Form 10-K for fiscal year ended 12/31/11

Large accelerated filer þ

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company ¨

(Do not check if a smaller reporting company)

10-K 1 d305909d10k.htm FORM 10-K FOR FISCAL YEAR ENDED 12/31/11 Form 10-K for fiscal year ended 12/31/11

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011.

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 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 of incorporation or organization)		(I.R.S. Employer Identification No.)

701 Western Avenue, Glendale, California 91201-2397

(Address of principal executive offices) (Zip Code)

818-244-8080

(Registrant’s telephone number, including area code)

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


Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $0.01 par value per share		New York Stock Exchange
Depositary Shares Each Representing 1/1,000 of a Share of 7.000% Cumulative Preferred Stock, Series H, $0.01 par value per share		New York Stock Exchange
Depositary Shares Each Representing 1/1,000 of a Share of 6.875% Cumulative Preferred Stock, Series I, $0.01 par value per share		New York Stock Exchange
Depositary Shares Each Representing 1/1,000 of a Share of 6.700% Cumulative Preferred Stock, Series P, $0.01 par value per share		New York Stock Exchange
Depositary Shares Each Representing 1/1,000 of a Share of 6.875% Cumulative Preferred Stock, Series R, $0.01 par value per share		New York Stock Exchange
Depositary Shares Each Representing 1/1,000 of a Share of 6.450% Cumulative Preferred Stock, Series S, $0.01 par value per share		New York Stock Exchange

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

None

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No þ

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 þ 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 þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§232.405) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

As of June 30, 2011, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $1,026,372,826 based on the closing price as reported on that date.

Number of shares of the registrant’s common stock, par value $0.01 per share, outstanding as of February 20, 2012 (the latest practicable date): 24,129,684.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement to be filed in connection with the Annual Meeting of Shareholders to be held in 2012 are incorporated by reference into Part III of this Annual Report on Form 10-K.

PART I

ITEM 1. BUSINESS

Forward-Looking Statements

Forward-looking statements are made throughout this Annual Report on Form 10-K. 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; (f) the economic health of our tenants; (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; (k) other factors discussed under the heading “Item 1A. Risk Factors”. 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.

The Company

PS Business Parks, Inc. (“PSB”) is a fully-integrated, self-advised and self-managed real estate investment trust (“REIT”) that owns, operates acquires, and develops commercial properties, primarily multi-tenant flex, office and industrial space. PS Business Parks, L.P. (the “Operating Partnership”) is a California limited partnership, which owns directly or indirectly substantially all of our assets and through which we conduct substantially all of our business. PSB is the sole general partner of the Operating Partnership and, as of December 31, 2011, owned 76.8% of the common partnership units. The remaining common partnership units are owned by Public Storage (“PS”). PSB, as the sole general partner of the Operating Partnership, has full, exclusive and complete responsibility and discretion in managing and controlling the Operating Partnership. Unless otherwise indicated or unless the context requires otherwise, all references to “the Company,” “we,” “us,” “our,” and similar references mean PS Business Parks, Inc. and its subsidiaries, including the Operating Partnership.

As of December 31, 2011, the Company owned and operated 27.2 million rentable square feet of commercial space, comprising 102 business parks, located in eight states: Arizona, California, Florida, Maryland, Oregon, Texas, Virginia and Washington. The Company focuses on owning concentrated business parks as these parks provide the Company with the greatest flexibility to meet its customer needs. The Company also manages 1.3 million rentable square feet on behalf of PS.

History of the Company: The Company was formed in 1990 as a California corporation under the name Public Storage Properties XI, Inc. In a March 17, 1998 merger with American Office Park Properties, Inc. (“AOPP”) (the “Merger”), the Company acquired the commercial property business previously operated by AOPP and was renamed “PS Business Parks, Inc.” Prior to the Merger in January, 1997, AOPP was reorganized to succeed to the commercial property business of PS, becoming a fully integrated, self-advised and self-managed REIT.

In 2011 and 2010, the Company acquired 7.9 million square feet for an aggregate purchase price of $855.2 million. The table below reflects the assets acquired during the years ended December 31, 2011 and 2010 (in thousands):


Property	Date Acquired		Location		Purchase Price		Square Feet		Occupancy at December 31, 2011
Northern California Portfolio		December, 2011		East Bay, California	$	520,000		5,334		82.4	%
Royal Tech		October, 2011		Las Colinas, Texas		2,835		80		0.0	% (1)
MICC — Center 22		August, 2011		Miami, Florida		3,525		46		33.3	%
Warren Building		June, 2011		Tysons Corner, Virginia		27,100		140		69.5	%

Total 2011 Acquisitons					$	553,460		5,600		80.5	%

Westpark Business Campus		December, 2010		Tysons Corner, Virginia	$	140,000		735		65.0	%
Tysons Corporate Center		July, 2010		Tysons Corner, Virginia		35,400		270		65.9	%
Parklawn Business Park		June, 2010		Rockville, Maryland		23,430		232		83.0	%
Austin Flex Portfolio		April, 2010		Austin, Texas		42,900		704		92.0	%
Shady Grove Executive Center		March, 2010		Rockville, Maryland		60,000		350		88.0	%

Total 2010 Acquisitons						301,730		2,291		79.1	%

Total					$	855,190		7,891		80.1	%

(1)	As of January 1, 2012, the building was 100.0% leased to a single user.

In August, 2011, the Company completed the sale of Westchase Corporate Park, a 177,000 square foot flex park consisting of 13 buildings in Houston, Texas, for a gross sales price of $9.8 million, resulting in a net gain of $2.7 million.

In addition to the 2010 acquisitions, during 2010, the Company completed construction of a new building within its Miami International Commerce Center (“MICC”) in Miami, Florida, which added 75,000 square feet of rentable small tenant industrial space. In January, 2010, the Company completed the sale of a 131,000 square foot office building located in Houston, Texas. The gross sales price was $10.0 million, resulting in a net gain of $5.2 million.

In 2009, the Company sold 3.4 acres of land held for development in Portland, Oregon, for a gross sales price of $2.7 million, resulting in a net gain of $1.5 million. The Company made no acquisitions during the years ended December 31, 2009 and 2008.

In 2007, the Company acquired three business parks comprising 870,000 square feet for an aggregate cost of $140.6 million in Redmond, Washington, Santa Clara, California and Fairfax, Virginia.

From 1998 through 2006, the Company acquired 14.9 million square feet of commercial space, developed an additional 500,000 square feet and sold 1.9 million square feet along with some parcels of land.

The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 1990. To the extent that the Company continues to qualify as a REIT, it will not be taxed, with certain limited exceptions, on the net income that is currently distributed to its shareholders.

The Company’s principal executive offices are located at 701 Western Avenue, Glendale, California 91201-2397. The Company’s telephone number is (818) 244-8080. The Company maintains a website with the address www.psbusinessparks.com. The information contained on the Company’s website is not a part of, or incorporated by reference into, this Annual Report on Form 10-K. The Company makes available free of charge through its website its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after the Company electronically files such material with, or furnishes such material to, the Securities and Exchange Commission.

Business of the Company: The Company is in the commercial property business, with 102 business parks consisting of multi-tenant flex, industrial and office space. The Company owns 14.7 million square feet of flex space. The Company defines “flex” space as buildings that are configured with a combination of warehouse and office space and can be designed to fit a wide variety of uses. The warehouse component of the flex space has a number of uses including light manufacturing and assembly, storage and warehousing, showroom, laboratory, distribution and research and development activities. The office component of flex space is complementary to the

warehouse component by enabling businesses to accommodate management and production staff in the same facility. The Company owns 7.5 million square feet of industrial space that has characteristics similar to the warehouse component of the flex space as well as ample dock space. In addition, the Company owns 5.0 million square feet of low-rise office space, generally either in business parks that combine office and flex space or in submarkets where the economics of the market demand an office build-out.

The Company’s commercial properties typically consist of business parks with low-rise buildings, ranging from one to 48 buildings per park, located on parcels of various sizes and comprising from approximately 12,000 to 3.3 million aggregate square feet of rentable space. Facilities are managed through either on-site management or offices central to the facilities. Parking is generally open but in some instances is covered. The ratio of parking spaces to rentable square feet ranges from two to six per thousand square feet depending upon the use of the property and its location. Office space generally requires a greater parking ratio than most industrial uses. The Company may acquire properties that do not have these characteristics.

The tenant base for the Company’s facilities is diverse. The portfolio can be bifurcated into those facilities that service small to medium-sized businesses and those that service larger businesses. Approximately 34.9% of in-place rents from the portfolio are derived from facilities that serve small to medium-sized businesses. A property in this facility type is typically divided into units ranging in size from 500 to 4,999 square feet and leases generally range from one to three years. The remaining 65.1% of in-place rents from the portfolio are derived from facilities that serve larger businesses, with units greater than or equal to 5,000 square feet. The Company also has several tenants that lease space in multiple buildings and locations. The U.S. Government is the largest tenant with multiple leases encompassing approximately 829,000 square feet or 6.5% of the Company’s annualized rental income.

The Company currently owns properties in eight states and it may expand its operations to other states or reduce the number of states in which it operates. Properties are acquired for both income and potential capital appreciation; there is no limitation on the amount that can be invested in any specific property. Although there are no restrictions on our ability to expand our operations into foreign markets, we currently operate solely within the United States and have no foreign operations.

The Company owns land which may be used for the development of commercial properties. The Company owns approximately 6.4 acres of land in Northern Virginia, 11.5 acres in Portland, Oregon and 10.0 acres in Dallas, Texas as of December 31, 2011.

Operating Partnership

The properties in which the Company has an equity interest generally are owned by the Operating Partnership. Through this organizational structure, the Company has the ability to acquire interests in additional properties in transactions that could defer the contributors’ tax consequences by causing the Operating Partnership to issue equity interests in return for interests in properties.

The Company is the sole general partner of the Operating Partnership. As of December 31, 2011, the Company owned 76.8% of the common partnership units of the Operating Partnership, and the remainder of such common partnership units were owned by PS. The common units owned by PS may be redeemed by PS from time to time, subject to the provisions of our charter, for cash or, at our option, shares of our common stock on a one-for-one basis. Also as of December 31, 2011, in connection with the Company’s issuance of publicly traded Cumulative Preferred Stock, the Company owned 23.9 million preferred units of the Operating Partnership of various series with an aggregate redemption value of $598.5 million with terms substantially identical to the terms of the publicly traded depositary shares each representing 1/1,000 of a share of 6.700% to 7.375% Cumulative Preferred Stock of the Company. In addition, as of December 31, 2011, the Operating Partnership had outstanding 223,300 units of its 7.125% Series N preferred partnership units that are owned by third parties with an aggregate redemption value of $5.6 million. The Operating Partnership has the right to redeem each series of preferred units held by these third parties on or after the fifth anniversary of the issuance date of the series at the original capital contribution plus the cumulative priority return, as defined, to the redemption date to the extent not previously distributed. Each series of preferred units is exchangeable for shares of a corresponding series of the Company’s Cumulative Redeemable Preferred Stock on or after the tenth anniversary of the date of

issuance at the option of the Operating Partnership or a majority of the holders of the applicable series of preferred units.

As the general partner of the Operating Partnership, the Company has the exclusive responsibility under the Operating Partnership Agreement to manage and conduct the business of the Operating Partnership. The Board of Directors directs the affairs of the Operating Partnership by managing the Company’s affairs. The Operating Partnership will be responsible for, and pay when due, its share of all administrative and operating expenses of the properties it owns.

The Company’s interest in the Operating Partnership entitles it to share in cash distributions from, and the profits and losses of, the Operating Partnership in proportion to the Company’s economic interest in the Operating Partnership (apart from tax allocations of profits and losses to take into account pre-contribution property appreciation or depreciation). The Company since 1998 has paid per share dividends on its common and preferred stock that track, on a one-for-one basis, the amount of per unit cash distributions the Company receives from the Operating Partnership in respect of the common and preferred partnership units in the Operating Partnership that are owned by the Company.

Cost Allocation and Administrative Services

Pursuant to a cost sharing and administrative services agreement, the Company shares costs with PS for certain administrative services. These services include investor relations, legal, corporate tax and information systems. Under this agreement, costs are allocated to the Company in accordance with its proportionate share of these costs. These allocated costs totaled $442,000, $543,000 and $372,000 for the years ended December 31, 2011, 2010 and 2009, respectively.

Common Officers and Directors with PS

Ronald L. Havner, Jr., Chairman of the Company, is also the Chairman of the Board, Chief Executive Officer and President of PS. Gary E. Pruitt, an independent director of the Company is also a trustee of PS. The Company engages additional executive personnel who render services exclusively for the Company. However, it is expected that certain officers of PS will continue to render services for the Company as requested pursuant to the cost sharing and administrative services agreement.

Property Management

The Company manages commercial properties owned by PS, which are generally adjacent to self-storage facilities, for a fee of 5% of the gross revenues of such properties in addition to reimbursement of direct costs. The property management contract with PS is for a seven-year term with the agreement automatically extending for an additional one-year period upon each one-year anniversary of its commencement (unless cancelled by either party). Either party can give notice of its intent to cancel the agreement upon expiration of its current term. Management fee revenue derived from this management contract with PS totaled $684,000, $672,000 and $698,000 for the years ended December 31, 2011, 2010 and 2009, respectively.

PS also provides property management services for the self-storage component of two assets owned by the Company. These self-storage facilities, located in Palm Beach County, Florida, operate under the “Public Storage” name. Either the Company or PS can cancel the property management contract upon 60 days notice. Management fee expenses under the contract were $52,000, $48,000 and $50,000 for the years ended December 31, 2011, 2010 and 2009, respectively.

Management

Joseph D. Russell, Jr. leads the Company’s senior management team. Mr. Russell is President and Chief Executive Officer of the Company. The Company’s senior management includes: John W. Petersen, Executive Vice President and Chief Operating Officer; Edward A. Stokx, Executive Vice President and Chief Financial Officer; Maria R. Hawthorne, Executive Vice President, East Coast; Trenton A. Groves, Vice President and Corporate Controller; Mike Van Etten, Vice President of Construction Management; Coby A. Holley,

Vice President (Pacific Northwest Division); Robin E. Mather, Vice President (Southern California Division); William A. McFaul, Vice President (Washington Metro Division); Ross K. Parkin, Vice President, Acquisitions and Dispositions; Eddie F. Ruiz, Vice President and Director of Facilities; Viola I. Sanchez, Vice President (Southeast Division); and David A. Vicars, Vice President (Midwest Division).

REIT Structure

If certain detailed conditions imposed by the Code and the related Treasury Regulations are met, an entity, such as the Company, that invests principally in real estate and that otherwise would be taxed as a corporation may elect to be treated as a REIT. The most important consequence to the Company of being treated as a REIT for federal income tax purposes is that the Company can deduct dividend distributions (including distributions on preferred stock) to its shareholders, thus effectively eliminating the “double taxation” (at the corporate and shareholder levels) that typically results when a corporation earns income and distributes that income to shareholders in the form of dividends.

The Company believes that it has operated, and intends to continue to operate, in such a manner as to qualify as a REIT under the Code, but no assurance can be given that it will at all times so qualify. To the extent that the Company continues to qualify as a REIT, it will not be taxed, with certain limited exceptions, on the taxable income that is distributed to its shareholders.

Operating Strategy

The Company believes its operating, acquisition and finance strategies combined with its diversified portfolio produces a low risk, stable growth business model. The Company’s primary objective is to grow shareholder value. Key elements of the Company’s growth strategy include:

Maximize Net Cash Flow of Existing Properties: The Company seeks to maximize the net cash flow generated by its properties by (i) maximizing average occupancy rates, (ii) achieving the highest possible levels of realized monthly rents per occupied square foot and (iii) controlling its operating cost structure by improving operating efficiencies and economies of scale. The Company believes that its experienced property management personnel and comprehensive systems combined with increasing economies of scale will enhance the Company’s ability to meet these goals. The Company seeks to increase occupancy rates and realized monthly rents per square foot by providing its field personnel with incentives to lease space to higher credit tenants and to maximize the return on investment in each lease transaction. The Company seeks to maximize its cash flow by controlling capital expenditures associated with re-leasing space by acquiring and owning properties with easily reconfigured space that appeal to a wide range of tenants.

Focus on Targeted Markets: The Company intends to continue investing in markets that have characteristics which enable them to be competitive economically. The Company believes that markets with some combination of above average population growth, job growth, education levels and personal income will produce better overall economic returns. The Company targets individual properties in those markets that are close to critical infrastructure, middle to high income housing, universities and have easy access to major transportation arteries.

Reduce Capital Expenditures and Increase Occupancy Rates by Providing Flexible Properties and Attracting a Diversified Tenant Base: By focusing on properties with easily reconfigurable space, the Company believes it can offer facilities that appeal to a wide range of potential tenants, which aids in reducing the capital expenditures associated with re-leasing space. The Company believes this property flexibility also allows it to better serve existing tenants by accommodating their expansion and contraction needs. In addition, the Company believes that a diversified tenant base and property flexibility helps it maintain occupancy rates during periods when market demand is weak, by enabling it to attract a greater number of potential users to its space.

Provide Superior Property Management: The Company seeks to provide a superior level of service to its tenants in order to achieve high occupancy and rental rates, as well as minimal customer turnover. The Company’s property management offices are primarily located on-site or regionally located, providing tenants with convenient access to management and helping the Company maintain its properties and convey a sense of quality, order and security. The Company has significant experience in acquiring properties managed by others

and thereafter improving tenant satisfaction, occupancy levels, renewal rates and rental income by implementing established tenant service programs.

Financing Strategy

The Company’s primary objective in its financing strategy is to maintain financial flexibility and a low risk capital structure. Key elements of this strategy are:

Retain Operating Cash Flow: The Company seeks to retain significant funds (after funding its distributions and capital improvements) for additional investments. During the years ended December 31, 2011 and 2010, the Company distributed 37.4% and 45.2%, respectively, of its funds from operations (“FFO”) to common shareholders/unit holders. FFO is computed in accordance with the White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”). The White Paper defines FFO as net income, computed in accordance with U.S. generally accepted accounting principles (“GAAP”), before depreciation, amortization, gains or losses on asset dispositions, net income allocable to noncontrolling interests — common units, net income allocable to restricted stock unit holders and nonrecurring items. FFO is a non-GAAP financial measure and should be analyzed in conjunction with net income. However, FFO should not be viewed as a substitute for net income as a measure of operating performance as it does not reflect depreciation and amortization costs or the level of capital expenditure and leasing costs necessary to maintain the operating performance of the Company’s properties, which are significant economic costs and could materially impact the Company’s results of operations. Other REITs may use different methods for calculating FFO and, accordingly, the Company’s FFO may not be comparable to other real estate companies’ funds from operations. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Non-GAAP Supplemental Disclosure Measure: Funds from Operations,” for a reconciliation of FFO and net income allocable to common shareholders and for information on why the Company presents FFO.

Perpetual Preferred Stock/Units: The primary source of leverage in the Company’s capital structure is perpetual preferred stock or equivalent preferred units in the Operating Partnership. This method of financing eliminates interest rate and refinancing risks because the dividend rate is fixed and the stated value or capital contribution is not required to be repaid. In addition, the consequences of defaulting on required preferred distributions is less severe than with debt. The preferred shareholders may elect two additional directors if six quarterly distributions go unpaid, whether or not consecutive.

Debt Financing: The Company, from time to time, has used debt financing to facilitate acquisitions. The primary source of debt the Company has historically relied upon to provide short-term capital is its $250.0 million unsecured line of credit (the “Credit Facility”). In addition, during 2011, in connection with its $520.0 million portfolio acquisition in Northern California, the Company obtained a $250.0 million unsecured three-year term loan and assumed a $250.0 million mortgage note.

Access to Capital: The Company targets a minimum ratio of FFO to combined fixed charges and preferred distributions paid of 3.0 to 1.0. Fixed charges include interest expense. Preferred distributions include amounts paid to preferred shareholders and preferred Operating Partnership unit holders. For the year ended December 31, 2011, the FFO to combined fixed charges and preferred distributions paid ratio was 4.0 to 1.0, excluding the issuance costs related to the redemption of preferred equity. The Company believes that its financial position will enable it to access capital to finance its future growth. Subject to market conditions, the Company may add leverage to its capital structure. Throughout this Form 10-K, we use the term “preferred equity” to mean both the preferred stock issued by the Company (including the depositary shares representing interests in that preferred stock) and the preferred partnership units issued by the Operating Partnership and the term “preferred distributions” to mean dividends and distributions on the preferred stock and preferred partnership units.

Competition

Competition in the market areas in which many of the Company’s properties are located is significant and has from time to time reduced the occupancy levels and rental rates of, and increased the operating expenses of, certain of these properties. Competition may be accelerated by any increase in availability of funds for

investment in real estate. Barriers to entry are relatively low for those with the necessary capital and the Company competes for property acquisitions and tenants with entities that have greater financial resources than the Company. Sublease space and unleased developments are expected to continue to provide competition among operators in certain market areas in which the Company operates. While the Company will have to respond to market demands, management believes that the combination of its ability to offer a variety of options within its business parks and the Company’s financial stability provides it with an opportunity to compete favorably in its markets.

The Company’s properties compete for tenants with similar properties located in its markets primarily on the basis of location, rent charged, services provided and the design and condition of improvements. The Company believes it possesses several distinguishing characteristics that enable it to compete effectively in the flex, office and industrial space markets. The Company believes its personnel are among the most experienced in these real estate markets. The Company’s facilities are part of a comprehensive system encompassing standardized procedures and integrated reporting and information networks. The Company believes that the significant operating and financial experience of its executive officers and directors combined with the Company’s capital structure, national investment scope, geographic diversity and economies of scale should enable the Company to compete effectively.

Investments in Real Estate Facilities

As of December 31, 2011, the Company owned and operated 27.2 million rentable square feet comprised of 102 business parks in eight states compared to 21.8 million rentable square feet at December 31, 2010.

Summary of Business Model

The Company has a diversified portfolio. It is diversified geographically in eight states and has a diversified customer mix by size and industry concentration. The Company believes that this diversification combined with a conservative financing strategy, focus on markets with strong demographics for growth and our operating strategy gives the Company a business model that mitigates risk and provides strong long-term growth opportunities.

Restrictions on Transactions with Affiliates

The Company’s Bylaws provide that the Company may engage in transactions with affiliates provided that a purchase or sale transaction with an affiliate is (i) approved by a majority of the Company’s independent directors and (ii) fair to the Company based on an independent appraisal or fairness opinion.

Borrowings

As of December 31, 2011, the Company had outstanding mortgage notes payable of $282.1 million compared to $51.5 million at December 31, 2010. The increase in outstanding mortgage notes payable was due to the assumption of a $250.0 million mortgage note related to the Northern California Portfolio acquisition in December, 2011. See Notes 5 and 6 to the consolidated financial statements for a summary of the Company’s outstanding borrowings as of December 31, 2011.

On August 3, 2011, the Company modified the terms of its Credit Facility with Wells Fargo Bank. The modification of the Credit Facility increased the borrowing limit to $250.0 million and extended the expiration to August 1, 2015. The modified rate of interest charged on borrowings is equal to a rate ranging from the London Interbank Offered Rate (“LIBOR”) plus 1.00% to LIBOR plus 1.85% depending on the Company’s credit ratings. Currently, the Company’s rate under the Credit Facility is LIBOR plus 1.10%. In addition, the Company is required to pay an annual facility fee ranging from 0.15% to 0.45% of the borrowing limit depending on the Company’s credit ratings (currently 0.15%). As of December 31, 2011, the Company had $185.0 million outstanding on the Credit Facility at an interest rate of 1.41%. Subsequent to December 31, 2011, the Company repaid $85.0 million on the Credit Facility reducing the outstanding balance to $100.0 million as of February 24, 2012. The Company had $93.0 million outstanding on the Credit Facility at an interest rate of 2.11% at December 31, 2010. The Company had $1.1 million and $356,000 of unamortized commitment fees as of

December 31, 2011 and 2010, respectively. The Credit Facility requires the Company to meet certain covenants, with which the Company was in compliance at December 31, 2011 and 2010. Interest on outstanding borrowings is payable monthly.

As described in Note 3, in connection with the Northern California Portfolio acquisition, the Company entered into a term loan on December 20, 2011 with Wells Fargo Bank, National Association, as Administrative Agent and the lenders named therein (the “Term Loan”). Pursuant to the Term Loan, the Company borrowed $250.0 million for a three year term through December 20, 2014. However, the maturity date of the Term Loan Agreement can be extended by one year at the Company’s election. Interest on the amounts borrowed under the Term Loan will accrue based on an applicable rate ranging from LIBOR plus 1.15% to LIBOR plus 2.25% depending on the Company’s credit ratings. Currently, the Company’s rate under the Term Loan is LIBOR plus 1.20% (1.50% at December 31, 2011). The Company had $729,000 of unamortized commitment fees as of December 31, 2011. The covenants and events of default contained in the Credit Facility are incorporated into the Term Loan by reference, and the Term Loan is cross-defaulted to the Credit Facility. The Term Loan can be repaid in full or part prior to its maturity without penalty.

On February 9, 2011, the Company entered into an agreement with PS to borrow $121.0 million with a maturity date of August 9, 2011 at an interest rate of LIBOR plus 0.85%. The Company repaid, in full, the note payable to PS upon maturity.

The Company has broad powers to borrow in furtherance of the Company’s objectives. The Company has incurred in the past, and may incur in the future, both short-term and long-term indebtedness to increase its funds available for investment in real estate, capital expenditures and distributions.

Employees

As of December 31, 2011, the Company employed 145 individuals, primarily personnel engaged in property operations.

Insurance

The Company believes that its properties are adequately insured. Facilities operated by the Company have historically been covered by comprehensive insurance, including fire, earthquake, liability and extended coverage from nationally recognized carriers.

Environmental Matters

Compliance with laws and regulations relating to the protection of the environment, including those regarding the discharge of material into the environment, has not had any material effect upon the capital expenditures, earnings or competitive position of the Company.

Substantially all of the Company’s properties have been subjected to Phase I environmental reviews. Such reviews have not revealed, nor is management aware of, any probable or reasonably possible environmental costs that management believes would have a material adverse effect on the Company’s business, assets or results of operations, nor is the Company aware of any potentially material environmental liability.

ITEM 1A. RISK FACTORS

In addition to the other information in our Annual Report on Form 10-K, you should consider the risks described below that we believe may be material to investors in evaluating the Company. This section contains forward-looking statements, and in considering these statements, you should refer to the qualifications and limitations on our forward-looking statements that are described in Item 1, “Business — Forward-Looking Statements.”

Since our business consists primarily of acquiring and operating real estate, we are subject to the risks related to the ownership and operation of real estate that can adversely impact our business and financial condition.

The value of our investments may be reduced by general risks of real estate ownership: Since we derive substantially all of our income from real estate operations, we are subject to the general risks of acquiring and owning real estate-related assets, including:

•

changes in the national, state and local economic climate and real estate conditions, such as oversupply of or reduced demand for commercial real estate space and changes in market rental rates;

•

how prospective tenants perceive the attractiveness, convenience and safety of our properties;

•

difficulties in consummating and financing acquisitions and developments on advantageous terms and the failure of acquisitions and developments to perform as expected;

•

our ability to provide adequate management, maintenance and insurance;

•

natural disasters, such as earthquakes, hurricanes and floods, which could exceed the aggregate limits of our insurance coverage;

•

the expense of periodically renovating, repairing and re-letting spaces;

•

the impact of environmental protection laws;

•

compliance with federal, state, and local laws and regulations;

•

increasing operating and maintenance costs, including property taxes, insurance and utilities, if these increased costs cannot be passed through to tenants;

•

adverse changes in tax, real estate and zoning laws and regulations;

•

increasing competition from other commercial properties in our market;

•

tenant defaults and bankruptcies;

•

tenants’ right to sublease space; and

•

concentration of properties leased to non-rated private companies with uncertain financial strength.

Certain significant costs, such as mortgage payments, real estate taxes, insurance and maintenance, generally are not reduced even when a property’s rental income is reduced. In addition, environmental and tax laws, interest rate levels, the availability of financing and other factors may affect real estate values and property income. Furthermore, the supply of commercial space fluctuates with market conditions.

If our properties do not generate sufficient income to meet operating expenses, including any debt service, tenant improvements, lease commissions and other capital expenditures, we may have to borrow additional amounts to cover fixed costs, and we may have to reduce our distributions to shareholders.

There is significant competition among commercial properties: Many other commercial properties compete with our properties for tenants. Some of the competing properties may be newer and better located than our properties. Competition in the market areas in which many of our properties are located is significant and has affected our occupancy levels, rental rates and operating expenses. We also expect that new properties will be built in our markets. In addition, we compete with other buyers, many of which are larger than us, for attractive commercial properties. Therefore, we may not be able to grow as rapidly as we would like.

We may encounter significant delays and expense in re-letting vacant space, or we may not be able to re-let space at existing rates, in each case resulting in losses of income: When leases expire, we will incur expenses in retrofitting space and we may not be able to re-lease the space on the same terms. Certain leases provide tenants with the right to terminate early if they pay a fee. As of December 31, 2011, our properties generally had lower vacancy rates than the average for the markets in which they are located, and leases accounting for 23.2% of our annualized rental income are scheduled to expire in 2012. While we have estimated our cost of renewing leases

that expire in 2012, our estimates could be wrong. If we are unable to re-lease space promptly, if the terms are significantly less favorable than anticipated or if the costs are higher, we may have to reduce our distributions to shareholders.

Tenant defaults and bankruptcies may reduce our cash flow and distributions: We may have difficulty collecting from tenants in default, particularly if they declare bankruptcy. This could affect our cash flow and our ability to fund distributions to shareholders. Since many of our tenants are non-rated private companies, this risk may be enhanced. There is inherent uncertainty in a tenant’s ability to continue paying rent if they are in bankruptcy.

We may be adversely affected if casualties to our properties are not covered by insurance: We could suffer uninsured losses or losses in excess of our insurance policy limits for occurrences such as earthquakes or hurricanes that adversely affect us or even result in loss of the property. Approximately 41.0% of our properties are located in California and are generally in areas that are subject to risks of earthquake related damage. We might still remain liable on any mortgage debt or other unsatisfied obligations related to that property.

The illiquidity of our real estate investments may prevent us from adjusting our portfolio to respond to market changes: There may be delays and difficulties in selling real estate. Therefore, we cannot easily change our portfolio when economic conditions change. Also, tax laws limit a REIT’s ability to sell properties held for less than four years.

We may be adversely affected by changes in laws: Increases in income and service taxes may reduce our cash flow and ability to make expected distributions to our shareholders. Our properties are also subject to various federal, state and local regulatory requirements, such as state and local fire and safety codes. If we fail to comply with these requirements, governmental authorities could fine us or courts could award damages against us. We believe our properties comply with all significant legal requirements. However, these requirements could change in a way that would reduce our cash flow and ability to make distributions to shareholders.

We may incur significant environmental remediation costs: As an owner and operator of real properties, under various federal, state and local environmental laws, we are required to clean up spills or other releases of hazardous or toxic substances on or from our properties. Certain environmental laws impose liability whether or not the owner knew of, or was responsible for, the presence of the hazardous or toxic substances. In some cases, liability may not be limited to the value of the property. The presence of these substances, or the failure to properly remediate any resulting contamination, whether from environmental or microbial issues, also may adversely affect our ability to sell, lease, operate, or encumber our facilities for purposes of borrowing.

We have conducted preliminary environmental assessments of most of our properties (and conduct these assessments in connection with property acquisitions) to evaluate the environmental condition of, and potential environmental liabilities associated with, our properties. These assessments generally consist of an investigation of environmental conditions at the property (not including soil or groundwater sampling or analysis), as well as a review of available information regarding the site and publicly available data regarding conditions at other sites in the vicinity. In connection with these property assessments, our operations and recent property acquisitions, we have become aware that prior operations or activities at some properties or from nearby locations have or may have resulted in contamination to the soil or groundwater at these properties. In circumstances where our environmental assessments disclose potential or actual contamination, we may attempt to obtain indemnifications and, in appropriate circumstances, we obtain limited environmental insurance in connection with the properties acquired, but we cannot assure you that such protections will be sufficient to cover actual future liabilities nor that our assessments have identified all such risks. Although we cannot provide any assurance, based on the preliminary environmental assessments, we are not aware of any environmental contamination of our facilities material to our overall business, financial condition or results of operations.

There has been an increasing number of claims and litigation against owners and managers of rental properties relating to moisture infiltration, which can result in mold or other property damage. When we receive a complaint concerning moisture infiltration, condensation or mold problems and/or become aware that an air quality concern exists, we implement corrective measures in accordance with guidelines and protocols we have developed with the assistance of outside experts. We seek to work proactively with our tenants to resolve

moisture infiltration and mold-related issues, subject to our contractual limitations on liability for such claims. However, we can give no assurance that material legal claims relating to moisture infiltration and the presence of, or exposure to, mold will not arise in the future.

Property taxes can increase and cause a decline in yields on investments: Each of our properties is subject to real property taxes, which could increase in the future as property tax rates change and as our properties are assessed or reassessed by tax authorities. Recent local government shortfalls in tax revenue may cause pressure to increase tax rates or assessment levels or impose new taxes. Such increases could adversely impact our profitability.

We must comply with the Americans with Disabilities Act and fire and safety regulations, which can require significant expenditures: All our properties must comply with the Americans with Disabilities Act and with related regulations (the “ADA”). The ADA has separate compliance requirements for “public accommodations” and “commercial facilities,” but generally requires that buildings be made accessible to persons with disabilities. Various state laws impose similar requirements. A failure to comply with the ADA or similar state laws could lead to government imposed fines on us and/or litigation, which could also involve an award of damages to individuals affected by the non-compliance. In addition, we must operate our properties in compliance with numerous local fire and safety regulations, building codes, and other land use regulations. Compliance with these requirements can require us to spend substantial amounts of money, which would reduce cash otherwise available for distribution to shareholders. Failure to comply with these requirements could also affect the marketability of our real estate facilities.

We incur liability from tenant and employment-related claims: From time to time we have to make monetary settlements or defend actions or arbitration to resolve tenant or employment-related claims and disputes.

Global economic conditions adversely affect our business, financial condition, growth and access to capital.

There continues to be global economic uncertainty, elevated levels of unemployment, reduced levels of economic activity, and it is uncertain as to when economic conditions will improve. These negative economic conditions in the markets where we operate facilities, and other events or factors that adversely affect demand for commercial real estate, could continue to adversely affect our business. To the extent that turmoil in the financial markets returns or intensifies, it has the potential to materially affect the value of our properties, the availability or the terms of financing and may impact the ability of our customers to enter into new leasing transactions or satisfy rental payments under existing leases. The uncertainty and pace of an economic recovery could also affect our operating results and financial condition as follows:

Debt and Equity Markets: Our results of operations and share price are sensitive to volatility in the credit markets. The commercial real estate debt markets have experienced significant volatility as a result of various factors, including the tightening of underwriting standards by lenders and credit rating agencies and the continued erosion of operating fundamentals of assets pledged as collateral. Credit spreads for major sources of capital widened significantly as investors have demanded a higher risk premium. This has resulted in lenders increasing the cost for debt financing. Should the overall cost of borrowings increase, either by increases in the index rates or by increases in lender spreads, we will need to factor such increases into the economics of our acquisitions. In addition, the state of the debt markets could have an effect on the overall amount of capital being invested in real estate, which may result in price or value decreases of real estate assets and affect our ability to raise capital.

Our ability to issue preferred shares or other sources of capital, such has borrowing, has been in the past, and may in the future, be adversely affected by challenging credit market conditions. The issuance of perpetual preferred securities historically has been a significant source of capital to grow our business. We believe that we have sufficient working capital and capacity under our credit facilities and our retained cash flow from operations to continue to operate our business as usual and meet our current obligations. However, if we were unable to issue preferred shares or borrow at reasonable rates, that could limit the earnings growth that might otherwise result from the acquisition and development of real estate facilities.

Valuations: Market volatility has made the valuation of our properties more difficult. There may be significant uncertainty in the valuation, or in the stability of the value, of our properties, which could result in a substantial decrease in the value of our properties. As a result, we may not be able to recover the carrying amount of our properties, which may require us to recognize an impairment charge in earnings.

The acquisition of existing properties is a significant component of our long-term growth strategy, and acquisitions of existing properties are subject to risks that may adversely affect our growth and financial results.

We acquire existing properties, either in individual transactions or portfolios offered by other commercial real estate owners. In addition to the general risks related to real estate described above, we are also subject to the following risks which may jeopardize our realization of benefits from acquisitions.

Any failure to manage acquisitions and other significant transactions to achieve anticipated results and to successfully integrate acquired operations into our existing business could negatively impact our financial results: To fully realize anticipated earnings from an acquisition, we must successfully integrate the property into our operating platform. Failures or unexpected circumstances in the integration process, such as a failure to maintain existing relationships with tenants and employees due to changes in processes, standards, or compensation arrangements, or circumstances we did not detect during due diligence, could jeopardize realization of the anticipated earnings.

During 2011, we acquired 5.6 million square feet for an aggregate purchase price of $553.5 million. We continue to seek to acquire and develop flex, industrial and office properties where they meet our criteria all of which we believe will enhance our future financial performance and the value of our portfolio. Our belief, however, is subject to risks, uncertainties and other factors, many of which are forward-looking and are uncertain in nature or are beyond our control, including the risks that our acquisitions and developments may not perform as expected, that we may be unable to quickly integrate new acquisitions and developments into our existing operations, and that any costs to develop projects or redevelop acquired properties may exceed estimates. As of December 31, 2011, the aggregate occupancy of the assets acquired in 2011 was 80.5%. If the Company is unable to lease the vacant square footage of these properties in a reasonable period of time, it may not be able to achieve its objective of enhancing value. Further, we face significant competition for suitable acquisition properties from other real estate investors, including other publicly traded real estate investment trusts and private institutional investors. As a result, we may be unable to acquire additional properties we desire or the purchase price for desirable properties may be significantly increased.

In addition, some of these properties may have unknown characteristics or deficiencies or may not complement our portfolio of existing properties. We may also finance future acquisitions and developments through a combination of borrowings, proceeds from equity or debt offerings by us or the Operating Partnership, and proceeds from property divestitures. These financing options may not be available when desired or required or may be more costly than anticipated, which could adversely affect our cash flow. Real property development is subject to a number of risks, including construction delays, complications in obtaining necessary zoning, occupancy and other governmental permits, cost overruns, financing risks, and the possible inability to meet expected occupancy and rent levels. If any of these problems occur, development costs for a project may increase, and there may be costs incurred for projects that are not completed. As a result of the foregoing, some properties may be worth less or may generate less revenue than, or simply not perform as well as, we believed at the time of acquisition or development, negatively affecting our operating results. Any of the foregoing risks could adversely affect our financial condition, operating results and cash flow, and our ability to pay dividends on, and the market price of, our stock. In addition, we may be unable to successfully integrate and effectively manage the properties we do acquire and develop, which could adversely affect our results of operations.

Acquired properties are subject to property tax reappraisals which may increase our property tax expense: Facilities that we acquire are subject to property tax reappraisal which can result in substantial increases to the ongoing property taxes paid by the seller. The reappraisal process is subject to judgment of governmental agencies regarding estimated real estate values and other factors, and as a result there is a significant degree of uncertainty in estimating the property tax expense of an acquired property. In connection with future or recent

acquisitions of properties, if our estimates of property taxes following reappraisal are too low, we may not realize anticipated earnings from an acquisition.

We would incur adverse tax consequences if we fail to qualify as a REIT.

Our cash flow would be reduced if we fail to qualify as a REIT: While we believe that we have qualified since 1990 to be taxed as a REIT, and will continue to be so qualified, we cannot be certain. To continue to qualify as a REIT, we need to satisfy certain requirements under the federal income tax laws relating to our income, assets, distributions to shareholders and shareholder base. In this regard, the share ownership limits in our articles of incorporation do not necessarily ensure that our shareholder base is sufficiently diverse for us to qualify as a REIT. For any year we fail to qualify as a REIT, we would be taxed at regular corporate tax rates on our taxable income unless certain relief provisions apply. Taxes would reduce our cash available for distributions to shareholders or for reinvestment, which could adversely affect us and our shareholders. Also we would not be allowed to elect REIT status for five years after we fail to qualify unless certain relief provisions apply.

We may need to borrow funds to meet our REIT distribution requirements: To qualify as a REIT, we must generally distribute to our shareholders 90% of our taxable income. Our income consists primarily of our share of our Operating Partnership’s income. We intend to make sufficient distributions to qualify as a REIT and otherwise avoid corporate tax. However, differences in timing between income and expenses and the need to make nondeductible expenditures such as capital improvements and principal payments on debt could force us to borrow funds to make necessary shareholder distributions.

PS has significant influence over us.

At December 31, 2011, PS owned 24.0% of the outstanding shares of the Company’s common stock and 23.2% of the outstanding common units of the Operating Partnership (100.0% of the common units not owned by the Company). Assuming issuance of the Company’s common stock upon redemption of its partnership units, PS would own 41.7% of the outstanding shares of the Company’s common stock. In addition, the PS Business Parks name and logo is owned by PS and licensed to the Company under a non-exclusive, royalty-free license agreement. The license can be terminated by either party for any reason with six months written notice. Ronald L. Havner, Jr., the Company’s chairman, is also Chairman of the Board, Chief Executive Officer and President of PS. Consequently, PS has the ability to significantly influence all matters submitted to a vote of our shareholders, including electing directors, changing our articles of incorporation, dissolving and approving other extraordinary transactions such as mergers, and all matters requiring the consent of the limited partners of the Operating Partnership. PS’s interest in such matters may differ from other shareholders. In addition, PS’s ownership may make it more difficult for another party to take over our Company without PS’s approval.

Provisions in our organizational documents may prevent changes in control.

Our articles generally prohibit any person from owning more than 7% of our shares: Our articles of incorporation restrict the number of shares that may be owned by any other person, and the partnership agreement of our Operating Partnership contains an anti-takeover provision. No shareholder (other than PS and certain other specified shareholders) may own more than 7% of the outstanding shares of our common stock, unless our board of directors waives this limitation. We imposed this limitation to avoid, to the extent possible, a concentration of ownership that might jeopardize our ability to qualify as a REIT. This limitation, however, also makes a change of control much more difficult (if not impossible) even if it may be favorable to our public shareholders. These provisions will prevent future takeover attempts not supported by PS even if a majority of our public shareholders consider it to be in their best interests as they would receive a premium for their shares over market value or for other reasons.

Our board can set the terms of certain securities without shareholder approval: Our board of directors is authorized, without shareholder approval, to issue up to 50.0 million shares of preferred stock and up to

100.0 million shares of equity stock, in each case in one or more series. Our board has the right to set the terms of each of these series of stock. Consequently, the board could set the terms of a series of stock that could make it difficult (if not impossible) for another party to take over our Company even if it might be favorable to our public shareholders. Our articles of incorporation also contain other provisions that could have the same effect. We can also cause our Operating Partnership to issue additional interests for cash or in exchange for property.

The partnership agreement of our Operating Partnership restricts mergers: The partnership agreement of our Operating Partnership generally provides that we may not merge or engage in a similar transaction unless the limited partners of our Operating Partnership are entitled to receive the same proportionate payments as our shareholders. In addition, we have agreed not to merge unless the merger would have been approved had the limited partners been able to vote together with our shareholders, which has the effect of increasing PS’s influence over us due to PS’s ownership of operating partnership units. These provisions may make it more difficult for us to merge with another entity.

Our Operating Partnership poses additional risks to us.

Limited partners of our Operating Partnership, including PS, have the right to vote on certain changes to the partnership agreement. They may vote in a way that is against the interests of our shareholders. Also, as general partner of our Operating Partnership, we are required to protect the interests of the limited partners of the Operating Partnership. The interests of the limited partners and of our shareholders may differ.

We depend on external sources of capital to grow our Company.

We are generally required under the Internal Revenue Code to distribute at least 90% of our taxable income. Because of this distribution requirement, we may not be able to fund future capital needs, including any necessary building and tenant improvements, from operating cash flow. Consequently, we may need to rely on third-party sources of capital to fund our capital needs. We may not be able to obtain the financing on favorable terms or at all. Access to third-party sources of capital depends, in part, on general market conditions, the market’s perception of our growth potential, our current and expected future earnings, our cash flow, and the market price per share of our common stock. If we cannot obtain capital from third-party sources, we may not be able to acquire properties when strategic opportunities exist, satisfy any debt service obligations, or make cash distributions to shareholders.

We would incur adverse tax consequences if we fail to qualify as a REIT.

We are subject to laws and governmental regulations and actions that affect our operating results and financial condition.

Our business is subject to regulation under a wide variety of U.S. federal, state and local laws, regulations and policies including those imposed by the SEC, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act and New York Stock Exchange, as well as applicable labor laws. Although we have policies and procedures designed to comply with applicable laws and regulations, failure to comply with the various laws and regulations may result in civil and criminal liability, fines and penalties, increased costs of compliance and restatement of our financial statements.

There can also be no assurance that, in response to current economic conditions or the current political environment or otherwise, laws and regulations will not be implemented or changed in ways that adversely affect our operating results and financial condition, such as recently adopted legislation that expands health care coverage costs or facilitates union activity or federal legislative proposals to otherwise increase operating costs.

Terrorist attacks and the possibility of wider armed conflict may have an adverse impact on our business and operating results and could decrease the value of our assets.

Terrorist attacks and other acts of violence or war could have a material adverse impact on our business and operating results. There can be no assurance that there will not be further terrorist attacks against the U.S. Attacks or armed conflicts that directly impact one or more of our properties could significantly affect our ability to operate those properties and thereby impair our operating results. Further, we may not have insurance coverage for losses caused by a terrorist attack. Such insurance may not be available, or if it is available and we decide to obtain such terrorist coverage, the cost for the insurance may be significant in relationship to the risk overall. In addition, the adverse effects that such violent acts and threats of future attacks could have on the U.S. economy could similarly have a material adverse effect on our business and results of operations. Finally, further terrorist acts could cause the U.S. to enter into a wider armed conflict, which could further impact our business and operating results.

Developments in California may have an adverse impact on our business and financial results.

We are headquartered in, and approximately 41.0% of our properties are located in California, which like many other state and local jurisdictions is facing severe budgetary problems and deficits. Actions that may be taken in response to these problems, such as increases in property taxes, changes to sales taxes or other governmental efforts to raise revenues could adversely impact our business and results of operations.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

As of December 31, 2011, the Company owned 102 business parks consisting of a geographically diverse portfolio of 27.2 million rentable square feet of commercial real estate which consists of 14.7 million square feet of flex space, 7.5 million square feet of industrial space and 5.0 million square feet of office space concentrated primarily in eight states consisting of California, Virginia, Florida, Texas, Maryland, Oregon, Arizona and Washington. The weighted average occupancy rate throughout 2011 was 89.2% and the realized rent per square foot was $15.24.

The following table reflects the geographical diversification of the 102 business parks owned by the Company as of December 31, 2011, the type of the rentable square footage and the weighted average occupancy rates throughout 2011 (except as set forth below, all of the properties are held in fee simple interest) (in thousands, except number of business parks):


	Number of Business Parks										Weighted Average Occupancy Rate
			Rentable Square Footage
State			Flex		Industrial		Office		Total
California (1)		48		5,356		4,618		1,167		11,141		89.5	%
Virginia		17		1,947		—		2,218		4,165		84.2	%
Florida (1)		3		1,074		2,631		12		3,717		96.4	%
Texas (2)		19		3,095		231		—		3,326		90.4	%
Maryland		6		970		—		1,382		2,352		87.0	%
Oregon		3		1,126		—		188		1,314		82.8	%
Arizona		4		679		—		—		679		89.6	%
Washington		2		493		—		28		521		93.6	%

Total		102		14,740		7,480		4,995		27,215		89.2	%

⁽¹⁾	The Company has 5.4 million square feet, 5.1 million square feet in California and 307,000 square feet in Florida, which serves as collateral to mortgage notes payable. For more information, see Note 6 to the consolidated financial statements.

⁽²⁾	The Company owns two properties that are subject to ground leases in Las Colinas, Texas, expiring in 2019 and 2020, each with one 10 year extension option.

We currently anticipate that each of the properties listed above will continue to be used for its current purpose. Competition exists in each of the market areas in which these properties are located.

The Company has no plans to change the current use of its properties. The Company typically renovates its properties in connection with the re-leasing of space to tenants and expects that it will pay the costs of such renovations from rental income. The Company has risks that tenants will default on leases and declare bankruptcy. Management believes these risks are mitigated through the Company’s geographic diversity and diverse tenant base.

The Company evaluates the performance of its business parks primarily based on net operating income (“NOI”). NOI is defined by the Company as rental income as defined by GAAP less cost of operations as defined by GAAP, excluding depreciation and amortization. The Company uses NOI and its components as a measurement of the performance of its commercial real estate. Management believes that these financial measures provide them, as well as the investor, the most consistent measurement on a comparative basis of the performance of the commercial real estate and its contribution to the value of the Company. Depreciation and amortization have been excluded from NOI as they are generally not used in determining the value of commercial real estate by management or the investment community. Depreciation and amortization are generally not used in determining value as they consider the historical costs of an asset compared to its current value; therefore, to understand the effect of the assets’ historical cost on the Company’s results, investors should look at GAAP financial measures, such as total operating costs including depreciation and amortization. The Company’s calculation of NOI may not be comparable to those of other companies and should not be used as an alternative to measures of performance calculated in accordance with GAAP. As part of the table below, we have reconciled total NOI to income from continuing operations, which we consider the most directly comparable financial measure calculated in accordance with GAAP. The following information illustrates rental income, cost

of operations and NOI generated by the Company’s total portfolio in 2011, 2010 and 2009 by state and by property classifications. As a result of acquisitions and dispositions, certain properties were not held for the full year.

The Company’s calculation of NOI may not be comparable to those of other companies and should not be used as an alternative to measures of performance in accordance with GAAP. The tables below also include a reconciliation of NOI to the most comparable amounts based on GAAP (in thousands):


	For the Year Ended December 31, 2011								For the Year Ended December 31, 2010								For the Year Ended December 31, 2009
	Flex		Office		Industrial		Total		Flex		Office		Industrial		Total		Flex		Office		Industrial		Total
Rental Income:
California	$	48,014	$	18,557	$	8,517	$	75,088	$	49,601	$	20,561	$	8,096	$	78,258	$	52,669	$	21,500	$	8,413	$	82,582
Virginia		32,829		42,030		—		74,859		33,464		25,665		—		59,129		34,265		24,575		—		58,840
Florida		10,592		235		20,250		31,077		10,228		216		20,076		30,520		11,292		212		19,912		31,416
Texas		31,229		—		1,308		32,537		28,274		—		1,265		29,539		23,285		—		1,245		24,530
Maryland		20,098		32,783		—		52,881		17,218		29,762		—		46,980		16,670		22,442		—		39,112
Oregon		14,029		3,210		—		17,239		15,094		3,049		—		18,143		14,269		2,941		—		17,210
Arizona		5,655		—		—		5,655		5,793		—		—		5,793		6,393		—		—		6,393
Washington		7,894		589		—		8,483		7,738		552		—		8,290		8,291		638		—		8,929

Total		170,340		97,404		30,075		297,819		167,410		79,805		29,437		276,652		167,134		72,308		29,570		269,012

Cost of Operations:
California		14,748		7,799		2,151		24,698		14,732		8,015		1,745		24,492		14,643		7,983		1,778		24,404
Virginia		8,761		16,420		—		25,181		8,381		8,665		—		17,046		8,890		8,635		—		17,525
Florida		3,975		165		6,033		10,173		3,752		134		6,041		9,927		3,985		130		5,952		10,067
Texas		10,918		—		339		11,257		10,535		—		335		10,870		8,692		—		336		9,028
Maryland		5,182		11,261		—		16,443		5,160		10,036		—		15,196		4,820		7,293		—		12,113
Oregon		5,626		1,415		—		7,041		5,326		1,393		—		6,719		5,403		1,352		—		6,755
Arizona		2,734		—		—		2,734		2,749		—		—		2,749		2,735		—		—		2,735
Washington		2,420		201		—		2,621		2,438		193		—		2,631		2,205		207		—		2,412

Total		54,364		37,261		8,523		100,148		53,073		28,436		8,121		89,630		51,373		25,600		8,066		85,039

NOI:
California		33,266		10,758		6,366		50,390		34,869		12,546		6,351		53,766		38,026		13,517		6,635		58,178
Virginia		24,068		25,610		—		49,678		25,083		17,000		—		42,083		25,375		15,940		—		41,315
Florida		6,617		70		14,217		20,904		6,476		82		14,035		20,593		7,307		82		13,960		21,349
Texas		20,311		—		969		21,280		17,739		—		930		18,669		14,593		—		909		15,502
Maryland		14,916		21,522		—		36,438		12,058		19,726		—		31,784		11,850		15,149		—		26,999
Oregon		8,403		1,795		—		10,198		9,768		1,656		—		11,424		8,866		1,589		—		10,455
Arizona		2,921		—		—		2,921		3,044		—		—		3,044		3,658		—		—		3,658
Washington		5,474		388		—		5,862		5,300		359		—		5,659		6,086		431		—		6,517

Total	$	115,976	$	60,143	$	21,552	$	197,671	$	114,337	$	51,369	$	21,316	$	187,022	$	115,761	$	46,708	$	21,504	$	183,973

The following table is provided to reconcile NOI to consolidated income from continuing operations as determined by GAAP (in thousands):


	For The Years Ended December 31,
	2011			2010			2009
Property net operating income	$	197,671		$	187,022		$	183,973
Facility management fees		684			672			698
Interest and other income		221			333			536
Depreciation and amortization		(84,542	)		(78,441	)		(84,011	)
General and administrative		(9,036	)		(9,651	)		(6,202	)
Interest expense		(5,455	)		(3,534	)		(3,552	)

Income from continuing operations	$	99,543		$	96,401		$	91,442

Portfolio Information

The table below sets forth information with respect to occupancy and rental rates of the Company’s total portfolio for each of the last five years, including discontinued operations:


	2011			2010			2009			2008			2007
Weighted average occupancy rate		89.2	%		90.8	%		90.5	%		93.5	%		93.4	%
Realized rent per square foot	$	15.24		$	14.96		$	15.45		$	15.50		$	14.97

The following table set forth the lease expirations for all assets in continuing operations as of December 31, 2011 (in thousands):

Lease Expirations as of December 31, 2011


Year of Lease Expiration	Rentable Square Footage Subject to Expiring Leases		Annualized Rental Income Under Expiring Leases		Percent of Annualized Rental Income Represented by Expiring Leases
2012		6,110	$	83,546		23.2	%
2013		6,419		92,317		25.7	%
2014		4,289		61,361		17.1	%
2015		2,597		36,827		10.2	%
2016		2,854		43,299		12.0	%
2017		802		13,350		3.8	%
2018		408		9,871		2.7	%
2019		150		3,086		0.9	%
2020		370		6,933		1.9	%
2021		306		4,776		1.3	%
Thereafter		151		4,128		1.2	%

Total		24,456	$	359,494		100.0	%

ITEM 3. LEGAL PROCEEDINGS

We are not presently subject to material litigation nor, to our knowledge, is any material litigation threatened against us, other than routine actions for negligence and other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance or third party indemnifications and all of which collectively we do not expect to have a material adverse effect on our financial condition, results of operations, or liquidity.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Price of the Registrant’s Common Equity:

The common stock of the Company trades on the New York Stock Exchange under the symbol PSB. The following table sets forth the high and low sales prices of the common stock on the New York Stock Exchange for the applicable periods:


	Range
Three Months Ended	High		Low
March 31, 2010		$55.26		$44.34
June 30, 2010		$61.88		$50.69
September 30, 2010		$61.15		$52.14
December 31, 2010		$61.54		$51.31
March 31, 2011		$63.16		$55.63
June 30, 2011		$61.10		$52.13
September 30, 2011		$59.49		$46.39
December 31, 2011		$56.87		$46.19

Holders:

As of February 20, 2012, there were 407 holders of record of the common stock.

Dividends:

Holders of common stock are entitled to receive distributions when, as and if declared by the Company’s Board of Directors out of any funds legally available for that purpose. The Company is required to distribute at least 90% of its taxable income prior to the filing of the Company’s tax return to maintain its REIT status for federal income tax purposes. It is management’s intention to pay distributions of not less than these required amounts.

Distributions paid per share of common stock for the years ended December 31, 2011 and 2010 amounted to $1.76 per year. The Board of Directors has established a distribution policy intended to maximize the retention of operating cash flow and distribute the minimum amount required for the Company to maintain its tax status as a REIT. Pursuant to restrictions contained in the Company’s Credit Facility, distributions may not exceed 95% of funds from operations, as defined therein, for any four consecutive quarters. For more information on the Credit Facility, see Note 5 to the consolidated financial statements.

Issuer Repurchases of Equity Securities:

The Company’s Board of Directors previously authorized the repurchase, from time to time, of up to 6.5 million shares of the Company’s common stock on the open market or in privately negotiated transactions. During the three months ended December 31, 2011, there were no shares of the Company’s common stock repurchased. As of December 31, 2011, the Company has 1,614,721 shares available for purchase under the program. The program does not expire. Purchases will be made subject to market conditions and other investment opportunities available to the Company.

Securities Authorized for Issuance Under Equity Compensation Plans:

The equity compensation plan information is provided in Item 12.

ITEM 6. SELECTED FINANCIAL DATA

The following sets forth selected consolidated financial and operating information on a historical basis of the Company. The following information should be read in conjunction with the consolidated financial statements and notes thereto of the Company included elsewhere in this Form 10-K. Note that historical results from 2010 through 2007 were reclassified to conform to 2011 presentation for discontinued operations. See Note 3 to the consolidated financial statements included elsewhere in this Form 10-K for a discussion of income from discontinued operations.


	For The Years Ended December 31,
	2011			2010			2009			2008			2007
	(In thousands, except per share data)

Revenues:
Rental income	$	297,819		$	276,652		$	269,012		$	279,166		$	266,892
Facility management fees		684			672			698			728			724

Total operating revenues		298,503			277,324			269,710			279,894			267,616
Expenses:
Cost of operations		100,148			89,630			85,039			86,311			82,416
Depreciation and amortization		84,542			78,441			84,011			98,801			97,574
General and administrative		9,036			9,651			6,202			8,099			7,917

Total operating expenses		193,726			177,722			175,252			193,211			187,907
Other income and (expenses):
Interest and other income		221			333			536			1,457			5,104
Interest expense		(5,455	)		(3,534	)		(3,552	)		(3,952	)		(4,130	)

Total other income and (expenses)		(5,234	)		(3,201	)		(3,016	)		(2,495	)		974

Income from continuing operations		99,543			96,401			91,442			84,188			80,683

Discontinued operations:
Income from discontinued operations		380			468			1,409			1,159			992
Gain on sale of real estate facility		2,717			5,153			1,488			—			—

Total discontinued operations		3,097			5,621			2,897			1,159			992

Net income	$	102,640		$	102,022		$	94,339		$	85,347		$	81,675

Net income allocation:
Net income allocable to noncontrolling interests:
Noncontrolling interests — common units	$	15,543		$	11,594		$	19,730		$	8,296		$	6,155
Noncontrolling interests — preferred units		(6,991	)		5,103			(2,569	)		7,007			6,854

Total net income allocable to noncontrolling interests		8,552			16,697			17,161			15,303			13,009
Net income allocable to PS Business Parks, Inc.:
Common shareholders		52,162			38,959			59,413			23,179			17,537
Preferred shareholders		41,799			46,214			17,440			46,630			50,937
Restricted stock unit holders		127			152			325			235			192

Total net income allocable to PS Business Parks, Inc		94,088			85,325			77,178			70,044			68,666

Net income	$	102,640		$	102,022		$	94,339		$	85,347		$	81,675


	For The Years Ended December 31,
	2011			2010			2009			2008			2007
	(In thousands, except per share data)

Per Common Share:
Cash Distributions	$	1.76		$	1.76		$	1.76		$	1.76		$	1.61
Net income — basic	$	2.13		$	1.59		$	2.70		$	1.13		$	0.82
Net income — diluted	$	2.12		$	1.58		$	2.68		$	1.12		$	0.81
Weighted average common shares— basic		24,516			24,546			21,998			20,443			21,313
Weighted average common shares — diluted		24,599			24,687			22,128			20,618			21,573
Balance Sheet Data:
Total assets	$	2,138,619		$	1,621,057		$	1,564,822		$	1,469,323		$	1,516,583
Total debt	$	717,084		$	144,511		$	52,887		$	59,308		$	60,725
Equity:
PS Business Parks, Inc.’s shareholder’s equity:
Preferred stock	$	598,546		$	598,546		$	626,046		$	706,250		$	716,250
Common stock	$	580,659		$	594,982		$	589,633		$	414,564		$	439,330
Noncontrolling interests:
Preferred units	$	5,583		$	53,418		$	73,418		$	94,750		$	94,750
Common units	$	175,807		$	176,179		$	176,540		$	148,023		$	154,470
Other Data:
Net cash provided by operating activities	$	181,876		$	177,941		$	179,625		$	189,337		$	184,094
Net cash used in investing activities	$	(338,362	)	$	(327,448	)	$	(26,956	)	$	(35,192	)	$	(180,188	)
Net cash provided by (used in) financing activities	$	156,400		$	(53,656	)	$	545		$	(134,171	)	$	(35,882	)
Funds from operations(1)	$	149,797		$	124,420		$	163,074		$	131,558		$	122,405
Square footage owned at end of period		27,215			21,791			19,556			19,556			19,556

(1)

Funds from operations (“FFO”) is computed in accordance with the White Paper on FFO approved by the Board of Governors of NAREIT. The White Paper defines FFO as net income, computed in accordance with GAAP, before depreciation, amortization, gains or losses on asset dispositions, net income allocable to noncontrolling interests — common units, net income allocable to restricted stock unit holders and nonrecurring items. FFO should be analyzed in conjunction with net income. However, FFO should not be viewed as a substitute for net income as a measure of operating performance or liquidity as it does not reflect depreciation and amortization costs or the level of capital expenditure and leasing costs necessary to maintain the operating performance of the Company’s properties, which are significant economic costs and could materially impact the Company’s results of operations. Other REITs may use different methods for calculating FFO and, accordingly, the Company’s FFO may not be comparable to that of other real estate companies. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Funds from Operations,” for a reconciliation of FFO and net income allocable to common shareholders and for information on why the Company presents FFO.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the results of operations and financial condition should be read in conjunction with the selected financial data and the Company’s consolidated financial statements and notes thereto included elsewhere in the Form 10-K.

Overview

As of December 31, 2011, the Company owned and operated 27.2 million rentable square feet of multi-tenant flex, industrial and office properties located in eight states.

The Company focuses on increasing profitability and cash flow aimed at maximizing shareholder value. The Company strives to maintain high occupancy levels while increasing rental rates when market conditions allow, although the Company may decrease rental rates in markets where conditions require. The Company also acquires properties it believes will create long-term value, and from time to time disposes of properties which no longer fit within the Company’s strategic objectives or in situations where the Company believes it can optimize cash proceeds. Operating results are driven primarily by income from rental operations and are therefore substantially influenced by rental demand for space within our properties and rental rates.

During 2011, the Company leased 6.6 million square feet of space including 3.8 million square feet of renewals of existing leases and 2.8 million square feet of new leases. Overall, the Company experienced a decrease in rental rates in comparing new rental rates to outgoing rental rates by 8.3%. See further discussion of operating results below.

Critical Accounting Policies and Estimates:

Our accounting policies are described in Note 2 to the consolidated financial statements included in this Form 10-K. We believe our most critical accounting policies relate to revenue recognition, property acquisitions, allowance for doubtful accounts, impairment of long-lived assets, depreciation, accruals of operating expenses and accruals for contingencies, each of which we discuss below.

Revenue Recognition: The Company must meet four basic criteria before revenue can be recognized: persuasive evidence of an arrangement exists; the delivery has occurred or services rendered; the fee is fixed or determinable; and collectability is reasonably assured. All leases are classified as operating leases. Rental income is recognized on a straight-line basis over the terms of the leases. Straight-line rent is recognized for all tenants with contractual fixed increases in rent that are not included on the Company’s credit watch list. Deferred rent receivable represents rental revenue recognized on a straight-line basis in excess of billed rents. Reimbursements from tenants for real estate taxes and other recoverable operating expenses are recognized as rental income in the period the applicable costs are incurred. Property management fees are recognized in the period earned.

Property Acquisitions: The Company records the purchase price of acquired properties to land, buildings and improvements and intangible assets and liabilities associated with in-place leases (including tenant improvements, unamortized lease commissions, value of above-market and below-market leases, acquired in-place lease values, and tenant relationships, if any) based on their respective estimated fair values. Acquisition-related costs are expensed as incurred.

In determining the fair value of the tangible assets of the acquired properties, management considers the value of the properties as if vacant as of the acquisition date. Management must make significant assumptions in determining the value of assets acquired and liabilities assumed. Using different assumptions in the recording of the purchase cost of the acquired properties would affect the timing of recognition of the related revenue and expenses. Amounts recorded to land are derived from comparable sales of land within the same region. Amounts recorded to buildings and improvements, tenant improvements and unamortized lease commissions are based on current market replacement costs and other market rate information.

The value recorded to the above-market or below-market in-place lease values of acquired properties is determined based upon the present value (using a discount rate which reflects the risks associated with the acquired leases) of the difference between (i) the contractual rents to be paid pursuant to the in-place leases, and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The amounts recorded to above-market or below-market leases are included in other assets or other liabilities in the accompanying consolidated balance sheets and are amortized on a straight-line basis as an increase or reduction of rental income over the remaining non-cancelable term of the respective leases.

Allowance for Doubtful Accounts: Rental revenue from our tenants is our principal source of revenue. We monitor the collectability of our receivable balances including the deferred rent receivable on an ongoing basis. Based on these reviews, we maintain an allowance for doubtful accounts for estimated losses resulting from the possible inability of our tenants to make required rent payments to us. Tenant receivables and deferred rent receivables are carried net of the allowances for uncollectible tenant receivables and deferred rent. As discussed below, determination of the adequacy of these allowances requires significant judgments and estimates. Our estimate of the required allowance is subject to revision as the factors discussed below change and is sensitive to the effect of economic and market conditions on our tenants.

Tenant receivables consist primarily of amounts due for contractual lease payments, reimbursements of common area maintenance expenses, property taxes and other expenses recoverable from tenants. Determination of the adequacy of the allowance for uncollectible current tenant receivables is performed using a methodology that incorporates specific identification, aging analysis, an overall evaluation of the historical loss trends and the current economic and business environment. The specific identification methodology relies on factors such as the age and nature of the receivables, the payment history and financial condition of the tenant, the assessment of the tenant’s ability to meet its lease obligations, and the status of negotiations of any disputes with the tenant. The allowance also includes a reserve based on historical loss trends not associated with any specific tenant. This reserve as well as the specific identification reserve is reevaluated quarterly based on economic conditions and the current business environment.

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. Given the long-term nature of these types of receivables, determination of the adequacy of the allowance for unbilled deferred rent receivable is based primarily on historical loss experience. Management evaluates the allowance for unbilled deferred rent receivable using a specific identification methodology for significant tenants designed to assess their financial condition and ability to meet their lease obligations.

Impairment of Long-Lived Assets: The Company evaluates a property for potential impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. On a quarterly basis, we evaluate our entire portfolio for impairment based on current operating information. In the event that these periodic assessments reflect that the carrying amount of a property exceeds the sum of the undiscounted cash flows (excluding interest) that are expected to result from the use and eventual disposition of the property, the Company would recognize an impairment loss to the extent the carrying amount exceeded the estimated fair value of the property. The estimation of expected future net cash flows is inherently uncertain and relies on subjective assumptions dependent upon future and current market conditions and events that affect the ultimate value of the property. Management must make assumptions related to the property such as future rental rates, tenant allowances, operating expenditures, property taxes, capital improvements, occupancy levels and the estimated proceeds generated from the future sale of the property. These assumptions could differ materially from actual results in future periods. Our intent to hold properties over the long-term directly decreases the likelihood of recording an impairment loss. If our strategy changes or if market conditions otherwise dictate an earlier sale date, an impairment loss could be recognized, and such loss could be material.

Depreciation: We compute depreciation on our buildings and improvements using the straight-line method based on estimated useful lives generally ranging from five to 30 years. A significant portion of the acquisition cost of each property is recorded to building and building components. The recording of the acquisition cost to building and building components, as well as the determination of their useful lives, are based on estimates. If we do not appropriately record to these components or we incorrectly estimate the useful lives of these components, our computation of depreciation expense may not appropriately reflect the actual impact of these costs over future periods, which will affect net income. In addition, the net book value of real estate assets could be overstated or understated. The statement of cash flows, however, would not be affected.

Accruals of Operating Expenses: The Company accrues for property tax expenses, performance bonuses and other operating expenses each quarter based on historical trends and anticipated disbursements. If these estimates are incorrect, the timing and amount of expense recognized will be affected.

Accruals for Contingencies: The Company is exposed to business and legal liability risks with respect to events that may have occurred, but in accordance with GAAP has not accrued for such potential liabilities because the loss is either not probable or not estimable. Future events could result in such potential losses becoming probable and estimable, which could have a material adverse impact on our financial condition or results of operations.

Effect of Economic Conditions on the Company’s Operations: During 2011, the impact of the recent recession and continued weak economic conditions on commercial real estate was significant as the Company continued to experience decreases in new rental rates over expiring rental rates on executed leases. Although it is uncertain what impact economic conditions will have on the Company’s future ability to maintain existing occupancy levels and rental rates, management expects that the decrease in rental rates on lease transactions will result in a decrease in rental income for 2012 when compared to 2011. Current and future economic conditions may continue to have a significant impact on the Company, potentially resulting in further reductions in occupancy and rental rates.

While the Company historically has experienced a low level of write-offs of uncollectable rents, there is inherent uncertainty in a tenant’s ability to continue paying rent and meet their full lease obligation. The table below summarizes the impact to the Company from tenants’ inability to pay rent or continue to meet their lease obligations (in thousands):


	For The Years Ended December 31,
	2011			2010			2009
Annual write — offs of uncollectible rent	$	1,172		$	1,464		$	988
Annual write — offs as a percentage of annual rental income		0.4	%		0.5	%		0.4	%
Square footage of leases terminated prior to scheduled expiration due to business failures/bankruptcies		536			572			821
Accelerated depreciation expense related to unamortized tenant improvements and lease commissions associated with early terminations	$	1,370		$	2,779		$	2,653

As of February 24, 2012, the Company had 24,000 square feet of leased space occupied by tenants that are protected by Chapter 11 of the U.S. Bankruptcy Code. From time to time, tenants contact us, requesting early termination of their lease, a reduction in space under lease, or rent deferment or abatement. At this time, the Company cannot anticipate what impact, if any, the ultimate outcome of these discussions will have on our future operating results.

Company Performance and Effect of Economic Conditions on Primary Markets: The Company’s operations are substantially concentrated in 10 regions. During the year ended December 31, 2011, initial rental rates on new and renewed leases within the Company’s overall portfolio decreased 8.3% over expiring rents, an

improvement from a decline of 13.0% for the year ended December 31, 2010. The Company’s Same Park (defined below) occupancy rate at December 31, 2011 was 92.5%, up from 91.8% at December 31, 2010. The Company’s overall occupancy rate at December 31, 2011 was 88.9%, compared to 89.6% at December 31, 2010. Each of the 10 regions in which the Company owns assets is subject to its own unique market influences. See “Supplemental Property Data and Trends” below for more information on regional operating data.

Growth of the Company’s Operations and Acquisitions and Dispositions of Properties: The Company is focused on maximizing cash flow from its existing portfolio of properties by looking for opportunities to expand its presence in existing and new markets through strategic acquisitions. The Company may from time to time dispose of non-strategic assets that do not meet this criterion. The Company has historically maintained a low-leverage-level approach intended to provide the Company with the greatest level of flexibility for future growth.

As of December 31, 2011, the blended occupancy rate of the nine assets acquired was 80.1% compared to a blended occupancy rate of 77.5% at the time of acquisition. As of December 31, 2011, the Company had 1.6 million square feet of vacancy spread over these nine acquisitions which provides the Company with considerable opportunity to generate additional rental income given that the Company’s other assets in these same submarkets have a blended occupancy of 91.9% at December 31, 2011. The table below reflects the assets acquired in 2011 and 2010 (in thousands):


Property	Date Acquired	Location	Purchase Price		Square Feet		Occupancy at Acquisition			Occupancy at December 31, 2011
Northern California Portfolio	December, 2011	East Bay, California	$	520,000		5,334		82.2	%		82.4	%
Royal Tech	October, 2011	Las Colinas, Texas		2,835		80		0.0	%		0.0	% (1)
MICC — Center 22	August, 2011	Miami, Florida		3,525		46		33.3	%		33.3	%
Warren Building	June, 2011	Tysons Corner, Virginia		27,100		140		68.0	%		69.5	%
Westpark Business Campus	December, 2010	Tysons Corner, Virginia		140,000		735		61.9	%		65.0	%
Tysons Corporate Center	July, 2010	Tysons Corner, Virginia		35,400		270		47.0	%		65.9	%
Parklawn Business Park	June, 2010	Rockville, Maryland		23,430		232		70.6	%		83.0	%
Austin Flex Portfolio	April, 2010	Austin, Texas		42,900		704		88.0	%		92.0	%
Shady Grove Executive Center	March, 2010	Rockville, Maryland		60,000		350		73.5	%		88.0	%

Total			$	855,190		7,891		77.5	%		80.1	%

(1)	As of January 1, 2012, the building was 100.0% leased to a single user.

In addition to the 2010 property acquisitions, during 2010, the Company also completed construction on a parcel of land within MICC in Miami, Florida, which added 75,000 square feet of rentable small tenant industrial space. As of December 31, 2011, the newly constructed building was 89.9% occupied. Collectively, the Non-Same Park (defined below) assets, which includes the acquired assets noted above and the development in Miami were 80.2% occupied at December 31, 2011.

The Company made no acquisitions during the year ended December 31, 2009.

During January, 2010, the Company completed the sale of a 131,000 square foot office building located in Houston, Texas, for a gross sales price of $10.0 million, resulting in a net gain of $5.2 million.

In May, 2009, the Company sold 3.4 acres of land held for development in Portland, Oregon, for a gross sales price of $2.7 million, resulting in a net gain of $1.5 million.

Scheduled Lease Expirations: In addition to the 3.0 million square feet, or 11.1%, of space available in our total portfolio as of December 31, 2011, leases representing 25.0% of the leased square footage of our total portfolio or 23.2% of annualized rental income are scheduled to expire in 2012. Our ability to re-lease available space depends upon the market conditions in the specific submarkets in which our properties are located. As a result, we cannot predict with certainty the rate at which expiring leases will be re-leased.

Impact of Inflation: Although inflation has not been significant in recent years, it remains a potential factor in our economy, and the Company continues to seek ways to mitigate its potential impact. A substantial portion of the Company’s leases require tenants 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.

Concentration of Portfolio by Region: The table below reflects the Company’s square footage from continuing operations based on regional concentration as of December 31, 2011 (in thousands):


Region	Square Footage		Percent of Total
California
Northern California		7,153		26.3	%
Southern California		3,988		14.7	%
Virginia		4,165		15.3	%
Florida		3,717		13.7	%
Texas
Northern Texas		1,769		6.5	%
Southern Texas		1,557		5.7	%
Maryland		2,352		8.6	%
Oregon		1,314		4.8	%
Arizona		679		2.5	%
Washington		521		1.9	%

Total Square Footage		27,215		100.0	%

Concentration of Credit Risk by Industry: The information below depicts the industry concentration of our tenant base as of December 31, 2011. The Company analyzes this concentration to minimize significant industry exposure risk.


Industry	Percent of Annualized Rental Income
Business services		15.4	%
Health services		11.3	%
Government		10.6	%
Computer hardware, software and related services		10.4	%
Warehouse, distribution, transportation and logistics		9.3	%
Engineering and construction		6.1	%
Insurance and financial services		5.8	%
Retail, food and automotive		5.4	%
Communications		5.1	%
Home furnishing		3.4	%
Aerospace/defense products and services		3.2	%
Electronics		3.1	%
Educational services		1.7	%
Other		9.2	%

Total		100.0	%

The information below depicts the Company’s top 10 customers by annualized rental income as of December 31, 2011 (in thousands):


Tenants	Square Footage		Annualized Rental Income(1)		Percent of Annualized Rental Income
U.S. Government		829	$	21,930		6.5	%
Lockheed Martin Corporation		193		5,237		1.5	%
Level 3 Communication		197		3,641		1.1	%
Kaiser Permanente		206		3,540		1.0	%
Bristol-Meyers Squibb		114		2,667		0.8	%
Wells Fargo.		120		2,231		0.7	%
Luminex Corporation		149		2,209		0.7	%
Keeco LLC.		280		1,950		0.6	%
AARP		102		1,768		0.5	%
ATS Corporation		58		1,745		0.5	%

Total		2,248	$	46,918		13.9	%

(1)

For leases expiring prior to December 31, 2012, annualized rental income represents income to be received under existing leases from January 1, 2012 through the date of expiration.

Comparison of 2011 to 2010

Results of Operations: Net income for the year ended December 31, 2011 was $102.6 million compared to $102.0 million for the year ended December 31, 2010. Net income allocable to common shareholders for the year ended December 31, 2011 was $52.2 million compared to $39.0 million for the year ended December 31, 2010. Net income per common share on a diluted basis was $2.12 for the year ended December 31, 2011 compared to $1.58 for the year ended December 31, 2010 (based on weighted average diluted common shares outstanding of 24,599,000 and 24,687,000, respectively). The increase in net income allocable to common shareholders was primarily a result of an increase in net operating income and lower distributions resulting from the reduction of preferred equity outstanding, partially offset by the change in gain on the sale of a real estate facility combined with increases in interest and depreciation expense primarily related to property acquisitions.

In order to evaluate the performance of the Company’s overall portfolio over comparable periods, management analyzes the operating performance of stabilized properties owned and operated throughout both periods (herein referred to as “Same Park”). Acquired assets are generally considered stabilized when occupancy is within a range of comparable Company assets. Operating properties that the Company acquired subsequent to January 1, 2010 or those that are not deemed to be stabilized are referred to as “Non-Same Park.” For the years ended December 31, 2011 and 2010, the Same Park facilities constitute 19.2 million rentable square feet, which includes all stabilized assets in continuing operations that the Company owned from January 1, 2010 through December 31, 2011, representing 70.7% of the 27.2 million square feet in the Company’s portfolio as of December 31, 2011.

The following table presents the operating results of the Company’s properties for the years ended December 31, 2011 and 2010 in addition to other income and expense items affecting income from continuing operations. The Company reports Same Park operations to provide information regarding trends for stabilized properties the Company has held for the periods being compared (in thousands, except per square foot data):


	For The Years Ended December 31,						Change
	2011			2010			Change
Rental income:
Same Park (19.2 million rentable square feet) (1)	$	256,442		$	261,198			(1.8	%)
Non-Same Park (8.0 million rentable square feet) (2)		41,377			15,454			167.7	%

Total rental income		297,819			276,652			7.7	%

Cost of operations:
Same Park		84,228			83,858			0.4	%
Non-Same Park		15,920			5,772			175.8	%

Total cost of operations		100,148			89,630			11.7	%

Net operating income (3):
Same Park (1)		172,214			177,340			(2.9	%)
Non-Same Park		25,457			9,682			162.9	%

Total net operating income		197,671			187,022			5.7	%

Other income and (expenses):
Facility management fees		684			672			1.8	%
Interest and other income		221			333			(33.6	%)
Interest expense		(5,455	)		(3,534	)		54.4	%
Depreciation and amortization		(84,542	)		(78,441	)		7.8	%
General and administrative		(5,969	)		(6,389	)		(6.6	%)
Acquisition transaction costs		(3,067	)		(3,262	)		(6.0	%)

Income from continuing operations	$	99,543		$	96,401			3.3	%

Same Park gross margin (4)		67.2	%		67.9	%		(1.0	%)
Same Park weighted average occupancy		91.1	%		91.6	%		(0.5	%)
Non-Same Park weighted average occupancy		75.3	%		77.9	%
Same Park realized rent per square foot (5)	$	14.46		$	14.81			(2.4	%)

(1)	See above for a definition of Same Park. Excluding $2.9 million of lease buyout income noted below, rental income and net operating income from the Same Park portfolio decreased 2.9% and 4.5%, respectively, for the year ended December 31, 2011 over 2010.

(2)	See above for a definition of Non-Same Park.

(3)

Net operating income (“NOI”) is an important measurement in the commercial real estate industry for determining the value of the real estate generating the NOI. See “Item 2. Properties” above for more information on NOI. The Company’s calculation of NOI may not be comparable to those of other companies and should not be used as an alternative to measures of performance in accordance with GAAP.

(4)	Same Park gross margin is computed by dividing Same Park NOI by Same Park rental income.

(5)

Same Park realized rent per square foot represents the Same Park rental income earned per occupied square foot excluding $2.9 million of lease buyout income noted below. Including the $2.9 million of lease buyout income, Same Park realized rent per square foot was $14.62 for the year ended December 31, 2011.

Supplemental Property Data and Trends: Rental income, cost of operations and rental income less cost of operations, excluding depreciation and amortization, or net operating income prior to depreciation and amortization (defined as “NOI” for purposes of the following table) from continuing operations is summarized for the years ended December 31, 2011 and 2010 by region below. See “Item 2. Properties” above for more information on NOI, including why the Company presents NOI and how the Company uses NOI. The

Company’s calculation of NOI may not be comparable to those of other companies and should not be used as an alternative to measures of performance calculated in accordance with GAAP.

The following table summarizes the Same Park operating results by region for the years ended December 31, 2011 and 2010. In addition, the table reflects the comparative impact on the overall rental income, cost of operations and NOI from properties that have been acquired since January 1, 2010, and the impact of such is included in Non-Same Park facilities in the table below. As part of the table below, we have reconciled total NOI to income from continuing operations (in thousands):


Region	Rental Income December 31, 2011		Rental Income December 31, 2010		Increase (Decrease)			Cost of Operations December 31, 2011		Cost of Operations December 31, 2010		Increase (Decrease)			NOI December 31, 2011			NOI December 31, 2010		Increase (Decrease)
Same Park
Northern California	$	19,524	$	19,820		(1.5	%)	$	6,871	$	6,830		0.6	%	$	12,653		$	12,990		(2.6	%)
Southern California		54,329		58,438		(7.0	%)		17,430		17,662		(1.3	%)		36,899			40,776		(9.5	%)
Virginia		55,112		56,932		(3.2	%)		17,009		16,079		5.8	%		38,103			40,853		(6.7	%)
Florida		30,407		30,397		0.0	%		9,829		9,864		(0.4	%)		20,578			20,533		0.2	%
Northern Texas		16,482		16,664		(1.1	%)		5,598		5,720		(2.1	%)		10,884			10,944		(0.5	%)
Southern Texas		8,313		7,878		5.5	%		2,899		3,268		(11.3	%)		5,414			4,610		17.4	%
Maryland		40,898		38,843		5.3	%		12,196		12,336		(1.1	%)		28,702			26,507		8.3	%
Oregon		17,239		18,143		(5.0	%)		7,041		6,719		4.8	%		10,198			11,424		(10.7	%)
Arizona		5,655		5,793		(2.4	%)		2,734		2,749		(0.5	%)		2,921			3,044		(4.0	%)
Washington		8,483		8,290		2.3	%		2,621		2,631		(0.4	%)		5,862			5,659		3.6	%

Total Same Park		256,442		261,198		(1.8	%)		84,228		83,858		0.4	%		172,214			177,340		(2.9	%)
Non-Same Park
Northern California		1,235		—		100.0	%		397		—		100.0	%		838			—		100.0	%
Virginia		19,747		2,197		798.8	%		8,172		966		746.0	%		11,575			1,231		840.3	%
Florida		670		123		444.7	%		344		63		446.0	%		326			60		443.3	%
Northern Texas		—		—		—			76		—		100.0	%		(76	)		—		(100.0	%)
Southern Texas		7,742		4,997		54.9	%		2,684		1,882		42.6	%		5,058			3,115		62.4	%
Maryland		11,983		8,137		47.3	%		4,247		2,861		48.4	%		7,736			5,276		46.6	%

Total Non-Same Park		41,377		15,454		167.7	%		15,920		5,772		175.8	%		25,457			9,682		162.9	%

Total NOI	$	297,819	$	276,652		7.7	%	$	100,148	$	89,630		11.7	%	$	197,671		$	187,022		5.7	%


Reconciliation of NOI to income from continuing operations
Total NOI	$	197,671		$	187,022		5.7	%
Other income and (expenses):
Facilities management fees		684			672		1.8	%
Interest and other income		221			333		(33.6	%)
Interest expense		(5,455	)		(3,534	)	54.4	%
Depreciation and amortization		(84,542	)		(78,441	)	7.8	%
General and administrative		(9,036	)		(9,651	)	(6.4	%)

Income from continuing operations	$	99,543		$	96,401		3.3	%

The following table summarizes Same Park weighted average occupancy rates and realized rent per square foot by region for the years ended December 31, 2011 and 2010. Realized rent per square foot for Maryland and Total Same Park excludes $2.9 million of lease buyout income:


	Weighted Average Occupancy Rates For The Years Ended December 31,						Change			Realized Rent Per Square Foot For The Years Ended December 31,				Change
Region	2011			2010			Change			2011		2010		Change
Northern California		90.0	%		89.7	%		0.3	%	$	11.93	$	12.15		(1.8	%)
Southern California		89.6	%		92.5	%		(3.1	%)	$	15.21	$	15.85		(4.0	%)
Virginia		92.3	%		92.7	%		(0.4	%)	$	19.77	$	20.34		(2.8	%)
Florida		96.8	%		95.6	%		1.3	%	$	8.73	$	8.84		(1.2	%)
Northern Texas		92.0	%		91.8	%		0.2	%	$	10.60	$	10.74		(1.3	%)
Southern Texas		89.5	%		86.7	%		3.2	%	$	10.88	$	10.65		2.2	%
Maryland		88.5	%		91.4	%		(3.2	%)	$	24.29	$	24.03		1.1	%
Oregon		82.8	%		83.7	%		(1.1	%)	$	15.85	$	16.50		(3.9	%)
Arizona		89.6	%		86.7	%		3.3	%	$	9.30	$	9.84		(5.5	%)
Washington		93.6	%		90.4	%		3.5	%	$	17.39	$	17.60		(1.2	%)
Total Same Park		91.1	%		91.6	%		(0.5	%)	$	14.46	$	14.81		(2.4	%)

Rental Income: Rental income increased $21.2 million from $276.7 million for the year ended December 31, 2010 to $297.8 million for the year ended December 31, 2011 as a result of a $25.9 million increase in rental income from Non-Same Park facilities, partially offset by a $4.8 million decrease in rental income from the Same Park portfolio. The decrease in rental income from the Same Park portfolio was due to decreases in rental and occupancy rates, partially offset by lease buyout income of $2.9 million associated with a 53,000 square foot lease in Maryland which terminated during the third quarter of 2011. Excluding the lease buyout income, rental income from the Same Park portfolio decreased $7.6 million.

Facility Management Fees: Facility management fees account for a small portion of the Company’s net income. During the year ended December 31, 2011, $684,000 of revenue was recognized from facility management fees compared to $672,000 for the year ended December 31, 2010.

Cost of Operations: Cost of operations for the year ended December 31, 2011 was $100.1 million compared to $89.6 million for the year ended December 31, 2010, an increase of $10.5 million, or 11.7% as a result of increases in cost of operations from Non-Same Park facilities of $10.1 million and Same Park of $370,000. The increase in Same Park cost of operations was due to increases in utility costs and repairs and maintenance costs, partially offset by a decrease in payroll and benefit costs.

Depreciation and Amortization Expense: Depreciation and amortization expense was $84.5 million for the year ended December 31, 2011 compared to $78.4 million for the year ended December 31, 2010. The increase was primarily due to depreciation from 2011 and 2010 property acquisitions.

General and Administrative Expenses: For the year ended December 31, 2011, general and administrative expenses decreased $615,000, or 6.4%, over 2010 as a result of a decrease in payroll and benefit costs and a reduction in professional fees related to legal fees paid during the first quarter of 2010. Additionally, general and administrative expenses for the year ended December 31, 2011 were further reduced due to a decrease in acquisition transactions costs. The Company incurred and expensed acquisition transaction costs of $3.1 million and $3.3 million for the years ended December 31, 2011 and 2010, respectively.

Interest and Other Income: Interest and other income reflect earnings on cash balances in addition to miscellaneous income items. Interest income was $22,000 for the year ended December 31, 2011 compared to $198,000 for the year ended December 31, 2010. The decrease was primarily attributable to lower average cash balances in 2011. Average cash balances and effective interest rates for the year ended December 31, 2011 were $12.7 million and 0.2%, respectively, compared to $111.7 million and 0.2%, respectively, for the year ended December 31, 2010.

Interest Expense: Interest expense was $5.5 million for the year ended December 31, 2011 compared to $3.5 million for the year ended December 31, 2010. The increase was primarily attributable to an increase in borrowings on the Credit Facility, interest on the Term Loan and mortgage note assumption related to the Northern California Portfolio acquisition.

Gain on Sale of Real Estate Facility: Included in total discontinued operations is the gain on the sale of Westchase Corporate Park, a 177,000 square foot flex park consisting of 13 buildings in Houston, Texas, for a gross sales price of $9.8 million, resulting in a net gain of $2.7 million during August, 2011.

In January, 2010, the Company completed the sale of a 131,000 square foot office building located in Houston, Texas, for a gross sales price of $10.0 million, resulting in a net gain of $5.2 million.

Net Income Allocable to Noncontrolling Interests: Net income allocable to noncontrolling interests reflects the net income allocable to equity interests in the Operating Partnership that are not owned by the Company. Net income allocable to noncontrolling interests was $8.6 million ($7.0 million of loss allocated to preferred unit holders and $15.5 million of income allocated to common unit holders) for the year ended December 31, 2011 compared to $16.7 million of allocated income ($5.1 million allocated to preferred unit holders and $11.6 million allocated to common unit holders) for the year ended December 31, 2010. Included in net income allocable to noncontrolling interests for the year ended December 31, 2011 was a $7.4 million loss allocated to preferred unit holders resulting from the repurchase by the Company of preferred units at an amount less than the carrying value, partially offset with $1.7 million of income allocated to common unit holders due to the net gain on the

repurchases of preferred units. The decrease in net income allocable to noncontrolling interests was a result of a decrease in cash distributions as a result of the preferred equity transactions, partially offset by an increase in net operating income from Non-Same Park facilities.

Comparison of 2010 to 2009

Results of Operations: Net income for the year ended December 31, 2010 was $102.0 million compared to $94.3 million for the year ended December 31, 2009. Net income allocable to common shareholders for the year ended December 31, 2010 was $39.0 million compared to $59.4 million for the year ended December 31, 2009. Net income per common share on a diluted basis was $1.58 for the year ended December 31, 2010 compared to $2.68 for the year ended December 31, 2009 (based on weighted average diluted common shares outstanding of 24,687,000 and 22,128,000, respectively). The decrease in net income allocable to common shareholders was primarily due to the net gain of $35.6 million on the repurchase of preferred equity reported during the first quarter of 2009 combined with acquisition transaction costs of $3.3 million related to 2010 acquisitions. These decreases were partially offset by reductions in depreciation expense, preferred equity cash distributions and net income allocable to noncontrolling interests — common units.

In order to evaluate the performance of the Company’s overall portfolio over comparable periods, management analyzes the operating performance of stabilized properties owned and operated throughout both periods (herein referred to as “Same Park”). Acquired assets are generally considered stabilized when occupancy is within a range of comparable Company assets. Operating properties that the Company acquired subsequent to January 1, 2009 or those that are not deemed to be stabilized are referred to as “Non-Same Park.” For the years ended December 31, 2010 and 2009, the Same Park facilities constitute 19.2 million rentable square feet, which includes all stabilized assets in continuing operations that the Company owned from January 1, 2009 through December 31, 2010, representing 88.3% of the 21.8 million square feet in the Company’s portfolio as of December 31, 2010.

The following table presents the operating results of the Company’s properties for the years ended December 31, 2010 and 2009 in addition to other income and expense items affecting income from continuing operations. The Company reports Same Park operations to provide information regarding trends for stabilized properties the Company has held for the periods being compared (in thousands, except per square foot data):


	For The Years Ended December 31,						Change
	2010			2009			Change
Rental income:
Same Park (19.2 million rentable square feet) (1)	$	261,198		$	269,012			(2.9	%)
Non-Same Park (2.4 million rentable square feet) (2)		15,454			—			100.0	%

Total rental income		276,652			269,012			2.8	%

Cost of operations:
Same Park		83,858			85,039			(1.4	%)
Non-Same Park		5,772			—			100.0	%

Total cost of operations		89,630			85,039			5.4	%

Net operating income (3):
Same Park		177,340			183,973			(3.6	%)
Non-Same Park		9,682			—			100.0	%

Total net operating income		187,022			183,973			1.7	%

Other income and (expenses):
Facility management fees		672			698			(3.7	%)
Interest and other income		333			536			(37.9	%)
Interest expense		(3,534	)		(3,552	)		(0.5	%)
Depreciation and amortization		(78,441	)		(84,011	)		(6.6	%)
General and administrative		(6,389	)		(6,202	)		3.0	%
Acquisition transaction costs		(3,262	)		—			100.0	%

Income from continuing operations	$	96,401		$	91,442			5.4	%

Same Park gross margin (4)		67.9	%		68.4	%		(0.7	%)
Same Park weighted average occupancy		91.6	%		90.4	%		1.3	%
Non-Same Park weighted average occupancy		77.9	%		—
Same Park realized rent per square foot (5)	$	14.81		$	15.46			(4.2	%)

(1)	See above for a definition of Same Park.

(2)	See above for a definition of Non-Same Park.

(3)

(4)	Same Park gross margin is computed by dividing Same Park NOI by Same Park rental income.

(5)	Same Park realized rent per square foot represents the Same Park rental income earned per occupied square foot.

Supplemental Property Data and Trends: Rental income, cost of operations and rental income less cost of operations, excluding depreciation and amortization, or net operating income prior to depreciation and amortization (defined as “NOI” for purposes of the following table) from continuing operations is summarized for the years ended December 31, 2010 and 2009 by region below. See “Item 2. Properties” above for more information on NOI, including why the Company presents NOI and how the Company uses NOI. The Company’s calculation of NOI may not be comparable to those of other companies and should not be used as an alternative to measures of performance calculated in accordance with GAAP.

The following table summarizes the Same Park operating results by region for the years ended December 31, 2010 and 2009. In addition, the table reflects the comparative impact on the overall rental income, cost of operations and NOI from properties that have been acquired since January 1, 2009, and the impact of such is included in Non-Same Park facilities in the table below. As part of the table below, we have reconciled total NOI to income from continuing operations (in thousands):


Region	Rental Income December 31, 2010		Rental Income December 31, 2009		Increase (Decrease)			Cost of Operations December 31, 2010		Cost of Operations December 31, 2009		Increase (Decrease)			NOI December 31, 2010		NOI December 31, 2009		Increase (Decrease)
Same Park
Northern California	$	19,820	$	20,695		(4.2	%)	$	6,830	$	6,788		0.6	%	$	12,990	$	13,907		(6.6	%)
Southern California		58,438		61,887		(5.6	%)		17,662		17,616		0.3	%		40,776		44,271		(7.9	%)
Virginia		56,932		58,840		(3.2	%)		16,079		17,525		(8.3	%)		40,853		41,315		(1.1	%)
Florida		30,397		31,416		(3.2	%)		9,864		10,067		(2.0	%)		20,533		21,349		(3.8	%)
Northern Texas		16,664		16,576		0.5	%		5,720		5,777		(1.0	%)		10,944		10,799		1.3	%
Southern Texas		7,878		7,954		(1.0	%)		3,268		3,251		0.5	%		4,610		4,703		(2.0	%)
Maryland		38,843		39,112		(0.7	%)		12,336		12,113		1.8	%		26,507		26,999		(1.8	%)
Oregon		18,143		17,210		5.4	%		6,719		6,755		(0.5	%)		11,424		10,455		9.3	%
Arizona		5,793		6,393		(9.4	%)		2,749		2,735		0.5	%		3,044		3,658		(16.8	%)
Washington		8,290		8,929		(7.2	%)		2,631		2,412		9.1	%		5,659		6,517		(13.2	%)

Total Same Park		261,198		269,012		(2.9	%)		83,858		85,039		(1.4	%)		177,340		183,973		(3.6	%)
Non-Same Park
Virginia		2,197		—		100.0	%		966		—		100.0	%		1,231		—		100.0	%
Florida		123		—		100.0	%		63		—		100.0	%		60		—		100.0	%
Southern Texas		4,997		—		100.0	%		1,882		—		100.0	%		3,115		—		100.0	%
Maryland		8,137		—		100.0	%		2,861		—		100.0	%		5,276		—		100.0	%

Total Non-Same Park		15,454		—		100.0	%		5,772		—		100.0	%		9,682		—		100.0	%

Total NOI	$	276,652	$	269,012		2.8	%	$	89,630	$	85,039		5.4	%	$	187,022	$	183,973		1.7	%


Reconciliation of NOI to income from continuing operations
Total NOI	$	187,022		$	183,973		1.7	%
Other income and (expenses):
Facilities management fees		672			698		(3.7	%)
Interest and other income		333			536		(37.9	%)
Interest expense		(3,534	)		(3,552	)	(0.5	%)
Depreciation and amortization		(78,441	)		(84,011	)	(6.6	%)
General and administrative		(9,651	)		(6,202	)	55.6	%

Income from continuing operations	$	96,401		$	91,442		5.4	%

The following table summarizes Same Park weighted average occupancy rates and realized rent per square foot by region for the years ended December 31, 2010 and 2009:


	Weighted Average Occupancy Rates For The Years Ended December 31,						Change			Realized Rent Per Square Foot For The Years Ended December 31,				Change
Region	2010			2009			Change			2010		2009		Change
Northern California		89.7	%		85.5	%		4.9	%	$	12.15	$	13.31		(8.7	%)
Southern California		92.5	%		91.3	%		1.3	%	$	15.85	$	17.01		(6.8	%)
Virginia		92.7	%		93.6	%		(1.0	%)	$	20.34	$	20.82		(2.3	%)
Florida		95.6	%		94.5	%		1.2	%	$	8.84	$	9.24		(4.3	%)
Northern Texas		91.8	%		91.1	%		0.8	%	$	10.74	$	10.77		(0.3	%)
Southern Texas		86.7	%		84.9	%		2.1	%	$	10.65	$	10.98		(3.0	%)
Maryland		91.4	%		92.1	%		(0.8	%)	$	24.03	$	23.99		0.2	%
Oregon		83.7	%		79.9	%		4.8	%	$	16.50	$	16.40		0.6	%
Arizona		86.7	%		85.5	%		1.4	%	$	9.84	$	11.01		(10.6	%)
Washington		90.4	%		88.2	%		2.5	%	$	17.60	$	19.43		(9.4	%)
Total Same Park		91.6	%		90.4	%		1.3	%	$	14.81	$	15.46		(4.2	%)

Rental Income: Rental income increased $7.6 million from $269.0 million to $276.7 million for the year ended December 31, 2010 over 2009 as a result of rental income from Non-Same Park facilities of $15.5 million, partially offset by a decrease in Same Park rental income of $7.8 million. The decrease in rental income from the Same Park portfolio was due to a decrease in rental rates, partially offset by an increase in occupancy rates.

Facility Management Fees: Facility management fees account for a small portion of the Company’s net income. During the year ended December 31, 2010, $672,000 of revenue was recognized from facility management fees compared to $698,000 for the year ended December 31, 2009.

Cost of Operations: Cost of operations for the year ended December 31, 2010 was $89.6 million compared to $85.0 million for the year ended December 31, 2009, an increase of $4.6 million, or 5.4% as a result of cost of operations from Non-Same Park facilities of $5.8 million, partially offset by a $1.2 million decrease in Same Park costs of operations. The decrease in Same Park cost of operations was primarily due to decreases in property taxes, payroll and benefit costs and utility costs, partially offset by an increase in repairs and maintenance costs driven primarily by higher snow removal costs.

Depreciation and Amortization Expense: Depreciation and amortization expense was $78.4 million for the year ended December 31, 2010 compared to $84.0 million for the year ended December 31, 2009. The decrease was primarily due to a number of capital improvements that became fully depreciated, partially offset with depreciation from 2010 acquisitions.

General and Administrative Expenses: General and administrative expense was $9.7 million for the year ended December 31, 2010 compared to $6.2 million for the year ended December 31, 2009. The increase of $3.4 million, or 55.6%, was primarily due to $3.3 million of acquisition transaction costs related to 2010 property acquisitions.

Interest and Other Income: Interest and other income reflect earnings on cash balances in addition to miscellaneous income items. Interest income was $198,000 for the year ended December 31, 2010 compared to $431,000 for the year ended December 31, 2009. The decrease was primarily attributable to lower effective interest rates. Average cash balances and effective interest rates for the year ended December 31, 2010 were $111.7 million and 0.2%, respectively, compared to $112.7 million and 0.4%, respectively, for the year ended December 31, 2009.

Interest Expense: Interest expense was $3.5 million for the year ended December 31, 2010 compared to $3.6 million for the year ended December 31, 2009. The decrease was primarily attributable to the repayment of a mortgage note of $5.1 million during the first quarter of 2009, partially offset by an increase in interest expense related to borrowings on the Credit Facility.

Gain on Sale of Real Estate Facility: Included in total discontinued operations is the gain on the sale of a 131,000 square foot office building located in Houston, Texas, for a gross sales price of $10.0 million, resulting in a net gain of $5.2 million during January, 2010.

In May, 2009, the Company sold 3.4 acres of land held for development in Portland, Oregon, for a gross sales price of $2.7 million, resulting in a net gain of $1.5 million.

Net Income Allocable to Noncontrolling Interests: Net income allocable to noncontrolling interests reflects the net income allocable to equity interests in the Operating Partnership that are not owned by the Company. Net income allocable to noncontrolling interests was $16.7 million of allocated income ($5.1 million allocated to preferred unit holders and $11.6 million allocated to common unit holders) for the year ended December 31, 2010 compared to $17.2 million ($2.6 million loss allocated to preferred unit holders and $19.7 million of income allocated to common unit holders) for the year ended December 31, 2009. The decrease in net income allocable to non-controlling interests for the year ended December 31, 2010 was minimal compared to the year ended December 31, 2009. Included in net income allocable to noncontrolling interests in 2010 were issuance costs of $4.1 million associated with the preferred equity redemptions combined with a decrease in cash distributions as a result of the redemptions. Included in net income allocable to noncontrolling interests in 2009 was $8.9 million of income allocated to common unit holders due to the net gain on the repurchases of preferred equity, partially offset with an $8.4 million loss allocated to preferred unit holders due to the net gain on the repurchases of preferred units.

Liquidity and Capital Resources

Cash and cash equivalents decreased $86,000 from $5.1 million at December 31, 2010 to $5.0 million at December 31, 2011 for the reasons noted below.

Net cash provided by operating activities for the years ended December 31, 2011 and 2010 was $181.9 million and $177.9 million, respectively. Management believes that the Company’s internally generated net cash provided by operating activities will be sufficient to enable it to meet its operating expenses, capital improvements, debt service requirements and distributions to shareholders.

Net cash used in investing activities was $338.4 million and $327.4 million for the years ended December 31, 2011 and 2010, respectively. The change was primarily due to an increase in capital improvements of $9.2 million combined with an increase in cash paid for acquisitions. The Company paid $297.7 million for acquisitions in Virginia, Florida, Texas and California in 2011 compared $296.3 million for acquisitions in Maryland, Texas and Virginia in 2010.

Net cash provided by financing activities was $156.4 million for the year ended December 31, 2011 compared to net cash used in financing activities of $53.7 million for the year ended December 31, 2010. The $210.1 million increase in cash provided was primarily due to a new three-year term loan of $250.0 million entered in 2011 (described in Item 1, “Business — Borrowings”) and a decrease in cash paid for repurchases/redemptions of preferred equity of $83.4 million, partially offset by $72.5 million of net proceeds from the issuance of preferred stock in 2010 and cash paid of $30.3 million to repurchase common equity in 2011. The Company also assumed a $250.0 million mortgage note in connection with the Northern California Portfolio acquisition in December, 2011.

As described in Item 1, “Business — Borrowings,” the Company has a $250.0 million credit facility. The Company had $185.0 million outstanding on the Credit Facility at an interest rate of 1.41% at December 31, 2011. Subsequent to December 31, 2011, the Company repaid $85.0 million on the Credit Facility reducing the outstanding balance to $100.0 million as of February 24, 2012. The Company had $93.0 million outstanding on the Credit Facility at an interest rate of 2.11% at December 31, 2010.

The Company’s preferred equity outstanding decreased to 19.7% of its market capitalization during the year ended December 31, 2011 primarily due to an increase in outstanding short-term borrowings and an increase in mortgage notes payable combined with the repurchases of preferred units in 2011. The Company’s capital structure is characterized by a low level of leverage. As of December 31, 2011, the Company had four fixed-rate mortgage notes totaling $282.1 million and a combined outstanding balance on the Credit Facility and Term Loan of $435.0 million, which represented 9.2% and 14.2%, respectively, of its total market capitalization. The Company calculates market capitalization by adding (1) the liquidation preference of the Company’s outstanding preferred equity, (2) principal value of the Company’s outstanding mortgage notes and (3) the total number of common shares and common units outstanding at December 31, 2011 multiplied by the closing price of the stock on that date. The weighted average interest rate for the mortgage notes is 5.47% per annum and the weighted average interest rate on the Credit Facility and Term Loan was 1.46%. The Company had 25.2% of its properties, in terms of net book value, encumbered at December 31, 2011.

The Company focuses on retaining cash for reinvestment as we believe that this provides the greatest level of financial flexibility. While operating results have been negatively impacted by the recent economic recession, it is likely that as the economy recovers and operating fundamentals improve, additional increases in distributions to the Company’s common shareholders will be required. Going forward, the Company will continue to monitor its taxable income and the corresponding dividend requirements.

Issuance of Preferred Stock: Subsequent to December 31, 2011, the Company issued $230.0 million or 9,200,000 depositary shares, each representing 1/1,000 of a share of the 6.45% Cumulative Preferred Stock, Series S, at $25.00 per depositary share.

On October 15, 2010, the Company issued 3,000,000 depositary shares, each representing 1/1,000 of a share of the 6.875% Cumulative Preferred Stock, Series R, at $25.00 per depositary share for gross proceeds of $75.0 million.

Issuance of Common Stock: On August 14, 2009, the Company sold 3,450,000 shares of common stock in a public offering and concurrently sold 383,333 shares of common stock to PS. The aggregate net proceeds were $171.2 million.

Note Payable to Affiliate: On February 9, 2011, the Company entered into an agreement with PS to borrow $121.0 million with a maturity date of August 9, 2011 at an interest rate of LIBOR plus 0.85%. The Company repaid, in full, the note payable to PS upon maturity. Interest expense under this note payable was $664,000 for the year ended December 31, 2011.

Redemption of Preferred Equity: Subsequent to December 31, 2011, the Company completed the redemption of its 7.20% Cumulative Preferred Stock, Series M, at its par value of $79.6 million and its 7.375% Cumulative Preferred Stock, Series O, at its par value of $84.6 million. The Company will report the excess of the redemption amount over the carrying amount of $5.3 million, equal to the original issuance costs, as a reduction of net income allocable to common shareholders and unit holders during the first quarter of 2012.

On November 8, 2010, the Company completed the redemption of its 7.60% Cumulative Preferred Stock, Series L, at its aggregate par value of $48.4 million. The Company reported the excess of the redemption amount over the carrying amount of $1.6 million, equal to the original issuance costs, as a reduction of net income allocable to common shareholders and unit holders for the year ended December 31, 2010.

On May 12, 2010, the Company completed the redemption of its 7.950% Series G Cumulative Redeemable Preferred Units at its aggregate par value of $20.0 million, and on June 7, 2010, the Company completed the redemption of its 7.950% Cumulative Preferred Stock, Series K at its aggregate par value of $54.1 million, in each case, together with accrued dividends. In connection with these redemptions, the Company reported the excess of the redemption amount over the carrying amount of $2.4 million, equal to the original issuance costs, as a reduction of net income allocable to common shareholders and unit holders for the year ended December 31, 2010.

Repurchase of Preferred Equity: In February, 2011, the Company paid an aggregate of $39.1 million to repurchase 1,710,000 units of its 7.50% Series J Cumulative Redeemable Preferred Units and 203,400 units of its 6.55% Series Q Cumulative Redeemable Preferred Units for a weighted average purchase price of $20.43 per unit. The aggregate par value of the repurchased preferred units was $47.8 million, which generated a gain of $7.4 million, net of original issuance costs of $1.4 million, which was added to net income allocable to common shareholders and unit holders for the year ended December 31, 2011.

During March, 2009, the Company paid $50.2 million to repurchase 3,208,174 various depositary shares, each representing 1/1,000 of a share of Cumulative Redeemable Preferred Stock and $12.3 million to repurchase 853,300 units of various series of Cumulative Redeemable Preferred Units for a weighted average purchase price of $15.40 per share/unit. The aggregate par value of the repurchased preferred stock was $80.2 million, which generated a gain of $27.2 million, net of original issuance costs of $2.8 million, which was added to net income allocable to common shareholders and unit holders for the year ended December 31, 2009. The aggregate par value of the repurchased preferred units was $21.3 million, which generated a gain of $8.4 million, net of original issuance costs of $580,000, which was added to net income allocable to common shareholders and unit holders for the year ended December 31, 2009.

Repurchase of Common Stock: The Company’s Board of Directors previously authorized the repurchase, from time to time, of up to 6.5 million shares of the Company’s common stock on the open market or in privately negotiated transactions. During the year ended December 31, 2011, the Company repurchased 591,500 shares of common stock at an aggregate cost of $30.3 million or an average cost per share of $51.14. Since inception of the program, the Company has repurchased an aggregate of 4.9 million shares of common stock at an aggregate cost of $183.9 million or an average cost per share of $37.64. Under existing board authorizations, the Company can repurchase an additional 1.6 million shares. No shares of common stock were repurchased under this program during the years ended December 31, 2010 and 2009.

Mortgage Note Repayment: In October, 2011, the Company repaid $15.5 million on a mortgage note with a stated interest rate of 7.20%.

Capital Expenditures: During the years ended December 31, 2011, 2010 and 2009, the Company expended $44.8 million , $29.5 million and $28.3 million, respectively, in recurring capital expenditures, or $2.04, $1.44 and $1.45 per weighted average square foot owned, respectively. The Company defines recurring capital expenditures as those necessary to maintain and operate its commercial real estate at its current economic value. The following table depicts actual capital expenditures (in thousands):


	For The Years Ended December 31,
	2011		2010		2009
Recurring capital expenditures	$	44,812	$	29,494	$	28,345
Property renovations and other capital expenditures		4,811		10,884		1,168

Total capital expenditures	$	49,623	$	40,378	$	29,513

For the year ended December 31, 2011, recurring capital expenditures increased $15.3 million, or 51.9%, over 2010 primarily due to $12.4 million recurring of capital expenditures related to the lease up of the 2011 and 2010 acquisitions.

Property renovations and other capital expenditures decreased $6.1 million from $10.9 million for the year ended December 31, 2010 to $4.8 million for the year ended December 31, 2011 as a result of the 2010 development at MICC in Miami, Florida, combined with other property renovations.

Distributions: The Company has elected and intends to qualify as a REIT for federal income tax purposes. In order to maintain its status as a REIT, the Company must meet, among other tests, sources of income, share ownership and certain asset tests. As a REIT, the Company is not taxed on that portion of its taxable income that is distributed to its shareholders provided that at least 90% of its taxable income is distributed to its shareholders prior to the filing of its tax return.

The Company’s funding strategy has been to use permanent capital, including common and preferred stock, along with internally generated retained cash flows to meet its liquidity needs. In addition, the Company may sell properties that no longer meet its investment criteria. From time to time, the Company may use its Credit Facility or other forms of debt to fund real estate acquisitions or other capital allocations. The Company targets a minimum ratio of FFO to combined fixed charges and preferred distributions of 3.0 to 1.0. Fixed charges include interest expense. Preferred distributions include amounts paid to preferred shareholders and preferred Operating Partnership unit holders. For the year ended December 31, 2011, the FFO to fixed charges and preferred distributions coverage ratio was 4.0 to 1.0, excluding the issuance costs related to the redemption of preferred equity.

Non-GAAP Supplemental Disclosure Measure: Funds from Operations: Management believes that FFO is a useful supplemental measure of the Company’s operating performance. The Company computes FFO in accordance with the White Paper on FFO approved by the Board of Governors of NAREIT. The White Paper defines FFO as net income, computed in accordance with GAAP, before depreciation, amortization, gains or losses on asset dispositions, net income allocable to noncontrolling interests — common units, net income allocable to restricted stock unit holders and nonrecurring items. Management believes that FFO provides a useful measure of the Company’s operating performance and when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses and interest costs, providing a perspective not immediately apparent from net income.

FO should be analyzed in conjunction with net income. However, FFO should not be viewed as a substitute for net income as a measure of operating performance or liquidity as it does not reflect depreciation and amortization costs or the level of capital expenditure and leasing costs necessary to maintain the operating performance of the Company’s properties, which are significant economic costs and could materially affect the Company’s results of operations.

Management believes FFO provides useful information to the investment community about the Company’s operating performance when compared to the performance of other real estate companies as FFO is generally recognized as the industry standard for reporting operations of REITs. Other REITs may use different methods for calculating FFO and, accordingly, our FFO may not be comparable to other real estate companies.

FFO for the Company is computed as follows (in thousands):


	For The Years Ended December 31,
	2011			2010			2009			2008			2007
Net income allocable to common shareholders	$	52,162		$	38,959		$	59,413		$	23,179		$	17,537
Gain on sale of land and real estate facility		(2,717	)		(5,153	)		(1,488	)		—			—
Depreciation and amortization(1)		84,682			78,868			85,094			99,848			98,521
Net income allocable to noncontrolling interests — common units		15,543			11,594			19,730			8,296			6,155
Net income allocable to restricted stock unit holders		127			152			325			235			192

Consolidated FFO allocable to common and dilutive shares		149,797			124,420			163,074			131,558			122,405
FFO allocated to noncontrolling interests — common units		(34,319	)		(28,450	)		(40,472	)		(34,443	)		(31,094	)
FFO allocated to restricted stock unit holders		(301	)		(374	)		(726	)		(730	)		(598	)

FFO allocated to common shares	$	115,177		$	95,596		$	121,876		$	96,385		$	90,713

(1)

Includes depreciation from discontinued operations.

FFO allocable to common and dilutive shares for the year ended December 31, 2011 increased $25.4 million over 2010. The increase was primarily as a result of an increase in net operating income from Non-Same Park facilities and lower distributions resulting from the reduction of preferred equity outstanding, partially offset by a decrease in Same Park net operating income.

Related Party Transactions: At December 31, 2011, PS owned 24.0% of the outstanding shares of the Company’s common stock and 23.2% of the outstanding common units of the Operating Partnership (100.0% of the common units not owned by the Company). Assuming issuance of the Company’s common stock upon redemption of its partnership units, PS would own 41.7% of the outstanding shares of the Company’s common stock. Ronald L. Havner, Jr., the Company’s chairman, is also the Chairman of the Board, Chief Executive Officer and President of PS. Gary E. Pruitt, an independent director of the Company is also a trustee of PS.

Pursuant to a cost sharing and administrative services agreement, the Company shares costs with PS for certain administrative services. These costs totaled $442,000 in 2011, which are allocated to PS in accordance with a methodology intended to fairly allocate those costs. In addition, the Company provides property management services for properties owned by PS for a fee of 5% of the gross revenues of such properties in addition to reimbursement of direct costs. These management fee revenues recognized under management contract with PS totaled $684,000 in 2011. PS also provides property management services for the self-storage component of two assets owned by the Company for a fee of 6% of the gross revenues of such properties in addition to reimbursement of certain costs. Management fee expense recognized under the management contract with PS totaled $52,000 for the year ended December 31, 2011.

Concurrent with the public offering that closed August 14, 2009, the Company sold 383,333 shares of common stock to PS for net proceeds of $17.8 million.

The PS Business Parks name and logo is owned by PS and licensed to the Company under a non-exclusive, royalty-free license agreement. The license can be terminated by either party for any reason with six-months written notice.

Off-Balance Sheet Arrangements: The Company does not have any off-balance sheet arrangements.

Contractual Obligations: The table below summarizes projected payments due under our contractual obligations as of December 31, 2011 (in thousands):


	Payments Due by Period
Contractual Obligations	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
Mortgage notes payable (principal and interest)	$	351,447	$	16,289	$	59,036	$	276,122	$	—
Credit Facility (principal)		185,000		—		—		185,000		—
Term Loan (principal)		250,000		—		250,000		—		—

Total	$	786,447	$	16,289	$	309,036	$	461,122	$	—

The Company is scheduled to pay cash dividends of $42.2 million per year on its preferred equity outstanding as of December 31, 2011. Dividends are paid when and if declared by the Company’s Board of Directors and accumulate if not paid. Shares and units of preferred equity are redeemable by the Company in order to preserve its status as a REIT and are also redeemable five years after issuance.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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, from time to time, will use debt financing to facilitate acquisitions. In connection with the Northern California Portfolio acquisition, the Company assumed a $250.0 million mortgage note and obtained a $250.0 million term loan. As a result of the acquisition, the Company’s debt as a percentage of total equity (based on book values) increased to 52.7% as of December 31, 2011.

The Company’s market risk sensitive instruments include mortgage notes of $282.1 million, the outstanding balance on the Credit Facility of $185.0 million and the Term Loan of $250.0 million as of December 31, 2011. All of the Company’s mortgage notes bear interest at fixed rates with a weighted average fixed rate of 5.47% at December 31, 2011. The Credit Facility and Term Loan bear interest at variable rates which are currently LIBOR plus 1.10% and 1.20%, respectively. See Notes 2, 5 and 6 to consolidated financial statements for terms, valuations and approximate principal maturities of the mortgage notes payable, Credit Facility and Term Loan as of December 31, 2011. Based on borrowing rates currently available to the Company, the difference between the carrying amount of debt and its fair value is insignificant.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements of the Company at December 31, 2011 and 2010 and for the years ended December 31, 2011, 2010 and 2009 and the report of Ernst & Young LLP, Independent Registered Public Accounting Firm, thereon and the related financial statement schedule, are included elsewhere herein. Reference is made to the Index to Consolidated Financial Statements and Schedules in Item 15.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not Applicable.

ITEM 9A. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer 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 December 31, 2011. 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 December 31, 2011, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of such date, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during year ended December 31, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee on Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control-Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2011.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2011 has been audited by Ernst & Young, LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Changes in Internal Control Over Financial Reporting

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 fourth quarter of 2011 that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

PS Business Parks, Inc.

We have audited PS Business Parks, Inc. internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). PS Business Parks, Inc. management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, PS Business Parks, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of PS Business Parks, Inc. as of December 31, 2011 and 2010, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011 and our report dated February 24, 2012 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Los Angeles, California

February 24, 2012

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item with respect to directors is hereby incorporated by reference to the material appearing in the Company’s definitive proxy statement to be filed in connection with the annual shareholders’ meeting to be held in 2012 (the “Proxy Statement”) under the caption “Election of Directors.”

The following is a biographical summary of the executive officers of the Company:

Joseph D. Russell, Jr., age 52, has been President since September, 2002 and was named Chief Executive Officer and elected as a Director in August, 2003. Mr. Russell joined Spieker Partners in 1990 and became an officer of Spieker Properties when it went public as a REIT in 1993. Prior to its merger with Equity Office Properties (“EOP”) in 2001, Mr. Russell was President of Spieker Properties’ Silicon Valley Region from 1999 to 2001. Mr. Russell earned a Bachelor of Science degree from the University of Southern California and a Masters of Business Administration from the Harvard Business School. Prior to entering the commercial real estate business, Mr. Russell spent approximately six years with IBM in various marketing positions. Mr. Russell has been a member and past President of the National Association of Industrial and Office Parks, Silicon Valley Chapter. Mr. Russell is also a member of the Board of Governors of NAREIT.

John W. Petersen, age 48, has been Executive Vice President and Chief Operating Officer since he joined the Company in December, 2004. Prior to joining the Company, Mr. Petersen was Senior Vice President, San Jose Region, for Equity Office Properties from July, 2001 to December, 2004, responsible for 11.3 million square feet of multi-tenant office, industrial and R&D space in Silicon Valley. Prior to EOP, Mr. Petersen was Senior Vice President with Spieker Properties, from 1995 to 2001 overseeing the growth of that company’s portfolio in San Jose, through acquisition and development of nearly three million square feet. Mr. Petersen is a graduate of The Colorado College in Colorado Springs, Colorado, and was recently the President of National Association of Industrial and Office Parks, Silicon Valley Chapter.

Edward A. Stokx, age 46, a certified public accountant, has been Chief Financial Officer and Secretary of the Company since December, 2003 and Executive Vice President since March, 2004. Mr. Stokx has overall responsibility for the Company’s finance and accounting functions. In addition, he has responsibility for executing the Company’s financial initiatives. Mr. Stokx joined Center Trust, a developer, owner, and operator of retail shopping centers in 1997. Prior to his promotion to Chief Financial Officer and Secretary in 2001, he served as Senior Vice President, Finance and Controller. After Center Trust’s merger in January, 2003 with another public REIT, Mr. Stokx provided consulting services to various entities. Prior to joining Center Trust, Mr. Stokx was with Deloitte and Touche from 1989 to 1997, with a focus on real estate clients. Mr. Stokx earned a Bachelor of Science degree in Accounting from Loyola Marymount University.

Maria R. Hawthorne, age 52, was promoted to Executive Vice President, East Coast of the Company in February, 2011. Ms. Hawthorne served as Senior Vice President from March, 2004 to February, 2011, with responsibility for property operations on the East Coast, which includes Virginia, Maryland and Florida. From June, 2001 through March, 2004, Ms. Hawthorne was Vice President of the Company, responsible for property operations in Virginia. From July, 1994 to June, 2001, Ms. Hawthorne was a Regional Manager of the Company in Virginia. From August, 1988 to July, 1994, Ms. Hawthorne was a General Manager, Leasing Director and Property Manager for American Office Park Properties. Ms. Hawthorne earned a Bachelor of Arts Degree in International Relations from Pomona College.

Information required by this item with respect to the nominating process, the audit committee and the audit committee financial expert is hereby incorporated by reference to the material appearing in the Proxy Statement under the caption “Corporate Governance and Board Matters.”

Information required by this item with respect to a code of ethics is hereby incorporated by reference to the material appearing in the Proxy Statement under the caption “Corporate Governance and Board Matters.” We have adopted a code of ethics that applies to our principal executive officer, principal financial officer and principal accounting officer, which is available on our website at www.psbusinessparks.com. The information contained on the Company’s website is not a part of, or incorporated by reference into, this Annual Report on Form 10-K. Any amendments to or waivers of the code of ethics granted to the Company’s executive officers or the controller will be published promptly on our website or by other appropriate means in accordance with SEC rules.

Information required by this item with respect to the compliance with Section 16(a) is hereby incorporated by reference to the material appearing in the Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.”

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is hereby incorporated by reference to the material appearing in the Proxy Statement under the captions “Corporate Governance and Board Matters,” “Executive Compensation,” “Corporate Governance and Board Matters — Compensation Committee Interlocks and Insider Participation” and “Report of the Compensation Committee.”

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item with respect to security ownership of certain beneficial owners and management is hereby incorporated by reference to the material appearing in the Proxy Statement under the captions “Stock Ownership of Certain Beneficial Owners and Management.”

The following table sets forth information as of December 31, 2011 on the Company’s equity compensation plans:


Plan Category	(a) Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants, and Rights			(b) Weighted Average Exercise Price of Outstanding Options, Warrants, and Rights			(c) Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
Equity compensation plans approved by security holders		626,440		$	49.77			864,722
Equity compensation plans not approved by security holders		—		$	—			—

Total		626,440	*	$	49.77	*		864,722	*

Amounts include restricted stock units.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is hereby incorporated by reference to the material appearing in the Proxy Statement under the captions “Ratification of Independent Registered Public Accountants.”

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

a.	1. Financial Statements

The financial statements listed in the accompanying Index to Consolidated Financial Statements and Schedules are filed as part of this report.

Financial Statements Schedule

The financial statements schedule listed in the accompanying Index to Consolidated Financial Statements and Schedules are filed as part of this report.

Exhibits

The exhibits listed in the Exhibit Index immediately preceding such exhibits are filed with or incorporated by reference in this report.

Exhibits

The exhibits listed in the Exhibit Index immediately preceding such exhibits are filed with or incorporated by reference in this report.

c.	Financial Statement Schedules

Not

applicable.

PS BUSINESS PARKS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

(Item 15(a)(1) and Item 15(a)(2))


	Page
Report of Independent Registered Public Accounting Firm		47
Consolidated balance sheets as of December 31, 2011 and 2010		48
Consolidated statements of income for the years ended December 31, 2011, 2010 and 2009		49
Consolidated statements of equity for the years ended December 31, 2011, 2010 and 2009		50
Consolidated statements of cash flows for the years ended December 31, 2011, 2010 and 2009		51
Notes to consolidated financial statements		53
Schedule:
III — Real estate and accumulated depreciation		70

All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or notes thereto.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of

PS Business Parks, Inc.

We have audited the accompanying consolidated balance sheets of PS Business Parks, Inc. as of December 31, 2011 and 2010, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of PS Business Parks, Inc. at December 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), PS Business Parks, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2012 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Los Angeles, California

February 24, 2012

PS BUSINESS PARKS, INC.

CONSOLIDATED BALANCE SHEETS


	December 31,
	2011			2010
	(In thousands, except share data)
ASSETS
Cash and cash equivalents	$	4,980		$	5,066
Real estate facilities, at cost:
Land		772,933			562,678
Buildings and improvements		2,157,729			1,773,682

		2,930,662			2,336,360
Accumulated depreciation		(846,799	)		(772,407	)

		2,083,863			1,563,953
Properties held for disposition, net		—			6,671
Land held for development		6,829			6,829

		2,090,692			1,577,453
Rent receivable		3,198			3,127
Deferred rent receivable		23,388			22,277
Other assets		16,361			13,134

Total assets	$	2,138,619		$	1,621,057


LIABILITIES AND EQUITY
Accrued and other liabilities	$	60,940		$	53,421
Credit facility		185,000			93,000
Term loan		250,000			—
Mortgage notes payable		282,084			51,511

Total liabilities		778,024			197,932
Commitments and contingencies
Equity:
PS Business Parks, Inc.’s shareholders’ equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized, 23,942 shares issued and outstanding at December 31, 2011 and 2010		598,546			598,546
Common stock, $0.01 par value, 100,000,000 shares authorized, 24,128,184 and 24,671,177 shares issued and outstanding at December 31, 2011 and 2010, respectively		240			246
Paid-in capital		534,322			557,882
Cumulative net income		878,704			784,616
Cumulative distributions		(832,607	)		(747,762	)

Total PS Business Parks, Inc.’s shareholders’ equity		1,179,205			1,193,528
Noncontrolling interests:
Preferred units		5,583			53,418
Common units		175,807			176,179

Total noncontrolling interests		181,390			229,597

Total equity		1,360,595			1,423,125

Total liabilities and equity	$	2,138,619		$