2 0 1 6
A N N U A L
R E P O R T
•
•
BUSINESS PARK LOCATIONS
(As of December 31, 2016)
WA
(3)
CA
(47)
VVVVVVAVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVV
)))))))))))))))))))))))))))))
(17(17(177(
M
MD
(6)
Divisional/Regional Offi ce
( ) = Number of business parks in state
TX
(23)
FLLLLLLLLLLLLLLLLLLLL
(3)
California
f
Rentable Square Feet: 11,233,000
Buena Park
Carson
Cerritos
Concord
Culver City
Fremont
Hayward
Irvine
Laguna Hills
Lake Forest
Milpitas
Monterey
Monterey Park
Oakland
Orange
San Diego
San Jose
San Leandro
San Mateo
San Ramon
Santa Ana
Santa Clara
Signal Hill
South San Francisco
Studio City
Sunnyvale
Torrance
Texas
Rentable Square Feet: 5,088,000
Austin
Carrollton
Dallas
Farmers Branch
Garland
Irving
Mesquite
Plano
Richardson
g
Virginia
Rentable Square Feet: 3,917,000
Alexandria
Chantilly
Fairfax
Herndon
Lorton
McLean
Merrifield
Springfield
Sterling
Vienna
Woodbridge
Florida
Rentable Square Feet: 3,866,000
Boca Raton
Miami
Wellington
Maryland
y
Rentable Square Feet: 2,578,000
Beltsville
Gaithersburg
Rockville
Silver Spring
Washingtong
Rentable Square Feet: 1,390,000
Kent
Redmond
Renton
Cover photos (from top)
Miami International Commerce Center 3,468,000 square foot industrial park in Miami, Florida
Shady Grove Executive Park 578,000 square foot offi ce park in Rockville, Maryland
Bay Center Business Park 463,000 square foot fl ex park in Hayward, California
CUMULATIVE TOTAL RETURN
PS Business Parks, Inc., S&P 500 Index and NAREIT Equity Index
December 31, 2011 - December 31, 2016
$250
$200
$150
$100
$ 50
$ 0
PS Business Parks, Inc.
S&P 500 Index
NAREIT Equity Index
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
PS Business Parks, Inc.
$100.00
$ 120.40
$ 145.00
$ 160.05
$180.96
$ 248.11
S&P 500 Index
$100.00
$ 116.00
$ 153.57
$ 174.60
$177.01
$ 198.18
NAREIT Equity Index
$100.00
$ 119.70
$ 123.12
$ 157.63
$162.08
$ 176.07
The graph set forth above compares the yearly change in the cumulative total shareholder return on the Common Stock of the Company
for the five-year period ended December 31, 2016 to the cumulative total return of the Standard & Poor’s 500 Stock Index (“S&P
500 Index”) and the National Association of Real Estate Investment Trusts Equity Index (“NAREIT Equity Index”) for the same period
(total shareholder return equals price appreciation plus dividends). The stock price performance graph assumes that the value of the
investment in the Company’s Common Stock and each Index was $100 on December 31, 2011 and that all dividends were reinvested.
The stock price performance shown in the graph is not necessarily indicative of future price performance.
TO THE SHAREHOLDERS OF PS BUSINESS PARKS, INC.
From the President and Chief Executive Officer
PS Business Parks’ Strategy
PS Business Parks (PSB) has a simple strategy to which we have remained true since
inception. We own and operate multi-building and multi-tenant flex, industrial
and office parks in high barrier, top-tier markets. Currently, we own and operate
99 parks in six states and 12 markets. Our properties are located within specific
sub-markets which are proven to be those which are typically the “last to be hit and
first to recover” during real estate cycles. In addition to investing in well-located,
quality assets, we work hard to hire and retain outstanding team members so that
we operate our assets in ways that consistently produce market-leading results. We
have highly trained and experienced teams of real estate professionals in each of our
markets who interact directly with our customers to whom we provide exceptional
value. Another component of PSB’s strategy is a conservative and strong capital
structure which facilitates our ability to retain significant levels of cash to reinvest
in both existing and new parks. Successful execution of the above goals produces
exceptional results and allows us to achieve the objective of growing shareholder
value.
Total Shareholder Returns
The following chart compares the operating results of our same park assets and
highlights the fact that 2016 was the fifth consecutive year that we reported
positive same park growth as a result of strong market conditions and effective
execution of our operating strategy.
1
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
Same Park Revenue, Expense and NOI Growth
5.0%
4.2%
4.0%
1.9%
3.5%
3.2%
2.6%
2.2%
1.1%
1.2%
1.4%
0.6%
0.7%
0.0%
–1.3%
2012
2013
2014
2015
2016
RRe
Revenue
2010
Expense
NOI
In many ways, 2016 was a record year for PSB. This means that we are going into
2017 well positioned for continued success. Market conditions remain strong on
the West Coast, Texas and Florida, and there are early signs that Washington, D.C.
is recovering. These market conditions should provide continued ability to increase
rents and reduce transaction costs. The improvement in our operating metrics will
directly increase the value of the enterprise. In 2016, PSB outperformed both the
NAREIT Equity Index and S&P 500. In addition, as shown in the table below, PSB
consistently outperforms and is a proven investment for our shareholders.
Average Annual Total Shareholder Return
Years
PSB
NAREIT S&P 500
1
3
5
10
15
37.1%
19.6%
19.9%
8.7%
12.6%
8.6%
12.7%
12.0%
5.1%
10.8%
12.0%
8.9%
14.7%
7.0%
6.7%
2
Funds from Operations and Cash Flow
Now I will give results on a per share basis which provide a meaningful view for
our shareholders. The positive commercial real estate environment in 2016
combined with our strategy resulted in an increase in funds from operations
(FFO), a key industry metric measuring the operating performance of the
Company. This metric, as adjusted, excludes non-cash items such as depreciation,
increased to $5.44 per share in 2016 from $4.83 in 2015, an increase of 12.6%.
The Company’s improvement in cash flow was even better. Funds available for
distribution (FAD), the cash available to distribute to our shareholders after necessary
capital expenditures, was $4.67 per share in 2016, compared to $3.73 in 2015, an
increase of 25.2%.
$6.00
$5.50
$5.00
$4.50
$4.00
$5.07
$4.74
$4.73
$5.44
$4.67
$4.83
$3.73
$3.50
$3.27
$3.45
$3.44
$3.00
2012
2013
2014
2015
2016
2010
FFO, as adjusted, per share
FAD per share
Key 2016 Highlights and Review
2016 was an excellent year as demonstrated in our operating results. Our leasing
and property management teams produced outstanding returns for shareholders.
Momentum grew as the year progressed and the economy continued with steady
and sustained improvement, increasing the confidence among our customer base
of small- to medium-sized companies. Existing customer expansions resulted
3
in 381,000 square feet of new leasing, a significant contributor to PSB’s 2016
same park weighted average occupancy growth. The chart below illustrates the
improvement in same park occupancy over the last five years.
94.5%
94.0%
93.5%
93.0%
92.5%
92.0%
91.5%
91.0%
90.5%
Same Park Occupancy1
94.1%
93.5%
92.9%
92.9%
92.1%
92.0%
2012
2010
2013
2014
2015
2016
(1) Represents the same park portolio as reported in each period.
Year-over-year gains were made in Northern California, Southern California, Florida
and Texas. Washington, D.C. continues to battle the trend of a decreasing office
footprint of the government and government contractors. These large tenant
consolidations have been partially offset by job growth and a healthy business
environment within the small- to medium-sized companies which are the backbone
of PSB’s customer base. The end result was positive market net absorption in nearly
all of the markets in which we operate for the sixth consecutive year. In addition, there
was very little development of competitive product. In fact, many of our parks are
located within in-fill areas where inventory of low-density flex, office and industrial
product is being eliminated to make room for high density housing and office
buildings. This has been the case for several years. Last year, our leasing professionals
were busy as we executed leases aggregating 7.6 million square feet in nearly 2,200
separate transactions resulting in an average transaction size of 3,500 square feet.
This volume came with an overall increase of 5.3% in cash rental rates. Growth
in customer demand and occupancy also facilitated positive net operating income
(NOI), which increased 5% on a same park basis.
4
Reducing Transaction Costs
As mentioned earlier, we strive to increase cash flow while maintaining our assets and
providing excellent customer service. Our goal is to minimize the level of ongoing
capital required to achieve our leasing volume and grow net operating income. By
doing so, we are able to retain higher levels of cash, which we can use for acquiring
assets, development or investing in our stock. A key metric we use, called transaction
costs, trended down again in 2016. There are two main reasons for this downward
trend. First is the fact that all of our markets, except D.C., are landlord favorable.
When competitive properties are highly leased, landlords do not need to compete
as aggressively to fill vacant space. Second, and most importantly, is that the
simple and generic nature of small spaces enables us to control costs as we lease our
properties. Customers leasing small spaces often do not have broker representation.
In 2016, transaction costs, including tenant improvements and commissions, totaled
$3.04 per square foot, compared to $3.50 per square foot in 2015, and substantially
below the high watermark of $5.39 per square foot in 2011 when market conditions
heavily favored the tenant and the period in which we purchased and repositioned
an office portfolio in our Washington, D.C. market. In addition, we also look
at recurring capital costs as a percentage of NOI. The chart below reflects the
trend of recurring capital costs as a percentage of NOI. As a result, free cash for
reinvestment improved by 16.9%, to $57.6 million, allowing for more capital to
be invested in other areas of our business.
25.0%
20.0%
15.0%
10.0%
5.0%
Same Park Recurring Capital Costs as a % of NOI
20.6%
19.4%
17.2%
14.1%
11.6%
2012
2010
2013
2014
2015
2016
5
Investment and Development Activity
Commercial real estate fundamentals remained robust making it challenging to find
opportunities to invest capital in assets where we can add value and enhance the
underlying value of the Company. The investment market was extremely
competitive. Capital is readily available. In many markets, rates and occupancy
are reaching peak, or beyond, and cap rates remain compressed. During 2016,
the Company acquired two office buildings totaling 226,000 square feet for
$13.3 million in Montgomery County, Maryland. These two buildings are
18.5% leased and are located within a park we already own and where our average
occupancy over the last five years was 93%. There will be additional capital required
in order to reposition these two buildings into our multi-tenant standard from what
was built for single-tenant use. This will take several months, and we expect to start
leasing in the second quarter of 2017.
On the development front, we are more than halfway through construction of a new
Class A, 395-unit, 435,000 square foot apartment building known as Highgate
at The Mile. The building sits across the street from the headquarters of Hilton
Worldwide and Freddie Mac. Our site specifically resides in McLean, VA, one of the
highest income communities in the nation with an excellent school system.
We are encouraged about our position with Highgate due to several improvements
to the Tysons market. Tysons has recently seen the delivery of approximately 2,100
units in high-rise buildings, and absorption has been strong. This absorption is
driven by positive job growth, coupled with excellent reception of the $7 billion
dollars of transportation infrastructure improvements, now complete, headlined by
four new Metro stations. The shift in live-work balance will continue to favor our
project as Tysons becomes more desirable to both commercial tenants and residents.
Tysons is one of the main economic engines of Fairfax County, and if it were its
own employment center it would be the twelfth largest in the United States with
over 200,000 workers, most of whom are professionals. On the other hand, it has
always been severely lacking as a residential market with less than 20,000 residents.
PSB owns 45 prime acres in the heart of Tysons. The product we are developing
6
fits an under-served part of the market. We are offering a mid-rise building with
modern and upscale amenities that will attract multiple generations of occupants.
The site includes two parks, including a sizable dog park, all of which are unique in
Tysons. We will begin delivery of the building and commence leasing by spring
2017, and construction will be complete by early 2018. Including the land, this is a
$117 million investment. Since our expertise is not in multi-family development and
management, we have partnered with Kettler, Inc. in a joint venture in which we
have 95% ownership. Kettler is a well-regarded developer and manager who has
been based in Tysons since 1978. There will be minimal impact to NOI in 2017,
and we expect to gain momentum as apartments lease up through 2018.
We also made the decision in 2016 to proceed with rezoning the balance of our 45 acres
in Tysons. At the end of the third quarter, we had a full-building user vacate a 123,000
square foot building that is adjacent to our Highgate development. We moved this
building out of operations and into land held for development. This building along
with the other six remaining office buildings total 751,000 square feet. Rezoning
the entire property will allow us to increase the density for future development while
maintaining parcel integrity in the interim for the operating buildings. This location
is an example of low-density product located in a prime in-fill location where it makes
sense to look at higher and better uses in order to drive long-term growth.
Financial Strength
We ended 2016 with a capital structure that is the strongest in our history. We started
2016 with nearly $190 million of cash. During the year, we repaid the 5.45% $250
million CMBS mortgage, issued $190 million of preferred Series W, at a Company
all-time low rate of 5.2%, and called for the redemption of the 6.45% $230 million
preferred Series S. Going into 2017, we have $85 million drawn on our line of credit.
Our ratio of FFO to combined fixed charges and preferred distributions was 3.9 to 1.0
for 2016, and our FFO and FAD payout ratios were 57.7% and 63.9%, respectively.
Our use of perpetual preferred equity has served the Company well, and we have been
able to leverage the strength of the Company’s balance sheet to lower our average cost
7
of preferred equity over the last several years as reflected in the chart below. We
have significant financial flexibility with a $250 million line of credit, which
can be expanded to $400 million. Our conservative balance sheet and
consistent operational performance have led to the Company’s A- credit
rating from Standard & Poor’s, one of the highest in the REIT industry.
We are primed for significant enterprise expansion, and we will maintain a
disciplined acquisition strategy in order to continue long-term shareholder
growth.
s
n
o
i
l
l
i
m
n
i
s
’
$
$1,200
$1,100
$1,000
$900
$800
$700
$600
$500
Preferred Equity
$995.0
6.1%
$920.0
6.0%
$1,109.8
5.9%
7.0%
6.5%
$879.8
5.7%
6.0%
e
t
a
R
12/31/14
12/31/15
12/31/16
1/31/17
Oustanding preferred equity
Average rate
5.5%
5.0%
Leadership Team
PSB has a stable management group. The entire team is adept at creating value.
Our culture recognizes individual performance while emphasizing collaborative
teamwork as we maneuver through a management-intensive environment
meeting the needs of 5,000 customers. For the second time in the Company’s
history, we changed CEOs when Joe Russell became President of Public Storage.
I am fortunate to have been with PSB since inception and grateful to have
worked with two such strong leaders and CEOs—Ron Havner and Joe Russell. Like
Ron, Joe will continue to provide guidance and expertise as a Director of PSB. John
Petersen, Ed Stokx and I have been together for over 12 years, and we have made a
8
smooth and seamless transition with the help of the balance of our group which has
also been together for an average of ten years. We look forward to continued success
and growth.
Summary
2016 was an exceptional year at PS Business Parks. Externally, the markets in
which we operate remained strong, facilitating our ability to improve operational
performance. The strategy of focusing on small users in multi-tenant parks also
affords us the ability to out-perform markets. Due to our concentrations, we are able
to respond to the needs of our customers as they expand and grow. Our extremely
talented teams create value with their proven ability to quickly respond to market
conditions and stay close to our customers. The Company’s financial structure,
which has always been strong, grew even stronger giving us the opportunity to
expand the enterprise and extract long-term value. In 2016, PSB delivered to our
shareholders a total return of 37%. We are encouraged by a number of factors as we
enter 2017. The economy and our customer base are quite healthy. Our teams are
in-place and ready to find opportunities to provide excellent shareholder returns.
We remain committed to our strategy of investing in multi-building, multi-tenanted
business parks for what has proven to be a dynamic and consistent formula for
our success.
Thank you for your continued trust in our abilities and investment in PSB.
Maria R. Hawthorne
President and Chief Executive Officer
March 10, 2017
9
Supplemental Non-GAAP Disclosures (unaudited)
Funds from Operations (FFO), FFO, as Adjusted, and Funds Available for Distribution (FAD)
per Common and Dilutive Share (1)
The table below reconciles from diluted earnings per share to FFO and FFO, as adjusted, per common and dilutive share.
For The Years Ended December 31,
2012
2013
2014
2015
2016
Net income per common share — diluted
$
Gain on sale of land and real estate facilities
Depreciation and amortization (2)
FFO per common and dilutive share (3)
Adjustments:
Lease buyout payments
LTEIP modification due to change in senior
management
Acquisition transaction costs
Non-cash distributions related to the redemption
of preferred equity
Gain on sale of ownership interest in STOR-Re
$
0.81
(0.03)
3.46
4.24
1.77 $
—
3.38
4.19 $
(2.68)
3.21
2.52 $
(0.82)
3.06
5.15
4.72
4.76
(0.06)
(0.07)
—
0.01
0.55
—
—
0.03
—
(0.04)
—
—
0.01
—
—
—
—
—
0.07
—
FFO per common and dilutive share, as adjusted (4)
$
4.74
$
5.07 $
4.73 $
4.83 $
2.31
—
2.86
5.17
(0.01)
0.06
0.01
0.21
—
5.44
The table below reconciles from FFO to FAD per common and dilutive share.
For The Years Ended December 31,
2012
2013
2014
2015
2016
FFO per common and dilutive share
$
4.24
$
5.15 $
4.72
$
4.76 $
5.17
Deduct capital expenditures and eliminate
non-cash stock compensation and other
non-cash items
(0.97)
(1.70)
(1.28)
(1.03)
(0.50)
FAD per common and dilutive share (5)
$
3.27
$
3.45 $
3.44
$
3.73 $
4.67
(1) Per share amounts are computed using additional dilutive shares related to noncontrolling interests and restricted stock units.
(2)
Includes depreciation from discontinued operations.
(3) Funds from Operations (“FFO”) is computed in accordance with the White Paper on FFO approved by the Board of Governors of the National
Association of Real Estate Investment Trusts (“NAREIT”). The White Paper defines FFO as net income, computed in accordance with U.S.
generally accepted accounting principles (“GAAP”), before depreciation, amortization, gains or losses on asset dispositions, net income allocable
to noncontrolling interests — common units, net income allocable to restricted stock unit holders, impairment charges and nonrecurring items.
Management believes that FFO provides a useful measure of the Company’s operating performance and when compared year over year, reflects the
impact to operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses and
interest costs, providing a perspective not immediately apparent from net income. FFO is a non-GAAP financial measure and should be analyzed in
conjunction with net income. However, FFO should not be viewed as a substitute for net income as a measure of operating performance, as it does
not reflect depreciation and amortization costs or the level of capital expenditure and leasing costs necessary to maintain the operating performance
of the Company’s properties, which are significant economic costs and could materially impact the Company’s results of operations. Other REITs
may use different methods for calculating FFO and, accordingly, the Company’s FFO may not be comparable to other real estate companies’ FFO.
(4) FFO, as adjusted is a non-GAAP financial measure that management believes provides useful information to the investment community by
adjusting FFO for certain items so as to provide more meaningful year over year comparisons of the Company’s operating performance.
(5) Funds Available for Distribution (“FAD”) is a non-GAAP financial measure that is computed by adjusting FFO for recurring capital improve-
ments, which the Company defines as those costs incurred to maintain the assets’ value, tenant improvements, lease commissions, straight-line
rent, stock compensation expense, in-place lease adjustment, amortization of lease incentives and tenant improvement reimbursements, capitalized
interest and the effect of redemption of preferred equity. Like FFO, management considers FAD to be a useful measure for investors to evaluate the
Company’s operating performance on a cash flow basis. FAD should not be viewed as a substitute for net income or cash flow from operations as
defined by GAAP.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Í ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016.
or
‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
to
Commission File Number 1-10709
PS BUSINESS PARKS, INC.
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of
incorporation or organization)
95-4300881
(I.R.S. Employer Identification No.)
701 Western Avenue, Glendale, California 91201-2349
(Address of principal executive offices) (Zip Code)
818-244-8080
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $0.01 par value per share
Depositary Shares Each Representing 1/1,000 of a Share of
6.000% Cumulative Preferred Stock, Series T, $0.01 par value per share
Depositary Shares Each Representing 1/1,000 of a Share of
5.750% Cumulative Preferred Stock, Series U, $0.01 par value per share
Depositary Shares Each Representing 1/1,000 of a Share of
5.700% Cumulative Preferred Stock, Series V, $0.01 par value per share
Depositary Shares Each Representing 1/1,000 of a Share of
5.200% Cumulative Preferred Stock, Series W, $0.01 par value per share
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes Í No ‘
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ‘ No Í
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes Í No ‘
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes Í No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§232.405) is not contained herein, and will not be
contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. Í
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Í
Non-accelerated filer ‘
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ‘ No Í
As of June 30, 2016, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $2,082,893,848 based on
Accelerated filer ‘
Smaller reporting company ‘
the closing price as reported on that date.
Number of shares of the registrant’s common stock, par value $0.01 per share, outstanding as of February 20, 2017 (the latest practicable date):
27,138,138.
Portions of the definitive proxy statement to be filed in connection with the Annual Meeting of Shareholders to be held in 2017 are incorporated by
reference into Part III of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
ITEM 1. BUSINESS
Forward-Looking Statements
PART I
Forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995,
are made throughout this Annual Report on Form 10-K. 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: (a) changes in general economic and business conditions; (b) decreases
in rental rates or increases in vacancy rates/failure to renew or replace expiring leases; (c) tenant defaults; (d) the
effect of the recent credit and financial market conditions; (e) 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”); (f) the
economic health of our tenants; (g) increases in operating costs; (h) casualties to our properties not covered by
insurance; (i) the availability and cost of capital; (j) increases in interest rates and its effect on our stock price;
and (k) other factors discussed under the heading Item 1A, “Risk Factors.” 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.
The Company
PS Business Parks, Inc. (“PSB”) is a fully-integrated, self-advised and self-managed REIT that owns,
operates, acquires and develops commercial properties, primarily multi-tenant flex, office and industrial space.
PS Business Parks, L.P. (the “Operating Partnership”) is a California limited partnership, which owns directly or
indirectly substantially all of our assets and through which we conduct substantially all of our business. Unless
otherwise indicated or unless the context requires otherwise, all references to “the Company,” “we,” “us,” “our”
and similar references mean PS Business Parks, Inc. and its subsidiaries, including the Operating Partnership.
PSB is the sole general partner of the Operating Partnership and, as of December 31, 2016, owned 77.9% of the
common partnership units. The remaining common partnership units are owned by Public Storage (“PS”).
Assuming issuance of PSB common stock upon redemption of the common partnership units held by PS, PS
would own 42.0% (or 14.5 million shares) of the outstanding shares of the Company’s common stock. PSB, as
the sole general partner of the Operating Partnership, has full, exclusive and complete responsibility and
discretion in managing and controlling the Operating Partnership.
As of December 31, 2016,
the Company owned and operated 28.1 million rentable square feet of
commercial space, comprising 99 business parks, in the following states: California, Texas, Virginia, Florida,
Maryland and Washington. The Company focuses on owning concentrated business parks which provide the
Company with the greatest flexibility to meet the needs of its customers. The Company also manages 684,000
rentable square feet on behalf of PS.
History of the Company: The Company was formed in 1990 as a California corporation under the name
Public Storage Properties XI, Inc. In a March 17, 1998 merger with American Office Park Properties, Inc.
(“AOPP”) (the “Merger”), the Company acquired the commercial property business operated by AOPP and was
renamed “PS Business Parks, Inc.” Prior to the Merger, in January, 1997, AOPP was reorganized to succeed to
the commercial property business of PS, becoming a fully integrated, self-advised and self-managed REIT.
2
From January, 2014 through December, 2016, the Company acquired 904,000 square feet of multi-tenant
flex, office and industrial parks, which comprise the Non-Same Park portfolio as defined on page 29, for an
aggregate purchase price of $58.8 million. The Company made no acquisitions in 2015. The table below reflects
the assets acquired during this period (in thousands):
Property
Date Acquired
Location
Purchase
Price
Square
Feet
Occupancy at
December 31, 2016
Shady Grove . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September, 2016
Rockville, Maryland
$13,250
Total 2016 Acquisition . . . . . . . . . . . . . . . . . . . . .
Charcot Business Park II . . . . . . . . . . . . . . . . . . . . December, 2014
McNeil 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November, 2014
August, 2014
Springlake Business Center II . . . . . . . . . . . . . . . .
July, 2014
Arapaho Business Park 9 . . . . . . . . . . . . . . . . . . . .
July, 2014
MICC — Center 23 . . . . . . . . . . . . . . . . . . . . . . . .
San Jose, California
Austin, Texas
Dallas, Texas
Dallas, Texas
Miami, Florida
Total 2014 Acquisitions . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,250
16,000
10,550
5,148
1,134
12,725
45,557
$58,807
226
226
119
246
145
19
149
678
904
18.5%
18.5%
98.3%
100.0%
85.4%
91.5%
100.0%
96.3%
76.9%
In 2013, the Company entered into a joint venture known as Amherst JV LLC (the “Joint Venture”) with an
unrelated real estate development company (the “JV Partner”) for the purpose of developing a 395-unit multi-
family building on a five-acre site within The Mile in Tysons, Virginia (the “Project”). PSB holds a 95.0%
interest in the Joint Venture with the remaining 5.0% held by the JV Partner. The JV Partner is responsible for
the development and construction of the Project and through an affiliate will oversee the leasing and management
of the Project as it is completed. The aggregate amount of development costs are estimated to be $105.6 million
(excluding unrealized land appreciation), of which the Company is committed to funding $75.0 million through a
construction loan in addition to capital contributions of $28.5 million, which includes a land basis of $15.3
million, to the Joint Venture. The Company’s investment in and advances to unconsolidated joint venture was
$67.2 million as of December 31, 2016. The Project is expected to deliver its first completed units in the spring
of 2017, with final completion of the Project expected in early 2018.
As of November 1, 2016, the Company transferred a 123,000 square foot building also located within The
Mile in Tysons, Virginia to land and building held for development, as the Company is pursuing entitlements to
develop an additional multi-family complex on this site. The scope and timing of any future development will be
subject to a variety of approvals and contingencies. Prior to being classified as land and building held for
development, the building was occupied by a single user. The net operating income (“NOI”) associated with the
prior tenant is reflected as NOI from assets sold or held for development.
During 2015, the Company sold four business parks, aggregating 492,000 square feet, in non-strategic
markets for net proceeds of $41.2 million, which resulted in a gain of $23.4 million. Additionally, as part of an
eminent domain process, the Company sold five buildings, aggregating 82,000 square feet, at the Company’s
Overlake Business Park located in Redmond, Washington, for $13.9 million, which resulted in a gain of
$4.8 million.
During 2014, the Company sold five business parks aggregating 1.9 million square feet and 11.5 acres of
land in non-strategic markets, including Portland, Oregon and Phoenix, Arizona, for net proceeds of $212.2
million, which resulted in a gain of $92.4 million. With these sales the Company completed its stated objective of
exiting non-strategic markets in Sacramento, California, Oregon and Arizona.
The Company has elected to be taxed as a REIT under the Code, commencing with its taxable year ended
December 31, 1990. To the extent that the Company continues to qualify as a REIT, it will not be taxed, with
certain limited exceptions, on the net income that is currently distributed to its shareholders.
The Company’s principal executive offices are located at 701 Western Avenue, Glendale, California 91201-
2349. The Company’s telephone number is (818) 244-8080. The Company maintains a website with the address
www.psbusinessparks.com. The information contained on the Company’s website is not a part of, or
incorporated by reference into, this Annual Report on Form 10-K. The Company makes available free of charge
through its website its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on
Form 8-K, and amendments to these reports, as soon as reasonably practicable after the Company electronically
files such material with, or furnishes such material to, the Securities and Exchange Commission (the “SEC”).
3
Business of the Company: The Company is in the commercial property business, with 99 business parks
consisting of multi-tenant flex, industrial and office space. The Company owns 14.6 million square feet of flex
space which the Company defines as buildings that are configured with a combination of warehouse and office
space and can be designed to fit a wide variety of uses. The warehouse component of the flex space has a number
laboratory,
of uses including light manufacturing and assembly, storage and warehousing, showroom,
distribution and research and development activities. The office component of flex space is complementary to the
warehouse component by enabling businesses to accommodate management and production staff in the same
facility. The Company owns 8.8 million square feet of industrial space that has characteristics similar to the
warehouse component of the flex space as well as ample dock access. In addition, the Company owns 4.7 million
square feet of low-rise office space, generally either in business parks that combine office and flex space or in
submarkets where the market demand is more office focused.
The Company’s commercial properties typically consist of business parks with low-rise buildings, ranging
from one to 49 buildings per park, located on parcels of various sizes which comprise from nearly 12,000 to
3.5 million aggregate square feet of rentable space. Facilities are managed through either on-site management or
offices central to the facilities. Parking is generally open but in some instances is covered. The ratio of parking
spaces to rentable square feet generally ranges from two to six per thousand square feet depending upon the use
of the property and its location. Office space generally requires a greater parking ratio than most industrial uses.
The tenant base for the Company’s facilities is diverse. The portfolio can be bifurcated into those facilities
that service small to medium-sized businesses and those that service larger businesses. Approximately 35.9% of
in-place rents from the portfolio are derived from facilities that generally serve small
to medium-sized
businesses. A property in this facility type is typically divided into units under 5,000 square feet and leases
generally range from one to three years. The remaining 64.1% of in-place rents from the portfolio are generally
derived from facilities that serve larger businesses, with units 5,000 square feet and larger. The Company also
has several tenants that lease space in multiple buildings and locations. The U.S. Government is the largest tenant
with multiple leases encompassing approximately 692,000 square feet, or 4.6% of the Company’s annualized
rental income.
The Company owns operating properties in six states and it may expand its operations to other states or
reduce the number of states in which it operates. Properties are acquired for both income and potential capital
appreciation; there is no limitation on the amount that can be invested in any specific property.
The Company owns land which may be used for the future development of commercial properties including
approximately 14.0 acres in Dallas, Texas and 6.4 acres in Northern Virginia.
Operating Partnership
The properties in which the Company has an equity interest generally are owned by the Operating
Partnership. Through this organizational structure, the Company has the ability to acquire interests in additional
properties in transactions that could defer the contributors’ tax consequences by causing the Operating
Partnership to issue equity interests in return for interests in properties.
The Company is the sole general partner of the Operating Partnership. As of December 31, 2016, the
Company owned 77.9% of the common partnership units of the Operating Partnership, and the remainder of such
common partnership units were owned by PS. The common units owned by PS may be redeemed by PS from
time to time, subject to the provisions of our charter, for cash or, at our option, shares of our common stock on a
one-for-one basis. Also as of December 31, 2016, in connection with the Company’s issuance of publicly traded
Cumulative Preferred Stock, the Company owned 44.4 million preferred units of the Operating Partnership of
various series with an aggregate redemption value of $1.1 billion with terms substantially identical to the terms
of the publicly traded depositary shares each representing 1/1,000 of a share of 5.20% to 6.45% Cumulative
Preferred Stock of the Company. On December 7, 2016, the Company called for the redemption of its 6.45%
Cumulative Preferred Stock, Series S, at its par value of $230.0 million. As of December 31, 2016, the Company
reclassified the 6.45% Cumulative Preferred Stock, Series S, of $230.0 million from equity to liabilities as
preferred stock called for redemption.
4
As the general partner of the Operating Partnership, the Company has the exclusive responsibility under the
Operating Partnership Agreement to manage and conduct the business of the Operating Partnership. The
Operating Partnership is responsible for, and pays when due, its share of all administrative and operating
expenses of the properties it owns.
The Company’s interest in the Operating Partnership entitles it to share in cash distributions from, and the
profits and losses of, the Operating Partnership in proportion to the Company’s economic interest in the
Operating Partnership (apart from tax allocations of profits and losses to take into account pre-contribution
property appreciation or depreciation). The Company, since 1998, has paid per share dividends on its common
and preferred stock that track, on a one-for-one basis, the amount of per unit cash distributions the Company
receives from the Operating Partnership in respect of the common and preferred partnership units in the
Operating Partnership that are owned by the Company.
Common Officers and Directors with PS
Ronald L. Havner, Jr., Chairman of the Company, is also the Chairman of the Board of Directors of Trustee
and Chief Executive Officer of PS. Joseph D. Russell, Jr. is a director of the Company and also President of PS.
Gary E. Pruitt, an independent director of the Company, is also a trustee of PS. Other employees of PS render
services to the Company pursuant to the cost sharing and administrative services agreement.
Property Management Services
The Company manages commercial properties owned by PS, which are generally adjacent to self-storage
facilities, for a management fee equal
to 5% of the gross revenues of such properties in addition to
reimbursement of certain costs. The property management contract with PS is for a seven-year term with the
agreement automatically extending for an additional one-year period upon each one-year anniversary of its
commencement (unless cancelled by either party). Either party can give notice of its intent to cancel the
agreement upon expiration of its current term. Management fee revenue derived from this management contract
with PS totaled $518,000, $540,000 and $660,000 for the years ended December 31, 2016, 2015 and 2014,
respectively. As of December 31, 2016, the Company managed 684,000 rentable square feet on behalf of PS
compared to 813,000 rentable square feet as of December 31, 2015.
PS also provides property management services for the self-storage component of two assets owned by the
Company. These self-storage facilities, located in Palm Beach County, Florida, operate under the “Public
Storage” name. Either the Company or PS can cancel the property management contract upon 60 days’ notice.
Management fee expenses under the contract were $86,000, $79,000 and $70,000 for the years ended
December 31, 2016, 2015 and 2014, respectively.
Management
Maria R. Hawthorne leads the Company’s senior management team. Ms. Hawthorne became President and
Chief Executive Officer of the Company beginning July 1, 2016. Prior to July 1, 2016, Joseph D. Russell, Jr. was
the Chief Executive Officer of the Company. The Company’s senior management includes: John W. Petersen,
Executive Vice President and Chief Operating Officer; Edward A. Stokx, Executive Vice President and Chief
Financial Officer; Christopher M. Auth, Vice President (Washington Metro Division); Trenton A. Groves, Vice
President and Corporate Controller; Coby A. Holley, Vice President, Investments; Robin E. Mather, Vice
President, Business Development; Stuart H. Hutchison, Vice President (Southern California and Pacific
Northwest Divisions); Eddie F. Ruiz, Vice President and Director of Facilities; Richard E. Scott, Vice President
(Northern California Division); Eugene Uhlman, Vice President, Construction Management; and David A.
Vicars, Vice President (Southeast Division, which includes Florida and Texas).
REIT Structure
If certain detailed conditions imposed by the Code and the related Treasury Regulations are met, an entity,
such as the Company, that invests principally in real estate and that otherwise would be taxed as a corporation
may elect to be treated as a REIT. The most important consequence to the Company of being treated as a REIT
5
for federal income tax purposes is that the Company can deduct dividend distributions (including distributions on
preferred stock) to its shareholders, thus effectively eliminating the “double taxation” (at the corporate and
shareholder levels) that typically results when a corporation earns income and distributes that income to
shareholders in the form of dividends.
The Company believes that it has operated, and intends to continue to operate, in such a manner as to
qualify as a REIT under the Code, but no assurance can be given that it will at all times so qualify. To the extent
that the Company continues to qualify as a REIT, it will not be taxed, with certain limited exceptions, on the
REIT taxable income that is distributed to its shareholders.
Operating Strategy
The Company believes its operating, acquisition and finance strategies combined with its diversified
portfolio produces a low risk, stable growth business model. The Company’s primary objective is to grow
shareholder value. Key elements of the Company’s growth strategy include:
Maximize Net Cash Flow of Existing Properties: The Company seeks to maximize the net cash flow
generated by its properties by (i) maximizing average occupancy rates, (ii) achieving the highest possible levels
of realized rent per occupied square foot, (iii) controlling its operating cost structure by improving operating
efficiencies and economies of scale and (iv) minimizing recurring capital expenditures required to maintain and
improve occupancy. The Company believes that
its experienced property management personnel and
comprehensive systems combined with focused economies of scale enhance the Company’s ability to meet these
goals. The Company seeks to increase occupancy rates and realized rents per square foot by providing its field
personnel with incentives to lease space to credit worthy tenants and to maximize the return on investment in
each lease transaction.
Focus on Targeted Markets: The Company intends to continue investing in markets that have characteristics
which enable them to be competitive economically. The Company believes that markets with a combination of
above average population growth, job growth, higher education levels and personal income will produce better
overall economic returns. The Company targets parks in high barrier to entry markets that are close to critical
infrastructure, middle to high income housing or universities and have easy access to major transportation
arteries.
Reduce Capital Expenditures and Increase Occupancy Rates by Providing Flexible Properties and
Attracting a Diversified Tenant Base: By focusing on properties with easily reconfigurable space, the Company
believes it can offer facilities that appeal to a wide range of potential tenants, which aids in reducing recurring
capital expenditures associated with re-leasing space. The Company believes this property flexibility also allows
it to better serve existing tenants by accommodating expansion and contraction needs. In addition, the Company
believes that a diversified tenant base enables it to attract a greater number of potential users to its space which,
combined with flexible parks, helps it maintain occupancy rates.
Provide Superior Property Management: The Company seeks to provide a superior level of service to its
tenants in order to maintain occupancy and increase rental rates, as well as minimize customer turnover. The
Company’s property management offices are located either on-site or regionally, providing tenants with
convenient access to management and helping the Company maintain its properties and while conveying a sense
of quality, order and security. The Company has significant experience in acquiring properties managed by others
and thereafter improving tenant satisfaction, occupancy levels, retention rates and rental income by implementing
established tenant service programs.
Financing Strategy
The Company’s primary objective in its financing strategy is to maintain financial flexibility and a low risk
capital structure. Key elements of this strategy are:
Retain Operating Cash Flow: The Company seeks to retain significant funds (after funding its distributions
and capital improvements) for additional investments. During the years ended December 31, 2016 and 2015, the
Company distributed 41.4% and 31.7%, respectively, of its cash flow from operating activities computed in
6
accordance with GAAP, and 57.7% and 46.1%, respectively, of its funds from operations (“FFO”) to common
shareholders/unit holders. FFO is computed in accordance with the White Paper on FFO approved by the Board
of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). The White Paper
defines FFO as net
income, computed in accordance with U.S. generally accepted accounting principles
(“GAAP”), before depreciation, amortization, gains or losses on asset dispositions, net income allocable to
noncontrolling interests — common units, net income allocable to restricted stock unit holders, impairment
charges and nonrecurring items. FFO is a non-GAAP financial measure and should be analyzed in conjunction
with net income. However, FFO should not be viewed as a substitute for net income as a measure of operating
performance or liquidity, as it does not reflect depreciation and amortization costs or the level of capital
expenditure and leasing costs necessary to maintain the operating performance of the Company’s properties,
which are significant economic costs and could materially impact the Company’s results of operations. Other
REITs may use different methods for calculating FFO and, accordingly, the Company’s FFO may not be
comparable to other real estate companies’ FFO. See Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Liquidity and Capital Resources — Non-GAAP Supplemental
Disclosure Measure: Funds from Operations” for a reconciliation of FFO and net income allocable to common
shareholders and for additional information on why the Company presents FFO.
Perpetual Preferred Stock/Units: The primary source of leverage in the Company’s capital structure is
perpetual preferred stock or equivalent preferred units in the Operating Partnership. This method of financing
reduces interest rate and refinancing risks as the dividend rate is fixed and the stated value or capital contribution
is not required to be repaid. In addition, the consequences of defaulting on required preferred distributions are
less severe than with debt. The preferred shareholders may elect two additional directors if six quarterly
distributions go unpaid, whether or not consecutive.
Throughout this Form 10-K, we use the term “preferred equity” to mean both the preferred stock issued by
the Company (including the depositary shares representing interests in that preferred stock) and the preferred
partnership units issued by the Operating Partnership and the term “preferred distributions” to mean dividends
and distributions on the preferred stock and preferred partnership units.
Debt Financing: The Company, from time to time, has used debt financing to facilitate real estate
acquisitions and other capital allocations. The primary source of debt the Company has historically relied upon to
provide short-term capital is its $250.0 million unsecured line of credit (the “Credit Facility”). In addition, during
2011, in connection with its $520.0 million portfolio acquisition in Northern California, the Company obtained a
$250.0 million unsecured three-year term loan and assumed a $250.0 million mortgage note. The unsecured
three-year term loan was repaid in full during 2013 and the $250.0 million mortgage note was repaid in full on
June 1, 2016. From time to time, the Company may also consider other sources of unsecured debt financing to
meet its capital needs.
Access to Capital: The Company targets a minimum ratio of FFO to combined fixed charges and preferred
distributions paid of 3.0 to 1.0. Fixed charges include interest expense and capitalized interest while preferred
distributions include amounts paid to preferred shareholders and preferred Operating Partnership unit holders.
For the year ended December 31, 2016, the FFO to combined fixed charges and preferred distributions paid ratio
was 3.9 to 1.0, excluding the non-cash charge for the issuance costs related to the redemption of preferred equity.
The Company believes that its financial position enables it to access capital to finance future growth. Subject to
market conditions, the Company may add leverage to its capital structure.
Competition
Competition in the market areas in which many of the Company’s properties are located is significant and
has from time to time negatively impacted occupancy levels and rental rates of, and increased the operating
expenses of, certain of these properties. Competition may be accelerated by any increase in availability of funds
for investment in real estate. Barriers to entry are relatively low for those with the necessary capital and the
Company competes for property acquisitions and tenants with entities that have greater financial resources than
the Company. Sublease space and unleased developments continue to create competition among operators in
certain markets in which the Company operates. While the Company will have to respond to market demands,
7
management believes that the combination of its ability to offer a variety of options within its business parks and
the Company’s financial stability provide it with an opportunity to compete favorably in its markets.
The Company’s properties compete for tenants with similar properties located in its markets primarily on
the basis of location, rent charged, services provided and the design and condition of improvements. The
Company believes it possesses several distinguishing characteristics that enable it to compete effectively in the
flex, office and industrial space markets. The Company believes its personnel are among the most experienced in
these real estate markets. The Company’s facilities are part of a comprehensive system encompassing
standardized procedures and integrated reporting and information networks. The Company believes that the
significant operating and financial experience of its executive officers and directors combined with the
Company’s capital structure, national investment scope, geographic diversity and economies of scale should
enable the Company to compete effectively.
Investments in Real Estate Facilities
As of December 31, 2016, the Company owned and operated 28.1 million rentable square feet comprised of
99 business parks in six states compared to 28.0 million rentable square feet at December 31, 2015.
Investment in and Advances to Unconsolidated Joint Venture
PSB holds a 95.0% interest in the Joint Venture with the remaining 5.0% held by the JV Partner. The JV
Partner is responsible for the development and construction of the Project and through an affiliate will oversee
the leasing and management of the Project as it is completed. The Project is expected to deliver its first
completed units in the spring of 2017, with final completion of the Project expected in early 2018.
On October 5, 2015 (the “Contribution Date”), the Company contributed the site, along with capitalized
improvements, to the Joint Venture. Subsequent to the Contribution Date, demolition, site preparation and
construction commenced. The JV partner serves as the managing member, with mutual consent from both the
Company and the managing member required for all significant decisions. As such, the Company accounts for its
investment in the Joint Venture using the equity method.
Along with the equity capital the Company has committed to the Joint Venture, the Company has also
agreed to provide the Joint Venture with a construction loan in the amount of $75.0 million. The Joint Venture
will pay interest under the construction loan at a rate equal to the London Interbank Offered Rate (“LIBOR”)
plus 2.25%. The loan will mature on April 5, 2019 with two one-year extension options. The Company has
reflected the aggregate value of the contributed site, its’ equity contributions, capitalized interest and loan
advances to date as investment in and advances to unconsolidated joint venture. The aggregate amount of
development costs are estimated to be $105.6 million (excluding unrealized land appreciation), of which the
Company is committed to funding $75.0 million through a construction loan in addition to capital contributions
of $28.5 million, which includes a land basis of $15.3 million, to the Joint Venture.
The Company’s investment in and advances to unconsolidated joint venture was $67.2 million and $26.7
million as of December 31, 2016 and 2015, respectively. For the year ended December 31, 2016, the Company
made loan advances of $33.9 million, capital contributions of $5.7 million and capitalized $885,000 of interest.
Summary of Business Model
The Company has a geographically diversified portfolio in six states across the country with a diversified
customer mix by both size and industry concentration. The Company believes that this diversification combined
with a conservative financing strategy, a focus on markets with strong demographics for growth and a
decentralized operating strategy gives the Company a business model that mitigates risk and provides strong
long-term growth opportunities.
Restrictions on Transactions with Affiliates
The Company’s Bylaws provide that the Company may engage in transactions with affiliates provided that a
purchase or sale transaction with an affiliate is (i) approved by a majority of the Company’s independent
directors and (ii) fair to the Company based on an independent appraisal or fairness opinion.
8
Borrowings
On June 1, 2016, the Company repaid in full the $250.0 million mortgage note which had a fixed interest
rate of 5.45%. See Notes 6 and 7 to the consolidated financial statements included in this Form 10-K for a
summary of the Company’s outstanding borrowings as of December 31, 2016.
The Company’s Credit Facility is with Wells Fargo Bank, National Association (“Wells Fargo”).
Subsequent to December 31, 2016, the Company modified and extended the terms of its Credit Facility and the
Company’s related guaranty. The expiration date was extended from May 1, 2019 to January 10, 2022. The
Credit Facility has a borrowing limit of $250.0 million. The rate of interest charged on borrowings was modified
to a rate ranging from the LIBOR plus 0.80% to LIBOR plus 1.55%, depending on the Company’s credit ratings.
Currently, the Company’s rate under the Credit Facility is LIBOR plus 0.825%, down from the previous rate of
0.875%. In addition, the Company is required to pay an annual facility fee ranging from 0.10% to 0.30% of the
borrowing limit depending on the Company’s credit ratings (currently 0.125%). The Company had no balance
outstanding on the Credit Facility at December 31, 2016 and 2015. Subsequent to December 31, 2016, the
Company had $85.0 million outstanding on the Credit Facility in conjunction to the redemption of its 6.45%
Cumulative Preferred Stock, Series S. The Company had $539,000 and $769,000 of unamortized commitment
fees as of December 31, 2016 and 2015, respectively. The Credit Facility requires the Company to meet certain
covenants, all of which the Company was in compliance with at December 31, 2016. Interest on outstanding
borrowings is payable monthly.
The Company has broad powers to borrow in furtherance of the Company’s objectives. The Company has
incurred in the past, and may incur in the future, both short-term and long-term indebtedness to facilitate real
estate acquisitions and other capital allocations.
Employees
As of December 31, 2016, the Company employed 157 individuals, primarily personnel engaged in property
operations.
Insurance
The Company believes that its properties are adequately insured. Facilities operated by the Company have
historically been covered by comprehensive insurance, including fire, earthquake and liability coverage from
nationally recognized carriers.
Environmental Matters
Compliance with laws and regulations relating to the protection of the environment, including those
regarding the discharge of material into the environment, has not had any material effect upon the capital
expenditures, earnings or competitive position of the Company.
Substantially all of the Company’s properties have been subjected to Phase I environmental reviews. Such
reviews have not revealed, nor is management aware of, any probable or reasonably possible environmental costs
that management believes would have a material adverse effect on the Company’s business, assets or results of
operations, nor is the Company aware of any potentially material environmental liability. See Item 1A, “Risk
Factors” for additional information.
ITEM 1A. RISK FACTORS
In addition to the other information in our Annual Report on Form 10-K, you should consider the risks
described below that we believe may be material to investors in evaluating the Company. This section contains
forward-looking statements, and in considering these statements, you should refer to the qualifications and
limitations on our forward-looking statements that are described in Item 1, “Business — Forward-Looking
Statements.”
9
Since our business consists primarily of acquiring and operating real estate, we are subject to the risks
related to the ownership and operation of real estate that can adversely impact our business and financial
condition.
The value of our investments may be reduced by general risks of real estate ownership: Since we derive
substantially all of our income from real estate operations, we are subject to the general risks of acquiring and
owning real estate-related assets, including:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
changes in the national, state and local economic climate and real estate conditions, such as oversupply
of or reduced demand for commercial real estate space and changes in market rental rates;
how prospective tenants perceive the attractiveness, convenience and safety of our properties;
difficulties in consummating and financing acquisitions and developments on advantageous terms and
the failure of acquisitions and developments to perform as expected;
our ability to provide adequate management, maintenance and insurance;
natural disasters, such as earthquakes, hurricanes and floods, which could exceed the aggregate limits
of our insurance coverage;
the expense of periodically renovating, repairing and re-letting spaces;
the impact of environmental protection laws;
compliance with federal, state and local laws and regulations;
increasing operating and maintenance costs, including property taxes, insurance and utilities, if these
increased costs cannot be passed through to tenants;
adverse changes in tax, real estate and zoning laws and regulations;
increasing competition from other commercial properties in our market;
tenant defaults and bankruptcies;
tenants’ right to sublease space; and
concentration of properties leased to non-rated private companies with uncertain financial strength.
Certain significant costs, such as mortgage payments, real estate taxes,
insurance and maintenance,
generally are not reduced even when a property’s rental income is reduced. In addition, environmental and tax
laws, interest rate levels, the availability of financing and other factors may affect real estate values and property
income. Furthermore, the supply of commercial space fluctuates with market conditions.
If our properties do not generate sufficient income to meet operating expenses, including any debt service,
tenant improvements, lease commissions and other capital expenditures, we may have to borrow additional
amounts to cover fixed costs, and we may have to reduce our distributions to shareholders.
There is significant competition among commercial properties: Other commercial properties compete with
our properties for tenants. Some of the competing properties may be newer and better located than our properties.
Competition in the market areas in which many of our properties are located is significant and has affected our
occupancy levels, rental rates and operating expenses. We also expect that new properties will be built in our
markets. In addition, we compete with other buyers, some of which are larger than us, for attractive commercial
properties. Therefore, we may not be able to grow as rapidly as we would like.
We may encounter significant delays and expense in re-letting vacant space, or we may not be able to re-let
space at existing rates, in each case resulting in losses of income: When leases expire, we may incur expenses in
retrofitting space and we may not be able to re-lease the space on the same terms. Certain leases provide tenants
with the right to terminate early if they pay a fee. As of December 31, 2016, 2,217 leases, representing
6.3 million, or 24.0% of the leased square footage of our total portfolio, or 22.6% of annualized rental income,
are scheduled to expire in 2017. While we have estimated our cost of renewing leases that expire in 2017, our
10
estimates could be wrong. If we are unable to re-lease space promptly, if the terms are significantly less favorable
than anticipated or if the costs are higher, we may have to reduce our distributions to shareholders.
Tenant defaults and bankruptcies may reduce our cash flow and distributions: We may have difficulty
collecting from tenants in default, particularly if they declare bankruptcy. This could affect our cash flow and our
ability to fund distributions to shareholders. Since many of our tenants are non-rated private companies, this risk
may be enhanced. There is inherent uncertainty in a tenant’s ability to continue paying rent if they are in
bankruptcy.
We may be adversely affected if casualties to our properties are not covered by insurance: While we
maintain insurance coverage for the losses caused by earthquakes or hurricanes, we could suffer uninsured losses
or losses in excess of our insurance policy limits for such occurrences. Approximately 39.9% of our properties
are located in California and are generally in areas that are subject to risks of earthquake-related damage. In the
event of an earthquake, hurricane or other natural disaster, we would remain liable on any mortgage debt or other
unsatisfied obligations related to that property.
The illiquidity of our real estate investments may prevent us from adjusting our portfolio to respond to
market changes: There may be delays and difficulties in selling real estate. Therefore, we cannot easily change
our portfolio when economic conditions change. Also, REIT tax laws may impose negative consequences if we
sell properties held for less than two years.
We may be adversely affected by changes in laws: Increases in income and service taxes may reduce our
cash flow and ability to make expected distributions to our shareholders. Additionally, any changes in the tax law
applicable to REITs may adversely affect taxation of us and/or our shareholders. Our properties are also subject
to various federal, state and local regulatory requirements, such as state and local fire and safety codes. If we fail
to comply with these requirements, governmental authorities could fine us or courts could award damages against
us. We believe our properties comply with all significant legal requirements. However, these requirements could
change in a way that would reduce our cash flow and ability to make distributions to shareholders.
We may incur significant environmental remediation costs: As an owner and operator of real properties,
under various federal, state and local environmental laws, we are required to clean up spills or other releases of
hazardous or toxic substances on or from our properties. Certain environmental laws impose liability whether or
not the owner or buyer knew of, or was responsible for, the presence of the hazardous or toxic substances. In
some cases, liability may not be limited to the value of the property. The presence of these substances, or the
failure to properly remediate any resulting contamination, whether from environmental or microbial issues, also
may adversely affect our ability to sell, lease, operate, or encumber our facilities for purposes of borrowing.
We have conducted preliminary environmental assessments of most of our properties (and conduct these
assessments in connection with property acquisitions) to evaluate the environmental condition of, and potential
environmental liabilities associated with, our properties. These assessments generally consist of an investigation
of environmental conditions at the property (including soil or groundwater sampling or analysis if appropriate),
as well as a review of available information regarding the site and publicly available data regarding conditions at
other sites in the vicinity. In connection with these property assessments, our operations and recent property
acquisitions, we have become aware that prior operations or activities at some properties or from nearby
locations have or may have resulted in contamination to the soil or groundwater at these properties. In
circumstances where our environmental assessments disclose potential or actual contamination, we may attempt
to obtain indemnifications and, in appropriate circumstances, we obtain limited environmental insurance in
connection with the properties acquired, but we cannot assure you that such protections will be sufficient to cover
actual future liabilities nor that our assessments have identified all such risks. Although we cannot provide any
assurance, based on the preliminary environmental assessments, we are not aware of any environmental
contamination of our facilities material to our overall business, financial condition or results of operations.
There has been an increasing number of claims and litigation against owners and managers of rental
properties relating to moisture infiltration, which can result in mold or other property damage. When we receive
a complaint concerning moisture infiltration, condensation or mold problems and/or become aware that an air
quality concern exists, we implement corrective measures in accordance with guidelines and protocols we have
developed with the assistance of outside experts. We seek to work proactively with our tenants to resolve
11
moisture infiltration and mold-related issues, subject to our contractual limitations on liability for such claims.
However, we can give no assurance that material legal claims relating to moisture infiltration and the presence
of, or exposure to, mold will not arise in the future.
Property taxes can increase and cause a decline in yields on investments: Each of our properties is subject
to real property taxes, which could increase in the future as property tax rates change and as our properties are
assessed or reassessed by tax authorities. Recent local government shortfalls in tax revenue may cause pressure
to increase tax rates or assessment levels or impose new taxes. Such increases could adversely impact our
profitability.
We must comply with the Americans with Disabilities Act and fire and safety regulations, which can require
significant expenditures: All of our properties must comply with the Americans with Disabilities Act and with
related regulations (the “ADA”). The ADA has separate compliance requirements for “public accommodations”
and “commercial facilities,” but generally requires that buildings be made accessible to persons with disabilities.
Various state laws impose similar requirements. A failure to comply with the ADA or similar state laws could
lead to government imposed fines on us and/or litigation, which could also involve an award of damages to
individuals affected by the non-compliance. In addition, we must operate our properties in compliance with
numerous local fire and safety regulations, building codes, and other land use regulations. Compliance with these
requirements can require us to spend substantial amounts of money, which would reduce cash otherwise
available for distribution to shareholders. Failure to comply with these requirements could also affect the
marketability of our real estate facilities.
We incur liability from tenant and employment-related claims: From time to time we have to make
monetary settlements or defend actions or arbitration to resolve tenant or employment-related claims and
disputes.
Development of properties can subject us to risks: As of December 31, 2016, we have a joint venture
development for the purpose of developing a 395-unit multi-family project. Developments of this nature are
subject to a number of risks, including construction delays, complications in obtaining necessary zoning,
occupancy and other governmental permits, cost overruns, problems with our joint venture partner, financing
risks, and the possible inability to meet expected occupancy and rent levels. If any of these problems occur,
development costs for a project may increase, and there may be costs incurred for projects that are not completed.
As a result of the foregoing, some properties may be worth less or may generate less revenue than, or simply not
perform as well as, we believed at the time of development, negatively affecting our operating results. Any of the
foregoing risks could adversely affect our financial condition, operating results and cash flow, and our ability to
pay dividends on, and the market price of, our stock. In addition, we may be unable to successfully integrate and
effectively manage the properties we develop, which could adversely affect our results of operations.
Global economic conditions adversely affect our business, financial condition, growth and access to capital.
While there continues to be global economic uncertainty, United States unemployment levels and economic
activity have improved. Economic conditions in the markets where we operate facilities, and other events or
factors could adversely affect demand for commercial real estate, which could adversely affect our business. To
the extent that turmoil in the financial markets returns or intensifies, it has the potential to materially affect the
value of our properties, the availability or the terms of financing and may impact the ability of our customers to
enter into new leasing transactions or satisfy rental payments under existing leases. The volatility and duration of
an economic recovery could also affect our operating results and financial condition as follows:
Debt and Equity Markets: Our results of operations and share price are sensitive to volatility in the credit
markets. From time to time, the commercial real estate debt markets experience volatility as a result of various
factors, including changing underwriting standards by lenders and credit rating agencies. This may result in
lenders increasing the cost for debt financing. Should the overall cost of borrowings increase, either by increases
in the index rates or by increases in lender spreads, we will need to factor such increases into the economics of
our acquisitions. In addition, the state of the debt markets could have an effect on the overall amount of capital
being invested in real estate, which may result in price or value decreases of real estate assets and affect our
ability to raise capital.
12
Our ability to issue preferred shares or obtain other sources of capital, such as borrowing, has been in the
past, and may in the future, be adversely affected by challenging credit market conditions. The issuance of
perpetual preferred securities historically has been a significant source of capital to grow our business. We
believe that we have sufficient working capital and capacity under our credit facilities and our retained cash flow
from operations to continue to operate our business as usual and meet our current obligations. However, if we
were unable to issue preferred shares or borrow at reasonable rates, that could limit the earnings growth that
might otherwise result from the acquisition and development of real estate facilities.
Valuations: Market volatility makes the valuation of our properties difficult. There may be significant
uncertainty in the valuation, or in the stability of the value, of our properties, which could result in a substantial
decrease in the value of our properties. As a result, we may not be able to recover the carrying amount of our
properties, which may require us to recognize an impairment charge in earnings.
The acquisition of existing properties is a significant component of our long-term growth strategy, and
acquisitions of existing properties are subject to risks that may adversely affect our growth and financial
results.
We acquire existing properties, either in individual transactions or portfolios offered by other commercial
real estate owners. In addition to the general risks related to real estate described above, we are also subject to the
following risks which may jeopardize our realization of benefits from acquisitions.
Any failure to manage acquisitions and other significant transactions to achieve anticipated results and to
successfully integrate acquired operations into our existing business could negatively impact our financial
results: To fully realize anticipated earnings from an acquisition, we must successfully integrate the property into
our operating platform. Failures or unexpected circumstances in the integration process, such as a failure to
maintain existing relationships with tenants and employees due to changes in processes, standards, or
compensation arrangements, or circumstances we did not detect during due diligence, could jeopardize
realization of the anticipated earnings.
During 2016, we acquired two multi-tenant office buildings aggregating 226,000 square feet in Rockville,
Maryland, for a purchase price of $13.3 million. The buildings are located within Shady Grove Executive Park,
where we own three other buildings aggregating 352,000 square feet and we will continue to seek to acquire
additional multi-tenant flex, industrial and office properties where they meet our criteria. Our belief, however, is
subject to risks, uncertainties and other factors, many of which are forward-looking and are uncertain in nature or
are beyond our control, including the risks that our acquisitions and developments may not perform as expected,
we may be unable to quickly integrate new acquisitions and developments into our existing operations, and any
costs to develop projects or redevelop acquired properties may exceed estimates. Further, we face significant
competition for suitable acquisition properties from other real estate investors, including other publicly traded
real estate investment trusts and private institutional investors. As a result, we may be unable to acquire
additional properties we desire or the purchase price for desirable properties may be significantly increased.
In addition, some of these properties may have unknown characteristics or deficiencies or may not
complement our portfolio of existing properties. We may also finance future acquisitions and developments
through a combination of borrowings, proceeds from equity or debt offerings by us or the Operating Partnership,
and proceeds from property divestitures. These financing options may not be available when desired or required
or may be more costly than anticipated, which could adversely affect our cash flow. Real property development
is subject to a number of risks, including construction delays, complications in obtaining necessary zoning,
occupancy and other governmental permits, cost overruns, financing risks, and the possible inability to meet
expected occupancy and rent levels. If any of these problems occur, development costs for a project may
increase, and there may be costs incurred for projects that are not completed. As a result of the foregoing, some
properties may be worth less or may generate less revenue than, or simply not perform as well as, we believed at
the time of acquisition or development, negatively affecting our operating results. Any of the foregoing risks
could adversely affect our financial condition, operating results and cash flow, and our ability to pay dividends
on, and the market price of, our stock. In addition, we may be unable to successfully integrate and effectively
manage the properties we do acquire and develop, which could adversely affect our results of operations.
13
Acquired properties are subject to property tax reappraisals which may increase our property tax expense:
Facilities that we acquire are subject to property tax reappraisal which can result in substantial increases to the
ongoing property taxes paid by the seller. The reappraisal process is subject to judgment of governmental
agencies regarding estimated real estate values and other factors, and as a result there is a significant degree of
uncertainty in estimating the property tax expense of an acquired property. In connection with future or recent
acquisitions of properties, if our estimates of property taxes following reappraisal are too low, we may not realize
anticipated earnings from an acquisition.
We would incur adverse tax consequences if we fail to qualify as a REIT.
Our cash flow would be reduced if we fail to qualify as a REIT: While we believe that we have qualified
since 1990 to be taxed as a REIT, and will continue to be so qualified, we cannot be certain. To continue to
qualify as a REIT, we need to satisfy certain requirements under the federal income tax laws relating to our
income, assets, distributions to shareholders and shareholder base. In this regard, the share ownership limits in
our articles of incorporation do not necessarily ensure that our shareholder base is sufficiently diverse for us to
qualify as a REIT. For any year we fail to qualify as a REIT, we would be taxed at regular corporate tax rates on
our taxable income unless certain relief provisions apply. Taxes would reduce our cash available for distributions
to shareholders or for reinvestment, which could adversely affect us and our shareholders. Also we would not be
allowed to elect REIT status for five years after we fail to qualify unless certain relief provisions apply.
We may need to borrow funds to meet our REIT distribution requirements: To qualify as a REIT, we must
generally distribute to our shareholders 90% of our REIT taxable income. Our income consists primarily of our
share of our Operating Partnership’s income. We intend to make sufficient distributions to qualify as a REIT and
otherwise avoid corporate tax. However, differences in timing between income and expenses and the need to
make nondeductible expenditures such as capital improvements and principal payments on debt could force us to
borrow funds to make necessary shareholder distributions.
Subsequent to December 31, 2016, the Board of Directors of the Company (the “Board”) increased its
quarterly dividend from $0.75 per common share to $0.85 per common share, increasing quarterly distributions
by $3.4 million per quarter.
The Board will continue to evaluate our dividend rate in light of our actual and projected taxable income,
liquidity requirements and other circumstances, and there can be no assurance that the future dividends declared
by our Board will not differ materially.
Potential changes in tax laws could negatively impact us.
The Trump Administration and the Republican-led Congress are exploring potential changes to United
States tax law, such as reducing income tax rates, reducing the deductibility of interest, changing the allowable
recovery periods for acquired assets, and eliminating or limiting many other deductions and credits. These
potential changes, and others we may not be aware of, could have negative impacts such as reducing the value of
our common stock, reducing our access to capital, or making the acquisition of real estate assets less attractive. In
response, we may need to take actions such as changing our sources of capital, revising our capital allocation and
asset acquisition strategy, or reconsidering our status as a REIT. Such responses could be costly, reduce cash
available for distributions to shareholders, and present certain business and tax risks. We cannot predict whether,
when, or to what extent new federal tax laws, regulations, interpretations or rulings will be adopted.
PS has significant influence over us.
As of December 31, 2016, PS owned 7.2 million shares of the Company’s common stock and 7.3 million
common units of the Operating Partnership (100.0% of the common units not owned by the Company).
Assuming issuance of the Company’s common stock upon redemption of its partnership units, PS would own
42.0% (or 14.5 million shares) of the outstanding shares of the Company’s common stock at December 31, 2016.
In addition, the PS Business Parks name and logo are owned by PS and licensed to the Company under a non-
exclusive, royalty-free license agreement. The license can be terminated by either party for any reason with six
months written notice. Ronald L. Havner, Jr., the Company’s chairman, is also Chairman of the Board and Chief
14
Executive Officer of PS. Joseph D. Russell, Jr. is a director and former Chief Executive Officer of the Company
and also President of PS. Gary E. Pruitt, an independent director of the Company, is also a trustee of PS.
Consequently, PS has the ability to significantly influence all matters submitted to a vote of our shareholders,
including electing directors, changing our articles of incorporation, dissolving and approving other extraordinary
transactions such as mergers, and all matters requiring the consent of the limited partners of the Operating
Partnership. PS’s interest in such matters may differ from other shareholders. In addition, PS’s ownership may
make it more difficult for another party to take over our Company without PS’s approval.
Provisions in our organizational documents may prevent changes in control.
Our articles generally prohibit any person from owning more than 7% of our shares: Our articles of
incorporation restrict the number of shares that may be owned by any “person,” and the partnership agreement of
our Operating Partnership contains an anti-takeover provision. No shareholder (other than PS and certain other
specified shareholders) may own more than 7% of the outstanding shares of our common stock, unless our Board
waives this limitation. We imposed this limitation to avoid, to the extent possible, a concentration of ownership
that might jeopardize our ability to qualify as a REIT. This limitation, however, also makes a change of control
much more difficult (if not impossible) even if it may be favorable to our public shareholders. These provisions
will prevent future takeover attempts not supported by PS even if a majority of our public shareholders consider
it to be in their best interests as they would receive a premium for their shares over market value or for other
reasons.
Our Board can set the terms of certain securities without shareholder approval: Our Board is authorized,
without shareholder approval, to issue up to 50.0 million shares of preferred stock and up to 100.0 million shares
of equity stock, in each case in one or more series. Our Board has the right to set the terms of each of these series
of stock. Consequently, the Board could set the terms of a series of stock that could make it difficult (if not
impossible) for another party to take over our Company even if it might be favorable to our public shareholders.
Our articles of incorporation also contain other provisions that could have the same effect. We can also cause our
Operating Partnership to issue additional interests for cash or in exchange for property.
The partnership agreement of our Operating Partnership restricts mergers: The partnership agreement of
our Operating Partnership generally provides that we may not merge or engage in a similar transaction unless the
limited partners of our Operating Partnership are entitled to receive the same proportionate payments as our
shareholders. In addition, we have agreed not to merge unless the merger would have been approved had the
limited partners been able to vote together with our shareholders, which has the effect of increasing PS’s
influence over us due to PS’s ownership of operating partnership units. These provisions may make it more
difficult for us to merge with another entity.
The interests of limited partners of our Operating Partnership may conflict with the interests of our
common stockholders.
Limited partners of our Operating Partnership, including PS, have the right to vote on certain changes to the
partnership agreement. They may vote in a way that is against the interests of our shareholders. Also, as general
partner of our Operating Partnership, we are required to protect the interests of the limited partners of the
Operating Partnership. The interests of the limited partners and of our shareholders may differ.
We depend on external sources of capital to grow our Company.
We are generally required under the Code to distribute at least 90% of our REIT taxable income. Because of
this distribution requirement, we may not be able to fund future capital needs, including any necessary building
and tenant improvements, from operating cash flow. Consequently, we may need to rely on third-party sources of
capital to fund our capital needs. We may not be able to obtain the financing on favorable terms or at all. Access
to third-party sources of capital depends, in part, on general market conditions, the market’s perception of our
growth potential, our current and expected future earnings, our cash flow, and the market price per share of our
common stock. If we cannot obtain capital from third-party sources, we may not be able to acquire properties
when strategic opportunities exist, satisfy any debt service obligations, or make cash distributions to
shareholders.
15
We are subject to laws and governmental regulations and actions that affect our operating results and
financial condition.
Our business is subject to regulation under a wide variety of U.S. federal, state and local laws, regulations
and policies including those imposed by the SEC, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street
Reform and Consumer Protection Act and the New York Stock Exchange (the “NYSE”), as well as applicable
local, state and national labor laws. Although we have policies and procedures designed to comply with
applicable laws and regulations, failure to comply with the various laws and regulations may result in civil and
criminal liability, fines and penalties, increased costs of compliance and restatement of our financial statements
and could also affect the marketability of our real estate facilities.
There can also be no assurance that, in response to current economic conditions or the current political
environment or otherwise, laws and regulations will not be implemented or changed in ways that adversely affect
our operating results and financial condition, such as recently adopted legislation that expands health care
coverage costs or facilitates union activity or federal legislative proposals to otherwise increase operating costs.
Terrorist attacks and the possibility of wider armed conflict may have an adverse impact on our business
and operating results and could decrease the value of our assets.
Terrorist attacks and other acts of violence or war could have a material adverse impact on our business and
operating results. There can be no assurance that there will not be further terrorist attacks against the U.S.
Attacks or armed conflicts that directly impact one or more of our properties could significantly affect our ability
to operate those properties and thereby impair our operating results. Further, we may not have insurance
coverage for losses caused by a terrorist attack. Such insurance may not be available, or if it is available and we
decide to obtain such terrorist coverage, the cost for the insurance may be significant in relationship to the risk
overall. In addition, the adverse effects that such violent acts and threats of future attacks could have on the U.S.
economy could similarly have a material adverse effect on our business and results of operations. Finally, further
terrorist acts could cause the U.S. to enter into a wider armed conflict, which could further impact our business
and operating results.
Holders of depositary shares, each representing 1/1,000 of a share of our outstanding preferred stock, have
dividend, liquidation and other rights that are senior to the rights of the holders of shares of our common
stock.
Our shares of preferred stock are entitled to cumulative dividends before any dividends may be declared or
set aside on our common stock. Upon our voluntary or involuntary liquidation, dissolution or winding up, before
any payment is made to holders of our common stock, shares of our preferred stock are entitled to receive a
liquidation preference of $25,000 per share (or $25.00 per depositary share) plus any accrued and unpaid
distributions. This will reduce the remaining amount of our assets, if any, available to distribute to holders of our
common stock. In addition, our preferred stockholders have the right to elect two additional directors to our
Board whenever dividends are in arrears in an aggregate amount equivalent to six or more quarterly dividends,
whether or not consecutive.
Future issuances by us of shares of our common stock may be dilutive to existing stockholders, and future
sales of shares of our common stock may adversely affect the market price of our common stock.
Sales of substantial amounts of shares of our common stock in the public market (either by us or by PS), or
issuances of shares of common stock in connection with redemptions of common units of our Operating
Partnership, could adversely affect the market price of our common stock. The Company may seek to engage in
common stock offerings in the future. Offerings of common stock, including by us in connection with portfolio
or other property acquisitions or by PS in secondary offerings, and the issuance of common units of the
Operating Partnership in exchange for shares of common stock, could have an adverse effect on the market price
of the shares of our common stock.
16
We rely on technology in our operations and failures, inadequacies or interruptions to our service could
harm our business.
The execution of our business strategy is heavily dependent on the use of technologies and systems,
including the Internet, to access, store, transmit, deliver and manage information and processes. Although we
believe we have taken commercially reasonable steps to protect the security of our systems, there can be no
assurance that such security measures will prevent failures, inadequacies or interruptions in system services, or
that system security will not be breached. Disruptions in service, system shutdowns and security breaches could
have a material adverse effect on our business.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
17
ITEM 2. PROPERTIES
As of December 31, 2016, the Company owned 99 business parks consisting of a geographically diverse
portfolio of 28.1 million rentable square feet of commercial real estate which consists of 14.6 million square feet
of flex space, 8.8 million square feet of industrial space and 4.7 million square feet of office space. The weighted
average occupancy rate throughout 2016 was 94.0% and the realized rent per square foot was $14.61.
The following table reflects the geographical diversification of the 99 business parks owned by the
Company as of December 31, 2016, the type of the rentable square footage and the weighted average occupancy
rates throughout 2016 (except as set forth below, all of the properties are held in fee simple interest) (in
thousands, except number of business parks):
State
Number of
Business
Parks
Rentable Square Footage
Flex
Industrial Office
Total
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Virginia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maryland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47
23
17
3
6
3
99
5,539
4,611
1,947
1,074
970
411
4,618
477
1,076
2,780
— 1,970
12
— 1,608
28
951
11,233
— 5,088
3,917
3,866
2,578
1,390
14,552
8,826
4,694
28,072
Weighted
Average
Occupancy
Rate
96.2%
92.8%
92.3%
94.0%
86.2%
98.5%
94.0%
(1) The Company owns two properties comprising of 232,000 square feet that are subject to ground leases in
Las Colinas, Texas, expiring in 2019 and 2020, each with one 10-year extension option.
While we currently anticipate that each of the properties listed above will continue to be used for its current
purpose. Management will from time to time evaluate its properties from a highest and best use perspective.
Competition exists in each of the market areas in which these properties are located.
The Company renovates its properties in connection with the re-leasing of space to tenants and expects that
it will fund the costs of such renovations from rental income. From time to time the Company may identify
higher and better use of its assets. The Company has risks that tenants will default on leases and declare
bankruptcy. Management believes these risks are mitigated through the Company’s geographic diversity and
diverse tenant base.
The Company evaluates the performance of its business parks primarily based on NOI. NOI is defined by
the Company as rental income as defined by GAAP less cost of operations as defined by GAAP, excluding
depreciation and amortization. NOI is a non-GAAP financial measure that is often used by investors to determine
the performance and value of commercial real estate. Management believes NOI provides the most consistent
measurement on a comparative basis of the performance of the commercial real estate and its contribution to the
value of the Company. Depreciation and amortization have been excluded from NOI as they are generally not
used in determining the value of commercial real estate by management or the investment community.
Depreciation and amortization are generally not used in determining value as they consider the historical costs of
an asset compared to its current value; therefore, to understand the effect of the assets’ historical cost on the
Company’s results, investors should look at GAAP financial measures, such as total operating costs including
depreciation and amortization. The Company’s calculation of NOI may not be comparable to those of other
companies and should not be used as an alternative to measures of performance calculated in accordance with
GAAP. Following the table below, we have reconciled total NOI to net income, which we consider the most
directly comparable financial measure calculated in accordance with GAAP. The following information
illustrates adjusted rental income, adjusted cost of operations and NOI generated by the Company’s total
portfolio in 2016, 2015 and 2014 by state and by property classifications. Assets disposed of or transferred to
development are reflected as assets sold or held for development.
18
The Company’s calculation of NOI may not be comparable to those of other companies and should not be used as an alternative to measures of
performance in accordance with GAAP. In order to provide a meaningful period-to-period comparison, adjusted rental income in the tables below exclude a
material lease buyout payment noted below and adjusted cost of operations exclude amortization of the Senior Management Long-Term Equity Incentive Plan
(“LTEIP”) related to field leadership. The tables below also include a reconciliation of NOI to the most comparable amounts based on GAAP (in thousands):
For the Year Ended December 31, 2016
For the Year Ended December 31, 2015
For the Year Ended December 31, 2014
Flex
Office
Industrial
Total
Flex
Office
Industrial
Total
Flex
Office
Industrial
Total
Adjusted Rental Income:
California . . . . . . . . . . . . . . . . . $ 80,698 $ 24,228 $42,436 $147,362 $ 76,883 $ 21,658 $38,917 $137,458 $ 69,606 $ 19,890 $37,291 $126,787
47,445
Texas . . . . . . . . . . . . . . . . . . . . .
— 77,679
Virginia . . . . . . . . . . . . . . . . . . .
34,003
Florida . . . . . . . . . . . . . . . . . . . .
— 49,252
Maryland . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . .
12,495
Assets sold or held for
53,383
— 77,197
35,399
— 48,884
14,473
59,077
— 76,285
38,153
— 47,107
15,073
45,881
32,108
12,180
15,667
6,875
55,766
32,390
13,073
15,757
7,729
50,699
32,249
12,677
15,390
7,516
44,948
169
33,494
586
45,571
285
33,585
568
43,895
245
31,350
597
— 2,684
— 1,564
— 3,311
22,553
21,538
24,835
6,747
5,052
6,371
development . . . . . . . . . . . . .
—
3,286
—
3,286
2,711
3,630
—
6,341
22,223
6,371
— 28,594
Total . . . . . . . . . . . . . . . . . . . . .
205,413
103,601
77,329
386,343
198,125
104,485
70,525
373,135
204,540
106,270
65,445
376,255
1
9
Adjusted Cost of Operations:
California . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . .
Virginia . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . .
Maryland . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . .
Assets sold or held for
development . . . . . . . . . . . . .
22,508
19,836
9,764
3,871
5,215
2,004
9,210
9,755
— 1,016
41,473
20,852
— 25,494
10,578
— 16,892
3,911
6,638
1,714
22,368
18,657
9,615
4,016
5,328
2,059
9,234
—
15,497
95
10,806
200
41,125
9,523
967
19,624
— 25,112
10,885
— 16,134
3,930
6,774
1,671
21,701
16,977
9,483
3,895
5,709
1,983
9,094
—
15,395
120
11,765
202
39,913
9,118
431
17,408
— 24,878
10,506
— 17,474
3,837
6,491
1,652
15,730
69
11,677
193
—
905
—
905
1,242
702
—
1,944
8,823
1,909
— 10,732
Total . . . . . . . . . . . . . . . . . . . . .
63,198
37,784
19,123
120,105
63,285
36,534
18,935
118,754
68,571
38,485
17,692
124,748
NOI:
California . . . . . . . . . . . . . . . . .
Texas . . . . . . . . . . . . . . . . . . . . .
Virginia . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . .
Maryland . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . .
Assets sold or held for
development . . . . . . . . . . . . .
58,190
35,930
22,626
9,202
10,542
5,725
15,018
32,681
— 2,295
105,889
38,225
— 50,791
27,575
— 30,215
11,162
18,197
5,033
54,515
32,042
22,634
8,661
10,062
5,457
12,424
29,394
— 1,717
96,333
33,759
— 52,085
24,514
— 32,750
10,543
15,779
4,700
47,905
28,904
22,625
8,285
9,958
4,892
10,796
28,173
— 1,133
86,874
30,037
— 52,801
23,497
— 31,778
8,658
15,047
3,400
30,176
165
21,820
366
29,451
74
22,688
386
28,165
176
19,673
404
—
2,381
—
2,381
1,469
2,928
—
4,397
13,400
4,462
— 17,862
Total . . . . . . . . . . . . . . . . . . . . . $142,215 $ 65,817 $58,206 $266,238 $134,840 $ 67,951 $51,590 $254,381 $135,969 $ 67,785 $47,753 $251,507
The following table reconciles NOI to net income as determined by GAAP (in thousands):
Total NOI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income and (expenses):
Lease buyout payment (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LTEIP amortization:
Cost of operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Facility management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income and (expenses)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted general and administrative (2) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition transaction costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of real estate facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For The Years Ended December 31,
2016
2015
2014
$266,238
$ 254,381
$ 251,507
528
—
—
(3,003)
(6,758)
518
(4,949)
(99,486)
(7,776)
(328)
—
(2,470)
(5,766)
540
(12,740)
(105,394)
(7,816)
—
28,235
(2,623)
(4,802)
660
(13,221)
(110,357)
(8,487)
(350)
92,373
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$144,984
$ 148,970
$ 204,700
(1) Represents a material lease buyout payment recorded in 2016 associated with a 58,000 square foot lease in
Northern Virginia.
(2) Adjusted general and administrative expenses exclude LTEIP amortization and acquisition transaction costs.
Portfolio Information
The table below sets forth information with respect to occupancy and rental rates of the Company’s total
portfolio for each of the last five years, including discontinued operations:
2016(1)
2015
2014
2013(1)
2012(1)
Weighted average occupancy rate . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized rent per square foot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
94.0% 92.8% 91.3% 89.9% 89.4%
$14.61
$14.27
$14.00
$13.91
$14.05
(1) Excludes material lease buyout payments of $528,000, $2.3 million and $1.8 million for the years ended
December 31, 2016, 2013 and 2012, respectively.
The following table sets forth the lease expirations for all operating assets as of December 31, 2016 (dollars
and square feet in thousands):
Lease Expirations as of December 31, 2016
Year of Lease Expiration
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2026 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of
Tenants
Rentable Square
Footage Subject to
Expiring Leases
Annualized Rental
Income Under
Expiring Leases
Percent of
Annualized Rental
Income Represented
by Expiring Leases
6,346
6,029
5,301
3,409
2,138
1,226
707
509
472
160
169
26,466
2,217
1,360
677
316
225
50
24
11
18
16
7
4,921
20
$ 92,499
95,187
77,784
50,482
32,568
22,204
10,226
8,345
11,379
4,160
4,823
$409,657
22.6%
23.2%
19.0%
12.3%
8.0%
5.4%
2.5%
2.0%
2.8%
1.0%
1.2%
100.0%
ITEM 3. LEGAL PROCEEDINGS
We are not presently subject to material litigation nor, to our knowledge, is any material litigation
threatened against us, other than routine actions for negligence and other claims and administrative proceedings
arising in the ordinary course of business, some of which are expected to be covered by liability insurance or
third party indemnifications and all of which collectively are not expected to have a materially adverse effect on
our financial condition, results of operations, or liquidity.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Price of the Registrant’s Common Equity:
The common stock of the Company trades on the NYSE under the symbol PSB. The following table sets
forth the high and low sales prices of the common stock on the NYSE for the applicable periods:
Three Months Ended
March 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Range
High
Low
Dividends
Declared
$ 88.92
$ 84.25
$ 79.95
$ 90.25
$102.52
$106.17
$117.00
$117.35
$ 76.93
$ 71.14
$ 70.15
$ 77.00
$ 81.27
$ 94.88
$104.44
$102.32
$0.50
$0.50
$0.60
$0.60
$0.75
$0.75
$0.75
$0.75
Holders:
As of February 20, 2017, there were 315 holders of record of the common stock.
Dividends:
Holders of common stock are entitled to receive distributions when, as and if declared by our Board out of
any funds legally available for that purpose. The Company is required to distribute at least 90% of its REIT
taxable income prior to the filing of the Company’s tax return to maintain its REIT status for federal income tax
purposes. It is management’s intention to pay distributions of not less than these required amounts.
Subsequent to December 31, 2016, the Board increased its quarterly dividend from $0.75 per common share
to $0.85 per common share, increasing quarterly distributions by $3.4 million per quarter.
The Board has established a distribution policy intended to maximize the retention of operating cash flow
and distribute the amount required for the Company to maintain its tax status as a REIT.
Issuer Repurchases of Equity Securities:
The Board previously authorized the repurchase, from time to time, of up to 6.5 million shares of the
Company’s common stock on the open market or in privately negotiated transactions. During the three months
ended December 31, 2016,
there were no shares of the Company’s common stock repurchased. As of
December 31, 2016, the Company has 1,614,721 shares available for repurchase under the program. The program
does not expire. Purchases will be made subject to market conditions and other investment opportunities
available to the Company.
21
Securities Authorized for Issuance Under Equity Compensation Plans:
The equity compensation plan information is provided in Item 12, “Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters.”
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth selected consolidated financial and operating information on a historical basis of
the Company. The following information should be read in conjunction with the consolidated financial
statements and notes thereto of the Company included in this Form 10-K.
For The Years Ended December 31,
2016
2015
2014
2013
2012
(In thousands, except per share data)
Revenues:
Rental income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $386,871 $373,135 $376,255 $359,246 $346,548
649
Facility management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
639
518
660
540
Total operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
387,389
373,675
376,915
359,885
347,197
Expenses:
Cost of operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
123,108
99,486
14,862
121,224
105,394
13,582
127,371
110,357
13,639
114,831
108,917
5,312
114,108
109,398
8,919
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
237,456
240,200
251,367
229,060
232,425
Other income and (expenses):
Interest and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
715
(5,664)
590
(13,330)
372
(13,593)
1,485
(16,166)
241
(20,618)
Total other income and (expenses) . . . . . . . . . . . . . . . . . . . . . . .
(4,949)
(12,740)
(13,221)
(14,681)
(20,377)
Gain on sale of real estate facilities . . . . . . . . . . . . . . . . . . . . . . . . .
— 28,235
92,373
—
—
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . .
144,984
148,970
204,700
116,144
94,395
Discontinued operations:
Income from discontinued operations (1) . . . . . . . . . . . . . . . . . .
Gain on sale of real estate facilities . . . . . . . . . . . . . . . . . . . . . . .
Total discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
—
—
—
—
—
—
—
—
42
935
977
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $144,984 $148,970 $204,700 $116,144 $ 95,372
Net income allocation:
Net income allocable to noncontrolling interests:
Noncontrolling interests — common units . . . . . . . . . . . . . . . $ 16,955 $ 18,495 $ 30,729 $ 12,952 $
Noncontrolling interests — preferred units . . . . . . . . . . . . . . .
—
—
—
—
Total net income allocable to noncontrolling interests . . . .
16,955
18,495
30,729
12,952
5,970
323
6,293
Net income allocable to PS Business Parks, Inc.:
Preferred shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock unit holders . . . . . . . . . . . . . . . . . . . . . . . . . .
Common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64,588
569
62,872
61,885
299
68,291
60,488
329
113,154
59,216
125
43,851
69,136
138
19,805
Total net income allocable to PS Business Parks, Inc. . . . .
128,029
130,475
173,971
103,192
89,079
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $144,984 $148,970 $204,700 $116,144 $ 95,372
22
For The Years Ended December 31,
2016
2015
2014
2013
2012
(In thousands, except per share data)
Per Common Share:
Cash Distributions (2) . . . . . . . . . . . . . . . . . . . . . . . . $
Net income — basic . . . . . . . . . . . . . . . . . . . . . . . . . $
Net income — diluted . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted average common shares — basic . . . . . . .
Weighted average common shares — diluted . . . . . .
Balance Sheet Data:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,119,371 $2,186,658 $2,227,114 $2,238,559 $2,151,817
— $ 250,000 $ 250,000 $ 250,000 $ 468,102
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Preferred stock called for redemption . . . . . . . . . . . . $ 230,000 $
—
— $
Equity:
1.76
0.82
0.81
24,234
24,323
1.76 $
1.77 $
1.77 $
3.00 $
2.32 $
2.31 $
2.20 $
2.53 $
2.52 $
4.75 $
4.21 $
4.19 $
24,732
24,833
26,973
27,051
27,089
27,179
26,899
27,000
— $
— $
PS Business Parks, Inc.’s shareholders’ equity:
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . $ 879,750 $ 920,000 $ 995,000 $ 995,000 $ 885,000
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . $ 733,509 $ 740,496 $ 718,281 $ 722,941 $ 560,689
Noncontrolling interests:
Common units . . . . . . . . . . . . . . . . . . . . . . . . . . $ 197,455 $ 200,103 $ 194,928 $ 196,699 $ 168,572
Other Data:
Net cash provided by operating activities . . . . . . . . . $ 250,507 $ 238,839 $ 228,180 $ 222,680 $ 209,576
Net cash (used in) provided by investing
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (85,008)$
3,131 $ 113,188 $ (172,872)$ (105,729)
Net cash used in financing activities . . . . . . . . . . . . . $ (225,782)$ (205,525)$ (220,382)$ (31,210)$ (95,944)
28,208
Square footage owned at the end of period . . . . . . . .
28,072
29,740
27,969
28,550
(1) Prior to the adoption of the new guidance for reporting discontinued operations and disposal of components
of an entity,
the operating results from assets classified as properties held for disposition prior to
December 31, 2013 are included in discontinued operations for the years ended December 31, 2012 and
2013. Subsequent to the adoption, the operating results from assets sold after January 1, 2014 are included
in income from continuing operations.
(2) Amount includes a $2.75 per common share special cash dividend for the year ended December 31, 2014.
23
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the results of operations and financial condition should be read in
conjunction with the selected financial data and the Company’s consolidated financial statements and notes
thereto included in this Form 10-K.
Overview
All operating metrics discussed in this section as of and for the years ended December 31, 2016, 2015 and
2014 exclude assets sold or held for development. Management believes excluding the results of such assets
provides the most relevant perspective on the ongoing operations of the Company. Please refer to “Item
15. Exhibits and Financial Statement Schedules” for financial metrics that include results from assets sold or held
for development.
The Company focuses on increasing profitability and cash flow aimed at maximizing shareholder value. The
Company strives 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. The Company also acquires properties it believes will create long-term value, and from time
to time disposes of properties which no longer fit within the Company’s strategic objectives. Operating results
are driven primarily by income from rental operations and are therefore substantially influenced by demand for
rental space within our properties and our markets, which impacts occupancy, rental rates and capital
requirements.
During 2016,
the Company executed leases comprising 7.6 million square feet of space including
5.1 million square feet of renewals of existing leases and 2.5 million square feet of new leases. Overall, the
change in rental rates for the Company continued to improve. See further discussion of operating results below.
Critical Accounting Policies and Estimates:
Our accounting policies are described in Note 2 to the consolidated financial statements included in this
Form 10-K. We believe our most critical accounting policies relate to revenue recognition, property acquisitions,
allowance for doubtful accounts, impairment of long-lived assets, depreciation, accruals of operating expenses
and accruals for contingencies, each of which are more fully discussed below.
Revenue Recognition: The Company must meet four basic criteria before revenue can be recognized:
persuasive evidence of an arrangement exists; the delivery has occurred or services have been rendered; the
fee is fixed or determinable; and collectability is reasonably assured. All leases are classified as operating
leases. Rental income is recognized on a straight-line basis over the terms of the leases. Straight-line rent is
recognized for all tenants with contractual fixed increases in rent that are not included on the Company’s
credit watch list. Deferred rent receivable represents rental revenue recognized on a straight-line basis in
excess of billed rents. Reimbursements from tenants for real estate taxes and other recoverable operating
expenses are recognized as rental
income in the period the applicable costs are incurred. Property
management fees are recognized in the period earned.
Property Acquisitions: The purchase price of acquired properties is recorded to land, buildings and
improvements (including tenant improvements, unamortized lease commissions, acquired in-place lease
values, and tenant relationships, if any) and intangible assets and liabilities associated with the value of
above-market and below-market leases based on their respective estimated fair values. Acquisition related
costs are expensed as incurred.
In determining the fair value of the tangible assets of the acquired properties, management considers
the value of the properties as if vacant as of the acquisition date. Management must make significant
assumptions in determining the value of assets acquired and liabilities assumed. Using different assumptions
in the recording of the purchase cost of the acquired properties would affect the timing of recognition of the
related revenue and expenses. Amounts recorded to land are derived from comparable sales of land within
the same region. Amounts recorded to buildings and improvements, tenant improvements and unamortized
lease commissions are based on current market replacement costs and other market information.
24
The value recorded to the above-market or below-market in-place lease values of acquired properties is
determined based upon the present value (using a discount rate which reflects the risks associated with the
acquired leases) of the difference between (i) the contractual rents to be paid pursuant to the in-place leases,
and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured
over a period equal to the remaining non-cancelable term of the lease. The amounts recorded to above-
market or below-market
leases are included in other assets or other liabilities in the accompanying
consolidated balance sheets and are amortized on a straight-line basis as an increase or reduction of rental
income over the remaining non-cancelable term of the respective leases.
Allowance for Doubtful Accounts: Rental revenue from our tenants is our principal source of revenue.
Tenant receivables consist primarily of amounts due for contractual lease payments, reimbursements of
common area maintenance expenses, property taxes and other expenses recoverable from tenants. Deferred
rent receivable represents the amount that the cumulative straight-line rental income recorded to date
exceeds cash rents billed to date under the lease agreement. We monitor the collectability of our receivable
balances including the deferred rent receivable on an ongoing basis. Based on these reviews, we maintain an
allowance for doubtful accounts for estimated losses resulting from the possible inability of our tenants to
make contractual rent payments to us. Tenant receivables and deferred rent receivable are carried net of the
allowances for uncollectible tenant receivables and deferred rent. Determination of the adequacy of these
allowances requires significant
judgments and estimates, and our evaluation of the adequacy of the
allowance for uncollectible current tenant receivables and deferred rent receivable are performed using a
methodology that incorporates specific identification, aging analysis, an overall evaluation of the historical
loss trends and the current economic and business environment.
Impairment of Long-Lived Assets: The Company evaluates a property for potential
impairment
whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. On a
quarterly basis, we evaluate our entire portfolio for impairment based on current operating information. In
the event that these periodic assessments reflect that the carrying amount of a property exceeds the sum of
the undiscounted cash flows (excluding interest) that are expected to result from the use and eventual
disposition of the property, the Company would recognize an impairment loss to the extent the carrying
amount exceeded the estimated fair value of the property. The estimation of expected future net cash flows
is inherently uncertain and relies on subjective assumptions dependent upon future and current market
conditions and events that affect the ultimate value of the property. Management must make assumptions
related to the property such as future rental rates, tenant allowances, operating expenditures, property taxes,
capital improvements, occupancy levels and the estimated proceeds generated from the future sale of the
property. These assumptions could differ materially from actual results in future periods. Our intent to hold
properties over the long-term directly decreases the likelihood of recording an impairment loss. If our
strategy changes or if market conditions otherwise dictate an earlier sale date, an impairment loss could be
recognized, and such loss could be material.
Depreciation: We compute depreciation on our buildings and improvements using the straight-line
method based on estimated useful lives generally ranging from five to 30 years. A significant portion of the
acquisition cost of each property is recorded to building and building components. The recording of the
acquisition cost to building and building components, as well as the determination of their useful lives, are
based on estimates. If we do not appropriately record to these components or we incorrectly estimate the
useful lives of these components, our computation of depreciation expense may not appropriately reflect the
actual impact of these costs over future periods, which will affect net income. In addition, the net book
value of real estate assets could be overstated or understated. The statement of cash flows, however, would
not be affected.
Accruals of Operating Expenses: The Company accrues for property tax expenses, performance
bonuses and other operating expenses each quarter based on historical trends and anticipated disbursements.
If these estimates are incorrect, the timing and amount of expense recognized will be affected.
Accruals for Contingencies: The Company is exposed to business and legal liability risks with respect
to events that may have occurred, but in accordance with GAAP has not accrued for such potential liabilities
25
because the loss is either not probable or not estimable. Future events could result in such potential losses
becoming probable and estimable, which could have a material adverse impact on our financial condition or
results of operations.
Effect of Economic Conditions on the Company’s Operations: Throughout 2016, most markets
continued to reflect favorable conditions allowing for stable to improving occupancy as well as increasing
rental rates. With the exception of the Virginia and Maryland markets, new rental rates for the Company
improved over expiring rental rates on executed leases as economic conditions and tenant demand remained
healthy. The Virginia and Maryland markets continue to experience soft market conditions as evidenced by
continued pressure on occupancy and rental rates. In these markets, rental rates on executed leases declined
7.2% and 5.7%, respectively, over expiring rents for the year ended December 31, 2016. Given lease
expirations of 925,000 square feet in Virginia and 334,000 square feet in Maryland through December 31,
2017, the Company may continue to experience a decrease in rental income in these markets.
Tenant Credit Risk: The Company historically has experienced a low level of write-offs of
uncollectable rents, but there is inherent uncertainty in a tenant’s ability to continue paying rent and meet its
full lease obligation. The table below summarizes the impact to the Company from tenants’ inability to pay
rent or continue to meet their lease obligations (in thousands):
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annual write-offs of uncollectible rent
Annual write-offs as a percentage of rental income . . . . . . . . . . . . . . . . . . . . . .
Square footage of leases terminated prior to their scheduled expiration due to
For The Years Ended
December 31,
2016
$855
2015
$919
2014
$1,101
0.2%
0.2%
0.3%
business failures/bankruptcies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
378
473
362
Accelerated depreciation and amortization related to unamortized tenant
improvements and lease commissions associated with early terminations . . .
$747
$539
$ 460
As of February 20, 2017, the Company had 64,000 square feet of leased space occupied by three tenants that
are protected by Chapter 11 of the U.S. Bankruptcy Code. From time to time, tenants contact us, requesting early
termination of their lease, reductions in space under lease, or rent deferment or abatement. At this time, the
Company cannot anticipate what impact, if any, the ultimate outcome of these discussions will have on our future
operating results.
Company Performance and Effect of Economic Conditions on Primary Markets: During the year ended
December 31, 2016, initial rental rates on new and renewed leases within the Company’s total portfolio increased
5.3% over expiring rents, an improvement from the year ended December 31, 2015, in which initial rental rates
on new and renewed leases increased 4.4%. The Company’s Same Park (defined below) occupancy rate at
December 31, 2016 was 95.0%, compared to 94.7% at December 31, 2015. The Company’s total portfolio
occupancy rate at December 31, 2016 was 94.4% compared to 94.8% at December 31, 2015. The decrease is tied
to the September 2016 acquisition of two buildings in Maryland comprising 226,000 square feet that were 18.5%
leased at December 31, 2016. The Company’s operations are substantially concentrated in eight regions. Each of
the eight regions in which the Company owns assets is subject to its own unique market influences. See
“Supplemental Property Data and Trends” below for more information on regional operating data.
Effect of Acquisitions, Development and Dispositions of Properties on the Company’s Operations: The
Company is focused on growing its operations by looking for opportunities to expand its presence in existing and
new markets through strategic acquisitions that meet the Company’s focus on multi-tenant flex, industrial and
office parks in markets where it has or may obtain a substantial market presence. The Company may also from
time to time dispose of assets based on market conditions.
On September 28, 2016, the Company acquired two multi-tenant office buildings aggregating 226,000
square feet in Rockville, Maryland, for a purchase price of $13.3 million. The buildings, which were 18.5%
leased at the time of acquisition, are located within Shady Grove Executive Park, where the Company owns three
other buildings aggregating 352,000 square feet, which were 85.2% leased as of December 31, 2016.
26
As of December 31, 2016, the blended occupancy rate of the six assets acquired during 2014 and 2016,
which comprise the 904,000 square feet of Non-Same Park portfolio (defined below), was 76.9% compared to a
blended occupancy rate of 39.7% at the time of acquisition. As of December 31, 2016, the Company had 209,000
square feet of vacant space spread over these acquisitions, which we believe provides the Company with the
opportunity to generate additional rental income given that the Company’s Same Park assets in these same
submarkets have a weighted average occupancy of 95.1% at December 31, 2016. The table below contains the
assets acquired during 2014 and 2016 (dollars and square feet in thousands):
Property
Date Acquired
Location
Purchase Price
Square
Feet
Occupancy at
Acquisition
Occupancy at
December 31, 2016
Shady Grove . . . . . . . . . . . . . . . . . . . September, 2016 Rockville, Maryland
Charcot Business Park II . . . . . . . . . December, 2014 San Jose, California
Austin, Texas
McNeil 1 . . . . . . . . . . . . . . . . . . . . . . November, 2014
Dallas, Texas
August, 2014
Springlake Business Center II . . . . .
Dallas, Texas
July, 2014
Arapaho Business Park 9 . . . . . . . . .
Miami, Florida
July, 2014
MICC — Center 23 . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . .
$13,250
16,000
10,550
5,148
1,134
12,725
$58,807
226
119
246
145
19
149
904
18.5%
96.7%
53.3%
35.4%
100.0%
0.0%
39.7%
18.5%
98.3%
100.0%
85.4%
91.5%
100.0%
76.9%
As of November 1, 2016, the Company transferred a 123,000 square foot building located in Tysons,
Virginia to land and building held for development.
During 2015, the Company completed the sale of assets in Tempe, Arizona, Sacramento, California,
Milwaukie, Oregon and Redmond, Washington. The assets sold aggregated 574,000 square feet and generated
net proceeds of $55.2 million, which resulted in an aggregate gain of $28.2 million.
During 2014, the Company sold five business parks aggregating 1.9 million square feet and 11.5 acres of
land in non-strategic markets, including Portland, Oregon and Phoenix, Arizona, for net proceeds of $212.2
million, which resulted in a gain of $92.4 million.
PSB holds a 95.0% interest in the Joint Venture with the remaining 5.0% held by the JV Partner. The
aggregate amount of development costs are estimated to be $105.6 million (excluding unrealized land
appreciation), of which the Company is committed to funding $75.0 million through a construction loan. The
Company’s investment in and advances to unconsolidated joint venture was $67.2 million as of December 31,
2016. The Project is expected to deliver its first completed units in the spring of 2017, with final completion of
the Project expected in early 2018.
Scheduled Lease Expirations: In addition to the 1.6 million square feet, or 5.6%, of vacancy in our total
portfolio as of December 31, 2016, 2,217 leases, representing 6.3 million square feet, or 24.0% of the leased
square footage of our total portfolio are scheduled to expire in 2017. Our ability to re-lease available space will
depend upon market conditions in the specific submarkets in which our properties are located. As a result, we
cannot predict with certainty the rate at which expiring leases will be re-leased.
Impact of Inflation: Although inflation has not been significant in recent years, it remains a potential factor
in our economy, and the Company continues to seek ways to mitigate its potential impact. A substantial portion
of the Company’s leases require tenants to pay operating expenses, including real estate taxes, utilities, and
insurance, as well as increases in common area expenses, partially reducing the Company’s exposure to inflation.
To present comparative results, for the purpose of computing NOI, the tables below exclude amortization of
the Senior Management Long-Term Equity Incentive Plan (“LTEIP”) for the years ended December 31, 2016,
2015 and 2014.
27
Concentration of Portfolio by Region: The table below reflects the Company’s square footage based on
regional concentration as of December 31, 2016. As part of the table below, we have reconciled total NOI to net
income (in thousands):
Region
California
Square
Footage
Percent of
Square
Footage
2016
NOI
Percent
of NOI
Northern California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Southern California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Texas
Northern Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Southern Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Virginia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maryland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,245
3,988
3,125
1,963
3,917
3,866
2,578
1,390
25.7% $ 63,776
42,113
14.2%
11.1%
7.0%
14.0%
13.8%
9.2%
5.0%
20,245
17,980
50,791
27,575
30,215
11,162
24.2%
16.0%
7.7%
6.8%
19.2%
10.4%
11.5%
4.2%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,072
100.0% $263,857
100.0%
Reconciliation of NOI to net income
Total NOI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income and (expenses):
$ 263,857
NOI from assets sold or held for development
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease buyout payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LTEIP amortization:
Cost of operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Facility management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income and (expenses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition transaction costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,381
528
(3,003)
(6,758)
518
(4,949)
(99,486)
(7,776)
(328)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 144,984
Concentration of Credit Risk by Industry: The information below depicts the industry concentration of our
tenant base as of December 31, 2016. The Company analyzes this concentration to minimize significant industry
exposure risk.
Industry
Business services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warehouse, distribution, transportation and logistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Health services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer hardware, software and related services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail, food, and automotive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Engineering and construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance and financial services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aerospace/defense products and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Educational services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Percent of
Annualized
Rental Income
18.5%
10.6%
10.0%
9.8%
8.0%
7.3%
6.9%
4.2%
3.1%
3.1%
2.8%
2.2%
1.7%
11.8%
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100.0%
28
The information below depicts the Company’s top 10 customers by annualized rental income as of
December 31, 2016 (in thousands):
Tenants
Square
Footage
Annualized
Rental Income(1)
Percent of
Annualized
Rental Income
US Government
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lockheed Martin Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kaiser Permanente . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Keeco, L.L.C.
Luminex Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MAXIMUS, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
KZ Kitchen Cabinet & Stone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investorplace Media, LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inova Health Care Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kuehne + Nagel, Inc.
692
168
158
460
185
102
181
46
63
163
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,218
$17,725
4,524
4,142
3,527
3,239
2,062
1,985
1,802
1,779
1,675
$42,460
4.6%
1.2%
1.1%
0.9%
0.8%
0.5%
0.5%
0.5%
0.5%
0.4%
11.0%
(1) For leases expiring prior to December 31, 2017, annualized rental income represents income to be received
under existing leases from January 1, 2017 through the date of expiration.
Comparison of 2016 to 2015
Results of Operations: Net income for the year ended December 31, 2016 was $145.0 million compared to
$149.0 million for the year ended December 31, 2015. Net income allocable to common shareholders for the year
ended December 31, 2016 was $62.9 million compared to $68.3 million for the year ended December 31, 2015.
Net income per common share on a diluted basis was $2.31 for the year ended December 31, 2016 compared to
$2.52 for the year ended December 31, 2015 (based on weighted average diluted common shares outstanding of
27,179,000 and 27,051,000, respectively). The decrease in net income allocable to common shareholders was
primarily due to gain on sale of assets reported in 2015 partially offset by an increase in overall NOI and lower
interest expense in 2016.
In order to evaluate the performance of the Company’s portfolio over comparable periods, management
analyzes the operating performance of properties owned and operated throughout both periods (herein referred to
as “Same Park”). The Same Park portfolio includes all operating properties acquired prior to January 1, 2014.
Operating properties acquired subsequently are referred to as “Non-Same Park.” For the years ended
December 31, 2016 and 2015, the Same Park facilities constitute 27.2 million rentable square feet, representing
96.8% of the 28.1 million square feet in the Company’s total portfolio as of December 31, 2016.
29
The following table presents the operating results of the Company’s properties for the years ended
December 31, 2016 and 2015 in addition to other income and expenses items affecting net income (in thousands,
except per square foot data):
For The Years Ended
December 31,
2016
2015
Change
Adjusted rental income:
Same Park (27.2 million rentable square feet)
. . . . . . . . . . . . . . . . . . . . . . . . .
Non-Same Park (904,000 rentable square feet) . . . . . . . . . . . . . . . . . . . . . . . . .
$376,023
7,034
$ 361,510
5,284
Total adjusted rental income (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
383,057
366,794
Adjusted cost of operations:
Same Park . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Same Park . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
116,803
2,397
114,675
2,135
Total adjusted cost of operations (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
119,200
116,810
Net operating income:
Same Park . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Same Park . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
259,220
4,637
246,835
3,149
Total net operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
263,857
249,984
4.0%
33.1%
4.4%
1.9%
12.3%
2.0%
5.0%
47.3%
5.5%
Other income and (expenses):
NOI from assets sold or held for development (1) (2) . . . . . . . . . . . . . . . . . . .
Lease buyout payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LTEIP amortization:
Cost of operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Facility management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income and (expenses)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted general and administrative (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition transaction costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of real estate facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,381
528
4,397
(45.8%)
— 100.0%
(3,003)
(6,758)
518
(4,949)
(99,486)
(7,776)
(328)
—
(2,470)
(5,766)
540
(12,740)
(105,394)
(7,816)
21.6%
17.2%
(4.1%)
(61.2%)
(5.6%)
(0.5%)
— (100.0%)
(100.0%)
28,235
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$144,984
$ 148,970
(2.7%)
Same Park gross margin (4)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Same Park weighted average occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Same Park weighted average occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Same Park realized rent per square foot (5)
68.9%
94.1%
89.8%
14.71
$
68.3% 0.9%
93.1% 1.1%
80.8% 11.1%
2.9%
14.29
$
(1) Adjusted rental income excludes a material lease buyout payment of $528,000 recorded in 2016 and rental
income from assets sold or held for development of $3.3 million and $6.3 million for the years ended
December 31, 2016 and 2015, respectively.
(2) Adjusted cost of operations excludes LTEIP amortization of $3.0 million and $2.5 million for the years
ended December 31, 2016 and 2015, respectively, as well as, cost of operations from assets sold or held for
development of $905,000 and $1.9 million for the years ended December 31, 2016 and 2015, respectively.
(3) Adjusted general and administrative expenses exclude LTEIP amortization of $6.8 million and $5.8 million
for the years ended December 31, 2016 and 2015, respectively, as well as, acquisition transaction costs of
$328,000 recorded during 2016.
(4) Computed by dividing Same Park NOI by Same Park adjusted rental income.
(5) Represents the annualized Same Park adjusted rental income earned per occupied square foot.
30
Rental Income: Rental income increased $13.7 million, or 3.7%, from $373.1 million for the year ended
December 31, 2015 to $386.9 million for the year ended December 31, 2016. For comparative purposes,
management has adjusted rental income for a material lease buyout payment of $528,000 recorded in 2016 and
rental income from assets sold or held for development of $3.3 million and $6.3 million for the years ended
December 31, 2016 and 2015, respectively. Adjusted rental income increased $16.3 million from $366.8 million
for the year ended December 31, 2015 to $383.1 million for the year ended December 31, 2016 as a result of an
increase in the Same Park portfolio of $14.5 million, or 4.0%, combined with a $1.8 million, or 33.1%, increase
from Non-Same Park facilities. The Same Park increase was due to increases in occupancy and executed rental
rates.
Facility Management Fees: Facility management fees, derived from PS, account for a small portion of the
Company’s revenues. During the year ended December 31, 2016, $518,000 of revenue was recognized from
facility management fees compared to $540,000 for the year ended December 31, 2015.
Cost of Operations: Cost of operations increased $1.9 million, or 1.6%, from $121.2 million for the year
ended December 31, 2015 to $123.1 million for the year ended December 31, 2016. For comparative purposes,
management has adjusted cost of operations for LTEIP amortization of $3.0 million and $2.5 million for the
years ended December 31, 2016 and 2015, respectively, as well as, cost of operations from assets sold or held for
development of $905,000 and $1.9 million for the years ended December 31, 2016 and 2015, respectively.
Adjusted cost of operations increased $2.4 million, or 2.0%, from $116.8 million for the year ended
December 31, 2015 to $119.2 million for the year ended December 31, 2016 as a result of increases in the Same
Park portfolio of $2.1 million, or 1.9% and Non-Same Park facilities of $262,000, or 12.3%. This Same Park
increase was due to increases in property taxes and repairs and maintenance costs partially offset by a decrease in
compensation expense.
Depreciation and Amortization Expense: Depreciation and amortization expense was $99.5 million for the
year ended December 31, 2016 compared to $105.4 million for the year ended December 31, 2015. The decrease
in depreciation and amortization expense was due to a reduction in capital expenditure additions combined with
assets being fully depreciated.
General and Administrative Expenses: For the year ended December 31, 2016, general and administrative
expenses increased $1.3 million, or 9.4%, over 2015. For comparative purposes, management has adjusted
general and administrative expenses for LTEIP amortization of $6.8 million for the year ended December 31,
2016 and $5.8 million for the year ended December 31, 2015, as well as, acquisition transaction costs of
$328,000 recorded in 2016. The increase in the LTEIP amortization was primarily due to a net non-cash stock
compensation charge of $2.0 million recorded in 2016 related to a change in senior management and the future
issuances of restricted stock units our former Chief Executive Officer will receive under the Company’s LTEIP.
Adjusted general and administrative expenses decreased $40,000, or 0.5%, resulting from a decrease in
compensation expense.
Net Income Allocable to Noncontrolling Interests: Net income allocable to noncontrolling interests reflects
the net income allocable to equity interests in the Operating Partnership that are not owned by the Company. Net
income allocable to noncontrolling interests was $17.0 million and $18.5 million of allocated income to common
unit holders for the years December 31, 2016 and 2015, respectively. The decrease was primarily the result of the
gain on sale of real estate facilities recognized in 2015 partially offset by an increase in overall NOI.
Supplemental Property Data and Trends: NOI is summarized for the years ended December 31, 2016 and
2015 by region below. See Item 2, “Properties” above for more information on NOI, including why the Company
presents NOI and how the Company uses NOI. The Company’s calculation of NOI may not be comparable to
those of other companies and should not be used as an alternative to measures of performance calculated in
accordance with GAAP.
31
The following table summarizes the Same Park and Non-Same Park operating results by region for the years
ended December 31, 2016 and 2015. In addition, the table reflects the comparative impact on the overall adjusted
rental income, adjusted cost of operations and NOI from properties that have been acquired since January 1,
2014, and the impact of such is included in Non-Same Park facilities in the table below. As part of the table
below, we have reconciled total NOI to net income (in thousands):
Region
Same Park
Adjusted
Rental
Income
December 31,
2016
Adjusted
Rental
Income
December 31,
2015
Adjusted
Cost of
Operations
December 31,
2016
Adjusted
Cost of
Operations
December 31,
2015
Increase
(Decrease)
Increase
(Decrease)
NOI
December 31,
2016
NOI
December 31,
2015
Increase
(Decrease)
Northern California . . . . . . . . . . . . . $ 84,337
60,967
Southern California . . . . . . . . . . . . .
30,093
Northern Texas . . . . . . . . . . . . . . . .
25,779
Southern Texas . . . . . . . . . . . . . . . .
76,285
Virginia . . . . . . . . . . . . . . . . . . . . . .
36,678
Florida . . . . . . . . . . . . . . . . . . . . . . .
46,811
Maryland . . . . . . . . . . . . . . . . . . . . .
15,073
Washington . . . . . . . . . . . . . . . . . . .
$ 76,943
58,621
29,510
21,714
77,197
34,168
48,884
14,473
9.6% $ 22,074
4.0% 18,854
2.0% 10,849
8,797
18.7%
25,494
(1.2%)
7.3% 10,221
16,603
(4.2%)
3,911
4.1%
$ 21,791
18,797
10,550
7,918
25,112
10,443
16,134
3,930
1.3% $ 62,263 $ 55,152
39,824
42,113
0.3%
18,960
19,244
2.8%
13,796
16,982
11.1%
52,085
50,791
1.5%
23,725
26,457
(2.1%)
32,750
30,208
2.9%
10,543
11,162
(0.5%)
12.9%
5.7%
1.5%
23.1%
(2.5%)
11.5%
(7.8%)
5.9%
Total Same Park . . . . . . . . . . . . . . . . .
376,023
361,510
4.0% 116,803
114,675
1.9% 259,220
246,835
5.0%
Non-Same Park
Northern California . . . . . . . . . . . . .
Northern Texas . . . . . . . . . . . . . . . .
Southern Texas . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . .
Maryland . . . . . . . . . . . . . . . . . . . . .
Total Non-Same Park . . . . . . . . . . . . .
2,058
1,517
1,688
1,475
296
7,034
1,894
1,065
1,094
1,231
8.7%
42.4%
54.3%
19.8%
— 100.0%
545
516
690
357
289
1.5%
537
(3.6%)
535
11.1%
621
442
(19.2%)
— 100.0%
5,284
33.1%
2,397
2,135
12.3%
1,513
1,001
998
1,118
7
4,637
1,357
530
473
789
11.5%
88.9%
111.0%
41.7%
— 100.0%
3,149
47.3%
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . $383,057
$366,794
4.4% $119,200
$116,810
2.0% $263,857 $ 249,984
5.5%
Reconciliation of NOI to net income
Total NOI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income and (expenses):
NOI from assets sold or held for development
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease buyout payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LTEIP amortization:
Cost of operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Facility management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income and (expenses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition transaction costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of real estate facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$263,857 $ 249,984
5.5%
2,381
528
4,397
(45.8%)
— 100.0%
(3,003)
(6,758)
518
(4,949)
(99,486)
(7,776)
(328)
—
(2,470)
(5,766)
540
(12,740)
(105,394)
(7,816)
21.6%
17.2%
(4.1%)
(61.2%)
(5.6%)
(0.5%)
— (100.0%)
(100.0%)
28,235
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$144,984 $ 148,970
(2.7%)
The following table summarizes Same Park weighted average occupancy rates and realized rent per square
foot by region for the years ended December 31, 2016 and 2015. Realized rent per square foot for Virginia and
Total Same Park excludes a material lease buyout payment of $528,000 for the year ended December 31, 2016.
Weighted Average Occupancy Rates
Realized Rent Per Square Foot
Region
Northern California . . . . . . . . . .
Southern California . . . . . . . . . .
Northern Texas . . . . . . . . . . . . . .
Southern Texas . . . . . . . . . . . . . .
Virginia . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . .
Maryland . . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . . .
Total Same Park . . . . . . . . . . . . .
2016
96.8%
95.1%
90.0%
97.3%
92.3%
93.8%
87.8%
98.5%
94.1%
2015
Change
2016
2015
Change
1.0%
1.5%
1.8%
4.6%
1.1%
0.1%
(2.0%)
1.8%
1.1%
$12.23
$16.09
$11.28
$15.43
$21.10
$10.52
$22.65
$11.01
$14.71
$11.27
$15.69
$11.27
$13.60
$21.57
$ 9.81
$23.19
$10.76
$14.29
8.5%
2.5%
0.1%
13.5%
(2.2%)
7.2%
(2.3%)
2.3%
2.9%
95.8%
93.7%
88.4%
93.0%
91.3%
93.7%
89.6%
96.8%
93.1%
32
Comparison of 2015 to 2014
Results of Operations: Net income for the year ended December 31, 2015 was $149.0 million compared to
$204.7 million for the year ended December 31, 2014. Net income allocable to common shareholders for the year
ended December 31, 2015 was $68.3 million compared to $113.2 million for the year ended December 31, 2014.
Net income per common share on a diluted basis was $2.52 for the year ended December 31, 2015 compared to
$4.19 for the year ended December 31, 2014 (based on weighted average diluted common shares outstanding of
27,051,000 and 27,000,000, respectively). The decrease in net income allocable to common shareholders was
primarily due to higher gain on sale of assets reported in 2014 (gain on sale of real estate facilities was $28.2
million in 2015 compared to $92.4 million in 2014).
For the years ended December 31, 2015 and 2014, the Same Park facilities constitute 27.2 million rentable
in the Company’s total portfolio as of
square feet, representing 97.1% of the 28.0 million square feet
December 31, 2015.
The following table presents the operating results of the Company’s properties for the years ended
December 31, 2015 and 2014 in addition to other income and expenses items affecting net income (in thousands,
except per square foot data):
For The Years Ended
December 31,
2015
2014
Change
Adjusted rental income:
Same Park (27.2 million rentable square feet) . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .
Non-Same Park (678,000 rentable square feet)
$ 361,510
5,284
$ 347,263
398
4.1%
1,227.6%
Total adjusted rental income (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
366,794
347,661
5.5%
Adjusted cost of operations:
Same Park . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Same Park . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
114,675
2,135
113,420
596
Total adjusted cost of operations (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
116,810
114,016
1.1%
258.2%
2.5%
Net operating income:
Same Park . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Same Park . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
246,835
3,149
233,843
(198)
5.6%
(1,690.4%)
Total net operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
249,984
233,645
7.0%
Other income and (expenses):
NOI from assets sold or held for development (1) (2) . . . . . . . . . . . . . . . . .
LTEIP amortization:
Cost of operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Facility management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income and (expenses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted general and administrative (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition transaction costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of real estate facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,397
17,862
(75.4%)
(2,470)
(5,766)
540
(12,740)
(105,394)
(7,816)
—
28,235
(2,623)
(4,802)
660
(13,221)
(110,357)
(8,487)
(350)
92,373
(5.8%)
20.1%
(18.2%)
(3.6%)
(4.5%)
(7.9%)
(100.0%)
(69.4%)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 148,970
$ 204,700
(27.2%)
Same Park gross margin (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Same Park weighted average occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Same Park weighted average occupancy . . . . . . . . . . . . . . . . . . . . . . . . .
Same Park realized rent per square foot (5) . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
68.3%
93.1%
80.8%
14.29
$
1.5%
67.3%
91.6%
1.6%
37.0% 118.4%
2.4%
13.95
(1) Adjusted rental income excludes rental income from assets sold or held for development of $6.3 million and
$28.6 million for the years ended December 31, 2015 and 2014, respectively.
33
(2) Adjusted cost of operations excludes LTEIP amortization of $2.5 million and $2.6 million for the years
ended December 31, 2015 and 2014, respectively, as well as, cost of operations from assets sold or held for
development of $1.9 million and $10.7 million for the years ended December 31, 2015 and 2014,
respectively.
(3) Adjusted general and administrative expenses exclude LTEIP amortization of $5.8 million and $4.8 million
for the years ended December 31, 2015 and 2014, respectively, as well as, acquisition transaction costs of
$350,000 recorded during 2014.
(4) Computed by dividing Same Park NOI by Same Park adjusted rental income.
(5) Represents the annualized Same Park adjusted rental income earned per occupied square foot.
Rental Income: Rental income decreased $3.1 million from $376.3 million for the year ended December 31,
2014 to $373.1 million for the year ended December 31, 2015. For comparative purposes, management has
adjusted rental income for rental income from assets sold or held for development of $6.3 million and $28.6
million for the years ended December 31, 2015 and 2014, respectively. Adjusted rental income increased $19.1
million from $347.7 million for the year ended December 31, 2014 to $366.8 million for the year ended
December 31, 2015 as a result of an increase from the Same Park portfolio of $14.2 million, or 4.1%, combined
with a $4.9 million increase from Non-Same Park facilities. The Same Park increase was due to increases in
occupancy and executed rental rates, while the Non-Same Park increase was due to a combination of an increase
in occupancy and the acquisition of additional parks during the latter half of 2014.
Facility Management Fees: Facility management fees, derived from PS, account for a small portion of the
Company’s revenues. During the year ended December 31, 2015, $540,000 of revenue was recognized from
facility management fees compared to $660,000 for the year ended December 31, 2014.
Cost of Operations: Cost of operations decreased $6.1 million from $127.4 million for the year ended
December 31, 2014 to $121.2 million for the year ended December 31, 2015. For comparative purposes,
management has adjusted cost of operations for LTEIP amortization of $2.5 million and $2.6 million for the
years ended December 31, 2015 and 2014, respectively, as well as, cost of operations from assets sold or held for
development of $1.9 million and $10.7 million for the years ended December 31, 2015 and 2014, respectively.
Adjusted cost of operations increased $2.8 million, or 2.5%, from $114.0 million for the year ended
December 31, 2014 to $116.8 million for the year ended December 31, 2015 as a result of an increase in the Non-
Same Park facilities of $1.5 million combined with an increase in the Same Park portfolio of $1.3 million, or
1.1%. The increase in Same Park cost of operations was a result of increases in repairs and maintenance costs and
property taxes driven by higher assessed values partially offset by lower utility costs.
Depreciation and Amortization Expense: Depreciation and amortization expense was $105.4 million for
the year ended December 31, 2015 compared to $110.4 million for the year ended December 31, 2014. The
decrease in depreciation and amortization expense was due to the disposition of assets, partially offset by 2014
acquisitions.
General and Administrative Expenses: General and administrative expenses decreased $57,000 to $13.6
million for the year ended December 31, 2015. For comparative purposes, management has adjusted general and
administrative expenses for LTEIP amortization of $5.8 million and $4.8 million for the years ended
December 31, 2015 and 2014, respectively, as well as, acquisition transaction costs of $350,000 recorded during
2014. Adjusted general and administrative expenses decreased $671,000, or 7.9%, for the year ended
December 31, 2015 over the same period in 2014 as a result of non-cash expense of $840,000 relating to
adjustments made to outstanding stock options in December, 2014 in connection with the special cash dividend,
as well as an adjustment to shares to be granted to directors upon retirement in 2014.
Net Income Allocable to Noncontrolling Interests: Net income allocable to noncontrolling interests reflects
the net income allocable to equity interests in the Operating Partnership that are not owned by the Company. Net
income allocable to noncontrolling interests was $18.5 million and $30.7 million of allocated income to common
unit holders for the years ended December 31, 2015 and 2014, respectively. The decrease was primarily due to
higher gain on sale of assets reported in 2014 (gain on sale of real estate facilities was $28.2 million in 2015
compared to $92.4 million in 2014) partially offset with an increase in NOI.
34
Supplemental Property Data and Trends: NOI is summarized for the years ended December 31, 2015 and
2014 by region below. The Company’s calculation of NOI may not be comparable to those of other companies
and should not be used as an alternative to measures of performance calculated in accordance with GAAP.
The following table summarizes the Same Park and Non-Same Park operating results by region for the years
ended December 31, 2015 and 2014. In addition, the table reflects the comparative impact on the overall adjusted
rental income, adjusted cost of operations and NOI from properties that have been acquired since January 1,
2014, and the impact of such is included in Non-Same Park facilities in the table below. As part of the table
below, we have reconciled total NOI to net income (in thousands):
Adjusted
Rental
Income
December 31,
2015
Adjusted
Rental
Income
December 31,
2014
Increase
(Decrease)
Adjusted
Cost of
Operations
December 31,
2015
Adjusted
Cost of
Operations
December 31,
2014
Increase
(Decrease)
NOI
December 31,
2015
NOI
December 31,
2014
Increase
(Decrease)
Region
Same Park
Northern California . . . . .
Southern California . . . . .
Northern Texas . . . . . . . . .
Southern Texas . . . . . . . . .
Virginia . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . .
Maryland . . . . . . . . . . . . . .
Washington . . . . . . . . . . . .
$ 76,943
58,621
29,510
21,714
77,197
34,168
48,884
14,473
$ 71,917
54,864
27,096
20,040
77,679
33,920
49,252
12,495
7.0% $ 21,791
6.8% 18,797
8.9% 10,550
7,918
8.4%
(0.6%)
25,112
0.7% 10,443
16,134
(0.7%)
3,930
15.8%
$ 20,870
19,043
10,323
6,736
24,878
10,259
17,474
3,837
4.4% $ 55,152
39,824
(1.3%)
18,960
2.2%
13,796
17.5%
52,085
0.9%
23,725
1.8%
32,750
(7.7%)
10,543
2.4%
$ 51,047
35,821
16,773
13,304
52,801
23,661
31,778
8,658
Total Same Park . . . . . . . . . .
361,510
347,263
4.1% 114,675
113,420
1.1%
246,835
233,843
8.0%
11.2%
13.0%
3.7%
(1.4%)
0.3%
3.1%
21.8%
5.6%
Non-Same Park
Northern California . . . . .
Northern Texas . . . . . . . . .
Southern Texas . . . . . . . . .
Florida . . . . . . . . . . . . . . . .
Total Non-Same Park . . . . . .
1,894
1,065
1,094
1,231
5,284
6
237
72
83
398
31,466.7%
349.4%
1,419.4%
1,383.1%
537
535
621
442
1,227.6%
2,135
— 100.0%
93.1%
277
762.5%
72
78.9%
247
596
258.2%
1,357
530
473
789
3,149
6
(40)
—
(164)
22,516.7%
(1,425.0%)
100.0%
(581.1%)
(198)
(1,690.4%)
Total . . . . . . . . . . . . . . . . . . .
$366,794
$347,661
5.5% $116,810
$114,016
2.5% $ 249,984
$ 233,645
7.0%
Reconciliation of NOI to net income
Total NOI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 249,984
$ 233,645
7.0%
Other income and (expenses):
NOI from assets sold or held for development
LTEIP amortization:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,397
17,862
(75.4%)
Cost of operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Facility management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income and (expenses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition transaction costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of real estate facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,470)
(5,766)
540
(12,740)
(105,394)
(7,816)
—
28,235
(2,623)
(4,802)
660
(13,221)
(110,357)
(8,487)
(350)
92,373
(5.8%)
20.1%
(18.2%)
(3.6%)
(4.5%)
(7.9%)
(100.0%)
(69.4%)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 148,970
$ 204,700
(27.2%)
35
The following table summarizes Same Park weighted average occupancy rates and realized rent per square
foot by region for the years ended December 31, 2015 and 2014.
Weighted Average Occupancy Rates
Realized Rent Per Square Foot
Region
Northern California . . . . . . . . .
Southern California . . . . . . . . .
Northern Texas . . . . . . . . . . . .
Southern Texas . . . . . . . . . . . .
Virginia . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . .
Maryland . . . . . . . . . . . . . . . . .
Washington . . . . . . . . . . . . . . .
Total Same Park . . . . . . . . . . .
Liquidity and Capital Resources
2015
95.8%
93.7%
88.4%
93.0%
91.3%
93.7%
89.6%
96.8%
93.1%
2014
Change
2015
2014
Change
94.2%
92.4%
85.0%
94.8%
90.0%
95.9%
87.8%
85.8%
91.6%
1.7%
1.4%
4.0%
(1.9%)
1.4%
(2.3%)
2.1%
12.8%
1.6%
$11.27
$15.69
$11.27
$13.60
$21.57
$ 9.81
$23.19
$10.76
$14.29
$10.71
$14.89
$10.76
$12.31
$22.04
$ 9.51
$23.86
$10.42
$13.95
5.2%
5.4%
4.7%
10.5%
(2.1%)
3.2%
(2.8%)
3.3%
2.4%
Cash and cash equivalents decreased $60.3 million from $188.9 million at December 31, 2015 to $128.6
million at December 31, 2016 for the reasons noted below.
Net cash provided by operating activities for the years ended December 31, 2016 and 2015 was $250.5
million and $238.8 million, respectively. The increase of $11.7 million in net cash provided by operating
activities was primarily due to an increase in NOI. Management believes that the Company’s internally generated
net cash provided by operating activities will be sufficient to enable it to meet its operating expenses, capital
expenditures, debt service requirements and distributions to shareholders for the foreseeable future.
Net cash used in investing activities was $85.0 million for the year ended December 31, 2016 compared to
net cash provided by investing activities of $3.1 million for the year ended December 31, 2015. The change was
primarily due to net proceeds of $55.2 million received from assets sold in 2015 combined with a $34.9 million
increase in cash investment in the Joint Venture and $12.6 million acquisition in Rockville, Maryland, in 2016.
This change was partially offset by a decrease in cash paid related to capital improvements.
Net cash used in financing activities was $225.8 million and $205.5 million for the years ended
December 31, 2016 and 2015, respectively. The change was primarily due to repayment of mortgage note
payable of $250.0 million in 2016 combined with an increase in distributions paid to common shareholders and
unit holders of $27.8 million ($3.00 per share in 2016 compared to $2.20 in 2015). This change was also
impacted by net preferred equity transactions of $258.3 million resulting from the issuance of preferred equity of
$183.3 million in 2016 and the redemption of preferred equity of $75.0 million in 2015.
As described in Item 1, “Business — Borrowings,” the Company repaid in full the $250.0 million mortgage
note in 2016. The Company had no balance outstanding on its $250.0 million Credit Facility at December 31,
2016 and 2015. Subsequent to December 31, 2016, the Company had $85.0 million outstanding on the Credit
Facility in conjunction to the redemption of its 6.45% Cumulative Preferred Stock, Series S. See Notes 6 and 7 to
the consolidated financial statements included in this Form 10-K for a summary of the Company’s outstanding
borrowings as of December 31, 2016.
The Company’s preferred equity outstanding decreased from 22.0% of its market capitalization during the
year ended December 31, 2015 to 21.7% at December 31, 2016 primarily due to an increase in stock price from
$87.43 at December 31, 2015 to $116.52 at December 31, 2016 combined with the repayment of the $250.0
million mortgage note. The Company calculates market capitalization by adding (1) the liquidation preference of
the Company’s outstanding preferred equity, (2) principal value of the Company’s outstanding debt and (3) the
total number of common shares and common units outstanding at December 31, 2016 multiplied by the closing
price of the stock on that date.
The Company focuses on retaining cash for reinvestment, as we believe this provides us the greatest level of
financial flexibility. As operating fundamentals improve, additional increases in distributions to the Company’s
common shareholders may be required. The Company will continue to monitor its taxable income and the
corresponding dividend requirements as discussed below.
36
Issuance of Preferred Stock: On October 20, 2016, the Company issued $189.8 million or 7,590,000
depositary shares, each representing 1/1,000 of a share of the 5.20% Cumulative Preferred Stock, Series W, at
$25.00 per depositary share.
Redemption of Preferred Stock: On December 7, 2016, the Company called for the redemption of its 6.45%
Cumulative Preferred Stock, Series S, at its par value of $230.0 million and subsequently completed the
redemption on January 18, 2017. The Company reported non-cash distributions of $7.3 million, representing the
original issuance costs, as a reduction of net income allocable to common shareholders and unit holders for the
year ended December 31, 2016. As of December 31, 2016, the Company reclassified the 6.45% Cumulative
Preferred Stock, Series S, of $230.0 million from equity to liabilities as preferred stock called for redemption.
On October 15, 2015, the Company completed the redemption of its 6.875% Cumulative Preferred Stock,
Series R, at its par value of $75.0 million. The Company reported non-cash distributions of $2.5 million,
representing the original issuance costs, as a reduction of net income allocable to common shareholders and unit
holders for the year ended December 31, 2015.
Repurchase of Common Stock: No shares of common stock were repurchased under the board approved
common stock repurchase program during the years ended December 31, 2016 or 2015.
Mortgage Note Repayment: On June 1, 2016, the Company repaid in full a $250.0 million mortgage note
which had a fixed interest rate of 5.45%.
Investment in and Advances to Unconsolidated Joint Venture: The aggregate amount of development
costs are estimated to be $105.6 million (excluding unrealized land appreciation), of which the Company is
committed to funding $75.0 million through a construction loan in addition to capital contributions of $28.5
million, which includes a land basis of $15.3 million, to the Joint Venture. The Company’s investment in and
advances to unconsolidated joint venture was $67.2 million and $26.7 million as of December 31, 2016 and
2015, respectively. For the year ended December 31, 2016, the Company made loan advances of $33.9 million,
capital contributions of $5.7 million and capitalized $885,000 of interest.
Prior to the Contribution Date, the Company capitalized $2.8 million to the Project, of which $813,000 was
related to capitalized interest from January 1, 2015 through October 5, 2015. Subsequent to the Contribution
Date, the Company made capital contributions of $5.2 million and capitalized $346,000 of interest on its
investment in the Joint Venture from October 6, 2015 through December 31, 2015. The Company made no loan
advances to the Joint Venture in 2015.
At December 31, 2014, the land and capitalized development costs were $18.4 million for the Project. For
the year ended December 31, 2014, the Company capitalized $2.2 million to the Project, of which $944,000 was
related to capitalized interest.
Capital Expenditures: The Company defines recurring capital expenditures as those necessary to maintain
and operate its commercial real estate at its current economic value. During the years ended December 31, 2016,
2015 and 2014, the Company expended $31.0 million, $39.8 million and $47.2 million, respectively, in recurring
capital expenditures, or $1.10, $1.41 and $1.59 per weighted average square foot owned, respectively. Tenant
improvements exclude tenant reimbursements of $5.4 million, $3.1 million and $2.7 million for the years ended
improvements include property
December 31, 2016, 2015 and 2014, respectively. Nonrecurring capital
renovations and expenditures related to repositioning acquisitions.
37
The following table depicts capital expenditures (in thousands):
For the Years Ended December 31,
2016
2015
2014
Recurring capital expenditures
Capital improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tenant improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8,336
16,086
6,530
Total recurring capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30,952
Nonrecurring capital improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
925
$ 8,136
22,705
9,005
39,846
3,808
$ 8,664
27,824
10,684
47,172
4,614
Total capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$31,877
$43,654
$51,786
Capital expenditures on a per square foot owned basis are as follows:
For the Years Ended December 31,
2016
2015
2014
Recurring capital expenditures
Capital improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tenant improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recurring capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonrecurring capital improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$0.30
0.57
0.23
1.10
0.03
$0.29
0.80
0.32
1.41
0.13
$0.29
0.94
0.36
1.59
0.16
Total capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1.13
$1.54
$1.75
For the year ended December 31, 2016, recurring capital expenditures decreased $8.9 million, or 22.3%,
over 2015 primarily due to lower tenant improvement costs and continued efforts to reduce capital expenditures.
Distributions: The Company has elected and intends to qualify as a REIT for federal income tax purposes.
In order to maintain its status as a REIT, the Company must meet, among other tests, sources of income, share
ownership and certain asset tests. As a REIT, the Company is not taxed on that portion of its taxable income that
is distributed to its shareholders provided that at least 90% of its REIT taxable income is distributed to its
shareholders prior to the filing of its tax return.
Subsequent to December 31, 2016, the Board increased its quarterly dividend from $0.75 per common share
to $0.85 per common share, increasing quarterly distributions by $3.4 million per quarter.
The Company paid distributions of $138.6 million ($57.3 million to preferred shareholders and $81.3
million to common shareholders), $118.8 million ($59.4 million to preferred shareholders and $59.4 million to
common shareholders) and $188.3 million ($60.5 million to preferred shareholders and $127.8 million to
common shareholders) during the years ended December 31, 2016, 2015 and 2014, respectively. All of these
distributions were REIT qualifying distributions.
The Board will continue to evaluate our dividend rate in light of our actual and projected taxable income,
liquidity requirements and other circumstances, and there can be no assurance that the future dividends declared
by our Board will not differ materially.
The Company’s funding strategy has been to primarily use permanent capital, including common and
preferred stock, along with internally generated retained cash flows to meet its liquidity needs. In addition, the
Company may sell properties that no longer meet its investment criteria. From time to time, the Company may
use its Credit Facility or other forms of debt to facilitate real estate acquisitions or other capital allocations. For
the year ended December 31, 2016, the earnings to combined fixed charges and preferred distributions coverage
ratio was 2.1 to 1.0. The Company targets a minimum ratio of FFO to combined fixed charges and preferred
distributions of 3.0 to 1.0. Fixed charges include interest expense and capitalized interest while preferred
distributions include amounts paid to preferred shareholders and preferred Operating Partnership unit holders.
38
For the year ended December 31, 2016, the FFO to combined fixed charges and preferred distributions coverage
ratio was 3.9 to 1.0, excluding the non-cash charge for the issuance costs related to the redemption of preferred
equity.
Non-GAAP Supplemental Disclosure Measure: FFO: Management believes that FFO and FFO, as
adjusted are useful supplemental measures of the Company’s operating performance. The Company computes
FFO in accordance with the White Paper on FFO approved by the Board of Governors of NAREIT. The White
Paper defines FFO as net income, computed in accordance with GAAP, before depreciation, amortization, gains
or losses on asset dispositions, net income allocable to noncontrolling interests — common units, net income
allocable to restricted stock unit holders, impairment charges and nonrecurring items. Management believes that
FFO provides a useful measure of the Company’s operating performance and when compared year over year,
reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development
activities, general and administrative expenses and interest costs, providing a perspective not immediately
apparent from net income.
FFO and FFO, as adjusted should be analyzed in conjunction with net income. However, FFO and FFO, as
adjusted should not be viewed as substitutes for net income as measures of operating performance or liquidity, as
they do not reflect depreciation and amortization costs or the level of capital expenditure and leasing costs
necessary to maintain the operating performance of the Company’s properties, which are significant economic
costs and could materially affect the Company’s results of operations.
Management believes FFO provides useful information to the investment community about the Company’s
operating performance when compared to the performance of other real estate companies as FFO is generally
recognized as the industry standard for reporting operations of REITs. Management believes FFO, as adjusted
provides useful information to the investment community by adjusting FFO for certain items so as to provide
more meaningful period-to-period comparisons of our operating performance. Other REITs may use different
methods for calculating FFO and/or FFO, as adjusted and, accordingly, our FFO and FFO, as adjusted may not be
comparable to other real estate companies’ FFO and/or FFO, as adjusted.
39
FFO for the Company is computed as follows (in thousands, except per share data):
For The Years Ended December 31,
2016
2015
2014
2013
2012
Net income allocable to common shareholders . . . . . .
Gain on sale of land and real estate facilities . . . . . .
Depreciation and amortization (1) . . . . . . . . . . . . . .
Net income allocable to noncontrolling interests —
common units holders . . . . . . . . . . . . . . . . . . . . .
Net income allocable to restricted stock unit
$ 62,872
$ 68,291
— (28,235)
105,394
$113,154
(92,373)
110,357
$ 43,851
—
108,917
$ 19,805
(935)
109,494
99,486
16,955
18,495
30,729
12,952
5,970
holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
569
299
329
125
138
FFO allocable to common and dilutive shares . . . . . . .
FFO allocated to noncontrolling interests — common
units holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FFO allocated to restricted stock unit holders . . . . . . .
179,882
164,244
162,196
165,845
134,472
(37,871)
(1,576)
(34,853)
(701)
(34,586)
(256)
(37,755)
(264)
(31,041)
(455)
FFO allocated to common shares . . . . . . . . . . . . . . . . .
$140,435
$128,690
$127,354
$127,826
$102,976
Weighted average common shares outstanding . . . . . .
Weighted average common operating partnership
27,089
26,973
26,899
24,732
24,234
units outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,305
7,305
7,305
7,305
7,305
Weighted average restricted stock units
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average common share equivalents
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
290
90
130
78
69
101
51
101
107
89
Total common and dilutive shares . . . . . . . . . . . . . . . .
34,774
34,486
34,374
32,189
31,735
Net income per common share — diluted . . . . . . . . . .
Gain on sale of land and real estate facilities (2) . . .
Depreciation and amortization (2) . . . . . . . . . . . . . .
$
$
2.31
—
2.86
$
2.52
(0.82)
3.06
$
4.19
(2.68)
3.21
$
1.77
—
3.38
0.81
(0.03)
3.46
FFO per common and dilutive shares, as
reported (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
5.17
$
4.76
$
4.72
$
5.15
$
4.24
(1)
Includes depreciation from discontinued operations.
(2) Per share amounts are computed using additional dilutive shares related to noncontrolling interests and
restricted stock units.
40
The following table reconciles reported FFO to FFO, as adjusted, which excludes material lease buyout
payments, a net non-cash stock compensation charge of $2.0 million, acquisition transaction costs, the impact of
non-cash distributions related to the redemption of preferred equity and gain on sale of ownership interest in
STOR-Re on the Company’s FFO per common and dilutive share for the years ended December 31, 2012
through December 31, 2016.
FFO allocable to common and dilutive shares, as
reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease buyout payments . . . . . . . . . . . . . . . . . . . . . . . .
LTEIP modification due to change in senior
management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition transaction costs . . . . . . . . . . . . . . . . . . . .
Non-cash distributions related to the redemption of
preferred equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of ownership interest in STOR-Re . . . . .
FFO allocable to common and dilutive shares, as
For The Years Ended December 31,
2016
2015
2014
2013
2012
$179,882
(528)
$164,244
—
$162,196
—
$165,845
(2,252)
$134,472
(1,783)
2,018
328
7,312
—
—
—
2,487
—
—
350
—
—
—
854
—
350
—
(1,144)
17,316
—
adjusted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$189,012
$166,731
$162,546
$163,303
$150,355
FFO per common and dilutive share, as reported . . . .
Lease buyout payments . . . . . . . . . . . . . . . . . . . . . . . .
LTEIP modification due to change in senior
management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition transaction costs . . . . . . . . . . . . . . . . . . . .
Non-cash distributions related to the redemption of
preferred equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of ownership interest in STOR-Re . . . . .
$
$
5.17
(0.01)
$
4.76
—
0.06
0.01
0.21
—
—
—
0.07
—
4.72
—
—
0.01
—
—
$
$
5.15
(0.07)
4.24
(0.06)
—
0.03
—
(0.04)
—
0.01
0.55
—
4.74
FFO per common and dilutive share, as adjusted . . . .
$
5.44
$
4.83
$
4.73
$
5.07
$
FFO allocable to common and dilutive shares, as adjusted, increased $22.3 million for the year ended
December 31, 2016 compared to 2015. The increase was due to an increase in NOI and a decrease in interest
expense partially offset by non-cash distributions related to the redemption of preferred equity.
Related Party Transactions: As of December 31, 2016, PS owned 7.2 million shares of the Company’s
common stock and 7.3 million common units of the Operating Partnership (100.0% of the common units not
owned by the Company). Assuming issuance of the Company’s common stock upon redemption of its common
partnership units, PS would own 42.0% (or 14.5 million shares) of the outstanding shares of the Company’s
common stock at December 31, 2016. Ronald L. Havner, Jr., the Company’s chairman, is also the Chairman of
the Board, Chief Executive Officer of PS. Joseph D. Russell, Jr. is a director of the Company and also President
of PS. Gary E. Pruitt, an independent director of the Company, is also a trustee of PS.
Pursuant to a cost sharing and administrative services agreement, the Company shares costs with PS for
certain administrative services and rental of corporate office space. The administrative services include investor
relations, legal, lease administration, corporate tax and information systems, which were allocated between the
Company and PS in accordance with a methodology intended to fairly allocate those costs. For the year ended
December 31, 2016 the costs allocated to the Company totaled $493,000 and costs allocated to PS totaled
$38,000. In addition, the Company provides property management services for properties owned by PS for a
management fee equal to 5% of the gross revenues of such properties in addition to reimbursement of certain
costs. These management fee revenues recognized under a management contract with PS totaled $518,000 in
2016. PS also provides property management services for the self-storage component of two assets owned by the
Company for a fee of 6% of the gross revenues of such properties in addition to reimbursement of certain costs.
Management fee expense recognized under the management contract with PS totaled $86,000 for the year ended
December 31, 2016.
41
The PS Business Parks name and logo are owned by PS and licensed to the Company under a non-exclusive,
royalty-free license agreement. The license can be terminated by either party for any reason with six months
written notice.
Off-Balance Sheet Arrangements: The Company does not have any off-balance sheet arrangements that
have or are reasonably likely to have a material effect on the Company’s financial condition, results of
operations, liquidity, capital expenditures or capital resources.
Contractual Obligations: The Company does not have any contractual obligations that have or are
reasonably likely to have a material effect on the Company’s financial condition, results of operations, liquidity,
capital expenditures or capital resources.
The Company is scheduled to pay cash dividends of $51.1 million per year on its preferred equity
outstanding as of December 31, 2016. Dividends are paid when and if declared by the Company’s Board and
accumulate if not paid. Shares of preferred equity are redeemable by the Company in order to preserve its status
as a REIT and are also redeemable five years after issuance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To limit the Company’s exposure to market risk, the Company principally finances its operations and
growth with permanent equity capital consisting of either common or preferred stock. The Company had no debt
outstanding as of as of December 31, 2016.
Our exposure to market risk for changes in interest rates relates primarily to the Credit Facility, which is
subject to variable interest rates. See Notes 2, 6 and 7 to the consolidated financial statements included in this
Form 10-K for additional information regarding the terms, valuations and approximate principal maturities of the
Company’s indebtedness, including the Credit Facility. Based on borrowing rates currently available to the
Company, the difference between the carrying amount of debt and its fair value is insignificant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company at December 31, 2016 and 2015 and for the years ended
December 31, 2016, 2015 and 2014 and the report of Ernst & Young LLP, Independent Registered Public
Accounting Firm, thereon and the related financial statement schedule, are included elsewhere herein. Reference
is made to the Index to Consolidated Financial Statements and Schedules in Item 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as
of December 31, 2016. Management recognizes that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving their objectives and management necessarily
applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the
evaluation of the Company’s disclosure controls and procedures as of December 31, 2016, the Company’s Chief
Executive Officer and Chief Financial Officer concluded that, as of such date, the Company’s disclosure controls
and procedures were effective at the reasonable assurance level. The Company also has an investment in an
unconsolidated joint venture and because we do not control the joint venture, our disclosure controls and
procedures with respect to such joint venture are substantially more limited than those we maintain with respect
to our consolidated subsidiaries.
42
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the
supervision and with the participation of our management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting
based on the framework in Internal Control-Integrated Framework issued by the Committee on Sponsoring
Organizations of the Treadway Commission (2013 Framework). Based on that evaluation, our management
concluded that our internal control over financial reporting was effective as of December 31, 2016.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2016 has
been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their
attestation report which is included herein.
Changes in Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2016 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
43
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
PS Business Parks, Inc.
We have audited PS Business Parks, Inc.’s internal control over financial reporting as of December 31,
2016, based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). PS Business
Parks, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and
for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion
on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect
the transactions and dispositions of the assets of the Company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of the Company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, PS Business Parks, Inc. maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of PS Business Parks, Inc. as of December 31, 2016 and 2015,
and the related consolidated statements of income, equity, and cash flows for each of the three years in the period
ended December 31, 2016 and our report dated February 24, 2017 expressed an unqualified opinion thereon.
Los Angeles, California
February 24, 2017
/s/ Ernst & Young LLP
44
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item with respect to directors is hereby incorporated by reference to the
material appearing in the Company’s definitive proxy statement to be filed in connection with the annual
shareholders’ meeting to be held in 2017 (the “Proxy Statement”) under the caption “Election of Directors.”
The following is a biographical summary of the executive officers of the Company:
Maria R. Hawthorne, age 57, was named Chief Executive Officer and elected as a Director of the Company
in July, 2016. Ms. Hawthorne was promoted to President in August, 2015 and continues to serves as President of
the Company. Ms. Hawthorne most recently served as Executive Vice President, Chief Administrative Officer of
the Company from July, 2013 to July, 2015. Ms. Hawthorne served as Executive Vice President, East Coast from
February, 2011 to July, 2013. Ms. Hawthorne was Senior Vice President from March, 2004 to February, 2011,
with responsibility for property operations on the East Coast, which includes Northern Virginia, Maryland and
South Florida. From June, 2001 through March, 2004, Ms. Hawthorne was Vice President of the Company,
responsible for property operations in Virginia. From July, 1994 to June, 2001, Ms. Hawthorne was a Regional
Manager of the Company in Virginia. From August, 1988 to July, 1994, Ms. Hawthorne was a General Manager,
Leasing Director and Property Manager for American Office Park Properties. Ms. Hawthorne earned a Bachelor
of Arts Degree in International Relations from Pomona College.
John W. Petersen, age 53, has been Executive Vice President and Chief Operating Officer since he joined
the Company in December, 2004. Prior to joining the Company, Mr. Petersen was Senior Vice President, San
Jose Region, for Equity Office Properties from July, 2001 to December, 2004, responsible for 11.3 million square
feet of multi-tenant office, industrial and R&D space in Silicon Valley. Prior to EOP, Mr. Petersen was Senior
Vice President with Spieker Properties, from 1995 to 2001 overseeing the growth of that company’s portfolio in
San Jose, through acquisition and development of nearly three million square feet. Mr. Petersen is a graduate of
The Colorado College in Colorado Springs, Colorado, and was recently the President of National Association of
Industrial and Office Parks, Silicon Valley Chapter.
Edward A. Stokx, age 51, a certified public accountant, has been Chief Financial Officer and Secretary of
the Company since December, 2003 and Executive Vice President since March, 2004. Mr. Stokx has overall
responsibility for the Company’s finance and accounting functions. In addition, he has responsibility for
executing the Company’s financial initiatives. Mr. Stokx joined Center Trust, a developer, owner, and operator of
retail shopping centers in 1997. Prior to his promotion to Chief Financial Officer and Secretary in 2001, he
served as Senior Vice President, Finance and Controller. After Center Trust’s merger in January, 2003 with
another public REIT, Mr. Stokx provided consulting services to various entities. Prior to joining Center Trust,
Mr. Stokx was with Deloitte and Touche from 1989 to 1997, with a focus on real estate clients. Mr. Stokx earned
a Bachelor of Science degree in Accounting from Loyola Marymount University.
Information required by this item with respect to the nominating process, the audit committee and the audit
committee financial expert is hereby incorporated by reference to the material appearing in the Proxy Statement
under the caption “Corporate Governance and Board Matters.”
Information required by this item with respect to a code of ethics is hereby incorporated by reference to the
material appearing in the Proxy Statement under the caption “Corporate Governance and Board Matters.” We
have adopted a code of ethics that applies to our principal executive officer, principal financial officer and
principal accounting officer, which is available on our website at www.psbusinessparks.com. The information
contained on the Company’s website is not a part of, or incorporated by reference into, this Annual Report on
Form 10-K. Any amendments to or waivers of the code of ethics granted to the Company’s executive officers or
the controller will be published promptly on our website or by other appropriate means in accordance with SEC
rules.
45
Information required by this item with respect to the compliance with Section 16(a) of the Exchange Act is
hereby incorporated by reference to the material appearing in the Proxy Statement under the caption “Section
16(a) Beneficial Ownership Reporting Compliance.”
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by reference to the material appearing in the
Proxy Statement under the captions “Corporate Governance and Board Matters,” “Executive Compensation,”
“Corporate Governance and Board Matters — Compensation Committee Interlocks and Insider Participation”
and “Report of the Compensation Committee.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item with respect to security ownership of certain beneficial owners and
management is hereby incorporated by reference to the material appearing in the Proxy Statement under the
caption “Stock Ownership of Certain Beneficial Owners and Management.”
The following table sets forth information as of December 31, 2016 on the Company’s equity compensation
plans:
Plan Category
Equity compensation plans approved by security
holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity compensation plans not approved by security
holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(a)
Number of Securities
to be Issued Upon
Exercise of
Outstanding
Options,
Warrants and
Rights
(b)
Weighted
Average
Exercise Price of
Outstanding
Options,
Warrants and
Rights
(c)
Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation
Plans (Excluding
Securities Reflected in
Column (a))
374,348
$64.92
1,160,152
—
—
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
374,348*
$64.92*
1,160,152*
*
Amounts include restricted stock units.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this item is hereby incorporated by reference to the material appearing in the
Proxy Statement under the captions “Corporate Governance and Board Matters” and “Certain Relationships and
Related Transactions.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is hereby incorporated by reference to the material appearing in the
Proxy Statement under the caption “Ratification of Independent Registered Public Accountants.”
46
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. 1. Financial Statements
PART IV
The financial statements listed in the accompanying Index to Consolidated Financial Statements and
Schedules are filed as part of this report.
2. Financial Statements Schedule
The financial statements schedule listed in the accompanying Index to Consolidated Financial
Statements and Schedules are filed as part of this report.
3. Exhibits
The exhibits listed in the Exhibit Index immediately preceding such exhibits are filed with or
incorporated by reference in this report.
b. Exhibits
The exhibits listed in the Exhibit Index immediately preceding such exhibits are filed with or
incorporated by reference in this report.
c. Financial Statement Schedules
Not applicable.
47
PS BUSINESS PARKS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
(Item 15(a)(1) and Item 15(a)(2))
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated balance sheets as of December 31, 2016 and 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated statements of income for the years ended December 31, 2016, 2015 and 2014 . . . . . . . . . . . .
Consolidated statements of equity for the years ended December 31, 2016, 2015 and 2014 . . . . . . . . . . . . .
Consolidated statements of cash flows for the years ended December 31, 2016, 2015 and 2014 . . . . . . . . . .
Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule:
III — Real estate and accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
49
50
51
52
53
55
72
All other schedules have been omitted since the required information is not present or not present in
amounts sufficient to require submission of the schedule, or because the information required is included in the
consolidated financial statements or notes thereto.
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
PS Business Parks, Inc.
We have audited the accompanying consolidated balance sheets of PS Business Parks, Inc. as of
December 31, 2016 and 2015, and the related consolidated statements of income, equity and cash flows for each
of the three years in the period ended December 31, 2016. Our audits also included the financial statement
schedule listed in the Index at Item 15(a). These financial statements and financial statement schedule are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the consolidated financial position of PS Business Parks, Inc. at December 31, 2016 and 2015, and the
consolidated results of its operations and its cash flows for each of the three years in the period ended
December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), PS Business Parks, Inc.’s internal control over financial reporting as of December 31, 2016,
based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) and our report dated February 24, 2017 expressed
an unqualified opinion thereon.
Los Angeles, California
February 24, 2017
/s/ Ernst & Young LLP
49
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (Item 15(a)(1) and Item 15(a)(2))
PART IV
PS BUSINESS PARKS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate facilities, at cost:
December 31,
2016
2015
(In thousands, except share
data)
$
128,629
$
188,912
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
789,531
2,226,881
793,569
2,215,515
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land and building held for development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in and advances to unconsolidated joint venture . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rent receivable, net
Deferred rent receivable, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,016,412
(1,159,808)
3,009,084
(1,082,603)
1,856,604
27,028
1,883,632
67,190
1,945
29,770
8,205
1,926,481
6,081
1,932,562
26,736
2,234
28,327
7,887
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,119,371
$ 2,186,658
LIABILITIES AND EQUITY
Accrued and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock called for redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
78,657
230,000
—
308,657
76,059
—
250,000
326,059
Commitments and contingencies
Equity:
PS Business Parks, Inc.’s shareholders’ equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized, 35,190 and
36,800 shares issued and outstanding at December 31, 2016 and 2015,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, $0.01 par value, 100,000,000 shares authorized, 27,138,138 and
27,034,073 shares issued and outstanding at December 31, 2016 and 2015,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
879,750
920,000
271
733,671
1,502,643
(1,503,076)
269
722,009
1,375,421
(1,357,203)
Total PS Business Parks, Inc.’s shareholders’ equity . . . . . . . . . . . . . . . . . . . . . .
1,613,259
1,660,496
Noncontrolling interests:
Common units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
197,455
197,455
200,103
200,103
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,810,714
1,860,599
Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,119,371
$ 2,186,658
See accompanying notes.
50
PS BUSINESS PARKS, INC.
CONSOLIDATED STATEMENTS OF INCOME
For The Years Ended December 31,
2016
2015
2014
(In thousands, except per share data)
Revenues:
Rental income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Facility management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$386,871
518
$373,135
540
$376,255
660
Total operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
387,389
373,675
376,915
Expenses:
Cost of operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
123,108
99,486
14,862
121,224
105,394
13,582
127,371
110,357
13,639
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
237,456
240,200
251,367
Other income and (expenses):
Interest and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
715
(5,664)
590
(13,330)
372
(13,593)
Total other income and (expenses)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4,949)
(12,740)
(13,221)
Gain on sale of real estate facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
28,235
92,373
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$144,984
$148,970
$204,700
Net income allocation:
Net income allocable to noncontrolling interests:
Noncontrolling interests — common units . . . . . . . . . . . . . . . . . . . . . . . .
$ 16,955
$ 18,495
$ 30,729
Total net income allocable to noncontrolling interests . . . . . . . . . . . . .
16,955
18,495
30,729
Net income allocable to PS Business Parks, Inc.:
Preferred shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock unit holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64,588
569
62,872
61,885
299
68,291
60,488
329
113,154
Total net income allocable to PS Business Parks, Inc.
. . . . . . . . . . . . .
128,029
130,475
173,971
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$144,984
$148,970
$204,700
Net income per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2.32
2.31
$
$
2.53
2.52
$
$
4.21
4.19
Weighted average common shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27,089
26,973
26,899
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27,179
27,051
27,000
See accompanying notes.
51
PS BUSINESS PARKS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
5
2
Balances at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock in connection with stock-based
compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation, net
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions:
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment to noncontrolling interests in underlying operating
partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balances at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption of preferred stock, net of issuance costs . . . . . . . . . . . . . . . . . .
Issuance of common stock in connection with stock-based
compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions:
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment to noncontrolling interests in underlying operating
partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balances at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative effect of a change in accounting principle (Note 11) . . . . . . . . .
Issuance of preferred stock, net of issuance costs . . . . . . . . . . . . . . . . . . . . .
Redemption of preferred stock, net of issuance costs . . . . . . . . . . . . . . . . . .
Issuance of common stock in connection with stock-based
compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions:
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment to noncontrolling interests in underlying operating
partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred Stock
Common Stock
Shares
Amount
Shares
Amount
Paid-in
Capital
Cumulative
Net Income
Cumulative
Distributions
(In thousands, except share data)
Total PS
Business
Parks, Inc.’s
Shareholders’
Equity
Noncontrolling
Interests
Total
Equity
39,800
$ 995,000
26,849,822
$267
$699,314
$1,070,975
$(1,047,615)
$1,717,941
$196,699
$1,914,640
—
—
—
—
—
—
—
—
—
—
—
—
—
—
69,339
—
—
—
—
—
—
39,800
(3,000)
995,000
(75,000)
26,919,161
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
114,912
—
—
—
—
—
—
36,800
—
7,590
(9,200)
920,000
—
189,750
(230,000)
27,034,073
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
104,065
—
—
—
—
—
—
1
—
—
—
—
—
—
268
—
1
—
—
—
—
—
—
269
—
—
—
2
—
—
—
—
—
—
3,053
8,842
—
—
—
—
(2,201)
709,008
2,487
5,088
8,178
—
—
—
—
(2,752)
722,009
807
(6,434)
7,312
3,886
8,404
—
—
—
—
(2,313)
—
—
173,971
—
—
—
—
—
—
—
(60,488)
(127,838)
—
—
1,244,946
—
(1,235,941)
(2,487)
—
—
130,475
—
—
—
—
1,375,421
(807)
—
—
—
—
128,029
—
—
—
—
—
—
—
(59,398)
(59,377)
—
—
(1,357,203)
—
—
(7,312)
—
—
—
(57,276)
(81,285)
—
—
3,054
8,842
173,971
(60,488)
(127,838)
—
(2,201)
1,713,281
(75,000)
5,089
8,178
130,475
(59,398)
(59,377)
—
(2,752)
1,660,496
—
183,316
(230,000)
3,888
8,404
128,029
(57,276)
(81,285)
—
(2,313)
—
—
30,729
—
—
(34,701)
2,201
194,928
—
—
—
18,495
—
—
(16,072)
2,752
200,103
—
—
—
—
—
16,955
—
—
(21,916)
2,313
3,054
8,842
204,700
(60,488)
(127,838)
(34,701)
—
1,908,209
(75,000)
5,089
8,178
148,970
(59,398)
(59,377)
(16,072)
—
1,860,599
—
183,316
(230,000)
3,888
8,404
144,984
(57,276)
(81,285)
(21,916)
—
Balances at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35,190
$ 879,750
27,138,138
$271
$733,671
$1,502,643
$(1,503,076)
$1,613,259
$197,455
$1,810,714
See accompanying notes.
PS BUSINESS PARKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . .
In-place lease adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tenant improvement reimbursements, net of lease incentives . . . . .
Gain on sale of real estate facilities . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease (increase) in receivables and other assets . . . . . . . . . . . . .
Increase (decrease) in accrued and other liabilities . . . . . . . . . . . . .
For The Years Ended December 31,
2016
2015
2014
(In thousands)
$ 144,984
$ 148,970
$ 204,700
99,486
(520)
(1,666)
—
10,913
(2,022)
(668)
105,394
(1,251)
(1,861)
(28,235)
9,245
(989)
7,566
110,357
(901)
(1,580)
(92,373)
9,580
792
(2,395)
Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
105,523
89,869
23,480
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . .
250,507
238,839
228,180
Cash flows from investing activities:
Capital expenditures to real estate facilities . . . . . . . . . . . . . . . . . . .
Capital expenditures to land and building held for development . . .
Investment in and advances to unconsolidated joint venture . . . . . .
Acquisition of real estate facilities . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of real estate facilities . . . . . . . . . . . . . . . . . . . .
(31,877)
(49)
(40,454)
(12,628)
—
(43,654)
(2,809)
(5,566)
—
55,160
(51,786)
(2,189)
—
(45,021)
212,184
Net cash (used in) provided by investing activities . . . . . . . . . . .
(85,008)
3,131
113,188
Cash flows from financing activities:
Proceeds from the exercise of stock options . . . . . . . . . . . . . . . . . .
Redemption of preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for taxes in lieu of shares upon vesting of restricted
stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid to restricted stock unit holders . . . . . . . . . . . . . . . . . . . . .
Distributions paid to preferred shareholders . . . . . . . . . . . . . . . . . .
Distributions paid to common shareholders . . . . . . . . . . . . . . . . . . .
Distributions paid to noncontrolling interests . . . . . . . . . . . . . . . . .
Borrowings on credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of borrowings on credit facility . . . . . . . . . . . . . . . . . . .
Repayment of mortgage note payable . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from the issuance of preferred stock . . . . . . . . . . . . .
3,888
—
5,089
(75,000)
3,054
—
(1,940)
(569)
(57,276)
(81,285)
(21,916)
116,000
(116,000)
(250,000)
183,316
(767)
—
(59,398)
(59,377)
(16,072)
—
—
—
—
(409)
—
(60,488)
(127,838)
(34,701)
—
—
—
—
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . .
(225,782)
(205,525)
(220,382)
Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . .
Cash and cash equivalents at the beginning of the period . . . . . . . . . .
(60,283)
188,912
36,445
152,467
120,986
31,481
Cash and cash equivalents at the end of the period . . . . . . . . . . . . . . .
$ 128,629
$ 188,912
$ 152,467
Supplemental disclosures:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
7,395
$ 14,197
$ 14,200
See accompanying notes.
53
PS BUSINESS PARKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental schedule of non-cash investing and financing
activities:
Adjustment to noncontrolling interests in underlying operating
partnership:
Noncontrolling interests — common units . . . . . . . . . . . . . . . . . . .
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash distributions related to the redemption of preferred stock:
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
Preferred stock called for redemption:
Preferred stock called for redemption and reclassified to
For The Years Ended December 31,
2016
2015
2014
(In thousands)
2,313
(2,313)
$ 2,752
$ (2,752)
$ 2,201
$(2,201)
7,312
(7,312)
$ 2,487
$ (2,487)
$ —
$ —
liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 230,000
Preferred stock called for redemption and reclassified from
equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(230,000)
Transfer to land and building held for development:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .
Land and building held for development
$
(9,676)
$ (19,092)
$
7,870
$ 20,898
$
$
$
$
$
$
$
$
— $ —
— $ —
— $ —
— $ —
— $ —
— $ —
— $ —
— $ —
807
(807)
— $(21,170)
— $ 21,170
$ —
$ —
Cumulative effect of a change in accounting principle (Note 11):
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer to investment in and advances to unconsolidated joint
venture:
Land and building held for development
. . . . . . . . . . . . . . . . . . . .
Investment in and advances to unconsolidated joint venture . . . . .
$
$
$
$
See accompanying notes.
54
PS BUSINESS PARKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016
1. Organization and description of business
Organization
PS Business Parks, Inc. (“PSB”) was incorporated in the state of California in 1990. As of December 31,
2016, PSB owned 77.9% of the common partnership units (the “common partnership units”) of PS Business
Parks, L.P. (the “Operating Partnership”). The remaining common partnership units are owned by Public Storage
(“PS”). PSB, as the sole general partner of the Operating Partnership, has full, exclusive and complete
responsibility and discretion in managing and controlling the Operating Partnership. PSB and its subsidiaries,
including the Operating Partnership, are collectively referred to as the “Company.” Assuming issuance of the
Company’s common stock upon redemption of its common partnership units, PS would own 42.0% (or
14.5 million shares) of the outstanding shares of the Company’s common stock.
Description of business
The Company is a fully-integrated, self-advised and self-managed real estate investment trust (“REIT”) that
owns, operates, acquires and develops commercial properties, primarily multi-tenant flex, office and industrial
space. As of December 31, 2016, the Company owned and operated 28.1 million rentable square feet of
commercial space in six states. The Company also manages 684,000 rentable square feet on behalf of PS.
References to the number of properties or square footage are unaudited and outside the scope of the
Company’s independent registered public accounting firm’s audit of the Company’s financial statements in
accordance with the standards of the Public Company Accounting Oversight Board (United States).
2. Summary of significant accounting policies
Basis of presentation
The accompanying consolidated financial statements include the accounts of PSB and the Operating
Partnership. All significant inter-company balances and transactions have been eliminated in the consolidated
financial statements. The financial statements are presented on an accrual basis in accordance with U.S. generally
accepted accounting principles (“GAAP”).
Consolidation and Equity Method of Accounting
The Company accounts for its investment in a joint venture that it has significant influence over, but does
not control, using the equity method of accounting eliminating intra-entity profits and losses as if the joint
venture were a consolidated subsidiary.
The Company consolidates all variable interest entities (each a “VIE”) for which it
is the primary
beneficiary. Generally, a VIE is a legal entity in which the equity investors do not have the characteristics of a
controlling financial interest or the equity investors lack sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support. A limited partnership may be considered a VIE if the
limited partners do not participate in operating decisions. Under this criteria, the Operating Partnership is
in the Operating Partnership, and
considered a VIE. The Company’s significant asset
consequently, substantially all of the Company’s assets and liabilities represent those assets and liabilities of the
Operating Partnership. All of the Company’s debt is an obligation of the Operating Partnership.
is its investment
Noncontrolling interests
The Company’s noncontrolling interests are reported as a component of equity separate from the parent’s
equity. Purchases or sales of equity interests that do not result in a change in control are accounted for as equity
55
transactions. In addition, net income attributable to the noncontrolling interests is included in net income on the
face of the income statement and, upon a gain or loss of control, the interests purchased or sold, as well as any
interests retained, are recorded at fair value with any gain or loss recognized in earnings. At the end of each
reporting period, the Company determines the amount of equity (book value of net assets) which is allocable to
the noncontrolling interests based upon the ownership interest, and an adjustment is made to the noncontrolling
interests, with a corresponding adjustment to paid-in capital, to reflect the noncontrolling interests’ equity
interest in the Company.
Use of estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from these estimates.
Allowance for doubtful accounts
The Company monitors the collectability of its receivable balances including the deferred rent receivable on
an ongoing basis. Based on these reviews, the Company maintains an allowance for doubtful accounts for
estimated losses resulting from the possible inability of tenants to make contractual rent payments to the
Company. A provision for doubtful accounts is recorded during each period. The allowance for doubtful accounts
is netted against tenant and other receivables on the consolidated balance sheets. Tenant receivables are net of an
allowance for uncollectible accounts totaling $400,000 at December 31, 2016 and 2015. Deferred rent receivable
is net of an allowance for uncollectible accounts totaling $916,000 and $909,000 at December 31, 2016 and
2015, respectively.
Financial instruments
The methods and assumptions used to estimate the fair value of financial instruments are described below.
The Company has estimated the fair value of financial instruments using available market information and
appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop
estimates of market value. Accordingly, estimated fair values are not necessarily indicative of the amounts that
could be realized in current market exchanges. The Company determines the estimated fair value of financial
assets and liabilities utilizing a hierarchy of valuation techniques based on whether the inputs to a fair value
measurement are considered to be observable or unobservable in a marketplace. Observable inputs reflect market
data obtained from independent sources, while unobservable inputs reflect market assumptions. This hierarchy
requires the use of observable market data when available. The following is the fair value hierarchy:
•
•
Level 1 — quoted prices for identical instruments in active markets;
Level 2 — quoted prices for similar instruments in active markets; quoted prices for identical or similar
instruments in markets that are not active; and model-derived valuations in which significant inputs and
significant value drivers are observable in active markets; and
• Level 3 — fair value measurements derived from valuation techniques in which one or more significant
inputs or significant value drivers are unobservable.
Financial assets that are exposed to credit risk consist primarily of cash and cash equivalents and
receivables. The Company considers all highly liquid investments with a remaining maturity of three months or
less at the date of purchase to be cash equivalents. Cash and cash equivalents, which consist primarily of money
market investments, are only invested in entities with an investment grade rating. Receivables are comprised of
balances due from a large number of customers. Balances that the Company expects to become uncollectible are
reserved for or written off. Due to the short period to maturity of the Company’s cash and cash equivalents,
accounts receivable, other assets and accrued and other liabilities, the carrying values as presented on the
consolidated balance sheets are reasonable estimates of fair value.
Carrying values of the Company’s mortgage note payable and unsecured Credit Facility (as defined on
page 64) approximate fair value. The characteristics of these financial instruments, market data and other
comparative metrics utilized in determining these fair values are “Level 2” inputs.
56
Real estate facilities
Real estate facilities are recorded at cost. Costs related to the renovation or improvement of the properties
are capitalized. Expenditures for repairs and maintenance are expensed as incurred. Expenditures that are
expected to benefit a period greater than two years and exceed $2,000 are capitalized and depreciated over their
estimated useful life. Buildings and improvements are depreciated using the straight-line method over their
estimated useful lives, which generally range from five to 30 years. Transaction costs, which include tenant
improvements and lease commissions, of $1,000 or more for leases with terms greater than one year are
capitalized and depreciated over their estimated useful lives. Transaction costs less than $1,000 or for leases of
one year or less are expensed as incurred.
Land and building held for development
Property taxes, insurance, interest and costs essential to the development of property for its intended use are
capitalized during the period of development. Upon classification of an asset as held for development,
depreciation of the asset is ceased.
Properties held for disposition
An asset is classified as an asset held for disposition when it meets certain requirements, which include,
among other criteria, the approval of the sale of the asset, the marketing of the asset for sale and the expectation
by the Company that the sale will likely occur within the next 12 months. Upon classification of an asset as held
for disposition, depreciation of the asset is ceased, and the net book value of the asset is included on the balance
sheet as properties held for disposition.
Intangible assets/liabilities
Intangible assets and liabilities include above-market and below-market in-place lease values of acquired
properties based on the present value (using an interest rate which reflects the risks associated with the leases
acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and
(ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a
period equal to the remaining non-cancelable term of the lease. The capitalized above-market and below-market
lease values (included in other assets and accrued liabilities in the accompanying consolidated balance sheets) are
amortized to rental income over the remaining non-cancelable terms of the respective leases.
As of December 31, 2016, the value of in-place leases resulted in net intangible assets of $1.1 million, net of
$9.2 million of accumulated amortization with a weighted average amortization period of 9.3 years and net
intangible liabilities of $784,000, net of $10.0 million of accumulated amortization with a weighted average
amortization period of 6.6 years. As of December 31, 2015, the value of in-place leases resulted in net intangible
assets of $1.7 million, net of $8.6 million of accumulated amortization and net intangible liabilities of $1.8
million, net of $9.0 million of accumulated amortization.
The Company recorded a net increase in rental income of $520,000, $1.3 million and $901,000 during the
years ended December 31, 2016, 2015 and 2014, respectively, related to the amortization of net intangible
liabilities resulting from the above-market and below-market lease values.
Evaluation of asset impairment
The Company evaluates its assets used in operations for impairment by identifying indicators of impairment
and by comparing the sum of the estimated undiscounted future cash flows for each asset to the asset’s carrying
value. When indicators of impairment are present and the sum of the estimated undiscounted future cash flows is
less than the carrying value of such asset, an impairment loss is recorded equal to the difference between the
asset’s current carrying value and its value based on discounting its estimated future cash flows. In addition, the
Company evaluates its assets held for disposition for impairment. Assets held for disposition are reported at the
lower of their carrying value or fair value, less cost of disposition. At December 31, 2016, the Company did not
consider any assets to be impaired.
57
Asset impairment due to casualty loss
It is the Company’s policy to record as a casualty loss or gain, in the period the casualty occurs, the
differential between (a) the book value of assets destroyed and (b) any insurance proceeds that the Company
expects to receive in accordance with its insurance contracts. Potential proceeds from insurance that are subject
to any uncertainties, such as interpretation of deductible provisions of the governing agreements, the estimation
of costs of restoration, or other such items, are treated as contingent proceeds and not recorded until the
uncertainties are satisfied.
For the years ended December 31, 2016, 2015 and 2014 no material casualty losses were incurred.
Stock compensation
All share-based payments to employees, including grants of employee stock options, are recognized as stock
compensation in the Company’s income statement based on their grant date fair values. See Note 11.
Revenue and expense recognition
The Company must meet four basic criteria before revenue can be recognized: persuasive evidence of an
arrangement exists; the delivery has occurred or services have been rendered; the fee is fixed or determinable;
and collectability is reasonably assured. All leases are classified as operating leases. Rental income is recognized
on a straight-line basis over the terms of the leases. Straight-line rent is recognized for all tenants with
contractual fixed increases in rent that are not included on the Company’s credit watch list. Deferred rent
receivable represents rental revenue recognized on a straight-line basis in excess of billed rents. Reimbursements
from tenants for real estate taxes and other recoverable operating expenses are recognized as rental income in the
period the applicable costs are incurred. Property management fees are recognized in the period earned.
Costs incurred in connection with leasing (primarily tenant improvements and lease commissions) are
capitalized and amortized over the lease period.
Gains from sales of real estate facilities
The Company recognizes gains from sales of real estate facilities at the time of sale using the full accrual
method, provided that various criteria related to the terms of the transactions and any subsequent involvement by
the Company with the properties sold are met. If the criteria are not met, the Company defers the gains and
recognizes them when the criteria are met or uses the installment or cost recovery methods as appropriate under
the circumstances.
General and administrative expenses
General and administrative expenses include executive and other compensation, office expenses,
professional fees, acquisition transaction costs, state income taxes and other such administrative items.
Income taxes
The Company has qualified and intends to continue to qualify as a REIT, as defined in Section 856 of the
Internal Revenue Code of 1986, as amended. As a REIT, the Company is not subject to federal income tax to the
extent that it distributes its REIT taxable income to its shareholders. A REIT must distribute at least 90% of its
REIT taxable income each year. In addition, REITs are subject to a number of organizational and operating
requirements. The Company may be subject to certain state and local taxes on its income and property and to
income and excise taxes on its undistributed taxable income. The Company believes it met all
federal
organization and operating requirements to maintain its REIT status during 2016, 2015 and 2014 and intends to
continue to meet such requirements. Accordingly, no provision for income taxes has been made in the
accompanying consolidated financial statements.
The Company can recognize a tax benefit only if it is “more likely than not” that a particular tax position
will be sustained upon examination or audit. To the extent that the “more likely than not” standard has been
58
satisfied, the benefit associated with a position is measured as the largest amount that is greater than 50% likely
of being recognized upon settlement. As of December 31, 2016, the Company did not recognize any tax benefit
for uncertain tax positions.
Accounting for preferred equity issuance costs
The Company records issuance costs as a reduction to paid-in capital on its balance sheet at the time the
preferred securities are issued and reflects the carrying value of the preferred equity at the stated value. Such
issuance costs are recorded as non-cash preferred equity distributions at the time the Company notifies the
holders of preferred stock of its intent to redeem such shares.
Net income allocation
Net income was allocated as follows for the years ended December 31, (in thousands):
2016
2015
2014
Net income allocable to noncontrolling interests:
Noncontrolling interests — common units . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 16,955
$ 18,495
$ 30,729
Total net income allocable to noncontrolling interests . . . . . . . . . . . . . . .
16,955
18,495
30,729
Net income allocable to PS Business Parks, Inc.:
Preferred shareholders
Distributions to preferred shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash distributions related to the redemption of preferred stock . . . . .
Total net income allocable to preferred shareholders . . . . . . . . . . . . . .
Restricted stock unit holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
57,276
7,312
64,588
569
62,872
59,398
2,487
61,885
299
68,291
60,488
—
60,488
329
113,154
Total net income allocable to PS Business Parks, Inc.
. . . . . . . . . . . . . . .
128,029
130,475
173,971
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$144,984
$148,970
$204,700
Net income per common share
Per share amounts are computed using the number of weighted average common shares outstanding.
“Diluted” weighted average common shares outstanding includes the dilutive effect of stock options and
restricted stock units under the treasury stock method. “Basic” weighted average common shares outstanding
excludes such effect. The Company’s restricted stock units are participating securities and are included in the
computation of basic and diluted weighted average common shares outstanding. The Company’s restricted stock
unit holders are paid non-forfeitable dividends in excess of the expense recorded which results in a reduction in
net income allocable to common shareholders and unit holders.
Earnings per share has been calculated as follows for the years ended December 31, (in thousands, except
per share amounts):
2016
2015
2014
Net income allocable to common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . .
$62,872
$68,291
$113,154
Weighted average common shares outstanding:
Basic weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . .
Net effect of dilutive stock compensation — based on treasury stock method
27,089
26,973
26,899
using average market price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
90
78
101
Diluted weighted average common shares outstanding . . . . . . . . . . . . . . . . . . .
27,179
27,051
27,000
Net income per common share — Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per common share — Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2.32
2.31
$
$
2.53
2.52
$
$
4.21
4.19
59
Options to purchase 25,000, 32,000 and 16,000 shares for the years ended December 31, 2016, 2015 and
2014, respectively, were not included in the computation of diluted net income per share because such options
were considered anti-dilutive.
Segment reporting
The Company views its operations as one segment.
Reclassifications
Certain reclassifications have been made to the consolidated financial statements for 2015 and 2014 in order
to conform to the 2016 presentation.
Recently issued accounting standards
In May, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2014-09, Revenue from Contracts with Customers, which amended the existing accounting standards
for revenue recognition. The core principle underlying this guidance is that entities will recognize revenue upon
the transfer of promised goods or services to customers in an amount that reflects the consideration to which the
entity expects to be entitled for such exchange. The guidance also provides a model for the measurement and
recognition of gains and losses on the sale of certain nonfinancial assets, such as property and equipment,
including real estate. This guidance is currently effective for the Company’s fiscal year beginning January 1,
2018. Early adoption is permitted for the Company’s fiscal year beginning January 1, 2017. ASU 2014-09 allows
for full retrospective adoption applied to all periods presented or modified retrospective adoption with the
cumulative effect of initially applying the standard recognized at the date of initial application. The Company
intends to adopt the guidance using the modified retrospective approach for the fiscal year beginning January 1,
2018. The Company anticipates no impact upon adoption of the new accounting guidance on its consolidated
financial statements relating to the Company’s facility management fees for property management services
provided to PS or the recognition of gains and losses on the sale of real estate assets as the Company’s current
accounting for such transactions is consistent with the new guidance’s core principle. Rental income from leasing
arrangements are a substantial portion of the Company’s revenue and is specifically excluded from ASU 2014-09
and will be governed by the applicable lease codification (ASU 2016-02, Leases). In conjunction with the
adoption of the leasing guidance, the Company is currently in the process of evaluating certain variable payment
terms included in these lease arrangements which are governed by ASU 2014-09.
In February, 2016, the FASB issued ASU 2016-02, Leases, which amends the existing accounting standards
for lease accounting. The accounting applied by a lessor is largely unchanged under this guidance. However, the
guidance requires lessees to classify leases as either finance or operating leases based on the principle of whether
or not the lease is effectively a financed purchase of the leased asset by the lessee. The classification will
determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis
over the term of the lease. A lessee is also required to record a right-of-use asset and related liability for most
leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or
less will be accounted for similar to existing guidance for operating leases today. The new guidance is expected to
result in the recognition of a right-of-use asset and related liability to account for our future obligations under our
ground lease arrangements for which we are the lessee. As of December 31, 2016, the remaining contractual
payments under our ground lease agreements aggregated $381,000. Additionally, the new guidance will require
that lessees and lessors capitalize, as initial direct costs, only those costs that are incurred due to the execution of a
lease. This guidance is effective for annual periods beginning after December 15, 2018 and interim periods within
annual periods beginning after December 15, 2018. Early adoption is permitted. The guidance must be adopted
using a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest
comparative period in the financial statements. The Company is currently in the process of evaluating the impact
of adoption of the new accounting guidance on its consolidated financial statements.
In August, 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to
Continue as a Going Concern, which is intended to define management’s responsibility to evaluate whether there
is substantial doubt about an organization’s ability to continue as a going concern for a period of one year after
60
the date that the financial statements are issued. This guidance is effective for annual periods ending after
December 15, 2016 and interim periods within annual periods beginning after December 15, 2016. The Company
adopted the new guidance during the fourth quarter of 2016 and the adoption did not require any disclosures
about the Company’s ability to continue as a going concern.
In February, 2015, the FASB issued ASU 2015-02, Consolidation – Amendments to the Consolidation
Analysis, which amended the existing accounting standards for consolidation under both the variable interest
model and the voting model. On January 1, 2016, the Company adopted this guidance and as the Operating
Partnership is already consolidated in the balance sheets of the Company, the identification of this entity as a VIE
has no impact on the consolidated financial statements of the Company. Additionally, the Company’s accounting
for its investment in its joint venture was not impacted by the adoption of this guidance.
In March, 2016,
the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment
Accounting, to amend the accounting guidance for share-based payment accounting. The Company early adopted
this standard effective October 1, 2016. Under this standard, a share-based payment related to the tax liability paid
on behalf of employees in lieu of shares received is classified as a financing activity on the statement of cash
flows, rather than as an operating activity as the Company had previously presented such amounts. The Company
applied this provision retrospectively. On our consolidated statements of cash flows for the years ended
December 31, 2015 and 2014, the Company reclassified $767,000 and $409,000, respectively, for share-based
payments related to tax liability paid on behalf of employees in lieu of shares received upon vesting of restricted
stock units as a reduction from financing activities. The Company previously reflected these amounts as a
reduction from operating activities. The standard also allows an employer to make a policy election to account for
forfeitures of share-based payments as they occur or estimate forfeitures and adjust the estimate when it is likely to
change, as is currently required. The Company elected to recognize forfeitures of share-based payments as they
occur, rather than estimating them in advance, effective October 1, 2016, under the modified retrospective
transition method. The Company recorded a cumulative-effect adjustment of $807,000 to decrease cumulative net
income and increase paid-in capital as of October 1, 2016, representing the impact of estimated forfeitures on our
cumulative share-based compensation expense recorded through September 30, 2016. See Note 11.
3. Real estate facilities
The activity in real estate facilities for the years ended December 31, 2016, 2015 and 2014 is as follows (in
thousands):
Balances at December 31, 2013 . . . . . . . . . . . . . . . . . . . . .
Acquisition of real estate facilities . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . .
Transfer to properties sold . . . . . . . . . . . . . . . . . . . . . . . . .
Balances at December 31, 2014 . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . .
Transfer to properties sold . . . . . . . . . . . . . . . . . . . . . . . . .
Balances at December 31, 2015 . . . . . . . . . . . . . . . . . . . . .
Acquisition of real estate facilities . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . .
Transfer to land and building held for development . . . . . .
Land
$772,161
21,408
—
—
—
—
793,569
—
—
—
—
793,569
5,638
—
—
—
(9,676)
Buildings and
Improvements
Accumulated
Depreciation
Total
$2,115,987
24,890
54,462
(10,587)
—
(1,759)
$ (896,189) $1,991,959
46,298
54,462
—
(110,357)
2,703
—
—
10,587
(110,357)
4,462
2,182,993
46,777
(13,990)
—
(265)
2,215,515
7,637
37,232
(14,411)
—
(19,092)
(991,497)
—
13,990
(105,394)
298
(1,082,603)
—
—
14,411
(99,486)
7,870
1,985,065
46,777
—
(105,394)
33
1,926,481
13,275
37,232
—
(99,486)
(20,898)
Balances at December 31, 2016 . . . . . . . . . . . . . . . . . . . . .
$789,531
$2,226,881
$(1,159,808) $1,856,604
61
The unaudited basis of real estate facilities for federal income tax purposes was approximately $1.9 billion
at December 31, 2016.
The purchase price of acquired properties is recorded to land, buildings and improvements (including tenant
improvements, unamortized lease commissions, acquired in-place lease values, and tenant relationships, if any)
and intangible assets and liabilities associated with the value of above-market and below-market leases based on
their respective estimated fair values. Acquisition-related costs are expensed as incurred.
In determining the fair value of the tangible assets of the acquired properties, management considers the
value of the properties as if vacant as of the acquisition date. Management must make significant assumptions in
determining the value of assets acquired and liabilities assumed. Using different assumptions in the recording of
the purchase cost of the acquired properties would affect the timing of recognition of the related revenue and
expenses. Amounts recorded to land are derived from comparable sales of land within the same region. Amounts
recorded to buildings and improvements, tenant improvements and unamortized lease commissions are based on
current market replacement costs and other market information. The amount recorded to acquired in-place leases
is determined based on management’s assessment of current market conditions and the estimated lease-up
periods for the respective spaces.
On September 28, 2016, the Company acquired two multi-tenant office buildings aggregating 226,000
square feet in Rockville, Maryland, for a purchase price of $13.3 million. The buildings are located within Shady
Grove Executive Park, where the Company owns three other buildings aggregating 352,000 square feet. The
Company incurred and expensed acquisition transaction costs of $328,000 for the year ended December 31,
2016.
On December 30, 2014, the Company acquired Charcot Business Park II, an eight-building, 119,000 square
foot multi-tenant flex park in San Jose, California, for $16.0 million. The park is contiguous to the Company’s
existing 164,000 square foot Charcot Business Park. On November 3, 2014, the Company acquired a 246,000
industrial building in Austin, Texas, for a purchase price of $10.6 million. On
square foot multi-tenant
August 21, 2014, the Company acquired a 145,000 square foot multi-tenant flex park consisting of six single-
story buildings located in Dallas, Texas, for a purchase price of $5.1 million. On July 28, 2014, the Company
acquired a 19,000 square foot building in Dallas, Texas, for $1.1 million. The flex building is located in the
Company’s 389,000 square foot Arapaho Business Park. On July 24, 2014, the Company acquired a 149,000
square foot building in Miami, Florida, for $12.7 million. The building is located within the Company’s
3.3 million square foot Miami Industrial Commerce Center. The Company incurred and expensed acquisition
transaction costs of $350,000 for the year ended December 31, 2014.
The Company did not acquire any assets or assume any liabilities during the year ended December 31, 2015.
The following table summarizes the assets acquired and liabilities assumed for
the years ended
December 31, (in thousands):
2016
2015
2014
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Below-market in-place lease value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5,638
7,637
(25)
$ — $21,408
— 24,890
(666)
—
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating assets acquired and liabilities assumed . . . . . . . . . . . . . . . . . . . . . . .
13,250
(622)
— 45,632
(611)
—
Total cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$12,628
$ — $45,021
As of November 1, 2016, the Company transferred a 123,000 square foot building located within The Mile
in Tysons, Virginia to land and building held for development, as the Company is pursuing entitlements to
develop an additional multi-family complex on this site. The scope and timing of any future development will be
subject to a variety of approvals and contingencies. Prior to being classified as land and building held for
development, the building was occupied by a single user.
62
During 2015, the Company sold four business parks, aggregating 492,000 square feet, in non-strategic
markets for net proceeds of $41.2 million, which resulted in a gain of $23.4 million. Additionally, as part of an
eminent domain process, the Company sold five buildings, aggregating 82,000 square feet, at the Company’s
Overlake Business Park located in Redmond, Washington, for $13.9 million, which resulted in a gain of $4.8
million. During 2014, the Company sold five business parks aggregating 1.9 million square feet and 11.5 acres of
land in non-strategic markets, including Portland, Oregon and Phoenix, Arizona, for net proceeds of $212.2
million, which resulted in a gain of $92.4 million. With these sales the Company has completed its stated
objective of exiting non-strategic markets in Sacramento, California, Oregon and Arizona.
4. Investment in and advances to unconsolidated joint venture
In 2013, the Company entered into a joint venture known as Amherst JV LLC (the “Joint Venture”) with an
unrelated real estate development company (the “JV Partner”) for the purpose of developing a 395-unit multi-
family building on a five-acre site within The Mile in Tysons, Virginia (the “Project”). PSB holds a 95.0%
interest in the Joint Venture with the remaining 5.0% held by the JV Partner. The JV Partner is responsible for
the development and construction of the Project and through an affiliate will oversee the leasing and management
of the Project as it is completed. The Project is expected to deliver its first completed units in the spring of 2017,
with final completion of the Project expected in early 2018.
On October 5, 2015 (the “Contribution Date”), the Company contributed the site, along with capitalized
improvements, to the Joint Venture. Subsequent to the Contribution date, demolition, site preparation and
construction commenced. The JV partner serves as the managing member, with mutual consent from both the
Company and the managing member required for all significant decisions. As such, the Company accounts for its
investment in the Joint Venture using the equity method.
Along with the equity capital the Company has committed to the Joint Venture, the Company has also
agreed to provide the Joint Venture with a construction loan in the amount of $75.0 million. The Joint Venture
will pay interest under the construction loan at a rate equal to the London Interbank Offered Rate (“LIBOR”)
plus 2.25%. The loan will mature on April 5, 2019 with two one-year extension options. The Company has
reflected the aggregate value of the contributed site, its’ equity contributions, capitalized interest and loan
advances to date as investment in and advances to unconsolidated joint venture. The aggregate amount of
development costs are estimated to be $105.6 million (excluding unrealized land appreciation), of which the
Company is committed to funding $75.0 million through a construction loan in addition to capital contributions
of $28.5 million, which includes a land basis of $15.3 million, to the Joint Venture.
The Company’s investment in and advances to unconsolidated joint venture was $67.2 million and $26.7
million at December 31, 2016 and 2015, respectively. For the year ended December 31, 2016, the Company
made loan advances of $33.9 million, capital contributions of $5.7 million and capitalized $885,000 of interest.
Prior to Contribution Date, the Company capitalized $2.8 million to the Project, of which $813,000 was
related to capitalized interest from January 1, 2015 through October 5, 2015. Subsequent to the Contribution
Date,
the Company made cash contributions of $5.2 million and capitalized $346,000 of interest on its
investment in the Joint Venture from October 6, 2015 through December 31, 2015. The Company made no loan
advances to the Joint Venture in 2015.
At December 31, 2014, the land and capitalized development costs were $18.4 million for the Project. For
the year ended December 31, 2014, the Company capitalized $2.2 million to the Project, of which $944,000 was
related to capitalized interest.
63
5. Leasing activity
The Company leases space in its real estate facilities to tenants primarily under non-cancelable leases
generally ranging from one to 10 years. Future minimum rental revenues, excluding recovery of operating
expenses under these leases, are as follows as of December 31, 2016 (in thousands):
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter
$ 274,275
211,707
145,187
94,697
63,185
114,628
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 903,679
In addition to minimum rental payments, certain tenants reimburse the Company for their pro rata share of
specified operating expenses. Such reimbursements amounted to $82.6 million, $78.9 million and $80.7 million
for the years ended December 31, 2016, 2015 and 2014, respectively. These amounts are included as rental
income in the accompanying consolidated statements of income.
Leases accounting for 3.6% of total leased square footage are subject to termination options, of which 2.3%
of total leased square footage have termination options exercisable through December 31, 2017 (unaudited). In
general, these leases provide for termination payments should the termination options be exercised. The future
minimum rental revenues in the above table assume such options are not exercised.
6. Bank loans
The Company has a line of credit (the “Credit Facility”) with Wells Fargo Bank, National Association
(“Wells Fargo”) with a borrowing limit of $250.0 million. Subsequent to December 31, 2016, the Company
modified and extended the terms of its Credit Facility and the Company’s related guaranty. The expiration date
was extended from May 1, 2019 to January 10, 2022. The rate of interest charged on borrowings was modified to
a rate ranging from the LIBOR plus 0.80% to LIBOR plus 1.55%, depending on the Company’s credit ratings.
Currently, the Company’s rate under the Credit Facility is LIBOR plus 0.825%, down from the previous rate of
0.875%. In addition, the Company is required to pay an annual facility fee ranging from 0.10% to 0.30% of the
borrowing limit depending on the Company’s credit ratings (currently 0.125%). The Company had no balance
outstanding on the Credit Facility at December 31, 2016 and 2015. Subsequent to December 31, 2016, the
Company had $85.0 million outstanding on the Credit Facility in conjunction to the redemption of its 6.45%
Cumulative Preferred Stock, Series S. The Company had $539,000 and $769,000 of unamortized commitment
fees as of December 31, 2016 and 2015, respectively, which is included in other assets in the accompanying
consolidated balance sheets. The Credit Facility requires the Company to meet certain covenants, all of which the
Company was in compliance with at December 31, 2016. Interest on outstanding borrowings is payable monthly.
7. Mortgage note payable
On June 1, 2016, the Company repaid in full the $250.0 million mortgage note which had a fixed interest
rate of 5.45%.
8. Noncontrolling interests
As described in Note 2, the Company reports noncontrolling interests within equity in the consolidated
financial statements, but separate from the Company’s shareholders’ equity. In addition, net income allocable to
noncontrolling interests is shown as a reduction from net income in calculating net income allocable to common
shareholders.
64
Common partnership units
The Company presents the accounts of PSB and the Operating Partnership on a consolidated basis.
Ownership interests in the Operating Partnership that can be redeemed for common stock, other than PSB’s
interest, are classified as noncontrolling interests — common units in the consolidated financial statements. Net
income allocable to noncontrolling interests — common units consists of the common units’ share of the
consolidated operating results after allocation to preferred units and shares. Beginning one year from the date of
admission as a limited partner (common units) and subject to certain limitations described below, each limited
partner other than PSB has the right to require the redemption of its partnership interest.
A limited partner (common units) that exercises its redemption right will receive cash from the Operating
Partnership in an amount equal to the market value (as defined in the Operating Partnership Agreement) of the
partnership interests redeemed. In lieu of the Operating Partnership redeeming the common units for cash, PSB,
as general partner, has the right to elect to acquire the partnership interest directly from a limited partner
exercising its redemption right, in exchange for cash in the amount specified above or by issuance of one share of
PSB common stock for each unit of limited partnership interest redeemed.
A limited partner (common units) cannot exercise its redemption right if delivery of shares of PSB common
stock would be prohibited under the applicable articles of incorporation, or if the general partner believes that
there is a risk that delivery of shares of common stock would cause the general partner to no longer qualify as a
REIT, would cause a violation of the applicable securities laws, or would result in the Operating Partnership no
longer being treated as a partnership for federal income tax purposes.
On December 30, 2014, the Company paid a one-time special cash dividend of $2.75 per share along with
the fourth quarter regular dividend of $0.50 per share. Holders of the common partnership units received the
same distribution.
At December 31, 2016, there were 7,305,355 common units owned by PS, which are accounted for as
noncontrolling interests. Combined with PS’s existing common stock ownership, on a fully converted basis, PS
has a combined ownership of 42.0% (or 14.5 million shares) of the Company’s common equity.
9. Related party transactions
The Operating Partnership manages industrial, office and retail facilities for PS. These facilities, all located
in the United States, operate under the “Public Storage” or “PS Business Parks” names. The PS Business Parks
name and logo are owned by PS and licensed to the Company under a non-exclusive, royalty-free license
agreement. The license can be terminated by either party for any reason with six months written notice.
Under the property management contract with PS, the Operating Partnership is compensated based on a
percentage of the gross revenues of the facilities managed. Under the supervision of the property owners, the
Operating Partnership coordinates rental policies, rent collections, marketing activities,
the purchase of
equipment and supplies, maintenance activities, and the selection and engagement of vendors, suppliers and
independent contractors. In addition, the Operating Partnership assists and advises the property owners in
establishing policies for the hire, discharge and supervision of employees for the operation of these facilities,
including property managers and leasing, billing and maintenance personnel.
The property management contract with PS is for a seven-year term with the agreement automatically
extending for an additional one-year period upon each one-year anniversary of its commencement (unless
cancelled by either party). Either party can give notice of its intent to cancel the agreement upon expiration of its
current term. Management fee revenues under this contract were $518,000, $540,000 and $660,000 for the years
ended December 31, 2016, 2015 and 2014, respectively.
PS also provides property management services for the self-storage component of two assets owned by the
Company. These self-storage facilities, located in Palm Beach County, Florida, operate under the “Public
Storage” name.
Under the property management contract, PS is compensated based on a percentage of the gross revenues of
the facilities managed. Under the supervision of the Company, PS coordinates rental policies, rent collections,
65
marketing activities, the purchase of equipment and supplies, maintenance activities, and the selection and
engagement of vendors, suppliers and independent contractors. In addition, PS is responsible for establishing the
policies for the hire, discharge and supervision of employees for the operation of these facilities, including on-
site managers, assistant managers and associate managers.
Either the Company or PS can cancel the property management contract upon 60 days’ notice. Management
fee expenses under the contract were $86,000, $79,000 and $70,000 for the years ended December 31, 2016,
2015 and 2014, respectively.
Pursuant to a cost sharing and administrative services agreement, the Company shares costs with PS for
certain administrative services and rental of corporate office space, which are allocated between the Company
and PS in accordance with a methodology intended to fairly allocate those costs. Costs allocated to the Company
totaled $493,000, $469,000 and $451,000 for the years ended December 31, 2016, 2015 and 2014, respectively.
Costs allocated to PS totaled $38,000 for the year ended December 31, 2016.
The Company had net amounts due from PS of $295,000 and $57,000 at December 31, 2016 and 2015,
respectively, for these contracts, as well as for certain operating expenses paid by the Company on behalf of PS.
10. Shareholders’ equity
Preferred stock
As of December 31, 2016 and 2015, the Company had the following series of preferred stock outstanding:
Series
Issuance Date
Earliest Potential
Redemption Date
Dividend
Rate
Shares
Outstanding
Amount
(in thousands)
Shares
Outstanding
Amount
(in thousands)
December 31, 2016
December 31, 2015
May, 2012
Series T . . . . . . .
May, 2017 6.000% 14,000
Series U . . . . . . . September, 2012 September, 2017 5.750% 9,200
March, 2018 5.700% 4,400
Series V . . . . . . .
October, 2021 5.200% 7,590
Series W . . . . . .
—
January, 2017 6.450%
Series S . . . . . . .
March, 2013
October, 2016
January, 2012
$350,000
230,000
110,000
189,750
—
Total
. . . . . . . . .
35,190
$879,750
14,000
9,200
4,400
—
9,200
36,800
$350,000
230,000
110,000
—
230,000
$920,000
On December 7, 2016, the Company called for the redemption of its 6.45% Cumulative Preferred Stock,
Series S, at its par value of $230.0 million and subsequently completed the redemption on January 18, 2017. The
Company reported non-cash distributions of $7.3 million, representing the original issuance costs, as a reduction
of net income allocable to common shareholders and unit holders for the year ended December 31, 2016. As of
December 31, 2016, the Company reclassified the 6.45% Cumulative Preferred Stock, Series S, of $230.0 million
from equity to liabilities as preferred stock called for redemption.
On October 20, 2016, the Company issued $189.8 million or 7,590,000 depositary shares, each representing
1/1,000 of a share of the 5.20% Cumulative Preferred Stock, Series W, at $25.00 per depositary share. The 5.20%
Series W Cumulative Redeemable Preferred Units are non-callable for five years and have no mandatory
redemption.
On October 15, 2015, the Company completed the redemption of its 6.875% Cumulative Preferred Stock,
Series R, at its par value of $75.0 million. The Company reported non-cash distributions of $2.5 million,
representing the original issuance costs, as a reduction of net income allocable to common shareholders and unit
holders for the year ended December 31, 2015.
The Company recorded $64.6 million, $61.9 million and $60.5 million in distributions to its preferred
shareholders for the years ended December 31, 2016, 2015 and 2014, respectively.
Holders of the Company’s preferred stock will not be entitled to vote on most matters, except under certain
conditions. In the event of a cumulative arrearage equal to six quarterly dividends, the holders of the preferred
stock will have the right to elect two additional members to serve on the Company’s Board of Directors (the
“Board”) until all events of default have been cured. At December 31, 2016, there were no dividends in arrears.
66
Except under certain conditions relating to the Company’s qualification as a REIT, the preferred stock is not
redeemable prior to the previously noted redemption dates. On or after the respective redemption dates, the
respective series of preferred stock will be redeemable, at the option of the Company, in whole or in part, at
$25.00 per depositary share, plus any accrued and unpaid dividends. The Company had $28.4 million and $29.3
million of deferred costs in connection with the issuance of preferred stock as of December 31, 2016 and 2015,
respectively, which the Company will report as additional non-cash distributions upon notice of its intent to
redeem such shares.
Common stock
Subsequent to December 31, 2016, the Board increased its quarterly dividend from $0.75 per common share
to $0.85 per common share, increasing quarterly distributions by $3.4 million per quarter.
During the three months ended March 31, 2016, the Board increased its quarterly dividend from $0.60 per
common share to $0.75 per common share. During the three months ended September 30, 2015, the Board
increased its quarterly dividend from $0.50 per common share to $0.60 per common share.
Dividends declared for the three months ended December 31, 2014 included a one-time special cash
dividend of $2.75 per share (the “Special Cash Dividend”) along with the fourth quarter regular dividend of
$0.50 per share. The Special Cash Dividend was declared to distribute a portion of the excess income attributable
to gains on sales from asset dispositions during 2014, as discussed in Note 3.
The Company paid $81.3 million ($3.00 per common share), $59.4 million ($2.20 per common share) and
$127.8 million ($4.75 per common share) in distributions to its common shareholders for the years ended
December 31, 2016, 2015 and 2014, respectively. The portion of the distributions classified as ordinary income
was 100.0%, 89.4% and 70.5% for the years ended December 31, 2016, 2015 and 2014, respectively. The portion
of the distributions classified as long-term capital gain income was 0.0%, 10.6% and 29.5% for the years ended
December 31, 2016, 2015 and 2014, respectively. The percentages in the two preceding sentences are unaudited.
No shares of common stock were repurchased under the board approved common stock repurchase program
during the years ended December 31, 2016, 2015 and 2014.
Equity stock
In addition to common and preferred stock, the Company is authorized to issue 100.0 million shares of
Equity Stock. The Articles of Incorporation provide that Equity Stock may be issued from time to time in one or
more series and give the Board broad authority to fix the dividend and distribution rights, conversion and voting
rights, redemption provisions and liquidation rights of each series of Equity Stock.
11. Stock compensation
PSB has a 2003 Stock Option and Incentive Plan (the “2003 Plan”) and a 2012 Equity and Performance-
Based Incentive Compensation Plan (the “2012 Plan”) covering 1.5 million and 1.0 million shares of PSB’s
common stock, respectively. Under the 2003 Plan and 2012 Plan, PSB has granted non-qualified options to
certain directors, officers and key employees to purchase shares of PSB’s common stock at a price not less than
the fair market value of the common stock at the date of grant. Additionally, under the 2003 Plan and 2012 Plan,
PSB has granted restricted shares of common stock to certain directors and restricted stock units to officers and
key employees.
Options under the 2003 Plan and 2012 Plan vest over a five-year period from the date of grant at the rate of
one fifth per year and expire 10 years after the date of grant. Restricted stock units granted prior to 2016 are
subject to a six-year vesting, none in year one and 20% for each of the next five years. Restricted stock units
granted during 2016 are subject to a five-year vesting at the rate of 20% per year. The grantee of restricted stock
units receives dividend equivalents for each outstanding award equal to the per-share dividends received by
common shareholders and are recorded in additional paid-in capital. The Company expenses any dividend
equivalents previously paid upon forfeiture of the related unvested restricted stock unit. Upon vesting, the
grantee receives common shares equal to the number of vested awards, less common shares withheld in exchange
for tax deposits made by the Company to satisfy the grantee’s statutory tax liabilities arising from the vesting.
67
As noted under “Recently issued accounting standards” in Note 2, the Company elected to early adopt ASU
2016-09, Improvements to Employee Share-Based Payment Accounting, and account for forfeitures of share-
based payments as they occur. Accordingly, compensation cost previously recognized for an award that is
forfeited because of a failure to satisfy a service or performance condition will be reversed in the period of the
forfeiture. This election was made using a modified retrospective approach, with a cumulative-effect adjustment
of $807,000 to decrease cumulative net income and increase paid-in capital representing the impact of estimated
forfeitures on cumulative share-based compensation expense recorded through September 30, 2016. The
Company did not record any reserves on share-based compensation expense for the three months ended
December 31, 2016.
The weighted average grant date fair value of options granted during the years ended December 31, 2016,
2015 and 2014 was $9.05 per share, $8.49 per share and $10.95 per share, respectively. The Company has
calculated the fair value of each option grant on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions used for grants during the years ended December 31, 2016,
2015 and 2014, respectively: a dividend yield of 2.9%, 2.5% and 2.3%; expected volatility of 15.5%, 16.1% and
17.7%; expected life of five years; and risk-free interest rates of 1.1%, 1.4% and 1.7%.
The weighted average grant date fair value of restricted stock units granted during the years ended
December 31, 2016, 2015 and 2014 was $87.45, $82.78 and $81.47, respectively. The Company calculated the
fair value of each restricted stock unit grant using the market value on the date of grant.
At December 31, 2016, there was a combined total of 1.2 million options and restricted stock units
authorized to be granted.
In connection with the 2014 Special Cash Dividend discussed in Note 10, the number of options and
exercise prices of all outstanding options as of December 31, 2014 were adjusted pursuant to the anti-dilution
provisions of the applicable plans so that the option holders would be neither advantaged nor disadvantaged as a
result of the Special Cash Dividend.
Information with respect to outstanding options and nonvested restricted stock units granted under the 2003
Plan and 2012 Plan is as follows:
Options:
Outstanding at December 31, 2013 . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special cash dividend adjustment (1) . . . . . . . . . . . . . . . .
Number of
Options
380,773
16,000
(61,273)
(4,000)
10,352
Outstanding at December 31, 2014 . . . . . . . . . . . . . . . . .
341,852
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,000
(99,178)
—
Outstanding at December 31, 2015 . . . . . . . . . . . . . . . . .
258,674
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39,000
(68,019)
—
Outstanding at December 31, 2016 . . . . . . . . . . . . . . . . .
229,655
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contract Life
Aggregate
Intrinsic
Value
(in thousands)
$ 56.45
$ 82.84
$ 49.84
$ 52.35
N/A
$ 57.11
$ 80.13
$ 51.31
$ —
$ 60.76
$102.58
$ 57.17
$ —
$ 68.93
5.35 Years
$10,930
Exercisable at December 31, 2016 . . . . . . . . . . . . . . . . . .
153,432
$ 58.63
3.92 Years
$ 8,882
(1)
the number and exercise price of
In accordance with the applicable equity award plan documents,
outstanding options as of December 31, 2014 have been adjusted as a result of the Special Cash Dividend so
that the option holder maintains their economic position with respect to the shareholders.
68
Restricted Stock Units:
Nonvested at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of
Units
45,100
6,800
(12,980)
(3,750)
Nonvested at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35,170
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
75,606
(25,384)
(6,740)
Nonvested at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78,652
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
119,950
(47,779)
(6,130)
Nonvested at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
144,693
Weighted
Average Grant
Date Fair Value
$60.07
$81.47
$53.65
$69.00
$65.62
$82.78
$74.19
$76.22
$78.44
$87.45
$80.45
$76.51
$58.56
Effective March, 2014, the Company entered into a performance-based restricted stock unit program, the
Senior Management Long-Term Equity Incentive Program for 2014-2017 (“LTEIP”), with certain employees of
the Company. Under the LTEIP, the Company established three levels of targeted restricted stock unit awards for
certain employees, which would be earned only if the Company achieved one of three defined targets during
2014 to 2017. Under the LTEIP there is an annual award following the end of each of the four years in the
program, with the award subject to and based on the achievement of total return targets during the previous year,
as well as an award based on achieving total return targets during the cumulative four-year period 2014-2017. In
the event the minimum defined target is not achieved for an annual award, the restricted stock units allocated to
be awarded for such year are added to the restricted stock units that may be received if the four-year target is
achieved. All restricted stock unit awards under the LTEIP vest in four equal annual installments beginning from
the date of award. Up to 99,150 restricted stock units would be awarded for each of the four years assuming
achievement was met and up to 92,900 restricted stock units would be awarded for the cumulative four-year
period assuming achievement was met. Compensation expense is recognized based on the restricted stock units
expected to be awarded based on the target level that is expected to be achieved. Net compensation expense of
$9.8 million, $8.2 million and $7.4 million related to the LTEIP was recognized for the years ended
December 31, 2016, 2015 and 2014, respectively. Included in the 2016 amount, the Company recorded a net non-
cash stock compensation charge of $2.0 million related to a change in senior management and the future issuance
of restricted stock units our former Chief Executive Officer will receive under the Company’s LTEIP.
In connection with the LTEIP, targets for 2014 and 2015 were achieved at the threshold total return level.
As such, 99,150 and 66,506 restricted stock units were granted during the years ended December 31, 2016 and
2015, respectively, at a weighted average grant date fair value of $83.59 and $83.47, respectively.
Included in the Company’s consolidated statements of income for the years ended December 31, 2016, 2015
and 2014, was $282,000, $261,000 and $1.1 million, respectively, in net compensation expense related to stock
options. Included in the 2014 compensation expense relating to stock options was $644,000 of expense resulting
from modifications made to outstanding stock options as a result of the Special Cash Dividend paid in December,
2014. Net compensation expense of $10.3 million, $8.7 million and $8.0 million related to restricted stock units
was recognized during the years ended December 31, 2016, 2015 and 2014, respectively.
As of December 31, 2016, there was $566,000 of unamortized compensation expense related to stock
options expected to be recognized over a weighted average period of 3.5 years. As of December 31, 2016, there
was $12.6 million of unamortized compensation expense related to restricted stock units expected to be
recognized over a weighted average period of 3.7 years.
Cash received from 68,019 stock options exercised during the year ended December 31, 2016 was $3.9
million. Cash received from 99,178 stock options exercised during the year ended December 31, 2015 was $5.1
69
million. Cash received from 61,273 stock options exercised during the year ended December 31, 2014 was $3.1
million. The aggregate intrinsic value of the stock options exercised was $3.4 million, $2.6 million and $2.1
million during the years ended December 31, 2016, 2015 and 2014, respectively.
During the year ended December 31, 2016, 47,779 restricted stock units vested; in settlement of these units,
28,046 shares were issued, net of 19,733 shares applied to payroll taxes. The aggregate fair value of the shares
vested for the year ended December 31, 2016 was $4.7 million. During the year ended December 31, 2015,
25,384 restricted stock units vested; in settlement of these units, 15,734 shares were issued, net of 9,650 shares
applied to payroll taxes. The aggregate fair value of the shares vested for the year ended December 31, 2015 was
$2.0 million. During the year ended December 31, 2014, 12,980 restricted stock units vested; in settlement of
these units, 8,066 shares were issued, net of 4,914 shares applied to payroll taxes. The aggregate fair value of the
shares vested for the year ended December 31, 2014 was $1.1 million. In addition to the vesting of these shares,
tax deposits totaling $1.9 million, $767,000 and $409,000 were made during the years ended December 31, 2016,
2015 and 2014, respectively, on behalf of employees in exchange for common shares withheld upon vesting.
In April, 2015, the shareholders of the Company approved the issuance of up to 130,000 shares of common
stock under the Retirement Plan for Non-Employee Directors (the “Director Plan”). Under the Director Plan, the
Company grants 1,000 shares of common stock for each year served as a director up to a maximum of 8,000
shares issued upon retirement. The Company recognizes compensation expense over the requisite service period.
As a result, included in the Company’s consolidated statements of income was $339,000, $316,000 and $550,000
in compensation expense for the years ended December 31, 2016, 2015 and 2014, respectively. Included in the
2014 compensation expense relating to the retirement shares was $243,000 of expense resulting from the increase
in maximum shares. As of December 31, 2016, 2015 and 2014, there was $887,000, $1.2 million and $1.5
million, respectively, of unamortized compensation expense related to these shares. In April, 2016, the Company
issued 8,000 shares to a director upon retirement with an aggregate fair value of $775,000. No shares were issued
during the years ended December 31, 2015 and 2014.
12. Supplementary quarterly financial data (unaudited, in thousands, except per share data):
Three Months Ended
March 31,
2016
June 30,
2016
September 30,
2016
December 31,
2016
Rental income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$95,845
$96,087
$97,340
$97,599
Cost of operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$31,894
$29,750
$30,796
$30,668
Net income allocable to common shareholders . . . . . . . . . . . . .
$14,569
$15,731
$19,718
$12,854
Net income per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
0.54
0.54
$
$
0.58
0.58
$
$
0.73
0.72
$
$
0.47
0.47
Three Months Ended
March 31,
2015
June 30,
2015
September 30,
2015
December 31,
2015
Rental income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$92,315
$92,948
$93,322
$94,550
Cost of operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$31,746
$30,057
$30,448
$28,973
Net income allocable to common shareholders . . . . . . . . . . . . .
$19,771
$11,129
$22,484
$14,906
Net income per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
0.73
0.73
$
$
0.41
0.41
$
$
0.83
0.83
$
$
0.55
0.55
70
13. Commitments and contingencies
The Company currently is neither subject to any other material litigation nor, to management’s knowledge,
than routine litigation and
litigation currently threatened against
the Company other
is any material
administrative proceedings arising in the ordinary course of business.
14. 401(k) Plan
The Company has a 401(k) savings plan (the “Plan”) in which all eligible employees may participate. The
Plan provides for the Company to make matching contributions to all eligible employees up to 4% of their annual
salary dependent on the employee’s level of participation. For the years ended December 31, 2016, 2015 and
2014, $409,000, $410,000, and $417,000, respectively, was charged as expense related to this plan.
71
PS BUSINESS PARKS, INC.
SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2016
(IN THOUSANDS)
7
2
Description
Location
Square
Feet
Buena Park, CA
Buena Park Industrial Center
. . . . . . . . . . . . . . . . .
Carson, CA
Carson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cerritos, CA
Cerritos Business Center . . . . . . . . . . . . . . . . . . . . .
Cerritos, CA
Cerritos/Edwards . . . . . . . . . . . . . . . . . . . . . . . . . . .
Concord, CA
Concord Business Park . . . . . . . . . . . . . . . . . . . . . .
Culver City, CA
Culver City . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fremont, CA
Bayview Business Park . . . . . . . . . . . . . . . . . . . . . .
Fremont, CA
Christy Business Park . . . . . . . . . . . . . . . . . . . . . . .
Industrial Drive Distribution Center . . . . . . . . . . . .
Fremont, CA
Bay Center Business Park . . . . . . . . . . . . . . . . . . . . Hayward, CA
Cabot Distribution Center . . . . . . . . . . . . . . . . . . . . Hayward, CA
Diablo Business Park . . . . . . . . . . . . . . . . . . . . . . . . Hayward, CA
Eden Landing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hayward, CA
Hayward Business Park . . . . . . . . . . . . . . . . . . . . . . Hayward, CA
Huntwood Business Park . . . . . . . . . . . . . . . . . . . . . Hayward, CA
Parkway Commerce . . . . . . . . . . . . . . . . . . . . . . . . Hayward, CA
Corporate Pointe . . . . . . . . . . . . . . . . . . . . . . . . . . .
Laguna Hills Commerce Center . . . . . . . . . . . . . . .
Plaza Del Lago . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cañada Business Center
. . . . . . . . . . . . . . . . . . . . .
Dixon Landing Business Park . . . . . . . . . . . . . . . . . Milpitas, CA
Monterey/Calle . . . . . . . . . . . . . . . . . . . . . . . . . . . . Monterey, CA
Monterey Park . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Monterey Park, CA
Port of Oakland . . . . . . . . . . . . . . . . . . . . . . . . . . . . Oakland, CA
Orangewood . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Orange County, CA
Orange County Business Center . . . . . . . . . . . . . . . Orange County, CA
Kearney Mesa . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lusk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rose Canyon Business Park . . . . . . . . . . . . . . . . . .
Charcot Business Park . . . . . . . . . . . . . . . . . . . . . . .
Las Plumas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . .
Little Orchard Distribution Center
Montague Industrial Park . . . . . . . . . . . . . . . . . . . .
Oakland Road . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rogers Ave . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Doolittle Business Park . . . . . . . . . . . . . . . . . . . . . .
Bayshore Corporate Center . . . . . . . . . . . . . . . . . . .
San Ramon/Norris Canyon . . . . . . . . . . . . . . . . . . .
Commerce Park . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Santa Clara Tech Park . . . . . . . . . . . . . . . . . . . . . . .
Walsh at Lafayette . . . . . . . . . . . . . . . . . . . . . . . . . .
San Diego, CA
San Diego, CA
San Diego, CA
San Jose, CA
San Jose, CA
San Jose, CA
San Jose, CA
San Jose, CA
San Jose, CA
San Leandro, CA
San Mateo, CA
San Ramon, CA
Santa Clara, CA
Santa Clara, CA
Santa Clara, CA
Irvine, CA
Laguna Hills, CA
Laguna Hills, CA
Lake Forest, CA
317
77
395
31
246
147
104
334
199
463
249
271
83
1,091
176
407
161
513
101
297
505
12
199
200
107
437
164
371
233
283
214
213
316
177
67
113
340
52
251
178
321
Initial Cost to Company
Buildings
and
Improvements
$ 7,703
2,496
10,273
1,217
20,491
8,157
4,831
16,254
6,812
50,501
10,811
15,721
6,174
54,418
11,819
10,433
18,519
39,559
5,051
13,785
21,121
706
7,862
11,066
12,291
35,746
7,089
14,049
20,054
17,580
12,889
3,846
12,807
8,765
4,896
6,231
36,891
3,642
21,914
15,645
17,890
Land
$ 3,245
990
4,218
450
12,454
3,252
4,990
11,451
7,482
19,052
5,859
9,102
3,275
28,256
7,391
4,398
6,876
16,261
2,037
5,508
26,301
288
3,078
5,638
2,637
9,405
2,894
5,711
15,129
18,654
4,379
7,725
14,476
3,458
3,540
3,929
25,108
1,486
17,218
7,673
13,439
Cost
Capitalized
Subsequent to
Acquisition
Buildings
and
Improvements
$ 2,715
1,537
4,139
1,421
1,027
6,031
328
1,586
798
3,702
374
863
131
2,807
889
4,222
6,760
7,317
4,060
6,031
3,244
337
1,586
627
3,873
18,507
2,890
5,623
2,321
1,704
6,716
84
485
3,233
630
413
6,202
1,348
3,733
4,514
281
Gross Amount at Which Carried at
December 31, 2016
Buildings
and
Improvements
$10,418
4,033
14,412
2,638
21,518
14,188
5,159
17,840
7,610
54,203
11,185
16,584
6,305
57,225
12,708
14,655
25,279
46,876
9,111
19,816
24,365
1,043
9,448
11,693
16,164
54,253
9,979
19,672
22,375
19,284
19,605
3,930
13,292
11,998
5,526
6,644
43,093
4,990
25,647
20,159
18,171
Land
$ 3,245
990
4,218
450
12,454
3,252
4,990
11,451
7,482
19,052
5,859
9,102
3,275
28,256
7,391
4,398
6,876
16,261
2,037
5,508
26,301
288
3,078
5,638
2,637
9,405
2,894
5,711
15,129
18,654
4,379
7,725
14,476
3,458
3,540
3,929
25,108
1,486
17,218
7,673
13,439
Total
$13,663
5,023
18,630
3,088
33,972
17,440
10,149
29,291
15,092
73,255
17,044
25,686
9,580
85,481
20,099
19,053
32,155
63,137
11,148
25,324
50,666
1,331
12,526
17,331
18,801
63,658
12,873
25,383
37,504
37,938
23,984
11,655
27,768
15,456
9,066
10,573
68,201
6,476
42,865
27,832
31,610
Accumulated
Depreciation
Year(s) Acquired
Depreciable
Lives
(Years)
$ 7,047
2,867
9,960
1,946
5,070
10,468
1,509
5,030
1,820
12,659
2,528
3,978
1,569
13,205
3,327
9,816
17,027
30,670
6,473
13,319
6,953
763
6,611
2,817
9,072
40,977
6,920
13,645
12,005
5,239
14,446
1,241
4,334
8,267
2,659
1,775
10,038
3,385
15,900
13,468
5,151
1997
1997
1997
1997
2011
1997
2011
2011
2011
2011
2011
2011
2011
2011
2011
1997
2000
1997
1997
1997
2011
1997
1997
2011
2003
2003
1997
1997
2005
2011/2014
1998
2011
2011
1997
2006
2011
2013
1997
2007
2000
2011
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
7
3
Description
Location
Square
Feet
Signal Hill, CA
So San Francisco, CA
So San Francisco, CA
Studio City, CA
Sunnyvale, CA
Torrance, CA
Boca Raton, FL
Rockville, MD
Rockville, MD
Rockville, MD
Silver Spring, MD
Signal Hill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Airport Boulevard . . . . . . . . . . . . . . . . . . . . . . . . . .
South San Francisco/Produce . . . . . . . . . . . . . . . . . .
Studio City/Ventura . . . . . . . . . . . . . . . . . . . . . . . . .
Kifer Industrial Park . . . . . . . . . . . . . . . . . . . . . . . . .
Torrance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Boca Commerce . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MICC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miami, FL
Wellington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wellington, FL
Ammendale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Beltsville, MD
Gaithersburg/Christopher . . . . . . . . . . . . . . . . . . . . . Gaithersburg, MD
Metro Park . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Parklawn Business Park . . . . . . . . . . . . . . . . . . . . . .
Shady Grove . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Westech Business Park . . . . . . . . . . . . . . . . . . . . . . .
Ben White . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Austin, TX
Lamar Business Park . . . . . . . . . . . . . . . . . . . . . . . . Austin, TX
McKalla . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Austin, TX
McNeil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Austin, TX
Rutland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Austin, TX
Waterford . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Austin, TX
Braker Business Park . . . . . . . . . . . . . . . . . . . . . . . . Austin, TX
Mopac Business Park . . . . . . . . . . . . . . . . . . . . . . . . Austin, TX
Southpark Business Park . . . . . . . . . . . . . . . . . . . . . Austin, TX
Valwood Business Center
Empire Commerce . . . . . . . . . . . . . . . . . . . . . . . . . . Dallas, TX
Northgate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dallas, TX
Northway Plaza . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Springlake Business Center . . . . . . . . . . . . . . . . . . .
Westwood Business Park . . . . . . . . . . . . . . . . . . . . .
Eastgate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Garland, TX
Freeport Business Park . . . . . . . . . . . . . . . . . . . . . . .
NFTZ (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Royal Tech . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
La Prada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mesquite, TX
Plano, TX
The Summit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Richardson, TX
Arapaho Business Park . . . . . . . . . . . . . . . . . . . . . .
Richardson, TX
Richardson Business Park . . . . . . . . . . . . . . . . . . . .
Bren Mar
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Alexandria, VA
Eisenhower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Alexandria, VA
Beaumont . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dulles South/Sullyfield . . . . . . . . . . . . . . . . . . . . . .
Lafayette . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Park East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair Oaks Business Campus . . . . . . . . . . . . . . . . . . .
Chantilly, VA
Chantilly, VA
Chantilly, VA
Chantilly, VA
Fairfax, VA
Irving, TX
Irving, TX
Irving, TX
. . . . . . . . . . . . . . . . . . . .
Carrolton, TX
Farmers Branch, TX
Farmers Branch, TX
Farmers Branch, TX
269
52
41
22
287
147
135
3,468
263
309
29
898
232
578
532
108
198
236
525
235
106
257
117
181
356
44
194
131
206
112
36
256
231
794
56
184
408
117
113
95
107
99
197
198
290
Initial Cost to Company
Buildings
and
Improvements
12,699
2,387
1,886
1,530
37,874
6,069
9,258
112,583
18,560
18,380
1,203
94,463
19,628
58,364
74,572
7,015
6,596
13,212
24,495
9,397
9,649
13,990
3,579
9,882
13,859
1,545
5,505
4,503
5,715
6,884
1,203
9,506
6,499
54,113
1,235
6,654
10,661
3,568
5,380
3,635
11,051
6,810
13,398
18,029
36,232
Land
6,693
899
776
621
13,227
2,318
7,795
95,115
10,845
4,278
475
33,995
3,387
11,010
25,261
1,550
2,528
1,945
5,477
2,022
2,108
1,874
719
1,266
2,510
304
1,274
1,742
2,607
941
480
4,564
1,517
13,989
495
1,536
5,226
799
2,197
1,440
4,736
1,373
1,680
3,851
13,598
Cost
Capitalized
Subsequent to
Acquisition
Buildings
and
Improvements
2,695
745
553
589
1,369
3,263
3,056
40,445
2,490
11,175
632
40,692
3,783
8,860
17,232
1,952
6,043
2,188
4,513
2,160
3,823
1,723
694
2,361
1,916
814
4,112
791
1,861
2,289
479
2,348
3,506
23,889
594
4,291
3,394
2,954
3,832
2,486
2,238
3,135
5,381
10,270
8,132
Gross Amount at Which Carried at
December 31, 2016
Buildings
and
Improvements
15,394
3,132
2,439
2,119
39,243
9,332
12,314
153,028
21,050
29,555
1,835
135,155
23,411
67,224
91,804
8,967
12,639
15,400
29,008
11,557
13,472
15,713
4,273
12,243
15,775
2,359
9,617
5,294
7,576
9,173
1,682
11,854
10,005
78,002
1,829
10,945
14,055
6,522
9,212
6,121
13,289
9,945
18,779
28,299
44,364
Land
6,693
899
776
621
13,227
2,318
7,795
95,115
10,845
4,278
475
33,995
3,387
11,010
25,261
1,550
2,528
1,945
5,477
2,022
2,108
1,874
719
1,266
2,510
304
1,274
1,742
2,607
941
480
4,564
1,517
13,989
495
1,536
5,226
799
2,197
1,440
4,736
1,373
1,680
3,851
13,598
Total
22,087
4,031
3,215
2,740
52,470
11,650
20,109
248,143
31,895
33,833
2,310
169,150
26,798
78,234
117,065
10,517
15,167
17,345
34,485
13,579
15,580
17,587
4,992
13,509
18,285
2,663
10,891
7,036
10,183
10,114
2,162
16,418
11,522
91,991
2,324
12,481
19,281
7,321
11,409
7,561
18,025
11,318
20,459
32,150
57,962
Accumulated
Depreciation
Year(s) Acquired
Depreciable
Lives
(Years)
9,169
2,131
1,632
1,420
9,001
6,636
4,550
87,812
8,792
21,995
1,323
87,175
8,552
20,086
53,912
6,312
9,498
7,563
10,425
8,017
9,215
6,327
1,661
5,109
4,060
1,754
6,893
1,352
2,020
5,486
1,212
2,920
6,997
50,291
1,355
8,140
4,371
4,834
6,754
4,610
7,419
6,756
12,790
19,339
25,358
1997/2006
1997
1997
1997
2011
1997
2006
2003/2011/2014
2006
1998
1997
2001
2010
2010/2016
2006
1998
1997
1998/2012
1999/2010/2012/2014
1998/1999
1999
2010
2010
2010
2013
1998
1998
2013
2013/2014
2003
1997
2013
1998
1998-2000/2011
1997
1998
2013/2014
1998
1997
1997
2006
1999
1999/2000
1999
2004/2007
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
Description
Location
Square
Feet
Lorton, VA
Monroe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Herndon, VA
Gunston . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Mile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . McLean, VA
Prosperity Business Campus . . . . . . . . . . . . . . . Merrifield, VA
Springfield, VA
Alban Road . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Springfield, VA
I-95 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Northpointe . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sterling, VA
Sterling, VA
Shaw Road . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tysons Corporate Center . . . . . . . . . . . . . . . . . . Vienna, VA
Woodbridge . . . . . . . . . . . . . . . . . . . . . . . . . . . . Woodbridge, VA
212th Business Park . . . . . . . . . . . . . . . . . . . . . . Kent, WA
Overlake . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Renton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redmond, WA
Renton, WA
244
247
628
659
150
210
147
149
270
114
951
411
28
Initial Cost to Company
Buildings
and
Improvements
18,911
17,872
83,596
67,575
4,736
15,672
8,778
10,008
25,302
3,398
17,695
41,106
889
Land
6,737
4,146
38,279
23,147
1,935
3,535
2,767
2,969
9,885
1,350
19,573
23,122
330
Cost
Capitalized
Subsequent to
Acquisition
Buildings
and
Improvements
11,274
11,221
22,340
31,491
5,050
12,142
4,587
4,476
9,333
1,908
12,134
6,692
597
Gross Amount at Which Carried at
December 31, 2016
Buildings
and
Improvements
30,185
29,093
105,936
99,066
9,786
27,814
13,365
14,484
34,635
5,306
29,829
47,798
1,486
Land
6,737
4,146
38,279
23,147
1,935
3,535
2,767
2,969
9,885
1,350
19,573
23,122
330
Total
36,922
33,239
144,215
122,213
11,721
31,349
16,132
17,453
44,520
6,656
49,402
70,920
1,816
Accumulated
Depreciation
Year(s) Acquired
Depreciable
Lives
(Years)
21,005
16,313
37,304
63,020
7,410
20,528
9,976
10,828
13,426
3,935
8,335
27,685
1,065
1997/1999
1998
2010/2011
2001
1997
2000
1997/1998
1998
2010
1997
2012
2007
1997
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
5-30
(1) The Company owns two properties that are subject to ground leases in Las Colinas, Texas, expiring in 2019 and 2020, each with one 10-year extension option.
28,072
$789,531
$1,716,799
$510,082
$789,531
$2,226,881
$3,016,412
$1,159,808
7
4
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Dated: February 24, 2017
PS BUSINESS PARKS, INC.
By: /s/ Maria R. Hawthorne
Maria R. Hawthorne
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Ronald L. Havner, Jr.
Ronald L. Havner, Jr.
/s/ Maria R. Hawthorne
Maria R. Hawthorne
/s/ Edward A. Stokx
Edward A. Stokx
/s/ Jennifer Holden Dunbar
Jennifer Holden Dunbar
/s/ James H. Kropp
James H. Kropp
/s/ Sara Grootwassink Lewis
Sara Grootwassink Lewis
/s/ Gary E. Pruitt
Gary E. Pruitt
/s/ Robert S. Rollo
Robert S. Rollo
/s/ Joseph D. Russell, Jr.
Joseph D. Russell, Jr.
/s/ Peter Schultz
Peter Schultz
Chairman of the Board
February 24, 2017
Director and Chief Executive
Officer (principal executive officer)
February 24, 2017
Chief Financial Officer (principal
financial and accounting officer)
February 24, 2017
February 24, 2017
February 24, 2017
February 24, 2017
February 24, 2017
February 24, 2017
February 24, 2017
February 24, 2017
Director
Director
Director
Director
Director
Director
Director
75
PS BUSINESS PARKS, INC.
EXHIBIT INDEX
(Items 15(a)(3) and 15(b))
3.1
3.2
3.3
3.4
3.5
3.6
4.1
4.2
4.3
4.4
10.1
10.2
10.3*
10.4*
10.5
10.6
Restated Articles of Incorporation. Filed with Registrant’s Registration Statement on Form S- 3
(SEC File No. 333-78627) and incorporated herein by reference.
Restated Bylaws, as amended. Filed with Registrant’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2012 (SEC File No. 001-10709) and incorporated herein by reference.
Certificate of Determination of Preferences of 6.00% Series T Cumulative Redeemable Preferred
Stock of PS Business Parks, Inc. Filed with Registrant’s Current Report on Form 8- K dated
May 7, 2012 (SEC File No. 001-10709) and incorporated herein by reference.
Certificate of Determination of Preferences of 5.75% Series U Cumulative Redeemable Preferred
Stock of PS Business Parks, Inc. Field with Registrant’s Current Report on Form 8- K dated
September 7, 2012 (SEC File No. 001-10709) and incorporated herein by reference.
Certificate of Determination of Preferences of 5.70% Series V Cumulative Redeemable Preferred
Stock of PS Business Parks, Inc. Field with Registrant’s Current Report on Form 8- K dated
March 5, 2013 (SEC File No. 001-10709) and incorporated herein by reference.
Certificate of Determination of Preferences of 5.20% Series W Cumulative Redeemable Preferred
Stock of PS Business Parks, Inc. Field with Registrant’s Current Report on Form 8- K dated
October 12, 2016 (SEC File No. 001-10709) and incorporated herein by reference.
Deposit Agreement Relating to 6.00% Cumulative Preferred Stock, Series T of PS Business
Parks, Inc. dated as of May 3, 2012. Filed with Registrant’s Current Report on Form 8-K dated
May 7, 2012 (SEC File No. 001-10709) and incorporated herein by reference.
Deposit Agreement Relating to 5.75% Cumulative Preferred Stock, Series U of PS Business
Parks, Inc. dated as of September 5, 2012. Filed with Registrant’s Current Report on Form 8- K
dated September 7, 2012 (SEC File No. 001-10709) and incorporated herein by reference.
Deposit Agreement Relating to 5.70% Cumulative Preferred Stock, Series V of PS Business
Parks, Inc. dated as of March 5, 2013. Filed with Registrant’s Current Report on Form 8-K dated
March 5, 2013 (SEC File No. 001-10709) and incorporated herein by reference.
Deposit Agreement Relating to 5.20% Cumulative Preferred Stock, Series W of PS Business
Parks, Inc. dated as of October 11, 2016. Filed with Registrant’s Current Report on Form 8-K
dated October 11, 2016 (SEC File No. 001-10709) and incorporated herein by reference.
Inc. and Public Storage
Amended Management Agreement between Storage Equities,
Commercial Properties Group, Inc. dated as of February 21, 1995. Filed with PS’s Annual Report
on Form 10-K for the year ended December 31, 1994 (SEC File No. 001-08389) and incorporated
herein by reference.
Agreement of Limited Partnership of PS Business Parks, L.P. Filed with Registrant’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998 (SEC File No. 001-10709) and
incorporated herein by reference.
Form of Indemnity Agreement. Filed with Registrant’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998 (SEC File No. 001-10709) and incorporated herein by reference.
Form of Indemnification Agreement for Executive Officers. Filed with Registrant’s Annual
Report on Form 10-K for the year ended December 31, 2004 (SEC File No. 001-10709) and
incorporated herein by reference.
Cost Sharing and Administrative Services Agreement dated as of November 16, 1995 by and
among PSCC, Inc. and the owners listed therein. Filed with Registrant’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998 (SEC File No. 001-10709) and incorporated
herein by reference.
Amendment to Cost Sharing and Administrative Services Agreement dated as of January 2, 1997
by and among PSCC, Inc. and the owners listed therein. Filed with Registrant’s Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998 (SEC File No. 001-10709) and incorporated
herein by reference.
76
10.7
10.8
10.9
10.10
10.11
10.12
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20*
10.21*
10.22*
Accounts Payable and Payroll Disbursement Services Agreement dated as of January 2, 1997 by
and between PSCC, Inc. and AOPP LP. Filed with Registrant’s Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998 (SEC File No. 001-10709) and incorporated herein by
reference.
Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. relating to 6.00%
Series T Cumulative Preferred Units, Series T, dated as of May 14, 2012. Filed with Registrant’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 (SEC File No. 001-10709)
and incorporated herein by reference.
Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. relating to 5.75%
Series U Cumulative Preferred Units, dated as of September 14, 2012. Filed with Registrant’s
Quarterly Report on Form 10-Q for
the quarter ended September 30, 2012 (SEC
File No. 001-10709) and incorporated herein by reference.
Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. relating to 5.70%
Series V Cumulative Preferred Units, dated as of March 14, 2013. Filed with Registrant’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 (SEC File No. 001-10709)
and incorporated herein by reference.
Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. relating to 5.20%
Series W Cumulative Preferred Units, dated as of October 20, 2016. Filed with Registrant’s
Quarterly Report on Form 10-Q for
the quarter ended September 30, 2016 (SEC
File No. 001-10709) and incorporated herein by reference.
Third Amended and Restated Revolving Credit Agreement dated as of January 10, 2017 by and
among PS Business Parks, L.P., a California limited partnership, as borrower, and Wells Fargo
Bank, National Association, as Administrative Agent for the Lenders. Filed with the Registrant’s
Current Report on Form 8-K dated January 10, 2017 (SEC File No. 001-10709) and incorporated
herein by reference.
Registrant’s 1997 Stock Option and Incentive Plan. Filed with Registrant’s Registration
Statement on Form S-8 (SEC File No. 333-48313) and incorporated herein by reference.
Registrant’s 2003 Stock Option and Incentive Plan. Filed with Registrant’s Registration
Statement on Form S-8 (SEC File No. 333-104604) and incorporated herein by reference.
Amended and Restated Retirement Plan for Non-Employee Directors. Filed with Registrant’s
Annual Report on Form 10-K for the year ended December 31, 2011 (SEC File No. 001-10709)
and incorporated herein by reference.
Form of PS Business Parks, Inc. Restricted Stock Unit Agreement. Filed with Registrant’s
the quarter ended September 30, 2004 (SEC
Quarterly Report on Form 10-Q for
File No. 001-10709) and incorporated herein by reference.
Form of PS Business Parks, Inc. 2003 Stock Option and Incentive Plan Non-Qualified Stock
Option Agreement. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004 (SEC File No. 001-10709) and incorporated herein by reference.
Form of PS Business Parks, Inc. 2003 Stock Option and Incentive Plan Stock Option
Agreement. Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004 (SEC File No. 001-10709) and incorporated herein by reference.
Amendment to Form of Director Stock Option Agreement. Filed with Registrant’s Annual
Report on Form 10-K for the year ended December 31, 2010 (SEC File No. 001-10709) and
incorporated herein by reference.
Revised Form of Director Stock Option Agreement. Filed with Registrant’s Annual Report on
Form 10-K for the year ended December 31, 2010 (SEC File No. 001-10709) and incorporated
herein by reference.
Registrant’s 2012 Equity and Performance-Based Incentive Compensation Plan (2012 Plan).
Filed with Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012
(SEC File No. 001-10709) and incorporated herein by reference.
Form of Registrant’s 2012 Plan Non-Qualified Stock Option Agreement. Filed with Registrant’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 (SEC File No. 001-10709)
and incorporated herein by reference.
77
10.23*
10.24*
10.25*
12
21
23
31.1
31.2
32.1
101 .INS
101 .SCH
101 .CAL
101 .DEF
101 .LAB
101 .PRE
Form of Registrant’s 2012 Plan Restricted Stock Unit Agreement. Filed with Registrant’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 (SEC File No. 001-
10709) and incorporated herein by reference.
Retirement Plan For Non-Employee Directors, as amended. Filed with Registrant’s Annual
Report on Form 10-K for the year ended December 31, 2015 (SEC File No. 001-10709) and
incorporated herein by reference.
Form of 2012 Plan Restricted Share Unit Agreement. Filed with Registrant’s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2016 (SEC File No. 001-10709) and
incorporated herein by reference.
Statement re: Computation of Ratio of Earnings to Fixed Charges and Preferred Stock
Dividends. Filed herewith.
List of Subsidiaries. Filed herewith.
Consent of Independent Registered Public Accounting Firm. Filed herewith.
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. Filed herewith.
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. Filed herewith.
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. Filed herewith.
XBRL Instance Document. Filed herewith.
XBRL Taxonomy Extension Schema. Filed herewith.
XBRL Taxonomy Extension Calculation Linkbase. Filed herewith.
XBRL Taxonomy Extension Definition Linkbase. Filed herewith.
XBRL Taxonomy Extension Label Linkbase. Filed herewith.
XBRL Taxonomy Extension Presentation Link. Filed herewith.
* Denotes management contract or compensatory plan agreement or arrangement
78
PS BUSINESS PARKS, INC.
Exhibit 12
STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
(in thousands, except ratio data)
For The Years Ended December 31,
2016
2015
2014
2013
2012
Income from continuing operations . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . .
$144,984
5,568
$148,970
13,270
$204,700
13,509
$116,144
16,074
$ 94,395
20,618
Earnings from continuing operations available
to cover fixed charges . . . . . . . . . . . . . . . . . . .
$150,552
$162,240
$218,209
$132,218
$115,013
Fixed charges (1)
. . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock dividends . . . . . . . . . . . . . . . . . .
Preferred partnership distributions . . . . . . . . . . .
$
6,452
64,588
—
$ 14,428
61,885
—
$ 14,453
60,488
—
$ 16,433
59,216
—
$ 20,618
69,136
323
Combined fixed charges and preferred
distributions . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 71,040
$ 76,313
$ 74,941
$ 75,649
$ 90,077
Ratio of earnings from continuing operations to
fixed charges . . . . . . . . . . . . . . . . . . . . . . . . . .
Ratio of earnings from continuing operations to
combined fixed charges and preferred
distributions . . . . . . . . . . . . . . . . . . . . . . . . . .
23.3
11.2
15.1
8.0
5.6
2.1
2.1
2.9
1.7
1.3
(1) Fixed charges include interest expense and capitalized interest.
Supplemental Disclosure of Ratio of Funds from Operations (“FFO”) to Fixed Charges:
FFO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . .
Net income allocable to noncontrolling
interests — preferred units . . . . . . . . . . . . . . .
Preferred stock dividends . . . . . . . . . . . . . . . . . .
For The Years Ended December 31,
2016
2015
2014
2013
2012
$179,882
5,568
$164,244
13,270
$162,196
13,509
$165,845
16,074
$134,472
20,618
—
64,588
—
61,885
—
60,488
—
59,216
323
69,136
FFO available to cover fixed charges . . . . . . . . .
$250,038
$239,399
$236,193
$241,135
$224,549
Fixed charges (1)
. . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock dividends (2) . . . . . . . . . . . . . . .
Preferred partnership distributions (2) . . . . . . . .
$
6,452
57,276
—
$ 14,428
59,398
—
$ 14,453
60,488
—
$ 16,433
59,216
—
$ 20,618
51,969
174
Combined fixed charges and preferred
distributions paid . . . . . . . . . . . . . . . . . . . . . .
$ 63,728
$ 73,826
$ 74,941
$ 75,649
$ 72,761
Ratio of available FFO to fixed charges . . . . . . .
38.8
16.6
16.3
14.7
10.9
Ratio of available FFO to combined fixed
charges and preferred distributions paid . . . . .
3.9
3.2
3.2
3.2
3.1
(1) Fixed charges include interest expense and capitalized interest.
(2) Excludes the issuance costs related to the redemption/repurchase of preferred equity and the gain on
the repurchase of preferred equity.
List of Subsidiaries
Exhibit 21
The following sets forth the subsidiaries of the Registrant and their respective states of incorporation
or organization:
Name
Amherst JV LLC
Amherst Property, LLC
American Office Park Properties, TPGP, Inc.
AOPP Acquisition Corp. Two
Arapaho Investors, LLC
GB, LLC
Hernmore Corporation
Metro Park I, LLC
Metro Park II, LLC
Metro Park III, LLC
Metro Park IV, LLC
Metro Park V, LLC
Miami International Commerce Center Association, Inc.
Monroe Parkway, L.L.C.
PS Business Parks, L.P.
PS Metro Park, LLC
PSB Amherst Investors, L.L.C.
PSB Amherst L.L.C.
PSB Amherst Finance LLC
PSB Boca Commerce Park, LLC
PSB Meadows LLC
PSB Meadows Member LLC
PSB MICC 2323 LLC
PSB Northern California Industrial Portfolio, LLC
PSB Shady Grove LLC
PSB Wellington Commerce Park I, LLC
PSB Wellington Commerce Park II, LLC
PSB Wellington Commerce Park III, LLC
PSBP Industrial, LLC
PSBP Northpointe D LLC
PSBP QRS, Inc.
PSBP Springing Member LLC
PSBP Westwood GP, LLC
REVX-098, LLC
Tenant Advantage, Inc.
State
Delaware
Delaware
California
California
Delaware
Maryland
Maryland
Delaware
Delaware
Delaware
Delaware
Delaware
Florida
Virginia
California
Maryland
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Maryland
Delaware
Delaware
Delaware
Delaware
Virginia
California
Delaware
Delaware
Delaware
California
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement (Form S-8 No. 333-48313) of PS Business Parks, Inc. pertaining to the PS
Business Parks, Inc. 1997 Stock Option and Incentive Plan,
(2) Registration Statement (Form S-8 No. 333-50274) of PS Business Parks, Inc. pertaining to the PS
401(k)/Profit Sharing Plan,
(3) Registration Statement (Form S-8 No. 333-104604) of PS Business Parks, Inc. pertaining to the PS
Business Parks, Inc. 2003 Stock Option and Incentive Plan,
(4) Registration Statement (Form S-8 No. 333-129463) of PS Business Parks, Inc. pertaining to the PS
Business Parks, Inc. Retirement Plan for Non-Employee Directors,
(5) Registration Statement (Form S-8 No. 333-184316) of PS Business Parks, Inc. pertaining to the PS
Business Parks, Inc. 2012 Equity and Performance-Based Incentive Compensation Plan,
(6) Registration Statement (Form S-8 No. 333-203771) of PS Business Parks, Inc. pertaining to the PS
Business Parks, Inc. Retirement Plan for Non-Employee Directors, and
(7) Registration Statement (Form S-3 No. 333-202624);
of our reports dated February 24, 2017 with respect to the consolidated financial statements and
schedule of PS Business Parks, Inc., and the effectiveness of internal control over financial reporting of PS
Business Parks, Inc., included in this Annual Report (Form 10-K) of PS Business Parks, Inc. for the year
ended December 31, 2016.
Los Angeles, California
February 24, 2017
/s/ Ernst & Young, LLP
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Maria R. Hawthorne certify that:
1. I have reviewed this annual report on Form 10-K of PS Business Parks, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
the effectiveness of the disclosure controls and
presented in this report our conclusions about
procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s ability
to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
/s/ Maria R. Hawthorne
Name: Maria R. Hawthorne
Title:
Date: February 24, 2017
Chief Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Edward A. Stokx certify that:
1. I have reviewed this annual report on Form 10-K of PS Business Parks, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
the effectiveness of the disclosure controls and
presented in this report our conclusions about
procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s ability
to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
/s/ Edward A. Stokx
Name: Edward A. Stokx
Title:
Date: February 24, 2017
Chief Financial Officer
Certification of CEO and CFO Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1
In connection with the Annual Report on Form 10-K of PS Business Parks, Inc. (the “Company”) for
the period ending December 31, 2016 as filed with the Securities and Exchange Commission on the date
hereof (the “Report”), Maria R. Hawthorne, as Chief Executive Officer of the Company, and Edward A.
Stokx, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. § 1350, as
adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
/s/ Maria R. Hawthorne
Name: Maria R. Hawthorne
Title:
Date: February 24, 2017
Chief Executive Officer
/s/ Edward A. Stokx
Name: Edward A. Stokx
Title:
Date: February 24, 2017
Chief Financial Officer
CORPORATE DATA
Corporate Headquarters
Executive Officers
Regional Vice Presidents
MARK D. ANTROBIUS
Regional Vice President, Southern
California
RALPH D. ASHWORTH
Vice President, Property Operations
Controller
THOMAS M. DRISCOLL
Regional Vice President, Northern
Virginia and Maryland
DENNIS FAY
Regional Vice President, Northern
Virginia and Maryland
RICHARD GUERTIN
Regional Vice President, Miami,
Florida
AMY L. HERITAGE
Regional Vice President, Austin,
Texas
JEFFREY C. PASCHAL
Regional Vice President, Texas and
Florida
EDDIE F. RUIZ
Vice President, Director of Facilities
JAMI S. SHAW
Regional Vice President, Northern
California
MARIA R. HAWTHORNE
President and Chief Executive Officer
JOHN W. PETERSEN
Executive Vice President and Chief
Operating Officer
EDWARD A. STOKX
Executive Vice President, Chief Financial
Officer and Secretary
Divisional Vice Presidents
CHRISTOPHER M. AUTH
Divisional Vice President, Northern
Virginia and Maryland
TRENTON A. GROVES
Vice President, Corporate Controller
COBY A. HOLLEY
Vice President, Real Estate
STUART H. HUTCHISON
Divisional Vice President, Southern
California and Pacific Northwest
ROBIN E. MATHER
Vice President, Business Development
RICHARD E. SCOTT
Divisional Vice President, Northern
California
EUGENE UHLMAN
Vice President, Construction
Management
DAVID A. VICARS
Divisional Vice President, Texas
and Florida
701 Western Avenue
Glendale, California 91201-2349
(818) 244-8080 Telephone
(818) 242-0566 Facsimile
Website
psbusinessparks.com
Board of Directors
RONALD L. HAVNER, JR. (1998)
Chairman of the Board
Chairman of the Board and Chief
Executive Officer
Public Storage
MARIA R. HAWTHORNE (2016)
President and Chief Executive Officer
JENNIFER HOLDEN DUNBAR (2009)
Co-Founder and Managing Director
Dunbar Partners, LLC
JAMES H. KROPP (1998)
Chief Investment Officer
SLKW Investments LLC
SARA GROOTWASSINK LEWIS (2010)
Chief Executive Officer
Lewis Corporate Advisors, LLC
GARY E. PRUITT (2012)
Retired Chairman and Chief Executive Officer
Univar N.V.
ROBERT S. ROLLO (2013)
Retired Senior Partner
Heidrick and Struggles
JOSEPH D. RUSSELL, JR. (2003)
President
Public Storage
PETER SCHULTZ (2012)
Retired President, Chief Executive Officer
and Director
The Beacon Group, Inc.
( ) = Year director was elected to the Board
Transfer Agent
Stock Listing
Certifications
Additional Information Sources
American Stock Transfer
& Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
(800) 937-5449
PS Business Parks, Inc. is
traded on the New York
Stock Exchange under the
symbol “PSB.”
Independent Registered
Public Accounting Firm
Ernst & Young LLP
Los Angeles, CA
The most recent
certifications by our Chief
Executive Officer and Chief
Financial Officer pursuant
to Sections 302 and 906 of
the Sarbanes-Oxley Act of
2002 are filed as exhibits to
our Form 10-K. Our Chief
Executive Officer’s most
recent annual certification to
the New York Stock
Exchange was submitted on
May 17, 2016.
The Company’s website,
psbusinessparks.com, contains
financial information of interest to
shareholders, brokers and others.
PS Business Parks, Inc. is a
member and active supporter of the
National Association of Real Estate
Investment Trusts.
PS BUSINESS PARKS, INC.
701 Western Avenue, Glendale, California 91201-2349
(818) 244-8080 • psbusinessparks.com