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Rating Action:

Moody's affirms PS Business Parks' rating; outlook stable

16 Apr 2018

Approximately $960 million of securities affected.

New York, April 16, 2018 -- Moody's Investors Service ("Moody's") has affirmed the preferred stock rating of PS Business Parks, Inc. (PSB) at Baa2. The rating outlook remains stable. The REIT's rating reflects its solid operating performance and long-held adherence to maintaining a low-risk capital structure, earmarked by modest overall leverage and a strong liquidity profile.

The following ratings were affirmed:

PS Business Parks, Inc. -- preferred stock at Baa2

The following ratings were assigned:

PS Business Parks, Inc. -- senior unsecured debt shelf at (P)Baa1; non-cumulative preferred stock shelf at (P)Baa2; cumulative preferred stock shelf at (P)Baa2; subordinated debt shelf at (P)Baa2

RATINGS RATIONALE

PSB's operating performance has continued to improve, with same-park net operating income increasing 5.7% in 2017 and the same-park portfolio remains well occupied at an average of 95.1% for 4Q17. Moody's expects continued NOI growth over the intermediate term will help PSB sustain its strong credit metrics.

PSB has a long history of conservative balance sheet management and consistently strong fixed charge coverage, which improved to 4.9x for 2017 from 3.9x for 2016. The REIT does not regularly employ debt other than what may be assumed via acquisitions, instead maintaining a long-term liability structure that emphasizes preferred stock and retained cash flow as primary funding sources. The permanence of this funding structure is a key ratings consideration.

PSB's key credit challenges remain its modest size, geographic concentrations, and the potential volatility of cash flows associated with its focus on multi-tenant flex, office and industrial business parks. PSB operates in six states and the largest, California, comprised about 41% of 4Q17 NOI (27% Northern California and 14% Southern California) excluding assets held for sale. Furthermore, the REIT's focus on small and mid-sized business parks remains a credit concern given the more management intensive nature of such assets and the shorter-term leases, although PSB has managed these risks well. Market fundamentals remain favorable across its markets, with the exception of the DC Metro area (29% of NOI), which is expected to remain challenging for the foreseeable future.

The stable outlook reflects Moody's expectation that PSB will continue to demonstrate solid growth in core earnings while also maintaining its historically conservative financial discipline as it continues to grow.

Upward ratings movement would be difficult in the intermediate term given the potential earnings volatility associated with PSB's product type. An upgrade would likely reflect substantially increased size (gross assets above $5 billion) and geographic diversification, with no sub-market comprising more than 10% of total NOI. Maintenance of fixed charge coverage above 4.5x on a sustained basis would also be needed.

A downgrade would be likely should the REIT experience a significant decline in operating performance, resulting in fixed charge coverage falling below 3.0x on a sustained basis. Alternatively, increased effective leverage (debt plus preferred stock as % of gross assets) approaching 50% or a material shift in funding strategy would also result in a downgrade.

PS Business Parks, Inc. (NYSE: PSB) is a self-advised and self-managed real estate investment trust (REIT) that acquires, develops, owns and operates commercial properties, primarily multi-tenant flex, office and industrial space. As of December 31, 2017, the REIT wholly owned 28 million rentable square feet throughout six states and a 95.0% interest in a 395-unit apartment complex. Gross assets totaled $3.2 billion as of December 31, 2017.

The principal methodology used in these ratings was Global Rating Methodology for REITs and Other Commercial Property Firms published in July 2010. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Lori Marks
VP - Senior Credit Officer
Commercial Real Estate Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Nick Levidy
MD - Structured Finance
Commercial Real Estate Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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