Q2 2021 PS Business Parks Inc Earnings Call
Good afternoon, and welcome to the P. S business Parks second quarter 2021 earnings results conference call and webcast. At this time all participants have been placed in a listen only mode. The floor will be opened for your questions. Following the presentation. If you would like to ask a question at that time.
Press Star 1 on your Touchtone phone.
If at any point. Your question has been answered you may remove yourself from the queue by pressing the pound key.
If you should require operator assistance. Please press star zero. It is now my pleasure to turn the floor over to Jeff hedges.
E Finance.
You may begin.
Thank you good morning, everyone and thank you for joining us for the second quarter 2021, PS business Parks Investor Conference call. This is Jeff hedges Chief Financial Officer.
With me today is our president and Chief Executive Officer, Mac, Chandler, and our Chief Accounting Officer Trenton growth.
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 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.
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 dotcom.
I will now turn the call over to Max Thank.
Thank you Jeff Good morning, good afternoon to those in the East welcome to PS business Parks second quarter 2021 earnings call.
<unk> call I will highlight our second quarter achievements and provide a rundown on our markets and investment activity. Jeff will then provide an update on our financial results balance sheet and capital allocation.
Our second quarter was encouraging on many levels and it's rewarding to see the fruits of our labor.
It starts with another quarter of strong lease production, we signed more leases for more square footage in the first half of 2021 than we did in the first half of any of the 5 previous years.
Occupancy increased by 70 basis points over the quarter to end at 93, 5%.
Led by industrial portfolio with at which averaged 95, 1% for Q2 the.
These gains are contributing to our same park cash NOI, which for Q2 increased by 13, 5% over the same period in the prior year.
Our team continues to utilize for capital efficiently through the first half of the year lease transaction costs for $2.71 per.
Per square foot or just 6.7% of contractual rent.
The powerful combination of compounding cash NOI and an astute deployment of capital contributed to our growth in funds available for distribution.
Pacifically, our Q2 GAAP increased 22, 2% over the same period in the prior year.
Now, let's turn to other markets.
In Seattle, the industrial sector remains strong and the overall market is approximately 95% leased interest in our product is high with demand driven by logistics and fulfillment users.
This activity came through in our Q2 industrial cash rent growth of 12% and retention of 70 per cent.
Last quarter, we touched on our 48000 square foot vacancy at our 212 business parks. We have we have had good activity, but nothing today to spending.
In Northern California, the market continues to pick up momentum the.
The logistics sector is the leading demand driver, but now we are seeing a broader base demand as well.
Industrial rent growth in northern California was $12.4 per cent.
The improvements to our 140000 square foot vacancy at Hayward are now substantially complete and the space is available for immediate occupancy.
We had a tenant on the 1 yard line this past quarter, but unfortunately put they put they put the transaction it hold it as a part of the business as anyone knows but our team is anything but complacent and we were doing all the right things to identify high quality customer.
It's uncertain if it will be at least by year end, but we remain very confident in this space and the location for the long term.
Moving to southern California, as the region continues to open the seat. This the team is seeing strong demand for logistics smaller last mile companies import export firms and construction debt.
Mid counties industrial market is especially strong with vacancy less than 1%.
This has contributed to our strong average occupancy of 96, 7% and retention of 86%.
In Texas industrial demand is healthy, particularly in Austin, where our weighted average occupancy is 97, 5% in the second quarter.
Industrial activity in Austin was led by medical construction users.
As well as the expansion and integration of technology related businesses.
As mentioned last quarter, an office user will be vacating, a 60 day 67000 square foot space within a flex building in north Austin in September.
The building is well located and our plan is to reposition the space and potentially subdivide the premises in order to meet the demand of the market.
And Dallas Q2 occupancy was 81, 1% due primarily to large vacancies are Royal Tech Flex Park in Las Colinas, which ended the quarter at 66% occupied.
We are currently marketing the vacant suites of Royal Tech. However, our expectation is for occupancy in Dallas will lag or other regions for the remainder of 2021.
Washington Metro our industrial portfolio continues to perform well with Q2 occupancy coming in at $92.3 per cent.
Our office portfolio was 87, 4% occupied.
Certainly better than the competition, but lagging the overall portfolio.
Demand for suburban office is improving as employees continue to return to the office and we have seen a notable increase in tour activity this quarter.
Our GSA leases continue to renew but overall there doesn't appear to be an increase or decrease in GSA demand.
Florida is leaving leading all of our markets due to increasing demand for business services logistics distribution and E. Commerce average occupancy for Q2 was 96, 9% rate growth was 8.8% and activity is exceeding pre pandemic levels.
Occupancy at our <unk> Park in Miami was 96, 9% with small and mid sized industrial users driving demand, allowing us to set the market with rent set an all time high.
Moving to our development projects Freeport are 83000 square foot industrial development of Dallas is on track to exceed our yield expectations. The building is currently nearly 40% leased with rents approximately 50% above pro forma we have solid interest in the remainder of the building and we are tracking to have it fully committed by year end.
In Seattle the building permits for our 212 development were delayed another quarter as the city of Cat still inundated due to staffing cuts. Fortunately 1 of our 2 permits is approved and the second 1 is imminent.
However, sourcing our steel trusses for small projects such as <unk> hundred 12 is a challenge and we anticipate breaking ground in the fourth quarter, where first quarter of next year.
Construction of the Brentford at the mile or 411 unit multifamily development in Tysons, Virginia is on schedule concrete foundations and columns are complete and framing is well underway.
We plan to deliver the first units in summer 2022.
On the disposition front in June we sold Park East Corporate Center and office oriented Flex Park and subsequent to quarter end, we sold our Monroe Office Park located in Herndon, the combined cap rate of both transactions was approximately 5.5%.
Sales consistent with our strategy to Opportunistically divest non strategic assets.
We have also announced that we are considering the sale of 2 additional assets less business Park, a flex park in the life science cluster of San Diego.
And our sub portfolio flex buildings at Royal Tech at Las Colinas.
We are under no pressure to sell these assets and we will only consider transacting, if a pricing and timing expectations are met.
We are actively in the market for acquisitions that meet our high standards, particularly multi tenant industrial parks that allow us to add value through our best in class leasing and operating platform.
We hope next quarter to provide an update on some compelling acquisitions that we're pursuing.
Before I turn the call over to Jeff I'd, just like to acknowledge the dedication of our team for the.
The past quarter I've had the opportunity to tour all of our markets and spend time in our local offices we.
We have a truly amazing team that cares about our customers and our stakeholders my hats off to them.
Jeff.
Thank you Mac.
I'll begin with an overview of our financial results for the quarter and 6 months ended June 32021.
Net income allocable to common stockholders for the 3 months ended June 30 was $45.6 million or $1.65 per diluted share while core <unk> was $61.8 million or $1.77 per share representing an 11, 7% increase from the same period in the prior year.
For the 6 months ended June 30, net income per diluted share was $2.66.
And core <unk> per share was $3.44, representing a 4.3% increase from the prior year.
During the quarter cash net operating income attributable to our same park portfolio was $73.1 million, a 13, 5% increase from the prior year.
The increase in same park cash NOI was driven by cash rental income growth of 10, 7%, primarily due to rental rate growth and an increase in occupancy, but it was also partly attributable to the fact that we had less net write off a day man and rent deferral activity in Q2.2021 than the prior year.
During the quarter, we incurred approximately 150000 of net write off a day, Matt and rent deferral activity and our same park portfolio.
To roughly $5.6 million a year ago.
For the 6 months ended June 30, same park cash NOI increased 6.4% over the prior year driven by a 5.8% growth in cash rental income.
Funds available for distribution or F. N D was $54.5 million for the 3 months ended June 30, representing a 22, 2% increase from Q2.
2020.
For the 6 months ended June 30, <unk> was $104.8 million and 11, 6% increase from the prior year.
In addition to the previously mentioned cash NOI growth F. A D continues to benefit from low recurring capital expenditures, which parks same park portfolio registered a 9.9% of NOI.
As I said on our prior call. These low recurring capital costs are continuing reflection of our teams efficient use of transaction capital, but also partially attributable to timing of certain capital improvements our expectation is that recurring capital measured as a percentage of NOI will increase slightly in the second half of the year to be closer to our historic.
Average.
Turning now to the balance sheet.
We ended the quarter with $116 million of unrestricted cash and our credit facility remains undrawn subsequent to quarter end. We also sold Monroe Office Park in Herndon, Virginia for $41.3 million.
We intend to utilize operating free cash flow cash on hand, and as necessary our credit facility to fund investment activity.
<unk> development and future acquisition opportunities.
I'd also like to highlight that our series W preferred shares become callable at our option on October 20th.
As many of you know we have historically sought to Opportunistically refinance series a preferred equity when rates are attractive.
At this time, we have not made a determination as to what we may do with regard to our series W. Shares. However market conditions are favorable and has a call date approaches we will monitor the capital markets and our cash needs as we evaluate our capitalization opportunities.
Lastly, I'll point out that we paid a dividend of $1.5 per share to common stockholders in the second quarter and our board recently declared a dividend of $1.5 per share to be paid in the third quarter of 2021 on September 30 to stockholders of record on September 15th.
With that we will now open the call for questions operator.
Yes.
And the floor is now open for questions. At this time, if you have a question or comment. Please press star 1 on your telephone keypad. If at any point. Your question is answered you may remove yourself from the queue by pressing the pound key.
We do ask that you please limit your.
To your question that you pick up your handset to provide optimal sound quality and our first question will come from Manny Korchman with Citi. Please go ahead. Your line is open.
Hey, everyone.
I think you said that you'd give us some details on the acquisitions maybe over the next call, but just Jeff trying to balance the size of your potential dispositions for a couple of flex parks and asking for you mentioned.
Versus what those are.
Thomas for any acquisition opportunities might be.
Hey, maybe this is Matt let me try to address that in a different way.
So we're doing things a little bit different in a couple ways 1.
Me being here I'm spending a lot more time on acquisitions, and we're focusing more on it.
Second is about a month ago, we hired someone.
Who's up in Seattle, Who's dedicated to working directly on these.
Multifamily.
Projects that we have underway and also the entitlements and provides just a lot more bandwidth for our acquisitions team to focus strictly on acquisitions. So we're more focused on it than we had been previously and I think that's really helping us.
And.
We there are some compelling opportunities that we're pursuing we're as we mentioned we're not ready to talk about that now.
But I think we also have a lot of flexibility with these 2 potential sales that we talked about and.
We will be patient with it.
And.
I think the buyers have such interest in debt will be able to manage the timing to our advantage and.
We think we see things is very promising.
Hopefully that answers your question.
Great. Thanks, Mike and then would that personnel dedicated to I guess alternate uses would be the right way to phrase it.
Should we expect more debt to comment as that can be concentrated.
In Virginia, where you've done the multifamily conversions or elsewhere within the portfolio.
Well it certainly Virginia is where the near term starts are setup.
And we're in a position to likely start a third phase of the mile.
Which is already a master plan, but we're going through working with the county to get the project are finalized.
But there also there are also other opportunities within our portfolio on the west coast as well, where we have the ability to.
Rezoning properties and obtain entitlements are favorable debt increase the density increase the value of the land. So that gives us great optionality in the future.
Thank you.
And our next question comes from Craig Mailman with Keybanc Capital. Please go ahead. Your line is open.
Hey, guys.
Maybe just following up on Manny's question on acquisitions back I I know and I. Appreciate you don't want to talk too much about the acquisitions, but could you just talk about kind of what type of opportunities youre looking at and what the relative yield profile, maybe versus what <unk> sold to date and what youre potentially looking to sell in <unk>.
Diego and in Dallas, and maybe bridge the gap.
Sure.
In general were.
Our preferred asset classes really the it's the larger multi tenant parks. So 1 is where the average head size is generally quite small.
And consistent with our current portfolio, we like the properties that really take it that our management intensive because our platform is built to do that.
And those larger parks.
That are well located and generally that we're looking for high quality assets starting yield.
<unk>.
In the high threes to low fours and they'll stabilize.
A few years later.
In the high force.
Walt on these projects are.
What you would have to 3 years, 3 and a half years. So.
But the bigger differences for long term.
Growth profile, so the assets were selling have.
Uh huh.
Flat to negative long term growth profile, but also they are quite capital intensive.
Versus the projects that we're looking at are much more capital efficient in the cash flow profile is really a much more positive outlook, especially as you look further out in the future.
So.
Maybe just a follow up to that so it sounds like you're trying to get rid of higher capex assets that drag on the long term.
What does that mean for the balance of office.
And maybe timing of selling out of that altogether and maybe how.
How much flex do you want to own you know, it's always a good asset class when things are good but can be a little bit more expensive when things get challenging.
Well I mean, we you can if you look historically, we have to end our office portfolio.
And I think we'll continue to do that but we're not in a rush that we'll do that Opportunistically and you can you can see for the last 2.
Properties that we sold.
We realized really pretty solid value is probably better than many expected averaging a 5 and a cap rate on these older assets what was that.
That met our high.
Expectations.
So.
We will look for opportunities not not all office assets within our portfolio are created equal.
Certainly have better long term profiles than others.
And that goes the same for flex flow.
Next some of our flex properties are more office oriented in and some are certainly.
Really resemble industrial properties.
Net debt ratio of office build out.
It's a pretty good indicator for performance.
It is different market market to market.
And then and then just maybe for Jeff from a timing perspective in room with the dividend to the extent you have some decent gains on any of these cash do you have enough activity within the timeframe for $10.31.
Yeah, Hey, Greg Yeah, certainly that's.
That would be great.
With regard to the 2 sales that have closed Monroe and park East in Northern Virginia, we have the capacity.
To absorb those gains with or without an exchange and as Mac said with the other 2 potential sales.
We announced we have timing flexibility, there and certainly <unk>.
That will be considered if and when we do decide to go forward with the sales transaction.
And we will look to be strategic in how we manage the potential gain on those potential sales.
And just 1 last 1 on the $1.40 in Hayward.
Kind of where it was the mark to market on that potentially going to be in any details about the pipeline there and maybe why the tenant decided to step away.
The tenant was a little coy about about why they put it on pause.
I actually didn't kill the deal, but they needed to put it on pause.
Until December so it may come back.
We're not we're not waiting around but it was.
It had terrific rent growth.
Really the quote that we don't want to sort of work against ourselves as other tenants for looking at the space.
But we were very pleased with that deal if it comes back.
Will be.
But as I mentioned, there are other opportunities out there for.
For the for the right user who needs that space to be able to come across the space.
In that condition, that's ready to go.
It's pretty special so the team feels very bullish about it and just 1 of the things were.
Sometimes you get down to the 1 yard line of things don't make.
The nature of the business.
Great. Thanks.
Yeah.
And once again as a reminder that is star 1 for your questions.
1 and we will take our next question from Blaine Heck with Wells Fargo. Please go ahead. Your line is open.
Great. Thanks, Good morning out there a math you just gave some great detail on what Youre looking for on the acquisition side can you do kind of the same for the assets that you're marketing for sale in terms of cap rate or other pricing targets as well as what are the characteristics that kind of drove you to look to sell what you have sold in.
What's kind of on the block right now.
Well I wouldn't want to say anything that would discourage our buyers from sharpening their pencils.
But I'll point out less because it's a little different than most so.
This day.
2 assets.
Happy to be located right in the heart of the life Science cluster.
In San Diego is the third largest life science cluster and probably the fastest growing many respects and so the buyers looking at these 2 assets are likely going to tear these assets down and rebuild and go ground up because theres very favorable underlying zoning and the FAA to rebuild that product is.
Is available.
So we think we will have.
Very favorable pricing.
And so.
We think we would achieve a cap rate.
That's far better than anything we would expect to.
<unk> on a forward IRR basis so.
It's it's part of the beauty of buying well located property years ago and that and the markets grew up around you and this is a good example of it. So you look around in the highest and best use is not the property say, we've we've generate tremendous cash flow over the years.
And it's.
It's the assets really is just sort of time to be something else and so the buyers for this asset are the.
The interested buyers to date are largely life science developers and so.
We're excited about the prospects for that.
Got it that's really helpful.
And just to follow up on that debt back as you as you look across the portfolio and I'm sure you've seen most if not all of it at this point how many more of those situations are there how much how much more do you have in the noncore office bucket or even the kind of opportunistic sales bucket like you're describing at San Diego how much of that is left.
Is there anything in the industrial or multifamily buckets, you'd look to sell as well.
Well I think that one's unique for the reasons I described.
Think we have any sort of similar to that but there are other assets that have.
Upside not necessarily in a in a straight up assets sale, but in the re entitlement of these assets and so that that's where we're going to see some value creation, there and where we think bringing on this expertise Inc.
And enhancing our ability to do that really is going to create some value creation opportunities for the next few years title minutes in the tight markets that we're in where there is high barriers to entry are they take it takes several years.
But we we have.
<unk> and I think the.
Bandwidth now and the expertise to create the value and then we will decide.
Is it better for us to to actually reinvest in the asset we have.
Often we may use a local partner we may not.
But but we think there's real value to be created in this.
Okay. Thanks.
I would tell you is that traditionally the the core industrial assets. It's typically.
The older office product that we have that's sort of garden walk up style.
And some of the flex, but but.
If that if that helps you to sort of get your head wrapped around where those opportunities would lie.
Got it I appreciate it.
Okay.
And once again, if he would like to ask a question. Please press star 1 on your Touchtone phone.
We will pause to allow any further questions. Thank you.
Yeah.
And there appears to be no further questions I will turn the call back over to Matt Chandler for any closing remarks.
Just wanted to take a moment to thank everyone for your time and your interest in PSP. Please.
Please enjoy the rest of your day.
We will talk soon.
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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