Q2 2019 Earnings Call
And your last name with spelling.
Mckellar, rich and I see H H E. L E V I C H.
[noise].
And what's your first name.
Michael.
You might see a deal.
What your company please Michael.
That's not a audio eat all right.
Hi, he or a okay and lastly, your contact phone number with Enrico.
Some of the one nine to seven eight to nine times.
Eight to nine five very good we'll get right on the PSP Q2, one nine they're just getting started standby.
Thank you great.
Earnings results and conference call.
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 you would like to ask a question at that time. Please press.
Yes.
One 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 and zero.
It is now my pleasure to turn the floor over to Jeff hedges P. SBS Chief Financial Officer, you may begin.
Thank you.
Good morning, everyone and thank you for joining us for the second quarter 2019, PS business Parks Investor Conference call.
This is Jeff hedges Chief Financial Officer.
Here with me are Maria Hawthorne, CEO , Jon Petersen, COO and train grows CA.
Before we begin let me remind everyone that all statements other than statements of historical facts 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 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 Maria.
Thanks, Jeff Good morning, everyone and thank you for joining US today, we were pleased to report several exciting this morning.
Starting with our quarterly financial results.
Q2 was another strong quarter for us as I reported same park NOI grew 5.2% with cash rental rate growth of 9% on 1.7 million square feet of executed leases.
Occupancy held steady at a weighted average of 94.3% for same park portfolio.
In total portfolio retention with over 72%.
These strong results again demonstrate the strength of our infill markets combined with our small customer strategy.
No I'm extremely pleased to announce that we recently received masterplan rezoning approval for the mile in Tysons, Virginia.
We are very happy with the success of Highgate, our existing 395 unit multifamily property and with this master plan approval. We now have the ability to move forward with all future phases of redevelopment.
Which includes about 3 million square feet of mixed use Anthony.
Or said differently nearly 3100 additional multifamily units.
Of course redevelopment of the park will take several years to complete but our rezoning approval affords us complete discretion on if and when to move forward with any future phase of development.
Today, we're only pursuing the next phase of development, which will be called Brentford at the mile a multifamily property, which will be very similar to highgate in size and design.
What we love about Brentford and the potential next phase of development behind it.
Is that both can be developed without disrupting any of the in place and why we're currently generating from our existing office properties, which are currently over 94% leased.
It is too early to say exactly when construction will begin on Bradford, but we are estimating sometime in mid Twentys 20 of course, we will keep you informed of our plans as they evolve.
Now for a quick update on the potential sale of the Maryland office portfolio, which we announced on our previous earnings call.
We're pleased with how the marketing process has progressed and you'll know.
But in our GAAP financials, we have reclassified a portion of the marketed portfolio to held for sale.
These held for sale properties accounted for 5.9% of our total company and Hawaii in fiscal year, 2018, and 5.5% of our total company and our why in the first half of 2019.
Expect another update from us on this process on our next quarterly call.
Lastly, I would like to welcome Steve Wilson and Chris the pipe.
Two our board of directors.
Both Steve and Christie bring with them extensive real estate and financial expertise.
And we are extremely excited to have them advising us going forward.
With that I turn the call over to Jay.
Thanks Maria.
As most of you already know the industrial market is robust in each of our regions with solid demand.
Low overall vacancy and historically low unemployment.
The cumulative impact of all this is strong operating metrics for our portfolio in Q2.
Our washing Metro Division had another good quarter leasing 410000 square feet.
Retention of almost 80% and essentially flat rent growth.
Additionally, combined same park occupancy in Washington Metro was 93.5%.
With Northern Virginia, and outstanding 94.7%, a 370 basis point improvement over Q2 2018.
So what has been the key to our recent success.
One.
We havent experienced talented team that has been in the market through good times and bad too as Weve been talking about for over a decade, our focus on small multitenant parks.
Buildings in suites allows us to tap into a small business environment that has been growing for some time.
And three the tech sector is leading an expanding DC economy, and we are capturing more than our fair share of this activity.
Now for an update on our 1 million square foot 19 building multi tenant northern Virginia industrial portfolio, we purchased in June 2018.
We have completed our repositioning efforts.
Clan some of the undesirable users and improved occupancy from 76%.
To over 85% as of today.
We are on track to stabilize and VIP in mid 2020 near 95% just as we expected.
Leasing activity in Northern California. It was also active in Q2.
With our team signing 398000 square feet of deals.
Generating cash rent growth of almost 17%.
Hi, occupancy dipped by 80 basis points from Q1, as we saw a handful of users over 20000 square feet move out.
We were able to lease the 130000 square foot vacancy I mentioned last call to an existing customer that needed additional space.
That occupancy commenced in late Q2.
Rent growth on that lease was in excess of 30% as we price the space to the current market rate.
We have three other expirations over 150000 square feet in Q4 that are currently in various stages of negotiations.
We expect healthy rent growth on these deals and when we may experience some downtime on one or more of them.
These buildings are in good Submarkets and we have solid interest.
Southern California had another strong quarter, signing 315000 square feet of leases.
Buoyed by a retention of 75%.
Rent growth was nearly 10% and demand for small tenant industrial space is quite healthy.
The southern California economy, especially industrial sector is performing at historically high levels.
Giving us the ability to keep our customers and push rents.
In Texas, our team signed 264000 square feet and 56 deals combined rent growth in Austin, and Dallas was 8.6%.
With Dallas is solid 10.3%.
Small users, let our leasing volume with an average deal size of 4700 square feet.
Occupancy in Texas increased 290 basis points on the strength of these small users and the customer retention of almost 77%.
In South, Florida, we have yet to see any material signs of the trade wars and demand is active.
Especially for suites under 10000 square feet.
We signed 228000 square feet.
4000 square foot average deal size.
Retention was low for us at 34% as we thought three users over 15000 square feet move out in the quarter.
We have backfills, one of those spaces and of activity, including existing customers on the other two.
Based on strong market demand rent growth was over 10% in Q2.
Finally, Seattle completed 26 leases for 73000 square feet.
Occupancy in Seattle is 95.1% as we had two spaces over 20000 square feet vacate in Q2.
Subsequently, we released one which is already taken occupancy with strong rent growth in the mid teens.
For the quarter rent growth was over 15% as a Seattle industrial market remains one of the highest in the country.
As we look ahead to the balance of 2019, we remain optimistic that the economic engine in our markets will drive user demand.
And with vacancies at or near historic lows.
Our teams have put together positive metrics.
I look forward to the opportunity we have with our three larger expirations in northern California.
To push rents.
Improve users and upgrade credit quality.
Other than that with 13% or 3.6 million square feet of our portfolio expiring in 2019.
Our teams will continue to execute by pushing rents.
Lowering transaction costs and maintaining occupancy in the mid to high Ninetys.
Now over to Jeff.
Thank you JP.
I'm pleased to report that we rounded out the first half of 2019 with a strong second quarter.
Net income for the three months ended June Thirtyth was a dollar ofour per basic and diluted common share and for the first half of 2019 was $2 per basic and diluted common share.
FFO was $1.75 per share for the quarter and for the six months ended June Thirtyth was $3.42 per share.
An increase of 7.8% from a year ago.
Meanwhile, funds available for distribution or F.A.D. increased 8.5% during the first half of the year.
The increases in both FFO and FHLB were primarily attributable to growth in same park, NOI, which increased 4.8% in the first half of 2019 compared to the prior year.
On a cash basis, which excludes the effect of non cash rent.
In Hawaii increased 5.5% for the six months ended June thirtyth, driven by 4.8% cash rental income growth.
There are a couple items I would like to point out related to our same park operating results first in connection with their classification as held for sale for GAAP purposes.
The Maryland disposition properties have been excluded from our same park financial results for the three and six months ended June Thirtyth.
As well as in the comparative periods for 2018.
Second I would like to point out that we did benefit from above average lease buyout income in Q2, which was approximately seven 780000 during the second quarter.
After normalizing for lease buyout income our same park NOI growth for the six months ended June Thirtyth would have been 4.2% or 4.9% on a cash basis.
Turning now to an update on the model.
We are pleased to report that Highgate continues to perform well and annualized for the first half of 2019 came in at $2.9 million, which was in line with our expectations.
We expect continued into July improvement in the second half of 2019, as we turn through the remainder of first generation leases.
Finally ill wrap up by pointing out that we paid a dividend of one dollar of five to common shareholders in the second quarter and our board recently declared a dividend of one dollar five to be paid to shareholders in the third quarter payable on September 27 to shareholders of record on September 12.
With that we'll now open the call for questions operator.
The floor is now open for questions. At this time, if you have a question or a comment please press star and one on your Touchtone phone if at any point. Your question is answered you may remove yourself from the queue by pressing the pound key.
We do ask that while you pose your question you pick up your handset to provide optimal sound quality.
Our first question is coming from Craig Mailman with Keybanc capital markets. Please go ahead.
Hi, everyone.
Just Maria a couple follow ups here on the Maryland portfolio.
Could you just give us a sense of kind of.
Where you are in the process. It also just.
What is being excluded from the held for sale portfolio of the assets you want to sell.
Good morning, Craig, Yes, that's a good question and what we did when we marketed whereas we marketed the 1.4 million square feet of the total portfolio, but we also marketed and marketed it in pieces as six separate portfolios that could be purchased.
And what happened is is that when pricing came in and if you remember we said that we would evaluate when and if and what to sell we determined that.
There was one piece, which is 114000 square foot building with a single user it's a government user with six years left on the term and we decided to keep that.
And then the other piece of the portfolio. We decided he was a just a small lot with a land lease.
Is the ground lease with a bank on it and there's a lot of term left on that so we excluded those two points and we're confident that the balance of the portfolio 1.3 million square feet will sell.
And I think you guys had said last quarter or when it first came out it.
I guess with the 160 going it was like 16 or 17 million then why is that still kind of the.
The bogey here I know you gave the percentages are just.
Trying to get the nominal value.
Steve.
Yes, Hi, Greg. This is Jeff you know, we don't have any specific in a line number today to guide you on related to just the portion that is being classified as held for sale other than the percentage of ally that Maria mentioned in her opening remarks.
And then just timing on this I know you guys are pretty sensitive to tax planning.
What do you think timing would be.
The the assets that could sell and are you guys, even under a anywhere close to l. wise or under contract on any of this stuff.
Yeah. So okay. So we're in negotiations we did qualify you know.
Moving these to being held for disposition, we are hopeful that it will happen this year.
And then the other thing I would like to say is that we have also identified enough of an acquisition pipeline Craig that we feel confident that we will be able to do an exchange.
So that we.
You know, we won't be doing a special dividend.
Which we were uncertain about earlier in the year.
Okay and on the.
Kind of what you're rolling it into is that more industrial or more flex office Im just trying to get a sense of what you think the dilution could be if these are kind of in that 8% to 9% range, where do you guys think you can redeploy.
Okay. So right now we're looking to redeploy a in a core plus market on the west coast.
So that's going to be at a cap rate far lower than eight or 9%.
There.
And then just one last one for me I know you guys are going to be pretty deliberate how you build out the rest of the mile but in terms of how we should anticipate you guys funding.
The Brentford here starting next year.
You know you guys typically use preferred in the past as it it'd be more construction financing an unsecured is kind of how do you guys see the balance sheet management changing if at all as you build this out.
Yeah, Craig it's a little too early to give any real guidance on that point other than to say, we have sufficient capacity under our credit facility. So we have that.
At our disposal for construction financing, if we choose to use it but there are a number of variables in play including other potential acquisition opportunities.
Or other things that could impact our cash management between now and when we actually start development I'm sorry construction on the project.
I would not expect to see any true.
Secured construction financing.
Just given that we have sufficient capacity.
Again, either on our corporate credit facility or through other means available to us to fund that project.
Great. Thank you.
Our next question will come from Blaine Heck with Wells Fargo.
Please go ahead.
Thanks, So just follow up on that when you think about your cost of capital clearly you guys have a better cost the equity to them and I think you've ever had does that have any effect on your investment strategy or underwriting and would you guys consider equity has an attractive source of funds. If there were a large opportunity that come along.
Yeah blame that that's a really good point, we are trading at multiples that are extremely attractive and our cost of capital is certainly the Lois that we have seen in our.
History since we went public in 1998 it is.
Given the strength of the markets the way the and industrial markets are going.
It is changing how we are looking at potential acquisitions.
And you know and we plan to utilize the strength of our balance sheet right now as we go forward with development and feature acquisition.
Okay, and then I guess generally in separate from the 10 31, you're talking about with.
In conjunction with the Maryland industrial sales.
Are there any markets that you're currently targeting that you'd like to be and that you're not in currently.
Right now all of the markets that we're in are very deep. So like if you think about the Los Angeles market, which is nearly a billion square feet or we can go much deeper within our markets and where we actually have successful operating platforms.
But we do look at new markets are and to go into a new market I think as we've said before we do like to enter a market with a concentration of hopefully about a million and a half square feet, which allows us to put our own leasing and management team in place, which is how we like to operate our facilities. So we wouldn't exclude going into new markets, but right now or current potential acquisitions or within existing markets.
Okay. That's helpful. Lastly for Jeff Your NOI margin was stronger this quarter than it has been recently a while I think some of that is due to reclassifying. The salary that's DNA instead of Opex or were there any other operating expenses that you expected to incur this quarter that may have gotten pushed out or any other nuances.
Yeah. The short answer is it was a pretty normal quarter for US now obviously, given the nature of our business. There's a number of things that could influence the timing of.
Certain operating expense items, including utilities and repairs and maintenance. So there's there's no large items to note there it potentially could be a little depending on weather patterns storm related damage things like that you know, it's always possible that a Q3 Q4 could have additional R&D spend but we're not we're not forecasting anything necessarily in that area. One item I do want to clear up though on what you said regarding the reclassification of the salaries, we have restated that in the period shown so just want to make sure if you're looking on a comparative basis based on what we have produced last quarter and this quarter and our earnings supplement we have normalize that for all periods shown.
Got it that's helpful. Thanks.
Our next question will come from Eric Frankel with Green Street Advisors. Please go ahead.
Oh. Thank you just to clarify on on the Maryland assets that had been re crop classified as held for sale. What is the occupancy of those assets I understand that that a large tenant left I just want to make sure I understand that better.
Yes, you know what Eric.
You know Eric will have to get back to you on this specific occupancy where it is right now because we as we've been marketing it we continue to.
Continue to lease space and customers moving in and out so to answer your question, where it is right now we don't know and we have to get back to that I think they did you backfill that that that plan vacancy.
No we did not backfill that larger vacancies it I think you're referring to yes, okay. That's helpful.
Yeah, Eric that was the big one was the 156000 square feet, we the customer there did downsizing keep 15000.
But the balance of it is currently vacant which we chose to do because the property isn't an opportunity zone and so we marketed it so bad if someone wanted to take advantage of that they could right and that they can see is not part of your eight to nine cap valuation estimate that you thought you he speculated last quarter.
Yes. It is.
It is okay Gotcha and then.
As in the lack of even with that they can see you would still value everything including that's based on a nine cap.
Yeah rolled up yes.
Hi.
Okay, maybe I'll clarify after the call just to just that math.
You know obviously the jury seems like fundamentals in the rest of your portfolio are doing quite well have you seen a move in values or cap rates for what you're what you're looking at is there a reason why you're more optimistic now that you're a bit you're going to be able to find opportunities to redeploy the sale proceeds.
You know were.
We're just looking at the market looking at what is happening in our in our areas and.
We're just being a little bit more aggressive given given the valuation of our stock and where we would be able to deploy a you know and some long term unsecured debt and so that is giving us flexibility that we didn't necessarily have in the past.
Okay. That's all I've got thank you thanks, Eric.
Once again, if you have a question you May press star and one on your Touchtone phone, we'll go next to Emmanuel Korchman with Citi.
Please go ahead, hi, everyone I'm, just just switching to the Bradford development when you're looking at your build cost assumptions there how different are they going to be than Highgate laws.
Manny that's a good question, we are finalizing the budget.
And the interior design is not yet complete but.
When we locked in pricing in 2015, when we built Highgate construction costs have gone up so that's where you'll see we are seeing an increase in price. The good news is that rent and tysons have definitely increased over the last year as were seeing as we renew our <unk> and move in new residents Highgate. So we're anticipating similar returns so far.
Similar returns to what we're getting at hiking.
Oh, and the fit and finish in sort of quality will be.
Cool to argue that this can be a competitor product or is it going to be higher or lower on the scale.
It'll be equal finishes will be equal to Highgate Ah Ah, but we are making some different tweaks a and it's based on recommendations from our development partner, who has expertise in this area. So for instance, we look at what's being delivered to the market and they have to do with a unit mix and some will be larger some movie smaller based on our success with Highgate as well as what's being delivered to the market. Because we just don't you know, we don't Wanna add too much direct competition.
Right and then.
I think earlier in the year, we had spoken about other office asset sales beyond Maryland can you give us an update as to where those stand and that's in the marketing process.
Okay. So right now we are not looking nor am I ready to announce any additional office sales.
We what we have in northern and if you think about it we really only have one office park 340000 feet in San Mateo, which are the highest rents were currently getting in our entire portfolio and the park is about 97% leased.
So that we won't sell it for an amazing piece of land.
And then our northern Virginia assets, It's JP said the office is extremely well leased.
And we're selling the bulk of the Maryland office portfolio. So at this point, we're happy with what we own but it is something that we will evaluate as we proceed but where we won't be announcing anything else. This year.
Oh I got back in the CR Chairman Flutters earlier in the year that you guys.
Pretty plainly put out there that you'll be selling all of the suburban office is something change or did I, just miss read them as remember, though no Manny we put it out there that we will so office that we don't have plans to redevelop well we didn't put a timeline on it.
And so and that's what I'm, saying that for this year, we're not going to announce anything further, but that's not to say that in the future there won't be other parts that we now but just so you know.
All of the office parks that we would sell are now in Maryland, and Virginia, because outside of the DC market. There's only one other office asset and that sand the tail, which which is not on the table for sale that would be a future redevelopment opportunity.
Thanks, Brian .
Sure. Thanks Manny.
And there are no further questions at this time, so I'll turn it back to Jeff hedges for any additional or closing remarks.
Alright. Thank you everyone. We look forward to speaking with you all soon have a great rest of your day.
Thank you. This does conclude today's conference call. Please disconnect your lines at this time and have a wonderful day.
[noise].