Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

PS Business Parks Inc. (NYSE:PSB)

Q4 2013 Earnings Conference Call

February 19, 2014 1:00 PM ET

Executives

Ed Stokx - Chief Financial Officer

Joe Russell - President and CEO

John Petersen - Chief Operating Officer

Maria Hawthorne - Chief Administrative Officer

Analysts

Craig Mailman - KeyBanc Capital Markets

Jordan Sadler - KeyBanc Capital Markets

Eric Frankel - Green Street Advisors

Michael Mueller - JPMorgan

Operator

Good afternoon. My name is Sheen and welcome to the PS Business Parks’ Fourth Quarter Investor Conference Call. I will be facilitating the audio portion of today’s interactive broadcast. All lines have been placed on mute to prevent any background noise. For those of you on the stream, please take note of the options available in your event console. (Operator’s Instructions)

At this time, I would like to turn the show over to Ed Stokx. You may begin your conference.

Ed Stokx

Thank you. Good morning and thank you for joining us for the fourth quarter 2013 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, Chief Administrative Officer.

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 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.

Now I will turn the call over to Joe.

Joe Russell

Thank you, Ed. Good morning and thank you for joining us. Today I will start with a brief overview of fourth quarter results and then spend a moment putting some perspective on full year 2013 performance. The fourth quarter was a mixture of strong leasing volume with slightly negative rent change, flat Same Park occupancy but continued occupancy growth and Non-Same Park assets.

In total, Same Park NOI was up 2.1% comparatively and adjusted FFO increased 1.6%. A key driver for the company is the ability to re-price space at today's rates, and we remain encouraged that recovering market dynamics will benefit renewal and new leasing comparable in both Same Park and newly acquired assets.

Since the broadest pool of leases we're rewriting were signed over the last four years when conditions were more tenuous. JP will go into more detail on our quarterly operational results and Ed will discuss the financials. As previously announced in Q4, we raised $192 million through a common equity offering, the second follow-on offering in our 16 years of the public company.

Demand was strong, and we were pleased by the level of participation from existing and new shareholders, including the $75.3 million investment from our largest shareholder, Public Storage. On the acquisition front, we closed on Bayshore Corporate Center for $60 million, which is a 340,000 square foot multi-tenant office park in San Mateo, California.

This asset like the majority of parks acquired over the last four years is in need of repositioning from both a physical and operational perspective. Occupancy at acquisition was 81.8% with the average in-place suite size already in an ideal PSB zone at less than 2000 square feet.

The strategy here is to once again duplicate what we have done on the approximately 10 million square feet of acquired assets since early 2010. This includes some common area of physical enhancements, landscaping, and signage upgrades, and most importantly, infusing a team of PSP professionals to handle leasing and property management.

This site is extremely well located and sits at the intersection of two heavily traveled freeways in the Mid-Peninsula market of the Bay area. The park is a perfect fit for a small user environment as it is configured by seven identical three-story buildings on a prominent 15-acre site that faces the 101 freeway. We will keep you posted on repositioning progress over the coming quarters as we expect the physical upgrades to be completed by the third quarter of this year.

Now to reflect on full-year 2013 results. Over the last 12 months, PSB moved forward on several initiatives and saw positive results that were encouraging as we began 2014. Here are some highlights.

First, Same Park NOI of 1.4%, the highest full year NOI growth since 2008. Second, healthy leasing volume which totaled 9.1 million square feet in over 2200 transactions, an all-time high for the company. Third, stabilization of several newly acquired parks led by the Northern California flex/industrial portfolio which has grown our occupancy by 1200 basis points and now stands at 94%.

Fourth, total capital raising of $300 million to a record low coupons preferred offering in Q1, and a Q4 common equity offering I just mentioned, which combined with our free cash flow provided at $345 million to pay down short-term borrowings while taking PSB’s fixed charge coverage ratio to 3.7 times in the fourth quarter.

And fifth, acquisition volume of 116 million as we added 1.5 million square feet of flex and office assets in Dallas and the Bay Area, all bought well below replacement costs with strong upside in occupancy once repositioned. Through the efforts of our leaders in the field and here at the home office, the company is well positioned to capture the growing economic activity we see in the majority of our markets.

Coupled with the fact that we now own 108 well located business parks that gives us the opportunity to focus on the most vibrant part of each market, the broad cross section of the small business America. As noted, the company’s balance sheet is in great shape and will give us plenty of capacity to consider interesting growth alternatives in the future.

Finally, we announced yesterday a 13.6% increase in our quarterly dividend to $0.50 per share.

Now to JP’s comments.

John Petersen

Thanks Joe. I will start with an overview of current market conditions and follow with specific results of PSB’s portfolio. From a macro perspective, the leasing environment is healthy, and this activity is showing up in the statistics.

Net absorption was positive in the fourth quarter in all of our markets. Texas and Northern California are two of our most active markets with solid tour velocity. The leasing decisions are being made quicker, especially with small businesses, markets with demand factors improving are Orange County, Washington Metro, and Phoenix. Blended market occupancy where we own assets was 88.5%.

I will now take you through PSB results for the quarter. Driven by this active small business environment, we completed a record 2.7 million square feet of transactions with a blended term of 3.7 years. Northern California led with 644,000 square feet. Texas was not far behind with a healthy 567,000 square feet. Southern California was also active and executed 432,000 square feet in 182 deals, an average deal size of 2,400 square feet.

Washington Metro completed almost 308,000 square feet in 114 deals, a 2,700 square foot average. On the large tenant front, importantly, we completed a lease termination and buyout with a 75,000 square feet customer. Fortunately, we were then able to re-lease the space to Nike, plus an additional 35,000 square feet in an adjacent building.

We now have approximately 240,000 square feet leased to Nike in Beaverton at Cornell Oaks Business Park. Same Park occupancy remained unchanged from the third quarter at 92%. The strongest increase was in Northern California where occupancy improved 230 basis points to 93.6%.

Orange County jumped 120 basis points to 92.1% and Phoenix grew 40 basis points to a solid 95.9%. In Northern Virginia, occupancy slipped 135 basis points to 90% due to two large flex users leaving the portfolio. In Austin, occupancy fell 119 basis points to 90.4% and Seattle was up 50 basis points to 94%.

In our remaining markets, same park occupancy was essentially flat. Solid occupancy gains were realized in two of our Non-Same Park assets; 212th Business Park in Seattle and the Northern California flex industrial portfolio. At 212th Business Park, we increased occupancy 590 basis points to 69.1% at the end of 2013 and the Northern California acquisitions grew occupancy 490 basis points to 94%.

Cash rents fell slightly at 0.4% over expiring rents in the fourth quarter. In Dallas, our team was able to grow rent 9.3% and in Austin, rents were up 5%. Florida captured market and occupancy momentum to grow rent 6.9%, and the Orange County rents improved 1.1%.

In Washington Metro, rents decreased 7.2% due to a handful of longer-term spaces over 10,000 square feet re-leasing at market. Rents in Northern California were up 4.3%, as one large deal coming off a 15-year lease was renewed. In our remaining markets, rent declines were in the low single-digit range.

Retention in the fourth quarter was 56%, while 2013 full year retention was 61%. Strong retention was realized in Texas at 72%, Florida 70% and Seattle 63%. Retention in Northern California was 53%, as one large user left the portfolio. Washington Metro was 51%, primarily due to one customer over 30,000 square feet that vacated in Q4.

We have since re-leased 20,000 of these 30,000 square feet. Southern California retention was 49%, mostly due to two customers totaling nearly 80,000 square feet leaving in Q4. Retention in our markets was in the high 50% to low 60% range. In 2014, we have approximately 7.3 million square feet or 25% expiring. This represents a normal year in terms of lease roll and an opportunity to capitalize on improving market fundamentals.

Of that flex represents 56%, industrial 26% and office the remaining 18%. With all of our markets close to or above 90%, improving tour activity, and leasing fundamentals our portfolio is well positioned going forward. Based on this, we view the 2014 expirations, average size of approximately 3,000 square feet as an opportunity to tap into the active small user environment, move occupancy higher and push rents.

Now, I will turn the call over to Ed.

Ed Stokx

Thank you, JP. Adjusted FFO, as outlined in our press release, for the fourth quarter of 2013 was $1.26 per share compared to $1.24 per share in the fourth quarter of 2012, an increase of 1.6%. For the year ended December 31, 2013, adjusted FFO per share was $4.95 per share compared to $4.86 per share in 2012, an increase of 1.9%. These increases were driven by growth in total portfolio NIO, partially offset by the impact of the company’s common equity offering and the increases in outstanding preferred equity.

In the fourth quarter, Same Park NOI increased 2.1% over the same period in 2012, driven by a 0.6% increase in revenue and a 2.7% reduction in expenses, including approximately $600,000 in property tax savings. During the same period, non-Same Park NOI increased 28.6%, as occupancy of acquired assets continues to improve combined with NOI derived from the $116 million of acquisitions acquired in 2013.

For the full year, Same Park NOI increased 1.4% with revenues increasing 1.2%, while expenses were slightly higher by 0.6%. The revenue growth was driven by a 30 basis improvement in year-over-year occupancy combined with a 0.9% increase in realized rent per square foot. Non-Same Park NOI increased 18.7%, driven by occupancy growth combined with assets acquired in 2013.

In 2013, we had recurring capital expenditures of $49.2 million compared to $49.9 million for 2012 and in 2013 we incurred $9 million of non-recurring capital improvements, primarily related to repositioning of acquired assets. And then 12 months ended December 31, 2013 and 2012, the company retained free cash of $44.6 million and $40.4 million respectively and the company’s FAD payout ratio was 51.3% and 53.6% respectively.

At the beginning of 2012, the company put in place a long-term incentive plan based on the company’s ability to achieve certain defined growth goals over a 4-year period. The original plan targets were based on a strong economic recovery starting in 2012. Given the pace of the recovery, management has concluded that the targets are not likely to be met. Accordingly during the quarter, we reversed $6.9 million of non-cash compensation expense recorded through September 2013.

In addition, we also stopped recording expense at that time increasing fourth quarter FFO by $1.1 million or $0.03 per share, representing the compensation that would have been recorded in the quarter. The reconciliation of adjusted FFO in our press release provides true comparative results by neutralizing the effect of the long-term incentive plan in each period.

We also noted during the quarter -- the fourth quarter, we reported a gain on the sale of our interest in Stor-RE of $1.1 million. The investment represented a long held ownership interest in an inactive insurance captive, primarily owned by Public Storage.

As Joe noted, during the quarter we had a very successful common stock offering. Proceeds were used to repay the remaining balance outstanding on our term loan of $90 million and to acquire Bayshore for $60 million. Today, the company has $54 million of cash on hand and full availability of its $250 million credit facility.

We will now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Craig Mailman from KeyBanc Capital Markets. Your line is now open.

Craig Mailman - KeyBanc Capital Markets

Good afternoon, guys. Jordan Sadler is online with me also. Just curious on the expirations for ’14, I want to go back to Joe’s earlier comments about being able to re-price the portfolio. Just wondering if you guys have an estimated mark-to-market of where you think those leases are versus market rents?

Joe Russell

Yeah, Craig, no, we don’t talk to the forward-looking numbers in that regard. The thing that you are certainly hearing us talk to, which we’re optimistic about is as market conditions improve, we are feeling again more confident and are seeing evidence of growing traction just on pricing. So again, statistically as I did note, most of the leases that we’re going to be rewriting from an expiration standpoint, we’re probably fine. On average about three years ago, market conditions were quite different than they are today. So, the teams out in all of our markets are very focused on that aspect of all leasing dynamics, and again, going into this year, we are pretty encouraged by that.

Craig Mailman - KeyBanc Capital Markets

And just looking -- the rent -- the flat, slightly negative rent roll down this quarter, it looks to be kind of skewed by DC and Northern Cal. Is it fair to think that those are kind of more one-time in nature of those drags and maybe we get back to -- I know you guys don’t give guidance but maybe on track of the same trend that we’ve been seeing over the last couple of quarters of the improving rent spreads sort of in the positive territory?

Joe Russell

Yeah, that’s a fair perspective, particularly the case in Northern California, there was one or two situations JP talked about, the largest that came up with a 15-year lease. And as we’ve seen with that portfolio and now that we’ve owned it two years, market conditions there continue to be favorable. Maria can give you a little bit color on what seems to be trending in DC, and again with that again, your overall comment is fair.

Maria Hawthorne

Okay. And then speaking specifically to DC, as JP said, we’ve got about 1.3 million square feet or 20% of the portfolio expiring this year. And just to give you a breakdown, 33% are deals that are over 20,000 square feet with an average square foot size of 28,000, and then the remaining two-thirds percent or two thirds of the expirations averaged about 2,900 square feet. And then to put more in perspective, the average vacant size is 3,700 square feet, and then we are encouraged in DC given the fact that we now have a budget in place and we seem to be past the main impact of sequestration.

Craig Mailman - KeyBanc Capital Markets

That’s helpful. And then maybe staying in DC, we saw some articles, more about the JV on the multi-family, redevelopment down there. Could you maybe give us an update on that and maybe size? Is it accurate what has been in news reports up to 400 units?

Joe Russell

So, yeah, I even read every report out there Craig, but process we’re going through will take additional few quarters, but we have a submittal in front of the county to again take that 5-acre size, the size that we contemplated multi-family development would be approximately 400 units. Things seem to be tracking well. We’ve got a very skilled partner who has very long history and good reputation right there in that market, and as our progress moves forward, we’ll continue to keep you posted, but we’re likely to go through few more quarters until it’s completely definitive, but so far things are tracking well.

Jordan Sadler - KeyBanc Capital Markets

Hey Joe, it’s Jordan Sadler. I just wanted to have a quick question on the Bayshore acquisition. Could you maybe just give us a little bit more flavor on it, vis-à-vis, the REEF portfolio that you acquired in late ’11? I’m just kind of curious as to sort of how things have evolved from a pricing standpoint and what kind of, maybe, stabilized return you guys would be underwriting to today versus back then?

Joe Russell

Okay, sure Jordon, yeah, so that is a different product type compared to the REEF portfolio. So it’s multi-tenant, small, very small user office environment. So, as I noted, it’s seven buildings, they are all identical, three-story multi-tenant office buildings. The edge-up that we’ve got on that deal compared to, for instance, a lot of the office project that we bought out in DC, three or four years ago is that it is already fortunately kind of in our sweet spot from a configuration standpoint.

So, we don’t need to go in and do a lot of capital repositioning just in terms of the actual tenant sizes, so that’s great. It is as I noted a phenomenal location, kind of a classic underperformer, however, to the market in regard to the way it’s been leased and managed over the last 20 plus years under private ownership, so it’s a great opportunity for the company.

We bought it for about 175 bucks of square foot, again because it’s office product. But ironically, both the trajectory with that asset and the cost factors at the end of the day is going to be slightly but actually lower on a per square foot basis than a lot of the office products that we bought in DC.

And once we get it stabilized both from an occupancy standpoint and then, we’re pretty optimistic that we got some strong rent growth there. We should get, as we’ve seen on other like assets, stabilized return on high-single-digit level or better depending again on how much continued traction we see in that market.

But it plays well to our strength, as we’ve seen a lot of markets where we can under the same management structure there in the Bay area, operate this office asset in very like fashion to relate that we’re operating a multi-tenant, smaller user flex and industrial product. So, again, it’s a great anchor, good size property. We’re now the number one and largest owner of that product type in that submarket right there in San Mateo. And again, with that we’ll have and have immediate presence and it’s I think going to be a very good asset for us.

Jordan Sadler - KeyBanc Capital Markets

Is that a one or two-year type timeframe or so for you guys to work your magic?

Joe Russell

Yeah. Yeah, Jordan, I think hopefully, fingers crossed, we’ll start getting some occupancy traction in the next two or three quarters. And we’re actually encouraged by some of the out-of-the-gate activity we’re seeing there but like we’ve had to do in most of the other assets, we've got to put some upgrade into it, because it’s lacking in kind of presence more than configuration of the park itself. So it's going to be an easier transition than a lot of the other office products that we bought, again particularly back in D.C. But it will take us a year plus to get it into the zone we want it to be.

Jordan Sadler - KeyBanc Capital Markets

Okay. Thank you.

Joe Russell

You bet.

Operator

Your next question comes from the line of Eric Frankel from Green Street Advisors. Your line is now open.

Eric Frankel - Green Street Advisors

Thank you. I was wondering if you could just give your thoughts on the preferred equity market and just kind of wonder if that’s actually a useful capital source in the case you find the interesting capital allocation opportunities.

John Petersen

So Eric, the market -- that market has been very quite for a few quarters now. Our outstanding preferred are trading in and around 720 yield. So certainly the yield there has moved up sharply from where we issued in the first quarter of 2013. But it's -- that market has gone through periods of quiet periods in the past and we think it will be a viable option for us in the future, but right now it’s just been a little bit quite.

Eric Frankel - Green Street Advisors

Okay. And then maybe if you could comment on the re-leasing spreads within the portfolio. Out of all the leasing you did during the quarter, how much of this was outside the Same Park pool, just to get a sense of what the actual internal NOI growth might look like in the near future?

John Petersen

We're looking for that exact step, but in terms of just our 2.7 million square feet that we did in the quarter. As I look for that, we saw good traction, especially in the non-Same Park stuff as I mentioned in my comments. And we're able to see especially in certain market, again as I mentioned, traction from a volume standpoint in Southern California which is all Same Park, we did over 400,000 square feet even in -- yeah in Texas we were strong. Of course in Northern California a lot of that was in the non-Same Park, the acquisition that Joe was discussing and where we've seen that traction, especially where we have opportunity to grow rents, I mean grow occupancy. We're able to get a lot of deals done. So I would say in terms of -- we did about 500,000 to 600,000 square feet in the non-Same Parks stuff, Eric?

Eric Frankel - Green Street Advisors

Okay, great. Thank you for that. And then just regarding operating expenses, I noticed sequentially in the Same Park pool operating expenses declined $1.5 million. Ed I believe you mentioned $600,000 of that was due to tax rebate. Was there anything else in there that we should know about?

Ed Stokx

That was the big one on a sequential basis. There was some timing of utilities and what not, but the big one that I wanted to point out because it may not to be a recurring savings is the property tax rebate.

Eric Frankel - Green Street Advisors

But everything else is recurring whereas it will be billed to tenants anyway?

Ed Stokx

Exactly.

Eric Frankel - Green Street Advisors

Okay. And then finally if you just may be go into the dividend rates just regarding your thoughts behind that?

Ed Stokx

Well, Eric, it's been something we -- the board evaluates every quarter and we've been able to keep the dividend at a rate -- the constant rates since 2007, allowing us to retain cash and redeploy that. But as we've grown and our free cash has increased, the board made the decision that it was appropriate at this point to increase the dividend.

Eric Frankel - Green Street Advisors

Okay, thank you. I appreciate it.

Operator

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

Michael Mueller - JPMorgan

Yeah, hi. JP I know you talked about the non-Same Parks occupancies, but I mean I've missed this. Could you say kind of thinking more in the same-store basis for that? So excluding the fourth quarter acquisitions, what that occupancy increase would have been from 930? So I think 930, you started off at 85%, ex-acquisitions where would that have been in Q4?

John Petersen

In the non-Same Park?

Michael Mueller - JPMorgan

Yeah, the non-Same Park. If we get rid of the (inaudible) 34:15 assets that were I think 76% or 78% occupied, once that are 81%, so that obviously pulls down the 86%?

John Petersen

Yeah, sure. So if you include -- if you exclude the fourth quarter acquisitions that we did that like you mentioned and brought down our occupancy in terms of the non-Same Park. If you exclude those, we took occupancy in the core -- in the third quarter from, it was 85.7, we ended the year at 90.7.

Michael Mueller - JPMorgan

Okay.

John Petersen

So we were…

Michael Mueller - JPMorgan

I'm sorry, go ahead.

John Petersen

No, that's it. So, about 500 basis points.

Michael Mueller - JPMorgan

Okay. So it was 85.7 and 9.30 and then you said about 90 or so, okay?

John Petersen

Yeah, 90.7 at the end of the year.

Michael Mueller - JPMorgan

In one quarter, okay. And then just separately thinking about the cash on hand, is there anything imminent on the acquisition front, is there anything under contract or close to being under contract?

Joe Russell

Yeah, Mike, nothing to talk to at this point.

Michael Mueller - JPMorgan

Okay. That was it. Thanks.

Joe Russell

You bet.

John Petersen

Thanks Mike.

Operator

There are no further questions at this time. I will now turn the call back over to Ed Stokx.

Ed Stokx

Thank you everyone for joining us for our conference call. And we look forward to taking to you in the future. Have a great day.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: PS Business Parks' CEO Discusses Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts