Aside from U.S. government bonds, there are no risk-free investments. However, some are less risky than others. With that in mind, here's a closer look at the risk profile of PS Business Parks (NYSE: PSB).
How risky is PS Business Parks' business model?
PS Business Parks is a real estate investment trust (REIT) focused on industrial real estate. The industrial REIT primarily owns multi-tenant industrial, office, and flex (an office and warehouse combination with several uses) properties. The company owns more than 90 business parks in 12 markets with 27.6 million square feet of space leased to more than 5,000 customers. The REIT also has about 800 multifamily units.
The company's diversified operations help reduce risk. While it has a portfolio focused on industrial and industrial-flex properties (89.4% of its portfolio), it has a large-scale, geographically diversified portfolio leased to a variety of tenants led by the U.S. government and Amazon at 3.4% and 1.6% of its total annualized rent, respectively. That makes it less risky than other REITs, which might concentrate on one market or have outsized exposure to a single tenant type or industry.
While the company does have some exposure to the office market (11% of its portfolio), which is facing some pandemic-related headwinds, most of its properties are industrial (67%) or industrial-flex (22%). Its industrial-flex properties are versatile and appeal to a broad range of customers, providing a stable cash flow profile. Meanwhile, its industrial properties are in high demand, given the need for warehouse space in the country.
How risky is PS Business Parks' financial profile?
PS Business Parks' supports its relatively low-risk portfolio with one of the best balance sheets in the REIT sector. It's one of only a handful of REITs with A-rated credit. That's due to its fortress-like balance sheet, which features no long-term debt. Instead, PS Business Parks uses preferred equity to help finance its operations. Even if we counted this as debt, the company has a low leverage ratio of 3.1 times net debt and preferred equity to EBITDA.
Meanwhile, PS Business Parks compliments that strong balance sheet with a reasonable dividend payout ratio. For 2020, PS Business Parks paid out 77.2% of its funds available for distribution in supporting its 2.8%-yielding dividend.
That conservative payout ratio allows it to retain some cash to help finance expansion. Combine that with its top-tier balance sheet, and PS Business Parks has one of the lowest-risk financial profiles in the entire REIT industry.
The company also takes a measured approach to growth. It will opportunistically develop industrial buildings on existing land within its business parks and redevelop older facilities. Meanwhile, it's working with a joint venture partner on a larger scale master-planned redevelopment project that's adding 3,000 multifamily units, 200,000 square feet of Class A office space, and 300,000 square feet of storage in nine phases.
The company will also selectively acquire properties financed primarily by recycling capital through the opportunistic sale of nonstrategic assets. This conservative approach to expanding and financing growth also helps reduce risk.
PS Business Parks is one of the least risky REITs
REITs are generally less risky than other investments because most own cash-flowing commercial real estate backed by leases. However, PS Business Parks takes things a step further by holding a diversified portfolio of lower-risk industrial properties supported by one of the best financial profiles in the sector. Add in its conservative approach to growth, and it's an ideal REIT for investors seeking a lower-risk option.