PS Business Parks Finds Tenants ‘Doing Fine’

 Executives with PS Business Parks Inc. were pleased with the company’s third-quarter results even as the company and its customers work through the coronavirus pandemic.John Petersen, interim chief executive of the Glendale real estate investment trust that buys and manages multi-tenant industrial and office space, said in a conference call with analysts that the company was experiencing a robust expansion rate with new net leases of nearly 200,000 square feet from about 125 tenants.

“While the path of the pandemic is uncertain, it is clear that our core small business customers are resilient, active and, in the vast majority of cases, they have figured out how to successfully operate their businesses in this environment,” said Petersen, who also serves as chief operating officer, during the call.

PS Business Parks reported net income of $50.9 million ($1.11 a share) for the quarter ending Sept. 30, compared to net income of $46.5 million (96 cents) in the same period a year earlier. Revenue dropped by 4 percent to $104 million.

The share price has declined about 12 percent from the start of the year through Nov. 16. On Nov. 18, the stock price closed at $134.81.

As of Sept. 30, the company owned and operated 27.5 million rentable square feet of commercial space in six states, comprised of 97 business or industrial parks and 672 buildings. In the San Fernando Valley, PS Business Parks has properties in Studio City and North Hollywood.  Craig Mailman, equity research analyst at KeyBanc Capital Markets, who follows PS Business Parks, said in a research note that the firm’s “outsized exposure to small business tenants” remains a headwind in the current market.

On a positive note, industrial demand continues to drive a steady leasing pace, Mailman wrote.“A big lease in Los Angeles provided a boost to rent spreads that would have otherwise been more flattish,” he added in the research note. “In addition, cash rent collections improved in the third quarter of 2020 and so far in October versus second quarter 2020 collections.”Rent collectionsThe lease Mailman referred to was for 288,000 square feet at the Hathaway Industrial Park in Santa Fe Springs.

“This lease, which is to a credit customer, came with cash rent growth of over 36 percent,” Petersen said during the conference call. “Subsequent to quarter end, we leased an additional 40,000 square feet to the same customer in the same park.” The Hathaway lease addressed one of the largest remaining availabilities in the company’s portfolio, Mailman said in his note.As for rent collections, PS Business Parks brought in 5.2 percent more during the third quarter compared to the previous quarter. It also improved rent collections back to pre-pandemic levels in its non-California markets, Petersen said.

Jeff Hedges, chief financial officer, said during the conference call that collecting rents in California proves “to be more challenging than other markets due to the ongoing state and local ordinances.”In the city and county of Los Angeles, commercial tenants are protected from evictions for non-payment of rent due to COVID-19 related reasons. In the city, once the pandemic emergency has been declared over, businesses have three months to pay their back rent, while in the county it is six month to 12 months, depending on the size of the business.During the conference call, Chris McCurry, a senior associate in equity research in the New York office of Citigroup Inc., asked about the company’s views on California and its broader market in general.  Petersen responded that he was pleased with how the company’s core customer base – not including restaurants or other consumer-related businesses – was responding to the pandemic and how they have proven that they can get through it.“And I think California, we’re not out of it yet, as I mentioned, but our core customers have done well,” Petersen said during the call. “Again, retail and restaurants and those kinds of things are struggling because those for the most part have not reopened in California and we do not know when that is going to end. But our core industrial customers in California are doing fine.”Petersen became interim chief executive in the spring after then-chief executive Maria Hawthorne took a leave of absence for medical reasons. She then announced her retirement effective Sept. 1 but continues to serve on the board of directors.The board is conducting both an internal and external search for a new chief executive and has hired the management consulting firm Korn Ferry to assist with identifying candidates.