PS Business Parks, Inc.
Q2 2008 Earnings Call Transcript

Published: 17 Aug 2008

[Operator:]

Good morning, my name is Janet and I'll be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Stokx, you may begin your conference.

[Ed Stokx:]

Thank you. Good morning and thank you for joining us for the second quarter 2008 PS Business Parks investor conference call. I'm Ed Stokx, CFO of the company and with me are Joe Russell, President and Chief Executive Officer; John Petersen, Chief Operating Officer; and Maria Hawthorne, Senior Vice President. 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 included in our 2007 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 Web site. Now, I will turn the call over to Joe.

[Joe Russell:]

Thank you, Ed. Good morning and thank you for joining us. I would like to cover three areas this morning before I turn the call over to John Petersen, and then Ed will review financials and open the call for questions. First, I would like to review a number of key drivers that are leading tenants to our parks in today’s environment. Second, I will highlight some of the significant components of our Q2 performance, and finally I will touch on what we are seeing in the investment arena. First, let me review how we are sourcing transactions and closing deals in our business parks. As I frequently point out, small user vibrancy is evident in and out of economic cycles for our multi-tenant flex, office and industrial business parks. Small users are typically far more abundant in any given market due to the simple fact that there are 6 million small businesses and another 10 million plus self-employed sole proprietors. This has been particularly evident in the most recent economic cycle where job growth from small companies has been more robust as both expansion and now contraction has taken place. We like the odds of targeting users from the diverse and well-populated pool of small users across all of our markets. In addition, the concentrated business parks we own which today totals over 70 enable us to cater to companies in a unique manner as we can offer them a high degree of flexibility as their businesses change over time. It is not uncommon for a business to locate in one of our parks for a three-year initial term for instance and then end up staying for several lease cycles. In fact, tenants that renew their original term with us typically occupy their space for over ten years. With nearly 4000 customers in our portfolio operating in a wide variety of industry segments, we are also able to constantly monitor various impacts that affect any particular type of business regardless of size. By virtue of this, we can quickly react to and redirect our company occupancy efforts to minimize exposure to any one industry segment that may be under pressure. PSB’s decentralized operations and market savvy leasing teams are particularly skilled at identifying and closing business with this user range and consistently outperform their respective markets. Today, tenant behavior has shifted to varying degrees of caution due to the unknown impacts from housing, oil, credit availability, and the direction of the overall economy. At large, there is more stress within many companies thus becoming more conservative. Customers more than ever are looking for value, another key ingredient to what often leads a prospective tenant to us. We have always provided an economical solution to the real estate needs of our tenants that in many ways is even more attractive today than it was when the economy was stronger. For PSB, the ability to adapt to and find these opportunities is not new or overwhelming. It is the backbone of how we strategically approach our markets and how we find successful ways to operate the portfolio. Now, let’s me turn to PSB’s reported results for Q2. FFO on a comparative basis was up 8.7% with occupancy up by 20 basis points on Same Park properties. As in Q1, we were particularly pleased by leasing results. As our marketing teams closed over 1.3 million square feet of transactions, demand from new and existing customers was broad based across PSB’s 12 major markets. We closed over 400 leases with the average lease size of approximately 3300 square feet. In Orange County, Washington DC and Florida markets that have had a fair amount of negative press, we closed over 125 transactions for approximately 700,000 square feet and of combined occupancies of 94.6%. PSB’s financial posture remains very strong generating nearly $10 million in free cash and our payout ratios remain at industry low levels. Today we have approximately $50 million of cash in our balance sheet. Finally, I would like to conclude by briefly discussing the investment arena. We did not complete any transactions in the quarter and have remained patient as we interpret the continued behavior of sellers and buyers. Transaction volume is down as much as 80% or more in some markets as sellers are reluctant to embrace our market with very conservative underwriting by most buyers. Along with much more onerous capital and lending availability, it is still difficult to assess how far values have come of the highs we were seeing in 2006 and early 2007. We are however particularly well positioned to capture a wide range of opportunities due to PSB’s low leverage and enviable balance sheet. Our powder is dry to seek strategic opportunities and we look forward to competing in an investment arena that will likely reward a buyer like PSB, one without material debt, low overall leverage and a track record of investing in assets that enable us to outperform markets. Now, I’ll turn the call over to JP.

[John Petersen:]

Thank you, Joe. I will begin with an overview of market conditions and then get into some of the details for the quarter. Overall across most of our markets leasing dynamics remain challenging but active. While we are still able to drive towards end leasing volume, most deals are simply taking longer to complete as decision makers take more caution when making their real estate commitments. Supply demand fundamentals remain relatively in check and net absorption was up slightly in our markets by 1.5 million square feet. Of our 12 major markets, six were positive and six were slightly negative. As we have discussed before, these conditions are significantly different and materially better than the negative market consequences which occurred during the tech bust in 2001 and 2002. Specifically, Southern California continues to be impacted by slowing job growth due to housing and financial lows. Activity in Northern California is slowing and Portland is not seeing much leasing velocity at the moment. We were pleased to see that Northern Virginia had over 700,000 square feet of positive net absorption and in Texas the economy is holding up quite well resulting in positive net absorption of 522,000 square feet. In summary, there are still deals to be done but they are taking longer and we have to work harder. Small business America is holding up and our local teams continue to find ways to outperform their markets. We have demonstrated an ability to adjust our tactics to aggressively handle changing leasing climates throughout our markets. Here are some specifics. Total company occupancy slipped by 50 basis points from the first quarter primarily due to the anticipated occupancy lost in Portland of 490 basis points due to Intel vacating 120,000 square feet as we discussed last quarter. San Diego lost 270 basis points in occupancy as one 20,000 square foot customer vacated when we cannot meet their expansion needs. The good news is that of the 140,000 square feet, we have successfully subdivided and re-leased 40% or 55,000 square feet. Occupancy increased nearly 275 basis points in Seattle and 180 basis points in Houston. Northern Virginia and Northern California each gained approximately 90 basis points of occupancy. As Joe mentioned, leasing was solid as we completed a total of 403 transactions for over 1.3 million square feet with an average term of 3.1 years. Overall rents were up over expiring rents by 2.7% on a cash basis. As far as specific rental rate growth in the quarter new rents grew over expiring rents in eight of our 12 markets. Maryland was down 9.1% and Palm Beach down 3.8%. Orange County was off slightly 0.9% but up 2.4% year to date. Rental rate growth in Austin was 18.3%, 10.7% in Portland, Seattle up 5.9%, Northern California up 5.4% and Los Angeles up 5%. Retention was 54.6% for the quarter partially because we lost Intel. Without Intel, retention for the quarter was 59.2%. Year to date, retention is 60.2%. We continue to focus on retention and getting to our customers lease expirations early. With the leases completed during the first half of the year, 9.6% of portfolio rent are said to expire over the next two quarters. In terms of product type, 75% of our remaining 2008 expirations occur in our active and versatile flex portfolio. Collectively we have approximately 1.9 million square feet expiring over the balance of 2008. Year to date we have leased over 2.8 million square feet and almost 800 transactions and are highly confident in our team’s ability not only to tackle these expirations but taken to our key 2009 expirations as well. Now, I will turn the call over to Ed.

[Ed Stokx:]

Thank you JP. FFO per share was $1.12 for the quarter, an increase of 8.7% over reported FFO the second quarter of 2007 of $1.03 per share. On a comparative basis, Same Park NOI increased 3.3%. Revenue increased by 3% over the second quarter of 2007 driven by 2.8% increase in average realized rental rates. Expenses for the second quarter increased 2.5% over the same period of 2007. The increase in operating expenses was driven primarily by higher property taxes. As anticipated, operating costs were lower in the second quarter than the first quarter of the year due to higher seasonal costs incurred in Q1, which helped improve the company’s gross margin to 68.8% from 68% in the first quarter. For the first six months of 2008, FFO was $2.22 per share compared to FFO for the first six months of 2007 of $2.05 per share, an increase of 8.3%. During this period, Same Park revenue increased 3.3% while operating expenses increased 3.9% resulting in a 3% increase in Same Park NOI for the first half of 2008. Consistent with the second quarter results, the revenue and expense increases for the first half of the year were driven by higher realized rental rates and higher property tax expense. We continue to closely monitor our tenants’ ability to meet their lease obligations; we believe that we have a very thorough and diligent underwriting process which is reflected in our modest write-offs of uncollectable receivables. During the first half of 2008, our write-offs of uncollectable balances approximated 0.3% of revenues while over the course of 2007 they approximated 0,27% of revenues representing an annualized increase of less than $100,000 in additional write-offs. I would like to update you on a specific tenant in Northern California. During the quarter, we executed a lease amendment with 134,000 square foot tenant that had been in default of their lease. As part of the amendment, we reduced the square footage leased to this tenant by 48,000 square feet as we executed a new ten-year lease with a separate entity. No rental concessions or transactions costs were incurred as a result of this transaction. The existing tenant is current on all aspects of the reduced 86,000 square foot lease. Recurring capital expenditures for the three months ended June 30, 2008 were $10.2 million compared to $7.5 million for the same period of 2007. The increase over 2007 is primarily related to the timing of the payment of maintenance capital and transaction costs as reported capital expenditures will vary from quarter to quarter depending on the volume and timing of leasing activity and the nature of leasing activity including size and product type. In addition, the company is focused on completing scheduled maintenance capital projects during the first three quarters of the year. For leasing activity completed in the first six months of 2008, committed transaction costs are consistent with the costs committed on leases executed in 2007. Free cash retained by the company after distributions to our investors for the quarter was $9.9 million. We continue to maintain industry low payout ratios with an FFO payout ratio of 38.9% and an FAD payout ratio of 55.2%. As both Joe and JP noted in their comments, we have a proven operating platform that is structured to be both responsive and adaptive which enables us to source business during both prosperous and challenging economic times. Combining this platform with a capital structure that has minimal debt, no restrictive covenants, no maturity or refinancing exposure, PSB is particularly well positioned to confront economic uncertainty while continuing to generate significant free cash flow and when appropriate, we will use this cash structure to make additional investments. With that, we will open the call to your questions.

[Operator:]

(Operator instructions) Your first question comes from the line of Michael Bilerman of Citigroup.

[Irvin Guzman:]

Good morning, it’s Irvin Guzman for Michael Bilerman. Joe you mentioned the 60% renewal rate for the first half of this year, can you talk about any more markets that are deviating from that average either driving a higher revolver whether the markets or perhaps a tenant site?

[Joe Russell:]

No Irvin, I couldn’t point any particular market, in fact I couldn’t really even point any particular product type or to a degree any particular tenant type although I would say in general as we have seen for the last couple of years, we have been more wary about any occupancy tied to anything related to housing or those kinds of influence industries like virtually what has been going on in the overall housing market, but again, we did 400 plus transactions in the quarter, we have done nearly 800 transactions year to date, it’s widespread, and our goal is to certainly retain as many tenants as possible. We have got our teams very focused on that effort. JP talked about some of the things that we do to get as close as we can to our customers and we are working hard to do that and that’s definitely a good source of business for us. As I also mentioned, it plays out fast and that once we get a tenant to run an initial lease cycle, we have a very high degree of odds to keep them from multiple cycles beyond that. What’s comes from that is a company can get more entrenched in a particular location they will end up liking the part that they are in, they are happy with the level of service we are giving them and from that again we are able to drive retentions there.

[Irvin Guzman:]

Can you talk a little bit about sort of your near term tackling order for capital use, got about $40 million cash in the balance sheet and $100 million credit facility, you mentioned that the bid adds [ph] spread on transactions are still pretty quiet and preferred seems to be becoming more expensive, you have been active in the past purchasing your own stock, can you just talk about how you sort of plan to use that capacity in the next quarter or six months?

[Joe Russell:]

Yes, I wouldn’t say any particular target is more of a priority than others right now Irvin, it is just going to depend upon what opportunities and capital allocations decisions play out on our behalf. We like the fact as I mentioned that we have an incredibly well positioned balance sheet and the fact that we can be very competitive not only because of what our history has been which is not being shy about tackling repositioning opportunities or opportunities that might have a fair amount of reward tied to them but now with the assets to capital far more limited, we feel we are even in a better position. So, it’s too soon to tell how vibrant the rest of the year is going to be relative to additional transactions or sensors that are probably not going to get a lot more active just again based on the kind of trading that has been going on but again we’ll see how that plays out.

[Irvin Guzman:]

Just one other question, you mentioned the sort of small business, small business that have generated more jobs for us in the last cycle, with the exception of sort of the tech element in the last session, in your conversations with tenants, what do they see that is different or how are your conversations different today versus what they were like seven or eight years ago?

[Joe Russell:]

Well, there are a number of things that are very different from seven or eight years ago. It starts with the overall condition of the real estate markets. We are in 12 major markets and as JP mentioned, all 12 of them actually have relatively healthy dynamics outside of one or two that are new to the overall dynamics that we are dealing with in those particular areas, for instance in Portland and Arizona but our 10 other markets are as healthy or close to being as healthy as they almost ever have been because there is very little spec construction and a lot of tenants unlike what happens again on the tech bust have not gone out and over committed themselves to square footage and there is not a lot of sublease space on the markets we are competing against. So, that’s one key difference and what I think has evolved over the last few years and is really no different in our tried and true tenant base even when it was back then, frankly our tenant base more often than not does not over commit from a space standpoint, they are real (inaudible). They will come to us and if they need 3000 square feet, we are going to lease 3000 square feet, we are not going to lease 4000, 5000 or 8000 square feet. So, by virtue of that the thing that we are seeing in our tenancy today that is very consistent is so long as any particular industry they may be operating in or being a part of, so long as they have enough fundamental business to keep their own business moving forward, they are going to stay hopefully with us more often than not and we are going to find ways of again attracting new companies into our parks and as I also mentioned, I think that is actually even a different benefit that we can compete against as we are out attracting new companies into our parks. We offer them efficient space, we are able to offer them an element of flexibility if over time, even during an existing lease cycle something changes, we can work with them very proactively and figure out what is the right size of space for them. Because of that we can be a very different kind of landlord and one that again our tenancy really looks to those kinds of solutions. So, as JP also mentioned though, there is more stress out there, it is just tied to the overall economy, but what we are doing also to combat that is we are just staying as close as we can to our customers and we are very aggressive with anything that is maybe a result of that, again that’s what we are built to do and we do a good job of it.

[Irvin Guzman:]

Thank you.

[Joe Russell:]

You bet.

[Operator:]

Your next question comes from the line of Jordan Sadler of KeyBanc Capital Markets.

[Craig Mailman:]

Hi it’s Craig Mailman here for Jordan. You guys had mentioned already that Portland, the activity there is kind of slow but could you just talk about the re-tenanting effort on the Intel space?

[John Petersen:]

Sure Craig, it’s JP. We did two quick deals on the Intel space as I mentioned last quarter and what we are doing is we typically do when it is happening is we have made a consorted effort and so far successful in subdividing 120,000 square foot use into multiple suites. So, we were underway there, we did two deals and we will continue to subdivide that as we re-lease the rest of that space. So, the challenge in Portland is the velocity and that’s what we are dealing with But we think obviously there is more users in the smaller size ranges than they are big dogs out there for say 60,000 or 80,000 square feet and that’s our target, is to continue to break it down.

[Craig Mailman:]

Okay and on those two deals how much of the space did that represent?

[John Petersen:]

It was about 42,000 square feet.

[Craig Mailman:]

Alright. Then just kind of excluding the Intel vacancy, it looked like occupancy on the total portfolio was down for the second consecutive quarter, I saw maybe eight of your markets, is it just a function of your portfolio or product mix in those markets? Could you just go into that a little bit more?

[John Petersen:]

Sure. Yes, occupancy will ebb and flow from time to time and when you lose, we had two among others, we had those two deals that I mentioned Intel and we lost a customer in San Diego that actually we couldn’t meet their expansion needs. So, we lost 20,000 square feet, we just didn’t have any more space, they needed 30,000 or 40,000 square feet. So we subdivided that down and so far of that 20,000 we have re-leased three different users for 12,000 square feet. So, we’ll continue to do that there. Yes, from time to time we’ll lose say a 30,000 or 40,000 square foot customer and then we’ll have to re-lease it back, but that’s not unusual. But I don’t want to forget, we’re still over 93.5% and in some of the challenging markets north of Virginia we are pushing 98%. So, we will lose customers from time to time and we are continuing to push occupancy where we can, and in this market, as Joe mentioned, we had a pretty robust quarter in terms of our leasing efforts.

[Craig Mailman:]

Okay and then just one more, I know you guys have touched on the acquisition market and that you are going to be continually patient but I guess one of your flex peers in the Metro DC Southern Virginia region recently kind of went into that pricing is becoming more attractive, is that just something that maybe they are seeing in their markets or are you starting to see that across your product type?

[Joe Russell:]

Well there has been a perception certainly and an expectation that there would be some softening in values and by virtue of that obviously a pop up in cap rates, but you know like I said, the trading volume is still very light and what we continue to be focused on is keeping a very high filter on the product type that we feel best suits our strategic initiatives, one of which is to make sure we are investing in assets that are very flexible especially in the context of being multi-tenant oriented that have appropriate configurations where – today they may be occupied by larger tenants but we can go back and re-tenant them. We like concentrated business parts, we like really good locations and good sub-markets. So, we continue to keep a very tight filter on all of those investment parameters and so I could not talk to exactly what potential investment may have been made here or there but what I am telling you based on what we are seeing is the kind of product that has been very successful for us, again that well-located, very well-designed, good quality submarket product. There is not a lot about volume taking place right now but we are very focused on sourcing it and we hope to see some good opportunities. But again, we’ll see how it plays up.

[Craig Mailman:]

Okay, great, thanks.

[Operator:]

Your next question comes from the line of Chris Lucas of Robert W. Baird & Co.,

[Joe Russell:]

Good morning Chris.

[Chris Lucas:]

On the tenant retention and spreads and leases you are signing today, how are they reflected relative to sort of what you thought the year would unfold?

[Joe Russell:]

That’s a good question. I think they are holding up quite well relative to the headlines that you read and what we are seeing actually is rents have increased year over year, ’08 from ’07 in most of our markets Arizona being maybe the one exception, Orange County we are not pushing around to that level either but we are still able to see rents increase, from time to time as you know there will be a high outgoing rent that we have to mark to market, of course we will do that, but it is held up better than, maybe better than we anticipate, it is certainly better than the headlines would suggest and I do think our teams are focused on that and we are focused on not only maintaining rent but minimizing our transaction costs. So, there are multiple components to any deal as you know and for us it is a volume equation and we are able to keep that volume up so far in the first half of the year.

[Chris Lucas:]

So, in terms of just your tenant retention rate, you are pretty comfortable with that level as it is related to your plan for the year as well as sort of how the length of leases you are signing (inaudible) any less?

[Joe Russell:]

Yes Chris, I mean we would always like our retention to be higher regardless of what the exact number is and again, if it is a little off in one area, then the good news is that we feel like we have got great opportunities to still go out and source a variety of different types of users if in fact the particular tenant for whatever reason has decided not to renew their lease and again, that’s what I think so impactful in the way that we can source and drive volume across all of our markets. It goes back again to the whole dynamic of the quantity of users in any particular market that we do target and then we couple that with a very important ingredient which is the skill set and the tenacity of our onsite leasing people and it is a very powerful formula. So, again quarter to quarter that retention level certainly can ebb and flow and where it will swing at more dramatically from time to time is a bigger tenant situation but we are built for the volume that we continue to produce. As JP mentioned, we have done 2.8 million square feet, a little over or close to 800 transactions year to date and we are built for that kind of volume. It is what we do day in and day out, and retention that’s 60% we certainly want it to be higher than that. If it is at 55, we definitely want it to be even higher so we can ebb and flow where we need to focus our efforts to make up any lost ground for instance if our retention slows a little bit here and there.

[Chris Lucas:]

Thanks for that. On the capital strategy S&P went through and did a broad rush downgrade of all lead preferreds, obviously you guys were caught in that as well, does that impact at all your view of how you finance your business going forward or is that just – instead of deal with it and move on?

[Ed Stokx:]

Well Chris, I think it is a fair question, obviously we weren’t real pleased with the change in the structure that S&P made, but to be honest with you, the true impact of that is yet to be determined, the preferred market has been pretty quiet of late, but what I would tell you is that we will continue to look at all options available to us as we have in the past and we will make the appropriate decision at the time when we definitely need or the opportunity is there.

[Chris Lucas:]

Does that mean that you would be more proactive about actually putting secured debt on assets as opposed to just sort of acquiring secured debt on transactions?

[Ed Stokx:]

I wouldn’t say exactly that’s what we are going go out and do but I would just say Chris that we are going to evaluate all options available to us.

[Chris Lucas:]

Okay, thanks a lot guys.

[Ed Stokx:]

You bet.

[Operator:]

(Operator instructions) Your next question comes from the line of Michael Mueller of JP Morgan.

[Michael Mueller:]

Hi. Following up on the last question on rent rolls 2.7% in the quarter, can you give us any sense as to how wide the band was around that 2.7% and then also as you work on second half of the year leases and 2009 leases, can you comment on any trends you are seeing with respect to that mark to market?

[Joe Russell:]

Yes Mike, you know the band was, as I think I mentioned in my comments, we had a roll down of over 9% for the quarter in Maryland and a high of an 18% rent growth in Austin. So, that was the band but as I also mentioned, rents actually grew in 8 out of our 12 markets for the quarter, so we were pleased with that and as we head into the rest of the year, we have been very focused all of the year of 2008 and certainly even into 2009 and we are already covering some of that. Surprisingly rents are holding. Is there pressure on rents from mark to market? Yes. There is pressure and what we are seeing really though is pressure on maybe terms. So, instead of a five-year deal it may be three or instead of four it may be a three or a two. That’s an area that our customers are maybe willing to commit to a lesser term than actually say one year lower rent. That’s one area that we are having to maybe adjust with versus say rent. Transaction costs as I mentioned earlier are holding up well for us but we haven’t seen much pressure like I mentioned from maybe Phoenix and Orange County but even there rents are still holding up better than I would have thought.

[Michael Mueller:]

Okay and you also commented actually on the second question to which is what are tenants thinking in this environment, so it sounds like the term that they would rather have or that their (inaudible) signing on for is a little bit shorter than what it has been, how do they think about renewals, do they want you hold off and do something as late as possible, do they want to renew sooner because they think rents are ultimately going to kind of turn the corner and move back up, what is in their mindset right now?

[Joe Russell:]

Well, we’ve done 800 deals and we probably have 799 different scenarios in that but if you were to cut and generalize I think what you could say is that they don’t want to commit because of the economic uncertainties for longer periods of time yet. That is one kind of trend we are seeing in terms of they are looking for term – so that is the term element. Rents are holding up okay and they are holding off until the very end, 30 days out or 60 days out and our teams are doing a marvelous job of being aggressive with them and getting them to get their leases signed early but they are going to hold off in many cases until they have to, to make a decision and I would say that is consistent from market to market, they are waiting to make a real estate decision. But there is an upside to that for us, the longer they wait the better opportunity we have to retain them and I think we will see that benefit us for the rest of the year because it does cost money to move, we do provide a good value and good service and we think that that will benefit us for the rest of the year.

[Michael Mueller:]

Okay, great thanks.

[Operator:]

You have a question from the line of David Rodgers of RBC Capital Markets.

[David Rodgers:]

Hi, good morning guys. Had just one question about Northern California, the unusual circumstance of the lease that you mentioned, I think Ed you mentioned in your prepared comments, did you recognize a termination fee on the original lease that kind of what made you decide to go ahead with renewing the tenant there in the small space [ph]?

[John Petersen:]

This is JP. You are familiar with the story you just mentioned, what we did is we had another customer that we felt was creditworthy and they were able to take down over 40,000 square feet of that existing premises, we did a 10-year deal with them. We did not receive a termination fee because there was a great upside for us in this long ten-year deal, this ten-year deal with what we thought was good credit. So, we felt the great opportunity for us to minimize exposure to a customer that has been challenging and at the same time add a new ten-year revenue stream to our Northern California portfolio.

[David Rodgers:]

Any larger vacancies, I know your average space is quite small but any larger tenants in the second half of the year that you are dealing with now that could have a similar impact or could require additional work as you are talking about now?

[Joe Russell:]

We have a few for mark to markets depending how you define larger but nothing that is noteworthy.

[David Rodgers:]

Okay, thank you.

[Operator:]

At this time, there are no further questions. Do you have any closing comments?

[Ed Stokx:]

Thank you everyone for joining us. We appreciate your interest in PSB and we look forward to talking to you after our third quarter. Thank you.

[Operator:]

This concludes today’s conference. You may now disconnect.