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PS Business Parks Lags in Feeling Economic Downturn

CORPORATE FOCUS PS Business Parks Lags in Feeling Economic Downturn By JACQUELINE FOX Staff Reporter Glendale-based PS Business Parks Inc. (PSB) is showing latent signs of the impact of the economic downturn reporting a drop in net income for its first quarter and projecting relatively flat performance throughout the remainder of the year. Net income for the quarter ending March 31 was $9.7 million or $0. 27 per diluted share on revenues of $48.5 million, compared to $16.7 million or $0.60 per diluted share on revenues of $48.4 million for the same quarter a year ago. According to PSB President Joe Russell the company was able to recognize revenue from a $5.4 million real estate sale in late 2001 of a 77,000-square foot facility in San Diego, which boosted its net income for the first quarter of 2002. But a plan to sell off five office buildings and a 3.5 acre swath of land in Beaverton, Ore. earlier this year fell through. As a result PSB, which had projected a gain of $34.5 million from the transaction, was forced to report an impairment loss of $5.9 million. PSB, a real estate investment trust, develops and operates multi-tenant office and industrial properties in eight states. The company currently owns about 14.5 million square feet of rentable properties. Analysts said the company’s most recent quarterly performance reflects the general downturn in the economy, adding that PSB fared somewhat better than the industry overall. PSB’s same-park occupancy rates averaged 92.7 percent, above the national averages of 90 percent. “Their numbers are certainly weaker now than the company has seen in a while,” says John Sheehan, an analyst who covers PSB and other REITs for A.G. Edwards. “But it certainly doesn’t suggest that they are going over a cliff.” Sheehan said that REIT performance in general tends to lag national trends because of the long-term leases under which these companies operate. But their opportunities for recovery when the economy improves are also hampered by their lease contracts. “Just as they can’t start lowering rents during a downturn, which protects them, REITs can’t by the same token just start hiking rents when things turn around,” Sheehan said. “So we think they will lag a bit behind the recovery period and take a while to capture the upside. But we anticipate them coming back pretty strong in 2004.” Stock price holds So far, at least, the company’s stock does not seem to have been impacted by its most recent financial results. After descending to the low-$30 range early in May, when its first-quarter results were announced, PSB shares have risen to the mid-$30 range. On July 1, the stock closed at $35.72. Analysts said the company’s funds from operations (FFOs), which exclude certain factors calculated into net income such as depreciation and impairment loss, were a more important indicator of PSB’s financial strength. “If you look not just at revenues or net income, but at FFO’s, which is what the company’s actual cash flow is and the measure used by most REITs, they actually had a modest increase there, and that’s the important factor,” said Sheehan. For the first quarter of the year, PSB reported funds from operations had inched up to $26.3 million compared to $26.1 million in the comparable period last year. PBS also continued to add to its portfolio throughout most of last year. Its most recent acquisition: the $46-million Orange County Business Center in Santa Ana. The 437,000-square foot master-planned business park is roughly 75 percent occupied and boosts PSB’s Orange County presence to 1.5 million square feet. The company now owns roughly 4.7 million square feet of commercial space across California. Russell said there are no acquisition plans on the table going forward and the company does not plan on getting back into development any time in the near future. Instead, PSB’s strategy for riding out the lull, said Russell, will center on strengthening its existing core markets. “We are planning on just staying very close to our markets, our customers and coming up with creative ways to find new customers in those markets,” Russell said. “We have a very nimble team of people that focus on that aspect of our business day in and day out, so we are always in the position of being able to react to a downturn rather quickly and in a better position to protect ourselves.”

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