PS Business Parks, Inc. (PSB - Free Report) stock has outperformed the industry it belongs to, in the past six months. The company’s shares have gained 11% while the industry recorded 3.8% growth, during this time period.
Notably, there are enough reasons to expect a solid upside for this commercial real estate investment trust (REIT) stock. Particularly, the earnings outlook and operating fundamentals of PS Business Parks appear strong enough to drive the stock further in the near term.
The company enjoys a well diversified portfolio situated across varied markets. It operates real estate properties including multi-tenant flex, office and industrial assets mainly in six major markets — California, Virginia, Florida, Texas, Maryland and Washington .This diversification helps in mitigating operating risks associated with a particular asset category or economic downturns in a specific region. Further, it provides greater ability to tap opportunities across different asset classes.
The company has been making diligent efforts to expand its business around large population centers and diversify geographically. In fact, in June, it announced the acquisition of Fullerton Industrial Park and Northern Virginia Industrial Park in Springfield, VA for $14.3 million. The purchase of this multi-tenant industrial portfolio will strengthen PS Business Parks foothold in the Springfield industrial sub-market, where the company already owns an industrial portfolio with an impressive historical occupancy of 95% since 2000.
Complementing its acquisitions, the company aims at portfolio repositioning to achieve a better mix in the long term. Particularly, buyout of strategic assets at a discount to replacement costs will enable the company to emerge stronger amid improving industrial market fundamentals in the United States. Moreover, it is disposing assets that do not suit its growth strategies. In fact, in April, the company completed the sale of Orange County Business Center, situated in Orange County, CA and generated $73.3 million in net proceeds.
Notably, the industrial real estate market is witnessing improving fundamentals amid the growth of e-commerce business. This is driving demand for warehouse space as companies are compelled to enhance their distribution and production platforms as well as address a large customer base and urbanization.
Moreover, a healthy manufacturing environment, a recovering economy and job market gains are likely to drive demand for office space. Hence, amid strengthening fundamentals across different asset classes, PS Business Parks is well poised to gain from this trend with its strong portfolio of strategic properties.
Also, its return on equity is 18.6% compared with the industry’s average of 5%. This reflects that the company reinvests more efficiently compared to the industry. Further, the company remains committed to boost shareholders’ wealth. In February 2017, it announced a 13.3% sequential hike in quarterly common dividend rate and has kept the rate unchanged. Given the company’s solid financial position and significantly lower debt-to-equity ratio compared to that of the industry, this dividend payout is expected to be sustainable.
PS Business Parks also generates higher cash flow per share of $6.8 compared to the industry’s average of $1.91. Further, the company’s solid operating margins also keep us optimistic of its growth prospects. Specifically, it has a net margin of 43% against the industry’s average of 13.4%.
Lastly, the trend in estimate revisions indicates a solid outlook for this Zacks Rank #2 (Buy) stock. In fact, the Zacks Consensus Estimate for 2018 funds from operation (FFO) per share has witnessed 1.4% upward revision in two months’ time. Given its progress on the fundamentals, the stock is likely to perform well in the quarters ahead.
Other Stocks to Consider
Investors can also consider other top-ranked stocks in the real estate space like Duke Realty Corporation (DRE - Free Report) , Lamar Advertising Company (LAMR - Free Report) and Columbia Property Trust (CXP - Free Report) . All three stocks carry a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Duke Realty’s Zacks Consensus Estimate for 2018 FFO per share has remained unchanged at $1.30 in a month’s time. Its shares have returned 14.8% over the past three months.
Lamar’s FFO per share estimates for the current year have remained unchanged at $5.40 in the past month. Its shares have gained 9.3% in the past three months.
Columbia Property’s FFO per share estimates for 2018 have remained unchanged at $1.46 over the past month. Its shares have appreciated 15% in the past three months.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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