UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


S	Quarterly Report Pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934
	For the quarterly period ended June 30, 2019
	or
£	Transition Report Pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934
	For the transition period from to

☒~~Quarterly Report Pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934~~

~~For the quarterly period ended June 30, 2018~~

☐~~Transition Report Pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934~~

~~For the transition period from~~ ~~____________~~ to ~~____________~~

Commission File Number 1-10709

PS BUSINESS PARKS, INC.

(Exact name of registrant as specified in its charter)

California	95-4300881
(State or Other Jurisdiction	(I.R.S. Employer
of Incorporation)	Identification Number)

701 Western Avenue, Glendale, California 91201-2349

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (818) 244-8080

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Ticker Symbol	Name of Each Exchange on Which Registered
Common Stock, $0.01 par value per share	PSB	New York Stock Exchange
Depositary Shares Each Representing 1/1,000 of a Share of 5.750% Cumulative Preferred Stock, Series U, $0.01 par value per share	PSBPrU	New York Stock Exchange
Depositary Shares Each Representing 1/1,000 of a Share of 5.700% Cumulative Preferred Stock, Series V, $0.01 par value per share	PSBPrV	New York Stock Exchange
Depositary Shares Each Representing 1/1,000 of a Share of 5.200% Cumulative Preferred Stock, Series W, $0.01 par value per share	PSBPrW	New York Stock Exchange
Depositary Shares Each Representing 1/1,000 of a Share of 5.250% Cumulative Preferred Stock, Series X, $0.01 par value per share	PSBPrX	New York Stock Exchange
Depositary Shares Each Representing 1/1,000 of a Share of 5.200% Cumulative Preferred Stock, Series Y, $0.01 par value per share	PSBPrY	New York Stock Exchange

Indicate by check mark whether the registrant (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.

Yes ☒S No ☐£

Indicate by check mark whether the registrant has submitted electronically ~~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).

Yes ☒S No ☐£

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒S

Accelerated filer

☐£

Non-accelerated filer

☐£

Smaller reporting company

☐£

Emerging growth company

☐£

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐£

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐£ No ☒S

As of July ~~23, 2018,~~22, 2019, the number of shares of the registrant’s common stock, $0.01 par value per share, outstanding was ~~27,332,842.~~

27,430,764.

Table of Contents

PS BUSINESS PARKS, INC.

INDEX



	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets as of June 30, ~~2018~~2019 (unaudited) and December 31, ~~2017~~2018	3
Consolidated statements of income (unaudited) for the three and six months ended June 30, ~~2018~~2019 and ~~2017~~2018	4
Consolidated statement of equity (unaudited) for the three and six months ended June 30, 2019 and 2018	5
Consolidated statements of cash flows (unaudited) for the six months ended June 30, ~~2018~~2019 and ~~2017~~2018	67
Notes to consolidated financial statements (unaudited)	78
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3. Quantitative and Qualitative Disclosures About Market Risk	38
Item 4. Controls and Procedures	38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	38
Item 1A. Risk Factors	3839
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	3839
Item 6. Exhibits	3940

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PS BUSINESS PARKS, INC.

CONSOLIDATED BALANCE SHEETS

(InAmounts in thousands, except share data)



	June 30,		December 31,
	2019		2018
	(Unaudited)
ASSETS

Cash and cash equivalents	$	42,046	$	37,379

Real estate facilities, at cost
Land		772,399		762,731
Buildings and improvements		2,171,281		2,157,407
		2,943,680		2,920,138
Accumulated depreciation		(1,135,107)		(1,097,748)
		1,808,573		1,822,390
Properties held for sale, net		124,680		128,093
Land and building held for development		31,841		30,848
		1,965,094		1,981,331
Rent receivable, net		2,308		1,403
Deferred rent receivable, net		34,572		33,308
Other assets		13,524		15,173
Total assets	$	2,057,544	$	2,068,594

LIABILITIES AND EQUITY

Accrued and other liabilities	$	80,367	$	85,141
Total liabilities		80,367		85,141
Commitments and contingencies
Equity
PS Business Parks, Inc.’s shareholders’ equity
Preferred stock, $0.01 par value, 50,000,000 shares authorized,
38,390 shares issued and outstanding at
June 30, 2019 and December 31, 2018		959,750		959,750
Common stock, $0.01 par value, 100,000,000 shares authorized,
27,429,756 and 27,362,101 shares issued and outstanding at
June 30, 2019 and December 31, 2018, respectively		274		274
Paid-in capital		733,777		736,131
Accumulated earnings		67,049		69,207
Total PS Business Parks, Inc.’s shareholders’ equity		1,760,850		1,765,362
Noncontrolling interests		216,327		218,091
Total equity		1,977,177		1,983,453
Total liabilities and equity	$	2,057,544	$	2,068,594

June 30,

December 31,

2018

2017

(Unaudited)

ASSETS

Cash and cash equivalents
$
7,214

$
114,882

Real estate facilities, at cost

Land

816,656

769,036
Buildings and improvements

2,362,209

2,156,862

3,178,865

2,925,898
Accumulated depreciation

(1,201,990)

(1,161,798)

1,976,875

1,764,100
Properties held for sale, net

9,465

49,259
Land and building held for development

30,068

29,665

2,016,408

1,843,024
Investment in and advances to unconsolidated joint venture

—

100,898
Rent receivable, net

1,807

1,876
Deferred rent receivable, net

31,917

32,062
Other assets

14,969

7,417
Total assets
$
2,072,315

$
2,100,159

LIABILITIES AND EQUITY

Accrued and other liabilities
$
81,296

$
80,223
Preferred stock called for redemption

—

130,000
Credit facility

10,000

—
Total liabilities

91,296

210,223
Commitments and contingencies

Equity

PS Business Parks, Inc.’s shareholders’ equity

Preferred stock, $0.01 par value, 50,000,000 shares authorized,

38,390 shares issued and outstanding at

June 30, 2018 and December 31, 2017

959,750

959,750
Common stock, $0.01 par value, 100,000,000 shares authorized,

27,331,834 and 27,254,607 shares issued and outstanding at

June 30, 2018 and December 31, 2017, respectively

272

272
Paid-in capital

733,617

735,067
Accumulated earnings (deficit)

69,448

(1,778)
Total PS Business Parks, Inc.’s shareholders’ equity

1,763,087

1,693,311
Noncontrolling interests

217,932

196,625
Total equity

1,981,019

1,889,936
Total liabilities and equity
$
2,072,315

$
2,100,159

See accompanying notes.

Table of Contents

PS BUSINESS PARKS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in thousands, except per share data)

(Unaudited)



	For The Three Months				For The Six Months				For The Three Months				For The Six Months
	Ended June 30,				Ended June 30,				Ended June 30,				Ended June 30,
	2018		2017		2018		2017		2019		2018		2019		2018

Rental income	$	101,824	$	99,800	$	205,583	$	199,861	$	107,782	$	101,824	$	215,607	$	205,583

Expenses
Cost of operations		31,256		30,250		64,256		61,283		31,460		30,796		65,053		63,252
Depreciation and amortization		24,416		23,628		48,298		46,706		24,768		24,416		49,643		48,298
General and administrative		2,368		2,443		4,674		5,274		2,827		2,828		6,060		5,678
Total operating expenses		58,040		56,321		117,228		113,263		59,055		58,040		120,756		117,228

Operating income		43,784		43,479		88,355		86,598
Interest and other income		294		154		578		387		764		294		1,382��		578
Interest and other expense		(167)		(285)		(332)		(469)		(118)		(167)		(285)		(332)
Equity in loss of unconsolidated joint venture		—		(382)		—		(382)
Gain on sale of real estate facilities		58,448		1,209		85,283		1,209		—		58,448		—		85,283
Gain on sale of development rights		—		—		—		3,865
Net income		102,359		44,175		173,884		91,208		49,373		102,359		95,948		173,884
Allocation to noncontrolling interests		(18,400)		(6,645)		(30,300)		(13,746)		(7,623)		(18,400)		(14,650)		(30,300)
Net income allocable to PS Business Parks, Inc.		83,959		37,530		143,584		77,462		41,750		83,959		81,298		143,584
Allocation to preferred shareholders		(12,959)		(12,591)		(25,962)		(25,882)		(12,959)		(12,959)		(25,918)		(25,962)
Allocation to restricted stock unit holders		(779)		(197)		(1,353)		(445)		(212)		(779)		(480)		(1,353)
Net income allocable to common shareholders	$	70,221	$	24,742	$	116,269	$	51,135	$	28,579	$	70,221	$	54,900	$	116,269

Net income per common share
Basic	$	2.57	$	0.91	$	4.26	$	1.88	$	1.04	$	2.57	$	2.00	$	4.26
Diluted	$	2.56	$	0.90	$	4.24	$	1.87	$	1.04	$	2.56	$	2.00	$	4.24

Weighted average common shares outstanding
Basic		27,322		27,200		27,294		27,174		27,426		27,322		27,400		27,294
Diluted		27,423		27,412		27,395		27,384		27,532		27,423		27,505		27,395

Dividends declared per common share	$	0.85	$	0.85	$	1.70	$	1.70



											Total PS																Total PS
									Accumulated		Business Parks,																Business Parks,
	Preferred Stock			Common Stock			Paid-in		Earnings		Inc.’s Shareholders’		Noncontrolling		Total
	Shares	Amount		Shares	Amount		Capital		(Deficit)		Equity		Interests		Equity
Balances at December 31, 2017	38,390	$	959,750	27,254,607	$	272	$	735,067	$	(1,778)	$	1,693,311	$	196,625	$	1,889,936
For the three months ended																	Preferred Stock			Common Stock			Paid-in		Accumulated		Inc.’s Shareholders’		Noncontrolling		Total
June 30, 2019																	Shares	Amount		Shares	Amount		Capital		Earnings (Deficit)		Equity		Interests		Equity
Balances at March 31, 2019																	38,390	$	959,750	27,417,909	$	274	$	732,955	$	67,059	$	1,760,038	$	216,237	$	1,976,275
Issuance of common stock in
connection with stock-based
compensation	—		—	77,227		—		1,228		—		1,228		—		1,228	—		—	11,847		—		304		—		304		—		304
Stock compensation, net	—		—	—		—		1,245		—		1,245		—		1,245	—		—	—		—		706		—		706		—		706
Cash paid for taxes in lieu of
shares upon vesting of
restricted stock units	—		—	—		—		(4,529)		—		(4,529)		—		(4,529)	—		—	—		—		(6)		—		(6)		—		(6)
Consolidation of joint venture (see Note 3)	—		—	—		—		—		—		—		4,032		4,032
Net income	—		—	—		—		—		143,584		143,584		30,300		173,884	—		—	—		—		—		41,750		41,750		7,623		49,373
Distributions
Preferred stock	—		—	—		—		—		(25,962)		(25,962)		—		(25,962)
Common stock	—		—	—		—		—		(46,396)		(46,396)		—		(46,396)
Preferred stock (Note 8)																	—		—	—		—		—		(12,959)		(12,959)		—		(12,959)
Common stock ($1.05 per share)																	—		—	—		—		—		(28,801)		(28,801)		—		(28,801)
Noncontrolling interests—
Common Units																	—		—	—		—		—		—		—		(7,670)		(7,670)
Joint Venture																	—		—	—		—		—		—		—		(45)		(45)
Adjustment to noncontrolling interests—
common units in the OP																	—		—	—		—		(182)		—		(182)		182		—
Balances at June 30, 2019																	38,390	$	959,750	27,429,756	$	274	$	733,777	$	67,049	$	1,760,850	$	216,327	$	1,977,177

For the three months ended
June 30, 2018
Balances at March 31, 2018																	38,390	$	959,750	27,316,698	$	272	$	732,574	$	21,673	$	1,714,269	$	205,378	$	1,919,647
Issuance of common stock in
connection with stock-based
compensation																	—		—	15,136		—		975		—		975		—		975
Stock compensation, net																	—		—	—		—		431		—		431		—		431
Net income																	—		—	—		—		—		83,959		83,959		18,400		102,359
Distributions
Preferred stock (Note 8)																	—		—	—		—		—		(12,959)		(12,959)		—		(12,959)
Common stock ($0.85 per share)																	—		—	—		—		—		(23,225)		(23,225)		—		(23,225)
Noncontrolling interests—
common units	—		—	—		—		—		—		—		(12,419)		(12,419)	—		—	—		—		—		—		—		(6,209)		(6,209)
Adjustment to noncontrolling interests—
common units in the OP	—		—	—		—		606		—		606		(606)		—	—		—	—		—		(363)		—		(363)		363		—
Balances at June 30, 2018	38,390	$	959,750	27,331,834	$	272	$	733,617	$	69,448	$	1,763,087	$	217,932	$	1,981,019	38,390	$	959,750	27,331,834	$	272	$	733,617	$	69,448	$	1,763,087	$	217,932	$	1,981,019



											Total PS
											Business Parks,
For the six months ended	Preferred Stock			Common Stock			Paid-in		Accumulated		Inc.’s Shareholders’		Noncontrolling		Total
June 30, 2019	Shares	Amount		Shares	Amount		Capital		Earnings (Deficit)		Equity		Interests		Equity
Balances at December 31, 2018	38,390	$	959,750	27,362,101	$	274	$	736,131	$	69,207	$	1,765,362	$	218,091	$	1,983,453
Issuance of common stock in
connection with stock-based
compensation	—		—	67,655		—		709		—		709		—		709
Stock compensation, net	—		—	—		—		1,409		—		1,409		—		1,409
Cash paid for taxes in lieu of
shares upon vesting of
restricted stock units	—		—	—		—		(5,500)		—		(5,500)		—		(5,500)
Net income	—		—	—		—		—		81,298		81,298		14,650		95,948
Distributions
Preferred stock (Note 8)	—		—	—		—		—		(25,918)		(25,918)		—		(25,918)
Common stock ($2.10 per share)	—		—	—		—		—		(57,538)		(57,538)		—		(57,538)
Noncontrolling interests—
Common Units	—		—	—		—		—		—		—		(15,341)		(15,341)
Joint Venture	—		—	—		—		—		—		—		(45)		(45)
Adjustment to noncontrolling interests—
common units in the OP	—		—	—		—		1,028		—		1,028		(1,028)		—
Balances at June 30, 2019	38,390	$	959,750	27,429,756	$	274	$	733,777	$	67,049	$	1,760,850	$	216,327	$	1,977,177

For the six months ended
June 30, 2018
Balances at December 31, 2017	38,390	$	959,750	27,254,607	$	272	$	735,067	$	(1,778)	$	1,693,311	$	196,625	$	1,889,936
Issuance of common stock in
connection with stock-based
compensation	—		—	77,227		—		1,228		—		1,228		—		1,228
Stock compensation, net	—		—	—		—		1,245		—		1,245		—		1,245
Cash paid for taxes in lieu of
shares upon vesting of
restricted stock units	—		—	—		—		(4,529)		—		(4,529)		—		(4,529)
Consolidation of joint venture (see Note 3)	—		—	—		—		—		—		—		4,032		4,032
Net income	—		—	—		—		—		143,584		143,584		30,300		173,884
Distributions
Preferred stock (Note 8)	—		—	—		—		—		(25,962)		(25,962)		—		(25,962)
Common stock ($1.70 per share)	—		—	—		—		—		(46,396)		(46,396)		—		(46,396)
Noncontrolling interests—
common units	—		—	—		—		—		—		—		(12,419)		(12,419)
Adjustment to noncontrolling interests—
common units in the OP	—		—	—		—		606		—		606		(606)		—
Balances at June 30, 2018	38,390	$	959,750	27,331,834	$	272	$	733,617	$	69,448	$	1,763,087	$	217,932	$	1,981,019

Table of Contents

PS, 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 interests

Noncontrolling interests represent (i) PS’s noncontrolling interest in the OP through its ownership of 7,305,355 common partnership units and (ii) a third-party 5.0% interest in aour consolidated joint venture owning a 395-unit ~~multi-family~~multifamily apartment complex. See Note 76 for further ~~information.~~information on noncontrolling interests.

Use of estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.

Allowance for doubtful accounts

The Company monitors the collectability of its receivable balances, including ~~the~~ deferred rent ~~receivable~~receivables, on an ongoing basis. Customer ~~receivables~~receivable balances are net of an allowance for estimated uncollectible accounts totaling $400,000 at June 30, ~~2018~~2019 and December 31, ~~2017.~~2018. Deferred rent receivable isbalances are net of an allowance for uncollectible accounts totaling ~~$843,000~~$914,000 and ~~$867,000~~$876,000 at June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

Financial instruments

The methods and assumptions used to estimate the fair value of financial instruments 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.~~

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 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~~various customers. Balances that the Company expects to become uncollectible are reserved for or written off. Due to the short period to maturity of the Company’s cash and cash equivalents, accounts receivable, other assets and accrued and other liabilities, the carrying values as presented on the consolidated balance sheets are reasonable estimates of fair value.

‎

Table of Contents

The following table provides a reconciliation of cash, cash equivalents and restricted cash per the consolidated statements of cash flow to the corresponding financial statement line items in the consolidated balance sheets ~~as of June 30, 2018 and 2017~~ (in thousands):



	December 31,
	2018		2017
Consolidated balance sheets
Cash and cash equivalents	$	37,379	$	114,882
Restricted cash included in
Land and building held for development		1,088		1,088
Consolidated statements of cash flows	$	38,467	$	115,970



	June 30,
	2019		2018
Consolidated balance sheets
Cash and cash equivalents	$	42,046	$	7,214
Restricted cash included in
Land and building held for development		1,088		1,088
Consolidated statements of cash flows	$	43,134	$	8,302

June 30,

2018

2017
Consolidated Balance Sheets

Cash and cash equivalents
$
7,214

$
5,408
Restricted Cash

Land and building held for development

1,088

1,088
Consolidated Statements of Cash Flows
$
8,302

$
6,496

During 2017, in conjunction with seeking entitlements to develop our multi-family projects in Tysons, Virginia, we contributed $1.1 million into an escrow account for the future development of an athletic field.

~~Carrying values of the Company’s unsecured Credit Facility (as defined below) approximate fair value.~~ The characteristics of these financial instruments, market data and other comparative metrics utilized in determining these fair values are “Level 2” inputs.

Real estate facilities

Real estate facilities are recorded at cost. Property taxes, insurance, interest and costs essential to the development of property for its intended use are capitalized during the period of development. ~~Costs~~Direct costs related to the renovation or improvement of the properties are capitalized. Expenditures for repairs and maintenance are expensed as incurred. Expenditures that are expected to benefit a period greater than two years are capitalized and depreciated over their estimated useful life. Buildings and improvements are depreciated using 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, for leases with terms greater than one year are capitalized and depreciated over their estimated useful lives.

Property held for sale or development

Real estate is classified as held for sale 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 no longer used in its original form and likely that it will be developed to an alternate ~~use and no longer used in its present form.~~use. Property held for development or sale is not depreciated.

Intangible assets/liabilities

When we acquire real estate facilities, an intangible asset is recorded as other assets for leases where the in-place rent is higher than market rents, and an intangible liability is recorded as other liabilities 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. As of June 30, ~~2018,~~2019, the value of above-market in-place rents resulted in net intangible assets of ~~$2.1~~$1.5 million, net of ~~$9.7~~$10.3 million of accumulated amortization and the value of below-market in-place rents resulted in net intangible liabilities of ~~$2.0~~$1.7 million, net of ~~$10.6~~$11.1 million of accumulated amortization. As of December 31, ~~2017,~~2018, the value of above-market in-place rents resulted in net intangible assets of ~~$731,000,~~$1.8 million, net of ~~$9.5~~$10.0 million of accumulated amortization and the value of below-market ~~in-place~~in-

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place rents resulted in net intangible liabilities of ~~$383,000,~~$1.8 million, net of ~~$10.4~~$10.8 million of accumulated amortization.

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Additionally, when we acquire real estate facilities, the value of in-place leases ~~(customer origination~~(i.e., customer lease-up costs) is recorded as other assets and is amortized to depreciation and amortization expense over the respective remaining lease term. As of June 30, 2019, the value of acquired in-place leases resulted in net intangible assets of $4.1 million, net of $2.4 million of accumulated amortization. As of December 31, 2018, the value of acquired in-place leases resulted in net intangible assets of ~~$6.4~~$4.7 million, net of ~~$789,000~~$1.3 million of accumulated amortization.

Evaluation of asset impairment

We evaluate our real estate and finite-lived intangible assets for impairment each quarter. If there are indicators of impairment and we determine that the carrying value of the asset is not recoverable from estimated 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~~No impairment ~~charge to the extent the carrying amount exceeds estimated fair value, when we believe any such shortfall is other than temporary.~~

~~No impairments~~charges were recorded in any ~~of our evaluations for any~~ period presented herein.

Stock compensation

~~All share-based~~Share-based payments to employees, including grants of employee stock options, are recognized as stock compensation expense in the Company’s consolidated statements of income based on their grant date fair values, except for performance-based grants, which are accounted for based on their fair values at the beginning of the service period. See Note ~~11.~~10.

Accrued and other liabilities ~~and other assets~~

Accrued and other liabilities consist primarily of rents prepaid by our customers, trade payables, property tax accruals, accrued payroll and contingent loss accruals when probable and ~~estimable.~~estimable, as well as the intangible liabilities discussed above. We disclose the nature of significant unaccrued losses that are reasonably possible of occurring and, if estimable, a range of exposure.

Other assets

Other assets are comprised primarily of prepaid ~~expenses. We believe~~expenses, as well as the ~~fair value of our accrued and other liabilities and other~~intangible assets ~~approximate book value, due to the short period until settlement.~~discussed above.

Revenue recognition

We recognize the aggregate rent to be collected (including the impact of escalators and concessions) under leases ratably throughout the non-cancellable lease term ~~(on~~on a ~~“Straight-Line” basis),~~“straight-line” basis, commencing when the customer takes control of the leased space. Cumulative ~~Straight-Line~~straight-line rent recognized in excess of amounts billed per the lease ~~terms~~term is presented as “deferred rent receivable” on our consolidated balance sheets. ~~Reimbursements~~We present reimbursements from customers for real estate taxes and other recoverable operating expenses under a single lease component presentation as the timing and pattern of transfer of such reimbursements are ~~recognized~~the same as the lease term, and the combined single component of such leases are classified as operating leases. Accordingly, we recognize such variable lease payments resulting from the reimbursements from customers for real estate taxes and other recoverable operating expenses as rental income in the period the applicable costs are incurred. Property management fees are recognized in the period earned as other income.

Costs incurred in acquiring customers (primarily tenant improvements and lease commissions) are capitalized and amortized over the lease ~~period.~~period for leases with terms greater than one year.

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Sales of real estate facilities

Sales of real estate facilities are not part of our ordinary ~~activities;~~activities, and as a result, we consider such sales as contracts with non-customers. We recognize sales of real estate when we have collected payment and the attributes of ownership, such as possession and control of the asset, have been transferred to the buyer. If a contract for sale includes obligations to provide goods or services to the buyer, an allocated portion of the contract price is recognized as revenue as the related ~~good~~goods or ~~service~~services are transferred to the buyer.

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General and administrative ~~expenses~~expense

General and administrative ~~expenses include~~expense includes executive and other compensation, corporate office expenses, professional fees, state income taxes and other such costs that are not directly related to the operation of our real estate facilities.

Income taxes

We 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 substantially all 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 June 30, 2019 and December 31, 2018, we did not recognize any tax benefit for uncertain tax positions.

Accounting for preferred equity issuance costs

We 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 of the original issuance costs, and we reclassify the redemption value from equity to liabilities when we call preferred shares for redemption.

Net income per common share

Notwithstanding the presentation of income allocations on our consolidated statements of income, net income is allocated to (a) preferred shareholders, for distributions paid or payable, (b) preferred shareholders, to the extent redemption value exceeds the related carrying value, ~~(a “Preferred Redemption Allocation”)~~(c) our joint venture partner, to the extent the consolidated joint venture produce net income or loss during the period and ~~(c)~~(d) restricted ~~share~~stock unit (“RSU”) 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 of stock compensation awards outstanding (Note ~~11)~~10) using the treasury stock method.

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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):



	For The Three Months				For The Six Months				For The Three Months				For The Six Months
	Ended June 30,				Ended June 30,				Ended June 30,				Ended June 30,
	2018		2017		2018		2017		2019		2018		2019		2018
Calculation of net income allocable to common shareholders	Calculation of net income allocable to common shareholders								Calculation of net income allocable to common shareholders
Net income	$	102,359	$	44,175	$	173,884	$	91,208	$	49,373	$	102,359	$	95,948	$	173,884
Net (income) loss allocated to
Preferred shareholders based upon distributions		(12,959)		(12,591)		(25,962)		(25,882)		(12,959)		(12,959)		(25,918)		(25,962)
Noncontrolling interests—joint venture		383		—		819		—		(10)		383		(13)		819
Restricted stock unit holders		(779)		(197)		(1,353)		(445)		(212)		(779)		(480)		(1,353)
Net income allocable to common shareholders
and noncontrolling interests—common units		89,004		31,387		147,388		64,881		36,192		89,004		69,537		147,388
Net income allocation to noncontrolling interests—
common units		(18,783)		(6,645)		(31,119)		(13,746)		(7,613)		(18,783)		(14,637)		(31,119)
Net income allocable to common shareholders	$	70,221	$	24,742	$	116,269	$	51,135	$	28,579	$	70,221	$	54,900	$	116,269

Calculation of common partnership units as a percentage of common share equivalents	Calculation of common partnership units as a percentage of common share equivalents								Calculation of common partnership units as a percentage of common share equivalents
Weighted average common shares outstanding		27,322		27,200		27,294		27,174		27,426		27,322		27,400		27,294
Weighted average common partnership units outstanding		7,305		7,305		7,305		7,305		7,305		7,305		7,305		7,305
Total common share equivalents		34,627		34,505		34,599		34,479		34,731		34,627		34,705		34,599
Common partnership units as a percentage of common
share equivalents		21.1%		21.2%		21.1%		21.2%		21.0%		21.1%		21.0%		21.1%

Weighted average common shares outstanding
Basic weighted average common shares outstanding		27,322		27,200		27,294		27,174		27,426		27,322		27,400		27,294
Net effect of dilutive stock compensation—based on
treasury stock method using average market price		101		212		101		210		106		101		105		101
Diluted weighted average common shares outstanding		27,423		27,412		27,395		27,384		27,532		27,423		27,505		27,395

Segment reporting

We have two operating segments: (i) the acquisition, development, ownership and management of commercial real estate and (ii) the acquisition, development, ownership and management of ~~multi-family~~multifamily real estate, but have one reportable segment as the ~~multi-family~~multifamily segment does not meet the quantitative ~~thresholds.~~thresholds necessary to require reporting as a separate segment.

Reclassifications

We have reclassified our divisional vice presidents’ compensation costs totaling $460,000 and $1.0 million for the three and six months ended June 30, 2018, respectively, from cost of operations into general and administrative expense on our consolidated statements of income in the three and six months ended June 30, 2018 in order to conform to the current periods’ presentation. Certain reclassifications have been made to the consolidated financial statements for ~~2017~~2018 in order to conform to the ~~2018~~2019 presentation, including reclassifying ~~management fee income totaling $124,000 and $252,000~~assets held for ~~the three and six months ended~~sale as of June 30, ~~2017, respectively,~~2019 from “real estate facilities, at costs” totaling $128.1 million as of December 31, 2018 into ~~“interest and other income”~~“properties held for sale, net” on our consolidated ~~statements of income.~~balance sheets.

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Recently issued accounting standards

In May 2014 and February 2016, the Financial Accounting Standards Board (“FASB”) 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,~~ ~~Clarifying the Scope~~non-customers.

Table of ~~Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets~~.Contents

Lessor accounting

The Lease Standard ~~will direct~~directs 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~~directs how we account for the non-lease components of our lease contracts, primarily expense reimbursements (“Non-Lease Payments”). ~~The adoption of the Revenue Standard and its impact on our accounting for the disposition of real estate facilities is described below.~~

~~The Lease Standard~~

The Lease Standard requires us to identify Fixed Lease Payments and Non-Lease Payments of a lease agreement and ~~will govern~~governs the recognition of revenue for the Fixed Lease Payments. Revenue related to Non-Lease Payments under our lease arrangements ~~will be~~is subject to the Revenue Standard effective upon adoption of the Lease Standard. See further discussion below on Fixed Lease Payments and Non-Lease Payments.

Under the Lease Standard, a set of practical expedients for implementation, which must be elected as a package and for all leases, was elected as part of our adoption of the Lease Standard. These practical expedients include (i) relief from re-assessing whether an expired or existing contract meets the definition of a lease, (ii) relief from re-assessing the classification of expired or existing leases at the adoption date and (iii) allowing previously capitalized initial direct leasing costs to continue to be amortized.

We ~~will implement~~adopted the Lease Standard on its effective date of January 1, 2019 using the required modified retrospective transition approach (with certain transition relief that is available to us). The modified retrospective approach will require us to first record an adjustment2019. In addition to the ~~January 1, 2017 balance~~package of ~~accumulated earnings (deficit) for~~practical expedients noted above, we also elected the cumulative impact of the Lease Standard on all leases existing at January 1, 2017. Then, we will have to restate the financial statements for the years ended December 31, 2017 and 2018 for the Lease Standard impact on all leases that were in force at any time during those periods. The FASB proposed an amendment to the transition method that would allow adoption on January 1, 2019 with a cumulative effect adjustment as of January 1, 2019, with no restatement of prior periods. If this proposal becomes effective, we may utilize this method instead.

~~Lessor Accounting~~

We recognized revenue from our lease arrangements aggregating $101.8 million and $205.6 million for the three and six months ended June 30, 2018, respectively. The revenue consisted primarily of rental income and expense reimbursements of $78.8 million and $23.0 million, respectively, for the three-month period and $159.4 million and $46.2 million, respectively, for the six-month period.

Under the current accounting standards, 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. Payments for expense reimbursements received under these lease arrangements related to our customer’s pro rata share of real estate taxes, insurance, utilities, repairs and maintenance, common area expense and other operating expenses are considered Fixed Lease Payments. We recognize these reimbursements as revenue when the related contractually recoverable operating expenses are incurred.

Under the Lease Standard, the total consideration in each lease agreement will be allocated to the Fixed Lease Payment and Non-Lease Payments based on their relative standalone selling prices. Lessors will continue to recognize the Fixed Lease Payments on a straight-line basis, which is consistent with existing guidance for operating leases. In January, 2018, the FASB proposed an amendment to the Lease Standard that would allow lessors to elect, as a practical expedient not to allocate the total consideration to Fixed Lease Payments and Non-Lease Payments based on their relative standalone selling prices. ~~If adopted, this~~This practical expedient ~~will allow~~allows lessors to elect a combined single component presentation if (i) the timing and pattern of the revenue recognition for the Fixed Lease Payments and Non-Lease Payments are the same, and (ii) the combined single component of the lease would continue to be classified as an operating lease.

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We ~~do not expect that~~have assessed and believe the ~~Lease Standard will impact our accounting~~two conditions have been met 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 Non-Lease Payments. If the proposed practical expedient mentioned above is adopted and we elect it, we expect payments for expense reimbursements that qualify as Non-Lease Payments ~~will be presented under a single lease component presentation. However, without~~as (i) the ~~proposed practical expedient, we expect these reimbursements would be separated into~~timing and pattern of transfer of the Fixed Lease Payments and Non-Lease ~~Payments. Under~~Payments are the ~~Lease Standard, reimbursements relating to property taxes~~same, and ~~insurance are Fixed Lease Payments as~~(ii) the ~~payments relates to~~combined single component of the ~~right to use the leased assets, while reimbursements relating to maintenance activities and common area expense are Non-Lease Payments and~~lease would be ~~accounted under the Revenue Standard upon the~~classified as an operating lease. The adoption of the ~~Lease~~Leasing Standard ~~as these payments for goods or services are transferred separately from the right to use the underlying assets.~~

Expense reimbursements relating to property taxes and insurance categorized as Fixed Lease Payments will generally be variable consideration with revenue recognized as the recoverable services are provided. Expense reimbursements categorized as Non-Lease Payments will be recognized atdid not result in a ~~point in time or over time based on the pattern of transfer of the underlying goods or services~~material impact to our ~~customers.~~consolidated financial statements.

We recognized revenue from our lease arrangements aggregating $107.8 million and $101.8 million for the three months ended June 30, 2019 and 2018, respectively, and $215.6 million and $205.6 million for the six months ended June 30, 2019 and 2018, respectively. This revenue consisted primarily of rental income from operating leases and the related variable lease payments resulting from reimbursements of property operating expenses. Rental income was $83.8 million and $78.8 million for the three months ended June 30, 2019 and 2018, respectively, and $166.6 million and $159.4 million for the six months ended June 30, 2019 and 2018, respectively. Variable lease payments were $24.0 million and $23.0 million for the three months ended June 30, 2019 and 2018, respectively, and $49.0 million and $46.2 million for the six months ended June 30, 2019 and 2018, respectively.

Costs to execute leases

The Lease Standard also ~~requires~~provides updated guidance on the requirements for the capitalization of ~~only~~ the incremental costs incurred in executing ~~each particular lease,~~leases, such as legal fees ~~to draft a lease or commissions based upon a particular lease. Costs~~and commissions. Under the Lease Standard, any costs that would have been incurred regardless of successful lease execution, such as allocated costs of internal personnel, are to be expensed and may not be capitalized. ~~We do~~As we have historically not ~~capitalize~~capitalized any such costs, ~~relating to~~ the ~~execution~~adoption of ~~leases and do~~the Lease Standard did not ~~expect this standard to have~~result in a material impact ~~on expenses as~~to our ~~accounting policy is consistent with the provisions of the standard.~~consolidated financial statements.

Lessee accounting

Under the Lease Standard, lessees are required to apply a dual approach by classifying leases as either finance or operating leases based on the principle whether the lease is effectively a finance purchase of the ~~lease~~leased asset by the lessee. This classification ~~will determine~~determines whether the lease expense is recognized based on an effective interest method or a straight-line basis over the term of the lease. 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~~is recognized on our balance sheet as a right-of-use (“ROU”) asset and related liability. ~~We do not expect~~On January 1, 2019, the Company recorded a ~~material impact~~ROU asset of $1.7 million, included in “other assets” on our consolidated ~~financial statement~~balance sheets and a corresponding liability of $1.7 million under “accrued and other

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liabilities”, relating to our existing ground lease arrangements. These operating leases were recognized based on the present value of the future minimum lease payments over the lease term. As these leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available in determining the present value of future payments. The discount rate used to determine the present value of these operating leases’ future payments was 4.20%. These ground leases expire in 2029 and 2030 and do not have an option to extend. As of June 30, 2019, the remaining lease terms ranged from 10.3 years to 10.6 years. Lease expense for minimum lease payments is recognized in the ~~initial recognition~~period the applicable costs are incurred as monthly rent for these operating leases are constant without increases through the remaining terms of ~~each lease liability upon the~~these leases. The adoption ~~and the pattern~~ of ~~recognition subsequent to adoption.~~

~~The Revenue Standard~~

In May, 2014, the FASB issued the Revenue Standard on recognition of revenue arising from contracts with customers, as well as the accounting for the disposition of real estate facilities, and subsequently, issued additional guidance that further clarified 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 ~~(discussed above).~~

The core principle underlying this guidance is that entities will recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled for such exchange.

The Revenue Standards permit either the full retrospective or modified retrospective transition method. We adopted the Revenue Standards effective January 1, 2018 utilizing the modified retrospective transition method applied to contracts not completed as of January 1, 2018 and the adoption did not result in a material impact to our consolidated financial ~~statements.~~

~~As previously noted above in~~statements from the lease accounting section, depending upon the nature of the underlying expense and the contractual reimbursement arrangement, certain expense reimbursements may be subject to the Revenue Standard upon our adoption of the Lease Standard, no later than January 1, 2019.

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~~Revenue within the scope of the Revenue Standard~~

~~Sales of Real Estate Facilities~~

~~The adoption of the Revenue Standard had no material impact on~~initial recognition of ~~$85.3 million in gain on sale~~each lease liability or from the pattern of ~~real estate facilities during the six months June 30, 2018.~~recognition subsequent to adoption.

~~Other recently issued accounting standards~~

~~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 standard is effective on January 1, 2018, with early adoption permitted and requires the use of the retrospective transition method. We early adopted the new guidance during the fourth quarter of 2017 and, accordingly, net cash used in investing activities decreased by $1.1 million for the six months ended June 30, 2017, in the previous presentation, as compared to the current presentation.

3. Real estate facilities

The activity in real estate facilities for the six months ended June 30, ~~2018 is~~2019 was as follows (in thousands):



			Buildings and		Accumulated
	Land		Improvements		Depreciation		Total
Balances at December 31, 2018 ⁽¹⁾	$	762,731	$	2,157,407	$	(1,097,748)	$	1,822,390
Acquisition of real estate facility		9,668		3,978		—		13,646
Capital expenditures		—		17,722		—		17,722
Disposals ⁽²⁾		—		(7,184)		7,184		—
Depreciation and amortization expense		—		—		(48,598)		(48,598)
Transfer to properties held for sale		—		(642)		4,055		3,413
Balances at June 30, 2019	$	772,399	$	2,171,281	$	(1,135,107)	$	1,808,573

____________________________

Buildings and

Accumulated

Land

Improvements

Depreciation

Total
Balances at December 31, 2017 (1)
$
769,036

$
2,156,862

$
(1,161,798)

$
1,764,100
Acquisition of real estate facility

25,806

112,230

—

138,036
Consolidation of joint venture

21,814

85,436

—

107,250
Capital expenditures

—

15,279

—

15,279
Disposals (2)

—

(7,247)

7,247

—
Depreciation and amortization expense

—

—

(47,508)

(47,508)
Transfer to properties held for sale

—

(351)

69

(282)
Balances at June 30, 2018
$
816,656

$
2,362,209

$
(1,201,990)

$
1,976,875

~~____________________________~~

⁽¹⁾

Land, building and improvements, and accumulated depreciation, respectively, totaling $1.3 million, $9.7 million, and $7.2 million were reclassified as of December 31, 2017 to “properties held for sale, net,” representing a 194,000 rentable square foot flex business park located in Dallas, Texas.

⁽²⁾

~~Disposals primarily represent the book value of tenant improvements that have been removed upon the customer vacating their space.~~

⁽¹⁾Land, building and improvements, and accumulated depreciation, respectively, totaling $53.9 million, $217.5 million and $143.3 million were reclassified as of December 31, 2018 to “properties held for sale, net” representing 1.3 million rentable square feet of flex and office business parks located in Rockville and Silver Spring, Maryland.

⁽²⁾Disposals primarily represent the book value of tenant improvements that have been removed upon the customer vacating their space.

As of June 30, 2019, we have commitments, pursuant to executed leases throughout our portfolio, to spend $8.9 million on transaction costs, which include tenant improvements and lease commissions.

The purchase price of acquired properties is allocated to land, buildings and improvements (including tenant improvements, unamortized lease commissions, acquired in-place lease values and customer relationships, if any), intangible assets and intangible liabilities (see Note 2), based upon the relative fair value of each component, which are evaluated independently.

We must make significant assumptions in determining the fair value of assets acquired and liabilities assumed, which can affect the recognition and timing of revenue and depreciation and amortization expense. The fair value of land is estimated based upon, among other considerations, comparable sales of land within the same region. The fair value of buildings and improvements, tenant improvements and unamortized lease commissions are based on current market replacement costs and other available market information. The amount recorded to acquired in-place leases is determined based on management’s assessment of current market conditions and the estimated lease-up periods for the respective spaces. Transaction costs related to asset acquisitions are capitalized.

On April 18, 2019, we acquired a multi-tenant industrial park comprised of approximately 74,000 rentable square feet in Signal Hill, California, for a total purchase price of $13.8 million.

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On June 8, 2018, we acquired two multi-tenant industrial parks aggregating 1.1 million rentable square feet in Springfield, Virginia, for a ~~net~~ purchase price of ~~$143.8~~$143.8 million.

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The following table summarizes the assets acquired and liabilities assumed ~~related to the asset acquisition during~~for the six months ended June 30, ~~2018~~ (in thousands):



~~Land~~	$	~~25,806~~
~~Buildings and improvements~~		~~112,230~~
~~Other assets (above-market in-place rents)~~		~~1,487~~
~~Accrued and other liabilities (below-market in-place rents)~~		~~(1,790)~~
~~Other assets (in-place lease value)~~		~~6,033~~
~~Total purchase price~~		~~143,766~~
~~Net operating assets acquired and liabilities assumed~~		~~(1,367)~~
~~Total cash paid~~	$	~~142,399~~



	2019		2018
Land	$	9,668	$	25,806
Buildings and improvements		3,978		112,230
Other assets (above-market in-place rents)		—		1,487
Accrued and other liabilities (below-market in-place rents)		(212)		(1,790)
Other assets (in-place lease value)		390		6,033
Total purchase price		13,824		143,766
Net operating assets acquired and liabilities assumed		(88)		(1,367)
Total cash paid	$	13,736	$	142,399

We have a 95.0% interest in a 395-unit multifamily apartment complex on a five-acre site within the Company’s 628,000 square foot office park located in Tysons, Virginia. An unrelated real estate development company (the “JV Partner”) holds the remaining 5.0%. On January 1, 2018, we began to consolidate our joint venture due to changes to the joint venture agreement that gave the Company control of the joint venture.

The following table summarizes the assets acquired and liabilities assumed related to the consolidation of the joint venture, which was accounted for as an asset acquisition, as of January 1, 2018 ~~(see Note 4 below)~~ (in thousands):



~~Land~~	$2018		~~21,814~~
Land	$	21,814
Buildings and improvements		~~85,436~~ 84,903
Other assets (in-place lease value)		1,199
Total consolidated joint venture		~~108,449~~ 107,916
Noncontrolling interest in consolidated joint venture		(4,032)
Net book value of joint venture at consolidation	$	~~104,417~~ 103,884

~~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 $6.5~~million. We received net proceeds of $3.9 million, of which $1.5 million was received in prior years and $2.4 million was received in March, 2017. The Company recorded a gain of $3.9 million related to the net proceeds received through June 30, 2017, which are non-refundable. The Company reported an additional gain of $2.5~~million when the final proceeds were received in the fourth quarter of 2017 and the remaining contingencies had lapsed.~~

~~As of June 30, 2018, we have commitments, pursuant to executed leases, to spend $14.3 million on transaction costs, which include tenant improvements and lease commissions.~~

Properties Sold and Held for Sale

We plan to sell 1.3 million rentable square feet of flex and office business parks located in Rockville and Silver Spring, Maryland, and expect to complete the sale within the next year. We determined that the sale did not meet the criteria for discontinued operations presentation, as the plan to sell did not represent a strategic shift that will have a major effect on our operations and financial results. As a result of this classification, the assets of the properties are separately presented as held for sale in the consolidated balance sheet as of December 31, 2018.

On March 5, 2018, we sold Corporate Pointe Business Park, a park consisting of five multi-tenant office buildings totaling 161,000 square feet located in Orange County, California, for net sale proceeds of $41.7 million, which resulted in a gain of $26.8 million.

On April 18, 2018, we sold Orange County Business Center, a park consisting of five multi-tenant office buildings totaling 437,000 square feet located in Orange County, California, for net sale proceeds of $73.3 million, which resulted in a gain of $50.6 million.

On April 30, 2018, we sold Northgate Business Park, a park consisting of seven multi-tenant flex buildings totaling 194,000 square feet located in Dallas, Texas, for net sale proceeds of $11.8 million, which resulted in a gain of $7.9 million.

~~Each of~~ We determined that these facilities sold during the six months ended June 30, 2018 were included in “properties held for sale, net” as of December 31, 2017, along with 107,000 rentable square feet of office product located in Orange County, California, included in “properties held for sale, net” as of June 30, 2018 which we expect to sell during the remainder of 2018.

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~~4. Investment in and advances to unconsolidated joint venture~~

In 2013, the Company entered into a joint venture known as Amherst JV LLC with an unrelated real estate development company (the “JV Partner”) for the purpose of developing a 395-unit multi-family building on 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% interest in the joint venture with the remaining 5.0% held by the JV Partner. The JV Partner was responsible for the development and construction of the Project, and has been and continues to be responsible for the leasing and operational management of the Project. Prior to January 1, 2018, wesales also did not ~~control~~meet the ~~joint venture, when considering, among other factors, that the consent of our JV Partner was required~~criteria for all significant decisions. Accordingly, we previously accounted for our investment using the equity method. On January 1, 2018, we began to consolidate the joint venture due to changes to the joint venture agreement that gave the Company control of the joint venture.discontinued operations presentation.

On October 5, 2015, the Company contributed the site and improvements to the joint venture. We provided 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 were $105.4 million (excluding unrealized land appreciation). The Project delivered its first completed units in May, 2017 and was substantially completed during the fourth quarter of 2017.

At December 31, 2017, we 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 $100.9 million as of December 31, 2017.

During the three and six months ended June 30, 2017, the Company recorded an equity loss in the unconsolidated joint venture of $382,000, comprised of a net operating loss of $278,000 and depreciation expense of $104,000.

5.4. Leasing activity

The Company leases space in its commercial real estate facilities to customers primarily under non-cancelable leases generally ranging from one to 10 years. Future minimum rental income, excluding recovery of operating expenses under these leases, ~~are~~is as follows as of June 30, ~~2018~~ 2019 (in thousands):
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Remainder of 2018	$	147,982
2019		252,260
Remainder of 2019			$	144,071
2020		177,679		243,799
2021		125,550		182,849
2022		87,908		126,476
2023				85,682
Thereafter		137,956		121,267
Total (1)	$	929,335	$	904,144

____________________________

⁽¹⁾

~~Excludes future minimum rental income from an asset held for sale.~~

⁽¹⁾Excludes future minimum rental income from assets held for sale.

In addition to minimum rental payments, certain customers reimburse the Company for their pro rata share of specified property operating expenses. Such reimbursements amounted to ~~$23.0~~$24.0 million and ~~$22.7~~$23.0 million for the three months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~$46.2~~$49.0 million and ~~$45.9~~$46.2 million for the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. These variable lease payment amounts are included as rental income in the accompanying consolidated statements of income.

Leases accounting for ~~2.9%~~3.3% of total leased square footage are subject to termination options, of which ~~1.2%~~1.4% of total leased square footage have termination options exercisable through December 31, ~~2018.~~2019. In general, these leases provide for termination payments to us should the termination options be exercised. Certain leases also have an option to extend the terms of the lease. The future minimum rental income in the above table assumes ~~such~~termination options and lease extension options are not exercised.

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6.5. Bank loans

We have a revolving 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 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% of the borrowing limit depending on the Company’s credit ratings (currently 0.125%). We had ~~$10.0 million~~no balance outstanding on our Credit Facility at June 30, ~~2018, which we repaid during July, 2018. We had no balance outstanding on our Credit Facility at~~2019 and December 31, ~~2017.~~2018. The Company had ~~$806,000~~$576,000 and ~~$921,000~~$691,000 of total unamortized loan origination costs as of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, 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 June 30, ~~2018.~~2019. Interest on outstanding borrowings is payable monthly.

7.6. Noncontrolling interests

Noncontrolling interests represent (i) PS’s noncontrolling interest in the OP through its ownership of 7,305,355 common partnership units, totaling ~~$214.7~~$213.4 million and $215.1 million at June 30, ~~2018 ($196.6 million at~~2019 and December 31, ~~2017)~~2018, respectively, and (ii) ~~a third-party~~the JV Partner’s 5.0% interest in a joint venture owning a 395-unit ~~multi-family~~multifamily apartment complex, totaling ~~$3.2~~$3.0 million at June 30, ~~2018 (none at~~2019 and December 31, ~~2017).~~2018.

PS OP Interests

Each common partnership unit receives a cash distribution equal to the dividend paid on our common shares 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 redeemed 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.

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In 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, totaling ~~$18.8~~$7.6 million and ~~$6.6~~$18.8 million for the three months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~$31.1~~$14.6 million and ~~$13.7~~$31.1 million for the six months ended June 30, 2019 and 2018, ~~and 2017,~~ respectively.

~~Joint Venture Interest~~JV Partner

In conjunction with consolidating the joint venture on January 1, 2018, we recorded noncontrolling interest of $4.0 million related to ~~a third-party’s~~the JV Partner’s 5.0% interest in a joint venture owning a 395-unit ~~multi-family~~multifamily apartment complex. A total of ~~$383,000~~$10,000 in income and ~~$819,000~~$383,000 in loss was allocated to the ~~joint venture interest~~JV Partner during the three months ended June 30, 2019 and 2018, respectively, and $13,000 in income and $819,000 in loss for the six months ended June 30, 2019 and 2018, respectively. Distributions of $45,000 were paid to the JV Partner during the three and six months ended June 30, ~~2018, respectively,~~2019 and ~~no distributions~~none were paid ~~to the joint venture interest.~~during 2018.

8.7. Related party transactions

We manage certain industrial, office and retail facilities in the United States for PS under either the “Public Storage” or “PS Business Parks” names (the “PS Management Agreement”). 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.~~revenues, which is included in “interest and other income” on our consolidated statements of income. Management fee revenues were ~~$112,000~~$72,000 and ~~$124,000~~$112,000 for the three months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~$238,000~~$150,000 and ~~$252,000~~$238,000 for the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. We allocate certain operating expenses to PS related to the management of these properties, including payroll and other

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business expenses, totaling ~~$121,000~~$91,000 and ~~$130,000~~$121,000 for the three months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~$275,000~~$193,000 and ~~$267,000~~$275,000 for the six months ended June 30, 2019 and 2018, ~~and 2017,~~ 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 provides us property management services for the self-storage component of two assets we own and operates them 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, and property maintenance and other operational activities, including the selection of vendors, suppliers, employees and independent contractors. Management fee expenses were ~~$24,000~~$25,000 and ~~$23,000~~$24,000 for the three months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~$47,000~~$49,000 and ~~$45,000~~$47,000 for the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. Additionally, PS allocated certain operating expenses to us related to the management of these properties totaling ~~$18,000~~$19,000 and ~~$14,000~~$18,000 for the three months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~$35,000~~$37,000 and ~~$29,000~~$35,000 for the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. These amounts are included under “cost of operations” on our consolidated statements of income.

Pursuant to a cost sharing agreement, we share certain administrative services, corporate office space, and certain other third party costs with PS which are allocated based upon fair and reasonable estimates of the cost of the services expected to be provided. We reimbursed PS ~~$185,000~~$168,000 and ~~$159,000~~$409,000 for costs PS incurred on our behalf for the three months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~$415,000~~$420,000 and ~~$317,000~~$639,000 for the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. PS reimbursed us ~~$10,000~~$9,000 and ~~$8,000~~$10,000 for costs we incurred on their behalf for the three months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~$19,000~~$17,000 and ~~$15,000~~$19,000 for the six months ended June 30, 2019 and 2018, ~~and 2017,~~ respectively.

The Company had net amounts due to PS of ~~$133,000 and $245,000~~$127,000 at June 30, ~~2018~~2019 and due from PS of $43,000 at December 31, ~~2017, respectively,~~2018 for these contracts, as well as ~~for~~ certain operating expenses paid by the Company on behalf of PS.

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8. Shareholders’ equity

Preferred stock

As of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company had the following series of preferred stock outstanding:



		Earliest Potential	Dividend	Shares	Amount
Series	Issuance Date	Redemption Date	Rate	Outstanding	(in thousands)
Series U	September, 2012	September, 2017	5.75%	9,200	$	230,000
Series V	March, 2013	March, 2018	5.70%	4,400		110,000
Series W	October, 2016	October, 2021	5.20%	7,590		189,750
Series X	September, 2017	September, 2022	5.25%	9,200		230,000
Series Y	December, 2017	December, 2022	5.20%	8,000		200,000
Total				38,390	$	959,750

On January 3, 2018, we completed the redemption of our remaining 6.00% Cumulative Preferred Stock, Series T, at par of $130.0 million. We recorded a Preferred Redemption Allocation of $4.1 million in the three months ended December 31, 2017 and reclassified the shares from equity to “preferred stock called for redemption” on our consolidated balance sheets at December 31, 2017.

We paid $13.0 ~~million and $12.6~~ million in distributions to our preferred shareholders for each of the three months ended June 30, 2019 and 2018, and ~~2017, respectively,~~$25.9 million and $26.7 ~~million and $25.9~~ million in distributions to our preferred shareholders for the six months ended June 30, 2019 and 2018, ~~and 2017,~~ respectively.

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The holders of our preferred stock have general preference rights with respect to liquidation, quarterly distributions and any accumulated unpaid distributions. Holders of our 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 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 June 30, ~~2018,~~2019, there were no dividends in arrears.

Except under certain conditions relating to the Company’s qualification as a REIT, the preferred stock is not redeemable prior to the ~~previously~~redemption 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.

Common stock and units

We paid ~~$23.2~~$28.8 million ($~~0.85~~1.05 per common share) and ~~$23.1~~$23.2 million ($0.85 per common share) in distributions to our common shareholders for the three months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~$46.4~~$57.5 million ($~~1.70~~2.10 per common share) and ~~$46.2~~$46.4 million ($1.70 per common share) in distributions to our common shareholders for the six months ended June 30, 2019 and 2018, respectively.

We paid $7.7 million ($1.05 per common unit) and ~~2017,~~$6.2 million ($0.85 per common unit) in distributions to our common unit holders for the three months ended June 30, 2019 and 2018, respectively, and $15.3 million ($2.10 per common unit) and $12.4 million ($1.70 per common unit) in distributions to our common unit holders for the six months ended June 30, 2019 and 2018, respectively.

Equity stock

~~In addition to common and preferred stock, the~~The Company is authorized 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. As of June 30, 2019 and December 31, 2018, no equity stock had been issued.

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9. Commitments and contingencies

We are a party to various legal proceedings and subject to various claims and complaints; however, we believe that the likelihood of these contingencies resulting in a material loss to the Company, either individually or in the aggregate, is remote.

~~11.~~10. Stock compensation

Under various share-based compensation plans, PSB grants non-qualified options to purchase the Company’s common shares 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) the 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~~RSUs vests.

We account for forfeitures of share-based payments as they occur by reversing previously amortized share-based compensation expense with respect to grants that are forfeited in the period the employee terminates employment.

We amortize 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 is amortized on a straight-line basis over the service period. For awards with performance conditions, the individual cost of each vesting is amortized separately over each individual service period (the “accelerated attribution” method).

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Stock Options

Stock options expire 10 years after the grant date 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 on the date of grant.

For the three and six months ended June 30, ~~2018,~~2019, respectively, we recorded ~~$64,000~~$61,000 and ~~$117,000~~$118,000 in compensation expense related to stock options as compared to ~~$54,000~~$64,000 and ~~$103,000~~$117,000 for the same periods in ~~2017.~~2018.

During the six months ended June 30, ~~2018, 16,000~~2019, 14,000 stock options were granted, ~~and 20,136~~11,179 options were ~~exercised.~~exercised and 4,000 options were forfeited. A total of ~~168,273~~142,236 and 143,415 options were outstanding at June 30, ~~2018 (172,409 at~~2019 and December 31, ~~2017).~~ 2018, respectively.

Restricted Stock Units

RSUs granted prior to 2016 are subject to a six-year vesting, with 20% vesting after year two, and 20% vesting after each of the next four years. RSUs granted during and subsequent to 2016 are subject to a five-year vesting at the rate of 20% per year. The grantee receives dividends for each outstanding RSU equal to the per share dividend received by common shareholders. We expense any dividends previously paid upon forfeiture of the related RSU. Upon vesting, the grantee receives common shares equal to the number of vested RSUs, less common shares withheld in exchange for tax ~~deposits~~withholdings made by the Company to satisfy the grantee’s statutory tax liabilities arising from the vesting. The fair value of our RSUs is determined based upon the applicable closing trading price of our common shares on the date of grant.

For the three and six months ended June 30, 2018, respectively, we recorded $556,000 and $1.6 million in compensation expense related to RSUs as compared to $1.4 million and $3.4 million for the same periods in 2017.

During the six months ended June 30, 2018, 176,950 RSUs were granted, 97,183 RSUs vested and 10,140 RSUs were forfeited. This vesting resulted in the issuance of 57,091 common shares. In addition, tax deposits totaling $4.5 million ($3.4 million for the same period in 2017) were made on behalf of employees in exchange for 40,092 common shares withheld upon vesting. A total of 234,710 RSUs were outstanding at June 30, 2018 (165,083 at December 31, 2017).

Effective March, 2014, the Company entered into a performance-based ~~restricted stock unit~~RSU program, the Senior Management Long-Term Equity Incentive Program for 2014-2017 (“LTEIP”), with certain employees of the Company. Under the LTEIP, the Company established three levels of targeted ~~restricted stock unit~~RSU 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 iswas 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

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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 iswas not achieved for an annual award, the ~~restricted stock units~~RSUs allocated to be awarded for such year ~~are~~were added to the ~~restricted stock units~~RSUs that may be received if the four-year target iswas achieved. All ~~restricted stock unit~~RSU awards under the LTEIP vest in four equal annual installments beginning from the date of award. Up to 94,150 restricted stock units would be awarded for each of the four years assuming achievement was met and up to 81,800 restricted stock units would be awarded for the cumulative four-year period assuming achievement was met. Compensation expense is recognized based on the ~~restricted stock units~~RSUs expected to be awarded based on the target level that is expected to be achieved. The compensation expense and RSU counts with respect to the LTEIP are included in the aggregate RSU amounts disclosed above. Senior management earned 145,350 shares of ~~restricted stock units~~RSUs granted in March, 2018 as the maximum targets were achieved for both the year ended December 31, 2017 and for the cumulative four-year period.

For the three and six months ended June 30, 2019, respectively, we recorded $797,000 and $1.7 million in compensation expense related to RSUs as compared to $556,000 and $1.6 million for the same periods in 2018.

During the six months ended June 30, 2019, 1,000 RSUs were granted, 83,880 RSUs vested and 1,460 RSUs were forfeited. Tax withholdings totaling $5.5 million were made on behalf of employees in exchange for 35,404 common shares withheld upon vesting for the six months ended June 30, 2019 resulting in the issuance of 48,476 common shares. Tax withholdings totaling $4.5 million were made on behalf of employees in exchange for 40,092 common shares withheld upon vesting for the six months ended June 30, 2018 resulting in the issuance of 57,091 common shares. A total of 158,950 and 243,290 RSUs were outstanding at June 30, 2019 and December 31, 2018, respectively.

Pursuant to the existing Retirement Plan for Non-Employee Directors, we issued 8,000 shares to a director upon retirement during the six months ended June 30, 2019. Compensation expense for these shares was previously expensed. The aggregate fair value of such shares was $1.2 million. No shares were issued during the six months ended June 30, 2018.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS

Forward-Looking Statements: Forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, are made throughout this Quarterly Report on Form 10-Q. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “may,” “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” “intends” and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including but not limited to: (a) changes in general economic and business conditions; (b) decreases in rental rates or increases in vacancy rates/failure to renew or replace expiring leases; (c) tenant defaults; (d) the effect of the recent credit and financial market conditions; (e) our failure to maintain our status as a REIT under the Internal Revenue Code of 1986, as ~~amended;~~amended (the “Code”); (f) the economic health of our customers; (g) increases in operating costs; (h) casualties to our properties not covered by insurance; (i) the availability and cost of capital; (j) increases in interest rates and its effect on our stock price; and (k) other factors discussed under the heading “Part I, Item 1A. Risk Factors” in our annual report on Form 10-K for the year ended December 31, ~~2017.~~2018. 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.

Critical Accounting Policies and Estimates:

Our accounting policies are described in Note 2 to the consolidated financial statements included in this Form 10-Q. We believe our critical accounting policies relate to income tax expense, accounting for acquired real estate facilities, allowance for doubtful accounts, impairment of long-lived assets, and accrual for uncertain and contingent liabilities, each of which are more fully discussed below.

Income Tax Expense: We have elected to be treated as a REIT, as defined in the ~~Internal Revenue Code of 1986, as amended (the “Code”).~~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~~shown in our consolidated financial statements.

Accounting for Acquired Real Estate Facilities: We estimate the fair ~~values~~value 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 customer 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.

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Allowance for Doubtful Accounts: Customer receivables consist primarily of amounts due for contractual lease payments, reimbursements of common area maintenance expenses, property taxes and other expenses recoverable from customers. 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

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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.~~materially different.

Business Overview

Our overall operating results are impacted primarily by the performance of our existing real estate facilities, which at June 30, ~~2018 are~~2019 were comprised of 28.3 million rentable square feet of primarily multi-tenant industrial, flex and office properties concentrated in six states and a 95.0% interest in a 395-unit ~~multi-family~~multifamily apartment complex. Our multi-tenant commercial properties are located in markets that have experienced long-term economic growth with a particular concentration on ~~small-and~~small- and medium-size customers. Accordingly, a significant degree of management attention is paid to maximizing the cash flow from our existing real estate portfolio. Also, our strong and conservative capital structure allows us the flexibility to ~~leverage~~use debt and equity capital prudently to fund our growth, which allows us toacquire properties we believe will create long-term value. From time to time we sell properties which no longer fit ~~within~~ the Company’s strategic objectives.

We had 7.6 million rentable square feet that we reclassified from “flex” space in our December 31, 2017 annual report to “industrial” space at January 1, 2018 based upon a critical review of our properties’ office to warehouse ratio. We believe the reclassification will assist investors to better understand our business operations.

Existing Real Estate Facilities: The operating results of our 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 ~~expenditures~~expenditure requirements. We strive to maintain high occupancy levels while increasing rental rates and minimizing capital expenditures when market conditions allow, 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, 2017 Form 10-K, include~~includes incentivizing our personnel to maximize the return on investment for each lease transaction and providing a superior level of service to our ~~customers.~~customers, are described in more detail in our Annual Report on Form 10-K for the year ended December 31, 2018.

Acquisitions of Real Estate Facilities: We ~~also~~ seek to grow our ~~operations~~portfolio through acquisitions of facilities generally consistent with the Company’s focus on owning concentrated business parks with easily configurable space and in markets and product types with favorable long-term return potential.

On April 18, 2019, we acquired a multi-tenant industrial park comprised of approximately 74,000 rentable square feet in Signal Hill, California, for a total purchase price of $13.8 million. The portfolio consists of eight buildings and was 98.4% occupied as of the date of the acquisition. The eight buildings are located in the Signal Hill industrial submarket where we already own five industrial parks totaling 268,000 square feet.

On June 8, 2018, we acquired two multi-tenant industrial parks aggregating 1.1 million rentable square feet in Springfield, Virginia, for a ~~net~~ purchase price of $143.8 million. The portfolio consists of 19 buildings and was 76.1% occupied as of the date of acquisition. The 19 buildings are located in the Springfield/Newington industrial submarket where we already own three industrial parks totaling 606,000 square feet.

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We continue to seek to acquire additional facilities in our existing markets and generally

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in close 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 feet on 44.5 acres of land) located within an area known as The Mile in Tysons, Virginia. We demolished one of our existing office buildings at The Mile and built a 395-unit ~~multi-family~~multifamily building (“Highgate”) at a cost, including the estimated fair value of existing land, of ~~$115.9~~$115.4 million.

While ~~multi-family~~multifamily real estate is not a core asset class for us, we determined that ~~multi-family~~multifamily real estate represented a unique opportunity and the highest and best use of ~~this~~that parcel. We have partnered through a joint venture with a local developer and operator of ~~multi-family space~~multifamily properties in order to leverage their development and operational experience. See “Analysis of ~~Operating~~Net Income – ~~Multi-Family”~~Multifamily” below and ~~Notes~~Note 3 ~~and 4~~ to our consolidated financial statements for more information on Highgate.

We commenced consolidating Highgate beginning January 1, 2018. Prior to January 1, 2018, we accounted for our investment in the joint venture using the equity method and accordingly, reflected our share of net loss under “equity in loss of unconsolidated joint venture.”

We have an additional 123,000 square foot vacant office building located within The Mile that we are seeking to demolish in order to construct another ~~multi-family~~multifamily property 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 entitlements. We do not expect that development will commence any earlier than ~~the fourth quarter of 2019.~~mid-2020.

Sales of Real Estate Facilities: We may from time to time sell individual real estate facilities based on market conditions, fit with our existing portfolio, evaluation of long-term potential returns of markets or product types, or other reasons.

WeAs of June 30, 2019, we have ~~107,000~~1.3 million rentable square feet of flex and office ~~product~~business parks located in ~~Orange County, California,~~Rockville and Silver Spring, Maryland, held for sale, ~~as of June 30, 2018~~ and expect to complete the sale ~~during~~within the ~~remainder of 2018.~~next year. The operations of the facilities we sold and expect to sell are presented below under “assets sold or held for sale.”

Certain Factors that May Impact Future Results

Impact of Inflation: Although inflation has not been significant in recent years, an increase in inflation could impact our future results, and the Company continues to seek ways to mitigate its potential impact. A substantial portion of the Company’s leases require customers to pay operating expenses, including real estate taxes, utilities and insurance, as well as increases in common area expenses, partially reducing the Company’s exposure to inflation during each lease’s respective lease period.

Regional Concentration: Our portfolio is concentrated in eight regions, in six states. We have chosen to concentrate in these regions because we believe they have characteristics which enable them to be competitive economically, such as above average population growth, job growth, higher education levels and personal ~~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.

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Industry and Customer Concentrations: We seek to minimize the risk of industry or customer concentrations. As of June 30, ~~2018,~~2019, excluding ~~asset~~assets held for sale, leases from our top 10 customers comprised ~~10.0%~~9.5% of our annualized rental income, with only one customer, the U.S. Government (4.2%), representing more than 1%. In terms of industry

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concentration, ~~18.4%~~19.5% of our annualized rental income comes from business ~~services; 11.4%~~services, 12.3% from warehouse, distribution, transportation and ~~logistics;~~logistics, and ~~10.3%~~11.1% from computer hardware, software and related services. No other industry group represents more than 10% of our annualized rental income.

Customer 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~~in any year over the last ~~six~~seven years. However, there can be no assurance that ~~write offs~~write-offs may not increase because there is inherent uncertainty in a customer’s ability to continue paying rent and meet its full lease obligation. As of July ~~23, 2018,~~22, 2019, we had ~~53,000~~95,000 square feet of leased space occupied by ~~a customer~~two customers that are protected by Chapter 11 of the U.S. Bankruptcy Code. From time to time, customers contact us, requesting early termination of their lease, reductions in space leased, or rent deferment or ~~abatement.~~ abatement, which we are not obligated to grant but will consider under certain circumstances.

Net Operating Income

We utilize net operating income (“NOI”), a measure that is not defined in accordance with U.S. generally accepted accounting principles (“GAAP”), to evaluate the operating 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.parks. We define NOI as rental income less adjusted cost of operations. Adjusted ~~Cost~~cost of Operations (described below). NOI excludes depreciation and amortization expense because management and investors do not consider it important in valuing real estate or evaluating real estate performance since depreciation and amortization expense 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 Cost of Operations~~operations represents cost of operations, excluding ~~LTEIP amortization,~~stock compensation expense, which can vary significantly period to period based upon the performance of the ~~whole company, rather than just property operations.~~ company.

We believe NOI assists investors in analyzing the performance and value of our business parks by excluding (i) corporate overhead (i.e., general and administrative expense) because it does not relate to the direct operating performance of our business parks (ii) depreciation and amortization expense because it does not accurately reflect changes in the fair value of our business parks and (iii) stock compensation expense because this expense item can vary significantly from period to period and thus impact comparability across periods. The Company’s calculation of NOI and ~~Adjusted Cost~~adjusted cost of ~~Operations~~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.

Beginning January 1, 2019, the Company has recorded our divisional vice presidents’ compensation costs within general and administrative expense, as we determined that the nature of these individuals’ responsibilities is more consistent with corporate oversight as opposed to direct property operations. As a result of this change, we have reclassified our divisional vice presidents’ compensation costs totaling $460,000 for the three months ended June 30, 2018, consisting of $305,000 of compensation costs and $155,000 of stock compensation expense, and compensation costs totaling $1.0 million for the six months ended June 30, 2018, consisting of $690,000 of compensation costs and $314,000 of stock compensation expense, from cost of operations into general and administrative expense on our consolidated statements of income in the three and six months ended June 30, 2018 in order to conform to the current periods’ presentation.

See “Analysis of ~~operating~~net income” below for reconciliations of each of these measures to their closest analogous GAAP measure onfrom our consolidated statements of income. ~~Adjusted Cost of Operations is reconciled to cost of operations and Net Operating Income is reconciled to operating income.~~

Results of Operations

Operating Results Overview: Three and Six Months Ended June 30, 2019 and 2018

For the three months ended June 30, 2019, net income allocable to common shareholders was $28.6 million or $1.04 per diluted share, compared to $70.2 million or $2.56 per diluted share for the same period in 2018. The decrease was mainly due to the gain on sale of real estate facilities sold during the second quarter of 2018 that did not recur in the second quarter of 2019 partially offset by a $5.3 million increase in NOI with respect to our real estate facilities. The increase in NOI includes a $3.4 million, or 5.2%, increase attributable to our Same Park facilities (described below) due to higher rental income per occupied square foot, combined with increased NOI from our Non-Same Park and multifamily assets, partially offset by reduced NOI generated from facilities sold in 2018 as well as assets held for sale as of June 30, 2019.

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For the six months ended June 30, 2019, net income allocable to common shareholders was $54.9 million or $2.00 per diluted share, compared to $116.3 million or $4.24 per diluted share for the same period in 2018. The decrease was mainly due to the gain on sale of real estate facilities sold during the first half of 2018 that did not recur in 2019 partially offset by an $8.1 million increase in NOI with respect to our real estate facilities. The increase in NOI includes a $6.2 million, or 4.8%, increase attributable to our Same Park facilities due to higher rental income per occupied square foot, combined with increased NOI from our Non-Same Park and multifamily assets, partially offset by reduced NOI generated from facilities sold in 2018.

Analysis of Net Income

Our net income is comprised primarily of our real estate operations, depreciation and amortization expense, general and administrative expense, interest and other income, interest and other expenses and gain on sale of real estate facilities.

We segregate our real estate activities into (a) same park operations, representing all operating properties acquired prior to January 1, ~~2016,~~2017, comprising ~~26.9~~25.8 million rentable square feet of our 28.3 million in rentable square feet at June 30, ~~2018~~2019 (the “Same Park” facilities), (b) non-same park operations, representing those facilities we own that were acquired after January 1, ~~2016~~2017 (the “Non-Same Park” facilities), (c) ~~multi-family~~multifamily operations and (d) assets sold or held for sale, representing ~~facilities whose existing operations are no longer part~~approximately 1.3 million square feet of ~~our ongoing operations, because they were sold or are expected to be sold.~~

~~Operating Results Overview: Three and Six Months Ended~~assets held for sale as of June 30, ~~2018 and 2017~~

~~For the three months ended June 30, 2018, net income allocable~~2019 as well as operating results related to ~~common shareholders was $70.2 million or $2.56 per diluted share, compared to $24.7 million or $0.90 per diluted share for the same period in 2017.~~ ~~The increase was mainly due to a gain on sale of an office park in Orange County, California and an industrial park in Dallas, Texas during the second quarter of 2018.~~

For the six months ended June 30, 2018, net income allocable to common shareholders was $116.3 million or $4.24 per diluted share, compared to $51.1 million or $1.87 per diluted share for the same period in 2017. ~~The increase was mainly due to a gain on sale~~899,000 square feet of assets sold in ~~2018 and a $2.2 million increase in NOI with respect to our real estate facilities. The increase in NOI includes a $1.9 million increase for our Same Park facilities due to higher rental income~~2018.

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per occupied square foot and higher occupancy, $1.2 million of NOI from our multi-family asset and $1.0 million increase for our Non-Same Park facilities partially offset by reduced NOI with respect to facilities we sold.

~~We analyze our net income in this discussion analysis in two main sections: operating income and all other components of net income.~~

~~Analysis of Operating Income~~

~~Our operating income is comprised primarily of our real estate operations, depreciation and amortization expense and general and administrative expenses.~~

The table below sets forth the various components of our ~~operating~~net income (in thousands):

For the Three Months

For The Six Months

Ended June 30,

Ended June 30,

2018

2017

Change

2018

2017

Change
RENTAL INCOME

Same Park
$
97,760

$
95,464

2.4%

$
195,782

$
191,220

2.4%
Non-Same Park

1,336

314

325.5%

1,944

605

221.3%
Multi-family

1,738

—

100.0%

3,162

—

100.0%
Assets sold or held for sale (1)

990

4,022

(75.4%)

4,695

8,036

(41.6%)
Total rental income

101,824

99,800

2.0%

205,583

199,861

2.9%

COST OF OPERATIONS

Adjusted Cost of Operations (2)

Same Park

28,865

28,008

3.1%

58,900

56,222

4.8%
Non-Same Park

564

270

108.9%

924

624

48.1%
Multi-family

973

—

100.0%

1,970

—

100.0%
Assets sold or held for sale (1)

550

1,565

(64.9%)

1,803

3,234

(44.2%)
LTEIP amortization

304

407

(25.3%)

659

1,203

(45.2%)
Total cost of operations

31,256

30,250

3.3%

64,256

61,283

4.9%

OPERATING INCOME

Net operating income (3)

Same Park

68,895

67,456

2.1%

136,882

134,998

1.4%
Non-Same Park

772

44

1,654.5%

1,020

(19)

5,468.4%
Multi-family

765

—

100.0%

1,192

—

100.0%
Assets sold or held for sale (1)

440

2,457

(82.1%)

2,892

4,802

(39.8%)
LTEIP amortization

(304)

(407)

(25.3%)

(659)

(1,203)

(45.2%)
Depreciation and amortization

(24,416)

(23,628)

3.3%

(48,298)

(46,706)

3.4%
General and administrative

(2,368)

(2,443)

(3.1%)

(4,674)

(5,274)

(11.4%)
Operating income
$
43,784

$
43,479

0.7%

$
88,355

$
86,598

2.0%



	For the Three Months					For The Six Months
	Ended June 30,					Ended June 30,
	2019		2018		Change	2019		2018		Change
Rental income
Same Park ⁽¹⁾	$	95,945	$	91,942	4.4%	$	191,638	$	183,620	4.4%
Non-Same Park		3,429		627	446.9%		5,910		627	842.6%
Multifamily		2,475		1,738	42.4%		4,973		3,162	57.3%
Assets sold or held for sale ⁽²⁾		5,933		7,517	(21.1%)		13,086		18,174	(28.0%)
Total rental income		107,782		101,824	5.9%		215,607		205,583	4.9%

Cost of operations ⁽³⁾
Adjusted cost of operations ⁽⁴⁾
Same Park		26,947		26,366	2.2%		55,389		53,588	3.4%
Non-Same Park		1,024		224	357.1%		2,167		224	867.4%
Multifamily		1,002		973	3.0%		2,073		1,970	5.2%
Assets sold or held for sale ⁽²⁾		2,192		2,899	(24.4%)		4,823		6,763	(28.7%)
Stock compensation expense ⁽⁵⁾		295		334	(11.7%)		601		707	(15.0%)
Total cost of operations		31,460		30,796	2.2%		65,053		63,252	2.8%

Net operating income ⁽⁶⁾
Same Park		68,998		65,576	5.2%		136,249		130,032	4.8%
Non-Same Park		2,405		403	496.8%		3,743		403	828.8%
Multifamily		1,473		765	92.5%		2,900		1,192	143.3%
Assets sold or held for sale ^{(2) (7)}		3,741		4,618	(19.0%)		8,263		11,411	(27.6%)
Stock compensation expense ⁽⁵⁾		(295)		(334)	(11.7%)		(601)		(707)	(15.0%)
Depreciation and amortization expense		(24,768)		(24,416)	1.4%		(49,643)		(48,298)	2.8%
General and administrative expense ⁽³⁾		(2,827)		(2,828)	(0.0%)		(6,060)		(5,678)	6.7%
Interest and other income		764		294	159.9%		1,382		578	139.1%
Interest and other expense		(118)		(167)	(29.3%)		(285)		(332)	(14.2%)
Gain on sale of real estate facilities		—		58,448	(100.0%)		—		85,283	(100.0%)
Net income	$	49,373	$	102,359	(51.8%)	$	95,948	$	173,884	(44.8%)

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⁽¹⁾

The operations for “assets sold or held for sale” are primarily comprised of the historical operations, for all periods we owned, of the 705,000 rentable square feet of office product and 194,000 rentable square feet of flex product either sold or held for sale and are therefore not expected to remain part of our ongoing operations.

⁽²⁾

~~Adjusted Cost of Operations excludes the impact of LTEIP amortization.~~

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⁽³⁾

~~Net operating income represents rental income less Adjusted Cost of Operations.~~

~~Rental~~⁽¹⁾Same Park rental income ~~increased $2.0~~includes lease buyout income of $780,000 and $122,000 for the three months ended June 30, 2019 and 2018, respectively, and $957,000 and $250,000 for the six months ended June 30, 2019 and 2018, respectively.

⁽²⁾Amounts for the three and six months ended June 30, 2019 reflect the operating results related to 1.3 million square feet of flex and ~~$5.7~~office assets held for sale as of June 30, 2019; amounts shown for the three and six months ended June 30, 2018 reflect the operating results related to 1.3 million square feet of flex and office assets held for sale as of June 30, 2019 as well as operating results related to 899,000 square feet of assets sold in 2018.

⁽³⁾We have reclassified our divisional vice presidents’ compensation costs totaling $460,000 and $1.0 million for the three and six months ended June 30, 2018, respectively, ~~as compared~~from cost of operations into general and administrative expense on our consolidated statements of income in the three and six months ended June 30, 2018 in order to conform to the ~~same periods~~current periods’ presentation. Of this amount, $155,000 and $314,000 of stock compensation expense for the three and six months, respectively, had previously been excluded from NOI.

⁽⁴⁾Adjusted cost of operations excludes the impact of stock compensation expense.

⁽⁵⁾Stock compensation expense, as shown here, represents stock compensation expense for employees whose compensation expense is recorded in ~~2017 due primarily~~cost of operations. Note that stock compensation expense attributable to ~~increases in~~our executive management team (including divisional vice presidents) and other corporate employees is recorded within general and administrative expense.

⁽⁶⁾Net operating income represents rental income ~~at the Same Park and Non-Same Park facilities combined with rental income from our multi-family asset offset partially by rental income~~less adjusted cost of operations.

⁽⁷⁾NOI from assets ~~sold.~~

~~Cost of operations increased $1.0~~held for sale was $3.7 million and ~~$3.0~~$4.2 million for the three months ended June 30, 2019 and 2018, respectively, and $8.3 million and $8.5 million for the six months ended June 30, 2019 and 2018, respectively. The three and six months 2018 remaining NOI balances relate to assets sold during 2018.

Rental income increased $6.0 million and $10.0 million for the three and six months ended June 30, ~~2018, respectively,~~2019 as compared to the same periods in ~~2017~~2018 due primarily to increases in ~~Adjusted Cost of Operations for~~

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~~the~~rental income from our Same Park facilities and multifamily asset combined with rental income from our Non-Same Park facilities ~~combined with Adjusted Cost~~acquired during the second half of ~~Operations from our multi-family asset,~~2018 and early 2019 partially offset ~~partially~~ by ~~Adjusted Cost~~a loss of ~~Operations~~rental income from assets sold ~~as well as lower LTEIP amortization.~~and held for sale.

~~Operating income~~Cost of operations increased ~~$305,000~~$664,000 and $1.8 million for the three and six months ended June 30, ~~2018, respectively,~~2019 as compared to the same periods in ~~2017~~2018. The increase was primarily due to an increase in adjusted cost of operations from our Same Park facilities combined with adjusted cost of operations from our Non-Same Park facilities acquired during the second half of 2018 and early 2019 partially offset by a loss of adjusted cost of operations from assets sold and held for sale.

Net income decreased $53.0 million and $77.9 million for the three and six months ended June 30, 2019 as compared to the same periods in 2018 due primarily to ~~higher rental income~~the gain on sale of office product in Orange County, California and ~~lower general and administrative expenses partially offset by~~ flex product in Dallas, Texas during the first half of 2018 combined with higher depreciation and amortization ~~expense.~~ expense partially offset by higher NOI.

~~See below for a discussion of depreciation and amortization expense and general and administrative expenses.~~

Same Park Facilities

The Same Park facilities are those that we have owned and operated since January 1, ~~2016.~~2017. We evaluate the operations of these facilities to ~~more effectively evaluate~~provide an informative view of how the ~~ongoing performance of our~~Company’s portfolio ~~in 2018 and 2017.~~has performed over comparable periods. We believe ~~the~~that investors and analysts use Same Park information ~~is used by investors and analysts~~ in a similar manner.

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The following table summarizes the historical operating results of these facilities and certain statistical information related to leasing activity in the three and six months ended June 30, 2019 and 2018 (in thousands, except per square foot data):



	For The Three Months					For The Six Months					For The Three Months					For The Six Months
	Ended June 30,					Ended June 30,					Ended June 30,					Ended June 30,
	2018		2017		Variance	2018		2017		Variance	2019		2018		Change	2019		2018		Change
Rental income(1)	$	97,760	$	95,464	2.4%	$	195,782	$	191,220	2.4%	$	95,945	$	91,942	4.4%	$	191,638	$	183,620	4.4%

Adjusted Cost of Operations
Adjusted cost of operations ⁽²⁾
Property taxes		10,211		9,782	4.4%		20,403		19,610	4.0%		10,129		9,764	3.7%		20,337		19,512	4.2%
Utilities		5,242		5,295	(1.0%)		10,955		10,744	2.0%		4,524		4,637	(2.4%)		9,516		9,572	(0.6%)
Repairs and maintenance		6,375		5,886	8.3%		12,386		11,605	6.7%		6,138		5,695	7.8%		11,725		11,127	5.4%
Snow removal		40		103	(61.2%)		834		481	73.4%		36		42	(14.3%)		1,049		655	60.2%
Other expenses		6,997		6,942	0.8%		14,322		13,782	3.9%		6,120		6,228	(1.7%)		12,762		12,722	0.3%
Total		28,865		28,008	3.1%		58,900		56,222	4.8%		26,947		26,366	2.2%		55,389		53,588	3.4%

Net operating income	$	68,895	$	67,456	2.1%	$	136,882	$	134,998	1.4%
NOI											$	68,998	$	65,576	5.2%	$	136,249	$	130,032	4.8%

Selected Statistical Data
Gross margin (1)		70.5%		70.7%	(0.3%)		69.9%		70.6%	(1.0%)
NOI margin ⁽³⁾												71.9%		71.3%	0.8%		71.1%		70.8%	0.4%
Weighted average square foot occupancy		94.6%		93.7%	1.0%		94.6%		94.1%	0.5%		94.3%		94.5%	(0.2%)		94.5%		94.5%	—
Annualized rental income per
occupied square foot	$	15.36	$	15.15	1.4%	$	15.38	$	15.10	1.9%
Revenue per occupied square foot ⁽⁴⁾											$	15.77	$	15.08	4.6%	$	15.71	$	15.06	4.3%
Revenue per available foot (RevPAF) ⁽⁵⁾											$	14.87	$	14.25	4.4%	$	14.85	$	14.23	4.4%

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⁽¹⁾

~~Computed by dividing NOI by rental income.~~

~~Analysis of~~ ⁽¹⁾Same Park ~~Rental Income~~rental income includes lease buyout income of $780,000 and $122,000 for the three months ended June 30, 2019 and 2018, respectively, and $957,000 and $250,000 for the six months ended June 30, 2019 and 2018, respectively.

~~Rental income generated by the Same Park facilities increased 2.4%~~⁽²⁾We have reclassified divisional vice presidents’ compensation costs totaling $289,000 and $655,000 for ~~each of~~ the three and six months ended June 30, 2018, respectively, from adjusted cost of operations into general and administrative expense in order to conform to the current periods’ presentation. Non-cash compensation expense for our divisional vice presidents, which totaled $149,000 and $302,000 for the three and six months ended June 30, 2018, respectively, had previously been excluded from adjusted cost of operations.

⁽³⁾NOI margin is computed by dividing NOI by rental income.

⁽⁴⁾Revenue per occupied square foot is computed by dividing rental income during the period by weighted average occupied square feet during the same period. For the three and six month periods ending June 30, 2019 and 2018, rental income amounts have been annualized.

⁽⁵⁾Revenue per available square foot is computed by dividing rental income during the period by weighted average available square feet. For the three and six month periods ending June 30, 2019 and 2018, rental income amounts have been annualized.

Analysis of Same Park Rental Income

Rental income generated by our Same Park facilities each increased 4.4% for the three and six months ended June 30, 2019, as compared to the same periods in ~~2017.~~2018. The increases were due primarily to ~~increased~~higher rental ~~income~~rates charged to our customers, as revenue per occupied square foot ~~combined with an increase~~increased 4.6% and 4.3% in ~~occupancy.~~ the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018.

We believe that high ~~occupancies~~occupancy levels help maximize our rental income. Accordingly, we seek to maintain a weighted average occupancy over 90%.

During the first six months of 2019 and 2018, most markets continued to reflect conditions favorable ~~conditions~~to landlords allowing for stable occupancy as well as increasing cash rental rates. With the exception of Northern Virginia and Suburban Maryland ~~and Dallas~~ markets, new cash rental rates for the Company improved over expiring cash rental rates on executed leases as economic conditions and tenant demand remained ~~healthy.~~robust.

~~Table of Contents~~

Our future revenue growth will come primarily from contractual rental increases as well as from potential increases in market rents allowing us to increase rent levels when leases are either renewed with existing customers or re-leased

During the three and six months ended June 30, ~~2018,~~2019, we leased approximately ~~2.1~~1.6 million and ~~3.7~~3.1 million ~~respectively,~~ in rentable square feet, respectively, to new and existing customers ~~with a 0.8%~~at an average ~~reduction~~of 9.1% and 9.8% increases in cash rental rates over the previous rates, ~~during the three months ended June 30, 2018, and a 1.3% increase during the six months ended June 30, 2018.~~respectively. Renewals of leases with existing customers represented ~~63.4%~~61.6% of our leasing activity for the six months ended June 30, ~~2018.~~2019. See “Analysis of Same Park ~~Leasing~~Market Trends” below for further ~~information on leasing trends~~analysis of such data on a by market basis.

Our ability to re-lease space on expired leases in a way that minimizes vacancy periods and achieves market rental rates will depend upon market conditions in the specific submarkets in which each of our properties are located.

Adjusted ~~Cost~~cost of ~~Operations~~operations generated by the Same Park facilities increased ~~3.1%~~2.2% and ~~4.8% during~~3.4% for the three and six months ended June 30, ~~2018,~~2019, respectively, as compared to the same periods in the prior year. The three month increase was due primarily to higher repairs and maintenance costs and higher property tax expense partially offset by lower utility costs, while the six month increase was due primarily to an increase in snow removal costs, higher property tax expense and higher repairs and maintenance costs.

Property taxes increased 3.7% and 4.2% for the three and six months ended June 30, 2019, respectively, as compared to the same periods in the prior year. The increases were due primarily to higher ~~repairs and maintenance costs and property tax expense and, with respect to the six-month period, increases in snow removal and utility costs.~~

~~Property taxes increased 4.4% and 4.0% during the three and six months ended June 30, 2018, respectively, as compared to the same periods in the prior year due primarily to higher~~ assessed values. We expect property tax growth ~~for~~in the ~~remainder of 2018~~future due primarily to higher assessed ~~values and changes in tax rates.~~values.

Utilities are dependent primarily upon energy prices and usage levels. Changes in usage levels are driven primarily by weather and temperature. Utilities decreased ~~1.0% for~~2.4% and 0.6% during the three ~~months~~ and ~~increased 2.0% for the~~ six months ended June 30, ~~2018,~~2019, respectively, as compared to the same periods in the prior year. ~~The six month increase was primarily due to a colder winter in 2018 in our Northern Virginia and Suburban Maryland markets.~~ It is difficult to estimate future utility costs, because weather, temperature and energy prices are volatile and not predictable. However, based upon current trends and expectations regarding commercial electricity rates, we expect inflationary increases in rates in the future.

Repairs and maintenance increased ~~8.3%~~7.8% and ~~6.7% during~~5.4% for the three and six months ended June 30, ~~2018,~~2019, respectively, as compared to the same periods in the prior ~~year due to timing of repairs and rate increases from property service providers.~~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.

Snow removal ~~decreased 61.2% during the three months and~~ increased ~~73.4%~~60.2% during the six months ended June 30, ~~2018, respectively,~~2019 as compared to the same ~~periods~~period in the prior year. The six month increase was due to a colder

winter in ~~2018~~2019 in our Northern Virginia and Suburban Maryland ~~markets.~~markets compared to the same period in 2018. Snow removal costs are weather dependent and therefore not predictable.

Other expenses decreased 1.7% and increased ~~0.8% and 3.9% during~~0.3% for the three and six months ended June 30, ~~2018~~2019, respectively, as compared to the same periods in the prior year. These costs are comprised of on site and supervisory personnel,

Analysis of Same Park Market Trends

The following tables set forth ~~market rent, expense~~rental income, adjusted cost of operations, weighted average occupancy and ~~occupancy trends~~annualized revenue per occupied square foot data in our Same Park facilities (in thousands, except per square foot data):



		For The Three Months				For The Six Months						For The Three Months				For The Six Months
		Ended June 30,				Ended June 30,						Ended June 30,				Ended June 30,
Region		2018		2017	Variance	2018			2017	Variance		2019		2018	Change	2019			2018	Change

Selected Geographic Data on Same Park
Geographic Data on Same Park											Geographic Data on Same Park

Rental income
Northern California (7.2 million feet)	$	24,786	$	22,879	8.3%	$	49,021	$	46,175	6.2%	$	26,783	$	24,786	8.1%	$	52,839	$	49,021	7.8%
Southern California (3.3 million feet)		13,178		12,390	6.4%		26,158		24,712	5.9%		13,542		13,178	2.8%		27,149		26,158	3.8%
Dallas (2.9 million feet)		7,477		7,998	(6.5%)		15,227		15,723	(3.2%)		8,681		7,477	16.1%		17,001		15,227	11.7%
Austin (2.0 million feet)		7,809		7,273	7.4%		15,245		14,789	3.1%		7,786		7,809	(0.3%)		15,414		15,245	1.1%
Northern Virginia (3.9 million feet)		18,309		18,559	(1.3%)		37,189		37,648	(1.2%)		18,266		18,309	(0.2%)		37,132		37,189	(0.2%)
South Florida (3.9 million feet)		10,454		10,251	2.0%		21,031		20,188	4.2%		10,725		10,454	2.6%		21,616		21,031	2.8%
Suburban Maryland (2.3 million feet)		11,503		12,069	(4.7%)		23,432		23,929	(2.1%)
Suburban Maryland (1.2 million feet) ⁽¹⁾												5,763		5,685	1.4%		11,694		11,270	3.8%
Seattle (1.4 million feet)		4,244		4,045	4.9%		8,479		8,056	5.3%		4,399		4,244	3.7%		8,793		8,479	3.7%
Total Same Park (26.9 million feet)		97,760		95,464	2.4%		195,782		191,220	2.4%
Total Same Park (25.8 million feet)												95,945		91,942	4.4%		191,638		183,620	4.4%

Adjusted Cost of Operations
Adjusted cost of operations											Adjusted cost of operations
Northern California		5,663		5,670	(0.1%)		11,492		11,560	(0.6%)		5,786		5,545	4.3%		11,830		11,236	5.3%
Southern California		3,416		3,376	1.2%		6,725		6,649	1.1%		3,491		3,337	4.6%		7,037		6,555	7.4%
Dallas		2,898		2,710	6.9%		5,701		5,294	7.7%		2,926		2,853	2.6%		5,838		5,606	4.1%
Austin		2,814		2,491	13.0%		5,410		4,979	8.7%		2,886		2,782	3.7%		5,610		5,341	5.0%
Northern Virginia		6,115		6,166	(0.8%)		13,131		12,284	6.9%		5,904		6,038	(2.2%)		12,986		12,969	0.1%
South Florida		2,814		2,677	5.1%		5,765		5,428	6.2%		3,002		2,752	9.1%		5,885		5,629	4.5%
Suburban Maryland		4,013		3,897	3.0%		8,453		8,008	5.6%
Suburban Maryland ⁽¹⁾												1,885		1,952	(3.4%)		4,101		4,082	0.5%
Seattle		1,132		1,021	10.9%		2,223		2,020	10.0%		1,067		1,107	(3.6%)		2,102		2,170	(3.1%)
Total Same Park		28,865		28,008	3.1%		58,900		56,222	4.8%		26,947		26,366	2.2%		55,389		53,588	3.4%

Net operating income	Net operating income										Net operating income
Northern California		19,123		17,209	11.1%		37,529		34,615	8.4%		20,997		19,241	9.1%		41,009		37,785	8.5%
Southern California		9,762		9,014	8.3%		19,433		18,063	7.6%		10,051		9,841	2.1%		20,112		19,603	2.6%
Dallas		4,579		5,288	(13.4%)		9,526		10,429	(8.7%)		5,755		4,624	24.5%		11,163		9,621	16.0%
Austin		4,995		4,782	4.5%		9,835		9,810	0.3%		4,900		5,027	(2.5%)		9,804		9,904	(1.0%)
Northern Virginia		12,194		12,393	(1.6%)		24,058		25,364	(5.1%)		12,362		12,271	0.7%		24,146		24,220	(0.3%)
South Florida		7,640		7,574	0.9%		15,266		14,760	3.4%		7,723		7,702	0.3%		15,731		15,402	2.1%
Suburban Maryland		7,490		8,172	(8.3%)		14,979		15,921	(5.9%)
Suburban Maryland ⁽¹⁾												3,878		3,733	3.9%		7,593		7,188	5.6%
Seattle		3,112		3,024	2.9%		6,256		6,036	3.6%		3,332		3,137	6.2%		6,691		6,309	6.1%
Total Same Park	$	68,895	$	67,456	2.1%	$	136,882	$	134,998	1.4%	$	68,998	$	65,576	5.2%	$	136,249	$	130,032	4.8%

Weighted average square foot occupancy	Weighted average square foot occupancy										Weighted average square foot occupancy
Northern California		97.9%		94.9%	3.2%		97.8%		96.4%	1.5%		95.8%		97.9%	(2.1%)		96.2%		97.8%	(1.6%)
Southern California		98.3%		95.3%	3.1%		97.9%		96.1%	1.9%		94.7%		98.3%	(3.7%)		95.2%		97.9%	(2.8%)
Dallas		86.9%		89.9%	(3.3%)		88.2%		89.9%	(1.9%)		92.7%		86.9%	6.7%		92.5%		88.2%	4.9%
Austin		92.8%		94.2%	(1.5%)		93.6%		94.2%	(0.6%)		91.3%		92.8%	(1.6%)		91.0%		93.6%	(2.8%)
Northern Virginia		92.0%		90.0%	2.2%		91.5%		90.2%	1.4%		94.7%		92.0%	2.9%		94.2%		91.5%	3.0%
South Florida		96.3%		98.0%	(1.7%)		96.2%		97.8%	(1.6%)		94.5%		96.3%	(1.9%)		95.4%		96.2%	(0.8%)
Suburban Maryland		89.5%		88.5%	1.1%		89.5%		87.8%	1.9%
Suburban Maryland ⁽¹⁾												89.7%		83.1%	7.9%		89.8%		82.6%	8.7%
Seattle		98.1%		98.2%	(0.1%)		98.1%		98.4%	(0.3%)		95.1%		98.1%	(3.1%)		95.6%		98.1%	(2.5%)
Total Same Park		94.6%		93.7%	1.0%		94.6%		94.1%	0.5%		94.3%		94.5%	(0.2%)		94.5%		94.5%	—

Annualized rental income per occupied square foot
Annualized revenue per occupied square foot											Annualized revenue per occupied square foot
Northern California	$	13.98	$	13.31	5.0%	$	13.85	$	13.23	4.7%	$	15.44	$	13.98	10.4%	$	15.17	$	13.85	9.5%
Southern California	$	16.34	$	15.85	3.1%	$	16.29	$	15.68	3.9%	$	17.43	$	16.34	6.7%	$	17.38	$	16.29	6.7%
Dallas	$	11.91	$	12.32	(3.3%)	$	11.95	$	12.11	(1.3%)	$	12.96	$	11.91	8.8%	$	12.72	$	11.95	6.4%
Austin	$	17.14	$	15.73	9.0%	$	16.59	$	15.98	3.8%	$	17.38	$	17.14	1.4%	$	17.26	$	16.59	4.0%
Northern Virginia	$	20.31	$	21.06	(3.6%)	$	20.75	$	21.31	(2.6%)	$	19.69	$	20.31	(3.1%)	$	20.12	$	20.75	(3.0%)
South Florida	$	11.24	$	10.83	3.8%	$	11.31	$	10.68	5.9%	$	11.74	$	11.24	4.4%	$	11.72	$	11.31	3.6%
Suburban Maryland	$	21.83	$	23.19	(5.9%)	$	22.22	$	23.16	(4.1%)
Suburban Maryland ⁽¹⁾											$	20.36	$	21.68	(6.1%)	$	20.64	$	21.63	(4.6%)
Seattle	$	12.45	$	11.86	5.0%	$	12.43	$	11.78	5.5%	$	13.31	$	12.45	6.9%	$	13.23	$	12.43	6.4%
Total Same Park	$	15.36	$	15.15	1.4%	$	15.38	$	15.10	1.9%	$	15.77	$	15.08	4.6%	$	15.71	$	15.06	4.3%

⁽¹⁾Approximately 1.3 million square feet of flex and office business parks located in Rockville and Silver Spring, Maryland, have been classified as held for sale as of June 30, 2019. As such, these parks have been removed from Same Park results for the three and six months ended June 30, 2019 and 2018.
‎

⁽¹⁾Cash Rental Rate Change is computed by taking the percentage difference between the incoming initial billed monthly cash rental rates inclusive of estimated expense recoveries (excluding the impact of certain items such as concessions or future escalators) on new leases or extensions executed in the period, and the outgoing monthly cash rental rates inclusive of estimated expense recoveries last billed on the previous lease for that space. Leases executed on spaces vacant for more than the preceding twelve months have been excluded from this measure.

During the first six months of 2019 and 2018, most markets, with the exception of Northern Virginia and Suburban Maryland, ~~and Dallas~~ continued to reflect favorable conditions allowing for stable occupancy as well as increasing cash rental rates. In Northern Virginia and Suburban Maryland, cash rental rates on executed leases declined ~~9.7%~~0.2% and ~~15.7%~~7.6%, respectively, for the six months ended June 30, ~~2018,~~2019, reflecting continued soft market conditions that have persisted for several years due to, among other factors, federal government downsizing. To ~~a lesser extent, Dallas has recently been facing softer conditions with 0.9% rental rate decline on executed leases for the six months ended June 30, 2018. To~~ the extent that such trends continue in these markets, which comprised ~~38.7%~~25.5% of our Same Park rental income for the six months ended June 30, ~~2018~~2019 and ~~31.4%~~18.6% of square feet expiring through December 31, ~~2019,~~2020, we may continue to face reduced rental income in these markets.

NOI from the Non-Same Park facilities included $403,000 of NOI from the 2018 acquisition for the three and six months ended June 30, 2018. Excluding the results from the 2018 acquisition, the three and six month NOI increases from prior periods were tied to increases in occupancy at our 2016 acquisition.

We believe that our management and operating infrastructure typically allows us to generate higher NOI from newly acquired real estate facilities than was achieved by the previous owners. However, it can take 24 or more months for us to fully achieve the higher NOI, and the ultimate levels of NOI to be achieved can be affected by changes in general economic conditions. As a result, there can be no assurance that we will achieve our expectations with respect to ~~these~~ newly acquired real estate facilities.

We expect the Non-Same Park facilities to continue to provide increased NOI in ~~2018~~2019 as these facilities increase in occupancy.

~~Multi-family:~~Multifamily: As of June 30, ~~2018,~~2019, we have a 95.0% interest in Highgate, a ~~consolidated joint venture.~~395-unit apartment complex. On January 1, 2018, we began to consolidate ~~the~~our joint venture due to changes to the joint venture agreement that gave the Company control of the joint venture. Prior to January 1, 2018, we accounted for our investment in the joint venture using the equity method and accordingly, reflected our share of net loss under “equity in loss of unconsolidated joint venture.”

~~The joint venture began leasing activities during second quarter of 2017.~~ During the three ~~and six~~ months ended June 30, ~~2018, respectively, the joint venture~~2019, Highgate generated $1.5 million of NOI, consisting of $2.5 million in rental income and $1.0 million in adjusted cost of operations compared to $765,000 of NOI, consisting of $1.7 million in rental income and $973,000 in ~~Adjusted Cost~~adjusted cost of ~~Operations,~~operations for the same period in 2018. During the six months ended June 30, 2019, Highgate generated $2.9 million of NOI, consisting of $5.0 million in rental income and $2.1 million in adjusted cost of operations compared to $1.2 million of NOI, consisting of $3.2 million in rental income and $2.0 million in ~~Adjusted Cost~~adjusted cost of ~~Operations.~~operations for the same period in 2018.

The following table summarizes ~~the joint venture’s~~Highgate’s project timeline and ~~updates~~certain statistics as of June 30, ~~2018:~~2019:

⁽¹⁾The project cost for Highgate includes the underlying land at the assigned contribution value upon formation of the joint venture.

⁽²⁾Average rent per unit is defined as the total potential monthly rental revenue (actual rent for occupied apartment units plus market rent for vacant apartment units) divided by the total number of rentable apartment units.

Assets sold or held for sale: These amounts include historical operating results with respect to properties that ~~have been~~we sold or are held for sale.

~~Depreciation and Amortization Expense:~~ ~~Depreciation and amortization expense was $24.4 million~~Amounts for the three and six months ended June 30, ~~2018 compared~~2019 reflect the operating results related to ~~$23.6~~1.3 million square feet of flex and office assets held for sale as of June 30, 2019; amounts shown for the ~~same period in 2017. Depreciation~~three and ~~amortization expense was $48.3 million for the~~ six months ended June 30, 2018 reflect the operating results related to 1.3 million square feet of flex and office assets held for sale as of June 30, 2019 as well as operating results related to 899,000 square feet of assets sold in 2018.

Depreciation and Amortization Expense: Depreciation and amortization expense was $24.8 million and $49.6 million for the three and six months ended June 30, 2019, respectively, compared to ~~$46.7~~$24.4 million and $48.3 million for the same ~~period~~periods in ~~2017.~~2018, respectively. The three and six month increases in depreciation and amortization expense were primarily due to depreciation and amortization expense ~~of our multi-family asset as we consolidated its operations effective January 1, 2018.~~from the Non-Same Park facilities.

General and Administrative ~~Expenses:~~Expense: General and administrative ~~expenses~~expense primarily ~~represent~~represents executive and other compensation, ~~for senior executives,~~audit and tax ~~compliance,~~fees, legal expenses and costs associated with being a public company. For the ~~three and~~ six

⁽¹⁾Excludes $13,000 of recurring capital improvements on our multifamily asset in 2018.

The following table summarizes Same Park, Non-Same Park, ~~multi-family~~multifamily and assets sold or held for sale recurring capital expenditures paid and the related percentage of NOI by region for the six months ended June 30, 2019 and 2018 ~~and 2017~~ (in thousands):

The ~~decrease~~increase in Same Park recurring capital expenditures of ~~$2.8~~$1.2 million, or ~~16.7%~~9.5%, was primarily due to transaction costs ~~related to large renewals and leasing production~~spent on repositioning two properties in ~~2017.~~Austin, Texas. The ~~decrease~~increase in Non-Same Park recurring capital expenditures are related to ~~substantially completing~~transaction costs spent on our Northern Virginia Industrial Portfolio, which was acquired in June, 2018, attributed to the ~~repositioning and~~ lease-up of ~~a facility in 2017.~~that park.

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~~We paid $25.9 million in distributions to our preferred shareholders for the six months ended June 30, ~~2018, the Company is scheduled~~2019 and expect to continue to pay ~~cash dividends~~quarterly distributions in the same amount for the foreseeable future or until such time as there is a change in the amount or composition of ~~$51.8 million per year on its~~our series of preferred equity outstanding. Dividends on preferred equity 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

⁽²⁾Represents future contractual payments on land under various operating leases.

To limit the Company’s exposure to market risk, the Company principally finances its operations and growth with permanent equity capital consisting of either common or preferred stock. The Company had ~~$10.0 million~~no debt outstanding on its Credit Facility as of June 30, ~~2018 and subsequently repaid the balance during July, 2018. The Company’s debt as a percentage of total equity (based on book values) was 0.5% as of June 30, 2018.~~ 2019.

Our exposure to market risk for changes in interest rates relates primarily to the Credit Facility, which is subject to variable interest rates. See Notes 2 and 65 to the consolidated financial statements included in this Quarterly Report 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 of debt and its fair value is insignificant.~~

The Company’s management, with the participation of the Company’s Chief Executive Officer ~~who is also serving as interim~~and Chief Financial Officer, evaluated the effectiveness of the Company’s 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”)) as of June 30, ~~2018.~~2019. These controls and procedures have been designed to ensure that information required for disclosure is recorded, processed, summarized and reported within the requisite time periods and that such information is accumulated and communicated to management. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company’s disclosure controls and procedures as of June 30, ~~2018,~~2019, the Company’s Chief Executive Officer ~~who is also serving as acting~~and Chief Financial Officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended June 30, ~~2018~~2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The Company currently is not subject to any material ~~litigation~~legal proceedings other than ordinary routine litigation and administrative proceedings ~~arising in the ordinary course~~incidental to its business.
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	For The Six Months				For The Six Months
	Ended June 30,				Ended June 30,
	2018		2017		2019		2018
Cash flows from operating activities
Net income	$	173,884	$	91,208	$	95,948	$	173,884
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization expense		48,298		46,706		49,643		48,298
Tenant improvement reimbursements, net of lease incentives		(1,134)		(856)
Equity in loss of unconsolidated joint venture		—		382
Gain on sale of real estate facilities and development rights		(85,283)		(5,074)
Stock compensation		1,781		3,646
Tenant improvement reimbursement amortization, net of lease incentive amortization						(663)		(1,134)
Gain on sale of real estate facilities						—		(85,283)
Stock compensation expense						1,889		1,781
Amortization of financing costs		263		226		272		263
Other, net		(6,055)		1,276		(5,920)		(6,055)
Total adjustments		(42,130)		46,306		45,221		(42,130)
Net cash provided by operating activities		131,754		137,514		141,169		131,754
Cash flows from investing activities
Capital expenditures to real estate facilities		(15,083)		(23,363)		(17,503)		(15,083)
Capital expenditures to land and building held for development		(403)		(500)		(993)		(403)
Investment in and advances to unconsolidated joint venture		—		(24,451)
Acquisition of real estate facility		(142,399)		—		(13,736)		(142,399)
Consolidation of joint venture		1,082		—		—		1,082
Proceeds from sale of real estate facilities		126,836		2,144		—		126,836
Proceeds from sale of development rights		—		2,400
Net cash used in investing activities		(29,967)		(43,770)		(32,232)		(29,967)
Cash flows from financing activities
Borrowings on credit facility		50,000		168,000		—		50,000
Repayment of borrowings on credit facility		(40,000)		(67,000)		—		(40,000)
Payment of financing costs		(148)		(724)		(157)		(148)
Proceeds from the exercise of stock options		1,228		2,157		709		1,228
Redemption of preferred stock		(130,000)		(230,000)		—		(130,000)
Cash paid for taxes in lieu of shares upon vesting of restricted stock units		(4,529)		(3,403)		(5,500)		(4,529)
Cash paid to restricted stock unit holders		(536)		(399)		(480)		(536)
Distributions paid to preferred shareholders		(26,655)		(25,882)		(25,918)		(26,655)
Distributions paid to common shareholders		(46,396)		(46,207)		(57,538)		(46,396)
Distributions paid to noncontrolling interests—common units		(12,419)		(12,419)		(15,341)		(12,419)
Distributions paid to noncontrolling interests—joint venture						(45)		—
Net cash used in financing activities		(209,455)		(215,877)		(104,270)		(209,455)
Net decrease in cash and cash equivalents		(107,668)		(122,133)
Net increase (decrease) in cash and cash equivalents						4,667		(107,668)
Cash, cash equivalents and restricted cash at the beginning of the period		115,970		128,629		38,467		115,970
Cash, cash equivalents and restricted cash at the end of the period	$	8,302	$	6,496	$	43,134	$	8,302

Supplemental schedule of non-cash investing and financing activities
Adjustment to noncontrolling interests—common units in the OP
Noncontrolling interests—common units	$	(606)	$	80	$	(1,028)	$	(606)
Paid-in capital	$	606	$	(80)	$	1,028	$	606
Consolidation of joint venture
Land	$	21,814	$	—	$	—	$	21,814
Buildings and improvements	$	85,436	$	—	$	—	$	85,436
Other, net	$	(2,320)	$	—	$	—	$	(2,320)
Investment in and advances to unconsolidated joint venture	$	(100,898)	$	—	$	—	$	(100,898)
Noncontrolling interest — joint venture	$	(4,032)	$	—	$	—	$	(4,032)



								Percent of									Percent of
			Rentable Square		Percent of	Annualized Rental		Annualized Rental				Rentable Square		Percent of	Annualized Rental		Annualized Rental
	Number of		Footage Subject to		Total Leased	Income Under		Income Represented		Number of		Footage Subject to		Total Leased	Income Under		Income Represented
Year of Lease Expiration	Customers		Expiring Leases		Square Footage	Expiring Leases		by Expiring Leases		Customers		Expiring Leases		Square Footage	Expiring Leases		by Expiring Leases
Remainder of 2018		1,089		2,555	10.0%	$	42,759		10.4%
2019		1,574		6,970	27.1%		105,748		25.7%
Remainder of 2019											1,126		3,516	14.3%	$	53,412		13.0%
2020		1,155		5,819	22.7%		88,820		21.6%		1,522		5,945	24.1%		93,889		22.8%
2021		487		3,189	12.4%		49,404		12.0%		1,004		4,287	17.4%		70,999		17.3%
2022		287		2,810	10.9%		47,195		11.4%		491		3,914	15.9%		68,769		16.7%
2023											328		2,638	10.7%		44,183		10.8%
Thereafter		280		4,330	16.9%		77,814		18.9%		247		4,334	17.6%		79,880		19.4%
Total		4,872		25,673	100.0%	$	411,740		100.0%		4,718		24,634	100.0%	$	411,132		100.0%



	For the Three Months Ended June 30, 2018					For the Three Months Ended June 30, 2019
	Square			Transaction		Square			Transaction
	Footage	Customer		Costs per	Rental	Footage	Customer		Costs per	Cash Rental
Regions	Leased	Retention		Executed Foot	Rate Change (1)	Leased	Retention		Executed Foot	Rate Change ⁽¹⁾
Northern California	470	85.3%	$	0.65	12.5%	398	82.6%	$	2.30	16.8%
Southern California	288	70.4%	$	0.99	5.8%	310	75.0%	$	1.57	9.3%
Dallas	295	80.7%	$	3.56	(0.9%)	150	65.2%	$	3.49	10.3%
Austin	54	74.9%	$	2.72	5.5%	114	92.5%	$	4.82	6.3%
Northern Virginia	306	88.7%	$	4.64	(9.3%)	265	79.7%	$	7.67	0.8%
South Florida	359	44.8%	$	1.51	0.1%	228	33.8%	$	2.65	10.8%
Suburban Maryland	258	85.5%	$	4.57	(18.3%)	52	60.9%	$	10.61	(9.2%)
Seattle	48	69.7%	$	4.57	11.1%	74	86.5%	$	0.87	15.4%
Total	2,078	76.4%	$	2.48	(0.8%)	1,591	71.4%	$	3.60	9.1%



	For the Six Months Ended June 30, 2019
	Square			Transaction
	Footage	Customer		Costs per	Cash Rental
Regions	Leased	Retention		Executed Foot	Rate Change ⁽¹⁾
Northern California	728	51.2%	$	2.07	19.2%
Southern California	620	70.5%	$	1.87	9.9%
Dallas	434	73.8%	$	5.34	8.1%
Austin	158	76.2%	$	4.56	6.0%
Northern Virginia	508	79.4%	$	6.25	(0.2%)
South Florida	447	46.9%	$	2.15	13.3%
Suburban Maryland	74	50.6%	$	11.01	(7.6%)
Seattle	151	66.5%	$	0.90	17.2%
Total	3,120	64.9%	$	3.46	9.8%



	For the Six Months Ended June 30, 2018
	Square			Transaction
	Footage	Customer		Costs per	Rental
Regions	Leased	Retention		Executed Foot	Rate Change (a)
Northern California	719	72.5%	$	1.11	14.6%
Southern California	594	73.9%	$	1.34	4.8%
Dallas	450	51.1%	$	3.23	(0.9%)
Austin	170	74.7%	$	1.73	8.2%
Northern Virginia	537	77.2%	$	8.10	(9.7%)
South Florida	750	62.7%	$	1.30	1.9%
Suburban Maryland	344	83.8%	$	5.19	(15.7%)
Seattle	100	36.6%	$	3.15	13.3%
Total	3,664	68.9%	$	2.94	1.3%



	For the Three Months Ended
	March 31		June 30		September 30		December 31
Rental income
2018	$	98,022	$	97,760	$	—	$	—
2017	$	95,756	$	95,464	$	96,073	$	97,211

Adjusted Cost of Operations
2018	$	30,035	$	28,865	$	—	$	—
2017	$	28,214	$	28,008	$	29,191	$	29,642

Snow removal
2018	$	794	$	40	$	—	$	—
2017	$	378	$	103	$	—	$	63

Utilities
2018	$	5,713	$	5,242	$	—	$	—
2017	$	5,448	$	5,295	$	5,798	$	5,393

Weighted average square foot occupancy
2018		94.6%		94.6%		—		—
2017		94.6%		93.7%		94.1%		95.1%

Annualized rental income per occupied square foot
2018	$	15.40	$	15.36	$	—	$	—
2017	$	15.05	$	15.15	$	15.18	$	15.20



			Purchase		Square	Occupancy at	Occupancy at			Purchase		Square	Occupancy at	Occupancy at
Property	Date Acquired	Location	Price		Feet	Acquisition	June 30, 2018	Date Acquired	Location	Price		Feet	Acquisition	June 30, 2019
Walnut Avenue Business Park								April, 2019	Signal Hill, CA	$	13,824	74	98.4%	100.0%
Northern Virginia and Fullerton	June, 2018	Lorton and Springfield,	$	143,766	1,057	76.1%	76.1%	June, 2018	Lorton and Springfield,
Road Industrial Parks		Virginia							Virginia		143,766	1,057	76.1%	82.2%
The Grove 270	September, 2016	Rockville, Maryland		13,250	226	18.5%	58.9%
Total			$	157,016	1,283	66.0%	73.0%			$	157,590	1,131	77.5%	83.3%



	For the Six Months Ended June 30,								For the Six Months Ended June 30,
	2018		2017		2018		2017		2019		2018		2019		2018
Commercial Real Estate	(in thousands)				(per square foot)				(in thousands)				(per square foot)
Recurring capital expenditures
Capital improvements (1)	$	3,447	$	3,425	$	0.12	$	0.12	$	3,608	$	3,447	$	0.13	$	0.12
Tenant improvements		7,757		15,641		0.28		0.56		8,567		7,757		0.30		0.28
Lease commissions		3,773		3,145		0.14		0.11		3,373		3,773		0.12		0.14
Total commercial recurring capital expenditures		14,977		22,211		0.54		0.79		15,548		14,977		0.55		0.54
Nonrecurring capital improvements		93		1,152		0.04		0.04		1,955		93		0.07		—
Total commercial capital expenditures (1)	$	15,070	$	23,363	$	0.58	$	0.83	$	17,503	$	15,070	$	0.62	$	0.54



	For the Six Months Ended June 30,
						Recurring
	Recurring					Capital Expenditures
	Capital Expenditures					as a Percentage of NOI
		2019		2018	Change	2019		2018
Region
Same Park
Northern California	$	1,253	$	1,530	(18.1%)		3.1%		4.0%
Southern California		1,836		1,234	48.8%		9.1%		6.3%
Dallas		1,886		1,841	2.4%		16.9%		19.1%
Austin		1,756		479	266.6%		17.9%		4.8%
Northern Virginia		4,520		4,336	4.2%		18.7%		17.9%
South Florida		1,252		1,913	(34.6%)		8.0%		12.4%
Suburban Maryland		920		871	5.6%		12.1%		12.1%
Seattle		294		322	(8.7%)		4.4%		5.1%
Total Same Park		13,717		12,526	9.5%		10.1%		9.6%
Non-Same Park
Northern Virginia		1,317		—	100.0%		—		—
Total Non-Same Park		1,317		—	100.0%		—		—
Assets sold or held for sale		514		2,451	(79.0%)		—		—
Total commercial recurring
capital expenditures		15,548		14,977	3.8%		—		—
Multifamily		—		13	(100.0%)		—		—
Total	$	15,548	$	14,990	3.7%		—		—



	Payments Due by Period										Payments Due by Period
Contractual Obligations	Total		Less than 1 year		1-3 years		4-5 years		More than 5 years		Total		Less than 1 year		1-3 years		4-5 years		More than 5 years
Transaction costs (1)	$	14,312	$	14,312	$	—	$	—	$	—	$	8,889	$	8,889	$	—	$	—	$	—
Ground lease obligations (2)		184		131		53		—		—		2,040		75		594		397		974
Total	$	14,496	$	14,443	$	53	$	—	$	—	$	10,929	$	8,964	$	594	$	397	$	974


Exhibits Number	Description

Exhibit 31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.

Exhibit 31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.

Exhibit 32.1	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.

Exhibit 101.INS	XBRL Instance Document. Filed herewith.

Exhibit 101.SCH	XBRL Taxonomy Extension Schema. Filed herewith.

Exhibit 101.CAL	XBRL Taxonomy Extension Calculation Linkbase. Filed herewith.

Exhibit 101.DEF	XBRL Taxonomy Extension Definition Linkbase. Filed herewith.

Exhibit 101.LAB	XBRL Taxonomy Extension Label Linkbase. Filed herewith.

Exhibit 101.PRE	XBRL Taxonomy Extension Presentation Linkbase. Filed herewith.



	Dated: July ~~27, 2018~~25, 2019

	PS BUSINESS PARKS, INC.

	BY:	/s/ ~~Maria R. Hawthorne~~Jeffrey D. Hedges
		~~Maria R. Hawthorne~~Jeffrey D. Hedges
		~~President and Chief~~ Executive ~~Officer~~
		~~(Principal Executive Officer and Principal Financial Officer)~~


~~Exhibits~~

~~Exhibit 12~~	Statement re: Computation of Ratio of Earnings to Fixed Charges, Ratio of Earnings to Combined Fixed Charges and Income Allocation to Preferred Shareholders and Supplemental Disclosure of Ratio of FFO to Fixed Charges and Ratio of FFO to Combined Fixed Charges and Preferred Distributions. Filed herewith.

~~Exhibit 31.1~~	~~Certification of Chief Executive Officer~~Vice President and Chief Financial Officer ~~pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.~~

~~Exhibit 32.1~~	~~Certifications of Chief Executive Officer and Chief~~(Principal Financial ~~Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.~~

~~Exhibit 101.INS~~	~~XBRL Instance Document. Filed herewith.~~

~~Exhibit 101.SCH~~	~~XBRL Taxonomy Extension Schema. Filed herewith.~~

~~Exhibit 101.CAL~~	~~XBRL Taxonomy Extension Calculation Linkbase. Filed herewith.~~

~~Exhibit 101.DEF~~	~~XBRL Taxonomy Extension Definition Linkbase. Filed herewith.~~

~~Exhibit 101.LAB~~	~~XBRL Taxonomy Extension Label Linkbase. Filed herewith.~~

~~Exhibit 101.PRE~~	~~XBRL Taxonomy Extension Presentation Linkbase. Filed herewith.~~Officer)