We reiterate our long-term ‘Outperform’ recommendation for PS Business Parks, Inc. (PSB), a real estate investment trust (REIT) that owns and operates commercial real estate properties across the U.S. The reiteration is based on our anticipation of the company performing 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 third quarter 2011 results with a healthy year-over-year increase in earnings. The company reported third quarter 2011 FFO (fund from operations) of $38.8 million or $1.21 per share compared to $33.7 million or $1.05 per share in the year-earlier quarter. Fund 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.
The reported FFO for third quarter 2011 was ahead of the Zacks Consensus Estimate by $0.12. The healthy year-over-year increase in FFO was primarily due to a lease buyout income of $2.9 million and lower distributions resulting from redemptions and repurchases of preferred equity. Total revenues during the reported quarter increased 9.7% year over year to $76.6 million driven by an increase in revenues from both same-store and non same-store properties.
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 Parksgenerates 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 Zacks #2 Rank that translates into a short-term ‘Buy’ rating. However, we have a ‘Neutral’ recommendation and Zacks #3 Rank (short-term ‘Hold’) for First Industrial Realty Trust Inc. (FR), a competitor of PS Business Parks.
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PS BUSINESS PKS (PSB): Free Stock Analysis Report
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