We reiterate our Neutral recommendation on PS Business Parks Inc. (PSB) as we expect the stock to perform in line with the broader market.The company reported second quarter 2011 funds from operations (FFO) of $35.8 million or $1.11 per share compared with $30.7 million or 96 cents per share in the year-earlier quarter. Funds from operations, 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.
PS Business Parks Inc. is a self-managed equity real estate investment trust (REIT) that owns, acquires, develops, and operates commercial real estate properties across eight states in the U.S. Over the years, the company has focused on investing and owning real estate in diversified markets, thereby catering to multiple industries and minimizing the risks associated with the economic uncertainties.
The company seeks to maximize its cash flow by controlling capital expenditures related to re-leasing of space, through the acquisition of properties with easily reconfigured space that appeals to a wide range of tenants.
However, PS Business Parks’ portfolio primarily comprises suburban office and industrial properties, which lacks near or long-term growth prospects as compared to some of its better-positioned peers. Suburban office and industrial properties usually face the impact of the challenging macro environment ahead of the others. With a challenging macroeconomic environment, rent growth will be difficult in most of the markets. Consequently, the company is under severe stress to maintain profitability.
PS Business Parks currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock. One of its competitors, Brandywine Realty Trust (BDN) also holds a Zacks #3 Rank.
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