Q2 2020 PS Business Parks Inc Earnings Call
Good afternoon, and welcome to the P.S. business Parks second quarter 2020 earnings results conference call on webcast.
At this time, all participants have been placed any listen only mode and the floor will be open for your questions. Following the presentation.
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It's now my pleasure to turn the floor over to Jeff hedges P.S. <unk> Chief Financial Officer, Sir you may begin.
Thank you.
Good morning, everyone and thank you for joining us for the second quarter 2020, PS business Parks Investor Conference call.
The judges Chief Financial Officer with me today is our interim Chief Executive Officer, and COO, John Peterson, and our Chief Accounting officer trend gross.
Before we begin let me remind everyone that all statements other than statements of historical fact 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 in or implied by such forward looking statements.
All forward looking statements speak only as of the data 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 with the Securities and Exchange Commission.
Including our annual report on form 10-K, and subsequent reports on form 10-Q four makeup.
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 earnings supplement which can be found.
Yes business parks Dot com.
I'll now turn the call over to JP.
Thanks, Jeff Good morning, and thank you for joining us today before we get into Q2 results I want to give everyone an update on our president and CEO Maria Hawthorne.
Are you husband not on non coping medical leave since April.
She is recovering and remains on labor for the time be.
Our team wish her well, we're hoping for her full recovery so.
Picking up our team.
I want to take a minute and think each and every member of the TSB family for their tremendous efforts over the last several months.
In spite of the many challenges presented by this unprecedented pandemic our team delivered solid results.
Including impressively think production.
No transaction costs and steadily improving collection.
And all of our parks have remained open and functional throughout.
Our leasing team led us to an impressive 1.8 million square feet of production.
And first half 2020 leasing volume.
Almost 400000 square feet more and the same period and 29.
Retention during the quarter.
54.8%.
However, this metric was impacted by the plan moved out of a 288000 square foot independent customer at her Hathaway business Park.
Got it moved out retention was 64.4%.
Included in our Q2 production was 880000 square for at least in our Hayward business Park to a fortune 100 customer.
This lease represents approximately 40%.
Of the 460000 square foot vacancy I have been discussing the last couple of quarters.
We still have 280000 square feet bake it in that building on which we have good activity.
Regarding other large vacancy at 280000 square feet and penetrate springs here in Southern California.
Activity levels high.
Optimistic we'll be able to lease the space in the near term.
The effect of the government or shutdowns in Q2 did have an impact on our ability to push rents.
As we prioritize production in the mix of the pandemic.
Cash rent growth was 2.5% in Q2.
Industrial rent growth was higher at 4.4% well office rents declined by 6% in Q2.
As demand for office space loading.
Economic shutdowns in our markets are cold.
I would like to point out that although rent growth on the nearly 1.8 million square feet in leasing production in Q2 was lower than what we have reported in recent quarters.
We achieved this production with near record low transaction cost for P. S C.
$2.28 per square foot so the total portfolio.
Our strategy has always been and continues to be keeping our buildings well occupied while preserving capital.
Next I would like to provide an update on brentford at the mile. Our 411 unit multifamily development in Tysons, Virginia.
On our last call.
I mentioned, we were pressing the pause button to evaluate market fundamentals and pricing.
Over the last few months, we've worked hard with our JV partner.
And our contractor to secure improved pricing and we will commence construction this week.
Not only Ari pleased with our lower cost basis.
Also believed that demand these high quality well located multifamily units will be strong well we've had when we plan to deliver Bradford in the summer of 2022.
Also on the development side are 80000 square foot 8 million dollar multi tenant industrial development in Dallas is on track for completion in Q4 this year.
In Seattle, we are anticipating securing permits this fall for a similar 80000 square foot Multitenant industrial building and we are targeting delivery in Q4 of 2021.
Finally in doesn't market has been quiet.
We are starting to see some deals surface in our core markets.
Initial pricing guiding guidance on these offerings is essentially the same as it was pretty cold it.
Well actively pursue deals that we like they'll also remain disciplined as the markets reopened.
Now I'll turn the call over to Jeff.
Thank you JP.
I'll begin with an overview of our financial results for the second quarter.
Net income for the three months ended June Thirtyth was 25.5 million or 93 cents per share well that though was 55.4 million or $1.59 for sure.
Second quarter Epo includes 1.2 million of accounts receivable write off and an additional 2.4 million a noncash deferred rent receivable write off.
Each represent reductions NFL, a three cents and seven cents per share respectively.
Net operating income attributable to our same park portfolio was 65.7 million decreasing 3.6% from the prior year due primarily to the same aer and noncash deferred rent receivable write offs mentioned above.
Same park cash NOI was 63.1 million a 6.6% decrease from the prior year.
The noncash write off the deferred rent receivable did not impact cash NOI. However, we did exclude 4.5 million of deferred and abated rents from our computation same park cash NOI and were recognized the collection a deferred rent for cashing in why purposes in the period in which they are received.
Similarly deferred intubated rents are excluded enter computation of funds available for distribution, which was 44.6 million for the quarter.
I'll now provide an update on recollections.
To date, 94% of second quarter rents have been collected and less than 1% remain uncollected after giving effect to amounts that were deferred or abated.
Our recollection experience has progressive we improved each month since April and as of today, approximately 4% underlies rents remains uncollected.
In addition to the steadily improving recollection activity the volume of rent of rent relief request has slowed significantly over the past several weeks.
Subsequent to quarter end, we did it for an additional 1 million of July right. However, the majority of those agreements either work in progress at the ended the quarter or had already been agreed to in a prior month.
Turning now to the balance sheet, we ended the quarter with roughly 100 million of unrestricted cash and our corporate credit facility remains undrawn, meaning we have no debt outstanding.
As JP mentioned, we're excited to commence development on Brentford, that's a mile and we intend to finance the development with retain cash and cash on hand, and if necessary will draw on our credit facility, depending on the acquisition volume over the development period.
Lastly, before I turn it back to JP I'll point out that we paid a dividend of a dollar of five per share to common shareholders in the second quarter and our board recently declared a dividend of a dollar by pershare to be paid in the third quarter on September thirtyth to shareholders of record on September 15th.
With that I'll turn the call back to JP.
Thanks, Jeff.
Before we open the call for questions. That's we look towards the second half of 2020.
I would like to again acknowledge extraordinary efforts of our team and their dedication serving our customers.
I am confident in the resiliency in small business America, we are proud to serve as our customer base and I am pleased with our current momentum which sets the stage for the second half of the year.
With that no one else the culprit question operator.
The floor is now open for questions. At this time, if you have your question or comment. Please press star one when you were touchtone phone if at any point. Your question has answered you maybe move yourself from the Q by pressing the pound <unk>, we do ask that while you pose your question that you pick up your handset to provide optimal sound quality.
Thank you.
Our first question.
Craig Mailman.
Bank capital.
And Mr. mailing your line is open please check your mute switch.
Well move next to Blaine Heck. Your line is open of Wells Fargo.
Great. Thanks, just wanted to start on retention as you noted <unk> the first and second quarter figures were probably a pretty skewed by the parts are known move outs that you had.
As I'm looking out between now and the end of 20 to 22, you have over 50% of your leases expiring. So I'm, just trying to get a sense or what the.
Pension expectation is for you guys over that time period, and and whether you have anymore.
Except space that might be on offense or known move outs during that period of time.
Yeah Blaine.
You know if you pull out as you pointed out if you pull out that.
Hathaway exploration I mean, we were at 64% and there were two other larger three other over 40000 square foot customers that vacated.
During the quarter and if you pull those out we're in the low 70%. So I would expect as we look into 2020.
And even 21 and where our expirations are which.
Good portion in California.
Retention would get back to those normalized numbers, especially if economies continue to reopen so I mean look that's that's what we're relying on so if we get some.
Momentum with the economy I expect our retention to be in the mid Sixty's.
Turning to low seventys going forward.
To your question Okay. Yeah, that's helpful and that's just any any arch.
So he can talk about that that might be coming up in the next couple of years.
Nothing on the magnitude would <unk>, what we've been discussing today, we do have one in Dallas coming up later this year, which were looking at extending but nothing on the magnitude of what we've been talking about.
Okay. That's helpful and so you noted in your press release that you plan to or maybe you said expected additional rent relief requests going forward I'm can you just get a little color on that could you comment on how many of these you know rent relief discussions you're having for the future you know how much release are we talking about and I know.
<unk>.
It was might apply to.
Yeah. Glenn this is Jeff so as of right now, we have a little less or right around 1% of our customer base on a revenue basis has opened rent relief requests a in our evaluation Q can't really say what percentage of those will or will not be.
Approved but certainly that is a quite a bit lower than what we were evaluating a you know a month or two or three months ago. So as we look forward. It's hard for us to predict you know how many additional crest will come in a that's gonna be dependent on the environment in which we find.
Herself Sen from a macroeconomic perspective in Q3 Q4 beyond but right now as I said in my prepared remarks, the volume of requested have come in have decreased significantly from where they were a few months ago and absent any other changes in the economy, well, what we expect to see that kind of the decline.
In a activity.
Okay, Great. That's helpful. Just and then maybe one more for you.
Like you guys are able to negotiate the cost the construction down at the graph at the mine, which is great. Obviously those costs are one of the most important inputs as you're looking at pro forma yield so.
During if you guys can give us a your targeted yield on that development now that that cost has been reset.
Yeah, but we were I'm real pleased with our ability.
Touched on to lower our basis in Bradford and our partners in this project realize that yeah. We're ready to go if we could if we could demonstrate some savings and we've done that and as I mentioned in my remarks, where we're starting work here. This week. So that's very exciting in terms of returned.
I mean, I think we're gonna be in me in that high Fives Sixs range on Penford and you know realizing this cost saving so I'm real pleased with our efforts there and we do expect that when we deliver the thing in two years that there will be good demand that submarket. So.
We're excited with our execution so far in getting Brentford started.
Does that answer your question.
Absolutely thanks, guys.
Thanks Bye.
Our next question is from Eric Frankel of Green Street.
Oh. Thank you would you mind, just getting a bit of more color or detail on the break out of the answer industries that have been either offered rental payments or where rents were written off in the second quarter and weren't deferrals occurred in July and wherever they might going forward just to kind of going up.
So what we're looking at.
The shape of economic recovery.
Yeah, Hi, Eric This is Jeff so as it relates to the deferrals that were granted it really ranged across.
A number of industries.
And geographic location and certainly you know some some segments of our customer base performed better or were less impacted by the shutdowns than others, but you know the business our customers that rely on on in person foot traffic.
So you know the the gyms the the restaurant locations that we have the reach of the showroom retail that we have a at some of our parts were impacted more than others. So they got a disproportionate amount of the deferrals and and certainly the abatements.
But you know as I said, the deferrals kinda ranged across a number of industries and geographic locations. So it's hard to pinpoint a specific segment of our customer base that was a predominantly attributable to the rent relief request that were granted.
Oh, Okay. So it's it's fair to say then that you know based on just kind of what the virus to tell us if we kind of live in operate for for a while that Jim's in a restaurant.
Those you know, we're you know by health officials burnt commodity close for the next.
Six months to a year or so we should we should continue to docs rental revenue by 1% to 2% per month for that and I don't want you to present during that time period. If that's generally the right way to think about it.
I think that might.
I think in general the way you're thinking about is logical but I don't know that we could extrapolate that percentage exactly going forward because a lot of these.
On a lot of these customers have pivoted they've changed their revenue model. For instance, you know we have some restaurants that have embraced the delivery model or the curbside pickup and have been able to return to revenue generation. So I would hesitate.
On saying you know you that extrapolation, but certainly yes. The ER segment of our portfolio that does remain on that in person commerce is going to continue to be affected probably more so than E commerce related tenants.
As the effects of the pandemic continue on.
Oh, Okay, and then can do you mean would you mind sharing what your rent collection staff, including you're already offered deferrals for July 2020, how does that compare I understand that it's progressing relative to last year, how does that compare to last year in July 2019.
You know I don't have the exact percentage of collection as of July Thirtyth 2019, Eric but it is you know at 4% uncollected, a that would be significantly higher than where we would typically end a month, where usually around 1% to 2% uncollected at the end of.
Given month, a in normal times.
Okay. That's helpful.
A question I'll I'll just go back in the Q.
Somebody after this.
But that's question but.
You know obviously you know the notion that cost decrease for the brand for product.
Yeah, when but it looks like fundamentals are are we always occupancy deteriorated kind of meaningfully for for.
For the first project at the model he talked about apartment fundamentals, there and where there you know obviously I'm sure eat the malls nonoperating assets.
That region, but he is populates the near term outlook will look like there.
Let's get a sense, whether you know fundamental you have apartments in that area have changed.
Sure Eric.
As you can imagine the.
You know when the pandemic hit in March and then kind of held for March and then we over April May we had a lot of move outs and generate activity, we had to drop Brett. So we did that and then kind of in late June early July move out kind of.
Moderated and in fact over the last.
A few weeks, we're pushing occupancy backup.
Towards 92% or so so we made progress we think the worst of it is behind us.
And there's the outlook for the near term is choppy for multifamily in Tysons, but we like really like the demographics of that <unk> submarket for Highgate and Brent for as we look ahead, you know two years out when we're delivering brentford. So I think overall, it's gonna be.
Choppy, we've been able to reverse the decline occupancy Highgate and trending nicely. This month and our anticipation is you know the rest of the summer in early fall.
We should continue that trend and then Brent for like I said, we like where where we're going to be in two years time.
That out.
Oh, yes. Thank you.
And once again to ask a question that is star one to ask a question.
Our next question comes from Manny Korchman of Citi. Your line is open.
Hey, everyone. Thank you I'm just wondering if you guys have looked at or or thought about how he is either.
Impacting that once you have and they look like <unk>.
Burns off.
People coming in for for more.
For all the costs.
Yeah, I'll start and then turnover is yet, but when you say how P.P.E. the impacting our ability to collect rent is that what sorry, <unk> P to P. P. P loans, no masks and gloves, sorry, [laughter], what we were our gloves in math when collect threat, but yeah I think it's a good question.
You know, there's it's going to be watching to see what happened.
As that PPP rolls off and then if the economy continued to roll to roll open, which you know maybe we're going to see here in the second half year, although it certainly will be choppy.
We think that our customer base is stabilizing.
With each passing week, so the effects of the P. P P.
I think you, though will be minimal to our to our customer base, Jeff did you want to anything there.
Yeah, I mean, I think just a couple of things regarding the the P.P.P. loan program and the other government program government sponsored a seamless programs that are out there as we've mentioned before our process that we develop for evaluating rent relief requests, we we required and we verified that customers who came to us.
Looking for a relief a we're exploring and applying for all the relief the government spots or lead programs that were available to them, including the P.P. loans and certainly a large number of our.
Customers were eligible for those loans and benefited from those in general what we've seen is that those loans for our customer base have worked as intended which was to create a bridge to allow them to keep payroll I'm sorry to keep a head count on staff or or re higher headcount and you know as I mentioned on a early.
Your question in some cases pivot their business model to adapt to the current environment and so as JP. Just said, we've seen that our customer base has been pretty resilient and and in many cases have returned to.
No businesses have returned.
And in some cases, a I think that the effects of the shutdowns and the environment find ourselves and has drawn out further than what was originally anticipated and so we will we have seen a very select few a return rate relief requests as that and I suppose.
Yes, that's something to do with the PPP funds that those customers received being depleted, but certainly we feel good about where our customer base stands right now and we think that's a as I mentioned before.
The request that are coming in today are are quite a bit lower than what they were earlier in the year, a few months ago, and we hope to see that continued positive momentum.
And Jeff I think earlier in the call maybe with your or.
You talked about sort of the retail uses and show rooming uses in your portfolio being most impact that do you happen to have stats available is that how much your portfolio is that retail or show room or or similar use.
Yeah, you know we don't have those exact stats I think you're referring to there are many but we do have in our earnings supplement a breakout of our portfolio.
That's defined by asked I see code.
We will look into I'm trying to make some of those more detailed stats available and in the future, but as of right. Now we don't have those exact percentages to provide.
So I think your point is you have it by tenant types. So type attendance at the sign the lease but not necessarily their use within your portfolio.
That's correct.
Perfect. Thanks, guys.
And what's going to ask a question that is star one on your Touchtone phone, we have a follow up from Eric Frankel of Green Street.
Yes, just afraid you still get into trends in terms of market rents or you know rent. It seems like decelerated <unk> rent change is on re lease rollover Tito diesel every little bit maybe survival more color on July activity, and whether just obviously the lack of foot traffic and the in it.
[laughter] actually transact and indeed business and the second quarter, maybe maybe that's a they did a little bit.
Sure, let me take a stab at that I mean.
As we as we go through each of our markets I mean, not all market is created not all markets are created equal in terms of pushing rents. It certainly in our office portfolio you can imagine there's not a high demand for office that we have more aggressive with rent there and if you look towards.
Some other markets, we still had some positive rent upside in northern California, and even in certain submarkets in southern California, and especially.
In the last.
Call. It 30 days maybe to your point.
We have the ability in certain submarkets it in certain properties to push back. So when this thing started early on in the in the second quarter, we didn't know where it was going I'm notwithstanding the increase in cases around the country we've been operating.
Fairly I wouldn't call it normally but we've been doing tours socialism tours virtual toward we've been able to as you saw in our production kind of get to normal numbers, there and we expect.
To the extent, we can keep that velocity, we will have better pricing power not not a ton, but we'll have better pricing power in certain submarkets in certain prototype as we head into the summer in the fall.
Hello.
Hi, guys, maybe you get touch upon some of the markets. We had the most significant deceleration and cash run rate change from first quarter second quarter. So it looks like a Seattle Orange county onto a lesser extent San Diego that it has turned negative there so any any other color.
For those markets would be appreciated <unk>, yeah sure for San Diego, specifically that portfolio is really was really impacted initially by some businesses that just couldn't make it and that we didn't we didn't feel are viable going forward so to push back up occupancy.
We did drop rents and you'll notice occupancy in San Diego is almost 96% so for these small and.
Sometimes it's hard to do you think back to April may even parts of June when there was a lot more nothing theres not uncertainty, but for business is looking for space. There were not a lot of small companies out looking for space. At this pandemic started so some didn't make it as I said, but.
In order to attract that activity to our parks.
We had to drop bread and we did that and we were able to keep San Diego It almost 96% leased in the quarter real happy with that same thing.
With Orange County, well not a lot of activity in the second quarter in Orange County.
But we were able to keep occupancy you know over 93% there so in order to get if you're a small business looking for space.
In a pandemic.
And there's availability, we want to get that.
Prospect to our space, so we're going to where appropriate be aggressive and then certain parts of ours are still hubs at least until finer still well Ethan we're not having to drop rents there. So.
Really a park by park situation the last marking you asked about was.
Oh.
I'm sorry.
Seattle.
Yeah, Seattle, let me just like here real quick.
Yeah, Seattle, we've had really good rent growth as you know over the last several quarters and I expect that and most of our <unk> most of our experts that there we should get back to two positive <unk> growth in Seattle here as we push into the remainder of the year.
See I feel pretty pretty well occupied fourth at 97%.
Okay.
Thank you appreciate it.
Thanks, Eric.
And this concludes our question and answer session I'd be happy to return the call to Mr., Jeff hedges for any concluding remarks.
Alright. Thank you everyone. We hope you all stay safe and look forward to talking with you again soon have a good afternoon.
Thank you. This does conclude today's conference call. Please disconnect your lines at this time and have a wonderful day.
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