Challenges often open the door to new opportunities. One obstacle facing self-storage real estate investment trust (REIT) Public Storage (NYSE: PSA) in the early 1980s was that some zoning and planning commissions wouldn't let it build self-storage facilities on some of the prime real estate it owned without some kind of buffer. The company solved that problem by putting other types of businesses on these properties, such as retail, industrial parks, and garden office properties. This development strategy was so successful that the REIT spun off the division PS Business Parks (NYSE: PSB) into a separate REIT in 1998 to focus on developing and owning these types of properties.
Here's a closer look at this REIT formed to focus on business parks.
PS Business Parks company profile
Public Storage still owns a significant equity interest (42% as of mid-2020) in PS Business Parks, which it considers part of its family of companies. Because of that, there's a meaningful Public Storage presence on the board of PS Business Parks, including the self-storage REIT's current chairman and CEO, Ronald Havner, who also serves as chairman of PS Business Parks' board.
However, the two REITs operate independently. PS Business Parks is a self-advised, self-managed industrial REIT focused on properties that offer businesses flexibility. It acquires, develops, owns, and operates commercial properties that are primarily multi-tenant industrial, office, and flex (an office and warehouse combination with several uses including office, assembly, showroom, laboratory, light manufacturing, and warehouse) space.
As of the middle of 2020, the REIT owned nearly 27.5 million rentable square feet (SF) of commercial properties (64% industrial, 23.8% flex, and 12.2% office) and a 95% interest in a 395-unit apartment complex. The company's properties are in about a dozen submarkets across six states:
- Southern California: 3.9 million SF of warehouse, flex, and office space in Los Angeles, Orange County, and San Diego.
- Northern California: 7.3 million SF of warehouse, flex, and office space in the Bay area.
- Seattle: 1.4 million SF of warehouse, flex, and office space in the Seattle area.
- Dallas: 2.9 million SF of warehouse and flex space in the Dallas area.
- Austin: 2 million SF of warehouse and flex space in the Austin area.
- Florida: 3.9 million SF of warehouse and flex space in Miami and Palm Beach county.
- Northern Virginia: 5 million SF of warehouse, flex, and office space in Northern Virginia.
- Maryland: 1.1 million SF of office and warehouse space in Suburban Maryland.
Overall, 88.6% of its portfolio is light industrial/flex space in gateway markets. The company leases space in its business parks to more than 5,000 customers. It's a key landlord of small businesses as it leases more than 30% of its space to small tenants. It has a diversified tenant base across various industries, including:
- Business services (19.2% of its space)
- Warehouse, distribution, transportation, and logistics (12.2%)
- Computer hardware, software, and related services (11.5%)
- Retail, food, and automotive (9.2%)
- Heath services (8%)
- Engineering and construction (7.8%)
- Government (6.3%)
- Insurance and financial services (3.2%)
- Electronics (3.1%)
- Home furnishings (2.6%)
- Communications (1.9%)
- Aerospace/defense products and services (1.6%)
- Educational services (1%)
- All other (12.4%)
PS Business Parks news
Since its spin-off from Public Storage, PS Business Parks has steadily expanded its portfolio via acquisitions and development projects. It will buy single properties and portfolios. For example, in January of 2020, the REIT purchased the La Mirada Commerce Center, a multi-tenant industrial park with 73,000 square feet in La Mirada, California, for $13.4 million. Meanwhile, in June of 2018, it bought two industrial parks in Northern Virginia for $143.3 million. That portfolio consisted of 19 buildings with 1.1 million SF on 65 acres.
The REIT also selectively invests in development projects. The Freeport Business Park in Dallas is an 83,250 SF multi-tenant industrial building on undeveloped land within an existing park that it expects to complete by the end of 2020. Meanwhile, in Seattle, 212 Industrial Park is an 82,000 multi-tenant industrial building that the company hopes to start building on undeveloped land in an existing park in early 2021.
Finally, the company and a partner are building a 45-acre master-planned redevelopment in Tysons, Virginia, called The Mile. It currently has 750,000 SF of office space and a 395-unit multifamily property. It had the property zoned for 3 million square feet of redevelopment (3,100 multifamily units, 200,000 SF of Class A office, 300,000 SF of storage, and more than 10 acres of open space). It expects to complete the redevelopment in nine phases, with the second phase a 411-unit multifamily project that it started in 2020 and expects to complete by the summer of 2022.
Another growth driver for the company is rental increases. The REIT has dedicated leasing teams to drive strong occupancy and rent growth across its markets. The REIT has increased its same park revenue per available foot (REVPAF) by 2.6% per year from 2015 through 2019.
Unfortunately, like most commercial real estate companies, the COVID-19 outbreak in 2020 impacted PS Business Parks. The REIT's FFO had declined by 3.6% through the first half of that year due to the write-off of accounts receivable and deferred rent. The economic downturn caused by the pandemic also weighed on occupancy, which fell from 93.7% in the second quarter of 2019 to 91.7% in the second quarter of 2020. That's due in part to the outsized impact the recession has had on smaller businesses, which don't have the scale and financial resources of their larger peers.
While the REIT's exposure to smaller tenants hurt it during the current downturn, its focus on owning industrial/flex properties has benefitted it in the past. That's because those properties tend to rent at higher rates than logistics properties, which are the focus of many of its industrial peers. Because of that, PS Business Parks' same-park cash NOI per available square foot has averaged $9.74 during the 10-quarter period ending in mid-2020, which is 65% higher than its peer group average.
PS Business Parks stock price
PS Business Parks' differentiated approach has paid dividends for shareholders over the years. The REIT had outperformed the NAREIT index in each of the last 1-, 5-, 10-, and 20-year periods ending in 2019. It also outperformed the S&P 500 in all those periods other than 2019. Driving its long-term outperformance has been the REIT's disciplined investing, best-in-class operations, and prudent balance sheet management.
Unfortunately, like a lot of REITs, PS Business Parks' stock price has been under some pressure in 2020, which has impacted its performance versus the S&P 500: