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Neutral Stance on PSB

Zacks Equity Research

On Oct 8, 2013, we reinstated our long-term recommendation on PS Business Parks Inc. (PSB) – a real estate investment trust (:REIT) – at Neutral. The decision is based on the company’s decent operating performance with rising rental revenues. Yet stiff competition, rising interest rates and a volatile office sector remain our plausible concerns.

Why the Neutral Stance?

PS Business Parks’ portfolio in diversified markets enables it to tap opportunities and neutralize the operating risks associated with the economic down cycles. In addition, it aims to expand in high growth areas through accretive acquisitions.

Also, PS Business Parks seeks to maximize its cash flow by controlling capital expenditures associated with re-leasing space by acquiring and owning properties that can be easily reconfigured and which are suited for various uses. This initiative made by the company appeals to a wide range of tenants.

However, PS Business Parks’ second-quarter 2013 FFO per share of $1.19 missed the Zacks Consensus Estimate by 2 cents, due to an uptick in cost of operations as well as a rise in preferred equity distributions. Nevertheless, the quarterly FFO per share managed to come above the year-over-year figure, aided by a rise in rental income in both the Same Park and Non-Same Park facilities.

Yet, the present weak office market scenario and stiff competition from commercial property developers remain plausible concerns for this Zacks Rank #3 (Hold) stock. In addition, rising interest rates put pressure on PS Business Parks’ ability to refinance existing debt and interest cost on new debt increases as well. This adversely affects the company’s FFO and funds available for distribution.

The Zacks Consensus Estimate for 2013 and 2014 FFO (funds from operations) per share remained unchanged at a respective $4.83 and $5.06, over the last 60 days.

Other Stocks to Consider

Some better performing REITs include Cousins Properties Inc. (CUZ), Douglas Emmett Inc (DEI) and Piedmont Office Realty Trust Inc. (PDM). All the stocks have a Zacks Rank #2 (Buy).

Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

Read the Full Research Report on PSB
Read the Full Research Report on CUZ
Read the Full Research Report on PDM
Read the Full Research Report on DEI

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