PS BUSINESS PARKS, INC.
Forward-Looking Statements: Forward-looking statements, within the meaning of
the Private Securities Litigation Reform Act of 1995, are made throughout this
Quarterly Report on Form 10-Q. For this purpose, any statements contained herein
that are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "may," "believes,"
"anticipates," "plans," "expects," "seeks," "estimates," "intends" and similar
expressions are intended to identify forward-looking statements. There are a
number of important factors that could cause the results of the Company to
differ materially from those indicated by such forward-looking statements,
including but not limited to: (i) the occurrence of any event, change or other
circumstance that could give rise to the termination of the merger agreement
described in Note 12 - "Merger Events" to our consolidated financial statements
under Item 1 in this quarterly report on Form 10-Q; (ii) the failure to satisfy
any of the other conditions to the completion of the proposed transaction; (iii)
stockholder litigation in connection with the proposed transaction, which may
affect the timing or occurrence of the proposed transaction or result in
significant costs of defense, indemnification and liability; (iv) the effect of
the announcement of the proposed transaction on the ability of PSB to retain and
hire key personnel and maintain relationships with its tenants, vendors and
others with whom it does business, or on its operating results and businesses
generally; (v) risks associated with the disruption of management's attention
from ongoing business operations due to the proposed transaction; (vi) the
ability to meet expectations regarding the timing and completion of the proposed
transaction; (vii) significant transaction costs, fees, expenses and charges;
(viii) the duration and severity of the coronavirus ("COVID-19") pandemic and
its impact on our business and our customers; (ix) changes in general economic
and business conditions, including as a result of the economic fallout of the
COVID-19 pandemic; (x) potential regulatory actions to close our facilities or
limit our ability to evict delinquent customers; (xi) decreases in rental rates
or increases in vacancy rates/failure to renew or replace expiring leases; (xii)
tenant defaults; (xiii) the effect of the recent credit and financial market
conditions; (xiv) our failure to maintain our status as a real estate investment
trust (a "REIT") under the Internal Revenue Code of 1986, as amended (the
"Code"); (xv) the economic health of our customers; (xvi) the health of our
officers and directors; (xvii) increases in operating costs; (xviii) casualties
to our properties not covered by insurance; (xix) the availability and cost of
capital; (xx) increases in interest rates and its effect on our stock price;
(xxi) security breaches, including ransomware, or a failure of our networks,
systems or technology which could adversely impact our operations or our
business, customer and employee relationships or result in fraudulent payments;
(xxii) the impact of inflation; and (xxiii) other factors discussed under the
heading "Part I, Item 1A. Risk Factors" in our Annual Report on Form 10-K for
the year ended December 31, 2021 . In light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of
such information should not be regarded as a representation by us or any other
person that our objectives and plans will be achieved. Moreover, we assume no
obligation to update these forward-looking statements to reflect actual results,
changes in assumptions or changes in other factors affecting such
forward-looking statements, except as required by law.
Critical Accounting Policies and Estimates:
Our critical accounting estimates are defined as accounting estimates or assumptions made in accordance withU.S. generally accepted accounting principles ("GAAP"), which involve a significant level of estimation uncertainty or subjectivity and have had or are reasonably likely to have a material impact on our financial condition or results of operations. Our significant accounting policies, which utilize these critical accounting estimates, are described in Note 2 - "Summary of significant accounting policies" to our consolidated financial statements under Item 1 in this quarterly report on Form 10-Q. During the three months endedJune 30, 2022 , there were no material changes to our critical accounting estimates as compared to the critical accounting estimates disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2021 . 24
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Business Overview
The Company is a fully-integrated, self-advised and self-managed REIT that owns, operates, acquires and develops commercial properties, primarily multi-tenant industrial, industrial-flex, and low rise-suburban office space. As ofJune 30, 2022 , the Company owned and operated 26.6 million rentable square feet of commercial space in six states consisting of 93 parks and 636 buildings. The Company's properties are primarily located in major coastal markets that have experienced long-term economic growth. The Company also held a 95.0% interest in a joint venture entity which owns Highgate at The Mile, a 395-unit multifamily apartment complex located in Tysons,Virginia , and a 98.2% interest in a joint venture formed to develop Brentford at The Mile, a planned 411-unit multifamily apartment complex also located in Tysons,Virginia . Pending Acquisition of Company by Affiliates ofBlackstone : Refer to Note 12 - "Merger Events" to our consolidated financial statements under Item 1 in this quarterly report on Form 10-Q, for information regarding the merger agreement the Company enter into onApril 24, 2022 (the mergers described therein, the "Merger"). The Merger, which was approved by the Company's common stockholders at a special meeting onJuly 15, 2022 , is subject to other customary closing conditions. The Merger is expected to close on or aroundJuly 20, 2022 , after the conditions to closing are satisfied or waived. The Company can provide no assurances regarding whether the Merger will close as expected, or at all. Existing Real Estate Facilities: The operating results of our existing real estate facilities are substantially influenced by demand for rental space within our properties and our markets, which impacts occupancy, rental rates, and capital expenditure requirements. We strive to maintain high occupancy levels while increasing rental rates and minimizing capital expenditures when market conditions allow, although the Company may decrease rental rates in markets where conditions require. Management's initiatives and strategies with respect to our existing real estate facilities, which include incentivizing our personnel to maximize the return on investment for each lease transaction and provide a superior level of service to our customers. Acquisitions of Real Estate Facilities: We seek to grow our portfolio through acquisitions of facilities generally consistent with the Company's focus on owning concentrated business parks with easy to configure space and in markets and product types with favorable long-term return potential. We continue to seek to acquire additional properties in our existing markets and generally in close proximity to our existing portfolio; however, there can be no assurance that we will acquire additional facilities that meet our risk-adjusted return and underwriting requirements.
Development or Redevelopment of Real Estate Facilities: In certain instances, we may seek to redevelop our existing real estate or develop new buildings on excess land parcels.
As ofJune 30, 2022 , we were in the process of developing an approximately 83,000 square foot multi-tenant industrial building at our212 Business Park located inKent, Washington . During the quarter endedJune 30, 2022 ,$1.5 million was reclassified from land to property held for development on our consolidated balance sheet and, as ofJune 30, 2022 ,$10.7 million of the estimated$17.1 million total development costs had been incurred. The total investment, inclusive of land and development costs, for the212 Business Park development is projected to be$18.6 million . This construction project is scheduled to be completed in the fourth quarter of 2022. As ofJune 30, 2022 , we have contractual construction commitments totaling$3.7 million that will be paid to various contractors as the project is completed. As ofJune 30, 2022 , we were in the process of developing an approximately 17,000 square foot multi-tenant industrial building at ourBoca Commerce Park , located inBoca Raton, Florida . During the quarter endedJune 30, 2022 ,$0.6 million was reclassified from land to property held for development on our consolidated balance sheet and, as ofJune 30, 2022 ,$3.4 million of the estimated$4.2 million total development costs had been incurred. The total investment, inclusive of land and development costs, for theBoca Commerce Park development is projected to be$4.8 million . This construction project is scheduled to be completed in the fourth quarter of 2022. As ofJune 30, 2022 , we have contractual construction commitments totaling$0.8 million that will be paid to various contractors as the project is completed. The Mile is an office and multifamily park we own which sits on 44.5 contiguous acres of land located in Tysons,Virginia . The park consists of 628,000 square feet of office space and a 395-unit multifamily apartment community we developed, Highgate at The Mile, which we completed in 2017 through a joint venture with the JV Partner. In 2019, we successfully rezoned The Mile allowing us to develop, at our election, up to 3,000 additional multifamily units and approximately 500,000 square feet of other commercial uses. 25
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InAugust 2020 , the Company entered into a new joint venture with the JV Partner (the "Brentford Joint Venture") for the purpose of developing a second multifamily property, Brentford at The Mile, a planned 411-unit multifamily apartment complex. Under the Brentford Joint Venture agreement, the Company has a 98.2% controlling interest and is the managing member with the JV Partner holding the remaining 1.8% limited partnership interest. We contributed a parcel of land to the Brentford Joint Venture (the "Brentford Parcel") at a value of$18.5 million , for which we received equity contribution credit in the Brentford Joint Venture. Our cost basis in the Brentford Parcel was$5.1 million as ofJune 30, 2022 . Construction of Brentford at The Mile commenced inAugust 2020 and is anticipated to be completed over a period of 24 to 36 months at an estimated development cost of$110 million to$115 million , excluding land cost. As ofJune 30, 2022 , the development cost incurred was$77.2 million , which is reflected in land and building held for development, net on our consolidated balance sheets along with our$5.1 million cost basis in the Brentford Parcel. While multifamily real estate was not previously a core asset class for us, we determined that multifamily real estate represents a unique opportunity and the highest and best use of the Brentford Parcel. Through joint ventures we have partnered with a local developer and operator of multifamily properties in order to leverage their development and operational expertise. The scope and timing of the future phases of development of The Mile are subject to a variety of uncertainties, including site plan approvals and building permits.
We consolidate both the joint venture that owns Highgate at The Mile and the joint venture that is developing Brentford at The Mile.
See "Analysis of Net Income - Multifamily" below and Note 3 and 4 to our consolidated financial statements for more information on Highgate at The Mile and Brentford at The Mile.
Sale of Real Estate Facilities: We may from time to time sell individual real estate facilities based on market conditions, fit with our existing portfolio, evaluation of long-term potential returns of markets or product types, or other reasons.
On
OnMay 6, 2022 , the Company sold a 291,000 square foot office-oriented business park located inFairfax, Virginia , for net sale proceeds of$35.6 million , which resulted in a gain on sale of$6.5 million . OnMarch 29, 2022 , the Company sold a 702,000 square foot industrial-flex business park located inIrving, Texas , for net sale proceeds of$91.9 million , which resulted in a gain on sale of$57.0 million . (TheJune 1 ,May 6 , andMarch 29, 2022 sales, collectively the "2022 Assets Sold"). OnJune 17, 2021 , the Company sold a 198,000 square foot office-oriented flex business park located inChantilly, Virginia , for net sale proceeds of$32.6 million , which resulted in a gain on sale of$19.2 million . (The "2021 Asset Sold").
The operations of these facilities are presented in the tables below under "assets sold."
Certain Factors that May Impact Future Results
Pending merger transaction: Refer to Note 12 - "Merger Events" to our consolidated financial statements under Item 1 in this quarterly report on Form 10-Q, for information regarding the Merger.
Impact of COVID-19 pandemic: Starting inMarch 2020 , the COVID-19 pandemic resulted in cessation, severe curtailment, or impairment of business activities in most sectors of the economy in all markets we operate in, due to governmental "stay at home" orders, risk mitigation procedures, and closure of businesses not considered to be "essential." Since it remains unknown at this time how long the COVID-19 pandemic will continue, particularly given the impact of existing and potential future variants, we cannot estimate how long these negative economic impacts will persist. Since the onset of the COVID-19 pandemic, the Company entered into rent relief agreements consisting of$6.2 million of rent deferrals and$1.6 million of rent abatements. As ofJune 30, 2022 , the 289 current customers that received rent relief account for 9.30% of rental income. Also as ofJune 30, 2022 , the Company had collected$5.7 million of rent deferral repayment, representing 99.8% of the amounts scheduled to be repaid throughJune 30, 2022 . An additional$0.5 million of rent deferral repayment is scheduled to be repaid thereafter. 26
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Our ability to re-lease space as leases expire in a way that minimizes vacancy periods and maximizes market rental rates will depend upon market conditions in the specific submarkets in which each of our properties are located. Due to the uncertainty of the COVID-19 pandemic's impact on the Company's future ability to grow or maintain existing occupancy levels, possible decreases in rental rates on new and renewal transactions, and the potential negative effect of additional rent deferrals, rent abatements, and customer defaults, we believe in some instances the COVID-19 pandemic may continue to have adverse effects on rental income for 2022 and possibly beyond. Impact of Inflation: Inflation has significantly increased recently and a continued increase in inflation could adversely impact our future results, including as a result of adverse impacts to our tenants and to the economy generally. 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, which should partially reduce the Company's exposure to inflation. Regional Concentration: Our portfolio is concentrated in eight regions, in six states. We have chosen to concentrate in these regions because we believe they have characteristics which enable them to be competitive economically, such as above average population growth, job growth, higher education levels and personal income. Changes in economic conditions in these regions in the future could impact our future results. Industry and Customer Concentrations: We seek to minimize the risk of industry or customer concentrations. As ofJune 30, 2022 , leases from our top 10 customers comprised 10.0% of our annualized rental income, with only four customers representing 1% or more- theUS Government (2.5%),Amazon Inc. (1.6%), KZ Kitchen Cabinet & Stone (1.3%), and Luminex Corporation (1.0%). In terms of industry concentration, 24.1% of our annualized rental income comes from Business services, and 15.4% from Logistics. No other industry group represents more than 10% of our annualized rental income.
Customer credit risk: Historically, we have experienced a low level of
write-offs of uncollectible rents, with less than 0.4% of rental income written
off in any single year from 2011-2019. As of
As ofJuly 13, 2022 , we had 25,000 square feet of leased space occupied by one customer that is protected by Chapter 11 of theU.S. Bankruptcy Code, which has a remaining lease value of$0.1 million . From time to time, customers contact us, requesting early termination of their lease, reductions in space leased, or rent deferment or rent abatement, which we are not obligated to grant but will consider and grant under certain circumstances.
Net Operating Income
We utilize net operating income ("NOI"), a measure that is not defined in accordance with GAAP, to evaluate the operating performance of our real estate. We define NOI as rental income less Cost of Operations.
We believe NOI assists investors in analyzing the performance of our real estate
by excluding (i) corporate overhead (i.e., general and administrative expense)
because it does not relate to the direct operating performance of our real
estate, and (ii) depreciation and amortization expense because it does not
accurately reflect changes in the fair value of our real estate. The Company's
calculation of NOI may not be comparable to those of other companies and should
not be used as an alternative to performance measures calculated in accordance
with GAAP. NOI should not be used as a measure of our liquidity, nor is it
indicative of funds available to fund our cash needs. NOI should not be used as
a substitute for cash flow from operating activities in accordance with GAAP.
We also report NOI on a basis which excludes non-cash rents that have been
deferred or abated during the period, certain non-cash revenue items, including
amortization of deferred rent receivable, in-place lease intangible, tenant
improvement reimbursements, and lease incentives, and also excludes
stock-compensation expense for employees whose compensation expense is recorded
in cost of operations ("Cash NOI"). We utilize Cash NOI to evaluate the cash
flow performance of our properties and believe investors and analysts utilize
this metric for the same purpose. Cash NOI should not be used as a measure of
our liquidity, nor is it indicative of funds available to fund our cash needs.
Cash NOI should not be used as a substitute for cash flow from operating
activities in accordance with GAAP.
See "Analysis of net income" below for reconciliations of each of these measures to their closest analogous GAAP measure from our consolidated statements of income.
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Operating Results Overview: Three and Six Months Ended
For the three months endedJune 30, 2022 , net income allocable to common stockholders was$77.1 million , or$2.78 per diluted share, compared to$45.6 million , or$1.65 per diluted share, for the same period in 2021. The increase was mainly due to a$61.8 million gain on sale of assets sold during second quarter of 2022, compared to a$19.2 million gain on sale of assets sold during the same period in 2021, combined with a$3.3 million increase in NOI from ourSame Park portfolio (defined below), a$1.5 million increase in NOI from ourNon-Same Park portfolio (defined below), and$2.5 million lower preferred distributions in 2022 compared to 2021 due to the redemption of preferred stock inNovember 2021 , partially offset by Merger related costs of$6.1 million and a decrease of$4.3 million in NOI generated from assets sold. For the six months endedJune 30, 2022 , net income allocable to common stockholders was$149.1 million , or$5.38 per diluted share, compared to$73.5 million , or$2.66 per diluted share for the same period in 2021. The increase was mainly due to a$118.8 million gain on sale of assets sold during the first six months of 2022, compared to a$19.2 million gain on sale of assets sold during the same period in 2021, combined with a$9.0 million increase in NOI from ourSame Park portfolio (defined below), a$3.0 million increase in NOI from ourNon-Same Park portfolio (defined below), and$4.9 million lower preferred distributions in 2022 compared to 2021 due to the redemption of preferred stock inNovember 2021 , partially offset by a decrease of$7.3 million in NOI generated from assets sold, Merger related costs of$6.1 million , and a one-time cash payment of$6.7 million to the former Chief Executive Officer ("CEO"), which consists of a$6.6 million cash payment for RSUs, a$0.1 million cash payment for COBRA coverage reimbursement in accordance with his separation agreement, partially offset by$0.6 million non-cash adjustment related to the reversal of stock compensation for the unvested former CEO's shares, net of dividend forfeiture expense. Analysis of Net Income
Our net income is comprised primarily of our real estate operations, depreciation and amortization expense, general and administrative expense, interest and other income, interest and other expenses and gain on sale of real estate facilities.
We segregate our real estate activities into (i) same park operations, generally representing all operating properties acquired prior toJanuary 1, 2020 , comprising 25.4 million rentable square feet of our 26.6 million of rentable square feet atJune 30, 2022 the "Same Park " portfolio), (ii) non-same park operations, representing those facilities we own that were acquired afterJanuary 1, 2020 (the "Non-Same Park " portfolio), (iii) multifamily operations, and (iv) assets sold or held for sale, including the 2022 Assets Sold totaling 1.1 million square feet and the 2021 Asset Sold totaling 0.2 million square feet. 28
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The table below sets forth the various components of our net income (in
thousands):
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 % Change 2022 2021 % Change
Rental income
Same Park $ 103,988 $ 98,010 6.1 % $ 207,390 $ 194,167 6.8 %
Non-Same Park 3,659 1,377 165.7 % 7,007 2,623 167.1 %
Multifamily 2,524 2,248 12.3 % 4,893 4,575 7.0 %
Assets sold (1) 739 7,729 (90.4) % 4,460 16,046 (72.2 %)
Total rental income 110,910 109,364 1.4 % 223,750 217,411 2.9 %
Cost of Operations (2)
Same Park 29,853 27,188 9.8 % 59,950 55,594 7.8 %
Non-Same Park 1,279 494 158.9 % 2,339 916 155.3 %
Multifamily 1,181 1,177 0.3 % 2,405 2,244 7.2 %
Assets sold (1) 274 2,990 (90.8) % 2,007 6,313 (68.2 %)
Total cost of operations 32,587 31,849 2.3 % 66,701 65,067 2.5 %
Stock compensation expense
(3) (549) (481) 14.1 % (1,085) (937) 15.8 %
Total cost of operations excl. stock compensation expense 32,038 31,368 2.1 % 65,616 64,130 2.3 % NOI (4) Same Park 74,135 70,822 4.7 % 147,440 138,573 6.4 % Non-Same Park 2,380 883 169.5 % 4,668 1,707 173.5 % Multifamily 1,343 1,071 25.4 % 2,488 2,331 6.7 % Assets sold (1) 465 4,739 (90.2) % 2,453 9,733 (74.8 %) Depreciation and amortization expense (22,799) (22,514) 1.3 % (45,931) (45,499) 0.9 % General and administrative expense (11,092) (4,799) 131.1 % (22,416) (9,181) 144.2
%
Interest and other income 1,722 923 86.6 % 1,968 1,179 66.9
%
Interest and other expense (476) (268) 77.6 % (806) (479) 68.3 % Gain on sale of real estate facilities 61,842 19,193 222.2 % 118,801 19,193 519.0 % Net income$ 107,520 $ 70,050 53.5 %$ 208,665 $ 117,557 77.5 % _______________
(1)Amounts shown for the three and six months ended
(2)Cost of Operations under Cash NOI excludes the impact of stock compensation expense.
(3)Stock compensation expense, as shown here, represents stock compensation expense for employees whose compensation expense is recorded in cost of operations. Note that stock compensation expense attributable to our executive management team (including divisional vice presidents) and other corporate employees is recorded within general and administrative expense.
(4)NOI represents rental income less Cost of Operations.
Rental income increased$1.5 million and$6.3 million for the three and six months endedJune 30, 2022 , respectively, as compared to the same periods in 2021 due primarily to higher occupancy in 2022 compared to the same period in 2021 combined with rental income from ourNon-Same Park portfolio acquired during the third and fourth quarters of 2021. These increases were partially offset by a decrease in rental income from assets sold. 29
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Cost of operations, excluding stock compensation expense, increased$0.7 million and$1.5 million for the three and six months endedJune 30, 2022 , respectively, as compared to the same periods in 2021 due primarily to higher Cost of Operations incurred by ourSame Park (discussed below) andNon-Same Park portfolios, partially offset by a decrease in Cost of Operations from assets sold. Net income increased$37.5 million and$90.6 million for the three and six months endedJune 30, 2022 , respectively, as compared to the same periods in 2021. The three month increase was mainly due to a$42.6 million increase in the gain on sale of assets sold during second quarter of 2022, compared to the same period in 2021, combined with a$3.3 million increase in NOI from ourSame Park portfolio (defined below), a$1.5 million increase in NOI from ourNon-Same Park portfolio (defined below), and$2.5 million lower preferred distributions in 2022 compared to 2021 due to the redemption of preferred stock inNovember 2021 , partially offset by the Merger related costs of$6.1 million and a decrease of$4.3 million in NOI generated from assets sold or held for sale. The six month increase was due to a$99.6 million increase in the gain on sale of assets sold during the six months endedJune 30, 2022 compared to the same period in 2021, combined with an$8.9 million increase in NOI from ourSame Park portfolio (defined below), a$3.0 million increase in NOI from ourNon-Same Park portfolio (defined below), partially offset by a decrease of$7.3 million in NOI generated from assets sold or held for sale, the Merger related costs of$6.1 million , and a one-time cash payment of$6.7 million to the former CEO, which consists of a$6.6 million cash payment for RSUs, a$0.1 million cash payment for COBRA coverage reimbursement in accordance with his separation agreement, partially offset by$0.6 million non-cash adjustment related to the reversal of stock compensation for the unvested former CEO's shares, net of dividend forfeiture expense. 30
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Same Park Portfolio
We believe that evaluation of theSame Park portfolio provides an informative view of how the Company's portfolio has performed over comparable periods. We believe that investors and analysts useSame Park information in a comparable manner. The following table summarizes the historical operating results of ourSame Park portfolio and certain statistical information related to leasing activity during the three and six months endedJune 30, 2022 and 2021 (in thousands, except per square foot data): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 % Change 2022 2021 % Change Rental income Cash Rental Income (1)$ 103,242 $ 97,698 5.7 %$ 205,749 $ 192,518 6.9 % Non-Cash Rental Income (2) 746 312 139.1 % 1,641 1,649 (0.5 %) Total rental income 103,988 98,010 6.1 % 207,390 194,167 6.8 % Cost of Operations Property taxes 11,366 10,718 6.0 % 22,997 21,756 5.7 % Utilities 4,172 3,948 5.7 % 8,586 8,169 5.1 % Repairs and maintenance 6,339 5,428 16.8 % 11,805 10,461 12.8 % Compensation 4,857 4,345 11.8 % 9,936 8,825 12.6 % Snow removal 12 6 100.0 % 784 928 (15.5 %) Property insurance 1,251 1,147 9.1 % 2,502 2,302 8.7 % Other expenses 1,856 1,596 16.3 % 3,340 3,153 5.9 % Total Cost of Operations (3) 29,853 27,188 9.8 % 59,950 55,594 7.8 % Less: Non-cash stock based compensation in operating costs (518) (438) 18.3 % (1,004) (852) 17.8 % Total Cash Cost of Operations 29,335 26,750 9.7 % 58,946 54,742 7.7 % NOI (4)$ 74,135 $ 70,822 4.7 %$ 147,440 $ 138,573 6.4 % Cash NOI (5)$ 73,907 $ 70,948 4.2 %$ 146,803 $ 137,776 6.6 % Selected Statistical Data Square footage at period end 25,365 25,365 - 25,365 25,365 - NOI margin (6) 71.3 % 72.3 % (1.0 %) 71.1 % 71.4 % (0.3 %) Cash NOI margin (7) 71.6 % 72.6 % (1.0 %) 71.4 % 71.6 % (0.2 %) Weighted average square foot occupancy 95.6 % 94.2 % 1.4 % 95.9 % 93.8 % 1.9 % Revenue per Occupied Square Foot (8)$ 16.83 $ 16.41 2.6 %$ 16.78 $ 16.32 2.8 % Cash Rental Income per Occupied Square Foot (9)$ 16.58 $ 16.36 1.3 %$ 16.47 $ 16.18 1.8 % _______________
(1)Cash Rental Income represents rental income excluding Non-Cash Rental Income (defined below). See table below for the change in Cash Rental Income.
(2)Non-Cash Rental Income represents amortization of deferred rent receivable (net of write-offs), in-place lease intangible, tenant improvement reimbursements, and lease incentives.
(3)Cost of Operations, as presented above, includes stock compensation expense for employees whose compensation expense is recorded in cost of operations.
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(4)NOI represents rental income less Cost of Operations.
(5)Cash NOI represents Cash Rental Income less Cash Cost of Operations.
(6)NOI margin is computed by dividing NOI by rental income.
(7)Cash NOI margin is computed by dividing Cash NOI by Cash Rental Income.
(8)Revenue per Occupied Square Foot is computed by dividing rental income for the period by weighted average occupied square feet for the same period. Revenue per Occupied Square Foot for the three and six month periods shown is annualized. (9)Cash Rental Income per Occupied Square Foot is computed by dividing Cash Rental Income for the period by weighted average occupied square feet for the same period. Cash rental Income per Occupied Square Foot for the three and six month periods shown is annualized.
Analysis of Same Park Rental Income
Rental income for ourSame Park portfolio increased 6.1% and 6.8% for the three and six months endedJune 30, 2022 , respectively, as compared to the same periods in 2021. The three and six month increase was due primarily due to an increase in weighted average occupancy and higher rental rates charged to our customers, as revenue per occupied square foot increased 2.6% and 2.8%, in the three and six months endedJune 30, 2022 , respectively, compared to the same periods in 2021.
The following table details the change in
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 $ Change 2022 2021 $ Change
Rental income
Base rental income $ 76,232 $ 73,270 $ 2,962 $ 151,919 $ 143,437 $ 8,482
Expense recovery income 26,694 23,815 2,879 53,050 47,587 5,463
Lease buyout income 112 170 (58) 272 486 (214)
Rent receivable recovery/(write-off) (128) 47 (175) (215) 46 (261)
Abatements - (103) 103 (2) (185) 183
Deferrals - (78) 78 - (280) 280
Deferral repayments, net 139 422 (283) 289 1,103 (814)
Fee Income 193 155 38 436 324 112
Cash Rental Income 103,242 97,698 5,544 205,749 192,518 13,231
Non-Cash Rental Income (1) 746 312 434 1,641 1,649 (8)
Total rental income $ 103,988 $ 98,010 $ 5,978 $ 207,390 $ 194,167 $ 13,223
_______________
(1)Non-cash rental income includes amortization of deferred rent receivable (net
of write-offs), in-place lease intangible, tenant improvement reimbursements,
and lease incentives.
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We expect our future revenue growth will come primarily from contractual rental increases as well as from potential increases in market rents which would allow us to increase rent levels when leases are either renewed with existing customers or re-leased to new customers. The following table sets forth the expirations of existing leases in ourSame Park portfolio over the next five years based on lease data atJune 30, 2022 (dollars and square feet in thousands): Percent of Square Percent of Annualized Rental Annualized Rental Number of Footage Subject to Total Leased Income Under Income Represented Year of Lease Expiration Customers Expiring Leases Square Footage Expiring Leases by Expiring Leases Remainder of 2022 1,155 2,787 12 % 50,250 11 % 2023 1,441 5,860 24 % 101,889 23 % 2024 1,006 5,017 21 % 92,169 21 % 2025 460 3,858 16 % 72,389 17 % 2026 225 2,356 10 % 42,911 10 % Thereafter 193 4,131 17 % 79,007 18 % Total 4,480 24,009 100 % 438,615 100 %
See "Analysis of Same Park Market Trends" below for further analysis of such data on a by market basis.
Analysis of Same
Cost of Operations, excluding stock-based compensation, for ourSame Park portfolio increased 9.8% and 7.8% for the three and six months endedJune 30, 2022 , respectively, as compared to the same periods in the prior year. The three and six month increases were due to increases in almost all cost of operations categories due to increased traffic as customers returned to the workplace, except for snow removal and other expenses. Property taxes increased 6.0% and 5.7% for the three and six months endedJune 30, 2022 , respectively, as compared to the same periods in the prior year. These increases were 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 increased 5.7% and 5.1% during the three and six months endedJune 30, 2022 , respectively, as compared to the same period in the prior year. The three-month increase was driven by increased rates and increased usage as customers returned to the workplace. It is difficult to estimate future utility costs because weather, temperature, and energy prices are volatile and not readily predictable. However, we expect utility costs in the future to return to pre-COVID-19 pandemic levels over time due to expected increases in traffic and use at our parks as our customers resume operations. Repairs and maintenance increased 16.8% and 12.8% for the three and six months endedJune 30, 2022 , as compared to the same period in the prior year. The three-month increase was due to increased usage as customers returned to the workplace. Repairs and maintenance costs are dependent upon many factors including weather conditions, which can impact repair and maintenance needs, inflation in material and labor costs, and random events, and as a result, are not always predictable. We expect repairs and maintenance costs for the remainder of 2022 to be more consistent with pre-COVID-19 pandemic levels as a result of expected increases in traffic and use at our parks as customers resume operations. Compensation increased 11.8% and 12.6% for the three and six months endedJune 30, 2022 , respectively, as compared to the same periods in the prior year. The increase in compensation was primarily due to increases in personnel and increased wages due to inflationary impacts on labor. We expect compensation and payroll expenses to continue to increase in the future. 33
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Snow removal costs increased 100.0% and decreased 15.5% during the three and six months endedJune 30, 2022 , respectively, as compared to the same periods in the prior year. Snow removal costs are weather dependent and therefore not predictable. Property insurance increased 9.1% and 8.7% for the three and six months endedJune 30, 2022 , respectively, as compared to the same periods in the prior year. The three-month increase was primarily due to an increase in our property insurance premiums due to unfavorable market conditions pervasive throughout commercial real estate sectors. 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 increased 16.3% and 5.9% for the three and six months endedJune 30, 2022 , respectively, as compared to the same periods in the prior year. Other expenses are comprised of general property expenses incurred in the operation of our properties. We expect other expenses for the remainder of 2022 to be similar to our results for the three and six months endedJune 30, 2022 . 34
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Analysis of Same Park Market Trends
The following tables set forth historical data by region related to the
operations of our
Three Months Ended June 30, Six Months Ended June 30,
Region 2022 2021 Change 2022 2021 Change
Geographic Data on Same Park
Cash Rental Income Square Feet
Northern California 7,231 $ 30,209 $ 28,573 5.7% $ 60,457 $ 55,937 8.1%
Southern California 3,529 16,177 15,411 5.0% 32,132 29,504 8.9%
Dallas 2,093 5,553 5,173 7.3% 10,999 10,217 7.7%
Austin 1,963 9,537 8,652 10.2% 18,371 17,285 6.3%
Northern Virginia 4,241 17,916 17,951 (0.2)% 36,631 36,044 1.6%
South Florida 3,866 13,747 12,020 14.4% 26,922 23,806 13.1%
Seattle 1,350 5,135 5,081 1.1% 10,367 10,001 3.7%
Suburban Maryland 1,092 4,968 4,837 2.7% 9,870 9,724 1.5%
Total Same Park 25,365 $ 103,242 $ 97,698 5.7% 205,749 192,518 6.9%
Cash Cost of Operations
Northern California $ 6,913 $ 6,218 11.2% 13,524 12,561 7.7%
Southern California 4,141 3,836 8.0% 8,353 7,691 8.6%
Dallas 1,960 1,989 (1.5)% 3,751 3,908 (4.0)%
Austin 3,892 3,141 23.9% 7,398 6,356 16.4%
Northern Virginia 5,922 5,525 7.2% 12,645 11,958 5.7%
South Florida 3,632 3,175 14.4% 7,159 6,359 12.6%
Seattle 1,269 1,271 (0.2)% 2,709 2,563 5.7%
Suburban Maryland 1,606 1,595 0.7% 3,407 3,346 1.8%
Total Same Park $ 29,335 $ 26,750 9.7% 58,946 54,742 7.7%
Cash NOI
Northern California $ 23,296 $ 22,355 4.2% 46,933 43,376 8.2%
Southern California 12,036 11,575 4.0% 23,779 21,813 9.0%
Dallas 3,593 3,184 12.8% 7,248 6,309 14.9%
Austin 5,645 5,511 2.4% 10,973 10,929 0.4%
Northern Virginia 11,994 12,426 (3.5)% 23,986 24,086 (0.4)%
South Florida 10,115 8,845 14.4% 19,763 17,447 13.3%
Seattle 3,866 3,810 1.5% 7,658 7,438 3.0%
Suburban Maryland 3,362 3,242 3.7% 6,463 6,378 1.3%
Total Same Park $ 73,907 $ 70,948 4.2% $ 146,803 $ 137,776 6.6%
Weighted average square foot occupancy
Northern California 96.3 % 93.9 % 2.4% 96.9 % 93.5 % 3.4%
Southern California 97.6 % 97.0 % 0.6% 97.7 % 96.6 % 1.1%
Dallas 91.3 % 88.4 % 2.9% 92.1 % 87.7 % 4.4%
Austin 94.3 % 95.0 % (0.7)% 94.3 % 95.0 % (0.7)%
Northern Virginia 93.8 % 92.8 % 1.0% 94.2 % 92.7 % 1.5%
South Florida 98.6 % 96.9 % 1.7% 98.3 % 96.2 % 2.1%
Seattle 95.7 % 94.0 % 1.7% 95.6 % 93.6 % 2.0%
Suburban Maryland 91.6 % 91.8 % (0.2)% 91.8 % 92.0 % (0.2)%
Total Same Park 95.6 % 94.2 % 1.4% 95.9 % 93.8 % 2.1%
Cash Rental Income per Occupied Square Foot (1)
Northern California $ 17.36 $ 16.82 3.2% $ 17.27 $ 16.53 4.5%
Southern California $ 18.80 $ 18.01 4.4% $ 18.64 $ 17.32 7.6%
Dallas $ 11.62 $ 11.18 3.9% $ 11.40 $ 11.13 2.4%
Austin $ 20.60 $ 18.55 11.1% $ 19.83 $ 18.53 7.0%
Northern Virginia $ 18.01 $ 18.24 (1.3)% $ 18.33 $ 18.34 (0.1)%
South Florida $ 14.42 $ 12.83 12.4% $ 14.16 $ 12.80 10.6%
Seattle $ 15.89 $ 16.02 (0.8)% $ 16.06 $ 15.82 1.5%
Suburban Maryland $ 19.81 $ 19.25 2.9% $ 19.64 $ 19.31 1.7%
Total Same Park $ 17.03 $ 16.36 4.1% $ 16.92 $ 16.18 4.6%
_______________
(1)Defined in Management's Discussion and Analysis of Financial Condition and Results of Operations-Analysis of Net Income-Same Park Portfolio table.
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Our past revenue growth has come from contractual annual rent increases, as well
as re-leasing of space at rates above outgoing rental rates. We believe the
percentage difference between outgoing cash rent inclusive of estimated expense
recoveries and incoming cash rent inclusive of estimated expense recoveries for
leases executed ("Cash Rental Rate Change") is useful in understanding trends in
current market rates relative to our existing lease rates. The following table
summarizes Cash Rental Rate Change and other key statistical information with
respect to the Company's leasing production for its Same Park portfolio for the
three months ended June 30, 2022 (square feet in thousands):
Three Months Ended June 30, 2022
Square Transaction
Footage Customer Costs per Cash Rental GAAP
Industrial Leased Retention Executed Foot Rate Change (1) Rent Change (2)
Northern California 149 53.8 % $ 4.77 32.1 % 63.3 %
Southern California 145 65.2 % 1.70 22.4 % 41.6 %
Dallas 90 96.5 % 2.23 43.0 % 59.7 %
Austin 14 35.7 0.72 7.7 % 30.4 %
Northern Virginia 32 77.3 % - 12.8 % 25.2 %
South Florida 176 71.1 % 1.06 36.8 % 49.2 %
Seattle 31 71.5 % 4.59 20.4 % 41.8 %
Suburban Maryland 44 100.0 % 0.08 16.5 % 18.2 %
Industrial Totals by Region 681 68.4 % $ 2.21 28.2 % 47.8 %
Flex
Northern California 23 65.6 % $ 1.63 8.6 % 13.3 %
Southern California 34 67.1 % 2.50 20.0 % 35.3 %
Dallas 66 69.2 % 4.96 12.6 % 29.3 %
Austin 65 82.3 % 11.72 2.6 % 17.5 %
Northern Virginia 52 56.8 % 4.84 1.0 % 8.5 %
South Florida 1 100.0 % - 25.7 % 43.9 %
Seattle 19 91.8 % 1.75 8.7 % 21.4 %
Flex Totals by Region 260 68.5 % $ 5.74 7.6 % 19.8 %
Office
Northern California 19 75.5 % $ 0.29 (4.1) % (4.0) %
Southern California 5 100.0 % 0.26 4.1 % 12.4 %
Northern Virginia 70 87.1 % 6.67 (5.3) % (0.4) %
Suburban Maryland 12 42.5 % 11.17 (4.4) % 1.1 %
Office Totals by Region 106 79.0 % $ 5.74 (4.4) % (0.8) %
Company Totals by Type 1,047 69.6 % $ 3.44 17.8 % 32.3 %
_______________
(1)Cash Rental Rate Change is computed by taking the percentage difference
between the incoming initial billed monthly cash rental rates inclusive of
estimated expense recoveries (excluding the impact of certain items such as
concessions or future escalators) on new leases or extensions executed in the
period, and the outgoing monthly cash rental rates inclusive of estimated
expense recoveries last billed on the previous lease for that space. Leases
executed on spaces vacant for more than the preceding twelve months have been
excluded from this measure.
(2)GAAP rent represents average rental payments for the term of a lease on a
straight-line basis in accordance with GAAP and excludes operating expense
reimbursements.
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The following table summarizes Cash Rental Rate Change and other key statistical information with respect to the Company's leasing production for itsSame Park portfolio for the six months endedJune 30, 2022 (square feet in thousands): Six Months Ended June 30, 2022 Square Transaction Footage Customer Costs per Cash Rental Rate GAAP Rent Change Industrial Leased Retention Executed Foot Change (1) (2) Northern California 375 67.3 % $ 3.28 22.0 % 43.7 % Southern California 378 71.3 % 2.17 16.3 % 30.5 % Dallas 187 57.4 % 2.89 24.9 % 41.8 % Austin 42 31.3 2.39 15.4 % 41.7 % Northern Virginia 172 93.0 % 1.20 7.9 % 19.3 % South Florida 475 66.7 % 1.25 29.1 % 50.3 % Seattle 76 68.8 % 3.42 19.2 % 39.4 % Suburban Maryland 52 100.0 % 0.25 13.1 % 14.8 % Industrial Totals by Region 1,757 69.4 % $ 2.14 20.3 % 38.1 % Flex Northern California 54 75.8 % $ 1.36 9.6 % 15.7 % Southern California 78 74.5 % 3.91 12.4 % 26.0 % Dallas 117 68.3 % 4.08 10.4 % 24.5 % Austin 168 86.3 % 8.73 4.1 % 17.3 % Northern Virginia 87 55.6 % 4.48 0.3 % 5.3 % South Florida 7 63.9 % 1.84 18.5 % 36.4 % Seattle 51 63.0 % 2.41 8.1 % 18.8 % Flex Totals by Region 562 70.5 % $ 5.07 6.8 % 17.9 % Office Northern California 38 77.0 % $ 0.15 (5.4) % (4.9) % Southern California 6 66.2 % 0.20 3.4 % 11.5 % Northern Virginia 144 68.9 % 9.46 (7.4) % (0.1) % Seattle 1 100.0 % - 6.2 % 15.3 % Suburban Maryland 34 56.3 % 10.59 (2.6) % 2.6 % Office Totals by Region 223 68.3 % $ 7.74 (5.9) % (0.8) % Company Totals by Type 2,542 69.6 % $ 6.19 13.7 % 27.7 % _______________ (1)Cash Rental Rate Change is computed by taking the percentage difference between the incoming initial billed monthly cash rental rates inclusive of estimated expense recoveries (excluding the impact of certain items such as concessions or future escalators) on new leases or extensions executed in the period, and the outgoing monthly cash rental rates inclusive of estimated expense recoveries last billed on the previous lease for that space. Leases executed on spaces vacant for more than the preceding twelve months have been excluded from this measure. (2)GAAP rent represents average rental payments for the term of a lease on a straight-line basis in accordance with GAAP and excludes operating expense reimbursements. For the three and six months endedJune 30, 2022 , weighted average occupancy was 95.6% and 95.9%, respectively, an increase from weighted average occupancy of 94.2% and 93.8% for the three and six months endedJune 30, 2021 . Renewals of leases with existing customers represented 73.8% of our leasing activity for the six months endedJune 30, 2022 . Average lease term of the leases executed during the three months endedJune 30, 2022 , respectively, was 3.8 years with associated average transaction costs (tenant improvements and leasing commissions) of$3.44 . For comparative purposes, average lease term and transaction costs on leases executed during the three months endedJune 30, 2021 were 3.3 years and$2.76 per square foot, respectively. The uncertainty of the COVID-19 pandemic's impact on the Company's future ability to increase or maintain existing occupancy levels, possible decreases in rental rates on new and renewal transactions, and potential additional rent deferrals, rent abatements, and customer defaults, may affect our ability to growSame Park rental income in the near future. 37
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Non-Same Park Portfolio: The table below reflects the assets comprising our
Purchase Square Occupancy at June
Acquired Property Date Acquired Location Price Feet 30, 2022
Jupiter Business Park November 2021 Plano, TX $ 25,600 141 100.0%
Port America September 2021 Grapevine, Texas 123,268 718 96.5%
Pickett Industrial Park October 2020 Alexandria, VA 46,582 246 58.2%
La Mirada Commerce Center January 2020 La Mirada, CA 13,513 73 100.0%
Total acquired property $ 208,963 1,178 89.1%
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 achieved can be affected by changes in general economic conditions. Due to the uncertainty of the COVID-19 pandemic's impact on the Company's ability to generate higher NOI from these newly acquired real estate facilities in the future, there can be no assurance that we will achieve our expectations with respect to newly acquired real estate facilities.
Multifamily: As of
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 % Change 2022 2021 % Change
Rental income $ 2,524 $ 2,248 12.3 % $ 4,893 $ 4,575 7.0 %
Cost of operations 1,181 1,177 0.3 % 2,405 2,244 7.2 %
NOI $ 1,343 $ 1,071 25.4 % $ 2,488 $ 2,331 6.7 %
Selected Statistical Data
Weighted average square foot
occupancy 94.9 % 94.6 % 0.3 % 94.9 % 94.4 % 0.5 %
As of June 30, 2022
Total costs (1) $ 115,426
Physical occupancy 94.1 %
Average rent per unit (2) $ 2,132
_______________
(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 three and six month increases in NOI in 2022 compared to 2021 were primarily due to an increase in rental income as the Tysons submarket continued to show signs of recovery. The cost of operations for the three months endedJune 30, 2022 remained flat compared to the same period in 2021. The increase in the cost of operations for the six months endedJune 30, 2022 is primarily due to an increase in utility charges, increased costs for common area cleaning, increased turnover costs, and unscheduled repairs to the garage door and HVAC units. Due to the uncertainty of the COVID-19 pandemic's impact on the Company's future ability to maintain existing occupancy levels and rental rates, we may continue to experience NOI levels below those which were achieved prior to the onset of the COVID-19 pandemic in the future. 38
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Assets sold or held for sale: These amounts include historical operating results with respect to properties that were sold or held for sale.
For the three and six months endedJune 30, 2022 , the operating results include 1.1 million square feet of 2022 Assets Sold. For the three and six months endedJune 30, 2021 , the operating results include 1.1 million square feet of 2022 Assets Sold and 0.2 million square feet of 2021 Assets Sold. Depreciation and Amortization Expense: Depreciation and amortization expense was$22.8 million and$45.9 million for the three and six months endedJune 30, 2022 and 2021, and consistent with the$22.5 million and$45.5 million for the same periods in 2021. General and Administrative Expense: General and administrative expense primarily represents executive and other compensation, including non-cash stock compensation, audit and tax fees, legal expenses and other costs associated with being a public company. For the three months endedJune 30, 2022 , general and administrative expense increased$6.3 million compared to the same period in 2021 primarily due to Merger related costs of$6.1 million for professional fees and investor related services. For the six months endedJune 30, 2022 , general and administrative expense increased$13.2 million compared to the same period in 2021 primarily due to Merger related costs of$6.1 million for professional fees and investor related services and a one-time cash payment of$6.7 million to the former CEO in the first quarter of 2022, which consists of a$6.6 million cash payment for RSUs, a$0.1 million cash payment for COBRA coverage reimbursement in accordance with his separation agreement, partially offset by the non-cash$0.6 million reversal of stock compensation for the unvested former CEO's shares net of dividend forfeiture expense.
Gain on Sale of Real Estate Facilities
On
OnMay 6, 2022 , the Company sold a 291,000 square foot office-oriented business park located inFairfax, Virginia , for net sale proceeds of$35.6 million , which resulted in a gain on sale of$6.5 million .
On
OnJune 17, 2021 , the Company sold a 198,000 square foot office-oriented flex business park located inChantilly, Virginia , for net sale proceeds of$32.6 million , which resulted in a gain on sale of$19.2 million .
Refer to "Note 13. Subsequent Events" for information regarding Company's asset
sales in
Liquidity and Capital Resources
This section should be read in conjunction with our consolidated statements of cash flows for the three and six months endedJune 30, 2022 and 2021 and the notes to our consolidated financial statements, which set forth the major components of our historical liquidity and capital resources. The discussion below sets forth the factors which we expect will affect our future liquidity and capital resources or which may vary substantially from historical levels.
Overview and Outlook
Our expected material cash requirements for the three months endedJune 30, 2022 and thereafter consist of (i) contractually obligated expenditures, including payments of principal and interest; (ii) other essential expenditures, including property operating expenses, maintenance capital expenditures and dividends paid in accordance with REIT distribution requirements; and (iii) opportunistic expenditures, including acquisitions and developments and repurchases of our securities. We expect to satisfy these short-term and long-term cash requirements through operating cash flow, disposition proceeds and opportunistic debt and equity financing. 39 -------------------------------------------------------------------------------- Table of Contents Refer to Note 12 - "Merger Events" to our consolidated financial statements under Item 1 in this quarterly report on Form 10-Q, for information regarding the Merger. If and when the Merger closes, we expect thatBlackstone will operate the Company with higher leverage and secured debt levels than the Company has historically utilized. These changes could significantly impact the Company's liquidity in future periods. These anticipated changes will and have impacted our credit ratings. For example, as a result of the announced Merger, our corporate credit rating by Standard and Poor's (S&P) was downgraded to BBB+, while our preferred stock classes were downgraded to a rating of BBB-. S&P placed all their ratings on PSB, including our 'BBB+' issuer credit rating, on CreditWatch with negative implications. The CreditWatch placement reflects that S&P could lower their ratings upon closing of the transaction, based on the pro forma capital structure and their view of the acquirer's financial policy. S&P no longer views PSB as being strategic to Public Storage. In addition, following the announcement of the Merger, Moody's Investors Service ("Moody's") placed under review for downgrade the ratings of the Company and our Baa2 preferred stock rating and the Baa1 senior unsecured shelf rating of our main operating subsidiary,PS Business Parks, L.P. The review for downgrade reflects the likelihood that PSB's credit profile will deteriorate underBlackstone's ownership, with the potential for meaningfully higher leverage and secured debt levels that could result in a multi-notch downgrade of the REIT's ratings, including crossing over to non-investment grade territory, upon transaction close.
Sources of Capital
Operating Cash Flow: We believe that our net cash provided by our operating activities will continue to be sufficient to enable us to meet our ongoing requirements for debt service, capital expenditures and distributions to our stockholders for the foreseeable future. In the last five years, we have retained$40 to$60 million in operating cash flow per year. Retained operating cash flow represents cash flow provided by operating activities, less stockholder and unit holder distributions and capital expenditures, excluding development costs. In addition, as ofJune 30, 2022 , we had$173.5 million in unrestricted cash. Proceeds from Dispositions: Refer to "Business Overview-Sale of Real Estate Facilities" above for a discussion of our dispositions. We expect to continue sell properties that are no longer consistent with our investment strategy and expect to use the proceeds from these dispositions to fund new acquisitions, development or other cash requirements. Access to Capital Markets: As a REIT, we are required to distribute at least 90% of our "REIT taxable income" to our stockholders each year, which relative to a taxable C corporation, limits the amount of cash flow from operations that we can retain for investment purposes, such as to fund acquisitions and developments. As a result, in order to grow our asset base, access to capital is important. InAugust 2021 , we amended and restated the credit agreement governing our revolving Credit Facility to increase the aggregate principal amount of the Credit Facility from$250.0 million to$400.0 million and extend the expiration date toAugust 2025 . The Credit Facility can also be expanded to$700.0 million . We can use the Credit Facility as necessary as temporary financing until we are able to raise longer term capital. Historically we have funded our long-term capital requirements with retained operating cash flow and proceeds from the issuance of common and preferred securities. We will select among these sources of capital based upon availability, relative cost, the impact of constraints on our operations (such as covenants), and the desire for leverage. 40
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Cash Requirements
Contractual Commitments: Our material contractual commitments as ofJune 30, 2022 consist of principal and interest on our Credit Facility, payment of dividends on our preferred stock (which if not paid will accrue), contractual construction commitments for development projects, and ground lease obligations:
•Credit Facility: As of
•Preferred stock dividends: We paid$19.2 million and to preferred stockholders during the six months endedJune 30, 2022 . We expect to continue to pay quarterly distributions of$9.6 million to our preferred stockholders for the foreseeable future or until such time as there is a change in the amount or composition of our series of preferred equity outstanding. Dividends on preferred equity are paid when and if declared by our Board of Directors (the "Board") and accumulate if not paid.
•Contractual commitments: Contractual construction commitments as of
•Ground lease obligations: Our contractual payment requirements under various operating leases as ofJune 30, 2022 are approximately$0.1 million for 2022 and$1.4 million thereafter. •Leasing transaction cost commitments: We have commitments, pursuant to executed leases throughout our portfolio, to spend$7.1 million on transaction costs, which include tenant improvements and lease commissions as ofJune 30, 2022 . Capital Expenditures: We define recurring capital expenditures as those necessary to maintain and operate our real estate at its current economic value. Nonrecurring capital improvements generally are related to property reconfiguration and other capital expenditures related to repositioning asset acquisitions. The following table sets forth our commercial capital expenditures paid for in the six months endedJune 30, 2022 and 2021 on an aggregate and per square foot basis: Six Months Ended June 30, 2022 2021 2022 2021 (in thousands) (per square foot) (1)Commercial Real Estate Recurring capital expenditures Capital improvements$ 5,116 $ 4,429 $ 0.19 $ 0.16 Tenant improvements 8,956 7,024 0.33 0.25 Lease commissions 2,928 3,404 0.11 0.12 Total commercial recurring capital expenditures 17,000 14,857 0.63 0.53 Nonrecurring capital improvements 2,120 843 0.08 0.03
Total commercial capital expenditures
$ 0.71 $ 0.56 _______________
(1)Per square foot amounts are calculated based on capital expenditures divided by total weighted average square feet owned for the periods presented.
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The following table summarizes recurring capital expenditures paid and the
related percentage of NOI for
Six Months Ended June 30,
Recurring
Recurring Capital Expenditures
Capital Expenditures as a Percentage of NOI
2022 2021 2022 2021
Region
Same Park
Northern California $ 1,729 $ 4,143 (58.3)% 3.7 % 9.4 %
Southern California 3,452 1,535 124.9% 14.5 % 6.7 %
Dallas 1,076 1,283 (16.1)% 15.0 % 20.5 %
Austin 1,055 569 85.4% 9.6 % 5.4 %
Northern Virginia 3,354 2,713 23.6% 13.5 % 11.3 %
South Florida 1,394 958 45.5% 7.2 % 5.6 %
Seattle 1,047 607 72.5% 13.5 % 8.2 %
Suburban Maryland 495 1,534 (67.7)% 7.9 % 25.3 %
Total Same Park 13,602 13,342 1.9% 9.2 % 9.6 %
Non-Same Park
Southern California 32 38 (15.8)%
Dallas 554 72 669.4%
Northern Virginia 2,077 145 1332.4%
Total Non-Same Park 2,663 255 944.3%
Assets sold or held for sale 735 1,260 (41.7)%
Total commercial recurring 14.4%
capital expenditures $ 17,000 $ 14,857
In the last five years, our annual Same Park recurring capital expenditures have
ranged between 10.7% and 14.3% as a percentage of NOI, and we expected future
recurring capital expenditures to be within this range. While what we disclose
herein with respect to capital expenditures represents our best estimates at
this time, there can be no assurance that these amounts will not change
substantially in the future for various reasons, including the potential impact
of the COVID-19 pandemic on capital projects and leasing volume.
Redemption of Preferred Stock: Shares of preferred stock are redeemable by the
Company five years after issuance or in order to preserve its status as a REIT,
but shares of preferred stock are never redeemable at the option of the holder.
Historically, we have reduced our cost of capital by refinancing higher coupon
preferred securities with lower coupon preferred securities. Our Series X
preferred shares, with a coupon rate of 5.25%, at a par value of $230.0 million
and Series Y preferred shares, with a coupon rate of 5.20%, at a par value of
$200.0 million are redeemable in September 2022 and December 2022 , respectively.
Future redemptions of preferred stock will depend upon many factors, including
available cash and our cost of capital. Refer to Note 9 to our consolidated
financial statements or more information on our preferred stock.
Acquisitions of real estate facilities: Refer to "Business Overview-Acquisition
of Real Estate Facilities" above for a discussion of our recent acquisitions. We
continue to seek to acquire additional real estate facilities; however, there is
significant competition to acquire existing facilities in our markets and there
can be no assurance as to the volume of future acquisition activity.
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Development real estate facilities: Refer to "Business Overview-Development or Redevelopment of Real Estate Facilities" above for a discussion of our recently completed developments. As ofJune 30, 2022 , we were in the process of developing an approximately 83,000 square foot multi-tenant industrial building at our212 Business Park located inKent, Washington . During the quarter endedJune 30, 2022 ,$1.5 million was reclassified from land to property held for development on our consolidated balance sheet and, as ofJune 30, 2022 ,$10.7 million of the estimated$17.1 million total development costs had been incurred. The total investment, inclusive of land and development costs, for the212 Business Park development is projected to be$18.6 million . This construction project is scheduled to be completed in the fourth quarter of 2022. As ofJune 30, 2022 , we have contractual construction commitments totaling$3.7 million that will be paid to various contractors as the project is completed. As ofJune 30, 2022 , we were in the process of developing an approximately 17,000 square foot multi-tenant industrial building at ourBoca Commerce Park , located inBoca Raton, Florida . During the quarter endedJune 30, 2022 ,$0.6 million was reclassified from land to property held for development on our consolidated balance sheet and, as ofJune 30, 2022 ,$3.4 million of the estimated$4.2 million total development costs had been incurred. The total investment, inclusive of land and development costs, for theBoca Commerce Park development is projected to be$4.8 million . This construction project is scheduled to be completed in the fourth quarter of 2022. As ofJune 30, 2022 , we have contractual construction commitments totaling$0.8 million that will be paid to various contractors as the project is completed. InAugust 2020 , we entered into the Brentford Joint Venture for the purpose of developing a second multifamily property, Brentford at The Mile, a planned 411-unit multifamily apartment complex. We contributed the Brentford Parcel at a value of$18.5 million , for which we received equity contribution credit in the Brentford Joint Venture. Our cost basis in the Brentford Parcel was$5.1 million as ofJune 30, 2022 Construction of Brentford at The Mile commenced inAugust 2020 and is anticipated to be completed over a period of 24 to 36 months at an estimated development cost of$110 million to$115 million , excluding land cost. As ofJune 30, 2022 , the development cost incurred was$77.2 million , which is reflected in land and building held for development, net on our consolidated balance sheets along with our$5.1 million cost basis in the Brentford Parcel. As ofJune 30, 2022 , we have contractual construction commitments totaling$20.8 million that will be paid to various contractors as the project is completed. Repurchase of Common Stock: The Board has approved a common stock repurchase program and we may in the future acquire our shares under the program. As ofJune 30, 2022 , management has the authorization to repurchase an additional 1,614,721 shares. No shares of common stock were repurchased under the board-approved common stock repurchase program during the three and six months endedJune 30, 2022 . The Company does not expect to repurchase shares prior to the closing of the Mergers. Requirement to Pay Distributions: Our election to be taxed as a REIT, as defined by the Code, applies to all periods presented herein. As a REIT, we do not incurU.S. federal corporate income tax on our "REIT taxable income" that is distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and we continue to meet certain organizational and operational requirements. We believe we have met these requirements in all periods presented herein, and we expect we will continue to qualify as a REIT in future periods.
We paid REIT qualifying distributions of
Our consistent, long-term dividend policy has been to set dividend distribution amounts based on our taxable income.
OnJuly 8, 2022 , the Company announced that, in accordance with the Merger Agreement, the Board declared (i) a prorated quarterly cash dividend on the Company's common stock equal$0.216848 per share and (ii) a cash dividend of$5.25 per share of the Company's common stock (the "Closing Cash Dividend), each payable immediately before the effective time of the Partnership Merger, to holders of record as of the close of business on the business day immediately preceding the closing of the Mergers and contingent upon the approval of the Company Merger by the Company's stockholders, the satisfaction or waiver of the other conditions to the Mergers, and the Merger Agreement not having been terminated. The Closing Cash Dividend will be designated, to the maximum extent permitted by applicable law, as a "capital gains dividend" under the Code. The per share merger consideration will be reduced by the per share amount of such Closing Cash Dividend. Refer to Note 12 - "Merger Events" to our consolidated financial statements under Item 1 in this quarterly report on Form 10-Q, for additional information regarding the Merger. 43
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Funds from Operations, Core Funds from Operations, and Funds Available for Distributions
Funds from Operations ("FFO") is a non-GAAP measure defined by the National
Association of Real Estate Investment Trusts and is considered a helpful measure
of REIT performance by REITs and many REIT analysts. FFO represents GAAP net
income before real estate depreciation and amortization expense, gains or losses
on sales of operating properties and land and impairment charges on real estate
assets.
We also present Core FFO and Funds Available for Distribution ("FAD") which are
both also non-GAAP measures. The Company defines Core FFO as FFO excluding the
impact of (i) income allocated to preferred stockholders to the extent
redemption value exceeds the related carrying value and (ii) other nonrecurring
income or expense items as appropriate. FAD represents Core FFO adjusted to (i)
deduct recurring capital improvements and capitalized tenant improvements and
lease commissions and (ii) remove certain non-cash income or expense items such
as amortization of deferred rent receivable and stock compensation expense.
FFO for the three and six months ended June 30, 2022 was $1.68 per share and
$3.33 per share, representing a 4.0% and 2.9% decrease from the same periods in
2021.
The decrease in FFO per share for the three months ended June 30, 2022 was due
to Merger related costs of $6.1 million and higher general and administrative
expenses. The decrease in FFO was partially offset by lower preferred
distributions in the second quarter due to the Series W preferred stock
redemption in Q4 2021, and higher NOI as described above.
The decrease in FFO per share for the six months ended June 30, 2022 was due to
the above-mentioned Merger costs of $6.1 million , a one-time cash payment of
$6.6 million to the former Chief Executive Officer ("CEO") for RSUs and a $0.1
million cash payment for COBRA coverage reimbursement, in accordance with his
separation agreement, partially offset by a $0.6 million non-cash adjustment
related to the reversal of stock compensation for the unvested former CEO's
shares, net of dividend forfeiture expense, and higher general and
administrative expenses. The decrease in FFO was partially offset by lower
preferred distributions due to the Series W preferred stock redemption in Q4
2021, and higher NOI as described above.
Core FFO for the three and six months ended June 30, 2022 was $1.85 per share
and $3.68 , per share representing a 4.5% and 7.0% increase from the same periods
in 2021.
Core FFO for the three and six months ended June 30, 2022 excludes the impact of
the Merger related costs of $6.1 million and the a one-time cash payment of $6.7
million to the former CEO, which consists of a $6.6 million cash payment for
RSUs, a $0.1 million cash payment for COBRA coverage reimbursement in accordance
with his separation agreement, partially offset by $0.6 million non-cash
adjustment related to the reversal of stock compensation for the unvested former
CEO's shares, net of dividend forfeiture expense.
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The following table reconciles net income allocable to common stockholders to
FFO, Core FFO and FAD as well as net income per share to FFO per share and Core
FFO per share (amounts in thousands, except per share data):
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Net income allocable to common
stockholders $ 77,077 $ 45,595 $ 149,070 $ 73,481
Adjustments
Gain on sale of real estate facilities (61,842) (19,193) (118,801) (19,193)
Depreciation and amortization 22,799 22,514 45,931 45,499
Net income allocable to noncontrolling
interests 20,388 12,094 39,437 19,505
Net income allocable to restricted stock
unit holders 475 314 998 478
FFO allocated to joint venture partner (33) (18) (56) (45)
FFO allocable to diluted common stock and 58,864 61,306 116,579 119,725
units
Acquisition and merger costs 6,147 - 6,147 - CEO cash payment for RSUs net of reversal of stock compensation - - 6,108 - Maryland reincorporation costs - 510 - 510 Core FFO allocable to diluted common stock and units$ 65,011 $
61,816
FAD
FFO allocable to diluted common stock and units$ 58,864 $ 61,306 $ 116,579 $ 119,725 Adjustments: Recurring capital improvements (3,055) (3,638) (4,611) (4,183) Tenant improvements (5,837) (3,849) (8,735) (6,254) Capitalized lease commissions (1,620) (1,430) (2,920) (3,160) Total recurring capital expenditures for assets sold (139) (542) (734) (1,261) Cash paid for taxes in lieu of stock upon vesting of restricted stock units (387) (5) (1,318) (3,202) Non-cash rental income (1) (1,015) (183) (2,172) (1,490) Non-cash stock compensation expense 2,000 2,301 2,940 4,081 FAD allocable to diluted common stock and units 48,811 53,960 99,029 104,249 Weighted average outstanding Common stock 27,630 27,531 27,618 27,513 Operating partnership units 7,305 7,305 7,305 7,305 Restricted stock units 39 32 39 35 Common stock equivalents 92 101 89 98 Total diluted common stock and units 35,066 34,969 35,051 34,951 Reconciliation of Earnings per share to FFO per share Net income per common stock-diluted $ 2.78$ 1.65 $ 5.38$ 2.66 Gain on sale of real estate facilities (1.76) (0.55) (3.39) (0.55) Depreciation and amortization expense 0.65 0.64 1.31 1.31 Net income allocated to restricted stock unit holders 0.01 0.01 0.03 0.01 FFO per share $ 1.68$ 1.75 $ 3.33$ 3.43 Acquisition and merger costs 0.17 - 0.17 - CEO cash payment for RSUs net of reversal of stock compensation - - 0.18 - Maryland reincorporation costs - 0.01 - 0.01 Core FFO per share $ 1.85$ 1.77 $ 3.68$ 3.44 _______________ (1)Non-cash rental income includes amortization of deferred rent receivable (net of write-offs), in-place lease intangible, tenant improvement reimbursements, and lease incentives. We believe FFO, Core FFO, and FAD assist investors in analyzing and comparing the operating and financial performance of a company's real estate from period to period. FFO, Core FFO, and FAD are not substitutes for GAAP net income. In addition, other REITs may compute FFO, Core FFO, and FAD differently, which could inhibit comparability. 45
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