PS Business Parks, Inc.
Q3 2019 Earnings Call Transcript

Published: 23 Oct 2019

[Operator:]

Good afternoon, and welcome to the PS Business Parks' Third Quarter 2019 Earnings Results Conference Call and Webcast. At this time, all participants have been placed on listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions]It is now my pleasure to turn the floor over to Jeff Hedges, PSB's Chief Financial Officer. Sir, you may begin.

[Jeff Hedges:]

Thank you. Good morning, everyone, and thank you for joining us for the third 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.

[Maria Hawthorne:]

Thanks, Jeff. Good morning, everyone, and thank you for joining us today. We had an outstanding quarter on both investments and operations. In September, we closed on Hathaway Industrial Park for $104.3 million. Hathaway is a 10-building, 543,000 square foot park located in Santé Fe Springs, Los Angeles County, near the intersection of three major freeways, the 5, the 105 and the 605.This market is 1.5% vacant and in place rents for the park are approximately 20% to 30% below market. There is a single user in the largest building totaling 288,000 square feet who will expire in April 2020. This space represents a near-term opportunity to add value. On October 08, we closed on the sale of the 1.3 million square foot Office/Flex portfolio in Maryland. The sale totaled $148.8 million and was right in line with our expectations. At this point, there are no other assets for sale in our portfolio for 2019.We continue to be pleased with NOI growth at high Highgate at The Mile, our multifamily asset. Compared to prior year NOI grew 73% and weighted average occupancy was 95.6%. Last quarter I announced that we had received full rezoning of the balance of The Mile and that we are launching a second multifamily development called Brentford and construction will begin in mid-2020.Continuing with development updates, we are also going to commence construction of two Class A multitenant industrial buildings which are both approximately 80,000 square feet. In both cases we are taking advantage of excess land located in existing parks. The first to start is located in our Freeport Business Park in Dallas, which is a mile from DFW Airport. The other building, which will start late next year, is located in our 212 Business Park in Kent Valley, Washington with close proximity to SeaTac Airport and the Seattle and Tacoma Ports. We will give you updates on future calls.Operationally, industrial continues to lead and customer confidence remains high. Year-to-date total cash NOI is up 5.7%. Cash rental rate change for our commercial properties is up 8.5% and 5.3 million square feet of leasing. We feel confident that our positive momentum will carry through the fourth quarter and set us up for an equally successful 2020.With that, I'll turn the call over to JP.

[John Petersen:]

Thanks Maria. Operating fundamentals in our markets were again solid as demonstrated by 2 million square feet of production same park occupancy of 94.7% up 40 basis points from Q2, retention of almost 74% and overall cash rent spreads of 6.5%, including 13.6% rent on our industrial leases. Results were helped as our customers continued to grow with us in Q3. We signed 53 expansions for a net 82,000 square feet.Now for a quick Q3 breakdown by market. There was active user demand in Northern Virginia we signed 107 leases for 426,000 square feet. Occupancy jumped 100 basis points to 92.8%, well ahead of our peer set which is currently at 81%. A portion of this occupancy gain was generated by 13 existing customers that expanded in the quarter.We did have negative rent growth of 8.4% in Northern Virginia, primarily due to two office renewals over 20,000 square feet and one key office expansion of over 40,000 square feet. All three transactions were important wins for us as we grew occupancy and extended lease term with minimal transaction costs. Demand in Northern Virginia is being driven by technology, healthcare, and government contractors.Norman California was also active in Q3 with our team signing 490,000 square feet of deals, average deal size of 7500 square feet generating cash rent growth of 18%. Occupancy increased 130 basis points from Q2 to 97.1% of the 130,000 square feet vacancy we discussed in Q2 was occupied for all of Q3. Speaking of larger space in Northern California, I mentioned last call that we had three expirations in Q4 each over 150,000 square feet. We successfully renewed one and have solid activity with good rent growth potential on the other two.Small user drove our leasing production in Southern California. The team in South California signed an amazing 149 leases in Q3 totaling 287,000 square feet for an average deal size of 1900 square feet. This averages about two deals per workday and demonstrates our team's ability to drive market demand. [Indiscernible] rent growth was 6%. Orange County rent was up only 1% as we get one large [indiscernible] lease with a rent write-down.Los Angeles is a very tight industrial market as you all know and we increased rents in Los Angeles 10.5%. We did have one move out in Los Angeles of 52,000 square feet earlier in the year. We have since repositioned the building. We have a lot of interest in this space and expect solid rent growth upon lease-up.San Diego rents improved 3.7% on the strength or our 1400 square foot of average deal size. In Texas solid fundamentals continued to drive business forward and our team signed over 325,000 square feet in 68 transactions. Combined rent growth in Austin and Dallas were 6.8%. Occupancy in Texas decreased 70 basis points due to one 25,000 square foot customer leaving the portfolio. We have since re-leased this space. Additionally, we signed a 30,000 square foot lease in Las Colinas that occupies in Q1 2020.Heading to South Florida, we're not seeing any signs of a slowdown due to trade wars or economic uncertainty. Consequently, the Miami team generated good activity in Q3 with 217,000 square feet of leases producing 13.2% rent growth. Occupancy increased 110 basis points to 95.6%.Finally, Seattle continued to be a top performer with rent growth of 16%, retention 91%, and 180,000 square feet of production. The Seattle market is one of the tightest in the country and we have been able to take advantage of these stellar fundamentals.Looking into Q4 I have confidence that with 2.2 million square feet expiring we are poised to produce solid operating metrics buoyed by strong existing customer demand, low market vacancy, and a team that knows how to produce results.Now I'll turn the call over to Jeff.

[Jeff Hedges:]

Thank you, JP. As Maria mentioned in our opening remarks, we are very pleased with our third quarter financial results. Net income for the three months ended September 30 was $0.96 per diluted common share and $2.95 per diluted common share for the nine months ended September 30. Year-to-date funds from operations or FFO was $5.13 per share, an increase of 6.7% from a year ago, while funds available for distribution or FAD increased 9.9% over the same period. The increases in both FFO and FAD were primarily attributable to growth in same-park NOI which on a cash basis increased 5.1% over the nine-month period ended September 30, compared to the prior-year.We are also very pleased with how our non-same-park portfolio is performing, as all of our recent acquisitions have to this point met or exceeded our underwritten assumptions. Additionally, our multifamily property, Highgate at The Mile, continues to perform very well as NOI reached $4.4 million for the nine months ended September 30, which is in line with our expectations.I'd like to now provide a few additional details related to the Maryland sale. First, we want to clarify that the half assets sold are identical to those which are classified as held for sale as of the nine months ended September 30. Of the portfolio which was marketed, we opted to retain one 113,000 square foot office building, which is 100% occupied by a single GSA tenant and the pad site. Both the GSA tenanted building and pad site had not been previously classified as held for sale and both remain in our same-park portfolio.Turning now to the balance sheet, as you may have noticed, we were out on a line $50 million as of September 30. With receipt of the Maryland sale proceeds we have paid that down in full.Finally, I'll wrap up by pointing out that we paid a dividend of $1.05 to common shareholders in the third quarter and our Board recently declared a dividend of a $1.05 to be paid to shareholders in the fourth quarter payable on December 30, to shareholders of record on December 13.With that, we'll now open the call for questions. Operator?

[Operator:]

[Operator Instructions] And we will take our first question from Craig Mailman with KeyBanc Capital Markets.

[Craig Mailman:]

Hi everyone. Just on Hathaway here, and you know you mentioned that almost half the property has an expiration in 2020. Are you guys planning on that tenant moving out and kind of going in with your typical kind of PSP demise program and kind of getting the small tenants or is that a market where you feel like you want to keep a larger space for bigger tenants and kind of what's the capital that you think would have to go in if you do decide to kind of do your typical program?

[John Petersen:]

Yes Craig, its JP here. Good question. Right now we are real confident, well first of all we're negotiating with the customer to renew and we're real confident if we're unable to come to a renewal that the market supports a full building user. The rest of the park as you can imagine is small multitenant industrial. This one big building in LA is very marketable and we expect that there will be good demand if we're unable to renew the tenants. So and either way we're confident we are really renters there and just small amount of capital to lease this space out. So we like our position with that expiration.

[Craig Mailman:]

Okay, and what's the timing to get kind of the rest of the leases to kind of capture that 20% to 30% mark-to-market?

[Maria Hawthorne:]

Hey Craig, so in the first two years, first 24 months of ownership, 76% of the park is churning as you know to 188,000 or 543 is over 50% is this one deal and then as JP said, the other spaces are pretty small industrially speaking. So we're confident about what's going on there and the rent increases that we'll see throughout the park.

[Craig Mailman:]

And so, I know you guys typically wanted to talk about yields, but kind of from you're going in to where this thing could stabilized in two years, I mean what do you think the uplift could be on yield?

[Maria Hawthorne:]

Craig, we don’t like to give yield information like that, that's spreading the HF [ph] guidance there. But this was definitely a market deal and it was expensive. But what we loved about it was that it was a 10-building park, various sizes and we have a great operating team in LA and we're very confident that we will be very successful moving this asset forward and bringing it to our market rates. And Craig, this is a big acquisition, I mean with the big expiration coming, you'll see it happen next year.

[Craig Mailman:]

Right, right. I'm just trying to get a sense of like the dollar uplift on it, I mean is there any way to state what the in place rents are on a per month basis or kind of -- I'm just trying to get a sense of how to model the upwards [indiscernible] there could be a pretty big upper swing and it does not take much to move your FFO a couple pennies.

[Maria Hawthorne:]

Yes, Craig, it would be hard to say for 2019 just because this big customer if they renew that will be a big increase immediately, but then of course if they go stark then it does pay one or two or three quarters to lease that size face up. So I wouldn’t want to be forecasting FFO for this space and we will certainly give a better update in February when we talk again.

[Craig Mailman:]

All right, I guess moving on outside of this 288 what are big expirations you guys have in 2020, any chunky ones?

[John Petersen:]

Yes, we've got - as I mentioned, we've got a couple in Northern California that are expiring this quarter. Again, much like the one in LA at Hathaway. There is a market for big expirations. Our plan is not to slice and dice, but we could have - I mean, just to be clear, we could have some vacancy in Northern California as we head into ’20. Other than that, we don't have any big ones in Southern California and nothing that's material really in the rest of the country. I'd say primarily Northern California we've got these two big ones, we've got another -- a couple of others mid-year. But again, I like our position there in renewing those and pushing rents as those leases mark-to-market.

[Craig Mailman:]

Got it.

[John Petersen:]

And we do have, sorry Craig. We have a bigger one in Seattle at our 212 Business Park. So that we're pretty sure it is going to come back to market with us mid-year next. So, that's really it. It's over a 100,000 square feet up in Seattle.

[Craig Mailman:]

Okay. So you guys are still built - the guys you are going to build another 80,000 square foot facility there. So you - I guess feel real good about the demand at that park?

[John Petersen:]

Yes, we feel great about demand and [indiscernible]. That park, our park has been when the space comes vacant we re-release it very quickly. We've operated in the high 90s for the last, I don't know, several years and we are also - that's why we're building this new building as Maria pointed out, and we're building multitenant industrial and that's what the park is and that's what, even though this is one expiration, more than likely you'll see us slice and dice that like we always do with our bigger blocks or like we mostly do with our bigger blocks. Does that answer your questions?

[Craig Mailman:]

It does. And just on the developments, are you guys going to spend an aggregate like $10 million to $15 million, you think of spend that you could fund just through cash flow or is it the cost bigger depending on what you're doing now?

[Maria Hawthorne:]

Yeah, Craig, even though these are multitenant industrial buildings, they're still industrial buildings. So - and what will make them unique is that they're hyper infill. So Dallas is not a place we would ordinarily develop. But, the park that I'm talking about is less, is about one mile from the freight access into DFW. It will have 28-foot clear height, 10,000 foot units and that is just something that will be unique, that close to the airport.And it's the same thing with the Kent Valley. That is a completely built out market in Seattle. And we're putting a 30-foot clear height, which, and again, working with small tenants, and we don't have a lot of 10, 12,000 square foot spaces at T-12 Business Park, and the ones we have usually have a waiting list. So we're very confident that these will be as successful as the development that we did in Miami a few years ago.

[John Petersen:]

I'm just saying Craig, we won't have to do anything out of the ordinary to finance these developments. You are directionally accurate in kind of your thoughts in terms of cost of development.Yeah, we won’t have to do anything out of the ordinary to finance these developments. You are directionally accurate and kind of your thought in terms of the cost of development.

[Craig Mailman:]

Okay. So it's like 60 bucks a foot ex-land basically, roughly?

[Maria Hawthorne:]

I think costs have gone up.

[Craig Mailman:]

Yes ma’am.

[Maria Hawthorne:]

And it is Seattle, so I would target more a 100 to 115.

[Craig Mailman:]

Even ex-land, of course you guys already have the land, right? So...

[Maria Hawthorne:]

Yes. That’s correct, yes.

[Craig Mailman:]

Okay. And then just one last one from me…

[Maria Hawthorne:]

And Craig, we are still getting bids, and so, but those are good numbers to model. Seattle a little more expensive about 20% more expensive than Dallas.

[Craig Mailman:]

Okay. And then just one last one, anything in the same store expenses, cash runs were pretty consistent grower, but expenses were up a bit this quarter.

[Jeff Hedges:]

Yes. Craig, as we talked about a little bit last quarter, our business is somewhat seasonal and also is impacted by weather patterns or other events that are out of our control. So quarter-to-quarter there could be little tiny differences. We probably benefited a little bit from some timing items in Q2 that came into normalization in Q3.So, what I always remind people is, well it's important to look at quarterly results for directional indications, it's equally more important to look at the year-to-date results. And I would say our nine months ended year-to-date results are a better reflection of how our portfolio is trending from an OpEx perspective.

[Craig Mailman:]

Great. Thanks guys.

[Maria Hawthorne:]

Thank you.

[Operator:]

Our next question will come from Manny Korchman with Citi. Please go ahead.

[Manny Korchman:]

Hi guys. Just - as we think about the two new developments that are starting, are there other places in the portfolio that we should expect announcements of new developments or is this kind of it for now?

[Maria Hawthorne:]

Manny, that's a good question and for now that's it. I mean there will definitely be opportunities in the future for redevelopment, but nothing for 2020.

[Manny Korchman:]

Thanks Maria. And then JP on the large leases you spoke about in Southern California, are those going to require repositioning assets or a bunch of capital or is it just simply trying to match the tenants in the right space there?

[John Petersen:]

Well, there's two. The one at the Hathaway Park we just bought won't require much capital. That is a 288,000 square foot, expiration is coming up. And the one that we just repositioned, a 52,000 square feet I mentioned, that required more capital - that tenant had been in the building basically for 30 years. And so we had to reposition that building. And now we have it back and we're marketing it and, we're really excited about our rent uptick there.

[Manny Korchman:]

So there is no timing delay or capital need from here forward. That's all been done for both of those spaces essentially?

[John Petersen:]

That's correct, that's correct.

[Manny Korchman:]

Perfect, thanks guys.

[Operator:]

Our next question will come from Blaine Heck with Wells Fargo. Please go ahead.

[Blaine Heck:]

Thanks. So just to follow up on the developments, how do you guys think about the economics? Is there kind of a yield hurdle you guys are targeting or any other target you use to I guess, determine whether or not to go ahead with construction?

[Maria Hawthorne:]

Yes. Hey Blaine, that's a good question too. And, I can tell you that stabilized returns will probably be at least 200 points higher than what you can buy new product these days, once it is stabilized.

[Blaine Heck:]

Okay, that's helpful. And then you guys seem to have several different options for funding between the low cost of debt out there, potential preferred issuance, your low cost of equity in potential disposition proceeds. So I guess maybe for Jeff, can you just tell us how you're thinking about maybe the relative attractiveness of funding sources for spend on both the development pipeline and potential additional acquisitions out there?

[Jeff Hedges:]

Yes, great question. So, obviously we keep a close eye on all the capital markets and you're right in identifying that, all three, common, preferred, and potentially issuing debt are attractive to us right now. So at this point in time, we don't have a funding need that would require us to tap into those markets for new acquisitions or for growth capital. We hope to have something to raise capital around here in the near future. And at that point in time, we'll assess what the right avenue is for us at that given point in time.What you've heard us say for the last couple of quarters is that even though we historically have not utilized debt at least not significantly, that is something we will explore potentially. But of course, our cost of common and preferred equity remained attractive to us as well. So, we're going to keep a close eye on all of that and we'll provide guidance on this topic, once we have something to actually raise capital around.

[Blaine Heck:]

Great, that's helpful. And last one maybe for JP, you know, rent spreads have been negative for your office portfolio this year. Do you anticipate those turning positive in the near future or do you think we'll see negative spreads and are those negative spreads mostly attributable to the greater DC portfolio or are there maybe any other pockets of weakness out that?

[John Petersen:]

Yes Blaine. This is not new for DC office as you well know. So, when we assess doing a lease or renewal and some of the ones that I talked about in my remarks, it's far better for us to do a renewal especially ones that I mentioned, one of which was a large expansion. So we're real happy with those renewals, even though they came with a rent write-down. In terms of looking forward, all of the office rent issues are in DC, not anywhere else. We don’t have much office anywhere else for that matter.I do think we’re seeing more strength in DC to be honest. We’re seeing more activity from government contractors. One of the expansions I mentioned was a government contractor is and their take, by virtue they're taking more space and extending term, that's a good sign that we’re seeing.So we do have parks where from time to time we can keep rents flat. It's hard to grow when the market is 20% vacant, grow rents that is, but I do think our goal is to start reducing that office rent decline. It's really tough to do in a market again its 20% vacant, but from time to time and park to park we do have opportunities in our office portfolio in DC to either hold the line on rents that expire or occasionally believe it or not we can grow rents in some of our parks there.So, but it’s really is isolated to DC and again our view on DC as we've had a really good view there, production wise and we’re seeing more activity frankly in 2019 than we have in a long time from the sectors that I mentioned; technology, government contractors, we’re not seeing anything directly from the Amazon effect, no direct deals from that or anything. So I don't want you to read into that, but the economy is active, unemployment is 3% in DC. The nationals are in the World Series and things are good there, so…

[Blaine Heck:]

Got it, that’s helpful, thanks everyone.

[Maria Hawthorne:]

Thanks Blaine.

[Operator:]

Our next question will come from Eric Frankel with Green Street Advisors. Please go ahead.

[Eric Frankel:]

Thank you. Can you remind me on the dispositions what the occupancy was of the portfolio that sold? I know there was a tenant move out, but I wasn't sure that occurred late in the quarter or early in the quarter. So I just want to get a better sense of the cap rate and what that entails?

[Maria Hawthorne:]

Yes Eric, the big tenant that moved out was about 160,000 square feet and that did occur in the first quarter and we were around 80% occupied upon the sale.

[Eric Frankel:]

Okay. You know, it seems like a pretty negative read through for overall property guys for that office/flex properties in Maryland and Virginia. Can you comment on whether that valuation that you are experiencing is that appropriate to extend for the rest of your portfolio there or is there special circumstances that kind of gave this portfolio a bit of a discount?

[Maria Hawthorne:]

Okay yes. There are special circumstances. So first off it is Maryland and Virginia are two different markets. We break it out that way. Virginia is a right to work state. It’s very pro-business and in fact Montgomery County did a survey on and Montgomery County is where we had these assets, did a survey on why Fairfax County was getting more business than Montgomery. And it came out as the issue is pro-business lower taxes.Maryland is a very high tax state, Virginia is lower tax state. So don't ascribe the Maryland asset sales to Northern Virginia. Secondly, the portfolio that we sold, when we say flex this was a large tenant flex that was really 95% built out as commodity office. So again, and the office portfolio in Maryland was larger tenant office than what we have in Northern Virginia. So with the market as well as the type of product that was the difference.So if you think about, like what we bought in Northern Virginia last year that 1.1 million square foot acquisition, that was pure play industrial, which is seeing rent growth, seeing occupancy growth and we’re very, very happy. And so, and that should have an industrial cap rates on it. But suburban Maryland office quite frankly right now just has a black eye.

[Eric Frankel:]

Right, but would spread that to suburban Virginia office, I understand that the fundamentals are a little bit better there, they have been a little bit better business environment, but the occupancy between your two portfolios isn’t all that different and the right spread haven’t been all that meaningfully different over time too. So I just want to have an investor review cash flow in North Virginia office versus or flex versus Maryland 9 to 10 last year's purchase in the industrial portfolio, that is a different tenant profile and different economic drivers. It seems obviously that offices heading in one direction and industrial is heading in another direction. So just trying to see what we should think about evaluation?

[Maria Hawthorne:]

Yes okay. So Eric, a lot of the Virginia office, a lot of it sets The Mile and we're going to eventually redevelop that entire 45 acres. So we've only redeveloped five of it - and then honestly we’ll have two more phases coming which will be about another 10/12 acres. But if you think about that, that will be a redevelopment opportunity. Our other office and/or bigger piece office in Northern Virginia is [indiscernible] and that was one of our original part that has one of our lowest basis and the Metro literally is being built and is being opened next year across the street.So we feel really good and that will also be a future redevelopment opportunity. Then we have a big flex office park in Merrifield and again down the street eighth of a mile away from the Metro. So our Virginia office portfolio is very well located for future development. It has higher occupancy than Maryland and that’s because the demographics and the economic dynamics in Northern Virginia are stronger than suburban Maryland.

[Eric Frankel:]

Okay it sounds like Maryland needs the train line too. I have a couple other questions if you don't mind. Just on the development certainly it makes sense for you to get started on building on some of [indiscernible] in the market. So why haven’t you developed those assets a little bit sooner, those markets have been in great shape for a few years now?

[Maria Hawthorne:]

They have the – first off the space that we’re going to be able to build the Seattle office, I am sorry – good not office industrial building is currently yard space for the big tenant expiration that JP referenced in earlier question. So we don’t have access to it until that tenant moves out next year. And then quite frankly, the Freeport our park there is more of a flex park though not a high finish flex park and it really hit us and as we were thinking about it starting last year we explored the idea, could we build the industrial building and we can. So we’ve been working on that, but we didn’t want to announce anything until we knew we could build it.

[Eric Frankel:]

Okay that’s helpful. My final question is related to the acquisition. It seems obviously that you haven’t disclosed the yield, but certainly it seems like it has the fundamentals and that market is in great shape. And I know you're also recycling some proceeds from the Maryland office flex sale, but why not significantly increase your appetite for those types of transactions. It seems like they are out there.I understand that they are not easy to find and it's super competitive, but you guys certainly have a pretty durable competitive advantage in operating small tenant assets and some of the -- in the markets that you traffic in they are still a fair amount of assets now that are trading. Do you have any appetite for being a little bit more aggressive going forward?

[Maria Hawthorne:]

Eric, I would love to come back in February and then announce 10 more Hathaways. There would be nothing that would please me more. The problem is that while there has been a lot of industrial that’s come on the market and some parks, [indiscernible] Illinois, Farmland in Pennsylvania, lots of assets for sale in Las Vegas Reno. And what I would contribute [ph] further second dairy markets and but at cap rates that are now because of cap rate compression approaching primary market rate. So those - that - if we’re going to pay for retail it will be in our core market. And quite frankly, it's hard to find these very attractive business parks in our core infill markets. And - but when we see them, as we did with Hathaway, we got very aggressive.

[Eric Frankel:]

Okay, sounds good. We'll discuss again. Thank you.

[Maria Hawthorne:]

Thanks Eric.

[Operator:]

[Operator Instructions] We'll take our next question from Tony Paolone with JP Morgan. Please go ahead.

[Anthony Paolone:]

Thank you. I guess the first question on the development, I think the last development you did was residential when you had a partner. Do you guys have the team and staff to do this or do you need to make changes there?

[Maria Hawthorne:]

We do, but with the thought that we're going to be thinking about redevelopment, not just at The Mile, but other locations in the future, we are going to be adding an executive of development to make sure that we have appropriate oversight. We are very happy with our joint venture partner and the next development we're going to be working with them again. We're very happy with them, but we realize as this will continue in the future we do also need that in-house expertise.Just as a reminder too, we did also add to our Board a multifamily development expert. So we have that expertise on the Board, and of course the industrial development we have in-house. I mean, that's JPs background and he's developed millions of square feet of industrial. So we're good there.

[Anthony Paolone:]

Okay. And then how do we think about that more specifically with G&A particularly in the quarter, which was a bit higher, how should we kind of roll that as we think ahead?

[Jeff Hedges:]

So there's nothing to announce. So you shouldn't expect anything with regard to be named new hire that Maria referenced a minute ago for 2019. We're hoping to have somebody join our team in that role in early to mid-2020 and you could expect a kind of mid-level salary attributable to that person and you're right in assuming that that would run through. That would be a G&A position.

[John Petersen:]

We'll - Tony, we'll provide an – as that search progresses and we have something to announce, of course, we will make that announcement.

[Anthony Paolone:]

Okay, and what about just the third quarter you just reported in terms of that number being a bit higher, does that come back down or in near term or?

[Jeff Hedges:]

Yes, so, as we tried to highlight in the press release, there was a - what we're kind of referring to as the one-time events related to the change in the director retirement share policy. And so for accounting purposes, the stock-based comp, expense related to that change was about $1.1 million and that's a one-time effect. The run rate stock-based comp will be marginally higher attributable to that change, but very de minimis in terms of the run rate effect of that. And that $1.1 million charge is truly a one-time event related to the change. So we expect Q4 to come back in line with what we experienced in the first six months of the year.

[Anthony Paolone:]

Okay. And then for JP, just you kind of touched on this a number different ways, but I just want to make sure I understand that. So the three larger expirations in 4Q one is renewed, but in terms of the other two, should we anticipate either some level of downtime or gaps such that occupancy maybe dips down in 4Q before trending back up or how should we think about that just near-term?

[John Petersen:]

Yes, Tony. So look and what we're trying to do here is secure really good credit, really long terms at really high rents. So we want it all. So yes, there's a chance that there will be some downtime because I think we're at a point in time now in that particular market in Northern California where we can try and we've been successful in getting good credit and high rents for long-term leases. So that's what we're trying to do here.As a result, we may not be able to make the deals that we're interested in, so there could be some downtime. My goal is to keep those spaces full, but if we were unable to come to an agreement quickly, yes, we're fine with going forward on the market fundamentals there and the demand for those tight spaces is very strong. So we could realize some downtime, yes. I hope we don't, but we could and I'm fine with it if we do. Does that makes sense?

[Anthony Paolone:]

Yep. No, I'm just trying to understand near term since you've had very good occupancy trends like if we just see that kind of step back before continuing on. Okay we will work that out. Last question I guess, and I know, Craig I think probably tried to ask this five ways on the modelling side with Hathaway, but just order of magnitude in terms of thinking about how you're thinking about returns, like if you were going in a market return, that's probably got a four handle on it like in three to five years out for it to be interesting to you, does that need to go to five? Does it need to go to eight? Like what is an interesting return for you all these days for real core type property in your portfolio?

[Maria Hawthorne:]

Well, we always like to get high returns and we are accustomed to that. But one of the things that happened and I think reference - Jeff referenced this in an earlier remark is that interest rates have never been more attractive. They've been attractive for a long time and we are open to tapping into that. So that allows us to keep historic spreads for our returns, but they will be materially lower than what we required in the past, which was in the 7% to 8% range. And for industrial right now in these core markets, we're happy to get 5.5 to 6.

[Anthony Paolone:]

That 5.5 to 6 being something a few years out after you kind of stabilized and moved the rent up and that sort of thing?

[Maria Hawthorne:]

Exactly.

[Anthony Paolone:]

Okay, great. That's helpful. Thank you.

[Maria Hawthorne:]

Okay, sure.

[Operator:]

And there appear to be no further questions at this time, so I'll turn it back to Jeff for closing remarks.

[Jeff Hedges:]

All right. Thank you everyone and we look forward to seeing many of you at NIRI [ph] in a few weeks. Have a good afternoon.

[Operator:]

This does conclude today's program. Thank you for your participation. You may now disconnect.