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Real estate investment trust (REIT) – PS Business Parks Inc.’s (PSB - Analyst Report) second-quarter 2013 FFO (fund from operations) per share came in at $1.19, missing the Zacks Consensus Estimate by 2 cents. However, it came a penny above the year-ago quarter figure of $1.18 (on an adjusted basis).  

An uptick in cost of operations as well as a rise in preferred equity distributions acted as the dampeners. However, the rise in rental income in both the Same Park and Non-Same Park facilities helped the company post better year-over-year comparisons.

Total revenue in the reported quarter rose 2.7% year over year to $87.9 million and marginally exceeded the Zacks Consensus Estimate of $87 million. This was mainly driven by a significant increase in rental revenues from Non-Same Park (13.1%) and a slight rise in Same Park properties (1.0%). The growth was aided by a rise in occupancy rates as well as acquisitions in 2012.

Behind the Headlines

Same Park weighted average occupancy in the quarter was 91.9%, up 50 basis points year over year. Annualized same park realized rent per square foot rose 0.5% to $15.15 from $15.08 reported in the prior-year quarter.

Total cost of operations grew 3.6% year over year to $28.7 million. This was driven by a 16.4% escalation in expenses at Non-Same Park facilities and a 1.7% rise at Same Park facilities.

Total portfolio NOI rose 2.2% to $59.2 million from $57.9 million in the year-earlier quarter. Same park NOI were up modestly (0.7%) year over year to nearly $50.1 million while Non-same park NOI increased 11.6% year over year to $9.1 million.

Notably, as of Jun 30, 2013, Same Park facilities comprised 21.4 million rentable square feet, representing 76.0% of the 28.2 million square feet in the company’s portfolio.  

Acquisition

Subsequent to the quarter end, on Jul 26, 2013, PS Business Parks shelled out $14.8 million to buy a multi-tenant flex park spanning 389,000 square foot in Dallas, Texas. The property comprising 18 single-story buildings was 66.5% occupied at the time of purchase and was financed with cash in hand.

Liquidity

At quarter-end, PS Business Parks had cash and cash equivalents of nearly $18.8 million compared to $12.9 million as of Dec 31, 2012. The company had full capacity available under the $250 million unsecured credit facility. Debt and preferred equity to market cap was 36.9% at quarter end, while ratio of FFO to fixed charges and preferred distributions was 3.0x.

Dividend Update

Concurrent with its earnings release, the board of directors of PS Business Parks declared a quarterly dividend of 44 cents per share on its common stock. This dividend will be paid on Sep 30, 2013 to shareholders of record as of Sep 13, 2013.

In Conclusion

While lower-than-expected results at PS Business Parks is discouraging, we believe that this REIT’s portfolio in diversified markets enables it to tap opportunities and neutralize the operating risks associated with the economic down cycles. Moreover, it has a strong balance sheet with adequate liquidity. The recent acquisition also augurs well.

However, the volatility in the office sector with job cuts and a decline in market fundamentals remain headwinds. Moreover, stiff competition from office and industrial asset developers somewhat undermines the company’s near-term profitability.

PS Business Parks currently has a Zacks Rank #2 (Buy). We now look forward to the results of Public Storage (PSA - Analyst Report), slated to release on Aug 1, which possesses a 41% common equity interest in PS Business Parks.

Other well performing REITs include Diamondrock Hospitality Co. (DRH - Snapshot Report) and Winthrop Realty Trust (FUR - Snapshot Report), both carrying a Zacks Rank #1 (Strong Buy).

Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.
 

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