PSB (2021 - Q4)

Good afternoon and welcome to the PS Business Parks, Fourth Quarter and Full-Year 2021, 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 your questions following the presentation. It is now my pleasure to turn the floor over to Adeel Khan, PSB's Chief Financial Officer. Sir, you may begin. Adeel Kh

We thank you for joining us for PS Business Parks, fourth quarter 2021 Earnings Conference Call. In addition to the press release distributed yesterday after market closed, we posted a supplemental package in the Investor Relations section on our website at www.psbusinessparks.com. On today's call management's remarks and answers to your questions contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. For more information about these risk factors, we encourage you to review our 10-K and other SEC filings. PS Business Parks assumes no obligation to update any forward-looking statements in the future. In addition, certain financial information presented on this call represents non-GAAP financial measures. Our earnings release and supplemental package present GAAP reconciliations, and explanations of why such non-GAAP financial measures are useful to investors. Today's conference call is hosted by PS Business Park Interim Chief Executive Officer, Steve Wilson, Interim Chief Operating Officer, Maria Hawthorne, together with Chief Financial Officer, Adeel Khan. We will make some prepared remarks, and then open the line for your questions. Now I will turn the call over to Steve.

Thank you, and welcome to PS Business Parks, fourth quarter 2021, Earnings Call. Before we begin, on behalf of the entire PSB team and the Board of Directors, we wish Mack a speedy recovery. And the management team will continue the forward momentum from 2021, into 2022, in his absence. I'll begin with a summary of our fourth quarter and full-year operating results. I will then discuss PS Business Parks positioning, and general outlook, for 2022. Maria will then cover our operational activity. And Adeel will follow with more details on our financial results and balance sheet. Let me start with our fourth quarter results and activity. We increased core FFO by 9.6% to 63.5 million and generated a 9% increase in core FFO per share to $1.81. Our Same Park NOI grew by 6.5% on a cash basis, and 8.6% on a GAAP basis. We achieved 96.4% occupancy in our Same Park portfolio, representing 270 basis point increase from prior year. We are pleased to report our leasing volume during the fourth Quarter, was 1.8 million square feet. Our leasing spreads were 6.1% on a cash basis, and 16.4% on a GAAP basis. Our industrial assets led the way for the quarter with cash and GAAP rent growth of 11.5% and 25.7% respectively. We redeemed all Series W preferred shares in November and paid a one-time special dividend of $4.60 per share to common stock and unit holders. We acquired one property during the fourth quarter for $25.5 million. Our full-year 2021 investment volume was $148.5 million. We sold three properties during the fourth quarter for $329 million. Our full-year disposition volume was $408 million. 89.6% of PS Business Parks portfolio is comprised of industrial and industrial flex space, and continues to benefit from the uniqueness of the supply demand dynamics in our markets. Our industrial portfolio continues to flourish with an average same pump occupancy of 97.7% for the quarter. And full-year Same Park Cash NOI growth of 12.5% compared to last year. Moving to production. For the year, we leased 7.4 million square feet. Cash and GAAP rent growth was 5.2% and 14.7%, respectively. Again, our industrial assets led the way with cash and GAAP rent growth of 9.4% 21.7%, respectively. Leasing transaction costs was $3.15 per square foot for the quarter. A sequential decrease of 28%. Turning to our rent collections. As of December 31st, 2021, the company collected 99.9% of the revenue build during the year. The company collected $5.3 million of rent deferral repayments, representing 99.8% of the amount scheduled to be repaid through December 2021. An additional $900,000 of rent deferral repayments is scheduled to be repaid, of which $500,000 is in 2022. While we remain focused on rent collections, we have not, and will not, lose sight of our overall strategy to create better-than core returns through investment in prime, infill, industrial real estate, in our key markets, The key tenants of PS Business Parks strategy continued to be proven out in the midst of this pandemic. Supply, demand, dynamics remain in the landlords favor. Rental rate growth is expected to continue, and we have a platform designed for value creation beyond market rental rate growth. Now, turning to our investment activity. On November 21st, 2021, we acquired Jupiter Business Park, a 141,000 square foot multi-tenant industrial park in Plano, Texas, for $25.5 million. The park is currently 97.3% occupied and continues to meet our high expectations in all aspects, particularly on rent growth and renewals. We are forecasting a stabilized yield of approximately 4.3%. On the sales front, we announced the sale of Lusk Business Park at 371,000 square foot industrial flex property in San Diego for a gross price of $315 million. This sales price represents greater than 60 times or 1.6% cap rate on our 2021 estimated NOI for the property. The net proceeds, and the end gain from Lusk Business Park sale, were used for the payment of the special dividend series W preferred redemption and the remainder was exchanged in Port America and Jupiter Business Park. In addition, we sold a 53,000 square foot property in Bellville, Maryland for $4.8 million and a 70,000 square foot property in Dallas for $9.1 million. We've previously announced that we are marketing for sale our Royal Tech Flex Park in Dallas, we anticipate this project should close this quarter. We are actively in the market for external growth through acquisitions that meet our thresholds. Particularly multi-Tenant industrial parks that allow us to add value through our best-in-class leasing operating platform. Moving to our development projects, we are pleased to announce our 83,000 square foot Freeport industrial development in Dallas, is now 100% occupied with a stabilized yield of 11%. Our Boca Raton development in Florida, and 212 development in Seattle, are on track with anticipated completions in fourth quarter of 2022. Construction of Brentford at The Mile, our 411 unit multi-family development in Tysons, Virginia, is on schedule. We plan to deliver the first units in late 2022. For 2022 and beyond, we will continue to evaluate our portfolio with an eye towards improving the property mix and the income stream, with a critical eye on disposing of non-core high CapEx office similar to the Royal Tech and Ammendale dispositions. In addition, we will be nimble to capitalize on opportunities within the portfolio, to seek the highest and best use, which can ultimately lead to higher densities and outsized value creation. The re-entitlement at The Mile and the South San Francisco multi-family rezone are prime examples. We now have in-house capabilities to execute these strategies and create value and have identified a number of such opportunities. We may pursue re-entitlement internally or sell to others to pursue. Lastly, the prime example. During Mack's absence, the team is fully engaged and has hit the ground running. We look forward to executing the strategy as we move into 2022. I will now turn the call over to Maria.

Thank you, Steve. I'm happy to be here today with so many familiar names. As you can tell from Steve's comments, our leasing machine and operations teams are all performing extremely well. If 2021 was the year of growing occupancy, 2022 will continue to be the year of driving rental rates. It's safe to say that all industrial markets are seeing record low vacancies and as a result, there is upward pricing pressure. Operating fundamentals include low unemployment, positive net absorption, limited new construction of our product type, and robust user demand. Now let's turn to the individual markets. In Seattle, our industrial assets, average occupancy increased to 98.2% for the fourth quarter. A 260 basis points sequential expansion and cash rent growth of 11.5%. The Seattle industrial market in general had a record year with good job growth and great absorption. The story in California continues to be great despite regulatory constraint. In California, our Same Park industrial assets, average occupancy increased to 97.3% for the fourth quarter, a 100 basis points sequential expansion. Cash rent growth for the industrial assets was 10.9%. Northern California delivered outstanding metrics in Q4 and led us in leasing production with 452,000 square feet and retention of 78.5%. Southern California saw 85% retention on 242,000 square feet of deals executed. Fourth quarter Same Park average occupancy was 97.7%. With the economic engine moving forward in Texas, we had success in virtually all our metrics. Leasing production delivered 359,000 square feet, and retention at 72%. Our Same Park industrial assets average occupancy increased to 96.6% for the fourth quarter, a 230 basis points sequential increase. Cash rent growth for the industrial assets was 14.9%. As Steve mentioned, our development adjacent to DFW Airport is 100% leased and occupied with rental rates that set a new high point for the market. The South Florida industrial markets is benefiting from strong trade dynamics. From time-to-time, we may lose a customer due to uncertainty with the various trade issues, but we are able to retenant quickly and often through existing customer demand. Our industrial assets average occupancy increased to 98.6% for the fourth quarter, a 10 basis points sequential increase and cash rent growth for all assets was 16%. For the Washington Metro area, our Same Park industrial assets average occupancy increased to 98.5% for the fourth quarter, a 240 basis points sequential increase. As you know, the bulk of PSBs office portfolio is in this market. And it is here that we are battling our only headwinds. We had hoped at the beginning of the year that people would head back to the office in 2021. However, the COVID variants put that on hold for many office users. Despite this, I'm proud that the team was able to maintain 88% occupancy in an office market that is 80% occupied and have GAAP rent growth of 5.8% on a 171, 000 square feet of leasing with transaction costs of only $4 per square foot. This just proves once again that our small tenant spaces with generic office build-out and finishes continue to outperform the market. I am optimistic as we look at 2022. For the remainder of the year, 71% of all explorations orient our industrial product. 21% is flex, and only 8% is office. Our goal is to take advantage of the industrial tailwinds by maintaining high occupancy and pushing rental rates. I will now turn the call over to Adeel.

Thank you, Maria. Beginning with our operating results. For the three months ended December 31, 2021, net income allocable to common stockholders was approximately $267.4 million or $9.66 per fully diluted share. This compares to $26.9 million or $0.98 per fully diluted share for the same quarter in 2020. For the three months ended December 31, 2021, core FFO was $63.5 million as compared to $57.9 million for the same quarter in 2020. On a per-share basis, core FFO was a $1.81 per fully diluted share representing a 9% increase year-over-year. Same Park NOI was $72.2 million for the three months ended December 31, 2021, which compared to the $66.5 million for the same quarter in 2020, an increase of 8.6%. On a cash basis, Same Park NOI increased by 6.5% year-over-year. Funds available for distribution or FAD was $54.3 million for the three months ended December 31 bringing 2021 FAD to $210.7 million, representing a 10.8% increase from the prior year. In addition to the previously mentioned cash NOI growth, FAD continues to benefit from well-managed recurring capital expenditures, which our Same Park portfolio registered at 11.5% of NOI. Turning now to our balance sheet and financing activities, we continue to believe that maintaining a low leverage balance sheet with ample liquidity and a diverse array of capital sources as a competitive advantage for PS Business Parks. In November, we redeemed all $190 million of serous W preferred shares. At the end of the forth quarter, we had approximately $27 million of cash and $368 million available on our credit facility. We remain in a very strong liquidity position with the net debt plus preferred equity to EBITDA ratio of 2.6 times. With regard to our dividend, on February 21, 2022, our Board declared an ordinary good dividend of $1.5 per share to be paid in the first quarter of 2022, on March 31, 2022, to stockholders of record on March 16th, 2022. This concludes our prepared remarks and will that, we'll open the line for questions. Operator?

And the floor is now open for questions. Thank you. And our first question comes from Anthony Paolone with JPMorgan. Please go ahead.

Thank you. I was wondering if you can first potentially address the timeline with Mark and just any update on that front. And also in that same regard, I know you had some plans to consider a CIO seat and whether that's on hold or any of those types of moves are still in process.

Hi. This is Steve. Well, first and foremost, our thoughts are with Mark and his family and that's the most important element. Other than what we've already publicly disclosed, we have no additional update for this time and should that change, we will publicly release that status. The second part of your question. I think we'll leave that until Mark returns. He needs to hire his own team. So I think we'll put that on pause for a while. But it doesn't stop or slowdown the work that we're doing.

Okay. And then same question, can you talk about just what the investment pipeline looks like, put any dollar amounts around it, or the types of things you might be looking at in the near-term?

There is a lot of product out there. There's a mix -- mixed quality. We're underwriting a number of opportunities right now. How much of that we execute on, remains to be seen, but we're going to be competitive and there are things I think we would be quite aggressive with.

Okay. Then just last question, maybe for Maria. You talked about pushing rate in 2022, given where the occupancy level is. Can you give us any sense as to perhaps what mark-to-markets might look like this year in comparison to last year, given the mix and just what's happened with the market?

Tony, I think that on the west coast because all of the markets are really good, whether it's Seattle, the Bay area, or the LA markets that we have, so we'd be looking at 15% to 20% for our industrial. Flex is a little more variable depending on the office build-out. But overall, I would hope we could get at least an average of 10% and on office right now on that, we're just looking to maintain occupancy and it's not so much about rent growth at all. But the good news is that we don't have really any big explorations coming up this year. One that we have is in Florida, is about a 100,000 square feet. There's intense activity. I think we've already pre -leased one or two of the spaces and we're looking at -- for instance, on that one, we're looking at between 25% and 30% rent growth. And then we have one in Dallas expiring about 60,000 feet. And again, that one, we're looking at 27% rent growth. Those are both industrial deals, but that's the growth we're looking at.

Okay. And just to clarify, those spreads are cash numbers?

Cash.

Thank you.

We will take our next question from Craig Mailman.

Good afternoon -- good morning out there. This is Ardie on for Craig. Just a quick one on capital sources and uses. So it looks like you guys have pro forma of the disposition in Texas. You guys are looking at some capital that you can redeploy here. Through the year, should we expect you guys to be net acquirers given in pipeline today and just any thoughts there?

I answered that question. Almost as we continue to decline tune the portfolio in the way we have been doing over the last year. So I think that's priority number 1, and to Steve’s point earlier there, right. As we fine tune the portfolio and as we get any disposition proceeds, our first order business is to get that money to exchange so we can find sources to redeploy. So that's our laser focus. So we're not distracted from that perspective. But having said that, we're very disciplined in terms of capital. And to Steve supporting point, there's quite a bit of stuff that we're looking that we are operating in some of the best markets. And that's great in terms of our ability to execute in different markets. And certainly what we know is just an example in terms of our capability. And last part of this question, obviously, that's just on the disposition strategy and what we do with the proceeds. Our balance sheet is just ready and equipped to go any which way we want. We have the best balance sheet in class. So the team is laser-focused in their perspective and we've got a great team here and just looking at every single thing that we need to do to just to make sure that we continue to be accretive for the shareholders.

Got it. Thank you. And one more quick one, if I could. preferred profitable this year, the Series X and the Series why?

Yes. That's a great question. And I think we'll answer that as we get closer, right? So it all starts with the right data, first and foremost priority. However, having said that, if for some reason we don't find the quality that we're looking at, if they don't cancel end really well, that's certainly an opportunity set for us, and we've seen us execute on that side in the past, but we can't really guide , but as we get closer, we will certainly have a lot more messaging from our perspective in terms of the quarter-by-quarter breakdown. And then we'll guide you a little bit further. But certainly, at our table, but we'll see. The first and foremost priority is to just increase, to grow the company.

Thank you.

We'll take the next question from Emmanuel Korchman with Citi. Please ask your question.

Hey, everyone. Steve, maybe this is one for you, but I'm just trying to reconcile a couple of comments you've made on holding to hire a CIO as Mark's decision. But then sounded like you might be aggressive on some sounded like acquisitions, so help us without Mark actively in the seat or is that just stuff that's already underway or how are you thinking about what needs to be a more permanent decision versus

Well, the management team has some depth. We have a of real estate, he's actively in the market and source in all the deals. And the Chief Investment Officer would obviously be more strategic. But it doesn't affect what's going on right now things we've been looking at for maybe three months. So it doesn't change how we're viewing the business. Maria, Adeel, and myself, we're very involved, and so I don't think it affects anything, I just think it's important for Mac to hire his own Chief Investment Officer when the time comes, but it doesn't impact how we're going about our business on a daily basis.

And then Maria, one for you. Just as you think about the relationship between occupancy and rental rate growth and retention, all those things, are you actively changing the way that you track are longer or depending like that?

That's a good question, Manny. We -- our average deals on the larger status to get five plus years. And you can do that with more sophisticated tenants as seen by the deals we executed last in regards from 10-year deals on this. Our little guys are bread and butter. It's hard to get them beyond three years just because they don't have five and 10-year projections usually. So some of the shorter-terms allow us to be last seven years. To have two and three bites at the apple of increasing the rental rate growth on even those little guys. But when you have the little guys, you're not getting 20% and 30% rent increases if you're renewing them every two years. Does that makes sense?

No, it does. So it sounds like years ago. I was just wondering if you were actively thinking about changing things, but the answer -- it sounds like the answer is no.

No, you can. I would love to get 5 and 10-year deals with our automatic increases. That would be great but you just can't do that.

I'll just add one antidote to what Maria is saying is that, and I think this chose to goes to Maria's comments earlier on the rent growth, I think that's purely the focus here. And then we look at 2022 and I know we don't provide guidance here, but when we look at our internal numbers here, we're pushing more -- trying to put lower retention because we want us to push the rent that's what how we're looking at our business. So that really aligns well with what Maria was saying. And obviously this is not news to you guys on the call because you've seen that from all the industrial peers, so that's the key focus. So if that retention create shift a little bit lower, it's all by design. Because again to her point, we're trying to get more bites at the apple and we want to make sure that if there's an opportunity set there, we get new tenants who are willing to pay higher. And because of the demand, just certainly as they are. So hopefully you will see a little bit of that flow through the numbers as well as we go in the year.

Thank you, everyone.

There are no further questions at this time. I will turn the call back over to Steve Wilson for any closing remarks.

Well, thank you everyone for your time this morning and we look forward to talk to you again in a couple of months. Thank you. Have a great day.

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