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Fitch Affirms PS Business Parks' IDR at 'BBB' & Preferred at 'BBB-'; Outlook Stable

^{Published on 2010-05-26 12:35:14 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the credit ratings of PS Business Parks, Inc. (NYSE: PSB) and its operating partnership, PS Business Parks, L.P. (collectively, PSB, or the company) as follows:

PS Business Parks, Inc.

--Issuer Default Rating (IDR) at 'BBB';

--$571.9 million preferred stock at 'BBB-';

--$100 million unsecured revolving credit facility at 'BBB' (as guarantor).

PS Business Parks, L.P.

--IDR at 'BBB';

--$100 million unsecured revolving credit facility at 'BBB' (as borrower).

The Rating Outlook is Stable.

The 'BBB' ratings revolve around the cash flows generated by the company's flex, industrial and office property portfolio in excess of its fixed charges, which are predominantly preferred stock dividends. The ratings further reflect PSB's ample unencumbered asset coverage of preferred stock (the company had no unsecured debt outstanding as of March 31, 2010), strong liquidity position, limited debt and minimal refinance risk, and solid risk-adjusted capitalization.

The affirmation takes into account Fitch's view that ongoing pressure on rent rollovers will drive down same-park net operating income (NOI) by mid-single digits in 2010 and low-single digits in 2011, though fixed-charge coverage is not expected to weaken materially. Additional offsetting factors include occupancy rates that are below historical levels, and the inherent geographical focus and modest overall size of the portfolio.

PSB generated a fixed-charge coverage ratio (defined as recurring operating EBITDA less recurring capital expenditures less straight-line rents divided by interest incurred and preferred stock dividends) of 2.8 times (x) for the 12 months ended Mar. 31, 2010, consistent with full-year 2009 performance. Seventy-five of the company's 79 business parks and other properties (totaling 20.5 million square feet of commercial real estate) are unencumbered by mortgage debt and thus the majority of net operating income is unencumbered NOI. In addition, unencumbered asset coverage of preferred stock was 3.0x as of March 31, 2010, providing downside protection to preferred stockholders.

The company also has a solid liquidity position, as sources of liquidity (unrestricted cash pro forma for acquisitions subsequent to March 31, 2010 and an announced redemption of all series K preferred stock, availability under the company's unsecured revolving credit facility, and Fitch projected retained cash flows from operating activities after dividend payments) cover uses of liquidity (debt maturities and principal payments and projected recurring capital expenditures) by 7.8x for April 1, 2010 to Dec. 31, 2011.

Broadly, the company has limited refinance risk, and strong risk-adjusted capitalization for the 'BBB' ratings. No more than 10% of the company's $52.5 million in debt matures between 2010 and 2012, and the company's common and preferred stock capital base enables PSB to withstand property value movements. Consistent with Fitch's criteria for rating hybrid securities, leverage as measured by net debt plus 25% of preferred stock to recurring operating EBITDA was strong at 0.2x as of March 31, 2010. For illustrative purposes, net debt plus 100% of preferred stock to recurring operating EBITDA was 2.9x as of March 31, 2010.

Fitch anticipates ongoing pressure on operating fundamentals. Following an average same-park NOI decline of negative 4.4% in 2009 and negative 5.9% in first-quarter 2010, Fitch anticipates further declines in 2010 and 2011 due to PSB's performance thus far during 2010, PSB's staggered lease expiration schedule, and broader market data. Recent rent renewal rates have declined by approximately 15%, indicating PSB's limited near-term pricing power.

Offsetting same-park NOI trends, PSB continues to take advantage of its strong liquidity position by actively acquiring select business parks in areas such as in Austin, Texas, and Rockville, Maryland, bolstering future earnings power. Additionally, on May 6, 2010, PSB announced that it is calling for redemption of all series K preferred stock on June 7, 2010 with excess on-balance-sheet cash, reducing annualized preferred stock dividends by $4.3 million. Therefore, absent a significant change in PSB's capital structure, Fitch anticipates that PSB will withstand same-park NOI pressure, with fixed-charge coverage remaining between 2.5x and 3.0x.

Same-park weighted average occupancy rates declined to 90.4% in 2009 from 93.4% in 2008, but improved to 91.4% in 1Q2010 due to leasing activity, mainly from customers leasing space under 5,000 square feet. Stronger markets include the Washington D.C. area due to government-related demand and Austin, Texas due to favorable demographics and an active technology sector. Challenged markets include those most heavily affected by the high unemployment rate or those still struggling with the housing downturn, such as Southern California, Portland, OR and Arizona.

The ratings further capture the high geographical focus and relatively small size of the portfolio. PSB's properties are located across eight states, but Southern California (22.5%), Northern Virginia (21.3%), Maryland (17.1%) and Southern Florida (11.0%) represent nearly 72% of PSB's annual base rents. The company had $2.3 billion in undepreciated book assets as of March 31, 2010.

The Stable Rating Outlook reflects Fitch's view that fixed-charge coverage will remain in the range of 2.5x to 3.0x despite challenging fundamentals, and that the size of the unencumbered portfolio will not change materially given the company's financial strategy. Additionally, the covenants associated with PSB's $100 million unsecured revolving credit facility, which was undrawn as of March 31, 2010 and matures in August 2010, are not expected to limit PSB's financial flexibility.

The one-notch difference between the company's IDR and preferred stock rating reflects the fact that unlike the majority of preferred stock issuers in the real estate investment trust (REIT) industry (which have a two-notch difference between their IDRs and preferred stock ratings), PSB has, and is expected to maintain, limited levels of debt; therefore, recoveries of preferred stock would likely be stronger than recoveries of preferred stock of other REITs.

The following factors may result in positive momentum on the ratings and/or Rating Outlook:

--If the company's fixed-charge coverage ratio sustains above 3.0x (for the 12 months ended March 31, 2010, fixed-charge coverage was 2.8x);

--If the company's unencumbered asset coverage of unsecured debt and preferred stock sustains above 3.0x (as of March 31, 2010, the company's unencumbered asset coverage ratio was in a range around 2.9x);

--Increased geographical diversification and size of the portfolio.

The following factors may result in negative momentum on the ratings and/or Rating Outlook:

--If the company's fixed-charge coverage ratio sustains below 2.5x;

--If the company's unencumbered asset coverage of unsecured debt and preferred stock sustains below 2.0x;

--If the company issues unsecured debt to fund its acquisition and development activities, which would deviate from its current financing strategy of utilizing retained cash flow and net proceeds from the issuance of preferred stock.

Relevant Fitch criteria available on the Fitch website at '[ www.fitchratings.com ]' include:

--Criteria for Rating U.S. Equity REITs and REOCs, April 16, 2010;

--Equity Credit for Hybrids & Other Capital Securities - Amended, Dec. 29, 2009;

--Rating Hybrid Securities, Dec. 29, 2009;

--Recovery Rating and Notching Criteria for REITs, Dec. 23, 2009;

--Corporate Rating Methodology, Nov. 24, 2009;

--Evaluating Corporate Governance, Dec. 12, 2007;

--Parent and Subsidiary Rating Linkage, June 19, 2007.

PSB is a fully-integrated, self-advised, and self-managed REIT that acquires, owns, operates and develops commercial properties, primarily multi-tenant flex, office and industrial space. As of March 31, 2010, PSB owned 77% of the common partnership units of PS Business Parks, L.P. The remaining common partnership units were owned by Public Storage. As of March 31, 2010 PSB had approximately $2.3 billion in undepreciated book assets and a total market capitalization of approximately $2.5 billion. As of May 6, 2010, PSB wholly owned 20.5 million rentable square feet with 3,910 customers located in eight states.

Additional information is available at '[ www.fitchratings.com ]'.

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