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Edited Transcript of PSB earnings conference call or presentation 1-May-19 5:00pm GMT

Q1 2019 PS Business Parks Inc Earnings Call

GLENDALE May 29, 2019 (Thomson StreetEvents) -- Edited Transcript of PS Business Parks Inc earnings conference call or presentation Wednesday, May 1, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey D. Hedges

PS Business Parks, Inc. - Executive VP, CFO & Secretary

* John W. Petersen

PS Business Parks, Inc. - Executive VP & COO

* Maria R. Hawthorne

PS Business Parks, Inc. - President, CEO & Director

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Conference Call Participants

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* Brendan Patrick Finn

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Craig Allen Mailman

KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst

* Eric Joel Frankel

Green Street Advisors, LLC, Research Division - Senior Analyst

* Jill Ryann Sawyer

Citigroup Inc, Research Division - Senior Associate

* Patrice Chen

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to the PS Business Parks First Quarter 2019 Earnings Results Conference Call and Webcast. (Operator Instructions) It is now my pleasure to turn the floor over to Jeff Hedges, Chief Financial Officer. Please go ahead.

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Jeffrey D. Hedges, PS Business Parks, Inc. - Executive VP, CFO & Secretary [2]

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Thank you. Good morning, everyone, and thank you for joining us for the First Quarter 2019 PS Business Parks Investor Conference Call. This is Jeff Hedges, Chief Financial Officer. Here with me are Maria Hawthorne, CEO; John Petersen, COO; and Trenton Groves, CAO.

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 and earnings supplement, which can be found on our website at psbusinessparks.com.

I will now turn the call over to Maria.

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Maria R. Hawthorne, PS Business Parks, Inc. - President, CEO & Director [3]

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Thanks, Jeff. Good morning, everyone, and thank you for joining us. 2019 is off to a great start. We're happy to report Same Park NOI growth of 4.3%, along with 9.2% rent growth on 1.6 million square feet of executed leases. These metrics, combined with Same Park occupancy of 94.5%, demonstrates the strength of our infill markets, combined with our small customer strategy.

Market conditions for industrial properties remains among the best we have seen. Our balance sheet is well positioned for growth, and investor demand for our type of real estate is intense. JP will give greater detail on the performance of our operations, and Jeff will close with some commentary on our Q1 financial results.

Current operating conditions in nearly all our markets are excellent, and Washington, D.C., which has lagged in prior quarters, is improving. We feel that, on average, we are likely to continue to achieve improved rental rates on new and renewed leases for our 2019 expirations.

We remain focused on making multi-tenant industrial park acquisitions in our existing markets. Pricing remains high, and our volume will be dependent on the quality and pricing of opportunities. I am pleased to tell you that in the month of April, we closed on the acquisition of Walnut Industrial Park, a park located in Los Angeles, very close to some of our most established and successful assets.

Walnut has long been a direct competitor. It is comprised of 8 buildings totaling 74,000 square feet, with 32 customers. We purchased the park for $13.8 million, and it is currently 98% leased, with in-place rents approximately 20% less than what we are getting on our comparable properties. As is typical with our acquisitions, there will be some turbulence in occupancy over the next 2 years as we increase rents to market.

In the first quarter, we announced that we were marketing 2 parks for disposition as we continue to shed office parks that we do not intend to redevelop in the near to midterm. The assets are located in Montgomery County, Maryland, totaling approximately 1.4 million square feet. And in 2018, they generated approximately 7% of the company's total NOI. As a quick update, I wanted to let you know that the properties are on the market, the offering memorandums are out, and they are currently being shown. We are willing to sell as a single portfolio, and we are also considering multiple sales similar to what happened in Orange County last year, which resulted in giving us the best value through 3 separate transactions in a process that took 9 months to execute.

We will keep you updated as the marketing process evolves. Now I will turn the call over to JP.

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John W. Petersen, PS Business Parks, Inc. - Executive VP & COO [4]

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Thanks, Maria. In terms of operational metrics, 2019 started off -- started where 2018 left off. User demand was robust in all our markets, lease concessions were contained, and our teams in the field delivered cash rent growth of 9.2%. A portion of our leasing volume was driven by our existing customer base, with a net of 18 expansions, aggregating to almost 80,000 square feet.

Notwithstanding the fact that Same Park occupancy dipped 60 basis points to 94.5% due to the known move-outs I mentioned last quarter, favorable landlord momentum reached into each of our markets driven by growing small businesses. This demand from small users helped drive strong leasing production in Q1. I will now provide a market-by-market update going west to east.

In Seattle, the operating environment remains tight. Demand is consistent and we delivered strong results. Rent growth was nearly 19% on the strength of 24 deals for 78,000 square feet. Occupancy dropped to 96.1% from 99% in Q4 due to 3 separate move-outs at the end of 2018 as they outgrew our essentially full portfolio. We have since re-leased one of the spaces and have good tour volume on the other 2. We expect to continue to see this kind of move-out activity from time to time as we simply don't have room to handle all our internal customer demand.

Our Northern California team was again able to take advantage of the landlord-favorable conditions and signed 87 deals totaling 329,000 square feet, an average of 3,800 square feet per lease, with rent growth of 22.1%. As expected, occupancy dipped 120 basis points to 96.6% as we took back the 130,000-square-foot industrial space in Hayward I noted last quarter. Aside from that move-out, demand is healthy, and our team is focused on continuing to push rents, meet existing customer demand and improving both the use and credit quality of our customer base.

In Southern California, the economy is healthy, demand is good, and we delivered 311,000 square feet of deals. Occupancy dropped 110 basis points in Q1 to 95.7% due to a 53,000-square-foot industrial user filing bankruptcy. The good news is that once we get the space back, we should be able to re-lease it quickly and generate solid rent growth.

Blended rent growth in Southern California for Q1 was 10.6%.

We signed 327,000 square feet in Texas in 80 transactions, with retention of 84%. In Dallas, buoyed by a strong local economy, our small customers are looking to secure their space in a tight market, pushing retention to 91% and rent growth of 6.6%. In Austin, user activity was strong, which allowed us to grow rents 5.5%.

In Washington Metro, the team completed 400,000 square feet in 117 deals, an average of 3,400 square feet. Strong retention of 79% helped improve our cash rent decline, which was negative 2.8%. A portion of this demand is coming from tech users, both the private sector and government contractors. Our Q1 Same Park occupancy in Northern Virginia was 93.7%, again demonstrating we are capturing more than our fair share of user demand.

The South Florida industrial market continues to be one of our strongest operating environments. As such, our team grew rents 16% on 219,000 square feet, an average size of 4,400 square feet. We generate the best rent growth on our dock-high industrial spaces, below 5,000 square feet at our MICC Park in Miami. Users looking for small industrial space with dock- and grade-level loading near Miami International Airport have very few options, allowing us to set rents 20% higher than the competition.

Looking ahead, I am confident that primarily driven by continued small business job growth, our team will be able to produce favorable metrics on the approximately 18.7% or 5.3 million square feet of our portfolio expiring in 2019. The majority, over 70% of these expirations, occur in our strong coastal industrial markets, which should provide ample rent growth and retention opportunities.

Now I'll turn the call over to Jeff.

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Jeffrey D. Hedges, PS Business Parks, Inc. - Executive VP, CFO & Secretary [5]

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Thank you, JP. I'm pleased to report that we kicked off 2019 with a strong first quarter. Net income for the 3 months ended March 31 was $0.96 per common share, while FFO was $1.67 per share, an increase of 5.2% from the same period a year ago. The increase in FFO was primarily attributable to growth in Same Park NOI, which increased 4.3% in Q1 driven by 4.3% rental income growth.

Note that FFO growth also benefited from NOI generated by our NVIP portfolio, which we acquired in mid-2018. Funds available for distribution, or FAD, was $46.2 million, an increase of 5.3% from Q1 2018. FAD growth was driven by the same factors as FFO, coupled with continued discipline in our management of recurring capital expenditures.

I'd like to now spend a minute providing some commentary on a couple updates to our reporting package that we pushed through this quarter. First, we have enhanced our cash NOI disclosure to now include cash NOIs by market and product type. Cash NOI, which as we present it excludes straight-line rent from rental revenues and stock-based compensation from operating expenses, had historically been provided on a Same Park and total portfolio basis and our hope is that this additional disclosure will allow you to form a more granular view on the performance of our portfolio.

Second, you'll note that beginning on January 1, 2019, we are recording compensation costs related to our divisional vice presidents in general and administrative expense as the role that these 4 individuals play within our organization is more aligned with corporate oversight than with direct property operations. Where appropriate, we have reclassified prior periods to conform to the current period presentation in an effort to preserve comparability between periods. While the dollar amount of this reclassification is not significant, we believe that this change will be helpful going forward in comparing our property operating performance to that of other market participants as well as comparing our corporate overhead expense to that of our corporate peers.

Turning now to Highgate at The Mile. We are pleased with the first quarter results of over $1.4 million of net operating income, up from $1.3 million in Q4. Recall that we began the year at stabilized occupancy levels, and the strategy for the first half of 2019 is to bring rents in line with market rates as some of our early tenants turn for the first time. As a result, we expect to see Highgate's NOI continue to increase as we progress deeper into the year.

Finally, I'll wrap up by pointing out that we paid a dividend of $1.05 to common shareholders in the first quarter, and our Board recently declared a dividend of $1.05 to be paid to shareholders in the second quarter, payable on June 27 to shareholders of record on June 12. Our balance sheet at March 31 remains largely consistent from how we began the year. And I'll note that we funded the recent Walnut Industrial Park acquisition with cash on hand, leaving our corporate credit facility untapped and ready for use if and when we identify additional accretive acquisition opportunities.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Manny Korchman with Citi.

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Jill Ryann Sawyer, Citigroup Inc, Research Division - Senior Associate [2]

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It's Jill Sawyer here with Manny. Can you talk about some of the embedded mark-to-market you have on the lease roll in some of the higher-growth markets like California or South Florida?

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John W. Petersen, PS Business Parks, Inc. - Executive VP & COO [3]

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Yes. Sure, Jill. We've, as you well know, had good track record over the last several quarters with rent growth in Northern California in the high teens, low 20s quarter after quarter. And as we take -- continue to take leases to market, we see that continuing.

It could fluctuate quarter-to-quarter depending on what rolls. But with mostly our West Coast expiration, we're happy to get that space coming to us because markets are strong, market rent growth is strong, and we're able to mark-to-market quite nicely. Will it always be over 20%? No, I don't think so, but we're anticipating strong conditions in '19.

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Jill Ryann Sawyer, Citigroup Inc, Research Division - Senior Associate [4]

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Okay. And now your industrial retention rate was lower than some of the peers this quarter. How do you go about weighing the balance between pushing rents versus keeping tenants or your willingness to lose them?

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John W. Petersen, PS Business Parks, Inc. - Executive VP & COO [5]

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Yes. It's a great question. And the good news is, especially in our coastal markets, including Florida, I mean, we have the upper hand. And so in Seattle, I know that we lost some occupancy. Tenants just outgrew our park. They needed more space. We didn't have it. And in Northern California, we lost a big space, as I mentioned, last quarter. They also outgrew our portfolio.

But more often than not, it's advantageous to us to renew a customer than to let a customer go, all things being equal, because we'll have less transaction costs, lower broker fees, et cetera. So -- but it is a balance, and we're also trying, as I noted earlier, to ensure that we have good long-term credit and good tenant uses going forward. So we have the ability to be more selective now.

And so you will see from time to time that we let a tenant go if we don't like the use, don't like the credit, and it gives us -- we do have options on most of our expirations in our coastal industrial markets.

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Operator [6]

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We'll take our next question from Brendan Finn with Wells Fargo.

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Brendan Patrick Finn, Wells Fargo Securities, LLC, Research Division - Associate Analyst [7]

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I guess can you guys comment on the acquisition environment, I guess, in the event of a sale of the Maryland assets and I guess, where you guys are looking and if you're looking for core-type assets or maybe value-add assets?

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Maria R. Hawthorne, PS Business Parks, Inc. - President, CEO & Director [8]

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Yes, Brendan. So Q1 was a little bit slow. The reports where it was down, we didn't see a lot of assets, and then what there was, did sell at record highs within their markets. So it's intensely competitive. There was even competition on the small asset in Signal Hill because that's a market that's very, very desirable, at the intersection of the 405, the 91 and the 110. So our goal will be to do what we did last year, but we'll have to double it.

So if you think about when we sold our Orange County and the asset in Texas, it was almost a dollar-for-dollar trade with the NVIP portfolio, and portfolios like that tend to come out after first quarter. So believe me, we're talking with investment brokers in our markets, and we are looking to repeat our success from last year.

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Brendan Patrick Finn, Wells Fargo Securities, LLC, Research Division - Associate Analyst [9]

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Got you. And then, I guess, JP, you mentioned the industrial tenant filing for bankruptcy. When do you plan to get that space back? And then, I guess, are there any other tenants that are on your watch list that you guys are concerned about?

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John W. Petersen, PS Business Parks, Inc. - Executive VP & COO [10]

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No, no other major tenants that we're concerned about. We can't get the space back soon enough, obviously, based on where it's located in Los Angeles. It's a great industrial park. And it might take a couple months to go through the bankruptcy process and recapture the space. But that's not preventing us from marketing it and things like that. So it's a good opportunity for us to mark-to-market.

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Operator [11]

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We'll take our next question from Craig Mailman from KeyBanc Capital Markets.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [12]

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Maria, could you maybe just -- I know it may be early in the marketing process, but any takeaways you're seeing from kind of depth of demand for the potential asset sales and pricing expectations. I know you're not going to give to cap rate, but just maybe versus your initial kind of what the brokers are kind of guiding you guys to?

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Maria R. Hawthorne, PS Business Parks, Inc. - President, CEO & Director [13]

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Okay. Sure, Craig. So we are seeing good activity. There has been over 70 requests for signatures to the MVA. So when those get signed, that gives people access to the rent roll. We are in very heavy tour mode last week and this week and next week. We'll probably do an initial call for offers.

It's hard for me to say right now whether it will go as a full portfolio or if we will split it up because we do have interest both on the full portfolio, but as well as interest from people who are interested in bits and pieces. So it's hard for me to give guidance right now on where that pricing will go. But I will say that the office market for suburban Maryland is not what it was for Orange County last year. So we're anticipating for the office pieces cap rates that are in the 9% to 9.5% range.

And just as a reminder, one of the parks that we're selling have, the big 156,000-square-foot user, will be vacating this year. And for the remaining 9 months of the year, depending on when we sell that office in -- or that asset in Maryland, that will negatively impact our NOI by about $2.7 million compared to what it contributed last year.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [14]

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Right. And then that kind of leads into my next question. I mean are you guys seeing any different -- I guess how much demand is there for that piece of the portfolio versus kind of the better low lease? Or, I guess, what kind of appetite is there for vacancy in that market?

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Maria R. Hawthorne, PS Business Parks, Inc. - President, CEO & Director [15]

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Well, actually, the property that, that big customer is leaving is actually a flex property that is directly adjacent to a brand-new hospital that's opening next quarter. So there's actually a lot of interest in that asset, and it's being seen as a value-add opportunity.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [16]

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Okay. All right. And then, Jeff, I know we've talked about it in the past. It's been a while since you guys put an LTIP in. I know you don't give guidance, but is there any indication from the Board that, that could be in the future and kind of bump up G&A here as we go forward?

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Jeffrey D. Hedges, PS Business Parks, Inc. - Executive VP, CFO & Secretary [17]

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Yes. So no, we don't have anything to officially report here today. That conversation is being had at the Board level. We -- the Board recognizes that it's been a while since our last LTIP expired. And so we do expect that something will be in place at some point in the future, but we don't have any guidance to give you here today as to the timing of that. So unfortunately, I just am not able to disclose any more than that at this point in time.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [18]

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No. That's fair. And I guess just as a benchmark, kind of what type of drag have you guys historically seen when some of those plans have been put in place? Is it sort of going to be around a $4 million annual kind of drag? Is that kind of a good place to put it?

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Jeffrey D. Hedges, PS Business Parks, Inc. - Executive VP, CFO & Secretary [19]

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Yes. There are some nodding heads in the room here, Craig. I think you're in the ballpark. Again, I have to be careful here because that is dependent on a number of different variables. There's several factors that could influence the GAAP impact in terms of what the increase to G&A would be. But I think ballpark, you're in the right area.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [20]

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And just one last one for JP. You guys had some good success here on moderating the rent roll downs in Northern Virginia in the last couple quarters. Has this been a mix issue, where maybe some of your industrial rents are rolling so you have a better mix versus more office, or is this kind of sustainable?

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John W. Petersen, PS Business Parks, Inc. - Executive VP & COO [21]

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Great question, Craig. It's a little bit of both. If you look at -- we are able to see rent growth on our industrial portfolio in Northern Virginia. And so -- and we recognize that. Our industrial flex portfolio is in the mid-90s, and in that environment, we have the ability to push rents, not as much as we would like in other -- say, we have on the West Coast.

But that's also offset by improving demand, low unemployment on the office sector in Northern Virginia. And then as I mentioned in my prepared comments, our portfolio in Northern Virginia is almost 94% leased. And we're coaching our teams.

Look, when you're in the mid-90s, you have to try harder to maintain rents, at least maintain your last outgoing rent. So it is still a struggle. Market vacancy is still in the high teens, low 20s. So we're fighting that battle. But our portfolio, especially in Tysons, and that area, we're 93%, 94%, pushing 95% at times. So in that environment, there's good demand, and we can at least maintain rents.

Now sometimes, we have a longer-term lease that's coming off a bunch of annual increases. It's harder there. But yes, we're -- our team's done a great job in Northern Virginia trying to minimize rent declines. Does that help?

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [22]

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Yes.

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Operator [23]

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We'll take our next question from Eric Frankel with Green Street Advisors.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Senior Analyst [24]

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Just to clarify the potential Maryland sales. Maria, when you say the expected pricing amounts to a 9% to 9.5% cap rate, does that include the -- this 156,000-square-foot tenant vacating? Or does that include -- is that per unit and that gets leased up and that's the stabilized yield?

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Maria R. Hawthorne, PS Business Parks, Inc. - President, CEO & Director [25]

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I -- it does include -- the underwriting assumes that, that tenant is vacating. Because it's flex, we don't expect that one to necessarily be at the 9% to 9.5%. However, there is a lot of office in that portfolio and so that, the office portion, will drive the total sales to that overall cap rate, Eric.

The only thing is that I would be very hesitant to assume that all of this will sell either second or third quarter because if the pricing doesn't come in to our expectations, we could do what we did in Orange County, take -- and Texas, where we take a step back and then break the portfolio apart because it does break very nicely into 6 separate pieces.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Senior Analyst [26]

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I see. And per what you described in the last call, where you may not see the short- or medium-term opportunity for redevelopment, is it being marketed that way? Just to understand kind of what...

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Maria R. Hawthorne, PS Business Parks, Inc. - President, CEO & Director [27]

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Well, yes. These assets, we don't see as redevelopment opportunities for us. However, there's about 0.5 million square feet in eastern Montgomery County that we're selling that is in an opportunity zone. And the one asset that does have the big vacancy that is adjacent to the hospital, there are other medical office users that are looking at that as a potential redevelopment opportunity.

We're not going to redevelop into office. So that's why we're shedding this portfolio at this time. There may, in the future, be some other portfolios, pure office-play portfolios that we will be announcing, but like maybe next year.

But right now, the only office that we would be keeping would be what we consider redevelopment plays, for instance, Tysons at The Mile. We have a beautiful asset portfolio that's currently about 95% leased in San Mateo. That would be a longer-term redevelopment opportunity. But it's in San Mateo and a great location. So for instance, you would not see us putting that up for sale. Does that...

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Senior Analyst [28]

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You had a couple. So it sounds like, potentially, more assets in Maryland and Virginia might be taken out of your portfolio at some point. Is that fair to say?

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Maria R. Hawthorne, PS Business Parks, Inc. - President, CEO & Director [29]

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Yes. If you think about it, the only office that we have left on the West Coast really other than maybe a tiny little building within a bigger park, there is -- it is the asset in San Mateo. And then really, the office that's left is Northern Virginia and Maryland.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Senior Analyst [30]

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Okay. And then maybe this is for Jeff, I suppose, just on the Highgate projects. I know you're describing that you want to -- you still have an offer for leasing concessions, and maybe that skews the rent figures a little bit. But could you maybe provide what you think a stabilized yield is going to be in that project and how that's going to affect your underwriting for future phases going forward?

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Maria R. Hawthorne, PS Business Parks, Inc. - President, CEO & Director [31]

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You know what, Eric, let me take that one so -- and just give a little bit of context around Highgate. So unlike our commercial, where we give weighted average occupancy, for the apartment, we stated what occupancy was on December 31. And I think you noticed we dropped about 100 basis points to March 31.

So first off, that was because we had our first significant rollover of customers. Now -- so and then you'll also see that the average rate per unit dropped a few dollars. One of the reasons for that was because we finally leased up all of our workforce dwelling units. So that had a heavier impact than normal on the first quarter.

The good news though is that between now and 2021, there's only 900 more units delivering in all of Tysons. And they're all high-rises. So as a result of kind of the delivery and the market tailing off, we're finally beginning to see some rent growth opportunity in Tysons, and we currently are offering 0 free rent and 0 incentives at Highgate.

Hence, Jeff's comment that each quarter we do expect NOI to increase at Highgate as we're rolling off of some lower rents that we had in place last year that we gave some massive concessions and we had some lower rents just so that we could get the occupancy going. So now we want to maintain around 95% occupancy, and then we're going to push rents as hard as we can.

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Operator [32]

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We'll take our next question from Anthony Paolone with JPMorgan.

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Patrice Chen, JP Morgan Chase & Co, Research Division - Analyst [33]

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It's actually Patrice on for Tony. Just a quick one as most of my questions have been answered. Are you guys disclosing the cap rate for the Signal Hill acquisition?

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Maria R. Hawthorne, PS Business Parks, Inc. - President, CEO & Director [34]

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Yes. Patrice, we don't disclose the cap rate. But I can tell you, given that in-place rents were -- are at least 20% below current market and the location, so the price per pound was very, very high, it does have a very low ingoing cap rate. And we'll be improving it over the next 2 years because 76% of the rent will -- does roll in the next 18 months.

So you might see us as we're pushing rents to what our current Signal Hill assets are giving us, you might see some, like I said, some turbulence with the occupancy as we get the full mark-to-market and improve our returns.

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Operator [35]

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And it appears we have no further questions. I'll return the floor to Jeff Hedges for any additional or closing remarks.

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Jeffrey D. Hedges, PS Business Parks, Inc. - Executive VP, CFO & Secretary [36]

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All right. Well, thank you, everybody. It was a pleasure talking with you today, and we look forward to seeing many of you at NAREIT. Have a good afternoon.

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Operator [37]

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And this will conclude today's program. Thanks for your participation. You may now disconnect.