2020 ANNUAL REPORT
psbusinessparks.com
BUSINESS PARK LOCATIONS
(As of December 31, 2020)
WA
(3)
CA
(47)
VA
(20)
MD
(4)
Divisional/Regional Office
( ) = Number of business parks in state
TX
(21)
FL
(3)
California
Rentable Square Feet: 11,297,000
Buena Park
Carson
Cerritos
Concord
Culver City
Fremont
Hayward
La Mirada
Laguna Hills
Lake Forest
Milpitas
Monterey
Monterey Park
Oakland
San Diego
San Jose
San Leandro
San Mateo
San Ramon
Santa Clara
Santa Fe Springs
Signal Hill
South San Francisco
Studio City
Sunnyvale
Torrance
Texas
Rentable Square Feet: 4,850,000
Austin
Carrollton
Farmers Branch
Garland
Irving
Mesquite
Plano
Richardson
Virginia
Rentable Square Feet: 5,220,000
Alexandria
Chantilly
Fairfax
Herndon
Lorton
McLean
Merrifield
Springfield
Sterling
Vienna
Woodbridge
Florida
Rentable Square Feet: 3,866,000
Boca Raton
Miami
Wellington
Maryland
Rentable Square Feet: 1,145,000
Beltsville
Gaithersburg
Rockville
Washington
Rentable Square Feet: 1,350,000
Kent
Redmond
Renton
Cover photo
212 Business Park, a 1.0 million square foot multi-tenant industrial park located in Seattle, Washington.
CUMULATIVE TOTAL RETURN
PS Business Parks, Inc., S&P 400 Index and NAREIT Equity Index
December 31, 2010 - December 31, 2020
$400
$350
$300
$250
$200
$150
$100
$ 50
$ 0
12/31/10 12/31/11 12/31/12 12/31/13 12/31/14 12/31/15 12/31/16 12/31/17
12/31/18
12/31/19
12/31/20
PS Business Parks, Inc.
S&P 400 Index
NAREIT Equity Index
12/31/10 12/31/11 12/31/12 12/31/13 12/31/14 12/31/15 12/31/16 12/31/17 12/31/18 12/31/19 12/31/20
PS Business Parks, Inc.
$100.00
$102.76
$123.73
$149.00
$164.47
$185.96
$254.96
$281.21
$303.44
$391.70
$325.84
S&P 400 Index
$100.00
$98.27
$115.84
$154.64
$169.75
$166.06
$200.49
$233.06
$207.23
$261.52
$297.24
NAREIT Equity Index
$100.00
$108.28
$129.62
$133.32
$170.68
$175.51
$190.65
$207.19
$198.81
$255.79
$242.69
The graph set forth above compares the yearly change in the cumulative total shareholder return on the
Common Stock of the Company for the ten-year period ended December 31, 2020 to the cumulative total
return of the Standard & Poor’s 400 Stock Index (“S&P 400 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, 2010 and that all
dividends were reinvested. The stock price performance shown in the graph is not necessarily indicative of
future price performance.
Dear Fellow Shareholders:
Most of us will forever remember 2020 as a year filled with previously unimaginable
challenges. As I reflect on this past year, I am proud of what the PS Business Parks family
accomplished despite tremendous adversity. Our team displayed extraordinary dedication,
commitment, compassion, and camaraderie; and I am sincerely thankful for how they have
supported our customers and one another throughout these trying times.
Resiliency is the common thread that runs through all parts of our business. PS Business Parks
was built to withstand the stress of market cycles, capital market fluctuations, changes in user
demand, environmental considerations, and other pressures which we have weathered in our
30-plus years of experience. The COVID-19 pandemic created a stress test unlike any we have
seen before; and I am pleased to report that we not only withstood the test and produced solid
results, but emerged as a stronger and more durable company, poised to continue creating
value for you, our shareholders.
2020 Operating Results
Our business is a fairly simple one: we own and operate a geographically diverse portfolio of
multi-tenant business parks located in strong gateway markets. Select operating results for 2020
and 2019 are shown below.
Rental income
Same Park Cash Rental Income
Same Park Cash Net Operating Income (NOI)
(In millions)
2020
$415.6
$379.9
$267.4
2019
$429.8
$379.5
$269.9
We entered 2020 expecting lower year-over-year weighted average occupancy knowing we
would receive possession of several larger than average suites during the year, including a
460,000 square foot single-tenant building in the East Bay submarket of Northern California
which vacated in the first quarter and a 288,000 square foot single-tenant building in the
Los Angeles submarket of Southern California which vacated in the second quarter. These large
expirations created an occupancy headwind for us, which we welcomed for the opportunity to
mark the expiring rents to market for the first time in many years through the re-leasing
process. As we anticipated, these larger-than-average spaces did not produce much cash flow
in 2020 due to downtime and free rent concessions associated with replacement leases;
however, by the end of the year, we had re-leased most of these spaces. In doing so, we
captured the largest lease in the Company’s history (in terms of contractual revenue) with the
backfill of the 288,000 square foot building in Southern California, resulting in over 36% cash
rental rate growth over the outgoing rent, and also achieved 34.8% rental rate growth with 70%
backfill of the 460,000 square foot building in Northern California. We expect to re-lease the
remaining 30% of the Northern California property in 2021 with similar cash rental rate growth.
1
By the start of the second quarter, the COVID-19 pandemic was upon us, which introduced
additional pressures to our portfolio as many of our customers’ businesses were significantly
disrupted and leasing demand decreased precipitously. In immediate response to the COVID-19
pandemic, we introduced a rent relief program designed to provide time for our hardest hit
customers to absorb the immediate shock of the pandemic and adapt their business models.
Through this program, we issued $1.3 million of rent abatement and $5.7 million of rent
deferral, more than half of which was paid back by the end of the year.
Despite the confluence of pressures on our portfolio in 2020, operating fundamentals remained
strong throughout the year. Lower year-over-year weighted average occupancy led to a
decrease in Same Park Cash NOI, but the occupied portion of our portfolio performed well as
illustrated by the revenue per occupied square foot statistics below.
Same Park Portfolio
Square Feet
Weighted average occupancy
Cash Rental Income per Occupied Square Foot
Cash Rental Income per Available Square Foot
2020
2019
25,656,000
92.4%
$16.03
$14.81
25,656,000
94.5%
$15.65
$14.79
We ended the year with 92.9% in-place occupancy (total portfolio and Same Park portfolio)
and achieved 5.8% cash rental rate growth on 7.5 million square feet of lease production. Our
portfolio is well positioned for strong performance in 2021 and beyond as we look to recapture
occupancy and push rental rates on new leases and renewals.
Leadership
We are fortunate to have a stable and seasoned management team with an average tenure of
approximately 15 years. Our team is adept at creating value and withstanding adversity. We
have a culture founded on integrity, accountability, and trust–one that recognizes individual
performance while emphasizing collaborative teamwork. Leveraging this culture of trust, and
through strong leadership in each of our regions, we were able to quickly mobilize into a
remote work arrangement with very little efficiency loss throughout the year. Our team of
market leaders are cycle-tested, and their belief in each other and confidence in our business
model again guided us to solid results in 2020.
Customers
PS Business Parks is proud to serve small- and medium-sized businesses–the backbone of the
U.S. economy–as its core customer base. Although we enjoy several lease agreements with
top-tier Fortune 100® customers, and the U.S. Government remains our largest single tenant,
our diverse base of small- and medium-sized customers forms the nucleus of tenancy at many
of our parks. With our top ten customers accounting for only 11.4% of total revenues and a
wide mix of industries with no single industry accounting for more than 20% of total revenues,
the diversity of our customer base provides stability through economic cycles.
2
Education 1.0%
Aerospace/defense 1.8%
Communications 1.8%
Home furnishings 2.6%
Insurance and
financial services 2.6%
Electronics 3.1%
Government 6.6%
Health services 7.6%
Construction and
engineering 8.3%
Business services 19.8%
Logistics 12.9%
Technology 11.1%
Retail, food, and
automotive 8.9%
Other 11.9%
For many years, and through multiple business cycles, we have touted the resiliency of small-
and medium-sized businesses, and 2020 was a testament to their strength and adaptability.
Faced with an exogenous shock few had ever even contemplated, most of our customers have
pivoted and survived (and some even thrived!) in the pandemic environment. We partnered
with certain customers by establishing a rent relief program designed to create a bridge for our
hardest-hit customers to survive liquidity constraints. We are proud to report that our program
was a success–as of the date of this letter, our tenants had paid over 99% of rent deferral
amounts scheduled to be repaid by December 31, 2020, and many of the customers who
received rent relief have returned their businesses to solvency. For those customers who are
still struggling, we will continue to partner with them as appropriate.
Heading into 2021, we saw a meaningful pickup in activity from existing customers and
prospective customers looking to grow their businesses and expand their operations, evidenced
by nearly 100,000 square feet of expansions from 34 customers in the fourth quarter of 2020
and approximately 500,000 square feet of expansions from 141 customers in 2020 overall. I am
heartened to see that the entrepreneurial spirit is alive and well in America.
Portfolio
Each of our core, gateway markets proved to be resilient in 2020; and in the case of our
industrial portfolio (which makes up more than 65% of our total leasable square feet), market
rents have continued to rise in nearly all markets. Our focus over the years on owning our
in-fill, multi-tenant industrial portfolio in dense metropolitan areas once again proved crucial as
we were able to tap into an active user base that requires locations close to their own customer
base. Beyond industrial, our remaining office and flex portfolios persevered in their own right;
and our teams impressed me by proving that even in a pandemic, they are capable of leasing
well appointed, well located low-rise office and flex space.
3
2020 Leasing Volume
(Square Feet)
Cash Rental Rate
Change
Industrial
Flex
Office
5,111,000
1,755,000
602,000
9.6%
1.1%
(1.5%)
We have built a portfolio and an operating strategy that allows for efficient use of capital
expenditures–both transaction and maintenance capital. Our typical suites are designed to be
attractive to a wide array of potential users; and we tend to avoid over-customization and
buildout for any one user, allowing for efficient re-leasing when our spaces turn. Further, we
perform nearly all leasing in-house, which not only helps control transaction costs in the form
of lower (or often times no) broker commissions, but also helps us better control the customer
mix and use types at our parks, leading to efficient maintenance capital requirements.
Same Park Recurring Capital as a Percentage of NOI
14.3%
11.6%
12.7%
12.3%
11.5%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
2016
2017
2018
2019
2020
In prior communications, we have signaled our intent to grow our industrial portfolio while
reducing our exposure to office. That remains our strategy; and most of the office-oriented
parks we still own serve as near- or mid-term redevelopment opportunities that we are
pursuing, although we may look to opportunistic dispositions of certain assets in the near
future based on market conditions. We prefer industrial over office due to the long-term
growth profile of industrial rents coupled with the low recurring capital required by industrial
parks vis-à-vis office.
4
Industrial
Flex
Office
Total
Transaction Cost per Square Foot
2020
$2.39
$3.39
$6.73
$2.97
2019
$2.27
$5.44
$8.79
$3.73
2018
$ 1.55
$ 3.54
$10.15
$ 3.68
Regarding redevelopment of certain office parks, in some cases we may seek to redevelop
these properties ourselves–as is the case with The Mile in Tysons, Virginia, where we recently
commenced our second phase of multifamily development. In other cases, we may opt to
create value through the re-entitlement process and then sell to others for development,
allowing us to redeploy sale proceeds into growing our industrial portfolio or other initiatives.
Financial Condition
Few public Real Estate Investment Trusts, or public companies of any kind, can tout a balance
sheet more resilient than ours. We have long preferred permanent sources of capital to match
the perpetual nature of our assets, and as a result we enter 2021 with ample liquidity and a
pristine balance sheet ready to be put to work for accretive growth. Although we had no debt
outstanding at December 31, 2020, we will potentially use modest levels of long-term senior
unsecured debt to finance future growth, in addition to common and preferred equity financing
which we have historically relied upon. We will continue to adhere to sound balance sheet
management principles and maintain the strong credit profile that has provided stability over
time and allowed us to opportunistically invest capital through full economic cycles.
6.0x
5.5x
5.0x
4.5x
4.0x
3.5x
3.0x
2.5x
2.0x
Fixed Charge Coverage Ra(cid:2)o
Debt + Preferred/EBITDA Ra(cid:2)o
4.4x
3.9x
4.9x
4.1x
5.3x
5.3x
3.5x
3.3x
5.7x
3.4x
2016
2017
2018
2019
2020
5
Growth
While the pandemic presented many challenges, I am pleased that we were able to be
opportunistic with a few key growth opportunities in 2020. First, we commenced and
completed an 83,000 square foot multi-tenant industrial development in Dallas, Texas–on time
and budget. Additionally, we commenced construction of Brentford at The Mile, a planned
411-unit, $110 to $115 million multifamily development in Tysons, Virginia, which is scheduled
for delivery in mid-2022. Lastly, we utilized accumulated retained cash from operations to
acquire La Mirada Commerce Center, a 73,000 square foot industrial park in La Mirada,
California, for a total acquisition price of $13.5 million and Pickett Industrial Park, a 246,000
square foot industrial park in Alexandria, Virginia, for a total acquisition price of $46.6 million.
As we enter 2021, we look to take advantage of an increase in acquisition opportunities as we
seek to grow our portfolio accretively.
2021 Outlook
As we look ahead, we are well-positioned to continue delivering strong results. We are
encouraged by the opportunity to grow occupancy, push rental rates, and meet our customers’
growing business needs in 2021. We will capitalize on a macro economic climate that seems to
be improving, strong industrial fundamentals, a resilient and battle-tested leadership team, and
a customer base that has endured the most difficult of circumstances. We remain committed to
our business model and operating strategy; and along with our fortress balance sheet,
PS Business Parks is poised to create value for you, our shareholders, and continue along our
long journey of success.
Thank you for your continued trust in our business and your investment in PS Business Parks.
John W. Petersen
Interim President and Chief Executive Officer
February 28, 2021
6
Supplemental Non-GAAP Disclosures (unaudited)
Same Park Cash Rental Income and Same Park Cash Net Operating Income (NOI)
The table below reconciles from Same Park Cash Rental Income to rental income and Same Park Cash
NOI to net income on the consolidated statements of income (in thousands).
For The Years
Ended December 31,
2019
2020
Rental income
Same Park Cash Rental Income (1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Same Park Non-Cash Rental Income (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Same Park . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 379,495 $379,947
3,417
22,109
9,464
686
2,455
14,276
10,075
23,545
Total rental income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
429,846
415,623
Cost of operations
Adjusted cost of operations (3)
Same Park . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Same Park . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation expense (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
109,559
4,899
4,137
8,614
1,134
112,569
7,327
4,264
143
1,210
Total cost of operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
128,343
125,513
Net operating income (5)
Same Park Cash NOI (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Same Park Non-Cash Rental Income (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Same Park . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation expense (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest and other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of real estate facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
269,936
2,455
9,377
5,938
14,931
(1,134)
(104,249)
(13,761)
4,492
(657)
16,644
267,378
3,417
14,782
5,200
543
(1,210)
(96,314)
(14,526)
1,234
(1,072)
27,273
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 203,972 $206,705
(1)
(2)
Same Park Cash Rental Income represents Same Park rental income excluding Same Park Non-Cash Rental Income (defined below).
Same Park Non-Cash Rental Income represents amortization of deferred rent receivable, amortization of above and below
market rents, net, and amortization of lease incentives and tenant improvement reimbursements.
(4)
(5)
(3) Adjusted Cost of Operations, as presented above, excludes stock compensation expense for employees whose compensation
expense is recorded in cost of operations, which can vary significantly period to period based upon the performance of the
Company.
Stock compensation expense, as shown here, represents stock compensation expense for employees whose compensation
expense is recorded in cost of operations. Note that stock compensation expense attributable to the executive management
team (including divisional vice presidents) and other corporate employees is recorded within general and administrative
expense.
The Company utilizes NOI, a non-GAAP financial measure, to evaluate the operating performance of its business parks. The
Company defines NOI as rental income less Adjusted Cost of Operations. The Company believes NOI assists investors in
analyzing the performance of its real estate by excluding (i) corporate overhead (i.e., general and administrative expense)
because it does not relate to the direct operating performance of the real estate, (ii) depreciation and amortization expense
because it does not accurately reflect changes in the fair value of the real estate, and (iii) stock compensation expense
because this expense item can vary significantly from period to period and thus impact comparability across periods.
The Company utilizes Cash NOI to evaluate the cash flow performance of its business parks, and believes investors utilize this
metric for the same purpose. The Company defines Same Park Cash NOI as Same Park Cash Rental Income less Same Park
Adjusted Cost of Operations.
(6)
Supplemental Non-GAAP Disclosures (unaudited) (continued)
Ratio of Debt and Preferred Equity to Earnings Before Interest, Taxes,
Depreciation, and Amortization (EBITDA)
The table below reflects the ratio of debt and preferred equity to EBITDA and reconciles net income to
EBITDA (in thousands).
2016
For The Years Ended December 31,
2018
2019
2017
Mortgage note payable
Preferred stock
$
— $
— $
— $
— $
1,109,750
1,089,750
959,750
944,750
2020
—
944,750
Combined mortgage note payable
and preferred stock
$ 1,109,750 $ 1,089,750 $
959,750 $
944,750 $
944,750
Net Income
Adjustments
Depreciation and amortization
Depreciation from
unconsolidated joint venture
Interest expense
Interest income
Gain on sale of land and real
estate facilities
Gain on sale of development
rights
EBITDA (1)
Ratio of debt and preferred equity
to EBITDA
$
144,984 $
179,316 $
271,901 $
203,972 $
206,705
99,486
94,270
99,242
104,249
96,314
—
5,568
(463)
—
—
1,180
1,179
(356)
—
555
(489)
—
611
(1,885)
—
548
(370)
(1,209)
(93,484)
(16,644)
(27,273)
(6,365)
—
—
—
$
249,575 $
268,015 $
277,725 $
290,303 $
275,924
4.4
4.1
3.5
3.3
3.4
(1) EBITDA is a non-GAAP financial measure that represents net income before interest, depreciation and amortization and
adjusted to exclude gains or losses from sales of depreciable real estate assets and impairment charges on real estate assets.
Management believes that EBITDA is frequently used by analysts and investors in evaluating the operating performance of our
business activities, including the impact of general and administrative expenses, and without the impact from gains or losses
from sales of depreciable real estate assets.
Supplemental Non-GAAP Disclosures (unaudited) (continued)
Ratio of Funds from Operations (FFO) to Combined Fixed Charges and Preferred
Distributions
The table below reconciles from net income to FFO and reflects the ratio of FFO to combined fixed
charges and preferred distributions (in thousands).
Net income allocable to common
shareholders
Adjustments
Gain on sale of land, real estate facilities
and development rights
Depreciation and amortization expense
Depreciation from unconsolidated joint
venture
Net income allocated to noncontrolling
interests
Net income allocated to restricted stock
unit holders
FFO allocated to joint venture partner
FFO allocable to diluted common shares and
units (1)
Interest expense
Allocation to preferred shareholders based
upon
Distributions
Redemptions
For The Years Ended December 31,
2016
2017
2018
2019
2020
$
62,872 $
90,425 $
172,899 $
108,703 $124,645
—
99,486
(7,574)
94,270
(93,484)
99,242
(16,644)
104,249
(27,273)
96,314
—
1,180
—
—
—
16,955
24,279
45,199
29,006
33,158
569
—
761
—
1,923
(13)
910
(149)
716
(118)
179,882
5,568
203,341
1,179
225,766
555
226,075
611
227,442
548
57,276
7,312
52,873
10,978
51,880
—
54,346
11,007
48,186
—
FFO available to cover fixed charges
$
250,038 $
268,371 $
278,201 $
292,039 $276,176
Fixed charges (2)
Distributions to preferred shareholders
Combined fixed charges and preferred
6,452
57,276
1,685
52,873
555
51,880
611
54,346
548
48,186
distributions
$
63,728 $
54,558 $
52,435 $
54,957 $ 48,734
Ratio of available FFO to combined fixed
charges and preferred distributions paid
3.9
4.9
5.3
5.3
5.7
(1) FFO is a non-GAAP financial measure that assists investors in analyzing and comparing the operating and financial
performance of a company’s real estate between periods. Refer to Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations under Funds from Operations, Core Funds from Operations, and Funds Available for
Distribution included in our Annual Report on Form 10-K for the definition and reconciliation of FFO.
(2) Fixed charges include interest expense and capitalized interest.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020.
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
Common Stock, $0.01 par value per share
Depositary Shares Each Representing 1/1,000 of a
5.200% Cum Pref Stock, Series W, $0.01 par value
Depositary Shares Each Representing 1/1,000 of a
5.250% Cum Pref Stock, Series X, $0.01 par value
Depositary Shares Each Representing 1/1,000 of a
5.200% Cum Pref Stock, Series Y, $0.01 par value
Depositary Shares Each Representing 1/1,000 of a
4.875% Cum Pref Stock, Series Z, $0.01 par value
Ticker Symbol
PSB
Name of Each Exchange on Which Registered
New York Stock Exchange
PSBPrW
PSBPrX
PSBPrY
PSBPrZ
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 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
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 No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
As of June 30, 2020, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $2,651,598,115 based on 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 19, 2021 (the latest practicable date): 27,488,684.
Portions of the definitive proxy statement to be filed in connection with the Annual Meeting of Shareholders to be held in 2021 are incorporated by reference into Part III of this
Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
PART I
ITEM 1. BUSINESS
Forward-Looking Statements
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:
(i) the duration and severity of the coronavirus (“COVID-19”) pandemic and its impact on our business and our
customers; (ii) changes in general economic and business conditions, including as a result of the economic fallout of
the COVID-19 pandemic; (iii) potential regulatory actions to close our facilities or limit our ability to evict delinquent
customers; (iv) decreases in rental rates or increases in vacancy rates/failure to renew or replace expiring leases; (v)
tenant defaults; (vi) the effect of the recent credit and financial market conditions; (vii) 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”);
(viii) the economic health of our customers; (ix) increases in operating costs; (x) casualties to our properties not
covered by insurance; (xi) the availability and cost of capital; (xii) increases in interest rates and its effect on our stock
price; (xiii) security breaches or a failure of our networks, systems or technology could adversely impact our business,
customer and employee relationships; and (xiv) 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 industrial, flex and office space. As of December
31, 2020, PSB owned and operated 27.7 million rentable square feet of commercial space, comprising 98 business
parks and 675 buildings located in California, Texas, Virginia, Florida, Maryland, and Washington. PSB focuses on
owning concentrated business parks, which provides us with the greatest flexibility to meet the needs of our customers.
PSB also held a controlling interest in the following joint venture arrangements, both located in Tysons, Virginia: a
95.0% interest in Highgate at the Mile, a 395-unit multifamily apartment complex, and a 98.2% interest in Brentford
at the Mile, a 411-unit multifamily apartment complex development. PSB manages 0.4 million rentable square feet
on behalf of Public Storage (“PS”).
Substantially all of PSB’s assets are held, and its business is conducted, through PS Business Parks, L.P. (the
“OP”), a California limited partnership. As of December 31, 2020, PSB owned 79.0% of the common partnership
units of PS Business Parks, L.P. (the “OP”). The remaining common partnership units are owned by PS. PSB, as the
sole general partner of the OP, has full, exclusive and complete responsibility and discretion in managing and
controlling the OP. PS also owns 7.2 million common shares and would own 41.6% (or 14.5 million shares) of the
outstanding shares of the Company’s common stock if it redeemed its common partnership units for common shares.
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 OP and our consolidated
joint ventures.
History of the Company: The Company was formed in 1990 as a California corporation. Through a series of
transactions between January 1997 and March 1998, the Company was renamed “PS Business Parks, Inc.” and became
a publicly held, fully integrated, self-advised and self-managed REIT having interests in commercial real estate held
through our OP.
Principal Business Activities
We are a commercial property landlord, with 98 business parks consisting of multi-tenant industrial, flex and office
space. The Company owns 18.4 million square feet of industrial space that is primarily configured as warehouse space
with ample dock access. We own 6.2 million square feet of flex space, representing industrial buildings that are
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configured with a combination of warehouse and office space that can be designed to fit a wide variety of use types.
The warehouse component of the flex space has a number of uses including light manufacturing and assembly, storage
and warehousing, showroom, laboratory, 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. In addition, the Company owns 3.1 million square feet of low-rise office
space, generally either in business parks that combine office buildings with industrial and/or flex buildings or in
submarkets where the market demand is more office focused.
We generally seek to own and operate multi-tenant buildings in multi-building business parks which accommodate
various businesses and uses. Our business parks average 14 buildings and 0.8 million rentable square feet per park,
located on parcels of various sizes, ranging from 1 to 49 buildings and 12,000 to 3.5 million square feet of rentable
space. Parking at most of our parks is 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 customer base for our facilities is diverse. For certain operational performance metrics, we bifurcate our
facilities into those with average unit sizes over 5,000 square feet and those with average unit sizes under 5,000 square
feet given that the nature of the customer base and use types differ between the two, which can result in varying
performance. Approximately 35.9% of in-place rents as of December 31, 2020 were derived from customers at
properties with average unit sizes under 5,000 square feet. The remaining 64.1% of in-place rents came from customers
at properties with average unit sizes over 5,000 square feet. The Company also has several customers that lease space
in multiple buildings and locations. As of December 31, 2020, the U.S. Government is the largest customer with 21
separate leases encompassing approximately 657,000 square feet and 3.8% of the Company’s annualized rental
income.
We operate in six states and we may expand our operations to other states or reduce the number of states in which
we operate. Properties are acquired for both income and capital appreciation potential, and we place no limitation on
the amount that can be invested in any specific property.
The Company owns approximately 14.0 acres and 6.4 acres of land in Dallas and Northern Virginia, respectively,
which are reflected on our consolidated balance sheets as land and building held for development. The Company will
seek to develop these parcels and possibly seek redevelopment of other assets in the future.
During 2020, we developed an 83,000 square foot shallow-bay industrial building at our Freeport Business Park
in Irving, Texas, on 4.0 of the 14.0 acres located in the Dallas submarket. As of December 31, 2020, $7.8 million of
the estimated $8.1 million total development costs had been incurred and was reflected under land and building held
for development, net on our consolidated balance sheets. The remaining $0.3 million of development cost was incurred
subsequent to December 31, 2020 and construction was completed in January 2021.
See “Objectives and Strategies” below for further information.
Our principal executive offices are located at 701 Western Avenue, Glendale, California 91201-2349, and our
telephone number is (818) 244-8080. We maintain a website with the address www.psbusinessparks.com. The
information contained on our website is not a part of, or incorporated by reference into, this Annual Report on Form
10-K. We make available free of charge through our website our 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 we electronically file or furnish such material to the Securities and Exchange Commission (the “SEC”).
Recent Company Developments
Acquisition of Real Estate Facilities: On October 28, 2020, we acquired a multi-tenant industrial park comprising
approximately 246,000 rentable square feet in Alexandria, Virginia, for a total purchase price of $46.6 million,
inclusive of capitalized transaction costs. The park consists of three buildings and was 100.0% occupied at acquisition
with suites ranging from 7,000 to 75,000 square feet.
On January 10, 2020, we acquired a multi-tenant industrial park comprising approximately 73,000 rentable square
feet in La Mirada, California, for a total purchase price of $13.5 million, inclusive of capitalized transaction costs. The
park consists of five buildings and was 100.0% occupied at acquisition with suites ranging from 1,200 to 3,000 square
feet.
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Development of Multifamily Real Estate: In 2019, we successfully rezoned our 44.5 acre office and multifamily
park, known as The Mile, located in Tysons, Virginia. The rezoning will allow us to develop, at our election, up to
3,000 additional multifamily units and approximately 500,000 square feet of other commercial uses. We leveraged
the expertise of a well-regarded local developer and operator of multifamily real estate to develop our first multifamily
development at The Mile, a 395-unit multifamily property known as Highgate at The Mile, which completed in 2017.
In August 2020, the Company entered into a new joint venture agreement with the same well-regarded local developer
for the purpose of developing our second multifamily property, Brentford at The Mile, a planned 411-unit multifamily
apartment complex. Construction of Brentford at The Mile commenced in August 2020 and is anticipated to be
completed over a period of 24 to 36 months at an estimated development cost of $110 million to $115 million,
excluding land cost. There could be several phases of the development at The Mile beyond that, but the scope, timing
and construction of all future phases of development of The Mile are subject to a variety of uncertainties, including
site plan approvals and building permits. See “Objectives and Strategies” below for further information regarding our
development and redevelopment activities.
Sales of Real Estate Facilities: On September 16, 2020, the Company sold two industrial buildings totaling 40,000
square feet located in Redmond, Washington, which were subject to an eminent domain process for net proceeds of
$11.4 million, which resulted in a gain on sale of $7.7 million.
On January 7, 2020, the Company completed the sale of a single-tenant building totaling 113,000 square feet in
Montgomery County, Maryland, for net sale proceeds of $29.3 million, which resulted in a gain on sale of $19.6
million.
Tax and Corporate Structure
For all periods presented herein, we have elected REIT status under the Code. For each taxable year in which we
qualify for taxation as a REIT, we generally will not be subject to U.S. federal corporate income tax on our “REIT
taxable income” (generally, taxable income subject to specified adjustments, including a deduction for dividends paid
and excluding our net capital gain) that is distributed to our shareholders. We believe we have met these requirements
in all periods presented herein, and we expect to continue to qualify as a REIT.
PSB is structured as an umbrella partnership REIT (“UPREIT”), with substantially all of our activities conducted
through the OP. We acquired interests in certain properties from PS during PSB’s initial formation in exchange for
operating partnership units, which allowed PS to defer the recognition of a tax gain on the contributed properties.
We are the sole general partner of the OP, which has equity in the form of common partnership units and preferred
partnership units. As of December 31, 2020, we owned 79.0% of the common partnership units of the OP and 100%
of the preferred partnership units. The remainder of the common partnership units are owned by PS. The common
units owned by PS may be redeemed, subject to certain limitations, for shares of our common stock on a one-for-one
basis or, at our option, an equivalent value in cash.
The Company’s interest in the OP entitles it to share in cash distributions from, and the profits and losses of, the
OP in proportion to the Company’s economic interest in the OP (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 OP in respect of the common and preferred partnership units in the OP
that are owned by the Company.
As the general partner of the OP, the Company has the exclusive responsibility under the Operating Partnership
Agreement to manage and conduct the business of the OP.
Common Officers and Directors with PS
Ronald L. Havner, Jr., Chairman of the Company, is also the Chairman of the Board of Trustees of PS. Joseph D.
Russell, Jr. is a director of the Company and also President and Chief Executive Officer of PS. Kristy M. Pipes, an
independent director of the Company, is also a trustee of PS and Gary E. Pruitt, an independent director of the
Company, was also a trustee of PS until he retired from the Board of Trustees of PS in January 2021. Other employees
of PS render services to the Company pursuant to a cost sharing and administrative services agreement.
4
Services Provided to and by PS
We manage industrial, office, and retail facilities in the United States for PS under either the “Public Storage” or
“PS Business Parks” names (the “PS Management Agreement”). Under PS’s supervision, we coordinate and assist in
rental and marketing activities, property maintenance and other operational activities, including the selection of
vendors, suppliers, employees and independent contractors. Management fee revenue derived from the PS
Management Agreement totaled $0.3 million, $0.3 million, and $0.4 million for the years ended December 31, 2020,
2019, and 2018, respectively. These amounts are included in “interest and other income” on our consolidated
statements of income.
PS also provides property management services for the self-storage component of two assets owned by the
Company. Management fee expenses under the contract were $0.1 million for each of the years ended December 31,
2020, 2019, and 2018. These amounts are included under “cost of operations” on our consolidated statements of
income.
Pursuant to a cost sharing agreement, we share certain administrative services, corporate office space, and certain
other third party costs with PS which are allocated based upon fair and reasonable estimates of the cost of the services
expected to be provided. We reimbursed PS $1.2 million for each of the years ended December 31, 2020, 2019, and
2018 for costs paid on our behalf, while PS reimbursed us less than $0.1 million for costs we incurred on their behalf
for each of the years ended December 31, 2020, 2019, and 2018.
Management
John W. Petersen, Interim President and Chief Executive Officer (“CEO”), and Chief Operating Officer of the
Company, leads the Company’s senior management team. The Company’s senior management includes: Jeffrey D.
Hedges, Executive Vice President and Chief Financial Officer; Trenton A. Groves, Senior Vice President and Chief
Accounting Officer; Coby A. Holley, Vice President, Investments; Christopher M. Auth, Divisional Vice President
(Washington Metro Division); Stuart H. Hutchison, Divisional Vice President (Southern California and Pacific
Northwest Divisions); Richard E. Scott, Divisional Vice President (Northern California Division); David A. Vicars,
Divisional Vice President (Texas Division); Rich Guertin, Divisional Vice President (Florida Division); and Eugene
Uhlman, Vice President, Construction Management.
Competition
Our properties compete for tenants with similar properties located in our markets primarily on the basis of location,
rental rate, services provided and the design and condition of improvements. Competition in the market areas we
operate in is significant and has from time to time negatively impacted occupancy levels and rental rates of, and
increased the operating expenses of, certain of our properties. The demand for space in our markets is impacted by
general economic conditions, which can affect the local competition for tenants. Sublease space and unleased
developments have from time to time created competition among operators in certain markets in which the Company
operates. Refer to “Management Discussion and Analysis—Analysis of Net Income” for a discussion of trends in our
occupancy levels, rental rates and operating expenses.
Objectives and Strategies
Our primary objective is to grow shareholder value in a risk appropriate and stable manner by maximizing net cash
flow generated by our existing properties, as well as prudently seeking opportunities for growth through acquisitions
and development with attractive risk-adjusted returns on invested capital.
We seek to maximize net cash flow of our existing properties by optimizing occupancy levels and rental rates,
while minimizing capital expenditures and leasehold improvements. Below are the primary elements of our strategy:
Concentration in favorable markets: We believe that our properties generally are located in markets that have
favorable characteristics such as above average population, job, and income growth, as well as high education levels.
In addition, we believe our business parks are generally in markets with higher than average barriers to entry that are
close to critical infrastructure, middle to high income housing or universities and have easy access to major
transportation arteries. We believe that these characteristics contribute to property operating cash flow stability and
growth.
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Standard build outs and finishes: We generally seek to configure our rentable space with standard buildouts and
finishes that meet the needs of a wide variety of tenants, minimizing the need for specialized and costly tenant
improvements and enabling space to be “move-in ready” quickly upon vacancy. We believe this makes our space
more attractive to potential tenants, allows tenants to move in quickly and seamlessly, and reduces the cost of capital
improvements, relative to real estate operators that offer specialized finishes or build outs. Also, such flexibility
facilitates our ability to offer diverse sizes and configurations to meet potential customer’s needs, as well as to change
space sizes for existing customers when their needs change.
Large, Diverse Parks: Our business parks are generally concentrated in large complexes of diverse buildings, with
a variety of available space sizes and configurations that we can offer to tenants. We believe that this allows us to
attract a greater number of potential tenants to our parks and minimizes the loss of existing customers when their space
requirements change.
Smaller tenants and diverse tenant base with shorter-term leases: By concentrating on smaller spaces, we seek to
reach a large number of smaller tenants in the market. We believe this focus gives us a competitive edge as most
institutional owners focus primarily on large users. Small users perceive more incremental value from the level of
customer service that we offer. We also believe having smaller tenants improves our diversity of tenants across
industries, which improves the stability of our cash flows. In addition, our lease term tends to be short, generally an
average of three and a half years, which we believe allows us to more quickly capture increases in market rents in our
high-growth markets. At December 31, 2020, our average suite size was approximately 5,000 rentable square feet and
we had only four customers – the U.S. Government, Amazon Inc., KZ Kitchen Cabinet & Stone, and Luminex
Corporation – representing more than 1% of our annualized rental income.
Decentralized operating strategy: Our local management teams are empowered, within a prescribed decision and
metrics framework, to make many leasing and capital decisions in a manner which we believe maximizes the return
on investment on lease transactions. We believe this decentralized approach allows us to be more nimble and efficient
in our decision making, and more effectively price and market our space, relative to a more centralized approach.
Superior Service to Customers: We seek to provide a superior level of service to our customers in order to maintain
occupancy and increase rental rates, as well as minimize customer turnover. The Company’s property management
offices are located on-site, helping the Company maintain its properties and providing customers with convenient
access to management, while conveying a sense of quality, order and security. We believe that our personnel are
among the most experienced and effective real estate professionals in our markets. The Company has significant
experience in acquiring properties managed by others and thereafter improving customer satisfaction, occupancy
levels, retention rates and rental income by implementing established customer service programs.
In addition, we seek to expand through acquisitions or development activities that generate attractive returns on
invested capital, as follows:
Acquire facilities in targeted markets at prudent price levels: We have a disciplined capital allocation approach,
seeking to purchase properties at prices that are not in excess of the cost to develop similar facilities (i.e. replacement
cost), which we believe reduces our risk and maximizes long term returns. We seek generally to acquire in our existing
markets, which we believe have favorable growth characteristics. We also believe acquiring in our existing markets
leverages our operating efficiencies. We would consider expanding to additional markets with similar favorable
characteristics of our existing markets, if we could acquire sufficient scale.
Redevelop existing real estate facilities: Certain of our existing business parks were developed in or near areas that
have been undergoing gentrification with an influx of residential development, and, as a result, certain buildings in
our business parks may have higher and better uses. We will seek to identify potential candidates for redevelopment
within our portfolio, and where appropriate will leverage the expertise and scale of existing operators and developers
should we pursue redevelopment of any of our properties. For example, at The Mile in Tysons, Virginia, we
demolished an existing building and developed Highgate at The Mile, a 395-unit apartment building, with a joint
venture partner. In 2019, we successfully rezoned the remainder of The Mile, allowing us to pursue the development
of additional multifamily and mixed use projects. In 2020, we demolished a vacant office building and began
developing our second multifamily property, Brentford at The Mile, a planned 411-unit multifamily apartment
complex with the same joint venture partner. There can be no assurance as to the level of additional redevelopment
opportunities throughout our portfolio in the future.
6
Financing Strategy
Overview of financing strategy and sources of capital: As a REIT, we generally distribute all of our “REIT taxable
income” to our shareholders each year, which relative to a taxable C corporation, limits the amount of cash flow from
operations that we can retain for investment purposes. As a result, in order to expand our asset base, access to capital
is important.
Our financial profile is characterized by strong credit metrics, including low leverage relative to our total
capitalization and operating cash flows. Our credit profile and ratings enable us to effectively access both the public
and private capital markets to raise capital. We will seek to maintain our current credit profile and ratings.
Sources of capital available to us include retained cash flow, the issuance of preferred and common equity, the
issuance of medium and long-term debt, joint venture financing, the sale of existing properties, and borrowing off our
revolving line of credit.
Historically, we have financed our cash investment activities primarily with retained operating cash flow and the
issuance of preferred equity.
We select from the sources of capital available to us based upon relative cost, availability, desired leverage levels,
nature of the investment opportunities for which the capital will be used, as well as other factors such as the impact of
covenants in the case of debt.
Retained Operating Cash Flow: Although we are required to distribute to our shareholders at least 90% of our
“REIT taxable income” each year, we have nonetheless been able to retain operating cash flow to the extent that our
tax depreciation exceeds our capital expenditures. In recent years, we have retained between $40 to $60 million in
operating cash flow per year.
Preferred Equity: We view preferred equity as an important source of capital over the long term. We have
historically favored preferred equity as a source of capital due to the low interest rate and refinancing risk as the
dividend rate is fixed for life and it never matures. In addition, the consequences of defaulting on required preferred
distributions are less severe than with debt. However, rates and market conditions for the issuance of preferred
securities can be volatile or inefficient from time to time. As of December 31, 2020, we have $944.8 million in
preferred securities outstanding with an average coupon rate of 5.10%.
Medium or long-term debt: In addition to borrowing from our revolving line of credit, we may seek to issue term
debt in the future in an effort to diversify our sources of capital. We may consider issuance in the public bond market
or private placement of senior unsecured debt depending on the nature and timing of the associated use of capital.
Common equity: We believe that the market for our common equity is liquid and, as a result, common equity is a
viable potential source of capital.
Tax advantaged equity: As noted above, we have the ability to offer common or preferred operating partnership
units with economic characteristics that are similar to our common and preferred stock, but provide the seller the
opportunity to defer the recognition of a tax gain.
Credit Facility: We have a $250.0 million unsecured revolving line of credit (the “Credit Facility”), which we use
from time to time as temporary financing, along with short-term bank loans when necessary, until we are able to
replace it with longer-term capital. As of December 31, 2020, there was no balance outstanding on our Credit Facility
and we had no short-term bank loans.
Investments in Real Estate Facilities
As of December 31, 2020, the Company owned and operated 27.7 million rentable square feet comprising 98
business parks in six states compared to 27.6 million rentable square feet comprising 97 business parks in six states
as of December 31, 2019. The Company also held a 95.0% interest in a 395-unit multifamily apartment complex as
of both December 31, 2020 and 2019, and a 98.2% interest in a 411-unit multifamily apartment complex development
as of December 31, 2020.
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Restrictions on Transactions with Affiliates
The Company’s Restated 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.
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, wind damage and liability coverage
from nationally recognized carriers, subject to customary deductibles.
Compliance with Government Regulations
We are subject to various laws, ordinances and regulations, including various federal, state and local regulations
that apply generally to the ownership of real property and the operation of such properties. These include various laws
and government regulations concerning environmental matters, labor matters and employee safety and health matters.
Further, all of our properties must comply with the Americans with Disabilities Act and with related regulations,
which generally requires that buildings be made accessible to persons with disabilities. Various state laws impose
similar requirements. In addition, we must operate our properties in compliance with numerous local fire and safety
regulations, building codes, zoning requirements and other land use regulations. We are not aware of any government
regulations that have resulted or that we expect will result in compliance costs that had or will have a material effect
on our capital expenditures, earnings or competitive position. See “We must comply with the Americans with
Disabilities Act, fire and safety regulations and zoning requirements, which can require significant expenditures” in
Item 1A. “Risk Factors” for further information regarding our risks related to government regulations. In addition,
during the COVID-19 pandemic, our properties and our customers have been subject to public-health regulations that
have impacted our operations and our business. See “We are subject to risks from the COVID-19 pandemic and we
may in the future be subject to risks from other public health crises.” in Item 1A. “Risk Factors” for further information
regarding these regulations. We are also subject to the California Privacy Rights Act (“CPRA”), which amends and
expands the California Consumer Privacy Act (“CCPA”). The CPRA, which goes into effect on January 1, 2023,
provides new rights and amends existing rights found in the CCPA and also creates a new privacy enforcement
authority, the California Privacy Protection Agency (“CalPPA”). The CPRA grants the Attorney General and the
CalPPA the authority to issue regulations on a wide range of topics. We are not aware of any current privacy
requirements that have resulted or that we expect will result in compliance costs that had or will have a material effect
on our business practices that could increase costs or reduce revenues. Other states have also considered or are
considering privacy laws similar to those passed in California. Similar laws may be implemented in other jurisdictions
that we do business in and in ways that may be more restrictive than those in California. See “We are subject to laws
and governmental regulations and actions that affect our operating results and financial condition.” in Item 1A. “Risk
Factors” for further information regarding our risks related to this regulation.
We are committed to a long-term environmental stewardship program that reduces emissions of hazardous
materials into the environment and the remediation of identified existing environmental concerns, including
environmentally-friendly capital initiatives and building and operating properties with a high structural resilience and
low obsolescence. We accrue environmental assessments and estimated remediation costs when it is probable that
such efforts will be required and the related costs can be reasonably estimated. Our current practice is to conduct
environmental investigations in connection with property acquisitions. Although there can be no assurance, we are
not aware of any environmental contamination of any of our facilities, which individually or in the aggregate would
be material to our overall business, financial condition, or results of operations. 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. See
“We may incur significant environmental remediation costs” in Item 1A. “Risk Factors” for further information
regarding our risks related to government regulations.
Human Capital Management
The Company’s human capital management objectives are to attract, retain, and develop the highest quality talent.
To support these objectives, the Company develops its employees to prepare them for critical roles and leadership
positions for the future and fosters a team-oriented culture aimed at making the workplace more engaging and
inclusive. The Company works to acquire talent and facilitate internal talent mobility to create a high-performing and
diverse workforce that is empowered to make thoughtful decisions, eager to collaborate, and motivated to provide a
high level of service to our customers. The Company employed 155 people as of December 31, 2020, comprised
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primarily of personnel engaged in property operations. Our Nominating/Corporate Governance Committee oversees
our sustainability efforts, including our environmental, social, and governance initiatives.
Diversity and Inclusion: At PSB, we strive to create a diverse and inclusive environment where all employees feel
valued, included, and excited to be part of our team. For example, we strive to include a subset of diverse candidates
as we seek to fill open positions. With team members from all different races, backgrounds, and life experiences, we
celebrate inclusion and value the diversity each person brings to PSB. Our employee population is approximately 50%
female, with 30% in a supervisory role, and approximately 43% have self-identified as Hispanic or Latino, Native
American, Pacific Islander, Asian, Black or African American, or of two or more races, with 24% in a supervisory
role. Our workforce also has generational diversity: 54% millennials (aged 24-42), 25% generation X (aged 43-54),
and 21% baby boomers (aged 55-73).
Compensation Policies: PSB believes in aligning employee compensation with our short- and long-term
performance goals and to provide compensation and incentives needed to attract, motivate, and retain employees who
are crucial to our success. We tailor our compensation programs to each employee group to ensure competitiveness in
the market and to drive employee engagement. The Company provides the opportunity for employees to own a part
of the Company through equity grants for senior members of our team, with nearly 65% of our exempt employees
having received equity grants in the form of restricted stock units or stock option awards.
Health and Wellness: PSB is committed to its employees’ overall health and well-being. We want to help them
feel happy, healthy, socially connected, and purposeful. Our goal is to provide tools and resources to help empower
our employees to explore what they need and to evaluate for themselves what makes sense in achieving a healthy and
balanced lifestyle. We partner with our health care provider to promote health and wellness programs to incentivize
our employees to maintain an active and healthy lifestyle.
We provide benefits to all of our employees and dependents, including medical, dental, vision, flexible and health
savings accounts, and income protection plans. We also offer a 401(k) plan with matching employer contributions to
help our employees prepare for retirement.
Supporting Our Employees During the COVID-19 Pandemic: The COVID-19 pandemic brought varying
challenges to each of our team members. We took a multipronged approach in providing resources, tools and added
protocols that focused on the safety of employees and their families while still allowing us to support the customers
we serve during these unprecedented times. For example, our field operations and business park protocols were
quickly modified to ensure a safe workspace. Additionally, we had a swift transition to work-from-home for our entire
workforce, where applicable, by utilizing various existing technology platforms and implementing new technologies
necessary to accommodate the situation. We provided additional incentive pay for certain personnel. Additionally, we
provided an employee assistance program, which offers employees mental health, financial, and legal support to assist
them in their well-being during these unique times.
Training, Development, and Recognition: We hire and develop outstanding team members to lease and manage
all of our properties and deliver market-leading service to our customers. Our decentralized, vertically integrated
platform gives us the flexibility to meet the needs of our customers, react quickly to local market dynamics, and
contain operating expenses and capital expenditures, and allows us to keep all property management and leasing
activity in-house, maximize cost efficiencies, and speed up decision making.
We offer training programs for new team members and ongoing training and development programs for our entire
workforce. We are able to accomplish this, in part, by utilizing an online platform that provides a central repository
for accessing training courses and reference materials. We also reinforce our Company culture by celebrating major
accomplishments, stand-out performances, and individual milestones through various recurring recognition programs
and events throughout the year, and offer incentive programs designed to recognize and reward outstanding
achievements. We work towards development of our employees and creating opportunities for them to advance. For
example, where and when possible, we seek to fill open positions with internal candidates.
Communication and Engagement: Given our decentralized platform, it is important for us to ensure that team
members feel they are informed and included. We communicate through various channels such as recurring meetings,
frequent email communications and updates from management, Company intranet postings, and engagement surveys.
Employee engagement is instrumental in understanding and evaluating the effectiveness of our strategies. We actively
solicit input from our employees on how the Company can better achieve its goals, including through employee
surveys that give us feedback and help us measure commitment, motivation and engagement.
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Community and Social Impact: We encourage employees to give back to our communities by providing two
“volunteer” days to all employees annually which can be used by participating in group volunteer events or
individually. We also offer a charitable gift matching program, providing a donation match up to the preset limit per
employee annually to qualifying 501(c)(3) organizations.
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.”
We have significant exposure to real estate risk.
Risks Related to Our Business
Since our business consists primarily of acquiring, developing, and operating real estate, we are subject to risks
related to the ownership and operation of real estate that can adversely impact our business and financial condition.
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.
Since we derive substantially all our income from real estate operations, we are subject to the following general
risks of acquiring and owning real estate related assets that could result in reduced revenues, increased expenses,
increased capital expenditures, or increased borrowings, which could negatively impact our operating results, cash
flow available for distribution or reinvestment and our stock price:
• 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, fires, hurricanes and floods, which could exceed the aggregate limits
of our insurance coverage;
the consequences of changes in climate, including severe weather events, and the steps taken to prevent
•
climate change, could result in increased capital expenditures and expenses
•
•
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 customers;
•
the result of a future California statewide ballot initiative (or similar legislative or regulatory actions) that
could remove the property tax protections of Proposition 13 with respect to our California real estate and result
in substantial increases in our California property tax bills;
• adverse changes in tax, real estate and zoning laws and regulations;
•
increasing competition from other commercial properties in our market;
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•
•
tenant defaults and bankruptcies;
tenants’ right to sublease space; and
• concentration of properties leased to non-rated private companies with uncertain financial strength.
There is significant competition among commercial property operators: 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 customers with the right
to terminate early if they pay a fee. As of December 31, 2020, 2,133 leases, representing 5.7 million, or 22.1%, of the
leased square footage of our total portfolio, or 21.8% of annualized rental income, are scheduled to expire in 2021.
While we have estimated our cost of renewing leases that expire in 2021, our 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,
our operating results, cash available for distribution or reinvestment and stock price could be negatively impacted.
Tenant defaults and bankruptcies may reduce our cash flow and distributions: We may have difficulty collecting
from customers in default, particularly if they declare bankruptcy. Since many of our customers are non-rated private
companies, this risk may be enhanced. There is inherent uncertainty in a customer’s ability to continue paying rent if
they are in bankruptcy. This could negatively affect our operating results, cash available for distribution or
reinvestment and stock price.
Natural disasters or terrorist attacks could cause damage to our facilities that is not covered by insurance, and
could increase costs, reduce revenues, and otherwise impair our operating results: While we maintain insurance
coverage for the losses caused by earthquakes, fire or hurricanes, we could suffer uninsured losses or losses in excess
of our insurance policy limits for such occurrences. Approximately 40.7% 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, fire,
hurricane or other natural disaster, we would remain liable on any mortgage debt or other unsatisfied obligations
related to that property. In addition, we may not have sufficient insurance coverage for losses caused by a terrorist
attack, or such insurance may not be available or cost-effective. Significant natural disasters, terrorist attacks, threats
of future terrorist attacks, or resulting wider armed conflict could have negative impacts on the U.S. economy, reducing
demand for our rental space and impairing our operating results, even if our specific losses were covered. This could
negatively affect our operating results, cash available for distribution or reinvestment and stock price.
Consequences of climate change, including severe weather events, and the steps taken to prevent climate change,
could result in increased capital expenditures, increased expenses, and reduced revenues: Direct and indirect impacts
of climate change, such as increased destructive weather events, fires, reduced lifespans and population reduction,
reduced natural habitats, water, food, arable land, and other resources, as well as resulting armed conflicts, could
increase our costs. Governmental, political, and societal pressure could (i) require costly changes to future newly
developed facilities, or require retrofitting of our existing facilities, to reduce carbon emissions through multiple
avenues including changes to insulation, space configuration, lighting, heating, and air conditioning, and (ii) increase
energy costs as a result of switching to less carbon-intensive, but more expensive, sources of energy to operate our
facilities.
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. In addition, when we sell properties at significant gains upon sale, it can increase
our distribution requirements, thus making it difficult to retain and reinvest the sales proceeds. 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
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properties comply with all significant legal requirements. However, these requirements could change in a way that
could negatively affect our operating results, cash available for distribution or reinvestment and stock price.
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.
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 customers to resolve 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.
Any such environmental remediation costs or issues, including any potential ongoing impacts on rent or operating
expenses, could negatively impact our operating results, cash flow available for distribution or reinvestment and our
stock price.
Operating costs, including property taxes, could increase: We could be subject to increases in insurance premiums,
property or other taxes, repair and maintenance costs, payroll, utility costs, workers compensation, and other operating
expenses due to various factors such as inflation, labor shortages, commodity and energy price increases, weather,
changes to governmental safety and real estate use limitations, as well as other governmental actions. Our property
tax expense, which totaled $47.7 million during the year ended December 31, 2020, generally depends upon the
assessed value of our real estate facilities as determined by assessors and government agencies, and accordingly could
be subject to substantial increases if such agencies changed their valuation approaches or opinions or if new laws are
enacted, especially if new approaches are adopted or laws are enacted that result in increased property tax assessments
in states or municipalities where we have a high concentration of facilities.
We have exposure to increased property tax in California: Approximately $128.3 million of our 2020 net operating
income is from our properties in California, and we incurred approximately $17.0 million in related property tax
expense. Due to the impact of Proposition 13, which generally limits increases in assessed values to 2% per year, the
assessed value and resulting property tax we pay is significantly less than it would be if the properties were assessed
at current values. From time to time proposals have been made to reduce the beneficial impact of Proposition 13,
particularly with respect to commercial and industrial (non-residential) real estate. An initiative was on California’s
November 2020 statewide ballot (“Prop 15”) that would have resulted in the reassessment of our California properties
and would substantially increase our property tax expense likely starting in 2023. Prop 15 did not pass; however, there
can be no assurance that a similar initiative will not be proposed and passed in the future. If a similar initiative or a
similar proposal were to be adopted, it would end the beneficial effect of Proposition 13 for our properties, and our
property tax expense could increase substantially, adversely affecting our cash flow from operations and net income.
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We must comply with the Americans with Disabilities Act, fire and safety regulations and zoning requirements,
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, zoning requirements and other land use regulations, all of
which are subject to change and could become more costly to comply with in the future. The cost of compliance with
these requirements can be substantial, and could reduce cash otherwise available for distribution to shareholders.
Failure to comply with these requirements could also affect the marketability and rentability of our real estate facilities.
We incur liability from customer and employment-related claims: From time to time we have to make monetary
settlements or defend actions or arbitration to resolve customer or employment-related claims and disputes. Settling
any such liabilities could negatively impact our earnings and cash available for distribution to shareholders, and could
also adversely affect our ability to sell, lease, operate, or encumber affected facilities.
Our development of real estate can subject us to certain risks: We are engaged in significant real estate
development. For example, as of December 31, 2020, we have a 98.2% interest in a 411-unit multifamily apartment
complex development and in 2019 we successfully rezoned the remainder of The Mile and are able to pursue the
development of additional multifamily and mixed use projects. We are also considering the potential redevelopment
of other facilities in our portfolio. Development or redevelopment of facilities are subject to a number of risks,
including construction delays, complications in obtaining necessary zoning, occupancy and other governmental
permits, cost overruns, failures of our development partners, financing risks, and the possible inability to meet
expected occupancy and rent levels. In addition, we do not have experience in multifamily development and are relying
to some degree on the experience of our joint venture partner. As a result of these risks, our development projects may
be worth less or may generate less revenue than we believed at the time of development. Any of the foregoing risks
could negatively impact our operating results, cash flow available for distribution or reinvestment and our stock price.
In addition, we may be unable to successfully integrate and effectively manage the properties we develop, which could
adversely affect our results of operations.
We are subject to risks from the COVID-19 pandemic and we may in the future be subject to risks from other
public health crises.
Beginning in 2020, the COVID-19 pandemic has spread globally, including to every state in the United States,
adversely affecting public health and economic activity. Our business is subject to risks from the COVID-19
pandemic, including, among others:
•
illness or death of our employees or customers, negative impacts to the economic environment and to our
customers which could reduce the demand for commercial property space or reduce our ability to collect rent,
or potential regulatory action to close certain of our facilities that were determined not to be an “essential
business” or for other reasons, limit our ability to complete development and redevelopment projects;
•
risk that government restrictions due to the COVID-19 pandemic ease, such as social distancing
requirements, will continue or will be reinstituted in case of future waves of infection or if additional pandemics
occur;
•
risk that the economic effects of the COVID-19 pandemic could reduce consumer confidence and result in
an elevated level of move-outs of our long-term customers, resulting in a reduction in rental income due to
occupancy reductions and increased “rent roll down” due to new customers having lower rental rates than
departing customers; and
risk of negative impacts on the cost and availability of debt and equity capital as a result of the COVID-19
•
pandemic, which could have a material impact upon our capital and growth plans.
We believe that the degree to which the COVID-19 pandemic adversely impacts our business, operating results,
cash flows and/or financial condition will be driven primarily by the duration, spread and severity of the pandemic
itself, the speed and effectiveness of vaccine and treatment developments and distribution, as well as the duration of
indirect economic impacts such as recession, dislocation in capital markets, and job loss, as well as potential longer
term changes in consumer behavior, all of which are uncertain and difficult to predict. As a result, we are not able at
this time to estimate the effect of these factors on our business, but the adverse impact on our business, results of
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operations, financial condition and cash flows could be material. Future pandemics or public health crises could have
similar impacts.
Economic conditions can adversely affect our business, financial condition, growth and access to capital.
Economic conditions in the areas we operate, capital markets, global economic conditions, and other events or
factors could adversely affect rental demand for our real estate, our ability to grow our business and acquire new
facilities, to access capital, as well as the value of our real estate. Such conditions, which could negatively impact our
operating results, cash flow available for distribution or reinvestment and our stock price, include the following:
Commercial credit 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, which could affect the economic viability of any acquisition or development activities we
may undertake or otherwise increase our costs of borrowing. Conversely, to the extent that debt becomes cheaper or
underwriting terms become more favorable, it could increase the overall amount of capital being invested in real estate,
allowing more competitors to bid for facilities that we may wish to acquire, reducing the potential yield from
acquisitions or preventing us from acquiring assets we might otherwise wish to acquire.
Capital markets: The issuance of perpetual preferred securities historically has been a significant source of capital
to grow our business, and we have considered issuing unsecured debt publicly or in private transactions. We also
consider issuance of our common equity a potential source of capital. Our ability to access these sources of capital
can be adversely affected by challenging market conditions, which can increase the cost of issuance of preferred equity
and debt, and reduce the value of our common shares, making such sources of capital less attractive or not feasible.
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 public equity or borrow at reasonable rates, that could limit the earnings growth that might otherwise
result from the acquisition and development of real estate facilities.
Asset 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. Reductions in the value of our assets could result
in a reduction in the value of our common shares.
Potential negative impacts upon demand for our space and customers’ ability to pay: We believe that our current
and prospective customers are susceptible to global and local economic conditions as well as the impact of capital
markets, asset valuations, and commercial credit markets, which could result in an impairment of our customers’
existing business operations or curtail plans for growth. Such impairment could reduce demand for our rental space,
or make it difficult for customers to fulfill their obligations to us under their leases.
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 associated with the acquisition of real estate facilities which could negatively impact our operating results, cash
flow available for distribution or reinvestment and our stock price:
Due diligence could be insufficient: Failure to identify all significant circumstances or conditions that affect the
value, rentability, or costs of operation of an acquired facility, such as unidentified structural, environmental, zoning,
or marketability issues, could jeopardize realization of anticipated earnings from an acquisition and negatively impact
our operating results.
We could fail to successfully integrate acquired properties into our platform: Failures to integrate acquired
properties into our operating platform, such as a failure to maintain existing relationships with customers due to
changes in processes, standards, customer service, could temporarily or permanently impair our operating results.
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We compete with other real estate operators for facilities: 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, reducing potential yields from acquisitions.
Acquired properties are subject to property tax reappraisals, which occur following the acquisition and can be
difficult to estimate: Facilities that we acquire are subject to property tax reappraisal, which can substantially increase
ongoing property taxes. The reappraisal process is subject to a significant degree of uncertainty, because it involves
the judgment of governmental agencies regarding real estate values and other factors. In connection with underwriting
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 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 applicable to our status as a REIT, and 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.
In response to current economic conditions or the current political environment or otherwise, laws and regulations
could be implemented or changed in ways that adversely affect our operating results and financial condition, such as
legislation that could otherwise increase operating costs. Such changes could also adversely affect the operations of
our customers, which could affect the price and demand for our space as well as our customer’s ability to pay their
rent.
On November 3, 2020, Californians passed a ballot measure that creates the CPRA. The CPRA amends and
expands the CCPA, which went into effect on January 1, 2020. The CPRA, which goes into effect on January 1, 2023,
provides new rights and amends existing rights found in the CCPA. It also creates a new privacy enforcement
authority, the CalPPA. The CPRA grants the Attorney General and the CalPPA the authority to issue regulations on a
wide range of topics. It therefore remains unclear what, if any, modifications will be made to the CPRA or how it will
be interpreted. While we believe we have developed processes to comply with current privacy requirements, a
regulatory agency may not agree with certain of our implementation decisions, which could subject us to litigation,
regulatory actions or changes to our business practices that could increase costs or reduce revenues. Other states have
also considered or are considering privacy laws similar to those passed in California. Similar laws may be implemented
in other jurisdictions that we do business in and in ways that may be more restrictive than those in California,
increasing the cost of compliance, as well as the risk of noncompliance, on our business.
Ineffective succession planning for our CEO and executive management, as well as for our other key employees,
may impact the execution of the Company’s strategic plan.
We may not effectively or appropriately identify ready-now succession candidates for CEO and executive
management team, which may negatively impact the Company’s ability to meet key strategic goals. Failure to
implement a succession plan for other key employees may leave the Company vulnerable to retirements and turnover.
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. We rely extensively on third-party
vendors to retain data, process transactions and provide other systems services. The failure, damage or interruption of
these systems, including as a result of power outages, computer and telecommunications failures, hackers, computer
worms, viruses and other destructive or disruptive security breaches, natural disasters, terrorist attacks, and other
catastrophic events could significantly and have a material adverse effect on our business.
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If our confidential information is compromised or corrupted, including as a result of a cybersecurity breach,
our reputation and business relationships could be damaged, which could adversely affect our financial
condition and operating results.
In the ordinary course of our business we acquire and store sensitive data, including personally identifiable
information of our prospective and current customers and our employees. The secure processing and maintenance of
this information is critical to our operations and business strategy. Although we believe we have taken commercially
reasonable steps to protect the security of our confidential information, information security risks have generally
increased in recent years due to the rise in new technologies and the increased sophistication and activities of
perpetrators of cyberattacks. Despite our security measures, we have experienced security breaches due to cyberattacks
and additional breaches could occur in the future. In these cases, our information technology and infrastructure could
be vulnerable and our or our customers’ or employees’ confidential information could be compromised or
misappropriated. Any such breach could result in serious and harmful consequences for us or our customers.
Our confidential information may also be compromised due to programming or human error or malfeasance. We
must continually evaluate and adapt our systems and processes to address the evolving threat landscape, and therefore
there is no guarantee that they will be adequate to safeguard against all data security breaches or misuses of data. In
addition, as the regulatory environment related to information security, data collection and use, and privacy becomes
increasingly rigorous, with new and changing requirements applicable to our business from multiple regulatory
agencies at the local, state, federal, or international level, compliance with those requirement could also result in
additional costs, or we could fail to comply with those requirements due to various reasons such as not being aware
of them.
Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under
laws that protect the privacy of personal information, regulatory penalties, disruption to our operations and the services
we provide to customers or damage our reputation, any of which could adversely affect our results of operations,
reputation and competitive position. In addition, our customers could lose confidence in our ability to protect their
personal information, which could cause them to discontinue leasing our facilities. Such events could lead to lost
future revenues and adversely affect our results of operations and could result in remedial and other costs, fines or
lawsuits, which could be in excess of any available insurance that we have procured.
Risks Related to Our Ownership, Organization and Structure
We would incur adverse tax consequences if we failed to qualify as a REIT and we would have to pay substantial
U.S. federal corporate income taxes.
REITs are subject to a range of complex organizational and operational requirements. A qualifying REIT does not
generally incur U.S. federal corporate income tax on its “REIT taxable income” (generally, taxable income subject to
specified adjustments, including a deduction for dividends paid and excluding net capital gain) that it distributes to its
shareholders. We believe we have qualified as a REIT and we intend to continue to maintain our REIT status.
However, there can be no assurance that we qualify or will continue to qualify as a REIT, because of the highly
technical nature of the REIT rules, the ongoing importance of factual determinations, the possibility of unidentified
issues in prior periods, or changes in our circumstances, as well as share ownership limits in our articles of
incorporation that 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, unless certain relief provisions apply (the granting of such relief
could nonetheless result in significant excise or penalty taxes), we would not be allowed a deduction for dividends
paid, we would be subject to U.S. federal corporate income tax on our taxable income, and generally we would not be
allowed to elect REIT status until the fifth year after such a disqualification. Any taxes, interest, and penalties incurred
would reduce our cash available for distributions to shareholders and could negatively affect our stock price. However,
for years in which we failed to qualify as a REIT, we would not be subject to REIT rules that require us to distribute
substantially all of our taxable income to our shareholders.
Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flow.
Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes,
including payroll taxes, taxes on any undistributed income, taxes on income from some activities conducted as a result
of a foreclosure, a 100% excise tax on any transactions with a Taxable REIT Subsidary (“TRS”) that are not conducted
on an arm’s-length basis, and state or local income, franchise, property and transfer taxes. Moreover, if we have net
income from the sale of properties that are “dealer” properties (a “prohibited transaction” under the Code), that income
will be subject to a 100% penalty tax. In addition, our TRSs will be subject to U.S. federal, state and local corporate
16
income taxes on their net taxable income, if any. Any of these taxes would reduce our cash available for distributions
to shareholders and could negatively affect our stock price.
We may need to borrow funds to meet our REIT distribution requirements.
As a REIT, we are required to distribute at least 90% of our “REIT taxable income” (determined before the
deduction for dividends paid and excluding net capital gains) to our shareholders each year. Our income consists
primarily of our share of our OP’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. Future dividend levels are not determinable at this time.
Changes in tax laws could negatively impact us.
The United States Treasury Department and Congress frequently review U.S. federal income tax legislation,
regulations and other guidance. We cannot predict whether, when or to what extent new U.S. federal tax laws,
regulations, interpretations or rulings will be adopted. Any legislative action may prospectively or retroactively modify
our tax treatment and, therefore, may adversely affect taxation of us or our shareholders.
PS has significant influence over us.
As of December 31, 2020, PS owned 7.2 million shares of the Company’s common stock and 7.3 million common
units of the OP (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 41.6% (or 14.5 million shares) of the
outstanding shares of the Company’s common stock at December 31, 2020. 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 Trustees of PS. Joseph D. Russell, Jr. is a director and former Chief
Executive Officer of the Company and also President and Chief Executive Officer of PS. Kristy M. Pipes, an
independent director of the Company, is also a trustee of PS and Gary E. Pruitt, an independent director of the
Company, was also a trustee of PS until he retired from the Board of Trustees of PS in January 2021. 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 OP. 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
or acquire our Company without PS’s approval, even if favorable to our public shareholders.
Provisions in our organizational documents may prevent changes in control.
In certain circumstances, shareholders might desire a change of control or acquisition of us in order to realize a
premium over the then-prevailing market price of our shares or for other reasons. However, current provisions of our
articles of incorporation and the powers of our Board could prevent, deter, or delay such a transaction, including (1)
restrictions on the acquisition of our shares, (2) the power to issue additional common stock, preferred stock or equity
stock on terms approved by the Board without obtaining shareholder approval and (3) the advance notice provisions
of our bylaws.
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 OP 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 of Directors of the Company (the “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). 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, such as to 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
17
incorporation also contain other provisions that could have the same effect. We can also cause our OP to issue
additional interests for cash or in exchange for property.
The partnership agreement of our OP restricts our ability to enter into mergers: The partnership agreement of
our OP generally provides that we may not merge or engage in a similar transaction unless either the limited partners
of our OP are entitled to receive the same proportionate consideration as our shareholders, or 60% of the OP’s limited
partners approve the merger. In addition, we may not consummate a merger unless the matter is approved by a vote
of the OP’s partners, with our interests in the OP voted in proportion to the manner in which our shareholders voted
to approve the merger. These provisions have 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 OP may conflict with the interests of our common stockholders.
Limited partners of our OP, 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 OP, we are
required to protect the interests of the limited partners of the OP. The interests of the limited partners and of our
shareholders may differ.
We depend on external sources of capital to grow our Company.
As a REIT, we are required to distribute at least 90% of our “REIT taxable income” (determined before the
deduction for dividends paid and excluding net capital gains) to our shareholders each year. 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.
Risks Related to Our Preferred Stock
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.
Holders of our shares of preferred stock are entitled to cumulative dividends before any dividends may be declared
or set aside on our common stock. Upon liquidation, 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 before any payment is made to the common shareholders.
These preferences may limit the amount received by our common shareholders for ongoing distributions or upon
liquidation. 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.
Preferred Shareholders are subject to certain risks.
Holders of our preferred shares have preference rights over our common shareholders with respect to liquidation
and distributions, which give them some assurance of continued payment of their stated dividend rate, and receipt of
their principal upon liquidation of the Company or redemption of their securities. However, holders of our preferred
shares should consider the following risks:
• The Company has in the past, and could in the future, issue or assume additional debt. Preferred shareholders
would be subordinated to the interest and principal payments of such debt, which would increase the risk that
there would not be sufficient funds to pay distributions or liquidation amounts to the preferred shareholders.
• The Company has in the past, and could in the future, issue additional preferred shares that, while pari passu to
the existing preferred shares, increases the risk that there would not be sufficient funds to pay distributions to the
preferred shareholders.
• While the Company has no plans to do so, if the Company were to lose its REIT status or no longer elect REIT
status, it would no longer be required to distribute its taxable income to maintain REIT status. If, in such a
18
circumstance, the Company ceased paying dividends, unpaid distributions to the preferred shareholders would
continue to accumulate. The preferred shareholders would have the ability to elect two additional members to
serve on our Board until the arrearage was cured. The preferred shareholders would not receive any compensation
(such as interest) for the delay in the receipt of distributions, and it is possible that the arrearage could accumulate
indefinitely.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of December 31, 2020, we owned 98 business parks and 675 buildings in a geographically diverse portfolio of
27.7 million rentable square feet of commercial real estate which consists of 18.4 million square feet of industrial
space, 6.2 million square feet of flex space, and 3.1 million square feet of office space. The weighted average
occupancy rate for these assets throughout 2020 was 91.9% and the realized rent per square foot was $16.03.
The following table reflects the geographical diversification of the 98 business parks owned by the Company as
of December 31, 2020, the type of rentable square footage and the weighted average occupancy rates throughout 2020
(except as set forth below, all of the properties are held fee simple) (in thousands, except number of business parks):
Region
Northern California
Southern California
Dallas (1)
Austin
Northern Virginia
South Florida
Seattle
Suburban Maryland
Total
____________________________
Number of
Business
Parks
30
17
12
9
20
3
3
4
98
Rentable Square Footage
Flex
Office
Total
Weighted
Average
Occupancy
Rate
593
953
1,587
1,208
1,440
126
270
—
6,177
340
31
—
—
1,970
12
28
751
3,132
7,324
3,973
2,887
1,963
5,220
3,866
1,350
1,145
27,728
91.3%
91.6%
88.0%
94.9%
92.3%
93.5%
95.6%
89.5%
91.9%
Industrial
6,391
2,989
1,300
755
1,810
3,728
1,052
394
18,419
(1) The Company owns two properties comprising 231,000 square feet that are subject to ground leases in Irving, Texas. These
leases expire in 2029 and 2030.
Along with the 27.7 million rentable square feet of commercial space, we also have a 95.0% interest in a 395-unit
multifamily apartment complex and a 98.2% interest in a 411-unit multifamily apartment complex development.
We currently anticipate that each of our properties will continue to be used for its current purpose. However, we
will from time to time evaluate our properties from a highest and best use perspective, and may identify higher and
better uses for our real estate. We renovate our properties in connection with the re-leasing of space to customers and
expect to fund the costs of such renovations generally from rental income.
Competition exists in each of the market areas in which our properties are located, and we have risks that customers
could default on leases and declare bankruptcy. We believe these risks are mitigated in part through the Company’s
geographic diversity and our diverse customer base.
Please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
for portfolio information with respect to lease expirations and operating results in 2020, 2019, and 2018 by region and
by type of rentable space.
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, 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.
19
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 for the Registrant’s Common Equity:
The common stock of the Company trades on the NYSE under the symbol PSB.
Holders:
As of February 19, 2021, there were 260 holders of record of the common stock.
Dividends:
Holders of common stock are entitled to receive distributions when and if declared by our Board out of any funds
legally available for that purpose. As a REIT, we do not incur U.S. federal corporate income tax on our “REIT taxable
income” that is fully distributed each year (for this purpose, certain distributions paid in a subsequent year may be
considered), and if we meet certain organizational and operational requirements. We believe we have met these REIT
requirements in all periods presented herein, and we expect to continue to elect and qualify as a REIT.
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 has 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, 2020,
there were no shares of the Company’s common stock repurchased. As of December 31, 2020, 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.
Securities Authorized for Issuance Under Equity Compensation Plans:
Information related to the Company’s equity compensation plan is provided in Item 12, “Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters.”
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
20
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.
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 critical accounting policies relate to income tax expense, accounting for acquired real estate
facilities, accounting for customer receivable balances, including deferred rent receivable balances, impairment of
long-lived assets, and accrual for uncertain and contingent liabilities, each of which are more fully discussed below.
Income Tax Expense: We have elected to be treated as a REIT, as defined in the Code. As a REIT, we do not
incur U.S. federal corporate income tax on our “REIT taxable income” that is fully distributed each year (for this
purpose, certain distributions paid in a subsequent year may be considered), and if we meet certain organizational
and operational requirements. We believe we have met these REIT requirements for all periods presented herein.
Accordingly, we have recorded no U.S. federal corporate income tax expense related to our “REIT taxable
income.”
Our evaluation that we have met the REIT requirements could be incorrect, because compliance with the tax
rules requires factual determinations, and circumstances we have not identified could result in noncompliance with
the tax requirements in current or prior years. For any taxable year that we fail to qualify as a REIT and for which
applicable statutory relief provisions did not apply, we would be taxed at the regular corporate rates on all of our
taxable income for at least that year and the ensuing four years, we could be subject to penalties and interest, and
our net income would be materially different from the amounts shown in our consolidated financial statements.
Accounting for Acquired Real Estate Facilities: We estimate the fair value of land, buildings, intangible assets
and intangible liabilities for purposes of allocating purchase price. Such estimates, which are determined with the
assistance of third-party valuation specialists where appropriate, are based upon many assumptions and judgments,
including, but not limited to, (i) market rates of return and capitalization rates on real estate and intangible assets,
(ii) building and material cost levels, (iii) estimated market rent levels, (iv) future revenue growth rates, (v) future
cash flows from the real estate and the existing customer base and (vi) comparisons of the acquired underlying
land parcels to recent land transactions. Others could come to materially different conclusions as to the estimated
fair values, which could result in different depreciation and amortization expense, rental income, gains and losses
on sale of real estate assets, and real estate and intangible assets.
Accounting for Customer Receivable Balances, including Deferred Rent Receivable Balances: Customer
receivables consist primarily of amounts due for contractual lease payments, reimbursements of common area
maintenance expenses, property taxes and other expenses recoverable from customers. Deferred rent receivables
represent the amount that the cumulative straight-line rental income recorded as of a reporting date exceeds cash
rents billed through that same date under the lease agreement, inclusive of rent deferrals and abatements granted
to our customers in response to the COVID-19 pandemic. The Company writes off uncollectible customer
receivable balances, including deferred rent receivable balances, in the period such receivable balances are deemed
uncollectible. Significant bad debt losses could materially impact our net income.
Impairment of Long-Lived Assets: The analysis of impairment of our long-lived assets involves identification
of indicators of impairment, projections of future operating cash flows and estimates of fair values or selling prices,
all of which require significant judgment and subjectivity. Others could come to materially different conclusions.
In addition, we may not have identified all current facts and circumstances that may affect impairment. Any
unidentified impairment loss, or change in conclusions, could have a material adverse impact on our net income.
Accrual for Uncertain and Contingent Liabilities: We accrue for certain contingent and other liabilities that
have significant uncertain elements, such as property taxes, performance bonuses and other operating expenses,
as well as other legal claims and disputes involving customers, employees, governmental agencies and other third
parties. We estimate such liabilities based upon many factors such as past trends and our evaluation of likely
outcomes. However, the estimates of known liabilities could be incorrect or we may not be aware of all such
liabilities, in which case our accrued liabilities and net income could be materially different.
21
Business Overview
The Company is a fully-integrated, self-advised and self-managed REIT that owns, operates, acquires and develops
commercial properties, primarily multi-tenant industrial, flex and office space. As of December 31, 2020, the
Company owned and operated 27.7 million rentable square feet of commercial space in six states consists of 98 parks
and 675 buildings located in markets that have experienced long-term economic growth with a particular concentration
on small- and medium-size customers. Accordingly, a significant degree of management attention is paid to
maximizing the cash flow from our existing real estate portfolio. The Company also held a 95.0% interest in a joint
venture entity which owns Highgate at The Mile, a 395-unit multifamily apartment complex located in Tysons,
Virginia, and a 98.2% interest in a joint venture formed to develop Brentford at The Mile, a planned 411-unit
multifamily apartment complex also located in Tysons, Virginia. Our strong and conservative capital structure allows
us the flexibility to use debt and equity capital prudently to fund our growth, which allows us to acquire properties we
believe will create long-term value. From time to time we sell properties which no longer fit the Company’s strategic
objectives.
Existing Real Estate Facilities: The operating results of our existing real estate facilities are substantially
influenced by demand for rental space within our properties and our markets, which impacts occupancy, rental rates
and capital expenditure requirements. We strive to maintain high occupancy levels while increasing rental rates and
minimizing capital expenditures when market conditions allow, although the Company may decrease rental rates in
markets where conditions require. Management’s initiatives and strategies with respect to our existing real estate
facilities, which include incentivizing our personnel to maximize the return on investment for each lease transaction
and provide a superior level of service to our customers.
Acquisitions of Real Estate Facilities: We seek to grow our portfolio through acquisitions of facilities generally
consistent with the Company’s focus on owning concentrated business parks with easy to configure space and in
markets and product types with favorable long-term return potential.
On October 28, 2020, we acquired a multi-tenant industrial park comprising approximately 246,000 rentable
square feet in Alexandria, Virginia, for a total purchase price of $46.6 million, inclusive of capitalized transaction
costs. The park consists of three buildings and was 100.0% occupied at acquisition with suites ranging from 7,000 to
75,000 square feet.
On January 10, 2020, we acquired a multi-tenant industrial park comprising approximately 73,000 rentable square
feet in La Mirada, California, for a total purchase price of $13.5 million, inclusive of capitalized transaction costs. The
park consists of five buildings and was 100.0% occupied at acquisition with suites ranging from 1,200 to 3,000 square
feet.
On December 20, 2019, we acquired a multi-tenant flex park comprising approximately 79,000 rentable square
feet in Santa Clara, California, for a total purchase price of $16.8 million, inclusive of capitalized transaction costs.
The park consists of nine buildings and was 95.6% occupied at acquisition with suites ranging from 200 to 3,500
square feet.
On September 5, 2019, we acquired a multi-tenant industrial park comprising approximately 543,000 rentable
square feet in Santa Fe Springs, California, for a total purchase price of $104.3 million, inclusive of capitalized
transaction costs. The park consists of ten buildings and was 100.0% occupied at acquisition with suites ranging from
5,000 to 288,000 square feet.
On April 18, 2019, we acquired a multi-tenant industrial park comprising approximately 74,000 rentable square
feet in Signal Hill, California, for a total purchase price of $13.8 million, inclusive of capitalized transaction costs.
The park consists of eight buildings and was 98.4% occupied at acquisition with suites ranging from 1,200 to 8,000
square feet.
On June 8, 2018, we acquired two multi-tenant industrial parks aggregating 1.1 million rentable square feet in
Springfield, Virginia, for a total purchase price of $143.8 million, inclusive of capitalized transaction costs. The
portfolio consists of 19 buildings and was 76.1% occupied at acquisition with suites ranging from 100 to 32,000 square
feet.
We continue to seek to acquire additional properties in our existing markets and generally in close proximity to
our existing portfolio; however, there can be no assurance that we will acquire additional facilities that meet our risk-
adjusted return and underwriting requirements.
22
Development or Redevelopment of Real Estate Facilities: In certain instances, we may seek to redevelop our
existing real estate or develop new buildings on excess land parcels. During 2020, we developed an 83,000 square
foot shallow-bay industrial building on an excess land parcel at our Freeport Business Park in Irving, Texas. As of
December 31, 2020, $7.8 million of the estimated $8.1 million total development costs had been incurred and was
reflected under land and building held for development, net on our consolidated balance sheets. The remaining $0.3
million was incurred subsequent to December 31, 2020 and construction was completed in January 2021.
The Mile is an office and multifamily park we own which sits on 44.5 contiguous acres of land located in Tysons,
Virginia. The park consists of 628,000 square feet of office space and a 395-unit multifamily apartment community,
Highgate at The Mile, which we completed in 2017 through a joint venture with an unrelated real estate development
company (the “JV Partner”). In 2019, we successfully rezoned The Mile allowing us to develop, at our election, up to
3,000 additional multifamily units and approximately 500,000 square feet of other commercial uses.
In August 2020, the Company entered into a new joint agreement with the JV Partner for the purpose of developing
Brentford at The Mile, a planned 411-unit multifamily apartment complex (the “Brentford Joint Venture”). Under the
Brentford Joint Venture agreement, the Company has a 98.2% controlling interest and is the managing member with
the JV Partner holding the remaining 1.8% limited partnership interest. We contributed a parcel of land to the
Brentford Joint Venture (the “Brentford Parcel”) at a value of $18.5 million, for which we received equity contribution
credit in the Brentford Joint Venture. Our cost basis in the Brentford Parcel was $5.5 million as of December 31, 2020.
Construction of Brentford at The Mile commenced in August 2020 and is anticipated to be completed over a period
of 24 to 36 months at an estimated development cost of $110 million to $115 million, excluding land cost. As of
December 31, 2020, the development cost incurred was $9.6 million, which is reflected in land and building held for
development, net on our consolidated balance sheets along with our $5.5 million cost basis in the Brentford Parcel.
During the year ended December 31, 2020, the Company also recorded non-capitalizable demolition costs of $0.3
million in interest and other expense on our consolidated statements of income.
While multifamily real estate was not previously a core asset class for us, we determined that multifamily real
estate represented a unique opportunity and the highest and best use of the Brentford Parcel. Through joint ventures
we have partnered with a local developer and operator of multifamily properties in order to leverage their development
and operational expertise. The scope and timing of the future phases of development of The Mile are subject to a
variety of uncertainties, including site plan approvals and building permits.
We consolidate both the joint venture that owns Highgate at The Mile and the joint venture that is developing
Brentford at The Mile.
See “Analysis of Net Income – Multifamily” below and Note 3 and 4 to our consolidated financial statements for
more information on Highgate at The Mile and Brentford at The Mile.
Sales of Real Estate Facilities: We may from time to time sell individual real estate facilities based on market
conditions, fit with our existing portfolio, evaluation of long-term potential returns of markets or product types, or
other reasons.
On September 16, 2020, the Company sold two industrial buildings totaling 40,000 square feet located in
Redmond, Washington, which were subject to an eminent domain process for net proceeds of $11.4 million, which
resulted in a gain on sale of $7.7 million. These properties were classified as held for sale, net, in the consolidated
balance sheet as of December 31, 2019.
On January 7, 2020, the Company completed the sale of a single-tenant building totaling 113,000 square feet in
Montgomery County, Maryland, for net sale proceeds of $29.3 million, which resulted in a gain on sale of $19.6
million. This property was classified as held for sale as of December 31, 2019.
On October 8, 2019, we sold three business parks located in Montgomery County, Maryland: Metro Park North,
Meadow Business Park and WesTech Business Park. The parks, consisting of 28 buildings totaling approximately 1.3
million rentable square feet sold for net sale proceeds of $144.6 million, which resulted in a gain on sale of $16.6
million.
On March 5, 2018, we sold Corporate Pointe Business Park, a park consisting of five multi-tenant office buildings
totaling 161,000 square feet located in Orange County, California, for net sale proceeds of $41.7 million, which
resulted in a gain on sale of $26.8 million. On April 18, 2018, we sold Orange County Business Center, a park
consisting of five multi-tenant office buildings totaling 437,000 square feet located in Orange County, California, for
23
net sale proceeds of $73.3 million, which resulted in a gain on sale of $50.6 million. On April 30, 2018, we sold
Northgate Business Park, a park consisting of seven multi-tenant flex buildings totaling 194,000 square feet located
in Dallas, Texas, for net sale proceeds of $11.8 million, which resulted in a gain on sale of $7.9 million. On October
31, 2018, we sold Orangewood Office Park, a park consisting of two multi-tenant office buildings totaling 107,000
square feet located in Orange County, California, for net sale proceeds of $18.3 million, which resulted in a gain on
sale of $8.2 million.
The operations of these facilities are presented below under “assets sold.”
Certain Factors that May Impact Future Results
Impact of COVID-19 Pandemic: During 2020, the COVID-19 pandemic resulted in cessation, severe curtailment,
or impairment of business activities in most sectors of the economy in all markets we operate in, due to governmental
“stay at home” orders, risk mitigation procedures, and closure of businesses not considered to be “essential.” This
resulted in a rapid and dramatic increase in unemployment in the U.S. in the second quarter of 2020, with only a partial
recovery by year end. Since it remains unknown at this time how long the COVID-19 pandemic will continue, we
cannot estimate how long these negative economic impacts will persist.
The COVID-19 pandemic has had a severe negative impact on many of our customers’ businesses. For the year
ended December 31, 2020, the Company granted rent relief to 393 customers (representing 11.0% of total customers
based on rental income), including $5.7 million of rent deferrals, of which $3.1 million had been repaid by December
31, 2020, and $1.3 million of rent abatements. The Company also wrote off accounts receivable and deferred rent
receivable of $1.6 million and $3.1 million, respectively, for the year ended December 31, 2020, compared to $1.1
million and $0.5 million, respectively, for the year ended December 31, 2019.
The table below represents percentages of billed revenue that the Company has collected, deferred, and
abated/written-off, by product type, for the respective periods presented (percentages shown are all as of December
31, 2020):
Q4 2020
Industrial
Flex
Office
Total
FY 2020
Industrial
Flex
Office
Total
Collected
Outstanding
Deferred
Abated/Written-off
Percentage of Rent
98%
98%
99%
98%
97%
98%
99%
97%
2%
2%
1%
2%
0%
1%
0%
1%
0%
0%
0%
0%
2%
1%
1%
1%
0%
0%
0%
0%
1%
0%
0%
1%
As of February 19, 2021, the Company had open rent relief requests from approximately 1% of customers. It is
possible that additional rent relief requests will arise in future months as a result of continued effects of the COVID-
19 pandemic and related responses from state and local governments; however the timing and magnitude of such
future requests cannot be easily predicted due to the inherent uncertainty of the virus and its varying regional effects.
All rent relief requests to date have been, and all future rent relief requests are expected to be evaluated on a case-by-
case basis. To the extent we grant additional requests for abatement, or to the extent that our customers default on
their lease obligations, it will have a negative effect on our future rental income and net income.
Our ability to re-lease space as leases expire in a way that minimizes vacancy periods and maximizes market rental
rates will depend upon market conditions in the specific submarkets in which each of our properties are located. Due
to the uncertainty of the COVID-19 pandemic’s impact on the Company’s future ability to grow or maintain existing
occupancy levels, possible decreases in rental rates on new and renewal transactions, and the potential negative effect
of additional rent deferrals, rent abatements, and customer defaults, we believe the COVID-19 pandemic will continue
to have adverse effects on rental income for 2021 and possibly beyond.
24
Impact of Inflation: Although inflation has not been significant in recent years, an increase in inflation could
impact our future results, and the Company continues to seek ways to mitigate its potential impact. A substantial
portion of the Company’s leases require customers 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
during each lease’s respective lease period.
Regional Concentration: Our portfolio is concentrated in eight regions, in six states. We have chosen to
concentrate in these regions because we believe they have characteristics which enable them to be competitive
economically, such as above average population growth, job growth, higher education levels and personal income.
Changes in economic conditions in these regions in the future could impact our future results.
Industry and Customer Concentrations: We seek to minimize the risk of industry or customer concentrations.
As of December 31, 2020, only three industry concentrations represented more than 10% of our annualized rental
income as depicted in the following table.
Industry
Business services
Warehouse, distribution, transportation and logistics
Computer hardware, software and related services
Retail, food, and automotive
Engineering and construction
Health services
Government
Electronics
Insurance and financial services
Home furnishings
Communications
Aerospace/defense products and services
Educational services
Other
Total
Percent of
Annualized
Rental Income
19.8%
12.9%
11.1%
8.9%
8.3%
7.6%
6.6%
3.1%
2.6%
2.6%
1.8%
1.8%
1.0%
11.9%
100.0%
As of December 31, 2020, leases from our top 10 customers comprised 11.4% of our annualized rental income
with four customers representing more than 1% as depicted in the following table (in thousands).
Customers
U.S. Government
Amazon Inc.
KZ Kitchen Cabinet & Stone
Luminex Corporation
ECS Federal, LLC
Lockheed Martin Corporation
Carbel, LLC
CentralColo, LLC
Applied Materials, Inc.
Costco
Total
____________________________
Square Footage
Annualized
Rental Income (1)
657,000
543,000
343,000
198,000
142,000
124,000
236,000
96,000
162,000
180,000
2,681,000
$
$
Percent of
Annualized
Rental Income
3.8%
1.6%
1.3%
1.1%
0.7%
0.6%
0.6%
0.6%
0.6%
0.5%
11.4%
15,832
6,632
5,321
4,472
2,938
2,671
2,502
2,402
2,401
1,933
47,104
(1) For leases expiring prior to December 31, 2021, annualized rental income represents income to be received under existing
leases from January 1, 2021 through the date of expiration.
Customer Credit Risk: Historically we have experienced a low level of write-offs of uncollectible rents, with less
than 0.4% of rental income written off in any single year from 2011-2019. The negative impact of the COVID-19
pandemic and its effect on our customers’ ability to pay rent resulted in accounts receivable write-offs of $1.6 million
for the year ended December 31, 2020, which equates to 0.4% of rental income, which is at the high end of the
historical range noted above. The majority of write-offs occurred in the second quarter near the initial onset of the
COVID-19 pandemic, and in the third and fourth quarters of 2020 account receivable write-off volume was in-line
25
with historic levels. During the three months ended December 31, 2020, we wrote-off $0.2 million of accounts
receivable, which is consistent with the $0.2 million written-off during the three months ended December 31, 2019.
The Company writes off deferred rent receivable balances as a reduction to rental income in the period such
balances are no longer deemed probable of being collected. In the year ended December 31, 2020, the Company wrote-
off $3.1 million of deferred rent receivable, which is well above the amount written-off for the year ended December
31, 2019 of $0.5 million. Similar to accounts receivable write-offs, the majority of deferred rent receivable write-offs
in 2020 were recognized in the second quarter. During the three months ended December 31, 2020, we wrote-off
deferred rent receivables of $0.4 million, which is slightly above the $0.1 million written-off during the three months
ended December 31, 2019.
For the three months ended December 31, 2020, we agreed to defer and abate a total of $0.2 million and $0.1
million, respectively, to customers whose businesses were disrupted by the COVID-19 pandemic, well below amounts
granted in the second and third quarters. For the year ended December 31, 2020, the Company granted $5.7 million
of rent deferrals and $1.3 million of rent abatements. We are closely monitoring the collectability of such deferred
rents. As of February 19, 2021, the Company had collected $3.7 million, or 97.1%, of the scheduled repayments of
COVID-19 related rent deferrals billed through February 1, 2021.
As of February 19, 2021, we had 51,000 square feet of leased space occupied by three customers that are protected
by Chapter 11 of the U.S. Bankruptcy Code, which have an aggregate remaining lease value of $1.8 million. From
time to time, customers contact us, requesting early termination of their lease, reductions in space leased, or rent
deferment or abatement, which we are not obligated to grant but will consider and grant under certain circumstances.
Net Operating Income
We utilize net operating income (“NOI”), a measure that is not defined in accordance with U.S. generally accepted
accounting principles (“GAAP”), to evaluate the operating performance of our real estate. We define NOI as rental
income less Adjusted Cost of Operations. Adjusted cost of operations represents cost of operations, excluding stock
compensation, which can vary significantly period to period based upon the performance of the Company.
We believe NOI assists investors in analyzing the performance of our real estate by excluding (i) corporate
overhead (i.e., general and administrative expense) because it does not relate to the direct operating performance of
our real estate, (ii) depreciation and amortization expense because it does not accurately reflect changes in the fair
value of our real estate and (iii) stock compensation expense because this expense item can vary significantly from
period to period and thus impact comparability across periods. The Company’s calculation of NOI may not be
comparable to those of other companies and should not be used as an alternative to performance measures calculated
in accordance with GAAP.
See “Analysis of net income” below for reconciliations of each of these measures to their closest analogous GAAP
measure from our consolidated statements of income.
Results of Operations
Operating Results for 2020 and 2019
For the year ended December 31, 2020, net income allocable to common shareholders was $124.6 million or $4.52
per diluted share, compared to $108.7 million or $3.95 per diluted share for the year ended December 31, 2019. The
increase was mainly due to higher gain on sale of real estate facilities sold in 2020 than 2019, a charge related to the
redemption of preferred stock incurred in 2019 that did not reoccur in 2020, lower preferred distributions in 2020
compared to 2019, and increased NOI from our Non-Same Park portfolio (defined below), partially offset by a
decrease in NOI generated from assets sold.
Operating Results for 2019 and 2018
For the year ended December 31, 2019, net income allocable to common shareholders was $108.7 million or $3.95
per diluted share, compared to $172.9 million or $6.31 per diluted share for the year ended December 31, 2018. The
decrease was mainly due to higher gain on sale of real estate facilities sold in 2018 than 2019, a charge related to the
redemption of preferred stock incurred in 2019 that did not occur in 2018, and reduced NOI from facilities sold in
2018 and 2019, partially offset by an increase in NOI with respect to the Company’s Same Park (defined below) and
Non-Same Park portfolios and multifamily asset.
26
Analysis of Net Income
Our net income is comprised primarily of our real estate operations, depreciation and amortization expense, general
and administrative expense, interest and other income, interest and other expenses and gain on sale of real estate
facilities.
We segregate our real estate activities into (i) same park operations, representing all operating properties acquired
prior to January 1, 2018, comprising 25.7 million rentable square feet of our total 27.7 million of rentable square feet
at December 31, 2020 (the “Same Park” portfolio), (ii) non-same park operations, representing those facilities we own
that were acquired after January 1, 2018 (the “Non-Same Park” portfolio), (iii) multifamily operations, and (iv) assets
sold, including 899,000 square feet of assets sold in 2018, 1.3 million square feet of assets sold in October 2019,
113,000 square feet of assets sold in January 2020, and 40,000 square feet of assets sold in September 2020.
The table below sets forth the various components of our net income (in thousands):
Rental income
Same Park (1)
Non-Same Park
Multifamily
Assets sold (2)
Total rental income
Cost of operations
Adjusted Cost of Operations (3)
Same Park
Non-Same Park
Multifamily
Assets sold (2)
Stock compensation expense (4)
Total cost of operations
NOI (5)
Same Park
Non-Same Park
Multifamily
Assets sold (2)
Stock compensation expense (4)
Depreciation and amortization expense
General and administrative expense
Interest and other income
Interest and other expense
Gain on sale of real estate facilities
Net income
____________________________
For the Years
Ended December 31,
2020
2019
Variance
For the Years
Ended December 31,
2018
2019
Variance
$ 383,364 $
22,109
9,464
686
415,623
381,950 $
14,276
10,075
23,545
429,846
1,414 $
7,833
(611)
(22,859)
(14,223)
381,950 $ 364,020 $
14,276
10,075
23,545
429,846
5,532
7,353
36,611
413,516
17,930
8,744
2,722
(13,066)
16,330
112,569
7,327
4,264
143
1,210
125,513
109,559
4,899
4,137
8,614
1,134
128,343
3,010
2,428
127
(8,471)
76
(2,830)
109,559
4,899
4,137
8,614
1,134
128,343
104,227
1,884
4,054
13,019
1,446
124,630
5,332
3,015
83
(4,405)
(312)
3,713
270,795
14,782
5,200
543
(1,210)
(96,314)
(14,526)
1,234
(1,072)
27,273
$ 206,705 $
272,391
9,377
5,938
14,931
(1,134)
(104,249)
(13,761)
4,492
(657)
16,644
203,972 $
(1,596)
5,405
(738)
(14,388)
(76)
7,935
(765)
(3,258)
(415)
10,629
2,733 $
12,598
259,793
272,391
9,377
5,729
3,648
5,938
2,639
3,299
14,931
(8,661)
23,592
(1,134)
312
(1,446)
(99,242)
(104,249)
(5,007)
(12,072)
(13,761)
(1,689)
1,510
4,492
2,982
(665)
(657)
8
93,484
16,644
(76,840)
203,972 $ 271,901 $ (67,929)
(1)
Included in the calculation of Same Park rental income are (a) lease buyout income of $1.2 million, $1.4 million, and $0.6
million for the years ended December 31, 2020, 2019, and 2018, respectively, (b) accounts receivable write-offs of $1.5
million, $1.0 million, and $0.8 million for the years ended December 31, 2020, 2019, and 2018, respectively, and (c) deferred
rent receivable write-offs of $3.0 million, $0.5 million, and $0.2 million for the years ended December 31, 2020, 2019, and
2018, respectively.
(2) Amounts for the year ended December 31, 2020 reflect the operating results attributable to two industrial buildings totaling
40,000 square feet sold in September 2020 and a 113,000 square foot asset sold in January 2020; amounts for the year ended
December 31, 2019 reflect the operating results attributable to the two industrial buildings totaling 40,000 square feet and the
113,000 square foot asset sold in 2020, and 1.3 million square feet of flex and office assets sold in October 2019; amounts for
the year ended December 31, 2018 reflect the operating results attributable to the two industrial buildings totaling 40,000
square feet and the 113,000 square foot asset sold in 2020, 1.3 million square feet of assets sold in 2019, and 899,000 square
feet of assets sold in 2018.
(3) Adjusted Cost of Operations excludes the impact of stock compensation expense.
(4) Stock compensation expense, as shown here, represents stock compensation expense for employees whose compensation
expense is recorded in cost of operations. Note that stock compensation expense attributable to our executive management
27
team (including divisional vice presidents) and other corporate employees is recorded within general and administrative
expense.
(5) NOI represents rental income less Adjusted Cost of Operations.
Rental income decreased $14.2 million in 2020 compared to 2019 and increased $16.3 million in 2019 compared
to 2018. The decrease in 2020 was due primarily to reduced rental income from assets sold, partially offset by an
increase in rental income from our Non-Same Park and Same Park portfolios. The increase in 2019 was due primarily
to increases in rental income at our Same Park portfolio, Non-Same Park portfolio, and our multifamily asset, offset
partially by rental income from assets sold.
Cost of operations decreased $2.8 million in 2020 compared to 2019 and increased $3.7 million in 2019 compared
to 2018. The decrease in 2020 was due primarily to reduced operating expenses from assets sold partially offset by
higher Adjusted Cost of Operations incurred by our Same Park portfolio, and higher Adjusted Costs of Operations
incurred by our Non-Same Park portfolio. The increase in 2019 was due primarily to increases in Adjusted Cost of
Operations for our Same Park and Non-Same Park portfolios, offset partially by reduced operating expenses from
assets sold.
Net income increased $2.7 million in 2020 compared to 2019 and decreased $67.9 million in 2019 compared to
2018. The increase in 2020 was mainly due to higher gain on sale of real estate facilities sold in 2020 than 2019
combined with lower depreciation and amortization expense partially offset by lower NOI and lower interest and other
income. The decrease in 2019 was mainly due to higher gain on sale of real estate facilities sold in 2018 than 2019
combined with higher depreciation and amortization expense and higher general and administrative expense partially
offset by higher NOI.
Same Park Portfolio
We believe that evaluation of the Same Park portfolio provides an informative view of how the Company’s
portfolio has performed over comparable periods. We believe that investors and analysts use Same Park information
in a similar manner.
The following table summarizes the historical operating results of our Same Park portfolio and certain statistical
information related to leasing activity in 2020, 2019, and 2018 (in thousands, except per square foot data):
Rental income (1)
Adjusted Cost of Operations (2)
Property taxes
Utilities
Repairs and maintenance
Payroll
Snow removal
Property insurance
Other expenses
Total Adjusted Cost of Operations
For the Years
Ended December 31,
2020
383,364 $
2019
381,950
$
For the Years
Ended December 31,
Variance
2019
2018
0.4% $ 381,950 $ 364,020
Variance
4.9%
42,360
18,835
24,495
15,981
274
4,082
6,542
112,569
40,016
19,493
23,489
15,197
1,046
3,371
6,947
109,559
5.9%
(3.4%)
4.3%
5.2%
(73.8%)
21.1%
(5.8%)
2.7%
40,016
19,493
23,489
15,197
1,046
3,371
6,947
109,559
38,028
19,502
21,670
14,522
713
2,964
6,828
104,227
5.2%
(0.0%)
8.4%
4.6%
46.7%
13.7%
1.7%
5.1%
NOI
$
270,795 $
272,391
(0.6%) $ 272,391 $ 259,793
4.8%
Selected Statistical Data
NOI margin (3)
Weighted average square foot occupancy
Revenue per occupied square foot (4)
Revenue per available foot (RevPAF) (5)
____________________________
70.6%
92.4%
16.17 $
14.94 $
71.3%
94.5%
15.75
14.89
$
$
(1.0%)
(2.2%)
2.7% $
0.3% $
71.3%
94.5%
15.75 $
14.89 $
71.4%
94.8%
14.96
14.19
(0.1%)
(0.3%)
5.3%
4.9%
(1)
Included in the calculation of Same Park rental income are (a) lease buyout income of $1.2 million, $1.4 million, and $0.6
million for the years ended December 31, 2020, 2019, and 2018, respectively, (b) accounts receivable write-offs of $1.5
million, $1.0 million, and $0.8 million for the years ended December 31, 2020, 2019 , and 2018, respectively, and (c) deferred
rent receivable write-offs of $3.0 million, $0.5 million, and $0.2 million for the years ended December 31, 2020, 2019, and
2018, respectively.
(2) Adjusted Cost of Operations excludes the impact of stock compensation expense.
(3) NOI margin is computed by dividing NOI by rental income.
28
(4) Revenue per occupied square foot is computed by dividing rental income for the period by weighted average occupied square
feet for the same period.
(5) Revenue per Available Square Foot (RevPAF) is computed by dividing rental income for the period by weighted average
available square feet for the same period.
Analysis of Same Park Rental Income
Rental income for our Same Park portfolio increased 0.4% in 2020 compared to 2019 and 4.9% in 2019 compared
to 2018. The increase in 2020 was due primarily to higher rental rates charged to customers, as revenue per occupied
square foot increased 2.7%, partially offset by a 2.2% decrease in weighted average occupancy in 2020 compared to
2019, rent deferrals and abatements granted in 2020, and higher write-offs of accounts receivable and deferred rent
receivable in 2020. The increase in 2019 was due primarily to higher rental rates, as revenue per occupied square foot
increased 5.3%, partially offset by a 0.3% decrease in weighted average occupancy in 2019 compared to 2018.
The following table details the change in Same Park rental income for the years ended December 31, 2020 and
2019 (in thousands):
$
Rental income
Base rental income
Expense recovery income
Lease buyout income
Rent receivable write-off
Abatements
Deferrals, net of repayments
Fee Income
Non-Cash Rental Income (1)
Total rental income
$
____________________________
For The Years
Ended December 31,
2019
2020
Change
For The Years
Ended December 31,
2018
2019
Change
292,729 $
90,225
1,199
(1,461)
(1,300)
(2,356)
911
3,417
383,364 $
289,361 $
88,523
1,373
(1,033)
—
—
1,271
$
3,368
1,702
(174)
(428)
(1,300)
(2,356)
(360)
$
289,361
88,523
1,373
(1,033)
—
—
1,271
274,935 $
84,261
583
(814)
—
—
1,274
2,455
381,950 $
962
1,414 $
2,455
381,950 $
3,781
364,020 $
14,426
4,262
790
(219)
—
—
(3)
(1,326)
17,930
(1) Non-cash rental income includes amortization of deferred rent receivable (net of write-offs), in-place lease intangible, tenant
improvement reimbursement, and lease incentive intangible.
Our future revenue growth will come primarily from contractual rental increases as well as from potential increases
in market rents allowing us to increase rent levels when leases are either renewed with existing customers or re-leased
to new customers. The following table sets forth the expirations of existing leases in our Same Park portfolio over the
next 10 years based on lease data at December 31, 2020 (dollars and square feet in thousands):
Percent of
Rentable Square
Percent of
Number of Footage Subject to Total Leased
Income Under
Square Footage Expiring Leases
Year of Lease Expiration Customers Expiring Leases
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
Thereafter
Total
1,990
1,305
711
335
210
43
24
10
11
13
4
4,656
5,352
5,518
4,529
3,054
2,567
1,111
284
526
290
550
32
23,813
Annualized Rental Annualized Rental
Income Represented
by Expiring Leases
22.0%
23.5%
18.2%
13.0%
10.8%
4.9%
1.3%
2.1%
1.7%
2.3%
0.2%
100.0%
93,128
99,114
76,791
54,835
45,622
20,557
5,762
8,964
7,066
9,744
899
422,482
22.5% $
23.2%
19.0%
12.8%
10.8%
4.7%
1.2%
2.2%
1.2%
2.3%
0.1%
100.0% $
See “Analysis of Same Park Market Trends” below for further analysis of such data on a by market basis.
29
Analysis of Same Park Adjusted Cost of Operations
Adjusted Cost of Operations for our Same Park portfolio increased 2.7% in 2020 compared to 2019 due primarily
to higher property taxes, higher repairs and maintenance, higher payroll costs, and higher insurance costs, partially
offset by lower utility costs and savings from snow removal costs. Adjusted Costs of Operations increased 5.1% in
2019 compared to 2018 due to higher property tax expense, higher repairs and maintenance costs, higher payroll
expense, higher insurance costs, and an increase in snow removal costs.
Property taxes increased 5.9% in 2020 compared to 2019 and 5.2% in 2019 compared to 2018 due to higher
assessed values. We expect potential property tax growth in the future due to higher assessed values.
Utilities are dependent upon energy prices and usage levels. Changes in usage levels are driven primarily by
weather and temperature. Utilities decreased 3.4% in 2020 compared to 2019 and remained flat in 2019 compared to
2018. The decrease in 2020 was due primarily to a rate reduction related to adopting a renewable energy program
during the year as well as reduced water and electricity usage due to the COVID-19 pandemic. It is difficult to estimate
future utility costs because weather, temperature and energy prices are volatile and not readily predictable. However,
we expect utility costs in the future to be higher than our results for year ended December 31, 2020 due to increased
traffic and use at our parks as our customers resume operations.
Repairs and maintenance increased 4.3% in 2020 compared to 2019 and 8.4% in 2019 compared to 2018. The
increase in 2020 was primarily due to increased property services combined with higher landscaping repairs and
security costs incurred partially offset by a reduction in general repairs and maintenance projects as a result of the
COVID-19 pandemic. The increase in 2019 resulted from higher roof and landscaping repairs compared to 2018.
Repairs and maintenance costs are dependent upon many factors including weather conditions, which can impact
repair and maintenance needs, inflation in material and labor costs and random events, and as a result are not readily
predictable. However, we expect repairs and maintenance costs in the future to be higher than our results for the year
ended December 31, 2020 as a result of increased traffic and use at our parks as customers resume operations.
Payroll expense increased 5.2% in 2020 compared to 2019 and 4.6% in 2019 compared to 2018. Payroll expense
includes on site and supervisory personnel costs incurred in the operation of our properties. The increases in payroll
was primarily due to salary increases and promotions. We expect payroll expenses to increase in the future at a similar
rate.
Snow removal decreased 73.8% in 2020 compared to 2019 and increased 46.7% in 2019 compared to 2018. Snow
removal costs are weather dependent and therefore not predictable.
Property insurance expense increased 21.1% in 2020 compared to 2019 and 13.7% in 2019 compared to 2018
primarily due to an increase in our property insurance premium for the policy period June 2019 to May 2020 and a
further increase for the policy period June 2020 to May 2021. We expect to experience increases in property insurance
expense in the future as unfavorable market conditions pervasive throughout commercial real estate sectors persist.
Other expenses decreased 5.8% in 2020 compared to 2019 and increased 1.7% in 2019 compared to 2018. Other
expenses are general property expenses incurred in the operation of our properties. The decrease in 2020 was primarily
due to higher than average professional fees related to ordinary course tenant related matters incurred in 2019, which
did not recur in 2020. This was also the primary reason for the increase in 2019 compared to 2018. We expect other
expenses to be comparable to our results for the year ended December 31, 2020.
30
Same Park Quarterly Trends
The following table sets forth historical quarterly data related to the operations of our Same Park portfolio for
rental income, Adjusted Cost of Operations, weighted average occupancy, annualized revenue per occupied square
foot, and RevPAF (in thousands, except per square foot data):
Rental income (1)
2020
2019
2018
Adjusted Cost of Operations (2)
2020
2019
2018
NOI (3)
2020
2019
2018
$
$
$
$
$
$
$
$
$
Weighted average square foot occupancy
2020
2019
2018
Revenue per occupied square foot (4)
2020
2019
2018
RevPAF (5)
2020
2019
2018
____________________________
$
$
$
$
$
$
For the Three Months Ended
March 31
June 30
September 30 December 31
Full Year
97,735
94,604
90,634
28,134
28,143
26,918
69,601
66,461
63,716
92.9%
94.7%
94.4%
16.40
15.57
14.96
15.24
14.75
14.13
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
92,657
94,794
90,786
26,997
26,683
26,093
65,660
68,111
64,693
92.4%
94.2%
94.5%
15.64
15.68
14.98
14.45
14.78
14.15
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
96,399
95,137
91,240
28,903
27,452
25,998
67,496
67,685
65,242
92.3%
94.7%
95.1%
16.29
15.66
14.96
15.03
14.83
14.23
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
96,573
97,415
91,360
28,535
27,281
25,218
68,038
70,134
66,142
92.0%
94.4%
95.4%
16.37
16.09
14.93
15.06
15.19
14.24
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
383,364
381,950
364,020
112,569
109,559
104,227
270,795
272,391
259,793
92.4%
94.5%
94.8%
16.17
15.75
14.96
14.94
14.89
14.19
(1)
Included in the calculation of Same Park rental income are (a) lease buyout income of $0.1 million, $0.1 million, $0.2 million,
$0.1 million, $0.2 million, $0.8 million, $0.2 million, $0.2 million, $0.3 million, $0.3 million, $0.3 million, and $0.4 million
for the three months ended March 31, 2018, June 30, 2018, September 30, 2018, December 31, 2018, March 31, 2019, June
30, 2019, September 30, 2019, December 31, 2019, March 31, 2020, June 30, 2020, September 30, 2020, and December 31,
2020, respectively, (b) accounts receivable write-offs of $0.2 million, $0.1 million, $0.2 million, $0.3 million, $0.2 million,
$0.3 million, $0.3 million, $0.2 million, $0.1 million, $1.1 million, $0.2 million, and $0.1 million for the three months ended
March 31, 2018, June 30, 2018, September 30, 2018, December 31, 2018, March 31, 2019, June 30, 2019, September 30,
2019, December 31, 2019, March 31, 2020, June 30, 2020, September 30, 2020, and December 31, 2020, respectively, and
(c) deferred rent receivable write-offs of $0.1 million, $0, $0, $0.1 million, $0.1 million, $0.1 million, $0.1 million, $0.1
million, $0, $2.3 million, $0.3 million, and $0.4 million for the three months ended March 31, 2018, June 30, 2018, September
30, 2018, December 31, 2018, March 31, 2019, June 30, 2019, September 30, 2019, December 31, 2019, March 31, 2020,
June 30, 2020, September 30, 2020, and December 31, 2020, respectively.
(2) Adjusted Cost of Operations excludes stock compensation expense for employees whose compensation expense is recorded
in cost of operations, which can vary significantly period to period based upon the performance of the Company.
(3) NOI represents rental income less Adjusted Cost of Operations.
(4) Revenue per occupied square foot is computed by dividing rental income for the period by weighted average occupied square
feet for the same period.
(5) RevPAF is computed by dividing rental income for the period by weighted average available square feet for the same period.
31
Analysis of Same Park Market Trends
The following tables set forth historical data by region related to the operations of our Same Park portfolio for rental
income, Adjusted Cost of Operations, weighted average occupancy, annualized revenue per occupied square foot, and
RevPAF (in thousands, except per square foot data):
Region
Geographic Data on Same Park
Rental income
Northern California (7.2 million feet)
Southern California (3.3 million feet)
Dallas (2.9 million feet)
Austin (2.0 million feet)
Northern Virginia (3.9 million feet)
South Florida (3.9 million feet)
Seattle (1.4 million feet)
Suburban Maryland (1.1 million feet)
Total Same Park (25.7 million feet)
Adjusted Cost of Operations
Northern California
Southern California
Dallas
Austin
Northern Virginia
South Florida
Seattle
Suburban Maryland
Total Same Park
NOI
Northern California
Southern California
Dallas
Austin
Northern Virginia
South Florida
Seattle
Suburban Maryland
Total Same Park
Weighted average square foot occupancy
Northern California
Southern California
Dallas
Austin
Northern Virginia
South Florida
Seattle
Suburban Maryland
Total Same Park
Revenue per occupied square foot (1)
Northern California
Southern California
Dallas
Austin
Northern Virginia
South Florida
Seattle
Suburban Maryland
Total Same Park
For the Years
Ended December 31,
2019
2020
Variance
For the Years
Ended December 31,
2019
2018
Variance
$
$
$
$
$
$
$
$
$
$
$
108,007
54,810
32,502
33,285
71,901
43,979
19,223
19,657
383,364
25,123
14,593
11,703
12,041
24,621
12,469
5,051
6,968
112,569
82,884
40,217
20,799
21,244
47,280
31,510
14,172
12,689
270,795
91.3%
94.9%
88.0%
94.9%
92.7%
93.5%
95.6%
89.5%
92.4%
16.33
17.60
12.78
17.87
19.80
12.16
19.12
14.89
16.17
$
$
$
$
$
$
$
$
$
$
$
108,046
55,080
33,789
30,679
73,734
43,601
17,145
19,876
381,950
24,313
14,215
11,488
10,843
25,488
11,977
4,109
7,126
109,559
83,733
40,865
22,301
19,836
48,246
31,624
13,036
12,750
272,391
96.1%
95.0%
92.4%
91.8%
94.1%
95.4%
96.0%
89.3%
94.5%
15.52
17.67
12.66
17.02
20.01
11.82
13.22
19.39
15.75
(0.0%)
(0.5%)
(3.8%)
8.5%
(2.5%)
0.9%
12.1%
(1.1%)
0.4%
3.3%
2.7%
1.9%
11.0%
(3.4%)
4.1%
22.9%
(2.2%)
2.7%
(1.0%)
(1.6%)
(6.7%)
7.1%
(2.0%)
(0.4%)
8.7%
(0.5%)
(0.6%)
(5.0%)
(0.1%)
(4.8%)
3.4%
(1.5%)
(2.0%)
(0.4%)
0.2%
(2.2%)
5.2%
(0.4%)
0.9%
5.0%
(1.0%)
2.9%
44.6%
(23.2%)
2.7%
$
$
$
$
$
$
$
$
$
$
$
108,046
55,080
33,789
30,679
73,734
43,601
17,145
19,876
381,950
24,313
14,215
11,488
10,843
25,488
11,977
4,109
7,126
109,559
83,733
40,865
22,301
19,836
48,246
31,624
13,036
12,750
272,391
96.1%
95.0%
92.4%
91.8%
94.1%
95.4%
96.0%
89.3%
94.5%
15.52
17.67
12.66
17.02
20.01
11.82
13.22
19.39
15.75
$
99,610
52,873
30,899
29,608
73,818
41,824
16,413
18,975
364,020
22,653
13,349
10,896
10,352
25,128
10,733
4,127
6,989
104,227
76,957
39,524
20,003
19,256
48,690
31,091
12,286
11,986
259,793
97.8%
97.6%
89.7%
92.5%
92.8%
96.4%
98.2%
83.1%
94.8%
14.06
16.50
11.92
16.29
20.31
11.23
12.39
19.89
14.96
$
$
$
$
$
$
$
$
$
$
8.5%
4.2%
9.4%
3.6%
(0.1%)
4.2%
4.5%
4.7%
4.9%
7.3%
6.5%
5.4%
4.7%
1.4%
11.6%
(0.4%)
2.0%
5.1%
8.8%
3.4%
11.5%
3.0%
(0.9%)
1.7%
6.1%
6.4%
4.8%
(1.7%)
(2.7%)
3.0%
(0.8%)
1.4%
(1.0%)
(2.2%)
7.5%
(0.3%)
10.4%
7.1%
6.2%
4.5%
(1.5%)
5.3%
6.7%
(2.5%)
5.3%
RevPAF (2)
Northern California
Southern California
Dallas
Austin
Northern Virginia
South Florida
Seattle
Suburban Maryland
Total Same Park
____________________________
(1) Revenue per occupied square foot is computed by dividing rental income for the period by weighted average occupied square feet for the
—
(0.5%)
(3.8%)
8.5%
(2.4%)
0.9%
12.1%
(1.1%)
0.3%
8.4%
4.2%
9.3%
3.6%
(0.2%)
4.3%
4.4%
4.8%
4.9%
13.75
16.11
10.70
15.08
18.85
10.82
12.16
16.57
14.19
14.91
16.70
11.26
16.96
18.36
11.38
14.24
17.17
14.94
14.91
16.78
11.70
15.63
18.82
11.28
12.70
17.36
14.89
14.91
16.78
11.70
15.63
18.82
11.28
12.70
17.36
14.89
$
$
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same period.
(2) RevPAF is computed by dividing rental income for the period by weighted average available square feet for the same period.
32
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3
Our past revenue growth has come from contractual annual rent increases, as well as re-leasing of space at rates
above outgoing rental rates. We believe the percentage difference between outgoing cash rent inclusive of estimated
expense recoveries and incoming cash rent inclusive of estimated expense recoveries for leases executed (“Cash Rental
Rate Change”) is useful in understanding trends in current market rates relative to our existing lease rates. The
following table summarizes Cash Rental Rate Change and other key statistical information with respect to the
Company’s leasing production for its Same Park portfolio for the year ended December 31, 2020 (square feet in
thousands):
Regions
Northern California
Southern California
Dallas
Austin
Northern Virginia
South Florida
Seattle
Suburban Maryland
Total
____________________________
Square
Footage
Leased
For the Year Ended December 31, 2020
Customer
Retention
Transaction
Costs per
Executed Foot
Cash Rental
Rate Change (1)
1,708
1,187
662
410
960
1,193
477
164
6,761
60.5% $
69.4% $
48.3% $
75.3% $
70.4% $
58.7% $
76.3% $
48.5% $
63.3% $
2.60
2.13
2.72
4.10
5.35
1.02
0.78
6.77
2.70
11.5%
3.1%
1.4%
1.9%
(1.5%)
3.0%
18.0%
(0.5%)
5.0%
(1) Cash Rental Rate Change is computed by taking the percentage difference between the incoming initial billed monthly cash
rental rates inclusive of estimated expense recoveries (excluding the impact of certain items such as concessions or future
escalators) on new leases or extensions executed in the period, and the outgoing monthly cash rental rates inclusive of
estimated expense recoveries last billed on the previous lease for that space. Leases executed on spaces vacant for more than
the preceding twelve months have been excluded from this measure.
The COVID-19 pandemic has negatively affected occupancy levels across our portfolio. For the year ended
December 31, 2020, weighted average occupancy was 92.4%, a decrease from weighted average occupancy of 94.5%
for the year ended December 31, 2019. Weighted average cash rental rate growth on leases executed during the year
ended December 31, 2020 was 5.0% while average net effective rent1 growth was 14.2%. Renewals of leases with
existing customers represented 63.7% of our leasing activity for the year ended December 31, 2020. Average lease
term of the leases executed during the year ended December 31, 2020 was 3.4 years, with associated average
transaction costs (tenant improvements and leasing commissions) of $2.70 per square foot. For comparative purposes,
average lease term and transaction costs on leases executed in the same period of 2019 were 4.2 years and $3.73 per
square foot, respectively. Due to the uncertainty of the COVID-19 pandemic’s impact on the Company’s future ability
to increase or maintain existing occupancy levels, possible decreases in rental rates on new and renewal transactions,
and the negative effect of additional rent deferrals, rent abatements, and customer defaults, we may continue to
experience challenges growing Same Park rental income in the near future.
Non-Same Park Portfolio: The table below reflects the assets comprising our Non-Same Park portfolio (in
thousands):
Acquired Property
Pickett Industrial Park
Purchase Square Occupancy at
Occupancy at
Feet
Acquisition December 31, 2020
La Mirada Commerce Center
San Tomas Business Center
Hathaway Industrial Park
Walnut Avenue Business Park April 2019
Northern Virginia and Fullerton June 2018
Location
Date Acquired
Alexandria, VA
October 2020
January 2020
La Mirada, CA
December 2019 Santa Clara, CA
September 2019 Santa Fe Springs, CA
Signal Hill, CA
Lorton and Springfield,
$
Price
46,582
13,513
16,787
104,330
13,824
246
73
79
543
74
100.0%
100.0%
95.6%
100.0%
98.4%
Road Industrial Parks
Total Acquired Property
VA
143,766
$ 338,802
1,057
2,072
76.1%
87.5%
92.2%
91.9%
88.8%
95.6%
95.0%
92.2%
93.1%
We believe that our management and operating infrastructure typically allows us to generate higher NOI from
newly acquired real estate facilities than was achieved by previous owners. However, it can take 24 or more months
for us to fully achieve higher NOI, and the ultimate levels of NOI to be achieved can be affected by changes in general
economic conditions. Due to the uncertainty of the COVID-19 pandemic’s impact on the Company’s ability to
generate higher NOI from these newly acquired real estate facilities in the future, there can be no assurance that we
will achieve our expectations with respect to newly acquired real estate facilities.
_____________________________
1Net effective rent represents average rental payments for the term of a lease on a straight-line basis in accordance with GAAP, excluding operating
expense reimbursements.
34
Multifamily: As of December 31, 2020, we held a 95.0% controlling interest in a joint venture that owns Highgate
at The Mile, a 395-unit apartment complex. The following table summarizes the historical operating results of
Highgate at The Mile and certain statistical information (in thousands, except per unit data):
Rental income
Cost of operations
NOI
Selected Statistical Data
For The Years
Ended December 31,
For The Years
Ended December 31,
2020
$ 9,464
4,264
$ 5,200
2019
$ 10,075
4,137
5,938
$
Change
(6.1%)
3.1%
(12.4%)
2019
$ 10,075
4,137
5,938
$
2018
$ 7,353
4,054
$ 3,299
Change
37.0%
2.0%
80.0%
Weighted average square foot occupancy
92.9%
95.4%
(2.6%)
95.4%
78.2%
22.0%
Total costs (1)
Physical occupancy
Average rent per unit (2)
____________________________
As of December 31, 2020
$ 115,426
94.9%
2,048
$
(1) The project cost for Highgate at The Mile includes the underlying land at its assigned contribution value upon formation of
the joint venture of $27.0 million, which includes unrealized land appreciation of $6.0 million that is not recorded on our
balance sheet.
(2) Average rent per unit is defined as the total potential monthly rental revenue (actual rent for occupied apartment units plus
market rent for vacant apartment units) divided by the total number of rentable apartment units.
The decrease in NOI in 2020 compared to 2019 was primarily due to a decline in occupancy and rental rates as
result of the COVID-19 pandemic, in addition to accounts receivable write-offs of $0.3 million for the year ended
December 31, 2020. Physical occupancy at Highgate at The Mile had returned to 94.9% at December 31, 2020;
however, due to the uncertainty of the COVID-19 pandemic’s impact on the Company’s future ability to maintain
existing occupancy levels and rental rates, we may continue to experience lower NOI levels in the near future.
Assets Sold: These amounts include historical operating results with respect to properties that we sold. Amounts
for the year ended December 31, 2020 reflect the operating results attributable to two industrial buildings totaling
40,000 square feet sold in September 2020 and a 113,000 square foot asset sold in January 2020; amounts for the year
ended December 31, 2019 reflect the operating results attributable to the two industrial buildings totaling 40,000
square feet and the 113,000 square foot asset sold in 2020, and 1.3 million square feet of flex and office sold in October
2019; amounts for the year ended December 31, 2018 reflect the operating results attributable to the two industrial
buildings totaling 40,000 square feet and the 113,000 square foot asset sold in 2020, 1.3 million square feet of flex
and office sold in October 2019, and 899,000 square feet of assets sold in 2018.
Depreciation and Amortization Expense: Depreciation and amortization expense decreased 7.6% in 2020
compared to 2019 and increased 5.0% in 2019 compared to 2018. The decrease in 2020 over 2019 was primarily due
to acceleration of depreciation expense related to the building held for development in 2019, which is also the primary
reason for the increase in 2019 over 2018.
General and Administrative Expense: General and administrative expense primarily represents executive and
other compensation, audit and tax fees, legal expenses and other costs associated with being a public company. General
and administrative expense increased $0.8 million, or 5.6%, in 2020 compared to 2019 and $1.7 million, or 14.0%, in
2019 compared to 2018.
The increase in 2020 over 2019 was primarily due to higher stock compensation expense due to accelerated stock
compensation expense related to our President and CEO retiring in September 2020 (discussed below) and an increase
in professional fees related to various corporate service projects. The increase was partially offset by a decrease in
compensation expense related to our President and CEO’s retirement and stock compensation expense incurred during
2019 tied to a modification of the Director Retirement Plan which did not recur in 2020.
In August 2020, the Company announced that Maria Hawthorne was retiring from her role as President and CEO
effective September 1, 2020, and would continue to serve as a director of the Company. Due to Ms. Hawthorne’s
continued service as a director of the Company, her unvested stock option and restricted stock units will continue to
vest on their original vesting schedule in accordance with the Company’s 2012 Equity and Performance-Based
Incentive Compensation Plan and related award agreements. For financial reporting purposes, the end of the service
periods for these stock option and restricted stock unit grants have changed from the various respective vesting dates
to September 1, 2020, the date of her retirement as President and CEO. Accordingly, all remaining stock compensation
35
expense for Ms. Hawthorne, which totaled $1.7 million, was amortized and included in general and administrative
expense during year ended December 31, 2020.
The increase in 2019 over 2018 was primarily due to an increase in stock compensation expense tied to a
modification of the Director Retirement Plan during 2019 as well as an increase in compensation costs relating to the
chief financial officer who started during the latter half of 2018.
Gain on sale of real estate facilities: On September 16, 2020, we sold two industrial buildings totaling 40,000
square feet located in Redmond, Washington, which were subject to an eminent domain process for net proceeds of
$11.4 million, which resulted in a gain on sale of $7.7 million.
On January 7, 2020, we sold a 113,000 square foot office building located at Metro Park North in Montgomery
County, Maryland, for net sale proceeds of $29.3 million, which resulted in a gain on sale of $19.6 million.
On October 8, 2019, we sold 1.3 million rentable square feet located in Rockville and Silver Spring, Maryland, for
net sale proceeds of $144.6 million, which resulted in a gain on sale of $16.6 million.
On March 5, 2018, we sold Corporate Pointe Business Park, a park consisting of five multi-tenant office buildings
totaling 161,000 square feet located in Orange County, California, for net sale proceeds of $41.7 million, which
resulted in a gain on sale of $26.8 million. On April 18, 2018, we sold Orange County Business Center, a park
consisting of office multi-tenant office buildings totaling 437,000 square feet located in Orange County, California,
for net sale proceeds of $73.3 million, which resulted in a gain on sale of $50.6 million. On April 30, 2018, we sold
Northgate Business Park, a park consisting of seven multi-tenant flex buildings totaling 194,000 square feet located
in Dallas, Texas, for net sale proceeds of $11.8 million, which resulted in a gain on sale of $7.9 million. On October
31, 2018, we sold Orangewood Office Park, a park consisting of two multi-tenant office buildings totaling 107,000
square feet located in Orange County, California, for net sale proceeds of $18.3 million, which resulted in a gain on
sale of $8.2 million.
Liquidity and Capital Resources
This section should be read in conjunction with our consolidated statements of cash flows for the years ended
December 31, 2020, 2019, and 2018 and the notes to our consolidated financial statements, which set forth the major
components of our historical liquidity and capital resources. The discussion below sets forth the factors which we
expect will affect our future liquidity and capital resources or which may vary substantially from historical levels.
Capital Raising Strategy: As a REIT, we are required to distribute at least 90% of our “REIT taxable income” to
our shareholders each year, which relative to a taxable C corporation, limits the amount of cash flow from operations
that we can retain for investment purposes. As a result, in order to grow our asset base, access to capital is important.
Our financial profile is characterized by strong credit metrics, including low leverage relative to our total
capitalization and operating cash flows. We are a highly rated REIT, as determined by Moody’s and Standard &
Poor’s. Our corporate credit rating by Standard and Poor’s is A-, while our preferred shares are rated BBB by Standard
and Poor’s and Baa2 by Moody’s. We believe our credit profile and ratings will enable us to efficiently access both
the public and private capital markets to raise capital, as necessary.
In order to maintain efficient access to the capital markets, we target a minimum ratio of FFO (as defined below)
to combined fixed charges and preferred distributions of 3.0 to 1.0. Ratio of FFO to fixed charges and preferred
distributions is calculated by dividing FFO excluding fixed charges and preferred distributions by fixed charges and
preferred distributions paid. Fixed charges include interest expense, capitalized interest and preferred equity
distributions paid. For the year ended December 31, 2020, the ratio of FFO to combined fixed charges and preferred
distributions paid was 5.7 to 1.0.
We have a $250.0 million revolving Credit Facility that can be expanded to $400.0 million and expires in January
2022. We can use the Credit Facility as necessary as temporary financing until we are able to raise longer term capital.
Historically we have funded our long-term capital requirements with retained operating cash flow and proceeds from
the issuance of common and preferred securities. We will select among these sources of capital based upon availability,
relative cost, the impact of constraints on our operations (such as covenants), and the desire for leverage.
36
The COVID-19 pandemic has had varying effects on the cost and availability of debt and equity capital and may
have intensified negative impacts if resurgent outbreaks of the virus occur. Based upon our substantial current liquidity
relative to our capital requirements noted below, and our strong financial profile and credit ratings, we do not expect
such capital market turbulence to have a material impact upon our capital and growth plans over the next 12 months.
However, there can be no assurance that it would not in the future if the COVID-19 pandemic were to persist for a
long period of time or intensify.
Short-term Liquidity and Capital Resource Analysis: We believe that our net cash provided by our operating
activities will continue to be sufficient to enable us to meet our ongoing requirements for debt service, capital
expenditures and distributions to our shareholders for the foreseeable future.
As of December 31, 2020, we had $69.1 million in unrestricted cash. In the last five years, we have retained
between $40 to $60 million in operating cash flow per year. Retained operating cash flow represents cash flow
provided by operating activities, less shareholder and unit holder distributions and capital expenditures.
Required Debt Repayment: As of December 31, 2020, we have no debt outstanding on our Credit Facility. We are
in compliance with all of the covenants and other requirements of our Credit Facility.
Capital Expenditures: We define recurring capital expenditures as those necessary to maintain and operate our
real estate at its current economic value. Nonrecurring capital improvements generally are related to property
reconfigurations and other capital expenditures related to repositioning asset acquisitions. The following table sets
forth our commercial capital expenditures paid for in the years ended December 31, 2020, 2019, and 2018 on an
aggregate and per square foot basis:
For the Years Ended December 31,
Commercial Real Estate
Recurring capital expenditures
Capital improvements (1)
Tenant improvements
Lease commissions
Total commercial recurring
capital expenditures (1)
Nonrecurring capital improvements
Total commercial capital
expenditures (1)
____________________________
2020
2019
(in thousands)
2018
2020
2019
(per total weighted average square foot)
2018
$
9,497 $
15,948
8,878
11,224 $
17,360
8,267
10,738 $
18,688
8,048
0.34 $
0.58
0.32
0.40 $
0.62
0.29
34,323
1,715
36,851
2,494
37,474
1,176
1.24
0.06
1.31
0.09
0.38
0.67
0.29
1.34
0.05
$
36,038 $
39,345 $
38,650 $
1.30 $
1.40 $
1.39
(1) Excludes $24, $20, and $13 of recurring capital improvements on our multifamily asset in 2020, 2019, and 2018, respectively.
37
The following table summarizes recurring capital expenditures paid and the related percentage of NOI for Same
Park, Non-Same Park, multifamily, and assets sold by region for the years ended December 31, 2020, 2019, and 2018
(in thousands):
For the Years Ended December 31,
2020
Recurring Capital Expenditures
Change
2019
2019
2018
Change
Recurring Capital Expenditures
as a Percentage of NOI
2019
2018
2020
$
$
6,354 $
3,568
3,984
1,955
9,819
2,313
1,326
1,794
31,113
4,411 44.0%
(21.0%)
4,514
(13.8%)
4,623
(56.9%)
4,539
(5.3%)
10,366
5.6%
2,191
914 45.1%
(12.5%)
(7.4%)
2,051
33,609
4,411 $
4,514
4,623
4,539
10,366
2,191
914
2,051
33,609
3,602
3,167
5,027
2,362
10,810
3,149
952
2,714
31,783
22.5%
42.5%
(8.0%)
92.2%
(4.1%)
(30.4%)
(4.0%)
(24.4%)
5.7%
7.7%
8.9%
19.2%
9.2%
20.8%
7.3%
9.4%
14.1%
11.5%
76
2,134
984
3,194
16
— 100.0%
54 3,851.9%
2,154
(54.3%)
2,208 44.7%
(98.5%)
1,034
—
54
2,154
2,208
1,034
—
—
— 100.0%
615 250.2%
615 259.0%
(79.6%)
5,076
—
—
—
—
—
5.3%
11.0%
20.7%
22.9%
21.5%
6.9%
7.0%
16.1%
12.3%
—
—
—
—
—
4.7%
8.0%
25.1%
12.3%
22.2%
10.1%
7.7%
22.6%
12.2%
—
—
—
—
—
34,323
24
34,347
$
$
36,851
(6.9%)
20 20.0%
(6.8%)
36,871
36,851
20
36,871
37,474
13
37,487
(1.7%)
53.8%
(1.6%)
$
$
12.0%
—
11.8%
12.4%
—
12.2%
13.1%
—
12.9%
Region
Same Park
Northern California
Southern California
Dallas
Austin
Northern Virginia
South Florida
Seattle
Suburban Maryland
Total Same Park
Non-Same Park
Northern California
Southern California
Northern Virginia
Total Non-Same Park
Assets sold
Total commercial
recurring capital
expenditures
Multifamily
Total
In the last five years, our annual recurring capital expenditures have ranged between 11.5% and 16.3% as a
percentage of NOI, and we expected future recurring capital expenditures to be within or near the low end of this
range. While what we disclose herein with respect to capital expenditures represents our best estimates at this time,
there can be no assurance that these amounts will not change substantially in the future for various reasons, including
the potential impact of the COVID-19 pandemic on capital projects and leasing volume.
Redemption of Preferred Stock: Historically, we have reduced our cost of capital by refinancing higher coupon
preferred securities with lower coupon preferred securities. We have one series of preferred securities that will become
redeemable during 2021, at our option, with a coupon rate of 5.20% at a par value of $189.8 million (see Note 9 to
our December 31, 2020 financial statements). Redemption of such preferred shares will depend upon many factors,
including our cost of capital. None of our preferred securities are redeemable at the option of the holders.
Acquisitions of Real Estate Facilities: On October 28, 2020, we acquired a multi-tenant industrial park comprising
approximately 246,000 rentable square feet in Alexandria, Virginia, for a total purchase price of $46.6 million,
inclusive of capitalized transaction costs. On January 10, 2020, we acquired a multi-tenant industrial park comprising
approximately 73,000 rentable square feet in La Mirada, California, for a total purchase price of $13.5 million,
inclusive of capitalized transaction costs. On December 20, 2019, we acquired a multi-tenant flex park comprising
approximately 79,000 rentable square feet in Santa Clara, California, for a total purchase price of $16.8 million,
inclusive of capitalized transaction costs. On September 5, 2019, we acquired a multi-tenant industrial park comprising
approximately 543,000 rentable square feet in Santa Fe Springs, California, for a total purchase price of $104.3
million, inclusive of capitalized transaction costs. On April 18, 2019, we acquired a multi-tenant industrial park
comprising approximately 74,000 rentable square feet in Signal Hill, California, for a total purchase price of $13.8
million, inclusive of capitalized transaction costs. On June 8, 2018, we acquired two multi-tenant industrial parks
aggregating 1.1 million rentable square feet in Springfield, Virginia, for a total purchase price of $143.8 million,
inclusive of capitalized transaction costs. We continue to seek to acquire additional real estate facilities; however,
there is significant competition to acquire existing facilities in our markets and there can be no assurance as to the
volume of future acquisition activity.
Sale of Real Estate: On September 16, 2020, we sold two industrial buildings totaling 40,000 square feet located
in Redmond, Washington, which were subject to an eminent domain process for net proceeds of $11.4 million, which
resulted in a gain on sale of $7.7 million. On January 7, 2020, we sold an 113,000 square foot office building located
at Metro Park North in Montgomery County, Maryland, for net sale proceeds of $29.3 million, which resulted in a
gain on sale of $19.6 million. During the year ended December 31, 2019, we sold 1.3 million rentable square feet of
flex and office business parks located in Rockville and Silver Spring, Maryland, for net sale proceeds of $144.6
million, which resulted in a gain on sale of $16.6 million. During the year ended December 31, 2018, we sold 899,000
38
rentable square feet of real estate facilities located in Orange County, California, and Dallas, Texas, for net sale
proceeds of $145.1 million, which resulted in a gain on sale of $93.5 million.
Development of Real Estate Facilities: As noted above, during 2020, we developed an 83,000 square foot shallow-
bay industrial building at our Freeport Business Park in Irving, Texas. As of December 31, 2020, $7.8 million of the
estimated $8.1 million total development costs had been incurred and was reflected under land and building held for
development, net on our consolidated balance sheets. The remaining $0.3 million was incurred subsequent to
December 31, 2020 and construction was completed in January 2021.
In August 2020, we entered into the Brentford Joint Venture with the JV Partner for the purpose of developing
Brentford at The Mile, a planned 411-unit multifamily apartment complex. We contributed the Brentford Parcel to the
Brentford Joint Venture at a value of $18.5 million, for which we received equity contribution credit in the Brentford
Joint Venture. Our cost basis in the Brentford Parcel was $5.5 million as of December 31, 2020.
Construction of Brentford at The Mile commenced in August 2020 and is anticipated to be completed over a period
of 24 to 36 months at an estimated development cost of $110 million to $115 million, excluding land cost. As of
December 31, 2020, the development cost incurred was $9.6 million, which is reflected in land and building held for
development, net on our consolidated balance sheets along with our $5.5 million cost basis in the Brentford Parcel.
During year ended December 31, 2020, the Company also recorded non-capitalizable demolition costs of $0.3 million
in interest and other expense on our consolidated statements of income.
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, 2020, 2019, and 2018. As of December 31, 2020,
management has the authorization to repurchase an additional 1,614,721 shares.
Requirement to Pay Distributions: Our election to be taxed as a REIT, as defined by the Code, applies to all
periods presented herein. As a REIT, we do not incur U.S. federal corporate income tax on our “REIT taxable income”
that is distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and
we continue to meet certain organizational and operational requirements. We believe we have met these requirements
in all periods presented herein, and we expect we will continue to qualify as a REIT in future periods.
We paid REIT qualifying distributions of $163.6 million ($48.2 million to preferred shareholders and $115.4
million to common shareholders) during the year ended December 31, 2020.
We estimate the annual distribution requirements with respect to our preferred shares outstanding at December 31,
2020 to be $48.2 million per year.
Our consistent, long-term dividend policy has been to set dividend distribution amounts based on our taxable
income. Future quarterly distributions with respect to common shares will continue to be determined based upon our
REIT distribution requirements and, along with distributions to preferred shareholders, we expect will be funded with
cash provided by operating activities.
Funds from Operations, Core Funds from Operations, and Funds Available for Distribution
Funds from Operations (“FFO”) is a non-GAAP measure defined by the National Association of Real Estate
Investment Trusts (“NAREIT”) and is considered a helpful measure of REIT performance by REITs and many REIT
analysts. FFO represents GAAP net income before real estate depreciation and amortization expense, gains or losses
on sales of operating properties and land and impairment charges on real estate assets.
We also present Core FFO and Funds Available for Distribution (“FAD”) which are both also non-GAAP
measures. Core FFO is defined by the Company as FFO excluding the net impact of (i) income allocated to preferred
shareholders to the extent redemption value exceeds the related carrying value (a “Preferred Redemption Allocation”)
and (ii) other nonrecurring income or expense items as appropriate. FAD represents Core FFO adjusted to (i) deduct
recurring capital improvements and capitalized tenant improvements and lease commissions and (ii) remove certain
non-cash income or expense items such as amortization of deferred rent receivable and stock compensation expense.
FFO for the year ended December 31, 2020 was $6.51 per share representing an increase of 0.6% from the same
period in 2019.
Core FFO was $6.57 and $6.78 per share for the years ended December 31, 2020 and 2019, respectively. For the
year ended December 31, 2020, Core FFO excludes the impact of the (i) accelerated amortization of stock
39
compensation expense of $1.7 million related to the retirement of our former President and CEO and (ii) non-
capitalizable demolition costs of $0.3 million. For the year ended December 31, 2019, Core FFO excludes the impact
of the Preferred Redemption Allocation of $11.0 million related to the redemption of our 5.75% Cumulative Preferred
Stock, Series U, and our 5.70% Cumulative Preferred Stock, Series V, during December 2019.
The following table reconciles net income allocable to common shareholders to FFO, Core FFO and FAD as well
as net income per share to FFO per share and Core FFO per share (amounts in thousands, except per share data):
Net income allocable to common shareholders
$
124,645
$
108,703
$
172,899
For The Years Ended December 31,
2019
2018
2020
Adjustments
Gain on sale of real estate facilities
Depreciation and amortization expense
Net income allocated to noncontrolling interests
Net income allocated to restricted stock unit holders
FFO allocated to JV partner
FFO allocable to diluted common shares and units
Non-capitalizable demolition costs
Acceleration of stock compensation expense
due to President and CEO retirement
Preferred Redemption Allocation
Core FFO allocable to diluted common shares and units
Adjustments
$
Recurring capital improvements
Tenant improvements
Capitalized lease commissions
Non-cash rental income (1)
Non-cash stock compensation expense (2)
Cash paid for taxes in lieu of shares upon vesting
of restricted stock units
FAD allocable to diluted common shares and units
Weighted average outstanding
Common shares
Common operating partnership units
Restricted stock units
Common share equivalents
Total common and dilutive shares
Reconciliation of Earnings per Share to FFO per Share
Net income per common share — diluted
Gain on sale of real estate facilities
Depreciation and amortization expense
FFO per share
Non-capitalizable demolition costs
Acceleration of stock compensation expense
due to President and CEO retirement
Preferred Redemption Allocation
Core FFO per share
____________________________
(27,273)
96,314
33,158
716
(118)
227,442
335
1,687
—
229,464
(9,521)
(15,948)
(8,878)
(4,713)
3,961
$
(16,644)
104,249
29,006
910
(149)
226,075
—
—
11,007
237,082
(11,244)
(17,360)
(8,267)
(3,936)
4,956
$
(93,484)
99,242
45,199
1,923
(13)
225,766
—
—
—
225,766
(10,751)
(18,688)
(8,048)
(5,230)
4,174
(4,216)
190,149
$
(6,350)
194,881
$
(4,981)
182,242
$
27,475
7,305
51
88
34,919
27,418
7,305
124
108
34,955
$
$
4.52
(0.77)
2.76
6.51
0.01
0.05
—
6.57
$
$
3.95
(0.47)
2.99
6.47
—
—
0.31
6.78
$
$
27,321
7,305
182
101
34,909
6.31
(2.68)
2.84
6.47
—
—
—
6.47
(1) Non-cash rental income includes amortization of deferred rent receivable (net of write-offs), in-place lease intangible, tenant
improvement reimbursement, and lease incentive intangible.
(2) Amounts shown are net of accelerated stock compensation expense related to the President and CEO retirement, which is also
excluded from the computation of Core FFO.
We believe FFO, Core FFO and FAD assist investors in analyzing and comparing the operating and financial
performance of a company’s real estate from period to period. FFO, Core FFO and FAD are not substitutes for GAAP
net income. In addition, other REITs may compute FFO, Core FFO, and FAD differently, which could inhibit
comparability.
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.
40
Contractual Obligations: We paid $48.2 million in distributions to our preferred shareholders for the year ended
December 31, 2020 and expect to continue to pay quarterly distributions of $12.0 million to our preferred shareholders
for the foreseeable future or until such time as there is a change in the amount or composition of our series of preferred
equity outstanding. Dividends on preferred equity are paid when and if declared by 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, but are not redeemable at the option of the holder.
Our significant contractual obligations as of December 31, 2020 and their impact on our future cash flow and
liquidity are summarized below (in thousands):
Contractual Obligations
Transaction costs (1)
Ground lease obligations (2)
Total
____________________________
Payments Due by Period
1 - 3 years
Total
Less than 1 year
$
$
9,144 $
1,769
10,913 $
9,144 $
199
9,343 $
4 - 5 years More than 5 years
—
— $
— $
596
596 $
397
397 $
577
577
(1) Represents transaction costs, including tenant improvements and lease commissions, which we are committed to under the
terms of executed leases.
(2) Represents future contractual payments on land under various operating leases.
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, 2020.
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 and 6 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company at December 31, 2020 and 2019 and for the years ended December 31,
2020, 2019, and 2018 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.
41
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, 2020. These controls and procedures have been designed to ensure that information required for
disclosure is recorded, processed, summarized and reported within the requisite time periods and that such information
is accumulated and communicated to management. 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, 2020,
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.
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, 2020.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 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 2020 that have materially affected, or
are reasonably likely to materially affect, the Company’s internal control over financial reporting.
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
PS Business Parks, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited PS Business Parks, Inc.’s internal control over financial reporting as of December 31, 2020, 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). In our opinion, PS Business
Parks, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheets of PS Business Parks, Inc. as of December 31, 2020 and 2019, the
related consolidated statements of income, equity and cash flows for each of the three years in the period ended
December 31, 2020, and the related notes and financial statement schedule listed in the Index at Item 15(a) and our
report dated February 22, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’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 are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
Los Angeles, California
February 22, 2021
/s/ Ernst & Young LLP
43
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 2021 (the “Proxy Statement”) under the caption “Proposal 1: Election of Directors.”
The Information required by this item with respect to executive officers is hereby incorporated by reference to the
material appearing in the Proxy Statement under the caption “Our Named Executive Officers.”
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.
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 “Compensation Committee Interlocks and Insider Participation,” “Compensation of
Directors,” Compensation Discussion and Analysis (CD&A),” “Executive Compensation Tables,” “Compensation
Committee Report,” and “Pay Ratio Disclosure.”
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, 2020 on the Company’s equity compensation plans:
(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)) (2)
$
171,694
—
171,694 * $
108.29
—
108.29 *
815,894
—
815,894
Plan Category
Equity compensation plans approved by security holders (1)
Equity compensation plans not approved by security holders
Total
____________________________
(1) Represents shares of our common stock available for issuance under the Company’s 2012 Equity and
Performance-Based Incentive Compensation Plan (2012 Plan).
(2) Amounts remaining available for future issuance account for stock options and RSUs issued and outstanding.
44
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 “Additional Information about our
Directors and Executive Officers; Certain Relationships.”
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.”
45
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. 1. Financial Statements
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.
ITEM 16. FORM 10-K SUMMARY
None.
46
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, 2020 and 2019
Consolidated statements of income for the years ended December 31, 2020, 2019, and 2018
Consolidated statements of equity for the years ended December 31, 2020, 2019, and 2018
Consolidated statements of cash flows for the years ended December 31, 2020, 2019, and 2018
Notes to consolidated financial statements
Schedule:
III — Real estate and accumulated depreciation
Page
48
50
51
52
53
55
71
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.
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
PS Business Parks, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of PS Business Parks, Inc. (the Company) as of
December 31, 2020 and 2019, and the related consolidated statements of income, equity and cash flows for each of
the three years in the period ended December 31, 2020, and the related notes and financial statement schedule listed
in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the
consolidated financial statements referred to above present fairly, in all material respects, the financial position of the
Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, 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 22, 2021 expressed an unqualified opinion
thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the financial statements. We believe that our
audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial
statements that was communicated or required to be communicated to the audit committee and that: (1) relates to
accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,
subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion
on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter
below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Purchase price accounting
Description of the Matter As described in Note 3 to the consolidated financial statements, the Company
completed two acquisitions during 2020 for consideration of $60.1 million.
As explained in Note 3 to the consolidated financial statements, the transactions were
accounted for as asset acquisitions, and as such, are recorded at the price to acquire
the real estate property, including acquisition costs. The purchase price is allocated to
land, building, and acquired lease intangible assets and/or liabilities based upon the
relative fair value of the acquired tangible and intangible lease assets and liabilities.
The relative fair value of the acquired tangible and intangible lease assets and
liabilities were determined by the Company and its valuation specialist utilizing
available market information.
48
How We Addressed the
Matter in Our Audit
Auditing the Company’s accounting for its acquisitions was complex due to the
significant estimation required by management in determining the fair values of the
acquired land, building, and intangible lease assets and liabilities. The significant
estimation was primarily due to the judgmental nature of the inputs to the valuation
models used to measure the fair value of the tangible and intangible lease assets and
liabilities as well as the sensitivity of the respective fair values to the significant
underlying assumptions. The Company utilized the sales comparison approach to
measure the fair value of the acquired land and a combination of the discounted cash
flow and replacement costs methods to measure the fair value of the remaining
acquired tangible and intangible assets and liabilities. The more significant
assumptions utilized included revenue growth rates, discount rates, market rental
rates, and capitalization rates. These significant assumptions are forward-looking and
could be affected by future economic and market conditions.
We obtained an understanding, evaluated the design, and tested the operating
effectiveness of controls over management’s accounting for acquired real estate
properties, including controls over the Company’s review of the assumptions
underlying the purchase price allocation, the cash flow projections, and the accuracy
of the underlying data used. For example, we tested controls over the determination
of the fair value of the land, building and intangible lease assets and liabilities,
including the controls over the review of the valuation models and the underlying
assumptions used to develop such estimates.
For each of the Company’s real estate property acquisitions, we read the purchase and
sale agreements, and evaluated whether the Company had appropriately determined
whether the transaction was a business combination or asset acquisition. We also
evaluated the significant assumptions and methods used in developing the fair value
estimates of the tangible assets and intangible lease assets acquired and liabilities
assumed. To test the estimated fair value of the land, building and intangible lease
assets and liabilities, we performed audit procedures that included, among other
procedures, evaluating the Company’s use of the income approach and testing the
significant assumptions used in the discounted cash flow model, and testing the
completeness and accuracy of the underlying data supporting the significant
assumptions and estimates. For example, we agreed the contractual rents used in the
determination of the in-place and above/below market lease intangible assets and
liabilities to tenant leases and market information. We also involved our valuation
specialists to assist in the assessment of the methodology utilized by the Company,
performed procedures to corroborate the reasonableness of the significant assumptions
utilized in the developing the fair value estimates, and performed corroborative
calculations to assess the reasonableness of the acquired building asset. For example,
our valuation specialists (i) used independently identified data sources to evaluate the
appropriateness of management’s selected comparable land sales, (ii) calculated the
building value using the replacement cost approach and reconciled it to the recorded
value, and (iii) obtained market specific information for the revenue growth rates,
discount rates, market rental rates, and capitalization rates to corroborate the market
information utilized by the Company.
We have served as the Company’s auditor since 1997.
Los Angeles, California
February 22, 2021
/s/ Ernst & Young LLP
49
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (Item 15(a)(1) and Item 15(a)(2))
PS BUSINESS PARKS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
ASSETS
Cash and cash equivalents
Real estate facilities, at cost
Land
Buildings and improvements
Accumulated depreciation
Properties held for sale, net
Land and building held for development, net
Rent receivable
Deferred rent receivable
Other assets
Total assets
LIABILITIES AND EQUITY
Accrued and other liabilities
Total liabilities
Commitments and contingencies
Equity
PS Business Parks, Inc.’s shareholders’ equity
Preferred stock, $0.01 par value, 50,000,000 shares authorized,
37,790 shares issued and outstanding at ($944,750 aggregate
liquidation preference) December 31, 2020 and 2019
Common stock, $0.01 par value, 100,000,000 shares authorized,
27,488,547 and 27,440,953 shares issued and outstanding at
December 31, 2020 and 2019, respectively
Paid-in capital
Accumulated earnings (deficit)
Total PS Business Parks, Inc.’s shareholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
December 31,
2020
2019
$
69,083
$
62,786
874,680
2,247,389
3,122,069
(1,229,102)
1,892,967
—
43,014
1,935,981
1,519
36,788
14,334
2,057,705
82,065
82,065
$
$
844,419
2,203,308
3,047,727
(1,158,489)
1,889,238
15,264
28,110
1,932,612
1,392
32,993
16,660
2,046,443
84,632
84,632
944,750
944,750
274
738,022
73,631
1,756,677
218,963
1,975,640
2,057,705
$
274
736,986
63,666
1,745,676
216,135
1,961,811
2,046,443
$
$
$
See accompanying notes.
50
PS BUSINESS PARKS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
For The Years Ended December 31,
2019
2018
2020
Rental income
Expenses
Cost of operations
Depreciation and amortization
General and administrative
Total operating expenses
Interest and other income
Interest and other expense
Gain on sale of real estate facilities
Net income
Allocation to noncontrolling interests
Net income allocable to PS Business Parks, Inc.
Allocation to preferred shareholders based upon
Distributions
Redemptions (Note 9)
Allocation to restricted stock unit holders
Net income allocable to common shareholders
Net income per common share
Basic
Diluted
Weighted average common shares outstanding
Basic
Diluted
$
415,623
$
429,846
$
413,516
125,513
96,314
14,526
236,353
1,234
(1,072)
27,273
206,705
(33,158)
173,547
(48,186)
—
(716)
124,645
4.54
4.52
$
$
$
128,343
104,249
13,761
246,353
4,492
(657)
16,644
203,972
(29,006)
174,966
(54,346)
(11,007)
(910)
108,703
3.96
3.95
$
$
$
124,630
99,242
12,072
235,944
1,510
(665)
93,484
271,901
(45,199)
226,702
(51,880)
—
(1,923)
172,899
6.33
6.31
27,475
27,563
27,418
27,526
27,321
27,422
$
$
$
See accompanying notes.
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B
PS BUSINESS PARKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization expense
Straight-line rent and amortization of lease intangibles, net
Gain on sale of real estate facilities
Stock compensation expense
Amortization of financing costs
Other, net
Total adjustments
Net cash provided by operating activities
Cash flows from investing activities
Capital expenditures to real estate facilities
Capital expenditures to land and building held for development
Acquisition of real estate facilities
Proceeds from sale of real estate facilities
Consolidation of joint venture
Net cash used in investing activities
Cash flows from financing activities
Borrowings on credit facility
Repayment of borrowings on credit facility
Payment of financing costs
Proceeds from the exercise of stock options
Cash paid for taxes in lieu of shares upon vesting of restricted stock units
Redemption of preferred stock
Net proceeds from the issuance of preferred stock
Capital contribution to joint venture
Cash paid to restricted stock unit holders
Distributions paid to preferred shareholders
Distributions paid to common shareholders
Distributions paid to noncontrolling interests—common units
Distributions paid to noncontrolling interests—joint venture
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash, cash equivalents and restricted cash at the beginning of the period
Cash, cash equivalents and restricted cash at the end of the period
Supplemental disclosures
Interest paid
For The Years Ended December 31,
2018
2019
2020
$
206,705 $
203,972 $
271,901
96,314
(4,713)
(27,273)
5,648
548
(254)
70,270
276,975
(36,062)
(16,412)
(60,019)
40,674
—
(71,819)
104,249
(3,936)
(16,644)
4,956
544
(2,546)
86,623
290,595
(39,365)
(5,278)
(134,278)
144,599
—
(34,322)
—
—
(335)
258
(4,216)
—
—
493
(654)
(48,186)
(115,396)
(30,683)
(140)
(198,859)
6,297
63,874
70,171 $
70,000
(70,000)
(296)
969
(6,350)
(340,000)
316,038
—
(910)
(54,346)
(115,154)
(30,683)
(134)
(230,866)
25,407
38,467
63,874 $
99,242
(5,230)
(93,484)
4,174
537
(987)
4,252
276,153
(38,663)
(1,183)
(142,399)
145,097
1,082
(36,066)
50,000
(50,000)
(307)
3,010
(4,981)
(130,000)
—
—
(1,142)
(52,573)
(103,837)
(27,760)
—
(317,590)
(77,503)
115,970
38,467
— $
67 $
40
$
$
See accompanying notes.
53
PS BUSINESS PARKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Supplemental schedule of non-cash investing and financing activities
Adjustment to noncontrolling interests—common units in the OP
Noncontrolling interests—common units
Paid-in capital
Preferred redemption allocation
Paid-in capital
Accumulated earnings (deficit)
Accrued capital expenditures to land and building held for development
Land and building held for development, net
Accrued and other liabilities
Consolidation of joint venture
Land
Buildings and improvements
Other, net
Investment in and advances to unconsolidated joint venture
Noncontrolling interests—joint venture
For The Years Ended December 31,
2018
2019
2020
$
$
$
$
$
$
$
$
$
$
$
— $
— $
(145) $
145 $
— $
— $
11,007 $
(11,007) $
1,698 $
(1,698) $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
(5)
5
—
—
—
—
21,814
84,903
(1,787)
(100,898)
(4,032)
See accompanying notes.
54
PS BUSINESS PARKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020
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, 2020, PSB
owned 79.0% of the common partnership units of PS Business Parks, L.P. (the “OP”). The remaining common partnership
units are owned by Public Storage (“PS”). PS’s interest in the OP is referred to as the “PS OP Interests.” PSB, as the sole
general partner of the OP, has full, exclusive and complete responsibility and discretion in managing and controlling the
OP. PSB and its subsidiaries, including the OP and our consolidated joint ventures, are collectively referred to as the
“Company,” “we,” “us,” or “our.” PS also owns 7.2 million common shares and would own 41.6% (or 14.5 million shares)
of the outstanding shares of the Company’s common stock if it redeemed its common partnership units for common shares.
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 industrial, flex and office space. As of
December 31, 2020, the Company owned and operated 27.7 million rentable square feet of commercial space in six states
comprising 98 parks and 675 buildings. The Company also held a 95.0% interest in a joint venture entity which owns
Highgate at The Mile, a 395-unit multifamily apartment complex located in Tysons, Virginia, and a 98.2% interest in a joint
venture formed to develop Brentford at The Mile, a planned 411-unit multifamily apartment complex also located in Tysons,
Virginia. The Company manages for a fee approximately 0.4 million rentable square feet on behalf of PS.
References herein to the number of properties, parks, apartment units or square footage are unaudited and outside the
scope of the Company’s independent registered public accounting firm's audit of the Company’s consolidated 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 its subsidiaries, including the OP
and our consolidated joint venture. 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
We consider entities to be Variable Interest Entities (“VIEs”) when they have insufficient equity to finance their
activities without additional subordinated financial support provided by other parties, or the equity holders as a group do
not have a controlling financial interest. A limited partnership is also generally considered a VIE if the limited partners do
not participate in operating decisions. We consolidate VIEs when we are the primary beneficiary, generally defined as
having (i) the power to direct the activities most significantly impacting economic performance and (ii) either the obligation
to absorb losses or the right to receive benefits from the VIE.
We account for investments in entities that are not VIEs that we have significant influence over, but do not control,
using the equity method of accounting and for investment in entities that we control, we consolidate. We do not consider
the joint venture entity that owns Highgate at The Mile a VIE, but we consolidate the entity as the Company has control
over the joint venture. See Note 3 for more information relating to this joint venture arrangement.
We have a 98.2% interest in Brentford at The Mile, a planned 411-unit multifamily apartment complex (the “Brentford
Joint Venture”). An unrelated real estate development company (the “JV Partner”) holds the remaining 1.8% interest. Based
on management’s analysis of the joint venture and certain related agreements, we have concluded we have control over the
55
Brentford Joint Venture as we (a) are the managing member of Brentford Joint Venture, (b) have designated decision making
power to direct the activities that most significantly affect the economic performance of the joint venture, and (c) have a
98.2% economic interest in the investment. Thus, we determined the Brentford Joint Venture is a VIE, and that we are the
primary beneficiary. As such, we consolidate the Brentford Joint Venture, and the related land and development costs of
$15.1 million was included in land and building held for development, net on our consolidated balance sheets as of
December 31, 2020. The assets of the Brentford Joint Venture may only be used to settle obligations of the Brentford Joint
Venture and the creditors of the Brentford Joint Venture have no recourse to the general credit of the Company. See Note
4 for more information relating to this joint venture arrangement.
PS, the sole limited partner in the OP, has no power to direct the activities of the OP. PSB is the primary beneficiary
and has control over the OP as we have the exclusive responsibility under the Operating Partnership Agreement to manage
and conduct the business of the OP. Accordingly, we consider the OP a VIE and consolidate it. Substantially all of our
assets and liabilities are held by the OP.
Noncontrolling interests
Noncontrolling interests represent (i) PS’s noncontrolling interest in the OP through its ownership of 7,305,355 common
partnership units (ii) a third-party 5.0% interest in our consolidated joint venture that owns Highgate at The Mile and (iii) a
1.8% interest in our consolidated joint venture formed to develop Brentford at The Mile. See Note 7 for further information
on noncontrolling interests.
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.
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 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 balances due from various customers. Balances that the Company expects
to become uncollectible are 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.
56
The following table provides a reconciliation of cash, cash equivalents and restricted cash per the consolidated
statements of cash flow to the corresponding financial statement line items in the consolidated balance sheets as of
December 31, 2020, 2019, and 2018 (in thousands):
Consolidated balance sheets
Cash and cash equivalents
Restricted cash included in
Land and building held for development, net
Cash, cash equivalents and restricted cash
at the end of the period
2020
For The Years Ended December 31,
2019
2018
$
$
69,083
$
62,786
$
37,379
1,088
1,088
1,088
70,171
$
63,874
$
38,467
During 2017, in conjunction with seeking entitlements to develop our multifamily projects in Tysons, Virginia, we
contributed $1.1 million into an escrow account for the future development of an athletic field. This amount is reflected in
the table above as restricted cash included in land and building held for development, net.
Carrying values of the Company’s Credit Facility (as defined in Note 6) 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.
Real estate facilities
Real estate facilities are recorded at cost. Property taxes, insurance, interest and costs essential to the development of
property for its intended use are capitalized during the period of development. Direct 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 provide benefit for a period greater than two years 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, for leases with terms greater than one year are capitalized and depreciated over the corresponding lease term.
Property held for sale or development
Real estate is classified as held for sale when the asset is being marketed for sale and we expect that a sale is likely to
occur in the next 12 months. Real estate is classified as held for development when it is no longer used in its original form
and it will be developed to an alternate use. Property held for sale or development is not depreciated.
Intangible assets/liabilities
When we acquire real estate facilities, an intangible asset is recorded in other assets for leases where the in-place rent is
higher than market rents, and an intangible liability is recorded in other liabilities where the market rents are higher than
the in-place rents. The amounts recorded are based upon the present value (using a discount rate which reflects the risks
associated with the leases acquired) of such differences over the lease term and such amounts are amortized to rental income
over the respective remaining lease term. As of December 31, 2020, the value of above-market in-place rents resulted in net
intangible assets of $1.2 million, net of $11.1 million of accumulated amortization and the value of below-market in-place
rents resulted in net intangible liabilities of $2.2 million, net of $12.2 million of accumulated amortization. As of December
31, 2019, the value of above-market in-place rents resulted in net intangible assets of $1.2 million, net of $10.6 million of
accumulated amortization and the value of below-market in-place rents resulted in net intangible liabilities of $2.4 million,
net of $11.4 million of accumulated amortization.
Additionally, when we acquire real estate facilities, the value of in-place lease intangible (i.e., customer lease-up costs)
is recorded in other assets and is amortized to depreciation and amortization expense over the respective remaining lease
term. As of December 31, 2020, the value of acquired in-place lease intangible resulted in net intangible assets of $5.3
million, net of $7.2 million of accumulated amortization. As of December 31, 2019, the value of acquired in-place lease
intangible resulted in net intangible assets of $5.7 million, net of $4.1 million of accumulated amortization.
57
As of December 31, 2020, the value of our right-of-use (“ROU”) assets relating to our existing ground lease
arrangements, included in “other assets” on our consolidated balance sheets and the corresponding liability included under
“accrued and other liabilities,” was $1.5 million, net of $0.2 million of accumulated amortization. As of December 31, 2019,
the value of our ROU assets and related liability relating to our ground lease arrangements was $1.6 million, net of $0.1
million of accumulated amortization. These ground leases expire in 2029 and 2030 and do not have options to extend. As
of December 31, 2020, the remaining lease terms were 8.8 years and 9.1 years. Lease expense for these ground leases is
recognized in the period the applicable costs are incurred, and the monthly lease amount for these operating leases is constant
and without contractual increases throughout the remaining terms.
Evaluation of asset impairment
We evaluate our real estate and finite-lived intangible assets for impairment each quarter. If there are indicators of
impairment and we determine that the carrying value of the asset is not recoverable from estimated future undiscounted
cash flows to be received through the asset’s remaining life (or, if earlier, the expected disposal date), we record an
impairment charge to the extent the carrying amount exceeds the asset’s estimated fair value less costs to sell or expected
net proceeds from disposal.
No impairment charges were recorded in any period presented herein.
Asset impairment due to casualty loss
It is our policy to record losses due to physical damages during the accounting period in which they occur, while the
amount of monetary assets to be received from the insurance policy, if any, is recognized when receipt of insurance
recoveries is probable. Losses, which are reduced by the related probable insurance recoveries, are recorded as costs of
operations on the consolidated statements of income. Anticipated proceeds in excess of recognized losses would be
considered a gain contingency and recognized when the contingency related to the insurance claim has been resolved.
Anticipated recoveries for lost rental income due to property damages are also considered to be a gain contingency and
recognized when the contingency related to the insurance claim has been resolved.
No material casualty losses were incurred in any period presented herein.
Stock compensation
Share-based payments to employees, including grants of employee stock options, are recognized as stock compensation
expense in the Company’s consolidated statements of income based on their grant date fair values, except for performance-
based grants, which are accounted for based on their fair values at the beginning of the service period. See Note 10.
Accrued and other liabilities
Accrued and other liabilities consist primarily of rents prepaid by our customers, trade payables, property tax accruals,
accrued payroll and contingent loss accruals when probable and estimable, as well as the intangible liabilities discussed
above. We disclose the nature of significant losses not accrued that are reasonably possible of occurring and, if estimable,
a range of exposure. The fair value of accrued and other liabilities approximate book value due to the short period until
settlement.
Other assets
Other assets are comprised primarily of prepaid expenses, as well as the intangible assets discussed above.
Revenue recognition
We recognize the aggregate rent to be collected (including the impact of escalators and concessions) under leases ratably
throughout the non-cancellable lease term on a “straight-line” basis, commencing when the customer takes control of the
leased space. Cumulative straight-line rent recognized in excess of amounts billed per the lease term is presented as
“deferred rent receivable” on our consolidated balance sheets. The Company presents reimbursements from customers for
real estate taxes and other recoverable operating expenses under a single lease component presentation as the timing and
58
pattern of transfer of such reimbursements are the same as base rent, and the combined single component of such leases are
classified as operating leases. Accordingly, the Company recognizes such variable lease payments resulting from the
reimbursements from customers for real estate taxes and other recoverable operating expenses as rental income in the period
the applicable costs are incurred. Property management fees are recognized in the period earned as other income.
The Company monitors the collectability of its receivable balances, including deferred rent receivable balances, on an
ongoing basis. The Company writes off uncollectible customer receivable balances, including deferred rent receivable
balances, as a reduction to rental income in the period such balances are no longer probable of being collected. Therefore,
recognition of rental income is limited to the lesser of the amount of cash collected or rental income reflected on a “straight-
line” basis, plus any accruable variable lease payments for those customer receivable balances deemed uncollectible. The
Company wrote-off accounts receivable and deferred rent receivable of $1.6 million and $3.1 million, respectively, for the
year ended December 31, 2020.
The Company recognized revenue from our lease arrangements aggregating to $415.6 million, $429.8 million, and
$413.5 million for the years ended December 31, 2020, 2019, and 2018, respectively. This revenue consisted primarily of
rental income from operating leases and the related variable lease payments resulting from reimbursements of property
operating expenses. Base rental income was $319.2 million, $333.3 million, and $322.3 million for the years ended
December 31, 2020, 2019, and 2018, respectively, while variable lease payments were $96.4 million, $96.5 million, and
$91.2 million for the years ended December 31, 2020, 2019, and 2018, respectively.
In April 2020, the Financial Accounting Standards Board issued a Staff Question-and-Answer ("Lease Modification
Q&A") to respond to frequently asked questions about accounting for lease concessions related to the novel coronavirus
(“COVID-19”) pandemic. Under existing lease guidance, an entity would have to determine, on a lease by lease basis, if a
lease concession contained a lease modification which would be accounted for under the lease modification framework, or
if a lease concession was an enforceable right or obligation that existed in the original lease, which would be accounted for
outside the lease modification framework. The Lease Modification Q&A provides that, to the extent that cash flow after the
lease concessions are substantially the same, or less than, the cash flow previously required by the existing lease, an entity
is not required to evaluate each contract to determine whether a concession provided by a lessor to a lessee in response to
the COVID-19 pandemic is a lease modification. Instead, an entity can account for such lease concessions either (i) as if
they were part of the enforceable rights and obligations of the parties under the existing lease contract; or (ii) as a lease
modification. Based on the Lease Modification Q&A, an entity is not required to account for all lease concessions in
response to the COVID-19 pandemic under one elected option; however, the entity is required to apply the elected option
consistently to leases with similar characteristics and in similar circumstances.
In accordance with the Lease Modification Q&A, the Company has elected to account for lease concessions in response
to the COVID-19 pandemic as a lease modification as the cash flow after these lease concessions is substantially the same,
or less than, the cash flow previously required by the existing lease. The Company records rent deferrals and abatements in
deferred rent receivable in the accompanying consolidated balance sheets and will recognize these amounts over the
remainder of the respective lease terms. For lease concessions in response to the COVID-19 pandemic that modified the
terms and substantially changed the underlying cash flow of the existing lease for the remaining term, the Company accounts
for such concession as a lease modification.
As a result of the COVID-19 pandemic, for the year ended December 31, 2020 the Company entered into rent relief
agreements with 393 customers (representing 11.0% of total customers based on rental income). The Company agreed to
defer $5.7 million and abate $1.3 million of billed rental income during year ended December 31, 2020. As of February 19,
2021, of the $5.7 million of COVID-19 related rent deferrals, the Company collected $3.7 million, or 97.1%, of scheduled
repayments billed through February 1, 2021. The duration and severity of the effects of the COVID-19 pandemic on the
economy are uncertain and are likely to impact collectability of certain customers rent receivable balances in the future. The
Company has taken into account the current financial condition of its tenants, including consideration of COVID-19
impacts, in its estimation of its uncollectible accounts and deferred rents receivable at December 31, 2020. The Company
is closely monitoring the collectability of such rents and will adjust future estimations as appropriate as further information
becomes known.
59
Sales of real estate facilities
Sales of real estate facilities are not part of our ordinary activities, and as a result, we consider such sales as contracts
with non-customers. We recognize sales of real estate when we have collected payment and the attributes of ownership such
as possession and control of the asset have been transferred to the buyer. If a contract for sale includes obligations to provide
goods or services to the buyer, an allocated portion of the contract price is recognized as revenue as the related goods or
services are transferred to the buyer.
General and administrative expense
General and administrative expense includes executive and other compensation, corporate office expenses, professional
fees, and other such costs that are not directly related to the operation of our real estate facilities.
Income taxes
We have elected to be treated as a REIT, as defined in the Internal Revenue Code of 1986, as amended (the “Code”).
As a REIT, we do not incur U.S. federal corporate income tax if we distribute all of our “REIT taxable income” each year,
and if we meet certain organizational and operational requirements. We believe we have met these REIT requirements for
all periods presented herein. Accordingly, we have recorded no U.S. federal corporate income tax expense related to our
“REIT taxable income.”
We recognize tax benefits of uncertain income tax positions that are subject to audit only if we believe it is more likely
than not that the position would ultimately be sustained assuming the relevant taxing authorities had full knowledge of the
relevant facts and circumstances of our positions. As of December 31, 2020 and 2019, we did not recognize any tax benefit
for uncertain tax positions.
Accounting for preferred equity issuance costs
We record preferred equity issuance costs as a reduction to paid-in capital on our consolidated balance sheets at the time
the preferred securities are issued and reflect the carrying value of the preferred equity at its redemption value. An additional
allocation of income is made from the common shareholders to the preferred shareholders in the amount of the original
issuance costs, and we reclassify the redemption value from equity to liabilities, when we call preferred shares for
redemption, with such liabilities relieved once the preferred shares are redeemed.
Net income per common share
Notwithstanding the presentation of income allocations on our consolidated statements of income, net income is
allocated to (a) preferred shareholders, for distributions paid or payable, (b) preferred shareholders, to the extent redemption
value exceeds the related carrying value (a “Preferred Redemption Allocation”), (c) our joint venture partner in proportion
to their percentage interest in the joint ventures, to the extent the consolidated joint ventures produce net income or loss
during the period and (d) restricted stock unit (“RSU”) holders, for non-forfeitable dividends paid adjusted for participation
rights in undistributed earnings. The remaining net income is allocated to the common partnership units and our common
shareholders, respectively, based upon the pro-rata aggregate number of units and shares outstanding.
Basic and diluted net income per common share are each calculated based upon net income allocable to common
shareholders, divided by (i) in the case of basic net income per common share, weighted average common shares and (ii) in
the case of diluted income per share, weighted average common shares adjusted for the impact of stock compensation
awards outstanding (Note 10) using the treasury stock method.
The following table sets forth the components of our basic and diluted net income per share that are not reflected on the
face of our consolidated statements of income, including the allocation of income to common shareholders and common
partnership units, the percentage of weighted average shares and common partnership units, as well as basic and diluted
weighted average shares for the years ended December 31, (in thousands):
60
Calculation of net income allocable to common shareholders
Net income
Net (income) loss allocated to
Preferred shareholders based upon distributions
Preferred shareholders based upon redemptions
Noncontrolling interests—joint venture
Restricted stock unit holders
Net income allocable to common shareholders
and noncontrolling interests—common units
Net income allocation to noncontrolling interests—
common units
Net income allocable to common shareholders
2020
2019
2018
$
206,705
$
203,972
$
271,901
(48,186)
—
(17)
(716)
(54,346)
(11,007)
(44)
(910)
(51,880)
—
1,030
(1,923)
157,786
137,665
219,128
(33,141)
124,645
$
(28,962)
108,703
$
(46,229)
172,899
$
Calculation of common partnership units as a percentage of common share equivalents
Weighted average common shares outstanding
Weighted average common partnership units outstanding
Total common share equivalents
Common partnership units as a percentage of common
share equivalents
Weighted average common shares outstanding
Basic weighted average common shares outstanding
Net effect of dilutive stock compensation—based on
treasury stock method using average market price
Diluted weighted average common shares outstanding
Segment reporting
27,475
7,305
34,780
27,418
7,305
34,723
21.0%
21.0%
27,321
7,305
34,626
21.1%
27,475
27,418
27,321
88
27,563
108
27,526
101
27,422
The Company has two operating segments: (i) the acquisition, development, ownership and management of commercial
real estate and (ii) the acquisition, development, ownership and management of multifamily real estate, but has only one
reportable segment as the multifamily segment does not meet the quantitative thresholds necessary to require reporting as a
separate segment.
Reclassifications
Certain reclassifications have been made to the consolidated financial statements for 2019 in order to conform to the
2020 presentation, including reclassifying assets sold during 2020 from “real estate facilities, at cost” totaling $3.8 million
as of December 31, 2019 into “properties held for sale, net” on our consolidated balance sheets. Additionally, we combined
all non-cash rental income items into straight-line rent and amortization of lease intangibles, net within the operating
activities section of our consolidated statements of cash flows for all periods presented herein.
61
3. Real estate facilities
Activity related to our real estate facilities for the years ended December 31, 2020, 2019, and 2018 is as follows (in
thousands):
$
Buildings and Accumulated
Improvements Depreciation
(1,012,798)
$
—
—
—
17,345
(96,732)
6,252
(1,085,933)
Balances at December 31, 2017
Acquisition of real estate facilities
Consolidation of joint venture
Capital expenditures
Disposals (1)
Depreciation and amortization expense
Transfer to properties held for sale
Balances at December 31, 2018
Acquisition of real estate facilities
Capital expenditures
Disposals (1)
Depreciation and amortization expense
Transfer to properties held for sale
Balances at December 31, 2019 (2)
Acquisition of real estate facilities
Capital expenditures
Disposals (1)
Depreciation and amortization expense
Transfer to properties held for sale
Balances at December 31, 2020
____________________________
Land
708,706
25,806
21,814
—
—
—
—
756,326
88,093
—
—
—
—
844,419
30,261
—
—
—
—
874,680
$
$
$
1,921,379
112,230
84,903
38,904
(17,345)
—
(4,208)
2,135,863
44,313
40,092
(15,796)
—
(1,164)
2,203,308
27,168
36,328
(19,399)
—
(16)
2,247,389
—
—
15,796
(93,416)
5,064
(1,158,489)
—
—
19,399
(90,058)
46
(1,229,102)
$
Total
1,617,287
138,036
106,717
38,904
—
(96,732)
2,044
1,806,256
132,406
40,092
—
(93,416)
3,900
1,889,238
57,429
36,328
—
(90,058)
30
1,892,967
$
$
(1) Disposals primarily represent the book value of tenant improvements that have been removed upon the customer vacating their
space.
(2) Land, building and improvements, and accumulated depreciation, respectively, totaling $2.2 million, $2.8 million, and $1.2 million
were reclassified as of December 31, 2019 to “properties held for sale, net” representing two industrial buildings totaling 40,000
square feet located in Redmond, Washington, which were subject to an eminent domain process and sold in 2020.
We have a 95.0% interest in a joint venture that owns Highgate at The Mile, a 395-unit multifamily apartment complex
on a five-acre parcel within The Mile. The remaining 5.0% interest in the joint venture is held by the JV Partner. We
consolidate the joint venture that owns Highgate at The Mile and as such, the consolidated real estate assets and activities
related to this joint venture are included in the table above.
The unaudited December 31, 2020 net federal tax basis of real estate facilities was approximately $1.7 billion.
As of December 31, 2020, we have commitments, pursuant to executed leases throughout our portfolio, to spend $9.1
million on transaction costs, which include tenant improvements and lease commissions.
The purchase price of acquired properties is allocated to land, buildings and improvements (including tenant
improvements, unamortized lease commissions, acquired in-place lease intangible and customer relationships, if any), and
intangible assets and intangible liabilities (see Note 2), based upon the relative fair value of each component, which are
evaluated independently.
The Company must make significant assumptions in determining the fair value of assets acquired and liabilities assumed,
which can affect the recognition and timing of revenue and depreciation and amortization expense. The fair value of land
is estimated based upon, among other considerations, comparable sales of land within the same region. The fair value of
buildings and improvements is determined using a combination of the income and replacement cost approaches which both
utilize available market information relevant to the acquired property. The fair value of other acquired assets including
tenant improvements and unamortized lease commissions are determined using the replacement cost approach. The amount
recorded to acquired in-place lease intangible is also determined utilizing the income approach using market assumptions
62
which are based on management’s assessment of current market conditions and the estimated lease-up periods for the
respective spaces. Transaction costs related to asset acquisitions are capitalized.
On October 28, 2020, we acquired a multi-tenant industrial park comprising approximately 246,000 rentable square feet
in Alexandria, Virginia, for a total purchase price of $46.6 million, inclusive of capitalized transaction costs.
On January 10, 2020, we acquired a multi-tenant industrial park comprising approximately 73,000 rentable square feet
in La Mirada, California, for a total purchase price of $13.5 million, inclusive of capitalized transaction costs.
On December 20, 2019, we acquired a multi-tenant flex park comprising approximately 79,000 rentable square feet in
Santa Clara, California, for a total purchase price of $16.8 million, inclusive of capitalized transaction costs.
On September 5, 2019, we acquired a multi-tenant industrial park comprising approximately 543,000 rentable square
feet in Santa Fe Springs, California, for a total purchase price of $104.3 million, inclusive of capitalized transaction costs.
On April 18, 2019, we acquired a multi-tenant industrial park comprising approximately 74,000 rentable square feet in
Signal Hill, California, for a total purchase price of $13.8 million, inclusive of capitalized transaction costs.
On June 8, 2018, we acquired two multi-tenant industrial parks aggregating 1.1 million rentable square feet in
Springfield, Virginia, for a purchase price of $143.8 million, inclusive of capitalized transaction costs.
The following table summarizes assets acquired and liabilities assumed for the years ended December 31, (in
thousands):
Land
Buildings and improvements
Other assets (above-market in-place rents)
Accrued and other liabilities (below-market in-place rents)
Other assets (in-place lease intangible)
Total purchase price
Net operating assets acquired and liabilities assumed
Total cash paid
2020
2019
2018
30,261
27,168
523
(557)
2,700
60,095
(76)
60,019
$
$
88,093
44,313
—
(1,241)
3,777
134,942
(664)
134,278
$
$
25,806
112,230
1,487
(1,790)
6,033
143,766
(1,367)
142,399
$
$
The following table summarizes the assets acquired and liabilities assumed related to the consolidation of the joint
venture, which was accounted for as an asset acquisition, as of January 1, 2018 (in thousands):
Land
Buildings and improvements
Other assets (in-place lease intangible)
Total consolidated joint venture
Noncontrolling interest in consolidated joint venture
Net book value of joint venture at consolidation
$
$
21,814
84,903
1,199
107,916
(4,032)
103,884
During 2020, we developed an 83,000 square foot shallow-bay industrial building at our Freeport Business Park in
Irving, Texas. As of December 31, 2020, $7.8 million had been incurred and was reflected under land and building held for
development, net on our consolidated balance sheets. An additional $0.3 million was incurred subsequent to December 31,
2020 and construction was completed in January 2021.
Properties Sold
On September 16, 2020, the Company sold two industrial buildings totaling 40,000 square feet located in Redmond,
Washington, which were subject to an eminent domain process for net proceeds of $11.4 million, which resulted in a gain
on sale of $7.7 million. On January 7, 2020, we sold an 113,000 square foot office building located at Metro Park North in
Rockville, Maryland, for net sale proceeds of $29.3 million, which resulted in a gain on sale of $19.6 million. These
properties were classified as held for sale, net, in the consolidated balance sheet as of December 31, 2019.
63
On October 8, 2019, the Company sold 1.3 million rentable square feet of flex and office business parks located in
Rockville and Silver Spring, Maryland, for net sale proceeds of $144.6 million, which resulted in a gain on sale of $16.6
million. We determined that these sales did not meet the criteria for discontinued operations presentation, as the sales of
such assets did not represent a strategic shift that will have a major effect on our operations and financial results.
On March 5, 2018, we sold Corporate Pointe Business Park, a park consisting of five multi-tenant office buildings
totaling 161,000 square feet located in Orange County, California, for net sale proceeds of $41.7 million, which resulted in
a gain on sale of $26.8 million. On April 18, 2018, we sold Orange County Business Center, a park consisting of five multi-
tenant office buildings totaling 437,000 square feet located in Orange County, California, for net sale proceeds of $73.3
million, which resulted in a gain on sale of $50.6 million. On April 30, 2018, we sold Northgate Business Park, a park
consisting of seven multi-tenant flex buildings totaling 194,000 square feet located in Dallas, Texas, for net sale proceeds
of $11.8 million, which resulted in a gain on sale of $7.9 million. On October 31, 2018, we sold Orangewood Office Park,
a park consisting of two multi-tenant office buildings totaling 107,000 square feet located in Orange County, California, for
net sale proceeds of $18.3 million, which resulted in a gain on sale of $8.2 million. We determined that these sales also did
not meet the criteria for discontinued operations presentation, as the sales of such assets did not represent a strategic shift
that will have a major effect on our operations and financial results.
4. Multifamily developmental activity
In August 2020, the Company entered into the Brentford Joint Venture with the JV Partner for the purpose of developing
Brentford at The Mile, a planned 411-unit multifamily apartment complex. Under the Brentford Joint Venture agreement,
the Company has a 98.2% controlling interest and is the managing member with the JV Partner holding the remaining 1.8%
limited partnership interest. We contributed the Brentford Parcel to the Brentford Joint Venture at a value of $18.5 million,
for which we received equity contribution credit in the Brentford Joint Venture. Our cost basis in the Brentford Parcel was
$5.5 million as of December 31, 2020.
Construction of Brentford at The Mile commenced in August 2020 and is anticipated to be completed over a period of
24 to 36 months. As of December 31, 2020, the development cost incurred was $9.6 million, which is reflected in land and
building held for development, net on our consolidated balance sheets along with our $5.5 million cost basis in the Brentford
Parcel. During the year ended December 31, 2020, the Company also recorded non-capitalizable demolition costs of $0.3
million in interest and other expense on our consolidated statements of income.
5. Leasing activity
The Company leases space in its commercial real estate facilities to customers primarily under non-cancelable leases
generally ranging from one to 10 years. Future minimum rental income, excluding recovery of operating expenses that may
be collectable under these leases, as of December 31, 2020 is as follows (in thousands):
2021
2022
2023
2024
2025
Thereafter
Total
$
$
295,415
224,442
160,352
109,475
65,356
120,165
975,205
In addition to minimum rental payments, certain customers reimburse the Company for their pro rata share of specified
property operating expenses. Such reimbursements amounted to $96.4 million, $96.5 million, and $91.2 million for the
years ended December 31, 2020, 2019, and 2018, respectively. These variable lease payment amounts are included as rental
income in the accompanying consolidated statements of income.
Leases accounting for 2.9% of total leased square footage are subject to termination options, of which 1.8% have
termination options exercisable through December 31, 2021 (unaudited). In general, these leases provide for termination
payments to us should the termination options be exercised. Certain leases also have an option to extend the term of the
lease. The future minimum rental income in the above table assumes termination options and lease extension options are
not exercised.
64
6. Bank loans
We have an unsecured revolving line of credit (the “Credit Facility”) with Wells Fargo Bank, National Association
(“Wells Fargo”). The Credit Facility has a borrowing limit of $250.0 million and expires January 10, 2022. The rate of
interest charged on borrowings is based on 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%. 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%). We had zero balance outstanding on our Credit Facility at December 31, 2020 and 2019. The Company
had $0.2 million and $0.5 million of total unamortized loan origination costs as of December 31, 2020 and 2019,
respectively, which is included in other assets in the accompanying consolidated balance sheets. The Credit Facility requires
us to meet certain covenants, all of which we were in compliance with at December 31, 2020. Interest on outstanding
borrowings is payable monthly.
7. Noncontrolling interests
Noncontrolling interests represent (i) PS’s noncontrolling interest in the OP through its ownership of 7,305,355 common
partnership units, totaling $215.7 million and $213.2 million at December 31, 2020 and 2019, respectively, and (ii) the JV
Partner’s interests in our consolidated joint ventures, totaling $3.3 million and $2.9 million at December 31, 2020 and 2019,
respectively.
PS OP Interests
Each common partnership unit receives a cash distribution equal to the dividend paid on our common shares and is
redeemable at PS’s option.
If PS exercises its right of redemption, at PSB’s option (a) PS will receive one common share from us for each common
partnership unit redeemed, or (b) PS will receive cash from us for each common partnership unit redeemed generally equal
to the market value of a common share (as defined in the Operating Partnership Agreement). We can prevent redemptions
that we believe would violate either our articles of incorporation or securities laws, cause PSB to no longer qualify as a
REIT, or could result in the OP no longer being treated as a partnership for U.S. federal tax purposes.
In allocating net income and presenting equity, we treat the common partnership units as if converted to common shares.
Accordingly, they received the same net income allocation per unit as a common share totaling $33.1 million, $29.0 million,
and $46.2 million for the years ended December 31, 2020, 2019, and 2018, respectively.
JV Partner
As a result of consolidating the Brentford Joint Venture, the Company recorded noncontrolling interests of $0.5 million
related to the JV Partner’s 1.8% interest during the year ended December 31, 2020.
In conjunction with consolidating the joint venture owning Highgate at The Mile, we recorded noncontrolling interest
of $4.0 million related to the JV Partner’s 5.0% interest on January 1, 2018.
8. Related party transactions
We manage certain industrial, office and retail facilities in the United States for PS under either the “Public Storage” or
“PS Business Parks” names (the “PS Management Agreement”). Under PS’s supervision, we coordinate and assist in rental
and marketing activities, property maintenance and other operational activities, including the selection of vendors, suppliers,
employees and independent contractors. We receive a management fee based upon a percentage of revenues, which is
included in interest and other income on our consolidated statements of income. Management fee revenues were $0.3
million, $0.3 million, and $0.4 million for the years ended December 31, 2020, 2019, and 2018, respectively. We allocate
certain operating expenses to PS related to the management of these properties, including payroll and other business
expenses, totaling $0.4 million, $0.4 million, and $0.5 million for the years ended December 31, 2020, 2019, and 2018,
respectively.
65
The PS Business Parks name and logo are owned by PS and licensed to us under a non-exclusive, royalty-free license
agreement. The license can be terminated by either party for any reason with six months written notice.
PS provides us property management services for the self-storage component of two assets we own and operates them
under the “Public Storage” name. Either the Company or PS can cancel the property management contract upon 60 days’
notice. Under our supervision, PS coordinates and assists in rental and marketing activities, and property maintenance and
other operational activities, including the selection of vendors, suppliers, employees and independent contractors.
Management fee expenses were $0.1 million for each of the years ended December 31, 2020, 2019, and 2018, respectively.
Additionally, PS allocated certain operating expenses to us related to the management of these properties totaling $0.1
million for each of the three years ended December 31, 2020, 2019, and 2018, respectively. These amounts are included
under cost of operations on our consolidated statements of income.
Pursuant to a cost sharing agreement, we share certain administrative services, corporate office space, and certain other
third party costs with PS which are allocated based upon fair and reasonable estimates of the cost of the services expected
to be provided. We reimbursed PS $1.2 million for costs PS incurred on our behalf for each of the years ended December
31, 2020, 2019, and 2018. PS reimbursed us less than $0.1 million for costs we incurred on their behalf for each of the years
ended December 31, 2020, 2019, and 2018, respectively.
The Company had net amounts due to PS of less than $0.1 million and $0.1 million at December 31, 2020 and 2019,
respectively, for these contracts.
9. Shareholders’ equity
Preferred stock
As of December 31, 2020 and 2019, the Company had the following series of preferred stock outstanding:
Series
Series W
Series X
Series Y
Series Z
Total
Issuance Date
October 2016
September 2017
December 2017
November 2019
Earliest Potential
Redemption Date
October 2021
September 2022
December 2022
November 2024
Dividend
Rate
Shares
Outstanding
Amount
(in thousands)
5.200%
5.250%
5.200%
4.875%
7,590
9,200
8,000
13,000
37,790
$
$
189,750
230,000
200,000
325,000
944,750
On December 30, 2019, the Company completed the redemption of its 5.75% Cumulative Preferred Stock, Series U, at
par of $230.0 million as well as its 5.70% Cumulative Preferred Stock, Series V, at par of $110.0 million. The Company
recorded a Preferred Redemption Allocation of $11.0 million for the year ended December 31, 2019.
On November 4, 2019, we issued $325.0 million or 13,000,000 depositary shares representing interests in our 4.875%
Cumulative Preferred Stock, Series Z, at $25.00 per depositary share. The 4.875% Series Z Cumulative Redeemable
Preferred Units are non-callable for five years and have no mandatory redemption. We received $316.0 million in net
issuance proceeds.
On January 3, 2018, we completed the redemption of our remaining 6.00% Cumulative Preferred Stock, Series T, at par
of $130.0 million. We recorded a Preferred Redemption Allocation of $4.1 million in the year ended December 31, 2017
and reclassified the shares from equity to “preferred stock called for redemption” on our consolidated balance sheets at
December 31, 2017.
We paid $48.2 million, $54.3 million, and $52.6 million in distributions to our preferred shareholders for the years ended
December 31, 2020, 2019, and 2018, respectively.
The holders of our preferred stock have general preference rights with respect to liquidation, quarterly distributions and
any accumulated unpaid distributions. Holders of our 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 our preferred
66
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, 2020, there were no dividends in arrears.
Except under certain conditions relating to the Company’s qualification as a REIT, our preferred stock is not redeemable
prior to the redemption dates noted above. 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.
Common stock and units
We paid $115.4 million ($4.20 per common share), $115.2 million ($4.20 per common share), and $103.8 million ($3.80
per common share) in distributions to our common shareholders for the years ended December 31, 2020, 2019, and 2018,
respectively. We paid $30.7 million ($4.20 per common unit), $30.7 million ($4.20 per common unit), and $27.8 million
($3.80 per common unit) in distributions to our common unit holders for the years ended December 31, 2020, 2019, and
2018, respectively.
The portion of the distributions classified as ordinary income was 100.0%, 100.0%, and 99.3% for the years ended
December 31, 2020, 2019, and 2018, respectively. The portion of the distributions classified as long-term capital gain
income was 0.0%, 0.0% and 0.7% for the years ended December 31, 2020, 2019, and 2018, respectively. The percentages
in the two preceding sentences are unaudited.
During the three months ended June 30, 2018, the Board increased our quarterly dividend from $0.85 per common share
to $1.05 per common share.
Equity 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. As of December 31, 2020 and 2019, no equity stock had been issued.
10. Stock compensation
Under various share-based compensation plans, PSB grants non-qualified options to purchase the Company’s common
shares at a price not less than fair value on the date of grant, as well as RSUs, to certain directors, officers and key employees.
The service period for stock options and RSUs begins when (i) the Company and the recipient reach a mutual
understanding of the key terms of the award, (ii) the award has been authorized, (iii) the recipient is affected by changes in
the market price of our stock and (iv) it is probable that any performance conditions will be met, and ends when the stock
options or RSUs vest.
We amortize the fair value of awards starting at the beginning of the service period as compensation expense. For awards
that are earned solely upon the passage of time and continued service, the entire cost of the award is amortized on a straight-
line basis over the service period. For awards with performance conditions, the individual cost of each vesting is amortized
separately over each individual service period (the “accelerated attribution” method).
We account for forfeitures of share-based payments as they occur by reversing previously amortized share-based
compensation expense with respect to grants that are forfeited in the period the employee terminates employment.
In August 2020, the Company announced that Maria Hawthorne was retiring from her role as President and CEO
effective September 1, 2020 and would continue to serve as a director of the Company. Due to Ms. Hawthorne’s continued
service as a director of the Company, her unvested stock option and restricted stock units will continue to vest on their
original vesting schedule in accordance with the Company’s 2012 Equity and Performance-Based Incentive Compensation
Plan and related award agreements. For financial reporting purposes, the end of the service periods for these stock option
and restricted stock unit grants have changed from the various respective vesting dates to September 1, 2020, the date of
her retirement as President and CEO. Accordingly, all remaining stock compensation expense for Ms. Hawthorne, which
67
totaled $1.7 million, was amortized and included in general and administrative expense during the year ended December
31, 2020.
Stock Options
Stock options expire 10 years after the grant date and the exercise price is equal to the closing trading price of our
common shares on the grant date. Stock option holders cannot require the Company to settle their award in cash. We use
the Black-Scholes option valuation model to estimate the fair value of our stock options on the date of grant.
Stock option expense for the year ( in 000's)
$
Aggregate exercise date intrinsic value of options exercised during the year (in 000's) $
412
305
$
$
299
1,567
$
$
236
2,752
2020
2019
2018
Average assumptions used in valuing options with the Black-Scholes method:
Expected life of options in years, based upon historical experience
Risk-free interest rate
Expected volatility, based upon historical volatility
Expected dividend yield
5
0.4%
22.3%
3.3%
5
2.0%
22.2%
2.6%
5
2.8%
20.8%
2.9%
Average estimated value of options granted during the year
$
15.27
$
26.85
$
18.11
As of December 31, 2020, there was $1.0 million of unamortized compensation expense related to stock options
expected to be recognized over a weighted average period of 3.4 years.
Cash received from 4,136 stock options exercised during the year ended December 31, 2020 was $0.3 million. Cash
received from 15,585 stock options exercised during the year ended December 31, 2019 was $1.0 million. Cash received
from 44,994 stock options exercised during the year ended December 31, 2018 was $3.0 million.
Information with respect to stock options during 2020, 2019, and 2018 is as follows:
Options:
Outstanding at December 31, 2017
Granted
Exercised
Forfeited
Outstanding at December 31, 2018
Granted
Exercised
Forfeited
Outstanding at December 31, 2019
Granted
Exercised
Forfeited
Outstanding at December 31, 2020
Exercisable at December 31, 2020
RSUs
Number of
Options
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contract Life
Aggregate
Intrinsic
Value
(in thousands)
172,409
16,000
(44,994)
—
143,415
34,000
(15,585)
(4,000)
157,830
18,000
(4,136)
—
171,694
105,094
$
$
$
$
$
$
$
$
$
$
$
$
$
$
78.63
115.45
66.88
—
86.42
163.95
62.15
110.04
104.92
127.22
62.29
—
108.29
89.74
4.49 Years
3.85 Years
$
$
5,278
4,744
RSUs granted prior to 2016 are subject to a six-year vesting, with 20% vesting after year two, and 20% vesting after
each of the next four years. RSUs granted during and subsequent to 2016 are subject to a five-year vesting at the rate of
20% per year. Grantees receive dividends for each outstanding RSU equal to the per share dividend received by common
shareholders. We expense any dividends previously paid upon forfeiture of the related RSU. Upon vesting, the grantee
receives common shares equal to the number of vested RSUs, less common shares withheld in exchange for tax withholdings
68
made by the Company to satisfy the grantee’s statutory tax liabilities arising from the vesting. The fair value of our RSUs
is determined based upon the applicable closing trading price of our common shares on the date of grant.
In March 2020, the Compensation Committee of the Board approved an annual performance-based equity incentive
program (“Annual Equity Incentive Program”) under the Company’s 2012 Equity and Performance-Based Incentive
Compensation Plan. Under the program, certain employees will be eligible on an annual basis to receive RSUs based on the
Company’s achievement of pre-established targets for (i) growth in net asset value per share, and (ii) shareholder value
creation, each as computed pursuant to the terms of the Annual Equity Incentive Program. In the event the pre-established
targets are achieved, eligible employees will receive the target award, except that the Compensation Committee of the Board
may adjust the actual award to 75%-125% of the target award based on the their assessment of whether certain strategic and
operational goals were accomplished in the performance period.
During the year ended December 31, 2020, management determined that it was not probable that the targets under the
Annual Equity Incentive Program for the 2020 performance year would be met, largely due to the negative impact of the
COVID-19 pandemic, and, as such, the Company did not record stock compensation expense related to the Annual Equity
Incentive Program.
During the three months and year ended December 31, 2020, the Company granted a total of 18,286 RSUs to our
Regional and Divisional Vice Presidents. Furthermore, during the same periods, the Company also granted a one-time
special equity grant of 20,000 RSUs to our Interim President and Chief Executive Officer and Chief Operating Officer.
Information with respect to RSUs during 2020, 2019, and 2018 is as follows (dollar amounts in thousands):
Restricted Stock Units:
Nonvested at December 31, 2017
Granted
Vested
Forfeited
Nonvested at December 31, 2018
Granted
Vested
Forfeited
Nonvested at December 31, 2019
Granted
Vested
Forfeited
Nonvested at December 31, 2020
Number of
RSUs
Weighted
Average Grant
Date Fair Value
165,083
194,450
(106,103)
(10,140)
243,290
6,400
(95,500)
(3,342)
150,848
46,036
(73,256)
(2,120)
121,508
$
$
$
15,116
18,431
(9,256)
(905)
23,386
1,137
(8,753)
(345)
15,425
5,562
(6,991)
(290)
13,706
As of December 31, 2020, there was $7.8 million of unamortized compensation expense related to RSUs expected to be
recognized over a weighted average period of 3.4 years.
(In thousands, except number of shares)
Restricted share unit expense
Common shares issued upon vesting
Fair value of vested shares on vesting date
Cash paid for taxes in lieu of shares upon vesting of RSUs
2020
2019
2018
$
$
$
4,475 $
43,458
10,350
4,216
$
$
3,196 $
55,267
15,078
6,350
$
$
3,727
62,500
12,127
4,981
In July 2019, the Company amended the Retirement Plan for Non-Employee Directors (the “Director Retirement Plan”),
to increase the maximum shares issued upon retirement as a director from 8,000 shares to 10,000 shares of common stock.
The Company recognizes compensation expense with regard to grants to be issued in the future under the Director
Retirement Plan over the requisite service period. The Company recorded compensation expense related to these shares of
$0.8 million, $1.5 million, and $0.2 million for the years ended December 31, 2020, 2019, and 2018, respectively.
69
In April 2019, we issued 8,000 shares to a director upon retirement with an aggregate fair value of $1.2 million. No
director retirement shares were issued during the years ended December 31, 2020 and 2018.
11. Commitments and contingencies
The Company currently is neither subject to any material litigation nor, to management’s knowledge, is any material
litigation currently threatened against the Company other than routine litigation and administrative proceedings arising in
the ordinary course of business.
12. Subsequent Events
Other than as disclosed elsewhere, no subsequent events have occurred that would require recognition in the
consolidated financial statements or disclosure in the accompanying notes.
70
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10.1
10.2
PS BUSINESS PARKS, INC.
EXHIBIT INDEX
(Items 15(a)(3) and 15(b))
Restated Articles of Incorporation. Filed as exhibit 3.1 to the Registrant’s Registration
Statement on Form S- 3 (SEC File No. 333-78627) and incorporated herein by reference.
Amended and Restated Bylaws. Filed with Registrant’s Current Report on Form 8-K dated
August 4, 2020 (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 11, 2016 (SEC File No. 001-10709) and incorporated herein by reference.
Certificate of Determination of Preferences of 5.25% Series X Cumulative Redeemable
Preferred Stock of PS Business Parks, Inc. Filed with Registrant’s Current Report on Form
8- K dated September 12, 2017 (SEC File No. 001-10709) and incorporated herein by
reference.
Certificate of Determination of Preferences of 5.20% Series Y Cumulative Redeemable
Preferred Stock of PS Business Parks, Inc. Filed with Registrant’s Current Report on Form
8- K dated November 30, 2017 (SEC File No. 001-10709) and incorporated herein by
reference.
Certificate of Determination of Preferences of 4.875% Series Z Cumulative Redeemable
Preferred Stock of PS Business Parks, Inc. Filed with Registrant’s Current Report on Form
8- K dated October 24, 2019 (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.
Deposit Agreement Relating to 5.25% Cumulative Preferred Stock, Series X of PS Business
Parks, Inc. dated as of September 12, 2017. Filed with Registrant’s Current Report on Form
8-K dated September 12, 2017 (SEC File No. 001-10709) and incorporated herein by
reference.
Deposit Agreement Relating to 5.20% Cumulative Preferred Stock, Series Y of PS Business
Parks, Inc. dated as of November 30, 2017. Filed with Registrant’s Current Report on Form
8-K dated November 30, 2017 (SEC File No. 001-10709) and incorporated herein by
reference.
Deposit Agreement Relating to 4.875% Cumulative Preferred Stock, Series Z of PS Business
Parks, Inc. dated as of October 24, 2019. Filed with Registrant’s Current Report on Form 8-K
dated October 25, 2019 (SEC File No. 001-10709) and incorporated herein by reference.
Description of Registrant’s Securities Registered Pursuant to Section 12 of the Securities
Exchange Act of 1934. Filed with Registrant’s Annual Report on Form 10-K for the year
ended December 31, 2019 (SEC File No. 001- 10709) and incorporated herein by reference.
Amended Management Agreement between Storage Equities, Inc. and Public Storage
Commercial Properties Group, Inc. dated as of February 21, 1995. Filed as exhibit 10.8 to
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 as exhibit 10.1 to the
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.
74
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
*
*
Form of Indemnity Agreement. Filed as exhibit 10.1 to the 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 as exhibit 10.2 to the 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 as exhibit 10.3
to the 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 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.
Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. relating to 5.25%
Series X Cumulative Preferred Units, dated as of September 21, 2017. Filed with Registrant’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 (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 Y Cumulative Preferred Units, dated as of December 7, 2017. Filed with Registrant’s
Annual Report on Form 10-K for the year ended December 31, 2017 (SEC File
No. 001- 10709) and incorporated herein by reference.
Amendment to Agreement of Limited Partnership of PS Business Parks, L.P. relating to
4.875% Series Z Cumulative Preferred Units, dated as of November 4, 2019. Filed with
Registrant’s Annual Report on Form 10-K for the year ended December 31, 2019 (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.
Third Amended and Restated Repayment Guaranty dated as of January 10, 2017. Filed with
Registrant’s Current Report on Form 8-K dated January 10, 2017 (SEC File No. 001-10709)
and incorporated herein by reference.
Amendment to Amended Agreement of Limited Partnership of PS Business Parks, L.P. to
Authorize Special Allocations, dated as of January 1, 2017. Filed with Registrant’s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2018 (SEC File No. 001-10709) and
incorporated herein by reference.
10.14
10.15
*
*
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.
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.
75
10.16
*
10.17
*
10.18
*
10.19
*
10.20
*
10.21
*
21
23
31.1
31.2
32.1
†
†
†
†
†
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.
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.
Amended and Restated Retirement Plan For Non-Employee Directors, as amended. Filed with
Registrant’s Annual Report on Form 10-K for the year ended December 31, 2019 (SEC File
No. 001- 10709) and incorporated herein by reference.
Form of PS Business Parks, Inc. 2012 Equity and Performance-Based Incentive Compensation
Plan Restricted Stock Unit Agreement. Filed with Registrant’s Quarterly Report on Form 10-
Q for the quarter ended September 30, 2020 (SEC File No. 001-10709) and incorporated
herein by reference.
Form of PS Business Parks, Inc. 2012 Equity and Performance-Based Incentive Compensation
Plan Non-Qualified Stock Option Agreement. Filed with Registrant’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2020 (SEC File No. 001-10709) and
incorporated herein by reference.
Form of PS Business Parks, Inc. 2012 Equity and Performance-Based Incentive Compensation
Plan Stock Unit Agreement. Filed with Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2020 (SEC File No. 001-10709) and incorporated herein by
reference.
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.
101
.INS XBRL Instance Document. Filed herewith.
101
.SCH XBRL Taxonomy Extension Schema. Filed herewith.
101
.CAL XBRL Taxonomy Extension Calculation Linkbase. Filed herewith.
101
.DEF XBRL Taxonomy Extension Definition Linkbase. Filed herewith.
101
.LAB XBRL Taxonomy Extension Label Linkbase. Filed herewith.
101
.PRE XBRL Taxonomy Extension Presentation Linkbase. Filed herewith.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
* Denotes management contract or compensatory plan agreement or arrangement.
† Filed herewith.
76
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 22, 2021
PS BUSINESS PARKS, INC.
By:
/s/ John W. Petersen
John W. Petersen
Interim 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/ John W. Petersen
John W. Petersen
/s/ Jeffrey D. Hedges
Jeffrey D. Hedges
/s/ Maria R. Hawthorne
Maria R. Hawthorne
/s/ Jennifer Holden Dunbar
Jennifer Holden Dunbar
/s/ James H. Kropp
James H. Kropp
/s/Kristy M. Pipes
Kristy M. Pipes
/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
/s/ Stephen W. Wilson
Stephen W. Wilson
Chairman of the Board
February 22, 2021
Interim Chief Executive Officer
(principal executive officer)
February 22, 2021
Chief Financial Officer (principal
financial and accounting officer)
February 22, 2021
Director
February 22, 2021
Director
Director
Director
Director
Director
Director
Director
Director
77
February 22, 2021
February 22, 2021
February 22, 2021
February 22, 2021
February 22, 2021
February 22, 2021
February 22, 2021
February 22, 2021
The following sets forth the subsidiaries of the Registrant and their respective states of incorporation or
organization:
List of Subsidiaries
Exhibit 21
Name
Amherst JV LLC
Amherst Property, LLC
American Office Park Properties, TPGP, Inc.
AOPP Acquisition Corp. Two
Arapaho Investors, LLC
Brentford JV, LLC
Brentford Property, LLC
Charlton JV, LLC
Charlton Property, LLC
Hernmore Corporation
KF Amherst LLC
KF Brentford, LLC
Miami International Commerce Center Association, Inc.
PS Business Parks, L.P.
PSB Amherst Investors, L.L.C.
PSB Amherst L.L.C.
PSB Amherst Finance LLC
PSB Boca Commerce Park, LLC
PSB Brentford, LLC
PSB Charlton, LLC
PSB Hathaway I & II LLC
PSB MICC 2323 LLC
PSB Northern California Industrial Portfolio, LLC
PSB Pickett IP, LLC
PSB San Tomas BC, LLC
PSB Shady Grove LLC
PSB Walnut BP, 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.
The Mile, LLC
State
Delaware
Delaware
California
California
Delaware
Delaware
Delaware
Delaware
Delaware
Maryland
Virginia
Delaware
Florida
California
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Virginia
California
Maryland
California
Delaware
Delaware
Delaware
Delaware
Virginia
California
Delaware
Delaware
Delaware
California
Delaware
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-3ASR No. 333-223450) and related Prospectus of
PS Business Parks, Inc.;
of our reports dated February 22, 2021 with respect to the consolidated financial statements and the effectiveness of
internal control over financial reporting of PS Business Parks, Inc., included in this Annual Report (Form 10-K) for
the year ended December 31, 2020, and the financial statement schedule of PS Business Parks, Inc. included herein.
/s/ Ernst & Young, LLP
Los Angeles, California
February 22, 2021
Exhibit 31.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John W. Petersen, 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 presented in this report
our conclusions about the effectiveness of the disclosure controls and 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/ John W. Petersen
Name: John W. Petersen
Title: Interim Chief Executive Officer
Date: February 22, 2021
Exhibit 31.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jeffrey D. Hedges, 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 presented in this report
our conclusions about the effectiveness of the disclosure controls and 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/ Jeffrey D. Hedges
Name: Jeffrey D. Hedges
Title: Chief Financial Officer
Date: February 22, 2021
Exhibit 32.1
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
In connection with the Annual Report on Form 10-K of PS Business Parks, Inc. (the “Company”) for the period ending
December 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), John W.
Petersen, as Interim Chief Executive Officer of the Company, and Jeffrey D. Hedges, as Chief Financial Officer of
the Company, each hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley
Act of 2002, that to their 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/ John W. Petersen
Name: John W. Petersen
Title: Interim Chief Executive Officer
Date: February 22, 2021
/s/ Jeffrey D. Hedges
Name: Jeffrey D. Hedges
Title: Chief Financial Officer
Date: February 22, 2021
Corporate Headquarters
Executive Officers
Vice Presidents
CORPORATE DATA
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 Retired
Chief Executive Officer
Public Storage
MARIA R. HAWTHORNE (2016)
Retired President and Chief Executive Officer
PS Business Parks, Inc.
JENNIFER HOLDEN DUNBAR (2009)
Co-Founder and Managing Director
Dunbar Partners, LLC
JAMES H. KROPP (1998)
Retired Chief Investment Officer
SLKW Investments LLC and
Retired Chief Financial Officer
Microproperties LLC
KRISTY M. PIPES (2019)
Retired Managing Director and
Chief Financial Officer
Deloitte Consulting
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 and Chief Executive Officer
Public Storage
PETER SCHULTZ (2012)
Retired President, Chief Executive Officer
and Director
The Beacon Group, Inc.
STEPHEN W. WILSON (2019)
Retired Executive Vice President–Development
AvalonBay Communities, Inc.
(
) = Year director was elected to the Board
Stock Listing
PS Business Parks, Inc. is traded on the New
York Stock Exchange under the symbol “PSB.”
JOHN W. PETERSEN
Interim President and Chief Executive
Officer and Chief Operating Officer
JEFFREY D. HEDGES
Executive Vice President and Chief
Financial Officer
TRENTON A. GROVES
Senior Vice President and Chief
Accounting Officer
Divisional Vice Presidents
CHRISTOPHER M. AUTH
Divisional Vice President, Northern
Virginia and Maryland
RICHARD GUERTIN
Divisional Vice President, Florida
STUART H. HUTCHISON
Divisional Vice President, Southern
California and Seattle
RICHARD E. SCOTT
Divisional Vice President, Northern
California
DAVID A. VICARS
Divisional Vice President, Texas
Transfer Agent
American Stock Transfer & Trust
Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
(800) 937-5449
Independent Registered
Public Accounting Firm
Ernst & Young LLP
Los Angeles, CA
Certifications
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 20, 2020.
MARK D. ANTROBIUS
Regional Vice President, Southern
California and Seattle
RALPH D. ASHWORTH
Vice President, Property Operations
Controller
THOMAS M. DRISCOLL
Regional Vice President, Northern
Virginia and Maryland
AMY L. HERITAGE
Regional Vice President, Austin, Texas
COBY A. HOLLEY
Vice President, Real Estate
CRAIG B. MORROW
Regional Vice President, Southern
California and Seattle
JEFFREY C. PASCHAL
Regional Vice President, Texas
NGOC VU ROSSI
Regional Vice President, Northern
California
EDDIE F. RUIZ
Vice President, Director of Facilities
EUGENE UHLMAN
Vice President, Construction Management
JERREAD WRIGHT
Vice President, Information Technology
EDWARD ZAPTIN
Regional Vice President, Northern
Virginia and Maryland
Additional Information Sources
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
psbusinessparks.com