Q4 2019 Earnings Call
Good afternoon, and welcome to the PS business Parks fourth quarter and full year 2019 earnings results conference call and webcast.
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Yeah. So my pleasure to turn the floor over to Jeff hatches PSB Chief Financial Officer, Sir you may begin.
Thank you.
Good morning, everyone and thank you for joining us for the fourth quarter 2019, PS business Parks Investor Conference call. This is Jeff hedges Chief Financial Officer.
Here with me are Maria Hawthorne, CEO, John Peterson, COO and Tritan gross CIO.
Before we begin let me remind everyone that all statements other than statements of historical facts included in this conference call are forward looking statements.
These forward looking statements are subject to a number of risks and uncertainties many of which are beyond PS business parks control, which could cause actual results to differ materially from those set forth then or implied by such forward looking statements.
All forward looking statements speak only as of the date of this conference call.
PS business parks undertakes no obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise.
For additional information about risks and uncertainties that could adversely affect PS business parks forward looking statements. Please refer to the reports filed by the company, but the Securities and Exchange Commission, including our annual report on form 10-K, and subsequent reports on form 10-Q and form 8-K.
We will also provide certain non-GAAP financial measures.
Reconciliation of these non-GAAP financial measures to GAAP is included in our press release, and earning supplement which can be found on our website that PS business parks Dot com.
I'll now turn the call over to Maria Thank.
Thank you Jeff Good morning, and thank you for joining US today, let's start with an overview of the company's current condition and some perspective on full year Twinkie 19 performance.
Jeep he will provide details on operations and markets and Jeff will provide financial update.
We had a strong finish to a great year as favorable industrial metrics continued and showed no signs of slowing.
The overall annual results, we reported a reflective of the strong market conditions, we are experiencing and in 2019, we had same park cash and a wide growth of 5.5% with cash re leasing growth of 8.3% on 7.4 million square feet.
Of leases executed our team was busy as they completed nearly 2000 transactions during the year.
We can easily say that we are beyond peak rents in all of our industrial markets and rents continue to climb we remain encouraged that we do not see any signs of deceleration and all of our markets are experiencing job growth low unemployment in confidence remains high.
Hi, among our customer base.
Despite the growing supply at large tenant industrial we still see almost no new competitive supply a shallow they multi tenant buildings. This lack of new competitive supply has led in part to our decision to recently commenced construction of an 83000 square foot industrial.
Building on vacant land at one of our parts adjacent to DFW Airport. The building will be LEED silver certified have 20 foot clear height and eat sweet. Additionally, we are pursuing a similar development of an 80000 square foot class a industrial building at our 212 this.
Park in our Seattle market. We are currently finalizing plans and expect this development to commence late this year.
When he 19 was also a good year for multifamily project Highgate at the mile which continued to maintain occupancy around 95% well average effective rents grew 5.7% and in a light green to $5.9 million.
As a result, Highgate success, we're proceeding with the second phase of development Brent for adopt a mile which will be a 411 unit class a luxury apartment complex brafford will be built on land that is currently non income producing and construction will start in April with plans.
Delivery beginning in Q1 of 2022.
We continued with our initiative in selling office parks that we do not intend to redevelop and successfully completed the sale of the three office flux parks in Mckenzie County, Maryland that we announced last year totaling 1.4 million square feet for a combined gross sales price of 100 instead.
38.8 million.
This was done in two separate 10 transactions and the final building close last month at a gross sales price of 30 million.
We were able to exchange these proceeds into the purchase of ones left spark acquisition located in Santa Clara totaling 79000 square feet and three industrial Park acquisitions located in Los Angeles totaling 691000 square feet for a combined total purchase price of 140.
<unk> point Fivemillion.
Oh for acquired parks or adjacent to or near existing P.S. B properties, all have below market in place rents and require little capital repositioning.
In summary, the success of 2019 will carry over into Twentytwenty. The efforts of our leaders in the field and here at the home office mean that the company is well positioned coming into the year and conditions remain favorable to driving internal growth.
The balance sheet is primed for major expansion and we continue to work on development opportunities and sensible acquisition targets.
Now I turn the call over to our COO John Peterson.
Thanks Maria.
I will take you through fourth quarter statistics by market beginning on the West coast.
Northern California deliberate outstanding metrics in Q4, and let us in leasing production 560000 square feet and rent growth 15.9%.
One highlight in Q4 was the execution of a 213000 square foot.
10 year lease.
With only six weeks of downtime to Amazon.
This is one of the two larger meaning Q4 expirations I mentioned on our call last quarter.
And subsequent to year end, we didnt take back a foreigner 60000 square foot building as a user expanded out of our park.
You have the ability to divide this class a industrial building the three separate units and are actively marketing this space.
With his desirable east pay location, we have strong mark to market potential and we will pursue a credit user that is a good fit for the park.
Well, we do have activity this space could be down for multiple quarters.
The southern <unk> the economy in southern California, keep chugging along.
And helped our team delivered another productive quarter [noise].
As always our 320000 square feet of leasing was powered by small business America highlighted by the 2200 square foot average deal size.
Occupancy in Southern California was steady at 95.4% and Los Angeles led the way in rent growth at 13.9%.
As you May recall in Q3 of last year, we acquired Hathaway Industrial Park in the Los Angeles mid counties market and that asset is performing well for us.
We haven't known move out coming in Q2 of this year slightly under 3000 300000 square feet a great opportunity for us to release is space at a healthy mark to market rent increase.
In Seattle, our team grew occupancy by 240 basis points to 97.9% as we expanded one customer into a 36000 square foot vacancy and back filled a 20000 square foot space they vacated.
Retention in Seattle was 14% due to a determining terminating 140000 square for user in Q4.
To accommodate an existing customer.
These expansions helped us put push rent growth to 10.2%.
Both situations demonstrating the importance of multi building parks, but also having efficient business relationships with our customers.
Moving over to Washington, Metro, which is buoyed by unemployment of less than 3%.
Improving decision, making by government contractors and a robust technology sector. Our team had another good quarter, delivering 419000 square feet of leases.
You saw favorable trend with rent declines improving and negative 3.8% helped by strong retention of 75.6%.
Same park, Virginia occupancy is 93.5%, which as I mentioned before is 740 basis points better than our competitive peer set.
Our in VIP Industrial Park that we acquired in 2018.
Which remains that are non same park for portfolio is fully reposition 90% occupied and honest way to stabilizing in the mid nineties.
The South Florida industrial market is still benefiting from strong trade dynamics.
From time to time, we may lose a customer due to uncertainty with the various trade issues, but we are able to re tenant quickly normally through existing customer demand.
We signed 276000 square feet and 56 deals.
Generating robust rent growth of 10.7%.
Finally, with the economic engine moving forward in Texas.
We had success in virtually all our metrics leasing production delivered 449000 square feet retention of nearly 73% rent growth of 3.5% and occupancy grew by 190 basis points to 93.3%.
As we begin 2020, I'm bullish on our customer base and the favorable dynamics in our markets confident our teams are once again take advantage of these fundamentals.
Specifically with 25% of our portfolio expiring in 2020, 90% of which is industrial product. Our teams are poised to have another strong year.
Now I'll turn the call over to Jeff.
Thank you Jay Z.
As Maria mentioned at the opening of the call. We're very pleased with our fourth quarter operating results a great conclusion stronger growth.
Net income per per common share for the three months ended December 30, Onest was one dollar per basic and diluted share.
Same park cash NOI grew by 6.6% on the strength of 7% cash rental income growth.
On the year same park cash NOI was up 5.5% on cash rental income growth of 5.4%.
For the year, our total portfolio cash re leasing growth was 8.3% setting us up for continued strong underlying growth in 2020.
So for the quarter was a $1.34 per share while core AFFO was $1.65 cents per share.
We incurred and accounting charge of $11 million related to the redemption of our series U.N.V. preferred shares during the quarter, which has been excluded in our presentation of core FFM.
This noncash charge represents the only difference between core FFO NFL.
I'd also like to point out that we issued our series D preferred shares in late October but the related redemption of the series you and B shares did not complete until December thirtyth, resulting an effective double distribution for those shares for most of the quarter, creating a drag on core EPS up.
With redemption of the series you and B shares completed at the end of Q4, there will not be any lingering effect from this and 2020.
Funds available for distribution or essay D was 194.9 million for the year, an increase of 6.9% from the prior year.
In addition to cash NOI growth the year over year increase in F. Baby was driven by lower total recurring capital expenditures, but for 36.9 million down from 37.5 million in 2018, a decrease of 1.6%.
For the same park portfolio recurring capital expenditures were 12.3% measured as a percentage of an ally in 2019 generally consistent with the prior year.
Finally, I want to point out that we paid a dividend of a dollar of five to common shareholders in the fourth quarter, bringing our total dividend payout in 2019 to $4.20 per common share.
For the year RFMD distribution payout ratio was approximately 75% and we retained 48 million a free cash after distributions.
Our continued ability to retain significant free cash flow from operations, coupled with our fortress balance sheet provides us with the ability to move swiftly like creative acquisition opportunities present themselves.
With that we'll now open the call for questions operator.
And at this time, if you have a question or comment. Please press star one on your Touchtone phone if at any point. Your question has answered you may remember yourself by pressing the pound key we do have said well you pose your question you pick up your handset to provide optimal sound quality. Thank you.
We'll take today first question from Manny Korchman with Citi. Please go ahead. Your line is open.
Hi, everyone.
On the last call you discussed retaining the that last building in Maryland, it sounded like you're going to keep a long term and sold it did I just misinterpreted your your message in the last call or did something change.
So let us.
Hey, Manny Yeah, I'll take that and good morning, I know you're right we had intended to keep it.
As a when we went out with the portfolio early last year earlier last year, you know a the pricing for that building, which had a long term do you say user in it didn't come in where we wanted it to and then late in the year, we got an.
Elicited a little white hot for a number that you know met our pricing expectation. So we close very quickly on it.
Got it thanks, and then in your press release, you talked about a terrific 2020.
Was wondering if you could <unk> and I realize you don't give guidance, but was wondering if you could sort of help us put some type of.
Sales are bookends or whatever you want to call them on how you're defining terrific.
In terms of same store growth in terms of acquisition opportunities in terms of cash flow growth just give us some people watch on.
Sure well I think just internally with the portfolio that we have S.J.P. mentioned, 90% of our expirations are industrial and those metrics are just or.
Our still strong so there's that secondly, we've gone through our disposition. So any acquisitions that we have will be additive.
And thirdly, you know, Jeff and Triton did a great job last year and taking our employees preferred from 5.4% down to 5.1%. So I think that whatever way you look at it you know.
It should be a great year, I mean, all metrics are point pointing north for us.
Thank you.
Sure. Thanks Manny.
Well take our next question from Craig Mailman with Keybanc capital markets. Please go ahead.
Everyone.
No isn't that you guys do not give guidance I was just curious if you could help bridge for Q1 Q with the impact of known move outs associate downtime the l. tip I kinda give us.
Some context around some of the moving parts.
Hey, Craig this is Jeff so burst I'll quickly just address the l. tip so as.
You pointed out and as I'm sure everyone saw we did announce that our compensation Committee and the board recently did approve a new equity plan.
We're still working through.
The accounting for that but that will result, and incremental stock based compensation expense in 2020, beginning in Q1, and we don't have precise numbers to give you at this time, but we can't say, we expect the incremental impact of that for the year 2020.
To be roughly in the neighborhood of 200 million.
NGL <unk> 200, I'm, sorry to [laughter] 2 million. Thank you very much 2 million Oh to Gionee and then another roughly.
Half a million would run through cost of operations.
So that's on the none the Delta piece and then.
I'll turn it over to JP, who can talk little bit about the impact of the a large move outs.
Yeah. So Craig so we have as I mentioned, we do have a big vacancy that hit us.
In the first quarter of 20, we have activity on it and you know, it's it's in northern California in Hayward. So.
The best marks in the country, so I like our chances there of marking that's a market. We're gonna be patient as we always are as I mentioned to my prepared remarks, we were able to execute really well on a 200000 square foot lease also in the bay area to Amazon, which I'm not suggesting we're able to do that on this big space.
But there is lot of activity in the Bay area on industrial so we like our chances there we like our chances amid counties exploration, we have on that on the Hathaway acquisition.
We did last year, so where we have vacancy for these large move outs, we really like the market dynamics, we really like the activity, we're seeing and it affords the two things one mark to market and we have the ability because of the activity to be selective in the users we take so.
It's a those expirations and those that one vacancies integrate spot and.
Great building and we're excited to capture that but we're going to be patient too.
Does that help.
Yes, it does seem to put some numbers from the they can see so the Amazon lease you said.
How much downtimes that six months.
Six weeks is Oh six weeks sorry, yeah. They kinda talk you didn't see Craig they took occupancy in mid November.
And so that's the reason we took a slight dip in fourth quarter. The 460000 foot space went dark in mid January.
So that's the one that J.P. is referencing.
And that that when will impact, obviously, northern California, because that's 460000 feet on a 7.3 million square foot portfolio.
And kind of from a red perspective is that for 60 at like a six $7 <unk>.
Well, we'll see but no, let's just say vacated.
<unk>.
<unk>.
That would be about right yeah, probably.
Robinson.
Okay, and then Amazon.
What did those runs escalate to on a new lease.
Well I can't tell you exactly but let's say we market to market.
And is that's reflective in our stats that we announced for Q4 DOCSIS, we could you just kind of it.
16, 70% kind of mark to market as a guide.
That deal is baked into those numbers.
Okay, and then just separately you guys do have a fair bit of development going on out the second multifamily assets.
Somewhere between 100 340 million to finish do that plus the two.
Smaller industrial does that sound about right.
Yes.
That's right, but Craig I would say that not all obviously, that's going to stretch out over the entire development timeline. So certainly not all of that would be incurred in 2020.
No no I'm, just getting that I mean, it seems like you guys. It's about 63 million a cash.
At year end your thrown off you know 40 million a year me do even need to tap preferred or the line to fund. This is this girl.
Fund those cash on hand, or how should we think about that.
Yeah, I think you. It's a good observation we are in a strong cash position in and of course, we have the line at our disposal should.
There'd be a need but absent any large acquisition.
Opportunity, we likely would not need to raise any additional capital or perhaps even go out on the line and 2020 to fund the development activity that we've announced.
Alright, thank you.
Thanks, Greg.
We'll take our next question from Eric Frankel with Green Street Advisors. Please go ahead.
Oh, thank you.
Just a couple of questions here first just given the amount of lease roll that you highlighted for 2020 I understand you guys don't give any sort of guidance, but given the expected eat it moved up has already occurred in northern California would you expect that your average occupancy would actually decline next year versus 2009 or this year rather versus.
2019, just based on the mental lease roll that you guys have to Chuck for.
Yeah. The at least for all Eric you know first follows normal for us and <unk>, we can't wait to get out it because in almost all cases, there's mark to market opportunities in that knows expirations and our retention being you know plus or minus 70%.
And if we don't retain we have the ability and strong markets to backfill that pretty quickly. So we welcome to lease roll and then to your point on the occupancy yeah. There's it if we don't lease that space. This year, the big space in nor Cal we we could see it declined approximately VW 20, I mean vis-a-vis 19 so.
So that's right your observation is right.
Okay, and just remind me they should not have to other vacancies that we're coming to you had three they can see coming due in northern California in Q4, and I guess I'll see one with toppled with Amazon that maybe you can let us know what happened the other two.
Yeah, we renewed the other one yeah okay.
We took care to the three in this the big one I mean, they doubled in size. So unfortunately for us Oh can keep that deal gotcha. Okay. What are the de for 60 as part of that Okay. What part of those three okay understood you got.
Yeah, and then I think you kind of reference in your opening remarks, just about your acquisition <unk> acquisition development pipeline. There would have it right that you actually looking at development opportunities, no or or or something of the of that as well.
Eric I mean, I land prices are sky rocketing so.
You know, we don't really go out and when we're not like building a development pipeline by going out in buying land in developing.
On the to the two industrial development are literally just like extra parking spaces that we have at both of these parks Freeport in Dallas and then on T. 12, and Seattle and then of course, what we're talking about what.
The multifamily that's the mile acquisition, where we've got 700000 square feet of office and then we got the right. So this is a big strategic initiative to develop take that offices and convert it to about 3.1 million square feet of density, 92% of which can be resin.
Eventually so but the next two development that's a mile are both in locations where their current we wouldn't have to take any of our office and a lie offline. So so right now that's kind of low hanging fruit on the development front for us.
Okay, that's what you're referring to but any thoughts. There was you know given that you guys are you know you're so confident in managing your smaller tenant properties in pursuing you know there maybe some developers that maybe aren't as adept at managing you know small tenant property that you need by vacant assets that are that were recently developed in.
Maybe not in southern California, but maybe in Dallas, or South, Florida, or somewhere else, where you guys can you don't get some sort of yield premium for buying some vacancy.
You know what Eric I'm right now occupancy is pretty high everywhere.
So it's hard to find a value add and if you think about the you know the acquisitions, we did last year, both in northern and Southern California. They were all very highly occupied but you know anywhere from 20% to 35% in below market in place rents. So that's where we're going to be able.
Well two to improve Vienna, why on those or you know.
Prices, they're just going up in industrial and one other things I haven't appreciated lately is that how my here some of our big tenant appear industrial companies are now appreciative of the multi tenant small base sites. So so anyway.
So we do have institutional composition when we go for these small tenant a acquisitions now that we didn't used to have.
Okay. Thank you for the clarification.
Sure. Thanks, Eric.
And as a reminder, newstar in one to four questions today.
Well go next to Anfield Palone with JP Morgan. Please go ahead.
Hi, Thank you in the fourth quarter I was wondering if you can talk about the same store growth.
Your I think the weighted average occupancy was down year over year.
But the same store NOI growth was pretty high I'm. Just wondering if there was anything in there just walk through kind of what drew drove that.
Yeah, Hey, Tony I think what you're seeing is that you know while there was a slight decline you know weve been quarter after quarter throwing up really good rent in rental rate increases from expiring rents can you rent whether.
Sure. It's on incoming customers are renewing customers and I I think what you're seeing is that improved rent growth because usually that takes you know anywhere from one to three quarters to take effect a and then also is the deceleration of.
The rent decreases in Washington Metro are also helping because that's kind of in an anchor on that's driving along a little bit, but the Washington D.C. market as J.P. mentioned in his comments is you know really improving and we're actually.
Very hopeful this year that we'll see those negative rent growth numbers go positive.
Okay, but I think everything about it in the aggregate if you're.
Leasing say, 20% another portfolio each year at a 5% to 10% increase and and rents.
And then you have some contractual bumps on the <unk> remaining portfolio would seem like that ties with the you know were 4% or serotype same store NOI growth. It just it just struck me that you're up in the fixtures in the fourth quarter, you know with occupancy you know kind of down right and so I'm just wondering why if this continues into 20.
20, <unk> same store NOI growth Gonna Similarly look.
You know and that's.
North of 5% kind of range or I.
Tony I would given the big vacancy in northern California, I mean that like I said that that is impacting the entire companies occupancy I would be a little bit cautious, particularly.
First and second quarter.
Okay, and then just on the deal pipeline, a you mentioned how competitive it is but if we look at where where your stock trades and kind of somewhere in the world mid fours, maybe implied cap rate.
Could you even clear that kind of a return with with what you're seeing out there on the acquisition front or is that even yes.
South of that.
Are you asking I'm, we we are definitely buying assets that when stabilized or returning well above.
Well above that number.
Well I mean, everything that we've bought we feel will be accretive the FSRU and that's 80.
Okay. I mean, when you have to your pipeline today and what's what's in the market or can you find yields that are you know in the fours or higher aurs, there's the market just that that skinny.
No, it's well, it's a competitive market and Ah you know, but but there's still deals to be found and we're looking for both off market as well at off market deals as well as those that are marketed the sounds more steel in Santa Clara that was actually an.
If market deal that you know and it was just that is located just set the street from our office there in Santa Clara.
But it's Tony this is Jeff I'll. Just meant you know had you know are the competition. We're up against everybody is benefiting from favorable cost of capital dynamics right now so competition.
As intense on on a lot of the acquisition opportunities that we're looking at him. So but I was curious that certainly we're where we are getting aggressive and going after acquisition opportunities those opportunities that stabilize well above our required return thresholds.
Okay. Thanks, guys covered everything else that.
Okay. Thanks, Tony.
We also have a follow up question from Eric Frankel. Please go ahead.
Oh. Thank you maybe I just want a thoughtful what Tony was was getting too in your fourth quarter results. It can you maybe better explain how you can adopt to your mid 6% same store NOI growth. This quarter, just keeping that cash releasing spreads where they were and contractual releasing bumps are they are and your average oxy went down with her.
Is that some sort of free rent burn off or some big rent increase from at least that without a couple of quarters ago that boosted your numbers. It looks like some of that might have been in northern California.
I think.
Clarification.
Yeah, Hey, Eric This is Jeff <unk>, there's a number of things as you know that will factor into this and you cited a couple of.
The 8.3% cash releasing spread that we reported for F. Why 19 for the year.
That is going to obviously take time to.
Take effect in the cash rental income numbers that we report.
Both because you know that is an 8.3% over the year, but also you're right. There's in certain cases, there is free rent periods and other things. So what you're seeing in Q4 is the culmination of what has transpired in the several quarters.
Prior to that so we're benefiting you know not only of course from the Q4, releasing spreads, but the releasing spreads from the several quarters prior to that so it's it's hard to on this call triangulate for you all of the various pieces, but certainly there's a lot that is going to factor in.
To get to that 6.9%.
Right, but was there a big rent bumps within the leases that wouldn't leases signed for the past couple of quarters, <unk> Navy's and wasn't factored that 8.2% of cash releasing spreads estimate for figure.
And in general our contractual annual rent increases have remained pretty consistent.
Over the year.
Okay. Okay. Thank you.
And speakers. It appears we have no further questions I'll return, the Florida, Jeff hedges for any additional or closing remarks.
All right well. Thank you everyone and we look forward to speaking with you all again in a few weeks have a great after net.
And this will conclude today's program back free participation you may now disconnect.