Mar 6, 2008
Executives Edward A. Stokx - Executive Vice President, Chief Financial OfficerJoseph D.
Russell - President, Chief Executive OfficerJohn Petersen - Executive Vice President, Chief Operating OfficerAnalysts Jordan Sadler - KeyBanc CapitalIrwin Guzman and Michael Bilerman - CitiRich Anderson - BMO Capital MarketsDavid Cohen - Morgan StanleyOperator At this time, I would like to welcome everyone to the PS Business Parks fourth quarter investor’s call. (Operator Instructions) I would now like to turn the conference over to Mr.
Ed Stokx. Edward A.
Stokx Good morning and thank you for joining us for the fourth quarter 2007 PS Business Parks investor conference call. I’m Ed Stokx, CFO of the company and with me are Joe Russell, President and Chief Executive Officer; and John Petersen, Chief Operating Officer.Before we begin, let me remind everyone that this call will contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.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 the actual results to differ materially from those set forth in or implied by such forward-looking statements.
All statements other than statements of historical facts included in this conference call are 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 company’s 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 our press release which can be found on our website.Now, I will turn the call over to Joe.Joseph D.
Russell Good morning and thank you for joining us. I will begin by highlighting PSB’s Q4 results with some perspective on full-year 2007 performance.
I will then discuss our investment posture and conclude my remarks by reviewing the overall environment we are seeing today and how PSB is positioned going forward. JP will then go on to more detail on the quarter along with our operational focus for 2008.
Ed will then review our financial results and metrics, and we’ll open the call up for your questions.PSB’s fourth quarter results were characterized by solid growth in NOI, which was increased on a Same Park basis by 4.4%. With an occupancy gain of 70 basis points from a year ago, and 100 basis points from last quarter, we are pleased by the leasing velocity and traction tied to our markets mixed with the vitality within our small user base.For the full year, Same Park occupancy improved by 40 basis points with NOI up 3.5% and FFO up 10.4% net of D-42 costs.
Our leasing teams completed 5.2 million square feet of deals in over 1600 separate transactions. As we like to remind you, there are consistently far more small users in any given market than large users, and by focusing on this user group in each of our markets, we have better opportunities to capture transactions and raise occupancies above market levels.
Furthermore, spec construction of flex product is muted especially in better-located higher barrier to entry submarkets that we compete in. We see even more evidence today that a small tenant strategy will serve us well as we go forward and we typically reconfigure larger spaces within the portfolio to support our efforts.
Specifically and intentionally, PSB’s lease transaction size continues to shrink, as the average lease transaction in 2007 was 4200 square feet, down from 4700 square feet in 2006 and 4300 square feet in 2005. Small space is our specialty and we are pleased by the opportunities we are capturing in this segment of the market.Now to our perspective on the investment arena, this quarter, and basically for the second half of 2007, we saw few attractively priced assets, as owners have been reluctant to sell properties into an investment arena where cap rates are less predictable and credit availability has shrunk.
Our sense is that there may be stagnation in the flow of transactions for some time, particularly in larger portfolios that more recently could actually command a premium for multiple bidders. We will be patient as pricing expectations are reset while also looking for unusual situations brought about by the dislocation in the credit markets.
As you’re aware, our balance sheet is quite strong and we have not been shy about using it when particularly attractive opportunities arise.As we entered the fourth quarter, our cash balance was approximately $75 million. And we saw the value in repurchasing PSB shares.
As we’ve previously discussed, stock buybacks have been and will continue to be one option among other capital allocation alternatives that we will evaluate. As we weighed the inherent value of PSB shares compared to current investment alternatives, we saw better returns tied to our own equity.
Through the fourth quarter and into this year, we’ve acquired approximately $50 million of our common stock.Now, I’d like to discuss the operational and investment environment we see going into 2008. We are keeping a close eye on the pace and nature of leasing activity market-to-market, particularly where there has been more stress tied to local economies with an over-dependence on housing and/or markets with an abundance of spec commercial construction.In our case, Orange County and the Dulles Corridor in Washington DC are the two sub-markets we continue to monitor closely.
Market conditions for office users are very competitive and will likely stay that way until meaningful absorption takes place. Many of the vacant buildings are Class A in nature and are tailored toward large tenants.As PSB’s fourth quarter and full year 2007 results show, leasing demand from small users is widespread even in these tougher markets.
We have seen larger users taking more time to seek space while also negotiating transactions more aggressively as they typically source new locations several months in advance. On the flip side, our tried and true small tenants have much shorter decision timeframes and may have a more fundamental need for our type of space due to its location or fit to their particular business.
Also as some caution plays out in all decisions to lease space of any size, we may have an ability to retain larger number of our tenants as they are more conservative and less eager to grow their businesses. Our goal is stay focused on our base of nearly 4000 users to leverage retention wherever possible.So how might a portfolio like PSB’s perform in an environment of economic uncertainty?
First, we are confident our small user focus will provide an abundance of alternatives and potential tenants since there is always more activity in this segment of the market. The flex nature of our properties can support a large range of users giving us an ability to source tenants from a broad pool.
Second, we are well diversified from a market standpoint, and a majority of our markets has attractive occupancy and rent levels. The markets are in far better shape than they were when the last down-cycle occurred as new construction is limited and current market occupancies are quite healthy.Third, and perhaps most importantly, our experienced team of leasing professionals are savvy dealmakers that are well equipped to maneuver through whatever economic conditions are at hand and continue to outperform each of their respective markets.
And finally, we have had a bias to utilize our powerful balance sheet, financial leverage and retain cash when investment markets are in flux. As credit continues to tighten and some owners face difficult decisions to sell into an environment with far fewer qualified buyers, we are confident attractive opportunities will surface.
Due to these factors, PSB is in an excellent position to capture opportunities as today’s economic uncertainty unfolds.Now, I’ll turn the call over to JP.John Petersen I’ll start with more specific information on market conditions. By and large, real estate fundamentals remained stable across the majority of our markets throughout the fourth quarter.
Net absorption, while less than previous quarters, was flat or positive in over 60% of our markets. San Diego, Orange County, Seattle, Silicon Valley and the East Bay all realized slight negative absorption of less than 100,000 square feet during the quarter.On balance, these markets are still in relatively good shape.
As Joe mentioned, we had an active quarter as evidenced by a number of metrics. In terms of net absorption, occupancy increased 100 basis points from the third quarter to 94.2% for the total portfolio.
Occupancy increased 440 basis points in Dallas to 91.1%, Seattle increased 240 basis points to 91.2% and Northern Virginia increased 100 basis points to 95.9% while Orange County raised occupancy by 40 basis points to 94.2%. There were two markets that slipped in occupancy during the quarter; Portland dropped 50 basis points to 86.4% and Los Angeles dropped by 10 basis points to 96.3%.In the fourth quarter, our new rents grew over expiring rents in 10 of our 12 markets.
Rental rates grew by 3.5% overall. For the full year, rents grew by 5.8%.
We continue to see improvement in Texas with rents increasing by 8.5%. Miami rents increased by 8%, and Los Angeles and Orange County grew by 7.9% and 7.6% respectively.Additionally, leasing volume was robust with over 1.3 million square feet coming from 420 transactions.
As is consistent with our strategy, the average deal size was 3,100 square feet for the quarter and 3,200 square feet for the full year. The average term was 3.3 years for the quarter and 3.4 years for the year.
Retention was 61.5% for the fourth quarter and 62% for the year. Our focus on the customer continues to pay off with our Washington DC metro team leading the way at 65.2% retention for the quarter and a strong 74% for the year.
Also posting solid retention numbers were Texas, 63.6% for the quarter and 71.4% for the year. Looking into 2008, our teams will continue to be focused on cultivating, driving our core small customer portfolio, aggressively marketing, and subdividing our larger vacancies.
We have a normal expiration schedule of 3.9 million square feet or 20% of the portfolio expiring in 2008.From a revenue standpoint, 2008 lease expirations reflect the diversified nature of the portfolio. Northern Virginia had 17.8% of revenues expiring, followed by Northern California at 15.2%, Texas at 13.1%, Orange County at 9.1% and Los Angeles at 8.8%.In terms of product types, 66% occurred in our versatile flex properties, 18% in our industrial portfolio and only 16% in office properties.As far as our strategy in tackling our larger exploration in 2008, let me talk about how we are handling a large exploration in Portland.
Intel occupies three buildings totaling 120,000 square feet expiring April 30, 2008, and will be consolidating into own facilities. As we have with other large vacancies, we are already in the process of subdividing the space into smaller suites, and to date, we have pre-leased 43000 square feet or 36% of the upcoming vacancy.
I’m confident our geographic and product diversification combined with our strategy of continuing to break down larger spaces into smaller spaces will position us well in 2008.And finally, as we have previously discussed the fact that a 134,000 square foot tenant in Northern California had from time to time been in default with the terms of their lease, this customer is currently in full compliance with all provisions of its lease.And now, I’ll turn the call over to Ed.Edward A. Stokx Reported FFO per share increased 15.8% for the three months ended December 31, 2007 to $1.10 per share or $31.8 million on revenues of 69.8 million compared to FFO of $0.95 per share or $27.5 million on revenues of $62.6 million for the fourth quarter of 2006.
Included in FFO for the fourth quarter of 2006 were non-cash distributions of $1.7 million related to a preferred equity redemption. Without these non-cash distributions, FFO increased 8.9%.
Reported Same Park NOI for the fourth quarter increased 4.4% over the same period of 2006. The company’s gross margin remained consistent quarter-to-quarter at 70.1% as we experienced a modest increase in property tax and utility costs.Funds available for distribution for the three months ended December 31, 2007 were $21.4 million compared to $18.3 million in the same period of 2006, an increase of 16.9%.
The company’s FAD payout ratio was 58.8% for the fourth quarter of 2007 compared to 52.3% for the fourth quarter of 2006. Fourth quarter FFO payout ratios were 39.5% and 30.2% for 2007 and 2006 respectively.
The higher FAD and FFO payout ratios during the quarter are a result of the 51.7% increase in the company’s quarterly dividend of $0.44 per share which took effect in the second quarter of 2007.For the year-ended December 31, 2007, FFO was $122.4 million or $4.23 per share on revenues of $270.8 million compared to FFO for all of 2006 of $106.2 million or $3.67 per share on revenues of $242.2 million. Included in FFO in 2006 were non-cash distributions of $4.7 million related to preferred equity redemptions.
Excluding these non-cash distributions, FFO increased 10.4%. Reported Same Park NOI for the full year increased 3.5% over 2006 with revenues increasing 3.4% and expenses increasing 3.2%.
Recurring capital expenditures for the year ended December 31, 2007 were $37.4 million or $1.91 per square foot compared to $34.1 million or $1.89 per square foot incurred in 2006. The level of recurring capital expenditures will vary from quarter-to-quarter depending on the volume and timing of leasing activity and the level of transaction costs associated with such, combined with the nature of ongoing capital projects.Free cash after distributions to our investors for the 12 months ended December 31, 2007 was $42.1 million compared to $44.4 million generated over the whole of 2006.
The decrease of $2.3 million takes into account that we distributed an additional $12.9 million to our investors as a result of the increase in our quarterly dividend, clearly demonstrating our ability to generate significant free cash over the course of the year.As Joe mentioned, in late 2007 and earlier this year, we bought back our own common stock. During the fourth quarter of 2007, the company repurchased 601,000 shares at an aggregate cost of $31.9 million.
Subsequent to the end of the year, the company repurchased an additional 370,000 shares for an aggregate cost of $18.3 million. Combined, we invested $50.2 million with an average price per share of $51.67.
We have authorization to acquire an additional 2.2 million shares. Throughout our organization, we continue to maintain a very aggressive oversight of our tenants’ performance and their ability to meet their lease obligations.Within our leasing structure, we have a very thorough underwriting process.
These consistent management practices, combined with our ability to quickly re-lease space have proven to be very effective as we have had minimal consequences from default situations. In each of the past two years, our write-offs of bad debt have been one quarter of 1% of revenues.As we continue to experience economic uncertainty in the broad economy with a balance sheet with less than 3% debt, 35% perpetual equity with an average coupon of 7.2%, combined with the ability to retain significant cash on an annual basis, we are confident that we have a balance sheet and operating strategy that will benefit us and provide us the ability to maintain our excellent financial position.With that, we will open the call for questions.
Question-and-Answer Session Operator (Operator Instructions) Your first question comes from the line of Jordan Sadler - KeyBanc Capital.Jordan Sadler - KeyBanc Capital Regarding your forward-looking investment strategy, obviously, you did a bunch of repurchasing in the quarter and post-quarter end. But it sounds like now you may be switching gears to focus on possible opportunities in Orange Country, in Northern Virginia.
Is that sort of what I’m hearing; is that the right way to look at it? And can you maybe talk about what kind of opportunities you’re seeing?Joseph D.
Russell I wouldn’t characterize it in any way as switching gears. As I mentioned, the avenues ahead of us are a combination of the same choices we’ve had in the past.
There is definitely a different environment tied to the investment arena. And what we’re also doing based on those changing conditions is keeping a very close eye on what transactions have so far taken place which frankly isn’t a lot.
But then also keeping tabs on what may be at hand with other owners that may have more onerous conditions, whether its debt or a need for extracting whatever equity they may have in a particular asset. And we’re going to continue to monitor those things very aggressively in all of our markets, not just in Orange County or another market that we’re currently in.And again like I mentioned, we saw good value most recently in stepping back and acquiring our own equity.
And I’d say it’s still going to be the same mix going forward. We have an arena or a set of different alternatives and we’ll continue to both monitor those, and if we see some good opportunities out there on the property side, we’re going to look at them very seriously.
But, as I mentioned, there is not yet a lot of obvious, I would say, events going on, and there is a lot of theories out there that things could toughen for certain owners. And we’ll just see how that plays out.Jordan Sadler - KeyBanc Capital I guess I misunderstood.
I thought you were maybe more focused on Orange County and Northern Virginia for investment?Joseph D. Russell No, I wouldn’t say more focused.
We have a good presence in both of those markets and we understand them quite well. And we feel that our strategy in those markets continues to serve us well, meaning we are able to sustain good occupancies in those markets, especially if you compare the market stats to a Class A office owner in either one of those markets to our own occupancies.
And we see very good leasing traction there too. JP talked about the vitality that we even saw going through the fourth quarter in those markets and we’re very happy with the strategy that we continue to deploy there and in other markets which again focuses on smaller users.Jordan Sadler - KeyBanc Capital It made sense that in those markets as well as others that maybe some of the office guys may be more stressed and more leveraged, or more distressed and maybe more leveraged that the margin would how do you envision sort of the investment opportunity in front of you?
Is it in terms of weighted by asset class or type, is it, as you look at sort of the spectrum of the assets you own more towards industrial or office or flex?Joseph D. Russell Yes, it could be any combination of the three.
Undoubtedly, in the way the markets currently are playing out, I don’t disagree. There is more stress in some cases with potentially some of the overbuilt office owners, and but again that doesn’t necessarily mean that’s where we will only focus or we will look for opportunities.
We like all three product types, office, industrial and flex and across our markets we are going to continue to evaluate what’s at hand.Jordan Sadler - KeyBanc Capital And then maybe if you could just talk about in terms of what you’re seeing on the leasing front, as maybe a leading indicator. You talked about the role for next year I think its 3.9 million square feet.
Roughly how much of that is already, do you have good visibility on, and could you say you have wrapped up at this point?John Petersen We, as Joe mentioned, we’re seeing good activity here. And that I think I discussed a little bit about in my comments about where those expirations occur in 2008.
And so, we’re going to continue to focus early and often on getting deals done this year. There is no question that we’re focused on moving deals quickly, getting them turned.
We’re getting back to the basics here in all of our markets. In terms of stronger markets, Florida we think is still healthy.
Miami, that’s still healthy for us. Joe just talked about Orange County and Northern Virginia a little bit.
Northern California, even though it had slight negative absorption in the fourth quarter, we still view that market as balanced. And Los Angeles is balanced.
And even Texas is a balanced market heading into 2008. So, it doesn’t mean it’s not going to be a challenging environment for us, but we think that the markets for the most part are balanced.
And I want to also mention that in my remarks, I mentioned Texas has 13% of our revenues expiring, it’s actually Florida I apologize. It’s not Texas.
Florida has 13.1% expiring in 2008, and Texas has 8%. Jordan Sadler - KeyBanc Capital And do you think the retention rate you’ll be able to maintain the 62% you did the last couple of years?John Petersen You know of course we hope to, we work really hard on that Jordan, and we work hard, I mean we think as Joe mentioned in his comments that our existing customer base, we have 4000 customers plus or minus.
And, mostly small users, and we work very hard on cultivating those relationships and maintaining our skills at renewing them. So, no doubt, we have those customers, we need to cultivate those users, and we don’t make predictions around those numbers, but we’re doing everything we can to get there, sure, in 2008.
But we’ll see.Operator Your next question comes from the line of Michael Bilerman - Citi.Irwin Guzman and Michael Bilerman - Citi Good morning, it’s Irwin Guzman; Michael Bilerman is on the phone as well. You mentioned the obvious impact that illiquidity in the debt market is having on real estate valuations.
I’m wondering given your small tenant focus if you’re hearing anything from your customers that they are feeling a pinch of difficulty getting financing for their core businesses, and whether you expect that to have any impact on your results going forward?Joseph D. Russell Yes, Irwin, I think it’s a broad, I think issue with just the economy at large.
And our 4000 tenant mixture is really widespread with a very different collection of company types and obviously in multiple markets. And we continue to keep a close eye on all of our tenants consistently in and out of market cycles.
Ed pointed to the impact that we’ve seen certainly over the last two years with any specific impact on default. We’re very proactively managing our portfolio.
It’s a critical element in the way that we do our own day-to-day oversight of our assets. And we’re keeping an eye on everybody.
I would say that, and we talked about this the last few quarters, from time-to-time you’ll see certain industry sectors that you may even have a higher or a heightened awareness of, because there are certain pressures. No surprise that that’s been more severe along the lines of users that were tied to mortgage, title, things like that.
And we feel like we handled that well in not only vetting those kinds of users that were interested in coming to the portfolio and also working through the situations that we may have had in place as well. So, again, we’re all going to have to see how the economy at large plays out.
And thus far, we’re seeing a good vibrancy in the portfolio meaning that our tenant base is able to maintain its commitments from a leasing standpoint. And we’re seeing good levels of retention.
And we’re going to stay very, very focused on our tenant base across all elements.Irwin Guzman and Michael Bilerman - Citi You mentioned the opportunity within your portfolio to subdivide some larger spaces. Can you quantify how much capital you plan to spend there over the next year or two?
How many square feet that opportunity is and what returns you’re targeting?John Petersen We can’t quantify it, but I can, if it helps, I can walk you through our thoughts on that. As we’ve continued to talk about over the quarters and years, we focus and we find more, there are more users in smaller space requirements.
So, if we have let’s just say a 50,000 foot building, and we have a vacancy there, and we can subdivide that down into four or five 10,000 square foot spaces we find that more attractive. We’ll go ahead and put in demising walls, put in restrooms if that makes sense and put in the necessary doorways etc.
to attract. We think it will be easier to attract five 10,000-foot users than one 50,000-foot user.
And over time, that space that we build out ultimately for those 10,000-foot users will be more generic, more reusable, and we can reuse those improvements over several lease cycles versus a highly customized build-out for a 50,000-foot requirement that may be marketed heavily and brokered heavily. And so, we typically, those costs for the smaller users are going to be less, much less than the larger users.
Irwin Guzman and Michael Bilerman - Citi Yes JP, it’s Michael on the phone as well. Outside of that 120,000 square feet in Portland, the Intel space, it sounds like you’re chopping that up.
Is there anything else sort of on the immediate horizon where you’re doing that, where arguably there may be some delay where the tenant moves out, it will stay vacant for a little while. More so than what has happened in prior years?John Petersen No, it’s part of our core strategy.
I mean we go through that as part of our blocking and tackling how we deal with that stuff, Michael. I mean if we have a space here or a space there in any given market, and we will evaluate where user demand is coming from, we’ll evaluate the number of competitive vacancies in a given size range, what they are asking, etc.
I mean we break it down to the minutia and then we decide we act. More often than not, it will make sense to break that down, and not wait.
Occasionally, we will do a bigger deal because it makes sense for one reason or another, but typically our strategic focus is on breaking those down as quickly as possible and getting them re-leased.Joseph D. Russell And Michael, one other tie to that strategy is that’s a heavy filter we use when we’re out acquiring assets as well.
And just as JP is explaining, you may have a building today that’s got say a 50,000 square foot user, but we’re not out investing or looking for assets that don’t have that kind of flexibility tied to them. And we’ve done this time and time again in our investment strategy where the configuration of an acquired building or portfolio may be higher than what our average is of the company.
But over time, what we like to do is eventually get that down to that smaller user band or that smaller user range, because just like JP mentioned again, it’s more generic space. It’s going to be more tailored to a generic user.
And we can help contain our costs and over time continue to source the kinds of tenants we feel, again, are much more vibrant in the context of quantity, the way that we can attract them and the way that hopefully we can retain them over time.And it’s just like I mentioned, you can see that in our overall company stats from certainly 2005 till today where we keep notching down that average tenant size. But what’s critical to that is we don’t go out and buy for instance a 50,000 square foot square building that you can’t easily, economically, or functionally divide down.And that is not typical or that makes our portfolio I think a little bit more tailored to doing exactly what we’re doing strategically.
And that for us is a good way to not only continue to be in the flow of activity market-to-market, but we think over time, it helps us outperform.Irwin Guzman and Michael Bilerman - Citi How long were your blacked out on your stock for, in the beginning of this year?Joseph D. Russell The beginning of 2008?Irwin Guzman and Michael Bilerman - Citi Yes, how many, I guess prior to the results being announced, I’m just trying to figure when you did most of your repurchases.Edward A.
Stokx We did most of our repurchases in early January, Michael.Irwin Guzman and Michael Bilerman - Citi And then you stopped, you were blacked out two weeks prior to quarter-end?Edward A. Stokx We were essentially, but we also made a decision that we were comfortable with $50 million allocation to the common stock at that point in time.Operator Your next question comes from the line of Rich Anderson - BMO Capital Markets.Rich Anderson - BMO Capital Markets The term that JP used was balanced for all of your portfolio over many of your markets I should say.
And correct me if I’m wrong, but is that something a little bit less appealing than maybe a couple of years ago when you talked about Miami, Southern California, and Washington D.C. being your great markets.
Is balanced neutral or is balanced positive in your mind?John Petersen I think depending on how you look at it, it will ebb and flow quarter-to-quarter, year-to-year of course and even week-to-week. But I think if I look at a market and it’s under 10%, just the overall market, not our portfolio but our market, it’s under 10% vacancy.
More often than not, that’s a landlord favorable environment. How do you define balance?
I mean Orange County office, that’s not a balanced market in my opinion, office in Northern Virginia, not a balanced market, but certainly Miami, Northern California, as I mentioned. In our minds, it’s not prevailing towards the landlord as it may had been a year or so ago, as strong.
But we’re still seeing good activity. We’re still seeing plenty of tours.
Obviously, we’re getting deals done. So I don’t know how else I can describe it.Rich Anderson - BMO Capital Markets And next question you mentioned Dulles in particular as a large tenant orientation market of course.
How does the weakness from large tenants impact your small tenant business? In what way does it have an impact on your business?Joseph D.
Russell Well, I think in one way Rich, it garners headlines. No doubt because the bigger elephants get the attention whether it’s through a brokerage community, orientation or maybe even in industry publications, whatever.
But again, that’s where we encourage our targeted tenants whether renewal situations or there are new tenants coming into our properties to make sure they’re evaluating our alternative against what the market at large alternatives are. And say a 3000 or 5,000 square foot tenant of ours is not going to be able to debate that because there’s much more vacancy in Class A big tenant space that might have certain types of concessions tied to it, that that at the end of the day is completely relevant.And again, it requires us to know our markets well, deeply.
Our people are very conversant in the properties they compete against, the market flows, of deal activity, and that’s what we do day-in and day-out. So, we’ve got an open pipeline to that type of deal flow.
And again, because something might be going on in a much bigger tenant-oriented property doesn’t necessarily at the end of the day mean that that’s exactly transferable or it directs the pricing that we’re able to command on our own assets.Rich Anderson - BMO Capital Markets I can appreciate your commentary about small tenants and how you’re diversified so you’re sort of somewhat insulated from economic conditions, not entirely of course. Small tenants might be more exposed to having to shut their doors in a weakening economy, but I can understand your comments about being diversified.
But there was a time when PSB’s internal growth prospects were pretty bleak, and it wasn’t that long ago. And obviously, things have gotten better.
What is it about this time that is different than back then when your internal growth was really on a downward trend?Joseph D. Russell Well, I think I mean I’m not exactly sure what period of time you’re pointing to when thinks were bleak.Rich Anderson - BMO Capital Markets Well, like early part of 2000, I guess that would have been the tech issue for you, right?Joseph D.
Russell Yes, I think certainly, I mean that wasn’t in any way a condition that PSB was in an island or was a sole recipient or we were the only guys out being negatively affected by what was a very different market condition in many markets, where you had tremendous overbuilt properties, you had tremendous sublease space, you had negative job growth. I mean there were just many, many different factors tied to that downturn than whatever may be occurring today.Rich Anderson - BMO Capital Markets It’s really a supply issue, I think.Joseph D.
Russell And I think even then Rich, we were able to, and we were I think successful in finding ways to still outperform our markets. And we are very confident that as we’ve done in and out of multiple cycles for many, many years, and again we are very focused on the trends and the currents that do take place with smaller users.
And that’s what we specialize in.Rich Anderson - BMO Capital Markets You mentioned sort of having the great balance sheet and at the ready to do something if something surfaces. The question is you have always been the low debt company, and how high on the debt scale would you be willing to go as an organization, particularly now with the preferred markets I would assume being somewhat locked up for you to refinance that debt?Joseph D.
Russell Well, the preferred markets if there is a preferred market, I wouldn’t characterize it as, nearly as attractive as it was certainly a year ago. But that is still an alternative.
It’s more expensive no doubt. And as far as what level would we use leverage or what level would we use any kind of alternative financing strategy, it’s really going to be dependent upon the deal.
And we’re very confident that we’ve got a great balance sheet that will give us an unusual ability to look at different situations, and I can’t predict what will come of that. But I can tell you that we’re very confident that we have even more so today a greater competitive ability because we’re no longer out in a sea of competitive bidders that have easy access to money, cheap money with very few equity requirements, with very low loan covenants and all those kinds of things, and the whole financing world today is very different.Operator Your next question comes from the line of David Cohen - Morgan Stanley.David Cohen - Morgan Stanley Are there times in the cycle that you think that going after more of the small tenants as you are today will actually kind of work against you like for example, as we may, when we enter a kind of a rebound.
Are you giving up some of the leasing economics during those times because you’ll be making this space more generic or, and what about the stresses on the company because you’ll have four leases for every one that you had before?John Petersen David throughout ‘07, we were able to hold our average term around 3.3 years, and as we migrate through in 2008 hopefully 1600, 1700 lease transactions, there will be push and pull in many different scenarios. It could be term, it could be rate, it could be whatever, normal deal velocity and deal negotiating points.
We have yet to see that in our term. We don’t think it will work against us.
We think as I mentioned before, if we have a 4000 foot vacancy, we think there is more than likely in any market of ours, there is going to be a number of different perspective users for that, versus if we had a 100,000 foot vacancy, there may not be any in any given market. So, we like our chances on re-leasing that 4000 vacancy in any market in which we operate because even if a company or two is having some particular stress in their own business, if they do leave, we work real closely with our teams and with the marketplace to getting that space market ready and re-leased as quickly as possible.
And again there are a number of different users for that 4,000-foot vacancy that we’re going to go capture because we think we respond quicker. We’re more nimble versus our competitive peer set.Joseph D.
Russell And, I think David, the other thing is, we don’t look at having to do four transactions instead of one as stress on the organization. We’re built to handle the kind of volume JP is discussing.
We are built to move quickly, to move nimbly. And you can look at our staff and say it does work.
We are able to maintain very strong occupancies, and we can battle market conditions and we can also take advantage of market opportunities with that volume. But again, it’s because of the way we’re built.
And we know it well, we know how to handle the volume, and frankly, I think we’re very good at it.Operator At this time, there are no further questions.Edward A. Stokx We’d like to thank everyone for joining us.
And we look forward to talking to you at the end of the first quarter.