PS Business Parks, Inc. (PSB) CEO Maria Hawthorne on Q3 2018 Results - Earnings Call Transcript

|
About: PS Business Parks, Inc. (PSB)
by: SA Transcripts

PS Business Parks, Inc. (NYSE:PSB) Q3 2018 Earnings Conference Call October 24, 2018 1:00 PM ET

Executives

John Petersen - Executive Vice President and Chief Operating Officer

Maria Hawthorne - President and Chief Executive Officer

Jeffrey Hedges - Executive Vice President, Chief Financial Officer and Secretary

Analysts

Brendan Finn - Wells Fargo Securities, LLC

Anthony Paolone - JP Morgan

Michael Bilerman - Citigroup

Craig Mailman - KeyBanc Capital Markets Inc.

Eric Frankel - Green Street Advisors, Inc.

Operator

Good afternoon and welcome to the PS Business Parks Third Quarter 2018 Earnings Results Conference Call and Webcast. At this time, all participants have been placed in a listen-only mode and the floor will be open for questions following the presentation. [Operator Instructions]

It is now my pleasure to turn the call over to John Petersen, PSB's Chief Operating Officer. Sir, you may begin.

John Petersen

Hello, everyone. And thank you for joining us for the third quarter 2018 PS Business Parks Investor Conference Call. This is John Petersen, Chief Operating Officer. Here with me are Maria Hawthorne, CEO; Jeff Hedges, CFO; and Trenton Groves, CAO for PSB.

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

All forward-looking statements speak only as of the date of this conference call. PS Business Parks undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For additional information about risks and uncertainties that could adversely affect PS Business Parks' forward-looking statements, please refer to the reports filed by the company with the Securities and Exchange Commission, including our annual report on Form 10-K and subsequent reports on Form 10-Q and Form 8-K.

We will also provide certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to GAAP is included in our press release, which can be found on our website at psbusinessparks.com. I will now turn the call over to Maria.

Maria Hawthorne

Thank you, JP. Good day, everyone, and thank you for joining us. I will begin by giving you an overview of Q3 results and our view of market demand and investment activity. JP will then take you through operations and Jeff will discuss financial results.

On that note, as previously announced, Jeff Hedges has joined PSB as CFO and Trenton Groves has been promoted to CAO. And I want to officially welcome Jeff and congratulate Trenton. JP and I are pleased that both are joining the senior management team here at PS Business Parks.

As you can see, we have a strong with FFO per share increasing 6.5% over prior year to $1.64. Same Park NOI increased 3.8%. Rental rates on executed transactions increased 7.2% and the company generated $8.8 million of retained cash.

User demand and general leasing conditions across the major markets we operate in can be characterized as healthy with landlord favorable dynamics in the majority of our properties.

Smaller users are abundant and we have seen the typical broad array of companies seeking space to move into, renew or expand in our facilities. Confidence remains high among our tenants despite stock market volatility and threats of trade war.

Leasing volume was good in the quarter at over 1.8 million square feet completed. Same Park weighted occupancy improved by 40 basis points to 95% sequentially, even as we continue to push rent growth in both new and renewing customers.

The leasing team is containing transaction costs, which were $3.28 per square foot on executed deal. We did not make any new acquisitions during the quarter. Competition remains fierce for flex and industrial products, no matter the size of the portfolio. Occupancy and rental rates are beyond historic highs. And it is difficult to find underperforming and value-add properties, which is the basis of our investment strategy that is tied to acquiring quality assets that are accretive to NAV and cash flow.

There is no question we are well prepared to consider a wide range of investments alternative. But we will continue to be prudent as we deploy our capital. Highgate at the Mile had another strong leasing quarter. We ended at 91.4% occupied. This is up from 81.8% on June 30. We remain encouraged by Highgate's success and continue to work with Fairfax County on rezoning the remaining 40 acres we own at the Mile.

Now, I'll turn the call over to JP.

John Petersen

Thanks, Maria. Market conditions in the third quarter were once again strong and our metrics reflected those robust dynamics. In all of our markets, demand is active, concessions are down and customers remain confident about their growth. In addition, we are not seeing much competitive construction in the sub-markets we operate.

I will now discuss third quarter statistics beginning in Southern California. Leasing volume is nearly 300,000 square feet from 110 deals, driven by demand from existing and new small businesses. Occupancy was 98.1%, [moving] [ph] by retention of nearly 75% and rent growth was 12.9%. Our customers clearly have limited options in the market. And they are willing to step up and pay what it takes to keep their space.

Our team in Southern California has found the right balance, between maintaining high occupancy and pushing rents. Our Northern California team was also optimized and signed 80 leases, totaling 322,000 square feet. Northern California occupancy was 97.9%. Rents at Northern California increased by a whopping 27.4%, which was achieved through the combination of a few larger 5-year leases coming to market plus their normal small user expirations. Retention was 74%, as the overall economy continues to be strong and relocation options limited.

Industrial market trends in Seattle remained positive and demand is consistent. Occupancy in Q3 was 97.5% with 17.3% rent growth from 20 deals executed. For multiple years now, Seattle has been one of the highest industrial markets in the country, and our results in Seattle continue to reflect those strong fundamentals. South Florida industrial market is benefiting from favorable landlord conditions as well. Customer demand is good and we have not yet seen any hesitancy from our customers relating to trade-war issues. We signed 268,000 square feet in 60 transactions generating robust rent growth of 11.4%.

Moving to Texas, we leased 503,000 square feet in 82 transactions. Occupancy increased 100 basis points to 90.3%, primarily due to the backfill of the 75,000 square foot vacancy, I mentioned last quarter. We have now fully released the 100,000 square foot space that expired in March with two users. 125,000 square foot customer and the 75,000 square foot deal, which commenced in September. Rents overall in Texas grew 2.7%.

In Washington Metro, a relatively stable economy coupled with our focus on small business users allowed us to improve sequential Same Park occupancy 100 basis points to 92.1%. A fantastic achievement, where competitive office occupancy is in the mid- to low-80s. In order to achieve that improved occupancy, we marked expiring rents to market, which contributed to 11.4% rent decline in Q3. Leasing volume was consistent with 384,000 square feet sign in 121 deals.

Now for quick update on the two non-Same Park acquisitions in Washington Metro. The 220,000 square foot 2-building acquisition we completed in Rockville, Maryland in the third quarter of 2016 is expected to stabilize early next year. As of today, we are 85% leased, up from 18% in acquisition. Our small user strategy has worked. Since acquisition, we have completed 53 deals or 152,000 square feet, an average deal size of 2,800 square feet exactly as we anticipated when we purchased property.

Shifting to the 1 million square foot Northern Virginia Industrial portfolio, we purchased in June 2018. Our repositioning efforts are in full swing. We have signed a handful of leases, and I'm confident, we will achieve our plan to take these industrial parks to the mid-90% occupancy range over the next several quarters.

As I look ahead to Q4 and 2019. I'm excited about the opportunity to operate at high occupancy levels and continue to push rates in our core industrial markets. I'm encouraged that we have a 1.5 million square feet, approximately 6% of our portfolio expiring in the fourth quarter, plus our typical annual expiration schedule of 24% coming to us in 2019.

Industrial fundamental is strong, and 78% of our total expirations over the next five quarters coming from our industrial and flex portfolio. We are well positioned for strong mark-to-mark rent growth in the coming quarters.

Now, I'll turn the call over to Jeff.

Jeffrey Hedges

Thank you, JP. As Maria mentioned at the opening of the call, we had a great third quarter. Net income per common share for the three months ended September 30, was $0.92, with core FFO per common share coming in at $1.64, which is a 6.5% increase from a $1.54 in the third quarter of 2017.

Core FFO growth was primarily driven by 3.8% increase in Same Park NOI, which is a result of a 2.2% increase in Same Park rental income, coupled with 1.3% decrease in Same Park operating expenses. For the nine months ended September 30, core FFO was $4.81 per share, up from $4.61 in the prior year, an increase of 4.3%.

Turning now to capital expenditures. For the nine months ended September 30, recurring capital expenditures totaled $25.7 million, a decrease of $9.6 million or 27% from a year-ago. For our Same Park portfolio, year-to-date recurring capital expenditures were $24.3 million, down from $29 million in the same period in 2017, a decrease of 16%.

Measured as a percent of Same Park NOI recurring capital expenditures were 11.8% for the nine months ended September 30, down from 14.3% a year-ago, a reflection of our dedicated field teams disciplined approach to efficiently managing our assets.

I want to spend a minute now providing a brief update on our multifamily property in Tysons, Virginia, Highgate at the Mile. As a reminder, we started consolidating the joint venture entity, which owned Highgate at beginning of this year. For the three and nine months ended September 30, Highgate produced NOI of approximately $850,000 and $2 million respectively, while capital expenditures for both periods were effectively zero.

As Maria mentioned previously, end-of-period occupancy at Highgate was over 90%. And we expect operating income from Highgate to continue to increase in future periods as a property stabilizes.

Finally, I want to point out that we paid a dividend of $1.05 common shareholders in the third quarter, bringing our total dividend payout thus far in 2018 to $2.75 per common share. For the nine months ended September 30, our dividend payout ratio was approximately 70% and we have retained a little more than $40 million of free cash flow.

Our ability to retain free cash flow from operations, which we can reinvest into our properties, coupled with our corporate credit facility, which is currently undrawn and the overall strength of our balance sheet in general, puts us in a very strong liquidity position that will allow us to move swiftly when accretive acquisition opportunities present themselves in future periods.

With that, we will now open the call for questions. Operator?

Question-and-Answer Session

Operator

The floor is now open for questions. [Operator Instructions] Thank you. And we'll take our first question from Brendan Finn with Wells Fargo. Please go ahead. Your line is open.

Brendan Finn

Hey, guys. Thanks for taking my question. So, JP, I know you touched on this a little bit in your prepared remarks. But on the NoVa Industrial portfolio, you guys have owned that for a little over 4 months now. So I was just wondering how it's performed kind of relative to your initial expectations and then if there are any changes there on the redevelopment, lease-up or yield assumptions?

John Petersen

Sure, Brendan. Yeah, we've owned the property for a few months. Everything we expected what we're doing now is we're going for our repositioning efforts. We're taking the larger vacancies and dividing down to smaller vacancies. We're starting the painting process. We've signed those kinds of basic repositioning items. And we've seen - to be honest, we've seen - the level of interest from the customer community and the brokerage community is what we expected, so thrilled with the purchase, thrilled with our progress so far.

We won't have the property fully repositioned from a construction standpoint until next year. But we have done a few leases and we're pleased with where it's headed.

Brendan Finn

Great, okay. Thanks, guys. And then just on the Orange County disposition that you guys are expecting to close in Q4, I guess, what was the cap rate on that and then how do you guys plan to use the proceeds?

Maria Hawthorne

Hey, Brendan. Yeah, that's a little close to guidance. But we are under contract. We do expect to close in the next few weeks. And it's also been identified as a forward exchange. So it will wove into an exchange for the acquisition at NVIP.

Brendan Finn

Got you. That makes sense. Thanks, guys.

Maria Hawthorne

Okay. Thanks, Brendan.

Operator

We'll take our next question from Anthony Paolone with JP Morgan. Please go ahead. Your line is open.

Anthony Paolone

Hi, thanks. Just to follow up on that last point, did you give an order of magnitude on the Orange County sale, just in terms of dollar amount?

Maria Hawthorne

Oh, it's the smallest property, Tony. So it's only 100,000 feet and it's going to be under $20 million.

Anthony Paolone

Okay, got it. And then, on your earlier comments, talking about Highgate at the Mile, do you have an expected return on invested capital once the NOI is kind of stabilized? You mentioned the $2 million over the 9 months, but sounds like that's still kind of ramping.

Maria Hawthorne

Yeah, it's definitely still ramping up. There's been a lot of competition with some of the new towers that have delivered even this year, and then during lease-up there, definitely concessions that are given in the form of free rent. But we're pleased because we are now renewing customers with the 3% increase to rental rate. And we - and again, we don't give guidance, but we are expecting returns to be in the mid 5% to 6% range when all is set and done.

Anthony Paolone

Okay. And then a question for JP, start to look out to 2019. Can you hit on any of the larger potential expirations that might be in the mix or known move-outs that you have to be thinking about?

John Petersen

Yeah, we do have, as I mentioned, some what I characterize as opportunities in terms expirations in California, up and down the West Coast, Seattle. And we'll have a couple - handful of office expirations in DC as we always do, which will take a little bit longer to reposition. But where I'm optimistic as I mentioned earlier is getting mark-to-market some of these industrial expirations we got on the West Coast, where the markets remain very strong. And in some cases, will be able to even pre-lease some of these expirations that happened over the next year or so.

So, nothing specific yet, but good opportunity to get out from of these expirations, if they don't renew.

Anthony Paolone

Okay. And then just last - excuse me - last question, I think your leasing commissions year to date were $6 million to $7 million. Can you give us a sense as to maybe what portion of that was internal folks that might have to be expensed as we start to look into 2019 in the accounting change versus continuing the capitalization of those costs?

John Petersen

Yeah, sure. So we don't - if I think I understand your question, we don't have any internal leasing commissions. Any commissions we pay are through procuring brokers out in the markets. So does that answer your question?

Anthony Paolone

Yes. It sounds like the accounting change that we're all kind of talk about in 2019 is not going to affect you?

Jeffrey Hedges

Yeah, Tony. This is Jeff. That's correct. I think, it's going to be a very minimal, if any, effect as it relates to leasing commissions.

Maria Hawthorne

Yeah. And then, Tony, I'll just add to that. Our leasing directors, they get paid their compensation, their base salary plus bonuses. So they're not paid commission. And again, what JP said, and I'll elaborate on is that the broker commissions that you see are 100% to tenant representative brokers, because our leasing teams handle all of our leasing, and we currently do not have any landlord representative.

Anthony Paolone

Got it. I understand. Thanks for that color.

Maria Hawthorne

Sure.

Operator

We will take our next question from Manny Korchman with Citi. Please go ahead. Your line is open.

Michael Bilerman

Hey, it's Michael Bilerman speaking here with Manny. Just quick question, just in terms of operating margin was there any particular going on at least on the same-store pool for the operating expenses to come down year-over-year. And I don't know, if that was something that happened third quarter of last year or third quarter of this year? Margin was sort of about 30%, I would have expected it to be a little bit higher and sort of drove a big percentage of the beat?

John Petersen

Yeah, a lot of that was in repairs and maintenance, Michael, and mostly tied to Hurricane Irma last year.

Michael Bilerman

So it's something that didn't repeat from last year that drove the positive variance?

John Petersen

You got it.

Michael Bilerman

And then if you think about what carries forward into the fourth quarter, is that a - I don't know, if there is anything particular going on there that would cause NOI to dip sequentially? Or you expect this $1.64 to continue as a run rate.

Jeffrey Hedges

Hey, Michael. This is Jeff. As we said, we don't give guidance, but I think that some of the items that you saw in Q4 of last year - I'm sorry, Q3 of last year, in particular, the hurricane that Trenton just mentioned, we'll see some of that positive trend carry forward into Q4 as well.

Michael Bilerman

Right. Didn't know if there is anything within the NOI either a revenue or expense item in the actual from this third quarter that wouldn't repeat, right? So at least relative to The Street, right, a big part of the beat was NOI driven, and clearly, the acquisitions that you made using liquidity that you have. But that was more so whether there was anything particular or onetime that was either a reversible or lack of - timing of expenses or some timing of revenue that wouldn't trend forward into the fourth quarter that we should be knowledgeable of?

Jeffrey Hedges

No, I understand your question. And I think the answer is that Q3 was - there weren't any large onetime or nonrecurring items. And what you're seeing with the 1.3% decrease is primarily attributable to a high Q3 of 2017 related to the hurricane.

Michael Bilerman

Okay. And then, in terms of Lockheed, was there still some spillover on that rent reduction in this quarter?

John Petersen

In the renewal we did?

Michael Bilerman

Yeah.

John Petersen

Yeah, into Q3.

Michael Bilerman

Yeah.

John Petersen

I'm not sure I understand, Michael, exactly the nature of the question.

Maria Hawthorne

And Michael, let me clarify a little bit maybe we can refine - answer your question. But when we report rent roll-downs, it's based on execution. And so we renew that lease early, I think, in - which quarter was it? Second quarter?

Michael Bilerman

Yeah.

Maria Hawthorne

Okay. But the actual rent reduction actually commences in December of this year. Does that make sense?

Michael Bilerman

Right. Yeah, that's right. Whether it was - I couldn't remember whether you had the spreads shown on an executed basis at the time that you signed the lease, so that makes [indiscernible].

Maria Hawthorne

Okay.

Michael Bilerman

Okay. Thanks. I appreciate it.

Maria Hawthorne

Thanks, Michael.

Operator

[Operator Instructions] We will take our next question from Craig Mailman with KeyBanc Capital Markets. Please go ahead. Your line is open.

Craig Mailman

Hey, everyone. Just curious, the non-same-store pickup, was that almost primarily Northern Virginia that drove that - the acquisition there?

John Petersen

Well, yeah, I think there was the combination of lease-up at The Grove 270, the Maryland acquisition. We've had very good traction, as you can tell over the last several quarters, so that was part of it. We've done some leasing, you're right, in the industrial portfolio in Northern Virginia. So I think it's a combination of leasing activity in both parks.

Craig Mailman

Okay. I was just - I was getting close, like, $1.2 million, $1.3 million of pickup on NOI, which seem to be predominately behind the beat, at least relative to me. If you kind of parse that out, was that more of the office or more of the Northern Virginia Industrial that drove that?

John Petersen

Yeah, I think, looking at it, where - when we bought the industrial portfolio, it was in June, my - we've done some leasing, but I would say most of its attributable to the Maryland asset in terms of our - of what you're referring to, because that's where we've generated more actual leasing throughout the year at that asset. We just haven't had enough time to get traction that's going to materially impact of the Virginia Industrial portfolio.

Maria Hawthorne

Yeah. And Craig, if you're talking - I mean, I agree with what JP said and though, if you're talking about the total NOI pickup. Northern Virginia, remember, we bought it on June 8, so second quarter only saw three weeks of revenue, and so now we have the full quarter. The property, when we bought it was 76% leased. Correct me, if I'm wrong, about 76%, 78%. And even though, we've shaken out some users, that we don't really care for - or they weren't really good users for the property.

We've actually done some leasing. So you really haven't seen changes in occupancy, but we're getting some better users in the park. But I think the biggest gain is the fact that we were seeing a full quarter's worth of that NOI come in.

Craig Mailman

Right, right. And then, I doubted my numbers. It just - it was a big - and it kind of goes to Michael's question earlier, it was just a big NOI beat, and it didn't look like there was enough moving parts in the same-store portfolio to kind of drive it. And so just trying to reconcile, because it doesn't sound like there's any one-times, so no lease term fees or anything else that drove the top line?

Maria Hawthorne

No.

Craig Mailman

Okay. And then, JP, I know, you gave the color on the Dallas lease. Did you guys - have you guys backfilled the 98,000 MICC, yet?

John Petersen

Yeah, good question. We backfilled half of it, fairly early on, and we're balancing rents with occupancy there. Frankly, we're holding out for strong rent on the other half of it. So we could have leased it, Craig, by now, but we're testing the market, as we think we have the ability to do that, right now. So we'll get that leased pretty soon, I think.

Maria Hawthorne

I also have to brag a little more than JP, because they - he and his team leased it with one day of downtime, the 50% that we did backfill.

Craig Mailman

Do you guys feel like you gave that space away and that's why you're holding out at the rent that you want to get.

Maria Hawthorne

No, it's definitely our best building at MICC with a high clear height. And I mean, literally, it has access directly to the overpass that leads to freight. So it's a - yeah, it's desirable space.

Craig Mailman

Got it. And then, just on the rent roll-down on the lease that you guys renewed earlier. What's the per share drag that we should expect in 4Q or 1Q 2019 from that hitting?

Jeffrey Hedges

We don't have that readily available, so we'll have to get back to you on that.

Craig Mailman

Okay. And then just two more quick ones. Jeff, the G&A run rate into next year, I know, you guys have - hadn't put an LTEIP in after Ed's departure, and maybe that was something that was on the table. I know, you guys don't give guidance, but could you give us a sense of whether that's on the table and we should kind of be layering that into G&A for next year? Or this kind of quarter is a better run rate?

Maria Hawthorne

Craig, I'll take that one. The Comp Committee hasn't met yet to make that decision. So at this point, we're not comfortable making that decision or giving any sort of guidance on that. But as soon as we know, we'll be sure to let the entire analyst and industry know what to expect there.

Craig Mailman

And just one last quick one. The average rent on Highgate came down sequentially. What's going on there with that? Was it just a bigger mix of smaller units that you guys leased? Or…

Maria Hawthorne

Yeah, I can tell you. What happened was is 16% of the units are workforce housing, and those were actually the ones that took the longest for us to lease, because we had been leasing up all the market rate properties. So you get - that's what we definitely saw towards in third quarter and a little bit in October.

Craig Mailman

Great. Thank you.

Maria Hawthorne

Thanks, Craig.

Operator

We'll take our next question from Eric Frankel with Green Street Advisors. Your line is open. Please go ahead.

Eric Frankel

Thank you. This is, I guess, been a bit of busier quarter in terms of questions, so most of mine have been already asked. But one - important one that you probably are considering now. But as it looks like that the split role property that's going to get on the 2020 ballot, and being a California resident, it seems somewhat likely that, that's going to come through. How do you think that's going to impact your portfolio? And how tenants are going to perceive the tax increase?

Maria Hawthorne

So Eric, that's a really good question and something that definitely high on our radar. And what we can say is that, right now, everyone is anticipating this to be about a 50-50. Of course, we hope it doesn't happen. If it does, we know from when we have purchased properties, particularly in Northern California, that if something gets pass through, and it's the one expense that tenants don't argue about, they understand it. So we - and unfortunately, all of our leases in California are triple net. So it is 100% a pass through item. However, obviously, any vacancy will hit us, because you can't pass the vacant through to your existing customer base. So that would be a little bit of margin erosion.

And our hope would be that if this would be phased in, and so anyway, it's - I mean, it's something we're watching carefully. But it's not something we can comment on or say how it would affect us, because it would really depend on, A, if it passes; and then, B, how it gets passed in and - or phased in; and then, even when it gets phased in, because I think would have to be a multi-year phase in. Does that make sense?

Eric Frankel

It does. I think there is going to be a pretty big debate. First, I would probably say the odds are a little bit better than 50/50 based on just some of the polls I've seen indirectly. But we'll see, obviously, if it is certainly a question.

Maria Hawthorne

Yeah.

Eric Frankel

I think the greater question you guys are probably going to have to think - express to us at some point is whether tenants are going to be that focused on gross versus net rents and how that's going to play out. Obviously, this is going to impact the entire market. And so, a lot of property - a lot of tenants in older properties are going to experience - or older owners rather, are going to experience pretty significant markups.

And so, it's a pretty good question of what the balancing force is going to be in terms of whether tenants are being - understand that gross rents in general are going to go up or whether there's going to be a breaking point in terms of overall rent increases. So it will be interesting to see how that plays out. So I'm not sure if you have any perspective to share in terms of how newer properties have fared in terms of net rents and gross rents versus older properties.

John Petersen

Yeah, Eric, great question. Well, thought out. And, yes, we have thought about it and we have actually had to deal with it. As you recall, when we bought the Industrial portfolio a few years ago up in Northern California, we did have that issue on a pretty large scale. And so, how do tenants look at their rents? They look at the total rent, of course.

So is there an issue with having to absorb some of those costs? Our lease allows us, as Maria pointed out, to pass it all through. Can we collect it all? We managed to and have been collecting it all since we bought that portfolio. And that was a big step up there. So we have experience to do it and doing it. It all depends on how the market is and what other landlords deal with. And what their step up is, if any.

So, yeah, it's something we're watching. But we had good experience with that several years ago as we brought that Northern California Industrial portfolio to market from a tax standpoint. So we think we know how to deal with it, and adjust our occupancy, rents and the marketing strategy for that.

Eric Frankel

A fair point, I appreciate that. Second question, I guess, is more of an acquisitions, capital markets question. Can you share - obviously, industrial properties are still quite popular, and there is a [Technical Difficulty].

Maria Hawthorne

…smaller users who are exchange buyers up to the some very large portfolio and the institutional buyers are coming in for those.

Eric Frankel

Is it fair...?

Maria Hawthorne

We haven't…

Eric Frankel

Oh, sorry.

Maria Hawthorne

We haven't seen any hesitancy yet based on interest rates. I mean, it's still very frothy.

Eric Frankel

Yeah. Is it fair to say that cap rates for all the markets where you're pursuing opportunities are lower than debt borrowing costs for - in terms of first - secured mortgages?

Jeffrey Hedges

Eric, this is Jeff. I think that's a hard generalization to make, just because debt borrowing costs are going to differ depending on who the borrower is. I think potentially that's a fair statement. But again, I would hesitate to commit to that, because it's so subjective to a number of variables.

Eric Frankel

Right, we - I should probably clarify, call - fixed mortgage, 5 to 10 year term, it's typical term. But that certainly makes sense. But I think it's a fair take to say that it's pretty close, though.

Maria Hawthorne

I mean, Eric. There is a property that's just sold in Carson. And it sold on a 3.5 cap. It was a 100% leased and at a market rent. So it's - now, I don't - I know that we couldn't go out and put preferred out at 3.5. So to our mind, yes, they're selling at what I would consider sales prices that would be dilutive our NAV.

Eric Frankel

Yeah, okay. Final question, obviously, tariffs don't seem to be having much of an impact on fundamentals currently. But are there any warning signs that you can interpret for your portfolio, if it does start to, other than just lease volume or certain tenants that's - are there any tenants in your portfolio that would express concerns in terms of how their business is doing?

John Petersen

Yeah, good question. A question we ask a lot and we're asking now in our Q4 survey. Your timing is good. But in terms of our existing customer base, we had over 200 customers expand with us this year alone. What I mean by expand is take more space with us. So that tells us that they are feeling good about their business. They're feeling good enough to take more space at very high risk.

And are we seeing any warning signs? We're not seeing any warnings signs in AR. Where our AR is at an all-time low, we're able to - maybe I mentioned before - improve the quality of, and credit quality and use quality of our customer base. If we don't like a user, if they're not using the real estate right, we just won't renew them. And we'll very quickly get a backfill. So having said all that, we're very aware that we're operating at high levels. And we're looking for those signs that our customer is slowing down or they're not willing to pay the rent or we're having longer negotiations or anything like that.

We're acutely aware of those potential issues and are not seeing them at any deep level or broad-based level yet.

Eric Frankel

All right, thank you. I appreciate it. I'll ask my other questions at [near tentatively] [ph]. I appreciate it.

Maria Hawthorne

Thanks, Eric.

John Petersen

Thanks, Eric.

Maria Hawthorne

We'll see you soon.

Operator

And as there are no further questions at this time, I'll turn the floor back over to John Petersen.

John Petersen

Thank you, everyone, for joining us. We appreciate your interest in the company and we will talk next quarter. Bye-bye.

Operator

Thank you. This does conclude today's conference call. Please disconnect your line at this time and have a wonderful day.