Q3 2020 PS Business Parks Inc Earnings Call

Good afternoon, and welcome to <unk> third quarter 2020 earnings results conference call and webcast.

At this time, all participants have been placed in a listen only mode and the floor will be open for your questions. Following the presentation if.

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Now my pleasure to turn the floor over to Jeff hedges P.S. <unk>, Chief Financial Officer, Sir you may begin.

Thank you good.

Good morning, everyone and thank you for joining us for the third quarter 2020, PS business Parks Investor Conference call.

This is Jeff as Chief Financial Officer with.

With me today is our interim Chief Executive Officer, and COO, John Peterson, and our Chief Accounting officer try and 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.

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 although.

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 with 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 earnings supplement which can be found on our website at PS business parks Dot com.

I will now turn the call over to JP.

Thanks, Jeff.

Good morning, Thank you for joining us today, and we hope each of you and your families are doing well and staying healthy.

I'd like to start the call by thanking our team for delivering strong results in Q3, and they're quite hard work and dedication through these challenging times.

We successfully maneuver through the ongoing pandemic with nearly 2 million square feet of leasing.

Cash rent growth of 5.2% and also improve rent collections back to pre pandemic levels in our northern California markets.

Year to date the team has executed over 300000 square feet more leasing production than we did in the first nine months of 2019.

At a transaction cost per square foot rate that is nearly 20% lower than the prior year.

Further expansion of our existing customer base remained robust during the third quarter and year to date, we have had nearly 200000 square feet of net expansions from approximately 125 customers.

Well the path of the pandemic is uncertain. It is clear that our our core small business customers are resilient <unk>.

Active and in the vast majority of cases, they have figured out how to successfully operate their businesses in this environment.

I would like to discuss a couple important highlights since our last earnings call.

First I am very pleased to report that yesterday, we closed on pick an industrial park in Alexandria, Virginia in an off market transaction.

Because of the 246000 square foot three building multi tenant park currently 100% occupied with an average tenant size of 41000 square feet.

The park is located inside the capital Beltway and complements our seven existing parks in that Submarket.

Giving us 2.1 million square feet and a strong market share in an industrial submarket that is currently 96% leased.

Although pickett was 100% occupied at acquisition our plan is to reposition this asset over the next couple of years by subdividing two buildings.

And in doing so reducing the average unit size to 11000 square feet.

Which will enable us to accelerate leasing and drive rents higher for last mile users inside the beltway.

Competition for industrial assets, it's highly competitive as everyone knows.

However, this acquisition is an indication that even in this crowded environment, we can still source value add industrial parks that fit our strategic objectives at attractive yield.

Second I am pleased to announce that we recently completed a long term lease for the 288000 square foot vacancy at her Hathaway Industrial Park in Santa Fe Springs, California. This lease which is to a credit customer came with cash rent growth of over 36%.

Subsequent to quarter end, we leased an additional 40000 square feet to the same customer in the same park.

Both leases have commenced although the 42000 square foot lease is nodding included in our Q3 production figure figures will be included in Q4.

Regarding our other large vacancy in northern California, our team continues to pursue a strong credit tenants to fit well within this part.

Our expectation is to identify the right user or users for this space in the next few quarters.

As we look ahead through 2021, our expirations returned to normal levels with no single expiration exceeding 100000 square feet or.

Our scheduled expirations in 2021, or 5.5 million square feet, roughly 1 million square feet less than in 2020.

Turning now to rent growth cash rent spreads in Q3 average 5.2%.

Industrial cash rent growth remains favorable at 9.3% well flex was essentially flat and office rents declined by 3.6% as demand for office space remains muted.

Before I turn the call over to Jeff I want to briefly mention that are 80000 square foot multi tenant industrial development in Dallas is on track for completion next month and we're starting to see good interest in the building.

In Seattle, we continue to pursue permits for a similar 80000 square foot multi tenant industrial building and we are targeting delivery in Q4 of 2021.

Finally, as we announced last quarter, we have commenced construction on our 411 unit multifamily development spread out the mile in Tysons, Virginia.

With delivery expected in 2022.

As we have stated previously these developments represent an exciting opportunity for us to expand in our existing markets.

Now I'll turn the call over to Jeff.

Thank you JP.

Begin with an overview of our financial results for the third quarter.

Net income for the three months ended September Thirtyth was $50.9 million or one dollar and 11 cents per share.

FFF was 54.2 million, while core FFO was 56.3 million were $1.61 per share.

During the quarter, we incurred 1.7 million of accelerated amortization of stock based compensation expense associated with the retirement of our former president and CEO Maria Hawthorne.

Separately, we incurred 300000 of non Capitalizable demolition costs associated with our new multifamily development Brent <unk> mile.

These two non recurring charges were added back in our presentation of core NFL and were also excluded from our calculation of F.A.D., which was 48.3 million for the quarter.

Net operating income attributable to our same park portfolio was 67.5 million decreasing three tenths of a percent from the prior year.

Well same park cash NOI was 66.2 million a 1.1% decrease from the prior year.

As you'll see in our press release and 10-Q Aer write offs decreased significantly from Q2 and were in line with the prior year. The 1.1% decrease in same park cash NOI is primarily attributable to lower year over year occupancy as well as 600000 of net deferred and abated rent, which is consistent with the prior quarter.

We have excluded in our calculation of same park cash NOI.

I'd like to take a moment to provide a little more color on rent deferrals, which were 1.7 million in Q3.

The volume of rent relief requests continues to subside and in the month of October we have granted effectively no additional deferrals and currently have open rent relief requests from only 1% of customers.

Additionally, repayment of deferrals ramped up in the third quarter, and we collected over 98% of repayments build yeah.

Year to date, we have agreed to defer $5.5 million we.

We billed and collected 1.3 million through September Thirtyth and have an additional 1.9 million scheduled to be repaid in Q4.

The majority of the remaining 2.3 million is scheduled to be repaid in the first half of 2021.

Regarding rent collections in general we continue to post higher collection rates each month and as JP mentioned, we have returned to pre pandemic aer levels and all of our markets outside of California.

As you have heard from us and from many of our peers recollection in Californian markets continues to be more challenging than other markets due to the ongoing state and local ordinances.

Turning now to the balance sheet.

We ended the quarter with roughly 118 million of unrestricted cash some of which was used for acquisition of picking industrial Park, which we acquired in an all cash transaction.

Our credit facility remains Undrawn and we have no debt outstanding.

We intend to utilize cash on hand, and retain cash to fund our current and planned development projects and will utilize our credit facility as necessary as acquisition opportunities present themselves.

Lastly, I'll point out that we paid a dividend of one dollar a five to common shareholders in the third quarter and our board recently declared a dividend of one dollar a five to be paid in the fourth quarter on December thirtyth to shareholders of record on December 15th.

With that I'll 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 sales.

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Well take todays first question from Manny Korchman with Citi. Please go ahead.

Hi, <unk>, It's Christmas Korea Infirmity quick question here following the announced acquisition at <unk> Industrial Park. How are you thinking about the transaction markets today did your expectations for pricing on this asset change at all <unk>, resulting from coated.

Sure Chris.

You know as I mentioned briefly the acquisition market remains highly competitive for.

For industrial properties in all of our existing markets I'm really pleased with the way our team executed on this.

And as as I mentioned, it was an off market deal and we've been tracking this deal for some time, but we were able to.

To jump in and put this into our portfolio with some discount to pre Kobe <unk> pricing and I think the execution that timing is really good for us. So really pleased with how we're able to pull this off and like I said, when we started to read to engage with the seller.

The timing was good in the our ability to do a quick close our proven ability as a as an investor in this market I think allowed us to pull this off.

Off in an off market way and at a you know what we believe is a discount to pre covered pricing.

Does that answer your question Chris.

Yeah. That's helpful color I, just one quick follow up here as it relates to California, you know with smaller reopenings that threat of Lockdowns legislation in the works. That's what are your thoughts on the on the broader California market in general today.

Sure well you know, that's where were red quarter as you well know and look things in California have been slow to reopen and if you look at our.

Our customers in California really.

The the way that they demonstrated the resiliency to operate in this market you know what I'm, putting aside restaurants and.

And those kind of costs are a consumer focused businesses retailers and such.

I'm I'm pleased with what's going on in California in terms of our our core customer base and they they've proven for the most part that they can get through this and I think California, you know, we're not out of it yet as I mentioned, but I, our core customers have done well and get retail and restaurant.

And those kind of things are struggling because those for the most part have not reopen in California in there and we don't know when that is going to end, but our core industrial customers in California are doing fine.

Right. Thank you.

And the next question comes from Craig Mailman with Keybanc capital markets. Please go ahead.

Hi, everyone. This is already kind of an entre Craig can you guys. Please provide an update on the CEO and CIO search.

Yes, so I've no update to offer now in the process continues on both the CEO and the C.I. a search and.

Soon as we have something to announce we certainly will but there is no update at this time.

Okay. Thank you and that are moving up market fundamentals does it feel like were kind of.

And we should anticipate kinda less erosion to same store should the macro recovery continue its pace, given kind of where rent spreads of calm quarter over quarter and kind of the way collections are pacing and conversations with tenants Im just kind of looking at the demand dynamics does it feel like we're kind of past the bottom.

Yeah, I'd say it feels like we're past the bottom and I think if you look across our markets as Jeff pointed out our collections are pre co bid levels, you outside of California, and and business. It for the most part in our markets is you know once I certainly would say it's back to.

Normal, but like I said before I believe that our customers have figured out a way to operate to deliver their products to manufacture their products to.

Meet the demands of their own customers in this pandemic now look we've never been through a pandemic whenever the the world's never come out of a pandemic. So I can't tell you what is what it's going to look like in a few months, especially with cases rising but what I can say is when we talk to our customers and as I mentioned before you know, we're having customers actually.

Expand in the pandemic and I view that as a good sign so yeah I think we're past the bottom as we head into the fourth quarter here and then at 21.

But it doesn't mean the road wont be bumpy from time to time as well so does that help.

Yeah, but just kind of more from like.

You guys kind of typically prioritized occupancy over right when conditions get like this do you think that this is kind of the end of.

Or maybe as this is kinda where rent roll Downs night subside and rent spreads would continue to kind of accelerate as we continue here.

Or do you see it kind of maintaining its its pace of being kind of flattish to maybe down.

If you if you look at where our rents were down it was primarily in the office and our office portfolio and there's not which is primarily in in our Washington Metro Division, a industrial and flex were up to flat and so I see that trend continuing there's gonna be pressure on office.

Well, we have a small percentage of office there will be pressure there I think to to attract new deals for sure and even on renewals, but as we look forward you know into this shoot to the Reaming.

2020 and into 21, I think our industrial and flex are poised to to do well office is going to be it's going to be a challenge. So.

Got it. Thank you and then one last one if I could what what's the appetite for acquisitions here do you guys see activity kind of picking up into next year, and given where the stock is trading well.

Issuing debt and preferred that kinda record lows, how should we think about financing those deals if so.

Well, let me let me talk we definitely have an appetite to grow the business right now we have the balance sheet, which Jeff will touch on a second to go do that and execute and the picket deal was a great example of our ability to do that fairly quickly.

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Having said that the competition for industrial assets in our core markets is very intense right now we're not the only ones that can go buy deals, but I think we're able to go source deals strategically and in many cases off market that will allow us to put some capital to work what we'd like to see is more more deals come to market right now.

There's not a lot of deals in the market.

We'd like to see more of those come to market. So we're working very hard to extract some some deals.

And we hope more come to market in 2021, but we have the balance sheet as Jeff will touch on to go do that [noise], yeah, just to pick up on that I mean, the you're right in pointing out that the recent comps that we've seen in the preferred market and then also with debt placements those sources of capital remain attractive.

And so Ah well look to you know all sources of capital, including utilizing our credit facility, which has 250 million of untapped capacity to move quickly when additional acquisition opportunities present themselves.

Got it appreciate the color. Thank you.

Sure.

And as a reminder, it is star and one on your Touchtone phone for questions.

Next to Eric Frankel with Green Street. Please go ahead.

Oh. Thank you just touching upon your your now smaller office footprint, given kind of what's happened with the 10 dynamic and how that might shape help folks work in the future is there any thought maybe.

Maybe we'll wait until a CIO or CEO, Oh, gosh coming to the company in terms of what that portfolio will look like in the next couple of years, you think you'll accelerate dispositions or maybe some redevelopment initiatives aside from the type project.

Sure Eric you know we've been we've been pretty I've spoken about this in a as.

As it relates to our office portfolio, where it makes sense and where we don't feel we have the ability to redevelop a particular park or park, we're gonna strategically look at how we can exit.

Some of our office and we've done I think a pretty good job over the last couple of years of doing that and that hasn't changed and won't change you know having said that we do have some pretty nice office parks. It we think or have the ability overtime.

It's for a higher and better use and we're going to continue to explore those options as well. So I think we're a steady as she goes on that strategy and try and reduce our office portfolio, where it makes sense you know over the next couple of years.

Interesting that helpful or just.

Just going back to I guess and all your question on on the bottom. If you will so your your leasing spreads certainly looked like ever copper mostly versus the second quarter I guess the exception looked like the East Bay. So is there any explanation in terms of why rental rate growth seemed to have slowed significantly or turned negative in that market versus every other.

Industrial flux or market.

Yeah, Eric no nothing specifically.

Related to the East Bay at all so.

As we.

As we go through the next.

A quarter or two or a year or two we're going to be able to mark to market as the economy recovers a pretty quickly our average lease term as you know Eric is little over three years, and we are going to be able to is this market turns around we're going to be able to get to market rates pretty quickly and but specifically regarding east.

Hey, there was nothing unusual there to.

To speak of.

The market, not especially weak or strong it's just maybe just a bit sad to see what.

Whatever whatever idiosyncratically, but that came due.

Yeah No no we have we have higher market rents there we've been as you know we've been increasing our mark to market over in the East Bay over the last several years quite nicely and so.

There, maybe one or two situations, but nothing I mean, the eastbay still a tight market for us and that's where we have the vacancy as I mentioned earlier, so, but but no I think that's still a good market and it's still an active market not maybe not as active as it was a year or two ago.

Clearly because the cobot, but but there's still activity up in northern California to be clear.

Gotcha Gotcha, all right and just a final question yeah.

You kind of referenced your California portfolio, what they would be a.

More toward the and the moratorium.

You have the.

They are bad up kinda quite.

Quite the retail business <unk> what percent of your portfolio in California, It's actually open for business.

Oh, your 10 minutes already.

Yeah, then the VAT I mean 90 high 90% are open for business, Okay, yet clear when we talk about the moratorium that thought evictions.

Right and payments and it's kind of things not opening no almost I can't think even restaurants are able to open and serve on patios and outdoors you know in California will you know Eric I mean, so yes sure sure.

Actually I would say this that were closed that no no no no all of our I mean, there may be one or two but but oh.

All of our California customers are open for business, maybe not to extend it they like in terms of indoor seating in restaurants, and you know we may have a fitness center to that you have to have restriction things like that but that's really at all of our other businesses are wide open.

Okay. That's all I got thank you.

Thanks, Eric.

What's you're going to start on one for any final questions today start and one well pause for a moment.

And it does appear we have no further questions I'll return the floor to Jeff hedges for additional or closing remarks.

Alright, Thank you everyone for joining us here today, and we look forward to talking with you again soon have a great afternoon.

Thank you and this does conclude today's conference call. Please disconnect. Your line at this time and have a wonderful day.

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