PS Business Parks, Inc.
Q2 2018 Earnings Call Transcript

Published: 25 Jul 2018

[Operator:]

Good morning. My name is Nicole and I will be your conference operator today. At this time, I would like to welcome everyone to the PS Business Parks Second Quarter Investors 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. [Operator Instructions] Thank you. John Petersen, you may begin your call.

[John W. Petersen:]

Good morning and thank you for joining us for the Second Quarter 2018 PS Business Parks Investor Conference Call. I am John Petersen, Chief Operating Officer of the Company, and with me are Maria Hawthorne, President and Chief Executive Officer, and Trenton Groves, Vice President of Finance and Controller. 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 to GAAP of these non-GAAP financial measures is included in our press release, which can be found on our Web-site at psbusinessparks.com. Now I will turn the call over to Maria.

[Maria Hawthorne:]

Thank you, JP. Good morning everyone. I will begin with a summary of second quarter results and investment activity. Then JP and Trenton will give you more specific color on the quarter and our position going into the second half of the year. We continue to see good levels of tenant demand as market fundamentals remain strong. There is no doubt that industrial and flex product is driving the greatest growth in all of our markets. The second quarter was a mixture of strong leasing volume with positive rent growth in our industrial and flex parks. Our office parks gained 110 basis points in occupancy, though we continue to see rental rates resetting when leasing and renewing. In the second quarter, we maintained same-park occupancy of 94.6%. Demand remained strong throughout the West Coast, Texas and Florida as we benefit from the infill locations of our park concentrations. We are also benefiting from a strong economy that is showing no signs of slowing. Landlord friendly markets help us maintain low transaction cost, which were $2.97 per square foot on leases executed during the quarter. Our real estate team was busy with both acquisitions and dispositions. Year to date we have sold three parks, two in Orange County, California and one in Dallas, Texas, totaling 792,000 square feet with net proceeds of $126.8 million. We have one more office park in Orange County totaling 107,000 square feet which is in the early stages of marketing and we expect to sell this year. On June 8, PSB expanded its industrial presence in a core market by purchasing the Northern Virginia Industrial Portfolio or NVIP. This acquisition contains 19 buildings concentrated in two parks totaling approximately 1.1 million square feet located just south of the Pentagon, and is adjacent to Fort Belvoir which is headquarters for Army logistics. The parks were acquired at a cost of approximately $144 million, including transaction costs. At the time of purchase, the parks were 76% occupied in a market that is 94% occupied. We are excited about acquiring these assets since they are sitting on 65 acres in Fairfax County and are a true value-add opportunity. Our plan is to follow our tried-and-true formula which saw success with other industrial acquisitions in Miami, Northern California, and Seattle. We will undertake about $6 million of improvements to the buildings over the next several quarters. The repositioning strategy includes construction of small-bay industrial suites which are in high demand in this submarket. Our own product in this market is currently 95% leased and has averaged that occupancy since 2000. Our multifamily development, known as Highgate at The Mile, located in Tysons, Virginia continues to perform well and ended the quarter with nearly 82% occupancy. We are confident of achieving stabilized occupancy by year-end, which is about six months ahead of expectations. Our application on rezoning the balance of The Mile is proceeding. This is the largest rezoning application filed to date in Tysons and it will require several more quarters as it proceeds through the various departments and agencies. In summary, I feel that we are set up for a strong second half for 2018 due to our portfolio, team and strategy. Now, before I turn the call over to JP, I want to let you know that we continue our search for CFO. Okay, JP?

[John W. Petersen:]

Thanks, Maria. With real estate fundamentals robust and small business America active in all of our markets, our teams were able to sign 2.1 million square feet in 552 deals in the second quarter. This is the highest production in terms of square footage volume since fourth quarter of 2015. In our markets, square volume is healthy and occupancy is in the mid to high 90s across most of our portfolio. I will now take you through second quarter specifics by market. Starting with Washington Metro, we are dealing with the same dynamics we have had over the last several years, market vacancy in the mid to high teens, active small business demand, and few large tenant deals. In Q2 our Washington Metro team was busy with both small and large users and we signed 592,000 square feet in 136 deals. On the large deal front, we were able to execute a strategic renewal with a single building, 123,000 square foot credit customer we thought we were going to lose in Maryland. In order to secure this deal, we were forced to lower our rent to market as their five-year lease with escalations came to term. This was the main driver behind our rent decline of negative 13.8% in the second quarter. Same-park occupancy increased 70 basis points to 91.1% and is up 170 basis points over second quarter 2017. A key component of this occupancy increase is retention of 87%, as our customer-focused management tactics are working. Additionally, our small customer leasing has enabled us to continue occupancy growth at our Grove 270 acquisition in Rockville, Maryland. As a reminder, we purchased this 226,000 square foot two-building park in September 2016 for $59 a square foot at 18% occupancy. With our repositioning work complete, occupancy at this park is now over 70% and climbing. In South Florida, we had another strong quarter, signing 359,000 square feet in 65 deals, an average of 5,500 square feet. Occupancy was up slightly to 96.3%. Retention was 45% as the 100,000 square feet user I mentioned last quarter outgrew MICC. We have since re-leased nearly half the building. In Texas, our team was busy and signed 96 leases for 349,000 square feet. Occupancy in Texas dipped 220 basis points to 89.3% as the 100,000 square foot tenants I mentioned last call vacated at the end of Q1. We have re-leased 25% of this space and have activity on the remaining 75,000 square feet. Northern California had another solid quarter with [478,000] [ph] square feet signed, retention of 85%, and rent growth of 12.5%. Occupancy was up 30 basis points to 97.9%. Rent growth was strongest in our East Bay industrial portfolio at 18%. Our Northern California team is focused on driving rents and maintaining occupancy levels in the high 90s. Also demonstrating solid metrics in Q2 was Southern California. Combined occupancy in Southern California was 98.3%, up 90 basis points from Q1. We signed 144 leases totaling 288,000 square feet, a 2,000 square foot average deal size. Demand is still robust and rents in Southern California increased by 5.8%, with retention of 70%. In Seattle, occupancy was 98.1%. Rents were up 11% and retention was 70%. As I have mentioned before, we have very little vacancy in our Seattle parks and options are limited in the market. Thus, we are able to keep most of our expiring customers unless they outgrow the portfolio. With a growing economy, low unemployment, and a strong small business climate, I am encouraged with the opportunity we have with the 2.6 million square feet of expirations remaining in 2018. Our teams are going to focus on rent growth while maintaining high occupancy levels. Of the 2.6 million square feet expiring, approximately 35% or 895,000 square feet expire on the West Coast, 37% roll in Texas and Florida, and 16% industrial and flex expire in Washington Metro, helping us capture upside in the second half of 2018. Now I'll turn the call over to Trenton.

[Trenton Groves:]

Thank you, JP. We reported FFO of $1.59 per share for the second quarter, a 2.6% increase from $1.55 in the second quarter of 2017. The growth was driven by higher NOI combined with lower amortization of long-term equity compensation, partially offset by a reduction in NOI from sold assets. Second quarter same park NOI growth of 2.1% was driven by a 2.4% increase in revenue due to higher rates and increased occupancy. Same park operating expenses were up 3.1%, primarily due to higher property taxes and repairs and maintenance. Our multifamily asset, Highgate, delivered $765,000 of NOI for the second quarter. During the six months ended June 30, 2018, we incurred $15.1 million of total capital expenditures compared to $23.4 million in the same period in 2017. $5 million of the decrease relates to cost incurred on the 2016 acquisition in Rockville, Maryland as we reposition the asset and prepared space for occupancy last year. $2.8 million of the decrease was due to decrease in transaction cost and $413,000 of the decrease was the result of a reduction in capital incurred on our assets, those sold or held for sale. Our dividend payout ratio was 63.3% compared to 72.7% for the three months ended June 30, 2018 and 2017 respectively. We generated free cash at $17.1 million during the second quarter of 2018 compared to $9.9 million in the second quarter of 2017. The increase in free cash was primarily due to the decrease in capital expenditures. In connection with maintaining our requalification, we are required to distribute substantially all of our taxable income, and as a result, I am pleased to announce that our Board of Directors approved a 23.5% dividend increase to $1.05 per share per quarter. We will now open the call for questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Manny Korchman from Citi. Your line is open.

[Manny Korchman:]

Maria, could you talk to us about sort of the process of finding, getting a Virginia park that you acquired and maybe potential other opportunities that are similar out there?

[Maria Hawthorne:]

Sure, Manny, and good morning to you too. Yes, we are really excited about this park because I personally was in that market for 25 years. We went head to head against that asset with our Springfield parks as well. It's a great park that demises into 5,000 square foot spaces that have dock-high and drive-in truck access. And just the location, like I said, it's surrounded by Fort Belvoir, but on the other side it's also surrounded by very dense housing in Fairfax County, Virginia. So, whether you look at the land, the buildings, the construction type, it just completely fits into our wheelhouse and we kind of look at it like a mini MICC. And I'm going to let JP talk a little bit about kind of what him and the team are going to do to get this up so that we can get it up to market occupancy and our levels of occupancy that are really adjacent to this asset.

[John W. Petersen:]

Manny, like Maria said, we are thrilled that we were able to capture this asset in a competitive environment. And I think, combined with our knowledge of the markets, Maria's experience back there, and our team's experience, we are able to capture a perfect value-add industrial park for us and it has everything that we were hoping for. It was under-managed, it was under-maintained, and it had third-party brokers on there, and for us to come in and put our PSB stamp on it is going to be a great opportunity to take that thing up to 95% over the next several quarters. So, it really is right in our wheelhouse of what we do and we are thrilled with this deal.

[Maria Hawthorne:]

And then, Manny, the second half of your question was other opportunities. We are certainly looking but I think as you guys are probably very well aware, particularly on the West Coast, when assets fell, they were anywhere from 98% to 100% leased and their in-place cap rates are about 4.5%. So, for us to find something with an in-place cap rate in the high 4s and 76% occupancy, I mean this is what we do, we are willing to take the risk, and we know this will start producing. Those assets are hard to find for true industrial, but we're looking. They are clearly not impossible to find. And this is true industrial with very small office buildout.

[Manny Korchman:]

Great. And then, Maria, you mentioned that you're still in process on the CFO search. Just any updates on timing or sort of shift in strategy or direction there?

[Maria Hawthorne:]

Just that we will hire a CFO and we'll announce it when we have the person in place.

[Operator:]

Your next question comes from the line of Craig Mailman from Citibank Capital. Your line is open.

[Craig Mailman:]

Appreciate the extra disclosure you guys gave on the breakout of the rent spreads and all the other leasing metrics by property type. Just curious, JP, if you have at your fingertips kind of what the industrial rent change was in the first quarter?

[John W. Petersen:]

So, we did add this new additional disclosure and we think it helps, it will help you and it will help us. In the first quarter it was a little over 9% for the industrial.

[Craig Mailman:]

Is that quarter over quarter difference mainly just kind of mix or geographies?

[John W. Petersen:]

Yes, as you know, I mean this metric fluctuates quarter to quarter depending on what deals we do and where we do them. And in any given quarter, including the second quarter, we did two very large deals that weighed very heavily on our metric here, the one I mentioned in Washington Metro and then one in our big industrial that had a preset rent growth of 8%. So, that weighed heavily on the rent growth there. And then looking forward, we expect rent growth in our portfolio in all of our industrial and flex parks, but it will fluctuate, hopefully fluctuate on the high side, but depending on what deals we do and in which markets we do them, I expect that metric to fluctuate. But we are seeing good trends in the market. We've done some very good deals already in the third quarter in terms of that metric. And again, with our portfolio in the mid to high 90s, we have the ability on most deals, not all but most deals, to drive rents.

[Craig Mailman:]

Okay. And then as we kind of look at 2019, I guess two questions. One, are there any other kind of big expirations like what you had in Maryland in your North Virginia or Maryland expirations next year that could kind of weigh on spreads or NOIs? And I guess also, just looking at the rolls, you have a decent amount rolling in kind of Southern Cal and Northern Cal next year. Is there a chance that there is enough there to offset what's going on just broadly in kind of Northern Virginia, has a bigger expiration schedule to really see acceleration in same-store NOI? I know you don't give it, so [indiscernible] some sense.

[John W. Petersen:]

As you can imagine, we are very excited about our rent growth opportunity for the foreseeable future on the West Coast, and that's no surprise. So, will that offset our lack of pricing power in Washington Metro? I hope so. The good news is we have more industrial now in Washington Metro to capture rent growth opportunities and we will have – yes, we'll have, from time to time we'll have an expiration in Washington Metro that we have to deal with and we have to bring back to market. And our hope is that our strong West Coast portfolio in South Florida, we'll be able to offset that going forward.

[Craig Mailman:]

Do you have any identified today that are coming from the list of potential vacates that are north of 75,000 square feet that could be a [indiscernible]?

[John W. Petersen:]

We have identified all of our expirations heading into next year. I'm not going to get into the specifics on the call but we know what we have ahead of us, and like this deal I mentioned on the call, this was a credit company and we are very excited to secure that whole building deal regardless of the rent decline. It was highly competitive, highly sought after, and for us to capture that business was huge strategic opportunity for us. So, we'll continue to operate that way going forward and there may be a couple but I think we can manage it through the rest of the portfolio.

[Craig Mailman:]

Any sense of are they first half of the year, second half of the year?

[John W. Petersen:]

They are just kind of equally spread out across the Company, whether it's in Washington Metro or California or Seattle. It's just kind of equally weighted across portfolio.

[Craig Mailman:]

Okay. And you had mentioned, in Northern Virginia now you guys have more industrial than office. If I'm looking at the 1.2 million square feet expiring next year, what you think the breakdown of that is, office versus industrial?

[John W. Petersen:]

Good question. It's about 50-50.

[Craig Mailman:]

Okay. And then just last one for me. Trenton, I know we have talked about the LTIP in the past. Can you just remind us kind of the impact of that in the balance of the year, and maybe probability or timing of putting in another one and kind of what theoretically that could mean for G&A?

[Trenton Groves:]

Yes, the timing of putting in another one, I think that's really up in the air and we don't really have anything at this point in time. I think the existing LTIP amortization that you see coming out of Q1 and Q2 is just the trailing-off of that existing plan that will continue for the next few years of the vesting period. And based on the accounting methodology, that trend will go down over the expiration of the plan.

[Craig Mailman:]

All right, great. Thank you.

[Operator:]

Your next question comes from the line of Eric Frankel from Green Street Advisors. Your line is open.

[Eric Frankel:]

Maybe I just wanted to dig a little bit deeper to Craig's line of question. It's related to markets. And I obviously recognize, you extended upon the lease roll and how that choppiness can kind of lead to uneven re-leasing spreads. But could you maybe touch upon market rent growth in general, what you are seeing for your portfolio and the sizes of leasing that you guys typically execute? Are headline rents still growing in a lot of your markets sans the DC area?

[John W. Petersen:]

Eric, the simple answer is, yes, and let me just go through the markets real quick. Starting in Seattle, pricing power and market rents continue to go upwards. So, that is favorable. Opportunity is there. Market rents are going up. Same in really all of California, they are reaching all-time highs in both Northern and Southern California, again depending on the market. Texas, market rents are growing not as fast certainly as the West Coast. And in South Florida, there market rents are growing again just not as fast as the very robust West Coast. We already discussed Washington Metro. The good news about that, Washington Metro, is market rents are not declining. The market is not getting worse, but as leases roll off five or seven year terms with escalations, that you have to bring it back to market because market rents, as I have already discussed, are not increasing, but they are not getting worse.

[Maria Hawthorne:]

And industrial is actually growing.

[John W. Petersen:]

Yes, and industrial – you're right, Maria, industrial in Washington Metro is growing, and that's why we are so excited about this industrial deal we picked up.

[Eric Frankel:]

Okay, it's helpful. Just drilling it to Dallas and South Florida, you said the rents aren't growing as fast. Obviously both markets are facing a little bit more supply than the West Coast, probably a little bit less demand. But you are showing roughly flat rent change this quarter and roughly similar last quarter too.

[John W. Petersen:]

Eric, we lost you. Operator?

[Operator:]

There are no further questions at this time.

[John W. Petersen:]

Operator, we just dropped off.

[Maria Hawthorne:]

Yes, and we were in the middle of a question and we had other questioners. Did something happen?

[Operator:]

Are you able to hear me now?

[Maria Hawthorne:]

Yes.

[John W. Petersen:]

We can hear you.

[Operator:]

I'm showing that there's no further questions at this time.

[John W. Petersen:]

It dropped right in the middle of somebody speaking and the two other calls that were queued up dropped off on Leaderview. I'm showing Q&A blank but that's just…

[Operator:]

[Operator Instructions]

[Maria Hawthorne:]

There we go. Eric, are you there?

[Eric Frankel:]

I am speaking. Can you hear me?

[Maria Hawthorne:]

Okay.

[Eric Frankel:]

You can?

[Maria Hawthorne:]

Yes, now.

[Eric Frankel:]

All right. I didn't think I was that rude.

[Maria Hawthorne:]

No, I think our service provider had an issue there because we lost our [indiscernible]. All right.

[Eric Frankel:]

I'll just finish my thoughts quickly on this one. I do have one follow-up. Just re-leasing spreads are roughly flat in Dallas and South Florida and you said that rent growth has moderated a little bit there. Do you think your in-place leases are roughly at mark or are they still below market generally?

[John W. Petersen:]

Good question. I think they're still below, and as you looked at that quarter to quarter variability that I mentioned, we did do a larger deal, [indiscernible] square feet in Florida, that was coming off a very, very high rent. And so, like I mentioned at the beginning, from time to time that's going to happen. On the other hand, we did a lot of smaller deals with double-digit rent growth in South Florida. And we are going to continue to capture that and we've by and large taking care of our bigger expirations and vacancies. We got one or two more but our pricing power in South Florida, because there is limited competitive environment there, is much better than the larger deals, say over 30,000 or 40,000 square feet. And in Texas, I would characterize it the same way. So, pricing power with small guys, not as much with the big guys.

[Eric Frankel:]

Right, okay. A final question, it's related to Highgate apartment development. It looks like you are on track to stabilize that in terms of occupancy within the next quarter or so. But by my math, I might get to a stabilized NOI yield of around 5% or so. Let me know if that's incorrect. And it just looks like the fair amount of supply in that pocket, that's no secret, but it looks like it's kind of building a little bit. And I just saw some news about an apartment developer that bought a nearby vacant office building I think right next to the business park at a somewhat low-ish value. That's going to add more supply. So, I'd like to understand better what you think the economics are about building the rest of the park and the timeframe given the economics are okay but not spectacular?

[Maria Hawthorne:]

No. So, Eric, your 5% is low. And that's because during lease-up, there were concessions that we made. And then the lease-up, the increase in occupancy really happened towards the end of May and June, as the summer leasing season took place. So, we haven't really seen yet the benefit of the occupancy that we are showing at the 80%. Then, as for the supply, the other buildings that are under construction are all high-rise, which cost on average anywhere from $60,000 to $85,000 a unit more than it cost us to build Highgate. And then the site that you did mention across the street from us, yes, that will be and it will be at least 3.5 years before that building even opens, but that would be direct competition. And assuming – they are going through their zoning process right now. So, they are in the very early stages of zoning. So, anyway, but that would be the first building and the only one that would actually be direct competition in that the cost to build it would be more similar to Highgate.

[Eric Frankel:]

Okay, thanks. I'll let the other analysts queue in.

[Operator:]

Your next question comes from the line of Brendan Finn from Wells Fargo. Your line is open.

[Brendan Finn:]

So, it looks like you guys had a pretty strong leasing quarter and I was just wondering if you thought any of that was attributable to the passing of the federal budget earlier this year?

[John W. Petersen:]

Good question. Probably not directly attributable. We did have a very solid quarter in terms of production in Washington Metro. Maybe there was some of it, but I wouldn't characterize it as a big push from the passing of the federal budget. We are seeing very good action in terms of tour volume, et cetera, in Washington Metro. So, I mean it's a good economy there, especially for small business as I mentioned. But I wouldn't say anything was directly related to the passing of the budget.

[Brendan Finn:]

Got you. And then just wanted to follow up again on the multifamily asset. So, it looks like it's been or initial occupancy was in Q2 of last year. So, as these kind of one-year leases are rolling off, what are your expectations in terms of a rent change there?

[Maria Hawthorne:]

So, we are beginning to do renewals and we're getting between 3% and 4% increases. Don't have to give the move-in incentives, which in some cases include in free rent. So the effective rents will definitely be going up. And so far we just haven't had a lot, because even though we opened in June, we didn't really get leasing until like August and September. But so far, so good. Most multifamily sees about 50% retention and currently we are running at about 55%.

[Brendan Finn:]

Got you. That makes sense. And then just one last one for me. You guys have talked about marketing the 107,000 square foot Orange County office asset. I guess, how would you kind of describe interest in that and are you expecting pricing to be kind of similar to the previous two asset sales there?

[Maria Hawthorne:]

So, good question. Like I said, we are just actively marketing it, but just based on the number, so we haven't got any offers yet because we haven't done the call for offers yet. That will occur sometime probably in August or so. But there is a lot of interest. We have a lot of tours. And I would expect the pricing to be – it will be less than corporate point but more than of CBC.

[Brendan Finn:]

Got you. All right, thanks guys.

[Maria Hawthorne:]

Yes, not as good as Irvine but better than Santa Ana.

[Operator:]

Your next question comes from the line of Anthony Paolone from JP Morgan. Your line is open.

[Anthony Paolone:]

First question is just on The Mile. Can you remind us, if you are resounding through and everything is successful there, what you end up getting?

[Maria Hawthorne:]

Yes. Currently we have about 651,000 square feet of operating office that's approximately 94% occupied. And then we have got the one building that we are holding for development. That's 123,000 square feet. And I'm doing that from memory, so hopefully that's correct. And so then, so that would convert all-in including Highgate to over 3.5 million square feet of multiuse. But obviously, that's a long-term plan for that office park. That would take at least a decade to implement.

[Anthony Paolone:]

So, just to make sure I understand, the 3.5 million would be the total, so we would just back out the…?

[Maria Hawthorne:]

After full redevelopment. If we did the full redevelopment, I think it's a little over 750,000 feet would turn into 3.5 million.

[Anthony Paolone:]

Okay, got it. So just backing out the 651,000 and the smaller building that's held for redevelopment now?

[Maria Hawthorne:]

Right, correct.

[Anthony Paolone:]

Okay, thank you. And then on your acquisitions, can you talk a little bit about the economics, like current going-in cash on cash return, how much you intend to spend, or I think some of the dock days and things, and then what you think coming out of the shoots with all that done and leased up what the return will be?

[Maria Hawthorne:]

Sure. We don't give guidance, but like I had mentioned, we definitely bought with the in-place NOI in just sub-5, the high-4 cap rate. And then we'll put in about another $6 million, and then that's for demising the spaces. The previous seller did do a good job on most of the rooms to replace, the parking lot is in really good shape, and the buildings themselves are sound and very strong. The docks, both the drive-in and the dock-high, are already in place. So really the expense for us is demising because most of the vacants are in the 20,000 to 40,000 square foot range and we'll demise them into smaller units, which is really what's feasible in that market. And so, we'll do what we have done before. We build little office portion that will be anywhere from 5% to 10%, build out of atrium, the demising wall, separate the utilities, and that like I said all-in will be about $6 million. And once that's done, the asset will be positioned to just lease and go.

[Anthony Paolone:]

And any sense as to like what that high-4s goes to on what I guess the basis goes up to about 150 million with the improvements and kind of where the old goes then?

[Maria Hawthorne:]

Depending on where rent growth goes, we tend to be a little conservative that we'd be at least in the mid-6 cap to maybe approaching 7.

[Anthony Paolone:]

Okay. And [indiscernible] about the other Maryland acquisition that you made in 2016, how is that looking in terms of as you look back, what the return on invested capital is likely to end up in?

[Maria Hawthorne:]

It will be well north of 10%.

[Anthony Paolone:]

Okay, all right. And last question just on the dividend, the step-up was pretty notable. How does the new run rate thus compare with kind of where your taxable net is running, like does it give you some room for a while or is this something we should like you are really starting to bump up against things?

[John W. Petersen:]

Tony, I think that goes into our strategy all along. We try and kind of make moderate increases over time versus big jumps quarter to quarter. And based on what we see and kind of the forecasting of earnings, we think it gives us some run rate for a while. But with kind of some of the tax laws and some of the other things going on and some of depreciation and kind of the mechanics behind the calculation for a REIT, it requires that kind of dividend increase going forward for the next foreseeable probably four to six quarters.

[Anthony Paolone:]

Okay, great. Thank you.

[Operator:]

There are no further questions at this time. I'll turn the call back over to John Petersen.

[John W. Petersen:]

Thank you for joining us today. We appreciate your interest in the Company and we will talk to you on next quarter. Have a good day.

[Operator:]

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