PS Business Parks, Inc.
Q4 2014 Earnings Call Transcript

Published: 19 Feb 2015

[Operator:]

Good afternoon. My name is Jake and I will be your conference operator today. At this time, I would like to welcome everyone to the PS Business Parks’ Fourth Quarter Investor Conference. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Ed Stokx, you may begin your conference.

[Ed Stokx:]

Thank you. Good morning and thank you for joining us for the fourth quarter 2014 PS Business Parks investor conference call. I am Ed Stokx, CFO of the company. And with me are Joe Russell, President and Chief Executive Officer; John Petersen, Chief Operating Officer; and Maria Hawthorne, Chief Administrative Officer. 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 report on Form 10-K and subsequent reports on Form 10-Q and Form 8-K. We will also provide certain non-GAAP financial measures. Reconciliation to GAAP of these non-GAAP financial measures is included in our press release, which can be found on our website at psbusinessparks.com. Now, I will now turn the call over to Joe.

[Joe Russell:]

Thank you, Ed. Good morning and thank you for joining us. I’d like to review Q4 results, reflect on significant 2014 events while speaking to our view of 2015 in terms of market conditions and the acquisition environment. For the fourth quarter, PSB was able to reach a number of performance levels not seen since the 2007, 2008 era. Same Park NOI was up 3.6% bolstered by both strong occupancy at 93.4% and cash rent change of 2.3% during the quarter. Leasing volume was respectable at 2 million square feet with about 16% coming from non-Same Park assets where occupancy grew to approximately 84%. We are encouraged by the overall demand from small users with 71% of PSB parks over 91% occupied and no competitive new inventory coming into any of our markets. In 2015, approximately 25% of leases expire, and the improvement in most PSB markets continues to boost our view that a shift to landlord favorable conditions has taken place. JP will go into more specific divisional performance in a moment. Turning to dispositions and acquisitions, as previously announced, PSB sold 2 parks in Portland and 3 parks in Phoenix, which totaled 1.9 million square feet for net sale proceeds of $212 million. Last week we also closed on the remaining asset in Portland, a 102,000 square foot flex park for net proceeds of $10.6 million. The company has completed its exit from the Portland market, and has a single 23,000 square foot asset in Phoenix, which is being marketed for sale. We also are relaunching the marketing of the company’s 368,000 square foot flex portfolio in Sacramento that is no longer under contract. The timing of the sales of these assets is unknown at this point. Through acquisitions, we bought Orchard Business Park in San Jose, a 120,000 square foot, 8-building park in San Jose’s Golden Triangle for $16 million. The park is adjacent to Charcot Business Park, a 164,000 square foot asset that was part of our Northern California flex and industrial acquisition completed three years ago. Orchard already has an ideal tenant size of below 2,000 square feet, and will be merged into Charcot as a larger single park totaling 284,000 square feet. Occupancy is strong at 96%, but we have the ability to reset rent levels with 80% of the park expiring over the next 24 months. At $135 per square foot, we acquired the asset well below replacement cost, while strengthening PSB’s ownership in the Silicone Valley to 3.4 million square feet in 14 parks. Here we continue to see company high rent growth and occupancy levels with that market producing strong demand by existing and new companies. The overall investment arena remains challenging in that asset values have reached or exceeded historical levels in many of our markets. Competition for assets is aggressive as cap rates on most stabilized assets are near or below record lows. This has been brought on by low interest rates, improving access to capital and more investor interest in all three of our product types. With this fevered environment, it is difficult to predict the pace of transaction volume going into 2015. We continue to seek underperforming assets, as we have done over time, also acquiring bolt-on properties, those adjacent to or near existing PSB parks. We can typically jumpstart our repositioning efforts due to the presence we already have in a sub-market or specific location. The entire 678,000 square feet of 2014 acquisitions were centered on this bolt-on strategy. Finally, in the fourth quarter, PSB paid a special dividend of $2.75 per share. With sensible acquisition alternatives limited, we felt this was the appropriate decision thus distributing $94 million to our shareholders. Today, we have in excess of $185 million of cash on our balance sheet, an untapped $250 million credit facility and we will likely generate in excess of $50 million in free cash in 2015. There is no question we are well prepared to consider a wide range of investment alternatives, but we will continue to be prudent about the ability to generate accretive investment returns as we work to deploy this level of capital. Now to JP's comments.

[John Petersen:]

Thanks, Joe. First, I will discuss market conditions, review progress in the Same Park portfolio, and then discuss non-Same Park assets, which now total 3.4 million square feet. Operational dynamics are positive in Northern California, Southern Florida, Texas, Seattle and Southern California. Washington Metro continues to slowly improve, but we are not yet seeing the same level of robust activity. In the quarter, net absorption was positive by over 1 million square feet in Northern California, Southern California and Florida. Texas was positive by over 500,000 square feet, and Washington Metro had negative net absorption of approximately 650,000 square feet in Q4. Overall, there remains very little new competitive construction, market level occupancy is tightening and I’m pleased with these improving conditions. In Q4, we leased 2 million square feet in 535 transactions, an average of just over 3,700 square feet. Retention in Q4 was 58% and full year retention was 65%. Overall rent growth was 2.9% in Q4. I will now take you through a breakdown by market of this activity. In Southern California, we completed 495,000 square feet in 172 deals with positive rent growth of 1% in the quarter. Occupancy in Southern California increased 150 basis points to 92.9%. Solid market conditions in Texas helped us sign 401,000 square feet. Same Park occupancy improved 340 basis points from Q3 to 94.6% with rents growing 11%. In Florida, we signed 379,000 square feet with rent growth of 10.7%. Same Park occupancy dropped 120 basis points to 93.7% due to one large customer outgrowing their space with us at MICC. We continue to be bullish on our product in Florida as we have healthy demand and good rent growth. Our team in Washington Metro completed nearly 377,000 square feet in 108 separate transactions. Same Park occupancy in Washington Metro slipped 30 basis points to 89.7%. Pricing pressure continued in Washington Metro as cash rents fell 5.4% in Maryland and 7.3% in Northern Virginia. Northern California executed 278,000 square feet with solid rent growth of 9.4% and Same Park occupancy was an impressive 96% in Q4. Now I will discuss performance on our 3.4 million square feet of non-Same Park assets. With the help of improving conditions, we grew occupancy in these properties by 740 basis points to 84.2% on December 31. With that said, we still have at least another 900 basis points of occupancy upside, and our goal is to improve performance as quickly as possible in these assets to equal our Same Park occupancy of over 93%. Of note, Bayshore Corporate Commons, a 340,000 square foot office park in San Mateo is on track to be fully repositioned by Q2. With occupancy in the 80% range, our opportunity is to capitalize on the finished product and grow occupancy into the mid-90s% range throughout 2015. Looking towards 2015, I am encouraged by strong leasing and operational dynamics, and with over 7 million square feet or 25% of our portfolio expiring, my teams are laser-focused on maximizing this opportunity as we roll leases into these improving markets. Now I’ll turn the call over to Maria.

[Maria Hawthorne:]

Thank you JP. I’m happy to give an update regarding our multi-family development. As a reminder, we have a five acre parcel in Tysons Virginia that is part of our Westpark business campus. There is currently a 123,000 square foot vacant building on this side, we have completed the rezoning process, which allows us to construct a class A five-story 450,000 square foot multi-family building. It will have nearly 400 units and a neighborhood park among other amenities. We are proceeding with the next step which includes site plan, design and permits. As we have previously mentioned. We have formed a joint venture with an organization with substantial local experience in multi-family development. Our partner Kettler, is a premier developer in this market with over 30 years experience and is based in Tyson. The purpose of the JV is to complement our team with multi-family expertise while at the same time maximizing the value of our original investment. As a result, we have structured the JV so that we will maintain a 95% economic interest in the project. The project will be known as Highgate at Metropolitan Park. We will rebrand our business Park where we own 45 contiguous acres. This year, we will enter the next phase of pre-development as we secure the necessary building permits. Now I will turn the call over to Ed.

[Ed Stokx:]

Thank you, Maria. Adjusted FSO for the fourth quarter of 2014 was $1.21 per share compared to $1.26 per share for the fourth quarter of 2013, a decrease of 4%, the decrease resulting from the sale of 1.9 million square feet of real estate. In addition, during the quarter, the company incurred $887,000 or $0.03 per share in non-cash expense related to an adjustment to outstanding options tied to the special dividend as well as a change in the director retirement program. Partially offsetting the decrease in FFO was at 3.6% comparative increase in Same Park NOI as well as a $1.9 million comparative increase in NOI from acquired assets. Same Park revenue increased 2.6% during the quarter over the same period of 2013 as a result of improving occupancy, which increased from 91.8% in the fourth quarter of 2013 to 93.4% in n the fourth quarter of 2014. Same Park expenses were nearly flat comparatively, increasing a modest 0.3%. For the 12-months ended December 31, 2014, the company's total returning capital costs were $47.2 million compared to $49.2 million for all of 2013, a 4% decrease. Same Park recurring capital expenditures were down year-over-year by $4.1 million or 9.5%. While recurring capital expenditures in the non-Same Park portfolio increased $2.5 million as we continued to lease up the acquired vacancy. Excluding the special dividend, the company's dividend payout ratio for the year ended December 31, 2014 was 58% compared to 51.3% for 2013. Total retained cash after capital expenditures, debt service, and distributions was $43.8 million for the year compared to $44.6 million for 2013. While we intend to remain disciplined on our capital allocation, the retained proceeds from sales combined with recurring retained cash, position the company with significant capacity to continue to grow and deliver shareholder value as we identify opportunities that meet our strategic objectives. We will now open call for your questions.

[Operator:]

[Operator Instructions] And your first question comes from Lauren Tarola from Citi. Your line is open.

[Michael Bilerman:]

Hey, it’s Michael Bilerman here. Good morning out there.

[Joe Russell:]

Good morning.

[Michael Bilerman:]

So I just had a question, as we think about the Same Park pool heading into 2015, I assume it is going to be all the 2012 acquisitions, which I think were about 1.2 million square feet? So effectively that will be reduced at the pool?

[Joe Russell:]

That’s correct Michael. There is two portfolios that we acquired in 2012, which will roll into the Same Park pool effective the beginning of this year.

[Michael Bilerman:]

And how are those assets in terms of leasing in 2014, will it have any effect, both positive or any drag on your 2015 results in terms of same store?

[Joe Russell:]

We wouldn’t expect it to have any drag on it. Those assets have performed very well and there is still – one of the assets is a Park in – up in Seattle. It’s just under 1 million square feet and that Park, as of the end of the year was 91% or just under 92% leased. So there still some opportunity for growth there.

[Michael Bilerman:]

Okay, and then just as we think about the role heading into 2015, you talked about the 7.2 million square feet, 26% of rents. When you look at those rents relative to the portfolio average, you are anywhere from 5% to 10% lower, just given the rents that have been signed in the last few years and the vintage of leases coming due. How should we think about putting market rent growth aside given some of your comments about the environment, how should we think about the rent change on that 26% of your rents for 2015?

[Joe Russell:]

Well, again I Michael I think you need to continue to track and see the progression of those factors over the last few quarters, the commentary that both JP and I talked to include again, almost on a quarter-by-quarter basis continued, I would call either landlord tilting and or more favorable conditions to the metrics we operate around that drive rents and occupancy levels and again very little or absolutely no new competitive inventory. So we are encouraged by all of the macro impacts that go into the leasing functions across our market. The one market that in 2014 was negative relative to both market absorption and then our own rent change performance was Washington Metro. I will tell you we are getting more encouraged about again the demand factors that are coming out of that market and the things that go into government contract leading and business stabilization and all of those kinds of things. So I think even going into 2015, we've got more optimism around even that faction of our overall portfolio. So market by market there's good percolation going on. And again I think you will need to look directly to the fourth quarter, that’s definitely something that we feel encouraged by that, hopefully is a good baseline for us to go on 2015 relative to our expectations.

[Michael Bilerman:]

Right, and I guess, is there anything in the actual level of the expirations in terms of the rent levels that would give you more confidence at that trend should continue are those rents in 2015 lower than they were in 2014, just given when they were signed or

[Joe Russell:]

Yeah, I think there is a good statistical bias meaning we’ve got again, like every year plus or minus about 2000 transactions ahead of us. So there is high proportion of smaller spaces more or less below say that 3,000 to 4,000 square foot level. Many of those leases have been signed say two to three years ago where again market conditions were less favorable to our side of equation, they’re trending toward our favor and again we feel encouraged by that population of rents that we’re going to reset in the 2015. It’s broad based, literally every division that JP talked about individually got anywhere from 400 or 500 plus transactions ahead of them in 2015. So I think we’re going to have good opportunity to reset that 25% of the expiration schedule in 2015.

[Michael Bilerman:]

Okay, thank you.

[Joe Russell:]

You bet.

[John Petersen:]

Thanks Michael.

[Operator:]

Okay. And you next question comes from Craig Mailman from KeyBanc. You line of open.

[Craig Mailman:]

Hey guys. Joe can you maybe just give little bit more color about what happened in Sacramento?

[Joe Russell:]

Yeah, what we talked about on our last earnings call is we – like in our other markets had put that portfolio into the market on a sales process an initial buyer surfaced and again started and reviewed their own market reconnaissance that kind of thing and long story short, they made a decision not to go forward. So again we paused for a month or two and we’re getting ready to relaunch a new marketing process on the portfolio. So that’s about as much information I can really tell you. It’s really just the factor of Sacramento as we may have talked about before of the three markets we choose to exit is the weakest of the three and what we didn’t see in the prior process we ran on the Sacramento assets was the same level of buyer activity. So we’ll see how that may have changed going to 2015. As I noted, we clearly see more and more aggressive buying behavior in many of our markets so we’ll see if we have a better opportunity in this maybe actually better time and we’re not seeing any real change in the expected – the expected sales range or anything else. It’s really just going to be a question how many interested buyers are going to part of the process.

[Craig Mailman:]

Did they try to retrade you? Or did they just see something that they didn’t like?

[Joe Russell:]

Again, that was a discussion that was not well received on our end.

[Craig Mailman:]

Got it.

[Joe Russell:]

Again, there’s nothing that is pressing us to trade these assets for the sake of just trading them for that purpose alone. So yeah, we clearly feel comfortable with our expectations, and it just takes a little bit more time, that’s fine. We’ve got a good team working on the assets. And again, we find the right buyer, we will be obviously fully engaged to take that step forward, but we will see how that plays out over the next quarter or two.

[Craig Mailman:]

All right. That’s helpful. And then I know you’re – consistent comments, the acquisition environment is tough, just two questions on that. The bolt-on opportunity, is there anything adjacent to existing assets that is on the market that you guys are looking at? Or do you have to break it free? And then second, you guys, it’s a little bit later in the year, but the $75 million of preferred, is that a use of cash? Or do you refinance those? And kind of what do you think about pricing in the preferred market?

[Joe Russell:]

Okay. So I’ll answer the first part and I will hand the preferred discussion over to Ed. Yeah, Craig, on the bolt-on strategy, so here’s what’s becoming more and more advantageous for us as we over the last four years or five years put another $1 billion of real estate under our wings and magnify the number of parts we own, which is now just over 100 across the markets we are in. And the consistent view we’ve got is more often than not the ability to integrate and make all of our parts that much bigger is almost always a good thing to do. And you saw and have seen some of the success factors even in the near term that we’ve had. For instance, we bought a single additive building in Miami towards the end of last year and within a few weeks we got it fully leased and it was a simple integration. And it was just a great additional part of the strong portfolio that we already had on the ground there. So with the 100 plus parks we’ve got in our five states that we operate in, we’ve got I think many good opportunities to continue to seek out and find assets. Charcot, the deal that we bought late in the fourth quarter, a perfect example. Literally right next door, great feeder to the 164,000 square foot park that we already own. And the fact that it’s already – ideal tenant size range is just even that much more efficient for us to go in and leverage its capabilities now that it’s added into the park that we have owned there for a few years. So we are going to keep focused on that. We’ve got our teams and our focus across the 100 parks out, taking as many ways as we can those kinds of deals. And then as always we are going to also continue to look for new parks in many of the markets we are into.

[Ed Stokx:]

And then Craig, you asked about the preferred, as you know, we do have a $75 million issuance that is at 6.875%. That is redeemable in October. It’s certainly is something that we would look at this point to take out. The preferred market, although it’s been very quiet, our outstandings are trading right around 6%, which I think is probably a good indicator of where the pricing may be plus or minus a few basis points from there. So it will largely depend on what our cash position looks like at that time. But at 6.875%, it’s certainly is a rate that we would look to take out at this point.

[Craig Mailman:]

Okay. That’s helpful. Then just one last one for JP. You went through the non-same-store pool and pointed out Bayshore. I think you guys also have a decent enough space at MICC to backfill. What other large chunks do you guys have in that same-store pool that you feel really good about?

[John Petersen:]

In the same-store?

[Craig Mailman:]

The non-same-store, apologies.

[John Petersen:]

Okay. Non-same-store, in Texas, we have some spaces that -- as I mentioned in my comments, the market is robust there, lots of activity. We have a few spaces that are for us larger, say, over 10,000 square feet or 20,000 square feet. Same in Austin. We have a new acquisition, we bought last year in Austin, which for us in larger spaces over 20,000 square feet, where as you probably know that market is strong right now. We are seeing good activity there. So those – in non-Same Park, those would be our larger spaces. As you know, Bayshore is smaller, much smaller than that. And once our repositioning is done there, we expect to see the velocity really take off at Bayshore.

[Craig Mailman:]

And any activity in the MICC space?

[John Petersen:]

Yeah, we are seeing healthy market. We are seeing activity there. And that is in our Same Park just to be clear. You are right; there are some larger vacancies there that we took back, but good activity there, but that is technically in our Same Park pool.

[Craig Mailman:]

Thank you, guys.

[Joe Russell:]

Thanks, Craig.

[Operator:]

And our next question comes from Eric Frankel – your line is open – from Green Street Advisors.

[Eric Frankel:]

Thank you very much. Maria, can you touch a little bit more detail on conditions in the suburban DC, just the office market there and just wondering if I can get a sense of where rents are relative to leases in your current portfolio?

[Maria Hawthorne:]

Well, as JP mentioned, even the DC market is gaining a little bit of velocity and strength. Net absorption was still negative, large users are still consolidating. However, the good news is that with the budget and a little bit more confidence, we are seeing some longer-term renewals on GSA leases as well as government contractors willing to sign now four-year and five-year deals versus the one and twos that they were looking at last year – over the last several years. Pricing is about static to where it was last year. We are not really seeing pricing power, but hopefully what we will soon start to see is construction packages decrease.

[Eric Frankel:]

Okay. Do you have a sense of where rents are relative to market venture portfolio just embedded either rents growth [ph] or declines? Obviously, we have some roll down the past year or two. Just wanted to try to figure out where we are in that process as you guys keep rolling the portfolio?

[John Petersen:]

Hey, Eric, it's JP. Yeah, relative to where our rents are now, we still do have some rents that are going to roll down as I mentioned due to pricing pressure. It continues to get smaller quarter-to-quarter and year-over-year, and we like that trend. And so there will be an occasional deal where we will see positive rent growth. As it rolls, those are typically on the shorter-term leases. We still – as I mentioned, that longer-term leases that will drag that down. And it’s still a competitive environment. So my job is to get the portfolio leased. Through the midday is where we begin to establish pricing pressure. And in fact, some of our parks are in the mid-90s%, as you probably know. Our Westpark is in the mid-90s%, some of the [indiscernible] is in the mid-90s%. But it’s still a battle and I think we are continuing to inch back quarter-to-quarter to that flat and then positive range.

[Eric Frankel:]

Okay, thanks. Just a follow-up on suburban DC. Did you give a start date of the apartment developments? I might have missed that.

[Joe Russell:]

No, Eric, the thing that will happen through this year is, we were pleased that our process on the rezoning was as efficient as it was in – Maria and her team at Cutler [ph] did a really good job getting through our layers of approvals for that. So now we have entered into the more specific building design and permitting phase. That’s likely to take the bulk of this year. Once that is close to completion, you will probably start hearing us talk about timing of the actual development work. There could be some predevelopment work on the site towards the end of this year, but we will have to keep you posted on our next phasing and the timing that comes from that.

[Eric Frankel:]

Okay. Kudos on that by the way. I just have two quick follow-up questions of Ed. Of the LTIP adjustment you guys have out laid in your earnings this year, is that going to go away for next year so that there won't be as much noise in the FSO number?

[Ed Stokx:]

That’s correct, Eric. Next year we will not isolate it as an adjustment to reported. And as I’ve noted in the past, we primarily did that this year because we had so many moving parts in both the first and the fourth quarter of the year relative to the reversal of the prior plan. So next year it will be comparative and a much simpler presentation.

[Eric Frankel:]

Okay, thanks for the clarification. And then just finally on operating expenses, operating expenses were a little bit higher than inflation or whatever, probably measured inflation was higher than that this year principally due to winter related expenses. Do you have a sense of what that's going to look like for the next 12 months?

[Ed Stokx:]

Yeah, Eric, our expenses were up 3.5% for the full year, which was driven – about half of that was due to the winter expenses. So that’s obviously unknown at this point, but absent that I would say that we are expecting moderate level of expenses in 2015. So we don’t expect significant increases, but we also don’t expect them to be flat. We are seeing some pressure on property taxes and a little bit on utilities, but don't expect to have significant increases.

[Eric Frankel:]

Okay, great. I will return back in the queue. Thank you.

[Joe Russell:]

Thanks, Eric.

[Operator:]

[Operator Instructions] And your next question is Michael Mueller from JPMorgan. Your line is open.

[Michael Mueller:]

Thanks. I apologize if I missed this, but Ed, did you mention anything kind of one-time in nature in G&A putting aside acquisition costs and stuff like that because it just was notably higher than what it was in Q3?

[Ed Stokx:]

Yes, Michael, the $887,000 that we incurred during the quarter is a non-recurring expense. It relates to adjusting of the outstanding options as a result for the special dividend, and a change that was made to our director retirement program. So that – because most of those options were vested, all of that expense hit in the fourth quarter, so there is some, but it’s very, very minor expense going forward on that. So I would consider the bulk of that non-recurring in nature.

[Michael Mueller:]

Okay. And then looking at the non-same-store occupancy level. If you would take more of a same-store approach to that, just think about the progression from Q3 to Q4. How much was the organically [indiscernible] pool as opposed being impacted by the change in mix?

[Ed Stokx:]

The change in – you are talking about over the course of 2014?

[Michael Mueller:]

No, I’m talking Q3 to Q4.

[Ed Stokx:]

Q3 to Q4? Yeah, Michael, if you, because we did acquire some larger vacancy in the latter part of the year. So if I exclude those assets, our occupancy improved from call it 81.6% to 85.9%. So still a very significant growth from the third to the fourth quarter if you exclude those 14 acquisitions where we acquired some vacancy.

[Unidentified Analyst:]

Okay. That was it, thank you.

[Joe Russell:]

Thanks Mike.

[Operator:]

Okay and your next question comes from the line of Lauren Tarola from Citi. Your line is open.

[Michael Bilerman:]

Hey, it’s Bilerman. Maybe I should start talking like Lauren. Anyways on sales, you mentioned Phoenix and relisting Sacramento. Is there anything else that you’re contemplating? You were very active last year and then took advantage and paid a special rev and then reinvesting in assets given pricing levels. But I'm just curious, other than those two is there anything else that we should be mindful of that you potentially could execute?

[John Petersen:]

At this time, Michael, I think what we talked to was kind of a stated objective in the processes that we completed and the one small one that left in Sacramento was the overarching desire to leave those three markets Portland, Phoenix and now Sacramento. So at this point I've committed to and focused on remaining asset ownership we have in the market where we’re continuing to operate in. So that’s where we are.

[Michael Bilerman:]

Then how big is the Phoenix piece?

[John Petersen:]

The Phoenix, you mean the remaining assets?

[Michael Bilerman:]

Yeah, that you’re going to list.

[John Petersen:]

One small building, it’s 23,000 square feet. It’s a one-off building that was not part of any of the other parks that we owned in Phoenix. So we’re selling that on a one-off basis.

[Michael Bilerman:]

So the combination here is probably like $50 million of proceeds or something?

[John Petersen:]

You mean that’s remaining?

[Michael Bilerman:]

Between the two, between Sacramento and Phoenix.

[John Petersen:]

No, it will be lower than that Michael. So, it’s going to be closer to the mid-$20 million to $ 30 million range by the time we get through all of our marketing efforts et cetera, so...

[Michael Bilerman:]

And just on sticking with the balance sheet, the term loan that expires at the end of 2016, can you prepay any of that early?

[Ed Stokx:]

We can prepay it six months early. So we can repay it at of June 1 of 2016.

[Michael Bilerman:]

So, as you think about the preferred that’s coming that you can call, you wouldn't be able to do a double and sort of refinance and take out all debt completely at this point?

[Ed Stokx:]

Yeah, I think Michael we’ll kind of keep our options open in terms of what our cash balance is as we look to take that out, but our expectation would clearly be to take that out at the earliest possible date.

[Michael Bilerman:]

The preferred or the debt piece?

[Ed Stokx:]

Actually both, the debt would be June 1 of 2016, the preferred we can take out in October. So if we choose to refinance that with preferred, as I said earlier to a question, the market is probably right around 6%. But again, it would depend on what our cash utilization is at the time.

[Michael Bilerman:]

Now, is the make whole really cumulative if you were to call the debt before that, I guess the 5.5% rate?

[Ed Stokx:]

It is, Michael actually and if we were to prepay it earlier through the mechanisms allowed in the loan, we would not be able to repay it at June. We’d have to service the debt through the balance of the term in December of 2016.

[Michael Bilerman:]

Okay, so sounds like big release at next summer.

[Ed Stokx:]

Yeah.

[Michael Bilerman:]

Okay, alright, thank you.

[Joe Russell:]

You bet. Thanks Michael.

[Operator:]

And your next question is Eric Frankel from Green Street Advisors. Your line is open.

[Eric Frankel:]

Thank you, just a couple of quick follow-ups. We did notice that small tenant occupancy was pretty flat between 3Q and 4Q. Is there anything that caused that or is there a difference in activity between tenant that are greater than 5,000 square feet and less than 5,000 square feet?

[Joe Russell:]

No, Eric there is nothing. No trend lines or anything. I do think as the year progressed, things were starting to percolate a little bit with job growth et cetera and I would expect that small-tenant occupancy is going to move north here as we head into 2015. But there is nothing stand outs.

[Eric Frankel:]

Okay. Obviously we noticed the pretty impressive sale that that prologue [ph] executed with Facebook in Silicon Valley, do you have any properties you like to sell them?

[Joe Russell:]

Tell Mark Zuckerberg, we’ll always take his call.

[Eric Frankel:]

That's fair. I am curious about land values though in South Bay in Silicon Valley and just how much of that inventory can get converted into something else in the future? Obviously it’s such a different environment there than it is throughout the rest of the country? Lots of guys will talk on that?

[Joe Russell:]

You know, that is tough immediate strategy meaning over literally the last 10 years to 15 years, that’s been the theory that’s played through on a lot of sites that might have more longer-term vacancy and even with many of those it’s been tough for that to take place in big chunk. So we are pleased by the fact that our portfolio is well occupied. It’s now over 96%. We’ve got many staggered leases and it is unlikely a situation where we’re going to see any, if any of the kind of repurposing in the near term that I can even talk to. I’ll tell you that we’ve got great locations. The 14 Parks that we own in Silicon Valley are in great locations and they continue to be even more and more valuable, as some of these other sites have become repurposed and less and less inventory of our type is in that market and literally none of it being built today. So we’re certainly focused on that part of the equation, and it wouldn't be prudent for me to say that we've got one, two, or multiple sites that are ready for that kind of repurposing, so…

[Eric Frankel:]

Okay. That’s it from me, thank you guys.

[Joe Russell:]

Okay, Eric, thank you.

[Operator:]

There are no further questions. I’ll turn the call over back to the presenters.

[Joe Russell:]

Thank you, Jake. Thank you everyone for joining us and we look forward to talking to you next quarter. Take care.

[Operator:]

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