(38,472)

 

 

(41,498)

Distributions paid to common shareholders

 

(46,207)

 

 

(40,598)

 

(69,364)

 

 

(60,932)

Distributions paid to noncontrolling interests

 

(12,419)

 

 

(10,958)

 

(18,629)

 

 

(16,437)

Net cash used in financing activities

 

(215,877)

 

 

(276,338)

 

(135,473)

 

 

(307,851)

Net decrease in cash and cash equivalents

 

(123,221)

 

 

(185,210)

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

$

5,408 

 

$

3,702 

$

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

$

80 

 

$

1,030 

Supplemental schedule of non-cash investing and financing activities

 

 

 

 

 

Adjustment to noncontrolling interests in OP

 

 

 

 

 

Noncontrolling interests

$

(119)

 

$

1,613 

Paid-in capital

$

(80)

 

$

(1,030)

$

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.

 

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Table of Contents

 

PS BUSINESS PARKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JuneSeptember 30, 2017



1. Organization and description of business



PS Business Parks, Inc. (“PSB”) was incorporated in the state of California in 1990. As of JuneSeptember 30, 2017, PSB owned 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  JuneSeptember 30, 2017, the Company owned and operated 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 sixnine months ended JuneSeptember 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 interestWe 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 thewhen 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 itstheir 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 beis 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 consideredprimary 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 investmentjoint venture engaged in the Operating Partnership,development and consequently, substantially alloperation of residential real estate, which we account for using the Company’s assets and liabilities represent those assets and liabilitiesequity method of the Operating Partnership. All of the Company’s debt is an obligationaccounting. See Note 4 for more information on this entity.

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PS, the sole limited partner in the OP, has no power to direct the activities of the Operating Partnership.

The Company accounts for its investment inOP. We are the primary beneficiary of the OP. Accordingly, we consider the OP a joint venture thatVIE and consolidate it. Substantially all of our assets and liabilities are held by the Company does not consolidate but has significant influence over using the equity method of accounting. The joint venture is referred to as “Investment in and advances to unconsolidated joint venture”. At the end of each reporting period, the Company determines the amount of net income or loss based upon the Company’s ownership interest in the joint venture and presents the amount on its consolidated statements of income with a corresponding adjustment to its equity investment carrying amount.OP.



Noncontrolling interests



The Company’sPS 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 JuneSeptember 30, 2017 and December 31, 2016. Deferred rent receivable is net of an allowance for uncollectible accounts totaling $839,000$910,000 and $916,000 at JuneSeptember 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

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·

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, 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 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 buildingProperty held for disposition or development



Property taxes, insurance, interestReal estate is classified as held for disposition when the asset is being marketed for sale and costs essentialwe 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 assetnext 12 months. Real estate is classified as held for development depreciation of the assetwhen it is ceased.

Propertieslikely 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 assetsWhen 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-marketan intangible liability is recorded where the market rents are higher than the in-place lease values of acquired propertiesrents. The amounts recorded are based onupon the present value (using an interesta discount rate which reflects the risks associated with the leases acquired) of such differences over the difference between (i) the contractuallease 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 June 30, 2017, the value of in-place leases resulted in netWe have no material intangible assets of $889,000, net of $9.4 million of accumulated amortization with a weighted average amortization period of 9.6 years, and net intangibleor liabilities

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of $525,000, net of $10.3 million of accumulated amortization with a weighted average amortization period of 7.3 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 $9,000 and $138,000 for the three months ended June 30, 2017 and 2016, respectively, and $34,000 and $331,000 for the six months ended June 30, 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 itsWe evaluate our real estate and finite-lived intangible assets used in operations for impairment by identifyingeach quarter. If there are indicators of impairment and by comparingwe determine that the sum of the estimatedasset is not recoverable from future undiscounted future cash flows for each assetto 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 thanextent 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 equalcharge to the difference betweenextent the asset’s current carrying value and its value based on discounting itsamount 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 costwhen we believe any such shortfall is other than temporary.

No impairments were recorded in any of disposition. At June 30, 2017, the Company did not considerour 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 oflease 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 leasingacquiring 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

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 if we distribute 100% of our REIT taxable income each year, and if we meet certain organizational and operational rules. We believe we have met these REIT requirements for all periods presented herein. Accordingly, we have recorded no federal income tax expense related to our REIT taxable income.

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

Accounting for preferred equity issuance costs

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

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Income taxes

The Company has qualified and intends to continue to qualify as a REIT, as defined in Section 856 of the Internal Revenue Code of 1986, as amended. As a REIT, the Company is not subject to federal income tax to the extent that it distributes its REIT taxable income to its shareholders. A REIT must distribute at least 90% of its REIT taxable income each year. In addition, REITs are subject to a number of organizational and operating requirements. The Company may be subject to certain state and local taxes on its income and property and to federal income and excise taxes on its undistributed taxable income. The Company believes it met all organization and operating requirements to maintain its REIT status during 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 June 30, 2017, the Company did not recognize any tax benefit for uncertain tax positions.

Accounting for preferred equity issuance costs

The Company recordsoriginal issuance costs, as a reductionand we reclassify the redemption value from equity to paid-in capital on its balance sheet at the time theliabilities 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



PerNotwithstanding 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 usingunit 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 commonunits 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 averagenet income per common shares outstanding. The Company’s restricted stock unit holdersshare are paid non-forfeitable dividends in excess of the expense recorded which results in a reduction ineach 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).



EarningsThe following tables set forth the calculation of the components of our basic and diluted income per share has been calculatedthat 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 followswell as basic and diluted weighted average shares (in thousands except per share amounts):





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



For The Three Months

 

For The Six Months



Ended June 30,

 

Ended June 30,

 

2017

 

2016

 

2017

 

2016

Net income allocable to common shareholders

$

24,742 

 

$

15,731 

 

$

51,135 

 

$

30,300 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

27,200 

 

 

27,082 

 

 

27,174 

 

 

27,063 

Net effect of dilutive stock compensation—based on

 

 

 

 

 

 

 

 

 

 

 

treasury stock method using average market price

 

212 

 

 

90 

 

 

210 

 

 

86 

Diluted weighted average common shares outstanding

 

27,412 

 

 

27,172 

 

 

27,384 

 

 

27,149 

Net income per common share—Basic

$

0.91 

 

$

0.58 

 

$

1.88 

 

$

1.12 

Net income per common share—Diluted

$

0.90 

 

$

0.58 

 

$

1.87 

 

$

1.12 



No options were excluded from the computation of diluted net income per share for the three months ended June 30, 2017 and 2016 as no options were considered anti-dilutive. Options to purchase 16,000 and 14,000 shares for the six months ended June 30, 2017 and 2016, respectively, were not included in the computation of diluted net income per share because such options were considered anti-dilutive.



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



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 

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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 (“FASB”) issued two Accounting Standards UpdateUpdates (“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 amendedis governed under ASU 2017-05.

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

The Revenue Standard is effective on January 1, 2018, and generally requires that revenue recognition. The core principle underlying this guidance is that entities will recognize revenuefrom Non-Lease Payments be based upon the transferconsideration expected from our tenants, and be recognized under various methods depending upon the nature of promised goodsthe underlying expense and the contractual reimbursement arrangement. The standard permits either the retrospective (restatement) method or servicescumulative effects transition method and allowed for early adoption on January 1, 2017, which we did not elect. We expect to customersuse the cumulative effects transition method, which will result in an amount that reflects the considerationadjustment to which the entity expects to be entitled for such exchange. The guidance also provides a modelour retained earnings effective January 1, 2018 for the measurement and recognitioncumulative impact 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 dateas of initial application. The Company intendsDecember 31, 2017. We do not expect this standard to adopt the guidance using the modified retrospective approachhave a material impact on our accounting 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’sour facility management fees for property management services provided to PS or the recognition of gains and losses on the saledisposition of real estate assetsfacilities as the Company’s currentour accounting for such transactionspolicy is consistent with the new guidance’s core principle.provisions of the standard. Rental income from leasing arrangements areis a substantial portion of the Company’s revenueour revenues and is specifically excluded from ASU 2014-09the Revenue Standard and will be governed by the applicable lease codification (ASU 2016-02, Leases).Lease Standard. In conjunction with the adoption of the leasing guidance,Lease Standard, we are currently evaluating the Company is currently inimpact of the process of evaluating certain variable payment terms included in these lease arrangements which are governed by ASU 2014-09.standard as it relates to Non-Lease Payments.



In February, 2016, the FASB issued ASU 2016-02, Leases, which amends the existing accounting standards forThe Lease Standard is effective on January 1, 2019. The standard provides definitional guidance of what constitutes a lease, accounting. The guidance requiresrequiring lessees to classifyrecognize most leases as either finance or operating leases based on the principle of whether or notbalance sheet and making certain changes to lessor accounting. For leases in which we are 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 method orlessor, 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. A lessee isThe standard also requiredrequires capitalization of only the incremental costs incurred in executing each particular lease, such as legal fees to recorddraft a right-of-use asset and related liability forlease 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, regardlessin which we are the lessee, the present value of their classification. Leases with a term of 12 months or lessfuture lease payments will be accounted for similar to existing guidance for operating leases today. The new guidance is expected to result in the recognition ofrecognized on our balance sheet as 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.labiality. As of JuneSeptember 30, 2017, the remaining contractual payments under theour ground lease agreements aggregated $315,000.  For leases in which the Company is the lessor, the lease contract will be separated into lease and non-lease components in accordance with the provisions outlined within ASU No. 2014-09.$282,000. The lease component of the contract will be recognized on a straight-line basis in accordance with ASU 2016-02, while the non-lease component will be recognized under the provisions of ASU 2014-09. 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 guidance is effective for annual periods beginning after December 15, 2018 and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted. The guidance must be adopted usingstandard requires a modified retrospective transition approach for all leases that existexisting at or are entered into after the beginning of the earliest comparative period presented in the financial statements. The Companystatements 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 inconsistent with the processprovisions of the standard. We are currently evaluating the impact of adoptionthe standard as it relates to the capitalization of the new accounting guidance on its consolidated financial statements.costs associated with executed leases.

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In August, 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments,

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



In November, 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) – Restricted Cash, which requires the consolidated 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 sheetsheets 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 setassets, which we believe will apply to substantially all of transferred assets and activities does not meet this threshold, then an entity must evaluate whetherour future acquisitions of real estate facilities. Previously, such acquisitions were considered the set meets the requirement thatacquisition of a business, include, at a minimum, an input and a substantive process that together significantly contribute totransaction 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 Company2017. We early adopted the guidance effectivestandard 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 to2017; 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 sixnine months ended JuneSeptember 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

$

789,227 

 

$

2,224,522 

 

$

(1,158,054)

 

$

1,855,695 

$

789,227 

 

$

2,224,522 

 

$

(1,158,054)

 

$

1,855,695 

Capital expenditures

 

 

 

23,751 

 

 

 

 

23,751 

 

 

 

39,321 

 

 

 

 

39,321 

Disposals

 

 

 

(6,715)

 

 

6,715 

 

 

 

 

 

(9,180)

 

 

9,180 

 

 

Depreciation and amortization

 

 

 

 

 

(46,706)

 

 

(46,706)

 

 

 

 

 

(70,465)

 

 

(70,465)

Transfer to property held for disposition

 

 

 

 

 

25 

 

 

25 

Balances at June 30, 2017

$

789,227 

 

$

2,241,558 

 

$

(1,198,020)

 

$

1,832,765 

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 recordedallocated 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 therelative 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. Managementeach 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 wouldassumed, which can affect the recognition and timing of recognition of the related revenue and expenses. Amounts recorded todepreciation and amortization expense. The fair value of land are derived fromis estimated based upon, among other considerations, comparable sales of land within the same region. Amounts recorded toThe fair value of buildings

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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.



The Company did not acquire any assets or assume any liabilities during the six months ended June 30, 2017 and 2016. 

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On May 1, 2017, the Company 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.



On March 31, 2017, the Company sold development rights it held to build medical office buildings on land adjacent to its Westech Business Park in Silver Spring, Maryland for $6.5 million. The Company had acquired the development rights as part of its 2006 acquisition of the park. The Company has received $4.0net 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 JuneSeptember 30, 2017, less transaction costs of $135,000 as these amountswhich 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.



4. Investment in and advances to unconsolidated joint venture



In 2013, the Company entered into a joint venture known as Amherst JV LLC (the “Joint Venture”) 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 Company’s 628,000 square foot office park located in Tysons, Virginia (known as “The Mile”).  PSB holdsWe 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 overseeas well as the leasing and operational management of the Project. TheWe do not control the Joint Venture, when considering, among other factors, that the consent of our JV partner serves as the managing member, with mutual consent from both the Company and the managing memberPartner is required for all significant decisions. As such, the Company accountsAccordingly, we account for itsour investment in the Joint Venture using the equity method.



On  October 5, 2015 (the “Contribution Date”), the Company contributed the site along with capitalizedand improvements to the Joint Venture. The Company has agreed toWe provide the Joint Venture with a construction loan in the amount of $75.0 million. The Joint Venture will paymillion 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 aggregate amount of development costs are estimated to be $105.6 million (excluding unrealized land appreciation). The Company is committed to funding $75.0 million through the construction loan in addition to its equity contribution of $28.5 million, which includes a  land basis of $15.3 million. The Project delivered its first completed units in May, 2017, with final completion date of the overall Project expected during the fourth quarter of 2017.



The Company hasWe have reflected the aggregate valuecost of the contributed site its’and improvements,  our equity contributions capitalized interest and loan advances,  to dateas 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 $91.3$96.6 million and $67.2 million as of JuneSeptember 30, 2017 and December 31, 2016, respectively. For the sixnine months ended JuneSeptember 30, 2017,  the Companywe made loan advances of $23.9$29.7 million and capitalized $506,000 of interest. For the sixnine months ended JuneSeptember 30, 2016, the Company made loan advances to the Joint Venture of $6.8$22.3 million, equitycapital contributions of $5.7 million and capitalized $739,000$854,000 of interest.



The Joint Venture commenced its operations during the second quarterAs of September 30, 2017, as 233 of theall 395 units were delivered.have been completed. During the three and sixnine months ended JuneSeptember 30, 2017, the Company recorded an equity loss in the unconsolidated joint venture of $382,000, comprised of a net operating loss of $278,000$376,000 and depreciation expense of $104,000.$758,000, respectively.

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5. Leasing activity



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



 

 

 

 

 

 

 

 

Remainder of 2017

$

146,944 

$

75,498 

2018

 

249,289 

 

267,885 

2019

 

177,053 

 

196,801 

2020

 

117,279 

 

133,240 

2021

 

80,550 

 

92,451 

Thereafter

 

136,783 

 

168,364 

Total

$

907,898 

$

934,239 



In addition to minimum rental payments, certain tenants reimburse the Company for their pro rata share of specified operating expenses. Such reimbursements amounted to $22.7$22.6 million and $20.5$20.3 million for the three months ended JuneSeptember 30, 2017 and 2016, respectively, and $45.9$68.4 million and $41.3$61.6 million for the sixnine months ended JuneSeptember 30, 2017 and 2016, respectively. These amounts are included as rental income in the accompanying consolidated statements of income.



Leases accounting for 3.2%3.0% of total leased square footage are subject to termination options, of which 1.4%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.



6. Bank loans



In January, 2017, the Company modified and extended the terms of itsWe 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 CompanyWe paid $613,000 of loan origination costs. As of June 30, 2017, the Company had $101.0 million outstanding on the Credit Facility at an interest rate of 1.81%. Subsequent to June 30, 2017, the Company repaid net $14.0 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 $1.0 million$979,000 and $539,000 of unamortized loan origination costs as of JuneSeptember 30, 2017 and December 31, 2016, respectively, which is included in other assets in the accompanying consolidated balance sheets. The Credit Facility requires the Companyus to meet certain covenants, all of which the Company waswe were in compliance with as of JuneSeptember 30, 2017. Interest on outstanding borrowings is payable monthly.  



7. Noncontrolling interests



As described in Note 2,Noncontrolling interests represent 7,305,355 common partnership units of the Company reports noncontrolling interests within equity inOP 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 interestsdividend 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.



CommonIf PS exercises its right of redemption, at PSB’s option (a) PS will receive one common share from us for each common partnership units

The Company presentsunit redeemed, or (b) PS will receive cash from us for each common partnership unit generally equal to the accountsmarket value of PSB and the Operating Partnership on a consolidated basis. Ownership interestscommon share (as defined in the Operating Partnership Agreement). We can prevent redemptions that can be redeemedwe believe would violate either our articles of incorporation or securities laws, cause PSB to no longer qualify as a REIT, or could result in the OP no longer being treated as a partnership for common stock, other than PSB’s interest, are classifiedfederal tax purposes.

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as noncontrolling interests—common units in the consolidated financial statements. NetIn allocating net income allocable to noncontrolling interests—common units consists ofand presenting equity, we treat the common units’ share ofpartnership units as if converted to common shares. Accordingly, they receive the consolidated operating results aftersame net income allocation to preferred units and shares. Beginning one year from the date of admissionper unit as a limited partner (common units)common share and subjectare adjusted each period to certain limitations described below, each limited partner other than PSB hashave the right to require the redemption of its partnership interest.

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

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

At June 30, 2017, there were 7,305,355 common units owned by PS, which are accounted for as noncontrolling interests. Combined with PS’s existing common stock ownership, on a fully converted basis, PS has a combined ownership of 41.9% (or 14.5 million shares) of the Company’s common equity.share. 



8. Related party transactions



The Operating Partnership managesWe manage industrial, office and retail facilities for PS. These facilities, all located in the United States, operateU.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 Companyus 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 $124,000 and $131,000 for the three months ended June 30, 2017 and 2016, respectively, and $252,000 and $259,000 for the six months ended June 30, 2017 and 2016, respectively.

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

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

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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 $23,000$24,000 and $21,000$22,000 for the three months ended JuneSeptember 30, 2017 and 2016, respectively, and $45,000$69,000 and $42,000$64,000 for the sixnine months ended JuneSeptember 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 withwe and PS forshare 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 JuneSeptember 30, 2017 and 2016, respectively, and $265,000$397,000 and $247,000$370,000 for the sixnine months ended JuneSeptember 30, 2017 and 2016, respectively. Costs allocated to PS totaled $8,000 and $15,000$23,000 for the three and sixnine months ended JuneSeptember 30, 2017, respectively.



The Company had net amounts due to PS of $90,000$30,000 and due from PS of $295,000 at JuneSeptember 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.



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9. Shareholders’ equity



Preferred stock



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



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 

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 Companywe called for the redemption of itsour 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 distributionsWe recorded a Preferred Redemption Allocation of $7.3 million representingin the original issuance costs, as a reduction of net income allocable to common shareholders and unit holders for the yearthree months ended December 31, 2016. As of December 31, 2016 the Companyand reclassified the 6.45% Cumulative Preferred Stock, Series S, of $230.0 millionshares from equity to liabilities as preferred“preferred stock called for redemption.redemption” on our consolidated balance sheets at December 31, 2016.



The CompanyWe paid $12.6 million and $13.8 million in distributions to itsour preferred shareholders for the three months ended JuneSeptember 30, 2017 and 2016, respectively, and $25.9$38.5 million and $27.7$41.5 million in distributions to itsour preferred shareholders for the sixnine months ended JuneSeptember 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’sour 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 JuneSeptember 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 of deferred costs in connection with

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the issuance of preferred stock as of June 30, 2017 and December 31, 2016, which the Company will report as additional non-cash distributions upon notice of its intent to redeem such shares.

Common stock



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



The CompanyWe paid $23.1$23.2 million ($0.85 per common share) and $20.3 million ($0.75 per common share) in distributions to itsour common shareholders for the three months ended JuneSeptember 30, 2017 and 2016, respectively, and $46.2$69.4 million ($1.702.55 per common share) and $40.6$60.9 million ($1.502.25 per common share) in distributions to itsour common shareholders for the sixnine months ended JuneSeptember 30, 2017 and 2016, respectively.

No shares of common stock were repurchased under the board-approved common stock repurchase program during either of the six months ended June 30, 2017 and 2016.



Equity stock



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.



10. Commitments and contingencies



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.



11. Stock compensation



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



The weighted average grant date fair valueservice period for stock options and RSUs begins when (i) the Company and the recipient reach a mutual understanding of options granted during the six months ended June 30, 2017key terms of the award, (ii) the award has been authorized, (iii) the recipient is affected by changes in the market price of our stock and 2016 was $14.42 per share(iv) it is probable that any performance conditions will be met, and $8.41 per share, respectively. The Company has calculatedends when the fair value to eachstock option grant on the date of grand using the Black Scholes option-pricing model with the following weighted average assumptions used for grants during the six months ended June 30, 2017 and 2016, respectively: a dividend yield of 2.8% and 3.1%; expected volatility of 17.5% and 15.2%; expected life of five years; and risk-free interest rates of 1.9% and 1.4%.or RSU vests.



The weighted average grant date fair value of restricted stock units granted during the six months ended June 30, 2017 and 2016 was $89.25 and $83.59, respectively. The Company calculatedWe amortize the fair value of awards at the beginning of the service period as compensation expense. For awards that are earned solely upon the passage of time and continued service, the entire cost of the award is amortized on a straight-line basis over the service period. For awards with performance conditions, the individual cost of each restricted stock unitvesting is amortized separately over each individual service period (the “accelerated attribution” method).

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

Stock Options

Stock options vest over a five-year period, expire after the grant usingdate and the market valueexercise price is equal to the closing trading price of our common shares on the dategrant 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 grant.our stock options.



At JuneFor the three and nine months ended September 30, 2017, there was a combined total of 1.0 millionrespectively we recorded $53,000 and $156,000 in compensation expense related to stock options, as compared to $51,000 and restricted stock units authorized to be granted.$229,000 for the same periods in 2016.



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Information with respect toDuring 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 options and nonvested restricted stock units granted under the 2003 Plan and 2012 Plan is as follows:at September 30, 2017 (229,655 at December 31, 2016). 





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

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

16,000 

 

$

121.57 

 

 

 

 

 

Exercised

(37,256)

 

$

57.90 

 

 

 

 

 

Forfeited

 

$

 

 

 

 

 

Outstanding at June 30, 2017

208,399 

 

$

74.94 

 

5.72 Years

 

$

11,973 

Exercisable at June 30, 2017

135,659 

 

$

61.30 

 

4.17 Years

 

$

9,644 

Restricted Stock Units



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



 

 

 

 



 

 

 

 



 

 

Weighted



Number of

 

Average Grant

Restricted Stock Units:

Units

 

Date Fair Value

Nonvested at December 31, 2016

144,693 

 

$

58.56 

Granted

101,150 

 

$

89.25 

Vested

(68,914)

 

$

83.62 

Forfeited

(1,240)

 

$

89.56 

Nonvested at June 30, 2017

175,689 

 

$

77.26 

For the three and nine months ended September 30, 2017, respectively, we recorded a net reversal of $521,000 and expense of $2.9 million in compensation expense related to RSUs, as compared to expense of $1.7 million and $8.5 million for the same periods in 2016. In conjunction with the departure of our Chief Financial Officer (“CFO”), the Company recorded a reversal of stock compensation of $1.9 million in RSU expense related to RSUs under our LTEIP (see below) during the third quarter of 2017. The 2016 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 162,643 RSUs were outstanding 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 100,15094,150 restricted stock units would be awarded for each of the four years assuming achievement was met and up to 91,80081,800 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. NetThe compensation expense of $1.1 million and $4.1 million relatedRSU counts with respect to the LTEIP was recognized for the three months ended June 30, 2017 and 2016, respectively, and $2.9 million and $6.6 million for the six months ended June 30, 2017 and 2016, respectively. Included in the 2016 amount, the Company recorded a net non-cash stock compensation charge of $2.0 million related to a change in senior management and the future issuance of restricted stock units our former Chief Executive Officer will receive under the Company’s LTEIP. 

In connection with the LTEIP, targets for 2016 were achieved at the highest threshold total return level. As such, 100,150 restricted stock units were granted during the six months ended June 30, 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 June 30, 2017 and 2016, was $54,000 and $46,000, respectively, in net compensation expense related to stock options. Net compensation expense of $103,000 and $178,000 related to stock options was recognized during the six months ended June 30, 2017 and 2016, respectively. Net compensation expense of $1.4 million and $4.1 million related to restricted stock units was recognized during the three months ended June 30, 2017 and 2016, respectively. Net compensation expense of $3.4 million and $6.7 million related to restricted stock units was recognized during the six months ended June 30,

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2017 and 2016, respectively.

As of June 30, 2017, there was $657,000 of unamortized compensation expense related to stock options expected to be recognized over a weighted average period of 3.8 years. As of June 30, 2017, there was $10.3 million of unamortized compensation expense related to restricted stock units expected to be recognized over a weighted average period of 3.3 years.

Cash received from 37,256 stock options exercised during the six months ended June 30, 2017 was $2.2 million. Cash received from 16,823 stock options exercised during the six months ended June 30, 2016 was $900,000. The aggregate intrinsic value of the stock options exercised was $2.4 million and $723,000 during the six months ended June 30, 2017 and 2016, respectively.

During the six months ended June 30, 2017,  68,914 restricted stock units vested; in settlement of these units,  38,627 shares were issued, net of 30,287 shares applied to payroll taxes. The aggregate fair value of the shares vested for the six months ended June 30, 2017 was $7.7 million. During the six months ended June 30, 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 six months ended June 30, 2016 was $4.2 million. In addition to the vesting of these shares, tax deposits totaling $3.4 million and $1.8 million were made during the six months ended June 30, 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 $71,000 and $85,000 in compensation expense for the three months ended June 30, 2017 and 2016, respectively, and $148,000 and $169,000 for the six months ended June 30, 2017 and 2016, respectively. As of June 30, 2017 and 2016, there was $739,000 and $1.1 million, respectively, of unamortized compensation expense related to these shares. No shares were issued during the six months ended June 30, 2017. In April, 2016, the Company issued 8,000 shares to a director upon retirement with an aggregate fair value of $775,000.RSU amounts disclosed above.

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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.



Critical Accounting Policies:

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.

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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.

Strategic Overview



AsOur overall operating results are impacted primarily by the performance of Juneour existing real estate facilities, which at September 30, 2017 the Company owned and operatedare 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 profitabilityoperating 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 strivesour 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 timestrategies with respect to time disposes of propertiesour 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 onDecember 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.



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

Acquisitions: On September 28, 2016, the Companywe acquired two multi-tenant office buildings which comprise theaggregating 226,000 square feet of Non-Same Park portfolio (defined below), in Rockville, Maryland for a purchase price of $13.3 million. As of June 30, 2017, theThe occupancy rate of this assethas increased to 22.5% sincefrom 18.5% on the date of acquisition.acquisition to 31.6% as of September 30, 2017. These buildings are located within The Company had 175,000Grove 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 spreadland) 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 June 30, 2017. Thefourth

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buildings are located within Shady Grove Executive Park, wherequarter of 2017. The total estimated investment upon completion, including the Company owns three other buildings aggregating 352,000 square feet, which were 94.2% leased asfair value of June 30, 2017.existing land, will be approximately $117.2 million.



Development: 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 aHighgate Development. 

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

We have an additional 123,000 square foot office building located within The Mile that we are seeking to demolish in Tysons, Virginiaorder to land and building held for development, as the Company is pursuing entitlements to develop an additionalconstruct 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 classifiedthe 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 byof this site is subject to a single user. The net operating income (“NOI”) associated with thevariety of contingencies, including approval of entitlement. We do not expect that development will commence prior tenant is reflected as NOI from asset held for development.to December 31, 2018.



Highgate Multi- Family Joint Venture:Dispositions of Real Estate Facilities: In 2013, the Company entered into2014, we completed a joint venture known as Amherst JV LLC (the “Joint Venture”) with an unrelatedplan 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 development company (the “JV Partner”) for the purpose of developing a 395-unit multi-family buildingassets based on a five-acre site within The Mile in Tysons, Virginia (the “Project”). PSB holds a 95.0% interest in the Joint Venturemarket conditions, fit 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 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.

The Project delivered its first completed units in May, 2017, with final completion expected during the fourth quarter of 2017. The following table summarizes the Joint Venture’s Project timeline and updates as of June 30, 2017:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Schedule

 

As of June 30, 2017

Apartment Units

 

Total Estimated
Project Costs (1)
(in thousands)

 

Construction Start

 

Initial Occupancy

 

Estimated Stabilization Period

 

% Completed

 

%
Leased (2)

 

%
Occupied (2)

 

Average Rent per Unit (3)

395

 

$

117,241 

 

Q3 2015

 

Q2 2017

 

Q4 2018

 

59.0% 

 

9.9% 

 

9.1% 

 

$

2,197 

____________________________

(1)

The Project cost for the Joint Venture reflects the underlying land at the assigned contribution value upon formation of the Joint Venture. The estimated total costs of the Project includes land basis of $15.3 million plus unrealized land appreciation of $11.6 million.

(2)

As of July 24, 2017, Highgate’s multi-family residential units were 19.0% leased and 14.2% occupied.

(3)

Average monthly rental rate is defined as the total potential monthly rental revenue (actual rent for occupied apartment homes plus market rent for vacant apartment homes) dividend by the number of apartment homes.

In addition to its equity contribution of $28.5 million, which includes land basis of $15.3 million, the Company has 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 Joint Venture had an outstanding construction loan balance of $59.0 million as of June 30, 2017. 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 Company’s investment in and advances to unconsolidated joint venture was $91.3 million and $67.2 million at June 30, 2017 and December 31, 2016, respectively. For the six months ended June 30, 2017, the Company made loan advances of $23.9 million (which excludes accrued interest of $764,000) and capitalized $506,000 of interest.  

Dispositions:our existing portfolio or other reasons. On May 1, 2017, the Companywe 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.



On March 31, 2017, the Company sold development rights it held to build medical office buildings on land adjacent to its Westech Business Park in Silver Spring, Maryland for $6.5 million. The Company had acquired the development

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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 June 30, 2017 less transaction costs of $135,000 as these amounts are non-refundable. The Company will report an additional gain of $2.5million when the final proceeds are received in the fourth quarter of 2017 and the remaining contingencies have lapsed.Certain Factors that May Impact Future Results



Impact of Inflation: Although inflation has not been significant in recent years, it remains a potential factoran 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.



KeyRegional 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.

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Table of Contents

Net Operating MetricsIncome

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 and six months ended June 30, 2017 and 2016 exclude assets sold or 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 assets sold or 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 and six months ended June 30, 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

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

Results of Operations

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

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



To present comparative results,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 purposesame 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 computingdebt, and gains on the sale of real estate facilities and development rights. The increase in NOI the tables below exclude amortizationincludes a $12.5 million increase for our Same-Park facilities due primarily to higher realized rent per occupied square foot, offset partially by reduced NOI with respect to facilities we sold or are holding for development.

We analyze our net income in this discussion analysis in two main sections: operating income and then all other components of the Senior Management Long-Term Equity Incentive Plan (“LTEIP”) for the three and six months ended June 30, 2017 and 2016.

net income.

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Analysis of Operating 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.

Concentration of Portfolio by Region:The table below reflectssets forth the Company’s square footage based on regional concentration asvarious components of June 30, 2017. As part of the table below, we have reconciled total NOI to netour operating income (in(in thousands):





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

Percent of

 

 

 

NOI

 

 



 

Square

 

Square

 

Occupancy at

 

For The Six Months

 

Percent

Region

 

Footage

 

Footage

 

June 30, 2017

 

Ended June 30, 2017

 

of Total NOI

California

 

 

 

 

 

 

 

 

 

 

 

Northern California

 

7,245 

 

25.8% 

 

94.5% 

 

$

34,615 

 

24.8% 

Southern California

 

3,988 

 

14.2% 

 

94.6% 

 

 

22,171 

 

15.9% 

Texas

 

 

 

 

 

 

 

 

 

 

 

Northern Texas

 

3,081 

 

11.0% 

 

91.7% 

 

 

11,037 

 

7.9% 

Southern Texas

 

1,963 

 

7.0% 

 

95.4% 

 

 

9,810 

 

7.0% 

Virginia

 

3,917 

 

14.0% 

 

90.3% 

 

 

25,364 

 

18.1% 

Florida

 

3,866 

 

13.8% 

 

97.7% 

 

 

14,760 

 

10.6% 

Maryland

 

2,578 

 

9.2% 

 

83.2% 

 

 

15,902 

 

11.4% 

Washington

 

1,390 

 

5.0% 

 

97.1% 

 

 

6,036 

 

4.3% 

Total

 

28,028 

 

100.0% 

 

93.2% 

 

$

139,695 

 

100.0% 



 

 

 

 

 

 

 

 

 

 

 

Reconciliation of NOI to net income

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Total NOI

 

 

 

 

 

 

 

$

139,695 

 

 

Other income and (expenses):

 

 

 

 

 

 

 

 

 

 

 

NOI from assets sold or held for development

 

 

86 

 

 

LTEIP amortization:

 

 

 

 

 

 

 

 

 

 

 

Cost of operations

 

 

 

 

 

 

 

 

(1,203)

 

 

General and administrative

 

 

 

 

 

 

 

 

(1,684)

 

 

Facility management fees

 

 

 

 

 

 

 

 

252 

 

 

Other income and (expenses)

 

 

 

 

 

 

 

 

(334)

 

 

Depreciation and amortization

 

 

 

 

 

 

 

 

(46,706)

 

 

Adjusted general and administrative (1)

 

 

 

 

 

 

(3,590)

 

 

Equity in loss of unconsolidated joint venture

 

 

 

(382)

 

 

Gain on sale of real estate facility

 

 

 

 

 

 

1,209 

 

 

Gain on sale of development rights

 

 

 

 

 

 

3,865 

 

 

Net income

 

 

 

 

 

 

 

$

91,208 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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 

 

 

 

 

362 

 

 

976 

 

 

 

 

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 

 

 

 

 

291 

 

 

918 

 

 

 

 

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 

 

 

 

 

71 

 

 

58 

 

 

 

 

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 

____________________________

(1)(a)

Adjusted general and administrative expenses excluderental income excludes a material lease buyout payment.

(b)

Adjusted cost of operations excludes the impact of LTEIP amortizationamortization. 

(c)

Net operating income represents adjusted rental income less adjusted cost of $1.7 million for the six months ended June 30, 2017.operations.



Leasing Production: DuringRental income increased $3.1 million and $11.1 million for the first sixthree and nine months ofended September 30, 2017, respectively, as compared to the Company executed leases comprising 3.7 millionsame 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 feet of space (2.4 million square feet of lease renewals and 1.3 million square feet of new leases) while achieving initial rental rate growth on new and renewed leases of 3.4% over expiring rents. Total portfolio occupancy percentage decreased by 120 basis points to 93.2% since December 31, 2016.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

24

 


 

Table of Contents

 

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.  

Same Park Facilities

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:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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% 

____________________________

(a)

Computed by dividing NOI by adjusted rental income. 

(b)

Represents the annualized adjusted rental income earned per occupied square foot.

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Table of Contents

Analysis of Same Park Adjusted Rental Income

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%.

During the first nine months of 2017, most markets continued to reflect favorable conditions allowing for stable occupancy as well as increasing rental rates. With the exception of 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.

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):



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

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% 

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 to new and existing customers, with an average increase in rental rates over the previous rates of 5.7% and 4.3%. Approximately 66.8% of our leasing activity for the nine months ended September 30, 2017 represented renewals of leases with existing tenants. See “Analysis of Market Trends” below for further analysis of such data on a by-market basis.

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

Analysis of Same Park Adjusted Cost of Operations

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 1.7% and 1.0% for the three and nine months ended September 30, 2017, respectively, as compared to 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.

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Table of Contents

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.

Same Park Quarterly Trends

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:



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



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 

27


Table of Contents

Analysis of Same Park Market 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%

28


Table of Contents

The following table summarizestables 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 sixnine months ended JuneSeptember 30, 2017 (in thousands):





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

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 Three Months Ended June 30, 2017



 

Square

 

 

 

 

Transaction

 

 



 

Footage

 

Tenant

 

 

Costs per

 

Rental

Markets

 

Leased

 

Retention

 

 

Executed Foot

 

Rate Change (1)

Northern California

 

332 

 

54.3% 

 

$

1.02 

 

14.4% 

Southern California

 

403 

 

66.4% 

 

$

2.07 

 

5.1% 

Northern Texas

 

173 

 

31.5% 

 

$

3.88 

 

6.3% 

Southern Texas

 

173 

 

59.4% 

 

$

1.68 

 

14.2% 

Virginia

 

297 

 

71.6% 

 

$

3.16 

 

(10.7%)

Florida

 

350 

 

75.1% 

 

$

1.14 

 

3.3% 

Maryland

 

169 

 

88.5% 

 

$

16.54 

 

(7.5%)

Washington

 

94 

 

63.6% 

 

$

1.66 

 

15.7% 

Total

 

1,991 

 

64.5% 

 

$

3.22 

 

3.2% 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

For the Six Months Ended June 30, 2017



 

Square

 

 

 

 

Transaction

 

 



 

Footage

 

Tenant

 

 

Costs per

 

Rental

Markets

 

Leased

 

Retention

 

 

Executed Foot

 

Rate Change (1)

Northern California

 

577 

 

59.8% 

 

$

1.48 

 

16.7% 

Southern California

 

708 

 

61.8% 

 

$

2.23 

 

5.6% 

Northern Texas

 

399 

 

58.4% 

 

$

3.22 

 

4.2% 

Southern Texas

 

253 

 

41.4% 

 

$

2.69 

 

14.4% 

Virginia

 

525 

 

64.8% 

 

$

5.50 

 

(8.1%)

Florida

 

666 

 

71.7% 

 

$

1.58 

 

3.0% 

Maryland

 

297 

 

78.4% 

 

$

12.01 

 

(10.0%)

Washington

 

319 

 

82.0% 

 

$

0.80 

 

12.4% 

Total

 

3,744 

 

64.6% 

 

$

3.25 

 

3.4% 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

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% 

____________________________

(1)(a)

Rental rate change is computed by taking the percentage difference between outgoing rents and incoming rents for leases executed during the period. Leases executed on spaces vacant for more than the preceding twelve months have been excluded.



During the first sixnine months of 2017, most markets continued to reflect favorable conditions allowing for stable occupancy as well as increasing rental rates. With the exception of theNorthern 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. TheNorthern 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 1.31.1 million square feet in Northern Virginia and 802,000712,000 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 June 30, 2017 (dollars and square feet in thousands):



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

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

 

 

1,266 

 

 

2,735 

 

10.5% 

 

$

42,311 

 

 

10.3% 

2018

 

 

1,519 

 

 

6,164 

 

23.6% 

 

 

98,870 

 

 

24.0% 

2019

 

 

1,093 

 

 

6,119 

 

23.4% 

 

 

91,201 

 

 

22.1% 

2020

 

 

527 

 

 

4,407 

 

16.9% 

 

 

63,766 

 

 

15.5% 

2021

 

 

265 

 

 

2,264 

 

8.6% 

 

 

34,844 

 

 

8.5% 

Thereafter

 

 

262 

 

 

4,440 

 

17.0% 

 

 

80,805 

 

 

19.6% 

Total

 

 

4,932 

 

 

26,129 

 

100.0% 

 

$

411,797 

 

 

100.0% 

25


Table of Contents

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 June 30, 2017.  The Company analyzes this concentration to minimize significant industry exposure risk.

Percent of

Annualized

Industry

Rental Income

Business services

18.4% 

Warehouse, distribution, transportation and logistics

10.5% 

Health services

10.1% 

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

4.3% 

Electronics

3.1% 

Aerospace/defense products and services

2.8% 

Home furnishings

2.8% 

Communications

2.2% 

Educational services

1.8% 

Other

12.0% 

Total

100.0% 

The information below depicts the Company’s top 10 customers by annualized rental income as of June 30, 2017 (in thousands):



 

 

 

 

 

 



 

 

 

 

 

 



 

 

 

 

 

Percent of



 

 

Annualized

 

Annualized

Tenants

Square Footage

 

Rental Income (1)

 

Rental Income

US Government

662 

 

$

17,344 

 

4.3% 

Kaiser Permanente

158 

 

 

4,181 

 

1.0% 

Lockheed Martin Corporation

168 

 

 

4,136 

 

1.0% 

Keeco, L.L.C.

460 

 

 

3,566 

 

0.9% 

Luminex Corporation

185 

 

 

3,135 

 

0.8% 

MAXIMUS, Inc.

102 

 

 

2,088 

 

0.5% 

KZ Kitchen Cabinet & Stone

181 

 

 

2,067 

 

0.5% 

Investorplace Media, LLC

46 

 

 

1,826 

 

0.5% 

Inova Health Care Services

63 

 

 

1,805 

 

0.5% 

Quanta Computer Inc.

179 

 

 

1,663 

 

0.4% 

Total

2,204 

 

$

41,811 

 

10.4% 

____________________________

(1)

For leases expiring prior to December 31, 2017, annualized rental income represents income to be received under existing leases from July 1, 2017 through the date of expiration.

26


Table of Contents

Comparative Analysis of the Three and Six Months Ended June 30, 2017 to the Three and Six Months Ended June 30, 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 and six months ended June 30, 2017 and 2016, the SameNon-Same Park facilities constitute 27.8 millionare comprised of two office buildings in Maryland, with 226,000 rentable square feet representing 99.3%and occupancy of the 28.0 million square feet in the Company’s total portfolio as of June31.6% at September 30, 2017.2017 (33.9% at October 23, 2017).



The following table presents theAssets sold or held for development: These amounts include historical operating results of the Company’swith respect to properties for the threethat have been sold, and six months ended June 30, 2017 and 2016 in additionwith respect 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 pera 123,000 rentable square foot data):



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



For The Three Months

 

 

 

For The Six Months

 

 



Ended June 30,

 

 

 

Ended June 30,

 

 

 

2017

 

2016

 

Change

 

2017

 

2016

 

Change

Adjusted rental income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Park (27.8 million rentable square feet)

$

99,443 

 

$

95,152 

 

4.5% 

 

$

199,097 

 

$

190,060 

 

4.8% 

Non-Same Park (226,000 rentable square feet)

 

314 

 

 

 

100.0% 

 

 

605 

 

 

 

100.0% 

Total adjusted rental income (1)

 

99,757 

 

 

95,152 

 

4.8% 

 

 

199,702 

 

 

190,060 

 

5.1% 

Adjusted cost of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Park

 

29,544 

 

 

28,723 

 

2.9% 

 

 

59,383 

 

 

59,500 

 

(0.2%)

Non-Same Park

 

270 

 

 

 

100.0% 

 

 

624 

 

 

 

100.0% 

Total adjusted cost of operations (2)

 

29,814 

 

 

28,723 

 

3.8% 

 

 

60,007 

 

 

59,500 

 

0.9% 

Net operating income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Park

 

69,899 

 

 

66,429 

 

5.2% 

 

 

139,714 

 

 

130,560 

 

7.0% 

Non-Same Park

 

44 

 

 

 

100.0% 

 

 

(19)

 

 

 

(100.0%)

Total net operating income

 

69,943 

 

 

66,429 

 

5.3% 

 

 

139,695 

 

 

130,560 

 

7.0% 

Other income and (expenses):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOI from assets sold or held for development (1) (2)

 

14 

 

 

699 

 

(98.0%)

 

 

86 

 

 

1,383 

 

(93.8%)

LTEIP amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operations

 

(407)

 

 

(791)

 

(48.5%)

 

 

(1,203)

 

 

(1,655)

 

(27.3%)

General and administrative

 

(711)

 

 

(3,293)

 

(78.4%)

 

 

(1,684)

 

 

(4,897)

 

(65.6%)

Facility management fees

 

124 

 

 

131 

 

(5.3%)

 

 

252 

 

 

259 

 

(2.7%)

Other income and (expenses)

 

(255)

 

 

(1,954)

 

(86.9%)

 

 

(334)

 

 

(4,877)

 

(93.2%)

Depreciation and amortization

 

(23,628)

 

 

(25,214)

 

(6.3%)

 

 

(46,706)

 

 

(50,255)

 

(7.1%)

Adjusted general and administrative (3)

 

(1,732)

 

 

(2,084)

 

(16.9%)

 

 

(3,590)

 

 

(4,115)

 

(12.8%)

Equity in loss of unconsolidated joint venture

 

(382)

 

 

 

(100.0%)

 

 

(382)

 

 

 

(100.0%)

Gain on sale of real estate facility

 

1,209 

 

 

 

100.0% 

 

 

1,209 

 

 

 

100.0% 

Gain on sale of development rights

 

 

 

 

 

 

3,865 

 

 

 

100.0% 

Net income

$

44,175 

 

$

33,923 

 

30.2% 

 

$

91,208 

 

$

66,403 

 

37.4% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Park gross margin (4)

 

70.3% 

 

 

69.8% 

 

0.7% 

 

 

70.2% 

 

 

68.7% 

 

2.2% 

Same Park weighted average occupancy

 

93.7% 

 

 

93.5% 

 

0.2% 

 

 

94.1% 

 

 

93.8% 

 

0.3% 

Same Park period end occupancy

 

93.8% 

 

 

93.3% 

 

0.5% 

 

 

93.8% 

 

 

93.3% 

 

0.5% 

Non-Same Park weighted average occupancy

 

20.6% 

 

 

0.0% 

 

100.0% 

 

 

19.6% 

 

 

0.0% 

 

100.0% 

Same Park annualized realized rental income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

per square foot (5)

$

15.27 

 

$

14.63 

 

4.4% 

 

$

15.22 

 

$

14.58 

 

4.4% 

____________________________

(1)

Adjusted rental income excludes rental income from assets sold oroffice building which is vacant and being held for development of $43,000 and $935,000 for the three months ended June 30, 2017 and 2016, respectively, and $159,000 and $1.9 million for the six months

27


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ended June 30, 2017 and 2016, respectively.

(2)

Adjusted cost of operations excludes LTEIP amortization of $407,000 and $791,000 for the three months ended June 30, 2017 and 2016, respectively, and $1.2 million and $1.7 million for the six months ended June 30, 2017 and 2016, respectively, as well as, cost of operations from assets sold or held for development of $29,000 and $236,000 for the three months ended June 30, 2017 and 2016, respectively, and $73,000 and $489,000 for the six months ended June 30, 2017 and 2016, respectively.

(3)

Adjusted general and administrative expenses exclude LTEIP amortization of $711,000 and $3.3 million for the three months ended June 30, 2017 and 2016, respectively, and $1.7 million and $4.9 million for the six months ended June 30, 2017 and 2016, respectively.

(4)

Computed by dividing Same Park NOI by Same Park rental income.

(5)

Represents the annualized Same Park adjusted rental income earned per occupied square foot.

Rental Income:

·

Rental income increased $3.7 million, or 3.9%, from $96.1 million for the three months ended June 30, 2016 to $99.8 million for the three months ended June 30, 2017.

·

Rental income increased $7.9 million, or 4.1%, from $191.9 million for the six months ended June 30, 2016 to $199.9 million for the six months ended June 30, 2017.

·

The three and six month increases in adjusted rental income from the Same Park portfolio of $4.3 million, or 4.5%, and $9.0 million, or 4.8%, respectively, was due to higher executed rental rates and an increase in occupancy.

·

The three and six month increases in adjusted rental income from the Non-Same Park facilities of $314,000 and $605,000, respectively, was resulting from an asset acquisition during the third quarter of 2016.

Facility Management Fees: Facility management fees, derived from Public Storage (“PS”), account for future potential development into a small portion of the Company’s revenues. During the three months ended June 30, 2017,  $124,000 of revenue was recognized from facility management fees compared to $131,000 for the same period in 2016. During the six months ended June 30, 2017,  $252,000 of revenue was recognized from facility management fees compared to $259,000 for the same period in 2016.  

Cost of Operations: The following table summarizes the cost ofmulti-family building. We expect no further material operations for the Company’s properties for the three and six months ended June 30, 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.



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

For the Three Months

 

 

 

 

For The Six Months

 

 



 

 

Ended June 30,

 

 

 

 

Ended June 30,

 

 



 

 

2017

 

 

2016

 

% Change

 

 

2017

 

 

2016

 

% Change

Same Park

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property taxes

 

$

10,132 

 

$

9,800 

 

3.4% 

 

$

20,321 

 

$

19,458 

 

4.4% 

Utilities

 

 

5,734 

 

 

5,472 

 

4.8% 

 

 

11,630 

 

 

11,698 

 

(0.6%)

Repairs and maintenance

 

 

6,469 

 

 

6,602 

 

(2.0%)

 

 

13,104 

 

 

14,500 

 

(9.6%)

Other expenses

 

 

7,209 

 

 

6,849 

 

5.3% 

 

 

14,328 

 

 

13,844 

 

3.5% 

Total Same Park

 

 

29,544 

 

 

28,723 

 

2.9% 

 

 

59,383 

 

 

59,500 

 

(0.2%)

Non-Same Park

 

 

270 

 

 

 

100.0% 

 

 

624 

 

 

 

100.0% 

Total adjusted cost of operations

 

 

29,814 

 

 

28,723 

 

3.8% 

 

 

60,007 

 

 

59,500 

 

0.9% 

LTEIP amortization

 

 

407 

 

 

791 

 

(48.5%)

 

 

1,203 

 

 

1,655 

 

(27.3%)

Assets sold or held for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

development

 

 

29 

 

 

236 

 

(87.7%)

 

 

73 

 

 

489 

 

(85.1%)

Total cost of operations

 

$

30,250 

 

$

29,750 

 

1.7% 

 

$

61,283 

 

$

61,644 

 

(0.6%)

·

The three month increase in adjusted cost of operations from the Same Park portfolio of $821,000,  or 2.9%, was due to increases in compensation expense and utility costs as well as higher property taxes in Virginia and Southern Texas.

28


Table of Contents

·

The six month decrease in adjusted cost of operations from the Same Park portfolio of $117,000, or 0.2%, was due to lower repairs and maintenance costs due to a mild snow season in 2017 partially offset by increases in compensation expense and property taxes.

·

The three and six month increases in adjusted cost of operations from the Non-Same Park facilities of $270,000 and $624,000, respectively, was resulting from an asset acquisition during the third quarter of 2016.



Depreciation and Amortization Expense:Depreciation and amortization expense was $23.6$23.8 million for the three months ended JuneSeptember 30, 2017 compared to $25.2$24.6 million for the same period in 2016. Depreciation and amortization expense was $46.7 million for the six months ended June 30, 2017 compared to $50.3 million for the same period in 2016. The three and six month decreases in depreciation and amortization expense was due to assets being fully depreciated.

General and Administrative Expenses:  

·

For the three and six months ended June 30, 2017, general and administrative expenses decreased $2.9 million,  or 54.6%,  and $3.7 million, or 41.5%, respectively, compared to the same periods in 2016 primarily due to a change in senior management in July, 2016. 

·

The three and six month decreases in adjusted general and administrative expenses of $352,000, or 16.9%, and $525,000, or 12.8%, respectively, were driven by lower compensation expense. The six month decrease was also due to accelerated stock compensation related to a director retiring in 2016.

Equity loss from investment in and advances to unconsolidated joint venture: At June 30, 2017, the Company holds a 95.0% equity investment in the Joint Venture. The Company accounts for such investment using the equity method and records its pro-rata share of the net loss in the Joint Venture for each period. The Joint Venture commenced its operations during the second quarter of 2017. During the three and six months ended June 30, 2017, the Company recorded an equity loss in the unconsolidated joint venture of $382,000, comprised of a net operating loss of $278,000 and depreciation expense of $104,000. The equity loss from the Joint Venture was a result of a physical occupancy rate of 9.1% at June 30, 2017.

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 $6.6 million and $4.2 million for the three months ended June 30, 2017 and 2016, respectively, and $13.7 million and $8.2 million for the six months ended June 30, 2017 and 2016, respectively.  The three month increase was due to an increase in overall NOI, reduced interest expense resulting from the repayment of a $250.0 million mortgage note and a gain on sale of real estate facility in Dallas, Texas. The six month increase was also impacted by the gain on sale of development rights in Silver Spring, Maryland.

Supplemental Property Data and Trends: NOI is summarized for the three and six months ended June 30, 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.

29

 


 

Table of Contents

 

$70.5 million for the 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 following tables summarizethree month decrease was primarily due to a reduction in the Same Parkongoing LTEIP amortization ($571,000 in 2017 versus $907,000 in 2016), departure of our CFO during the third quarter of 2017 and Non-Same Park operating results by regionacquisition transaction costs of $328,000 incurred in 2016. The nine month decrease was primarily due to a reduction in the ongoing LTEIP amortization ($2.3 million in 2017 versus $3.8 million in 2016), departure of senior executives in 2016 and 2017 and acquisition transaction costs incurred in 2016 noted above.

naly

Analysis of Items Not Included in Operating Income

Interest and Other Expense: Interest and other expense was $503,000 for the three and six months ended JuneSeptember 30, 2017 compared to $155,000 for the same period in 2016. Interest and other expense was $972,000 for the nine months ended September 30, 2017 compared to $5.5 million for the same period in 2016. In addition,The three month increase was due to higher interest capitalized in 2016 as the tables reflectHighgate Development began operations in 2017, while the comparative impactnine month decrease was primarily due to a repayment of a $250.0 million mortgage note during the second quarter of 2016.

Equity in loss of unconsolidated joint venture: Our equity in loss of unconsolidated joint venture represents our pro rata equity in the earnings of our 95% equity investment in the JV that owns the Highgate Development. We have agreed to provide a construction loan to the Joint Venture, maturing in April, 2019 and having two one-year extension options, of up to $75.0 million. The interest income we receive on the overall adjusted rental income, adjustedloan 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 NOI from properties that have been$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:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Schedule

 

As of September 30, 2017

Apartment Units

 

Total Estimated
Project Costs (a)
(in thousands)

 

Construction Start

 

Initial Occupancy

 

Estimated Stabilization Period

 

% Completed

 

%
Leased (b)

 

%
Occupied

 

Average Rent per Unit (c)

395

 

$

117,241 

 

Q3 2015

 

Q2 2017

 

Q4 2018

 

100.0% 

 

46.3% 

 

41.8% 

 

$

2,183 

____________________________

(a)

The project cost for the Highgate Development reflects the underlying land at the assigned contribution value upon formation of the Joint Venture. The estimated total costs of the project include land basis of $15.3 million plus unrealized land appreciation of $11.6 million.

(b)

As of October 23, 2017, the apartment units were 55.2% leased.

(c)

Average monthly rental rate is defined as the total potential monthly rental revenue (actual rent for occupied apartment homes plus market rent for vacant apartment homes) divided by the number of apartment homes.

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

Gain on sale of real estate facility and gain on sale of development rights: On May 1, 2017, we sold a two-building single-story office park comprising 44,000 square feet, located in Dallas, Texas, for net proceeds of $2.1 million. On March 31, 2017, we sold development rights we had acquired since January 1, 2015, and the impactin 2006 in connection with our acquisition of such is includeda business park in Non-Same Park facilities in the tables below. As partSilver Spring, Maryland. When all contingencies of the tables below,sale have completed, we will have reconciled total NOI to net income (in thousands):



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



For the Three Months Ended June 30,



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

$

22,879 

 

$

21,580 

 

6.0% 

 

$

5,670 

 

$

5,578 

 

1.6% 

 

$

17,209 

 

$

16,002 

 

7.5% 

Southern California

 

15,984 

 

 

14,999 

 

6.6% 

 

 

4,802 

 

 

4,645 

 

3.4% 

 

 

11,182 

 

 

10,354 

 

8.0% 

Northern Texas

 

8,383 

 

 

7,771 

 

7.9% 

 

 

2,820 

 

 

2,773 

 

1.7% 

 

 

5,563 

 

 

4,998 

 

11.3% 

Southern Texas

 

7,273 

 

 

6,718 

 

8.3% 

 

 

2,491 

 

 

2,316 

 

7.6% 

 

 

4,782 

 

 

4,402 

 

8.6% 

Virginia

 

18,559 

 

 

19,303 

 

(3.9%)

 

 

6,166 

 

 

5,861 

 

5.2% 

 

 

12,393 

 

 

13,442 

 

(7.8%)

Florida

 

10,251 

 

 

9,406 

 

9.0% 

 

 

2,677 

 

 

2,699 

 

(0.8%)

 

 

7,574 

 

 

6,707 

 

12.9% 

Maryland

 

12,069 

 

 

11,675 

 

3.4% 

 

 

3,897 

 

 

3,900 

 

(0.1%)

 

 

8,172 

 

 

7,775 

 

5.1% 

Washington

 

4,045 

 

 

3,700 

 

9.3% 

 

 

1,021 

 

 

951 

 

7.4% 

 

 

3,024 

 

 

2,749 

 

10.0% 

Total Same Park

 

99,443 

 

 

95,152 

 

4.5% 

 

 

29,544 

 

 

28,723 

 

2.9% 

 

 

69,899 

 

 

66,429 

 

5.2% 

Non-Same Park

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maryland

 

314 

 

 

 

100.0% 

 

 

270 

 

 

 

100.0% 

 

 

44 

 

 

 

100.0% 

Total Non-Same Park

 

314 

 

 

 

100.0% 

 

 

270 

 

 

 

100.0% 

 

 

44 

 

 

 

100.0% 

Total

$

99,757 

 

$

95,152 

 

4.8% 

 

$

29,814 

 

$

28,723 

 

3.8% 

 

$

69,943 

 

$

66,429 

 

5.3% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of NOI to net income

 

 

 

 

 

 

 

 

 

 

 

 

 

Total NOI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

69,943 

 

$

66,429 

 

5.3% 

Other income and (expenses):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOI from assets sold or held for development

 

 

 

 

 

 

 

 

 

 

 

 

14 

 

 

699 

 

(98.0%)

LTEIP amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operations

 

 

 

 

 

 

 

(407)

 

 

(791)

 

(48.5%)

General and administrative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(711)

 

 

(3,293)

 

(78.4%)

Facility management fees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

124 

 

 

131 

 

(5.3%)

Other income and (expenses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(255)

 

 

(1,954)

 

(86.9%)

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23,628)

 

 

(25,214)

 

(6.3%)

Adjusted general and administrative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,732)

 

 

(2,084)

 

(16.9%)

Equity in loss of unconsolidated joint venture

 

 

 

 

 

 

 

 

 

 

 

 

(382)

 

 

 

(100.0%)

Gain on sale of real estate facility

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,209 

 

 

 

100.0% 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

44,175 

 

$

33,923 

 

30.2% 

30

 


 

Table of Contents

 

received a 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 received in the fourth quarter of 2017 and the remaining contingencies have lapsed.





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



For the Six Months Ended June 30,



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

$

46,175 

 

$

42,861 

 

7.7% 

 

$

11,560 

 

$

11,041 

 

4.7% 

 

$

34,615 

 

$

31,820 

 

8.8% 

Southern California

 

31,757 

 

 

29,617 

 

7.2% 

 

 

9,586 

 

 

9,200 

 

4.2% 

 

 

22,171 

 

 

20,417 

 

8.6% 

Northern Texas

 

16,555 

 

 

15,550 

 

6.5% 

 

 

5,518 

 

 

5,634 

 

(2.1%)

 

 

11,037 

 

 

9,916 

 

11.3% 

Southern Texas

 

14,789 

 

 

13,773 

 

7.4% 

 

 

4,979 

 

 

4,658 

 

6.9% 

 

 

9,810 

 

 

9,115 

 

7.6% 

Virginia

 

37,648 

 

 

38,551 

 

(2.3%)

 

 

12,284 

 

 

13,045 

 

(5.8%)

 

 

25,364 

 

 

25,506 

 

(0.6%)

Florida

 

20,188 

 

 

18,797 

 

7.4% 

 

 

5,428 

 

 

5,377 

 

0.9% 

 

 

14,760 

 

 

13,420 

 

10.0% 

Maryland

 

23,929 

 

 

23,450 

 

2.0% 

 

 

8,008 

 

 

8,542 

 

(6.3%)

 

 

15,921 

 

 

14,908 

 

6.8% 

Washington

 

8,056 

 

 

7,461 

 

8.0% 

 

 

2,020 

 

 

2,003 

 

0.8% 

 

 

6,036 

 

 

5,458 

 

10.6% 

Total Same Park

 

199,097 

 

 

190,060 

 

4.8% 

 

 

59,383 

 

 

59,500 

 

(0.2%)

 

 

139,714 

 

 

130,560 

 

7.0% 

Non-Same Park

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maryland

 

605 

 

 

 

100.0% 

 

 

624 

 

 

 

100.0% 

 

 

(19)

 

 

 

(100.0%)

Total Non-Same Park

 

605 

 

 

 

100.0% 

 

 

624 

 

 

 

100.0% 

 

 

(19)

 

 

 

(100.0%)

Total

$

199,702 

 

$

190,060 

 

5.1% 

 

$

60,007 

 

$

59,500 

 

0.9% 

 

$

139,695 

 

$

130,560 

 

7.0% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of NOI to net income

 

 

 

 

 

 

 

 

 

 

 

 

 

Total NOI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

139,695 

 

$

130,560 

 

7.0% 

Other income and (expenses):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOI from assets sold or held for development

 

 

 

 

 

 

 

86 

 

 

1,383 

 

(93.8%)

LTEIP amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of operations

 

 

 

 

 

 

 

(1,203)

 

 

(1,655)

 

(27.3%)

General and administrative

 

 

 

 

 

 

(1,684)

 

 

(4,897)

 

(65.6%)

Facility management fees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

252 

 

 

259 

 

(2.7%)

Other income and (expenses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(334)

 

 

(4,877)

 

(93.1%)

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(46,706)

 

 

(50,255)

 

(7.1%)

Adjusted general and administrative

 

 

 

 

 

 

 

(3,590)

 

 

(4,115)

 

(12.8%)

Equity in loss of unconsolidated joint venture

 

 

 

 

 

 

 

 

 

 

 

 

(382)

 

 

 

(100.0%)

Gain on sale of real estate facility

 

 

 

 

 

 

 

 

 

 

 

 

1,209 

 

 

 

100.0% 

Gain on sale of development rights

 

 

 

 

 

 

 

 

 

 

 

 

3,865 

 

 

 

100.0% 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

91,208 

 

$

66,403 

 

37.4% 

Liquidity and Capital Resources



The following table summarizes Same Park and Non-Same Park recurring capital expenditures (on page 34) and the related percentageThis section should be read in conjunction with our consolidated statements of NOI by regioncash flows for the sixthree and nine months ended JuneSeptember 30, 2017 and 2016 (in thousands):



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

For the Six Months Ended June 30,



 

 

 

 

 

 

 

 

 

Recurring



 

Recurring

 

 

 

Capital Expenditures



 

Capital Expenditures

 

 

 

as a Percentage of NOI

Region

 

 

2017

 

 

2016

 

Change

 

2017

 

2016



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same Park

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Northern California

 

$

1,159 

 

$

1,803 

 

(35.7%)

 

 

3.3% 

 

 

5.7% 

Southern California

 

 

2,290 

 

 

2,433 

 

(5.9%)

 

 

10.3% 

 

 

11.9% 

Northern Texas

 

 

1,865 

 

 

2,122 

 

(12.1%)

 

 

16.9% 

 

 

21.4% 

Southern Texas

 

 

517 

 

 

850 

 

(39.2%)

 

 

5.3% 

 

 

9.3% 

Virginia

 

 

6,078 

 

 

3,402 

 

78.7%

 

 

24.0% 

 

 

13.3% 

Florida

 

 

1,152 

 

 

1,141 

 

1.0%

 

 

7.8% 

 

 

8.5% 

Maryland

 

 

4,462 

 

 

1,854 

 

140.7%

 

 

28.0% 

 

 

12.4% 

Washington

 

 

290 

 

 

512 

 

(43.4%)

 

 

4.8% 

 

 

9.4% 

Total Same Park

 

 

17,813 

 

 

14,117 

 

26.2%

 

 

12.7% 

 

 

10.8% 

Non-Same Park

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maryland

 

 

4,398 

 

 

 

100.0%

 

 

 

 

Total Non-Same Park

 

 

4,398 

 

 

 

100.0%

 

 

 

 

Total

 

$

22,211 

 

$

14,117 

 

57.3%

 

 

15.9% 

 

 

10.8% 

31


Tableand the notes to our consolidated financial statements, which set forth the major components of Contents

our historical liquidity and capital resources. The following tables summarize Same Park weighted average occupancy rates and annualized realized rental income per square foot by region fordiscussion below sets forth the three and six months ended June 30, 2017 and 2016.



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

For the Three Months Ended June 30,



 

 

 

 

 

 

 

Annualized Realized

 

 



 

Weighted Average Occupancy Rates

 

 

 

Rental Income Per Square Foot

 

 

Region

 

2017

 

2016

 

Change

 

2017

 

2016

 

Change



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Northern California

 

94.9%

 

96.4%

 

(1.6%)

 

$

13.31 

 

$

12.37 

 

7.6%

Southern California

 

94.9%

 

93.7%

 

1.3%

 

$

16.90 

 

$

16.06 

 

5.2%

Northern Texas

 

90.3%

 

89.5%

 

0.9%

 

$

12.05 

 

$

11.27 

 

6.9%

Southern Texas

 

94.2%

 

96.4%

 

(2.3%)

 

$

15.73 

 

$

14.19 

 

10.9%

Virginia

 

90.0%

 

92.5%

 

(2.7%)

 

$

21.06 

 

$

21.29 

 

(1.1%)

Florida

 

98.0%

 

92.9%

 

5.5%

 

$

10.83 

 

$

10.48 

 

3.3%

Maryland

 

88.5%

 

87.5%

 

1.1%

 

$

23.19 

 

$

22.68 

 

2.2%

Washington

 

98.2%

 

98.3%

 

(0.1%)

 

$

11.86 

 

$

10.83 

 

9.5%

Total Same Park

 

93.7%

 

93.5%

 

0.2%

 

$

15.27 

 

$

14.63 

 

4.4%



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

For the Six Months Ended June 30,



 

 

 

 

 

 

 

Annualized Realized

 

 



 

Weighted Average Occupancy Rates

 

 

 

Rental Income Per Square Foot

 

 

Region

 

2017

 

2016

 

Change

 

2017

 

2016

 

Change



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Northern California

 

96.4%

 

96.5%

 

(0.1%)

 

$

13.23 

 

$

12.27 

 

7.8%

Southern California

 

95.4%

 

94.0%

 

1.5%

 

$

16.69 

 

$

15.81 

 

5.6%

Northern Texas

 

90.4%

 

89.4%

 

1.1%

 

$

11.89 

 

$

11.29 

 

5.3%

Southern Texas

 

94.2%

 

96.1%

 

(2.0%)

 

$

15.98 

 

$

14.59 

 

9.5%

Virginia

 

90.2%

 

92.7%

 

(2.7%)

 

$

21.31 

 

$

21.22 

 

0.4%

Florida

 

97.8%

 

94.0%

 

4.0%

 

$

10.68 

 

$

10.35 

 

3.2%

Maryland

 

87.8%

 

88.0%

 

(0.2%)

 

$

23.16 

 

$

22.66 

 

2.2%

Washington

 

98.4%

 

98.2%

 

0.2%

 

$

11.78 

 

$

10.93 

 

7.8%

Total Same Park

 

94.1%

 

93.8%

 

0.3%

 

$

15.22 

 

$

14.58 

 

4.4%

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):



 

 

 

 

 



 

 

 

 

 



For The Six Months



Ended June 30,



2017

 

2016

Write-offs of uncollectible rent

$

643 

 

$

356 

Write-offs as a percentage of rental income

 

0.3% 

 

 

0.2% 

Square footage of leases terminated prior to their scheduled expiration

 

 

 

 

 

due to business failures/bankruptcies

 

226 

 

 

216 

Accelerated depreciation and amortization related to unamortized tenant improvements

 

 

 

 

 

and lease commissions associated with early terminations

$

196 

 

$

361 

As of July 24, 2017, the Company 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 under lease, or rent deferment or abatement. At this time, the Company cannot anticipate what impact, if any, the ultimate outcome of these discussionsfactors which we expect will have onaffect our future operating results.

32


Table of Contents

Liquidityliquidity and Capital Resources

Cash and cash equivalents decreased $123.2 millioncapital resources or which may vary substantially from $128.6 million at December 31, 2016 to $5.4 million at June 30, 2017 for the reasons noted below.

Net cash provided by operating activities for the six months ended June 30, 2017 and 2016 was $137.5 million and $118.8 million, respectively. The increase of $18.7 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 $44.9 million and $27.7 million for the six months ended June 30, 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 and the sale of a real estate facility in Dallas, Texas.

Net cash used in financing activities was $215.9 million and $276.3 million for the six months ended June 30, 2017 and 2016, respectively.  The change was primarily due to repayment of a mortgage note payable of $250.0 million in 2016 compared to funds used to redeem preferred stock of $230.0 million in 2017. The change was also impacted by increased borrowings of $47.0 million from the Credit Facility.

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 June 30, 2017, the Company had $101.0 million outstanding on the Credit Facility at an interest rate of 1.81%. Subsequent to June 30, 2017, the Company repaid net $14.0 million on the Credit Facility. The Company had no balance outstanding on the Credit Facility at December 31, 2016. The Company had $1.0 million and $539,000 of unamortized loan origination costs as of June 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 to meet certain covenants, all of which the Company was in compliance with as of June 30, 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 15.9% at June 30, 2017 primarily due to a decrease in preferred stock outstanding from $1.1 billion at December 31, 2016 to $879.8 million at June 30, 2017 combined with borrowings of $101.0 million from the Credit Facility in 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 the first quarter of 2017, the Company increased its quarterly dividend from $0.75 per common share to $0.85 per common share.

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 and subsequently completed the redemption

33


Table of Contents

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: No shares of common stock were repurchased under the board-approved common stock repurchase program during the six months ended June 30, 2017 or the year ended December 31, 2016.

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

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 $11.6 million). The Company is committed to funding $75.0 million through a construction loan ($59.0 million was outstanding as of June 30, 2017) in addition to its equity contribution of $28.5 million, which includes a land basis of $15.3 million. The Company’s investment in and advances to unconsolidated joint venture was $91.3 million and $67.2 million as of June 30, 2017 and December 31, 2016, respectively. For the six months ended June  30, 2017, the Company made loan advances of $23.9 million and capitalized $506,000 of interest.

For the six months ended June 30, 2016, the Company made loan advances of $6.8 million, equity contributions of $5.7 million and capitalized $739,000 of interest. historical levels.



Capital Expenditures:Raising Strategy: The Company defines recurringAs a REIT, we generally distribute 100% of our taxable income to our shareholders, which relative to a taxable C corporation, limits the amount of cash flow from operations that we can retain for investments. As a result, in order to grow our asset base, access to capital expenditures as those necessary to maintain and operate its commercial real estate at its current economic value. During the six months ended June 30, 2017 and 2016, the Company expended $22.2 million and $14.1 million, respectively, in recurring capital expenditures, or $0.79 and $0.51 per weighted average square foot owned, respectively. Tenant improvements exclude tenant reimbursements of $388,000 and $1.7 million for the six months ended June 30, 2017 and 2016, respectively. Nonrecurring capital improvements include property renovations and expenditures related to repositioning acquisitions.is important.



The following table depictsOur 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 expenditures (in thousands):



 

 

 

 

 



 

 

 

 

 



For The Six Months



Ended June 30,

 

2017

 

2016

Recurring capital expenditures

 

 

 

 

 

Capital improvements

$

3,425 

 

$

2,679 

Tenant improvements

 

15,641 

 

 

7,850 

Lease commissions

 

3,145 

 

 

3,588 

Total recurring capital expenditures

 

22,211 

 

 

14,117 

Nonrecurring capital improvements

 

1,152 

 

 

346 

Total capital expenditures

$

23,363 

 

$

14,463 

34


Table of Contents

Capital expenditures on a per square foot owned basis are as follows:



 

 

 

 

 



 

 

 

 

 



For The Six Months



Ended June 30,

 

2017

 

2016

Recurring capital expenditures

 

 

 

 

 

Capital improvements

$

0.12 

 

$

0.10 

Tenant improvements

 

0.56 

 

 

0.28 

Lease commissions

 

0.11 

 

 

0.13 

Total recurring capital expenditures

 

0.79 

 

 

0.51 

Nonrecurring capital improvements

 

0.04 

 

 

0.01 

Total capital expenditures

$

0.83 

 

$

0.52 

markets to raise capital.



The increase in recurring capital expenditures of $8.1 million, or 57.3%, was primarily due to large renewals and expansions in the Same Park portfolio during 2017 combined with transaction costs related to the 2016 acquisition.

Distributions: The Company has elected and intends to qualify as a REIT for federal income tax purposes. In order to maintain its status as a REIT the Company must meet certain organizational and operational requirements relatedaccess 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 $71.4 million ($25.2 million to preferred shareholders and $46.2 million to common shareholders) and $68.3 million ($27.7 million to preferred shareholders and $40.6 million to common shareholders) during the six months ended June 30, 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 six months ended June 30, 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 sixnine months ended JuneSeptember 30, 2017, the FFO to combined fixed charges and preferred distributions coverage ratio was 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 believesWe believe that Funds from Operations (“FFO”)our net cash provided by our operating activities will continue to be sufficient to enable us to meet our ongoing requirements for debt service, capital expenditures and FFO, as adjusteddistributions to our shareholders for the foreseeable future.

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

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

Required Debt Repayment: As of September 30, 2017, we have no debt outstanding on our Credit Facility. Our Credit Facility does not expire until January, 2022. We are useful supplemental measures of the Company’s operating performance. The Company computes FFO in accordancecompliance with the White Paper on FFO approved by the Boardcovenants 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 charges and nonrecurring items. Management believes that FFO provides a useful measure of the Company’s operatingour Credit Facility.

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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 and FFO,Capital Expenditures: We define recurring capital expenditures as adjusted should be analyzed in conjunction with net income. However, FFO and FFO, as adjusted should not be viewed as substitutes for net income as measures of operating performance or liquidity, as they do not reflect depreciation and amortization costs or the level of capital expenditure and leasing coststhose 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 costsnine 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. Management believes FFO, as adjusted provides useful information to the investment community by adjusting FFO for certain items so as to provide more meaningful period-to-period comparisons of our operating performance. Other REITs may use different methods for calculating FFO and/or FFO, as adjusted and, accordingly, our FFO and FFO, as adjusted may not be comparable to other real estate companies’ FFO and/or FFO, as adjusted.



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



For The Nine Months ended September 30,

 

2017

 

2016

 

2017

 

2016



(in thousands)

 

(per square foot)

Recurring capital expenditures

 

 

 

 

 

 

 

 

 

 

 

Capital improvements

$

6,674 

 

$

5,300 

 

$

0.24 

 

$

0.19 

Tenant improvements

 

23,457 

 

 

13,109 

 

 

0.84 

 

 

0.47 

Lease commissions

 

5,162 

 

 

5,054 

 

 

0.18 

 

 

0.18 

Total recurring capital expenditures

 

35,293 

 

 

23,463 

 

 

1.26 

 

 

0.84 

Nonrecurring capital improvements

 

3,416 

 

 

767 

 

 

0.12 

 

 

0.03 

Total capital expenditures

$

38,709 

 

$

24,230 

 

$

1.38 

 

$

0.87 



FFOThe 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 datathousands)):







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



For The Three Months

 

For The Six Months



Ended June 30,

 

Ended June 30,

 

2017

 

2016

 

2017

 

2016

Net income allocable to common shareholders

$

24,742 

 

$

15,731 

 

$

51,135 

 

$

30,300 

Gain on sale of real estate facility

 

(1,209)

 

 

 

 

(1,209)

 

 

Gain on sale of development rights

 

 

 

 

 

(3,865)

 

 

Depreciation and amortization

 

23,628 

 

 

25,214 

 

 

46,706 

 

 

50,255 

Depreciation from unconsolidated joint venture

 

104 

 

 

 

 

104 

 

 

Net income allocable to noncontrolling interests—common units

 

6,645 

 

 

4,243 

 

 

13,746 

 

 

8,179 

Net income allocable to restricted stock unit holders

 

197 

 

 

117 

 

 

445 

 

 

259 

FFO allocable to common and dilutive shares

 

54,107 

 

 

45,305 

 

 

107,062 

 

 

88,993 

FFO allocated to noncontrolling interests—common units

 

(11,378)

 

 

(9,571)

 

 

(22,516)

 

 

(18,802)

FFO allocated to restricted stock unit holders

 

(361)

 

 

(252)

 

 

(786)

 

 

(535)

FFO allocated to common shareholders

$

42,368 

 

$

35,482 

 

$

83,760 

 

$

69,656 



 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

27,200 

 

 

27,082 

 

 

27,174 

 

 

27,063 

Weighted average common Operating Partnership units outstanding

 

7,305 

 

 

7,305 

 

 

7,305 

 

 

7,305 

Weighted average restricted stock units outstanding

 

179 

 

 

245 

 

 

196 

 

 

253 

Weighted average common share equivalents outstanding

 

212 

 

 

90 

 

 

210 

 

 

86 

Total common and dilutive shares

 

34,896 

 

 

34,722 

 

 

34,885 

 

 

34,707 



 

 

 

 

 

 

 

 

 

 

 

Net income per common share—diluted

$

0.90 

 

$

0.58 

 

$

1.87 

 

$

1.12 

Gain on sale of real estate facility

 

(0.03)

 

 

 

 

(0.03)

 

 

Gain on sale of development rights (1)

 

 

 

 

 

(0.11)

 

 

Depreciation and amortization, including amounts from investment

 

 

 

 

 

 

 

 

 

 

 

in unconsolidated Joint Venture (1)

 

0.68 

 

 

0.72 

 

 

1.34 

 

 

1.44 

FFO per common and dilutive share (1)

$

1.55 

 

$

1.30 

 

$

3.07 

 

$

2.56 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

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.

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

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

(1)

Per share amounts are computed using additional dilutive shares related to noncontrolling interests and restricted stock units.



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

Investment in and Advances to Unconsolidated Joint Venture: We expect to invest an additional $9.8 million in the Joint Venture, in order to fund completion of the Highgate Development. We do not expect any significant further investment necessary following table reconciles reported FFO to FFO, as adjusted, which excludes a net non-cash stock compensation charge of $2.0 million.completion.





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

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

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

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

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

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

Our consistent, long-term dividend policy has been to distribute our taxable income in order to maintain our REIT status. Future quarterly distributions with respect to the common shares will continue to be determined based upon our REIT distribution requirements and will be funded with cash provided by operating activities.



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



For The Three Months

 

For The Six Months



Ended June 30,

 

Ended June 30,



2017

 

2016

 

2017

 

2016

FFO allocable to common and dilutive shares

$

54,107 

 

$

45,305 

 

$

107,062 

 

$

88,993 

LTEIP modification due to a change in senior management

 

 

 

2,018 

 

 

 

 

2,018 

FFO allocable to common and dilutive shares, as adjusted

$

54,107 

 

$

47,323 

 

$

107,062 

 

$

91,011 



 

 

 

 

 

 

 

 

 

 

 

FFO per common and dilutive share

$

1.55 

 

$

1.30 

 

$

3.07 

 

$

2.56 

LTEIP modification due to a change in senior management

 

 

 

0.06 

 

 

 

 

0.06 

FFO per common and dilutive share, as adjusted

$

1.55 

 

$

1.36 

 

$

3.07 

 

$

2.62 

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Funds from Operations and Core Funds from Operations



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, as adjusted, increased $6.8 milliondivided by aggregate common and $16.1 milliondilutive shares. FFO and FFO per share are not a substitute for the threenet 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 six months ended June 30, 2017 compared to the same periods in 2016. The three and six month increases were due to an increase in NOI, reduced interest expense and savings from lower preferred distributions.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.



Related Party Transactions:The following table reconciles from net income allocable to common shareholders to FFO and net income per share to FFO per share  As of June 30, 2017, PS owned 7.2 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 upon redemption of its common partnership units, PS would own 41.9% (or 14.5 million shares) of the outstanding shares of the Company’s common stock at June 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 a director of the Company and also President of PS. Gary E. Pruitt, an independent director of the Company is also a trustee of PS.(amounts in thousands, except per share data):  





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



For The Three Months

 

For The Nine Months



Ended September 30,

 

Ended September 30,

 

2017

 

2016

 

2017

 

2016

Net income allocable to common shareholders

$

18,138 

 

$

19,718 

 

$

69,275 

 

$

50,017 

Gain on sale of real estate facility

 

 

 

 

 

(1,209)

 

 

Gain on sale of development rights

 

 

 

 

 

(3,865)

 

 

Depreciation and amortization

 

23,759 

 

 

24,631 

 

 

70,465 

 

 

74,886 

Depreciation from unconsolidated joint venture

 

483 

 

 

 

 

587 

 

 

Net income allocated to noncontrolling interests

 

4,866 

 

 

5,315 

 

 

18,610 

 

 

13,495 

Net income allocated to restricted stock unit holders

 

137 

 

 

128 

 

 

582 

 

 

387 

FFO allocable to common and dilutive shares

$

47,383 

 

$

49,792 

 

$

154,445 

 

$

138,785 



 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

27,226 

 

 

27,103 

 

 

27,192 

 

 

27,076 

Weighted average common operating partnership units outstanding

 

7,305 

 

 

7,305 

 

 

7,305 

 

 

7,305 

Weighted average restricted stock units outstanding

 

179 

 

 

268 

 

 

188 

 

 

256 

Weighted average common share equivalents outstanding

 

201 

 

 

98 

 

 

207 

 

 

90 

Total common and dilutive shares

 

34,911 

 

 

34,774 

 

 

34,892 

 

 

34,727 



 

 

 

 

 

 

 

 

 

 

 

Net income per common share—diluted

$

0.66 

 

$

0.72 

 

$

2.53 

 

$

1.84 

Gain on sale of real estate facility

 

 

 

 

 

(0.03)

 

 

Gain on sale of development rights

 

 

 

 

 

(0.11)

 

 

Depreciation and amortization, including amounts from investment

 

 

 

 

 

 

 

 

 

 

 

in unconsolidated Joint Venture

 

0.70 

 

 

0.71 

 

 

2.04 

 

 

2.16 

FFO per share (a)

$

1.36 

 

$

1.43 

 

$

4.43 

 

$

4.00 

Pursuant

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 a cost sharing and administrative services agreement, the Company shares costs with PS for certain administrative services and rental of corporate office space. The administrative services include investor relations, legal, lease administration, corporate tax and information systems, which were allocated between the Company and PS in accordance with a methodology intended to fairly allocate those costs. Costs allocatedstock based compensation, due to the Company totaled $132,000departure of senior executives and $123,000(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 three months ended June 30, 2017 and 2016, respectively, and $265,000 and $247,000 forsame manner as we do, may not use the six months ended June 30, 2017 and 2016, respectively. Costs allocatedsame terminology or may not present such a measure, Core FFO per share may not be comparable among REITs.

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Table of Contents

The following table reconciles FFO per share to PS totaled $8,000 and $15,000 for the three and six months ended June 30, 2017, respectively. In addition, 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 $124,000 and $131,000 for the three months ended June 30, 2017 and 2016, respectively, and $252,000 and $259,000 for the six months ended June 30, 2017 and 2016, respectively. PS also provides property management services for the self-storage component of two assets owned by the Company for a fee of 6% of the gross revenues of such properties in addition to reimbursement of certain costs. Management fee expense recognized under the management contract with PS totaled $23,000 and $21,000 for the three months ended June 30, 2017 and 2016, respectively, and $45,000 and $42,000 for the six months ended June 30, 2017 and 2016, respectively.Core FFO per share:



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



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



For The Three Months

 

For The Nine Months



Ended September 30,

 

Ended September 30,



2017

 

2016

 

2017

 

2016

FFO per share

$

1.36 

 

$

1.43 

 

$

4.43 

 

$

4.00 

Preferred Redemption Allocation

 

0.19 

 

 

 

 

0.19 

 

 

Net impact due to departure of senior executives

 

(0.01)

 

 

 

 

(0.01)

 

 

0.05 

Acquisition transaction costs

 

 

 

0.01 

 

 

 

 

0.01 

Lease buyout payment

 

 

 

(0.01)

 

 

 

 

(0.01)

Core FFO per share

$

1.54 

 

$

1.43 

 

$

4.61 

 

$

4.05 



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:  TheAs of September 30, 2017, the Company is scheduled to pay cash dividends of $50.4$41.4 million per year on its

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preferred equity outstanding as(excluding 8,800,000 depositary shares of JuneSeries T Preferred Stock which are scheduled to be redeemed on October 30, 2017.2017). 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):



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



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 

 

$



 

 

 

 

 

 

 

 

 

 

 

 

 

 

____________________________

(a)

Represents transaction costs, including tenant improvements and lease commissions, which we are committed to under the terms of executed leases.

(b)

Represents future expected loan advances to the Joint Venture under contract at September 30, 2017.

(c)

Represents future contractual payments on land under various operating leases.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 



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’sThe Company had no debt as a percentage of total equity (based on book values) was 5.6%outstanding as of JuneSeptember 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.

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Table of Contents

ITEM 4. CONTROLS AND PROCEDURES



The Company’s management, with the participation of the Company’s Chief Executive Officer, andwho 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 JuneSeptember 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 JuneSeptember 30, 2017, the Company’s Chief Executive Officer, andwho 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 JuneSeptember 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.



PART II. OTHER INFORMATION 



ITEM 1. LEGAL PROCEEDINGS



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



ITEM 1A. RISK FACTORS 



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.



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



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

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Table of Contents

the Company.



During the three months ended JuneSeptember 30, 2017, there were no shares of the Company’s common stock repurchased. As of JuneSeptember 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.



ITEM 6. EXHIBITS 



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.

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SIGNATURES



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.





 

 



 

 



Dated: July 28,October 27, 2017



 

 



PS BUSINESS PARKS, INC.



 

 



BY:

/s/ Edward A. StokxMaria R.  Hawthorne



 

Edward A. StokxMaria R. Hawthorne



 

Executive Vice President and Chief FinancialExecutive Officer



 

(Principal Executive Officer and Principal Financial Officer)



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Table of Contents

 

EXHIBIT INDEX



 

Exhibits

 



 

Exhibit 3.1

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

Exhibit 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

Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. relating to 5.25% Series X Cumulative Preferred Units, dated as of September 21, 2017. Filed herewith.

Exhibit 12

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



 

Exhibit 31.1

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

Exhibit 31.2

Certification ofand 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.



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