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Fitch Upgrades PS Business Parks' IDR to 'BBB+' and Preferred Stock to 'BBB'; Outlook Stable

^{Published on 2011-04-21 13:35:41 - Market Wire}
 

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

PS Business Parks, Inc.
--Issuer Default Rating (IDR) to 'BBB+' from 'BBB';
--$598.5 million Preferred Stock to 'BBB' from 'BBB-'.

PS Business Parks, L.P.
--IDR to 'BBB+' from 'BBB';
--$100 million unsecured revolving credit facility to 'BBB+' from 'BBB'.

The Rating Outlook is Stable.

The upgrade of PSB's ratings reflects that the company is expected to generate a fixed charge coverage ratio that is commensurate with a 'BBB+' rating. The upgrade also takes into account the company's minimal debt levels, which stem from a funding strategy focused on preferred and common stock and which result in low leverage and minimal refinance risk throughout capital market cycles. In addition, PSB's pool of unencumbered business parks provides value to unsecured creditors and preferred stockholders. While the company's credit ratings have been upgraded, Fitch's credit concerns for PSB include challenging commercial property market fundamentals in the company's modestly sized portfolio, as declining rental rates are expected to continue driving down same-park net operating income (NOI) in 2011. In addition, the company's near-term liquidity position has recently been adversely impacted by several transactions following a loan received from Public Storage.

PSB's fixed charge coverage ratio (defined as recurring operating EBITDA less Fitch's estimate of recurring capital expenditures less straight-line rents divided by interest expense, preferred stock dividends and preferred unit distributions) was solid at 2.9 times (x) during 2010, compared with 2.8x in 2009 and 2.5x in 2008. Improvements stem from reductions in the company's preferred stock dividends and preferred unit distributions over the past several years, offset by recent declines in recurring operating EBITDA due to rental rate rolldowns. Fitch anticipates that rental rates will remain under pressure in 2011 and recover in 2012, with fixed charge coverage remaining in the high 2.0x range over the next 12-24 months. In a more adverse case than currently anticipated by Fitch over the next 12-24 months, fixed charge coverage would approach 2.5x, which would remain adequate for the 'BBB+' rating.

As a result of its mostly perpetual funding strategy, PSB has low leverage, with net debt to recurring operating EBITDA of 0.8x as of Dec. 31, 2010. While not fully indicative of leverage given the perpetual nature of PSB's preferred stock, net debt plus preferred stock to recurring operating EBITDA was also strong for the 'BBB+' rating as of Dec. 31, 2010 at 4.4x, compared with 3.0x as of Dec. 31, 2009 and 4.3x as of Dec. 31, 2008. The improvement in 2009 was due to the company's sizeable cash balance, which was subsequently deployed to fund at the acquisition of under-leased properties during 2010. Fitch anticipates that this metric will remain between 3.5x and 4.5x over the next 12-24 months, which would remain strong for the 'BBB+' rating. In a more challenging operating environment than expected by Fitch, this metric could exceed 5.0x, which would be somewhat weak for the rating.

Eighty-one of the company's 85 business parks are unencumbered, giving PSB the ability to pledge additional assets if needed, though this is unlikely due to the company's limited refinance risk. Top markets in the portfolio include Northern Virginia (24.4% of annualized rental income as of Dec. 31, 2010), Southern California including Orange County, Los Angeles County and San Diego County (19.5%), Maryland (16.8%), Southern Florida (10.1%) and Northern California (6.8%). In addition, as of Dec. 31, 2010, unencumbered asset coverage of unsecured debt and preferred stock (calculated as 2010 unencumbered property NOI divided by a stressed capitalization rate of 9% divided by unsecured debt and preferred stock) was solid at 2.7x.

Operating fundamentals remain pressured in the face of the nascent economic recovery. In 2010, same-park NOI declined by 3.7% following a 4.6% decline in 2009 and 2.6% growth in 2008. A decline in same-park realized rent per square foot to $14.79 from $15.43, offset by a same-park weighted average occupancy increase to 91.5% from 90.4%, drove this trend. However, PSB has outperformed its peers' occupancy and has been in line with its peers' same-store NOI performance through the recent cycle. Moreover, PSB's same-park NOI has exceeded broader market conditions, due in part to PSB's granular tenant roster and smaller spaces that give users flexibility.

Going forward, Fitch expects a low-single digit NOI decline in 2011 with a subsequent low-single digit recovery in 2012. As of Dec. 31, 2010, 20.5% of the company's leases expire in 2011 and 24.4% expire in 2012, which is a concern should market rents continue to be below in-place rents.

PSB's near-term liquidity position is good, but was negatively affected by several transactions following the February 2011 origination of a $121 million loan to PSB from Public Storage. Public Storage has an IDR of 'A' by Fitch with a Stable Outlook and, when including its common partnership interest in PSB's operating partnership, has a 41% equity interest in PSB. As of Dec. 31, 2010, PSB's sources of liquidity (cash, availability under the unsecured revolving credit facility, projected retained cash flows from operating activities) exceeded uses of liquidity (debt maturities and projected recurring capital expenditures) by 2.5x for 2011 and 2012. Pro forma for the Public Storage loan, which along with retained cash flow was used to fund the repurchase of series J and series Q preferred units for $39.1 million and pay down $93 million outstanding under the company's $100 million revolving credit facility, liquidity coverage was 1.4x. Fitch expects that the company will be able to access the preferred or common stock market to address the repayment of the Public Storage loan that matures in August 2011.

The Stable Rating Outlook reflects Fitch's view that fixed-charge coverage will remain in a range between 2.5x to 3.0x despite market fundamentals, and also reflects that the unencumbered asset coverage will remain solid. Additionally, the covenants associated with PSB's $100 million unsecured revolving credit facility are not expected to limit PSB's financial flexibility.

The one-notch difference between the company's IDR and preferred stock rating reflects that, unlike the majority of preferred stock issuers in the 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:
-- Increased geographical diversification and size of the portfolio;
-- Continued access to multiple forms of capital;
-- If the company's fixed-charge coverage ratio sustains above 3.5x (for 2010, fixed-charge coverage was 2.9x);
-- If the company's net debt plus preferred stock to recurring operating EBITDA ratio sustains below 3.0x (as of Dec. 31, 2010, this metric was 4.4x).

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 net debt plus preferred stock to recurring operating EBITDA ratio sustains above 4.5x;
-- A liquidity shortfall (the company's liquidity coverage ratio as of Dec. 31, 2010 pro forma for the Public Storage loan, recent preferred unit redemptions, and the paydown of PSB's revolving credit facility was 1.4x for 2011 and 2012).

PS Business Parks, Inc. is a fully-integrated, self-advised, and self-managed real estate investment trust (REIT) headquartered in Glendale, CA that acquires, owns, operates and develops commercial properties, primarily multi-tenant flex, office and industrial space. As of Dec. 31, 2010, the company owned and operated approximately 21.8 million rentable square feet of commercial space, comprising 85 business parks, located in eight states: Arizona, California, Florida, Maryland, Oregon, Texas, Virginia and Washington. The company also manages approximately 1.4 million rentable square feet on behalf of Public Storage and its affiliated entities. As of Dec. 31, 2010, PSB had approximately $2.4 billion in undepreciated book assets and a total market capitalization of approximately $2.6 billion.

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

Applicable Criteria and Related Research:
--'Criteria for Rating U.S. Equity REITs and REOCs' (March 15, 2011);
--'Corporate Rating Methodology' (Aug. 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).

Applicable Criteria and Related Research:
Criteria for Rating U.S. Equity REITs and REOCs
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=610687 ]
Corporate Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 ]
Rating Hybrid Securities
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493086 ]
Recovery Rating and Notching Criteria for REITs
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492828 ]

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