TWST: What is Mission West Properties?
Mr. Berg: Mission West Properties started in 1998. We started in the development business in 1969, so by 1998, we had accumulated around 3 million square feet of buildings, and we basically transferred those 3 million into a public shell, which we purchased. Then we went out and did a secondary offering to get the stock distributed to the public company in 1999. Since then, we've built up the REITs to 8 million square feet; we primarily acquired leased buildings from my development company on pre-agreed terms that were advantageous to the REIT. We reached our peak square footage at the top of the dot-com boom, and our rents also reached their peak at the same time. We got hit hard in 2001 and 2002 with a number of bankruptcies. We ended up with a lot of vacancy that reached a high of about 35%. About three years ago, we forecast to our shareholders that because of the high rents we had on the books, the bankruptcies and the vacancies, we would see our earnings decline until the end of 2006 or the first quarter of 2007. Our projection turned out to be very close to actual results and we will hit a low point in earnings in Q406 or Q107.
TWST: If I had asked you 12 months ago for a list of your goals and expectations, and asked you for your report card, what would those two elements look like?
Mr. Berg: We pretty much projected exactly what would happen three years ago. Even though the results weren't great, they were exactly what we said would happen. Fundamentally, we reached the bottom in the first quarter of 2007. We will be on the upside from here forward. We've just increased our earnings projection for 2007, and we may increase that again. Our vacancy has reached its low point, and now we are on the upside of the vacancy. So for the last three years, we projected things exactly as they happened, and we hope that we will see both an increase in rents and a decrease in vacancy and start increasing our dividend in the near future.
TWST: What are the key metrics or events that investors should focus on as they track your performance and assess your performance? What matters?
Mr. Berg: I think the investors are primarily concerned about a dividend increase. The dividend increase will occur as we get the vacancy down and as the rents go up in the market area. If you look at the projections being made by most of the people in the area, they are projecting that rents will go up 10% to 15% this year, 10% to 15% next year, and then drop down to 4% to 6% over the next four or five years. Therefore, there is a lot of upside in rents. Even though you don't want to have vacancy, if you're going to have it, this is a good time to have it because we've got a lot of potential rental increases as a result of the vacant buildings we have. So ultimately, if we lease those buildings and we get higher rents, that means our dividend is going to go up, and most REIT shareholders care about dividend, so that should cause our stock to go up. We are very close to our all-time high at the present time.
TWST: What is it that you feel compels investors to include MSW in their current portfolios and in their longer-term investment strategies?
Mr. Berg: They know that even though we're small, we have a very outstanding management team. Number two, we have the best balance sheet in the industry. Number three, even though we've had a tough three years, when most analysts and shareholders compare our performance during these tough years with other companies, they believe that we've outperformed everyone else, considering the circumstances that we're in. They believe as things turn around, we will outperform others. So the real growth story is when the market gets back to where we can build new buildings on an economical basis and make a 7%-8% return on them - we will do that better than anyone else. We believe we will be able to get top rents as we fill our vacancies, and we hopefully will be able to increase the dividend, and those are things that our investors care about.
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