WASHINGTON,
FORM
☒Quarterly Report Pursuant to Section
or
☐Transition Report Pursuant to Section2022
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| Maryland | 95-4300881 | ||||
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | ||||
| 345 Park Avenue, New York, New York | 10154 | ||||
| (Address of |
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701 Western Avenue, Glendale, California 91201-2397
(Address of principal executive offices) (Zip Code)
(212) 583-5000 Yes Yes Large accelerated filer ý Smaller reporting company ¨ Yes Item 3. Financial Statements Business Parks, Inc. September 30, December 31, 2017 2016 (Unaudited) ASSETS Cash and cash equivalents $ $ Real estate facilities, at cost Land Buildings and improvements Accumulated depreciation Property held for disposition, net — Land and building held for development Investment in and advances to unconsolidated joint venture Rent receivable, net Deferred rent receivable, net Other assets Total assets $ $ LIABILITIES AND EQUITY Accrued and other liabilities $ $ Preferred stock called for redemption Total liabilities Commitments and contingencies Equity: PS Business Parks, Inc.’s shareholders’ equity Preferred stock, $0.01 par value, 50,000,000 shares authorized, 35,590 and 35,190 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively Common stock, $0.01 par value, 100,000,000 shares authorized, 27,251,037 and 27,138,138 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively Paid-in capital Accumulated earnings (deficit) Total PS Business Parks, Inc.’s shareholders’ equity Noncontrolling interests Total equity Total liabilities and equity $ $ For The Three Months For The Nine Months Ended September 30, Ended September 30, 2017 2016 2017 2016 Rental income $ $ $ $ Expenses Cost of operations Depreciation and amortization General and administrative Total operating expenses Operating income Interest and other income Interest and other expense Equity in loss of unconsolidated joint venture — — Gain on sale of real estate facility — — — Gain on sale of development rights — — — Net income Allocation to noncontrolling interests Net income allocable to PS Business Parks, Inc. Allocation to preferred shareholders based upon Distributions Redemptions (Note 9) — — Allocation to restricted stock unit holders Net income allocable to common shareholders $ $ $ $ Net income per common share Basic $ $ $ $ Diluted $ $ $ $ Weighted average common shares outstanding Basic Diluted Dividends declared per common share $ $ $ $ Total PS Business Parks, Preferred Stock Common Stock Paid-in Accumulated Inc.’s Shareholders’ Noncontrolling Total Shares Amount Shares Amount Capital Earnings (Deficit) Equity Interests Equity Balances at December 31, 2016 $ $ $ $ $ $ $ Issuance of preferred stock, net of issuance costs — — — — Redemption of preferred stock, net of issuance costs — — — Issuance of common stock in connection with stock-based compensation — — — — Stock compensation, net — — — — — — Cash paid for taxes in lieu of shares upon vesting of restricted stock units — — — — — — Net income — — — — — Distributions Preferred stock — — — — — — Common stock — — — — — — Noncontrolling interests — — — — — — — Adjustment to noncontrolling interests in the OP — — — — — — Balances at September 30, 2017 $ $ $ $ $ $ $ For The Nine Months Ended September 30, 2017 2016 Cash flows from operating activities Net income $ $ Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization Tenant improvement reimbursements, net of lease incentives Equity in loss of unconsolidated joint venture — Gain on sale of real estate facility — Gain on sale of development rights — Stock compensation Amortization of financing costs Other, net Total adjustments Net cash provided by operating activities Cash flows from investing activities Capital expenditures to real estate facilities Capital expenditures to land and building held for development — Investment in and advances to unconsolidated joint venture Acquisition of real estate facilities — Proceeds from sale of real estate facilities — Proceeds from sale of development rights — Net cash used in investing activities Cash flows from financing activities Borrowings on credit facility Repayment of borrowings on credit facility Repayment of mortgage note payable — Payment of financing costs — Proceeds from the exercise of stock options Net proceeds from the issuance of preferred stock — Redemption of preferred stock — Cash paid for taxes in lieu of shares upon vesting of restricted stock units Cash paid to restricted stock unit holders — Distributions paid to preferred shareholders Distributions paid to common shareholders Distributions paid to noncontrolling interests Net cash used in financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period $ $ Supplemental schedule of non-cash investing and financing activities Adjustment to noncontrolling interests in OP Noncontrolling interests $ $ Paid-in capital $ $ Preferred Redemption Allocation Paid-in capital $ $ — Accumulated earnings (deficit) $ $ — Preferred stock called for redemption Preferred stock called for redemption and reclassified to liabilities $ $ — Preferred stock called for redemption and reclassified from equity $ $ — PS Business Parks, Inc. (“PSB” or the “Company”), a Maryland corporation, was the distribution (the “Redemption and Distribution”) to the Parent Partners of certain subsidiaries of the Partnership which held assets comprised of 58 properties located in California, Washington and Virginia (the “Non-Core Portfolio”). As a result of the Redemption and Distribution, the Company (directly or indirectly) owns 100% of the Partnership. Total consideration for the exchange was $1,295,217, which represents the fair values as determined between us and our Parent Partners, a related party, on the transaction date. No gain or loss was recognized in connection with this transaction. We accounted for this transaction as a non-cash equity distribution in the Consolidated Financial Statements. Significant Accounting Policies Presentation Estimates asset for its intended use. The Company For The Three Months For The Nine Months Ended September 30, Ended September 30, 2017 2016 2017 2016 Calculation of net income allocable to common shareholders Net income $ $ $ $ Less net income allocated to Preferred shareholders based upon distributions Preferred shareholders based upon redemptions — — Restricted stock unit holders Net income allocable to common shareholders and noncontrolling interests Net income allocation to noncontrolling interests Net income allocable to common shareholders $ $ $ $ Calculation of common partnership units as a percentage of common share equivalents Weighted average common shares outstanding Weighted average common partnership units outstanding Total common share equivalents Common partnership units as a percent of common share equivalents Weighted average common shares outstanding Basic weighted average common shares outstanding Net effect of dilutive stock compensation—based on treasury stock method using average market price Diluted weighted average common shares outstanding asset acquisitions. The Company Buildings and Accumulated Land Improvements Depreciation Total Balances at December 31, 2016 $ $ $ $ Capital expenditures — — Disposals — — Depreciation and amortization — — Transfer to properties held for disposition — — Balances at September 30, 2017 $ $ $ $ other debt and selective development, redevelopment, or acquisition of properties. Remainder of 2017 $ 2018 2019 2020 2021 Thereafter Total $ As of September 30, September 30, 2017 December 31, 2016 Earliest Potential Dividend Shares Amount Shares Amount Series Issuance Date Redemption Date Rate Outstanding (in thousands) Outstanding (in thousands) Series T May, 2012 May, 2017 $ $ Series U September, 2012 September, 2017 Series V March, 2013 March, 2018 Series W October, 2016 October, 2021 Series X September, 2017 September, 2022 — — Total $ $ Z preferred stock Company Option, less any applicable withholding taxes. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Policies and Estimates: of Operations and Financial Condition inflation. For The Three Months For The Nine Months Ended September 30, Ended September 30, 2017 2016 Variance 2017 2016 Variance RENTAL INCOME Adjusted rental income (a) Same Park $ $ $ $ $ $ Non-Same Park Assets sold or held for development — Lease buyout payment — — Total rental income COST OF OPERATIONS Adjusted cost of operations (b) Same Park Non-Same Park Assets sold or held for development — LTEIP amortization Total cost of operations OPERATING INCOME Net operating income (c) Same Park Non-Same Park Assets sold or held for development — Lease buyout payment and LTEIP amortization Depreciation and amortization General and administrative Operating income $ $ $ $ $ $ Summary of Same Park Operations For The Three Months For The Nine Months Ended September 30, Ended September 30, 2017 2016 Variance 2017 2016 Variance Adjusted rental income $ $ $ $ Adjusted cost of operations Property taxes Utilities Repairs and maintenance Snow removal — — — Other expenses Total Net operating income $ $ $ $ Selected Statistical Data Gross margin (a) Weighted average square foot occupancy Annualized realized rent per occupied square foot (b) $ $ $ $ Percent of Rentable Square Percent of Annualized Rental Annualized Rental Number of Footage Subject to Total Leased Income Under Income Represented Year of Lease Expiration Tenants Expiring Leases Square Footage Expiring Leases by Expiring Leases Remainder of 2017 $ 2018 2019 2020 2021 Thereafter Total $ For the Three Months Ended March 31 June 30 September 30 December 31 Adjusted rental income 2017 $ $ $ $ — 2016 $ $ $ $ Adjusted cost of operations 2017 $ $ $ $ — 2016 $ $ $ $ Snow removal 2017 $ $ $ — $ — 2016 $ $ — $ — $ — Utilities 2017 $ $ $ $ — 2016 $ $ $ $ Weighted average square foot occupancy 2017 — 2016 Annualized realized rent per occupied square foot 2017 $ $ $ $ — 2016 $ $ $ $ For The Three Months For The Nine Months Ended September 30, Ended September 30, Region 2017 2016 Variance 2017 2016 Variance Selected Geographic Data on Same Park Adjusted rental income Northern California (7.2 million feet) $ $ 5.4% $ $ 7.0% Southern California (4.0 million feet) 5.2% 6.5% Dallas (3.0 million feet) 2.6% 5.2% Austin (2.0 million feet) 8.3% 7.7% Northern Virginia (3.9 million feet) 2.2% (0.8%) South Florida (3.9 million feet) 6.1% 7.0% Suburban Maryland (2.4 million feet) 2.2% 2.1% Seattle (1.4 million feet) 5.8% 7.2% Total Same Park (27.8 million feet) 4.4% 4.6% Adjusted cost of operations Northern California 4.1% 4.5% Southern California (0.1%) 2.7% Dallas (1.8%) (2.0%) Austin 7.4% 7.0% Northern Virginia (6.8%) (6.1%) South Florida 0.1% 0.7% Suburban Maryland 27.0% 3.9% Seattle 1.2% 1.0% Total Same Park 3.2% 0.9% Net operating income Northern California 5.9% 7.8% Southern California 7.8% 8.3% Dallas 5.0% 9.2% Austin 8.8% 8.0% Northern Virginia 6.9% 1.9% South Florida 8.5% 9.5% Suburban Maryland (9.5%) 1.1% Seattle 7.4% 9.5% Total Same Park $ $ 5.0% $ $ 6.3% Weighted average square foot occupancy Northern California (2.4%) (0.9%) Southern California (0.2%) 1.0% Dallas 0.1% 0.8% Austin (1.8%) (2.0%) Northern Virginia 0.8% (1.6%) South Florida 3.7% 3.9% Suburban Maryland 1.9% 0.5% Seattle (1.6%) (0.5%) Total Same Park (0.1%) 0.2% Annualized realized rent per square foot Northern California $ $ 8.0% $ $ 8.0% Southern California $ $ 5.5% $ $ 5.6% Dallas $ $ 2.5% $ $ 4.3% Austin $ $ 10.4% $ $ 9.7% Northern Virginia $ $ 1.4% $ $ 0.8% South Florida $ $ 2.2% $ $ 2.9% Suburban Maryland $ $ 0.3% $ $ 1.5% Seattle $ $ 7.5% $ $ 7.7% Total Same Park $ $ 4.6% $ $ 4.5% For the Three Months Ended September 30, 2017 Square Transaction Footage Tenant Costs per Rental Regions Leased Retention Executed Foot Rate Change (a) Northern California $ Southern California $ Dallas $ Austin $ Northern Virginia $ South Florida $ Suburban Maryland $ Seattle $ Total $ For the Nine Months Ended September 30, 2017 Square Transaction Footage Tenant Costs per Rental Regions Leased Retention Executed Foot Rate Change (a) Northern California $ Southern California $ Dallas $ Austin $ Northern Virginia $ South Florida $ Suburban Maryland $ Seattle $ Total $ Schedule As of September 30, 2017 Apartment Units Total Estimated Construction Start Initial Occupancy Estimated Stabilization Period % Completed % % Average Rent per Unit (c) 395 $ Q3 2015 Q2 2017 Q4 2018 $ following: For The Nine Months ended September 30, 2017 2016 2017 2016 (in thousands) (per square foot) Recurring capital expenditures Capital improvements $ $ $ $ Tenant improvements Lease commissions Total recurring capital expenditures Nonrecurring capital improvements Total capital expenditures $ $ $ $ For the Nine Months Ended September 30, Recurring Recurring Capital Expenditures Capital Expenditures as a Percentage of NOI Region 2017 2016 Change 2017 2016 Same Park Northern California $ $ (25.0%) Southern California 2.1% Dallas (2.0%) Austin 47.1% Northern Virginia 56.6% South Florida (11.2%) Suburban Maryland 97.2% Seattle (27.0%) Total Same Park 29.2% Non-Same Park Maryland — 100.0% — — Total Non-Same Park — 100.0% — — Total $ $ 50.4% redeem our preferred stock pursuant to the terms of their respective governing documents. The size of such repurchases may be material and may impact the liquidity and trading price of such preferred stock. REIT in future periods. For The Three Months For The Nine Months Ended September 30, Ended September 30, 2017 2016 2017 2016 Net income allocable to common shareholders $ $ $ $ Gain on sale of real estate facility — — — Gain on sale of development rights — — — Depreciation and amortization Depreciation from unconsolidated joint venture — — Net income allocated to noncontrolling interests Net income allocated to restricted stock unit holders FFO allocable to common and dilutive shares $ $ $ $ Weighted average common shares outstanding Weighted average common operating partnership units outstanding Weighted average restricted stock units outstanding Weighted average common share equivalents outstanding Total common and dilutive shares Net income per common share—diluted $ $ $ $ Gain on sale of real estate facility — — — Gain on sale of development rights — — — Depreciation and amortization, including amounts from investment in unconsolidated Joint Venture FFO per share (a) $ $ $ $ For The Three Months For The Nine Months Ended September 30, Ended September 30, 2017 2016 2017 2016 FFO per share $ $ $ $ Preferred Redemption Allocation — — Net impact due to departure of senior executives — Acquisition transaction costs — — Lease buyout payment — — Core FFO per share $ $ $ $ Payments Due by Period Contractual Obligations Total Less than 1 year 1-3 years 4-5 years More than 5 years Transaction costs (a) $ $ $ — $ — $ — Joint Venture commitments (b) — — — Ground lease obligations (c) — Total $ $ $ $ $ — Controls and Procedures Exhibits PS BUSINESS PARKS, INC. /s/ Matt Ostrower(818) 244-8080Title of each class Trading Symbol(s) Name of each exchange on which registered Depositary Shares Each Representing 1/1,000 of a 5.250% Cum Pref Stock, Series X, $0.01 par value PSBPrX New York Stock Exchange Depositary Shares Each Representing 1/1,000 of a 5.200% Cum Pref Stock, Series Y, $0.01 par value PSBPrY New York Stock Exchange Depositary Shares Each Representing 1/1,000 of a 4.875% Cum Pref Stock, Series Z, $0.01 par value PSBPrZ New York Stock Exchange registrantregistrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.☒☐¨and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).☒☐¨a smaller reporting company or an emerging growth company. See definitionthe definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.☒Non-accelerated filer ¨ Accelerated filer ☐Non-accelerated filer☐☐Emerging growth company ☐¨ ☐¨☐☒ýOctober 23, 2017,November 7, 2022, the number of shares of the registrant’s common stock, $0.01 par value per share, outstanding was 27,251,037.100.PageItem 1. Consolidated balance sheets as of September 30, 2017 (unaudited) and December 31, 201634567Item 2. 203536Item 1. 363636Item 4. Item 5. Item 6. 36ITEMFINANCIAL STATEMENTSBUSINESS PARKS, INC.Successor Predecessor September 30, 2022 December 31, 2021 ASSETS Assets: Investments in real estate, net $ 5,613,947 $ 1,936,338 Assets held for sale — 33,609 Cash and cash equivalents 112,180 27,074 Restricted cash 634 — Tenant and other receivables 8,422 39,202 Lease-related intangible assets, net 276,748 71,793 Prepaid expenses and other assets 127,953 15,206 Due from affiliates 9 — $ 6,139,893 $ 2,123,222 LIABILITIES AND EQUITY Liabilities: Debt, net $ 3,751,039 $ 32,000 Accounts payable, accrued expenses and other liabilities 151,342 94,301 Lease-related intangible liabilities, net 162,623 2,779 Due to affiliates 15,837 71 4,080,841 129,151 Commitments and contingencies (Note 11) Equity: Preferred stock, $0.01 par value, 50,000,000 shares authorized, 30,325 and 30,200 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively 563,526 755,000 Common stock, $0.01 par value, 200,000,000 shares authorized, 100 shares issued and outstanding as of September 30, 2022; 100,000,000 shares authorized, 27,589,807 shares issued and outstanding as of December 31, 2021 — 275 Paid-in capital 2,847,170 752,444 Accumulated earnings (deficit) (1,365,111) 226,737 Total PS Business Parks, Inc.'s stockholders' equity 2,045,585 1,734,456 Noncontrolling interest 13,467 259,615 Total equity 2,059,052 1,994,071 Total liabilities and equity $ 6,139,893 $ 2,123,222 Successor Predecessor Period from July 20, 2022 through September 30, 2022 Period from July 1, 2022 through July 19, 2022 Three Months Ended September 30, 2021 Period from January 1, 2022 through July 19, 2022 Nine Months Ended September 30, 2021 Revenue: Rental revenue $ 77,764 $ 22,412 $ 110,478 $ 246,175 $ 328,308 Total revenue 77,764 22,412 110,478 246,175 328,308 Expenses: Property expenses 17,810 8,135 33,099 74,848 98,198 Depreciation and amortization 100,211 4,626 23,857 50,557 69,356 General and administrative 2,642 2,572 5,155 19,079 14,511 Merger costs 37,266 94,805 — 100,952 — Total expenses 157,929 110,138 62,111 245,436 182,065 Other income (expense): Gain on sale of real estate, net — 38,221 29,924 157,022 49,117 Interest income (expense) 9,933 (59) (207) (615) (478) Other income 144 89 379 2,044 1,138 Total other income (expense) 10,077 38,251 30,096 158,451 49,777 Income (loss) before income tax (70,088) (49,475) 78,463 159,190 196,020 Income tax provision (25) — — — — Net income (loss) (70,113) (49,475) 78,463 159,190 196,020 Net (income) loss attributable to noncontrolling interests 157 10,213 (13,850) (29,224) (33,355) Net income (loss) attributable to the Company (69,956) (39,262) 64,613 129,966 162,665 Allocation to preferred stockholders (9,580) — (12,046) (19,160) (36,139) Allocation to restricted stock unit holders — (13) (350) (1,011) (828) Net income (loss) attributable to common stockholders $ (79,536) $ (39,275) $ 52,217 $ 109,795 $ 125,698 Earnings (loss) per common share – basic and diluted: Net income (loss) attributable to common stockholders - basic $ (1.42) $ 1.90 $ 3.98 $ 4.57 Net income (loss) attributable to common stockholders - diluted $ (1.42) $ 1.89 $ 3.96 $ 4.55 Weighted average common shares outstanding - basic 27,631,499 27,543,274 27,619,484 27,523,225 Weighted average common shares outstanding - diluted 27,631,499 27,634,778 27,708,617 27,622,549 Successor Period from July 20, 2022 through September 30, 2022 Preferred Stock Common Stock Paid-in Capital Accumulated Earnings (Deficit) Total PS Business Parks, Inc.'s Stockholders' Equity Noncontrolling Interest Total Equity Shares Amount Shares Amount Balance at July 20, 2022 - pre-merger — $ — — $ — $ — $ — $ — $ — $ — Total Blackstone purchase and contribution — — — — 2,847,170 — 2,847,170 — 2,847,170 Redemption of common shares — — (27,631,499) (276) (756,431) (4,279,134) (5,035,841) — (5,035,841) Application of purchase accounting 30,200 563,026 27,631,499 276 756,431 4,279,134 5,598,867 1,308,704 6,907,571 Distribution of assets — — — — — — — (1,295,217) (1,295,217) Parent Partners Loans receivable — — — — — (1,285,575) (1,285,575) — (1,285,575) Balance at July 20, 2022 - post-merger 30,200 563,026 — — 2,847,170 (1,285,575) 2,124,621 13,487 2,138,108 Issuance of stock, net of costs 125 500 100 — — — 500 — 500 Noncontrolling interests - joint venture — — — — — — — 137 137 Distributions Preferred stock — — — — — (9,580) (9,580) — (9,580) Net income (loss) — — — — — (69,956) (69,956) (157) (70,113) Balance at September 30, 2022 30,325 $ 563,526 100 $ — $ 2,847,170 $ (1,365,111) $ 2,045,585 $ 13,467 $ 2,059,052 Predecessor Period from July 1, 2022 through July 19, 2022 Preferred Stock Common Stock Paid-in Capital Accumulated Earnings (Deficit) Total PS Business Parks, Inc.'s Stockholders' Equity Noncontrolling Interest Total Equity Shares Amount Shares Amount Balance at June 30, 2022 30,200 $ 755,000 27,631,499 $ 276 $ 755,873 $ 318,782 $ 1,829,931 $ 284,079 $ 2,114,010 Issuance cost — — — — 176 — 176 — 176 Stock compensation, net — — — — 382 — 382 — 382 Capital contribution from noncontrolling interests—joint venture — — — — — — — 79 79 Distributions Common stock ($5.47 per share) — — — — — (151,056) (151,056) — (151,056) Noncontrolling interests — — — — — — — (39,972) (39,972) Net income (loss) — — — — — (39,262) (39,262) (10,213) (49,475) Balance at July 19, 2022¹ 30,200 $ 755,000 27,631,499 $ 276 $ 756,431 $ 128,464 $ 1,640,171 $ 233,973 $ 1,874,144 Three Months Ended September 30, 2021 Preferred Stock Common Stock Paid-in Capital Accumulated Earnings (Deficit) Total PS Business Parks, Inc.'s Stockholders' Equity Noncontrolling Interest Total Equity Shares Amount Shares Amount Balance at June 30, 2021 37,790 $ 944,750 27,541,464 $ 275 $ 739,336 $ 89,800 $ 1,774,161 $ 223,374 $ 1,997,535 Issuance of common stock in connection with share-based compensation — — 4,689 — — — — — — Stock compensation, net — — — — 2,174 — 2,174 — 2,174 Cash paid for taxes in lieu of stock upon vesting of restricted stock units — — — — (478) — (478) — (478) Capital contribution from noncontrolling interests—joint venture — — — — — — — 236 236 Distributions Preferred stock — — — — — (12,046) (12,046) — (12,046) Common stock ($1.05 per share) — — — — — (28,923) (28,923) — (28,923) Noncontrolling interests — — — — — — — (7,691) (7,691) Net income (loss) — — — — — 64,613 64,613 13,850 78,463 Balance at September 30, 2021 37,790 $ 944,750 27,546,153 $ 275 $ 741,032 $ 113,444 $ 1,799,501 $ 229,769 $ 2,029,270 Predecessor Period from January 1, 2022 through July 19, 2022 Preferred Stock Common Stock Paid-in Capital Accumulated Earnings (Deficit) Total PS Business Parks, Inc.'s Stockholders' Equity Noncontrolling Interest Total Equity Shares Amount Shares Amount Balance at December 31, 2021 30,200 $ 755,000 27,589,807 $ 275 $ 752,444 $ 226,737 $ 1,734,456 $ 259,615 $ 1,994,071 Issuance cost — — — — 176 — 176 — 176 Issuance of common stock in connection with share-based compensation — — 41,692 1 2,101 — 2,102 — 2,102 Stock compensation, net — — — — 3,028 — 3,028 — 3,028 Cash paid for taxes in lieu of stock upon vesting of restricted stock units — — — — (1,318) — (1,318) — (1,318) Capital contribution from noncontrolling interests—joint venture — — — — — — — 492 492 Distributions Preferred stock — — — — — (19,160) (19,160) — (19,160) Common stock ($7.57 per share) — — — — — (209,079) (209,079) — (209,079) Noncontrolling interests — — — — — — — (55,358) (55,358) Net income (loss) — — — — — 129,966 129,966 29,224 159,190 Balance at July 19, 2022¹ 30,200 $ 755,000 27,631,499 $ 276 $ 756,431 $ 128,464 $ 1,640,171 $ 233,973 $ 1,874,144
__________________________Nine Months Ended September 30, 2021 Preferred Stock Common Stock Paid-in Capital Accumulated Earnings (Deficit) Total PS Business Parks, Inc.'s Stockholders' Equity Noncontrolling Interest Total Equity Shares Amount Shares Amount Balance at December 31, 2020 37,790 $ 944,750 27,488,547 $ 274 $ 738,022 $ 73,631 $ 1,756,677 $ 218,963 $ 1,975,640 Issuance of common stock in connection with share-based compensation — — 57,606 1 906 — 907 — 907 Stock compensation, net — — — — 5,889 — 5,889 — 5,889 Cash paid for taxes in lieu of stock upon vesting of restricted stock units — — — — (3,680) — (3,680) — (3,680) Capital contribution from noncontrolling interests—joint venture — — — — — — — 523 523 Issuance costs — — — — (105) — (105) — (105) Distributions Preferred stock — — — — — (36,139) (36,139) — (36,139) Common stock ($3.15 per share) — — — — — (86,713) (86,713) — (86,713) Noncontrolling interests — — — — — — — (23,072) (23,072) Net income (loss) — — — — — 162,665 162,665 33,355 196,020 Balance at September 30, 2021 37,790 $ 944,750 27,546,153 $ 275 $ 741,032 $ 113,444 $ 1,799,501 $ 229,769 $ 2,029,270 Successor Predecessor Period from July 20, 2022 through September 30, 2022 Period from January 1, 2022 through July 19, 2022 Nine Months Ended September 30, 2021 Operating activities: Net income (loss) $ (70,113) $ 159,190 $ 196,020 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 100,211 50,557 69,356 Gain on interest rate derivatives (61,661) — — Straight-line rents and amortization of above and below market leases (11,542) (2,276) (1,943) Amortization of deferred financing costs 4,993 488 468 Incentive compensation expense — 3,335 6,422 Gain on sale of real estate, net — (157,022) (49,117) (Increase) decrease in tenant and other receivables, lease right-of-use assets, net, prepaid expenses and other assets, and due from affiliates 4,429 3,020 (3,370) Increase in accounts payable, accrued expenses and other liabilities, lease liabilities, and due to affiliates 12,343 59,096 14,576 Net cash provided by (used in) operating activities (21,340) 116,388 232,412 Investing activities: Acquisitions of real estate — — (122,171) Proceeds from sales of investments in real estate — 236,230 76,566 Capital expenditures (15,230) (57,964) (57,987) Net cash provided by (used in) investing activities (15,230) 178,266 (103,592) Financing activities: Proceeds from debt 3,756,828 20,000 — Repayments on debt — (52,000) — Payment of deferred financing costs (10,782) (198) (2,485) Proceeds from issuance of preferred stock 500 — — Exercise of stock options — 2,101 907 Payment of issuance costs — 176 (105) Cash paid for taxes in lieu of shares upon vesting of restricted stock units — (1,318) (3,680) Cash paid to restricted stock unit holders — (328) (545) Contributions from noncontrolling interests 137 492 523 Distributions to noncontrolling interests — (55,358) (23,072) Distribution to preferred stockholders (9,580) (19,160) (36,139) Distribution to common stockholders — (209,079) (86,713) Blackstone contribution 2,847,170 — — Redemption of common shares and related costs (5,141,856) — — Parent Partners Loans (1,285,575) — — Derivative premium paid (32,758) — — Derivative premium received 25,300 — — Net cash provided by (used in) financing activities 149,384 (314,672) (151,309) Net increase (decrease) in Cash and cash equivalents and restricted cash 112,814 (20,018) (22,489) Cash and cash equivalents and restricted cash - beginning of period — 27,074 69,083 Cash and cash equivalents and restricted cash - end of period $ 112,814 $ 7,056 $ 46,594 CONSOLIDATED BALANCE SHEETSIndollars in thousands, except share data)132,658 128,629 789,227 789,227 2,254,663 2,224,522 3,043,890 3,013,749 (1,219,314) (1,158,054) 1,824,576 1,855,695 909 29,252 27,028 1,853,828 1,883,632 96,593 67,190 2,203 1,945 31,670 29,770 8,779 8,205 2,125,731 2,119,371 82,618 78,657 220,000 230,000 302,618 308,657 889,750 879,750 272 271 735,714 733,671 60 (433) 1,625,796 1,613,259 197,317 197,455 1,823,113 1,810,714 2,125,731 2,119,371 See accompanying notes.3PS BUSINESS PARKS, INC.CONSOLIDATED STATEMENTS OF INCOME(Amounts in thousands, except per share data)(Unaudited)100,481 97,340 300,342 289,272 31,679 30,796 92,962 92,440 23,759 24,631 70,465 74,886 1,745 2,970 7,019 11,982 57,183 58,397 170,446 179,308 43,298 38,943 129,896 109,964 212 206 599 940 (503) (155) (972) (5,507) (376) (758) 1,209 3,865 42,631 38,994 133,839 105,397 (4,866) (5,315) (18,610) (13,495) 37,765 33,679 115,229 91,902 (12,590) (13,833) (38,472) (41,498) (6,900) (6,900) (137) (128) (582) (387) 18,138 19,718 69,275 50,017 0.67 0.73 2.55 1.85 0.66 0.72 2.53 1.84 27,226 27,103 27,192 27,076 27,427 27,201 27,399 27,166 0.85 0.75 2.55 2.25 See accompanying notes.4PS BUSINESS PARKS, INC.CONSOLIDATED STATEMENT OF EQUITYFOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017(In thousands, except share data)(Unaudited)35,190 879,750 27,138,138 271 733,671 (433) 1,613,259 197,455 1,810,714 9,200 230,000 (7,775) 222,225 222,225 (8,800) (220,000) 6,900 (6,900) (220,000) (220,000) 112,899 1 3,991 3,992 3,992 2,673 2,673 2,673 (3,865) (3,865) (3,865) 115,229 115,229 18,610 133,839 (38,472) (38,472) (38,472) (69,364) (69,364) (69,364) (18,629) (18,629) 119 119 (119) 35,590 889,750 27,251,037 272 735,714 60 1,625,796 197,317 1,823,113 See accompanying notes.5PS BUSINESS PARKS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited, in thousands)133,839 105,397 70,465 74,886 (1,654) (1,253) 758 (1,209) (3,865) 3,255 8,933 338 391 4,125 1,259 72,213 84,216 206,052 189,613 (38,709) (24,230) (2,224) (30,161) (28,800) (12,628) 2,144 2,400 (66,550) (65,658) 170,000 116,000 (170,000) (56,000) (250,000) (778) 3,992 2,956 222,225 (230,000) (3,865) (1,940) (582) (38,472) (41,498) (69,364) (60,932) (18,629) (16,437) (135,473) (307,851) 4,029 (183,896) 128,629 188,912 132,658 5,016 (119) 1,613 119 (1,613) 6,900 (6,900) 220,000 (220,000) See accompanying notes.6PS BUSINESS PARKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSeptember 30, 20171. Organization and description of businessincorporatedorganized in 1990. Effective May 19, 2021, following approval by its common and preferred stockholders, PSB reincorporated from the state of California to the state of Maryland.1990.an Agreement and Plan of Merger, dated as of April 24, 2022 (the “Merger Agreement”), a merger (the “Merger”) was completed between PSB and a direct subsidiary of Sequoia Parent LP, a Delaware limited partnership (“Parent”), with the Company surviving. As of September 30, 2017, PSB owned 78.0%a result of the common partnership unitsMerger, the Company became a subsidiary of Parent and certain of its affiliates, and PS Business Parks, L.P.L.P (the “OP”“Partnership”) remained a subsidiary of the Company. The Parent is an affiliate of Blackstone Real Estate Partners IX, L.P., which is an affiliate of Blackstone Inc. (“Blackstone”). The remaining common partnership units arestock of the Company is wholly owned by Public Storage (“PS”). PS’s interest in the OPParent and certain of its affiliates and is referred to asnot publicly traded. The depositary shares representing the “PS OP Interest.” PSB, as the sole general partnerpreferred stock of the OP, has full, exclusive and complete responsibility and discretion in managing and controlling the OP. Company are publicly traded. Refer to Note 2 for additional information on basis of presentation.OP,Partnership and its consolidated joint ventures, are collectively referred to as the “Company,” “we,” “us,” or “our.” PS would own 41.9% (or 14.5 million shares)outstanding sharesMerger Agreement, upon the Closing each partnership unit of the Company’s common stock if itPartnership (a “Partnership Unit”) that was issued and outstanding prior to the effective time of the Merger (the “Partnership Merger Effective Time”) (other than units held by the Company, Parent, or any of their respective wholly owned subsidiaries) was automatically cancelled and converted into the right to receive an amount in cash equal to $182.25 (the “Per Company Share Merger Consideration”), less any applicable withholding taxes, which represented $187.50 per share of Common Stock as reduced by a $5.25 per share cash dividend paid in connection with the Closing (the “Closing Cash Dividend”) in accordance with the terms of the Merger Agreement. At the Partnership Merger Effective Time, each Partnership Unit owned by the Company or any of its subsidiaries immediately prior to the Partnership Merger Effective Time remained outstanding as a Partnership Unit of the Partnership held by the Company or the relevant subsidiary.its commonall of such limited partnership units in exchange for common shares. fully-integrated, self-advised and self-managed real estate investment trust (“REIT”) that owns, operates, acquires and develops commercial properties, primarily multi-tenant flex,industrial, industrial-flex and low-rise suburban office and industrial space. As of September 30, 2017,2022 and December 31, 2021, the Company owned and operated 28.0 million471 buildings in six states with 20,659,564 rentable square feet of commercial spaceand 666 buildings in six states and a 95.0% interest in 395 apartments. The Company also manages 684,000with 27,716,719 rentable square feet, on behalfrespectively.significant accounting policiespresentationconsolidated financial statements include the accounts of PSB and its subsidiaries, including the OP. All significant inter-company balances and transactionsConsolidated Financial Statements have been eliminatedprepared in the consolidated financial statements. The financial statements are presented on an accrual basis in accordanceconformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all ofas established by the information and footnotes required by GAAP for complete financial statements.Financial Accounting Standards Board (“FASB”) including modifications issued under Accounting Standards Updates (“ASUs”). In the opinion of management, all adjustments (consisting of normal and recurring accruals)adjustments) necessary for a fair presentation have been included. Operating
____________________________July 20, 2022 Building $ 3,339,161 Site improvements 177,159 Land 1,921,093 Tenant improvements 71,805 Development in progress 150,977 In-place lease intangibles 242,551 Above market lease assets 7,888 Below market lease liabilities (172,109) 144,523 Acquired noncontrolling interest at fair value (13,481) Acquired preferred shares at fair value (563,026) Net assets acquired $ 5,306,541 Funded by: Total Blackstone contribution, net of parent partner loan distributed (1,561,595) Debt issued (3,744,946) Total consideration and merger contributions $ (5,306,541) 2017 are not necessarily indicative2021, it resulted in $30 and $449 changes to total revenue, $15 and $222 changes in total expenses, and $15 and $227 changes in total other income (expense), respectively. There was no change to net income as historically reported.results that may be expected foroutstanding voting interest unless it does not control the year ended December 31, 2017. For further information, refer to the consolidated financial statements and footnotes thereto included inentity. It is also the Company’s Annual Report on Form 10-Kpolicy to consolidate any variable interest entity (“VIE”) for which the year ended December 31, 2016. Consolidation and equity method of accountingWe consider entities to be Variable Interest Entities (“VIEs”) when they have insufficient equity to finance their activities without additional subordinated financial support provided by other parties, or the equity holders as a group do not have a controlling financial interest. A limited partnershipCompany is also generally considered a VIE if the limited partners do not participate in operating decisions. We consolidate VIEs when we are the primary beneficiary, generallyas defined as havingby GAAP. The Company is deemed to be the primary beneficiary when it has (i) the power to direct the activities that most significantly impactingimpact the economic performance of the entity, and (ii) either the obligation (or right) to absorb losses or(or receive benefits) of the rightentity that could potentially be significant.receive benefits fromexercise significant influence over operating and financial policies are presented under the VIE.We account for investmentsequity method. Investments in entities that arethe Company does not VIEs that we havecontrol and over which it does not exercise significant influence are carried at the lower of cost or fair value, as appropriate. The Company’s ability to correctly assess control over but do not control, usingan entity affects the equity methodpresentation of accounting. At September 30, 2017, we have an interest in a joint venture engagedthese investments in the developmentConsolidated Financial Statements. The portions of consolidated entities not owned by the Company are presented as noncontrolling interests as of and operation of residential real estate, which we account for usingduring the equity method of accounting. See Note 4 for more information on this entity.7PS, the sole limited partner in the OP, has no power to direct the activities of the OP. We are the primary beneficiary of the OP. Accordingly, we consider the OP a VIE and consolidate it. Substantially all of our assets and liabilities are held by the OP.Noncontrolling interestsThe PS OP Interest represents PS’s noncontrolling interest in the OP through its ownership of 7,305,355 common partnership units. See note 7 for further information. estimatesconsolidated financial statementsConsolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported inamounts of revenue and expenses during the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.Allowance for doubtful accountsThe Company monitors the collectability of its receivable balances including the deferred rent receivable on an ongoing basis. Tenant receivables are net of an allowance for estimated uncollectible accounts totaling $400,000 at September 30, 2017 and December 31, 2016. Deferred rent receivable is net of an allowance for uncollectible accounts totaling $910,000 and $916,000 at September 30, 2017 and December 31, 2016, respectively.Financial instrumentsThe methodsreporting period. Significant estimates, judgments and assumptions usedare required in a number of areas, including, but not limited to, estimateevaluating the impairment of long-lived assets and investments, allocating the purchase price of acquired properties, determining the fair value of financial instrumentsdebt and incentive compensation. These estimates, judgments and assumptions are described below. The Company has estimated the fair value of financial instruments using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop estimates of market value. Accordingly, estimated fair values are not necessarily indicative of the amounts that could be realized in current market exchanges. The Company determines the estimated fair value of financial assets and liabilities utilizing a hierarchy of valuation techniques based on whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. This hierarchy requires the use of observable market data when available. The following is the fair value hierarchy:·Level 1—quoted prices for identical instruments in active markets;·Level 2—quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and·Level 3—fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.Financial assets that are exposed to credit risk consist primarily of cashhistorical experience and cash equivalents and receivables. The Company considers all highly liquid investments with a remaining maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents, which consist primarily of money market investments, are only invested in entities with an investment grade rating. Receivables are comprised of balances due from a large number of customers. Balancesvarious other factors that the Company expectsbelieves to become uncollectible are reserved for or written off. Due tobe reasonable under the short period to maturity of the Company’s cashcircumstances. Actual results may differ from those estimates.cash equivalents, accounts receivable, other assets and accruedimprovements, including interest and other liabilities, the carrying values as presented on the consolidated balance sheetscosts capitalized during construction and development, are reasonable estimates of fair value.8Carrying values of the Company’s unsecured Credit Facility (as defined on page 15) approximate fair value. The characteristics of these financial instruments, market dataincluded in Investments in real estate, net and other comparative metrics utilized in determining these fair values are “Level 2” inputs.Real estate facilitiesReal estate facilities are recordedstated at cost. Property taxes, insurance, interest and costs essential toimprovements, excluding land, are depreciated over their estimated useful lives using the development of property for its intended usestraight-line method. The estimated useful lives by asset category are capitalized during the period of development. Costs related to the renovation or improvement of the properties are capitalized. as follows:Estimated useful life Buildings 10-40 years Building equipment and fixtures 5-10 years Land and building improvements 10-15 years Tenant improvements Shorter of the asset's useful life or the noncancelable term of lease Expenditures that are expected to benefit a period greater than two years and exceed $2,000 are capitalized and depreciated over their estimated useful life. BuildingsRenovations and improvements, are depreciated usingwhich improve or extend the straight-line method over their estimated useful lives, which generally range from five to 30 years. Transaction costs, which include tenant improvements and lease commissions, of $1,000 or more for leases with terms greater than one year are capitalized and depreciated over their estimated useful lives. Transaction costs less than $1,000 or for leases of one year or less are expensed as incurred.Property held for disposition or developmentReal estate is classified as held for disposition when the asset is being marketed for sale and we expect that a sale is likely to occur in the next 12 months. Real estate is classified as held for development when it is likely that it will be developed to an alternate use and no longer used in its present form. Property held for development or disposition is not depreciated.Intangible assets/liabilitiesWhen we acquire facilities, an intangible asset is recorded for leases where the in-place rent is higher than market rents, and an intangible liability is recorded where the market rents are higher than the in-place rents. The amounts recorded are based upon the present value (using a discount rate which reflects the risks associated with the leases acquired) of such differences over the lease term and such amounts are amortized to rental income over the respective remaining lease term.We have no material intangible assets or liabilities for any periods presented.Evaluation of asset impairmentWe evaluate our real estate and finite-lived intangible assets for impairment each quarter. If there are indicators of impairment and we determine that the asset is not recoverable from future undiscounted cash flows to be received through the asset’s remaining life (or, if earlier, the expected disposal date), we record an impairment charge to the extent the carrying amount exceeds the asset’s estimated fair value or net proceeds from expected disposal.We evaluate our investment in our unconsolidated joint venture on a quarterly basis. We record an impairment charge to the extent the carrying amount exceeds estimated fair value, when we believe any such shortfall is other than temporary.No impairments were recorded in any of our evaluations for any period presented herein.Stock compensationAll share-based payments to employees, including grants of employee stock options, are recognized as stock compensation in the Company’s consolidated statements of income based on their fair values at the beginning of the service period. See Note 11.9Accrued and other liabilities and other assetsAccrued and other liabilities consist primarily of rents prepaid by our tenants, trade payables, property tax accruals, accrued payroll and contingent loss accruals when probable and estimable. We disclose the nature of significant unaccrued losses that are reasonably possible of occurring and, if estimable, a range of exposure. Other assets, are comprised primarilycapitalized.prepaid expenses. We believeCostsfair valueland development and construction periods of our accrued and other liabilities and other assets approximate book value, due toqualifying projects, the short period until settlement.Revenue recognitionRevenue is recognized with respect to contractual arrangements when persuasive evidence of an arrangement exists; the delivery has occurred or services have been rendered; the fee is fixed or determinable; and collectability is reasonably assured. All leases are classified as operating leases. Rental income is recognized on a straight-line basis over the lease term, with the excess of cumulative rental income recognized over the cumulative rent billed for the lease term reflected as “deferred rent receivable” on our consolidated balance sheets. Reimbursements from tenants forCompany capitalizes interest costs, insurance, real estate taxes and other recoverable operating expenses are recognized as rental income ingeneral and administrative costs of the periodpersonnel performing the applicabledevelopment, renovation and rehabilitation if such costs are incurred. Property management fees are recognized inincremental and identifiable to a specific activity to ready the period earned.Costs incurred in acquiring tenants (primarily tenant improvements and lease commissions) are capitalized and amortized over the lease period.Gains from sales of real estate facilitiesrecognizes gains from sales of real estate facilities at the time of sale using the full accrual method, provided that various criteriacapitalizes transaction costs related to the termsacquisition of the transactionsland for future development and any subsequent involvement by the Company with theoperating properties sold are met. If the criteria are not met, the Company defers the gains and recognizes them when the criteria are met or uses the installment or cost recovery methodsthat qualify as appropriate under the circumstances.General and administrative expensesGeneral and administrative expenses include executive and other compensation, corporate office expenses, professional fees, acquisition transaction costs, state income taxes and other such costs that are not directly related to the operation of our real estate facilities.Income taxesWe have elected to be treated as a REIT, as defined in the Internal Revenue Code of 1986, as amended (the “Code”). As a REIT, we do not incur federal income tax if we distribute 100% of our REIT taxable income each year, and if we meet certain organizational and operational rules. We believe we have met these REIT requirements for all periods presented herein. Accordingly, we have recorded no federal income tax expense related to our REIT taxable income.We recognize tax benefits of uncertain income tax positions that are subject to audit only if we believe it is more likely than not that the position would ultimately be sustained assuming the relevant taxing authorities had full knowledge of the relevant facts and circumstances of our positions. As of September 30, 2017, we did not recognize any tax benefits for uncertain positions.Accounting for preferred equity issuance costsWe record issuance costs as a reduction to paid-in capital on our consolidated balance sheets at the time the preferred securities are issued and reflect the carrying value of the preferred equity at its redemption value. An additional allocation of income is made from the common shareholders to the preferred shareholders in the amount of10the original issuance costs, and we reclassify the redemption value from equity to liabilities when we call preferred shares for redemption.Net income per common shareNotwithstanding the presentation of income allocations on our consolidated statements of income, net income is allocated to (a) preferred shareholders, for distributions paid, (b) preferred shareholders, to the extent redemption value exceeds the related carrying value (a “Preferred Redemption Allocation”) and (c) restricted share unit holders, for non-forfeitable dividends paid adjusted for participation rights in undistributed earnings. The remaining net income is allocated to the common partnership units and our common shareholders, respectively, based upon the pro-rata aggregate number of units and shares outstanding.Basic and diluted net income per common share are each calculated based upon net income allocable to common shareholders, divided by (i) in the case of basic net income per common share, weighted average common shares and (ii) in the case of diluted income per share, weighted average common shares adjusted for the impact, if dilutive, of stock compensation awards outstanding (Note 11).The following tables set forth the calculation of the components of our basic and diluted income per share that are not reflected on the face of our consolidated statements of income, including the allocation of income to common shareholders and common partnership units, the percentage of weighted average shares and common partnership units, as well as basic and diluted weighted average shares (in thousands):42,631 38,994 133,839 105,397 (12,590) (13,833) (38,472) (41,498) (6,900) (6,900) (137) (128) (582) (387) 23,004 25,033 87,885 63,512 (4,866) (5,315) (18,610) (13,495) 18,138 19,718 69,275 50,017 27,226 27,103 27,192 27,076 7,305 7,305 7,305 7,305 34,531 34,408 34,497 34,381 21.2% 21.2% 21.2% 21.2% 27,226 27,103 27,192 27,076 201 98 207 90 27,427 27,201 27,399 27,166 11Segment reportingviews its operations as one segment.ReclassificationsCertain reclassifications have been made to the consolidated financial statements for 2016 and in order to conform to the 2017 presentation, including reclassifying management fee income totaling $130,000 and $389,000 for the three and nine months ended September 30, 2016 into “interest and other income” on our consolidated statements of income.Recently issued accounting standardsIn May 2014 and February 2016, the Financial Accounting Standards Board issued two Accounting Standards Updates (“ASU”s), ASU 2014-09, Revenue from Contracts with Customers (the “Revenue Standard”), and ASU 2016-02, Leases (the “Lease Standard”). These standards apply to substantially all of our revenue generating activities, as well as provide a model to account for the disposition of real estate facilities to non-customers, which is governed under ASU 2017-05.The Lease Standard will direct how we account for payments from the elements of our leases that are generally fixed and determinable at the inception of the lease (“Fixed Lease Payments”) while the Revenue Standard will direct how we account for the non-lease components of our lease contracts, primarily expense reimbursements (“Non-Lease Payments”) and the accounting for the disposition of real estate facilities.The Revenue Standard is effective on January 1, 2018, and generally requires that revenue from Non-Lease Payments be based upon the consideration expected from our tenants, and be recognized under various methods depending upon the nature of the underlying expense and the contractual reimbursement arrangement. The standard permits either the retrospective (restatement) method or cumulative effects transition method and allowed for early adoption on January 1, 2017, which we did not elect. We expect to use the cumulative effects transition method, which will result in an adjustment to our retained earnings effective January 1, 2018 for the cumulative impact of the standard as of December 31, 2017. We do not expect this standard to have a material impact on our accounting for our facility management fees for property management services provided to PS or the disposition of real estate facilities as our accounting policy is consistent with the provisions of the standard. Rental income from leasing arrangements is a substantial portion of our revenues and is specifically excluded from the Revenue Standard and will be governed by the Lease Standard. In conjunction with the adoption of the Lease Standard, we are currently evaluating the impact of the standard as it relates to Non-Lease Payments.The Lease Standard is effective on January 1, 2019. The standard provides definitional guidance of what constitutes a lease, requiring lessees to recognize most leases on the balance sheet and making certain changes to lessor accounting. For leases in which we are the lessor, we are required to account for Fixed Lease Payments on a straight-line basis, with the expected fixed payments recognized ratably over the term of the lease. The standard also requires capitalization of only thecapitalizes incremental costs incurred in executing each particular lease, such as legal fees to draftsuccessfully originate a lease or commissions based uponthat result directly from obtaining a particular lease. Costs thatlease and would also not have been incurred regardlessif the lease had not been obtained. In assessing the amount of lease execution, such as allocateddirect and indirect costs of internal personnel,to be capitalized, allocations are not capitalized. For most leases with a term of greater than 12 months, in which we are the lessee, the present value of future lease payments will be recognizedmade based on our balance sheet as a right-of-use asset and related labiality. As of September 30, 2017, the remaining contractual payments under our ground lease agreements aggregated $282,000. The standard requires a modified retrospective transition approach for all leases existing at or entered into after the beginningestimates of the earliest comparative period presentedactual amount of time spent in the financial statements on the date of initial application and allowed early adoption, which we did not elect. We do not expect that the Lease Standard will impact our accounting for Fixed Lease Payments, because our accounting policy is currently consistent with the provisions of the standard. We are currently evaluating the impact of the standard as it relates to the capitalization of costs associated with executed leases.12In August, 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which provides guidance on the classification of certain specific cash receipts and cash payments in the statement of cash flows, including, but not limited to, cash distributions received from equity method investees, including unconsolidated joint ventures. The new standard is effective for periods beginning after December 15, 2017, with early adoption permitted and shall be applied retrospectively where practicable. The Company is currently in the process of evaluating the impact of adoption of the new accounting guidance on its consolidated financial statements.In November, 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) – Restricted Cash, which requires the statements of cash flows to explain the change during the period in the total cash, cash equivalents, restricted cash and restricted cash equivalents. The new guidance also requires entities to reconcile such total to amounts on the balance sheets and disclose the nature of the restrictions. The guidance is effective for public entities for fiscal years beginning after December 15, 2017 and for interim periods therein, with early adoption permitted. The guidance must be adopted using a modified retrospective approach. each activity. The Company does not expectcapitalize any costs attributable to downtime or to unsuccessful projects.adoptionrequirements for capitalization are presented as a component of this standard to haveLease-related intangible assets, net in the Consolidated Balance Sheets and all other capitalized costs are included in the investment basis of the real estate assets.material impact on its consolidated financial statements.In January, 2017,transaction or other event is a business combination, which requires that the FASB issued ASU 2017-01, Business Combinations (Topic 805) - Clarifyingassets acquired and liabilities assumed constitute a business. If the Definition of a Business. Under the new guidance, a set of transferred assets and activities isacquired are not a business, whenthe Company would account for the transaction or other event as an asset acquisition. The Company’s acquisitions of investment properties are accounted for as asset acquisitions, as substantially all of the fair value of the gross assets acquired is typically concentrated in a single identifiable asset or a group of similar identifiable assets. When acquisitions are treated as asset acquisitions, the related transaction costs are capitalized.which we believe will applyand liabilities as held for sale when the sale of an asset has been duly approved by management, a legally enforceable contract has been executed and the buyer’s due diligence period, if any, has expired and a non-refundable deposit has been received. If a property is considered held for sale, a provision for loss is recognized if the fair value of the property less the estimated cost to substantially allsell is less than its carrying amount. Depreciation and amortization expense cease once a property is considered held for sale. As of our future acquisitionsSeptember 30, 2022 and December 31, 2021, zero and 12 properties were classified as held for sale, respectively.facilities. Previously,are generally considered to be sales to non-customers, requiring the Company to identify each distinct non-financial asset promised to the buyer. The Company determines whether the buyer obtains control of the non-financial assets, achieved through the transfer of the risks and rewards of ownership of the non-financial assets.acquisitions were consideredloss could be material. During the periods presented, no impairment was recognized in the Consolidated Financial Statements.business,tenant takes possession of the leased space for a new lease.transaction coststhe rent that is contractually due from the tenant over the contractual lease term. These amounts are classified as Tenant and other receivables in the Consolidated Balance Sheets. When a property is acquired, the terms of existing leases are considered to commence as of the acquisition date for purposes of this calculation. As a result of the election of pushdown accounting for the Merger, the Acquisition Date was used as commencement date for purposes of active leases that existed as of that date.acquisitions were expensed as incurred.entities after consideration of any net operating losses.new guidance, transaction costsCompany determines deferred tax assets and liabilities based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Any increase or decrease in the deferred tax liability that results from a change in circumstances, and that causes management to change its judgment about expected future tax consequences of events, is included in the tax provision when such changes occur. Deferred income taxes also reflect the impact of operating loss and tax credit carryforwards. A valuation allowance is provided if the Company believes it is more likely than not that all or some portion of the deferred tax asset will insteadnot be capitalizedrealized. Any increase or decrease in the valuation allowance that results from a change in circumstances, and that causes management to change its judgment about the realizability of the related deferred tax asset, is included in the tax provision when such changes occur.purchase price. This standard is effectiveCompany’s interest rate caps or swaps are currently or have been designated as hedges for fiscal years beginning after December 15, 2017. We early adoptedaccounting purposes. The Company’s derivative financial instruments are recorded at fair value and are recorded in the standard on January 1, 2017; however, the adoption had no effect because we have not acquired any facilities since January 1, 2017.3. Real estate facilitiesThe activity in real estate facilities for the nine months ended September 30, 2017 is as follows (in thousands):789,227 2,224,522 (1,158,054) 1,855,695 39,321 39,321 (9,180) 9,180 (70,465) (70,465) 25 25 789,227 2,254,663 (1,219,314) 1,824,576 The purchase price of acquired properties is allocated to land, buildingsline items Prepaid expenses and improvements (including tenant improvements, unamortized lease commissions, acquired in-place lease values and tenant relationships, if any), intangibleother assets and intangibleAccounts payable, accrued expenses and other liabilities (see Note 2), based uponin the relativeConsolidated Balance Sheets.component, whichquarter and are evaluated independently.We must make significant assumptionsreflected in Interest income (expense) in the Consolidated Statements of Operations.assets acquiredderivative instruments presented in the Consolidated Financial Statements. The Company classifies the inputs as follows:liabilities assumed,model-derived valuations in which can affectall significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the recognitionprices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers.timing of revenue and depreciation and amortization expense. valuation methodologies management believes to be appropriate for these purposes. In connection with the Merger, the preferred stocks were valued using quoted market prices in active markets (Level 1).landthe Company’s derivatives was determined by management, based on valuation information prepared by an independent third party. Their fair value model incorporates credit risk and changes in credit risk to determine a credit valuation adjustment. This model is estimated based upon, among other considerations, comparable saleson the applicable forward curve as a reflection of landthe market’s current expectation of payments discounted at market factors. The Company classifies these valuations within the same region.Level 2 fair value hierarchy.buildingsits above-market and improvements,below-market in-place leases based on the present value (using a discount rate that reflects the risk associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over the remaining non-cancelable term of the leases. Any below-market renewal options are also considered in the in-place lease values. This valuation methodology is based on Level 3 inputs in the fair value hierarchy.unamortized lease commissions are based on current market replacementforegone costs and other market information. The amount recorded to acquired in-place leases is determined based on management’s assessment of current market conditions andrent received during the estimated lease-up periodsperiod as if the space was vacant. This valuation methodology is based on Level 3 inputs in the fair value hierarchy.respective spaces.entire portfolio.13On May 1, 2017, the Company disposed of Empire Commerce, a two-building single-story office park comprising 44,000 square feet, located in Dallas, Texas, for net proceeds of $2.1 million, which resulted in a net gain of $1.2 million.On March 31, 2017, the Company sold development rights it held to build medical office buildings on land adjacent to its Westech Business Park in Silver Spring, Maryland for $6.5million. The Company had acquired the development rights as part of its 2006 acquisition of the park. received net proceeds of $3.9 million, of which $1.5 million was receiveda 98.2% interest in prior years and $2.4 million was received in March, 2017.Brentford at The Company recordedMile, a gain of $3.9 million related to the net proceeds received through September 30, 2017, which are non-refundable. The Company will report an additional gain of $2.5million when the final proceeds are received in the fourth quarter of 2017 and the remaining contingencies have lapsed.As of September 30, 2017, we have commitments, pursuant to executed leases, to spend $12.7 million in transaction costs, which include tenant improvements and lease commissions.4. Investment in and advances to unconsolidated joint ventureIn 2013, the Company entered into a joint venture known as Amherst JV LLCplanned 411-unit multifamily apartment complex (the “Joint“Brentford Joint Venture”) with an. An unrelated real estate development company (the “JV Partner”) forholds the purposeremaining 1.8% interest. Based on management’s analysis of developingthe joint venture and certain related agreements, the Company determined Brentford Joint Venture is a 395-unit multi-family building onVIE because (a) Brentford Joint Venture does not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties, and (b) there are no substantive kick-out rights. The Company has also concluded it has control over the Brentford Joint Venture as it (a) is the managing member of the Brentford Joint Venture, (b) has designated decision making power to direct the activities that most significantly affect the economic performance of the Brentford Joint Venture, and (c) has a five-acre site (the “Project”) within the Company’s 628,000 square foot office park located in Tysons, Virginia (known as “The Mile”). We hold a 95.0%98.2% economic interest in the investment. Thus, we determined that we are the primary beneficiary of Brentford Joint Venture. The assets of the Brentford Joint Venture withmay only be used to settle obligations of the remaining 5.0% held byBrentford Joint Venture and the JV Partner. creditors of the Brentford Joint Venture have no recourse to the general credit of the Company.JV Partner is responsiblefollowing table presents a summary of financial data of the consolidated VIE included in the Company’s Consolidated Balance Sheets:Successor Predecessor September 30, 2022 December 31, 2021 Investment State Company % Interest Total Assets Total Liabilities Total Assets Total Liabilities Brentford Joint Venture VA 98.2 % $ 151,433 $ 7,972 $ 76,206 $ 7,421 Successor Predecessor September 30, 2022 December 31, 2021 Buildings and improvements $ 3,589,032 $ 2,266,793 Land 1,921,093 763,961 Development in progress 165,652 — Land held for development — 78,991 Investments in real estate 5,675,777 3,109,745 Accumulated depreciation (61,830) (1,173,407) Investments in real estate, net $ 5,613,947 $ 1,936,338 development and construction of the Project, as well as the leasing and operational management of the Project. We do not control the Joint Venture, when considering, among other factors, that the consent of our JV Partner is required for all significant decisions. Accordingly, we account for our investment using the equity method.On October 5, 2015 (the “Contribution Date”), the Company contributed the site and improvements to the Joint Venture. We provide the Joint Venture with a construction loan in the amount of $75.0 million bearing interest at the London Interbank Offered Rate (“LIBOR”) plus 2.25%. The loan will mature on April 5, 2019 with two one-year extension options.The aggregate amount of development costs are estimated to be $105.6 million (excluding unrealized land appreciation). The Company is committed to funding $75.0 millionperiod from July 20, 2022 through the construction loan in addition to its equity contribution of $28.5 million, which includes a land basis of $15.3 million. The Project delivered its first completed units in May, 2017, with final completion date of the overall Project expected during the fourth quarter of 2017.We have reflected the aggregate cost of the contributed site and improvements, our equity contributions and loan advances, as well as capitalized third party interest we incurred as investment in and advances to unconsolidated joint venture. The Company’s investment in and advances to unconsolidated joint venture was $96.6 million and $67.2 million as of September 30, 20172022, theDecember 31, 2016,the three months ended September 30, 2021, respectively. ForDepreciation expense of investments in real estate was $61,830, $50,557 and $69,356 for the period from July 20, 2022 through September 30, 2022, the period from January 1, 2022 through July 19, 2022, and the nine months ended September 30, 2017, we made loan advances2021, respectively.Successor Predecessor Period from July 20, 2022 through September 30, 2022 Period from July 1, 2022 through July 19, 2022 Three Months Ended September 30, 2021 Period from January 1, 2022 through July 19, 2022 Nine Months Ended September 30, 2021 Operating properties acquired — — 7 — 7 Square feet — — 718,000 — 718,000 Total purchase price $ — $ — $ 123,268 $ — $ 123,268 Successor Predecessor 2022 Acquisitions 2022 Acquisitions 2021 Acquisitions Building $ — $ — $ 90,897 Site improvements — — 6,998 Land — — 20,308 Tenant improvements — — 2,998 In-place lease intangibles — — 3,223 Below market lease liabilities — — (1,156) Other — — (1,097) Allocated purchase price $ — $ — $ 122,171 $506,000and included within the allocated purchase price for the period from July 20, 2022 through September 30, 2022, theperiod from July 1, 2022 through July 19, 2022, and the three months ended September 30, 2021, respectively. Transaction costs of interest. For$—, $— and $271 were capitalized and included within the allocated purchase price for the period from July 20, 2022 through September 30, 2022, the period from January 1, 2022 through July 19, 2022, and the nine months ended September 30, 2016,2021, respectively.Successor Predecessor Period from July 20, 2022 through September 30, 2022 Period from July 1, 2022 through July 19, 2022 Three Months Ended September 30, 2021 Period from January 1, 2022 through July 19, 2022 Nine Months Ended September 30, 2021 Number of buildings 168 13 8 40 11 Number of land parcels — — — 1 — Net proceeds $ 1,295,217 $ 46,721 $ 43,900 $ 236,362 $ 76,540 Gain on sale of real estate, net $ — $ 38,221 $ 29,924 $ 157,022 $ 49,117 Successor Predecessor Period from July 20, 2022 through September 30, 2022 Period from July 1, 2022 through July 19, 2022 Three Months Ended September 30, 2021 Period from January 1, 2022 through July 19, 2022 Nine Months Ended September 30, 2021 Buildings placed into service — — — — 1 Square feet — — — — 83,000 $ — $ — $ — $ — $ 8,062 madeidentifies non-strategic assets for sale. The Company separately classifies properties held for sale in its Consolidated Financial Statements. Real estate investments to be disposed of are reported at the lower of carrying amount or estimated fair value, less costs to sell. Once an asset is classified as held for sale, depreciation and amortization expense is no longer recorded. Once a liability is classified as held for sale, amortization of below market leases is no longer recorded.Successor Predecessor September 30, 2022 December 31, 2021 Assets: Investments in real estate, net $ — $ 26,788 Lease-related intangible assets, net — 6,819 Prepaid expenses and other assets — 2 Total assets held for sale $ — $ 33,609 advances(the “Loan A Mortgage Loan”) on July 20, 2022 from Bank of America, N.A., Citi Real Estate Funding Inc., Barclays Capital Real Estate Inc., Morgan Stanley Bank, N.A., and Societe Generale Financial Corporation (together with its successors and assigns, the “Loan A Lenders”), and certain other indirect subsidiaries of the Partnership and certain subsidiaries of Blackstone Real Estate Partners IX, L.P within the Non-Core Portfolio (collectively, the “Loan B Mortgage Borrowers” and, together with the Loan A Mortgage Borrowers, the “Mortgage Borrowers”) obtained a $1,960,000 mortgage loan with an additional $96,000 future funding option (the “Loan B Mortgage Loan” and, together with the Loan A Mortgage Loan, the “Mortgage Loans”) on July 20, 2022 from Citibank, N.A., as administrative agent and the other lenders party thereto (together with the Loan B Lenders, the “Lenders”). On August 5, 2022, the Loan A Mortgage Loan was securitized as evidenced by that certain Offering Circular by BX Trust 2022-PSB, as the issuing entity, Bank of America Merrill Lynch Large Loan, Inc., as depositor, and Bank of America, National Association, Barclays Capital Real Estate Inc., Citi Real Estate Funding Inc., Morgan Stanley Mortgage Capital Holdings LLC and Societe Generale Financial Corporation, as mortgage loan sellers.Joint VentureNon-Core Affiliates and therefore have not recorded any liability related to their share of $22.3 million,the debt. Principal balances relating to the Company’s allocated amount of these loans are further outlined in the table below. Transaction costs related to loan issuances have been capitalized, deducted from the loan liabilities, and are amortized over the life of each respective loan. The Company used the proceeds from the Mortgage Loans, among other things, to (i) fund the consideration for the Merger, (ii) pay for certain costs and expenses relating to (a) the transactions in connection with the Merger and incurred in connection with the closing of the Mortgage Loans, and (b) the operation of the properties (including, without limitation, carrying costs with respect to the properties and funding working capital contributionsrequirements of $5.7 millionthe properties), (iii) establish reserves, including certain reserves required to be established under the terms of the Mortgage Loans, and capitalized $854,000(iv) other general corporate purposes. General corporate purposes may include, but are not limited to, the repayment of interest.Outstanding Balance at Interest Rate at September 30, 2022¹ Maturity Date at September 30, 2022² Successor Predecessor September 30, 2022 December 31, 2021 Debt, variable $ 3,795,930 $ — 5.25% - 6.84% August 2024 — 32,000 N/A N/A Unamortized debt issuance costs, net (9,697) — Unamortized discounts, net (35,194) — $ 3,751,039 $ 32,000 6.13% Years ending December 31: Principal¹ 2022 remainder $ — 2023 — 2024 3,795,930 2025 — 2026 — Thereafter — Total debt $ 3,795,930 Successor Number of Instruments Balance at September 30, 2022 Notional Amounts Strike Maturity Date Undesignated derivatives: Interest rate caps - purchased 2 $ 47,804 $ — $ 3,592,215 3.85 % August 2024 Interest rate cap - sold 1 — 47,804 $ 3,592,215 3.85 % August 2024 Interest rate swap - purchased 1 68,993 — $ 3,592,215 3.10 % August 2024 Total fair value of derivatives $ 116,797 $ 47,804 Successor Predecessor September 30, 2022 December 31, 2021 Carrying Value Fair Value Carrying Value Fair Value Financial assets: Level 2 $ 116,797 $ 116,797 $ — $ — Financial liabilities: Level 2 $ 47,804 $ 47,804 $ — $ — Level 3 $ 3,751,039 $ 3,774,620 $ 32,000 $ 32,000 Successor Predecessor Period from July 20, 2022 through September 30, 2022 Period from July 1, 2022 through July 19, 2022 Three Months Ended September 30, 2021 Period from January 1, 2022 through July 19, 2022 Nine Months Ended September 30, 2021 Fixed lease payments $ 59,492 $ 16,967 $ 82,652 $ 184,011 $ 247,387 Variable lease payments 18,272 5,445 27,826 62,164 80,921 Rental revenue $ 77,764 $ 22,412 $ 110,478 $ 246,175 $ 328,308 2017, all 395 units have been completed. 2022, the Company had $15,837 due to Link recorded in the line item Due to affiliates in the Consolidated Balance Sheets and $9 due from Link recorded in the line item Due from affiliates in the Consolidated Balance Sheets. The current term of the Master Services Agreement extends to December 31, 2022, and may be renewed for additional one-year terms thereafter; provided, however, that the Master Services Agreement may be terminated at any time upon prior written notice by either Link or the Company.three and nine months endedperiod from July 20, 2022 through September 30, 2017,2022, the Company incurred expenses in connection with the Merger totaling $14,948, for services rendered by Link. Such expenses are recorded an equity loss in the unconsolidated joint ventureline item Merger costs in the Consolidated Statements of $376,000Operations.$758,000, respectively.14Tablemature in July 2027. The aggregate principal amount of Contents5. Leasing activityTheleases space(“GMUC”), an affiliate of the Company, is a captive insurance company that began providing insurance coverage to the Company in its real estate facilities to tenants primarily under non-cancelable leases generally rangingJuly 2022. During the period from one to 10 years. Future minimum rental revenues, excluding recovery ofJuly 20, 2022 through September 30, 2022, the Company incurred $986 for insurance premiums recognized in Property operating expenses under these leases,in the Consolidated Statements of Operations. The fees paid are as followsin place of insurance premiums and fees that would otherwise be paid to third party insurance companies, and are equivalent or less than the rate third-party insurance companies would charge for such services. There were $— amounts payable to GMUC as of September 30, 2017 (in thousands):2022.75,498 267,885 196,801 133,240 92,451 168,364 934,239 In addition to minimum rental payments, certain tenants reimbursetheir pro rata sharean aggregate cash amount of specified operating expenses. Such reimbursements amounted to $22.6 million and $20.3 million for the three months ended September 30, 2017 and 2016, respectively, and $68.4 million and $61.6 million for the nine months ended September 30, 2017 and 2016, respectively. These amounts are included as rental income in the accompanying consolidated statements of income.Leases accounting for 3.0% of total leased square footage are subject to termination options, of which 1.2% of total leased square footage have termination options exercisable through December 31, 2017. In general, these leases provide for termination payments should the termination options be exercised.$500. The future minimum rental revenues in the above table assume such options are not exercised.6. Bank loansWe have a line of credit (the “Credit Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”). The Credit Facility has a borrowing limit of $250.0 million and expires January 10, 2022. The rate of interest charged on borrowings is based on the LIBOR plus 0.80% to LIBOR plus 1.55% depending on the Company’s credit ratings. Currently, the Company’s rate under the Credit Facility is LIBOR plus 0.825%. In addition, the Company is required to pay an annual facility fee ranging from 0.10% to 0.30%issuance of the borrowing limit dependingSeries A Preferred Stock was made in a private placement in reliance on the Company’s credit ratings (currently 0.125%). We paid $613,000 of loan origination costs in January, 2017. The Company had no balance outstanding on the Credit Facility at September 30, 2017 and December 31, 2016. Subsequent to September 30, 2017, the Company borrowed net $80.0 million on the Credit Facility. The Company had $979,000 and $539,000 of unamortized loan origination costs as of September 30, 2017 and December 31, 2016, respectively, which is included in other assets in the accompanying consolidated balance sheets. The Credit Facility requires us to meet certain covenants, all of which we were in compliance with as of September 30, 2017. Interest on outstanding borrowings is payable monthly. 7. Noncontrolling interestsNoncontrolling interests represent 7,305,355 common partnership unitsSection 4(a)(2) of the OP owned by PS. Each common partnership unit receives a cash distribution equal toSecurities Act of 1933, as amended, and the dividend paid on our common sharesrules and is redeemable at PS’s option.If PS exercises its right of redemption, at PSB’s option (a) PS will receive one common share from us for each common partnership unit redeemed, or (b) PS will receive cash from us for each common partnership unit generally equal to the market value of a common share (as defined in the Operating Partnership Agreement). We can prevent redemptions that we believe would violate either our articles of incorporation or securities laws, cause PSB to no longer qualify as a REIT, or could result in the OP no longer being treated as a partnership for federal tax purposes.15In allocating net income and presenting equity, we treat the common partnership units as if converted to common shares. Accordingly, they receive the same net income allocation per unit as a common share and are adjusted each period to have the same equity per unit as a common share. 8. Related party transactionsWe manage industrial, office and retail facilities in the U.S. for PS under both the “Public Storage” or “PS Business Parks” names (the “PS Management Agreement”). The PS Management Agreement can be cancelled by either party with seven years notice. Under PS’s supervision, we coordinate and assist in rental and marketing activities, property maintenance and other operational activities, including the selection of vendors, suppliers, employees and independent contractors. We receive a management fee based upon a percentage of revenues. Management fee revenues were $126,000 and $130,000 for the three months ended September 30, 2017 and 2016, respectively, and $378,000 and $389,000 for the nine months ended September 30, 2017 and 2016, respectively. We allocate certain operating expenses to PS related to the management of these properties, including payroll and other business expenses, totaling $134,000 and $142,000 for the three months ended September 30, 2017 and 2016, respectively, and $401,000 and $416,000 for the nine months ended September 30, 2017 and 2016, respectively. These amounts are included in “interest and other income” on our consolidated statements of income.The PS Business Parks name and logo are owned by PS and licensed to us under a non-exclusive, royalty-free license agreement. The license can be terminated by either party for any reason with six months written notice.PS also provides property management services for the self-storage component of two assets we own, that are located in Florida and operate under the “Public Storage” name. Either the Company or PS can cancel the property management contract upon 60 days’ notice. Under our supervision, PS coordinates and assists in rental and marketing activities, property maintenance and other operational activities, including the selection of vendors, suppliers, employees and independent contractors. Management fee expenses were $24,000 and $22,000 for the three months ended September 30, 2017 and 2016, respectively, and $69,000 and $64,000 for the nine months ended September 30, 2017 and 2016, respectively. Additionally, PS allocated certain operating expenses to us related to the management of these properties, including payroll and other business expenses, totaling $54,000 and $156,000 for the three and nine months ended September 30, 2017, respectively, and $49,000 and $153,000 for the three and nine months ended September 30, 2016, respectively. These amounts are included under “cost of operations” on our consolidated statements of income.Pursuant to a cost sharing and administrative services agreement, we and PS share certain administrative services and corporate office space, which are allocated between the Company and PS in accordance with a methodology intended to fairly allocate those costs. Costs allocated to the Company totaled $132,000 and $123,000 for the three months ended September 30, 2017 and 2016, respectively, and $397,000 and $370,000 for the nine months ended September 30, 2017 and 2016, respectively. Costs allocated to PS totaled $8,000 and $23,000 for the three and nine months ended September 30, 2017, respectively.The Company had net amounts due to PS of $30,000 and due from PS of $295,000 at September 30, 2017 and December 31, 2016, respectively, for these contracts, as well as for certain operating expenses paid by the Company on behalf of PS.169. Shareholders’ equityPreferred stock20172022 and December 31, 2016,2021, the Company had the following series of preferred stock outstanding:6.00% 5,200 130,000 14,000 350,000 5.75% 9,200 230,000 9,200 230,000 5.70% 4,400 110,000 4,400 110,000 5.20% 7,590 189,750 7,590 189,750 5.25% 9,200 230,000 35,590 889,750 35,190 879,750 Series Issuance Date Earliest Potential Redemption Date Dividend Rate Shares Outstanding Series X September 2017 September 2022 5.250 % 9,200 Series Y December 2017 December 2022 5.200 % 8,000 Series Z November 2019 November 2024 4.875 % 13,000 July 2022 12.000 % 125 Total 30,325 During September, 2017, we called for a partial redemption8,800,000 of our outstanding 14,000,000 depositary shares representing interests in our 6.0% Cumulativethe Series A Preferred Stock, Series T, at par. The aggregate redemption amount of $220.0 million is scheduled to be paid on October 30, 2017 to the holdersby resolutions of the depositary shares. We recordedBoard, in whole or in part, at any time or from time to time, for cash at a Preferred Redemption Allocation of $6.9 millionredemption price equal to $4,000 per share plus an amount equal to all accrued and unpaid dividends thereon to and including the date fixed for redemption. The redemption is within the threeCompany’s control, and nine months ended September 30, 2017 and reclassifiedthus the shares frompreferred equity to “preferred stock called for redemption” on our consolidated balance sheets at September 30, 2017.On September 21, 2017, we issued $230.0 million or 9,200,000 depositary shares representing interests in our 5.25% Cumulative Preferred Stock, Series X, at $25.00 per depositary share. The 5.25% Series X Cumulative Redeemable Preferred Unitsarrangements are non-callable for five years and have no mandatory redemption. We received $222.2 million in net proceeds.On December 7, 2016, we called our 6.45% Cumulative Preferred Stock, Series S, for redemption at par and completed the redemption on January 18, 2017. We recorded a Preferred Redemption Allocation of $7.3 millionclassified as permanent equity in the three months endedConsolidated Financial Statements. The preferred stock was issued in 2022 and therefore the balance as of December 31, 20162021 was $—.reclassified the shares from equity to “preferred stock called for redemption” on our consolidated balance sheets at December 31, 2016.We paid $12.6 million and $13.8 million$12,046 in distributions to ourits preferred shareholdersstockholders for the period from July 20, 2022 through September 30, 2022, the period from July 1, 2022 through July 19, 2022, and the three months ended September 30, 20172021, respectively.2016, respectively, and $38.5 million and $41.5 million$36,139 in distributions to ourits preferred shareholdersstockholders for the period from July 20, 2022 through September 30, 2022, the period from January 1, 2022 through July 19, 2022, and the nine months ended September 30, 20172021, respectively.2016, respectively.ourthe Company’s preferred stock have general preference rights with respect to liquidation, quarterly distributions and any accumulated unpaid distributions. Holders of ourthe Company’s preferred stock will not be entitled to vote on most matters, except under certain conditions. In the event of a cumulative arrearage equal to six quarterly dividends, the holders of the Company’s preferred stock will have the right to elect two additional members to serve on the Company’s Board of Directors (the “Board”) until all events of default have been cured. At September 30, 2017,2022, there were no dividends in arrears.previouslyredemption dates noted redemption dates.above. On or after the respective redemption dates, the respective series of preferred stock will be redeemable, at the option of the Company, in whole or in part, at $25.00 per depositary share, plus any accrued and unpaid dividends. The redemption is within the Company’s control, and thus the preferred equity arrangements are classified as permanent equity in the Consolidated Financial Statements.17During and unitsthree months ended March 31, 2017, the Board increased our quarterly dividends from $0.75 per common share to $0.85 per common share.We paid $23.2 million ($0.85 per common share) and $20.3 million ($0.75 per common share) inCompany’s distributions to our common shareholders forstockholders and common unit holders:Successor Predecessor Period from July 20, 2022 through September 30, 2022 Period from July 1, 2022 through July 19, 2022 Three Months Ended September 30, 2021 Period from January 1, 2022 through July 19, 2022 Nine Months Ended September 30, 2021 Distributions to common stockholders $ — $ 151,056 $ 28,923 $ 209,079 $ 86,713 Distributions to common unit holders $ — $ 39,972 $ 7,691 $ 55,358 $ 23,072 three months ended September 30, 2017terms and 2016, respectively, and $69.4 million ($2.55 perconditions of the Merger Agreement, at Company Merger Effective Time, each share of common share) and $60.9 million ($2.25 per common share) in distributions to our common shareholders for the nine months ended September 30, 2017 and 2016, respectively.Equity stockIn addition to common and preferred stock, of the Company, is authorizedpar value $0.01 per share (“Common Stock”), issued and outstanding immediately prior to issue 100.0 million shares of Equity Stock. The Articles of Incorporation provide that Equity Stock may be issued from time to time in one or more series and give the Board broad authority to fix the dividend and distribution rights, conversion and voting rights, redemption provisions and liquidation rights of each series of Equity Stock.10. Commitments and contingenciesThe Company currently is neither subject to any other material litigation nor, to management’s knowledge, is any material litigation currently threatened against the Company other than routine litigationMerger Effective Time was automatically converted into the right to receive an amount in cash equal to $182.25 per share, without interest and administrative proceedings arising inless any applicable withholding taxes, representing $187.50 per share of Common Stock as reduced by the ordinary course of business.11. Stock compensationUnder$5.25 per share Closing Cash Dividend.grantsgranted non-qualified options to purchase the Company’s common sharesstock at a price not less than fair value on the date of grant, as well as restricted stock units (“RSUs”),RSUs, to certain directors, officers and key employees.The service period for stock options and RSUs begins when (i)Company and the recipient reach a mutual understanding of the key terms of the award, (ii) the award has been authorized, (iii) the recipient is affected by changes in the market price of our stock and (iv) it is probable that any performance conditions will be met, and ends when the stock option or RSU vests.We amortizeMerger, we amortized the fair value of awards starting at the beginning of the service period as compensation expense. For awards that are earned solely upon the passage of time and continued service, the entire cost of the award iswas amortized on a straight-line basis over the service period. For awards with performance conditions, the individual cost of each vesting iswas amortized separately over each individual service period (the “accelerated attribution” method).In amortizing We accounted for forfeitures of share-based compensation expense, we do not estimate future forfeitures in advance. Instead, we reversepayments as they occurred by reversing previously amortized share-based compensation expense with respect to unvested grants that arewere forfeited in the period the employee terminates employment.Stock options vest over a five-yearexpire after the grant datefrom July 1, 2022 through July 19, 2022 and the exercise price is equal to the closing trading price of our common shares on the grant date. Employees cannot require the Company to settle their award in cash. We use the Black-Scholes option valuation model to estimate the fair value of our stock options.For the three and nine months ended September 30, 2017, respectively2021, we recorded $53,000$— and $156,000$124, respectively, in compensation expense related to stock options, as compared to $51,000options. For the period from January 1, 2022 through July 19, 2022 and $229,000 for the same periods in 2016.18During the nine months ended September 30, 2017, 16,0002021, we recorded $— and $523, respectively, in compensation expense related to stock options.and 69,67627,403 options were exercised.exercised, 132,167 options were cancelled, and zero options were forfeited. A total of 175,979zero and 159,570 options were outstanding at September 30, 2017 (229,655 at2022 and December 31, 2016). Restricted2021, respectively.UnitsRSUs generally vest ratably over(each, a five-year period from“Company Option”) outstanding immediately prior to the grant date. The grantee receives dividendsCompany Merger Effective Time was automatically cancelled in exchange for each outstanding RSUa cash payment in an amount in cash equal to the per-share dividends received by our common shareholders. We expense any dividends previously paid upon forfeiture of the related RSU. Upon vesting, the grantee receives common shares equal to(1) the number of vested RSUs, less common shares withheld in exchange for tax deposits made byof Common Stock subject to the Company Option immediately prior to satisfy the grantee’s statutory tax liabilities arising fromCompany Merger Effective Time multiplied by (2) the vesting. The fair valueexcess of our RSUs is determined based upon the Per Company Share Merger Consideration over the per share exercise price applicable closing trading price of our common shares onto the date of grant. threeperiod from July 1, 2022 through July 19, 2022 and ninethe three months ended September 30, 2017, respectively,2021, we recorded a net reversal of $521,000$327 and expense of $2.9 million$1,946, respectively, in compensation expense related to RSUs, as compared to expense of $1.7 millionRSUs. For the period from January 1, 2022 through July 19, 2022 and $8.5 million for the same periods in 2016. In conjunction with the departure of our Chief Financial Officer (“CFO”), the Company recorded a reversal of stock compensation of $1.9 million in RSU expense related to RSUs under our LTEIP (see below) during the third quarter of 2017. The 2016 amount includes $2.0 million in additional RSU expense related to RSUs under our LTEIP expected to be issued to our former Chief Executive Officer (“CEO”). During the nine months ended September 30, 2017, 110,7502021, we recorded $2,522 and $5,093, respectively, in compensation expense related to RSUs.15,80622,209 RSUs vested, 78,557 were cancelled, and 55,976 RSUs were forfeited and 76,994 RSUs vested. This vesting resulted in the issuance of 43,223 common shares. In addition, tax depositsforfeited.$3.9 million ($1.9 million for the same period in 2016)$1,318 were made on behalf of employees in exchange for 33,7717,920 shares of common sharesstock withheld upon vesting.vesting for the period from January 1, 2022 through July 19, 2022, resulting in the issuance of 12,528 shares of common stock. Tax withholding totaling $3,680 were made on behalf of employees in exchange for 23,935 shares of common stock withheld upon vesting for the nine months ended September 30, 2021, resulting in the issuance of 33,128 shares of common stock. A total of 162,643zero and 118,591 RSUs were outstanding at September 30, 2017 (144,693 at2022 and December 31, 2016). Effective March, 2014,2021, respectively.entered intogranted 1,000 shares of common stock for each year served as a performance-based restricteddirector up to a maximum of 10,000 shares issued upon retirement. In April 2021, we issued 10,000 shares of common stock unit program,to a director upon retirement with an aggregate fair value of $1,635. Compensation expense for these shares was previously recognized. No director retirement shares were issued during the Senior Management Long-Term Equity Incentive Program for 2014-2017 (“LTEIP”), with certain employeesperiod from January 1, 2022 through July 19, 2022.Company. Under the LTEIP,Merger Agreement, at or immediately prior to, as applicable, the Company established three levelsMerger Effective Time, each Company RSU award of targeted restricted stock unit awards for certain employees, which would be earned only if the Company achieved one of three defined targets during 2014 to 2017. Under the LTEIP there is an annual award following the end of each of the four years in the program, with the award subject to and based on the achievement of total return targets during the previous year, as well as an award based on achieving total return targets during the cumulative four-year period 2014-2017. In the event the minimum defined target is not achieved for an annual award, the restricted stock units allocated to be awardedcovering shares of Common Stock granted under a Company equity plan and each award of deferred stock units governed under the Company’s retirement plan for such year are addednon-employee directors that were outstanding immediately prior to the Company Merger Effective Time was cancelled in exchange for a cash payment in an amount in cash equal to (1) the number of shares of Common Stock subject to the Company RSU Award immediately prior to thestock unitscash at various high-quality financial institutions. The consolidated account balances at each institution typically exceed Federal Deposit Insurance Corporation (“FDIC”) insurance coverage, and as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. The Company believes this risk is not significant.received ifacquired in the four-year targetfuture.achieved.party to a variety of legal proceedings arising in the ordinary course of business. All restricted stock unit awardsof these matters, taken together, did not have a material impact on the consolidated financial condition, results of operations, or of the Company.Successor Predecessor Period from July 20, 2022 through September 30, 2022 Period from January 1, 2022 through July 19, 2022 Nine Months Ended September 30, 2021 Reconciliation to the Consolidated Balance Sheets: Cash and cash equivalents $ 112,180 $ 7,056 $ 46,594 Restricted cash 634 — — Total cash and cash equivalents and restricted cash $ 112,814 $ 7,056 $ 46,594 Supplemental disclosures of cash flow information: Interest paid $ 35,972 $ 58 $ — Interest capitalized $ — $ — $ — Income taxes paid $ 25 $ — $ — Cash paid for operating lease liabilities $ 33 $ — $ — Supplemental disclosures of non-cash activities: Accrued but not yet paid development and capital expenditures $ (3,289) $ (3,160) $ (3,362) Pushdown accounting opening balance sheet $ 5,306,541 — $ — Distribution of Non-Core Portfolio $ 1,295,217 $ — $ — LTEIP vestMerger, the Company applied pushdown accounting and the non-cash activity represents the fair value of assets acquired less liabilities assumed to reflect the acquisition in fouraccordance with ASC 805. Refer to Note 2. Summary of Significant Accounting Policies for additional details.annual installments beginning fromto SOFR plus 2.25%, which is the rate at which Blackstone Real Estate Partners IX, L.P borrowed under its unsecured revolving credit facility. The loan is collateralized by the real estate assets owned by the Brentford Joint Venture and has a maturity date of award. UpNovember 2025. Subsequent to 94,150 restricted stock units would be awarded for each ofclosing, the four years assuming achievement was met and up to 81,800 restricted stock units would be awarded forBrentford Joint Venture distributed the cumulative four-year period assuming achievement was met. Compensation expense is recognized based on the restricted stock units expected to be awarded based on the target level that is expected to be achieved. The compensation expense and RSU counts with respectproceeds to the LTEIP are includedJV partner. No additional material subsequent events have occurred since September 30, 2022 that require recognition or disclosure in the aggregate RSU amounts disclosed above.Company’s Consolidated Financial Statements.19MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONSto: (a) to the following:conditions; (b)conditions, including as a result of the economic fallout of the COVID-19 pandemic; (c) (d) (e) REITreal estate investment trust (a “REIT”) under the Internal Revenue Code of 1986, as amended; (f) amended (the “Code”);tenants; (g) customers; (h) (i) (j) ratesrates;its effect on our stock price;employee relationships or result in fraudulent payments, and (k) other in our annual reportof the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2021 and under “Part II, Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. Moreover, we assume no obligation to update these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements, except as required by law.Policies:consolidated financial statements includedMerger, our acquisitions of real estate or in-substance real estate were accounted for as asset acquisitions and not business combinations. The estimates used to measure the Merger accounted for as business combinations are described in Note 2 — Summary of Significant Accounting Policies to our Consolidated Financial Statements under Item 1 in this Quarterly Report on Form 10-Q. We believeDuring the following arethree months ended September 30, 2022, there were no other material changes to our critical accounting policies, because they have a material impact onestimates as compared to the portrayalcritical accounting estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our financial condition and results, and they require us to make judgments and estimates about matters that are inherently uncertain.Income Tax Expense: We have elected to be treated asAnnual Report on Form 10-K for the year ended December 31, 2021.as defined in the Internal Revenue Codethat owns, operates, acquires and develops commercial properties, primarily multi-tenant industrial, industrial-flex, and low rise-suburban office space. As of 1986, as amended (the “Code”). As a REIT, we do not incur federal income tax on our REIT taxable income that is fully distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and if we meet certain organizational and operational rules. We believe we have met these REIT requirements for all periods presented herein. Accordingly, we have recorded no federal income tax expense related to our REIT taxable income.Our evaluation that we have met the REIT requirements could be incorrect, because compliance with the tax rules requires factual determinations, and circumstances we have not identified could result in noncompliance with the tax requirements in current or prior years. For any taxable year that we fail to qualify as a REIT and for which applicable statutory relief provisions did not apply, we would be taxed at the regular corporate rates on all of our taxable income for at least that year and the ensuing four years, we could be subject to penalties and interest, and our net income would be materially different from the amounts estimated in our consolidated financial statements.Accounting for Acquired Real Estate Facilities: We estimate the fair values of the land, buildings, intangible assets and intangible liabilities for purposes of allocating the purchase price. Such estimates are based upon many assumptions and judgments, including (i) market rates of return and capitalization rates on real estate and intangible assets, (ii) building and material cost levels, (iii) comparisons of the acquired underlying land parcels to recent land transactions, (iv) estimated market rent levels and (v) future cash flows from the real estate and the existing tenant base. Others could come to materially different conclusions as to the estimated fair values, which would result in different depreciation and amortization expense, rental income, gains and losses on sale of real estate assets, and real estate and intangible assets.20Allowance for Doubtful Accounts: Tenant receivables consist primarily of amounts due for contractual lease payments, reimbursements of common area maintenance expenses, property taxes and other expenses recoverable from tenants. Deferred rent receivable represents the amount that the cumulative straight-line rental income recorded to date exceeds cash rents billed to date under the lease agreement. Determination of the adequacy of allowances for doubtful accounts requires significant judgments and estimates. Others could come to materially different conclusions regarding the adequacy of our allowance for doubtful accounts. Significant unreserved bad debt losses could materially impact our net income. Impairment of Long-Lived Assets: The analysis of impairment of our long-lived assets involves identification of indicators of impairment, projections of future operating cash flows and estimates of fair values or selling prices, all of which require significant judgment and subjectivity. Others could come to materially different conclusions. In addition, we may not have identified all current facts and circumstances that may affect impairment. Any unidentified impairment loss, or change in conclusions, could have a material adverse impact on our net income.Accrual for Uncertain and Contingent Liabilities: We accrue for certain contingent and other liabilities that have significant uncertain elements, such as property taxes, performance bonuses and other operating expenses, as well as other legal claims and disputes involving customers, employees, governmental agencies and other third parties. We estimate such liabilities based upon many factors such as assumptions of past and future trends and our evaluation of likely outcomes. However, the estimates of known liabilities could be incorrect or we may not be aware of all such liabilities, in which case our accrued liabilities and net income could be misstated.Strategic OverviewOur overall operating results are impacted primarily by the performance of our existing real estate facilities, which at September 30, 2017 are comprised of 28.0 million rentable square feet of multi-tenant flex, industrial and office properties concentrated2022, the Company owned 471 buildings in six states and a 95.0% interestwith 20,659,564 rentable square feet. The Company’s properties are primarily located in 395 apartments. Accordingly, a significant degree of management attention is paid to maximizing the cash flow from our existing real estate portfolio. We also acquire properties we believe will createmajor coastal markets that have experienced long-term value, and from time to time we dispose of properties which no longer fit within the Company’s strategic objectives.Existing Real Estate Facilities:economic growth. existing real estate facilities are substantially influenced by demand for rental space within our properties and our markets, which impacts occupancy, rental rates, and capital expenditure requirements. We strive to maintain high occupancy levels while increasing rental rates and minimizinginvesting in capital expenditures when market conditions allow,indicate favorable return on investment, although the Company may decrease rental rates in markets where conditions require. Management’s initiatives and strategies with respect to our existing real estate facilities, which are described in more detail in our December 31, 2016 Form 10-K, include incentivizing our personnel to maximize the return on investment for each lease transaction and providingprovide a superior level of service to our customers.Acquisitions We also seek to grow our operations through acquisitions of facilities generally consistent with the Company’s focus on owning concentrated business parks with easily configurable space. In the third quarter of 2016,certain instances, we acquired two multi-tenant office buildings aggregating 226,000 square feet in Rockville, Maryland for a purchase price of $13.3 million. The occupancy rate has increased from 18.5% on the date of acquisition to 31.6% as of September 30, 2017. These buildings are located within The Grove 270 (formerly Shady Grove Executive Park) where we already owned three substantially fully-leased buildings aggregating 352,000 square feet. We continue to seek to acquire additional facilities in our existing markets and generally in proximity to our existing facilities; however, there can be no assurance that we will acquire additional facilities that meet our risk-adjusted return and underwriting requirements.Development or redevelopment of real estate facilities: We also may seek to redevelop our existing real estate. We own a large contiguous block of real estate (628,000 rentable square feetor develop new buildings on 44.5 acres of land) located within excess land parcels.Milefollowing table presents the Company’s development pipeline at September 30, 2022:Number of Projects Estimated Square Feet Development/redevelopment under construction 3 472,825 $ 197,254 3Q23 - 1Q24 Total 3 472,825 $ 197,254 Tysons, Virginia. We demolished one of our existing office buildings in The Mile and are building a multi-family building (the “Highgate Development”), with completion in stages starting in May, 2017 through the fourth21quarter of 2017. The total estimated investment upon completion, including the fair value of existing land, will be approximately $117.2 million.While multi-family real estate is not a core asset for us, we determined that multi-family real estate represented a unique opportunity and the highest and best use of this parcel. We have partnered through a joint venture with a local developer and operator of multi-family space in order to leverage their operational experience. See “Analysis of Items Not Included in Operating Income – Equity in loss of unconsolidated joint venture” below and Note 4Real Estate to our consolidated financial statements for more informationConsolidated Financial Statements under Item 1 in this Quarterly Report on Form 10-Q.Highgate Development. We do not consolidate the joint venture that holds the Highgate Development; accordingly, our shareearlier of net loss is reflected under “equity in loss of unconsolidated joint venture.”We have an additional 123,000 square foot office building located within The Mile that we are seeking to demolish in order to construct another multi-family complex on the parcel. This parcel is reflected on our consolidated balance sheets as land and building held for development. The scope and timing of development of this site is subject to a variety of contingencies, including approval of entitlement. We do not expect that development will commence prior to December 31, 2018.In 2014, we completed a planWe continually evaluate opportunities with respect to exit non-strategic markets in Sacramento California, Oregonour portfolio and Arizona. We do not expect to exit any additional markets. However, we may from time to time dispose ofsell individual real estate assetsfacilities and land parcels or groups of facilities and land parcels based on market conditions, fit with our existing portfolio, evaluation of long-term potential returns of markets or product types, or other reasons. On MayThe size of such sales may be significant to us. Refer to “Dispositions” in Note 3 — Investments in Real Estate to our Consolidated Financial Statements under Item 1 2017, we disposedin this Quarterly Report on Form 10-Q. for a summary of Empire Commerce, a two-building single-story office park comprising 44,000 square feet, located in Dallas, Texas, for net proceeds of $2.1 million, which resulted in a net gain of $1.2 million.Certain our recent dispositions.ImpactAffect Our Future ResultsAlthough inflation Inflation has not been significant in recent years, ansignificantly increased recently and a continued increase in inflation could adversely impact our future results, including as a result of adverse impacts to our tenants and to the economy generally. The Company continues to seek ways to mitigate its potential impact. A substantial portion of the Company’s leases require tenantscustomers to pay operating expenses, including real estate taxes, utilities, and insurance, as well as increases in common area expenses, which should partially reducingreduce the Company’s exposure to inflation during each lease’s respective lease period.income, which we believe will produce better overall economic returns.income. Changes in economic conditions in these regions in the future could impact our future results.Industry and Tenantconcentrations. Asconcentrations existed as of September 30, 2017, leases2022.our top 10 tenants comprised 10.3% of our annualized rental income, with only two tenants, Kaiser Permanente (1.0%)July 20, 2022 through September 30, 2022 (Successor) and the U.S. Government (4.3%), representing more than 1%. In terms of industry concentration, 18.5% of our annualized rental income comesperiod from Business Services; 10.4% from Warehouse, Distribution, Transportation and Logistics; and 10% from Health Services. No other industry group represents more than 10% of our annualized rental income. Tenant credit risk: We have historically experienced a low level of write-offs of uncollectible rents, with less than 0.5% of rental income written off each year over the last six years. However, there can be no assurance that write offs may not increase, because there is inherent uncertainty in a tenant’s abilityJuly 1, 2022 through July 19, 2022 (Predecessor) compared to continue paying rent and meet its full lease obligation. As of October 23, 2017, we had 69,000 square feet of leased space occupied by four tenants that are protected by Chapter 11 of the U.S. Bankruptcy Code. From time to time, tenants contact us, requesting early termination of their lease, reductions in space leased, or rent deferment or abatement.22Net Operating IncomeWe evaluate the performance of our business parks primarily based on Net Operating Income (“NOI”), a non-GAAP financial measure, because we believe NOI is an important measure of the value and performance of our real estate. We believe investors utilize NOI in a similar manner and for similar reasons. NOI is defined by the Company as Adjusted Rental Income less Adjusted Cost of Operations (described below) and excludes depreciation and amortization. Depreciation and amortization is excluded from NOI because management and investors do not consider it important in valuing real estate or evaluating real estate performance, because depreciation assumes the value of real estate declines ratably from its historical cost based upon the passage of time, while we believe the value of real estate changes based upon cash flow and other market factors.Adjusted Rental Income represents rental income, excluding material lease buyout payments, which we believe are not reflective of ongoing rental income.Adjusted Cost of Operations represents cost of operations, excluding LTEIP amortization, which can vary significantly period to period based upon-the performance of the whole company, rather than just property operations.The Company’s calculation of NOI, Adjusted Rental Income and Adjusted Cost of Operations may not be comparable to those of other companies and should not be used as an alternative to performance measures calculated in accordance with GAAP.See “Analysis of operating income” below for reconciliations of each of these measures to their closest analogous GAAP measure on our consolidated statements of income. Adjusted Rental Income is reconciled to rental income, Adjusted Cost of Operations is reconciled to cost of operations and Net Operating Income is reconciled to operating income.Results of OperationsOperating Results Overview: Three and Nine Months Ended September 30, 2017 and 2016For the three months ended September 30, 2017, net income allocable to common shareholders was $18.1 million2021 (Predecessor)Successor Predecessor Period from July 20, 2022 through September 30, 2022 Period from July 1, 2022 through July 19, 2022 Three Months Ended September 30, 2021 Revenue: Rental revenue $ 77,764 $ 22,412 $ 110,478 Total revenue $ 77,764 $ 22,412 $ 110,478 $0.66 per diluted share,9.3%, for the three months ended September 30, 2022, including the successor and predecessor periods, as compared to $19.7 millionthe three months ended September 30, 2021 primarily due to the distribution of the Company’s interest in 58 properties included in the Non-Core Portfolio (see Note 1 — Description of Business to our Consolidated Financial Statements under Item 1 in this Quarterly Report on Form 10-Q).Successor Predecessor Period from July 20, 2022 through September 30, 2022 Period from July 1, 2022 through July 19, 2022 Three Months Ended September 30, 2021 Expenses: Property expenses $ 17,810 $ 8,135 $ 33,099 Depreciation and amortization 100,211 4,626 23,857 General and administrative 2,642 2,572 5,155 Merger costs 37,266 94,805 — Total expenses $ 157,929 $ 110,138 $ 62,111 Other income (expense): Gain on sale of real estate, net $ — $ 38,221 $ 29,924 Interest income (expense) 9,933 (59) (207) Other income 144 89 379 Total other income (expense) $ 10,077 $ 38,251 $ 30,096 $0.72 per diluted share331.6%, for the same period in 2016. The decrease was mainlythree months ended September 30, 2022, including the successor and predecessor periods, as compared to the three months ended September 30, 2021, primarily due to a $6.9 million Preferred Redemption Allocation,the following:$2.7 milliondecrease in property expenses of $7,154 for the three months ended September 30, 2022, including the successor and predecessor periods, as compared to the three months ended September 30, 2021, primarily due to the distribution of the Company’s interest in 58 properties included in the Non-Core Portfolio (see Note 1 — Description of Business to our Consolidated Financial Statements under Item 1 in this Quarterly Report on Form 10-Q).NOIinterest expense on our outstanding debt of $46,619, (ii) a $7,332 realized loss during the current year period due to changes in fair value on our interest rate derivatives, and (iii) amortization of financing costs of $4,992 during the current year period. This was offset by an unrealized gain on interest rate swaps of $68,993 in connection with respectthe interest rate contracts entered into during the current year period (see Note 5 — Derivative Financial Instruments to our real estate facilitiesConsolidated Financial Statements under Item 1 in this Quarterly Report on Form 10-Q). Subsequent to the Merger, we obtained two mortgage loans and reduced preferred distributions. The increaseterminated the unsecured revolving line of credit (see Note 4 — Debt to our Consolidated Financial Statements under Item 1 in NOI includes a $3.3 million increase for our Same Park facilities (see below) due primarilythis Quarterly Report on Form 10-Q).higher realized rent per occupied square foot, offset partially by reduced NOI with respect to facilities we sold or are holding for development.For the2017, net income allocable to common shareholders was $69.3 million2021Successor Predecessor Period from July 20, 2022 through September 30, 2022 Period from January 1, 2022 through July 19, 2022 Nine Months Ended September 30, 2021 Revenue: Rental revenue $ 77,764 $ 246,175 $ 328,308 Total revenue $ 77,764 $ 246,175 $ 328,308 $2.53 per diluted share, compared to $50.0 million or $1.84 per diluted share for the same period in 2016. The increase was due to a $10.5 million increase in NOI with respect to our real estate facilities, a reduction in interest expense due to the repayment of debt, and gains on the sale of real estate facilities and development rights. The increase in NOI includes a $12.5 million increase for our Same-Park facilities due primarily to higher realized rent per occupied square foot, offset partially by reduced NOI with respect to facilities we sold or are holding for development.We analyze our net income in this discussion analysis in two main sections: operating income and then all other components of net income.23Analysis of Operating IncomeOur operating income is comprised primarily of our real estate operations, depreciation and amortization expense and general and administrative expenses. We segregate our real estate activities into (a) same park operations, representing all operating properties acquired prior to January 1, 2015, comprising 27.8 million rentable square feet of our 28.0 million in rentable space at September 30, 2017 (the “Same Park” facilities)1.3%, (b) non-same park operations, representing those facilities we own that were acquired after January 1, 2015 (the “Non-Same Park” facilities) and (c) assets sold or held for development, representing facilities whose existing operations are no longer part of our ongoing operations, because they were sold or are expected to be developed or converted to alternate use.The table below sets forth the various components of our operating income (in thousands):100,110 95,867 4,243 299,207 285,927 13,280 371 9 362 976 9 967 936 (936) 159 2,808 (2,649) 528 (528) 528 (528) 100,481 97,340 3,141 300,342 289,272 11,070 30,821 29,875 946 90,204 89,375 829 294 3 291 918 3 915 261 (261) 73 750 (677) 564 657 (93) 1,767 2,312 (545) 31,679 30,796 883 92,962 92,440 522 69,289 65,992 3,297 209,003 196,552 12,451 77 6 71 58 6 52 675 (675) 86 2,058 (1,972) (564) (129) (435) (1,767) (1,784) 17 (23,759) (24,631) 872 (70,465) (74,886) 4,421 (1,745) (2,970) 1,225 (7,019) (11,982) 4,963 43,298 38,943 4,355 129,896 109,964 19,932 ____________________________(a)Adjusted rental income excludes a material lease buyout payment.(b)Adjusted cost of operations excludes the impact of LTEIP amortization. (c)Net operating income represents adjusted rental income less adjusted cost of operations.Rental income increased $3.1 million and $11.1 million for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016, due primarily to increases in adjusted rental income at the Same Park facilities, due primarily to higher annualized realized rental income per occupied square foot.Cost of operations increased $883,000 and $522,000 for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016, due primarily to increased adjusted cost of operations for the24Same Park and Non-Same Park facilities, offset partially by adjusted costs of operations from assets sold or held for development, as well as lower LTEIP amortization.Operating income increased $4.4 million and $19.9 million for the three and nine months ended September 30, 2017, respectively, as compared to the same periods in 2016, due primarily to higher rental income, lower general and administrative expenses and lower depreciation expense.See below for a discussion of depreciation and amortization expense and general and administrative expenses. Same Park FacilitiesThe Same Park facilities are those that we have owned and operated since January 1, 2015. We evaluate the operations of these facilities to more effectively evaluate the ongoing performance of our portfolio in 2015, 2016 and 2017. We believe the Same Park information is used by investors and analysts in a similar manner. The following table summarizes the historical operating results of these facilities and certain statistical information related to leasing activity:100,110 95,867 4.4% 299,207 285,927 4.6% 10,730 10,137 5.8% 31,052 29,595 4.9% 6,331 6,439 (1.7%) 17,961 18,137 (1.0%) 6,807 6,154 10.6% 19,429 18,845 3.1% 481 1,810 (73.4%) 6,953 7,145 (2.7%) 21,281 20,988 1.4% 30,821 29,875 3.2% 90,204 89,375 0.9% 69,289 65,992 5.0% 209,003 196,552 6.3% 69.2% 68.8% 0.6% 69.9% 68.7% 1.7% 94.0% 94.1% (0.1%) 94.1% 93.9% 0.2% 15.32 14.65 4.6% 15.25 14.60 4.5% ____________________________(a)Computed by dividing NOI by adjusted rental income. (b)Represents the annualized adjusted rental income earned per occupied square foot.25Analysis of Same Park Adjusted Rental IncomeAdjusted rental income generated by the Same Park facilities increased 4.4% and 4.6% in the three and nine months ended September 30, 2017, respectively, as compared to the same periods in the prior year. These increases were due primarily to increased annualized realized rental income per occupied square foot and, during the nine month period, an increase in weighted average occupancy.We believe that high occupancies help maximize our rental income. Accordingly, we seek to maintain a weighted average occupancy over 90%.During the first nine months of 2017, most markets continued to reflect favorable conditions allowing for stable occupancy as well as increasing rental rates. With the exception of the Northern Virginia and Suburban Maryland markets, new rental rates for the Company improved over expiring rental rates on executed leases as economic conditions and tenant demand remained healthy.Our future revenue growth will come primarily from potential increases in market rents allowing us to increase rent levels when leases are either renewed with existing tenants or re-leased to new tenants. The following table sets forth the expirations of our existing leases in place at September 30, 2017 over the next five years (dollars and square feet in thousands):807 1,716 6.5% 26,771 6.4% 1,562 5,863 22.2% 95,762 22.9% 1,304 6,495 24.6% 96,533 23.0% 672 4,757 18.1% 70,175 16.7% 279 2,362 9.0% 36,469 8.7% 328 5,178 19.6% 93,456 22.3% 4,952 26,371 100.0% 419,166 100.0% During the three and nine months ended September 30, 2017, we leased approximately 1.8 million and 5.6 million, respectively, in rentable square feet to new and existing customers, with an average increase in rental rates over the previous rates of 5.7% and 4.3%. Approximately 66.8% of our leasing activity for the nine months ended September 30, 2017 represented renewals2022, including the successor and predecessor periods, as compared to the nine months endedleases with existing tenants. See “Analysis of Market Trends” below for further analysis of such data on a by-market basis.Our ability to re-lease space on expired leasesthe Company’s interest in a way that minimizes vacancy periods and the lease rates that may be achieved are not predictable, because they will depend upon market conditions58 properties included in the specific submarketsNon-Core Portfolio (see Note 1 — Description of Business to our Consolidated Financial Statements under Item 1 in which eachthis Quarterly Report on Form 10-Q).Successor Predecessor Period from July 20, 2022 through September 30, 2022 Period from January 1, 2022 through July 19, 2022 Nine Months Ended September 30, 2021 Expenses: Property expenses $ 17,810 $ 74,848 $ 98,198 Depreciation and amortization 100,211 50,557 69,356 General and administrative 2,642 19,079 14,511 Merger costs 37,266 100,952 — Total expenses $ 157,929 $ 245,436 $ 182,065 Other income (expense): Gain on sale of real estate, net $ — $ 157,022 $ 49,117 Interest income (expense) 9,933 (615) (478) Other income 144 2,044 1,138 Total other income (expense) $ 10,077 $ 158,451 $ 49,777 5.8% and 4.9% duringby $221,300, or 121.5%, for the three and nine months ended September 30, 2017, respectively,2022, including the successor and predecessor periods, as compared to the same periods innine months endedSeptember 30, 2021, primarily due to the prior year due primarily to higher assessed values. We expect property taxes in the fourth quarter of 2017 to approximate the amountfollowing: third quarter of 2017. Utilities are dependent primarily upon energy prices and usage levels. Changes in usage levels are driven primarily by weather and temperature. Utilities decreased 1.7% and 1.0% for the three and nine months ended September 30, 2017, respectively,2022, including the successor and predecessor periods, as compared to the same periods in the prior year. It is difficult to estimate future utility costs, because weather, temperature and energy prices are volatile and not predictable.26Repairs and maintenance increased 10.6% and 3.1% during the three and nine months ended September 30, 2017, respectively,2021, primarily due to the step-up in basis of the real estate assets acquired and intangibles assumed in connection with the Merger (see Note 2 — Summary of Significant Accounting Policies to our Consolidated Financial Statements under Item 1 in this Quarterly Report on Form 10-Q).same periodsnine months ended September 30, 2021, primarily due to a one-time cash payment of $6,734 to the former CEO in the prior year. Repairs and maintenance costs are dependent upon many factors including weather conditions, which can impact repair and maintenance needs, inflation in material and labor costs and random events, and as a result are not readily predictable. We expect to incur incremental repairs and maintenance costs with respect to Hurricane Irma during the fourthfirst quarter of 2017.Snow removal decreased 73.4%2022, which consisted of a $6,643 cash payment for RSUs (see Note 10 — Incentive Compensation to our Consolidated Financial Statements under Item 1 in this Quarterly Report on Form 10-Q), and a $91 cash payment for COBRA coverage reimbursement in accordance with his separation agreement.2017 as compared to the same period in 2016. Snow removal costs are weather dependent and therefore not predictable.Other expenses decreased 2.7% during the three months ended September 30, 2017, and increased 1.4% during the nine months ended September 30, 2017 as compared to the same periods in 2016. These costs2022 are comprised primarily of on site and supervisory personnel, property insurancelegal and other expensesprofessional fees incurred in connection with the operation of our properties.Same Park Quarterly TrendsThe following table sets forth historical quarterly trendsMerger discussed herein. These increases in the operations of the Same Park facilities for adjusted rental income, adjusted cost of operations, occupancies, realized rents and those expenses which have material seasonal trends:99,654 99,443 100,110 94,908 95,152 95,867 96,457 29,839 29,544 30,821 30,777 28,723 29,875 29,336 378 103 1,810 5,896 5,734 6,331 6,226 5,472 6,439 5,775 94.6% 93.7% 94.0% 94.1% 93.5% 94.1% 94.8% 15.16 15.27 15.32 14.52 14.63 14.65 14.65 27Analysis of Same Park Market TrendsThe following tables set forth market rent, expense and occupancy trends in our Same Park facilities:22,814 21,640 68,989 64,501 16,298 15,487 48,055 45,104 8,128 7,924 24,683 23,474 7,390 6,823 22,179 20,596 19,271 18,853 56,919 57,404 10,269 9,678 30,457 28,475 11,953 11,694 35,882 35,144 3,987 3,768 12,043 11,229 100,110 95,867 299,207 285,927 6,011 5,773 17,571 16,814 4,972 4,978 14,558 14,178 2,765 2,817 8,283 8,451 2,570 2,394 7,549 7,052 6,034 6,471 18,318 19,516 2,716 2,714 8,144 8,091 4,768 3,755 12,776 12,297 985 973 3,005 2,976 30,821 29,875 90,204 89,375 16,803 15,867 51,418 47,687 11,326 10,509 33,497 30,926 5,363 5,107 16,400 15,023 4,820 4,429 14,630 13,544 13,237 12,382 38,601 37,888 7,553 6,964 22,313 20,384 7,185 7,939 23,106 22,847 3,002 2,795 9,038 8,253 69,289 65,992 209,003 196,552 94.2% 96.5% 95.6% 96.5% 95.3% 95.5% 95.4% 94.5% 91.2% 91.1% 90.7% 90.0% 95.9% 97.7% 94.8% 96.7% 92.3% 91.6% 90.9% 92.4% 97.0% 93.5% 97.5% 93.8% 89.3% 87.6% 88.3% 87.9% 97.3% 98.9% 98.0% 98.5% 94.0% 94.1% 94.1% 93.9% 13.37 12.38 13.28 12.30 17.16 16.27 16.85 15.96 11.56 11.28 11.77 11.28 15.70 14.22 15.88 14.47 21.31 21.01 21.31 21.15 10.95 10.71 10.77 10.47 22.76 22.70 23.02 22.67 11.79 10.97 11.78 10.94 15.32 14.65 15.25 14.60 28The following tables set forth key statistical information with respect to our Same Park leasing activities during the three and nine months ended September 30, 2017. As noted above, our past revenue growth has come from annual inflators, as well as re-leasing of space at current market rates. The following tables summarize the Company’s leasing productionwere partially offset by these eight regions for the three and nine months ended September 30, 2017 (in thousands):521 88.8% 1.81 22.1% 442 78.9% 2.62 3.3% 175 62.1% 3.11 4.2% 66 70.5% 1.78 13.5% 260 74.4% 7.94 (10.3%) 192 51.7% 1.20 5.4% 111 82.8% 4.14 (14.5%) 62 55.7% 2.61 12.1% 1,829 75.8% 3.10 5.7% 1,098 70.7% 1.64 19.2% 1,150 66.4% 2.36 4.7% 574 57.4% 3.40 4.2% 320 47.7% 2.62 14.2% 785 67.3% 6.08 (8.8%) 858 64.0% 1.50 4.0% 392 79.7% 9.14 (10.8%) 381 79.0% 1.07 12.3% 5,558 66.8% 3.12 4.3% ____________________________(a)Rental rate change is computed by taking the percentage difference between outgoing rents and incoming rents for leases executed during the period. Leases executed on spaces vacant for more than the preceding twelve months have been excluded.During the first nine months of 2017, most markets continued to reflect favorable conditions allowing for stable occupancy as well as increasing rental rates. With the exception of Northern Virginia and Suburban Maryland, new rental rates for the Company improved over expiring rental rates on executed leases as economic conditions and tenant demand remained healthy. Northern Virginia and Suburban Maryland continue to experience soft market conditions as evidenced by continued pressure on occupancy and rental rates. Given lease expirations of 1.1 million square feet in Northern Virginia and 712,000 square feet in Suburban Maryland through December 31, 2018, the Company may continue to experience a decrease in rental income in these regions.Non-Same Park facilities: Our Non-Same Park facilities are comprisedproperty expenses of two office buildings in Maryland, with 226,000 rentable square feet and occupancy of 31.6% at September 30, 2017 (33.9% at October 23, 2017).Assets sold or held for development: These amounts include historical operating results with respect to properties that have been sold, and with respect to a 123,000 rentable square foot office building which is vacant and being held for future potential development into a multi-family building. We expect no further material operations for this vacant property until development is complete; as noted above, we do not expect development activity to commence until at least December 2018.Depreciation and Amortization Expense: Depreciation and amortization was $23.8 million for the three months ended September 30, 2017 compared to $24.6 million for the same period in 2016. Depreciation and amortization was29$70.5 million$5,540 for the nine months ended September 30, 20172022, including the successor and predecessor periods, as compared to $74.9 million for the same period in 2016. The three and nine month decreases in depreciation and amortization were due to the cost of certain assets reaching the end of their depreciable lives.General and Administrative Expenses: General and administrative expenses primarily represent compensation for senior executives, tax compliance, legal and costs associated with being a public company. For the three and nine months ended September 30, 2017, general and administrative expenses decreased $1.2 million, or 41.2%, and $5.0 million, or 41.4%, respectively, compared to the same periods in 2016. The three month decrease was2021, primarily due to a reductionthe distribution of the Company’s interest in 58 properties included in the ongoing LTEIP amortization ($571,000Non-Core Portfolio (see Note 1 — Description of Business to our Consolidated Financial Statements under Item 1 in 2017 versus $907,000 in 2016), departure of our CFO during the third quarter of 2017 and acquisition transaction costs of $328,000 incurred in 2016. The nine month decrease was primarily due to a reduction in the ongoing LTEIP amortization ($2.3 million in 2017 versus $3.8 million in 2016), departure of senior executives in 2016 and 2017 and acquisition transaction costs incurred in 2016 noted above.nalyAnalysis of Items Not Included in Operating IncomeInterest and Other Expense: Interest andIncome (Expense): Total other expense was $503,000 for the three months ended September 30, 2017 compared to $155,000 for the same period in 2016. Interest and other expense was $972,000income (expense) for the nine months ended September 30, 20172022, including the successor and predecessor periods, was $168,528 as compared to $5.5 million for the same period in 2016. The three month increase was due to higher interest capitalized in 2016 as the Highgate Development began operations in 2017, while the nine month decrease was primarily due to a repaymenttotal other income (expense) of a $250.0 million mortgage note during the second quarter of 2016.Equity in loss of unconsolidated joint venture: Our equity in loss of unconsolidated joint venture represents our pro rata equity$49,777 in the earnings of our 95% equity investment in the JV that owns the Highgate Development. We have agreed to provide a construction loan to the Joint Venture, maturing in April, 2019 and having two one-year extension options, of up to $75.0 million. The interest income we receive on the loan is eliminated against our equity in earnings. During the three and nine months ended September 30, 2017, we recorded an equity loss in the unconsolidated joint venture of $376,000, comprised of $600,000 in revenue, $493,000 in cost of operations, and $483,000 in depreciation expense and $758,000, comprised of $642,000 in revenue, $813,000 in cost of operations, and $587,000 in depreciation expense.The following table summarizes the Joint Venture’s project timeline and updates as of September 30, 2017:
Project Costs (a)
(in thousands)
Leased (b)
Occupied117,241 100.0% 46.3% 41.8% 2,183 ____________________________(a)The project cost for the Highgate Development reflects the underlying land at the assigned contribution value upon formation of the Joint Venture. The estimated total costs of the project include land basis of $15.3 million plus unrealized land appreciation of $11.6 million.(b)As of October 23, 2017, the apartment units were 55.2% leased.(c)Average monthly rental rate is defined as the total potential monthly rental revenue (actual rent for occupied apartment homes plus market rent for vacant apartment homes) divided by the number of apartment homes.Our cumulative investment in and advances2021, primarily due to the Joint Venture, including the fair value of land we contributed, totaled $96.6 million at September 30, 2017.facility and gain on sale of development rights: On May 1, 2017, we sold a two-building single-story office park comprising 44,000 square feet, located in Dallas, Texas,net for net proceeds of $2.1 million. On March 31, 2017, we sold development rights we had acquired in 2006 in connection with our acquisition of a business park in Silver Spring, Maryland. When all contingencies of the sale have completed, we will have30received a total of $6.4 million in net proceeds. For the nine months ended September 30, 2017, we have recorded a combined net gain of $5.1 million2022, including the successor and predecessor periods, was $157,022, which was related to these dispositions. We expect to report an additional gain of $2.5 million when the final proceeds for the sale of 208 buildings. Gain on sale of real estate, net for the development rights are receivednine months ended September 30, 2021 was $49,117, which was related to the sale of 11 buildings. Refer to Note 3 — Investments in Real Estate to our Consolidated Financial Statements under Item 1 in this Quarterly Report on Form 10-Q for more information regarding our dispositions.fourth quarternine months ended September 30, 2021 to a $9,318 income for the nine months ended September 30, 2022, including the successor and predecessor periods, a total movement of 2017$9,796. There was (i) an increase in interest expense on our outstanding debt of $46,872, (ii) a $7,332 realized loss during the current year period due to changes in fair value on our interest rate derivatives, and (iii) amortization of financing costs of $4,992 during the remaining contingencies have lapsed.current year period. This was offset by an unrealized gain on interest rate swaps of $68,993 in connection with the interest rate contracts entered into during the current year period (see Note 5 — Derivative Financial Instruments to our Consolidated Financial Statements under Item 1 in this Quarterly Report on Form 10-Q). Subsequent to the Merger, we obtained two mortgage loans and terminated the unsecured revolving line of credit (see Note 4 — Debt to our Consolidated Financial Statements under Item 1 in this Quarterly Report on Form 10-Q).Liquidity and Capital Resourcesconsolidated statementsConsolidated Statements of cash flows for the threeCash Flows; and nine months ended September 30, 2017Note 4 — Debt, Note 5 — Derivative Financial Instruments, and 2016Note 11 — Commitments and the notesContingencies to our consolidated financial statements, which set forthConsolidated Financial Statements under Item 1 in this Quarterly Report on Form 10-Q for additional details on the major components of our historical liquidity and capital resources. The discussion below sets forth the factors which we expect will affect our future liquidity and capital resources or which may vary substantially from historical levels.Capital Raising Strategy: As a REIT, we generally distribute 100% our taxable income to our shareholders, which relative to a taxable C corporation, limits the amount of cash flow from operations that we can retain for investments. As a result, in order to grow our asset base, access to capital is important.Our financial profile is characterized by strong credit metrics, including low leverage relative to our total capitalization and operating cash flows. We are a highly rated REIT, as rated by major rating agencies Moody’s and Standard & Poor’s. Our corporate credit rating by Standard and Poors is A-, while our preferred shares are rated BBB by Standard and Poors and Baa2 by Moodys. Our credit profile and ratings enable us to effectively access both the public and private capital markets to raise capital.In order to maintain access to capital markets, we target a minimum ratio of FFO (as defined below) to combined fixed charges and preferred distributions of 3.0 to 1.0. Fixed charges include interest expense and capitalized interest while preferred distributions include amounts paid to preferred shareholders and preferred unit holders. Foron outstanding indebtedness, including approximately $232,603 due within the nine months ended September 30, 2017, the FFO to combined fixed charges and preferred distributions coverage ratio was 5.0 to 1.0, excluding the Preferred Redemption Allocation.We have a $250.0 million revolving Credit Facility that can be expanded to $400.0 million which expires in January, 2022. We use the Credit Facility along with bank term debt, as temporary “bridge” financing until we are able to raise longer term capital. Historically we have funded our long-term capital requirements with retained operating cash flow and proceeds from the issuance of common and preferred securities. We will select among these sources of capital based upon availability, relative cost, the impact of constraints of certain forms of capital on our operations (such as covenants), as well as the desirenext 12 months;leverage. Short-term Liquidity and Capital Resource Analysis: We believe that our net cash provided by our operating activities will continuethree ongoing projects, including $29,564 scheduled to be sufficient to enable us to meet our ongoing requirements for debt service,funded within the next 12 months;distributions to our shareholders for the foreseeable future.Asleasing commissions of $1,886;2017, we had no balance outstanding on our Credit Facility. In the last five years, we have retained an average of $402022 are approximately $50 for 2022 and $1,372 thereafter;$50 million in operating cash flow per year. Retained operating cash flow represents cash flow provided by operating activities, less shareholder and unit holder distributions and capital expenditures. We expect to invest an additional $9.8 million with respect to the Highgate Development.Potential future uses of capital in the next twelve months include the acquisition of additional real estate facilities, and potential future sources include the potential sale of real estate facilities.Required Debt Repayment: As of September 30, 2017, we have no debt outstanding on our Credit Facility. Our Credit Facility does not expire until January, 2022. We are in compliance with the covenants and all other requirements of our Credit Facility.31Capital Expenditures: We define recurring capital expenditures as those necessary to maintain and operate our real estate at its current economic value. Nonrecurring capital improvements include property renovations and expenditures related to repositioning acquisitions. The following table sets forth our capital expenditures paid for the nine months ended September 30, 2017 and 2016, respectively, on an aggregate and per square foot basis:6,674 5,300 0.24 0.19 23,457 13,109 0.84 0.47 5,162 5,054 0.18 0.18 35,293 23,463 1.26 0.84 3,416 767 0.12 0.03 38,709 24,230 1.38 0.87 The following table summarizes Same Park and Non-Same Park recurring capital expenditures paid and the related percentage of NOI by region for the nine months ended September 30, 2017 and 2016 (in thousands): 2,052 2,735 4.0% 5.7% 3,787 3,708 11.3% 12.0% 2,874 2,933 17.5% 19.5% 1,465 996 10.0% 7.4% 10,620 6,783 27.5% 17.9% 1,572 1,770 7.0% 8.7% 7,355 3,730 31.8% 16.3% 590 808 6.5% 9.8% 30,315 23,463 14.5% 11.9% 4,978 4,978 35,293 23,463 16.9% 11.9% The increase in Same Park recurring capital expenditures of $6.9 million, or 29.2%, was primarily due to transaction costs related to large renewals and leasing production in the Same Park portfolio during 2017. Non-Same Park capital expenditures are related to the lease-up of a facility we acquired in Maryland in 2016.In the last five years, our recurring capital expenditures have averaged generally between $1.10 and $1.80 per square foot, and 11.7% and 21.5% as a percentage of NOI. Redemption of Preferred Stock:Historically, we have reduced our cost of capital by refinancing higher coupon preferred securities with lower coupon preferred securities. During May, 2017, our 6.0% Series T preferred shares, with a par value of $350.0 million, became redeemable at par. In September, 2017, we called for a partial redemption of $220.0 million. Funds received from our 5.25% Series X preferred shares issued during September, 2017 will be used to complete this redemption on October 30, 2017.32At September 30, 2017, our 5.75% Series U preferred shares, with a par value of $230.0 million, were redeemable at par. Redemption of such preferred shares will depend upon many factors, including the cost of capital. None of our preferred securities are redeemable at the option of the holders.Investment in and Advances to Unconsolidated Joint Venture: We expect to invest an additional $9.8 million in the Joint Venture, in order to fund completion of the Highgate Development. We do not expect any significant further investment necessary following completion.Acquisitions of real estate facilities: We have acquired real estate facilities in the past, and we continue to seek to acquire additional real estate facilities, however, there is significant competition to acquire existing facilities and there can be no assurance as to the level of facilities we may acquire.Development of real estate facilities: As noted above, we have an additional 123,000 building located within The Mile that we are seeking to develop into another multi-family complex. There can be no assurance as to the timing or amount of any investment that may occur; however, we do not expect to incur any significant development costs on this potential project until at least December 2018.Repurchase of Common Stock: No shares of common stock were repurchased under the board-approved common stock repurchase programstockholders during the nine months ended September 30, 2017 or the year ended December 31, 2016. As2022, including successor and predecessor periods. Dividends on preferred equity are paid when and if declared by our Board of Directors (the "Board") and accumulate if not paid (see Note 9 — Stockholders' Equity to our Consolidated Financial Statements under Item 1 in this Quarterly Report on Form 10-Q), and2017, management has2022, and cash flow from operating activities. We may also satisfy our liquidity needs by:authorizationmaturity dates on existing financings.an additional 1,614,721 shares. However, we have no plans at this timeour preferred stock in open market or privately negotiated purchases, by tender offer or otherwise or to repurchase additional shares. For all periods presented herein, we have electedOur election to be treatedtaxed as a REIT, as defined inby the Code.Code, applies to all periods presented herein. As a REIT, we do not incur U.S. federal corporate income tax on our REIT“REIT taxable income (generally, net rents and gains from real property, dividends and interest)income” that is fully distributed each year (for this purpose, certain distributions paid in a subsequent year may be considered), and if we continue to meet certain organizational and operational rules.requirements. We believe we have met these requirements in all periods presented herein, and we expect towe will continue to elect and qualify as a REIT.During the first quarter of 2017, the Board increased our quarterly dividend from $0.75 per common share to $0.85 per common share, which is an increase of $0.10 or 13.3% over the previous quarter’s distribution.$107.1 million$237,819 ($37.8 million28,740 to preferred shareholdersstockholders and $69.4 million$209,079 to common shareholders) and $102.4 million ($41.5 million to preferred shareholders and $60.9 million to common shareholders)stockholders) during the nine months ended September 30, 20172022, including successor and 2016, respectively.Our consistent, long-term dividend policy has been to distribute our taxable income in order to maintain our REIT status. Future quarterly distributions with respect to the common shares will continue to be determined based upon our REIT distribution requirements and will be funded with cash provided by operating activities.33Funds from Operations and Core Funds from OperationsFunds from Operations (“FFO”) and FFO per share are non-GAAP measures defined by the National Association of Real Estate Investment Trusts and are considered helpful measures of REIT performance by REITs and many REIT analysts. FFO represents net income before real estate depreciation, gains or losses from sales and impairment charges, which are excluded because they are based upon historical real estate costs and assume that building values diminish ratably over time, while we believe that real estate values fluctuate due to market conditions. FFO per share represents FFO allocable to common and dilutive shares, divided by aggregate common and dilutive shares. FFO and FFO per share are not a substitute for net income or earnings per share. FFO is not a substitute for GAAP net cash flow in evaluating our liquidity or ability to pay dividends, because it excludes investing and financing activities presented on our consolidated statements of cash flows. In addition, other REITs may compute these measures differently, so comparisons among REITs may not be helpful.The following table reconciles from net income allocable to common shareholders to FFO and net income per share to FFO per share (amounts in thousands, except per share data): 18,138 19,718 69,275 50,017 (1,209) (3,865) 23,759 24,631 70,465 74,886 483 587 4,866 5,315 18,610 13,495 137 128 582 387 47,383 49,792 154,445 138,785 27,226 27,103 27,192 27,076 7,305 7,305 7,305 7,305 179 268 188 256 201 98 207 90 34,911 34,774 34,892 34,727 0.66 0.72 2.53 1.84 (0.03) (0.11) 0.70 0.71 2.04 2.16 1.36 1.43 4.43 4.00 We also present “Core FFO per share,” a non-GAAP measure that represents FFO per share excluding the net impact of (i) Preferred Redemption Allocation, (ii) separation settlement payments, as well as charges or reversals related to stock based compensation, due to the departure of senior executives and (iii) certain other non-cash and/or nonrecurring income or expense items. We review Core FFO per share to evaluate our ongoing operating performance, and we believe it is used by investors and REIT analysts in a similar manner. However, Core FFO per share is not a substitute for net income per share. Because other REITs may not compute Core FFO per share in the same manner as we do, may not use the same terminology or may not present such a measure, Core FFO per share may not be comparable among REITs.34The following table reconciles FFO per share to Core FFO per share:1.36 1.43 4.43 4.00 0.19 0.19 (0.01) (0.01) 0.05 0.01 0.01 (0.01) (0.01) 1.54 1.43 4.61 4.05 Off-Balance Sheet Arrangements: The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a material effect on the Company’s financial condition, results of operations, liquidity, capital expenditures or capital resources.Contractual Obligations: As of September 30, 2017, the Company is scheduled to pay cash dividends of $41.4 million per year on its preferred equity outstanding (excluding 8,800,000 depositary shares of Series T Preferred Stock which are scheduled to be redeemed on October 30, 2017). Dividends are paid when and if declared by the Company’s Board and accumulate if not paid. Shares of preferred equity are redeemable by the Company in order to preserve its status as a REIT and are also redeemable five years after issuance, but are not redeemable at the option of the holder.Our significant contractual obligations as of September 30, 2017 and their impact on our cash flows and liquidity are summarized below (in thousands):12,681 12,681 9,752 9,752 282 145 69 68 22,715 22,578 69 68 ____________________________
predecessor periods.(a)Represents transaction costs, including tenant improvements and lease commissions, which we are committed to under the terms of executed leases.(b)Represents future expected loan advances to the Joint Venture under contract at September 30, 2017.(c)Represents future contractual payments on land under various operating leases.ITEMQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKToQuantitative and Qualitative Disclosures About Market RiskCompany’s exposureimpact of interest rate changes on earnings and cash flows and to marketlower our overall borrowing costs. To achieve our objectives, we borrow primarily at fixed rates or variable rates with the lowest margins available.Company principally finances its operations and growth with permanent equity capital consistinguse of either common or preferred stock. The Company had no debt outstanding asanalytical techniques, including cash flow sensitivity analysis, to estimate the expected impact of September 30, 2017.Our exposure to market risk for changes in interest rates relates primarilyon our future cash flows.Facility,risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value derivative contract is positive, the counterparty owes us, which creates credit risk to us. We will minimize the credit risk in derivative instruments by entering into transactions with high-quality counterparties.rates. See Notes 2expense on our variable rate debt would decrease future earnings and 6 tocash flows by $2,037. This estimate considers the consolidated financial statements included in this Quarterly Reportimpact of our interest rate swap agreements and is calculated utilizing the interest rates on Form 10-Q for additional information regarding the terms, valuations and approximate principal maturities of the Company’s indebtedness, including the Credit Facility. Based on borrowing rates currently available to the Company, the difference between the carrying amount ofour debt and its fair value is insignificant.at September 30, 2022.35ITEMCONTROLS AND PROCEDURESCompany’s management, with the participation of the Company’s Chief Executive Officer, who is also serving as acting Chief Financial Officer, evaluated the effectiveness of the Company’sCompany maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as of September 30, 2017. Management recognizes that anyappropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectivesthe desired controls objectives. Our management has evaluated, under the supervision and management necessarily applies its judgment in evaluatingwith the cost-benefit relationshipparticipation of possible controlsour Chief Executive Officer and procedures. Based onChief Financial Officer, the evaluationeffectiveness of the Company’sour disclosure controls and procedures as of September 30, 2017, the Company’s2022. Based upon that evaluation, our Chief Executive Officer who is also serving as actingand Chief Financial Officerofficer have concluded that, as of such date, the Company’sSeptember 30, 2022, our disclosure controls and procedures were effective atto accomplish their objectives as the reasonable assurance level.have not been anywere no changes in the Company’sour internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended September 30, 20172022 that have materially affected, or are reasonably likely to materially affect, the Company’sour internal control over financial reporting.ITEMLEGAL PROCEEDINGSThe Company currently isLegal Proceedingssubject toinvolved in any material litigation other than routinenor, to our knowledge, is any material litigation and administrativethreatened against us. We are party to a variety of legal proceedings arising in the ordinary course of business.ITEMRISK FACTORSThere have been no material changes toRisk Factorsincludeddiscussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.2021 (the “Annual Report”). In light of the Merger, we are supplementing the risk factors discussed in the Annual Report with the following risk factors, which should be read in conjunction with the risk factors contained in our Annual Report.ITEMUNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSTheUnregistered Sales of Equity Securities and Use of Proceeds has authorized the repurchase, from time to time, of up to 6.5 million6,500,000 on shares of the Company’s common stock on the open market or in privately negotiated transactions. The authorization hashad no expiration date. Purchases will be made subject to market conditions and other investment opportunities available to the Company.DuringThe Company did not repurchase any shares of its common stock during the three months ended September 30, 2017, there were no shares2022 and terminated the program in connection with the Merger.ITEMEXHIBITS requiredItem 601us in these agreements or other documents were made solely within the specific context of Regulation S-K are filed herewiththe relevant agreement or incorporated herein by referencedocument and are listed inmay not describe the attached Exhibit Index which is incorporated herein by reference.actual state of affairs as of the date they were made or at any other time.36Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.Dated: October 27, 2017BY:/s/ Maria R. HawthorneMaria R. HawthornePresident and Chief Executive OfficerNovember 08, 2022 By: Matt Ostrower Chief Financial Officer ( Principal Executive Officer and Principal Financial Officer)37EXHIBIT INDEXExhibitsExhibit 3.1Exhibit 4.1Exhibit 10.1Exhibit 10.2Exhibit 12Exhibit 31.1Exhibit 32.1Exhibit 101.INSXBRL Instance Document. Filed herewith.Exhibit 101.SCHXBRL Taxonomy Extension Schema. Filed herewith.Exhibit 101.CALXBRL Taxonomy Extension Calculation Linkbase. Filed herewith.Exhibit 101.DEFXBRL Taxonomy Extension Definition Linkbase. Filed herewith.Exhibit 101.LABXBRL Taxonomy Extension Label Linkbase. Filed herewith.Exhibit 101.PREXBRL Taxonomy Extension Presentation Linkbase. Filed herewith.38