MOODY'S ASSIGNS (P) "ba1" TO THE CUMULATIVE PREFERRED STOCK SHELF OF PS BUSINESS PARKS, INC.; ASSIGNS Baa3 TO THE BANK CREDIT FACILITY OF PS BUSINESS PARKS, L.P
Moody's Investors Service has assigned prospective ratings to securities issuable under the $500 million preferred stock shelf registration of PS Business Parks, Inc. (cumulative preferred at (P)"ba1" and noncumulative/junior preferred at (P)"ba2"). The rating agency also assigned a Baa3 rating to the senior unsecured bank credit facility of PS Business Parks, L.P. PS Business Parks, an umbrella real estate investment trust (UPREIT), is the sole general partner of, and owns a 73% interest in, PS Business Parks, L.P., the Operating Partnership. This is the first time Moody's has rated the securities of PS Business Parks. The rating outlook is stable, reflecting the REIT's low leverage and conservative strategic plans.
The Baa3 bank loan rating reflects the structural provisions of the $100 million unsecured line of credit, due August 2000. The bank credit facility contains customary terms and conditions, including debt limitations, minimum debt service coverage requirements, as well as the maintenance of minimum levels of unencumbered assets.
According to Moody's, the ratings reflect PS Business Parks' solid "same store" operating performance, prudent capital management strategy, experienced management team, and significant equity ownership interest by Public Storage, Inc., a publicly traded self-storage REIT (cumulative preferred rated "baa2"). The ratings also incorporate the REIT's strategic focus on small and mid-sized office/industrial business park and flex properties. The rating agency cited the REIT's modest leverage of less than 10% of total assets (book), and strong financial flexibility due to the high level of unencumbered properties. PS Business Parks' conservative financing policy should help to preserve the REIT's strong interest and fixed charge coverage.
These strengths are offset by PS Business Parks' limited operating history in acquiring and owning office/flex properties and as a public company, its significant near-term lease rollover due to the short duration of the leases, and its focus on a more volatile and management-intensive asset class. Moody's added that the REIT's relatively small size and a more challenging capital markets environment for REITs are also credit concerns.
PS Business Parks was created to expand Public Storage's investments in flex properties. Approximately 40% of PS Business Parks' assets were contributed by predecessor organizations that were affiliates of Public Storage. PS Business Parks began actively acquiring assets on its own during late 1997. Although the REIT appears to have absorbed the acquisitions well thus far, Moody's expects that the operating performance of the REIT will be more fully realized over the longer term.
PS Business Parks' operating strategy includes acquisition-led growth over the medium term to establish a critical presence in core and in targeted growth markets throughout the USA. The office/flex real estate sector is a highly fragmented industry in which properties are often run by small, independent owners. PS Business Parks should be able to identify and capitalize on acquisition opportunities. Currently, approximately 90% of the REIT's net operating income is generated from properties in five core markets. Moody's expects that PS Business Parks will be disciplined in its growth, and anticipates that the REIT will prudently fund its growth with common and preferred equity, and internally generated cash flow.
Regarding the REIT's focus on business parks/flex properties, Moody's believes that these asset classes have a higher risk profile relative to pure suburban office and industrial properties, and contribute to greater earnings volatility. Flex properties also are more vulnerable to economic downturns and to overbuilding due to low barriers to entry. These properties generally have shorter lease terms, greater exposure to non-corporate grade tenants and higher leasing and tenant improvement costs. PS Business Parks has significant near-term lease rollover with approximately 23% of its leases expiring by YE99, and almost half of the REIT's tenants are small/mid-sized companies. Moody's noted that PS Business Parks' disciplined underwriting standards and aggressive pre-leasing requirements -- including efforts to execute longer term leases and to reduce tenant concentrations -- should help to preserve the REIT's cash flows during market cycles.
The following ratings were assigned:
PS Business Parks, Inc. - (P)"ba1" to cumulative preferred stock shelf, and (P)"ba2" to noncumulative/junior preferred stock shelf.
PS Business Parks, L.P. - Baa3 to senior unsecured bank credit facility.
PS Business Parks, Inc., [NYSE: PSB] headquartered in Glendale, California, USA acquires, develops, owns and operates commercial properties, including industrial/flex and office properties primarily located in California, Virginia, Maryland, Texas and Oregon. At December 31, 1998, the REIT had total assets of approximately $709 million (book) and total equity (including minority interest) of approximately $640 million (book).
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