Q4 2021 PS Business Parks Inc Earnings Call
Today's call management's remarks, and answers to your questions contain forward looking statements as defined in the private Securities Litigation Reform Act of 1095.
Forward looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today.
For more information about these risk factors, we encourage you to review our 10-K and other SEC filings.
<unk> business parks assumes no obligations to update any forward looking statements in the future.
In addition, certain financial information presented on this call represents non-GAAP financial measures.
Our earnings release, and supplemental package present, GAAP reconciliations and explanation of why such non-GAAP financial measures are useful to investors.
Today's conference call is hosted by peers business part interim Chief Executive Officer, Steve Wilson.
From Chief operating Officer, Maria Hawthorne, together with Chief Financial Officer Adeel Khan.
We will make some prepared remarks, and then open the line for your questions.
Now I will turn the call over to Steve.
Thank you and welcome to PS business Parks fourth quarter 2021 earnings call.
Before we begin on behalf of the entire PSP team and the board of directors, we wish Mac, a speedy recovery and the management team will continue the forward momentum from 2021 into 2022 in his absence.
Sure.
I'll begin with a summary of our fourth quarter and full year operating results I will then discuss PS business parks positioning and general outlook for 2022.
Maria will then cover our operational activity and the deal will follow with more details on our financial results and balance sheet.
Let me start with our fourth quarter results and activity.
We increased core SFO by nine 6% to $63 5 million and generated a 9% increase in core <unk> per share to a $1 81.
Our same park NOI grew by six 5% on a cash basis and eight 6% on a GAAP basis.
We achieved 96, 4% occupancy in our same park portfolio, representing 270 basis point increase from prior year.
We are pleased to report our leasing volume during the fourth quarter was one 8 million square feet.
Leasing spreads were six 1% on a cash basis and 16, 4% on a GAAP basis.
Our industrial assets led the way for the quarter with cash and GAAP rent growth over 11, 5% and 25, 7% respectively.
Yes.
We redeemed all series <unk> preferred shares in November and paid a onetime special dividend of $4 60 per share to common stock and unit holders.
We acquired one property during the fourth quarter for $25 5 million, our full year 2021 investment volume was $148 $5 million.
We sold three properties during the fourth quarter for $329 million.
Our full year disposition volume was $408 million.
89, 6% of PS business parks portfolio is comprised of industrial and industrial flex space and continues to benefit from the uniqueness of the supply demand dynamics in our markets.
Our industrial portfolio continues to flourish with an average same park occupancy of 97, 7% for the quarter and full year same park cash NOI growth of 12, 5% compared to last year.
Moving to production.
For the year, we leased seven 4 million square feet cash and GAAP rent growth was five 2% and 14, 7% respectively.
Again, our industrial assets led the way with cash and GAAP rent growth of nine 4% and 21, 7% respectively.
Leasing transaction costs was $3 15 per square foot for the quarter.
Sequential decrease of 28%.
Turning to our rent collections as of December 31.
2021, the company collected 99, 9% of the revenue build during the year.
The company collected $5 $3 million of rent deferral repayments, representing 99, 8% of the amount scheduled to be repaid through December 2021.
An additional $900000 of rent deferral repayments is scheduled to be repaid of which $500000.
As in 2022.
While we remain focused on rent collections, we have not and will not lose sight of our overall strategy to create better than core returns through investment in prime infill industrial real estate in our key markets.
The key tenants of PS business parks strategy continues to be proven out in the midst of this pandemic supply demand dynamics remain in the landlords favor rental rate growth is expected to continue and we have a platform designed for value creation beyond market rental rate growth.
Now turning to our investment activity.
November 21, 2021, we acquired Jupiter business Park, a 141000 square foot multi tenant industrial park in Plano, Texas for $25 5 million.
The Park is currently 97, 3% occupied and continues to meet our high expectations in all aspects, particularly on rent growth in renewals, we have forecast in a stabilized yield of approximately four 3%.
On the sales front, we announced the sale of glass business Park at 371000 square foot industrial Flex property in San Diego for a gross price of $315 million.
This sales price represents greater than 60 times, or one 6% cap rate or our 2021 estimated NOI for the property.
The net proceeds and the gain and game from lost business Park sale were used for the payment of the special dividend.
Series W preferred redemption, and the remainder was exchanged and polled America and Jupiter business Park.
In addition, we sold a 53000 square foot property in Beltsville, Maryland for $4 8 million and a 70000 square foot property in Dallas for $9 1 million.
We've previously announced that we are marketing for sale, our Royal Tech Flex Park in Dallas, We anticipate this project should close this quarter.
We are actively in the market for external growth through acquisitions that meet our thresholds, particularly multi tenant industrial parks allow us to add value through our best in class leasing operating platform.
Yes.
Moving to our development projects, we are pleased to announce our 83000 square foot Freeport industrial development in Dallas is now 100% occupied with a stabilized yield of 11%.
Boca return development in Florida, and 212 development in Seattle are on track with anticipated completion in fourth quarter of 2022.
Construction of Brent put us a mile or 411 unit multifamily development in Tysons, Virginia is on schedule, we plan to deliver the first units in late 2022.
For 2022, and beyond we will continue to evaluate our portfolio with an eye towards improving the property mix and the income stream with a critical eye on disposing of non core high Capex office similar to the Royal Tech and Avondale dispositions.
In addition.
<unk>, we will be nimble to capitalize on opportunities within the portfolio to seek the highest and best use which can ultimately lead to higher densities and outsized value creation. The re entitlement at the mile in the South San Francisco multifamily Rezone are prime examples we now have in house capabilities to execute.
Q3 strategies and create value and have identified a number of such opportunities. We may pursue re entitlements internally or sell to others to pursue.
Lastly, as a Prime example.
During Max absence. The team is fully engaged and has hit the ground running we look forward to executing this strategy as we move.
Into 2022, I will now turn the call over to Maria.
Thank you, Steve and happy to be here today with so many familiar Neil as you can tell from Steve's comments, our leasing machine and operations teams are all performing extremely well at 2021 with the year of growing occupancy 2022 will continue to be the year.
Driving rental rates, it's safe to say that all industrial markets are seeing record low vacancies and as a result, there is upward pricing pressure operating.
Operating fundamentals include low unemployment positive net absorption limited new construction of our product type and robust user demand.
And demand.
Now, let's turn to the individual market.
In Seattle, our industrial assets average occupancy increased to 98, 2% for the fourth quarter.
200, <unk> expansion and cash rent growth of 11.
Strong market in general.
Had a record year with.
The story in California continues to be great despite regulatory constraints.
In California, our same park industrial assets average occupancy.
Two 3% for the fourth quarter.
Okay.
Cash rent growth.
For the industrial assets was 10, 9%.
Standing metrics from Q4.
Production with 400.
52000 square feet on retention of 78 Southern California.
About 85% retention and 242000 square feet of deals executed.
Quarter same park average occupancy was 97, 7%.
With the economics.
Yes.
Have successful virtually all our metrics.
Leasing production delivered 359000 square feet on retention at 72%.
Our same park industrial assets average.
Occupancy increased for the <unk>.
Fourth quarter <unk>.
230 basis point sequential increase.
<unk> was $14 nine.
Percent.
As Steve mentioned, our development adjacent to DFW Airport is 100% leased and occupied.
With rental rates that set a new high point for the market industrial market is benefiting from strong trade dynamics.
From time to time.
We may lose a customer due to trade issues, but we are able to re tenant quickly.
Often three existing customer demand.
<unk> assets average occupancy to 98, 6% for the fourth quarter, a 10 gig.
Basis points sequential increase in cash rent growth for all assets was 16%.
For the Washington Metro area, our same park industrial assets average occupancy increased to 98, 5% for the fourth quarter, a 240 basis point sequential increase.
As you know the bulk of Psb's orchid.
And it is here that we are battling are only headwinds.
We had hoped at the beginning of the year that people would head.
Back to the office in 2021.
However on hold for many office.
Caesars.
Fight to maintain 88 and.
In office market that is.
80% occupied and had GAAP rent growth of five 8%.
This leasing with transaction cost of only $4 per square foot.
This just proves once again that our small tenant spaces with generic office buildout and finishes continue to outperform the market.
I am optimistic as we look at 2022.
The remainder of the year, 71% of all exploration.
Our industrial product, 21% is flocks and only 8% is office.
Our goal is to take advantage of the industrial tailwind.
Meaning high occupancy and pushing rental rates.
I will now turn the call over to a deal.
Thank you Maria.
Beginning with our operating results for the three months ended December 31, 2021, net income allocable to common stockholders was approximately $267 4 million or.
By $9 66 per fully diluted share.
This guidance.
Compares to $26 9 million diluted share for the same quarter in 2020.
For the three.
21 core <unk>.
$63 5 million as compared to 57 and 2020.
On a per share basis core <unk> was $1 81 per fully diluted.
Let's share representing a 9%.
Same park NOI was $72 $2 million.
As for the three months ended December 31 2021.
Which compares with $66 5 million for the same quarter in 2020, an increase of eight 6% or.
Our same park NOI was driven by a seven 3% increase in same park rental revenue while same park operating expenses increased by three 9%.
On a cash basis same park NOI increased by six 5% year over year.
Funds available for distribution or Fad.
Three months ended December 31, bringing 2021 F&B.
To 210.
$7 million.
Representing a 10, 8% increase from the prior year previously mentioned cash NOI growth.
<unk> continues to benefit from umbrella manage recurring capital expenditures.
<unk>.
Power portfolio registered at 11, 5% of NOI.
Turning now to our balance sheet and financing activities.
Continue to believe that maintaining a low leverage balance sheet with ample liquidity and a diverse array of capital sources as a competitive advantage for PS business parks.
In November we redeemed all $190 million of series <unk> preferred shares at the ultimately $27 million of cash.
And $368 million available on our credit facility.
We remain in a very strong liquidity position with a net debt plus preferred equity to EBITDA ratio of two six times.
With regard to our dividend on February 21, 2022, our board declared an ordinary dividend of $1 five per share to be paid in the first quarter of 2022 on March 31, 2022 to stockholders of record on March 16 2022.
This concludes our prepared remarks and with that we'll open the line for questions operator.
And the floor is now open for questions. At this time, if you have a question or comment. Please press star one on your telephone keypad.
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And our first question comes from Anthony <unk> with Jpmorgan. Please go ahead.
Yeah. Thank you.
I was wondering if you can first.
Can potentially address the timeline.
With Mac and just.
Any update on that front and also in that same regard I know you had some plans to consider a CIO.
<unk> types of merger is still in process.
Hi, This is Steve.
Well first and foremost our thoughts are with Mack and his family.
And.
That's the most important element other than that we have no additional.
Updates of this time should that change we will.
Although to release that status.
Yes.
The second part of your question.
I think we'll leave that.
So macro returns he needs to hiring zone is unchanged. So I think we will put that on pause for a while.
But it doesn't it doesn't stop or slow down the work.
That we're doing.
Okay.
And then second question can you talk on looks like put any.
Dollar amounts around it or the types of things you might be looking at in the near term.
There is.
There's a lot of product out there of mix mixed quality, we are underwriting a number of opportunities right.
Now.
How much of that we execute on remains to be seen but we're going to be competitive.
There are things I think we would be quite aggressively okay. And then just last question maybe for Maria.
You talked about pushing rate in 'twenty.
'twenty, two given where the occupancy rate.
Perhaps what mark to markets might look like this year in comparison to last year given the mix.
Just what's happening with the market.
I think that.
No.
And you know because.
All of the markets are really good whether it's Seattle the bay area or the law.
Markets that we have so we'd be looking at.
Yes.
For our industrial.
Flex is a little more variable depending on the office buildout, but overall I would hope we could get at least on average of 10%.
And on.
On office.
Right now on that we're just looking to maintain occupancy.
And it's not so much about <unk> at all.
<unk>.
The good news is that.
We don't have really any big expirations coming up this year.
One that we have is in Florida is about 100000 square feet. There is intense activity I think we've already pre leased one or two of the spaces and we're looking at for instance on that one we're looking at between 25% and 30% rent growth and then we have one in 60000 feet and again that one we're looking at.
27% rent growth does have both industrial deals.
It shows you the sort of overall rent growth we're looking at.
Okay, and just to clarify those spreads are.
Cash Pat numbers cash okay, yes.
Got it thank you.
And we will take our next question from Craig Millman with Keybanc capital. Please go ahead.
Good afternoon, or good morning out there this is already on for Craig.
Just a quick one on sort of capital sources and uses.
It looks like you guys have.
Pro forma of the.
Disposition that you can redeploy here through the year should we expect you guys to be net acquirers given.
It's there.
And then I think the way best way to.
Our goal first and fourth.
For most of this will continue to fine tune the portfolio.
During the way we have been doing over the last year or so I think thats priority number one and to Steve's point earn portfolio and as we get any disposition proceeds our first order business.
This is to get that money to exchange. So we can find sources to redeploy. So that's that's our laser focus so we are not distracted from that perspective.
But having said about our approach to how we deploy that capital and to Steve's point.
And theres quite a bit of stuff that we're looking at across the markets right. The great thing is that we are operating in some of the best markets and that's great in terms of our ability to execute in different markets and certainly at what you have seen us do in Dallas.
It's just an example in terms of our capability and last part of this question. Obviously, that's just on the disposition strategy and what we do with the proceeds right. Our balance sheet is just ready and equipped to go any which way we want right. We have the best balance sheet in class. So the team is laser focused on that perspective.
To Steve's point earlier right I think we got a great team here and just looking at every single thing that we need to do to just to make sure that we continue to be accretive got.
Got it thank you.
One more quick one if I could.
How should we think about the two preferred preferred shares that are coming callable. This year the series X in the series y.
Yet as we get closer right.
And so it all starts with the growing the base from a company perspective.
Right, that's our first and foremost priority. However, having said that if for some reason we don't find the quality they were seeking or the returns that we're looking at rate of data on pencil and really well, that's certainly an opportunity set for us right and we've seen.
<unk> seen us execute on that side in the past, but we can't really guide to that just yet the years ahead of us, but as we get closer we will certainly have a lot more messy.
Messaging from our perspective in terms of the quarter by quarter breakdown and then we will guide you a little bit further, but certainly you know.
Two are externally at our payroll, but we will see the first and foremost priority is to just attribute to grow the company.
Got it thank you.
Yeah.
We will take our next question from Manny Korchman with Citi. Please go ahead.
Hey, everyone.
Steve maybe this is one for you made on holding to hire a CIO is leaving that smacks decision.
But then sounding like you might be aggressive.
On some.
Sounded like acquisitions.
So help us.
No.
Reconcile what you guys are willing to do.
Without Max sort of actively in the seat or is that just stuff that's already underway or how are you thinking about what needs to be a more permanent decision versus the decision made with this interim team in place.
Well.
The.
The management team has some debt we have a senior vice president of.
Real estate is actively in the market and.
That is so similar deals team.
The Chief investment Officer will obviously be more strategic but it doesn't affect what's going on right now.
Things have been looking at assets, maybe three months.
So it doesn't change how we deal.
South.
Very.
Involved in.
And.
So I don't think FX anything I, just think it's important for Mac to higher result, Chief investment officer, when the time comes but it doesn't impact how it.
Talking about our business on a daily basis.
And then Maria one for you just as you think about the relationship between occupancy and rental rate growth and retention and all those things.
Are you actively changing the way that you structure any releases be it shorter or longer or depending on size longer shorter or anything like that.
Yes, that's a good question Manny and its nice talking with you again too but.
You know we are average deals are three and a half years.
Yes.
The larger spaces are.
Our preference is to get five plus years.
And you can do that with more sophisticated tenants as seen by the deals we executed last year with Amazon.
And we got some 10 year deals on those.
Our little guys are bread and butter.
It's hard to get them beyond three years, just because when you have a small business owner. They don't they don't have five and 10 year project, but we're happy with that.
<unk>.
April as the markets have.
The rising so well over the last seven years.
I have two and three bites at the Apple of increasing the rental rate growth on even those little guys, but when you have the little guys youre not getting 20%, 30% rent increases if you're renewing them every two years.
That.
Makes sense.
No it does.
So it sounds like like like not much has changed versus your business, two or three or five or 10 years ago.
Just wondering if you're actively thinking about changing things, but the answer it sounds like the answer is no.
No.
You can't.
<unk>.
On the little guys. If I wanted to say, if I would love to get five and 10 year deals with our with our automatic.
Increases.
That would be great, but you just can't do that.
Hey, Manny I'll, just add one anecdotal, but Maria is saying is that G&A and I think this just goes to Maria's comment on earlier on the rent growth I think thats.
Purely the focus here right and when we look at 2022 and I know, we don't provide guidance numbers here, we're pushing more try to put lower retention because we want to push the rent that's what how we are kind of looking at our business today.
That really aligns well with web Maria was saying and obviously this is not news to it seemed that from all the industrial peers right. So that's the key focus writer of that retention rate shifts a little bit.
The lower it is all by design right because again to her point drag we're trying to get more bites at the Apple lease out there right, we get new tenants, who are willing to pay higher right and because of the demand certainly is there so hopefully youll see a little bit of that flow to them.
The numbers as well as we go into year.
Thank you everyone.
And there are no further questions at this time I will turn the call back over to Steve Wilson for any closing remarks.
Well. Thank you everyone for your time and small to talk to you again in a couple of months.
Thank you have a great day.
Thank you and this does conclude today's conference call. Please disconnect. Your line at this time and have a wonderful day.
Okay.
Yeah.
[music].