PS Business Parks, Inc. (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

Presentation

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.

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