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GLENDALE, CA-PS Business Parks Inc., a business park operator and REIT with mainly small tenants throughout a diversity of industries, reported fierce competition and sluggish demand in its fourth-quarter earnings call, but the Glendale-based company nonetheless maintains a strong position. The company was able to report higher net income and FFO both quarterly and for the full year despite the tough economic conditions.

“Competition for all deals was fierce and demand sluggish,” chief operating officer John W. Petersen reported in the call. He explained that tenants “were reluctant to make lease commitments due to uncertainty with their own businesses and the overall economic climate.” Nonetheless, PS Business Parks maintained an overall occupancy of 92.7%, even though the occupancy declined by 1% on a quarter-to-quarter basis and 1.5% from a year ago.

The REIT’s president and CEO, Joseph D. Russell, said in the conference call thatPSB’s primary focus for 2009 will be “to compete for transactions in a tougher leasing environment, knowing that our product type can cater to a wide array of users and our primary user size continues to be the most populous in any given market.” Russell pointed out that larger transactions are taking longer, which has reduced the number of larger deals that are being signed.

“Without question, we experienced lighter demand, which was particularly evident on large spaces over 10,000 square feet,” he said. Petersen noted that the company completed more than 300 deals in the fourth quarter totaling 980,000 square feet with an average term of 3.4 years and average size of 3,200 square feet.

In addition to the diversity of its tenant base, Russell pointed out that PSB’s capital structure stayed strong through 2008 and that the company “is incredibly well positioned to not only weather this economic storm but, when appropriate, we will see meaningful growth by acquiring assets as cap rates shift higher.” The REIT has less than 3% debt, so it “is not burdened by having to restructure the balance sheet, repay or refinance debt maturities in an onerous environment, or worry about covering the dividend,” the PBS chief said.

Instead of facing some of the hurdles that other owners have to contend with, Russell pointed out, PSB is “able to focus on the opportunities at hand” in a market where many owners are or will soon need to reduce leverage. Although the changing market conditions have not yet pushed owners into selling yet, “We are well positioned once it does,” he said.

The PSB fourth-quarter results showed negative net absorption in all markets during the quarter, except for Houston and Dallas, where positive net absorption totaled 980,000 square feet and 570,000 square feet, respectively. Vacancies increased across the board except for Dallas, which declined by 20 basis points. Lease length, rent, and other concessions were prevalent in lease negotiations, but mostly customers were looking for value-oriented deals in order to contain costs, the company said. As Petersen explained, PSB’s customers typically “are not interested in high-finish expensive tenant improvements,” but are “more focused on generic space that is able to meet their challenging business needs.”

The REIT reported that net income for the fourth quarter ended Dec. 31 totaled $9.6 million and 47 cents per diluted share on revenue of $71.7 million compared to $3.8 million and 17 cents per share on revenue of $70 million for the same period in 2007. For the year, net income rose to was $23.4 million or $1.13 per diluted share on revenue of $284.2 million compared to $17.7 million and 82 cents pershare on revenue of $271.5 million for 2007. FFO for the fourth quarters of 2008 and 2007 were $37.6 million and $31.8 million respectively, or $1.35 per share, and $1.10 per share. For the year, FFO was $131.6 million and $4.70 per share, compared to $122.4 million and $4.23 per share for 2007.

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