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SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE

SECURITIES EXCHANGE ACT OF 1934

(AMENDMENT NO.    )

Filed by the Registrant

Filed by a Party other than the Registrant

Check the appropriate box:

 

Preliminary Proxy Statement

 

Definitive Proxy Statement

 

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

Definitive Additional Materials

 

Soliciting Material Pursuant to §240.14a-12

PS BUSINESS PARKS, INC.

 

 

(Name of Registrant as Specified In Its Charter)

 

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

 

  (1)

Title of each class of securities to which transaction applies:

 

 

 

  (2)

Aggregate number of securities to which transaction applies:

 

 

 

  (3)

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

 

 

  (4)

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  (5)

Total fee paid:

 

 

 

Fee paid previously with preliminary materials.

 

Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

  (1)

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701 Western Avenue

Glendale, California 91201

[                    ], 2021

Dear fellow shareholders:

This past year we faced unprecedented challenges from the global COVID-19 pandemic. Throughout this crisis, we have remained focused on protecting the health and safety of our employees while serving the needs of our customers and communities. Amidst these challenges, we have delivered strong operating results for our shareholders and are steadfast in our commitment to long-term value creation.

We are pleased to invite you to attend our 2021 Annual Meeting of Shareholders on Tuesday, April 20, 2021. Due to the COVID-19 pandemic, the Annual Meeting will be held in a virtual format only to provide a safe experience for our shareholders and employees. To attend, vote, and submit questions during the Annual Meeting, please visit www.virtualshareholdermeeting.com/PSB2021 and enter the control number included in your Notice of Internet Availability of Proxy Materials, voting instruction form, or proxy card. Online access to the webcast will open approximately fifteen (15) minutes prior to the start of the Annual Meeting. Attendance at the Annual Meeting is subject to capacity limits set by the virtual meeting platform provider.

This letter includes the official notice of meeting, proxy statement, and form of proxy. The proxy statement describes in detail the matters listed in the notice of meeting.

Your vote is important. Whether or not you plan to attend the annual meeting, we hope you vote as soon as possible. You may vote your shares over the Internet, by telephone, or, if you elect to receive printed proxy materials, by mail by following the instructions on the proxy card or the voting instruction card. Of course, even if you vote your shares ahead of time, you may still attend the meeting.

Thank you for your continued support of PS Business Parks, Inc., especially during these uncertain and challenging times. We look forward to seeing you at our 2021 Annual Meeting.

Sincerely,

John W. Petersen

Interim President and Chief Executive Officer

and Chief Operating Officer


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NOTICE OF THE 2021 ANNUAL MEETING OF SHAREHOLDERS

[                    ], 2021

To our shareholders:

We invite you to attend the 2021 Annual Meeting of Shareholders of PS Business Parks, Inc.

 

   

Date

  Tuesday, April 20, 2021

Time

  11:30 a.m., Pacific Time

Place

  Virtually via the Internet at: www.virtualshareholdermeeting.com/PSB2021

Matters to be

Voted On

 

   Election of Directors

 

   Advisory vote to approve executive compensation

 

   Approval of the reincorporation of the Company from the State of California to the State of Maryland

 

   Ratification of Ernst & Young LLP as our independent registered public accounting firm for 2021

 

   Any other matters that may properly be brought before the meeting

Record Date

  Close of business on February 26, 2021

Proxy Materials

  The notice of meeting, proxy statement, and Annual Report on Form 10-K are available free of charge at the Investor Relations section of psbusinessparks.com

If you hold your shares in street name and do not provide voting instructions, your shares will not be voted on any proposal on which your broker does not have discretionary authority to vote. See “How Proxies will be Voted” on page 85 of this Proxy Statement.

We sent a proxy statement to shareholders of record at the close of business on February 26, 2021, together with an accompanying form of proxy card and Annual Report, on or about [                    ], 2021. Whether or not you expect to attend, we urge you to sign, date, and promptly return the enclosed proxy card in the enclosed postage prepaid envelope or vote via telephone or the Internet in accordance with the instructions on the enclosed proxy card. If you attend the meeting, you may vote your shares in person, which will revoke any prior vote.

Due to the COVID-19 pandemic, the Annual Meeting will be held in a virtual format only to provide a safe experience for our shareholders and employees. To attend, vote, and submit questions during the Annual Meeting, please visit www.virtualshareholdermeeting.com/PSB2021 and enter the control number included in your Notice of Internet Availability of Proxy Materials, voting instruction form, or proxy card. Online access to the webcast will open approximately fifteen (15) minutes prior to the start of the Annual Meeting. Attendance at the Annual Meeting is subject to capacity limits set by the virtual meeting platform provider.

While we intend to hold the Annual Meeting virtually, we are actively monitoring the COVID-19 situation and the federal, state, and local government regulations that may affect the format of our Annual Meeting, including the ability to hold the Annual Meeting virtually. In the event it is not possible or advisable to hold the Annual Meeting virtually, we will announce the alternative meeting arrangements, which may include changing the date or location of the meeting or holding the meeting physically, in a press release filed with the Securities and Exchange Commission as promptly as practicable. We encourage you to monitor the Investor Relations section of our website at psbusinessparks.com for updated information about the Annual Meeting.

On behalf of the Board of Directors,

Jeffrey D. Hedges

Executive Vice President,

Chief Financial Officer, and Secretary

Important Notice Regarding Availability of Proxy Materials for the 2021 Annual Meeting: This Proxy Statement and our 2020 Annual Report are available at the Investor Relations section of our website, psbusinessparks.com.


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2021 PROXY SUMMARY

     1  

Proposal 1: Election of Directors

     17  

Executive Summary

     18  

About the Director Nominees

     18  

Nominee Qualifications

     19  

The Board has Nominated Nine Directors, Six of Whom are Independent

     19  

Director Nominees Skills Summary

     25  

Corporate Governance and Board Matters

     26  

Corporate Governance Framework

     26  

Board Engagement and Oversight

     26  

Commitment to Diversity

     26  

Board Leadership

     27  

Majority Vote Requirements for Directors

     27  

Presiding Independent Director

     27  

Board Responsibilities and Oversight of Risk Management

     27  

Political and Charitable Contributions

     28  

Board Orientation and Education

     28  

Board Retirement Policy

     28  

Director Independence

     28  

Committees of the Board

     29  

Communications with the Board

     32  

Board and Committee Meetings and Attendance

     33  

Board Committee Membership and 2020 Meetings

     33  

Our Executive Officers

     34  

Compensation of Directors

     35  

Proposal 2: Advisory Vote to Approve Compensation of Named Executive Officers

     38  

Compensation Discussion and Analysis (CD&A)

     40  

Overview of Executive Compensation Program Objectives

     40  
Our Compensation Philosophy and Practices Align Executive Pay With Performance and Creation of Long-Term Value      40  
We Use Various Compensation Elements to Incentivize and Reward Long-Term Value Creation      42  

Equity Grant Practices

     43  

2020 Say on Pay Vote

     43  

2020 NEO Compensation Framework

     44  

Changes in Company Strategy and Outlook for 2020 as a Result of the COVID-19 Pandemic

     46  

Revised 2020 Operational and Strategic Priorities

     46  
The Compensation Committee’s Approach to COVID-19 Effects on 2020 Incentive Compensation      47  

2020 Performance Results

     47  

Achievement of Revised 2020 Operational and Strategic Priorities

     48  


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2020 Incentive Compensation Awards

     49  

Tax Deductibility of Executive Compensation

     50  

2021 Compensation Outlook

     51  

Compensation Committee Report

     52  

The Compensation Committee

     52  

Executive Compensation Tables

     53  

I. Summary Compensation Table

     53  

II. Grants of Plan-Based Awards

     54  

III. Option Exercises and Stock Vested in 2020

     54  

IV. Outstanding Equity Awards at Year-End

     55  

V. Potential Payments Upon Termination or Change of Control

     56  

Stock Ownership of Certain Beneficial Owners and Management

     58  

Additional Information About our Directors and Executive Officers; Certain Relationships

     60  

Pay Ratio Disclosure

     61  

Proposal 3: Approval of Reincorporation

     63  

General

     64  

Reasons for the Reincorporation

     64  

What are the Benefits of the Reincorporation?

     65  

What are the Disadvantages of the Reincorporation?

     66  

Mechanism for Reincorporation

     66  

Effect of the Reincorporation

     67  

Accounting Treatment of the Reincorporation

     67  

Regulatory Approval

     68  

Dissenters’ Rights of Appraisal for Reincorporation Mergers

     68  

Comparison of Shareholder Rights

     68  

Material U.S. Federal Income Tax Consequences of the Reincorporation

     79  

Required Vote

     79  

Proposal 4: Ratification of Independent Registered Public Accounting Firm

     80  

Executive Summary

     81  

Audit and Non-Audit Fees

     81  

Auditor Independence

     81  

Policy to Approve Ernst & Young LLP Services

     81  

Audit Committee Report

     82  

The Audit Committee

     83  

General Information About the Meeting

     84  

Purpose of the Proxy Solicitation

     84  

Date, Time, and Place of the Annual Meeting

     84  

Who Can Vote

     84  

Quorum for the Annual Meeting

     84  

How Votes are Counted

     85  


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How Proxies will be Voted

     85  

How to Cast a Vote

     85  

How to Vote as a Participant in the 401(k) Plan

     86  

Changing Your Vote

     86  

Cost of this Proxy Solicitation

     86  

Contacting our Transfer Agent

     87  

Consideration of Candidates for Director

     87  
Deadline to Propose or Nominate Individuals to Serve as Directors for the 2022 Annual Meeting      87  

Deadlines for Receipt of Shareholder Proposals

     87  

Annual Report on Form 10-K

     88  

Other Matters

     88  

Virtual Meeting Matters

     88  

Appendix A: Reconciliation of non-GAAP measures to GAAP and other information

     90  

Annex A: Form of Agreement and Plan of Merger

     A-1  

Annex B: Form of PSB-Maryland Charter

     B-1  

Annex C: Form of PSB-Maryland Bylaws

     C-1  


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2021 PROXY SUMMARY

This summary highlights information contained elsewhere in this proxy statement and does not contain all the information you should consider. You should carefully read the entire proxy statement before voting.

PROXY STATEMENT

Your vote is very important. The Board of Directors (the Board) of PS Business Parks, Inc. (the Company, PS Business Parks, or PSB) requests that you allow the proxies named on the proxy card to represent your shares of PS Business Parks common stock (Common Stock) or, with respect to Proposal 3, your depositary shares of PS Business Parks preferred stock.

At the Board’s direction, our management has prepared this proxy statement, which is being sent or made available to you and our other shareholders on or about [                    ], 2021.

ANNUAL MEETING OVERVIEW

Voting Matters

 

             
     

Proposal

   Board    
 Recommendation    
  Vote Required       Page      

Election of Directors (Proposal 1)

 

FOR  

each nominee  

 

 

Majority of Common Stock votes cast(1)

      17       

Advisory Vote to Approve Compensation of Named Executive Officers (Proposal 2)

 

  FOR    

Non-binding Common Stock vote

      38       

Approval of the reincorporation of the Company from the State of California to the State of Maryland (Proposal 3)

 

  FOR    

Majority of outstanding Common Stock and majority of outstanding preferred stock, voting as separate classes

      63       

Ratification of Ernst & Young LLP as independent registered public accounting firm for 2021 (Proposal 4)

 

  FOR    

Majority of Common Stock votes cast

      80       

 

(1)

Directors not receiving a majority of votes are required to submit their resignation to be considered by the Board.

 

PS Business Parks • 2021 Proxy Statement • 1


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COMPANY OVERVIEW AND 2020 HIGHLIGHTS

PS Business Parks, Inc. (NYSE: PSB), a California corporation that has elected to be taxed as a real estate investment trust (REIT), acquires, develops, owns, and operates commercial properties, primarily multi-tenant industrial, flex, and office space. The Company wholly owns 27.7 million rentable square feet (RSF) concentrated in 12 submarkets spread across six states and holds a 95% interest in a 395-unit apartment complex and a 98.2% interest in a 411-unit multifamily apartment complex development.

RESPONSE TO COVID-19

The COVID-19 pandemic has created one of the most difficult operating environments in our Company’s history and has highlighted the importance of sustainable operations and financial fortitude in withstanding disruptions and crises. Our long-term strategy, dedicated employees, and fortress balance sheet allowed us to continue operating in difficult market conditions with a focus on serving our customers, protecting our employees, and creating shareholder value.

Serving our Customers

Many of our customers operate essential businesses; as such, we kept our parks open and operational throughout the pandemic. With a focus on health and safety, we implemented protocols consistent with local, state, and federal guidelines and best practices, and we made significant capital investments in our properties by installing safety and sanitary equipment in an effort to reduce the likelihood of COVID-19 spread at our parks. Further, in order to continue to serve our customers, we instituted virtual tours, remained flexible on lease terms, and supercharged our electronic marketing channels.

Many of our customers faced, and some continue to face, severe disruptions to their business as a result of the COVID-19 pandemic. We have partnered with approximately 11% of our customers, based on rental income, to provide rent relief in the form of rent deferrals, rent abatement, or both in an effort to provide these customers time to adjust their operations and address liquidity needs. In doing so, we believe that we have helped many of our hardest hit customers better position themselves to remain solvent through the COVID-19 pandemic and beyond.

Protecting and Supporting our Employees

Our commitment to our employees was paramount in our approach to navigating the COVID-19 pandemic. We instituted new health and safety protocols focused on our employees and their families, which allowed us to continue to serve our customers safely. We implemented a work-from-home arrangement for all corporate employees and field team members whose roles and responsibilities allow for remote working. We have offered an optional return-to-office policy with strict safety protocols, including safe social distancing practices and utilization of satellite offices, and instituted new office norms to ensure healthy interactions, providing protective equipment, protective barriers, temperature checks, designated walkways, and strict adherence to safety protocols when utilizing communal areas.

Shifting Our Focus to Value Preservation and Advancement of Long-Term Strategic Capabilities

The COVID-19 pandemic directly affected the Company’s business and operations in 2020. Importantly, the Company faced significant operational difficulties, rent collection challenges, and reduced demand, in part as a result of the pandemic’s adverse economic effects and government restrictions on commercial activity.

In response, under the leadership of our senior management team, the Company took significant steps to adapt its strategic and operational priorities to focus on short-term value preservation while still advancing initiatives to enhance long-term strategic capabilities. Management’s key operational priorities included (i) stabilizing occupancy, (ii) maintaining lease economic values above a desired threshold as measured by our proprietary

 

PS Business Parks • 2021 Proxy Statement • 2


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lease valuation metric, (iii) reducing accounts receivables to be in-line with historic averages, and (iv) maximizing repayment of deferred rent provided to certain customers to help mitigate the effects of the COVID-19 pandemic to their businesses. In addition, management focused on several key strategic priorities, including (i) initiating searches for key executive positions to further bolster the senior executive team, (ii) investing in the Company’s information technology platform to enhance data collection and analytics, and (iii) pursuing redevelopment entitlements for near-term redevelopment opportunities.

WE ARE DEDICATED TO CREATING LONG-TERM VALUE AND DELIVERING SUPERIOR RESULTS

Although the unprecedented challenges created by the COVID-19 pandemic required us to implement the short-term value preservation measures discussed above, our longstanding core strategy remains focused on creating value over the long-term. In 2020, we implemented the following principal strategies for creating long-term value:

 

   

continued portfolio refinement, targeting desired product-type density and scale in each of our core markets through acquisitions, developments, and dispositions;

 

   

effective containment of transaction costs, such as make-ready projects and leasing costs;

 

   

developing and empowering our dedicated and experienced in-house teams to lease and manage our portfolio effectively; and

 

   

optimizing our “fortress” balance sheet, which allows us to seize accretive growth opportunities through various operating cycles.

Achieving Core-Market Density and Scale through a Disciplined Investment Strategy

We enhanced and refined our presence in our core gateway markets, with high barriers to entry and attractive demographics, through accretive acquisitions and developments and prudent dispositions, including:

 

   

The acquisition of Pickett Industrial Park, a 246,000 square foot infill multi-tenant industrial park located in Alexandria, Virginia. The park consists of three buildings with suites ranging from 7,000 to 75,000 square feet, and is strategically located inside the Capital Beltway in the rapidly redeveloping Van Dorn Corridor, with immediate access to I-95, I-495, and I-395 highways and is in close proximity to the Pentagon, Fort Belvoir, and Washington, D.C. The acquisition is complementary to the Company’s existing Northern Virginia industrial and flex portfolio, bringing the total to 3.3 million square feet.

 

   

The acquisition of La Mirada Commerce Center, a multi-tenant industrial park comprising approximately 73,000 square feet in La Mirada, California. This acquisition brought the Company’s industrial and flex portfolio in Los Angeles to 2.3 million square feet.

 

   

The disposition of Metro Park IV, a single-tenant office building totaling 113,000 square feet in Montgomery County, Maryland. The sale of Metro Park IV completed the Company’s sale of the Metro Park North portfolio, as the other buildings in this portfolio were sold in 2019 as part of the Company’s strategy to transition away from suburban office properties and focus on industrial and flex properties in desirable infill locations within vibrant markets.

Superior Operations and Disciplined Capital Expenditures

We effectively and proactively minimized maintenance capital and transaction costs (i.e., make-ready and leasing costs) through aggressive cost-containment strategies, including the use of pre-designed and pre-built generic space and finish designs that are appropriate for a wide range of companies and industries, minimizing our exposure to capital-intensive office-related expenditures, and optimizing the use of our in-house leasing teams to minimize leasing transaction costs.

 

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Same Park recurring capital expenditures have trended downward over the past few years, which is the result of our effective transaction cost containment strategies:

 

 

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  (1)

Amounts shown in the table above reflect the reported Same Park data for each respective period.

Developing our People

We hire and develop outstanding team members to lease and manage all of our properties and deliver superior performance. Our decentralized platform gives us the flexibility to meet the needs of our customers, react quickly to local market dynamics, and contain operating expenses and capital expenditures, while our vertically integrated platform provides us with the ability to keep all property management and leasing activity in-house, maximize cost efficiencies, and speed up decision-making.

Prudent Balance Sheet Management

Consistent with our long-term growth philosophy, in 2020 we maintained our “fortress” balance sheet, ending the year with no debt outstanding and modest levels of permanent preferred equity. Our balance sheet remains one of the strongest in the REIT sector, and our balance sheet approach positions the Company to have sufficient access to capital necessary to sustain growth and financial performance through various market cycles. We are committed to responsible stewardship of our balance sheet—including, if appropriate, issuing debt as a capital source.

 

PS Business Parks • 2021 Proxy Statement • 4


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  (1)

Amounts shown in the table above reflect values as of December 31, 2020.

OUR FOCUS ON LONG-TERM VALUE CREATION DELIVERS SUPERIOR LONG-TERM PERFORMANCE

Our corporate strategy is uniquely focused on the long term. We manage all aspects of our business—operations, capital allocation, balance sheet, and risk management—for the decades, not just months or years, to come. The intended and achieved result is resilience in our properties and Company, which, in turn, reinforces and perpetuates our ability to create long-term value for stakeholders.

 

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Dividends, Core FFO, and FAD

As shown in the table below, over the last ten years Core Funds from Operations (Core FFO), Funds Available for Distribution (FAD), and dividends per share grew at annual compound growth rates well in excess of the compound annual growth rate of our portfolio (by square footage) over the same period, demonstrating the significant value created relative to our capital outlay.

 

 

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  (1)

Amounts shown in the table above reflect compound annual growth rates for the metrics shown for the ten-year period ended December 31, 2020. Core FFO and FAD are non-GAAP measures. Refer to pages 39-40 of our Form 10-K filed on February 22, 2021 for information regarding Core FFO and FAD, including a reconciliation to GAAP net income.

 

 

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The following table demonstrates our success at growing Core FFO per share and annual dividends per share of Common Stock over the same ten-year period.

 

 

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  (1)

Core FFO is a non-GAAP measure. Refer to pages 39-40 of our Form 10-K filed on February 22, 2021, for information regarding Core FFO, including a reconciliation to GAAP net income.

 

Return on Assets and Cost of Capital

During that same ten-year period, we increased return on assets, and reduced our cost of capital:

 

 

 

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  (1)

Return on Assets is a non-GAAP measure. Refer to Appendix A for information regarding Return on Assets, including a GAAP reconciliation.

 

 

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Our strong operating performance, capital allocation discipline, and prudent balance sheet management have generated consistently higher returns on assets relative to our industrial REIT peers.

 

 

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  (1)

Duke Realty, EastGroup Properties, Rexford Industrial, Terreno Realty Corporation, STAG Industrial, Inc., and First Industrial Realty Trust are included in the peer set average for the one-year and five-year periods. Only Duke Realty, EastGroup Properties, and First Industrial Realty Trust are included in the peer set average for the 10-year period. Peer set average represents a simple average of each peer company’s return on assets.

 

 

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Strong Credit Metrics

We believe that our outsized long-term performance and shareholder value creation is due in large part to maintaining our fortress balance sheet and adherence to an above-average credit profile. The following chart illustrates two of the Company’s key credit metrics over the trailing five-year period, when we reduced our already low leverage from 4.4x to 3.4x (debt and preferred equity to Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA)).

 

 

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  (1)

EBITDA is a non-GAAP measure. Refer to Appendix A for information regarding EBITDA, including a reconciliation to GAAP net income.

 

 

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Total Shareholder Return (TSR)

Our TSR has exceeded that of the NAREIT Equity Index for each of the 5-year, 10-year, and 20-year periods ending December 31, 2020 and for the S&P MidCap 400, of which we are a member company, for the 20-year period, averaging 11.6% per year since 2001.

 

 

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  (1)

TSR assumes Common Stock price appreciation plus reinvestment of dividends

 

The following chart shows our TSR expressed as cumulative return to shareholders since December 31, 2015, and illustrates that $100 invested in PS Business Parks on December 31, 2015, would have been valued at $175.22 as of December 31, 2020.

 

 

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  (1)

TSR assumes Common Stock price appreciation plus reinvestment of dividends

 

 

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Rental Income and RevPAF Growth

In 2020, we grew our Same Park rental income to $383.4 million, an increase of $1.4 million, or 0.4%, over 2019. Our disciplined approach to managing our assets, which focuses on maximizing rental income growth while maintaining desired portfolio occupancy, has resulted in a multi-year trend of positive rental income growth. The following chart demonstrates the growth in Same Park revenue per available foot (“RevPAF”) for our industrial and flex portfolio over the trailing five year period, and for our total Same Park portfolio (including our remaining office assets) over the same period.

 

 

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  (1)

Same Park REVPAF represents rental income earned per total Same Park weighted average available square foot reported during the period presented.

 

 

  (2)

For more information about Same Park rental income, including a reconciliation to GAAP net income, see page 27 of our Form 10-K filed on February 22, 2021.

 

In addition to our multi-year trend of positive rental income growth, we are outperforming our competitive peer set and are extracting significantly higher RevPAF than our industrial REIT peers.

 

 

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  (1)

PSB Same Park RevPAF as shown in the table above reflects results from our industrial and flex portfolio only (excludes results from our office portfolio).

 

 

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Similar to the RevPAF results highlighted above, we continue to generate significantly higher levels of NOI per available square foot than our industrial REIT peers.

 

 

 

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(1)   PSB Same Park Cash NOI per available foot as shown in the table above reflects results from our industrial and flex portfolio only (excludes results from our office portfolio). Same Park Cash NOI is a non-GAAP measure. Refer to Appendix A for information regarding Same Park Cash NOI, including a reconciliation to GAAP net income.

 

 

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2020 PERFORMANCE HIGHLIGHTS

Financial Performance

Despite an unprecedented and challenging operating environment caused by the COVID-19 pandemic, the senior management team led the successful execution of the Company’s strategy. Their leadership in navigating through the COVID-19 pandemic was directly responsible for the following key operational results:

 

   

We accomplished key operational objectives that bolster near- and mid-term cash flow generation

 

   Completed 7.5 million square feet of lease production, representing a 0.1 million square foot increase in total lease production from the prior year, with associated cash rental rate growth of 5.8%.

 

   Maintained lease economic values, as measured by our proprietary lease valuation metric, well above target levels as a result of (1) positive rent growth in nearly all markets, and (2) transaction cost capital at near record low levels for the Company.

 

   Ended the year with a commercial accounts receivable balance (excluding U.S. government customers) of $0.6 million, which is in-line with the balance in the prior year and in-line with historic average.

 

   Generated $43.3 million of free cash after distributions available to be reinvested in our business, ending the year with $319 million of liquidity (unrestricted cash and credit facility capacity). Free cash after distributions is a Non-GAAP metric. See Appendix A for a reconciliation to net income allocable to common shareholders.

Execution of Operational Objectives

In addition, we successfully executed on several key operational objectives and further positioned the Company for continued long-term value creation.

 

   

We accomplished key initiatives that positioned the Company for long-term performance

 

   We enhanced and optimized our presence in key markets by acquiring two parks at a gross acquisition price of $60.1 million, adding 319,000 rentable square feet to our portfolio.

 

   Obtained final development plan approval and commenced construction of Brentford at The Mile, a 411-unit, $110 million multifamily development in Tysons, Virginia.

 

   Commenced development and delivered a new 83,000 square foot multi-tenant industrial building in Dallas, Texas, completed on time and on budget for a total development cost of $8.1 million.

 

   We hired and developed outstanding team members to lease and manage all of our properties, delivering market leading transaction cost efficiencies (leasing and make-ready costs).

 

   We continued to maintain a conservative balance sheet that is structured with minimal debt and the use of permanent preferred equity; we are one of very few REITs that maintain an S&P corporate credit rating of “A-,” which significantly enhances our liquidity and access to capital through various operating cycles.

 

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OUR COMMITMENT TO ENVIRONMENTAL STEWARDSHIP AND SUSTAINABILITY, SOCIAL RESPONSIBILITY, AND GOOD GOVERANCE PRACTICES

We believe that a strong commitment to environmental stewardship and sustainability, social responsibility, and sound governance practices is good for our business and benefits our shareholders, employees, partners, and other stakeholders. We recognize our responsibility as a global citizen to operate in a responsible and sustainable manner that is aligned with the Company’s long-term strategy and promotes the best interests of our Company and its stakeholders.

Our Sustainability Committee, comprising our Interim CEO & COO and other senior executives, directs, supports, and reports on the Company’s ongoing commitment to environmental, health and safety, social responsibility, governance, and other related matters. The Sustainability Committee Charter is available on our website at psbusinessparks.com. In addition, the Board and the Nominating/Corporate Governance Committee (Governance Committee) oversees management’s efforts and activities on sustainability initiatives. This ensures a focused and appropriate level of oversight by the Board and demonstrates the Board’s commitment to ensuring the Company’s progress across our sustainability initiatives.

 

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Below are highlights of our primary environmental, social, and governance areas of focus and initiatives.

 

 
 E    

ENVIRONMENTAL. We are committed to growing and operating our business in an environmentally responsible and sustainable way.

 

Buildings and Footprint

 

    We employ “on demand” controls and energy management systems, including occupancy sensors, photocell sensors, dimmers, and timers to maximize energy efficiency

 

    We use real-time energy management programs to collect energy consumption data, identify energy reduction opportunities, and incorporate “quick solutions” to inefficiently programmed systems

 

    New developments are LEED Certified; in 2020 we delivered an 83,000 square foot multi-tenant industrial building in Dallas, Texas that was certified LEED Silver; also, in 2020 we commenced development of a 411-unit multifamily residential property in Tysons, Virginia that is designed LEED Silver

 

    In 2020 we invested $0.6 million on LED lighting retrofits throughout our portfolio, and we expect to have replaced effectively 100% of exterior lighting at our parks with energy-efficient LED lighting in 2021; similarly, we are replacing interior lighting at all of our properties with energy-efficient LED lights over a multi-year period as we gain access to units during vacancy periods

 

    We seek to procure renewable energy contracts with utility providers; during 2020 we entered into a multi-year agreement with a utility provider in Northern Virginia to supply the majority of our parks in that region with electricity 100% generated from renewable sources

 

    In 2020 we commenced an initiative targeting rooftop and carpark solar installation at our properties; in 2021 we intend to complete a portfolio-wide feasibility analysis and launch a pilot installation program

 

    We use trash compactors to reduce recycling pickups and train staff on facility protocols that simplify and maximize waste segregation and safe disposal, including the safe disposal of electronics

    

 

    During construction, we reuse existing material when possible and use ultra-low or no VOC paint

 

    Since 2010, we invested $15.0 million to replace approximately 1,410 HVAC Roof Top Units (RTUs), wall units or heat pumps

 

    We employ optimum start/stop programs to achieve temperature setbacks and increases during the night, weekends, and holidays

 

    We minimize “building envelope” energy leaks by using environmentally safe sealant, tinting windows to maximum efficiency, and replacing the large majority of roofs with reflective “cool roofs” that may reduce energy consumption by up to 20%; since 2010, we have invested $14.0 million to replace 69 roofs

 

    Since 2010, we have invested $9.7 million to replace over 370 major HVAC components, such as chillers, cooling towers, and compressors with high efficiency equipment

 

Waste and Recycling

 

    We reduce the use of single-purpose plastic at our facilities by purchasing reusable water bottles for each of our employees, eliminating consumption of over 25,000 plastic water bottles at our properties annually

 

    We reduce water consumption with efficient low flow and motion sensor plumbing devices, efficient irrigation systems, conversion of retention ponds to ecofriendly environments and drought-tolerant and native landscaping

 

    In 2020 we submitted our inaugural Global Real Estate Sustainability Benchmarking (GRESB) survey, establishing a baseline for measured improvement and targeted sustainability initiatives for 2021 and beyond

 

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 S    

SOCIAL. We are committed to investing in our employees and building customer, investor, and community relationships.

 

    We are an Affirmative Action and Equal Opportunity Employer

 

    Highly competitive compensation packages, with nearly 65% of our exempt employees having received stock grants

 

    Comprehensive and competitive health benefits for all full-time employees and dependents

 

    Regular engagement with and outreach to employees, customers, investors, and our communities

 

    Robust talent recruitment and employee development program

 

    We encourage employees to give back to our communities by providing two “volunteer” days to all employees annually that can be used by participating in group volunteer events or individually

    

 

    We offer a charitable gift matching program, providing a donation match of up to a preset limit per employee annually to qualifying 501(c)(3) organizations

 

    We sponsor employee wellness initiatives aimed at promoting healthy lifestyle choices at work and at home

 

    Gender and racial diversity at all employee levels: 43% of employees are non-white, with 24% in a supervisory role, and 50% of employees are women, with 30% in a supervisory role

 

    30% of our Board is female and our Compensation Committee and Audit Committee are chaired by female directors

 

    Our workforce has generational diversity: 54% millennials (aged 24-42), 25% generation X (aged 43-54), and 21% baby boomers (aged 55-73)

 

 
 G    

GOVERNANCE. The Company follows the corporate governance best practices highlighted below.

 

    Substantial majority of independent directors

 

    Annual election of directors/no classified board

 

    Executive sessions of non-management directors

 

    Oversight of risk by the full Board

 

    Presiding Independent Director and separate CEO and Chairman

 

    Robust stock ownership requirements

 

    Annual Board and committee self-evaluations

 

    No poison pill

 

    Anti-short-sale and anti-hedging policies

    

 

    Executive compensation is tied to performance

 

    All Audit Committee members are independent and financial experts

 

    Robust Clawback Policy applying to all incentive compensation

 

    Board members with diverse experiences, including fields of specialty in finance, real estate, executive recruitment, banking, talent management, and governance

 

    Code of Ethics for Senior Financial Executives

 

    Code of Conduct for Employees and Directors

 

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Proposal 1:

Election of Directors

 

 

Our Board has nominated nine directors, who, if elected by shareholders at our Annual Meeting, have agreed to serve until next year’s Annual Meeting. All nominees are currently directors of the Company.

RECOMMENDATION:

Vote FOR all nominees

 

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PROPOSAL 1:

ELECTION OF DIRECTORS

EXECUTIVE SUMMARY

In evaluating potential candidates for service on the Board, the Nominating/Corporate Governance Committee of our Board (the Nominating/Corporate Governance Committee) and the Board select director candidates who will best serve the Board and PS Business Parks in the current and anticipated business environment. The goal in the vetting and nomination process is to achieve an appropriate balance of knowledge, experience, diversity, and capabilities on the Board. The Board, through the Nominating/Corporate Governance Committee, considers the following non-exclusive list of experiences, qualifications, attributes, and skills of both potential director nominees and existing members of the Board:

 

   Senior leadership experience

  

   Governance experience

   Accounting/financial expertise

  

   Technology expertise

   Public company board experience

  

   Legal and regulatory compliance expertise

   Industry experience

  

   Real estate development experience

   Operational management experience

  

   Mergers and acquisitions experience

   Capital markets/investment banking expertise

  

   Diversity (gender, race, nationality, and other attributes)

   Executive recruitment, compensation, and development experience

  

Our director nominees have qualifications, skills, and experience relevant to our business. Each director has experience, mainly at senior executive levels, in other organizations, and a majority of the directors hold or have held directorships at other U.S. public companies. Most of our directors have served as chief executive officers, and all have demonstrated superb leadership, intellectual, and analytical skills gained from deep experience in management, finance, and corporate governance.

ABOUT THE DIRECTOR NOMINEES

The Nominating/Corporate Governance Committee recommended, and the Board has nominated, nine of our incumbent directors for re-election to the Board. James H. Kropp, who has served on the Board since 1998, will retire from the Board as of the 2021 Annual Meeting and thus has not been nominated for re-election. Six of the nine director nominees are independent. If elected, each of the nine nominees will serve for the one-year term beginning with our 2021 Annual Meeting, or until their successors, if any, are elected or appointed. Each nominee has agreed to serve if elected.

 

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NOMINEE QUALIFICATIONS

The Nominating/Corporate Governance Committee has recommended to the Board, and the Board has nominated, the nine incumbent directors listed below for re-election to the Board. The Board believes that these nominees provide the Company with the combined skills, experience, diversity, and personal qualities needed for an effective and engaged Board. We recommend that you vote FOR each nominee.

THE BOARD HAS NOMINATED NINE DIRECTORS, SIX OF WHOM ARE INDEPENDENT

 

       

Nominee

  Age    Principal Business Background  

Director  

Since 

 

Committee    

Membership    

       

Ronald L. Havner, Jr.

  63   Chairman of the Board and Former Chief Executive Officer of Public Storage and PS Business Parks, Inc.   1998    

 

       

Maria R. Hawthorne

  61   Former President and Chief Executive Officer of PS Business Parks, Inc.   2016   Capital
       

Jennifer Holden Dunbar

(Independent Director)

  58   Co-Founder and Managing Director of Dunbar Partners, LLC   2009   Audit, Capital, and Compensation (Chair)
       

Kristy M. Pipes

(Independent Director)

  61   Retired Managing Director and Chief Financial Officer of Deloitte Consulting   2019   Audit (Chair) and Nominating/Corporate Governance
       

Gary E. Pruitt

(Independent Director)

  71   Retired Chairman and Chief Executive Officer of Univar N.V.   2012   Audit
       

Robert S. Rollo

(Presiding Independent Director for 2020)(1)

  73   Retired Senior Partner of Heidrick and Struggles   2013   Nominating/Corporate Governance (Chair) and Compensation
       

Joseph D. Russell, Jr.

  61   Chief Executive Officer and President of Public Storage and former Chief Executive Officer and President of PS Business Parks, Inc.   2003   Capital
       

Peter Schultz

(Presiding Independent Director for 2021)(1)

  73   Retired Chief Executive Officer of The Beacon Group, Inc.   2012   Audit and Capital (Chair)
 

Stephen W. Wilson

(Independent Director)

  64   Retired Executive Vice President – Development of AvalonBay Communities, Inc.   2019   Capital and Compensation

 

(1)

Please see “Corporate Governance and Board Matters—Presiding Independent Director” on page 27.

 

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Age: 63

 

Director since: 1998

 

Director Qualification Highlights:

 

Extensive leadership experience

 

Extensive company and industry knowledge

 

Ronald L. Havner, Jr.,

Chairman of the Board of Public Storage

 

Mr. Havner has been Chairman of the Board of PS Business Parks since March 1998 and previously served as the Company’s Chief Executive Officer. Mr. Havner has been Chairman of the Board of Public Storage (NYSE: PSA), a PS Business Parks affiliate, since August 2011 and was Chief Executive Officer from November 2002 until his retirement effective January 1, 2019. Mr. Havner serves as Chairman of the Board of another PS Business Parks affiliate, Shurgard Self Storage SA (EURONEXT: SHUR) (Shurgard) since completion of its initial public offering in October 2018. Mr. Havner also serves as a director of AvalonBay Communities, Inc. (NYSE: AVB) and served as director of California Resources Corp. (NYSE: CRC) from December 2014 to May 2018. Mr. Havner was the 2014 Chairman of the Board of Governors of the National Association of Real Estate Investment Trusts, Inc. (NAREIT).

 

In considering the nomination of Mr. Havner for re-election to the Board, the Nominating/Corporate Governance Committee and the Board considered Mr. Havner’s extensive leadership experience, his knowledge of the Company and the industry from his service as Chairman since 1998 and as the Company’s previous Chief Executive Officer, and his public company board experience.

 

 

Age: 61

 

Director since: 2016

 

Committees: Capital

 

Director Qualification Highlights:

 

Extensive company knowledge

 

Extensive operational and leadership experience

 

Maria R. Hawthorne

Former President and Chief Executive Officer of PS Business Parks

 

Ms. Hawthorne served as Chief Executive Officer and President of the Company from July 2016 and August 2015, respectively, until her retirement on September 1, 2020. In addition, Ms. Hawthorne also served as the Company’s acting Chief Financial Officer (CFO) from September 2017 to September 2018. Ms. Hawthorne was elected as a member of our Board in July 2016. Ms. Hawthorne previously served as Executive Vice President, Chief Administrative Officer of the Company from July 2013 to August 2015. Prior to that, Ms. Hawthorne served as the Company’s Executive Vice President, East Coast, from February 2011 to July 2013. Ms. Hawthorne served as the Company’s Senior Vice President from March 2004 to February 2011, with responsibility for property operations on the East Coast, including Northern Virginia, Maryland, and South Florida. From June 2001 through March 2004, Ms. Hawthorne was a 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 also serves on the Board of Directors for Essex Property Trust (NYSE: ESS), a fully integrated REIT that acquires, develops, redevelops, and manages multifamily apartment communities located in supply-constrained markets on the West Coast.

 

In considering the nomination of Ms. Hawthorne for re-election to the Board, the Nominating/Corporate Governance Committee and the Board considered Ms. Hawthorne’s deep Company knowledge and her expertise in commercial real estate, financial and operational strategies, acquisitions and development, capital markets, enterprise risk management, and leadership development.

 

 

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Age: 58

 

Director since: 2009

 

Committees: Audit, Capital, and Compensation (Chair)

 

Director Qualification Highlights:

 

Extensive financial expertise

 

Experience in private equity, investments, and M&A

 

Jennifer Holden Dunbar

Co-Founder and Managing Director of Dunbar Partners, LLC

 

Ms. Dunbar has been a director of PS Business Parks since February 2009. From 1994 to 1998, Ms. Dunbar was a partner with Leonard Green and Partners, L.P., a private equity firm she joined in 1989. Ms. Dunbar has served as Co-Founder and Managing Director of Dunbar Partners, LLC, an investment and advisory services firm, since March 2005. Ms. Dunbar is also a director of Big 5 Sporting Goods Corporation (NASDAQ: BGFV), where she serves on the compensation committee and chairs the nominating and corporate governance committee. Since 2015, Ms. Dunbar has served on the board of trustees of various funds in the PIMCO Funds complex, where she is the chair of the investment performance committee and is a member of the audit, governance, and valuation oversight committee of each board. Each of the PIMCO entities is a registered investment company under the Investment Company Act of 1940, as amended.

 

In considering the nomination of Ms. Dunbar for re-election to the Board, the Nominating/Corporate Governance Committee and the Board considered Ms. Dunbar’s financial expertise, experience in private equity, and experience with investments and mergers and acquisitions. She also has valuable experience as a member of several public company boards.

 

 

Age: 61

 

Director since: 2019

 

Committees: Audit (Chair) and Nominating/Corporate Governance

 

Director Qualification Highlights:

 

Extensive leadership and financial experience

 

Kristy M. Pipes

Retired Managing Director and Chief Financial Officer of Deloitte Consulting

 

Ms. Pipes has been a director of PS Business Parks since July 2019. Ms. Pipes was Managing Director and Chief Financial Officer of Deloitte Consulting, a management consultancy firm with operations in the United States, India, Germany, and Mexico, where she managed the finance function. Ms. Pipes held various leadership positions, including serving on the firm’s Management Committee and Consulting Operations Committee. Prior to joining Deloitte in 1999, Ms. Pipes was Vice President and Manager, Finance Division, at Transamerica Life Companies and Senior Vice President and Chief of Staff for the President and Chief Executive Officer (among other senior management positions) at First Interstate Bank of California. Ms. Pipes serves on the Board of Trustees of Public Storage (NYSE: PSA) and the Board of Directors of ExlService Holdings, Inc. (NASDAQ: EXLS).

 

In considering the nomination of Ms. Pipes for re-election to the Board, the Nominating/Corporate Governance Committee and the Board considered Ms. Pipes’s extensive financial analysis and operational expertise. Ms. Pipes also brings deep management and leadership experience to the Board, having held several senior leadership positions during her career.

 

 

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Age: 71

 

Director since: 2012

 

Committees: Audit

 

Director Qualification Highlights:

 

Extensive leadership and financial experience

 

Experience as trustee of Public Storage

 

Gary E. Pruitt

Retired Chairman and Chief Executive Officer of Univar N.V.

 

Mr. Pruitt has served as a director of PS Business Parks since February 2012. He served as Chairman and Chief Executive Officer of Univar N.V. (Univar) from 2002 until his retirement as Chief Executive Officer in 2010 and as Chairman in 2011. Univar is a chemical distribution company based in Bellevue, Washington, with distribution centers in the United States, Canada, and Europe. Mr. Pruitt is also a director of Itron, Inc. (NASDAQ: ITRI). He is a former trustee of Public Storage (NYSE: PSA) and a former director of Esterline Technologies Corp. (NYSE: ESL).

 

In considering the nomination of Mr. Pruitt for re-election to the Board, the Nominating/Corporate Governance Committee and the Board considered Mr. Pruitt’s leadership and financial experience as Chairman and Chief Executive Officer at Univar and his public company board experience.

 

 

Age: 73

 

Director since: 2013

 

Committees: Nominating/Corporate Governance (Chair) and Compensation

 

Director Qualification Highlights:

 

Extensive knowledge and expertise in executive recruitment, compensation, and talent management

 

Experience in corporate governance

 

 

Robert S. Rollo

Retired Senior Partner of Heidrick and Struggles

 

Mr. Rollo has served as a director of PS Business Parks since October 2013. Mr. Rollo most recently served as a Senior Partner at Heidrick and Struggles (Heidrick), an international leadership advisory and executive search firm, from 2006 until his retirement in 2012. Mr. Rollo is a past trustee of the University of Southern California and is Chairman Emeritus of the Southern California Chapter of the National Association of Corporate Directors.

 

In considering the nomination of Mr. Rollo for re-election to the Board, the Nominating/Corporate Governance Committee and the Board considered Mr. Rollo’s extensive knowledge of and expertise in executive recruitment, compensation, and development and talent management, along with his experience in corporate governance.

 

 

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Age: 61

 

Director since: 2003

 

Committees: Capital

 

Director Qualification Highlights:

 

Leadership experience at the Company

 

Extensive industry knowledge

 

Joseph D. Russell, Jr.

Chief Executive Officer and President of Public Storage

 

Mr. Russell has been a director of PS Business Parks since August 2003. Mr. Russell has been President and Chief Executive Officer of Public Storage since July 2016 and January 2019, respectively. Mr. Russell also joined the Public Storage board in January 2019. Previously, Mr. Russell was Chief Executive Officer of PS Business Parks from August 2003 until July 2016, and President of PS Business Parks from September 2002 to August 2015. Mr. Russell serves on the Advisory Board of Governors of Nareit and previously served on the board of directors of the Self-Storage Association. Before joining PS Business Parks, Mr. Russell was employed by Spieker Properties (Spieker), an owner and operator of office and industrial properties in Northern California, and its predecessor, for more than ten years, becoming an officer of Spieker when it became a publicly held REIT in 1993.

 

In considering the nomination of Mr. Russell for re-election to the Board, the Nominating/Corporate Governance Committee and the Board considered Mr. Russell’s leadership experience; Company and industry knowledge, including his more than 20-year involvement with publicly held REITs; and extensive experience with office and industrial real estate.

 

 

Age: 73

 

Director since: 2012

 

Committees: Audit and Capital (Chair)

 

Director Qualification Highlights:

 

Leadership and senior management experience

 

Extensive knowledge of the real estate industry

 

Peter Schultz

Retired Chief Executive Officer and Director of The Beacon Group, Inc.

 

Mr. Schultz has been a director of PS Business Parks since February 2012. He served as President, Chief Executive Officer, and a director of The Beacon Group, Inc. (Beacon) and its affiliates for more than 25 years until his retirement in 2010. Beacon and its affiliates were engaged in the development and management of more than three million square feet of retail, industrial, hospitality, and residential projects. Prior to working at Beacon, Mr. Schultz was employed by Arthur Andersen for four years as a certified public accountant in its tax department.

 

Mr. Schultz is a member of the American Institute of Certified Public Accountants and the California Society of Certified Public Accountants.

 

In considering the nomination of Mr. Schultz for re-election to the Board, the Nominating/Corporate Governance Committee and the Board considered Mr. Schultz’s leadership and extensive real estate experience as President, Chief Executive Officer, and director of Beacon and its affiliates and his extensive financial expertise gained from his almost forty years of experience in finance.

 

 

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Age: 64

 

Director since: 2019

 

Committees: Audit and Compensation

 

Director Qualification Highlights:

 

Extensive leadership and financial experience

 

Stephen W. Wilson

Retired Executive Vice President—Development of AvalonBay Communities, Inc.

 

Mr. Wilson has been a director of PS Business Parks since July 2019. Mr. Wilson was Executive Vice President—Development of AvalonBay Communities, Inc. (NYSE:AVB), a real estate investment trust that develops, redevelops, acquires, and manages multifamily communities in the United States. Mr. Wilson held various senior leadership positions and was responsible for development activities on the West Coast and Mid-Atlantic at AvalonBay. Prior to joining AvalonBay in 1988, Mr. Wilson was Senior Vice President and Chief Operating Officer of SU Development, Inc. and Senior Vice President of Continental Pacific, Inc., with responsibilities in development, debt and equity financing, property management, and institutional sales.

 

Mr. Wilson is a member of ULI, former chair of the ULI Transit Oriented Development Council, a member of The American Institute of Certified Public Accountants.

 

In considering the nomination of Mr. Wilson for re-election to the Board, the Nominating/Corporate Governance Committee of the Board considered Mr. Wilson’s extensive real estate development experience, finance, and accounting experience. In addition, the Board considered Mr. Wilson’s service in several senior leadership positions at public and private companies.

 

 

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DIRECTOR NOMINEES SKILLS SUMMARY

The Board believes that our director nominees provide PS Business Parks with the combined skills, experience, and personal qualities needed for an effective and engaged Board.

 

    LOGO   LOGO   LOGO   LOGO   LOGO   LOGO   LOGO   LOGO   LOGO
                   
CEO or Executive Experience  

 

   

 

 

 

 

 

 

 

                   
Other Public Board Experience  

 

 

 

 

   

 

 

   

 

   

 

                   
Real Estate Industry Experience  

 

 

   

 

   

 

   

 

 

 

 

                   
Financial Expert or Tax Expertise  

   

 

 

 

 

   

 

   

 

 

 

                   
Corporate Governance Experience  

 

 

 

 

 

 

 

 

                   
M&A/Capital Markets/Capital Allocation Experience  

 

 

 

 

   

 

 

 

 

                   
Succession Planning/Management Development Experience  

 

   

 

 

 

 

 

 

 

                   
Gender Diversity    

 

 

 

 

   

 

   

 

   

 

   

 

   

 

                   
Racial Diversity (including self-identification as being from an underrepresented community)    

 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

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CORPORATE GOVERNANCE AND BOARD MATTERS

CORPORATE GOVERNANCE FRAMEWORK

The Board has adopted the following corporate governance documents, which, along with our charter and bylaws, establish the framework for our corporate governance and outline the general practice of our Board with respect to board structure, function conduct, and board and committee organization:

 

   

PS Business Parks Corporate Governance Guidelines and Director Code of Ethics (the Corporate Governance Guidelines)

 

   

Charters of our standing committees of the Board (the Committee Charters)

 

   

Business Conduct Standards applicable to our officers and employees

 

   

Code of Ethics for our senior financial officers (the Code of Ethics)

Our current Corporate Governance Guidelines, Business Conduct Standards, Code of Ethics, and Committee Charters are available online in the “Investor Relations” section of our website, psbusinessparks.com/investor-relations/corporate-governance, or will be delivered to you by mail upon your request in writing to the Company’s Investor Services Department, 701 Western Avenue, Glendale, California 91201.

The Nominating/Corporate Governance Committee reviews the Corporate Governance Guidelines at least annually and makes recommendations for any changes to the Board. We will disclose any substantive amendments or waivers to our ethics policies and standards on our website or in accordance with the SEC and New York Stock Exchange (NYSE) requirements.

BOARD ENGAGEMENT AND OVERSIGHT

During the COVID-19 pandemic, our management team has greatly benefited from the insights and oversight of our Board. Throughout 2020, our Board and its committees not only maintained their regular schedule of quarterly meetings, but also began regular and frequent meetings with management regarding COVID-19, including its impact on employees, operations, financial performance, and legal and regulatory matters. The Board’s longstanding work to provide oversight, review, and counsel related to long-term strategy, risks, and opportunities provided the necessary foundation for management and the Board to build upon in responding quickly and appropriately to the unexpected challenges resulting from the COVID-19 pandemic.

While the COVID-19 pandemic has required the senior management team’s and the Board’s immediate attention, one of the Board’s highest priorities continues to be guiding the development and execution of the Company’s long-term strategy. The Board remains focused on working with management to develop strategies to accelerate growth and generate value to shareholders.

COMMITMENT TO DIVERSITY

Although the Nominating/Corporate Governance Committee and the Board do not have a formal policy on diversity, the Company is committed to ensuring that a diversity of experiences and viewpoints are represented on the Board as well as the Company’s senior management team. Our Board reflects diverse perspectives, including a complementary mix of skills, experience, and backgrounds that we believe are paramount to our ability to represent the interests of our stakeholders. Our Board recognizes the importance of diversity and supports management’s efforts to enhance all aspects of diversity throughout the Company. As a reflection of this commitment, 30% of our proposed Board composition is female and one director is racially diverse and self-identifies as being from an underrepresented community.

 

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BOARD LEADERSHIP

We have separate individuals serving as Chairman of the Board and as CEO. Ronald L. Havner, Jr., has served as Chairman of the Board since March 1998. Mr. Havner has been involved with the Company since its founding and has extensive knowledge of the Company, the markets in which it operates, and the real estate industry. Dan M. Chandler, III has been appointed to serve as our President and Chief Executive Officer, effective April 5, 2021, and will succeed John W. Petersen, our Chief Operating Officer, who has served as our Interim President and Chief Executive Officer since April 2020.

We do not have a policy against one individual holding the positions of Chairman and CEO. Rather, the Board evaluates the desirability of having a combined or separate Chairman and CEO from time to time and adopts a structure based on what it believes to be in the best interests of PS Business Parks and its shareholders. Currently, the Board believes that having separate Chairman and CEO roles serves the interests of the Company and its shareholders well.

MAJORITY VOTE REQUIREMENTS FOR DIRECTORS

Our Corporate Governance Guidelines provide that, in an uncontested election of directors, each director nominee who does not receive at least a majority of the votes cast with respect to that director must submit his or her resignation to the Board. For the purpose of the Corporate Governance Guidelines, a majority means the number of votes cast “for” a director must exceed 50% of the votes cast with respect to the director. The Nominating/Corporate Governance Committee will then make a recommendation to the Board about whether to accept or reject the resignation or take other action. The Board will act on any such recommendation and publicly disclose its decision within 90 days from the date the election results were certified by the Inspector of Election. If a director’s resignation is accepted by the Board, the Board may fill the resulting vacancy or decrease the size of the Board in accordance with our bylaws.

PRESIDING INDEPENDENT DIRECTOR

The Board has established a position of Presiding Independent Director to provide an independent director with a leadership role on the Board. The Presiding Independent Director presides at meetings of all independent directors or all non-management directors in executive sessions without the presence of management. These meetings are held regularly in connection with each regularly scheduled board meeting and at the request of any independent or non-management director. In addition, the independent directors meet separately at least once annually. These sessions are designed to encourage open discussion of any matter of interest without the CEO or any other members of management present. The position of Presiding Independent Director generally rotates annually among the chairs of the standing committees of the Board. Robert S. Rollo was the Presiding Independent Director for 2020, and Peter Schultz is the Presiding Independent Director for 2021.

BOARD RESPONSIBILITIES AND OVERSIGHT OF RISK MANAGEMENT

The Board is responsible for overseeing our Company’s approach to major risks and our policies for assessing and managing these risks. In connection with its oversight function, the Board regularly receives presentations from management on areas of risk facing our business. The Board and management actively engage in discussions about these potential and perceived risks to the business.

In addition, the Board is assisted in its oversight responsibilities by the four standing Board committees (as described below), which have assigned areas of oversight responsibility for various matters, as described in the Committee Charters and as provided in the NYSE rules.

The Audit Committee assists the Board in overseeing the integrity of our financial statements, the qualifications, independence, and performance of our independent registered public accounting firm, and the performance of our internal audit function. Pursuant to its charter, the Audit Committee is also responsible for oversight of risk assessment and risk management, including any major financial risk exposures.

 

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The Compensation Committee oversees the compensation of our CEO and other executive officers and evaluates compensation incentives to ensure they will motivate senior management to grow long-term shareholder return without taking undue risk.

The Nominating/Corporate Governance Committee assists the Board by identifying individuals qualified to become Board members and makes recommendations on Board appointments and nominations. The Nominating/Corporate Governance Committee also oversees our governance policies and as part of that oversight focuses on risks associated with director and management succession planning, corporate governance, and overall Board effectiveness. The Nominating/Corporate Governance Committee also oversees our environmental, social, and governance (ESG) efforts and our political and charitable contributions and other public policy matters.

The Capital Committee oversees the optimization of the Company’s capital expenditures. The Capital Committee’s goal is to position the Company to maximize long-term benefit of its capital expenditures, while also ensuring the Company’s assets are well maintained and positioned to meet the needs of its current and prospective customers.

The Board committees also hear reports from members of management to enable each committee to identify, discuss, understand and manage risk. The chair of each of the Board’s standing committees reports on interim individual committee discussions to the full Board at each Board meeting. All directors have access to management in the event a director wishes to follow up on items discussed outside of Board meetings.

POLITICAL AND CHARITABLE CONTRIBUTIONS

In February 2020, our Board and Nominating/Corporate Governance Committee approved amendments to the Nominating/Corporate Governance Committee Charter to include oversight responsibilities with respect to the Company’s political and charitable contributions and other public policy matters. In order to facilitate accountability and informed decision-making with respect to the Company’s political and charitable contributions, the Nominating/Corporate Governance Committee has adopted certain Political and Charitable Contribution Guidelines, which apply to contributions or expenditures of corporate funds to various political entities, charitable organizations, and certain causes. Contributions subject to these guidelines must be approved by management and/or the Nominating/Corporate Governance Committee. All contributions are required to be reported quarterly to the Nominating/Corporate Governance Committee.

BOARD ORIENTATION AND EDUCATION

Each new director participates in an orientation program and receives materials and briefings concerning our business, industry, management, and corporate governance policies and practices. Continuing education is provided for all directors through Board materials and presentations, discussions with management, and the opportunity to attend external board education programs.

BOARD RETIREMENT POLICY

Our Corporate Governance Guidelines provide that no person will be nominated for election to the Board for any term unless he or she is 75 years of age or younger on the first day of the term. The Board has discretion to make exceptions to the policy, including to provide for a transition period.

DIRECTOR INDEPENDENCE

The Board evaluates the independence of each director annually based on information supplied by the directors and the Company, and on the recommendations of the Nominating/Corporate Governance Committee. The Corporate Governance Guidelines require that a majority of the directors be independent in accordance with the requirements of the NYSE. A director qualifies as independent unless the Board determines, in accordance with NYSE rules, that the director has a material relationship with PS Business Parks, based on all relevant facts and

 

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circumstances. Material relationships may include commercial, industrial, consulting, legal, accounting, charitable, family, professional, personal, and other relationships. The Board also considers the director’s relationships with Public Storage, our largest shareholder.

Following its annual review of each director’s independence, the Nominating/ Corporate Governance Committee in February 2021 recommended to the Board, and the Board determined, that (i) each of Jennifer Holden Dunbar, James H. Kropp, Kristy M. Pipes, Gary E. Pruitt, Robert S. Rollo, Peter Schultz, and Stephen W. Wilson is independent pursuant to the rules of the NYSE, and (ii) each Audit Committee member and each Compensation Committee member meets the additional independence requirements of the rules of the SEC.

COMMITTEES OF THE BOARD

Our Board has four standing committees: the Audit Committee, the Compensation Committee, the Nominating/Corporate Governance Committee, and the Capital Committee. Each of the standing committees operates pursuant to a written charter, which can be viewed at our website at psbusinessparks.com/investor-relations/corporate-governance. Any shareholder may obtain a printed copy by writing to the Company’s Secretary at PS Business Parks, Inc., 701 Western Avenue, Glendale, CA 91201.

Our four standing committees are described below.

Audit Committee

The primary functions of the Audit Committee, as set forth in its charter, are to:

 

   

oversee the integrity of our financial statements;

 

   

oversee compliance with legal and regulatory requirements;

 

   

consider the qualifications, independence, and performance of the independent registered public accounting firm;

 

   

review the scope and results of internal audits, the Company’s internal controls over financial reporting, and the performance of the Company’s internal audit function;

 

   

appoint, evaluate, and determine the compensation of the independent registered public accounting firm;

 

   

review and approve the scope of the annual audit, the audit fee, and the financial statements;

 

   

approve all other services and fees performed by the independent registered public accounting firm;

 

   

prepare the Audit Committee Report for inclusion in the annual proxy statement; and

 

   

annually review its charter and performance.

Each member of the Audit Committee: (1) meets the financial literacy and independence standards of the NYSE; (2) qualifies as an audit committee financial expert pursuant to the rules of the SEC; and (3) qualifies as independent pursuant to the rules of the SEC and NYSE.

Additionally, the Audit Committee reviews and discusses with management the Company’s major financial risk exposures and the steps management has taken to monitor and control such exposures, including the Company’s risk assessment policies.

 

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The Audit Committee also oversees cybersecurity and other IT risks affecting the Company. Management reports regularly to the Audit Committee regarding information security. We consider each member of our Audit Committee to possess information security experience by way of their oversight responsibilities over this area.

We identify and address information security risks by employing a defense-in-depth methodology that provides multiple, redundant defensive measures in case a security control fails or a vulnerability is exploited. We leverage internal resources, along with strategic external partnerships to mitigate cybersecurity threats to the Company. We deploy both commercially available solutions and proprietary systems to manage threats to our information technology environment actively. We employ robust information security and training programs for our employees, including mandatory computer-based training, regular internal communications, and ongoing end-user testing to measure the effectiveness of our information security program. We are externally audited and certified by top information security standards to ensure we comply with this rigorous standard. We regularly engage appropriate external resources regarding emerging threats in order to navigate the diverse cybersecurity landscape.

We have experienced no material information security breaches in the last three years. As such, we have not spent any material amount of capital on addressing information security breaches in the last three years, nor have we incurred any material expenses from penalties and settlements related to a material breach during this same time.

Compensation Committee

The primary functions of the Compensation Committee, as set forth in its charter, are to:

 

   

determine, either as a committee or together with other independent directors, the compensation of the Company’s CEO;

 

   

determine the compensation of other executive officers;

 

   

administer the Company’s equity and executive officer incentive compensation plans;

 

   

review and discuss with management the Compensation Discussion and Analysis (CD&A) to be included in the proxy statement and incorporated by reference into the Form 10-K and to recommend to the Board for inclusion of the CD&A in the Form 10-K and proxy statement;

 

   

provide a description of the processes and procedures for the consideration and determination of executive compensation for inclusion in the Company’s annual proxy statement;

 

   

review with management its annual assessment of potential risks related to the Company’s compensation policies and practices applicable to all employees;

 

   

review the advisory shareholder votes on the Company’s executive compensation programs;

 

   

produce the Compensation Committee Report for inclusion in the annual proxy statement; and

 

   

annually review its charter and performance.

The Compensation Committee has not delegated any of its responsibilities to individual members of the Compensation Committee or to a subcommittee of the Compensation Committee, although it has the discretion to do so. As required by its charter, the Compensation Committee and, in some instances, the Compensation Committee and all other independent members of the Board, made final compensation decisions for executive officers in 2020, including the NEOs set forth in the Summary Compensation Table on page 53 below. The Compensation Committee has the sole authority to retain outside compensation consultants for advice, but historically and for 2020 has not done so, relying instead on surveys of publicly available information about senior executive compensation at similar companies.

 

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Each member of the Compensation Committee qualifies as independent pursuant to the rules of the SEC and NYSE, including the heightened independence requirements for compensation committee members.

Compensation Committee Interlocks and Insider Participation. No executive officer of PS Business Parks served on the compensation committee or board of directors of any other entity that has an executive officer who also served on our Compensation Committee or Board at any time during 2020, and no member of the Compensation Committee had any relationship with the Company requiring disclosure under Item 404 of SEC Regulation S-K.

Messrs. Havner and Russell and Ms. Hawthorne are former officers of the Company and are members of the Board. They do not serve on the Compensation Committee.

Oversight of Compensation Risks. With respect to consideration of risks related to compensation, the Compensation Committee annually considers a report from our senior management team concerning potential risks related to compensation policies and practices applicable to all of the Company’s employees.

In early 2021, the Compensation Committee considered management’s review of the target metrics for all of our employee incentive compensation plans and management’s conclusion that the Company’s incentive compensation plans, practices, and policies (1) properly incentivized employees to achieve short- and long-term Company goals, (2) did not create any significant motivation or opportunity for employees to take undue risks to achieve an incentive compensation award, and (3) are not reasonably likely to have a material adverse effect on the Company. The Compensation Committee, following discussion, reached a similar conclusion. The Compensation Committee expects to further review compensation risks from time to time.

Nominating/Corporate Governance Committee

The primary functions of the Nominating/Corporate Governance Committee, as set forth in its charter, are to:

 

   

identify, evaluate and make recommendations to the Board for director nominees for each annual shareholder meeting and to fill any vacancy on the Board;

 

   

oversee the Company’s corporate governance policies and to review and assess the adequacy of those policies on an ongoing basis and recommend any changes to the Board;

 

   

oversee the annual Board assessment of Board performance;

 

   

oversee the Company’s sustainability initiatives, including ESG matters; and

 

   

oversee the Company’s political and charitable contributions.

Our Board has delegated to the Nominating/Corporate Governance Committee responsibility for recommending nominees for election to the Board. Other duties and responsibilities of the Nominating/Corporate Governance Committee include periodically reviewing the structure, size, composition, and operation of the Board and each Board committee; recommending assignments of directors to Board committees; conducting a preliminary review of director independence; overseeing director orientation; and annually reviewing and evaluating its charter and performance. The principles set forth in its charter further guide the Nominating/Corporate Governance Committee.

Director Qualifications. We believe that members of the Board should have high professional and personal ethics and values. They should have broad experience at the policy-making level in business or other relevant experience. They should be committed to enhancing shareholder value and should have sufficient time to carry out their duties and to provide insight and practical wisdom based on experience. Their service on other boards of public companies should be limited to a number that permits them, given their individual circumstances, to

 

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perform all director duties responsibly. In general, the Board seeks to add directors who meet the independence requirements of the NYSE rules. In addition, director candidates must annually submit a completed director questionnaire concerning matters related to independence determination, and the determination of whether a candidate qualifies as an audit committee financial expert, and must satisfactorily complete a background investigation by a third-party firm.

Identifying and Evaluating Nominees for Directors. The Nominating/Corporate Governance Committee utilizes a variety of methods for identifying and evaluating nominees for director.

The Nominating/Corporate Governance Committee regularly assesses the appropriate size of the Board and whether any vacancies on the Board are expected due to retirement or otherwise. In the event that vacancies are anticipated or otherwise arise, the Nominating/Corporate Governance Committee considers various potential candidates for director.

Candidates may come to the attention of the Nominating/Corporate Governance Committee through current Board members, professional search firms, shareholders, or other persons. These candidates are evaluated at meetings of the Nominating/Corporate Governance Committee and may be considered at any point during the year.

The Nominating/Corporate Governance Committee considers properly submitted shareholder nominations of candidates for the Board in the same manner as other candidates. Following verification of the shareholder status of persons proposing candidates, recommendations will be aggregated and considered by the Nominating/Corporate Governance Committee prior to the issuance of the proxy statement for the annual meeting. Any materials provided by a shareholder in connection with the recommendation of a director candidate are forwarded to the Nominating/Corporate Governance Committee. The Nominating/Corporate Governance Committee may also review materials provided by professional search firms or other parties in connection with a nominee who is not proposed by a shareholder. In evaluating such nominations, the Nominating/Corporate Governance Committee seeks to achieve a balance of knowledge, experience, and capability on the Board.

We do not have any other policies or guidelines that limit the selection of director candidates by the Nominating/Corporate Governance Committee, and the Nominating/Corporate Governance Committee and the Board have and continue to exercise broad discretion to select director candidates who will best serve the Board and the Company in the current and anticipated business environment.

Capital Committee

The Capital Committee focuses on assessing, monitoring, and optimizing the Company’s capital expenditures, including development and redevelopment opportunities as well as the Company’s annual recurring capital expenditures, which include maintenance capital, tenant improvements, and leasing commissions. The goal is to position the Company to maximize the long-term benefits of its capital expenditures while ensuring its assets are well maintained and positioned in the marketplace to meet the needs of the Company’s current and prospective customers. The Capital Committee operates pursuant to a formal charter adopted in July 2016.

COMMUNICATIONS WITH THE BOARD

The Company provides a process by which shareholders and interested parties may communicate with the Board. Communication to the Board should be addressed to: Board of Directors, c/o Jeffrey D. Hedges, Executive Vice President, Chief Financial Officer, and Secretary, PS Business Parks, Inc., 701 Western Avenue, Glendale, California 91201. Communications intended for a specified individual director or group of directors should be addressed to the director(s) c/o Secretary at the above address, and all such communications received will be forwarded to the designated director(s).

 

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BOARD AND COMMITTEE MEETINGS AND ATTENDANCE

The Board meets at regularly scheduled intervals and may hold additional special meetings as necessary or desirable in furtherance of its oversight responsibilities. As described above, the non-management directors generally meet in executive session without the presence of management in connection with each regularly scheduled Board meeting.

In 2020, the Board held 11 meetings, including telephonic meetings. During 2020, all directors attended at least 75% of the meetings held by the Board and all committees of the Board on which each director served, except for Ms. Hawthorne, who attended 55% due to her medical leave of absence. We do not have a policy regarding directors’ attendance at the annual meeting of shareholders, but directors are encouraged to attend. Seven of our directors attended the 2020 annual meeting of shareholders.

The following table summarizes the membership of the Board’s standing committees and the number of meetings held by each committee in 2020:

BOARD COMMITTEE MEMBERSHIP AND 2020 MEETINGS

 

Director

  Audit   Compensation  

 

Nominating/

Corporate

Governance

  Capital
       

Ronald L. Havner, Jr.

               
       

Joseph D. Russell, Jr.(1)

              Member
       

Maria R. Hawthorne

              Member
       

Jennifer Holden Dunbar

  Member   Chair       Member
       

James H. Kropp(2)

      Member   Member    
       

Kristy M. Pipes(1)

  Chair       Member    
       

Gary E. Pruitt(1)

  Member            
       

Robert S. Rollo

(Presiding Independent Director for 2020)

     

 

Member

 

 

Chair

   
       

Peter Schultz(1)

  Member           Chair
       

Stephen W. Wilson

      Member       Member
       

Number of Meetings in 2020

  4   9   10   4

 

(1)   Mr. Russell served as the Interim Chairman of the Capital Committee from July 23, 2019 to February 18, 2020, when Mr. Schultz resumed his role as Chairman of the Capital Committee. Mr. Pruitt served as the Interim Chairman of the Audit Committee from July 23, 2019 to April 22, 2020. On April 22, 2020, Ms. Pipes was appointed as the Chairman of the Audit Committee.

 

(2)   Mr. Kropp will retire from the Board immediately following the 2021 Annual Meeting.

 

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OUR EXECUTIVE OFFICERS

Maria R. Hawthorne, the Company’s former President and Chief Executive Officer, commenced a medical leave of absence on April 20, 2020, and ultimately retired from her role as President and Chief Executive Officer on September 1, 2020. John W. Petersen, the Company’s long-tenured Chief Operating Officer, assumed the role of Interim President and Chief Executive Officer on April 20, 2020, will serve in this role until April 5, 2021, and then will continue his role as Chief Operating Officer. Dan M. Chandler, III has been appointed to serve as our President and Chief Executive Officer, effective April 5, 2021.

The following are biographical summaries of our executive officers.

 

   

Dan M. Chandler, III, age 53, has been appointed to serve as our President and Chief Executive Officer effective April 5, 2021. The Board intends to appoint Mr. Chandler to the Board after the Annual Meeting. Mr. Chandler served as Executive Vice President, Chief Investment Officer at Regency Centers Corporation (Regency) (NASDAQ:REG), a public real estate investment trust that acquires, develops, owns, and operates open-air shopping centers in the United States, since August 2019. Prior to that, Mr. Chandler served as Regency’s Executive Vice President of Investments since January 2016 and as Managing Director—West Region since 2015, where he oversaw the growth and management of the Regency’s portfolio and new investments throughout California, Oregon and Washington. From 2007 to 2009, Mr. Chandler was a principal with Chandler Partners, a private commercial and residential real estate developer in Southern California. He was a Managing Director – Northeast Investments for Regency from 2006 to 2007, Senior Vice President of Investments (So Cal/Mid-Atlantic) from 2002 to 2006, Vice President of Investments (So Cal) from 1999 to 2002 and was a Director – Project Development (So Cal) at Pacific Retail Trust (PRT) from 1997 until its merger with Regency in 1999. Mr. Chandler holds a Bachelor of Science, a M.B.A. and a Master of Real Estate Development (M.R.E.D.) from the University of Southern California. He is a member of the ICSC and the ULI, where he serves on the Small-Scale Development Council.

 

   

John W. Petersen, age 57, has been our Executive Vice President and Chief Operating Officer since he joined the Company in December 2004. Mr. Petersen served as Interim President and Chief Executive Officer from April 20, 2020 to April 5, 2021. Prior to joining the Company, Mr. Petersen was Senior Vice President, San Jose Region, for Equity Office Properties (EOP) 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 working for 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 the National Association of Industrial and Office Parks, Silicon Valley Chapter.

 

   

Jeffrey D. Hedges, age 38, joined the Company as Executive Vice President, Chief Financial Officer, Secretary, and principal financial officer on September 17, 2018. Prior to joining the Company, Mr. Hedges served as Senior Vice President, Accounting and Reporting, from 2015 at Invitation Homes (NYSE:INVH) (formerly known as Starwood Waypoint Homes and prior to that Colony Starwood Homes), a publicly traded single-family residential real estate investment trust that owns and operates single-family rental homes in the United States. Mr. Hedges was a Senior Manager in the Transaction Advisory Services and Assurance (Audit) practices at Ernst & Young (EY) from 2006 to 2015. Mr. Hedges is a certified public accountant and holds a Bachelor of Science from the W.P. Carey School of Business, Arizona State University, and a Master of Business Administration from the Wharton School, University of Pennsylvania.

 

   

Trenton Groves, age 48, has served as the Company’s Senior Vice President, Chief Accounting Officer, Assistant Secretary, and principal accounting officer since September 2018. Mr. Groves joined the Company as Corporate Controller in 2004 and has served as Vice President, Finance, and Corporate Controller since 2007. Prior to joining the Company, Mr. Groves was in public accounting, serving as a Manager in the Assurance (Audit) group at EY from 2002 to 2004 and as Manager at Arthur Andersen

 

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from 1998 to 2002. Mr. Groves is a certified public accountant and holds a Bachelor of Science in accounting from California State University, Northridge.

COMPENSATION OF DIRECTORS

The Compensation Committee periodically reviews the Company’s non-employee director compensation and recommends any changes to the Board. The Board makes the final determination as to director compensation. The Board has approved the mix of cash and equity compensation described below.

Retainers and Meeting Fees. Non-employee directors (except for current executives of a PS Business Parks, Inc. or its affiliates, including Public Storage and Shurgard Europe) receive annual cash retainers (paid quarterly and pro-rated for any partial year of service) for serving on the Board and for chairing a committee, and cash payments for attending Board and committee meetings (including all telephonic meetings).

In light of the increased time and preparation required for attendance at meetings of the Board and its committees, the Compensation Committee in December 2020 recommended, and the Board approved, certain amendments to the Company’s Non-Employee Director Compensation Policies to modify per meeting attendance fees. The amendments provide that non-employee directors will be paid $1,000 for attending each of their Board and respective committee meetings, whether held telephonically or in person. The following is the current retainer/fee schedule:

 

 

 

Compensation

 

 

 

Amount

 

 
   
Board member retainer (annual)    $         25,000  
   
Chairman of the Board supplemental retainer (annual)     15,000  
   
Audit Committee Chair’s supplemental retainer (annual)     10,000  
   
Other standing committee chairs’ supplemental retainer (annual)     5,000  
   
Board or committee per meeting attendance fee     1,000  

Equity Awards. Each new non-employee director whom the Board determines to be independent, upon the date of his or her initial election by the Board or the shareholders to serve as a non-employee director, is granted a non-qualified stock option to purchase 10,000 shares of Common Stock, which vests in five equal annual installments beginning one year from the date of grant or the annual shareholders meeting date in that year, whichever is earlier, subject to continued service. Directors who previously served as Company executives are not eligible to receive this award.

Annually, each non-employee director receives a non-qualified stock option to purchase 2,000 shares of Common Stock, which vests in five equal annual installments beginning one year from the date of grant or the annual shareholders meeting date in that year, whichever is earlier, subject to continued service. The annual grants are made immediately following the annual meeting of shareholders at the closing price of the Common Stock on the NYSE on such date.

Upon retirement of a non-employee director from the Board, all outstanding options vest effective on the date of retirement and the director has one year to exercise all vested options. A retirement shall have occurred if (i) a non-employee director is not nominated for re-election pursuant to the Company’s mandatory retirement policy; or (ii) a non-employee director ceases service on the Board and the non-employee director has a combined age and years of service of at least 80 years, where the non-employee director is at least age 55 and has provided at least 10 years of Service (as defined in the 2012 Equity and Performance-Based Incentive Compensation Plan) to the Company (including its subsidiaries and affiliates).

 

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Each non-employee director who joins the Board receives a grant of 10,000 deferred stock units that vest in ten equal annual installments on each of the first ten anniversaries of the date the director commences service on the Board subject to certain conditions. The awards are intended to retain and reward long-term service on the Board and to provide equity compensation to Board members. Directors receive dividend equivalents on vested retirement shares. Directors who are former Company employees do not earn retirement shares for Board service until his/her completion of participation in the Company’s equity incentive plans as a former employee (i.e., until all unvested outstanding equity awards received by the former employee for his/her service as an employee have vested).

Director Stock Ownership Guidelines. Pursuant to the Corporate Governance Guidelines, each non-management director is encouraged to have a significant stock ownership in the Company. All directors are expected, within three years of election, to own at least $100,000 of Common Stock of the Company, as determined using the per-share value on the date of acquisition. All of our directors meet this stock ownership requirement.

Director Compensation in Fiscal 2020. The following table presents the compensation provided by the Company to our directors for the fiscal year ended December 31, 2020.

 

         
Director(1) Fees Earned
or Paid in
Cash
(2)
Director
Retirement
Shares
(3)
Option
Awards
(4)  
All Other
Compensation
(5)  
Total
         
Ronald L. Havner, Jr.   $51,000                 -   $33,420   $42,000   $126,420
         
Maria R. Hawthorne       5,083                 -              -               -         5,083
         
Jennifer Holden Dunbar     58,500                 -     33,420     42,000     133,920
         
James H. Kropp     55,500                 -     33,420     42,000     130,920
         
Kristy M. Pipes(6)     58,000   $175,480     33,420      2,100     269,000
         
Gary E. Pruitt(6)     45,500       80,870     33,420     33,600     193,390
         
Robert S. Rollo     60,500       75,060     20,460     26,250     182,270
         
Joseph D. Russell(6)             -                 -     33,420               -       33,420
         
Peter Schultz(6)     49,500       80,870     20,460     33,600     184,430
         
Stephen W. Wilson     44,500     173,330     33,420       2,100     253,350
         
Total $ 428,083 $ 585,610 $ 274,860 $ 223,650 $ 1,512,203 

 

(1) 

Joseph D. Russell, Jr. did not receive any cash compensation for service as a director during 2020. Ms. Hawthorne did not receive any cash compensation for service as a director during the portion of 2020 where she served as President and Chief Executive Officer. Beginning on September 1, 2020, Ms. Hawthorne ceased to be an employee of the Company and began receiving meeting fees. Ms. Hawthorne’s compensation for the portion of the year she served as CEO is set forth below beginning on page 53. Ms. Hawthorne also did not receive any option awards for her service as a director in 2020.

 

(2) 

Reflects the adjustment to per meeting fee attendance effective January 1, 2020, as approved by the Board in December 2020.

 

(3) 

Upon commencement of board service, each director receives a grant of 10,000 deferred stock units that vest in ten equal annual installments over the duration of their board service and are payable in shares of Common Stock upon retirement, subject to certain conditions. For a more detailed discussion, refer to “Compensation of Directors—Retirement Stock Grants” above. The amounts shown for each director reflect the portion of the grant date fair value allocable to units that vested in 2020. At December 31, 2020, Messrs. Havner and Kropp and Ms. Dunbar were each entitled to receive 10,000 fully-vested shares of Common Stock upon retirement; Messrs. Pruitt and Schultz were each entitled to 8,000 shares; Mr. Rollo was entitled to receive 7,000 shares; and Ms. Pipes and Mr. Wilson were each entitled to 1,000 shares. As of December 31, 2020, the value of each award of 10,000 shares was $1,328,700; the value of 8,000 shares was $1,062,960; the value of 7,000 shares was $930,090; and the value of 1,000 shares was $132,870, each based on the closing price of $132.87 of our Common Stock as of December 31, 2020.

 

(4)

Reflects the fair value on the date of grant of option awards granted during 2020. As of December 31, 2020, each director had the following number of options outstanding: Ronald L. Havner, Jr., 20,136, of which 14,136 are vested; Jennifer Holden Dunbar, 18,068, of which 12,068 are vested; James H. Kropp, 16,000, of which 10,000 are vested; Kristy M. Pipes, 12,000, of which 2,000 are vested;

 

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  Gary E. Pruitt, 28,410, of which 22,410 are vested; Robert S. Rollo, 13,670, of which 7,670 are vested; Joseph Russell, 8,000, of which 2,400 are vested; Peter Schultz, 28,410, of which 22,410 are vested; and Stephen W. Wilson, 12,000, of which 2,000 are vested. For a more detailed discussion of assumptions used in the calculation of these amounts, refer to Note 10 to the Company’s audited financial statements for the fiscal year ended December 31, 2020, included in the Form 10-K filed with the SEC on February 22, 2021.

 

(5) 

All other compensation consists of dividend equivalents paid on vested retirement shares.

 

(6) 

Mr. Russell was not compensated for his service as Interim Chairman of the Capital Committee. Mr. Schultz’s retainer for serving as Chairman of the Capital Committee was prorated based on his service from February 18, 2020 to December 31, 2020. Ms. Pipes and Mr. Pruitt’s retainers for serving as Chairmen of the Audit Committee were prorated based on their service dates of April 22, 2020 to December 31, 2020 for Ms. Pipes and January 1, 2020 to April 22, 2020 for Mr. Pruitt.

The Board recommends voting FOR all director nominees.

 

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Proposal 2:

Advisory Vote to Approve

Compensation of

Named Executive Officers

 

 

 

  

Approve 2020 compensation for the Company’s named executive officers (NEOs), as discussed and disclosed in the CD&A, the compensation tables, and any related material contained in this proxy statement.

 

RECOMMENDATION:

Vote FOR approval

 

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PROPOSAL 2

ADVISORY VOTE TO APPROVE COMPENSATION

OF NAMED EXECUTIVE OFFICERS

Advisory Vote

Pursuant to Section 14A(a)(1) of the Securities Exchange Act of 1934, as amended (Exchange Act), we provide shareholders an annual advisory vote to approve the compensation of our Named Executive Officers (NEOs), also known as a “Say-on-Pay” proposal. Although the shareholder vote is advisory and nonbinding on the Company, the Compensation Committee, which is responsible for designing and administering the compensation program, values the opinions expressed by shareholders. The Compensation Committee will consider and weigh heavily the outcome of the vote when making future compensation decisions.

We believe our compensation program for NEOs helped the Company deliver strong performance in 2020, despite an unprecedented and challenging operating environment due to the COVID-19 pandemic, and despite the Company’s full-time CEO, Maria Hawthorne, being on medical leave for nearly five months and ultimately retiring in September 2020. Our Compensation Committee’s determinations regarding 2020 incentive compensation were grounded in a principled, thoughtful, and comprehensive assessment our NEOs’ leadership during this crisis and their successful execution of strategic and operational priorities.

Accordingly, we are asking our shareholders to indicate their support for the compensation of our NEOs as disclosed in this proxy statement by voting “FOR” the following resolution:

“RESOLVED, that the shareholders of the Company approve, on an advisory basis, the compensation paid to the Company’s NEOs, as disclosed in this proxy statement for the Annual Meeting pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, the compensation tables, and the narrative discussion that accompanies the compensation tables.”

In considering your vote, you should review with care the information presented in the Compensation Discussion and Analysis below.

The Board recommends a vote FOR approval of our NEO compensation

as described in this proxy statement.

 

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COMPENSATION DISCUSSION AND ANALYSIS (CD&A)

OVERVIEW OF EXECUTIVE COMPENSATION PROGRAM OBJECTIVES

The Compensation Committee’s goal for our executive compensation program is to hire, retain, and motivate our senior management team to achieve solid financial results and create long-term shareholder value. We believe that our compensation programs have been effective in helping the Company move towards its financial and operational goals.

In general:

 

   

our compensation program has helped establish a strong culture of performance, operational excellence, and consistency, and enabled us to build a high-performing organization;

 

   

we are a leader in our industry in delivering sustainable growth and enhanced distributions to shareholders;

 

   

our compensation philosophy and processes align compensation with performance and the creation of long-term value in a disciplined, balanced, and responsible manner; and

 

   

our business model and supporting compensation program are effective in achieving our objective of building long-term value.

OUR COMPENSATION PHILOSOPHY AND PRACTICES ALIGN EXECUTIVE PAY WITH PERFORMANCE AND CREATION OF LONG-TERM VALUE

Compensation Objectives and Process

Our compensation goals are to hire and retain exceptional executives and to motivate our senior management team to create long-term value. We pay our NEOs based on what the Compensation Committee considers appropriate in view of individual and corporate performance, market and peer compensation practices, and our objective of aligning our NEOs’ interests with those of our shareholders to maximize long-term value.

In general, our compensation program for NEOs is composed of: (1) base salary; (2) short-term incentives generally in the form of annual cash bonuses; and (3) equity awards subject to long-term vesting, which may include restricted stock units (RSUs) and/or stock options.

We design our incentive compensation programs for NEOs to reward achievement of Company-wide, functional, and individual performance goals by tying awards to objectives that the Compensation Committee believes are key drivers of long-term, sustainable performance.

Because we design each component of our compensation program to accomplish or reward different objectives, the Compensation Committee generally determines the award of each component separately. With respect to 2020 compensation, the Compensation Committee did not retain or rely on information provided by any third-party compensation consultant in setting compensation levels and awards for our NEOs.

The Compensation Committee generally considers corporate, business unit, and individual performance and other relevant factors when setting compensation of NEOs. The Compensation Committee solicits and considers our CEO’s views on the performance of the executive officers reporting to the CEO, including each of the other NEOs. The Compensation Committee may solicit and consider the views of the Chairman and the Board with respect to compensation of the CEO.

 

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Our CEO attends all meetings of the Compensation Committee at which the Committee discusses (i) the compensation of the other NEOs or other employees and/or (ii) Company-wide compensation matters, such as the consideration of new equity plans. Our CEO does not vote on items before the Compensation Committee.

The Compensation Committee made all final compensation decisions for NEOs in 2020. The Board was informed of all final compensation decisions for NEOs and ratified the final compensation decisions for the CEO. Neither Ms. Hawthorne nor Mr. Petersen participated in the deliberations of the Compensation Committee with respect to setting their own compensation.

For more information on the Compensation Committee and its responsibilities, see “Corporate Governance and Board Matters—Committees of the Board—Compensation Committee” on page 30.

Focus on Pay for Performance

The guiding principle of our executive compensation philosophy is to pay for performance and incentivize our NEOs to create long-term value. The Compensation Committee believes that NEO compensation should be based on the Company’s achievement of strategic, operational, and financial goals and on each executive’s individual contributions. This link between incentive payouts and achievement of goals has helped drive our strong and consistent performance year after year. We believe our focus on pay for performance has fueled our impressive long-term performance. For example, our TSR beat the NAREIT Equity Index for the 5-year, 10-year, and 20-year periods ending December 31, 2020 and the S&P MidCap 400 for the 20-year periods ending December 31, 2020, averaging 11.6% in total annual return since 2001.

Assessment of Individual Contributions to Overall Performance

The Compensation Committee’s evaluation of each NEO places strong emphasis on his or her contributions to the Company’s overall performance in addition to his or her individual business or functional area. The Compensation Committee believes that the NEOs share responsibility to support the goals and performance of the Company as a whole.

Sound Governance Practices

In designing our executive compensation around the philosophy and objectives outlined above, the Compensation Committee believes that our program encourages the highest performance standards and aligns the interests of our NEOs with the long-term interests of our shareholders by:

 

   

keeping our NEOs focused on delivering sustainable results that are aligned with the Company’s business model;

 

   

aligning the financial gains and losses of each NEO with objectives the Compensation Committee believes will drive long-term shareholder returns; and

 

   

supporting retention and continuity of leadership.

At the same time, the following features of our program discourage inappropriate risk taking:

 

   

extensive stock holding requirements;

 

   

long vesting periods on equity compensation;

 

   

no guaranteed bonuses other than for new hires in their first year of employment; and

 

   

no additional grants to balance changes in value of prior grants.

 

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The following key features of our compensation program reflect our philosophy:

 

 
    What We Do        What We Don’t Do

 

LOGO   Substantial portion of our NEOs’ compensation “at risk”

       LOGO  

 

No guaranteed bonus arrangements with our NEOs except for new hires

 

LOGO   High percentage of executive compensation in equity

      

 

LOGO

  No excessive perquisites
 

LOGO   Long equity vesting periods promote retention and align pay with long-term value creation

      

 

LOGO

  No repricing of stock options
 

LOGO   Robust stock ownership guidelines

      

 

LOGO

  No tax gross ups
 

LOGO   Strong clawback provisions

      

 

LOGO

  No supplemental retirement plans
 

LOGO   Double trigger for accelerated vesting of equity upon a change in control

      

 

LOGO

  No hedging against price fluctuations in the Company’s securities

WE USE VARIOUS COMPENSATION ELEMENTS TO INCENTIVIZE AND REWARD LONG-TERM VALUE CREATION

We typically pay our NEOs a mix of cash and equity, the majority of which is “at risk” and tied to achieving performance objectives set by the Compensation Committee in light of the Company’s long-term strategy and the current business environment. We promote responsible growth and risk management and align the interests of our executives with the interests of our shareholders by using performance-based equity awards that are subject to long vesting periods as the predominant form of compensation.

 

   

Compensation Type

 

 

Pay Element

 

      

Primary Objectives

 

Fixed

Pay

 

Cash

Compensation

 

Base

Salary

    

   As the only fixed element of compensation, provides stable income and compensation for day-to-day responsibilities

 

   Helps attract and retain exceptional talent

 

At-Risk        

Pay

     

 

Performance-Based Bonus

    

 

   Variable compensation aligned with business strategy

 

   Motivate and reward achievement of annual financial, operational, and individual goals

 

    Equity Compensation   Performance-Based RSUs       

   Drive sustainable performance through achievement of multiple predetermined financial and other goals

 

   Foster ownership culture and align the interest of executives with those of shareholders

 

   Help retain executive talent through extended vesting schedule (five tranches over four years)

 

   RSU Deferral Program permits deferred receipt of shares, which may provide tax benefits

 

We may also occasionally grant stock options, which provide significant value in the retention of executives, including in connection with new executive hiring or promotions. As with our practice with RSUs, we motivate executives to focus on long-term value creation and sustained financial performance and improve retention by subjecting stock option grants to long vesting periods. Stock options are granted with an exercise price of not less

 

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than 100% of the fair market value of the Common Stock on the grant date. This ensures that the options will have value only when the price of our Common Stock increases after the grant date and remains above the exercise price through the vesting period, which further aligns the interests of our executives and shareholders.

EQUITY GRANT PRACTICES

Equity grants to all of our executive officers, including the NEOs, must be approved by the Compensation Committee, which consists entirely of independent directors, and:

 

   

grants occur only at meetings or upon written actions of the Board or the Compensation Committee (including telephonic meetings), and are made effective as of the date of the meeting or written action, or a future date if appropriate (such as in the case of a new hire);

 

   

equity awards to executive officers are not timed in coordination with the release of material non-public information;

 

   

awards are subject to the terms of our 2012 Equity and Performance-Based Incentive Compensation Plan (the 2012 Plan);

 

   

equity awards to executive officers have vested over an extended period, which the Compensation Committee believes furthers the goals of retention and motivation over the long-term;

 

   

with respect to awards to NEOs other than our CEO, the Compensation Committee determines award levels based on recommendations from our CEO, taking into consideration each individual’s responsibilities and performance, as discussed in more detail below; and

 

   

with respect to awards to the CEO, the Compensation Committee may solicit and consider the views of the Chairman and the Board when determining award levels.

In January 2020, the Compensation Committee approved the Employee RSU Deferral Program under the 2012 Equity and Performance-Based Incentive Compensation Plan approved by shareholders. The Employee RSU Deferral Program gives certain employees, including the NEOs, under certain circumstances the option of deferring receipt of shares that the Company would otherwise deliver to the employee on the vesting dates of RSUs, which may provide tax benefits for employees, deferring taxation to later dates.

Executive Officer Stock Ownership Guidelines

The Board implemented stock ownership guidelines for NEOs effective April 28, 2015. Each NEO is expected to beneficially own Common Stock equal in market value to a specified multiple of his or her annual base salary—five times base salary for the CEO and three times base salary for the other NEOs. All of our NEOs who have been with the Company at least five years exceed his/her stock ownership requirement. Only shares of Common Stock (1) owned by the executive, (2) owned jointly by him/her and his/her spouse, (3) owned by his/her spouse, (4) held by him/her in the 401(k) Plan, or (5) held in custodial accounts or trust for him/her or for his/her spouse and/or children are counted for determining compliance with these guidelines. Unvested time-based RSUs and in-the-money value of vested options are NOT counted for determining compliance with these guidelines.

2020 SAY ON PAY VOTE

At our 2020 Annual Meeting, 98% of the votes cast were in favor of the compensation paid to our NEOs in 2019, up from 97% support at our 2019 Annual Meeting. This approval signaled strong shareholder support of the elements and amounts of compensation paid for both 2019 performance and the compensation opportunities established to reward long-term growth and performance.

 

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2020 NEO COMPENSATION FRAMEWORK

In early 2020, the Compensation Committee approved the following key components of the Company’s 2020 compensation program, taking into account the Company’s financial and strategic goals and performance expectations at that time:

Base Salaries. Consistent with the Compensation Committee’s philosophy that executive compensation should be more heavily weighted towards performance-based, at-risk compensation, the Compensation Committee did not change NEO base salaries for 2020 from year-end-2019 levels, except for Mr. Groves, whose base salary was increased from $200,000 to $240,000 effective January 1, 2020. The 2020 base salary for Mr. Petersen did not change in connection with his promotion to Interim President and Chief Executive Officer in April 2020.

2020 Annual Cash Incentive Program. Prior to the onset of the economic effects of the COVID-19 pandemic in the U.S., the Compensation Committee established the 2020 annual cash incentive program with the following performance thresholds for funding the program: (i) at least 2.0% growth in 2020 Same Park Cash NOI and (ii) at least 5.0% growth in Adjusted FAD. Actual payouts were set according to the following rubric: 50% based on Same Park Cash NOI growth; 30% based on achievement of individual business goals; and 20% on acquisitions and balance sheet management. The Same Park Cash NOI growth component (50% of target bonus opportunity) was further conditioned on actual performance against the Company’s Cash NOI growth budget for 2020, according to the following payout scale, which incentivizes our management team to exceed their budgeted goal:

 

Actual Performance against
Budgeted Cash NOI Growth

 

 

      

Payout

(50% of Target Opportunity)

 

 

100%

       90%

105%

       100%

110%

       110%

115%

 

      

125%

 

The Compensation Committee selected these metrics because of their importance to the long-term success of the Company. The Compensation Committee set 2020 bonus target amounts at 100% of base salary for Ms. Hawthorne and Messrs. Petersen and Hedges, and 83% for Mr. Groves.

For purposes of determining performance metrics, Adjusted FAD is calculated as FAD after neutralizing the effect of (a) property dispositions during the performance year and/or the year prior, (b) year-over-year changes in maintenance capital, and (c) year-over-year changes cash paid for taxes in lieu of shares upon vesting of RSUs. FAD is computed by adjusting consolidated Funds From Operations (FFO) to (a) deduct recurring capital improvements that maintain the real estate value, capitalized tenant improvements, and lease commissions, (b) eliminate certain income or expenses such as straight-line rent and stock compensation expense and (c) eliminate the impact of non-cash charges related to preferred equity redemptions. FFO represents GAAP net income before real estate depreciation and amortization expense, gains or losses on sales of operating properties and land and impairment charges on real estate assets.

2020 Equity Incentive Plan. The Company did not have an equity incentive program for 2018 and 2019. In January 2020, the Compensation Committee approved a new annual Equity Incentive Plan under the Company’s 2012 Equity and Performance-Based Incentive Compensation Plan. The Equity Incentive Plan applies to the Company’s senior management, including its NEOs.

Under the Equity Incentive Plan, NEOs are eligible to receive RSUs subject to achievement of threshold levels of performance for two pre-established annual performance metrics: (1) growth in the Company’s net asset value (NAV) per share, and (2) change in total shareholder value creation (SVC) (with such metric to be based on growth in net asset value per share plus dividend yield calculated as common dividend distributions divided by the trailing 90-day price of our common stock at the beginning of the performance year), each as computed by the Compensation Committee pursuant to the terms of the Equity Incentive Plan. Under the Equity Incentive Plan,

 

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NAV is calculated as the sum of the value of the Same Park portfolio, which is calculated by applying a static cap rate (same rate applied to both periods) against trailing twelve month reported Cash NOI, the value of the stabilized multifamily portfolio computed in the same manner, and the undepreciated cost of other properties owned, less net debt, preferred stock, and other liabilities (net of other assets) all as reported in the GAAP balance sheet, and less the value of G&A expense using the same cap rate valuation methodology discussed above.

The Compensation Committee sets threshold levels of achievement each year. For 2020, the Compensation Committee set the performance targets to be (1) at least 5.0% growth in NAV per share; and (2) SVC growth of at least 7.4%. Both performance metrics must be satisfied for any awards to be granted. The Compensation Committee set these performance metrics prior to the onset of the COVID-19 pandemic’s economic effects, based on the Company’s budget and outlook at that time. If threshold levels for both of the pre-established performance targets are achieved, NEOs will generally receive their target award. However, the Compensation Committee may implement up to a 25% upward or downward adjustment of the actual RSU award based on the Committee’s assessment of the individual’s execution of certain long-term strategic and operational goals during the performance period. Any RSUs earned upon achievement of the performance goals will vest in five equal installments, with the first installment vesting on or around March 2021, and each subsequent installment vesting annually thereafter.

2020 At-Risk Compensation. We believe that paying a significantly larger percentage of total compensation to our NEOs in performance-based cash and equity incentive awards advances our pay-for-performance compensation philosophy. The following charts depict the split between (i) compensation tied to the achievement of performance goals, consisting of RSUs and annual cash incentive awards and (ii) compensation not tied to performance goals, consisting of base salary, for our CEO and for all of our NEOs together as approved by the Compensation Committee in the beginning of 2020 (prior to the onset of the COVID-19 pandemic’s economic effects).

 

LOGO    LOGO

 

(1) 

The amounts in the charts above include RSUs and annual cash incentive awards that would have been paid assuming target achievement for 2020 and exclude the one-time RSU award of 20,000 RSUs to Mr. Petersen related to his appointment as Interim President and Chief Executive Officer. CEO compensation reflects annualized compensation for Ms. Hawthorne as she served as the Company CEO at the time the 2020 compensation program was approved by the Compensation Committee.

 

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CHANGES IN COMPANY STRATEGY AND OUTLOOK FOR 2020 AS A RESULT OF THE COVID-19 PANDEMIC

The COVID-19 pandemic resulted in sudden and severe disruptions to the U.S and global economic environment. The pandemic and government responses to combat it—including widespread “stay-at-home” orders, business closure orders, and other restrictions on commercial activities—resulted in adverse economic consequences, including a historic increase in U.S. unemployment and a disproportionate effect on small businesses. These adverse economic effects directly and significantly affected the Company’s business starting in March 2020 and continuing throughout the year. The immediate and most impactful effects of the COVID-19 pandemic on the Company’s business and operations included:

 

   

Reduced leasing demand at most of the Company’s parks in most markets;

 

   

Collectability issues with certain customers for base rent and expense recovery billings due to disruptions to certain customers’ businesses, which resulted in significant year-over-year increases in rent deferrals and abatements and, consequently, a year-over-year decrease in our Same Park Cash NOI and lower adjusted FAD growth rates than what we likely would have otherwise achieved;

 

   

Logistical and operational challenges to running our business as a result of governmental stay-at-home orders and other necessary precautions taken by the Company to prioritize the safety and well-being of our employees, customers, and vendors; and

 

   

Increased operating and capital expenses incurred related to the installation of safety and other protective equipment.

REVISED 2020 OPERATIONAL AND STRATEGIC PRIORITIES

In light of the significant adverse effect of the COVID-19 pandemic on our business, the Company’s Board and senior management met regularly beginning in March 2020—ultimately meeting ten times through the end of the year—to discuss the Company’s strategy for mitigating these effects and protecting the well-being of the Company’s employees and customers.

As a result of these deliberations, senior management, under the oversight of the Board, adopted a number of changes to its operational and strategic priorities in response to the COVID-19 pandemic. Specifically, the senior management team determined that the following key priorities were paramount to the continued success of the Company as it navigated through the COVID-19 environment:

 

             
       Operational Priorities                     Strategic Priorities       
             
 

Stabilize occupancy

 

         

Build out senior executive team with initiatives to fill key leadership positions

 

 
 

Maintain lease economic values

 

         

Optimize IT platform to support prolonged virtual workplace arrangements and enhanced data analytics capabilities

 

 
 

Reduce accounts receivables and return to normal levels

 

         
 

Provide rent relief as appropriate and maximize deferred rent collections

 

         

Aggressively pursue entitlements for certain parks with redevelopment potential

 

 
             

 

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Management and the Board deemed the foregoing revised key operational priorities to be significant and designed to preserve near-term portfolio cash flow generation without disrupting long-term value creation. In addition, management determined, and the Board affirmed, that the above strategic priorities were critical to the Company’s long-term capabilities and ability to generate shareholder value in the pandemic environment and beyond.

THE COMPENSATION COMMITTEE’S APPROACH TO COVID-19 EFFECTS ON 2020 INCENTIVE COMPENSATION

After the Compensation Committee set the 2020 incentive compensation framework and performance targets in early 2020, the COVID-19 pandemic began fundamentally to alter the economic and operational landscape for the Company. The pandemic has had a materially adverse effect on the Company’s business results. In order to address the challenges of the pandemic, our management team, in close consultation with the Compensation Committee and the Board, updated the Company’s strategic and operational priorities, as discussed above.

In the wake of these strategic and operational changes and the material change to the Company’s 2020 financial outlook resulting from the pandemic, beginning in June 2020, the Compensation Committee commenced a comprehensive process to review the Company’s 2020 incentive compensation program. Through these deliberations, the Compensation Committee concluded that the 2020 financial performance metrics and targets that it had previously established for 2020 incentive compensation awards were likely unattainable due to the pandemic and were no longer consistent with the Company’s updated strategic and operational priorities. Indeed, incentivizing management to achieve the previously established short-term performance targets could, given the current environment, have had significant adverse effects on long-term performance.

Accordingly, the Compensation Committee concluded that the original 2020 incentive compensation goals were no longer consistent with the objectives of the compensation program of retaining and motivating our senior management team to achieve solid financial results and create long-term value. Moreover, because the duration and effects of the COVID-19 pandemic continue to be unpredictable, the Compensation Committee did not believe it could reasonably set revised metrics or targets. Instead, the Compensation Committee concluded that it was in the best interest of the Company and its shareholders—and consistent with the Company’s compensation philosophy—to realign the Company’s approach to 2020 NEO compensation to incentivize management to focus on the Company’s revised strategic and operational priorities.

The Compensation Committee received regular updates regarding management’s performance against these strategic and operational priorities, meeting five times in Q3 and Q4 2020. In early 2021, the Compensation Committee determined 2020 compensation awards after considering (i) the operating environment and the effects of COVID-19 on financial performance, (ii) management’s performance against all relevant factors, including management’s execution of the revised strategic and operational priorities and the Company’s financial performance, and (iii) each NEO’s performance against individual goals and objectives, as further discussed below.

2020 PERFORMANCE RESULTS

Original Annual Cash Incentive Plan and Equity Incentive Plan Threshold Goals

Primarily due to the economic and other effects of the COVID-19 pandemic, the Company in 2020 saw a 0.9% decline in Same Park Cash NOI and 2.6% growth in adjusted FAD—below the threshold performance metrics under the Annual Cash Incentive Plan originally approved by the Compensation Committee prior to the COVID-19 pandemic. In addition, NAV per share and SVC grew by 0.3% and 2.7%, respectively, in 2020, below the threshold performance metrics under the 2020 Equity Incentive Plan.

 

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However, in evaluating appropriate 2020 incentive awards, the Compensation Committee considered the effects of the COVID-19 pandemic on the Company’s performance relative to these metrics. Specifically, the Committee considered the Company’s strong Q1 2020 pre-pandemic results and the pandemic’s effects on the following:

 

   

Customer rent deferrals

 

   

Customer rent abatements

 

   

Year-over-year increase in accounts receivables write-offs

 

   

Cash basis non-recognized revenue

 

   

Net revenues lost due to COVID-19 related early lease terminations

The Committee determined that these pandemic effects on the Company’s financial performance were significant, and that adjusting for these effects would have resulted in the Company meeting or exceeding (1) the original Same Park Cash NOI and Adjusted FAD Growth performance thresholds under the Annual Cash Incentive Plan and (2) the original NAV per share and SVC growth targets under the Equity Incentive Plan.

ACHIEVEMENT OF REVISED 2020 OPERATIONAL AND STRATEGIC PRIORITIES

In early 2021, the Compensation Committee met to evaluate the senior management team’s performance against the Company’s revised operational and strategic priorities. In its evaluation, the Compensation Committee considered the following notable achievements:

Operational Priorities

 

   

Shortly after the onset of the pandemic, we quickly stabilized day-to-day operations through rapid mobilization of work-from-home arrangements for our corporate and field team members; we subsequently established an optional return-to-office policy with strict safety protocols for employees who periodically need access to our various office locations.

 

   

Our team generated 7.5 million square feet of lease production, representing a 0.1 million square foot increase in total lease production from the prior year, with associated cash rental rate growth of 5.8%; included in our 2020 lease production were four individual leases each over 100,000 square feet, two of which represent the largest two transactions (in terms of total contractual revenue) in the Company’s history.

 

   

We maintained averaged lease economic values, as measured by our proprietary lease valuation metric, well above target levels as a result of (1) positive rent growth in nearly all markets, and (2) transaction cost capital at near record low levels for the Company.

 

   

We ended the year with a commercial accounts receivable balance (excluding U.S. government customers) of $0.6 million, which is in-line with the balance in the prior year and in-line with historic average.

 

   

We successfully developed and implemented an electronic workflow designed for the efficient evaluation and processing of rent relief requests from our customers; in total, approximately 11% of our customers, based on rental income, received from us some form of rent relief, and through December 31, 2020, we had successfully collected 97% of scheduled deferred rent repayment through that date.

 

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Strategic Priorities

 

   

We hired a Vice President of Information Technology who joined the Company in early 2021 and who will lead the design, development, and implementation of a modern, scalable IT platform and further enhance the Company’s data collection and data analytics practices, providing senior management with better portfolio management and oversight capabilities.

 

   

We commenced a search processes for a Chief Investment Officer and Vice President of Development, both of whom will add bench strength to our existing senior management team.

 

   

We obtained final development plan approval and commenced construction of Brentford at The Mile, a 411-unit multifamily development in Tysons, Virginia; prior to development commencement we successfully identified and secured 7% construction cost savings resulting from local market disruptions related to the COVID-19 pandemic.

 

   

We commenced development and delivered a new 83,000 square foot multi-tenant industrial building in Dallas, Texas, completed on time and on budget.

Management Performance

In addition to the Company’s performance relative to the foregoing operational and strategic priorities, the Compensation Committee evaluated our NEOs’ performance individually and as a group, particularly with respect to their effectiveness in leading the Company through the COVID-19 crisis when the Company’s former CEO was on a medical leave of absence and, subsequently, when the Company was conducting an internal and external search for a permanent CEO. Specifically, the Committee recognized the following accomplishments:

 

                  

John W. Petersen
Interim CEO and President
Chief Operating Officer

 

     

Jeffrey D. Hedges
Chief Financial Officer

 

      

Trenton Groves
Chief Accounting Officer

 

   Served as Interim CEO since April 2020 while also serving as COO

 

   Led Company management to define and achieve revised operational and strategic priorities

 

   Completed nearly $60.1 million of acquisitions, four of the largest lease transactions in company history, and advanced development/redevelopment projects

   

   Assisted Interim CEO with operational oversight

 

   Led Company response to COVID-19 pandemic, including protecting employees and working with customers to preserve lease values

 

   Significant progress in optimization of IT platform, including hiring VP of Information Technology

    

   Implemented rent deferral management and risk assessment policies and procedures

 

   Managed Enterprise Risk Management program

 

   Implemented new payroll system and expense reconciliation platform

 

 

Based on the foregoing, the Compensation Committee concluded that our NEOs met, and in most cases, exceeded, the revised strategic, operational, and individual goals that the Board, the Committee, and management had previously set in light of the COVID pandemic’s economic and other effects. Our management team’s exemplary performance informed the Committee’s decisions regarding 2020 incentive compensation, as discussed below.

2020 INCENTIVE COMPENSATION AWARDS

In early 2021, the Compensation Committee determined 2020 compensation awards after considering (i) the operating environment and the effects of COVID-19 on financial performance, (ii) management’s performance against all relevant factors, including management’s achievement of the strategic and operational priorities described above and the Company’s financial performance, and (iii) each NEO’s performance against individual and team goals and objectives, including the individual achievements described above.

 

 

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The following is a summary of the Compensation Committee’s decisions with respect to 2020 incentive compensation for our NEOs. The Compensation Committee believes that these payouts reasonably reward our NEOs for exemplary performance under extraordinarily difficult circumstances, reflect management’s contributions to the successes the Company achieved in 2020, and are consistent with the Company’s compensation philosophy.

Annual Cash Incentive Plan. In recognition of the exemplary performance of our NEOs in leading the Company through the COVID-19 pandemic as discussed above, while being mindful of the Company’s overall financial performance in the difficult business environment caused by the pandemic, the Compensation Committee awarded the NEOs 2020 annual cash incentive payouts equal to 95% of target (amounting to 95% of base salary) for Mr. Petersen, 95% of target (amounting to 95% of base salary) for Mr. Hedges, and 85% of target (amounting to 70.8% of base salary) for Mr. Groves.

Equity Incentive Plan. The Compensation Committee also awarded RSUs in an amount equal to 100% of the 2020 Equity Incentive Plan target for Mr. Hedges and Mr. Groves. As a result, RSU awards were granted as follows: Mr. Hedges—4,429 RSUs and Mr. Groves—1,372 RSUs. These grants will vest in five equal installments, with the first installment vesting on or around March 1, 2021, and each subsequent installment vesting annually thereafter.

In determining the amount of the RSU grants to Messrs. Hedges and Groves, the Compensation Committee considered the Company’s achievement of the critical strategic and operational priorities discussed above and how the long vesting periods of these awards address retention considerations stemming from the Company’s lack of an equity incentive plan since 2018.

In light of the special one-time retention equity grant approved by the Compensation Committee in October 2020 to Mr. Petersen for his service as Interim President and Chief Executive Officer (as described below), the Compensation Committee determined that no further RSU awards were appropriate and therefore did not award Mr. Petersen any additional awards under the Equity Incentive Plan.

Special One-Time Equity Award to Mr. Petersen. On October 30, 2020, the Compensation Committee approved a one-time special equity retention grant of 20,000 RSUs to Mr. Petersen. The Compensation Committee determined that the special retention grant was appropriate in light of Mr. Petersen’s service as the Interim President and Chief Executive Officer, a role Mr. Petersen held from April 20, 2020 and throughout the remainder of 2020. Further, the Compensation Committee deemed it important to retain Mr. Petersen while the Board continued its search for a permanent Chief Executive Officer and beyond, especially in light of the operational challenges associated with the COVID-19 pandemic and the competitive market for talent. Mr. Petersen did not otherwise receive any additional special compensation for his service as Interim President and Chief Executive Officer in 2020, and the Compensation Committee did not award Mr. Petersen any additional equity incentive awards for 2020 performance under the Equity Incentive Plan. The special retention grant will vest in five equal installments, with the first installment vesting on or around March 1, 2021, and each subsequent installment vesting annually thereafter.

TAX DEDUCTIBILITY OF EXECUTIVE COMPENSATION

The Compensation Committee considers the tax deductibility of compensation as one factor when considering executive compensation program alternatives. Due to its tax status as a REIT, the Company must generally distribute its taxable income to shareholders. To the extent that compensation is not deductible, taxable income will be higher and so, distributions to shareholders may be higher than they would be otherwise.

Prior to January 1, 2018, Section 162(m) imposed a $1,000,000 per person limit on the annual tax deduction for compensation paid to the Company’s current chief executive officer and certain other executive officers. Certain “performance-based” compensation exceeding $1,000,000 annually paid to the executives was excluded from Section 162(m)’s limitation and was deductible if certain requirements were met. The Company generally designed awards of stock options, certain restricted share units, and cash incentives to qualify as deductible “performance-based” compensation.

 

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Under tax reform legislation signed into law on December 22, 2017 (the “Tax Cuts and Jobs Act”), the deductibility of executive compensation was limited further, effective January 1, 2018. Section 162(m) still imposes a $1,000,000 per person limit on the annual tax deduction for compensation paid to the Company’s current chief executive officer and certain other executive officers. But, the exclusion for “performance-based” compensation was repealed, and the group of employees subject to the limitation was expanded to include the chief financial officer and certain former executive officers.

The Compensation Committee has in the past approved and has reserved the right in the future to approve compensation that does not qualify for deductibility in circumstances it deems in the Company’s best interests.

2021 COMPENSATION OUTLOOK

The Compensation Committee believes the Company is well-positioned as a result of management’s focus and successful execution over the last several years. Given these expectations, the Compensation Committee met in January and February 2021 and made the following decisions for 2021 NEO compensation:

 

   

Base Salaries. NEO base salaries for 2021 are as follows: $450,000 for Mr. Petersen, $375,000 for Mr. Hedges, and $240,000 for Mr. Groves.

 

   

Annual Cash Incentive Plan. Target bonus amounts for 2021 are set at 100% of base salary for each of Mr. Petersen and Mr. Hedges, and 83% for Mr. Groves based on satisfaction of multiple pre-established 2021 performance targets relating to (1) adjusted FAD growth, (2) Cash NOI growth, and (3) leadership and individual performance goals.

 

   

Equity Incentive Plan. The Compensation Committee approved the following aggregate target number of RSUs that would be granted to the NEOs for 2021 performance under our Equity Incentive Plan, assuming that pre-established 2021 performance targets relating to NAV per share growth and SVC growth are achieved: 7,428 RSUs for Mr. Petersen; 6,060 for Mr. Hedges; and 1,877 RSUs for Mr. Groves.

On February 26, 2021, the Board appointed Mr. Chandler as President and Chief Executive Officer, effective April 5, 2021. In connection with the appointment the Board provided Mr. Chandler an offer letter which provides that:

 

   

Mr. Chandler will be paid an annual base salary of $600,000, to be increased to $650,000 effective January 1, 2023;

 

   

Mr. Chandler will be eligible to receive a target annual cash incentive award equal to 100% of his base salary, and that for 2021 his target annual cash incentive award will be guaranteed at no less than target and will not be prorated;

 

   

beginning for the 2022 performance year, Mr. Chandler will be entitled to a target annual equity award no less than the share-equivalent number of RSUs equal to $2.6 million, which will vest in five equal installments, with the first installment vesting on the grant date and annually thereafter, subject to continued employment;

 

   

Mr. Chandler will receive (i) a one-time RSU award (“Sign-On Award”) having a value on the grant date equal to $3.325 million, and (ii) a retention RSU award having a value on the grant date equal to $2.6 million, which in each case will vest ratably over five years subject to continued employment; and

 

   

if Mr. Chandler is terminated without cause or if he terminates his employment for good reason (i) prior to the second anniversary of his start date, he will receive a lump sum cash payment equal to $1.2 million, and (ii) at any time during his term of employment, any portion of the Sign-On Award that remains unvested will vest immediately upon the date of separation from the Company.

 

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COMPENSATION COMMITTEE REPORT

The Compensation Committee of the Board of PS Business Parks, Inc. has reviewed and discussed the foregoing CD&A with management. Based on this review and discussion, the Compensation Committee recommended to the Board that the CD&A be included in this proxy statement and incorporated by reference in the Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

This report is provided by the following independent directors who comprise the Compensation Committee:

THE COMPENSATION COMMITTEE

Jennifer Holden Dunbar, Chair

James H. Kropp

Robert S. Rollo

Stephen W. Wilson

 

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EXECUTIVE COMPENSATION TABLES

The following table sets forth certain information regarding the compensation of each NEO serving in 2020 for the years ended December 31, 2020, 2019, and 2018.

I. SUMMARY COMPENSATION TABLE

 

                                 

 Name and  Principal

 Position

   Year     Salary(1)     Bonus(2)    

Stock

Awards(3)

   

Option

Awards

   

Non-Equity

Incentive Plan

Compensation(4)

   

All Other

Compensation(5)(6)

    Total  

John W. Petersen
Interim President
and CEO and Chief Operating Officer

 

 

     2020     $ 400,764       -     $ 3,207,873                   -     $ 380,000     $ 11,400     $ 4,000,037  
     2019       393,264       -       -       -       460,000       11,200       864,464  
     2018       355,801       -       -       -       355,000       11,000       721,801  

Jeffrey D. Hedges
Executive Vice President, Chief Financial Officer and Secretary

 

     2020       375,764       -       756,473       -       356,250       11,400       1,499,887  
     2019       375,764       -       -       -       375,000       11,200       761,964  
     2018       101,343     $ 325,000       1,257,400       -       -       216,321       1,900,064  

Trenton A. Groves

Senior Vice President and Chief Accounting Officer

 

     2020       240,764       -       234,338       -       170,000       11,400       656,502  
     2019       200,764       -       -       -       200,000       11,200       411,964  
     2018       184,760       -       228,940       -       145,334       11,000       570,034  

Maria R. Hawthorne

Former President and CEO

     2020       318,683 (7)      -       1,464,098       -       -       11,400       1,794,181  
     2019       450,764       -       -       -       495,000       11,200       956,964  
     2018       450,801       -     $ 2,861,750       -       450,000       11,000       3,773,551  

 

(1)

Includes an amount of $764, $764, and $801 in holiday emoluments paid to each NEO for the year ended in December 31, 2020, 2019 and 2018, respectively; a benefit provided to all employees. Mr. Hedges joined the Company on September 17, 2018, and his annual salary for 2018 was $375,000.

 

(2)

The amount shown for Mr. Hedges in 2018 represents a guaranteed bonus agreed to in connection with his onboarding package.

 

(3)

The amounts for equity awards reflect the grant date fair value assuming, in the case of performance-based awards, target performance. Mr. Petersen’s stock awards include $927,273 attributable to his 2020 Equity Incentive Plan target award and $2,280,600 attributable to his one-time special retention RSU award of 20,000 RSUs related to his appointment as Interim President and Chief Executive Officer. In 2021 the Compensation Committee awarded RSUs in an amount equal to 100% of the 2020 Equity Incentive Plan target for Mr. Hedges and Mr. Groves for 2020 performance. Mr. Petersen did not earn RSUs for 2020 performance other than the special retention award. For a more detailed discussion and assumptions used in valuing the awards, refer to Note 10 to the Company’s audited financial statements for the fiscal year ended December 31, 2020, included in the Form 10-K filed with the SEC on February 22, 2021. All holders of unvested RSUs that are solely subject to time vesting receive payments equal to any dividends paid on the underlying Common Stock. Dividend equivalents are not paid or accrued on unearned RSUs that remain subject to performance vesting.

 

(4)

Includes amounts earned pursuant to the Company’s annual incentive award program.

 

(5)

All Other Compensation for 2020 consists of Company contributions to the 401(k) Plan (4% of the annual cash compensation up to a maximum of $11,400 in 2020, $11,200 in 2019, and $11,000 in 2018).

 

(6)

In addition to the Other Compensation referenced in (5) above, in 2018, Mr. Hedges received pursuant to his onboarding package a one-time gross-up of taxes of $111,153 related to $105,168 of relocation costs.

 

(7)

Ms. Hawthorne’s full year’s salary was $450,000.

 

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II.   GRANTS OF PLAN-BASED AWARDS

The following table sets forth information relating to estimated future payouts under non-equity incentive plan awards, stock options, and RSUs granted pursuant to our equity incentive plans during the year ended December 31, 2020 to each of our NEOs.

 

  Name

 

 

  Grant  

Date(1)

 

   

  Estimated Future Payouts  

Under Non-Equity Incentive

Plan Awards ($)(1)

 

   

  Estimated Future Payouts  

Under Equity Incentive

Plan Awards (#)

 

   

  All Other
RSU
Awards

(#)

 

   

  Grant Date  

Fair Value of
Stock
and

Option
Awards($)
(2)

 

 
           

Threshold

 

   

Target

 

   

Maximum

 

   

Threshold

 

   

Target

 

   

Maximum

 

               

Maria R. Hawthorne

    03/01/2020             6,429       8,572       10,715         $1,464,098  
      -       $427,500       $450,000       $506,250                                          

John W. Petersen

    03/01/2020             4,072       5,429       6,786         $   927,273  
    10/30/2020                   20,000       $2,280,600  
      -       $380,000       $400,000       $450,000                                          

Jeffrey D. Hedges

    03/01/2020             3,322       4,429       5,536         $   756,473  
      -       $356,250       $375,000       $421,875                                          

Trenton A. Groves

    03/01/2020             1,029       1,372       1,715         $   234,338  
      -       $190,000       $200,000       $225,000                                          

 

(1) 

The amounts shown in these columns represent the range of possible annual incentive award program based upon achievement of performance targets.

 

(2)

Represents the grant date fair value (at target level in the case of 2020 Equity Incentive Plan awards) granted during 2020. Refer to Note 10 to the Company’s audited financial statements for the fiscal year ended December 31, 2020, included in the Form 10-K filed with the SEC on February 22, 2021, for information on the computation of the grant date fair value.

III.   OPTION EXERCISES AND STOCK VESTED IN 2020

The following table provides information about options exercised by the NEOs and RSUs vested during the fiscal year ended December 31, 2020.

 

    

Option Awards

 

      

Stock Awards

 

     
Name   Number of Shares
Acquired on
Exercise (#)
     

Value Realized

on Exercise

     

Number of Shares

Acquired on
Vesting (#)

     

Value Realized

on Vesting(1)

Maria R. Hawthorne

      -           -           16,000         $  2,334,230

John W. Petersen

      -           -           9,000           1,286,640

Jeffrey D. Hedges

      -           -           2,000           250,420

Trenton A. Groves

      -           -           2,500           362,580

 

(1) 

Value realized upon vesting was calculated by multiplying the number of shares vesting by the closing price of our Common Stock on the NYSE on the vesting date as follows:

 

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Name

 

  

RSU

Vesting

Date

 

           

Fair Market
Value of

RSUs ($)

 

 

Maria R. Hawthorne

     03/08/20          $    779,550  
     03/15/20          1,286,640  
     07/01/20          268,040  

John W. Petersen

     03/15/20          1,286,640  

Jeffrey D. Hedges

     10/01/20          250,420  

Trenton A. Groves

     03/08/20          62,364  
     03/15/20                300,216  

IV. OUTSTANDING EQUITY AWARDS AT YEAR-END

The following table sets forth certain information concerning outstanding equity awards held by the NEOs at December 31, 2020.

 

            Option Awards      Stock Awards  
Name   

Grant

Date

    

Number of

Securities

Underlying

Unexercised

Options (#)

Exercisable

   

Number of

Securities

Underlying

Unexercised

Options (#)

Unexercisable

   

Option

Exercise

Price ($)

    

Option

Expiration

Date

    

Number of

Shares or

Units of

Stock that

Have Not

Vested

(#) (3)

   

Market

Value of

Shares of

Stock that

Have Not

Vested

($) (3)

 

Maria R. Hawthorne

     07/01/16        10,000 (1)      5,000  (1)    $ 105.76        07/01/26        2,000  (1)    $ 265,740  
     03/08/18        -       -       -        -        15,000  (1)      1,993,050  
     03/15/18        -       -       -        -        6,000  (2)      797,220  
       TOTAL        10,000       5,000       -        -        23,000     $  3,056,010  

John W. Petersen

     03/15/18        -       -       -        -        6,000  (2)      797,220  
     10/30/20        -       -       -        -        20,000  (1)      2,657,400  
       TOTAL        -       -       -        -        26,000     $ 3,454,620  

Jeffrey D. Hedges

     10/01/18        -       -       -        -        6,000  (1)    $ 797,220  
       TOTAL        -       -       -        -        6,000     $ 797,220  

Trenton A. Groves

     03/08/18        -       -       -        -        1,200  (1)      159,444  
     03/15/18        -       -       -        -        1,400  (2)      186,018  
       TOTAL        -       -       -        -        2,600     $ 345,462  

 

(1) 

These options or RSUs vest in five equal annual installments, beginning one year from the award date.

 

(2) 

These RSUs vest in four equal annual installments beginning from the date of award.

 

(3) 

Stock awards consist of RSUs granted to the named executive officers, and the values shown assume a price of $132.87 per share, the closing price for our Common Stock on the NYSE on December 31, 2020.

 

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V. POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL

Payments Upon Termination. We do not have a formal severance program for termination of employment through voluntary or involuntary termination, other than as specifically set forth in the 2012 Plan or as required by law. These include:

 

   

vested stock options following a voluntary termination of employment must be exercised within 30 days following the individual’s last date of employment;

 

   

all unvested stock options, restricted shares, and/or RSUs are forfeited (except in the case of death or disability or a qualifying retirement); and;

 

   

amounts contributed under our 401(k) Plan; and

 

   

accrued and unused vacation pay paid in a lump sum.

We also may enter into severance arrangements in connection with new hires, such as in connection with our appointment of Mr. Chandler as President and Chief Executive Officer in February 2021 as discussed above.

Payments Upon Retirement. In February 2020, the Board and Compensation Committee approved an Equity Awards Retirement Policy to provide for the accelerated vesting of outstanding equity awards upon retirement, subject to certain requirements. Our NEOs participate in the Equity Awards Retirement Policy on the same terms as other employees. Pursuant to the policy, in the event of an NEO’s qualifying retirement:

 

   

all outstanding unvested stock options and unvested RSUs accelerate and vest on the date of retirement; and

 

   

all such stock options may be exercised during the one-year period following the date of retirement (but before the termination date of the option).

In order for an NEO to be eligible for potential acceleration of equity award vesting under the Equity Awards Retirement Policy, all eligibility conditions must be satisfied, including: (1) the NEO must be at least 55 years old and have been in service for at least 10 years, and the sum of the employee’s age and total years of service must be at least 80; (2) the NEO must provide at least 12 months’ prior written notice of his or her intention to retire; (3) the NEO must enter into a written separation agreement; and (4) the Chairman of the Compensation Committee shall have, in his or her sole discretion, approved the application of the Equity Awards Policy to the NEO.

Payments Upon Death or Disability. In the event of the death or permanent and total disability of an NEO while employed by the Company, the executive officer will receive 401(k) Plan contributions and accrued unused vacation pay as noted above, in addition to the following:

 

   

In the case of death, all outstanding unvested stock options and RSUs held by the officer accelerate and vest as of the date of death and stock options may be exercised during the one-year period following the date of death, but prior to termination of the option;

 

   

In the case of permanent and total disability, all outstanding unvested stock options held by the officer continue to vest and are exercisable during the one-year period following the date of such permanent and total disability, but prior to termination of the option and all unvested RSUs vest as of the date of such permanent and total disability; and

 

   

The officer will receive payments under the Company’s life insurance program or disability plan, as applicable, similar to all other employees of the Company.

Payments Upon a Change of Control. Under the 2012 Plan, the vesting of outstanding awards will not accelerate unless (1) the Company experiences a qualifying change in control, and (2) one of the following

 

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conditions is also met: (a) for a change of control where such awards will be assumed or continued by the surviving entity, the holder’s employment must be terminated without “cause” (as defined in the 2012 Plan) within one year following the change of control, or (b) such awards must be terminated in connection with the change of control.

A “change of control” is defined in the 2012 Plan to generally include the following:

 

   

the dissolution or liquidation of PS Business Parks or merger in which PS Business Parks does not survive;

 

   

the sale of substantially all of PS Business Parks’ assets;

 

   

merger in which the company is the surviving corporation but after which the company’s shareholders immediately prior to such merger cease to own their shares or other equity interest in the company; or

 

   

any transaction that results in any person or entity owning 30% or more of the combined voting power of all classes of our shares.

The following table shows the estimated value of the acceleration of unvested equity awards pursuant to the termination events that trigger accelerations as described above assuming the event occurred as of December 31, 2020 and using a closing market price of our Common Stock on the NYSE as of December 31, 2020 of $132.87 per share.

 

  Name

 

  

Value of
Accelerated Option

Vestings

 

  

Value of
Accelerated

RSU Vestings

 

  

Total

 

 

Maria R. Hawthorne

              
       $

 

135,550

 

 

     $

 

3,056,010

 

 

     $

 

3,191,560

 

 

 

John W. Petersen

              
        

 

-

 

 

      

 

3,454,620

 

 

      

 

3,454,620

 

 

 

Jeffrey D. Hedges

              
        

 

-

 

 

      

 

797,220

 

 

      

 

797,220

 

 

 

Trenton A. Groves

              
      

 

-

 

 

      

 

345,462

 

 

      

 

345,462

 

 

Equity Compensation Plan Information as of December 31, 2020. The following table sets forth certain equity compensation plan information as of December 31, 2020:

 

  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)) 
(2)

 

Equity compensation plans approved by security holders (1)

 

      

 

171,694

 

 

     $

 

108.29

 

 

      

 

815,894

 

 

Equity compensation plans not approved by security holders

 

      

 

-

 

 

      

 

-

 

 

      

 

-

 

 

Total

 

      

 

171,694

 

 

     $

 

108.29

 

 

      

 

815,894

 

 

 

(1)

Represents shares of our Common Stock available for issuance under the Company’s 2012 Plan.

(2)

Amounts remaining available for future issuance account for stock options and RSUs issued and outstanding.

 

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STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership of Certain Beneficial Owners

The following table sets forth information as of the dates indicated with respect to persons known to the Company to be the beneficial owners of more than 5% of the outstanding shares of Common Stock:

 

             Shares of Common Stock Beneficially Owned         
Name and Address    Number of Shares    Percent of Class

Public Storage

701 Western Avenue

Glendale, California 91201(1)(2)

   7,158,354    26.04%

The Vanguard Group

100 Vanguard Blvd.

Malvern, Pennsylvania 19355(3)

   3,067,728    11.16%

BlackRock, Inc.

55 East 52nd Street

New York, New York 10055(4)

   2,871,064    10.40%

T. Rowe Price Associates, Inc.

100 E. Pratt Street

Baltimore, Maryland 21202(5)

   2,327,870    8.4%

Wellington Management Group LLP

280 Congress Street

Boston, MA 02210(6)

   2,114,007    7.69%

 

(1)

The percent of class is calculated using the Common Stock ownership numbers as of the dates indicated below divided by shares outstanding on February 26, 2021 of 27,488,684 shares of Common Stock.

 

(2)

Holdings reported are as of December 31, 2020. The reporting persons listed above have filed a joint Schedule 13D, amended as of November 8, 2013. Public Storage has sole voting and dispositive power with respect to all such shares. The 7,158,354 shares of Common Stock in the above table do not include 7,305,355 Units held by Public Storage and affiliated partnerships which (pursuant to the terms of the agreement of limited partnership of our operating partnership) are redeemable by the holder for cash or, at the Company’s election, for shares of the Company’s Common Stock on a one-for-one basis. Upon conversion of the Units to Common Stock, Public Storage and its affiliated partnerships would own approximately 41.6% of the Common Stock (based upon the Common Stock outstanding at February 26, 2021 and assuming such conversion).

 

(3)

Holdings reported as of December 31, 2020 as set forth on a Schedule 13G/A filed on February 10, 2021 by The Vanguard Group, as investment adviser of its clients, to report sole voting power with respect to 0 shares, shared voting power with respect to 90,342 shares, sole dispositive power with respect to 2,960,672 shares and shared dispositive power with respect to 107,056 shares.

 

(4)

Holdings reported as of December 31, 2020 as set forth in Schedule 13G/A filed on January 27, 2021 by BlackRock, Inc. and certain affiliates to report beneficial ownership and sole dispositive power with respect to 2,871,064 shares and sole voting power with respect to 2,813,910 shares.

 

(5)

Holdings reported as of December 31, 2020 as set forth on a Schedule 13G/A filed on February 16, 2021 by T. Rowe Price Associates, Inc. (Price Associates), as investment adviser of its clients, to report sole voting power with respect to 624,736 shares and sole dispositive power with respect to 2,327,870 shares. For SEC reporting purposes, Price Associates is deemed to be a beneficial owner of these securities. However, Price Associates has expressly disclaimed that it is an owner of such securities.

 

(6) 

Holdings reported as of December 31, 2020 as set forth on a Schedule 13G filed on February 4, 2021 by Wellington Management Group LLP, as investment adviser of its clients, to report sole voting power with respect to 0 shares, shared voting power with respect to 1,879,485, sole dispositive power with respect to 0 shares, and shared dispositive power with respect to 2,114,007 shares.

 

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Security Beneficial Ownership of Directors and Management

The following table sets forth information as of February 26, 2021 concerning the beneficial ownership of Common Stock of each of our directors and executive officers and all directors and executive officers as a group:

 

    

Shares of Common Stock

Beneficially Owned

 

 
Name    Number of Shares (1)     Percent of Class(1)   

Ronald L. Havner, Jr.

     177,789  (2)           *

Joseph D. Russell, Jr.

     49,242            *

Jennifer Holden Dunbar

     20,560  (3)           *

James H. Kropp

     30,761  (4)           *

Kristy M. Pipes

     3,120            *

Gary E. Pruitt

     26,410            *

Robert S. Rollo

     10,972            *

Peter Schultz

     25,620            *

Stephen W. Wilson

     2,400           

John W. Petersen

     51,924            *

Maria R. Hawthorne

     62,613            *

Jeffrey D. Hedges

     9,183            *

Trenton A. Groves

     10,506            *

All Directors and Executive Officers as a Group (13 persons)

     481,100  (1)(2)(3)(4)      1.75

 

*

Less than 1%

 

(1)

Represents shares of Common Stock beneficially owned as of February 26, 2021. Includes options to purchase shares of Common Stock exercisable within 60 days of February 26, 2021, as follows: R. Havner, 20,136 shares; J. Russell, 8,000 shares; J. Holden Dunbar, 18,068 shares; J. Kropp, 16,000 shares; K. Pipes, 2,400 shares; G. Pruitt, 24,410 shares; R. Rollo, 9,670 shares; P. Schultz, 24,410 shares; S. Wilson, 2,400 shares; and M. Hawthorne, 10,000 shares. Except as otherwise indicated and subject to applicable community property and similar statutes, the persons listed as beneficial owners of the shares have sole voting and investment power with respect to such shares. Includes shares credited to the accounts of the executive officers of the Company that are held in the 401(k) Plan. Also includes RSUs which are scheduled to vest within 60 days of February 26, 2021 as follows: M. Hawthorne, 11,000 RSUs; J. Hedges 885 RSUs; J. Russell, 4,687 RSUs; J. Petersen, 10,000 RSUs; and T. Groves, 2,074 RSUs. The percentage held is calculated using the outstanding shares of Common Stock on February 26, 2021 of 27,488,684.

 

(2)

Includes 155,584 shares held by Mr. Havner in a joint account with Mr. Havner’s spouse that are pledged in a margin brokerage account. Does not include shares owned by Public Storage as to which Mr. Havner disclaims beneficial ownership. Mr. Havner is Chairman of the Board of Public Storage. See “Security Ownership of Certain Beneficial Owners” on page 45 for Public Storage ownership.

 

(3)

2,425 shares are held by Ms. Dunbar and her spouse as trustees of the Lilac II Trust.

 

(4) 

Includes 4,491 shares held by custodian of an IRA for the benefit of Mr. Kropp.

 

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ADDITIONAL INFORMATION ABOUT OUR DIRECTORS AND EXECUTIVE OFFICERS; CERTAIN RELATIONSHIPS

Incentive Compensation Recoupment Policy (Clawback Policy)

The Board has adopted an Incentive Compensation Recoupment Policy which applies to an officer of the Company that is subject to Section 16 of the Exchange Act. Pursuant to this policy, in the event the Company’s financial results (i) are restated due to material noncompliance with any financial reporting requirement or (ii) have been determined by the Board to have been materially misstated, then an independent committee of the Board may require any covered officer to repay to the Company all or part of any “Excess Compensation” that such officer had previously received. Excess Compensation is defined as that part of the cash or equity incentive compensation received by a covered officer during the three-year period preceding the restatement or material misstatement determination that was in excess of the amount that such officer would have received had such incentive compensation been calculated based on the restated or corrected financial results.

Policy Regarding Pledging of Shares

Our insider trading policy discourages (but does not prohibit) the pledging of shares of Common Stock by insiders.

Anti-Hedging Policy

Our insider trading policy includes an anti-hedging provision that prohibits directors, officers, and employees from directly or indirectly engaging in hedging against future declines in the market value of any securities of the Company. The objective of this policy is to enhance alignment between the interests of our directors, officers, and employees and those of our shareholders.

Related Party Transaction Approval Policies and Procedures

The Audit Committee, in accordance with its charter, must review any related party transaction and make recommendations to the independent and disinterested directors of the Board with respect to approval or disapproval of such transactions.

In addition, pursuant to the charter of the Nominating/Corporate Governance Committee and the Director Code of Ethics, the Nominating/Corporate Governance Committee is generally responsible for considering conflicts of interest related to directors and executive officers and makes a recommendation to the Board with respect to any action to be taken. The director with an actual, potential or apparent conflict of interest does not participate in the decision-making process related to the transaction.

Relationship with Public Storage

The properties in which the Company has an equity interest are generally owned by our operating partnership (the Operating Partnership). As of February 26, 2021, the Company owned approximately 79.0% of the Operating Partnership’s common partnership units. The remaining common partnership units were owned by Public Storage and affiliated partnerships. The 7,305,355 units held by Public Storage and affiliated partnerships are redeemable (pursuant to the terms of the agreement of limited partnership of the Operating Partnership) by the holder for cash or, at the Company’s election, for shares of our Common Stock on a one-for-one basis. Upon conversion of the units to Common Stock, Public Storage and its affiliated partnerships would own approximately 41.6% of the Common Stock (based upon the Common Stock outstanding at February 26, 2021, and assuming such conversion).

 

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Management Agreement with Affiliates

The Operating Partnership operates industrial, retail, and office facilities for Public Storage and partnerships and joint ventures of which Public Storage is a general partner or joint venture (the Affiliated Entities) pursuant to a management agreement under which Public Storage and the Affiliated Entities pay to the Operating Partnership a fee of 5% of the gross revenues of the facilities operated for Public Storage and the Affiliated Entities. During 2020, Public Storage and the Affiliated Entities paid fees of approximately $0.3 million to the Operating Partnership pursuant to that management agreement. In 2020, we allocated approximately $0.4 million in operating expenses to Public Storage relating to the management agreement, including payroll and other overhead expenses.

Public Storage 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. Under the property management contracts, Public Storage is compensated based on a percentage of the gross revenues of the facilities managed. Under the supervision of the Company, Public Storage coordinates rental policies, rent collections, marketing activities, the purchase of equipment and supplies, maintenance activities, and the selection and engagement of vendors, suppliers, and independent contractors. In addition, Public Storage assists and advises the Company in establishing policies for the hire, discharge, and supervision of employees for the operation of these facilities, including on-site managers, assistant managers, and associate managers. Both the Company and Public Storage can cancel the property management contract upon 60 days’ notice. Management fees paid for these facilities were approximately $0.1 million for the year ended December 31, 2020, and, in 2020, Public Storage allocated approximately $0.1 million in operating expenses to us related to the management of the facilities, including payroll and overhead expenses. Public Storage also owns and licenses the PS Business Parks name and logo to the Company under a royalty-free license that may be terminated upon six months’ notice to the Company.

Cost Sharing and Other Arrangements with Public Storage

Pursuant to a cost sharing and administrative services arrangement, we share certain administrative services, corporate office space, and certain other third party arrangements with Public Storage which are allocated based upon time, effort, and other methodologies. For the year ended December 31, 2020, Public Storage reimbursed us less than $0.1 million for costs paid on their behalf, and we reimbursed Public Storage $1.2 million in costs that Public Storage incurred on our behalf. We had net amounts due to Public Storage of less than $0.1 million at December 31, 2020.

Common Management/Board Members with Public Storage

Ronald L. Havner, Jr., Chairman of the Board, is also Chairman of Public Storage. Joseph D. Russell, Jr., a director, is also the President and Chief Executive Officer and a trustee of Public Storage. Kristy M. Pipes is also trustee of Public Storage.

PAY RATIO DISCLOSURE

This section presents the ratio of annual total compensation of our Interim President and CEO, John W. Petersen (as disclosed in the Summary Compensation Table above), to the annual total compensation of our median employee (excluding Mr. Petersen). The ratio is a reasonable estimate calculated in a manner consistent with Item 402(u) of Regulation S-K under the Exchange Act.

We selected the median employee based on the Company’s 154 employees (excluding Mr. Petersen) as of December 31, 2020. In identifying our median employee, we calculated the annual total compensation of each employee as of December 31, 2020, based on Form W-2 information. We did not apply any cost-of-living adjustments as part of the calculation.

 

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The 2020 annual total compensation for our CEO, as disclosed in the Summary Compensation Table below, and as determined under Item 402 of Regulation S-K, was $4,000,037. The 2020 annual total compensation for our median employee, as determined under Item 402 of Regulation S-K, was $91,540. The ratio of our CEO’s annual total compensation to our median employee’s total compensation for fiscal year 2020 is 44 to 1.

The Board recommends a vote FOR approval of

our executive compensation as described in this proxy statement.

 

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Proposal 3:

Approval of

Reincorporation

 

 

Approve the reincorporation of the Company from the State of California to the State of Maryland.

RECOMMENDATION:

Vote FOR approval

 

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PROPOSAL 3

APPROVAL OF REINCORPORATION

GENERAL

The Board unanimously approved and recommends to shareholders a proposal to change the Company’s state of incorporation from the State of California to the State of Maryland (the Reincorporation). If our shareholders approve the Reincorporation, we will complete the Reincorporation through the merger of the Company with and into a wholly-owned subsidiary of the Company formed under the laws of the State of Maryland for the purpose of the Reincorporation (PSB-Maryland), whereby the existence of the Company will cease and PSB-Maryland, as the surviving corporation, will succeed to all business, properties, assets, and liabilities of the Company, as described in more detail below. For the purposes of this Proposal 3, we sometimes refer to the Company as “PSB-California” prior to the Reincorporation and “PSB-Maryland” after the Reincorporation.

Following the Reincorporation:

 

   

each outstanding share of Common Stock of PSB-California will be an outstanding share of Common Stock of PSB-Maryland, and each outstanding option, warrant, or right to purchase shares of Common Stock of PSB-California will be an option or right to acquire, on the same terms, shares of Common Stock of PSB-Maryland;

 

   

each outstanding depositary share representing 1/1,000 of a share of cumulative preferred stock of PSB-California will be a depositary share representing 1/1,000 of a cumulative preferred share of beneficial interest, on the same terms of such depositary share’s respective series, of PSB-Maryland;

 

   

the Company will be governed by the laws of the State of Maryland, including the Maryland General Corporation Law (MGCL), and subject to the PSB-Maryland charter and bylaws;

 

   

the Company’s corporate name and ticker symbol “PSB” will remain unchanged;

 

   

the Company’s business and management will continue to be the same as immediately prior to the Reincorporation;

 

   

the Company’s fiscal year, assets, liabilities and dividend policy will continue to be the same as immediately prior to the Reincorporation; and

 

   

the Company’s principal executive offices will not change.

REASONS FOR THE REINCORPORATION

When the Company was originally reorganized from a California limited partnership to a California corporation in 1990, it was a small, privately-controlled company focused on properties in California. The decision then to incorporate in California reflected the Company’s status as a private company, location of its shareholders and focus on conducting business within the state. Today, the Company is a publicly-traded REIT that owns and operates about 27.7 million rentable square feet of commercial space in six states. As of March 1, 2021, the market value of our outstanding Common Stock was approximately $4.0 billion based on the closing price of our Common Stock on the New York Stock Exchange and our Common Stock is widely held by institutional and individual shareholders located throughout the world.

The Board believes that the choice of the state of incorporation is important because state corporate law governs the internal affairs of a corporation. Management and boards of directors of corporations look to state corporate law and judicial interpretations of state law to guide their decision-making on many key issues, including appropriate governance policies and procedures, satisfaction of director duties to shareholders, and consideration of key strategic transactions for the corporation, including financings, mergers, acquisitions, and divestitures.

 

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We believe the Company is the only publicly-traded REIT incorporated in California. On the other hand, a substantial majority of publicly-traded REITs, including most of the Company’s peers, are domiciled in Maryland, either as Maryland corporations or Maryland real estate investment trusts.

The concentration of REITs domiciled in Maryland has been driven by (i) Maryland’s comprehensive, modern, and flexible corporate laws that are periodically updated and revised to meet changing business needs and (ii) Maryland statutory and judicial laws that provide more certainty to REIT boards and management on legal matters particularly relevant to REITs. For example, as compared to the California Corporations Code, the MGCL and other provisions of Maryland law are more favorable in permitting charter restrictions on the transferability of capital stock, which are necessary to satisfy REIT tax qualification requirements. As a result of this concentration of REITs in Maryland, Maryland courts have developed a greater expertise than California courts in dealing with REITs and REIT issues and thus have developed a greater body of relevant case law.

The Board believes that the MGCL and Maryland’s established body of relevant case law are more conducive to the operations of a REIT than the laws and policies of California and provide the directors and management of a REIT with greater certainty and predictability in managing its affairs. As a result of the above and the anticipated benefits and possible negatives of Reincorporation summarized below, the Board believes that being incorporated in Maryland and being governed by Maryland law would be in the best interest of the Company and its shareholders.

Maryland law offers protections not available under California law in the event of an unsolicited takeover attempt. These include the Maryland Unsolicited Takeovers Act (MUTA), the Maryland Business Combinations Act, and the Maryland Control Share Acquisition Act. While the Company recognizes that these laws may be used by companies in a manner that can protect shareholder interests, the Company understands that many of its shareholders believe these Maryland law provisions may be used in a manner that can be harmful to shareholder interests. The Company also believes that it has sufficient existing protections against unsolicited takeover attempts that are not in the best interests of the Company and its shareholders. Therefore, the proposed PSB-Maryland charter provides that PSB-Maryland will opt out of these Maryland law provisions and will not be able to opt in without shareholder approval.

While the Board believes that the Reincorporation is in the best interests of the Company and its shareholders, California and Maryland law differ in some respects. The rights of shareholders and the powers of our Board under California and Maryland law are discussed in more detail below. See “Comparison of Shareholder Rights.”

WHAT ARE THE BENEFITS OF THE REINCORPORATION?

The Board believes that the Company will benefit from the Reincorporation proposal in several ways, including:

 

   

the Company will be governed by the MGCL, which contains provisions conducive to the operations of a REIT, such as with respect to the Company charter ownership limitations that protect against REIT disqualification;

 

   

Maryland law provides for (i) additional protections for director and officer indemnification and reimbursement of litigation expenses and (ii) broader exculpation of directors and officers from personal liability for money damages, which should facilitate our efforts to attract and retain qualified directors and officers as we continue to refresh the Board;

 

   

as part of the Reincorporation, cumulative voting rights, which may permit a short-term, relatively small shareholder to obtain outsized influence on the composition of the Board as compared to larger shareholders, will be replaced with both (i) a proxy access bylaw that will facilitate director nominees by larger, long-term shareholders or group of shareholders and (ii) a majority-voting standard for uncontested director elections;

 

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as part of the Reincorporation, the Board will adopt an exclusive forum bylaw that will provide that most disputes related to the Company’s internal corporate affairs will be heard by a Maryland court that we believe will have significantly more experience with REIT corporate matters;

 

   

although the Company intends to hold in-person annual meetings of shareholders to the extent feasible given health considerations, reincorporating in Maryland will make it more practicable to hold virtual annual meetings to the extent health or other considerations, such as those related to the COVID-19 pandemic, make doing so appropriate; and

 

   

by being subject to the same laws as approximately 75% of public REITs and almost all of our peer companies, we believe it will be easier for shareholders and analysts to compare our governance profile with other REITs, and for us to attract officers and directors with prior REIT experience and familiarity with Maryland law requirements and protections.

The Company intends to maintain and enhance its strong governance profile, notwithstanding the flexibility to do otherwise under Maryland law, including:

 

   

as noted above, PSB-Maryland will provide in its charter that it opts out of all MUTA provisions (including the ability of the Board to unilaterally classify the Board and restrict shareholders from filling Board vacancies), the Maryland Business Combination Act, and the Maryland Control Share Acquisition Act, and will not be permitted to opt into these provisions without shareholder approval;

 

   

the Company will continue to have annual elections of all directors rather than have a classified board and will adopt a majority-voting standard for directors in uncontested elections;

 

   

the Company will not have a poison pill;

 

   

the Company will continue to require only 10% or greater of shareholders to call a special meeting of shareholders;

 

   

the Company will continue to permit shareholders to remove directors without cause by a majority vote and to fill the resulting vacancies;

 

   

the Company will adopt a new “proxy access” bylaw that will facilitate the inclusion of shareholder nominees of directors on the Company’s proxy card;

 

   

shareholders will continue to have the ability to amend the bylaws by a majority vote; and

 

   

the Board will continue to have a Presiding Independent Director and a separation of the Board chair from the CEO.

WHAT ARE THE DISADVANTAGES OF THE REINCORPORATION?

While the Board believes that the Reincorporation is in the best interests of the Company and its shareholders, California and Maryland law differ in some respects. In these instances, some shareholders may prefer California law. A comparison of the rights of shareholders and the powers of our Board and our officers under California law and the current charter and bylaws compared to Maryland law and the proposed PSB-Maryland charter and bylaws is set forth below.

MECHANISM FOR REINCORPORATION

If the Reincorporation is approved by the Company’s shareholders, the Reincorporation will be accomplished by the merger of PSB-California with and into PSB-Maryland whereby the separate legal existence of PSB-California will cease and PSB-Maryland, as the surviving corporation, will succeed to all business, properties, assets, and liabilities of PSB-California. As a result of the Merger, the Company’s legal domicile will be changed from California to Maryland.

 

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Upon the terms and subject to the conditions of the Agreement and Plan of Merger, a form of which is attached hereto as Annex A, by and between PSB-California and PSB-Maryland (the Merger Agreement), at the Effective Time (as defined in the Merger Agreement), each outstanding share of the Common Stock, par value $0.01 per share, of PSB-California will be converted into one share of Common Stock, par value $0.01 per share, of PSB-Maryland, and each outstanding depositary share representing 1/1,000 of a share of cumulative preferred stock of PSB-California will be converted into one depositary share representing 1/1,000 of a cumulative preferred share of beneficial interest, on the same terms of such depositary share’s respective series, of PSB-Maryland. In addition, at the Effective Time, each outstanding option, warrant or other right to purchase shares of PSB-California will continue outstanding as an option, warrant or other right to purchase shares of PSB-Maryland, upon the same terms and conditions as exist immediately prior to the Effective Time.

If the Reincorporation is approved by our shareholders, the Reincorporation will become effective when articles of merger are filed with and accepted for record by the State Department of Assessments and Taxation of the State of Maryland and when the certificate of merger is accepted for record by the Secretary of State of the State of California. If the Reincorporation is approved, we anticipate that the Board will cause the Reincorporation to be effected as soon as reasonably practicable following such approval. However, the Reincorporation may be delayed or terminated and abandoned by action of the Board at any time prior to the Effective Time, whether before or after the approval by the Company’s shareholders, if the Board determines for any reason that the consummation of the Reincorporation should be delayed or would be inadvisable or not in the best interests of the Company and its shareholders, as the case may be.

EFFECT OF THE REINCORPORATION

At the Effective Time of the Reincorporation, our Common Stock and depositary shares will continue to be traded on the New York Stock Exchange under the symbols “PSB,” “PSBPrW,” PSBPrX,” “PSBPrY” and “PSBPrZ.” There will be no interruption in the trading of our capital stock as a result of the Reincorporation. The Company will continue to file periodic reports and other documents with the SEC and provide to its shareholders the same type of information that it has previously filed and provided.

PSB-Maryland will change its name to “PS Business Parks, Inc.” as part of the merger and, consequently, the Reincorporation will not result in any change in the Company’s name. In addition, the Reincorporation will not, in and of itself, result in any change in the business, management, assets, liabilities or shareholders’ equity of the Company. The Company will continue to operate as a fully-integrated, self-advised and self-managed REIT that owns, operates, acquires and develops commercial properties, primarily multi-tenant industrial, flex, and office space. The directors and officers of PSB-California prior to the merger will be the directors and officers of PSB-Maryland after the merger, assuming the director nominees named in Proposal I of this proxy statement are re-elected at the Annual Meeting. The Company’s principal executive offices will not be changed.

Except for any changes attributable to the differences between the PSB-California charter and bylaws and the PSB-Maryland charter and bylaws, and between the California Corporations Code and the MGCL, as generally described below under “Comparison of Shareholder Rights,” the Company anticipates that the merger will not cause any significant change in the business or financial condition of the Company, and the Company anticipates that the merger will not cause any change in the Company’s management or day-to-day operations.

Following the Reincorporation, the transfer agent for PSB-Maryland will continue to be American Stock Transfer & Trust Company.

ACCOUNTING TREATMENT OF THE REINCORPORATION

The Reincorporation will have no effect on the Company from an accounting perspective because there will be no change in the entity as a result of the Reincorporation. Accordingly, the historical consolidated financial statements of PSB-California previously reported to the SEC as of and for all periods through the date of this proxy statement will remain the consolidated financial statements of PSB-Maryland.

 

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REGULATORY APPROVAL

To the Company’s knowledge, the only required regulatory or governmental approval or filing necessary in connection with the consummation of the Reincorporation will be the filing of the articles of merger with the State Department of Assessments and Taxation of the State of Maryland and the filing of the certificate of merger with the Secretary of State of the State of California.

DISSENTERS’ RIGHTS OF APPRAISAL FOR REINCORPORATION MERGERS

Pursuant to California law, if the Reincorporation is approved by the Company’s shareholders, shareholders who dissent from the Reincorporation will not be entitled to appraisal rights.

COMPARISON OF SHAREHOLDER RIGHTS

Upon consummation of the Reincorporation, the rights of the shareholders of the Company will be governed by the applicable laws of the State of Maryland, including the MGCL, and by the charter and bylaws of PSB-Maryland, which will effect some changes in the rights of our shareholders. The following is a summary comparison of the current rights of our shareholders under the California Corporations Code and the PSB-California charter and bylaws and the future rights of our shareholders under the MGCL and the PSB-Maryland charter and bylaws, if the Reincorporation is approved by our shareholders.

The statements in this section are qualified in their entirety by reference to, and are subject to, the detailed provisions of the California Corporations Code and the PSB-California charter and bylaws, and the MGCL and the PSB-Maryland charter and bylaws. Copies of the PSB-California charter and bylaws, respectively, have been previously filed with the SEC, and copies of the PSB-Maryland charter and bylaws are attached as Annexes B and C, respectively, to this proxy statement. The Company will send copies of the PSB-California charter and bylaws and the PSB-Maryland charter and bylaws to shareholders upon request without charge.

 

 

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PSB-California / California

Corporations Code

     

PSB-Maryland /

MGCL

       

Authorized Capital Stock

   

PSB-California is authorized to issue an aggregate of 250,000,000 shares of capital stock, consisting of (i) 100,000,000 shares of Common Stock, $0.01 par value per share, (ii) 100,000,000 shares of equity stock, $0.01 par value per share, and (iii) 50,000,000 shares of preferred stock, $0.01 par value per share.

   

PSB-Maryland is authorized to issue an aggregate of 250,000,000 shares of stock, consisting of (i) 100,000,000 shares of Common Stock, $0.01 par value per share, (ii) 100,000,000 shares of equity stock, $0.01 par value per share, and (iii) 50,000,000 shares of preferred stock, $0.01 par value per share.

       

Shareholder Approval of Amendment of the Articles of Incorporation

   

Under the California Corporations Code, an amendment to the PSB-California charter generally requires the majority vote of the outstanding shares of each class of securityholders entitled to vote to amend the PSB-California charter.

 

The certificates of designation relating to the outstanding preferred stock provide that 66 2/3% of the outstanding shares of each series of preferred stock, voting separately, will generally be required for any amendment to the PSB-California charter that will adversely alter or change the powers, preferences, privileges or rights of the shares of such series.

   

The MGCL provides that the affirmative vote of two-thirds of all outstanding stock entitled to vote, or of each class if more than one class is entitled to vote, is required to amend a corporation’s charter. However, the MGCL permits a corporation to reduce the voting requirements in its charter to allow for the approval of an amendment to the charter by not less than a majority of all of the shares of Common Stock then outstanding and entitled to be cast.

 

The PSB-Maryland charter provides that an amendment to the charter may be approved by the affirmative vote of the holders of not less than a majority of all of the shares of Common Stock then outstanding and entitled to be cast.

 

The PSB-Maryland charter may be amended only if such amendment is declared advisable by the Board.

 

The PSB-Maryland charter provides that 66 2/3% of the outstanding shares of each series of preferred stock, voting separately, will generally be required for any amendment to the PSB-Maryland charter that will adversely alter or change the powers, preferences, privileges or rights of the shares of such series.

       

Amendment of Bylaws

   

The PSB-California bylaws may be amended or repealed by the vote or written consent of a majority of the outstanding shares entitled to vote.

 

The Board may also amend the bylaws, subject to certain limitations.

   

The PSB-Maryland bylaws may be amended or repealed by the vote or written consent of a majority of the outstanding shares entitled to vote.

 

The Board may also amend the bylaws, subject to certain limitations.

       

Vote Required for Election of Directors, and Right to Cumulate Votes

   

Pursuant to the PSB-California bylaws, directors are elected by a plurality of all of the votes cast in the election of directors.

 

The Company’s Corporate Governance Guidelines provide that if a director fails to obtain a majority of votes cast, he or she must tender his or her resignation to the Board.

   

The PSB-Maryland bylaws provide that, in the case of a non-contested election, directors must receive a majority of votes cast for election at a meeting at which a quorum is present. For this purpose, a majority of the votes cast means that the number of shares voted “for” a director must exceed the number of shares voted “against” that director.

 

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Table of Contents
       

PSB-California / California

Corporations Code

     

PSB-Maryland /

MGCL

       
   

 

Under California law, cumulative voting for the election of directors is permitted if the shareholder provides advance notice of the intent to exercise cumulative voting. California law also permits public companies to eliminate cumulative voting by the approval of shareholders. PSB-California has not eliminated cumulative voting.

   

 

If a director fails to obtain a majority of votes cast, he or she must tender his or her resignation to the Board.

 

The MGCL does not permit cumulative voting for the election of directors unless the charter expressly provides for it. The PSB-Maryland charter does not provide for cumulative voting.

       

Number of Directors and Term

   

The PSB-California bylaws provide that the number of directors will be set by the Board. A majority of the Board may at any time increase or decrease the size of the Board. However, the number of directors shall be not less than 7 nor more than 13.

   

The PSB-Maryland bylaws provide that the number of directors will be set by the Board. A majority of the Board may at any time increase or decrease the size of the Board. However, the number of directors shall be not less than 7 nor more than 13.

 

The PSB-Maryland charter opts out of MGCL 3-804 which if not opted out of would have permitted the Board to unilaterally determine that only the Board has the authority to set the number of directors.

       

Classified Board / Term of Directors

   

The Board is not classified. Directors shall be elected at each annual meeting of the shareholders to hold office until the next annual meeting.

   

The Board is not classified. Directors shall be elected at each annual meeting of the shareholders to hold office until the next annual meeting.

 

The PSB-Maryland charter opts out of MGCL Section 3-803 which if not opted out of would have permitted the Board to unilaterally classify the Board.

       

Removal of Directors

   

The PSB California charter and bylaws are generally silent as to removal of directors. Thus, by default, the California Corporations Code applies with respect to the removal of directors.

 

The California Corporations Code states that any or all of the directors may be removed without cause if the removal is approved by a majority of outstanding shares, subject to the following:

 

•  No director may be removed (unless the entire board is removed) when the votes cast against removal, or not consenting in writing to the removal, would be sufficient to elect the director if voted cumulatively at an election at which the same total number of votes were cast (or, if the action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of the director’s most recent election were then being elected.

   

The MGCL provides that shareholders may remove directors with or without cause unless the PSB-Maryland charter provides that directors may be removed only for cause. However, if the charter provides that a director is elected by a particular voting group, that director may only be removed by the requisite vote of that voting group.

 

The PSB-Maryland charter provides that, subject to the rights, if any, of holders of any class or series of preferred stock to elect or remove one or more directors, a director may be removed with or without cause by the affirmative vote of the shares entitled to cast a majority of all the votes entitled to be cast generally in the election of directors.

 

The PSB-Maryland charter opts out of MGCL 3-804 which if not opted out of would have permitted the Board to unilaterally increase the voting threshold to remove a director to 2/3rds of votes entitled to be cast.

 

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Table of Contents
       

PSB-California / California

Corporations Code

     

PSB-Maryland /

MGCL

       
   

 

•  When by the provisions of the charter the holders of the shares of any class or series, voting as a class or series, are entitled to elect one or more directors, any director so elected may be removed only by the applicable vote of the holders of the shares of that class or series.

 

The California Corporations Code states that any director may also be removed for cause if such director is declared of unsound mind by any order of court or convicted of a felony.

   
       

Director Vacancies

   

The PSB-California bylaws provide that any director vacancies may be filled by a majority of the directors then in office, whether or not less than a quorum, or by a sole remaining director, except that a vacancy created by the removal of a director by shareholders or by court order may be filled only by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of holders of a majority of the outstanding shares entitled to vote.

 

The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election by written consent shall require the consent of a majority of the outstanding shares entitled to vote.

   

The PSB-Maryland bylaws provide that any director vacancies may be filled by a majority of the directors then in office, whether or not less than a quorum, except that a vacancy created by the removal of a director by the vote or written consent of the shareholders may be filled only by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of holders of a majority of the outstanding shares entitled to vote.

 

The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election by written consent shall require the consent of a majority of the outstanding shares entitled to vote.

 

The PSB-Maryland charter opts out of MGCL 3-804 which if not opted out of would have permitted the Board to unilaterally provide that only the Board has the authority to fill vacancies.

       

Proxy Access

   

PSB-California has not adopted proxy access.

   

Under the PSB-Maryland bylaws, a shareholder, or group of up to 20 shareholders, owning 3% or more of outstanding shares of PSB-Maryland Common Stock continuously for at least three years may nominate and include in PSB-Maryland’s proxy materials directors constituting up to the greater of 2 directors or 20% of the Board.

       

Annual Meetings of Shareholders

   

The annual meeting of shareholders shall be held each year on a date and at a time designated by the Board.

   

The annual meeting of shareholders shall be held each year on a date and at a time designated by the Board.

       

 

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Table of Contents
       

PSB-California / California

Corporations Code

     

PSB-Maryland /

MGCL

       

Special Meetings of Shareholders

   

The PSB-California bylaws provide that a special meeting of the shareholders may be called at any time by the Board, or by the chairman of the board, or by the president, or by one or more shareholders holding shares in the aggregate entitled to cast not less than 10% of the votes at that meeting.

   

The PSB-California bylaws provide that a special meeting of the shareholders may be called at any time by the Board, or by the chairman of the board, or by the president, or by one or more shareholders holding shares in the aggregate entitled to cast not less than 10% of the votes at that meeting.

 

The PSB-Maryland charter opts out of MGCL 3-804 which if not opted out of would have permitted the Board to unilaterally increase the voting threshold to call a special meeting to a majority of votes entitled to be cast.

       

Quorum at Shareholders Meetings

   

The presence in person or by proxy of the holders of a majority of the shares entitled to vote in any meeting of shareholders shall constitute a quorum for the transaction of business.

   

The presence in person or by proxy of the holders of a majority of the shares entitled to vote in any meeting of shareholders shall constitute a quorum for the transaction of business.

       

Shareholder Action by Written Consent

   

The PSB-California bylaws permit shareholder action by written consent if signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize the action at a meeting.

 

In the case of election of directors, such a consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors; provided, however, that a director may be elected at any time to fill a vacancy on the board of directors that has not been filled by the directors by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors.

   

The PSB-Maryland bylaws permit shareholder action by written consent if signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize the action at a meeting.

 

In the case of election of directors, such a consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors; provided, however, that a director may be elected at any time to fill a vacancy on the board of directors that has not been filled by the directors by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors.

       

Approval of Mergers and Business Combinations

   

Under the California Corporations Code, a majority vote of the outstanding shares of each class of securityholders (including holders of preferred stock) is required to approve reorganizations. The CGCL also imposes conditions on certain business combinations with interested shareholders.

 

Holders of preferred stock do not have voting rights in reorganizations if the Company is the successor and there are no changes to the rights, preferences, privileges, or restrictions of the preferred stock.

   

The MGCL provides that the affirmative vote of two-thirds of all outstanding stock entitled to vote, or of each class if more than one class is entitled to vote, is required to approve a merger or business combination. However, the MGCL permits a corporation to reduce the voting requirements in its charter to allow for the approval of a merger or business combination by not less than a majority of all of the shares of Common Stock then outstanding and entitled to be cast.

 

The PSB-Maryland charter provides that a merger or business combination

 

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Table of Contents
       

PSB-California / California

Corporations Code

     

PSB-Maryland /

MGCL

       
       

may be approved by the affirmative vote of the holders of not less than a majority of all of the shares of Common Stock then outstanding and entitled to be cast.

 

The MGCL does not provide holders of preferred stock voting rights on extraordinary transactions unless set for in the charter. The PSB-Maryland charter provides that with respect to any merger or other extraordinary action requiring shareholder approval under the MGCL, the affirmative vote of holders of a majority of the currently outstanding shares of preferred stock (voting as a single class) shall also be required to approve any such transaction, unless the Company is the surviving company in the transaction and the preferences, privileges and restrictions granted to or imposed upon the preferred Stock are not changed as the result of the transaction.

 

The Maryland Business Combination Act prohibits a business combination between a corporation and any interested stockholder or any affiliate of an interested stockholder for five years following the most recent date upon which the stockholder became an interested stockholder. As permitted under Maryland law, the PSB-Maryland charter opts out of the Maryland Business Combination Act.

       

Shareholder Rights Plan

   

PSB-California does not have a shareholder rights plan in effect.

 

The validity of a shareholder rights plan has not been definitively addressed by California courts.

   

PSB-Maryland does not have a shareholder rights plan in effect.

 

The MGCL allows boards to adopt a shareholder rights plan.

       

Ownership Limit

   

The PSB-California charter contains certain restrictions on the shares of capital stock that any shareholder may own in order to maintain PSB-California’s qualification as a REIT. The PSB-California charter provides that, subject to certain exceptions, no holder may own, or be deemed to own by virtue of the attribution provisions of the Internal Revenue Code (the Code), more than (i) 7.0% of the outstanding shares of the Company’s Common Stock and (ii) 9.9% of the outstanding shares of each class or series of shares

   

The PSB-Maryland charter contains certain restrictions on the shares of capital stock that any shareholder may own in order to maintain PSB-Maryland’s qualification as a REIT. The PSB-Maryland charter provides that, subject to certain exceptions, no holder may own, or be deemed to own by virtue of the attribution provisions of the Code, more than (i) 7.0% of the outstanding shares of the Company’s Common Stock and (ii) 9.9% of the outstanding shares of each class or series of shares of the

 

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Table of Contents
       

PSB-California / California

Corporations Code

     

PSB-Maryland /

MGCL

       
   

of the Company’s preferred stock or equity stock and that all shares of stock be imprinted with a legend setting forth that restriction.

 

The PSB-California charter provides that the Board, in its sole and absolute discretion, may grant exceptions to the ownership limits, so long as certain conditions are met.

   

Company’s preferred stock or equity stock and that all shares of stock be imprinted with a legend setting forth that restriction.

 

The PSB-Maryland charter provides that the Board, in its sole and absolute discretion, may grant exceptions to the ownership limits, so long as certain conditions are met.

       

Inspection Rights

   

The California Corporations Code provides that a shareholder or shareholders of the corporation holding at least 5% in the aggregate of the outstanding voting shares of the corporation may (i) inspect and copy the records of shareholders’ names and addresses and shareholdings during usual business hours on 5 days prior written demand, and (ii) obtain from the transfer agent of the corporation, on written demand and on the tender of such transfer agent’s usual charges for such list, a list of the shareholders’ name and addresses who are entitled to vote for the election of directors and their shareholdings as of the most recent record date for which that list has been compiled or as of a date specified by the shareholder after the date of demand.

 

The minutes and accounting books and records shall be open to inspection upon the written demand of any shareholder at any reasonable time during usual business hours, for a purpose reasonably related to the holder’s interests as a shareholder. The inspection may be made in person or by an agent or attorney and shall include the right to copy and make extracts.

   

The MGCL provides that shareholders of a Maryland corporation, irrespective of how long they have held stock, may inspect and copy, during usual business hours, the bylaws, minutes of the proceedings of the shareholders, annual statements of affairs, and voting trust agreements on file at the corporation’s principal office. If a shareholder makes a written request, the shareholder may obtain a statement showing all stock and securities issued by the corporation within the previous twelve months. In addition, a person who has owned for at least six months at least 5% of the outstanding stock of any class of the corporation may inspect and copy the corporation’s books of account and stock ledger during usual business hours, and may make a written request for a statement of the corporation’s affairs.

       

Director Standard of Conduct

   

The California Corporations Code requires a director of a California corporation to perform his or her duties as a director in good faith, in a manner believed to be in the best interests of the corporation and its shareholders with the care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.

   

The MGCL provides that a director of a Maryland corporation is required to perform his or her duties in good faith, with a reasonable belief that his or her actions are in the best interest of the corporation and with the care of an ordinary prudent person in a like position under similar circumstances.

 

An act of a director relating to an acquisition or potential acquisition of control is not subject to a higher duty or greater scrutiny than is applied to any other act of a director.

       

 

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Table of Contents
       

PSB-California / California

Corporations Code

     

PSB-Maryland /

MGCL

       

Advance Notice

   

The PSB-California bylaws provide that, with respect the proposal of director nominations and other business to be considered by the shareholders at an annual meeting of shareholders, the shareholder must have given timely notice thereof in proper written form to the secretary of the Company.

 

In general, notice of shareholder nominations or other business must be delivered no less than 90 days nor more than 120 days prior to the first anniversary of the date of the preceding year’s annual meeting.

   

The PSB-Maryland bylaws provide that, with respect the proposal of director nominations and other business to be considered by the shareholders at an annual meeting of shareholders, the shareholder must have given timely notice thereof in proper written form to the secretary of the Company.

 

In general, notice of shareholder nominations or other business must be delivered no less than 90 days nor more than 120 days prior to the first anniversary of the date of the preceding year’s annual meeting.

       

Indemnification of Directors and Officers and Advance of Expenses

   

Under the California Corporations Code, a corporation may generally indemnify its officers, directors, employees and agents against expenses (including attorneys’ fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding (other than actions by or in the right of corporation to procure a judgment in its favor), if they acted in good faith and in a manner they reasonably believed to be in the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. A similar standard is applicable in actions, against expenses actually and reasonably incurred in connection with the defense or settlement of the action, except that no indemnification may be made (1) if the person is adjudged liable to the corporation unless the court determines upon application that the person is fairly and reasonably entitled to indemnity for expenses and then only to the extent determined by the court, (2) for amounts paid in settling or otherwise disposing a pending action without court approval, or (3) for expenses incurred in defending a pending action which is settled or otherwise disposed of without court approval. The California Corporations Code provides that to the extent that such persons have been successful in defense of any proceeding, they must be indemnified by the corporation against expenses actually and reasonably incurred in connection therewith. Additionally, the California

   

The MGCL requires a corporation (unless its charter provides otherwise, which the PSB-Maryland charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made or threatened to be made a party by reason of his or her service in that capacity. The MGCL permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made or are threatened to be made a party by reason of their service in those or other capacities unless it is established that:

 

•  the act or omission of the director or officer was material to the matter giving rise to the proceeding and (i) was committed in bad faith or (ii) was the result of active and deliberate dishonesty;

 

•  the director or officer actually received an improper personal benefit in money, property or services; or

 

•  in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful.

 

However, under the MGCL, a Maryland corporation may not indemnify a director or officer for an adverse judgment in a suit by or in the right of the corporation or if the director or

 

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Table of Contents
       

PSB-California / California

Corporations Code

     

PSB-Maryland /

MGCL

       
   

Corporations Code provides that, the corporation may only indemnify the person if authorized in the specific case, upon a determination that indemnification is proper because the person has met the applicable standard of conduct, (1) by a majority vote of a quorum consisting of directors who are not parties to the proceeding, (2) if such a quorum is not obtainable, by independent legal counsel in a written opinion, (3) by approval of a majority of the outstanding shares entitled to vote, or (4) by the court in which the proceeding is or was pending upon application by the corporation or the person.

 

Expenses incurred in defending any proceeding may be advanced by the corporation prior to the final disposition of the proceeding upon the corporation’s receipt of an undertaking by or on behalf of the person to repay that amount if it is ultimately determined that the person is not entitled to be indemnified.

 

The PSB-California bylaws provide that the Company shall indemnify each of its agents to the maximum extent permitted by California law against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding arising by reason of the fact any such person is or was an agent of the Company.

   

officer was adjudged liable on the basis that personal benefit was improperly received, unless in either case a court orders indemnification and then only for expenses.

 

In addition, the MGCL permits a corporation to advance reasonable expenses to a director or officer upon the corporation’s receipt of a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation and a written undertaking by the director or on the director’s behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the director did not meet the standard of conduct.

 

The PSB-Maryland bylaws provide that the Company shall indemnify each of its agents to the maximum extent permitted by Maryland law against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding arising by reason of the fact any such person is or was an agent of the Company, and without requiring a preliminary determination of the ultimate entitlement to indemnification, shall pay or reimburse reasonable expenses in advance of final disposition.

       

Limitations on Personal Liability for Directors and Officers

   

The PSB-California charter eliminates monetary damages for director liability to the fullest extent permissible under California law.

 

In general, the liability of officers may not be eliminated or limited under California law

   

The MGCL permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its shareholders for money damages except for liability resulting from actual receipt of an improper benefit or profit in money, property or services or active and deliberate dishonesty established as being material to the cause of action. The PSB-Maryland bylaws contain such a provision that eliminates such liability to the maximum extent permitted by the MGCL.

 

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Table of Contents
       

PSB-California / California

Corporations Code

     

PSB-Maryland /

MGCL

       

Dissenter Appraisal Rights

   

Under the California Corporations Code, shareholders who do not vote in favor of a in certain types of reorganizations that require shareholder approval, who properly make a demand for appraisal of their shares, and who otherwise comply strictly with the provisions of the California Corporations Code with respect to dissenters’ rights, will be entitled to exercise dissenters’ rights and to obtain payment in cash for the fair market value of their shares.

   

The MGCL provides that a shareholder of a corporation is generally entitled to receive payment of the fair value of its stock if the shareholder dissents from transactions including a proposed merger, share exchange or a sale of substantially all of the assets of the corporation.

 

However, dissenters’ rights generally are not available for transactions involving shares that are registered on a national securities exchange.

       

Maryland Control Share Acquisition
Act

   

Not applicable.

   

The Maryland Control Shares Acquisition Act generally provides that persons acquiring 10% or greater of a Maryland corporation have no voting rights with respect to the control shares except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter.

 

As permitted under Maryland law, the PSB-Maryland charter opts out of the Maryland Control Share Acquisition Act.

       

Exclusive Forum

   

Under California law, a corporation may designate certain jurisdictions as the exclusive forum for certain claims. The PSB-California bylaws do not provide for an exclusive forum for any claims.

   

The PSB-Maryland bylaws provide that, unless the Company selects or consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim of breach of any duty owed by any director or officer or other employee to the Company or its shareholders, (iii) any action asserting a claim against the Company or any director or officer or other employee arising pursuant to any provision of Maryland law, the charter or the bylaws, or (iv) any action asserting a claim against the Company or any director or officer or other employee that is governed by the internal affairs doctrine, shall be the Circuit Court for Baltimore City, Maryland, or, if that court does not have jurisdiction, the United States District Court for the District of Maryland, Baltimore Division. The exclusive forum provision in the PSB-Maryland bylaws does not apply to actions arising under the Exchange Act or the Securities Act.

 

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Table of Contents
       

PSB-California / California

Corporations Code

     

PSB-Maryland /

MGCL

       

Transactions with Affiliates

   

Pursuant to the PSB-California bylaws, 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.

 

The PSB-California bylaws require shareholder approval to amend this provision.

   

Pursuant to the PSB-Maryland charter, the Company may engage in transactions in which affiliates have a material interest if: (i) the fact of the interest is disclosed or known to: (a) the Board, and the Board shall approve or ratify the contract or transaction by the affirmative vote of a majority of disinterested directors, even if the disinterested directors constitute less than a quorum, or (b) the shareholders entitled to vote on the matter, and the contract or transaction shall be authorized, approved or ratified by a majority of the votes cast by the shareholders entitled to vote other than the votes of shares owned of record or beneficially by the interested party; or (ii) the contract or transaction is fair and reasonable to the Company.

 

In addition, the PSB-Maryland charter requires that in connection with a merger or other extraordinary transaction with an interested party that requires shareholder approval, the Company must furnish shareholders an affirmative opinion as to the fairness (from a financial point of view) of the consideration to shareholders.

       

Meetings of Shareholders by Electronic Transmission

   

The California Corporations Code requires the consent of each shareholder to hold a meeting of shareholders by electronic transmission.

 

The PSB-California bylaws provide that a meeting of shareholders may be conducted in whole or in part, by electronic transmission by and to the company or by electronic video screen communication, subject to compliance with California law.

   

The MGCL permits meetings of shareholders by electronic transmission.

 

The PSB-Maryland bylaws provide that a meeting of shareholders may be conducted in whole or in part, by electronic transmission by and to the company or by electronic video screen communication, subject to compliance with Maryland law.

       

Terms of Preferred Stock and Depositary Shares

   

The terms of the PSB-California outstanding preferred stock and related depositary shares are set forth in the applicable certificates of determination to the PSB-California charter and the deposit agreements.

   

The terms of the PSB-Maryland preferred stock are set forth in annexes to the PSB-Maryland charter. The terms of the related depositary shares will be set forth in the applicable deposit agreement.

 

There are no substantive changes from the terms of the outstanding PSB-California preferred stock or related depositary shares.

 

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Table of Contents

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE REINCORPORATION

None. We believe that the Reincorporation will be a tax-free reorganization under the Code. Assuming the Reincorporation qualifies as a reorganization under the Code, no gain or loss will be recognized to the holders of the Company’s Common Stock or preferred stock as a result of the Reincorporation, and no gain or loss will be recognized by PSB-California or PSB-Maryland for U.S. federal income tax purposes. Each former holder of stock of PSB-California will have the same basis in the stock of PSB-Maryland received by such holder pursuant to the Reincorporation as such holder has in the stock of PSB-California held by such holder prior to the Reincorporation. Each shareholder’s holding period with respect to the PSB-California stock will include the period during which such holder held the corresponding PSB-California stock, provided the latter was held by such holder as a capital asset at the time of the Reincorporation. We have not obtained a ruling from the Internal Revenue Service (the IRS) or an opinion of legal counsel or tax advisor with respect to the U.S. federal income tax consequences of the Reincorporation, and the IRS could reach a different conclusion as to the U.S. federal income tax consequences of the Reincorporation. We urge our shareholders to consult their own tax advisors as to any federal, state, local and foreign tax consequences of the Reincorporation.

REQUIRED VOTE

Approval of the Proposal 3 requires the affirmative vote of (a) the holders of at least a majority of the outstanding shares of Common Stock and (b) the holders of at least a majority of outstanding preferred stock (voting as a single class). Abstentions and broker shares that are not voted on this proposal have the same effect as a vote against the proposal. Approval of this Proposal 3 constitutes approval of the Reincorporation, as well as approval of the Merger Agreement and the PSB-Maryland charter and bylaws.

If this Proposal 3 fails to obtain the requisite vote for approval, the Reincorporation will not be consummated and the Company will continue to be incorporated in California and be subject to the current PSB-California charter and bylaws.

The proposed amendments to the Company’s bylaws relating to proxy access, majority voting for directors in uncontested elections and exclusive forum are conditioned on the approval of Proposal 3. If Proposal 3 fails the Board may in the future amend the PSB-California bylaws to provide for proxy access or an exclusive forum without the approval of shareholders.

The Board recommends a vote FOR approval

the Reincorporation of the Company from the State of California to the State of Maryland

as described in this proxy statement.

 

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Proposal 4:

Ratification of Independent

Registered Public Accounting Firm

 

 

 

 

The Audit Committee has appointed Ernst & Young LLP (EY) as the Company’s independent registered public accounting firm to audit the Consolidated Financial Statements of PS Business Parks and its subsidiaries for the year ending December 31, 2021

 

Representatives from EY will be in attendance at the Annual Meeting and will have the opportunity to make a statement if they desire to do so and will be available to respond to appropriate questions

 

RECOMMENDATION:

Vote FOR ratification of the appointment of EY as our independent registered public accounting firm for the fiscal year ending December 31, 2021

 

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Table of Contents

PROPOSAL 4

RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS

EXECUTIVE SUMMARY

The Board recommends that shareholders ratify the Audit Committee’s appointment of EY as the Company’s independent registered public accounting firm (Independent Accountants) for the fiscal year ending December 31, 2021. EY has acted as the Independent Accountants since the Company’s organization in 1997.

The Company’s bylaws do not require ratification of EY’s appointment, but the Board believes that shareholder ratification is good corporate governance. If shareholders do not ratify the appointment of EY, the Audit Committee may consider the selection of a different registered public accounting firm. Even if shareholders ratify the appointment of EY, the Audit Committee, in its discretion, may change the appointment at any time during the year if it determines that a change would be in the best interest of the Company and its shareholders.

AUDIT AND NON-AUDIT FEES

The following table shows the fees billed or expected to be billed to the Company by EY for audit and other services provided for fiscal 2020 and 2019:

 

     

 

2020

 

    

 

2019

 

 

Audit Fees

 

   $

 

627,000

 

 

 

   $

 

675,000

 

 

 

Audit-Related Fees

 

    

 

24,000

 

 

 

    

 

24,000

 

 

 

Tax Fees

 

    

 

62,000

 

 

 

    

 

62,000

 

 

 

Total

 

   $

 

713,000

 

 

 

   $

 

761,000

 

 

 

Audit Fees. Audit fees represent fees for professional services provided in connection with the audit of the Company’s annual financial statements and internal control over financial reporting, review of the quarterly financial statements included in the Company’s quarterly reports on Form 10-Q and services in connection with the Company’s registration statements.

Audit related fees. Audit-related fees represent professional fees provided in connection with the audit of the Company’s 401(k)/Profit Sharing Plan (the 401(k) Plan).

Tax fees. During 2020 and 2019, tax services consisted of tax compliance and consulting services.

AUDITOR INDEPENDENCE

The Audit Committee has determined that the Independent Accountants’ provision of the non-audit services described above is compatible with maintaining the Independent Accountants’ independence.

POLICY TO APPROVE ERNST & YOUNG LLP SERVICES

The Audit Committee has adopted a pre-approval policy relating to services performed by the Company’s Independent Accountants. The policy requires that all services provided by EY to us, including audit services, audit-related services, tax services and other services, must be pre-approved by the Audit Committee.

Under this policy, the Audit Committee of the Company pre-approved all services performed by EY during 2020 and 2019, including those listed in the previous table. The Chairman of the Audit Committee has the authority to grant required approvals between meetings of the Audit Committee, provided that any exercise of this authority is presented at the next committee meeting.

 

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AUDIT COMMITTEE REPORT

The Audit Committee’s responsibilities include appointing the Company’s Independent Accountants, pre-approving audit and non-audit services provided by the firm, and assisting the Board in providing oversight to the Company’s financial reporting process.

In fulfilling its responsibilities, the Audit Committee meets with the Company’s Independent Accountants, internal auditor, and management to review the Company’s accounting, auditing internal controls, and financial reporting matters. Management is responsible for the Company’s financial statements, including the estimates and judgments on which they are based, for maintaining effective internal controls over financial reporting, and for assessing the effectiveness of internal controls over financial reporting. The Independent Accountant is responsible for performing an independent audit of the Company’s consolidated financial statements in accordance with the standards of the PCAOB and for issuing a report thereon. It is not the Audit Committee’s responsibility to plan or conduct audits or to determine that the Company’s financial statements and disclosures are complete, accurate, and in accordance with U.S. generally accepted accounting principles and applicable laws, rules, and regulations. The Audit Committee’s responsibility is to monitor and oversee these processes and necessarily relies on the work and assurances of the Company’s management and of the Company’s Independent Accountants.

In connection with its oversight responsibilities related to the Company’s financial statements included in the Company’s Annual Report on Form 10-K, the Audit Committee met with management and EY, the Company’s Independent Accountants, and reviewed and discussed with them the audited consolidated financial statements. Management represented to the Audit Committee that the Company’s consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles. The Audit Committee discussed with the Independent Accountants matters required to be discussed by PCAOB Auditing Standard No. 1301 (Communication with Audit Committees), as modified or supplemented. The discussion included, but was not limited to, the overall scope and plans for the annual audit, the results of their audit, their evaluation of the Company’s internal controls, and the overall quality of the Company’s financial reporting.

In addition to providing the required written disclosures and communications, the Company’s Independent Accountants also provided to the Audit Committee the letter confirming their independence of the Company as required by the applicable rules of the PCAOB, and the Audit Committee discussed with the Independent Accountants that firm’s independence. In addition, the Audit Committee has considered whether the Independent Accountant’s provision of non-audit services to the Company and its affiliates is compatible with the firm’s independence.

During 2020, management documented, tested, and evaluated the Company’s system of internal control over financial reporting in response to the requirements set forth in Section 404 of the Sarbanes-Oxley Act of 2002 and SEC regulations adopted thereunder. The Audit Committee met with representatives of management, the internal auditors, legal counsel, and the Independent Accountants on a regular basis throughout the year to discuss the progress of the process. At the conclusion of this process, the Audit Committee received from management its assessment and report on the effectiveness of the Company’s internal controls over financial reporting. In addition, the Audit Committee received from EY its assessment of and opinion on the Company’s internal control over financial reporting. These assessments and reports are as of December 31, 2020. The Audit Committee reviewed and discussed the results of management’s assessment and EY’s audit.

In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors, and the Board has approved, that the audited consolidated financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 for filing with the Securities and Exchange Commission. The Audit Committee also approved the appointment of EY as the Company’s independent registered public accountants for the fiscal year ending December 31, 2021, and recommended that the Board submit this appointment to the Company’s shareholders for ratification at the 2021 Annual Meeting.

 

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THE AUDIT COMMITTEE

Kristy M. Pipes, Chair

Jennifer Holden Dunbar

Gary E. Pruitt

Peter Schultz

 

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GENERAL INFORMATION ABOUT THE MEETING

PURPOSE OF THE PROXY SOLICITATION

We are providing these proxy materials on behalf of the Board of PS Business Parks, Inc. to ask for your vote and to solicit your proxies for use at our 2021 Annual Meeting to be held on April 20, 2021, or any adjournments or postponements thereof.

This proxy statement contains important information regarding the Annual Meeting. Specifically, it identifies the proposals on which you are being asked to vote, provides information you may find useful in deciding how to vote, and describes voting procedures. This Notice and proxy statement are first being distributed and made available on or about [                    ], 2021, to holders of our Common Stock on the record date. A copy of our Annual Report to Shareholders for the fiscal year ended December 31, 2020, which includes a copy of our Form 10-K, accompanies this proxy statement.

DATE, TIME, AND PLACE OF THE ANNUAL MEETING

The Annual Meeting will be held on Wednesday, April 20, 2021 at 11:30 a.m., Pacific Time. Due to public health concerns regarding the COVID-19 pandemic, the Annual Meeting will be held in virtual-only format, meaning that you may attend the meeting virtually by following the instructions set forth below. You will be able to attend and participate in the Annual Meeting virtually, vote your shares of Common Stock electronically and submit your questions during the meeting by visiting: www.virtualshareholdermeeting.com/PSB2021.

While we intend to hold the Annual Meeting virtually, we are actively monitoring the COVID-19 situation and the federal, state, and local government regulations that may affect the format of our Annual Meeting, including the ability to hold the Annual Meeting virtually. In the event it is not possible or advisable to hold the Annual Meeting virtually, we will announce the alternative meeting arrangements, which may include changing the date or location of the meeting or holding the meeting physically, in a press release filed with the Securities and Exchange Commission as promptly as practicable. You are encouraged to monitor the Investor Relations section of our website at psbusinessparks.com for updated information about the Annual Meeting.

WHO CAN VOTE

Holders of PS Business Parks Common Stock at the close of business on the record date may vote the shares of Common Stock they hold on that date at the Annual Meeting. For all matters submitted for vote at the Annual Meeting, each share of Common Stock is entitled to one vote.

Holders of depositary shares representing shares of all series of our preferred stock (together as a single class) at the close of business on the record date may vote the depositary shares they hold on that date at the Annual Meeting solely on the Reincorporation proposal. Each depositary share is entitled to one vote on the Reincorporation proposal, and each vote will represent 1/1000 of a vote of a share of preferred stock.

QUORUM FOR THE ANNUAL MEETING

The presence at the meeting in person or by proxy of the holders of a majority of the voting power represented by the outstanding shares of Common Stock and preferred stock (with each depositary share representing 1/1000 of a vote of a share of preferred stock), counted together as a single class, will constitute a quorum for the transaction of business.

As of the record date, we had 27,488,684 shares of Common Stock outstanding and entitled to vote on all proposals and 37,790 shares of preferred stock outstanding and entitled to vote on the Reincorporation proposal.

 

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HOW VOTES ARE COUNTED

For the election of directors, director nominees receiving an affirmative majority of votes cast (i.e., the number of shares cast “for” a director nominee exceeds the number of votes cast “against” that nominee) will be elected. Shares of common stock not voted (whether by abstention or otherwise) will not affect the vote. As discussed above, the Company has adopted a policy whereby directors who do not receive a majority of the votes cast for his or her election must submit their resignation to be considered by the Board.

The number of shares cast “for” each of Proposal 2 and Proposal 4 must exceed the number of votes cast “against” that proposal for approval of the proposal. We will not count shares that abstain from voting.

Although the advisory vote to approve executive compensation in Proposal 2 is non-binding, the Compensation Committee will consider and take into account the vote results in making future determinations on executive compensation.

Approval of the Proposal 3 (the Reincorporation proposal) requires the affirmative vote of (a) the holders of at least a majority of the outstanding shares of Common Stock and (b) the holders of at least a majority of outstanding preferred stock (voting as a single class).

Because the affirmative vote required to approve the Reincorporation proposal is based on the total number of outstanding shares of Common Stock and preferred stock, the failure to submit a proxy or voting instruction card or to vote at the Annual Meeting will have the same effect as a vote against the Reincorporation proposal.

HOW PROXIES WILL BE VOTED

If you hold shares through a broker or nominee and do not provide the broker or nominee with specific voting instructions, under the rules that govern brokers or nominees in such circumstances, your broker or nominee will have the discretion to vote such shares on routine matters, but not on non-routine matters. As a result:

 

   

Your broker or nominee will not have the authority to exercise discretion to vote such shares with respect to Proposals 1, 2, and 3 because the NYSE rules treat these matters as non-routine; and

 

   

Your broker or nominee will have the authority to exercise discretion to vote such shares with respect to Proposal 4 because that matter is treated as routine under the NYSE rules.

Broker non-votes will be counted as present for purposes of determining the presence or absence of a quorum but will otherwise have no effect on the outcome of the vote on Proposals 1 and 2. Broker non-votes will have the same effect as a vote AGAINST Proposal 3.

If you are a registered shareholder and submit a properly executed proxy card containing no instructions, the shares represented by the proxy will be voted FOR (i) each of Proposals 1, 2,3, and 4, and (ii) in accordance with the judgment of the proxy holders as to any other matter that may properly be brought before the Annual Meeting, or any adjournments or postponements thereof.

HOW TO CAST A VOTE

You may vote by any of the following means:

 

   

By Internet: Shareholders who have received a paper copy of a proxy card or voting instruction card by mail may submit proxies over the Internet by following the instructions on the proxy card or voting instruction card.

 

   

By Telephone: If provided on your proxy card or voting instruction card and if you live in the United States or Canada, you may submit proxies by telephone by calling the telephone number indicated on the card and following the instructions. You will need the control number on the card when voting.

 

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By Mail: Shareholders who received a paper copy of a proxy card or voting instruction card by mail may submit proxies by completing, signing, and dating their proxy card or voting instruction card and mailing it in the accompanying self-addressed envelope. No postage is necessary if mailed in the United States.

 

   

In Person, at the Annual Meeting: Shareholders who hold shares in their name as the shareholder of record may vote in person at the Annual Meeting. Shareholders who are beneficial owners but not shareholders of record may vote in person at the Annual Meeting only with a legal proxy obtained from their broker, trustee, or nominee, as applicable.

Properly completed and submitted proxy cards and voting instruction cards, and proxies properly completed and submitted over the Internet, if received in time for voting and not revoked, will be voted at the Annual Meeting in accordance with the instructions contained therein.

HOW TO VOTE AS A PARTICIPANT IN THE 401(K) PLAN

If you hold your shares as a participant in the 401(k) Plan, your proxy will serve as a voting instruction for the trustee of the 401(k) Plan with respect to the amount of shares of Common Stock credited to your account as of the record date. If you provide voting instructions via your proxy card or voting instruction card with respect to your shares of Common Stock held in the 401(k) Plan, the trustee will vote those shares of Common Stock in the manner specified. The trustee will vote any shares of Common Stock for which it does not receive instructions in the same proportion as the shares of Common Stock for which voting instructions have been received, unless the trustee is required by law to exercise its discretion in voting such shares.

To allow sufficient time for the trustee to vote your shares of Common Stock, the trustee must receive your voting instructions by 11:59 p.m., Pacific Daylight Time, on April 15, 2021.

CHANGING YOUR VOTE

You can change your vote at any time before your proxy is voted at the Annual Meeting. To revoke your proxy, you must either:

 

   

file an instrument of revocation with our Corporate Secretary at our principal executive offices, 701 Western Avenue, Glendale, California 91201;

 

   

mail a new proxy card dated after the date of the proxy you wish to revoke to our Corporate Secretary at our principal executive offices;

 

   

submit a later dated proxy over the Internet in accordance with the instructions set forth on the Internet voting website; or

 

   

if you are a shareholder of record, or you obtain a legal proxy from your broker, trustee, or nominee, as applicable, attend the Annual Meeting and vote in person.

We will vote your unrevoked proxy at the Annual Meeting in accordance with your instructions indicated on the proxy card, voting instruction card or, if submitted over the Internet, as indicated on the submission.

COST OF THIS PROXY SOLICITATION

We bear all proxy solicitation costs. In addition to solicitations by mail, our Board, our officers, and our regular employees, without additional remuneration, may solicit proxies by telephone, facsimile, electronic transmission, and personal interviews.

We will request brokers, banks, custodians, and other fiduciaries to forward proxy soliciting materials to the beneficial owners of Common Stock. We will reimburse them for their reasonable out-of-pocket expenses incurred in connection with distributing proxy materials.

 

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We have retained the services of MacKenzie Partners LLC to assist with the solicitation of proxies in connection with the Annual Meeting. We paid MacKenzie Partners LLC $15,000 for these services, not including reimbursement of customary costs and expenses associated with the services.

CONTACTING OUR TRANSFER AGENT

Please contact PS Business Parks’ transfer agent at the phone number or address listed below, with questions concerning share certificates, dividend checks, transfer of ownership, or other matters pertaining to your share account: American Stock Transfer & Trust Company, LLC 6201 15th Avenue, Brooklyn, New York 11219, 800-937-5449.

CONSIDERATION OF CANDIDATES FOR DIRECTOR

The policy of the Nominating/Corporate Governance Committee is to consider properly submitted shareholder recommendations for candidates for membership on the Board. Under this policy, shareholder recommendations may only be submitted by a shareholder entitled to submit shareholder proposals under the SEC rules. Any shareholder recommendations proposed for consideration by the Nominating/Corporate Governance Committee should include the nominee’s name and qualifications for board membership, including the information required under Regulation 14A under the Exchange Act, and should be addressed to: Jeffrey D. Hedges, Executive Vice President, Chief Financial Officer, & Secretary, PS Business Parks, Inc., 701 Western Avenue, Glendale, California 91201.

DEADLINE TO PROPOSE OR NOMINATE INDIVIDUALS TO SERVE AS DIRECTORS FOR THE 2022 ANNUAL MEETING

To nominate an individual for election at the 2022 annual meeting of shareholders (2022 Annual Meeting), a shareholder must give timely notice to the Corporate Secretary in accordance with our Bylaws, which, in general, require that the notice be received by the Corporate Secretary between the close of business on December 21, 2021, and the close of business on January 20, 2022, provided however that in the event that the date of the 2022 Annual Meeting is more than 30 days before or more than 60 days after such anniversary date, or if no annual meeting was held in the preceding year, notice by the shareholder must be delivered not earlier than the close of business on the 120th day and not later than the close of business on the later of the 90th day prior to such annual meeting or the tenth day following the date we announce publicly the date for our 2022 Annual Meeting. Unless our charter or bylaws are amended to provide otherwise, if a shareholder intends to cumulate votes in the election of directors at the 2022 Annual Meeting, the shareholder must provide notice of this intention at the meeting prior to voting in accordance with California law.

DEADLINES FOR RECEIPT OF SHAREHOLDER PROPOSALS

Any proposal that a holder of our shares wishes to submit for inclusion in our 2021 Proxy Statement pursuant to SEC Rule 14a-8 must be received by the Company no later than November 18, 2021. Such proposals also must comply with SEC regulations under Rule 14a-8 regarding the inclusion of shareholder proposals in Company-sponsored proxy materials. Under Rule 14a-8, we are not required to include shareholder proposals in our proxy materials unless certain conditions specified in the rule are met.

In addition, in accordance with our bylaws, notice of any proposal that a holder of our shares wishes to propose for consideration at the 2022 Annual Meeting, but does not seek to include in the 2022 Proxy Statement pursuant to Rule 14a-8, must be received by the Corporate Secretary between the close of business on December 21, 2021, and the close of business on January 20, 2022, provided however that in the event that the date of the 2022 Annual Meeting is more than 30 days before or more than 60 days after such anniversary date, or if no annual meeting was held in the preceding year, notice by the shareholder must be delivered not earlier than the close of business on the 120th day and not later than the close of business on the later of the 90th day prior to such annual meeting or the tenth day following the date we announce publicly the date for our 2022 Annual Meeting.

 

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ANNUAL REPORT ON FORM 10-K

A copy of our 2020 Annual Report and Form 10-K accompanies this proxy statement. Additional copies are available at: psbusinessparks.com/investor-relations/financial-reports

The Company will furnish a paper copy of the Form 10-K, excluding exhibits, without charge, upon the written request of any shareholder to Jeffrey D. Hedges, Executive Vice President, Chief Financial Officer, & Secretary, PS Business Parks, Inc., 701 Western Avenue, Glendale, California 91201. Copies of exhibits will be provided at a copying charge of $0.20 per page to reimburse us for a portion of the cost.

OTHER MATTERS

The Board knows of no other matters to be presented for shareholder action at the Annual Meeting. If any other matters are properly presented at the Annual Meeting for action, the persons named in the accompanying proxy will vote the shares represented by the proxy in accordance with their best judgment on such matters.

VIRTUAL MEETING MATTERS

Due to public health concerns regarding the COVID-19 pandemic, the Annual Meeting will be held in virtual-only format, meaning that you may attend the meeting virtually by following the instructions set forth in this section. You will be able to attend and participate in the Annual Meeting virtually, vote your shares of Common Stock electronically and submit your questions during the meeting by visiting: www.virtualshareholdermeeting.com/PSB2021.

The virtual format provides our shareholders with the opportunity to participate in the Annual Meeting, including the live, online Q&A session, from any location convenient to them, providing shareholder access to our management and enhancing participation. Conducting the meeting virtually will ensure shareholder access in light of the expected ongoing uncertainty for large gatherings due to the COVID-19 pandemic.

While we intend to hold the Annual Meeting virtually, we are actively monitoring the COVID-19 situation and the federal, state, and local government regulations that may affect the format of our Annual Meeting, including the ability to hold the Annual Meeting virtually. In the event it is not possible or advisable to hold the Annual Meeting virtually, we will announce the alternative meeting arrangements, which may include changing the date or location of the meeting or holding the meeting physically, in a press release filed with the Securities and Exchange Commission as promptly as practicable. You are encouraged to monitor the Investor Relations section of our website at psbusinessparks.com for updated information about the Annual Meeting.

ACCESSING THE MEETING

To be admitted to the Annual Meeting virtually, you must enter the control number found on your proxy card or voting instruction form. If your shares of Common Stock are held through a broker or bank in “street name” as of the close of business on the record date, you may vote your shares at the virtual meeting only if you obtain a legal proxy from your brokerage firm, bank or other nominee.

CASTING YOUR VOTE

You may vote your shares virtually at the Annual Meeting. To vote at the Annual Meeting virtually, you must re-enter the control number found on your proxy card or voting instruction form. Even if you plan to attend the Annual Meeting virtually, we recommend that you submit the accompanying proxy card or voting instruction form or vote via the Internet or by telephone by the applicable deadline so that your vote will be counted if you later decide not to attend the virtual Annual Meeting.

 

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LIVE, ONLINE Q&A

As part of the Annual Meeting, we will hold a live, online Q&A session, where shareholders of record at the close of business on the Record Date will be allowed to ask questions. Questions may be submitted prior to the Annual Meeting at www.virtualshareholdermeeting.com/PSB2021 or you may submit questions in real time during the Annual Meeting. We intend to answer all questions submitted before or during the Annual Meeting which are pertinent to the Company and the Annual Meeting matters, as time permits. Consistent with our prior annual meetings, all questions submitted will be generally addressed in the order received and we limit each shareholder to one question in order to allow us to answer questions from as many shareholders as possible.

If there are matters raised of individual concern to a shareholder, or if a question posed was not otherwise answered, we provide an opportunity for shareholders to contact us separately after the Annual Meeting through the “Investor Relations” section of our website, psbusinessparks.com/investor-relations.

TECHNICAL ASSISTANCE

If you encounter any difficulties accessing or participating in the virtual Annual Meeting, please call the technical support number that will be posted on the Annual Meeting website log-in page.

We urge you to vote the accompanying proxy and sign, date, and return it in the enclosed pre-addressed postage-paid envelope at your earliest convenience, whether or not you currently plan to attend the meeting in person.

 

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Appendix A

Reconciliation of non-GAAP measures to GAAP and other information

 

 

SUPPLEMENTAL NON-GAAP DISCLOSURES (UNAUDITED)

RETURN ON ASSETS (IN THOUSANDS)

The following table reconciles from rental income on our income statement to net operating income, and sets forth the calculation of return on assets.

 

 
 

 

   For The Years Ended December 31,
     
 

 

   2010   2015   2020
     

 Rental Income

    $ 278,417       $ 373,135      $ 415,623  
     

 Cost of operations

     90,534       118,469       125,513  
     

Net operating income

    $ 187,883      $ 254,666       $ 290,110  
      
 
  

 

   As of December 31,
 
  

 

   2010   2015   2020
       

 Land

    $ 564,851      $ 793,569      $ 874,680  
       

 Buildings and improvements

     1,782,613       2,215,515       2,247,389   
       

Pre-depreciation cost of real estate facilities

    $     2,347,464      $     3,009,084      $     3,122,069  
       

 Return on assets (1)

     8     8.5     9.3

RATIO OF DEBT AND PREFERRED EQUITY TO EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION (EBITDA)

The table below reflects the ratio of debt and preferred equity to EBITDA and reconciles net income to EBITDA (in thousands).

 

 
  

 

  For The Years Ended December 31,  
         
  

 

  2016     2017     2018     2019     2020  
         

 Mortgage note payable

   $      $      $      $  —      $  —  
         

 Preferred stock

    1,109,750       1,089,750       959,750       944,750       944,750  
         

 Combined mortgage note payable and preferred stock

   $     1,109,750      $     1,089,750      $     959,750      $     944,750      $     944,750  
         

 Net Income

   $ 144,984      $ 179,316      $ 271,901      $  203,972      $  206,705  
         

 Adjustments:

   

 

 

 

 

 

   

 

 

 

 

 

   

 

 

 

 

 

   

 

 

 

 

 

   

 

 

 

 

 

         

Depreciation and amortization

    99,486       94,270       99,242       104,249       96,314  
         

Depreciation from unconsolidated joint venture

          1,180                    
         

Interest expense

    5,568       1,179       555       611       548  
         

Interest income

    (463     (356     (489     (1,885     (370
         

Gain on sale of land and real estate facilities

          (1,209     (93,484     (16,644     (27,273
         

Gain on sale of development rights

          (6,365                  
         

 EBITDA (2)

   $ 249,575      $ 268,015      $  277,725      $  290,303    $  275,924
         

 Debt and Preferred to EBITDA Ratio

    4.4       4.1       3.5       3.3       3.4  

 

(1)

Return on assets is a non-GAAP financial measure representing the ratio of net operating income (rental income less cost of operations, which excludes depreciation) to pre-depreciation cost of real estate facilities. Management believes that this measure is useful in evaluating the Company’s earnings relative to the associated accumulated investment over time.

 

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SUPPLEMENTAL NON-GAAP DISCLOSURES (UNAUDITED) CONTINUED

 

(2)

EBITDA is a non-GAAP financial measure that represents net income before interest, depreciation and amortization and adjusted to exclude gains or losses from sales of depreciable real estate assets and impairment charges on real estate assets. Management believes that EBITDA is frequently used by analysts and investors in evaluating the operating performance of our business activities, including the impact of general and administrative expenses, and without the impact from gains or losses from sales of depreciable real estate assets.

RATIO OF FFO TO COMBINED FIXED CHARGES AND PREFERRED DISTRIBUTIONS

The table below reflects ratio of FFO to combined fixed charges and preferred distributions (in thousands).

 

    For The Years Ended December 31,  
    2016      2017