Seeking Alpha • Jun 29
PS Business Parks Will Disappear, But What With The Preferred Shares?
PS Business Parks has accepted an all-cash offer from Blackstone, and as a go-shop period did not result in higher offers, this likely is a 'done deal'.
The preferred shares saw their prices decrease on the back of higher interest rates and increased uncertainty related to the delisting of PS Business Parks.
Although the preferred shares will remain outstanding, the main risk is related to how Blackstone will run PSB's balance sheet.
Adding debt to the currently pristine balance sheet could reduce the asset coverage ratio and the preferred dividend coverage ratio.
Introduction
PS Business Parks, Inc. (PSB) is on its way to a delisting as its main shareholder, Public Storage (PSA), has agreed to tender its stake to Blackstone Inc. (BX), which made an all-cash offer to acquire PS Business Parks. While the common shares will be delisted, the acquirer is not planning to call the preferred shares and those securities will remain outstanding.
Data by YCharts
The Sale Of PS Business Parks To Blackstone Is A Given
I had PS Business Parks on my radar, mainly for the preferred shares, but I was also quite charmed by the very conservative balance sheet, which made me consider initiating a long position in its common shares as well. Unfortunately, before I could even think about pulling the trigger, Blackstone announced it had entered into an agreement to acquire all shares of PS Business Parks for a cash payment of $187.50. The main shareholder, Public Storage, agreed to tender its shares at that price, and the only thing that could block the sale was the 30-day “go shop” period where PS Business Parks could actively solicit offers superior to the Blackstone all-cash bid.
That “go shop” period ended at the end of May, and no superior offer came up, so there’s no reason for anyone to vote against this deal; after all, PSB was allowed to solicit higher offers, but nothing came along. And now, the interest rates have increased even further. I can’t imagine the appetite has increased for other parties to submit a superior offer which would have to be all-cash as well, unless a share deal with a much higher premium would be launched. For instance, a $188/share all-stock offer would likely not be deemed superior to $187.50 in cash by the PSB board of directors.
So, the sale of PS Business Parks to Blackstone seems to be a done deal. Although the PSB share price is trading at a discount to the offer, said discount is very small and does not pose superior returns compared to bonds these days, so the market also seems to believe the deal is going ahead.
The Preferred Shares Offer An Attractive Yield, But The Risks Are Increasing
Before I was even considering going long the common units, I was looking at PS Business Parks from the perspective of a preferred shareholder. There are currently three series of preferred share outstanding, with different preferred dividend payments.
Stockwatch.com
The Z-series have the highest yield at 6.91%, followed by the Y-shares (6.91%) and the X-series (6.7%). So although the preferred dividend payments in absolute dollar amounts are the lowest, the current low share price of the Z-series makes this series the most attractive one.
So first of all, allow me to explain how strong the preferred dividend coverage ratio is. Let’s first have a look at the REIT’s FFO and FAD (‘Funds Available for Distribution’) in the first quarter of this year.
PSB Investor Relations
As you can see, the FAD was approximately $50.2M, and this already includes in excess of $5M in recurring capital improvements and tenant improvements. Also keep in mind, the starting point of this calculation is the net income allocable to common stockholders. This means the starting point already includes the impact of all preferred dividend payments, and if we take a step back and have a look at the income statement, we see the total amount paid out as preferred dividends was $9.6M.
PSB Investor Relations
If we add this back to the equation, PSB generated almost exactly $60M in pre-preferred dividend FAD, which means the preferred dividends are very handsomely covered by a factor of in excess of 600%. That’s great, and it explains why PSB was able to issue these perpetual securities with such a low preferred dividend yield (ranging from 4.875% to 5.25%).
I was even more impressed with PSB’s balance sheet, which barely contained any debt: the $20M credit facility is just a fraction of the cash position and the cash position takes care of almost all liabilities (which means there’s about $53M in other assets like rent receivable to cover the shortfall.
PSB Investor Relations
This also means the preferred shareholders are first in line to be made whole in case something would go terribly wrong. The total equity value of the balance sheet was $1.78B, of which $755M was attributable to the preferred shares. Perhaps even more important is the accumulated depreciation on the assets to the tune of almost $1.2B, which means that excluding this accumulated depreciation, the book value would be closer to $3B for an asset coverage ratio of almost 400%.
That’s why I was very interested in the preferred shares of PS Business Parks before the buyout offer was announced.
