PS Business Parks, Inc Q2 2010 Earnings Call Transcript

Aug. 3.10 | About: PS Business (PSB)

PS Business Parks, Inc. (NYSE:PSB)

Q2 2010 Earnings Call

August 3, 2010 11:00 am ET

Executives

Joe Russell - President and CEO

Ed Stokx - CFO

John Petersen - COO

Analysts

David Simon - Citigroup

Craig Mailman - KeyBanc Capital Market

Suzanne Kim - Credit Suisse

Michael Mueller - JPMorgan

Mark Lutenski - BMO Capital Markets

Dave Rodgers - RBC Capital Markets

Chris Lucas - Robert W. Baird

Michael Bilerman - Citigroup

Jordan Sadler - KeyBanc Capital Market

Operator

At this time I would like to welcome everyone to the PS Business Parks Second Quarter 2010 Earnings Call. (Operator Instructions)

I would now to turn the event over to Mr. Ed Stokx, Chief Financial Officer of PS Business Parks. Sir, you may begin.

Ed Stokx

Good morning and thank you for joining us for the second quarter 2010 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; and John Petersen, Chief Operating Officer.

Before we begin, let me remind everyone that all statements other than statements of historical fact included in this conference call are forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond PS Business Parks' control, which could cause actual results to differ materially from those set forth in or implied by such forward-looking statements.

All forward-looking statements speak only as of the date of this conference call. PS Business Parks undertakes no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

For 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 www.psbusinessparks.com.

Now, I will turn the call over to Joe.

Joe Russell

Thank you Ed. Good morning and thank you for joining us. I am going to briefly touch on overall second quarter results. I will go then go on a more detail on our recent and year-to-date investment activity.

PSB's result for the second quarter are basically a continuation of the path we have been on for several quarters. Same-park occupancy has picked 30 basis points sequentially to 91.7%, primarily due to our ability compete successfully for value oriented customers, seeking simple, well-located functional space.

We executed approximately 1.4 million square feet of leasing transactions where cash rents 15.9%, while still [deflecting] high capital requirements as smaller users are not demanding over-standard tenant improvements. The average lease size was 3300 square feet with an average lease term of 3.3 years, which will enable us to re-price these leases in a more favorable environment in the future.

Small user vibrancy continues to drive the leasing activity across all of our markets, which again is no different than what we have seen throughout this correction. PSB's bread and butter product continues to be a good fit for the wide range of users that are right sizing their businesses in this challenging economy.

Now, I would like to discuss our recent and year-to-date investment activity. Late last week we completed acquisition of Tycon II and III a two building multi-tenant Class B office park in Tyson's Corner in Northern Virginia. This is PSB's first park in the Tyson submarket and we have purchased an underperforming, low occupied asset that is a perfect fit for our operations team to turnaround.

We acquired the assets for a $131 per square foot and will need to invest additional dollars to deliver multi-tenant space to the market. All-in-cost, will still be well below replacement cost, allowing us to aggressively market the park to drive occupancy and economic performance.

The current tenancy is already in our preferred zone, with an average tenant size of 3,000 square feet. Over the next several quarters we will launch a rebranding and repositioning effort by inserting our own personnel into the project, coupled with our traditional marketing, leasing and property management strategy.

Initial occupancy is 47% and note the immediate return on the asset will be impacted until occupancy is corrected. The closet asset PSB owns in this market is Prosperity Business Park, a 658,000 square foot multitenant office and Flex Park that was 97.5% occupied at June 30.

With Tycon, PSB has completed four separate transactions this year deploying approximately $162 million in asset purchases. The theme of these transactions is as follows. We are pursuing well-located, underperforming assets that need some repositioning effort. We take the risk of reformatting the asset to a PSB user standard and with that effort, capture the upside that our low cost bases and improved occupancy provide.

All assets have been acquired below replacement cost with average in-place occupancy of 71%. This gives us the ability to lease up assets and deliver far better returns than acquiring more stabilized but lower-yielding properties with far fewer competitors chasing these types of opportunities.

In addition, each of these transactions have enhanced PSB's footprint in markets we know quite well. Collectively, these newly acquired parks broaden our ability to offer existing and new customers more choices, while giving PSB's leasing and property management teams' additional scale to leverage our competitive position. We are confident that PSB's track record will play out with the approximately 1.6 million square feet of acquired inventory and we intend to deliver good results with this well located parks.

Even with the success we have seen thus far, we are diligently combing multiple markets in search of similar opportunities. Although more products are entering the market for sale, the depth of that activity is still light as many owners of assets are being given a high degree of flexibility by their lenders.

We continue to be well-poised as Ed will review to cash our assets with our pristine balance sheet.

Now I am going to call over to JP.

John Petersen

Thank you. As Joe mentioned, we had another solid quarter operationally although market conditions continue to be challenging. Fundamentals do not change materially from the first quarter and can still have the upper hand in negotiating lease terms.

One positive development during the quarter was that negative net absorption across our markets showed continued signs of improvement. In Northern Virginia, Maryland, Miami, Palm Beach and San Diego, all had positive absorption in the quarter, and several other markets saw the trend of increasing negative net absorption, begin to subside.

What this means is, that most of our markets fundamentals may be at or near the bottom, if not showing slight improvement in certain markets. However, the leasing environment is not yet robust, and the risk is still there. Though without job growth, these slowing improving market dynamics could slide backwards. Blended market occupancy in our markets was unchanged from the first quarter, at 85%.

Same-park occupancy in PSB's portfolio was 91.7% for the quarter. Occupancy growth occurred in eight of our fourteen markets as our teams were able to execute on our tactics of aggressive direct marketing, flexible lease terms and price discounting.

We were able to grow occupancy in three of our markets with very difficult operating fundamentals; Phoenix, Orange County and Portland, Phoenix improved 270 basis points to 85.6%; Orange County up 240 basis points to 91.1%; and Portland grew by 170 basis points to 83.7%.

Also contributing to occupancy growth was Dallas, of 80 basis points to 92.1%; Austin of 60 basis points to 85.3%; and Seattle up 130 basis points to 88.8%.

In Northern Virginia and Maryland occupancy slipped by 70 and 130 basis points respectively. Combined, Washington Metro was 93.2% occupied in the quarter.

Overall, the same-park rental rates fell by 15.9% over expiring rents in the quarter. Orange County rents declined by 23% as conditioned there remained challenging. Maryland rent fell by 13% due to one large deal coming of a longer-term lease. Phoenix continued to be difficult and rents there were up 25%. San Diego rents were down 18%. Northern Virginia rents slipped 5%. Austin rents were down 10% and Oregon rents up 11%. A make up of the 1.4 million square feet in leasing volume from 427 deals is basically unchanged from the first quarter, as small customers those under 5,000 square feet drove activity and accounted for 85% of lease production.

Our team in Southern California was busy as always and executed 344, 000 square feet or 24% of the company's leasing volume. Florida, one of our most favored markets completed 324,000 square feet of deals. Combined Portland, Seattle and Northern California accounted for 280,000 square feet or 20% of leasing volume.

Retention in the second quarter was 54%. Orange County retention was 66%; Northern California 69%; Dallas 79%; and Oregon 91%.

One expiring lease of note is a 58,000 square foot office building at our Prosperity Business Park in Merrifield, Virginia. On July 31st, the single tenant's full building lease expired. We have made a strategic decision to bring this single user building in line with the rest of our portfolio and convert it into a multi-tenant building that will be LEED certified.

As I have discussed many times before, the level of user activity is far more vibrant for smaller tenants and there are very few 58,000 square feet users active in that market. Our average customer size at Prosperity Business Park is currently 11,000 square feet. The building will be under construction into the fourth quarter, and we do not anticipate any material leasing of this project until 2011.

In Miami last month, we completed construction of a new 75,000 square foot multi-tenant industrial building and finished redevelopment of an existing 60,000 square foot building. The new development is 33% leased and the 60,000 square foot redevelopment is 10% leased. Both buildings are targeted to our core small bay industrial user. Excluding the new development, our Miami portfolio was 96.4% leased in the second quarter.

As we look forward to the remainder of 2010 and with most markets beginning to see some signs of stability, PSB is well positioned to continue outperform. Small deal activity remains relatively active. New spec construction is in check and the worse seems to be behind us.

Though we have yet to see sustained job growth, companies continue their search for value and flexibility in their real estate decisions. Our business parks offer companies the ideal locations to ride out this period of uncertainty. When job growth does return, PSB has the ability to capitalize on their business expansion need as well.

For the second half of 2010, we have approximately 1.9 million square feet expiring or 10% of the total portfolio and we will attack those expirations as aggressively as we always do.

Now, I will turn the call over to Ed.

Ed Stokx

Thank you, JP. Reported FFO for the second quarter of 2010 was $0.96 per share Included in FFO for the second quarter are non-cash distributions of $2.4 million related to the redemption of preferred equity during the quarter. Excluding these non-cash distributions, FFO for the second quarter was $1.03 per share.

Taking into account the company's 2009 common stock offering, pro forma FFO for the second quarter of 2009 was $0.99 per share, resulting in a comparative increase in FFO of 4%. The FFO increase is a result of NOI from recently acquired assets, offset by 0.4% decrease in same-park NOI, as well as $787,000 in G&A costs incurred in connection with the two assets acquired during the quarter.

The decline in NOI was driven by a 1.3% reduction in revenue resulting from declining rental rates offset by a 3.3% reduction in operating expenses. Driving the expense reduction were savings in property taxes, and repairs and maintenance. The savings and property taxes of approximately $300,000 relate primarily to reductions in assessed values, while the repairs and maintenance savings are largely timing related.

Also of note, during the second quarter, we received a $200,000 settlement from a former tenant that defaulted on their lease in 2009. FFO for the first six months of 2010 was $1.84 per share. Excluding the non-cash distributions, FFO per share was $1.92. Taking into account the company's 2009 common stock offering, and excluding the gain reported on the repurchase of preferred equity, pro forma FFO for the first half of 2009, was $1.98 per share, resulting in a comparative decrease in FFO of 3%.

The decease in FFO, was driven by a 3.2% comparative decline and same park NOI and $1.9 million of G&A cost, incurred a connection with the $126.3 million of acquisitions completed through June 30th. The same park NOI decline and additional G&A cost were partially offset by a $2.5 million of NOI from acquired assets.

Recurring capital expenditures for the three and six months ended June 30, 2010, were $6.4 million and $11.4 million respectively, compared to $6.2 million, and $11.1 million for the same periods in 2009.

During the first half, of 2010, the company incurred approximately $6.3 million in non-recurring accountable costs, primarily related to the recently completed projects in Miami, that JP previously mentioned.

PSB's strong balance sheet and focus on cash retention enabled the company to maintain exceptional FAD payout ratios, amidst challenging economic conditions. For the three months ended June 30, 2010 and 2009 the company's FAD payout ratio was 52.4% and 47% respectively.

During the second quarter of 2010, we had write-offs of uncollectible balances of $315,000 compared to $277,000 in the same period of 2009. Write-offs remained at a very manageable level, approximating one half of 1% of revenues or less.

In connection with the 58,000 square foot scheduled lease expiration and building repositioning that JP discussed, we likely incur between $4.5 million and $5 million of capital cost over the balance of 2010. The expired lease generated approximately $430,000 per quarter in revenue.

During the second quarter, we completed the redemption of our 7.95% Series G and Series K preferred equity at par value of $74.1 million, reducing quarterly cash distribution by $1.5 million.

Finally, we have renewed our $100 million credit facility for an additional two years. Interests on outstanding balances will be based on LIBOR plus 200 basis points. In addition we will pay an annual facility fee of 25 basis points.

This credit facility annual free cash of $30 million to $40 million and our exceptional balance sheet position us well to take advantage of future acquisition opportunities.

With that we will open the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Michael Bilerman with Citi.

David Simon - Citigroup

Good morning, guys. This is David Simon here with Michael. About at year end, you guys were saving on about $200 million of cash. Now after all these acquisitions and preferred redemptions just wondering if you could walk through your sources and uses over the next 12 months.

Obviously your liquidity is a little bit different now than it was at year end. So, do you plan on using that line or issuing more preferred?

Ed Stokx

Today we have utilized substantially all of the free cash that we had. We have today approximately as we speak about $16 million cash on hand. We do have the credit facility available to us, which we will certainly utilize if the opportunity presents itself.

Then other sources of capital are certainly available but that will be driven largely by opportunities that we see out there on the acquisition front.

David Simon - Citigroup

Where could you see preferred today?

Ed Stokx

Probably indications are that we would be somewhere in the range of 7.625 to 7.75.

David Simon - Citigroup

Then for the acquisition you guys did in Northern Virginia, what was that going in stabilized yield?

Joe Russell

As typical, we don't peg specific yields to acquisitions whether initial or stabilized, but not doubt as I noted, the acquisition is less than 50% occupied and we'll over the next several quarters work diligently to improve that occupancy.

With that I would tell the going in yield hovers in the mid-single digits and based on a trajectory where we can get the occupancy up to what I would say a PSB norm would be in that market, which is low to mid 90% range. We should do quite well on that return once it stabilizes.

David Simon - Citigroup

Then how long do you think it will take to stabilize those assets?

Joe Russell

Not sure. In all of our markets, the Washington D.C. market continues to provide us the best office leasing environment. As I mentioned, we know that market quite well. We've got a little bit of repositioning to do on that asset and again, our goal is to get it into that higher occupancy range as soon as possible.

Operator

Next question comes from the line of Jordan Sadler with KeyBanc Capital Market.

Craig Mailman - KeyBanc Capital Market

Hi guys, its Craig Mailman here with Jordan. Just going back to the acquisition you guys gave on the per pound basis; all in, what type of discount or replacement do you guys think you were able to buy this asset there?

Joe Russell

Yes, Craig, that's again, a bit of a moving target as I think you are aware based on what I think we continue to try to make sense of which is we'd have cap rates and overall values adjusted to in this particular point of the cycle.

The thing that we are highly confident of is it's substantially below replacement cost, whether you peg it to what the asset has traded at specifically in the past or you look at other comps, whether they are more in the near term or over an extended period of time.

As I mentioned, we took down the asset for about $131 a square foot. We could, I think, put another say $10 to $15 to $20 a square foot depending on what kind of specific leasing we end up doing to fill up the buildings. Again, even if it [calcs] out ultimately in the $145 to $150 range or stabilize, its well below replacement cost. We are excited about the opportunity.

As I mentioned, it's languished down for some period of time, not unlike what our investment thesis was for instance on Shady Grove, a recent acquisition we did in the first quarter of 2010.

Again, our day in and day out focus for these kinds of assets is sliced and diced, fill them up with our tried and truths, our user profile customer, and our teams are exceptionally talented in at it. So that will all definitely create some good value out of this asset as well.

Craig Mailman - KeyBanc Capital Market

It makes sense. I just had a look at the acquisitions you have done-to-date, is it just a coincidence that most of them had been in DC Metro, or is that where you are seeing, the most abundant, the deal flow out there.

I guess and just maybe comment are we just hearing that, Northern Virginia, a lot of pricing competition on some of the assets. Is that just, you guys are not seeing that or some of the stuffs, you are being able to buy, because you are kind of going down, the quality spectrum of that?

Joe Russell

Well, I can't get it, I wouldn't call it a quality spectrum issue for some of this on the quality asset. We are very pleased with the quality and the level of quality that we're inheriting with this particular asset and the others that we acquired. It's just a great fit for, I would classify a D user, which is a customer who is not looking for [super trophy] finishes, they are looking for well-priced, well located, simple and efficient space.

Again we can reform at these assets, to provide that all day long. It's a little bit of combination relatives to your question about it. It's a coincidence that we a bulk of these investments into the DC market. That is our biggest office market in the company statistically and the comfort we have in that market on the office front is the highest of all our markets when we talked about office products specifically.

Then you couple that with the fact that as I mentioned we are not seeing the overzealous pricing that comes into play if we would be looking at a fully stabilized well-occupied project especially in that market.

So we coupled the fact that it's got some lease up risk or repositioning risk and we are very comfortable on taking that down and very comfortable that we can figure out the variety of things that will stabilize the assets that we acquired right there in that DC market, which for the bulk of investments so far that we've made have been office in that market.

The fourth acquisition was Flex in Austin and that plays into again an intentional investment meaning that we wouldn't be nearly as comfortable in office products for instance in Austin as we were with Flex. There is a variety of things that come into those decision metrics but again if you stack up from a priority standpoint how good we feel about the office environment in all of our markets, DC is right on the top of that list.

Craig Mailman - KeyBanc Capital Market

That's helpful. I guess just lastly tuning on the operation side. You guys are holding winning kind of product portfolio, least percentage steady and the same-store improved little bit this quarter.

Maybe JP could you just balance kind of the state of your tenants mindset versus kind of where you guys are in the portfolio and at what point you guys might feel more comfortable being a little firm on rents? Going forward maybe moving down to the single digit on rent roll downs or kind of seeing that improve?

John Petersen

Sure, Craig. It's good question. The simple answer to that, its not market-by-market, its park-by-park or building-by-building. You're right, where we have either higher occupancy we try very hard to push back on the rental rate decline. If we have a space or a park that's struggling a bit, we've got to be more aggressive.

So, really our teams in the fields are very adept at managing each deal as it comes through. Say we get a call for certain size requirement, they will move that call because of our park layout, they'll move it a space that meets their requirements and their pricing needs relative to ours.

So we try and push back every deal that we can, but it really does come down to park-by-park, building-by-building, and space-by-space decision. We are over 90% in the park we try to push relative to where we can. The markets as I mentioned in my comments are still difficult for the most part, but where we can we're going push.

Operator

Next question comes from Suzanne Kim with Credit Suisse.

Suzanne Kim - Credit Suisse

I'm just looking at your second quarter numbers and you talked about it with the last caller. Just wondering how sustainable are these kinds of the rents pulling at. I mean, I looked at your second quarter same-store revenue and compared it to the first and sort of moderated it seems. How sustainable do you think is that going forward for the several quarters?

Ed Stokx

Suzanne, those moving pieces we did talk about the impact of the 58,000 square foot lease and as JP noted where we can we'll push rents and focus on minimizing the rent reduction and that will determine the ultimate stability of that.

Suzanne Kim - Credit Suisse

Do you think you can do more accretive with acquisitions at this point, because right now, we are seeing that the cash is spent but that there is no equity [spread of assets]?

Joe Russell

Yes, obviously the goal is to always do accretive acquisitions and the way as I've thought to we've made sense of deploying capital is looking at a collection of opportunities or assets that we've taken down that give us a lot of different alternatives to go out and ultimately make them quite accretive as we reposition them in the near-term.

Then as we all get through this correction we are dealing with and the economy finally starts picking up, market occupancy will start improving and we get back to the point where we actually have more pricing power with rents. So it's not easy to go out and find the kinds of deals we are looking for.

As I mentioned, we are combing markets diligently and so far we've had some good success with the collection we've taken down in 2010.

So we hope to find more assets that are similar in individual configuration in opportunity, but it's still very difficult to predict because at the end of the day, there's not nearly as much inventory coming into the markets that you would peg to be either typical or that you might even expect with, I think that onerous level of debt or reworking a lot of assets we still need to go through.

Suzanne Kim - Credit Suisse

With regards to the uptick that you saw in occupancy, do you think you sort of sacrificed a little bit in terms of concessions or how did you gain that occupancy this past quarter?

Joe Russell

Well, it's the same metrics that we have talked to you for the several quarters, which is, a unique attributes to our kind of real estate, and our typical customer is, we are not having to go out and compete for occupancy with high levels of concessions, tighter capital. Its really more tied to pricing the space correctly and as JP talked about, producing flexible lease terms, which we have always been quiet comfortable with, they may be shorter lease terms, or you got an average wall on an annual basis, that is a little bit higher than, that others might to look to but we always, built the portfolio around those statistics. We know it well and we are going to continue to use those metrics in this environment.

We have had some good success with the amount of quarterly leasing volumes, that we produced again in this last quarter of approximately 1.4 million square feet, and that's been made up of 400 plus transactions.

So our teams are immersed in all of their markets, using a lot of tried and true PSB specific tactics to find new customers, or renewing existing tenants. So we are doing all of those things, and we had a good result tied to that.

Suzanne Kim - Credit Suisse

Have you seen the credit quality erode or improve in your tenants?

Joe Russell

Again, it is a tough economy. The thing that has been very different about this recession is it has really impacted almost every type of industry that is in our portfolio, which is really a broad-based representation of the economy at large. So we keep a very close eye on it.

Ed continues to stay focused on the overall credit quality and individual credit quality of our tenant, and with that we have been able to really manage down the impact of either tenant defaults or bad debt expenses et cetera. So its again another day-to-day part of our make up operationally that was we're very focused on.

Suzanne Kim - Credit Suisse

Just one last question, in terms of our lease termination, do you see sort of trend in geography like since we localized few certain product or product types or is it geographic or is it just kind of all over?

Ed Stokx

The answer is it's kind of all over. I mean the trend we can tie to specific geography or market anything like that.

Operator

Question from the line of Michael Mueller with JPMorgan.

Michael Mueller - JPMorgan

I got a few random questions here, one, Ed on the taxes for the lower, I think it was a lower amount of by about $300,000 in the quarter. Is that a quarterly, is that a year-over-year comp that you are going to run into or is that kind of advertising payments we are going to see that every quarter?

Ed Stokx

That's a year-over-year comp but that is something because it's driven by lower set values we do expect to able to sustain that type of savings.

Michael Mueller - JPMorgan

Okay. So on sequential basis you will see the improvement as well?

Ed Stokx

Yes.

Michael Mueller - JPMorgan

Okay. The 58,000 square foot tenant lease termination that you were talking about, what was the exact timing of that, did that occur already?

Joe Russell

Yes, Mike, It was not a termination, it was just a national expiration.

Michael Mueller - JPMorgan

Expiration, okay.

Joe Russell

JP that's expired…

John Petersen

Just few weeks ago or whatever.

Joe Russell

So that expired in the third quarter

Michael Mueller – JPMorgan

Okay, so in July. Okay, great. At last quarter on the call you talked about a financial it was going to be seized so maybe $195,000 quarter revenues that can potentially come out of the numbers. Did that happen and if so, when did that occur?

Ed Stokx

Yes, Mike, there was a 31,000 square foot tenant that we had talked about. They are still planning to vacate that space. That lease has been basically terminated through the FDIC process. They are still in the process of moving their stuff and figuring out where all their locations will be. We expect that they will be out likely by the end of the third quarter.

Michael Mueller - JPMorgan

Okay, so right now you are receiving that income through the third quarter and then it would go away starting in the fourth?

Ed Stokx

Yes, you're correct. It's $195,000 per quarter.

Michael Mueller - JPMorgan

Okay, great. Lastly going back to the capital raising question in just financing acquisitions; last summer, even before you've ended up seeing deals, you went out to the common equity markets and you raised capital in advance of that. Right now the cash balance is lower.

How are you thinking about balancing capital raising versus acquisitions? Are you in the mindset where you want to raise the money and have it advance because you have a better feeling the deals will come or you're going to try to match fund it, maybe more so than you did last year?

Joe Russell

Yes, Mike it's a good question. You know, environmentally it was different this summer than it was a year ago when we did do what you characterized as an opportunistic equity raise. What we did not have at our disposal was an open preferred market. So with that we were seeing from a positioning standpoint the opportunity to be well capitalized that would put us in a better position to chase activity. That's being well suited for the $160 million or so that we deployed and then obviously the 74 million that we paid off on existing preferred. So, the environment today comparatively is different, meaning Ed's got more leverage at his disposal, the preferred market is open and the equity market is open as well.

What we have is a higher degree of confidence in is that we are well positioned to tap into either one, but it's not with I think at this point, a limited window or one where you have to navigate a window, meaning both markets appear to be favorable to us and it will depend on where we are able to go out and acquire and at this point, we are going probably manage it to that.

Michael Mueller - JPMorgan

When you are thinking about managing the balance sheet and leverage, I mean, let's say hypothetically, another 100 or $200 million of acquisitions comes up that you like, I mean, how do you think about the right split between, how much preferred do you do before you feel comfortable to the point where you want to go back and do some common?

Joe Russell

Yeah, I mean, I can talk to Ed first. Ed, you can give some more color on it. There's a variety of decisions that come into that exact question that point by point or moment by moment, you'd look to and say, okay, what's the benefit of going one direction versus another.

The other thing that is always a question mark too, is it has happened in the past where we've actually even taken down assets that even have existing debt that you can't pay off. So I mean there's another part of that whole equation that could come to bear depending on again the makeup of a particular asset or portfolio we might be looking at. Ed go ahead.

Ed Stokx

The other thing I would may be add Mike is, as you know our fixed charge coverage is well above three times, so we certainly have capacity, to bring on more preferred and keep very strong fixed charge coverage. So that is the only thing I would add, that is, there is plenty of capacity there.

Michael Mueller - JPMorgan

Okay and our last question, Tyson's that was unencumbered, right?

Joe Russell

It was.

Ed Stokx

Yes.

Operator

Question comes from the line of Mark Lutenski with BMO Capital Markets

Mark Lutenski - BMO Capital Markets

I was wondering if you guys, how much did you spend on the Miami redevelopments that you delivered?

Ed Stokx

Well, we said today, that we have spent $6.3 million through the end of the second quarter.

Mark Lutenski - BMO Capital Markets

Okay. Is that sort of you do that any case by case basis or is that something that you guys are looking at doing more of?

Joe Russell

You know that was a unique opportunity for us, we had a basically an oversized land component to one of the two buildings that was redelivered to the markets and so the building that was existing, basically had to be gutted and reformatted to multi-tenancy and then as we did that, we were able to actually get re-entitled, to a new 75,000 square foot building, again because we had an unusual situation of an over standard parking area and that's not a typical part of our overall portfolio.

So it was also a pretty time consuming process where it took us approximately two years to get those entitlements to build that new 75,000 square foot building. So we will always look at those kinds of re-positioning opportunities, but it is not a big part of our opportunity to reformat or rework our portfolio.

Mark Lutenski - BMO Capital Markets

Okay. What is the size of the deal pipeline right now for you guys?

Joe Russell

Again that's not a number or a target we talk to, all I can tell you is it's highly unpredictable. I would tell you it's also less vibrant than I think statistically you would think it would be. The amount again of reworking in stressed assets that are in markets that again lenders are giving a lot of continued leniency to not call loans or recapture real estate. So it's very unpredictable.

Sometimes it's faster moving than you would think, there maybe an asset that we are able to engage or capture but then at the same time when that you think might trade that gets pulled by back up to market.

So, statistically there is more trading and actual closing of acquisitions across our markets but it's still a very low number, compared to what a typical trading level would be on an annual basis.

Mark Lutenski - BMO Capital Markets

Have you guys bid on the property since Tysons Corner?

Joe Russell

Have we done what?

Mark Lutenski - BMO Capital Markets

Have you bid on a property?

Joe Russell

We are looking at lots of properties, so there is activity going on.

Operator

Our next question comes from the line of Dave Rodgers with RBC Capital Markets.

Dave Rodgers - RBC Capital Markets

Just a follow-up on the comments about acquisitions, I guess to beat the dead horse is, what do you think is going to be the bigger point for these lenders to start putting assets into the market or for the equity holders push them into the market given what you are seeing today, given the assets that have come to market already, what's driving those transactions and what's going to happen here going forward?

Joe Russell

That's Dave a tough thing to predict, I mean the lenders continue to have a lot of leniency and whether that's because banking regulators are not pushing the pressure on the banks specifically or they are choosing to postpone either capturing real estate or reworking loans. I think we all know what all those pressure points are.

So, I don't know. The amount of stressed real estate out there is still high and there are good candidates for us to continue to chase. The hard thing that is difficult to predict is when the asset finally is fully available to trade and that's seems to be a target that keeps getting postponed, collectively anyway.

Dave Rodgers - RBC Capital Markets

All right, thank you for that. Maybe Ed, with respect to your comment on the R&M expenses that were getting pushed, what was the magnitude of that push back from maybe the first or second quarter into back half of the year, if you can give us directionally comments?

Ed Stokx

Directionally its in the $300,000 to $350,000 range.

Dave Rodgers - RBC Capital Markets

Per quarter or total?

Ed Stokx

In total.

Dave Rodgers - RBC Capital Markets

Okay. Thank you for that. Then JP in your comments, I didn't hear if you had said it, I apologize. The total rent spread declined for the quarter?

John Petersen

15.9

Dave Rodgers - RBC Capital Markets

In that cash?

John Petersen

Yes.

Dave Rodgers - RBC Capital Markets

Okay, thank you for that. I guess the last question maybe for you build out cost, I know you do a lot of pre-built suite. With respect the cost either hard or soft costs around those build outs, I imagine it fairly economical still, but are you seeing any pressure one way or the other on those costs that make you want to do more like this LEED-certified built outs etcetera or maybe less going forward?

John Petersen

You asked a good question. We do a lot of building and we do make queries and that's the right thing to do for us from a marketing perspective. As our customers like to do whats is safe, they know it's ready to go and they can move in.

Are we seeing pressure on pricing? I think construction costs are still in our favor. Contractors are very aggressive with labor. Materials, I couldn't say they are going one way or another right now, but we are still seeing contractors aggressively wanting our work. So that helps pricing.

Operator

Your next question comes from the line of Chris Lucas with Robert Baird.

Chris Lucas - Robert W. Baird

Joe or JP, can you maybe give us a sense as to what you think net effective rents are in the Tysons' submarket that you brought assets in?

Joe Russell

Yes, Chris, there is a bit of a spread there right now because hopefully, very temporary overhang from all that construction, I know you are living through that right now too, but we could probably see rents anywhere from the mid to high 20 range on a full service basis in this environment and with the quality of the assets and especially once we get them fully repositioned, we are hoping to doing better than that ones, the overall construction in that market tie to the Metro system is completed.

The assets are really well located and again, may cater to our ideal customer size. So, once we get our team in there and really start working that market, we hope to certainly be able to deliver at those level of rents or better. Like I mentioned prosperity is our closest existing asset and we continue to get those levels of rents if not higher, and I think long term what we build in Tyson's is even a better submarket for us to price into those levels. So that is kind of a zone for now.

Chris Lucas - Robert W. Baird

What do you think expenses will run there? I guess I am just trying to get a sense as to what an incremental return will look like?

John Petersen

I would think it would hover around $10 or so. Again we will have to figure out, how to get it fully stabilized, but that is probably the right range.

Chris Lucas - Robert W. Baird

Okay, Then just kind of going through on the expense side, you talked about the property taxes and the repairs and maintenance. Was there any benefit year-over-year from a reduction in bad debt trends or any other sort of items there that to talk about?

Ed Stokx

Not significantly, Chris. As I noted the bad dept was $315,000 compared to $277,000 in the prior year, so pretty, pretty close to flat. The other thing that we did note is that we had in the revenue this quarter, we had $200,000 from our former tenant that had defaulted on the lease.

Chris Lucas - Robert W. Baird

Okay. So got to recapture there and what was the lease term fees for the quarter?

Ed Stokx

It was nominal. We did not disclose that number, but it was a fairly insignificant number, other than the $200,000 which we did disclose, the settlement.

Chris Lucas - Robert W. Baird

Okay, and then Joe, just going back to the acquisitions quickly, last two transactions you have done, have a fair amount of occupancy, opportunity to them. How much comfort do you have in continuing to do that versus the stabilized acquisitions that you done prior?

Joe Russell

Yeah, Chris. For us, guess what, at the end of the day, we are best suited to go out and reposition, and frankly just make a lot better return as we are able to improve occupancy reposition assets, get them into our day in and day out fold, relative to user type, with our own marketing team and property management technique et cetera, We love those kinds of opportunities.

The thing that we are not suited to do and we can't make sense of is going out and being one dozen or two dozen bidders that our cap rate is going to get dramatically reset to the downside because of that kind of bidding activity for a highly stabilized “trophy” type asset. We can't figure out how to make money doing those kinds of things right now. What we really are comfortable with is taking that occupancy upside or risk we see it as upside and with that getting the benefit of the return once we get stabilized.

Chris Lucas - Robert W. Baird

So in the both of Tyson's and in the Rockville transactions were those both off-market or those fully marketed deals?

Joe Russell

The Shady Grove asset was an off-market deal. Again, that was done earlier this year. Tycon was marketed but it had a number of moving parts, it wasn't a simple acquisition because it did have a high degree of risk. I mean it's for a competing buyer that for instance might need to put leverage on that deal. I mean you are looking at an asset that's only 47% occupied and that's strips out a lot of bidders in a process.

So as we always want to be, we are a cash buyer, we know the market dynamics quite well, we had a lot of credibility in the process, and I am pretty confident we weren't even a high bidder on the asset but we were the most logical buyer not only because of our particular balance sheet, but our reputation and again our track record in taking down those kinds of assets.

Chris Lucas - Robert W. Baird

Then lastly, is there any market bias that you have right now on the acquisition side, and is there any prospect for disposition in this environment?

Joe Russell

As far as bias, again because we've got lots of deep markets and our footprint is embedded in all the markets, just looking at how we are owning and managing our own real estate, we feel like we got lots of good opportunity than most of our markets to find opportunities. So, I mean, we have completely said, absolutely no in most of the markets.

We're going to be certainly more careful in the markets that are providing and continue over time to give the most headaches if you want to call it that, but overall, we like most of our markets and feel like we got the ability to add to our concentrations in a lot of really good long-term markets. So, we're looking at a lot of places.

The flipside of that is, just like you asked, where might we see some downsizing and that's not a [deep list]. We earlier this year sold an office asset down in Houston. We don't intend to grow our portfolio in that market, that could continue to go the other direction, but we'll see how that plays out over time and when we feel pricing might be appropriate. That recycling or downsizing is not going to be a big part our overall focus.

Operator

Next question is a follow up from the line of Michael Bilerman with Citi

Michael Bilerman - Citigroup

Good morning guys. Just on the dividend, which has been flat since mid '07, did the preferred redemptions affect, I guess its [pretty high] when you think about the common dividend.

Ed Stokx

Yeah, they certainly do impact what the potential common dividend would need to be if those are not replaced with other preferred dividends. The timing of any dividends will largely be determined based on our acquisition volume.

Michael Bilerman - Citigroup

So we should take that as being a likelihood given the fact the cash has run out, that you would probably come to the market to a, let's call it, a $100 million preferred, sooner rather than later. So that would keep the common flat and that would also give you the cash as you continue to ramp your acquisition activity?

Joe Russell

Well, I think, maybe Michael just set the stage from a strategic standpoint. As I think we've talked to you in the past, our premise has always been to be very focused on minimizing any dividend increases or retaining as much cash as we can. So things you are talking to certainly facilitate that. Ed, you can talk about timing, we are not looking at anything near-term in regard to being forced to make a dividend increase.

Ed Stokx

The another thing I would say Michael is, we are not going to issue preferred to avoid increasing our common dividend and sitting on the cash. So those decisions will be made independent of each other. The capital that we raise will be based on our needs from an acquisition standpoint.

Michael Bilerman - Citigroup

Just going back to Mike Mueller's question, last year you did raise the capital in the equities markets prior to doing buybacks and doing acquisitions, and I can appreciate your comments that the markets are a little bit more open today, especially to do preferred you offered your comment, but you guys don't give guidance. So we are just trying to figure out, how we should think about numbers in the back-half of the year, whether there would capital raises, prior to doing any acquisition activity?

Joe Russell

Well, again that is a crystal ball question, and I couldn't answer it., I think the thing, that is different today than it was a year ago is, we feel the preferred and equity markets are for us more accommodating. Meaning that they are available and if we so choose, depending again on the size or level of activity of additional acquisitions, we get to a point saying, it is the right time to look at either options. That's what is going to predicate it.

So it is difficult just to say, we are going to do it for other reasons right now. So even prior to the equity assurance, we did a year ago, I mean it is always a moving target, there is been a lot of things that is go in to the mix relatives, actually pulling that trigger, and again, it's a big crystal ball question, but the thing that, as I already talked to, in [prior mentally], both the avenues are clearly open.

Michael Bilerman - Citigroup

When you think about the back half of the year, if you did no acquisitions, and you didn't raise any preferred, so everything stays stagnant, would the dividend need to be increased or not ?

Ed Stokx

If the dividend would not need to be increased this year and probably into next year, but may be sometime shortly after that, it would likely need to be increased.

Michael Bilerman - Citigroup

Just to think about goal posts in terms of, Ed you mentioned fixed charge, which in history of the company it's been north of four, it's been above and high twos. Today pro forma you are probably 3.5, 3.75. So where should we think about comfort level to where you would take that down to before having to raise more common equity?

Ed Stokx

Well, just like we said Michael, it will range and the great news, those are great numbers.

Michael Bilerman - Citigroup

Yes.

Ed Stokx

We continue to have a very strong balance sheet and we are not seeing any stress that is making us do anything unusual or different than what we consistently go out and seek to do which is to keep our balance sheet in great shape and they are just as you said goal posts meaning that it's wide range quarter-to-quarter or even year-to- year that there is going to be a variety there, depending on the way us managing those metrics. We are in a really good [health]. So again the decision is going to give us a fair amount of flexibility to look at of variety of alternatives.

Michael Bilerman - Citigroup

All right. Then it sounds like you have room to move from this point to effectively lever back up a little bit?

Ed Stokx

Yes, just like the last event from a capital structure standpoint meaning the equity issuance has really helped and gave a lot of additional buffer to that fixed charge ratio and then the buybacks are preferred. It was a very simple decision for us to make because we didn't have any pressure to do anything unusual there either.

Michael Bilerman - Citigroup

Then the last one just on the deal pipeline, I know you said this is highly unpredictable, less vibrant and lot of another analogies. Is there anything under contract or letter or intent today?

Ed Stokx

Well, again, we've always waited to the point of getting a deal done to answer those kinds of questions. I'll just tell you that it's still a very difficult environment to predict an actual close. Sellers continue to be highly resistant, skeptical about letting go of the assets at price points that for most part they still don't like. More often not, they are taking some kind of value hit and some time that's quite substantial. So with that there is a lot of unusual behavior those are entirely unpredictable. So, we never given those kinds of numbers out, what the internal metrics might be deal by deal that we are working on. That again characterizes it as a tough market to predict. On the flip side we've really pleased with what have done thus so far this year.

Operator

Our next question is a follow up from the line of Jordan Sadler with KeyBanc Capital Market.

Jordan Sadler - KeyBanc Capital Market

Hi, guys, just a few quick follow ups. Ed, the transaction cost in Northern Virginia, are those similar to Maryland or they are going to be little bit less?

Ed Stokx

The transaction cost in Northern Virginia, you're referring to?

Jordan Sadler - KeyBanc Capital Market

[Acquisitions]

Ed Stokx

On the 58,000 square foot…

Joe Russell

On the acquisition, you are talking about the acquisition?

Jordan Sadler - KeyBanc Capital Market

Yes, the Tycon

Joe Russell

For the closing cost

Ed Stokx

I'm sorry, sorry; I didn't understand your question. Are you asking if they are similar?

Jordan Sadler - KeyBanc Capital Market

Maryland, low [22%], are they going to be that high or are they going to be a little bit lower?

Ed Stokx

They will probably be a little bit lower just because we don't have the level of transfer taxes that we have in Maryland.

Jordan Sadler - KeyBanc Capital Market

Okay. Then just on the 430,000 for the move-out, is that rent or is that kind of the FFO drag.

Ed Stokx

That is the rent that they are paying quarterly.

Operator

At this time there are no further questions. Mr. Stokx, do you have any additional remarks?

Ed Stokx

Okay. Thank you Kathy and thank you everyone for joining us and we will look forward to talking to you next quarter. Have a good day.

Operator

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

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