Fitch Affirms PS Business Parks' IDR at 'BBB' & Pfd. Stock at 'BBB-'; Stable Outlook

PS Business Parks, Inc.

--Issuer Default Rating (IDR) at 'BBB';

--$100 million unsecured revolving credit facility at 'BBB' (as guarantor);

--$700 million preferred stock at 'BBB-'.

PS Business Parks, L.P.

--IDR at 'BBB';

--$100 million unsecured revolving credit facility at 'BBB' (as borrower).

The Rating Outlook is Stable.

The rating affirmations revolve around the consistent cash flows generated by the company's flex, industrial and office property portfolio in excess of its fixed charges, which is predominantly comprised of preferred stock dividends.

PSB generated a fixed charge coverage ratio (defined as recurring EBITDA less capital expenditures less straight-line rents divided by interest expense and preferred stock dividends) of 2.6 times (x) for the trailing twelve months ended March 31, 2009. Furthermore, 74 of the company's 79 business parks and other properties, which are located primarily in southern California, the greater Washington D.C. area, southern Florida, northern California, Portland, OR, and Texas, and total 19.6 million square feet of commercial real estate, are unencumbered such that most of the company's net operating income is used to pay its preferred dividends and preferred operating partnership (OP) unit distributions.

However, the company's portfolio remains focused in several regions, and its balance sheet remains modestly sized, with approximately $2.1 billion in total properties on a gross book basis. Given these portfolio characteristics, PSB's 2.6x fixed charge coverage ratio is consistent with a 'BBB' IDR.

The rating action takes into account PSB's fixed charge coverage ratios on a prospective basis. Positively, the company repurchased $111.5 million of preferred stock and units year-to-date through May 2009 at a weighted average discount of approximately 40% including $62.5 million of repurchases for a gain of $27.2 million in the first quarter of 2009 (1Q'09) reducing the company's corporate obligations and fixed charges. However, Fitch anticipates that property market conditions will remain soft through 2009. During 1Q'09, weighted average occupancy on the same-park portfolio declined from 92.7% to 91.4% and same-park net operating income declined by 1.3%. Fitch anticipates further same-park NOI declines of approximately 2% for full-year 2009, which may mitigate the positive impact of opportunistic preferred stock repurchases.

Fitch views PSB's preferred stock as its primary source of leverage, and as such, PSB's leverage ratios remain appropriate for the 'BBB' rating level. The company's risk-adjusted capital ratio was 1.4x as of March 31, 2009 in a 'BBB' stress environment, while its debt plus preferred stock to recurring EBITDA ratio was 3.6x for the trailing twelve months ended March 31, 2009 (4.0x when including preferred OP units).

Even though the company's portfolio may grow modestly through 2009 as the company expands through development activities on its Miami International Commerce Center business park in Miami, Florida, debt plus preferred stock to recurring EBITDA may increase modestly as same-park NOI and occupancy declines impact the company's earnings. In addition, while unencumbered asset coverage of unsecured debt and preferred stock was strong for a 'BBB' IDR at 2.7x as of March 31, 2009 (2.5x when including preferred OP units), this is offset by the size of the company's unencumbered portfolio.

The one-notch rating differential between PSB's IDR and preferred stock is consistent with Fitch's criteria for corporate entities with an IDR of 'BBB' and further reflects that PSB's preferred stock does not contain covenant protections comparable to those within the company's revolving credit agreement that was most recently amended in August 2008. In addition, based on metrics set forth in Fitch's criteria report, 'Equity Credit for Hybrids & Other Capital Securities,' PSB's debt plus 25% of preferred stock to recurring EBITDA and debt plus 25% of preferred stock to undepreciated book capital were strong at 1.1x and 10.5%, respectively, as of March 31, 2009 (1.2x and 11.4%, respectively, when including 25% of preferred OP units).

The Stable Outlook reflects the company's staggered lease expiration schedule, granular tenant roster, and solid liquidity position. PSB has a low common stock dividend payout ratio and limited debt maturities. While the company had full availability of its $100 million revolving credit facility as of March 31, 2009, it utilized approximately 50% of the facility subsequent to March 31, 2009 to fund preferred stock repurchases. That being the case, Fitch calculates that PSB's sources of liquidity (cash, availability of the revolver and retained cash flows from operations pro forma for preferred stock repurchases) less uses of liquidity (debt maturities and recurring capital expenditures) result in a liquidity surplus of approximately $200 million from March 31, 2009 to Dec. 31, 2010, providing stability from a liquidity standpoint.

PS Business Parks, Inc. is a fully-integrated, self-advised and self-managed real estate investment trust (REIT) that acquires, owns, operates and develops commercial properties, primarily multi-tenant flex, office and industrial space. As of March 31, 2009, PSB owned 73.7% of the common partnership units of PS Business Parks, L.P. The remaining common partnership units were owned by Public Storage (Fitch IDR 'A'; Stable Outlook). As of March 31, 2009, PSB had approximately $2.1 billion in undepreciated book assets and a total market capitalization of approximately $1.8 billion.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

SOURCE: Fitch Ratings

Fitch Ratings, New York 
Sean Pattap, 212-908-0642 
Steven Marks, 212-908-9161 
Sandro Scenga, 212-908-0278 (Media Relations) 
sandro.scenga@fitchratings.com