PS Business Parks, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Incentive Compensation

Incentive Compensation

Apr. 05, 2021

Share-Based Payment Arrangement [Abstract]

Prior to the Merger, under various share-based compensation plans, PSB granted non-qualified options to purchase the Company’s common stock at a price not less than fair value on the date of grant, as well as RSUs, to certain directors, officers and key employees.

Prior to the Merger, we amortized the fair value of awards starting at the beginning of the service period as compensation expense. For awards that are earned solely upon the passage of time and continued service, the entire cost of the award was amortized on a straight-line basis over the service period. For awards with performance conditions, the individual cost of each vesting was amortized separately over each individual service period (the “accelerated attribution” method). We accounted for forfeitures of share-based payments as they occurred by reversing previously amortized share-based compensation expense with respect to unvested grants that were forfeited in the period the employee terminates employment.

Pursuant to the terms and conditions of the Merger Agreement, at or immediately prior to, as applicable, the Company Merger Effective Time, each 2022 Equity Incentive Plan award approved under the Company’s 2022 Equity Incentive Plan Awards Program was cancelled in exchange for a specific cash payment, less any applicable withholding taxes.

In connection with the separation agreement with our former President and Chief Executive Officer (“CEO”), who stepped down from his positions with the Company for health reasons effective March 23, 2022, the Company paid a lump sum payment of $6,643 in exchange for 41,186 restricted stock units owned by the former CEO, which represents the market value of the Company common stock underlying such units as of March 18, 2022.

In connection with the appointment of our President and Chief Executive Officer (“CEO”) effective April 5, 2021, the Company granted a one-time RSU sign-on award with a grant date fair value of $3,695 and a retention RSU award with a grant date fair value of $2,889. These RSUs were set to vest ratably over five years.

Prior to the Merger, effective September 1, 2020, Maria Hawthorne retired from her role as President and CEO and continued to serve as a director of the Company until July 2022. Due to Ms. Hawthorne’s continued service as a director of the Company, her unvested stock options and restricted stock units continued to vest on their original vesting schedule in accordance with the Company’s 2012 Equity and Performance-Based Incentive Compensation Plan and related award agreements. For financial reporting purposes, the end of the service periods for these stock option and restricted stock unit grants have changed from the various respective vesting dates to September 1, 2020, the date of her retirement as President and CEO. Accordingly, all remaining stock compensation expense for Ms. Hawthorne, which totaled $1,738, was amortized, and included in general and administrative expense during the year ended December 31, 2020.

Stock Options

Pursuant to the terms and conditions of the Merger Agreement, at or immediately prior to, as applicable, the Company Merger Effective Time, each stock option to purchase shares of Common Stock (each, a “Company Option”) outstanding immediately prior to the Company Merger Effective Time was automatically cancelled in exchange for a cash payment in an amount in cash equal to (1) the number of shares of Common Stock subject to the Company Option immediately prior to the Company Merger Effective Time multiplied by (2) the excess of the Per Company Share Merger Consideration over the per share exercise price applicable to the Company Option, less any applicable withholding taxes.

Stock options expire 10.0 years after the grant date and the exercise price is equal to the closing trading price of our common stock on the grant date. Stock option holders cannot require the Company to settle their award in cash. We use the Black-Scholes option valuation model to estimate the fair value of our stock options on the date of grant.


	Successor			Predecessor
	Period from July 20, 2022 through December 31, 2022			Period from January 1, 2022 through July 19, 2022			Year Ended December 31, 2021			Year Ended December 31, 2020
Stock option expense for the year	$	—		$	229		$	712		$	412
Aggregate exercise date intrinsic value of options exercised during the year	$	—		$	2,311		$	4,559		$	305
Average assumptions used in valuing options with the Black-Scholes method:
Expected life of options in years, based upon historical experience	0			0			5			5
Risk-free interest rate	—		%	—		%	0.8		%	0.4		%
Expected volatility, based upon historical volatility	—		%	—		%	15.4		%	22.3		%
Expected dividend yield	—		%	—		%	2.6		%	3.3		%
Average estimated value of options granted during the year	$	—		$	—		$	14.40		$	15.27

We declared a one-time special cash dividend of $4.60 per share (the “Special Cash Dividend”) along with the fourth quarter regular dividend of $1.05 per share for the three months ended December 31, 2021. The Special Cash Dividend was declared to distribute a portion of the excess income attributable to gains on sales from asset dispositions during the year ended December 31, 2021.

As of December 31, 2022, there was zero unamortized compensation expense related to stock options expected to be recognized over a weighted average period of 0.0 years. Included in 2021 compensation expense related to stock options was $102 of expense resulting from modifications made to outstanding stock options because of the Special Cash Dividend paid during the year ended December 31, 2021.

In connection with the Special Cash Dividend, the number of options and exercise prices of all outstanding options were adjusted pursuant to the anti-dilution provisions of the applicable plans so that the option holders would be neither advantaged nor disadvantaged because of the Special Cash Dividend.

Cash received from 27,403 options exercised during the period from January 1, 2022 through July 19, 2022 was $2,101. Cash received from 55,546 stock options exercised during the year ended December 31, 2021 was $5,012. Cash received from 4,136 stock options exercised during the year ended December 31, 2020 was $258.

Information with respect to stock options during 2022, 2021, and 2020 is as follows:


Options	Number of Options	Weighted Average Exercise Price		Weighted Average Remaining Contract Life	Aggregate Intrinsic Value
Outstanding at December 31, 2019 - Predecessor	157,830	$	104.92
Granted	18,000	$	127.22
Exercised	(4,136)	$	(62.69)
Forfeited	—	$	—
Outstanding at December 31, 2020 - Predecessor	171,694	$	108.29
Granted	38,000	$	162.63
Exercised	(55,546)	$	90.24
Forfeited	—	$	—
Special cash dividend adjustment1	5,422	$	124.13
Outstanding at December 31, 2021 - Predecessor	159,570	$	123.87
Granted	—	$	—
Exercised	(27,403)	$	76.76
Forfeited	(132,167)	$	133.64
Outstanding at July 19, 2022 - Predecessor	—	$	—
Granted	—	$	—
Exercised	—	$	—
Forfeited	—	$	—
Outstanding at December 31, 2022 - Successor	—	$	—	0.00	$	—
Exercisable at December 31, 2022 - Successor	—	$	—	0.00	$	—

____________________________

1 In accordance with the applicable equity award plan documents, the number and exercise price of outstanding options have been adjusted because of the Special Cash Dividend so that the option holder maintains their economic position with respect to the stockholders.

Restricted Stock Units

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

In March 2020, the Compensation Committee of the Board approved an annual performance-based equity incentive program (“Annual Equity Incentive Program”) under the Company’s 2012 Equity and Performance-Based Incentive Compensation Plan. Under the program, certain employees will be eligible on an annual basis to receive RSUs based on the Company’s achievement of pre-established targets for (i) growth in net asset value per share, and (ii) stockholder value creation, each as computed pursuant to the terms of the Annual Equity Incentive Program. In the event the pre-established targets are achieved, eligible employees will receive the target award, except that the Compensation Committee of the Board may adjust the actual award to 75%-125% of the target award based on the its assessment of whether certain strategic and operational goals were accomplished in the performance period. RSUs awarded under the Annual Equity Incentive Program for the 2021 performance year will be awarded on or around March 1, 2022 and will vest in five equal installments, with the first installment vesting on the award date. RSU holders will earn dividend equivalent rights during the vesting period.

In connection with the Annual Equity Incentive Program for the 2021 performance year, targets for 2021 were achieved at the threshold total return level. As such, subsequent to December 31, 2021, 25,140 restricted stock units were awarded with a March 1, 2021 grant date fair value of $3,617.

Pursuant to the terms and conditions of the Merger Agreement, at or immediately prior to, as applicable, the Company Merger Effective Time, each Company RSU award of restricted stock units covering shares of Common Stock granted under a Company equity plan and each award of deferred stock units governed under the Company’s retirement plan for non-employee directors that were outstanding immediately prior to the Company Merger Effective Time was cancelled in exchange for a cash payment in an amount in cash equal to (1) the number of shares of Common Stock subject to the Company RSU Award immediately prior to the Company Merger Effective Time multiplied by (2) the Per Company Share Merger Consideration, less any applicable withholding taxes.

In addition, each Company RSU Award and vested Company Deferred Stock Unit Award (as of July 19, 2022) was additionally entitled, pursuant to the terms of each award, to a dividend equivalent payment in respect of the Pro Rata Dividend. Each holder of a Company RSU Award, Company Deferred Stock Unit Award and/or Company Option received an aggregate payment with respect to such award inclusive of the aggregate Closing Cash Dividend that such holder would have received had such Company RSU Award or Company Deferred Stock Unit Award been settled in Company Common Stock or Company Option been exercised, in each case, immediately prior to the close of business on July 19, 2022.

Information with respect to RSUs during 2022, 2021, and 2020 is as follows:


Restricted Stock Units	Number of RSUs	Weighted Average Grant Date Fair Value
Nonvested at December 31, 2019 - Predecessor	150,848	$	15,425
Granted	46,036	5,562
Vested	(73,256)	(6,991)
Forfeited	(2,120)	(290)
Nonvested at December 31, 2020 - Predecessor	121,508	13,706
Granted	76,266	11,948
Vested	(61,243)	(6,255)
Forfeited	(17,940)	(2,107)
Nonvested at December 31, 2021 - Predecessor	118,591	17,292
Granted	38,151	5,807
Vested	(22,209)	(3,003)
Forfeited	(134,533)	(20,096)
Nonvested at July 19, 2022 - Predecessor	—	—
Granted	—	—
Vested	—	—
Forfeited	—	—
Nonvested at December 31, 2022 - Successor	—	$	—

Of the 38,151 RSUs the Company granted during the period from January 1, 2022 through July 19, 2022, 2,874 were granted to our former Chief Financial Officer, 1,877 were granted to our former Chief Accounting Officer and 23,263 RSUs in aggregate to our former Divisional Vice Presidents.

As of December 31, 2022, there was zero unamortized compensation expense related to RSUs expected to be recognized over a weighted average period of zero years.


	Successor		Predecessor
	Period from July 20, 2022 through December 31, 2022		Period from January 1, 2022 through July 19, 2022		Year Ended December 31, 2021		Year Ended December 31, 2020
Restricted stock unit expense	$	—	$	3,106	$	6,685	$	4,475
Shares of common stock issued upon vesting	—		12,528		35,714		43,458
Fair value of vested common stock on vesting date	$	—	$	3,704	$	9,474	$	10,350
Cash paid for taxes in lieu of shares of common stock withheld upon vesting of RSUs	$	—	$	1,318	$	3,940	$	4,216

For the predecessor period, under the Retirement Plan for Non-Employee Directors (the “Director Retirement Plan”), the Company granted 1,000 shares of common stock for each year served as a director up to a maximum of 10,000 shares issued upon retirement.

For the predecessor period from July 20, 2022 through December 31, 2022, period from July 1, 2022 through July 19, 2022, the year ended December 31, 2021, and the year ended December 31, 2020, we recorded $—, $583, $1,098, and $761, respectively, in compensation expense related to the Director Retirement Plan shares.

In April 2021, we issued 10,000 shares of common stock to a director upon retirement with an aggregate fair value of $1,635. Compensation expense for these shares was previously recognized. No director retirement shares were issued during the period from July 20, 2022 through December 31, 2022, the period from January 1, 2022 through July 19, 2022, and the year ended December 31, 2020.