Q4 2020 PS Business Parks Inc Earnings Call
Good afternoon, and welcome to the P. S business parks fourth quarter and full year 2020 earnings results conference call and webcast.
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It is now my pleasure to turn the floor over to Jeff hedges Psb's, Chief Financial Officer, Sir you may begin.
Thank you.
Good morning, everyone and thank you for joining us for the fourth quarter, 'twenty and 'twenty PS business Parks Investor Conference call.
This is Jeff hedges Chief Financial Officer.
With me today is our interim Chief Executive Officer, and C O O, John Peterson, and our Chief Accounting Officer, Trey and growth.
Before we begin let me remind everyone that all statements other than statements of historical fact included and 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 and or implied by such forward looking statements.
All forward looking statements speak only as of the day 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 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 J P.
Thanks, Jeff and good.
Good morning, Thank you for joining us today, and we hope each of you and your families are doing well and staying healthy and.
As we approach one year of dealing with this pandemic I would like to recognize and thank our team for everything they achieved in 'twenty and 'twenty.
It's been and challenging year for everyone and we are looking forward to a 'twenty 'twenty, one and that hopefully will be closer to what we all know what is normal.
Today, I will discuss a few Q4 highlights and touch on the acquisition environment and close with our view on 'twenty and 'twenty one.
I'll start by taking a moment to mention that there is no update to give today on the open executive positions, which we've discussed previously we remain excited to round out our executive team and move the company forward in 'twenty and 'twenty one.
Now turning to our Q4 and full year 'twenty and 'twenty results I am pleased with our performance on many fronts leasing production and transaction costs rent collections and.
And importantly, the resiliency of our customer base.
Our customers have been demonstrated on many levels their ability to pivot and adapt to the challenging economic climate.
Many businesses have emerged stronger and are better prepared to capture growth in 'twenty and 'twenty one and this is demonstrated by expansions of our existing customers.
In 'twenty and 'twenty, we had nearly 500000 square feet of expansions from 141 customers with Q4, bringing approximately 100000 square feet of expansions from 34 customers.
Additionally, as Jeff will discuss later rent collections are essentially back to pre pandemic levels.
We ended 2020th strong leasing activity for the fourth quarter totaling almost $1 9 million square feet and for the full year 'twenty and 'twenty, we completed seven and a half million square feet, which is more total production and then we achieved in 2019.
As we mentioned in our earnings release in December we signed 138000 square foot lease at our Wegman building and Hayward, California with strong rent growth over 40%.
This deal is consistent with our plan to subdivide the space, which was originally 460000 square feet.
And I have one unit left of approximately 140000 square feet on which we have strong activity and anticipate releasing it this year with rent growth consistent with this most recent deal.
Speaking of rent growth cash rent spreads and Q4 average 5.3% industrial.
Industrial cash rent growth continues to lead the way at eight 8% well flex and office rents were essentially flat.
Regarding the acquisition environment as most of you know competition for industrial assets remains highly competitive.
And the deals we have tracked and the last few quarters we.
We are seeing investors and many times competing for industrial assets and our core gateway markets.
Despite the heightened competition, we are encouraged by the number of deals and our pipeline and our team is actively underwriting several opportunities.
We are poised to utilize the strength of our balance sheet and put capital to work in 'twenty and 'twenty one.
On the development front, we have completed our 83000 square foot multi tenant industrial billing and Dallas, Texas on time and on budget and.
The property is attracting strong interest.
And it is attracting a strong and should we expect that it would and we anticipate the property will fully leased in 'twenty and 'twenty one.
In Seattle.
Plan to commence construction next month on a similar 80000 square foot multi tenant industrial building at our 212 business Park.
With delivery of targeted for Q4 of this year.
And we look ahead and we fully realize a pandemic is not behind us. Yet. However, we are encouraged by positive trends with our customers our markets and overall industrial operating fundamentals, we have seen early in 2021.
Demand for both new and renewal leases is healthy and rent collections are essentially back to normal stock.
Starting the year with occupancy at 92, 9%.
And no single scheduled expiration greater than 90000 square feet during the year. The P. S. P team is poised to capture our occupancy upside in 'twenty and 'twenty one.
Building upon the momentum from the second half of 'twenty and 'twenty am comforted that PSB is well positioned for a strong year in 'twenty and 'twenty one.
Now I will turn the call over to Jeff.
Thank you J P and all.
I'll begin with an overview of our financial results for the quarter and year ended December 31 2020.
Net income allocable to common shareholders for the three months ended December 31 was $26 9 million or <unk> 98 cents per diluted common share and for the 12 months and it was $124 6 million or $4 52 per diluted common share.
Core <unk> was $57 9 million or $1 66 per share for the quarter and $229 5 million or $6.57 per share for the year.
And Q4 cash net operating income attributable to our same park portfolio was $69 2 million a decrease of 0.5% from the prior year.
This decrease was primarily a result of lower same park weighted average occupancy, which was 92.0% and Q4, 'twenty and 'twenty versus 94, 4% and the prior year.
However, the decrease in occupancy was mostly offset by increased cash rental income from the occupied portion of our same park portfolio as cash rental income per occupied square foot increased three 6% and Q4 versus Q4 of 2019.
For the year same park cash NOI was $267 4 million a decrease of 0.9% from the prior year similar to Q4. The decrease for the year was primarily driven by lower weighted average occupancy in 'twenty and 'twenty, which was 92, 4% versus 94, 5% and 2019.
While cash rental income per occupied square foot increased 2.4%, excluding the effect of COVID-19 related rent deferrals and abatements the increase and same park cash rental income per occupied square foot was $3 four per cent.
As J P mentioned previously this increase and net income generated by the occupied portion of our portfolio provides momentum as we look to recapture occupancy in 'twenty and 'twenty one.
F. A D was 48.0 million for the three months ended December 31, 'twenty and 'twenty, representing an increase of six 7% from Q4 2019.
For the year F. A D was $190 1 million a decrease of two 4% from the prior year.
Relative to core F F L. They change and F. A D for both the three and 12 month periods benefited from efficient use of capital and our teams were able to generate significant lease production with minimal transaction costs for.
And for the year same park recurring capital, which includes both the transaction and maintenance capital was 11, 5% of NOI versus 12.3% and 2019.
I'll now take a moment to provide some commentary on rent collections and rent relief.
As presented in our earnings release, and 10-K filed last night, there was very little new rent deferral or abatement activity in Q4.
Further we have collected 97.1% of deferral repayments scheduled to be repaid two day.
And 2020, we granted $5 7 million of Covid related rent deferral of which $3 2 million was repaid through December 31, and.
And an additional one 9 million is scheduled to be repaid in 'twenty and 'twenty one.
Regarding a R Q4 was effectively a normal quarter for rent collections and we ended the year with and a our balance almost identical to the balance and the prior year and our write offs were 0.2 million.
Our second straight quarter of normal a R. A our write offs and volume.
California remains more challenging for rent collection than any of our other markets due to the continued moratoriums and the state and local orders that remain in place. However, our teams have done a terrific job of managing our list of delinquent tenants down to a small number of holdouts.
Turning now to the balance sheet.
We ended the quarter with roughly $69 1 million of unrestricted cash and our credit facility remains undrawn and we have no debt outstanding.
We are funding our current and planned development projects with cash on hand, and we will utilize our credit facility as necessary as acquisition opportunities present themselves.
Lastly, I'll point out that we paid a dividend of a dollar of five per share to common shareholders and the fourth quarter and our board recently declared a dividend of $1 five per share to be paid and the first quarter of 2021 on March 31 to shareholders of record on March 16th.
With that I'll open the call for questions operator.
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Thank you. Our first question is coming from Emmanuel Korchman with Citi. Please go ahead. Your line is open.
Hey, everyone.
Jeff just wondering where maybe this one for JP on the sort of leases.
You're trying to run rate. This quarter is that on you, making that choice is that the tenants wanting some flexibility with the lease or something in between.
Yeah, Hey, Manny.
It depends on the situation, but and maybe a little bit of both.
You know, we think that in Q4, you know that we have.
The market wasn't fully recovered yet and we think theres better things ahead and as you can tell.
So we may have wanted to keep lease from shorter.
And in some cases, the customers Werent sure of their business going forward and so they decided to do that but you know the way our teams work. The lease deals is on a situation case by case basis, and so I would say its a mixture there, but certainly at times, we have made that decision.
And then on the acquisition pipeline and you sort of wrapped up with what does that pipeline look like right. Now if we had to guess how much you might transact in 'twenty and 'twenty, one could you help us ballpark that.
I can't put a number to it but what I can tell you is.
With each succeeding.
Succeeding weak you know every couple of weeks, we're starting to see more activity, which is encouraging.
And our core markets and even where we're starting to see activity in markets that we're not and so.
And we're actively underwriting like I said before a number of these transactions. So it's starting to build momentum and and as you know.
And in mid year, and 'twenty with Covid.
Because your margin went silent for several months, but right now we're encouraged by what we're seeing out there.
In terms of deals coming to market. So don't have a number for you, but we are encouraged that we're gonna be able to put our capital to work here in 'twenty one.
But that's it from me thank you.
Yep.
We will move next with Craig Mailman with Keybanc. Please go ahead.
Yes, Hum, Jeff appreciate you've given us kind of what the AR and deferred rents to be paid back in <unk> and 'twenty, one or all of that $1 9 million is that all of the same store.
It's not all and the same store, but as you would expect given how much of our portfolio is comprised by our same store portfolio, it's primarily coming from that.
So, okay, well and I apologize I can look it up but what what's the same store as a percentage of the total pool right now.
It's roughly 90 just under 96%.
Okay.
Okay. So and I know you guys don't don't give guidance here, but clearly the pressure is kind of ebbing here from from Covid.
So I I don't know if there's a way you could give us some some building blocks to look at some.
Some of these pieces you guys have kind of in the and the bag so to speak versus what your kind of ending 2020 NOI is for the same store pool. So I mean, it seems like you get most of this $1 9 million, maybe the $1.3 million of abatements likely doesn't recur.
And then you have this lease you guys just didn't Hayward and maybe some free rents and from some of the other bigger leases that you guys have are you guys completed and in 'twenty and 'twenty, maybe burning off so I am not trying to get the guidance, but just could you give us some pieces of the building blocks of same store from what.
It's kind of in the bag already and maybe include like what rent bumps are on average.
Sure I will try and try and address at least some of that Craig I mean, I went and describe anything necessarily is in the bag, but as you've pointed out.
You know there are certain things that we have laid out in our press release in terms of the components of revenue.
Or items that are going against revenue such as the abatements that you know as we sit here today, we would expect.
And I expect in 'twenty and 'twenty, one we would have lower abate and that volume than we did in 2020.
Similarly, deferral volume has dropped off significantly in Q4, and if that trend continues to hold a deferral.
Deferral repayments would become a tailwind for us.
And in 2021 so.
Those I would point you to what we've included in our press release.
And specifically for the same park portfolio on those components of revenue and you can make your own assumptions in terms of how those will trend for us and in 'twenty and 'twenty, one and then as it relates to just rent bumps generally are.
Our average rent bump on her and multi year leases is roughly about 3% thats been the case for some time and it remains the case today and of the new leases that we've been signing recently.
That trend continues and so on average a multiyear leases tend to increase at least on the base share component by about 3% per year.
Okay and then on the the 140000 is at least you guys didn't heyward.
Was any of that in and <unk> or is that all going and kind of be recognized and.
In 2021 in terms of day benefit.
And that Youre talking about the large lease that we announced a 140000 square feet and Q4 correct.
Correct, Yeah that that lease was signed at the very end of the year. So the cash flow benefit of that lease will be entirely recognized in 'twenty and 'twenty one.
You give a sense of what a quarterly or annually.
And the uplift is from that or the just the total rent.
Craig I don't have that specific data available to give here today, but.
And I can tell you that.
With with leases of that nature. Typically there are you know we will give some free rent concessions on those and those leases and and this particular lease the free rent period is actually relatively short so we would expect.
To benefit from a cash flow from that particular lease transaction for most of 2021.
And is that like a eight or $9 per square foot lease or is.
Is it in that ballpark.
Yeah go ahead, yeah, yeah, that's in that ballpark and I can set and my prepared comments, Craig I mean, we were.
And we're excited about getting the next vacancy leased as well I can't tell you and because we I don't know but.
We do we are seeing good activity in that neighborhood of rent and and.
And Fortunately, there's good demand so our hope is to get that thing.
Put to bed here in the next couple of quarters, but as I've said before in previous calls me and we are and <unk>.
Being selective and the credit we're being selective with the user so we want to do the right deal for long term and.
And so where we are going to be patient there, but theres enough activity that we're confident that we can get something done this year.
Okay, and then just on the financing I know you guys have the series W that comes in October.
And where do you guys think you could price right now for preferreds or is this the time to maybe mix and some you know 10 year unsecured debt to give you guys a little bit more lift as you do acquisitions on the refinancing.
Yeah.
As you pointed out we do have the opportunity later this year.
To potentially refinance that series, a preferred and as we've said.
And numerous times over the past few quarters.
For the right deployment opportunity, we will take a very serious look at our senior unsecured debt as a means of financing.
Acquisition opportunities are those growth opportunities.
So JP you spend a little time early or talking about our pipeline.
If we are able to.
Acquire a meaningful amount of real estate. This year that will be considered as a potential means of financing those growth opportunities as it relates to the preferreds, specifically you know preferred as a.
We like it and we continue to like it we'll evaluate.
What if anything to do with the potential refinancing opportunity at those preferreds when they come due later this year, but for right now.
No commitment either way on that.
Where do you think you could price today and preferreds.
You know Thats, a hard question to answer specifically because of the lack of comps and the market I would say based on what we saw transpire in the.
At the end of last year, and Q4, and just what we're seeing in terms of where our strip yields are trading on our existing series.
Probably.
In the low to mid four area, certainly we would expect or hope that we would price inside.
The last issuance that we did.
Which was four and seven eighths, but again that's.
Subject to market movement, and and could change.
And without actually being in the market on an operating at its really hard for us to.
Pinpoint that with any precision.
Alright, great. Thank you guys.
Thanks, Craig.
Okay.
Thanks, Blaine Heck with Wells Fargo. Please go ahead.
Thanks, Greg Good morning out there and just to kind of continue along those same lines of Craig's question, Inc, and I'm, sorry, if I missed it but it didn't sound like you guys talked about dispositions as a source of capital.
Do you guys see sales as a viable source of funds or is it maybe because of office pricing and.
And the lack of visibility.
You know that we should assume that you guys are looking more towards kind of debt and and other sources of capital this year.
Yeah, Blayne and good question so.
As we've done you know from time to time and past, we've we strategically moved out of some office assets and we don't see as redevelopment opportunities and we will continue to evaluate.
Some of those parks is as the market recovers from the Covid.
Situation.
And to your point and as Jeff just talked about we would certainly look if we excuse me we can find some deals to put some debt potentially on.
On the balance sheet too to be acquisitive here, but.
I think it could be a combination and.
And of course, we are cash too we're ready to put to work. So it could be a mixture of each and we'll see how the office market recovers and what what's in play for some of our office portfolio that we don't think we can redevelop moving forward does that answer your question.
Yes that makes sense very helpful.
And then second question from me can you just talk about any shifts in demand you guys are seeing as a result of the pandemic and I'm just thinking about office, especially there's been a bit of the movement. We've seen from coastal high cost high density markets to more sunbelt or even fringes, maybe some more suburban markets.
Given that you guys have exposure on kind of both sides of the equation I wanted to see if you had you know any insight or we're seeing any noticeable differences and demand.
Throughout your markets.
Yeah, Blayne, so we monitor that and kind of very closely and Inc.
And are on a weekly basis and so what we're starting to see on the opposite first is.
In the last let's call it.
Four to six weeks, we're starting to see and as you know Blaine our office portfolio, primarily in Washington D C area and and it's all suburban and so frankly, we're seeing more office demand than you might expect.
We're seeing.
And where that's coming from we've we've done a deal most recently with the traditional suburban office space with the homebuilder.
We there are some we.
We did a deal with the government for office, we did a deal with a.
A government contractor <unk>.
Surprisingly.
We're able to and you know as I pointed out earlier, our rent growth was essentially flat for office, which again is another positive surprise so the.
The suburban office market is probably better than you would expect coming you know more and while we're still and the pandemic, but in this environment.
So and then shifting to the other side of the coin.
Yes, there has been some out migration from California, as well and well documented.
And as our stats would point out where we haven't seen any of that yet anecdotally sure and there are companies that are moving.
Two two other sunbelt markets.
As we've seen but theres still has good demand and southern California, Northern California as I've touched on we're seeing good demand.
Yes, I think theres some out migration from from California, but I think there's still a lot of innovation and growth to be realized and our California markets and and we're capturing that as you saw and a rent growth stats for California, and the activity. We're getting so we were a little bit concerned about it and we're still monitoring it really closely plane, but.
We're encouraged by the level of activity, especially I would say.
Maybe as we kind of got in mid January.
And maybe this COVID-19 kind of that surge has died down a little bit maybe we're seeing more activity.
And it shows in our income of our touring activity and things like that in California, specifically.
So I don't know if that helps.
Yes.
Okay I appreciate the commentary thanks.
Sure. Thanks Blayne.
Next question from Vince <unk> with Green Street. Please go ahead.
Hi, good morning, I have a follow up.
Do you expect shorter average lease terms to persist moving forward due to tenant preferences or do you think 'twenty and 'twenty was more of an outlier year due to the pandemic.
Well certainly 2020 event to your point was an outlier year is I think any.
Any user of industrial space was trying to figure out what to do and what was going to happen with the pandemic.
But I think industrial rates are still strong vacancy is very low still and and all of our markets. So there is rent pressure.
I think we'll start to return here for our product type and and our core customer base.
And then how do customers and what do we want.
And how do we want and position our properties and.
And like I said earlier.
And the call.
And look park by park deal by deal and how long do we want and lease terms and if we can find the right space and the right credit we're going to push and the right rent, we're going to push for a longer lease term.
But in certain situations. We may we may keep it short so it's really a push pull kind of on every situation, but I do think the leases were shorter in 2020 because of the uncertainty of the pandemic and demand going forward does that answer your question.
Yes, Thank you and makes sense one more from me could you discuss the differences and leasing capex between new leases and renewals and it looked like transaction cost per unit.
And right around three box in 2020.
Could you split that out between new leases and renewals just trying to get a sense.
And if lease terms are shorter for example, and you're renewing more frequently and could that have an impact on that the capex profile of the business.
Yeah.
Yeah, Hi, Vince.
And good to have you on the call here today.
Certainly are we.
We've always been more efficient with our transaction capital on our renewal leases the new leases and that has not changed in 2020.
And we haven't broken that out.
And anything that we've released.
To date, but I can tell you that and I'm just looking at the stats here.
We're roughly around $1 a square foot I'll call it $1.11 per square foot on transaction costs on our renewal leases and that worked for renewals that were signed in the fourth quarter. So hopefully that gives you. Some context in terms of the day difference between the efficiency, we've been able to achieve on the renewals.
Versus new leases.
Yeah, that's perfect. Thank you.
And from Anthony <unk> with JP Morgan. Please go ahead.
Alright, Thanks, and just in terms of the core portfolio and thank you for what gets your your occupancy and 18, and 19 and it seemed to be and call it 94.5% or so range on balance should we think about that as being you know what what sort of a return to normal it looks like for you guys.
Hey, Tony Yes.
Yes, I think that's that's where we need to be where our sweet spot is kind of 95.
And if we're in the 95, there is a good balance here between rent growth and occupancy and <unk>.
If you get too high and maybe you're not pushing rents enough right so and.
With our with our rollover we're.
We're keenly focused on that balance and.
There are certain parks as you will know that it's.
Paul and <unk>.
Really lease and we can push rents higher and those other parks, where you may have.
Our vacancy and and we need to we need to be a little more aggressive, but yeah and if you. Even if you think about the big deal and Hayward that was vacant became vacant last year.
That's what appointing a little over a point and a half of a full occupancy and so once we get that thing leased.
We're pushing we're back kind of from <unk> 95, or close to the 95% not quite there.
Yeah. Our goal is to get get to that 95, maybe push it beyond that and.
And look if there is.
Because if momentum that we're seeing early on and 21 continues and I think there's a chance to get there later in 'twenty, one, but we're going and you know we're going to have to.
We're going to have to benefit from the pandemic going away and and other improving fundamentals, but that's where our sweet spot is.
Okay, and do you actually I mean excuse me. Our next question like any other impediments to getting there in 'twenty, one because it seems like hayward's it's.
And it's getting back filled and you talked about I think 440000 square feet of expansion space from existing tenants and the fourth quarter alone.
Plus business getting back to.
To be normal and so and it's just it sounds like a timing issue.
Yes, it's going to and it's going to take some time and you know as we sit here with our mass on right I mean, we're still not through this year.
And there is still some uncertainty with business, but we think the trends are favorable as I had mentioned and.
We do have a vacancy and in Texas and Las cleanest, it's that we need to backfill.
And I'm confident we'll get some of these other leases that I mentioned backfill, but yes, it will take.
It will take some time here, but I don't think theres any major impediments, how long is it.
We continue to see the improvement and macroeconomic conditions across the country.
But I think we can get there towards the end of the year.
Okay, and then just last question.
Yeah.
And I have mentioned this with a man who's question, but.
Just on the deals you're considering on the acquisition side and the stuff you're seeing and the market any color on just where initial yields would be and just.
And where the market is going to add on transactions.
Well, Tony and the initial yields are lower than we'd like but.
As you know and as you've heard from others.
Yields and getting compressed.
In the force for sure for quality industrial and Gateway markets and.
And many cases, if you've seen from some of our our peers below four for initial yields and so how do you underwrite growth how do you underwrite.
And what the future looks like that's the question, but certainly for our core markets like ours and even.
What used to be known as secondary markets and.
I mean, those are getting even more compressed these days as well so I think initial yields and first year to our and the force potentially low force.
Okay, Thanks from health and health.
Okay. Thank you Tony.
And if you do have a question you May press star one on your Touchtone phone at this time.
Barbecue.
Yeah.
And once again start and Hawaii.
And there appear to be no further questions. At this time I would now like to turn the floor back over to Jeff hedges for any additional core closing remarks.
Thank you everyone for joining us today, we look forward to talking with you again soon and hope you enjoy the rest of your day take care.
Thank you.
And I'll conclude today's conference call. Please disconnect. Your line at this time and have a wonderful day.
Yeah.
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