Nov 6, 2007
Executives Ed Stokx - Chief Financial OfficerJoe Russell - President and Chief Executive OfficerJohn Petersen - Chief Operating OfficerAnalysts Jordan Sadler - Keybanc Capital MarketsMichael Bilerman - CitigroupMichael Mueller - JPMorganDavid Cohen - Morgan StanleyOperator Good afternoon. My name is Melissa, and I will be yourconference operator.
At this time I would like to welcome everyone to the PSBusiness Parks Third Quarter Investor Conference Call.All lines have been placed on mute to prevent any backgroundnoise. After the speakers' remarks, there will be a question-and-answer session(Operator Instructions).Mr.
Stokx, you may begin your conference.Ed Stokx Thank you, Melissa. Good morning and thank you for joiningus for the third quarter 2007 PS Business Parks investor conference call.
I amEd Stokx, CFO of the company. With me are Joe Russell, President and ChiefExecutive Officer, and John Petersen, Chief Operating Officer.Before we begin, let me remind everyone that this call willcontain forward-looking statements within the meaning of section 27-A of theSecurities Act of 1933, and section 21-E of the Securities Exchange Act of1934.These forward-looking statements are subject to a number ofrisks and uncertainties, many of which are beyond PS Business Parks' control,which could cause actual results to differ materially from those set forth inor implied by such forward-looking statements.All statements other than statements of historical factsincluded in this conference call are forward-looking statements.
Statements,all forward-looking statements speak only as of the date of this conference call.PS Business Parks undertakes no obligation to update orrevise any forward-looking statements, whether as a result of new information,future events, or otherwise. For additional information about risks anduncertainties that could adversely affect PS Business Parks' forward-lookingstatements please refer to the company's 2006 annual report on Form 10-K.We will also provide certain non-GAAP financial measures,reconciliation to GAAP of these non-GAAP financial measures is included in ourpress release which can be found on our website.Now I will turn the call over to Joe.Joe Russell Thank you, Ed.
Good morning everyone, and thank you forjoining us. I will begin by giving you an overview of Q3 results and our viewof market demand and investment activity.J P will then take you through operations and Ed willdiscuss financial results.
Reported company metrics for the third quarter werestrong and consistent on a number of fronts.FFO per share increased 15.1%. Same park NOI increased 4.3%.Rental rates on executed transactions increased 6.9%, and the company generated$7.8 million of retained cash.User demand and general leasing conditions across the ninemajor market we operate in can be characterized as healthy with landlordfavorable dynamics at hand in the majority of our properties.Smaller users are abundant and aside from someindustry-specific weakness tied to housing, we have seen the typical broadarray of tenet seeking space to move into, renew, or expand in our facility.Leasing volume was good in the quarter, at over 1.3 millionsquare feet completed.
Occupancy improved by 10 basis points sequentially, evenas we continue to push rent growth with both new and renewing tenants.In doing, so we have also been pleased by the consistentretention we have seen this year with each quarter above 60%. Still, we are notimmune from some of the drivers potentially impacting economic conditionsprimarily as a result of the weakening housing and credit industries.We are particularly focused on the Orange County officemarket, where a higher than average concentration of sub-prime lenders existed,coupled with new office starts.We expect office market statistics to soften here in theform of higher market vacancies and higher concessions.
Landlords operatingclass-A office buildings have become more aggressive as they attempt to leasethe inventory vacated by sub-prime and housing related users along with theapproximately 3 million square feet being delivered to the market.The direct impact to our own flex portfolio has been limitedas industrial statistics in Orange County are much stronger with currentvacancy of 2.9% and third quarter positive net absorption.For sometime we have intentionally limited our exposure tomortgage brokers and title companies and continue to monitor the health of anyexisting tenants that have ties to this industry segment.Current PSB occupancy in Orange County is 93.8%, and we arestill seeing good leasing activity coupled with limited new flex product underconstruction. On the East Coast, the market we are tracking closely is theDulles corridor in northern Virginia.For several quarters, we have spoken about the wave of newspec construction occurring here with the potential to create volatile fee fromthe wave of new class-A inventory hitting the market over the next year.
Thusfar we have been able to deflect any impact from the approximately 6 millionsquare feet in production, primarily due to our focus on multi-tenantproperties with the bulk of these new buildings do not easily support.Unlike Orange County this market posted positive netabsorption remains well diversified. Economic vitality is especially evident innorthern California, Florida, Los Angeles, Dallas, Austin, Seattle, and metropolitanDC, where 74% of our portfolio resides.The positive trends created by employment growth, strongcorporate earnings, landlord favorable market conditions, and littlecompetitive spec construction especially an infill locations has facilitated healthymarket conditions, which give us the ability to keep occupancy strong alongwith good rent growth and easing concessions.Small users are in good supply across all of our markets,and we remain focused on sourcing the majority of our transactions below 5,000square feet.
On the investment front, as previously discussed, PSB closed a $25million, 125,000 square foot multi-tenant office park in Fairfax, Virginia inearly August.Subsequent to that acquisition we did not purchase anyadditional properties. Recently, we have seen fewer quality assets enter thesales markets.
A number of sellers, however, may have ownership structures thatrequire them to sell more immediately and into today's less frothy dispositionarena.There are also fewer buyers chasing dailies but capital isstill available and transactions are taking place at or near the historical lowcap rates we have seen over the last two years. We expect some softening of caprates, however, but it is unclear what adjustments will take place.We are keeping our powder dry in an effort to capture betterprice acquisition opportunities with PSB's strong balance sheet that will allowus to stay nimble and well positioned as investments become more challengingfor less capitalized buyers.With lenders tightening their underwriting and equityrequirements increasing, the days of competing against the buyers with low-costloans who operated with a strategy of aggressively deploying capital appear tobe over, at least for now.
We feel this puts us 18 stronger position todistinguish ourselves, as our balance sheet and cash position are morecompetitive.PSB's current cash balance is approximately $70 million witha conservative debt and preferred equity to total capital ratio of 35% and afixed charge ratio of three times.Now I will turn the call over to JP.John Petersen Thank you, Joe. Now let me take you through some moredetails on market conditions and our own performance.
Operating fundamentalswere solid across most of the market in which we operate and overall conditionscontinue to favor the landlord.Miami, Los Angeles, northern California, Austin, andSeattle, all continue to show solid landlord fundamentals in the form of risingrents, positive absorption, and lower concessions. Northern Virginia andMaryland remain balanced markets with both increasing rents and positive netabsorption during the quarter.In Texas, we are seeing positive signs in terms of dealactivity and slightly increasing rents.
This is particularly significant sincethe Texas market has one of the slowest markets to show rent growth over thelast several years.Portland will show flat net absorption continues to beprimarily a tenant's market, as competition for users remains fierce. As Joementioned, portfolio occupancy increased to 93.2%.
Strong occupancy gains wererealized in Texas up 240 basis points to 90.2%, and northern Virginia, 120basis points and 94.9%. Northern California increased 150 basis points to90.07%, and San Diego gained 150 basis points to 95.5%.In Portland, occupancy slipped 340 basis points from thesecond quarter primarily due to the loss of four tenants due to businessfailures during the quarter.
We have sips released nearly 20% of the spacevacated. In Miami, occupancy adjusted down due to downtime resulting fromexpirations by 120 basis points to a still healthy 97.7%.In the third quarter, we realized solid rent growth of 6.9%.Miami once again saw the largest rent growth with 12.6% growth over expiringrents.
Northern California rents grew 10.5% and Portland, Maryland, LosAngeles, Northern Virginia, and Orange County were all up at least 5%.Leasing volume for the quarter was again robust as wecompleted over 1.3 million square feet. Solid velocity occurred in Florida with377,000 square feet and Southern California with 273,000 square feet.
Texas wasproductive again with 181,000 square feet and in Northern California 174,000square feet of deals were completed.As far as the size of our lease transactions 83% were smalltenants below 5,000 square feet with an average term of 2.6 years. In total, wecompleted 394 deals with an average size of 3,300 square feet and an averageterm of 3.3 years demonstrating that small users remain active across ourmarkets.
Customer retention was 61.6% for the quarter. Standouts were Texas,80.4%, Washington metro 69.7%, and Florida, 60.7%.Now I will turn it over to Ed.Ed Stokx Thank you, JP.
Reported FFO per share increased 15.1% forthe three months ended September 30, 2007, to $1.07 per share, or $31 million,on revenues of $68.7 million, compared to FFO of $0.93 per share or $26.8million on revenues of $61.8 million for the third quarter of 2006. Thirdquarter 2006 FFO included non-cash distributions of $1.4 million related to apreferred equity redemption.Excluding these non-cash distributions, thequarter-to-quarter increase in FFO per share was 9.2%.
Reported same park NOIfor the third quarter increased 4.3% over the third quarter of 2006. Theincrease in NOI is attributed to an increase in annualized realized rent persquare foot of 3.5%, offset by a modest increase in our operating expenses of1.2%.The company's gross margin improved to 69.6% for thequarter, compared to 68.9% for the third quarter of 2006.
Funds available fordistribution for the three months ended September 30, 2007 were consistent withthe same period of 2006 at $20.4 million, primarily due to the timing andvolume of recurring capital projects and tenant improvements.The company's FAD payout ratio was 61.7% for the thirdquarter of 2007 compared to 40.7% for the third quarter of 2006. The thirdquarter FFO payout ratios were 40.7% and 30.9% for 2007 and 2006 respectively.The higher FAD and FFO payout ratios during the quarter are a result of the51.7% increase in the company's quarterly dividend to $0.44 per share.For the first nine months of 2007 FFO was $90.6 million, or$3.13 per share on revenues of $201.5 million, compared to FFO for the sameperiod of 2006 of $78.8 million, or $2.72 per share, on revenues of $180.1million.
Included in FFO for the nine months ended September 30, 2006 werenon-cash distributions of $3 million related to preferred equity redemptions.Excluding these non-cash distributions, the year-to-year increase in FFO forthe nine-month period was 10.6%.Recurring capital expenditures for the nine months endedSeptember 30, 2007, were $26.1 million, or $1.35 per square foot, compared to$22.7 million or $1.27 per square foot incurred in the same period of 2006. Thepace of capital expenditures will vary from quarter to quarter depending on thetiming of leasing activity, as well as ongoing capital projects.Free cash generated during the nine-month period endedSeptember 30th, 2007 was $33.3 million, compared to $34.3 million generatedover the same period of 2006.
As of today, the company does not intend tonotify the holders of the 7.95% series G preferred units of its intent toredeem such.The company will continue to monitor its use of cash and thepreferred market to determine when or if the series G should be redeemed. As wehave previously discussed, we have a 134,000 square foot tenant in northernCalifornia that from time to time has been in default of the terms of theirlease.This customer has recently completed a restructuring of itsownership and has paid all past-due amounts.
We are working with the newownership to reinstitute all other existing provisions of their lease. Weanticipate this customer will restore full compliance of all other lease obligationsin the fourth quarter.With that we will open the call for questions.Question-and-Answer Session Operator (Operator Instructions) Your first question comes fromJordan Sadler with Keybanc Capital Markets.Jordan Sadler - Keybanc Capital Markets Good morning, guys.Ed Stokx Hi, Jordan.Jordan Sadler - Keybanc Capital Markets Joe, in your opening comment, you actually described themarket is healthy, with landlord favorable dynamics.
And I was curious, if you couldmaybe just give us a real-time update and let us know if you're seeing anyhesitance at all by tenants or if you saw any hesitancy for people to commitcapital and take space.I know you're focused on smaller users, but were they I meannot focused on what was going on in the capital markets I think during thesummer and late summer and even through today?Joe Russell I wouldn't take it as that, Jordan. What I'm talking to isthe fact that, again the market statistics and the areas in which we compete inwith a small user base, the competitive properties we deal with, use that we’recatering to they are in a situation where still a very limited amount ofcompetitive product in order to choose to continue occupancy whether it's inour particular location or a competitive location.By virtue of that, I would say, as I did, the markets ingeneral have a bias toward landlord favorable conditions.
There's no questionwith the economic events at hand and the negativity around credit markets andhousing statistics, people are probably looking at being more cautious and oursmall tenant guys aren't immune from that caution.But the reality of what they are dealing with as they go tolook for space or renew space, expand space, it's still a landlord favorableenvironment in many of our markets and that condition has not changed, evenwith some of the volatility tied to the overall economic environment tied tocredit and housing.Jordan Sadler - Keybanc Capital Markets So if you were to characterize the velocity of demand thattrended over the quarter and even into today, how is that is it the sametrajectory high or lower?Joe Russell It's on par. And you can see that from the way that we’vereported numbers each of the three-quarters this year.
Where quarter-to-quarterwe've kind of been in a range of say 1.2 to 1.3 to 1.4 million square feet aquarter of leasing activity.Again Q3, which honestly, during the summer months can be aslower quarter for us, we were pleased by the amount of activity that we sawas, again, we took down 1.3 million square feet of new leasing.And as J P described, it was balanced across many markets.It wasn't heavily wetted one area versus another and by virtue of that we'repleased again by this velocity that's still there. And we're keeping a closeeye on how that relates to any specific tenant, particularly depending ifthey're in any industry that has a tied housing or they are for whatever reasonsubject to some of the economic events going on.But you still can't ignore the fact that, again,economically there's employment growth going on, there are, as I mentioned,strong corporate earnings, the service sector in the economy at large appearsto be in pretty good shape, and again that's reflective in the type of tenancythat we have.Jordan Sadler - KeyBanc Capital Markets That's helpful.
Ed, can you maybe is there anything going onin the Same Park revenue of 3.3% this quarter year-over-year? It seems to bemoderating a little bit from the growth seen over the prior two quarters.Anything to make of that, or should we expect the previous sort of trend there?Ed Stokx I would characterize it, as a fairly normal clean quarter interms of unusual activity there really was none during the quarter.Jordan Sadler - KeyBanc Capital Markets Okay.
There's just tougher comps year-over-year as you guyscontinue to grow, that is resulting in that moderation, good way to think aboutit?Ed Stokx Yes, and then if you look at the from a full yearstandpoint, nine-months standpoint, remember as well that we had some unusualnon-recurring items that we recorded in the early part of 2006.Jordan Sadler - KeyBanc Capital Markets Okay. And then on the asset in Northern Fairfax, was the caprate in the range of similar stabilized acquisitions you guys had done andmaybe what's the opportunity there?Joe Russell Yes, and that transaction, Jordan, from an occupancystandpoint was a little unusual in some of the more recent deals we'vecompleted.
In that it's virtually a 100% occupied, and it's got some decentrollover over the next two years, with in place under market rents.And again, it's adjacent to 165,000 square foot asset webought about three years ago. So that, coupled with the fact that we're seeinggood overall statistics out of that particular sub market, we're encouraged bywhat we're going to be able to do with that, again, over the next two to threeyears.Jordan Sadler - KeyBanc Capital Markets And then lastly, Joe, if you said you're keeping your powderdry in hopes of capitalizing any opportunities.
Anything special we should lookfor out of you outside of the singles and doubles you've been hitting over thecourse of the last several quarters? Any new types of opportunities that mightbe available out there?Joe Russell Yes.
As you know, Jordan, it's hard to peg what kind of dealmight come into play. Relative to, again, is it a single or a double or itmight be something more portfolio oriented and larger in nature and we’ve gotthe capacity to consider all those types of transactions.And I'm encouraged by the fact that again, with credittightening and fewer traditional I wouldn't even call them traditional.
Fewerrecent type buyers that we've been competing against that had, honestly, tooeasy access to capital, with that out of the market.And, again, with our ability to consider either one-offs, orthe larger transactions, what we feel pretty encouraged by what could comeabout as things play out here over the next year or so. And we'll see.Jordan Sadler - KeyBanc Capital Markets Great.
Thank you.Joe Russell You bet.Operator Your next question comes from Michael Bilerman fromCitigroup.Michael Bilerman - Citigroup Hi guys, Ed, you talked about capital costs and how it'sbeen affected by timing. When you look at the full nine-months on a per squarefoot basis you're up about 6% year-over-year.
You ended last year just around$1.90 a foot.How should we think about the full year this year? Should weexpect it to be up, or is there going to be some moderation in the fourthquarter?Ed Stokx Certainly the timing is an impact or does impact us in termsof the levels.
In terms of trends, if you took our full nine-month numberthat's probably a better indicator of the direction that we're going versus,what might be characterized as a little bit of a spike in the third quarter,just primarily due to timing. So, I would encourage you to look at the nine-monthaverage versus three months.Michael Bilerman - Citigroup So you think that we're you're going to probably a hit northof $2 a foot for the year, using that sort of math?Ed Stokx Potentially, I think that if you use that math you'regetting to a decent trend.Michael Bilerman - Citigroup Okay.
Thinking about next year, given your shorter leaseterm, you obviously have a fair amount of space rolling, about 22% of theportfolio roll next year, a big chunk in Southern California and NorthernVirginia, can you just give us maybe some insight into some of the roll nextyear, how you feel about it, where you see rent rollovers trending in terms ofjust getting some comfort with next year's roll?Joe Russell Sure. Yes, Michael.
The roll over that we've got ahead of usin 2008 is really no different from an average standpoint of what we deal withyear in and year out, and for the most part we're looking for opportunities asthat comes back to us.Southern California we've got about 26% of expiring rentsthere, and, it's tied to 1 million square feet of properties, and about a thirdof that is in Orange County, and the rest of it is in L.A. County, San Diego.And as I mentioned, Orange County in particulars an areawhere we're keeping really close track of, especially because of the dynamicgoing on with office.
But, our portfolio doesn't just compete with office. Infact, you know, because of its flex nature, we get a lot of users that franklydon't want an office environment.They would prefer to have something more from a combinationstandpoint whether it's more industrial oriented or a smaller component ofoffice, and the nature of that entire roll in Southern California is smalltenant.And I think we've got in Orange County, for instance, threetenant situations above 10,000 square feet.
So we're not going to be outcompeting against the likes of, Ameriquest vacancy or a New Century vacancy orone of these new Office deliveries, because frankly, our tenant base is goingto both want to spend the money to go into one of those buildings or they'renot going to need the size that it would take to move into one of those newbuildings.So, it's the tried and true small tenant, flex roll orenvironment that we deal with on a year in and year out basis, and we'reconfident we can move through it, migrate through it, and we're looking forwardto what's ahead of us there. And then Virginia is the other mark you mentioned.Michael Bilerman - Citigroup Yeah.Joe Russell Virginia, again, we are keeping a close eye on that Dullescorridor.
We're not heavily tied to that sub market. We do have some productout there, but again, we're much heavier concentrated closer to the beltway,and we've got, again, I think good dynamics ahead of us, whether it's inSpringfield or Maryfield, and we have, I think we've got some goodopportunities ahead of us as we look at that rollover.Michael Bilerman - Citigroup When you think about where rents are, I guess throughoutthis year you've sort of been up 5 to 7% on rollover.
When you look at wherethe market is today and where the expires are occurring in ‘08, in what, giveus a little bit more color on where you see that trending?Joe Russell Yeah, I mean, it's going to vary, as it always does, marketto market, and, again, I would say, as J P talked, we saw in Orange County,let's start on one end of the spectrum to another, even this quarter we saw 5%rent growth in Orange County, could that soften a bit?Sure, with again the things we're talking to in keeping aneye on, but to counter balance that we've still got I think good opportunitiesin markets that again are still, strong you've got Northern California,Florida, as I mentioned, Virginia, Maryland, and, again, we're thinking we'vegot good opportunities as not only we're coming off of deals that may have beensigned anywhere from, say, two to five years ago, but, conditions are still,not detrimental to the landlord. We can still figure out ways of improvingrental rates.Michael Bilerman - Citigroup Right.
And thinking about use of capital you said you wouldwant to maintain dry powder for acquisitions?Joe Russell Yes.Michael Bilerman - Citigroup You haven't bought back any stock this year. You look atyour stock being down 20% for the year, trading upwards of high seven's,implied cap rate, why not use some of that powder in something thatyou know the best?Joe Russell Well, again, that is an opportunity and an alternative inthe variety of things that we look to do from a capital allocation standpoint,and we have authorization today, it's 1.2 million shares to do stock buybacks.As you mention, we haven't done them this year, but again,we'll see how the mix of opportunities play out and how, again, we want to useany of our existing cash balances or capital structure to do something likestock buybacks.
Then again, balance that with everything else that we'reconsidering.Michael Bilerman - Citigroup I'm just wondering why, with such a high implied cap rate onyour existing portfolio, I think it would be pretty hard to find acquisitionsat a 7.7, 7.8 implied cap, with the growth that you see in your own portfoliothat you can underwrite.Why wouldn't that be a great alternative today to putcapital to work? I'm also wondering why you haven't been able, why you haven'tdone it yet?Joe Russell Well, again, we have done it.
We haven't done it in calendaryear 2007. We've always balanced it with what other investment alternatives wehave.
We've found good opportunities to grow the portfolio which maybe we don'tget that initial yield at the 7, 7.5, but we're pretty confident we can getthat if not more traction as we migrate into these opportunities and are ableto reposition them and get good growth out of them from that direction.Again, it's certainly it's an alternative on the table, it'sone we look at, but we'll see how it plays out as different alternatives playout.Michael Bilerman - Citigroup And it sounds like there's nothing on the acquisition frontthat you're looking at right now?Joe Russell No, I haven't said that at all. I think the, there's nothingthat we closed through the third quarter, and other than the Fairfaxopportunity that I talked about, but again, we're confident that there willlikely be more opportunities going into the relatively near future, whetherit's in the next few quarters, based on again, this credit volatility that'sout there, and as always, we enjoy the fact that we are nimble, we've got agreat balance sheet, and we can move very, very quickly for the right kinds ofopportunities, and we'll see how that plays out.Michael Bilerman - Citigroup Okay.
Thank you.Joe Russell You bet.Operator Your next question comes from the Michael Mueller withJPMorgan.Michael Mueller - JPMorgan Hi. Question's been answered.
Well, actually, kind of goingback to the acquisition question. Q4 has typically been a pretty good quarterin terms of closing deals.
Should we expect anything to close this quarter?Joe Russell Again, Mike, you are right, in the context that it hasn'talways been a great quarter, but things can happen relative to sellers needingyear-end closings and things lake that. I think the thing that is differentabout what appears to be happening in the investment market today there's beensuch a negative reaction to the lack of capital available, again, to thesebuyers that have had such easy access that frankly many sellers are hesitatingto take properties to the market right now.So there's a little bit of a different mix and a differentoverhang in the investment arena because of that right now, and again we'll seehow things play out, but I would say that's one thing that is a littledifferent based on maybe a traditional fourth quarter environment, andalternatively, though, we'll see how both that plays out and then how thingstranspire into 2008 where if, for whatever reason, sellers are hesitating tobring product to market this quarter.I think there are still going to be a number of situationsthat will need to get brought to the market, and maybe they get deferred into2008, but again, we are pretty confident we can be a sensible buyer with maybeeven better opportunities because the competitive arena is just not the same.Michael Mueller - JPMorgan Okay.
You kind of touched on this, but going back to leasingspreads again, is it safe to say that based on what you see now, you'rethinking that the spreads on new leases will be comparable to what you'reseeing in '07, as you move out to '08?Joe Russell Well, as you know, we don't give guidance, but the thingthat's I think beneficial to our portfolio is we've got a good amount of marketdiversity. If you look at our nine or so major markets, and one, two, or threeof those markets are softening we've still got the advantage of others eitherstill staying in good check or maybe even getting stronger.Even a market as JP talked about like Texas, and, which hasbeen deflated and a sub performer for quite sometime, and finally the marketdynamics and the overall economic drivers in an Austin or a Dallas or even tosome degree a Houston are stronger and you're coming off still pretty low basisas far as rent growth, or rent levels to help drive better rent growth.So the mix is helping us, and we're pleased by that mix, andit's one of the benefits of not only having the combination of the smallertenant orientation and the lack of any real meaningful spec competitiveactivity in the spec arena, or in the flex arena, but I would say the crosspollination of various markets and it's helping us.Michael Mueller - JPMorgan Thank you.Joe Russell You bet.Operator Your next question comes from David Cohen with MorganStanley.
David Cohen - Morgan Stanley Good afternoon. Just a couple of follow-up questions.
You'vetalked about, obviously this is a landlord's environment still, but are you guyspreparing internally for an economic slowdown?I guess, what I mean is do you have the ability to kind ofextend lease terms a little bit longer even if they're still short, or are youprepared to kind of give a little bit on rents or concessions over the nextcouple of quarters just to make sure that you're well occupied going into aslowdown, and how early can you kind of address some of the leases that arerolling next year? Joe Russell Okay.
Yes, it's a mix, David, quarter-to-quarter we'll doanywhere from say 350 to 400 lease transactions. By virtue of that we have ourhands on all of our markets, and we can react very quickly.We can adjust, and we can do a number of things that eitherare tailorable to our reaction to blow by blow market changes, whether itrelates to a lease term, either extending or shortening, or a concession levelor things like that, and, yes, we'll make those adjustments and we react tothem, and that's one of the benefits of our structure.I think, as you know, all of our leasing people and ourmarket officers are in their markets, they're on the properties, each and everyday, and we do a high percentage of our own lease transactions.
So we can senseand react to the range of changes that go on in any given market at any giventime, and what our goal is, is to make sure we're interpreting that on adeal-by-deal basis and we understand what the dynamics are.When it's a new lease, a renewal, an expansion, any of thosekinds of things, and again this model is tied to smaller users, and weunderstand them well, we understand the things that are driving theirbusinesses, we stay close to those users, and again, one of the things we'retrying to do for instance, right now in Florida is we are trying toget longer terms there, and we like the rent levels we're achieving there andthe market statistics are as strong there as they've ever been. Again, this isright at MICC at the Miami airport.It's a good time to try to get as much term as possible.Alternatively, if you're having a little bit of a softness in another marketand it's deal by deal an advantage maybe to go a little bit shorter term on aparticular transaction, when you're weighing the advantage of keeping a tenantversus potentially losing one we can react to that very quickly.There's a whole host of things we do week by week as we'reworking with our leasing volume but again, we're built to handle that, and weall stay very close to it.
David Cohen - Morgan Stanley Okay. And just back to potential acquisitions, you said thatyou expect some softening in cap rates.
What can you put some kind of a finerpoint on that in terms of how much you think cap rates have shifted and talkabout each of the asset classes, which you expect to shift most and how muchgets you more excited to do kind of larger portfolio acquisitions? Joe Russell Yes, okay.
It might be a little bit difficult tocompartmentalize it across the portfolio, but as I mentioned you got cap rates,no surprise, have shifted and my sense in general is anywhere from 25 to maybe75 basis points. Again, across a pretty wide variety of both markets andproduct type.I would say it's been less of a shift as you go to a smallerasset in combination with a strong location.
In fact, even in the thirdquarter, we were very surprised to see some well located and well occupiedassets trading at these very historical cap rates where you could argue thatthere really hasn't been a shift.Now alternatively, as you get maybe into a bigger sizeacquisition, I would say there's probably more of a cap rate shift there andagain, I think that's just an indication that the buyers that are going tochase those deals don't have that easy access to capital.On the lower end, say a $10 million to a $20 millionacquisition, a lot of times you're dealing with buyers that have easy access tocapital because they maybe cash buyers, or they're doing trades, or againthere's a different dynamic with the way that they're structuring thoseacquisitions.The bigger portfolios I think are going see a little moreimpact and frankly, there just hasn't been enough data points or enoughtransactions taking place, say through mid summer through today that I thinkany of us know exactly what reduction is at hand but it definitely feels likethere is one.David Cohen - Morgan Stanley And which are there other new markets that you guys haven'tdiscussed that you would consider entering at this point?Joe Russell The markets in which we operate in, especially like the ninemajor markets, we feel like we've got very strong opportunities to continue togo deeper. The majority of our focus ties to that and looking other things thatwould prompt to us enter a new market beyond good diversity, good economics,opportunities over time, stronger barriers to entry, things like that isfrankly, just a big enough beachhead for us to establish our own operatingteam.And more often than not that's a tough thing to achieve.
Andwhat we're more focused on doing is just going deeper into either existingmarkets or sub-markets, and we feel like we've got great opportunities tocontinue to do that.David Cohen - Morgan Stanley And just last question your margins increased nicely thisquarter. Say something that you think can be sustained or is that based onone-time items?Ed Stokx Yes, we feel pretty good about where our margins are thisquarter.
We think it's a good indicator of where the portfolio is kind ofleveling at in terms of what the right margin level. It's been impacted overthe last several quarters by higher costs, we had higher repairs andmaintenance, higher insurance, and other things in the past, utility costs thathave impacted that, but we believe that we're starting to see some stabilizingin that area.David Cohen - Morgan Stanley Great.
Thanks.Joe Russell Thanks, David.Operator Your next question comes from Michael Bilerman withCitigroup.Michael Bilerman - Citigroup Just had a two quick follow-ups. Ed, you mentioned thistenant in Northern California is now doing all their payments.
Is there anyfourth quarter accounting impact for the catch-up?Ed Stokx No, they're current and we don't have any third quarter orfourth quarter impact from them from a financial standpoint.Michael Bilerman - Citigroup Okay. I think Joe, in your opening comments you mentioned$70 million of cash.
Balance sheet has 57 at quarter end is there? Are youincluding something else?
Ed Stokx He's just giving kind of a current cash balance based onactivity subsequent to September 30th.Michael Bilerman - Citigroup So, how do you get $13 million more cash?Ed Stokx Just retain cash from rents billed for October and rents billedfor November.Michael Bilerman - Citigroup Prior to the dividend payment I guess?Ed Stokx Yes.Michael Bilerman - Citigroup You expect it to come back down? There hasn't been any assetsales or anything one-time in nature?Ed Stokx No, that's just current cash balance based on where we standtoday.Michael Bilerman - Citigroup Okay.
Thank you.Ed Stokx You bet.Operator Your next question comes from Michael Mueller with JPMorgan.Michael Mueller - JPMorgan Hi, where could you guys price preferred stock today, if youwould?Ed Stokx Mike, we're being told that the market is probably for us inthe 7 3/4 to 7 7/8 range is wherewe'd probably place capital today.Michael Mueller - JPMorgan Okay. So, that's why the fees are staying outstanding eventhough it's only $20 million bucks?Ed Stokx Yes, exactly.Michael Mueller - JPMorgan Okay.
Thanks.Operator There are no further questions at this time.Ed Stokx Okay. Thank you Melissa.
We would like to thank everyone forjoining us, and we look forward to talking to you at the fourth quarterconference call. Thank you.Operator This concludes today's conference call.
You may all disconnect.