Although PS Business Parks Inc. (PSB) posted better-than-expected results in the second quarter, it is still facing issues in one of its core operational markets. The company’s adjusted FFO per share and revenue both beat the Zacks Consensus Estimate and were up on year over year basis.

In July, PS Business Parks reported second-quarter 2014 adjusted FFO per share of $1.26, which was 3.3% ahead of both the Zacks Consensus Estimate as well as the year-ago quarter figure of $1.22. Results were backed by growth in rental income from both Same Park and Non-Same Park portfolios.

However, the Washington D.C. market still remains a major concern for PS Business Park as the business continued to be impacted by the sluggish leasing environment. This was especially related to direct government leasing and the related impact on government contractors. Although the company is getting some relief from small customers, the leasing pace is anticipated to continue to be tepid in the near term.

In addition, going forward, we predict PS Business Parks’ continued divestiture to have a dilutive impact on the FFO per share. Recently, PS Business Park concluded the sale of two business parks in Oregon. Moreover, the company has a huge asset divestiture plan for the coming quarters, too.

Apart from these, tepid recovery of the office market fundamentals and continual office space efficiency trends, which tend to lower the additional demand for space, remains an overhang. Also, stiff competition from commercial real estate properties operators is a concern for PS Business Parks. Hence, we believe top-line growth would remain restrained in the coming quarters.

Echoing similar sentiments, analysts have revised their estimates downwards. In the last 60 days, the Zacks Consensus Estimate for 2014 FFO per share slipped by 2 cents to $4.78. Also, for 2015, it decreased by 9 cents to $4.89. Consequently, the stock currently has a Zacks Rank #4 (Sell).

For detailed insight into PS Business Parks, you can refer to our updated research report, which was issued on Oct 16, 2014.

Stocks That Warrant a Look

Investors interested in the REIT industry may, however, consider stocks like First Industrial Realty Trust Inc. (FR), W. P. Carey Inc. (WPC) and Digital Realty Trust Inc. (DLR). All three stocks have a Zacks Rank #1 (Strong Buy).

Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

Read the Full Research Report on PSB
Read the Full Research Report on DLR
Read the Full Research Report on FR
Read the Full Research Report on WPC


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