PS Business Parks' CEO Discusses Q4 2012 Results - Earnings Call Transcript

Feb.20.13 | About: PS Business (PSB)

PS Business Parks, Inc. (NYSE:PSB)

Q4 2012 Earnings Call

February 20, 2013, 01:00 pm ET

Executives

Ed Stokx - EVP & CFO

Joe Russell - President & CEO

John Petersen - EVP & COO

Maria Hawthorne - EVP, East Coast

Analysts

Craig Mailman - KeyBanc Markets

Josh Attie - Citi

Rich Anderson - BMO Capital Markets

John Stewart - Green Street Advisors

Michael Mueller - JPMorgan

Operator

Good afternoon. My name is Nicole and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter earnings conference call. All lines have been placed on-mute to prevent any background noise. After the speakers’ remarks, there will a question-and-answer session. (Operator Instructions) Thank you.

And Mr. Stokx, you may begin your conference.

Ed Stokx

Thank you. Good morning and thank you for joining us for the fourth quarter 2012 PS Business Parks investor conference call. I am Ed Stokx, CFO of the company and with me are Joe Russell, President and Chief Executive Officer; John Petersen, Chief Operating Officer and Maria Hawthorne, Executive Vice President of East Coast.

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 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 to GAAP of these non-GAAP financial measures is included in our press release which can be found on our website at psbusinessparks.com.

I will now turn the call over to Joe.

Joe Russell

Thank you, Ed. Good morning and thank you for joining us. I would like to begin with a brief review of full 2012 results and then talk specifically about the fourth quarter. JP and Maria will discuss operations and Ed will finish with our financial information.

Reflecting on 2012, there are four takeaways that are tied to PSB’s performance. One, improvement of Same Park NOI as we posted the first full-year of positive results since 2008. Two, continued stabilization of acquired assets as the occupancy grew 830 basis points to 82.8% on the 9 million square feet acquired in the last three years. Three, record issuances of preferred equity as we captured company historic low coupons on the $810 million issue. And four, with these proceeds coupled with free cash flow, we notched down our total debt by 35% or $249 million.

Overall, PSB is in a strong position to capture improving market conditions that by adherence to a strong financial foundation that even got stronger through 2012. This was recently noted by Standard & Poor’s rankings of REIT’s, where PSB placed at number nine out of 70 rated REIT’s based on overall credit quality.

Now the fourth quarter results. Total portfolio NOI was up 18.7% and adjusted FFO increased 6.2% from a year ago. Same Park NOI improved by 1.4%, which is the strongest level since the fourth quarter of 2008. On a full-year basis, Same Park NOI also was positive by 0.7%. Occupancy improved by 40 basis points sequentially and was up 50 basis points from a year ago. The pool of acquired assets was approximately 9 million square feet and as we have discussed in recent quarters, we're marching in the right direction as our repositioning efforts take hold and gain momentum.

Specifically in the quarter, sequential occupancy improved 60 basis points excluding the more recently acquired Seattle and Austin assets. Activity remained strong particularly in Northern California and Washington DC. In Northern Cal, we signed another 183,000, square feet where occupancy was 86.3% at year-end and in DC, we signed 244,000 square feet with occupancy at 83.3%. There is good receptivity and demand for remaining vacancy and we continue to stay focus on our efforts to fully stabilize these assets.

Of note, we have now signed 59,000 square feet of new leases at 212th Business Park in Seattle as well as 20,000 square feet of renewal. Repositioning activity has just begun. So we are pleased by the early activity on that new park.

As far as whole company leasing, the fourth quarter volume trended down slightly as we signed 1.9 million square feet of deals compared to a run rate of approximately 2 million square feet per quarter. I would characterize demand as steady with a bit above overhang in the quarter due to the election and fiscal cliff headlines out of DC. We are not sensing any material shift down in demand drivers with stronger levels of activity as the year ended.

Approximately 32% of the company’s leasing volume in 2012 was in newly acquired assets. I want to point out that almost 2 million square feet alone took place in Northern California where demand is good and overall we are pleased with the first full year of performance achieved on that 5.3 million square foot portfolio. We began 2013 with occupancy at 87% and positive momentum to push occupancy rates towards the stabilized Same Park portfolio in Northern California which was 91.8% in the fourth quarter.

Our balance sheet is in strong condition aided by historic preferred market conditions. As discussed last quarter, we have reissued preferred and through redemption opportunities now have an amiable in-place coupon of 6.13% on 885 million outstanding; the third lowest average coupon in the REIT universe. The improving fundamentals from property operation with reduced cost of capital will be an enduring sort of cash retention. No assets have been acquired since our last call. There are however, a number of properties entering the sales market as the year began. While expectations have shifted higher so the opportunity to find a stressed, well placed properties is more challenging. Our balance sheet is prime, so we will see what opens up in the coming months.

Now I’ll hand the call to JP.

John Petersen

Thank you, Joe. I will start with an overview of current market conditions and follow with specific results of PSB’s portfolio, then turn the call over to Maria to review progress on our DC acquisition.

From a macro perspective, the leasing environment is healthy and lease activity is showing up in the statistics. Net absorption was positive in the fourth quarter in most of our markets. The momentum saw in the second half of 2012 has continued in 2013. The negotiation of the lease terms is still determined on the micro-market and even park-by-park basis. With some markets like Texas, Northern California and Florida seeing more friendly conditions. Even in other markets with weaker demand factors such as Orange County, Washington Metro and Phoenix, total activity is relatively healthy. Blended market occupancy where we own assets was up slightly to 89%.

I will now take you through PSB’s results for the quarter. As Joe touched on, we continued 1.9 million square feet of transactions with a blended term of 3.2 years. Washington Metro completed on the 482,000 square feet, Southern California closed 367,000 square feet, Northern California and Florida each leased approximately 340,000, square feet and Texas leased 220,000 square feet.

Same Park occupancy increased 40 basis points in the third quarter to 92.3% Miami reaching to the high 90s taking occupancy of 120 basis points to 97.8%. San Diego was up 268 basis points to 95.2%. Our strongest increase was in Austin where occupants surged 460 basis points to 94.4% as we completed 70 deals under 10,000 square feet. Seattle increased occupancy by 300 basis points to a healthy 93.6%. Dallas [fell] nearly 300 basis points to 90.7% driven primarily by an existing customer partially renewing the downside by over 20,000 square feet. Phoenix was up 114 basis points to 89.7% when two customers over 8,000 square feet left the portfolio.

Cash rental rates fell by 9.3% over expiring rents in the fourth quarter. This decline was a result of a few larger deals we signed in the quarter with higher outgoing rent. This included locking 125,000 square foot renewal in (inaudible) which dropped 23%. In Northern Virginia rent slipped 11.8% due primarily to two deals over 10,000 square feet relative to market. Without these deals, total company rent change was negative 5.6% which is in line with the first three quarters of 2012.

Our remaining market rent declines were in the low single-digit range except for Austin where rents up 3.3% and Dallas where rents grew 1%. Retention in the fourth quarter was 60% while 2012 full-year retention was 58%. Strong retention was realized in Florida at 76%, Washington metro at 68% and Southern California at 64%.

Retention in Northern California was 34% primarily due to a 180,000 square foot customer leaving the portfolio. We were then able to expand an existing customer into that space with nominal downturn. Retention in our other markets was in the high 50% to low 60% range.

Now, I will turn the call over to Maria.

Maria Hawthorne

Thanks J.P. The political status quo continues in Washington DC. Election (inaudible) there no change for White House, Senate or House of Representatives and sequestration is still a headline. Despite this (inaudible) we continue to execute on our plans to reposition our occupation and see a continuing success in growing our occupancy. As most of you know since March of 2010, we've acquired 1.7 million square feet in two markets, (inaudible) Maryland and Tysons in Northern Virginia.

Overall average occupancy at these acquisitions was 63.6% representing 630,000 square feet of the agency at purchase. We are making significant progress outside of the single facing building physical repositioning is complete and today rented occupancy at these Washington metro acquisition is 84% for total net absorption of 355,000 square feet. Excluding the vacant buildings, occupancy is 90%.

Positive net absorption and growing occupancy validates our focus on small users even with the budgetary and political forces at hand. More specifically, in total, we have completed over a 180 transactions totaling nearly 480,000 square feet of new leasing for an average sale price of approximately 2,670 square feet. [TLC] Same Park occupancy in Washington metro is 90.8% and we anticipate continued progress with our acquisition as we move forward into 2013. I will now turn the call back to JP.

John Petersen

Thanks, Maria. In Northern California, the 5.3 million square foot industrial flex acquisition is progressing well. Our teams were able to complete 183,000 square feet of leasing in the quarter. We now have completed over 1.9 million square feet of total leasing, average of approximately 1 million square feet roughly in two leases while 900,000 square feet for renewals.

We have grown our occupancy in this portfolio from 82% at the date of acquisition to 87% today, we remain encouraged about our ability to drive occupancy and lease terms in Northern California portfolio.

In 2013, we've approximately 7.4 million square feet expiring with an average tenant size of 38,000 square feet. Of that, flex represents 61%, industrial 24% and office the remaining 15%. 1.8 million square feet or 23% of these explorations occur in Northern California, which is a combination of flex and industrial spaces and 1.5 million square feet or 20% happen in both Washington metro and Southern California.

With all of other markets close to or above 90%, improved productivity on leasing fundamentals, our portfolio is well positioned to benefit in four years of difficult conditions. Based on this review, these 2013 explorations has an opportunity to push rents and continue to move occupancy higher.

Now I will turn the call over to Ed.

Ed Stokx

Thank you, JP. Adjusted FFO for the fourth quarter of 2012 was $1.20 per share compared to $1.13 per share for the fourth quarter of 2011, an increase of 6.2%. These amounts exclude a $1.8 million of lease buyout payment in the fourth quarter of 2012 as well as acquisition transaction cost incurred in both periods.

Excluding these adjustments, reported FFO per share for the fourth quarter was $1.25 in 2012 and $1.04 in 2011. The FFO increased in the comparable periods was driven by a higher NOI from acquired assets as well as a 1.4% increase in the Same Park NOI.

The Same Park NOI increase was a result of a 1.1% increase in revenue offset by a modest 0.4% increase in expenses partially offsetting NOI were increases in interest costs and preferred equity distribution as the company has used a combination of short-term debt and permanent preferred equity to fund its growth.

The $1.18 million lease termination payment received during the fourth quarter related to a 39,000 square foot tenant in Northern Virginia who had a contractual right to terminate their lease subject to payment of a defined penalty. Approximately 75% of the space was released with no downtime.

During the fourth quarters of 2012 and 2011, the company incurred acquisition transaction costs of $192,000 and $2.8 million respectively. For the years ended December 31, 2012 and 2011, adjusted FFO was $4.74 and $4.46 per share respectively, a year-over-year increase of 6.3%. In addition to the adjustments I noted for the fourth quarters and for the full year of 2012, the company reported non-cash charges related to preferred equity redemptions of $17.3 million.

For the year ended December 31, 2011; we reported a net gain of $7.4 million related to the below par repurchase of preferred equity as well as the lease termination payment of $2.9 million. Excluding these adjustments, reported FFO per share for 2012 and 2011 was $4.24 and $4.69 respectively.

For the full year, Same Park NOI increased 0.7% as revenues on comparative basis were flat, while expenses decreased 1.3%. NOI from acquired assets increased 137% or $34.8 million. Recurring capital expenditures for the years ended December 31, 2012 and 2011 were $49.9 million and $43.6 million respectively. The increased from period-to-period was primarily driven by cost incurred in connection with our lease out of assets acquired over the past two years.

The company's FAD payout ratio continues to be one of the lowest in the industry at 53.6% for the year ended December 31, 2012 compared to 56.2% for 2011. In 2012 the company generated free cash of $40.4 million, an improvement of 7% over 2011 when we generated $37.8 million.

Before we open the call for your questions, I will quickly recap where we stand from a balance sheet perspective. We began the year with unsecured debt of $435 million between the balance on our credit facility and the term loan. Over the course of the year, we have been able to reduce this balance to $200 million outstanding.

In addition, between repayments made during 2012 as well as in the first quarter of 2013 we have reduced the amount of mortgage debt outstanding by $32 million leaving us with just the one $250 million mortgage assumed in December 2011 in connection with the Northern California acquisition.

At this point we will open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jordan Sadler from KeyBanc Markets.

Craig Mailman - KeyBanc Markets

Craig Mailman here with Jordan. JP it seems like you feel pretty good about the prospects to push rents and occupancies up from 2013. But you know its been tough to do so, so far ex some of the larger one you guys are down about 5%. But just looking at kind of the lease roll for 2013, it seems like its larger than average.

Could you just give maybe some thoughts about where you see the opportunities to push rents versus where you guys may still be kind of a price taker and where maybe, I know you don't give guidance, but maybe a sense of directionally where rent spreads could shake out next year?

John Peterson

Sure. Well, as I mentioned in my remarks, our expirations are an average tenant size of 3800 square feet. So as you well know that's right in our sweet spot. So where do we think we have the chance to put rents on those size user of course. What's important is we talked about before is getting occupancy for us to plus 90% range, and then once we do that we have the ability park by park, market by market, to push rents higher you know and we are there right now.

Beyond that demand factors are good in most of our markets. Maria touched on the absorption we've been able to achieve in DC, and so I'd think as we go forward into ’13, we will be able to target our small users like we always do. We are going to be able to take advantage of these expirations on our small users and park by park and market by market push rents. We do have some larger leases expiring like we always do and we are going to have (inaudible) as we always will.

Craig Mailman - KeyBanc Markets

And then just in Austin you guys had a good quarter there, and I know you know there's a lot of small leases. Any particular industry or trend you guys are seeing that really drove that.

John Peterson

Austin has been a strong market for a while for us and there is everything from tech to electronic gaming down there, government is strong down there. The capital, so we're seeing a cross section of users, Craig, down in Austin, that are really driving our activity. Nothing other than those three that I mentioned.

Craig Mailman - KeyBanc Markets

Okay, and then just lastly on acquisition opportunities. Joe, what are you seeing from pricing and relative to your kind of return expectations? How far has pricing moved in the last quarter to attracting the scale and what you are seeing kind of how much we expect the transaction volume to slow for you guys?

Joe Russell

Well, again, Craig, it's tough to tag what kind of volume we make. As I noted, we're pleased by the amount of new acquisition opportunities that seem to be entering the market, and they are going in the first part of 2013. Again what we saw through 2012, I would say, we’ll play out probably going in to this year too, which, you know, again sellers have a bit higher expectations because interest rates are still at historical low.

There is some capital out there that are chasing deals pretty competitively and our angle will likely continue to be more often than not repositioning opportunities. If you look at our volume in 2012, there is quite like. We did about $55 million in acquisition, which was less than 10% of what we've done in the prior year. Now, again, it's always tough to predict exact volume levels, but our underwriting standards are going to be consistent and we are going to look for ways to improve shareholder value in returns and accretive opportunities through acquisitions not just compete to the top dollar buyer.

So I am confident we are going to find some good stuff, but the timing of that will be interesting and we will see. But as I noted, there seems to be a little bit more activity coming into the first part of this year. Like 2012 there is even a mixture of some stuff that did not trade last year, so there is a little bit of a again the stuff that didn’t meet the seller expectations. So those sellers will likely try to sell it again this year. Whether or not they will get to their pricing we’ll see. But that’s something that we are going to stay very focused on, but we are not going to be able to peg exactly what kind of volume (inaudible) well we are well prepared for it, but we will see it happen.

Operator

Your next question comes from the line of Josh Attie from Citi. Your line is open.

Josh Attie - Citi

As you pointed out 2013 does have an elevated lease role with 28% of your rents expiring. It doesn’t look like you chipped away at that at all in the fourth quarter, and I think you have mentioned in the past that there are few larger deals in there and that you had viewed those larger deals as all potential renewals. Can you just update us on the progress that’s been made and if you still review those deals that way?

John Peterson

Yeah go ahead Joe.

Joe Russell

Yeah I will may be say a few things Josh and [John] you can add. Josh the thing that is for us I think a positive going into 2013 again the field of exploration is as JP noted right in our sweet spot so 4,800 square feet on average and part by part we are going to continue to pushing forward where we think we are best suited to strike our new transaction opportunity based on optimizing the new lease rate.

So we were not implying to do a heavy way of free leasing going into this year because frankly we think the market conditions are coming to our direction and we will pay that again on a part by part basis as we migrate through this year.

We are very confident about our prospects in 2013 no difference there in what we have had about a year ago and so last year we did a record amount of leasing and my guess is this year we will too.

John Peterson

And other thing Josh to add on to that, the majority of our leases there in Q3 and Q4 as to Joe’s point, we are not going to reach out early and we think in market are moving towards us in a favorable manners. So we are going to be patient and we are going to strike on at the right time for there smaller units that we typically target.

Josh Attie - Citi

And do you feel comfortable that you can maintain your 60% retention ratio through 2013?

Joe Russell

Well, hopefully we will find ways of even improving off of that. Without question the more renewable activity we do, there is typically going to be better economics tied to it. So that’s certainly something we pay a fair amount of attention to. So if we can keep those renewal averages north of 60% levels, we will be (inaudible) by that and we be helping us way out.

Josh Attie - Citi

And then just lastly, as you mentioned you have one $250 million floating rate term loan still outstanding, it doesn't mature till the end of 2014 and I guess how do you think about the timing of refinancing that debt is, do you look at that debt as being in the place to kind of support the transitional assets in Northern California and then as those assets lease up you’ll refinance the debt or do you look at it as a function of timing when you can kind of issue preferred at the best rate?

John Petersen

Josh, I think we look at it as the latter whether our opportunity to put permanent capital in place, you know, we've been very clear since we put that term loan in place and our ultimate goal and strategy was to repay that down overtime. We've been able to take that down from 250 to 200 as well as paying down the credit line in full and I think as opportunities present themselves at very attractive prices, we will continue to do that.

Operator

Your next question comes from the line of Rich Anderson from BMO Capital Markets. Your line is open.

Rich Anderson - BMO Capital Markets

So the 9 million square feet of unstabilized or recently acquired property is 83% occupied, I think you said. Assuming that number continues to go up during the course of 2013, do you have any sense of how much of an offset that creates to make for a breakeven year even from an operating standpoint, in other words could the same store growth go almost 2% or 3% negative and still the total portfolio will be positive because of that non-same store growth factor. Is there a way to quantify that?

John Petersen

Well, Rich, I think we probably do that sensitivity analysis, but frankly we are not looking at it that way in terms of that growth offsetting the Same Park portfolio as Joe noted and we noted and we reported 1.4% Same Park growth; the highest numbers since 2008 and we are looking to continue that to take advantage of that trend.

Joe Russell

The other thing, just one other point, so again the 9 million square feet of acquired assets you know part by part we have seen consistent migration or in performance of occupancy and because of that revenue levels, so part by part we are making good progress along the lines of each of those assets, some of which are either at or now well beyond Same Park occupancy levels, so the pool of remaining “unstabilized” parts in that entire 9 million square foot collection is kind of almost quarter by quarter getting smaller. So the point being I mean nothing is going backwards.

Rich Anderson - BMO Capital Markets

One of the things I don't know if you touched on much, if you guys have dispositions and I am curious how you think about that, you have a hot market in Austin and maybe that's the time to be a seller there or Texas in general. I am just wondering what your strategy is from a disposition standpoint if any?

Joe Russell

Sure. It’s a good question and its something that we evaluate portfolio wide; you know, very small scale, but we did sell our last remaining asset in Houston; again, that took place in the fourth quarter. Speaking a lot and specifically, in the quarter we actually grew there and we're very pleased by our position not only in Austin, but Texas, which the other component is Dallas is all very good for us and….

Rich Anderson - BMO Capital Markets

But it may not be forever, right?

Joe Russell

Well yeah, but we're very pleased by the position and the locations and the park concentrations we worked hard to accumulate over many years there. But, you know, again we're going to continue to look at that; more often or not, it maybe on an individual asset basis or something that may just strategically not make sense, but I wouldn’t, at this point, point to particular asset and tell you that it's prone to be recycle. So it's an internal review we constantly do, but we're overall pleased with the platform we got and hopefully we find ways to make it additive.

Rich Anderson - BMO Capital Markets

When you’ve seen what's happen in D.C. area, you’re kind of hanging in there okay, but, is there anything about all this noise and rhetoric and political craft going on that makes you rethink D.C. in terms of it's size relative to the overall portfolio?

Joe Russell

Well, I will start and Maria is living that day-by-day, so I will let her answer some of it specifically. You know, without question our D.C. portfolio is not a burden to us; it's the opposite. I mean we are enjoying the strategy decisions we've made intentionally there which is to be a small user operator in very selected submarkets. Overall but then, again good performers for us. In the last two to three years, we've grown dramatically in Tysons and I will tell you we are very pleased by the repositioning efforts and the [reactivity] to what we are doing with a small user focused there because frankly there are few other landlords are doing that. And hopefully, it gives you a perception of the market itself with all the headlines that goes on there has a good undercurrent of our user type that again Maria and her team there are doing very good job.

Maria Hawthorne

I was just going to say just add a little more color which is we own mostly in (inaudible) County. So just remember unemployment in both of those counties is sub 5% which is way below the national average. DC has actually seen job growth. So I know there is a lot of turbulence right in the district and especially with some large government users and the big government contractors but again and even when J.P. talks about the average sized customer expiring this year that is no different for Washington DC than it is for the rest of the company. We are right there with our average expiration of 3,700 square feet and so that’s with (inaudible) I mean, DC still continues to be a great demographic for us, the job growth in start up companies.

Rich Anderson - BMO Capital Markets

You know this is along the same lines of the question of dispositions as there is a good time then to just go back since you have done okay there and that was really the point. In terms of lease expiration schedule in out years, is there anything about 2014 and 2015 that is either positive or negative relative to your expectations for this year?

John Petersen

Well, no I think it’s in line with most of the years.

Rich Anderson - BMO Capital Markets

Okay, and then last question, I guess maybe for Joe, maybe the sense of mind, but did you kind of elevate your optimism this quarter versus your comments last quarter, it seems like there was a little bit more of a tepid view of the world than the tone of your comments today, is that a fair way of thinking about where you stand?

Joe Russell

Well, I mean I was there with a major shift but what we have, I think engaged by you know, in the eight place that we operate in and we have a 100 sub business parts that we operate and its quarter-by-quarter to last year and not going into this year. We were getting to 4,600; 4,700 tenants and business activity that we see from them and with that question the fourth quarter had a lot of overhang because of I know with the fiscal cliff and the election and all that garbage but in our bread and butter, customers seem to be doing quite well and we are pleased by the fact that a lot of them are bursting at the fields and what so we are seeing lot of good discussions take place around expansion or our growth opportunities and there is more (inaudible) mix than we see, so on the margin that we are a little bit more optimistic in that regard, I would say, yes.

Operator

Your next question comes from the line of John Stewart from Green Street Advisors. Your line is open.

John Stewart - Green Street Advisors

Maria, I was hoping you could shed a more light for us on the lease termination in the DC region during the quarter?

Maria Hawthorne

Yeah, we had a large medical user to which was tied to a government contract and so they had the right to terminate, you know, if they lose the contracts which they did and they have been a customer for 22 years but we were able to backfill, they had two states, one was their medical facility and one was a 10,000 square foot warehouse. We were able to backfill the medical facility immediately with another healthcare who has now become the largest tenant at that property which is Prosperity Business Campus.

John Stewart - Green Street Advisors

Okay, and just sticking with you for a minute, will there be any exposure after much one they will sequester…

Maria Hawthorne

The sequestration question?

John Stewart - Green Street Advisors

Yes.

Maria Hawthorne

I think what we are seeing and this is kind of, this is a question I do ask all my government contractors and customers when we meet with them as well as our government users, what you are, in essence they are operating as the sequestration is happening. So you don't see big new deals being taken down, in fourth quarter the government finds only three (inaudible), one was a very large one, in Northern Virginia, the office of intelligence, one of them was actually our renewal for 80,000 square feet at our West Park Business Campus and that is very unusual for the government so that means the government users are just on hold even though we have pacers and I am sure there are only (inaudible) where they have customers bursting at the scene, no one is willing to expand right now, no one’s really going to go long term, but what we are seeing is that if you have government users and contractors in place, they are tending to renew and probably that's why you see our retention in Washington metro at 68% range.

John Stewart - Green Street Advisors

And the 80,000 square foot renewal was that the FDA?

Maria Hawthorne

No it was another government user in Northern Virginia.

John Stewart - Green Street Advisors

Shifting gears quickly and I don't know if this one is perhaps for Joe or Ed but I guess what's the plan or the status on vacant building in DC?

Joe Russell

Okay, so John yeah there's a couple of things there. So that's at our West Park Business Campus. Today we own 45 acres in the heart of Tysons which I know you are well aware of and we are nearly starting to see some interesting things play out as the $7 billion of infrastructure comes to fruition and completion. The hot lanes and all the free way infrastructure is now complete. We've got a front door to our park based on that now so this has provided an extra level of access and a variety in a positive way to the Park. So that's a positive thing and then the metro line is you know certainly another couple of years now.

Maria Hawthorne

No, this year.

Joe Russell

Or even this year I'm sorry. So that coming into fruition you know very quickly as well. So with that, we've been entertaining some other things that's tied to that particular building. When we acquired the Park it was vacant. We intentionally held it vacant as we leased up the rest of that portfolio which is now about 90% occupied and we are going to see how that plays out for a variety of different alternative uses knowing that there maybe additional FAR possibilities and other things. So Ed is not going to be putting that asset in the Same Park on operations in 2013 and we will continue to update you as our plans unfold in that particular asset.

John Stewart - Green Street Advisors

Any sense of timing for when something might happen?

Joe Russell

Well, I would say our plans will become clear through this year. Again as we work through a number of different alternatives that frankly also includes just building users too, but again because this infrastructure upgrades been so powerful and frankly, much more powerful than we even imagine when we bought the park, we will be presented with pretty interesting alternatives. So as those things come in to more clarity, we will continue to update you.

John Stewart - Green Street Advisors

The way that would think about it then I am putting words in your mouth, but would you characterize your DC acquisition since 2010 as essentially stabilized but for this one building that you are holding out because you have different designs or different game plans for that asset?

Joe Russell

Yeah, John, I think we were right in that zone. Again, if you look at, where our Same Park occupancy is in the DC market and how the acquired asset pool is, either we’re asset level or a number of cases part by part we are above that level. So the heavy lifting is done, lets put it that way.

John Stewart - Green Street Advisors

Okay, and then lastly from me just on the [Reece] portfolio, when do you think that you will achieve stabilization on that day and how does that compare to you initial underwriting?

Joe Russell

Okay, well, I will answer that and JP you can give a little bit more color too. But we're pleased certainly by what I would call refreshment year on that portfolio where we did nearly 2 million square feet of leasing half of which was new and would certainly help with the fact that both JP and I have some history on a number of those assets.

So the market there is good and we are as our team stabilize meaning we have got our full PSB and very talented group of individuals running that portfolio. So we expand in that market getting closer and closer at each and every part in sub market and we are really starting to see the value of the size of that portfolio combined with our same park properties, and I think we are overall very pleased by it’s trajectory and what we are going to be able to accomplish now going (inaudible).

John Peterson

Yeah and John the opportunity for us is to literally work the vacancy that we have and the opportunity we have there and our renewals and how do we do. The markets strong as Joe mentioned, our team is in place and we are really pushing where we can on rents and lease terms as that market is very healthy.

So it’s not a question of grabbing occupancy just to grab occupancy, and we are all really working these deals hard, our teams are working these deals hard. So our focus is not just getting it to 90% our [folks] but it’s on doing the right deal, at the right time, at the right park. So we are working very hard to do that.

John Stewart - Green Street Advisors

And I assume you would have underwritten that lease to two year lease up initially?

Joe Russell

Yeah it’s in that range John again when we bought Miami several years ago which we have used as a comparable asset in many ways, again low occupancy, low 80% occupancy when acquired and again in most of my two year timeframe it pierced through the 90% level and we would hopefully think to play out here and based on what happened in the first year loan, I think we are pretty confident that we got equal levels of opportunity going to 2013.

Operator

(Operator Instructions) Your next question comes from the line of Michael Mueller from JPMorgan. Your line is open.

Michael Mueller - JPMorgan

I guess sticking with the non same store assets the occupancy is about 82%, and if we are looking at that 18% of vacancy, how much of that is available today, if it kind of came in versus its like form building where it’s being repositioned and not available today?

Joe Russell

You know Mike, so here just a couple of larger chunks of that. You noted the one building, so that’s about 125,000 square feet again that’s at [West] Park. The other more recently acquired park is in Kent Valley, so that is our 2012 assets. And again when we acquired that it was about 50% vacant, so that’s about 450,000 square feet of vacancy.

But as I noted the good news is, we actually were able to do about 70,000 square feet of new deal activity leasing without even getting with the point of repositioning a lot of that vacancy, but that 70,000 we just signed any other works of that which is just little under 400,000 square feet is in notion to be repositioned not unlike again what we did in Miami a few years ago.

We are taking bigger blocks of industrial state, targeting them down to what we feel is very active part of that market. There have been smaller user industrial spaces, so that will take us a little bit of time, two or three quarters to get that completely market ready. But it’s all in motion, but outside of that the rest of the acquired vacancy it is in pretty good shape.

It’s a small space but in Austin the deal that we closed in the fourth quarter we've got one space that's actually shell. So we got to do a little bit of make ready or market ready work on assets. Overall there’s not a big pool of repositioning activity necessary outside the Seattle property at this point and the one in Washington DC, that one building.

Michael Mueller - JPMorgan

And when you were talking about the DC building before I think the term you kept saying was like interesting things happening or seeing interesting alternatives, considering alternative stuff like that. I mean are you considering putting a single large tenant in there as opposed to carving up and going with the bread and butter small tenants.

Joe Russell

Well, that's certainly possible. Is it likely? You know we are not counting on that and as you are well aware of that isn't our kind of day to day strategy. What I maybe talking to a little bit more specifically is because of the range of infrastructure that's coming to closure there, there are certain additional densities that can play out and maybe some additional uses that we are also pursuing. So that particular building is on a kind of a prime five acre, simple almost perfectly configured piece of dirt and because of that it just has a lot of appeal to a lot of different user types. So we are going to pursue all of that and we will keep you posted.

Operator

There are no further questions at this time. Mr. Stokx I'll turn the call back over to you.

Edward Stokx

Thank you Nicole. Thank you everyone for joining us and we appreciate your interest in the company and we look forward to talking to you at the end of the first quarter. Take care.

Operator

This concludes today's conference call. You may now disconnect.

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