On Jan 15, 2013, we reiterated our long-term recommendation on PS Business Parks Inc. (PSB) – a real estate investment trust (REIT) – at Neutral. The decision is based on the company’s decent operating performance and recent buyout of premium assets. Yet, stiff competition and protracted recovery of office market fundamentals remain our plausible concerns.
Why the Neutral Stance?
PS Business Parks’ portfolio in diversified markets enables it to tap opportunities and neutralize the operating risks associated with the economic down cycles. In addition, it aims to expand in high-growth areas through accretive acquisitions.
As part of this, the company accomplished recent buyout of a series of premium assets and strengthened its position in its core markets. These included the acquisition of 9 multi-tenant flex buildings in the Valwood submarket of Dallas that helped it to become the largest flex space owner of the submarket. In addition, the purchase of Bayshore Corporate Center in San Mateo in December enhanced PS Business Parks’ operations in the California market.
Moreover, PS Business Parks’ third-quarter 2013 FFO per share of $1.21 exceeded the Zacks Consensus Estimate by a penny as well as the year-ago quarter figure by 2 cents. This was driven by a rise in net operating income in both the Same Park and Non-Same Park facilities. PS Business Parks also has a decent balance sheet with adequate liquidity.
Yet, protracted rate of job growth and persistent office space efficiency trends are limiting any robust growth in demand for office space. Additionally, the company faces stiff competition and depends on few tenants for revenue generation. Hence, these remain concerns for PS Business Parks.
Over the last 60 days, the Zacks Consensus Estimate for 2013 FFO (funds from operations) per share dipped by 0.4% to $4.82. However, for 2014 it moved north by 0.9% to $5.15. The company currently carries a Zacks Rank #2 (Buy).
Other Stocks to Consider
Other players in the REIT- Equity Trust – Other industry, which look attractive at current levels, include Cole Real Estate Investments, Inc. (COLE), W. P. Carey Inc. (WPC) and National Health Investors Inc. (NHI). All these stocks carry 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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