PS Business Parks (NYSE: PSB) is a real estate investment trust (REIT) focused on industrial real estate. However, unlike most industrial REITs that concentrate on operating large-scale logistics properties leased to single tenants primarily in the e-commerce sector, PS Business Parks focuses on owning multi-tenant flex properties leased to small businesses. That distinction is worth noting, since it will affect its growth prospects. With that in mind, here's a look at where the REIT seems headed over the next three years.
Where PS Business Parks is today
PS Business Parks currently owns 90 business parks in 12 U.S. markets. It controls 27.5 million square feet of office, industrial, and flex space (an office and warehouse combination with several uses, including office, assembly, showroom, laboratory, light manufacturing, and warehouse) leased to more than 5,000 tenants, primarily small businesses. The REIT also owns a 95% interest in a 395-unit multifamily complex and a 98.2% interest in another 411-unit apartment complex currently under development.
Where PS Business Parks seems headed
PS Business Parks prides itself in owning real estate built for small businesses. It owns, operates, develops, and acquires multipurpose commercial real estate that can meet a variety of tenants' needs.
One advantage of going small is that PS Business Parks' properties tend to generate more income per square foot than other industrial properties. For example, its same-park cash NOI per available square foot has averaged $9.74 over the past two years, compared to $5.99 per square foot for its publicly traded industrial peers. The company's niche focus has allowed it to steadily grow its revenue per available foot and FFO. Up until last year, this strategy had produced superior total returns.
Unfortunately, the COVID-19 outbreak had a larger impact on its small business tenants than other industrial REITs. Its rental collection rate averaged around 95% in 2020, while logistics REIT behemoth Prologis' (NYSE: PLD) collection rate was over 99% during the fourth quarter.
However, that headwind should become a tailwind as the U.S. economy bounces back. Further, demand for storage space will likely increase in coming years as companies shift from just-in-time inventory strategy to keeping more stock on hand in case of future supply disruptions. That should enable PS Business Parks to continue growing its rental rates.
Meanwhile, the REIT should be able to continue expanding its portfolio. The company has a long history of making accretive acquisitions. For example, it bought a 100%-occupied, 246,000-square-foot multi-tenant industrial park in Alexandria, Virginia, during the fourth quarter of 2020 for $46.3 million. Meanwhile, it also has a great track record in development by building new business parks and redeveloping existing assets to higher and better uses.
That focus on maximizing the value of its real estate led PS Business Parks to start developing apartment complexes in high-demand markets. Last August, it started construction of Brentford at The Mile, a 411-unit multifamily complex within its 628,000 square foot office and multifamily park in Tysons, Virginia.
The company has a third project under development at that location that could add another 350 multifamily units and 150,000 square feet of storage space on nonincome-producing land. PS Business Parks could eventually complete nine phases at this location, building up to 3,100 multifamily units, 200,000 square feet of class A office space, and 300,000 square feet of storage.
PS Business Parks has ample financial flexibility to expand its portfolio thanks to its top-tier balance sheet. Those future additions should enable the REIT to continue growing its FFO. That should allow it to increase its dividend once current market conditions improve.
More growth ahead for this REIT
PS Business Parks might not have other industrial REITs' growth potential, since it doesn't focus on the rapidly expanding logistics sector. However, it plays an important role in the real estate industry by providing solutions to small businesses. That should enable it to continue expanding its business park portfolio as the economy grows and these companies need additional flexible space.
On top of that, the company has started focusing on maximizing the value of its real estate by developing multifamily properties. Those dual growth drivers should enable PS Business Parks to expand its FFO and dividend in the coming years, making it an intriguing REIT to consider, especially for investors seeking a lower-risk option, given its top-tier balance sheet.