PS BUSINESS PARKS, INC.
Forward-Looking Statements: Forward-looking statements, within the meaning of
the Private Securities Litigation Reform Act of 1995, are made throughout this
Quarterly Report on Form 10-Q. For this purpose, any statements contained herein
that are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "may," "believes,"
"anticipates," "plans," "expects," "seeks," "estimates," "intends" and similar
expressions are intended to identify forward-looking statements. There are a
number of important factors that could cause the results of the Company to
differ materially from those indicated by such forward-looking statements,
including but not limited to: (i) the occurrence of any event, change or other
circumstance that could give rise to the termination of the merger agreement
described in Note 12 - "Subsequent Events" to our consolidated financial
statements under Item 15 in this quarterly report on Form 10-Q; (ii) the failure
to obtain the approval of PSB's stockholders of the proposed transaction or the
failure to satisfy any of the other conditions to the completion of the proposed
transaction; (iii) stockholder litigation in connection with the proposed
transaction, which may affect the timing or occurrence of the proposed
transaction or result in significant costs of defense, indemnification and
liability; (iv) the effect of the announcement of the proposed transaction on
the ability of PSB to retain and hire key personnel and maintain relationships
with its tenants, vendors and others with whom it does business, or on its
operating results and businesses generally; (v) risks associated with the
disruption of management's attention from ongoing business operations due to the
proposed transaction; (vi) the ability to meet expectations regarding the timing
and completion of the proposed transaction; (vii) significant transaction costs,
fees, expenses and charges; (viii) the duration and severity of the coronavirus
("COVID-19") pandemic and its impact on our business and our customers; (ix)
changes in general economic and business conditions, including as a result of
the economic fallout of the COVID-19 pandemic; (x) potential regulatory actions
to close our facilities or limit our ability to evict delinquent customers; (xi)
decreases in rental rates or increases in vacancy rates/failure to renew or
replace expiring leases; (xii) tenant defaults; (xiii) the effect of the recent
credit and financial market conditions; (xiv) our failure to maintain our status
as a real estate investment trust (a "REIT") under the Internal Revenue Code of
1986, as amended (the "Code"); (xv) the economic health of our customers; (xvi)
the health of our officers and directors; (xvii) increases in operating costs;
(xviii) casualties to our properties not covered by insurance; (xix) the
availability and cost of capital; (xx) increases in interest rates and its
effect on our stock price; (xxi) security breaches, including ransomware, or a
failure of our networks, systems or technology which could adversely impact our
operations or our business, customer and employee relationships or result in
fraudulent payments; (xxii) the impact of inflation; and (xxiii) other factors
discussed under the heading "Part I, Item 1A. Risk Factors" in our Annual Report
on Form 10-K for the year ended December 31, 2021 . In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by us
or any other person that our objectives and plans will be achieved. Moreover, we
assume no obligation to update these forward-looking statements to reflect
actual results, changes in assumptions or changes in other factors affecting
such forward-looking statements, except as required by law.
Critical Accounting Policies and Estimates:
Our critical accounting estimates are defined as accounting estimates or assumptions made in accordance withU.S. generally accepted accounting principles ("GAAP"), which involve a significant level of estimation uncertainty or subjectivity and have had or are reasonably likely to have a material impact on our financial condition or results of operations. Our significant accounting policies, which utilize these critical accounting estimates, are described in Note 2 - "Summary of significant accounting policies" to our consolidated financial statements under Item 15 in this quarterly report on Form 10-Q. During the three months endedMarch 31, 2022 , there were no material changes to our critical accounting estimates as compared to the critical accounting estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2021 . 21
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Business Overview
The Company is a fully-integrated, self-advised and self-managed REIT that owns, operates, acquires and develops commercial properties, primarily multi-tenant industrial, industrial-flex, and low rise-suburban office space. As ofMarch 31, 2022 , the Company owned and operated 27.0 million rentable square feet of commercial space in six states consisting of 96 parks and 652 buildings. The Company's properties are primarily located in major coastal markets that have experienced long-term economic growth. The Company also held a 95.0% interest in a joint venture entity which owns Highgate at The Mile, a 395-unit multifamily apartment complex located in Tysons,Virginia , and a 98.2% interest in a joint venture formed to develop Brentford at The Mile, a planned 411-unit multifamily apartment complex also located in Tysons,Virginia . Pending merger transaction: Refer to Note 12 - "Subsequent Events" to our consolidated financial statements under Item 15 in this quarterly report on Form 10-Q, for information regarding the merger agreement the Company enter into onApril 24, 2022 (the mergers described therein, the "Merger"). Existing Real Estate Facilities: The operating results of our existing real estate facilities are substantially influenced by demand for rental space within our properties and our markets, which impacts occupancy, rental rates, and capital expenditure requirements. We strive to maintain high occupancy levels while increasing rental rates and minimizing capital expenditures when market conditions allow, although the Company may decrease rental rates in markets where conditions require. Management's initiatives and strategies with respect to our existing real estate facilities, which include incentivizing our personnel to maximize the return on investment for each lease transaction and provide a superior level of service to our customers. Acquisitions of Real Estate Facilities: We seek to grow our portfolio through acquisitions of facilities generally consistent with the Company's focus on owning concentrated business parks with easy to configure space and in markets and product types with favorable long-term return potential. We continue to seek to acquire additional properties in our existing markets and generally in close proximity to our existing portfolio; however, there can be no assurance that we will acquire additional facilities that meet our risk-adjusted return and underwriting requirements.
Development or Redevelopment of Real Estate Facilities: In certain instances, we may seek to redevelop our existing real estate or develop new buildings on excess land parcels.
As ofMarch 31, 2022 , we were in the process of developing an approximately 83,000 square foot multi-tenant industrial building at our212 Business Park located inKent, Washington . During the quarter endedMarch 31, 2022 ,$1.5 million was reclassified from land to property held for development on our consolidated balance sheet and, as ofMarch 31, 2022 ,$5.5 million of the estimated$16.0 million total development costs had been incurred. The total investment, inclusive of land and development costs, for the212 Business Park development is projected to be$17.5 million . This construction project is scheduled to be completed in the fourth quarter of 2022. As ofMarch 31, 2022 , we have contractual construction commitments totaling$10.5 million that will be paid to various contractors as the project is completed. As ofMarch 31, 2022 , we were in the process of developing an approximately 17,000 square foot multi-tenant industrial building at ourBoca Commerce Park , located inBoca Raton, Florida . During the quarter endedMarch 31, 2022 ,$0.6 million was reclassified from land to property held for development on our consolidated balance sheet and, as ofMarch 31, 2022 ,$2.3 million of the estimated$4.2 million total development costs had been incurred. The total investment, inclusive of land and development costs, for theBoca Commerce Park development is projected to be$4.8 million . This construction project is scheduled to be completed in the fourth quarter of 2022. As ofMarch 31, 2022 , we have contractual construction commitments totaling$1.9 million that will be paid to various contractors as the project is completed. The Mile is an office and multifamily park we own which sits on 44.5 contiguous acres of land located in Tysons,Virginia . The park consists of 628,000 square feet of office space and a 395-unit multifamily apartment community we developed, Highgate at The Mile, which we completed in 2017 through a joint venture with the JV Partner. In 2019, we successfully rezoned The Mile allowing us to develop, at our election, up to 3,000 additional multifamily units and approximately 500,000 square feet of other commercial uses. 22
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InAugust 2020 , the Company entered into a new joint venture with the JV Partner (the "Brentford Joint Venture") for the purpose of developing a second multifamily property, Brentford at The Mile, a planned 411-unit multifamily apartment complex. Under the Brentford Joint Venture agreement, the Company has a 98.2% controlling interest and is the managing member with the JV Partner holding the remaining 1.8% limited partnership interest. We contributed a parcel of land to the Brentford Joint Venture (the "Brentford Parcel") at a value of$18.5 million , for which we received equity contribution credit in the Brentford Joint Venture. Our cost basis in the Brentford Parcel was$5.1 million as ofMarch 31, 2022 . Construction of Brentford at The Mile commenced inAugust 2020 and is anticipated to be completed over a period of 24 to 36 months at an estimated development cost of$110 million to$115 million , excluding land cost. As ofMarch 31, 2022 , the development cost incurred was$64.4 million , which is reflected in land and building held for development, net on our consolidated balance sheets along with our$5.1 million cost basis in the Brentford Parcel. While multifamily real estate was not previously a core asset class for us, we determined that multifamily real estate represents a unique opportunity and the highest and best use of the Brentford Parcel. Through joint ventures we have partnered with a local developer and operator of multifamily properties in order to leverage their development and operational expertise. The scope and timing of the future phases of development of The Mile are subject to a variety of uncertainties, including site plan approvals and building permits.
We consolidate both the joint venture that owns Highgate at The Mile and the joint venture that is developing Brentford at The Mile.
See "Analysis of Net Income - Multifamily" below and Note 3 and 4 to our consolidated financial statements for more information on Highgate at The Mile and Brentford at The Mile.
Sale of Real Estate Facilities: We may from time to time sell individual real estate facilities based on market conditions, fit with our existing portfolio, evaluation of long-term potential returns of markets or product types, or other reasons. OnMarch 29, 2022 , the Company sold a 702,000 square foot industrial-flex business park located inIrving, Texas , for net sale proceeds of$91.9 million , which resulted in a gain on sale of$57.0 million . (the "2022 Asset Sold"). There were no asset sales during the three months endedMarch 31, 2021 .
The operations of these facilities are presented in the tables below under "assets sold."
Certain Factors that May Impact Future Results
Pending merger transaction: Refer to Note 12 - "Subsequent Events" to our consolidated financial statements under Item 15 in this quarterly report on Form 10-Q, for information regarding the Merger.
Impact of COVID-19 pandemic: Starting inMarch 2020 , the COVID-19 pandemic resulted in cessation, severe curtailment, or impairment of business activities in most sectors of the economy in all markets we operate in, due to governmental "stay at home" orders, risk mitigation procedures, and closure of businesses not considered to be "essential." Since it remains unknown at this time how long the COVID-19 pandemic will continue, particularly given the impact of existing and potential future variants, we cannot estimate how long these negative economic impacts will persist. Since the onset of the COVID-19 pandemic, the Company has entered into rent relief agreements consisting of$6.2 million of rent deferrals and$1.6 million of rent abatements. As ofMarch 31, 2022 , the 307 current customers that received rent relief account for 9.6% of rental income. Also as ofMarch 31, 2022 , the Company had collected$5.4 million of rent deferral repayment, representing 99.8% of the amounts scheduled to be repaid throughMarch 31, 2022 . An additional$0.8 million of rent deferral repayment is scheduled to be repaid thereafter. Our ability to re-lease space as leases expire in a way that minimizes vacancy periods and maximizes market rental rates will depend upon market conditions in the specific submarkets in which each of our properties are located. Due to the uncertainty of the COVID-19 pandemic's impact on the Company's future ability to grow or maintain existing occupancy levels, possible decreases in rental rates on new and renewal transactions, and the potential negative effect of additional rent deferrals, rent abatements, and customer defaults, we believe in some instances the COVID-19 pandemic may continue to have adverse effects on rental income for 2022 and possibly beyond. Impact of Inflation: Inflation has significantly increased recently and a continued increase in inflation could adversely impact our future results. The Company continues to seek ways to mitigate its potential impact. A substantial portion of the 23
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Company's leases require customers to pay operating expenses, including real estate taxes, utilities, and insurance, as well as increases in common area expenses, which should partially reduce the Company's exposure to inflation.
Regional Concentration: Our portfolio is concentrated in eight regions, in six states. We have chosen to concentrate in these regions because we believe they have characteristics which enable them to be competitive economically, such as above average population growth, job growth, higher education levels and personal income. Changes in economic conditions in these regions in the future could impact our future results. Industry and Customer Concentrations: We seek to minimize the risk of industry or customer concentrations. As ofMarch 31, 2022 , leases from our top 10 customers comprised 10.0% of our annualized rental income, with only four customers representing 1% or more- theUS Government (2.6%),Amazon Inc. (1.6%), KZ Kitchen Cabinet & Stone (1.3%), and Luminex Corporation (1.0%). In terms of industry concentration, 23.8% of our annualized rental income comes from Business services, and 15.0% from Logistics. No other industry group represents more than 10% of our annualized rental income. Customer credit risk: Historically, we have experienced a low level of write-offs of uncollectible rents, with less than 0.4% of rental income written off in any single year from 2011-2019. As ofMarch 31, 2022 andDecember 31, 2021 , our level of write-offs of uncollectible rents were 0.1%, and 0.0% of rental income,respectively. As ofApril 27, 2022 , we had 29,320 square feet of leased space occupied by two customers that are protected by Chapter 11 of theU.S. Bankruptcy Code, which have an aggregate remaining lease value of$1.2 million . From time to time, customers contact us, requesting early termination of their lease, reductions in space leased, or rent deferment or rent abatement, which we are not obligated to grant but will consider and grant under certain circumstances.
Net Operating Income
We utilize net operating income ("NOI"), a measure that is not defined in accordance with GAAP, to evaluate the operating performance of our real estate. We define NOI as rental income less Cost of Operations.
We believe NOI assists investors in analyzing the performance of our real estate
by excluding (i) corporate overhead (i.e., general and administrative expense)
because it does not relate to the direct operating performance of our real
estate, and (ii) depreciation and amortization expense because it does not
accurately reflect changes in the fair value of our real estate. The Company's
calculation of NOI may not be comparable to those of other companies and should
not be used as an alternative to performance measures calculated in accordance
with GAAP. NOI should not be used as a measure of our liquidity, nor is it
indicative of funds available to fund our cash needs. NOI should not be used as
a substitute for cash flow from operating activities in accordance with GAAP.
We also report NOI on a basis which excludes non-cash rents that have been
deferred or abated during the period, certain non-cash revenue items, including
amortization of deferred rent receivable, in-place lease intangible, tenant
improvement reimbursements, and lease incentives, and also excludes
stock-compensation expense for employees whose compensation expense is recorded
in cost of operations ("Cash NOI"). We utilize Cash NOI to evaluate the cash
flow performance of our properties and believe investors and analysts utilize
this metric for the same purpose. Cash NOI should not be used as a measure of
our liquidity, nor is it indicative of funds available to fund our cash needs.
Cash NOI should not be used as a substitute for cash flow from operating
activities in accordance with GAAP.
See "Analysis of net income" below for reconciliations of each of these measures to their closest analogous GAAP measure from our consolidated statements of income.
Results of Operations
Operating Results Overview: Three Months Ended
For the three months endedMarch 31, 2022 , net income allocable to common stockholders was$72.0 million , or$2.60 per diluted share, compared to$27.9 million , or$1.01 per diluted share, for the same period in 2021. The increase was mainly due to a$57.0 million gain on sale of assets sold during the first quarter of 2022, compared to no assets sold in the first quarter of 2021, combined with a$5.3 million increase in NOI from ourSame Park portfolio (defined below), a$1.5 million increase in NOI from ourNon-Same Park portfolio (defined below), and$2.5 million lower preferred distributions in 2022 compared to 2021 due to the redemption of preferred stock inNovember 2021 , partially offset by a 24
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decrease of$2.7 million in NOI generated from assets sold or held for sale, and a one-time cash payment of$6.7 million to the former Chief Executive Officer ("CEO"), which consists of a$6.6 million cash payment for RSUs, a$0.1 million cash payment for COBRA coverage reimbursement in accordance with his separation agreement, partially offset by$0.6 million non-cash adjustment related to the reversal of stock compensation for the unvested former CEO's shares, net of dividend forfeiture expense. Analysis of Net Income
Our net income is comprised primarily of our real estate operations, depreciation and amortization expense, general and administrative expense, interest and other income, interest and other expenses and gain on sale of real estate facilities.
We segregate our real estate activities into (i) same park operations, generally representing all operating properties acquired prior toJanuary 1, 2020 , comprising 25.7 million rentable square feet of our 27.0 million of rentable square feet atMarch 31, 2022 the "Same Park " portfolio), (ii) non-same park operations, representing those facilities we own that were acquired afterJanuary 1, 2020 (the "Non-Same Park " portfolio), (iii) multifamily operations, and (iv) assets sold or held for sale, including the 2022 Asset Sold totaling 0.7 million square feet and the 2021 Assets Sold totaling 1.0 million square feet. The table below sets forth the various components of our net income (in thousands): Three Months Ended March 31, 2022 2021 % Change Rental income Same Park$ 105,014 $ 98,012 7.1 % Non-Same Park 3,348 1,246 168.7 % Multifamily 2,369 2,327 1.8 % Assets sold or held for sale (1) 2,109 6,462 (67.4) % Total rental income 112,840 108,047 4.4 % Cost of Operations (2) Same Park 30,900 29,175 5.9 % Non-Same Park 1,060 422 151.2 % Multifamily 1,224 1,067 14.7 % Assets sold or held for sale (1) 930 2,554 (63.6) % Total cost of operations 34,114 33,218 2.7 % Stock compensation expense (3) (536) (456) 17.5 % Total cost of operations excluding stock compensation 33,578 32,762 2.5 % expense NOI (4) Same Park 74,114 68,837 7.7 % Non-Same Park 2,288 824 177.7 % Multifamily 1,145 1,260 (9.1) % Assets sold or held for sale (1) 1,179 3,908 (69.8) % Depreciation and amortization expense (23,132) (22,985) 0.6 % General and administrative expense (11,324) (4,382) 158.4 % Interest and other income 246 256 (3.9) % Interest and other expense (330) (211) 56.4 % Gain on sale of real estate facilities 56,959 - 100.0 % Net income$ 101,145 $ 47,507 112.9 % _______________
(1)Amounts shown for the three months ended
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(2)Cost of Operations under Cash NOI excludes the impact of stock compensation expense.
(3)Stock compensation expense, as shown here, represents stock compensation expense for employees whose compensation expense is recorded in cost of operations. Note that stock compensation expense attributable to our executive management team (including divisional vice presidents) and other corporate employees is recorded within general and administrative expense.
(4)NOI represents rental income less Cost of Operations.
Rental income increased$4.8 million for the three months endedMarch 31, 2022 as compared to the same period in 2021 due primarily to higher occupancy in 2022 compared to the same period in 2021 combined with rental income from ourNon-Same Park portfolio acquired during the third and fourth quarters of 2021. These increases were partially offset by a decrease in rental income from assets sold. Cost of operations, excluding stock compensation expense, increased$0.8 million for the three months endedMarch 31, 2022 , as compared to the same period in 2021 due primarily to higher Cost of Operations incurred by ourSame Park (discussed below) andNon-Same Park portfolios, partially offset by a decrease in Cost of Operations from assets sold. Net income increased$53.6 million for the three months endedMarch 31, 2022 , as compared to the same period in 2021. The three month increase was mainly due to a$57.0 million gain on sale of assets sold during the first quarter of 2022 compared to 2021 as there were no assets sold in the first quarter of 2021, a$5.3 million increase in NOI from ourSame Park portfolio (defined below), a$1.5 million increase in NOI from ourNon-Same Park portfolio (defined below), partially offset by a decrease of$2.7 million in NOI generated from assets sold or held for sale, and a one-time cash payment of$6.7 million to the former CEO, which consists of a$6.6 million cash payment for RSUs, a$0.1 million cash payment for COBRA coverage reimbursement in accordance with his separation agreement, partially offset by$0.6 million non-cash adjustment related to the reversal of stock compensation for the unvested former CEO's shares, net of dividend forfeiture expense.
Same Park Portfolio
We believe that evaluation of theSame Park portfolio provides an informative view of how the Company's portfolio has performed over comparable periods. We believe that investors and analysts useSame Park information in a comparable manner. 26
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The following table summarizes the historical operating results of ourSame Park portfolio and certain statistical information related to leasing activity during the three months endedMarch 31, 2022 and 2021 (in thousands, except per square foot data): Three Months Ended March 31, 2022 2021 % Change Rental income Cash Rental Income (1)$ 104,096 $ 96,638 7.7 % Non-Cash Rental Income (2) 918 1,374 (33.2 %) Total rental income 105,014 98,012 7.1 % Cost of Operations Property taxes 11,788 11,197 5.3 % Utilities 4,637 4,417 5.0 % Repairs and maintenance 5,679 5,244 8.3 % Compensation 5,168 4,559 13.4 % Snow removal 846 1,002 (15.6 %) Property insurance 1,268 1,167 8.7 % Other expenses 1,514 1,589 (4.7 %) Total Cost of Operations (3) 30,900 29,175 5.9 % Less: Non-cash stock based compensation in operating (496) (421) 17.8 % costs Total Cash Cost of Operations 30,404 28,754 5.7 % NOI (4)$ 74,114 $ 68,837 7.7 % Cash NOI (5)$ 73,692 $ 67,884 8.6 % Selected Statistical Data Square footage at period end 25,749 25,749 - NOI margin (6) 70.6 % 70.2 % 0.4 % Cash NOI margin (7) 70.8 % 70.2 % 0.6 % Weighted average square foot occupancy 96.0 % 93.3 % 2.7 % Revenue per Occupied Square Foot (8)$ 16.99 $ 16.32 4.1 %
Cash Rental Income per Occupied Square Foot (9)
$ 16.10 4.6 % _______________
(1)Cash Rental Income represents rental income excluding Non-Cash Rental Income (defined below). See table below for the change in Cash Rental Income.
(2)Non-Cash Rental Income represents amortization of deferred rent receivable (net of write-offs), in-place lease intangible, tenant improvement reimbursements, and lease incentives. Same Park Non-Cash Rental Income is presented net of deferred rent receivable write-offs of$0.0 million and$0.1 million for the three months endedMarch 31, 2022 and 2021, respectively
(3)Cost of Operations, as presented above, includes stock compensation expense for employees whose compensation expense is recorded in cost of operations.
(4)NOI represents rental income less Cost of Operations.
(5)Cash NOI represents Cash Rental Income less Cash Cost of Operations.
(6)NOI margin is computed by dividing NOI by rental income.
(7)Cash NOI margin is computed by dividing Cash NOI by Cash Rental Income.
(8)Revenue per Occupied Square Foot is computed by dividing rental income for
the period by weighted average occupied square feet for the same period. Revenue
per Occupied Square Foot for the three month period shown is annualized.
(9)Cash Rental Income per Occupied Square Foot is computed by dividing Cash
Rental Income for the period by weighted average occupied square feet for the
same period. Cash rental Income per Occupied Square Foot for the three month
period shown is annualized.
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Analysis of Same Park Rental Income
Rental income for ourSame Park portfolio increased 7.1% for the three months endedMarch 31, 2022 , as compared to the same period in 2021. The three month increase was due primarily due to an increase in weighted average occupancy and higher rental rates charged to our customers, as revenue per occupied square foot increased 4.1%, in the three months endedMarch 31, 2022 , compared to the same period in 2021.
The following table details the change in
Three Months Ended March 31,
2022 2021 $ Change
Rental income
Base rental income $ 77,002 $ 71,600 $ 5,402
Expense recovery income 26,545 24,022 2,523
Lease buyout income 245 377 (132)
Rent receivable recovery/(write-off) (87) (1) (86)
Abatements (2) (83) 81
Deferrals - (187) 187
Deferral repayments, net 147 738 (591)
Fee Income 246 172 74
Cash Rental Income 104,096 96,638 7,458
Non-Cash Rental Income (1) 918 1,374 (456)
Total rental income $ 105,014 $ 98,012 $ 7,002
_______________
(1)Non-cash rental income includes amortization of deferred rent receivable (net
of write-offs), in-place lease intangible, tenant improvement reimbursements,
and lease incentives.
We expect our future revenue growth will come primarily from contractual rental
increases as well as from potential increases in market rents which would allow
us to increase rent levels when leases are either renewed with existing
customers or re-leased to new customers.
The following table sets forth the expirations of existing leases in our Same
Park portfolio over the next five years based on lease data at March 31, 2022
(dollars and square feet in thousands):
Percent of
Square Percent of Annualized Rental Annualized Rental
Number of Footage Subject to Total Leased Income Under Income Represented
Year of Lease Expiration Customers Expiring Leases Square Footage Expiring Leases by Expiring Leases
Remainder of 2022 1,629 4,063 16 % 72,761 16 %
2023 1,463 5,931 24 % 102,748 23 %
2024 923 4,978 20 % 90,522 20 %
2025 377 3,695 15 % 68,558 15 %
2026 223 2,372 10 % 43,422 10 %
Thereafter 159 3,696 15 % 69,794 16 %
Total 4,774 24,735 100 % 447,805 100 %
See "Analysis of Same Park Market Trends" below for further analysis of such data on a by market basis.
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Analysis of Same
Cost of Operations for ourSame Park portfolio increased 5.9% for the three months endedMarch 31, 2022 , as compared to the same period in the prior year. The three month increase was due to increases in almost all cost of operations categories except for snow removal and other expenses.
Property taxes increased 5.3% for the three months ended
Utilities are dependent upon energy prices and usage levels. Changes in usage levels are driven primarily by weather and temperature. Utilities increased 5.0% during the three months endedMarch 31, 2022 , as compared to the same period in the prior year. The three-month increase was driven by reduced consumption in the first quarter of 2021 resulting from the ongoing "shelter in place order" due to the COVID-19 pandemic during the first quarter of 2021. It is difficult to estimate future utility costs, because weather, temperature and energy prices are volatile and not readily predictable. However, we expect utility costs in the future to return to pre-COVID-19 pandemic levels over time due to expected increases in traffic and use at our parks as our customers resume operations. Repairs and maintenance expense increased 8.3% for the three months endedMarch 31, 2022 , as compared to the same period in the prior year. The three-month increase was due a reduction in general repairs and property services resulting from the ongoing "shelter in place order" due to the COVID-19 pandemic during the first quarter of 2021. Repairs and maintenance costs are dependent upon many factors including weather conditions, which can impact repair and maintenance needs, inflation in material and labor costs and random events, and as a result are not always predictable. We expect repairs and maintenance costs for the remainder of 2022 to be more consistent with pre-COVID-19 pandemic levels as a result of expected increases in traffic and use at our parks as customers resume operations. Compensation increased 13.4% for the three months endedMarch 31, 2022 , as compared to the same period in the prior year. Compensation expense is comprised of on-site and supervisory personnel costs incurred in the operation of our properties. The increase in compensation was primarily due to salary increases and promotions. We expect compensation and payroll expenses to continue to increase in the future. Snow removal costs decreased 15.6% during the three months endedMarch 31, 2022 as compared to the same period in the prior year. Snow removal costs are weather dependent and therefore not predictable. Property insurance expense increased 8.7% for the three months endedMarch 31, 2022 , as compared to the same period in the prior year. The three-month increase was primarily due to an increase in our property insurance premium for the policy periodJune 2021 toMay 2022 due to unfavorable market conditions pervasive throughout commercial real estate sectors combined with insurance deductibles recorded during 2021 related to damage from the winter storm inTexas . We expect to experience increases in property insurance expense in the future as unfavorable market conditions pervasive throughout commercial real estate sectors persist. Other expenses decreased 4.7% for the three months endedMarch 31, 2022 , as compared to the same period in the prior year. Other expenses are comprised of general property expenses incurred in the operation of our properties. We expect other expenses for the remainder of 2022 to be similar to our results for the three monthsMarch 31, 2022 . 29
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Analysis of Same Park Market Trends
The following tables set forth historical data by region related to the
operations of our
Three Months Ended March 31,
Region 2022 2021 Change
Geographic Data on Same Park
Cash Rental Income Square Feet
Northern California 7,324 $ 30,652 $ 27,791 10.3%
Southern California 3,529 15,955 14,093 13.2%
Dallas 2,093 5,446 5,044 8.0%
Austin 1,963 8,834 8,633 2.3%
Northern Virginia 4,532 19,900 19,484 2.1%
South Florida 3,866 13,175 11,786 11.8%
Seattle 1,350 5,232 4,920 6.3%
Suburban Maryland 1,092 4,902 4,887 0.3%
Total Same Park 25,749 $ 104,096 $ 96,638 7.7%
Cash Cost of Operations
Northern California $ 6,761 $ 6,498 4.0%
Southern California 4,212 3,854 9.3%
Dallas 1,792 1,921 (6.7)%
Austin 3,505 3,215 9.0%
Northern Virginia 7,368 7,039 4.7%
South Florida 3,526 3,184 10.7%
Seattle 1,439 1,292 11.4%
Suburban Maryland 1,801 1,751 2.9%
Total Same Park $ 30,404 $ 28,754 5.7%
Cash NOI
Northern California $ 23,891 $ 21,293 12.2%
Southern California 11,743 10,239 14.7%
Dallas 3,654 3,123 17.0%
Austin 5,329 5,418 (1.6)%
Northern Virginia 12,532 12,445 0.7%
South Florida 9,649 8,602 12.2%
Seattle 3,793 3,628 4.5%
Suburban Maryland 3,101 3,136 (1.1)%
Total Same Park $ 73,692 $ 67,884 8.6%
Weighted average square foot occupancy
Northern California 97.6 % 93.1 % 4.5%
Southern California 97.8 % 96.2 % 1.6%
Dallas 92.9 % 86.9 % 6.0%
Austin 94.2 % 95.1 % (0.9)%
Northern Virginia 93.7 % 91.7 % 2.0%
South Florida 98.0 % 95.5 % 2.5%
Seattle 95.4 % 93.3 % 2.1%
Suburban Maryland 92.1 % 92.2 % (0.1)%
Total Same Park 96.0 % 93.3 % 2.7%
Cash Rental Income per Occupied Square
Foot (1)
Northern California $ 17.16 $ 16.31 5.2%
Southern California $ 18.50 $ 16.62 11.3%
Dallas $ 11.19 $ 11.09 0.9%
Austin $ 19.10 $ 18.50 3.2%
Northern Virginia $ 18.75 $ 18.75 0.0%
South Florida $ 13.91 $ 12.76 9.0%
Seattle $ 16.24 $ 15.62 4.0%
Suburban Maryland $ 19.43 $ 19.37 0.3%
Total Same Park $ 16.84 $ 16.10 4.6%
_______________
(1)Defined in Management's Discussion and Analysis of Financial Condition and Results of Operations-Analysis of Net Income-Same Park Portfolio table.
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Our past revenue growth has come from contractual annual rent increases, as well
as re-leasing of space at rates above outgoing rental rates. We believe the
percentage difference between outgoing cash rent inclusive of estimated expense
recoveries and incoming cash rent inclusive of estimated expense recoveries for
leases executed ("Cash Rental Rate Change") is useful in understanding trends in
current market rates relative to our existing lease rates. The following table
summarizes Cash Rental Rate Change and other key statistical information with
respect to the Company's leasing production for its Same Park portfolio for the
three months ended March 31, 2022 (square feet in thousands):
Three Months Ended March 31, 2022
Square Transaction
Footage Customer Costs per Cash Rental GAAP
Industrial Leased Retention Executed Foot Rate Change (1) Rent Change (2)
Northern California 226 81.0 % $ 2.01 14.5 % 29.6 %
Southern California 240 81.6 % 1.82 11.8 % 22.8 % Dallas 97 44.9 % 3.22 10.6 % 25.7 % Austin 28 - 3.19 19.9 % 47.7 % Northern Virginia 141 97.4 % 1.92 6.7 % 17.9 % South Florida 299 66.2 % 1.36 25.1 % 51.0 % Seattle 45 71.9 % 1.80 18.4 % 37.7 % Suburban Maryland 9 100.0 % 1.09 (1.6) % 0.5 % Industrial Totals by Region 1,085 74.3 % $ 1.90 15.2 % 31.4 % Flex Northern California 43 91.5 % $ 0.75 6.4 % 13.1 % Southern California 44 81.1 % 4.88 8.0 % 20.4 % Dallas 51 79.0 % 2.46 7.8 % 18.9 % Austin 108 90.3 % 7.28 5.1 % 16.8 % Northern Virginia 34 53.0 % 3.74 (0.9) % 0.4 % South Florida 6 58.5 % 2.10 16.6 % 34.1 % Seattle 32 51.1 % 2.80 7.7 % 16.8 % Flex Totals by Region 318 75.4 % $ 4.36 5.9 % 15.6 % Office Northern California 19 91.7 % $ 0.04 (6.6) % (5.8) % Southern California 1 30.9 % - 1.0 % 9.0 % Northern Virginia 85 69.1 % 9.97 (8.4) % 1.1 % Seattle 1 100.0 % - 6.2 % 15.3 % Suburban Maryland 22 76.2 % 8.15 (1.3) % 4.0 % Office Totals by Region 128 72.3 % $ 8.00 (6.8) % (0.1) % Company Totals by Type 1,531 74.4 % $ 2.92 10.4 % 23.5 % _______________ (1)Cash Rental Rate Change is computed by taking the percentage difference between the incoming initial billed monthly cash rental rates inclusive of estimated expense recoveries (excluding the impact of certain items such as concessions or future escalators) on new leases or extensions executed in the period, and the outgoing monthly cash rental rates inclusive of estimated expense recoveries last billed on the previous lease for that space. Leases executed on spaces vacant for more than the preceding twelve months have been excluded from this measure. (2)GAAP rent represents average rental payments for the term of a lease on a straight-line basis in accordance with GAAP and excludes operating expense reimbursements. For the three months endedMarch 31, 2022 , weighted average occupancy was 96.0%, an increase from weighted average occupancy of 93.3% for the three months endedMarch 31, 2021 . Renewals of leases with existing customers represented 76.3% of our leasing activity for the three months endedMarch 31, 2022 . Average lease term of the leases executed during the three months endedMarch 31, 2022 was 3.4 years with associated average transaction costs (tenant improvements and leasing commissions) of$2.92 per square foot. For comparative purposes, average lease term and 31
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transaction costs on leases executed during the three months endedMarch 31, 2021 were 3.3 years and$2.58 per square foot, respectively. The uncertainty of the COVID-19 pandemic's impact on the Company's future ability to increase or maintain existing occupancy levels, possible decreases in rental rates on new and renewal transactions, and potential additional rent deferrals, rent abatements, and customer defaults, may affect our ability to growSame Park rental income in the near future.
Non-Same Park Portfolio: The table below reflects the assets comprising our
Purchase Square Occupancy at March
Acquired Property Date Acquired Location Price Feet 31, 2022
Jupiter Business Park November 2021 Plano, TX $ 25,600 141 100.0%
Port America September 2021 Grapevine, Texas 123,268 718 95.6%
Pickett Industrial Park October 2020 Alexandria, VA 46,582 246 44.3%
La Mirada Commerce Center January 2020 La Mirada, CA 13,513 73 95.6%
Total acquired property $ 208,963 1,178 85.3%
We believe that our management and operating infrastructure typically allows us to generate higher NOI from newly acquired real estate facilities than was achieved by previous owners. However, it can take 24 or more months for us to fully achieve higher NOI, and the ultimate levels of NOI achieved can be affected by changes in general economic conditions. Due to the uncertainty of the COVID-19 pandemic's impact on the Company's ability to generate higher NOI from these newly acquired real estate facilities in the future, there can be no assurance that we will achieve our expectations with respect to newly acquired real estate facilities. Multifamily: As ofMarch 31, 2022 , we held a 95.0% controlling interest in a joint venture that owns Highgate at The Mile, a 395-unit apartment complex in Tysons,Virginia . The following table summarizes the historical operating results of Highgate at The Mile and certain statistical information (in thousands, except per unit data): Three Months Ended March 31, 2022 2021 % Change Rental income$ 2,369 $ 2,327 1.8 % Cost of operations 1,224 1,067 14.7 % NOI$ 1,145 $ 1,260 (9.1 %) Selected Statistical Data Weighted average square foot occupancy 95.0 % 94.2 % 0.8 % As of March 31, 2022 Total costs (1)$ 115,426 Physical occupancy 96.9 % Average rent per unit (2)$ 2,123
_______________
(1)The project cost for Highgate at The Mile includes the underlying land at its assigned contribution value upon formation of the joint venture of$27.0 million , which includes unrealized land appreciation of$6.0 million that is not recorded on our balance sheet.
(2)Average rent per unit is defined as the total potential monthly rental revenue (actual rent for occupied apartment units plus market rent for vacant apartment units) divided by the total number of rentable apartment units.
The decrease in NOI in 2022 compared to 2021 was primarily due to an increase in
cost of operations. The increase in cost of operations was attributed to an
increase in utility charges, increased costs for common area cleaning, increased
turnover costs, unscheduled repairs to the garage door and HVAC units. Due to
the uncertainty of the COVID-19 pandemic's impact on the Company's future
ability to maintain existing occupancy levels and rental rates, we may continue
to experience NOI levels below those which were achieved prior to the onset of
the COVID-19 pandemic in the future.
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Assets sold or held for sale: These amounts include historical operating results with respect to properties that were sold or held for sale.
For the three months ended
Depreciation and Amortization Expense: Depreciation and amortization expense was$23.1 million for the three months endedMarch 31, 2022 , and consistent with the$23.0 million for the same period in 2021. General and Administrative Expense: General and administrative expense primarily represents executive and other compensation, including non-cash stock compensation, audit and tax fees, legal expenses and other costs associated with being a public company. For the three months endedMarch 31, 2022 , general and administrative expense increased$6.9 million compared to the same period in 2021 primarily due to a one-time cash payment of$6.7 million to the former CEO, which consists of a$6.6 million cash payment for RSUs, a$0.1 million cash payment for COBRA coverage reimbursement in accordance with his separation agreement, partially offset by the non-cash$0.6 million reversal of stock compensation for the unvested former CEO's shares net of dividend forfeiture expense.
Gain on Sale of Real Estate Facilities
OnMarch 29, 2022 , the Company sold a 702,000 square foot industrial-flex business park located inIrving, Texas , for net sale proceeds of$91.9 million , which resulted in a gain on sale of$57.0 million . There were no asset sales during the three months endedMarch 31, 2021 .
Liquidity and Capital Resources
This section should be read in conjunction with our consolidated statements of cash flows for the three months endedMarch 31, 2022 and 2021 and the notes to our consolidated financial statements, which set forth the major components of our historical liquidity and capital resources. The discussion below sets forth the factors which we expect will affect our future liquidity and capital resources or which may vary substantially from historical levels.
Overview
Our expected material cash requirements for the three months endedMarch 31, 2022 and thereafter consist of (i) contractually obligated expenditures, including payments of principal and interest; (ii) other essential expenditures, including property operating expenses, maintenance capital expenditures and dividends paid in accordance with REIT distribution requirements; and (iii) opportunistic expenditures, including acquisitions and developments and repurchases of our securities. We expect to satisfy these short-term and long-term cash requirements through operating cash flow, disposition proceeds and opportunistic debt and equity financing.
Sources of Capital
Operating Cash Flow: We believe that our net cash provided by our operating activities will continue to be sufficient to enable us to meet our ongoing requirements for debt service, capital expenditures and distributions to our stockholders for the foreseeable future. In the last five years, we have retained$40 to$60 million in operating cash flow per year. Retained operating cash flow represents cash flow provided by operating activities, less stockholder and unit holder distributions and capital expenditures, excluding development costs. In addition, as ofMarch 31, 2022 , we had$104.2 million in unrestricted cash. Proceeds from Dispositions: Refer to "Business Overview-Sale of Real Estate Facilities" above for a discussion of our dispositions. We expect to continue sell properties that are no longer consistent with our investment strategy and expect to use the proceeds from these dispositions to fund new acquisitions, development or other cash requirements. Access to Capital Markets: As a REIT, we are required to distribute at least 90% of our "REIT taxable income" to our stockholders each year, which relative to a taxable C corporation, limits the amount of cash flow from operations that we can retain for investment purposes, such as to fund acquisitions and developments. As a result, in order to grow our asset base, access to capital is important. 33
-------------------------------------------------------------------------------- Table of Contents As a result of the announced Merger, our corporate credit rating by Standard and Poor's (S&P) was downgraded to BBB+, while our preferred stock were downgraded to a rating of BBB-. S&P placed all their ratings on PSB, including our 'BBB+' issuer credit rating, on CreditWatch with negative implications. The CreditWatch placement reflects that S&P could lower their ratings upon closing of the transaction, based on the pro forma capital structure and their view of the acquirer's financial policy. S&P no longer views PSB as being strategic to Public Storage. Public Storage, which holds approximately 41% common equity interest in PSB, has agreed toBlackstone's acquisition bid. S&P previously considered PSB to be moderately strategic to Public Storage and, as such, S&P believed that Public Storage would provide support to PSB under a stress scenario. As a result, S&P applied a one-notch improvement to their standalone rating on PSB. The transaction changes S&P's view, such that they no longer expect Public Storage to support PSB under a hypothetical stress scenario. As a result, S&P downgraded PSB by one notch to 'BBB+'. S&P also lowered their ratings on PSB's preferred stock by one notch to 'BBB-', two notches below its issuer credit rating, in line with S&P's criteria. In addition, Moody's Investors Service ("Moody's") has placed under review for downgrade the ratings of the Company and our Baa2 preferred stock rating and the Baa1 senior unsecured shelf rating of our main operating subsidiary,PS Business Parks, L.P. The review for downgrade follows the announcement of the Merger. The review for downgrade reflects the likelihood that PSB's credit profile will deteriorate underBlackstone's ownership, with the potential for meaningfully higher leverage and secured debt levels that could result in a multi-notch downgrade of the REIT's ratings, including crossing over to non-investment grade territory, upon transaction close. In order to maintain efficient access to the capital markets, we target a minimum ratio of FFO (as defined below) to combined fixed charges and preferred distributions of 3.0 to 1.0. Ratio of FFO to fixed charges and preferred distributions is calculated by dividing FFO excluding fixed charges and preferred distributions by fixed charges and preferred distributions paid. Fixed charges include interest expense, capitalized interest and preferred equity distributions paid. For the year endedMarch 31, 2022 , the ratio of FFO to combined fixed charges and preferred distributions paid was 6.8 to 1.0. InAugust 2021 , we amended and restated the credit agreement governing our revolving Credit Facility to increase the aggregate principal amount of the Credit Facility from$250.0 million to$400.0 million and extend the expiration date toAugust 2025 . The Credit Facility can also be expanded to$700.0 million . We can use the Credit Facility as necessary as temporary financing until we are able to raise longer term capital. Historically we have funded our long-term capital requirements with retained operating cash flow and proceeds from the issuance of common and preferred securities. We will select among these sources of capital based upon availability, relative cost, the impact of constraints on our operations (such as covenants), and the desire for leverage.
Cash Requirements
Contractual Commitments: Our material contractual commitments as ofMarch 31, 2022 consist of principal and interest on our Credit Facility, payment of dividends on our preferred stock (which if not paid will accrue), contractual construction commitments for development projects, and ground lease obligations: •Credit Facility: As ofMarch 31, 2022 , we have$20.0 million outstanding on our Credit Facility. We are in compliance with all of the covenants and other requirements of our Credit Facility. Our Credit Facility expires inAugust 2025 . •Preferred stock dividends: We paid$9.6 million to preferred stockholders during the three months endedMarch 31, 2022 . We expect to continue to pay quarterly distributions of$9.6 million to our preferred stockholders for the foreseeable future or until such time as there is a change in the amount or composition of our series of preferred equity outstanding. Dividends on preferred equity are paid when and if declared by our Board of Directors (the "Board") and accumulate if not paid. •Contractual commitments: Contractual construction commitments as ofMarch 31, 2022 are approximately$46.4 million . •Ground lease obligations: Our contractual payment requirements under various operating leases as ofMarch 31, 2022 are approximately$0.1 million for 2022 and$1.4 million thereafter. •Leasing transaction cost commitments: We have commitments, pursuant to executed leases throughout our portfolio, to spend$11.4 million on transaction costs, which include tenant improvements and lease commissions as ofMarch 31, 2022 . 34
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Capital Expenditures: We define recurring capital expenditures as those necessary to maintain and operate our real estate at its current economic value. Nonrecurring capital improvements generally are related to property reconfiguration and other capital expenditures related to repositioning asset acquisitions. The following table sets forth our commercial capital expenditures paid for in the three months endedMarch 31, 2022 and 2021 on an aggregate and per square foot basis: Three Months Ended March 31, 2022 2021 2022 2021 (in thousands) (per square foot) (1)Commercial Real Estate Recurring capital expenditures Capital improvements$ 2,015 $ 648 $ 0.07 $ 0.02 Tenant improvements 3,027 2,909 0.11 0.10 Lease commissions 1,307 1,848 0.05 0.07 Total commercial recurring capital expenditures 6,349 5,405 0.23 0.19 Nonrecurring capital improvements 1,511 411 0.06 0.01
Total commercial capital expenditures
$ 0.29 $ 0.20 _______________
(1)Per square foot amounts are calculated based on capital expenditures divided by total weighted average square feet owned for the periods presented.
The following table summarizes recurring capital expenditures paid and the
related percentage of NOI for
Three Months Ended March 31,
Recurring
Recurring Capital Expenditures
Capital Expenditures as a Percentage of NOI
2022 2021 2022 2021
Region
Same Park
Northern California $ 392 $ 1,597 (75.5)% 1.6 % 7.3 %
Southern California 496 546 (9.2)% 4.2 % 4.9 %
Dallas 416 487 (14.6)% 11.5 % 15.8 %
Austin 340 187 81.8% 6.3 % 3.7 %
Northern Virginia 2,159 974 121.7% 16.8 % 7.7 %
South Florida 901 349 158.2% 9.4 % 4.1 %
Seattle 434 294 47.6% 11.4 % 8.2 %
Suburban Maryland 234 253 (7.5)% 7.7 % 8.5 %
Total Same Park 5,372 4,687 14.6% 7.2 % 6.8 %
Non-Same Park
Southern California 12 19 (36.8)%
Dallas 186 42 342.9%
Northern Virginia 771 23 3252.2%
Total Non-Same Park 969 84 1053.6%
Assets sold or held for sale 8 634 (98.7)%
Total commercial recurring 17.5%
capital expenditures $ 6,349 $ 5,405
In the last five years, our annual Same Park recurring capital expenditures have
ranged between 10.7% and 14.3% as a percentage of NOI, and we expected future
recurring capital expenditures to be within this range. While what we disclose
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herein with respect to capital expenditures represents our best estimates at this time, there can be no assurance that these amounts will not change substantially in the future for various reasons, including the potential impact of the COVID-19 pandemic on capital projects and leasing volume. Redemption of Preferred Stock: Shares of preferred stock are redeemable by the Company five years after issuance or in order to preserve its status as a REIT, but shares of preferred stock are never redeemable at the option of the holder. Historically, we have reduced our cost of capital by refinancing higher coupon preferred securities with lower coupon preferred securities. Our Series X preferred shares, with a coupon rate of 5.25%, at a par value of$230.0 million and Series Y preferred shares, with a coupon rate of 5.20%, at a par value of$200.0 million are redeemable inSeptember 2022 andDecember 2022 , respectively. Future redemptions of preferred stock will depend upon many factors, including available cash and our cost of capital. Refer to Note 9 to our consolidated financial statements or more information on our preferred stock. Acquisitions of real estate facilities: Refer to "Business Overview-Acquisition of Real Estate Facilities" above for a discussion of our recent acquisitions. We continue to seek to acquire additional real estate facilities; however, there is significant competition to acquire existing facilities in our markets and there can be no assurance as to the volume of future acquisition activity. Development real estate facilities: Refer to "Business Overview-Development or Redevelopment of Real Estate Facilities" above for a discussion of our recently completed developments. As ofMarch 31, 2022 , we were in the process of developing an approximately 83,000 square foot multi-tenant industrial building at our212 Business Park located inKent, Washington . During the quarter endedMarch 31, 2022 ,$1.5 million was reclassified from land to property held for development on our consolidated balance sheet and, as ofMarch 31, 2022 ,$5.5 million of the estimated$16.0 million total development costs had been incurred. The total investment, inclusive of land and development costs, for the212 Business Park development is projected to be$17.5 million . This construction project is scheduled to be completed in the fourth quarter of 2022. As ofMarch 31, 2022 , we have contractual construction commitments totaling$10.5 million that will be paid to various contractors as the project is completed. As ofMarch 31, 2022 , we were in the process of developing an approximately 17,000 square foot multi-tenant industrial building at ourBoca Commerce Park , located inBoca Raton, Florida . During the quarter endedMarch 31, 2022 ,$0.6 million was reclassified from land to property held for development on our consolidated balance sheet and, as ofMarch 31, 2022 ,$2.3 million of the estimated$4.2 million total development costs had been incurred. The total investment, inclusive of land and development costs, for theBoca Commerce Park development is projected to be$4.8 million . This construction project is scheduled to be completed in the fourth quarter of 2022. As ofMarch 31, 2022 , we have contractual construction commitments totaling$1.9 million that will be paid to various contractors as the project is completed. InAugust 2020 , we entered into the Brentford Joint Venture for the purpose of developing a second multifamily property, Brentford at The Mile, a planned 411-unit multifamily apartment complex. We contributed the Brentford Parcel at a value of$18.5 million , for which we received equity contribution credit in the Brentford Joint Venture. Our cost basis in the Brentford Parcel was$5.1 million as ofMarch 31, 2022 Construction of Brentford at The Mile commenced inAugust 2020 and is anticipated to be completed over a period of 24 to 36 months at an estimated development cost of$110 million to$115 million , excluding land cost. As ofMarch 31, 2022 , the development cost incurred was$64.4 million , which is reflected in land and building held for development, net on our consolidated balance sheets along with our$5.1 million cost basis in the Brentford Parcel. As ofMarch 31, 2022 , we have contractual construction commitments totaling$31.6 million that will be paid to various contractors as the project is completed. Repurchase of Common Stock: The Board has approved a common stock repurchase program and we may in the future acquire our shares under the program. As ofMarch 31, 2022 , management has the authorization to repurchase an additional 1,614,721 shares. No shares of common stock were repurchased under the board-approved common stock repurchase program during the three months endedMarch 31, 2022 . Requirement to Pay Distributions: Our election to be taxed as a REIT, as defined by the Code, applies to all periods presented herein. As a REIT, we do not incurU.S. federal corporate income tax on our "REIT taxable income" that is 36
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distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and we continue to meet certain organizational and operational requirements. We believe we have met these requirements in all periods presented herein, and we expect we will continue to qualify as a REIT in future periods.
We paid REIT qualifying distributions of
Our consistent, long-term dividend policy has been to set dividend distribution amounts based on our taxable income.
From the date of the Merger Agreement through the closing of the Merger, PSB may declare and pay regular, quarterly cash distributions to holders of its common stock and to holders of common units of partnership interest of the OP, in an amount of up to$1.05 per share or unit, including a pro rata distribution in respect of any stub period. Additionally, PSB is permitted to declare and pay regular quarterly dividends on its shares of preferred stock. Subject to the terms of the Merger Agreement, PSB will also pay a closing cash dividend (the "Closing Cash Dividend") to holders of record PSB common stock as of the close of business on the business day immediately prior to the closing date in an aggregate amount no greater than the cash available for distribution, which Closing Cash Dividend will be designated, to the maximum extent permitted by applicable law, as a "capital gains dividend" under the Code. The merger consideration will be reduced by the per share amount of such Closing Cash Dividend. Refer to Note 12 - "Subsequent Events" to our consolidated financial statements under Item 15 in this quarterly report on Form 10-Q, for additional information regarding the Merger.
Funds from Operations, Core Funds from Operations, and Funds Available for Distributions
Funds from Operations ("FFO") is a non-GAAP measure defined by the National
Association of Real Estate Investment Trusts and is considered a helpful measure
of REIT performance by REITs and many REIT analysts. FFO represents GAAP net
income before real estate depreciation and amortization expense, gains or losses
on sales of operating properties and land and impairment charges on real estate
assets.
We also present Core FFO and Funds Available for Distribution ("FAD") which are
both also non-GAAP measures. The Company defines Core FFO as FFO excluding the
impact of (i) income allocated to preferred stockholders to the extent
redemption value exceeds the related carrying value and (ii) other nonrecurring
income or expense items as appropriate. FAD 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 expense items such
as amortization of deferred rent receivable and stock compensation expense.
FFO for the three months ended March 31, 2022 was $1.65 per share, representing
a 1.2% decrease from the same period in 2021. The decrease in FFO per share for
the first quarter was due one-time cash payment of $6.6 million to the former
Chief Executive Officer ("CEO"), for RSUs and a $0.1 million cash payment for
COBRA coverage reimbursement, in accordance with his separation agreement,
partially offset by $0.6 million non-cash adjustment related to the reversal of
stock compensation for the unvested former CEO's shares, net of dividend
forfeiture expense. The decrease in FFO was partially offset by lower preferred
distributions in the first quarter due to the Series W preferred stock
redemption in Q4 2021.
Core FFO for the three months ended March 31, 2022 was $1.82 per share,
representing a 9.0% increase from the same period in 2021. Core FFO excludes the
impact of the a one-time cash payment of $6.7 million to the former CEO, which
consists of a $6.6 million cash payment for RSUs, a $0.1 million cash payment
for COBRA coverage reimbursement in accordance with his separation agreement,
partially offset by $0.6 million non-cash adjustment related to the reversal of
stock compensation for the unvested former CEO's shares, net of dividend
forfeiture expense.
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The following table reconciles net income allocable to common stockholders to
FFO, Core FFO and FAD as well as net income per share to FFO per share and Core
FFO per share (amounts in thousands, except per share data):
Three Months Ended March 31,
2022 2021
Net income allocable to common stockholders $ 71,993 $ 27,886
Adjustments
Gain on sale of real estate facilities (56,959) -
Depreciation and amortization 23,132 22,985
Net income allocable to noncontrolling interests 19,049 7,411
Net income allocable to restricted stock unit holders 523 164
FFO allocated to joint venture partner (23) (27)
FFO allocable to diluted common stock and units 57,715 58,419
CEO cash payment for RSUs net of reversal of stock compensation 6,108 -
Core FFO allocable to diluted common stock and units $
63,823
FAD
FFO allocable to diluted common stock and units$ 57,715 $ 58,419 Adjustments: Recurring capital improvements (2,010) (565) Tenant improvements (3,027) (2,422) Capitalized lease commissions (1,304) (1,784)
Total recurring capital expenditures for assets sold or held for sale
(8) (634)
Cash paid for taxes in lieu of stock upon vesting of restricted
stock units (931) (3,197)
Non-cash rental income (1) (1,157) (1,307)
Non-cash stock compensation expense 940 1,780
FAD allocable to diluted common stock and units 50,218 50,290
Weighted average outstanding
Common stock 27,607 27,495
Operating partnership units 7,305 7,305
Restricted stock units 45 47
Common stock equivalents 84 99
Total diluted common stock and units 35,041 34,946
Reconciliation of Earnings per share to FFO per share Net income per common stock-diluted
$ 2.60 $ 1.01
Gain on sale of real estate facilities (1.63) -
Depreciation and amortization expense 0.66 0.66
Net income allocated to restricted stock unit holders 0.02 -
FFO per share $ 1.65 $ 1.67
CEO cash payment for RSUs net of reversal of stock compensation 0.17 -
Core FFO per share $ 1.82 $ 1.67
_______________
(1)Non-cash rental income includes amortization of deferred rent receivable (net
of write-offs), in-place lease intangible, tenant improvement reimbursements,
and lease incentives.
We believe FFO, Core FFO, and FAD assist investors in analyzing and comparing
the operating and financial performance of a company's real estate from period
to period. FFO, Core FFO, and FAD are not substitutes for GAAP net income. In
addition, other REITs may compute FFO, Core FFO, and FAD differently, which
could inhibit comparability.
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