PS Business Parks, Inc. (NYSE:PSB) reported operating results for the three months ended March 31, 2021.

Operating Results for the Three Months Ended March 31, 2021

Net income allocable to common shareholders for the three months ended March 31, 2021 was $27.9 million, or $1.01 per diluted common share. Net operating income (“NOI”) attributable to the Company’s Same Park portfolio (defined below) was $70.3 million for the three months ended March 31, 2021, representing a decrease of 0.6% over the same period in 2020.

The Company also reports NOI, a measure that is not defined in accordance with U.S. generally accepted accounting principles (“GAAP”), on a cash basis, which excludes non-cash rental income such as amortization of deferred rent receivable and other non-cash items, and also excludes rents that have been deferred or abated during the period. Same Park Cash NOI was $69.9 million for the three months ended March 31, 2021, representing a decrease of 0.2% over the same period in 2020. The change in Same Park Cash NOI for the three months ended March 31, 2021 was driven by 1.2% cash rental income growth offset by 4.6% growth in adjusted cost of operations. Weighted average occupancy for the Company’s Same Park portfolio during the three months ended March 31, 2021 was 92.4% compared to 92.8% in the same period in 2020. Total portfolio weighted average occupancy was 92.4% during the three months ended March 31, 2021, compared to 92.9% for the same period in 2020.

The following table details the change in Same Park rental income for the three months ended March 31, 2021 and 2020 (in thousands):

Additional detail on Same Park NOI and Same Park Cash NOI for the three months ended March 31, 2021 is provided in the Property Operations–Same Park Portfolio section below.

Funds from Operations (“FFO”), Core FFO, and Funds Available for Distribution (“FAD”)

FFO for the three months ended March 31, 2021 was $1.67 per share, representing a decrease of 2.5% from the same period in 2020. The decrease in FFO per share was the result of flat NOI and $1.1 million higher general and administrative expense driven by $0.7 million higher stock-compensation expense. FFO is a non-GAAP measure defined by the National Association of Real Estate Investment Trusts and generally represents GAAP net income before (i) real estate depreciation and amortization expense, (ii) gains or losses on sales of operating properties, and (iii) land and impairment charges on real estate assets.

Core FFO per share was equal to FFO per share for both the three months ended March 31, 2021 and 2020. The Company defines Core FFO as FFO excluding the impact of (i) charges related to the redemption of preferred stock and (ii) other nonrecurring income or expense items as appropriate, neither of which were incurred by the Company during the three month periods ended March 31, 2021 and 2020.

FAD for the three months ended March 31, 2021 was $50.3 million, representing an increase of 2.0% from the same period in 2020. The increase in FAD for the three months ended March 31, 2021 was largely attributable to lower recurring capital expenditures incurred as compared to the same period in 2020. FAD is a non-GAAP measure that represents Core FFO adjusted to (i) deduct recurring capital improvements and capitalized tenant improvements and lease commissions and (ii) remove certain non-cash income or expenses, such as amortization of deferred rent receivable and stock compensation expense.

FFO, Core FFO, and FAD are not substitutes for GAAP net income. Other real estate investment trusts (“REITs”) may compute FFO, Core FFO, and FAD differently, which could inhibit comparability. The Company believes its presentations of FFO, Core FFO, and FAD assist investors and analysts in analyzing and comparing the operating and financial performance between reporting periods. Additional information about these measures is included on the Company’s quarterly report on Form 10-Q.

Leasing Production¹

During the three months ended March 31, 2021, the Company executed leases on 2.0 million square feet in 569 transactions compared to 1.9 million square feet in 495 transactions for the three months ended March 31, 2020. Weighted average cash rental rate growth on leases executed during the three months ended March 31, 2021, was 5.7%, while average net effective rent² growth was 14.8%. The average lease term of all leases executed during the three months ended March 31, 2021 was 3.2 years with associated average transaction costs (tenant improvements and leasing commissions) of $2.59 per square foot. For comparative purposes, average lease term and transaction costs on leases executed in the same period of 2020 were 3.8 years and $3.08 per square foot, respectively.

Property Operations–Same Park Portfolio

The Company believes that evaluation of the Same Park portfolio, defined as all properties owned and operated as of March 31, 2021 that were acquired prior to January 1, 2019, provides an informative view of how the Company’s portfolio has performed over comparable periods. As of March 31, 2021, the Same Park portfolio consisted of 26.3 million rentable square feet, or 94.6% of the 27.8 million rentable square feet in the Company’s total portfolio, and excludes the Company’s 95.0% interest in a 395-unit multifamily property. For the three months ended March 31, 2021 and all comparative periods presented herein, the Company has excluded 442,000 square feet of assets held for sale. The assets held for sale represent a 244,000 square foot office business park located in Herndon, Virginia, and a 198,000 square foot office oriented flex business park located in Chantilly, Virginia. The Company noted that the potential sale of these assets is consistent with its strategy to opportunistically divest of non-strategic assets.

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¹ Leasing production excludes production metrics from assets held for sale as of March 31, 2021.

² Net effective rent represents average rental payments for the term of a lease on a straight-line basis, excluding operating expense reimbursements.

The following table presents the unaudited operating results of the Company’s Same Park facilities for the three months ended March 31, 2021 and 2020 (in thousands, except per square foot amounts):

COVID-19 Pandemic/Rent Collections Update

The COVID-19 pandemic has had and is expected to continue to have an impact on our operations and capital plans. During the three months ended March 31, 2021, the Company granted $0.2 million of deferred rent and $0.1 million of rent abatement. Since the onset of the COVID-19 pandemic, the Company has granted rent relief to 398 customers (approximately 11.0% of total customers based on rental income) including $5.9 million of rent deferral and $1.4 million of rent abatement. As of March 31, 2021, the Company collected $3.9 million, or 98.5%, of the scheduled repayments of COVID-19 related rent deferrals billed through March 1, 2021. An additional $1.1 million of rent deferral repayments are scheduled to be repaid by customers between April 1, 2021 and December 31, 2021, with an additional $0.8 million thereafter.

As of April 26, 2021, the Company had collected 98.8%³ of billed revenue during the three months ended March 31, 2021. Further, the first quarter of 2021 marked the third consecutive quarter of normal accounts receivable write-off volume. During the three months ended March 31, 2021, the Company wrote off $0.0 of accounts receivable, which is lower than the $0.1 million written off during the three months ended March 31, 2020. Also during the three months ended March 31, 2021, the Company wrote off deferred rent receivables of $0.1 million, which is comparable to the $0.1 million written off during the three months ended March 31, 2020.

As of April 26, 2021, the Company had open rent relief requests from approximately 1% of its customers. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Overview, Impact of COVID-19 Pandemic” in our Form 10-Q for the quarter ended March 31, 2021 for more information.

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³ Excludes prior year recovery billings billed to customers during the month of March 2021.

Distributions Declared

On April 20, 2021, the Board of Directors declared a quarterly dividend of $1.05 per common share. Distributions were also declared on the various series of depositary shares, each representing 1/1,000 of a share of preferred stock. Distributions for both common shares and preferred stock will be payable on June 30, 2021 to shareholders of record on June 15, 2021.

Company Information

PS Business Parks, Inc., a member of the S&P MidCap 400, is a REIT that acquires, develops, owns, and operates commercial properties, primarily multi-tenant industrial, flex, and office space. As of March 31, 2021, the Company wholly owned 27.8 million rentable square feet with approximately 5,000 commercial customers in six states. The Company also held a 95.0% interest in a 395‑unit apartment complex and a 98.2% interest in a development of a 411-unit multifamily apartment complex.

Forward-Looking Statements

When used within this press release, the words “may,” “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” “intends,” and similar expressions are intended to identify “forward-looking statements.” Such forward-looking statements involve known and unknown risks, uncertainties, and other factors, which may cause the actual results and performance of the Company to be materially different from those expressed or implied in the forward-looking statements. Such factors include the duration and severity of the COVID-19 pandemic and its impact on our business and our customers; the impact of competition from new and existing commercial facilities which could impact rents and occupancy levels at the Company’s facilities; the Company’s ability to evaluate, finance, and integrate acquired and developed properties into the Company’s existing operations; the Company’s ability to effectively compete in the markets that it does business in; the impact of the regulatory environment as well as national, state, and local laws and regulations including, without limitation, those governing REITs; the impact of general economic and business conditions, including as a result of the economic fallout of the COVID-19 pandemic; rental rates and occupancy levels at the Company’s facilities; and changes in these conditions as a result of the COVID-19 pandemic, the availability of permanent capital at attractive rates, the outlook and actions of rating agencies and risks detailed from time to time in the Company’s SEC reports, including quarterly reports on Form 10-Q, reports on Form 8-K, and annual reports on Form 10-K.

Additional information about PS Business Parks, Inc., including more financial analysis of the first quarter operating results, is available on the Company’s website at psbusinessparks.com.

A conference call is scheduled for Wednesday, April 28, 2021, at 10:00 a.m. PDT (1:00 p.m. EDT) to discuss first quarter results. The Company will also be discussing its response to the COVID-19 pandemic and the effects it has had on its customers and the operation of its properties. The toll free number is 877-876-9173; the conference ID is PSBQ121. The call will also be available via a live webcast on the Company’s website. A replay of the conference call will be available through May 12, 2021 at 800-839-5146, as well as via webcast on the Company’s website.

Additional financial data attached.

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