May 6, 2008
PS Business Parks, Inc. (PSB)Q1 2008 Earnings Call TranscriptMay 6, 2008 1
00 am ETExecutives Ed Stokx – EVP and CFOJoe Russell – President and CEOJohn Petersen – EVP and COOAnalysts Craig Mellon [ph] – KeyBanc CapitalJordan Sadler – KeyBanc Capital ManagementIrwin Guzman – CitigroupMichael Mueller – JPMorganChris Lucas – Robert W. BairdDavid Cohen – Morgan StanleyStuart Seeley – Morgan StanleyOperator Good morning, my name is Sam and I'll be your conference operator today.
At this time, I would like to welcome everyone to the first quarter 2008 investor conference call. All lines are placed on mute to prevent any background noise.
After the speakers' remarks, there will be a question and answer session. (Operator instructions) Thank you.
Mr. Stokx, you may begin your conference.Ed Stokx Thank you.
Good morning and thank you for joining us for the first quarter 2008 PS Business Parks investor conference call. I'm Ed Stokx, CFO of the company.
And with me are Joe Russell, President and Chief Executive Officer; and John Petersen, Chief Operating Officer.Before we begin, let me remind everyone that all statements other than statements of historical fact 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's with the Securities and Exchange Commission including our 2007 annual report on Form 10-K and subsequent reports on Form 10-Q and Form 8-K. We will also provide certain non-GAAP financial measures.
A reconciliation to GAAP of these non-GAAP financial measures is included in our press release which can be found on our Web site. Now, I will turn the call over to Joe.Joe Russell Thank you, Ed.
Good morning and thank you for joining us. I will give you a brief overview of our first quarter results along with some perspective on how the economy seems to be affecting PSB's markets and our tenant base.
I will touch briefly on our capital position and what we are seeing in the investment arena, and then I will let JP and Ed go into more specifics on the operations and financial performance. In the first quarter, FFO on a comparative basis was up 7.8% and occupancy improved by 110 basis points to 94.3% on a Same Park basis.
We were pleased to capture over 1.5 million square feet in lease transactions, a higher level than we typically produce. Demand for our product was widespread, a validation of the diversified economies most of our markets provide.
Consistent with recent trends, vibrancy is most evident among users that are looking for or renewing space in smaller increments. 93% of leasing transactions were below 10,000 square feet.
Large users are often commanding more onerous terms and have the ability to negotiate their space requirements over a longer process, which can give them the upper hand as deal volume slows. Still, we have taken note that most tenants are being more cautious and deliberate in their real estate decisions as they try to interpret what impact the economic slowdown may have on their businesses.
One positive consequence to this caution is an ability to retain existing customers as they look to contain costs whether tied to expansions, relocation fees and the like. To a degree, this facilitated higher than average customer retention for the quarter, which was 67%.
We like other landlords are trying to assess today's economic landscape and how the economy will affect business demand for our type of real estates. Unlike recent downturns, many of our markets remain in relatively good shape with a mixture of positive absorption and limited spec construction of multi-tenant flex, office and industrial product.
While still recognizing the weight of spec Class A office available in Orange County and the Dulles corridor, there is nominal amount of competitive construction taking place in PSB's other markets. Event more importantly, there is a lack of small tenant product that poses a competitive threat to our flex industrial or office product.
JP will take you through specific market trends, but we have been pleased by the resiliency most of our markets are displaying. Beyond these factors, the diversity within our nearly 4000 customers combined with the flexible use our buildings provide allows us to capture a wide array of users.
This facilitates our ability to outperform markets even with weakening economic conditions.Having a decentralized market focus team leasing and managing our own assets is once again proving to be a difference maker, as this structure facilitates our ability to be nimble and decisive. These tactics have proven to be extremely beneficial in prior downturns and we are confident in our ability to drive results with this decentralized operating platform.
The investment arena remains quiet with limited volume of transactions as the availability of capital remain scarce and the cost of capital continues to rise. Outside of stock repurchases, no investments took place in the quarter and the volume of for-sale assets entering the market is light.
PSB's capital structure is solid with approximately $37 million in cash combined with industry low payout ratios, producing nearly $11 million in free cash for the quarter. We continue to assess a variety of alternative investments and like the position of being a standout buyer with an unusually strong balance sheet.
I'd like it to conclude my remarks by taking note of PS Business Parks' tenth anniversary of being a public entity. Over this decade, we have seen tremendous growth in the company and delivered strong shareholder returns.
Today, PSB owns over 70 concentrated multi-tenant flex, office and industrial parks in 12 markets, totaling approximately 20 million square feet. Over this decade, our stockholders have seen a return on their investment of 232% compared to the NAREIT Equity Index of 175% and 61% for the S&P 500.
We appreciate your investment in the company and look forward to delivering exceptional results as we embark on our second decade. Now, I will turn the call over to JP.John Petersen Thank you, Joe.
I will start with an overview of market conditions. Overall, deal activity and volume was fairly consistent in Q1 across all our markets.
Construction is still modest for our product type and net absorption was positive or nearly flat in all of our markets except for Orange County. Orange County had over 1 million square feet of negative net absorption in the quarter primarily in the Class A office within the airport sub market.
However, industrial vacancy in Orange County is tight at 2.8%. We were pleased to see that Northern Virginia had over 900,000 square feet of positive absorption, but we are still concerned with the over 4 million square feet of new Class A office construction coming online in that market.
Tour velocity across the portfolio has slowed somewhat and deals are taking longer to close as customers focus on their core operations, thus waiting to make real estate decisions until they have to. In summary, the diversified low barrier markets where assets are located held up well.
Total company occupancies slipped by 20 basis points from the fourth quarter of 2007 primarily due to a number of year-end lease expirations, which are typical for the portfolio. In Maryland, occupancy fell 380 basis points to 90.7% due primarily to the loss of one tenant.
Phoenix lost 260 basis points to 87.4% and Austin lost 170 basis points to 95.7%. Orange County lost 40 basis points but maintains occupancy of 93.8%.
Of these declines, Phoenix is the only market where the decrease is beyond normal ebbs and flows to our portfolio and is largely the result of the slowing housing economy. On the plus side, we were able to grow occupancy in Northern Virginia by 90 basis points to a very strong 96.8%.
Occupancy increase in San Diego by 90 basis points to 97% and Dallas once again was a strong performer taking occupancy up 200 basis points to 93.1%. Seattle continued to improve getting to 93.3%, up 210 basis points from Q4 2007.
In part, because of the balanced market conditions, we were able to have a solid quarter in terms of leasing production. A total of 372 transactions were completed totaling over 1.5 million square feet.
Average deal size was 4100 square feet, up from our 2007 average of 3200 square feet primarily due to a few larger leases over 20,000 square feet signed in the quarter. These larger deals also take the average term out slightly to 3.7 years for the quarter from the 3.4 years averaged in 2007.
Overall weighted rents were up slightly over expiring rents by 0.3%. As far as specific rental rate growth in the quarter, new rents grew over expiring rents in 10 of our 12 markets.
Only Maryland down 17.1% and Portland down 2.5% declined in the quarter. Maryland rents fell as a result of 43,000 square-foot transaction which replaced a long standing government lease that expired.
Excluding this one transaction, overall company rents grew by 3.5%. We saw improvement in Seattle with rents up 12.4%, Los Angeles up 10.9%, Miami up 8% and Orange County improving by 4.2%.
Retention was 67% for the quarter and our customer focus continues to pay off. Our Washington D.C.
metro team led the way at 86%, northern California and Portland both came in at 69% and Florida was 67%. As I mentioned, we are focusing on retention and getting to our customers lease expirations early.
With the leases completing in Q1, 14% of the portfolio rents are set to expire over the next three quarters. This is a typical run rate and our teams are aggressively targeting early renewals where possible.
In terms of product types, nearly three-quarters of our remaining 2008 expirations are current or active and versus [ph] our flex properties, 21% in our office portfolio, and 6.9% in industrial properties. Now, I will turn the call over to Ed.Ed Stokx Thank you JP.
FFO per share was $1.10 for the quarter, an increase of 7.8% from the $1.02 reported in the first quarter of 2007. On a comparative basis, Same Park NOI increased 2.7%.
Revenue increased by 3.5% over the first quarter of 2007 as a result of increases in both occupancy and average realized rental rates. Expenses for the first quarter were 5.3% higher than the same period of 2007.
The increase in operating expenses was driven by property taxes and repairs and maintenance. In addition, we incurred a slightly higher level of marketing costs associated with upfront marketing efforts and the timing of certain marketing events.
The increase in operating expenses contributed to our gross margin declining slightly to 68% for the quarter. While the margin was lower than it has been in 2007, we typically report lower margins in the first quarter due to the timing of certain costs including certain seasonal costs such as snow removal.
With uncertainty in the economy, we continue to monitor our tenants' ability to meet their lease obligations. During the quarter, our write-off of uncollectible balances was consistent with the average quarterly write-offs in 2007, representing approximately 0.25% of revenues.
We have 134,000 square-foot tenant in northern California who has from time to time been in default on their lease and is currently delinquent on their rent obligation for May. We hold a sizable security deposit on their lease and continue to work with them in an effort to cure the default.
Collectively, we feel comfortable with our reserve for potential uncollectible AR balances. Recurring capital expenditures for the three months ended March 31, 2008 were $8.7 million compared to $7.3 million for the same period of 2007.
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 by product type combined with the nature of ongoing capital projects. Free cash after distributions to our investors for the quarter was $10.8 million.
We continue to have near industry low payout ratios with an FFO payout ratio of 39.9% and an FAD payout ratio of 53.1%. As previously discussed, during the first quarter, we repurchased 370,000 shares of the company's common stock for an aggregate cost of $18.3 million.
We have authorization to acquire an additional 2.2 million shares. Before we open the call for questions, I would like to briefly touch on the strength of our balance sheet.
With a leverage ratio of 37.7% at the end of the first quarter comprised of 811 million of preferred equity at an average rate of 7.2% and just 2.6% of mortgage debt and a fixed charge coverage ratio of 3 times, we have significant capacity within our capital structure which positions us well for a variety of investment alternatives. With that, we will open the call for questions.
Question-and-Answer Session Operator (Operator instructions) And our first question comes from the line of Jordan Sadler with KeyBanc Capital Management.Craig Mellon – KeyBanc Capital Hi, it's Craig Mellon [ph] here for Jordan. Looking at your leased rate at the end of the quarter and looking at the total lease space versus the amount of square footage you have, it looks like that's up about 100 basis points sequentially.
Is that a good reason to what you are seeing across your portfolio in terms of the leasing activity?Joe Russell I'm not sure I understand your question. Are you questioning the level of activity?Craig Mellon – KeyBanc Capital Is the 100 basis points in your leased rate, I know you guys typically look at it in terms of occupancy but we were just backing into it, is that pretty indicative of the activity you are continuing to see that we might see that lease rate continue to tick up?John Petersen Well, I'm not sure I exactly understand, but it's hard to say relative to this lease rate you are backing into, but as you mentioned relative to occupancy, occupancy for the most part was stable during the quarter and we saw growth in some markets and in a couple of markets a decline, so that's not unusual for us.Jordan Sadler – KeyBanc Capital JP, it is Jordan.
We noticed that leased space sequentially was up 100 basis points. So, we were curious to know if you guys were filling up a bit more as you made your way through the quarter, if that kind of continued into the second quarter.
Is that indicative of sort of what the portfolio is seeing, or is occupancy not moving in that direction, it's more stable?John Petersen Well, as you noted, the occupancy was fairly stable and I said before it is stable. And we are aggressively targeting early renewals.
We are aggressively trying to market our vacant spaces, everyone is. But, we were pleased with the level of activity and the occupancy gains we realized in some markets.
So, yes, I think it was a good quarter for us. Did that help, Jordan?Jordan Sadler – KeyBanc Capital Yes.
Just one other quick question, what was your cash balance – what is your current cash balance?Ed Stokx Approximately $37 million.Jordan Sadler – KeyBanc Capital Great, thanks.Operator Your next question comes from the line of Irwin Guzman with Citi.Irwin Guzman – Citigroup Good morning. I was hoping to talk a little bit more about some of the markets specifically where you lost some occupancy.
You mentioned that most of it, with the exception of Orange County, was due to sort of just seasonal expirations of stuff at the end of last year. But, in markets like Maryland and Phoenix where you lost some occupancy, how far along are you in re-leasing that space and how sort of what's the lag in some of these markets that you expect?Joe Russell Yes, Irwin, I will start and then JP, you can chime in, if you want to put more color on this.
But, as JP mentioned, we had in Maryland a single tenant situation with the primary cause of the downdraft there. That's not untypical for our product type or tenant base in that particular market.
And the good news for that market is that it's relatively stable and we continue to see traditional patterns of leasing activity there. And we think we are well positioned in that market, we have got good product type, it's multi-tenant in nature, and we are happy with the outlook going into the rest of the year with the leasing that we are focused on doing there.
Phoenix as JP mentioned is a different situation really portfolio-wide. I would say it's one of the toughest markets we have today based on two factors.
One is the housing economy and the over-weighted impact that economy has had across the board on a variety of different types of businesses, even businesses that are not even directly related to housing. Combing with – Phoenix has been a market where a fair amount of construction continues to take place on a spec basis.
So, that's a different market for us, it's a different way to attack it. The type of product we have in that market is relatively small tenant and it oftentimes requires just not only more tenacity but maybe little bit of re-pricing, and then hopefully some resurgence in the overall economy there.
But we will have to wait and see. It is not as well diversified for instance as a Maryland market.
And those are two examples of maybe to bookings of what we are dealing with right now.Irwin Guzman – Citigroup And on the CapEx front, you mentioned – you talked about CapEx a little bit, where are your concessions trending generally versus year ago, are you seeing those pick up yet?Joe Russell Well, I mentioned, Irwin, that the most negotiating leverage a tenant has right now is the tenant that is looking for bigger space and primarily in an office arena. So, you will typically see more concessions tied to those type of transactions as those types of transactions get larger.
And again, that's not necessarily a new occurrence, but it's one that gets more magnified when market conditions soften in various areas. So, as we talk to you over time, our small tenant portfolio at the end of the day can't command a lot of onerous concessions because when you are dealing, say, with a 5000 or lower square foot space, there aren't a lot of hard improvements you can typically put into a space like that.
And because of that, we have a good source of containing transaction costs where it's going to be a little bit more volatile again market-to-market situations when you get into bigger spaces. And again, that will just depend on where we end up doing that kind of leasing.Irwin Guzman – Citigroup Can you just repeat what your rent spends were during the quarter?Joe Russell JP, you want to go through that?Irwin Guzman – Citigroup On the overall portfolio, I just missed that number.John Petersen Sure.
The overall portfolio was rent growth at 0.3%. And if you exclude the one deal we did in Maryland, overall company rents grew 3.5%.Irwin Guzman – Citigroup And that's cash mark to market, right?John Petersen Yes.
Irwin Guzman – Citigroup One last question, on the bad debt reserves of 300,000, I'm just surprised that that wouldn't have increased versus what you have been accruing every quarter, given where we are and given that arguably you should see a little bit of a loss factor with smaller tenant portfolio. How often do you revisit that assumption and can we expect that to go up a little bit?Ed Stokx We revisited every month and every quarter.
As I said in my prepared comments, our write-offs of uncollectible balances were consistent with our quarterly average last year which is about 0.25% of revenues. We are very conservative in terms of how we write off balances when we deem them uncollectible.
And then, at the end of each period, we look at balances that have yet to be written off that we think there may be some exposure to. We do that on a very specific watch list basis and compare that to the $300,000 reserve that we have, and that's why you see that being somewhat static because we are fairly conservative in writing the other balances off during the quarter.Irwin Guzman – Citigroup Okay, thank you.Operator (Operator instructions) Your next question comes from the line of Michael Mueller with JPMorgan.Michael Mueller – JPMorgan A few questions here.
First, is there a big difference in the lead time that say a small tenant or large tenant gives you when they are not going to renew a lease?John Petersen It depends obviously on the specific situation, specific space requirements of let's say a larger customer. But typically, yes, a larger customer will give you more notice because they need to do longer term planning for their real estate needs.
A smaller 5000 square-foot customer may go right up till the last 30, 60 days before their lease expired before they know what to do. So, but again, it depends generally – especially with the bigger usually on what their realty needs, but overall I think you could say that there is a longer lead time for bigger users.Michael Mueller – JPMorgan So, if it is a month or two for the small tenants, I mean, what's a general lead time for the larger ones, is it six months?John Petersen It's hard to say.
It could be anywhere between four months to six to 12 months depending on what they are doing. It really depends.Joe Russell Mike, I think maybe just a little bit more color on that.
I think when you start seeing certain markets soften, no surprise tenants become aware of that at all size levels. And some of their negotiating tactics may not even be what you might expect from historical trends coming off maybe a market condition that was a lot tighter where they had to be even more proactive in securing new space.
So, in the markets that probably have the more onerous vacancy conditions, a tenant may even be a little bit more cautious and/or may kind of lever that negotiation in a much shorter time frame.Michael Mueller – JPMorgan Okay. And going back to the rent spread question from before, the 3.5% number, how different can that number be when you are looking at the smaller tenants again versus the larger tenants?
And is it generally, if you are looking across the board, somewhere in that low single digit positive band or there are pretty significant variances either on the positive side or the negative side?Joe Russell Well, first as JP mentioned, we only had two markets that had negative rent growth, Maryland and that was again dominated by a big tenant lease situation, which completely ties to what we are talking about in the negotiation dynamics that go into larger deals. And then the bulk of our other markets, we have a variety of positive rent spreads.
Some are into the double digits and I wouldn't say it's directly tied to one specific size of tenant. But more often than not, as we talk to, we seem to have better leverage on smaller tenants.
So, oftentimes, we get a little bit more negotiating power in those situations. But again, it will depend deal to deal and that kind of thing.
As I mentioned, we do see more volume in our smaller transactions and we still have in many of our markets, a little bit of an edge in the negotiation tactics we are able to put on the table, when we are sitting down and talking to tenants.Michael Mueller – JPMorgan Okay. And last question, Joe, you mentioned you haven't been seeing a lot of product for acquisitions I guess come across your desk.
But, when you do see packages and products available, is the pricing that sellers are asking for, has that improved at all, or not really?Joe Russell I wouldn't say in terms that I think you would expect, Mike, meaning there is still pretty widespread between a seller's expectation and what a market bid may command. There has been some trading and I'm sure you are hearing this from a lot of other firms right now.
There is just not a lot of data points yet to say here is the true trend we are dealing with or the true adjustment that has been a result of the cost to capital, availability capital, and those kinds of things. The volume is way down.
I mean, it could be anywhere from 60% to 80% lower than where it was a year ago. And we just got to see some more traction out there to say this is really what's happened to both pricing and adjustment on either cap rates or per square foot portfolio buys, that kind of thing.
One dynamic we have seen, and again it's still too soon to tell, but a year ago, a big portfolio could actually command a premium, because of the amount of capital out chasing those kinds of deals and it's basically done a 180, where the biggest portfolios, probably have less success factors tied to bidding activity, and again just the amount of capital chasing those kinds of deals. And again, we will have to see how that plays out.Michael Mueller – JPMorgan Okay, thanks.Joe Russell You bet.Operator You have a follow-up question from the line of Irwin Guzman with Citi.Irwin Guzman – Citigroup Hello.
I'm just wondering on the – with the smaller tenants you mentioned that they don't have a lot of leverage in terms of concessions or rent, but are you seeing any pushback in terms of the length of the leases that you are signing, particularly in a small tenant base? Are they hesitating more to sign in the traditional five to seven year leases?John Peterson Well, it's a good question.
What they are doing for sure is they are taking a little longer. The smaller users or smaller customers are taking a little bit longer to make their decision, trying to decide what to do with their business.
So that's definitely a trend we are seeing. In terms of transaction costs and in terms of those items, we still – a lot of our properties as I mentioned are in the low to mid 90% occupied.
And so that does give us some leverage in negotiating with these guys. We are able to be pushed term where we want to.
But, still our average term was 3.7 years for the quarter. So our smaller guys aren't signing typically seven year terms.
Those are mostly the larger customers.Irwin Guzman – Citigroup And what percentage of your in-place leases are month to month, if any, and has that number changed in the last couple of months or within the last year?Ed Stokx It's a relatively smaller number, but it hasn't changed significantly from period to period.Irwin Guzman – Citigroup Thank you.Ed Stokx You bet.Operator Your next question comes from Chris Lucas with Robert W. Baird.Chris Lucas – Robert W.
Baird Good afternoon guys.Joe Russell Hi Chris.Chris Lucas – Robert W. Baird Just kind of a follow up question, are you seeing more broker representation with your small tenants than you might have seen a year ago?John Peterson It's hard to say, Chris.
That's a good question. You would think that, okay, the markets are tighter, so the brokers are going to try and get any deal they can.
Maybe we have seen that at the margins, but I don't think there is a nationwide trend, where our little guys are being represented more by brokers. Maybe here and there, but we are not seeing that across the board.Chris Lucas – Robert W.
Baird I'm wondering if that was contributing to some of the slower decision-making process?John Peterson No, not necessarily. No, I think what contributes to that, in my opinion, is really everyone is reading the headlines and they are just being more cautious in determining what they do with their real estate needs.
I think as Joe mentioned and I mentioned, it's been able to – we think that could potentially play to our advantage relative to retention.Chris Lucas – Robert W. Baird Okay.
And then just on a capital allocation kind of question, you guys have been great at accumulating cash and obviously the debt markets are not there. How do you go through your decision-making process right now in terms of whether you just build your cash, buy your stock back, or maybe buy your preferreds in the open market back?
What is the thought process there?Joe Russell Chris, what we have done over a longer period of time in and out of various types of alternative capital decisions, or stress points and/or opportunities, as we look at the landscape of alternatives that are out there. Fundamentally as you well know, we are designed to retain a very high degree of our own free cash flow.
We like that position and we feel that going into this environment, we've got some solid alternatives that could play out. As I mentioned, I really like the fact that as certain situations may evolve, we do have a very pristine balance sheet and we are a standout buyer, not only because of our cash balances, but because of our low leverage and the ability that we can use our balance sheet to pursue various alternatives.On stock buybacks, from time to time, when we see a balance again of using that lever and comparing it to other alternatives that are out there, we will also again utilize our cash balances for buybacks.
Obviously, we talked about that on our last earnings call and did some of that at end of 2007 and crossed over into early part of '08. Again, it's just one alternative out there among others.
We are hopeful that the stress that could be playing out with some owners could present some opportunities. And again, we just like the fundamental position we are in, to be very nimble and to be very opportunistic because of our structure.Chris Lucas – Robert W.
Baird Thanks a lot, guys.Joe Russell You bet.Operator Your next question comes from the line of David Cohen, with Morgan Stanley.David Cohen – Morgan Stanley Good afternoon. Can you just talk about the margins again?
You said that – I guess most of that was due to taxes and other operating expenses. What is your expectation going forward?Ed Stokx Well, David, what I will tell you is typically in the first quarter, we do see some seasonality to it as we incur snow removal costs, property taxes were up this quarter.
We expect or we encourage some slightly higher marketing costs. So, that impacted our margin.
I don't think that there is anything that we are looking at that tells us that our margins are going to be significantly less than they have been in the past. Where specifically those are going to go, we don't get into that kind of forward-looking number.
But, if I just looked at the snow impact for Q1, that took that margin down from the mid 68s to 68 flat. So the seasonal aspect of it is fairly impactful in the first quarter.David Cohen – Morgan Stanley So, you would say, what, half of that is just seasonal, would that be a correct characterization?Ed Stokx I think that – directionally that's a good number, yes.David Cohen – Morgan Stanley Okay.
And so, maybe you can discuss what type of marketing costs are not – are you incurring that are not yet – that you can't capitalize?Ed Stokx Well, these are not specific lease costs. These are more, if we might have broker activities where we might do a marketing effort for an entire market with the brokers.
Some of it is leasing material, producing leasing material for the year that we will use throughout the portfolio. That type of marketing cost.David Cohen – Morgan Stanley All right, thank you.Ed Stokx You're welcome.Operator Your next question comes from the line of Stuart Seeley, with Morgan Stanley.Stuart Seeley – Morgan Stanley Good afternoon.
I'm assuming at this point that you may be regretting a little bit opening the door on this relative leverage between the small tenants and large tenants given the amount of follow-up. But I confess that I'm still a little confused on it as well, and going back to your prepared remarks, I guess does it have to do more with the larger tenants have a lot more space alternatives or is it because they have the financial wherewithal to just have a more enduring process and other issues like that?John Peterson Well, I think it starts, Stuart, with alternatives.
The big guys in markets, and this is again I would say even more heavily weighted on office-type transactions, are typically going to have more choices in today's environment, because what we've seen is that is where there is more vacancy in number of areas. So they can basically be more commanding in their desire or their tactics in negotiating lease terms.
And that in some ways isn't really any different than it ever is. And again, as markets though in some cases can soften, that awareness on their part and their tactics can get even more extreme, and that's I think in one way a normal consequence of a downturn in certain economic drivers.
And again, that's where we always have been more comfortable in our approach, on looking at more multi-tenants, smaller tenant activity, because we just feel like there is more balanced playing field there relative to that negotiation.Stuart Seeley – Morgan Stanley Is it logical to look at perhaps the reverse of this issue and the extent that there are large blocks, more large blocks of space available, and landlords have better negotiating leverage with small tenants, but there is a risk that some of the large blocks of space might be converted more to multi-tenant and could create supply that you are not expecting in your core business?John Peterson That's certainly a theory, meaning that yes, some spaces or some buildings or even at a very fundamental level, a landlord may take on that approach. But what limits that and what comforts us in that, is many buildings are unable to be as multi-tenantable, as many of our buildings.
And also, many landlords don't want to be in the multi-tenant business. They like a larger tenant portfolio or maybe they're just geared to be very focused on that versus the day to day environment, the burden, the management intensity of a very multi-tenant environment.
And that's again what in our view magnifies our opportunities around having concentrated ownership of parts, where you have multiple buildings, and you can run these things, where you are balancing a number of different things literally on a weekly basis that are even outside of traditional lease expirations. A smaller tenant can come to you and say, I'm in 3,000 square feet, this just changed in my business, now I need to go to 5,000, and can we look at a different space, whatever else, and we have a combination of buildings, we can support that kind of activity in a much better and more efficient way than another operator who may only have one building that is a single tenant that's not nearly as divisible.
And again, at the end of day, their motivation is not to do that.Stuart Seeley – Morgan Stanley Very good. Thank you for that clarification.John Peterson You bet.Joe Russell Thanks Stuart.Operator (Operator instructions) You have a follow up question from the line of Jordan Sadler with KeyBanc Capital Management.Jordan Sadler – Keybanc Capital Hi guys, just following up on one of those earlier questions on investment opportunities.
Have you guys adjusted underwriting expectations or hurdles whatsoever given sort of the changed environment? I know there is not a ton of new products on the market, but how are you thinking about sort of either distressed opportunities or new investment opportunities?Joe Russell Yes, Jordan, I think the – without question, sure we have adjusted expectations, because across the board, capital is more expensive.
But there are still I think very opportunistic ways to underwrite and look at value creation that may not be so different than they were a year or two or three ago that might pertain to a portfolio that has got a certain amount of repositioning tied to it or risk tied to it or tenant expirations, et cetera, that we still feel in the longer term context is a great value add play for us. But, the going in yields or the onerous approach we take to each and every acquisition isn't materially different, but I would say we are definitely basing our decisions on different going in yields, meaning we want better returns than we were looking at a year or two ago.
Again, it's just a simple metric of cost to capital, definitely higher. And we think we can command better returns, because of that, going into whatever kind of ultimate environment this plays out over the next, say, a year or two.Jordan Sadler – Keybanc Capital So, where do you think your marginal – how much higher is your marginal cost to capital today versus say a year ago?Joe Russell Well, a simple comparison to that is, obviously we rely on or have relied traditionally on the perpetual preferred market.
A year ago about, we raised about $140 million in a record low environment. We did that at transaction on the preferred equity at 6.7%.
Today's environment, a comparable issuance would probably be in the high eights. And that market, again not unlike even the investment market, there aren't a lot of deals that have taken place in this current arena.
But our sense is that cost to capital has obviously changed dramatically. And again, we have to be cognizant not only using that as a data point but just other alternative capital structures as well.Jordan Sadler – Keybanc Capital So would it be safe to assume that on a going in unleveraged basis that your hurdle has changed by a similar amount, as that sort of marginal cost to capital?Joe Russell Well, I wouldn't say it's been that direct, but it certainly influences the perceptive view that we would take on a repositioning effort or a pure investment that we would be making.
Meaning, we want to command even higher returns than we were certainly a year ago for the fundamental reason that availability and cost to capital is different. The good news for us is we don't feel like we are constrained from an availability standpoint, again because of our low leverage.
But, again what we got to be cognizant of is just the cost of that. And knowing what many of our competitors are also having to do in their own decision making is they are potentially looking at either the same types of assets we are or the way that they are able to fund those transactions.Jordan Sadler – Keybanc Capital So, lastly, I wanted to see if I could clear up my question from earlier, my line cut out, but your weighted average occupancy in the quarter was 94% for the total portfolio.Joe Russell Yes.Jordan Sadler – Keybanc Capital Your leased space, just calculated from your supplemental at quarter end, appears to have been 94.5%.
And so, it seems as though occupancy either trended up through the quarter or at least maybe toward the quarter end at least, you had some leases signed. And so, I was just curious if that was a good read in terms of what you were seeing?Joe Russell Yes.Jordan Sadler – Keybanc Capital By market or if that was just sort of – just a moment in time that was not something to read into?Joe Russell Well, I think the collection of data points in that realm include, as JP mentioned, the amount of leasing that took place in the quarter, some of which hasn't taken occupancy yet some of which has.
And then again the amount of renewals that we are able to do in any given quarter, where certain leasing activity takes place, and when it begins. And in this quarter as you mentioned, yes, there was the change from the average to the at-number.
But again, I wouldn't say that that is materially different than it might be in any given quarter, where you might have that ebb and flow situation. The good news in the context of the quarter as JP mentioned was that we had a decent, if not pretty high level of volume than we typically see, meaning we did a little over 1.5 million square feet.
So, as that level of activity either renews and/or takes occupancy that is a good driver for us. But again, quarter to quarter, there is always going to be the ebb and flow.Jordan Sadler – Keybanc Capital That's a little more helpful.
Thanks, guys.Joe Russell You bet.Operator And at this time, there are no further questions.Ed Stokx Okay, thank you everyone for joining us. We look forward to talking to you at the end of next quarter.
Have a good day.Operator This concludes today's conference call. You may now disconnect and have a great afternoon.