PSB Upgraded to Outperform

We have recently changed our long-term recommendation for PS Business Parks, Inc. (PSB - Analyst Report), a real estate investment trust (REIT) that owns and operates commercial real estate properties across the U.S., from Neutral to Outperform as we anticipate it to perform well above the broader market.

PS Business Parks owns low-rise suburban multi-tenant offices, business parks and industrial and flex assets. Located mostly in high population markets, flex properties are a combination of warehouse and office space and can be easily configured to suit a variety of uses.

The warehouse component of the flex space is primarily used for purposes such as light manufacturing and assembly, storage and warehousing, showroom, laboratory, distribution and research and development activities. The office component of the flex space is complementary to the warehouse component and enables businesses to accommodate management and production staff in the same facility.

Over the years, PS Business Parks has focused on investing and owning real estate in diversified markets, thereby tapping multiple industry concentrations and minimizing the risks associated with the economic down cycles. In addition, the company seeks to maximize its cash flow by controlling capital expenditures associated with re-leasing space by acquiring and owning properties, which can be easily reconfigured to suit a variety of uses for a wide range of tenants.

This in turn has enabled PS Business Parks to report strong second quarter 2011 results with a healthy year-over-year increase in earnings and solid occupancy levels. Despite a challenging macroeconomic environment, net operating income increased 1.8% during second quarter 2011 on a year-over-year basis, driven by a solid rise in rental revenues.

Furthermore, PS Business Parks has one of the strongest balance sheets in the sector with minimal debt maturities and adequate liquidity that provides it with an operating flexibility to protect and enhance market positions by capitalizing on improving real estate market fundamentals.

We expect the company to continue its bull run in the coming quarters as well, with a dedicated professional team of skilled local real estate experts who are empowered to make ownership decisions and motivated to provide a high level of service to its customers.

However, PS Business Parks generates a significant amount of revenue from its office portfolio. Office demand is highly correlated to job growth. With fears of a double-dip recession looming large, operations in the company’s office portfolio are likely to suffer, thereby undermining its long-term growth potential.

PS Business Parks presently has a Zacks #1 Rank that translates into a short-term ‘Strong Buy’ rating. We also have an Outperform recommendation and a Zacks #2 Rank (short-term ‘Buy’) for First Industrial Realty Trust Inc. (FR - Snapshot Report), a competitor of PS Business Parks.

Read the full analyst report on PSB

Read the full analyst report on FR