PS Business Parks Inc (PSB) Q4 2018 Earnings Conference Call Transcript

PSB earnings call for the period ending December 31, 2018.

Motley Fool Transcribers
Motley Fool Transcribers
Feb 21, 2019 at 5:39PM
Financials

PS Business Parks Inc  (NYSE:PSB)

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Q4 2018 Earnings Conference Call
Feb. 21, 2019, 1:00 p.m. ET

Contents:

Prepared Remarks:

Operator

Good afternoon and welcome to the PSB Business Parks' Fourth Quarter and Full Year 2018 Earnings Results Conference Call and Webcast. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. (Operator Instructions)

It is now my pleasure to turn the floor over to Jeff Hedges, PSB's Chief Financial Officer. Sir, you may begin.

Jeffrey D. Hedges -- Executive Vice President, Chief Financial Officer and Secretary

Thank you. Good morning, everyone, and thank you for joining us for the fourth quarter 2018 PS Business Parks' investor conference call. This is Jeff Hedges, Chief Financial Officer. Here with me are Maria Hawthorne, CEO; John Petersen, COO; and Trenton Groves, CAO.

Before we begin, let me remind everyone that all statements, other than statements of historical facts, included in this conference call are forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond PS Business Parks' control, which could cause actual results to differ materially from those set forth in or implied by such forward-looking statements. All forward-looking statements speak only as of this date of this conference call. PS Business Parks undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

For additional information about risks and uncertainties that could adversely affect PS Business Parks' forward-looking statements, please refer to the reports filed by the Company with the Securities and Exchange Commission, including our Annual Report on Form 10-K and subsequent reports on Form 10-Q and Form 8-K.

We will also provide certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to GAAP is included in our press release and earnings supplement, which can be found on our website at psbusinessparks.com.

I will now turn the call over to Maria.

Maria R. Hawthorne -- President and Chief Executive Officer

Thank you Jeff. Good morning and thank you for joining us. Today, I will start with an overview of the company's current condition, fourth quarter results and some perspective on full year 2018 performance. JP will provide details on operations and markets and Jeff will provide financial updates. We had a strong fourth quarter as industrial metrics continue to accelerate and our Same Park performance improved sequentially throughout the year on multiple fronts including NOI, rent growth and continued occupancy growth and our non-Same Park assets and multifamily development.

Weighted Same Park occupancy of 95.2% for the quarter due illustrates the strength of our markets and the ability of our team as they leverage the growing tenant demand in nearly every location we operate.

Thank you, Jeff. Good morning and thank you for joining us. Today I will start with an overview of the Company's current condition, fourth quarter results, and some perspective on full-year 2018 performance, J.P. will provide details on operations and markets, and Jeff will provide financial update.

We had a strong fourth quarter as industrial metrics continue to accelerate and our Same Park performance improved sequentially throughout the year on multiple fronts, including NOI, rent growth, and continued occupancy growth in our non-Same Park assets and multifamily development.

Weighted Same Park occupancy of 95.2% for the quarter illustrates the strength of our markets and the ability of our team as they leverage the growing tenant demand in nearly every location we operate. On a square foot basis, 85% of our portfolio is industrial and flex product located in premier gateway markets and infill locations.

The West Coast and South Florida are enjoying record high rental rates and occupancy. Our team is busy and continues to reprice space on new and renewal transactions at today's rates. Despite inflammatory rhetoric regarding trade wars, we have seen no impact and remain encouraged that there is no deceleration in any of our markets. Due to skyrocketing land prices, we still have not seen meaningful new competitive supply of medium and small multi-tenant industrial or flex space. Without exception, all of our markets are experiencing job growth, low unemployment, and confidence remains high among our customer base.

Highgate at The Mile, which opened in June 2017, continues to perform strongly. As of December 31st, we were 95.9% occupied. Now that we have stabilized occupancy, our goal is to reduce tenant incentives and increase NOI. We remain encouraged by Highgate's success and continue to work with Fairfax County on rezoning the remaining 40 acres we own at The Mile. We anticipate obtaining approval for our rezoning application in the fourth quarter of this year and if conditions remain positive, conditions remain positive, construction on our next phase will begin about a year after that.

For the last five years, we have refined our portfolio and focused on our core markets and products. In 2018 we successfully sold three office parks in Orange County totaling 700,000 square feet for $133.3 million of net proceeds, and we were able to exchange these proceeds into the purchase of two industrial parks totaling 1.1 million square feet in Northern Virginia for $143.8 million. The acquired properties were 76% occupied at acquisition and required several million dollars for repositioning and creation of small bay industrial suites.

The repositioned suites are beginning to deliver and our team is cleaning up the rent roll. We have strategically allowed 3% of the occupancy to roll as we opted to terminate several leases. Despite this, we are beginning to see occupancy increase and today these assets are 79.5% occupied. We will continue to see occupancy increase over the next several quarters as it catches up with our other parts in that market which are currently 95% leased.

PSB will continue to share the office parks that we do not intend to redevelop in the near- to mid-term, and based on this rationale, we haven't (ph) identified two more parts for potential disposition. The assets are located in Montgomery County, Maryland, totaling approximately 1.4 million square feet and in 2018 generated approximately 7% of the Company's total NOI. There are many unknowns at this point as we are early in the process. So there is not much to share beyond the fact that we are in the early stages of marketing.

Now I'd like to make a few points regarding full year 2018 results. We moved forward on several initiatives and saw positive results that will launch a successful 2019. Here are some highlights. We experienced healthy leasing volume, which totaled 7.3 million square feet and nearly 2,000 transactions with 5% rent growth and 68% retention. Core FFO increased 5.5%. Our leasing team was able to drive down transaction costs, thus helping to drive a 10.9% increase in FAD.

Through the efforts of our leaders in the field and here at the home office, the Company is well positioned coming into 2019 as we feel that conditions remain favorable to driving internal growth. Further, our fortress balance sheet keeps the Company well positioned to capitalize on value-add investment opportunities.

Now I turn the call over to John Petersen.

John W. Petersen -- Executive Vice President, Chief Operating Officer

Thanks, Maria. As Maria mentioned, leasing momentum continued for landlords in Q4, which helped us deliver strong results in all our markets, as illustrated by 9.7% cash rent growth and 76% retention, led by California, Seattle, Florida, and Texas. Operating fundamentals included record low unemployment, positive net absorption, limited new construction, and robust user demand. In Washington Metro leasing fundamentals, while not as strong as our other markets, have stabilized primarily driven by small business users.

I will now take you through fourth quarter statistics by market beginning on the West Coast. Northern California once again delivered superior metrics and remains one of the most dynamic and tight landlord markets in the country. In Q4 our Northern California team was able to take advantage of these conditions and signed 106 deals totaling 382,000 square feet, an average of 3,600 square feet per lease, demonstrating deep small user demand in the Bay Area. Rent growth in Q4 was 22.8%, helped by customer retention of 83%, highlighting our keen focus on customer service and providing space options within our parks.

In Q1 2019 we are getting back a 130,000 square foot industrial space in Hayward as the user has outgrown the facility. Right now our plan is to target a single tenant to backfill the space as the inventory of available properties of this size is limited with 2% market vacancy. We have solid interest and my expectation is that we will have it released in the next few quarters with solid rent growth, consistent with what we have recently experienced in Northern California.

Southern California benefited once again from a healthy economy and limited new supply complemented by high demand for industrial infill product. Occupancy in Q4 reflected this tight operating environment as we were 96.8% occupied during the quarter. Blended rent growth in Southern California was 13.6% and retention was also strong at 71%.

Our Seattle team is capturing the benefits of an ultra-tight industrial market. Occupancy in our Seattle assets grew 160 basis points in Q4 to 99.1%. We signed 80,000 square feet of leases and 16 deals, an average size of 5,000 square feet. Rent growth was 20.7% and retention 78% as existing customers have few options other than to renew and pay the higher rent.

In Texas, we signed almost 334,000 square feet and 53 transactions with retention of 70%. Robust demand from users under 10,000 square feet helped grow rents in Austin 15.3% and 4.2% in Dallas. Occupancy in Austin was 91.6%, up 20 basis points from Q3. In Dallas, occupancy increased 340 basis points to 92.9% as we made progress backfilling some move-outs from 2018.

The South Florida industrial market is still enjoying favorable tailwinds, and we have not experienced any negative effects from the trade war headlines. In fact, and not surprisingly, the majority of our demand is coming from customers, including existing customers, under 20,000 square feet. We signed 225,000 square feet in 37 transactions generating robust rent growth of 12.7% and retention of almost 74%. Notwithstanding the temporary government shutdown in Q4, our team in Washington Metro had one of the strongest quarters in 2018 in terms of production and leased 553,000 square feet. We signed a couple larger renewals and achieved retention of 79% as we clearly understand the benefits of renewing our customers.

In terms of rent growth, Northern Virginia turned positive due to two key renewals where we were able to take rents to market. Maryland remains a battle for occupancy and rents declined 16.1% in Q4. Also in Maryland we are losing a 160,000 square foot long-term customer at the end of Q1 that is relocating into a build-to-suit campus facility.

The space we get back is easy to subdivide and will work well with our proven strategy of subdividing into smaller suites. This space will take multiple quarters to reposition and release. And based on the outgoing lease, the (inaudible) revenue, including reimbursements, is a little over $1 million. However, it should be noted that this space is located within one of the two parks that Maria mentioned earlier, which we have identified as potential disposition targets and thereby the drag that may be created by this pending move out could be mitigated based on if and when we sell the park.

Regarding the remainder of Washington Metro, the local economy is stable and small businesses are active, and we are focused on boosting occupancy while maintaining our disciplined strategy of containing transaction costs.

As we head into 2019, we remain positive and still like the industrial supply demand balance. The infill nature of our business parks and small businesses continue to demonstrate a need for space in great locations. In 2019, approximately 23% of our portfolio is expiring with nearly 70% of those expirations occurring in strong markets, of which 27% come from Northern California alone, giving us plenty of opportunity to continue our positive momentum.

Now I'll turn the call over to Jeff.

Jeffrey D. Hedges -- Executive Vice President, Chief Financial Officer and Secretary

Thank you, J.P. As Maria mentioned at the opening of the call, we successfully wrapped up 2018 with a strong fourth quarter. Net income per common share for the three months ended December 31st was $1.15 leading to FFO of $1.65 per share. Core FFO was also a $1.65 per share, which is an 8.6% increase from Q4 2017. FFO growth was driven by a 4% increase in Same Park NOI, which was supported by 95.2% weighted average occupancy during the quarter. For the year, net income was $6.31 per share, leading to FFO and core FFO of $6.47 per share. At $6.47, core FFO per share was up 5.5% year-over-year, driven primarily by Same Park NOI growth of 2.6% as well as operating income contributed by our Northern Virginia Industrial portfolio acquisition in mid-2018.

Funds available for distribution or FAD was $182.2 million for the year, an increase of 10.9% from the prior year. In addition to Same Park NOI growth, the year-over-year increase in FAD was driven by lower total recurring capital expenditures which were $37.5 million, down from $45.8 million in 2017, a decrease of 18.2%. Measured as a percentage of Same Park NOI, Same Park recurring capital expenditures in 2018 were 12.7%, down from 14.3% in the prior year, a continued reflection of our dedicated field team's disciplined approach to efficiently managing our assets.

I'll now spend a minute providing a brief financial update on our multifamily property, Highgate at The Mile. As a reminder, we started consolidating the joint-venture entity which owns Highgate at the beginning of this year. For the three months ended December 31, Highgate produced NOI of approximately $1.3 million, up from $850,000 in Q3. As Maria mentioned, the period-end occupancy for Highgate was 95.9%, which puts us on solid footing heading into 2019.

In effort to stabilize the property, in 2018 we offered certain concessions at move-in to new customers and we'll likely continue this practice in limited situations in the first half of 2019 as some of our earliest tenants roll for the first time. We expect the property will become fully stabilized in mid-2019.

Finally, I want to point out that we paid a dividend of $1.05 to common shareholders in the fourth quarter, bringing our total dividend payout in 2018 to $3.80 per common share. For the year, our dividend payout ratio was approximately 73%, and we have retained approximately $44 million of free cash flow. As we continue to actively seek out capital allocation opportunities, the free cash flow we retain from operations, coupled with our corporate credit facility and low leverage, affords us the ability to move swiftly when accretive acquisition opportunities present themselves.

With that we'll now open the call for questions. Operator?

Questions and Answers:

Operator

Certainly. The floor is now open for questions. (Operator Instructions) Thank you. Our first question is coming from Craig Mailman with KeyBanc. Please go ahead.

Craig Mailman -- KeyBanc Capital Markets, Inc. -- Analyst

Hey, everyone. Maria, just maybe on the potential sales in Maryland, I know there's been numbers kind of thrown out by industry reports, which I guess if you adjust for maybe this move-out put cap rate maybe in the 8% to 9% range potentially. Can you just give an update on the decision for timing here? Is it just you guys want to get rid of some of the CapEx that could come from some bigger move-outs at this point? The need for that much capital seems a little bit less, unless maybe there are acquisitions on the horizon that could ultimately play out.

Maria R. Hawthorne -- President and Chief Executive Officer

Yeah. Craig, that's -- you're making some good observations. And this is why we're saying we're testing the waters. We don't have to sell, but these two assets in particular are located in some good markets. We're currently 90% leased. So one park is located in West Montgomery County in an Opportunity Zone. So there -- so that's what we're thinking about with timing potentially for that asset.

And then the other one is Metro Park North. That is a combination of flex, industrial, and office space. So again, we could even break out the portfolio and the sales. We are not anticipating it being a single sale like in Orange County, but we think the timing might just be good right now because capital is plentiful. And then like I said, particularly on about a 0.5 million square feet of it, it's located in an Opportunity Zone. So that's what we're thinking about the timing.

Craig Mailman -- KeyBanc Capital Markets, Inc. -- Analyst

That's helpful.

Maria R. Hawthorne -- President and Chief Executive Officer

Okay.

Craig Mailman -- KeyBanc Capital Markets, Inc. -- Analyst

Then J.P., nice job on getting some positive mark-to-market Northern Virginia. You'd mentioned kind of these two key renewals here. It's encouraging that you're able to push through market rents with these two tenants. Is this an anomaly or given kind of what you guys have rolling, given the vacancies in the surrounding your parks, is there an opportunity to continue to narrow that that negative spread that you guys have had for a couple years?

John W. Petersen -- Executive Vice President, Chief Operating Officer

Yeah. Craig, so we did have the opportunity with a couple renewals to mark to market, not big obviously. But if you look at our Northern Virginia parks, they're much better occupied than our Maryland parks. Northern Virginia is a better market, more business friendly. There is more activity, and some of our multi-tenant office is operating in the mid-90s. So if our park is in the mid-90s, we have pricing power. And so on select parks, on select deals, we're absolutely trying to mark to market.

And we're able to do that here and there. I don't expect that every deal we'll be able to do this, because some market vacancy, as you know, is in the low-80s in suburban Northern Virginia. So we're still dealing with that effect. But when we have parks in the mid-90s from here and there, we certainly have some pricing power, not completely, but we have -- we can be more disciplined in the deals we do when we're in the mid-90s. Does that help?

Craig Mailman -- KeyBanc Capital Markets, Inc. -- Analyst

Yeah, that's definitely helpful. On Highgate, kind of, I know you guys are running concessions to get it leased, but given kind of the costs you guys have in here with the average rents, it looks like you guys are running in the low-fives on the yield perspective. And is that -- number one, is it accurate? Number two, kind of, what was the original underwriting on this asset and kind of how does your experience with the reality of the ground in Northern Virginia kind of influence you as you guys look to start the next -- potentially the next multifamily at that park?

Jeffrey D. Hedges -- Executive Vice President, Chief Financial Officer and Secretary

Hi, Craig. This is Jeff. I'll take that. So what we mentioned -- what I mentioned in opening the call here was that in Q4 all throughout 2018, for that matter, we did offer concessions in certain instances to get the property up to -- to reach stabilization.

We're actually not currently offering concessions at this time, but as some of our initial tenants roll for the first time, we do expect that we may continue to offer some of those concessions in the first part of 2019, which is why we say we're not declaring the property to fully stabilize until middle of this year. But if you look at Q4 in particular, there were concessions used in that quarter. And so you can't simply take Q4 NOI and annualize it to back into what we would view as the true yield on the property.

In regard to your question about what we underwrote, we don't provide that information, but we do feel very good with how the property is operating at this point in time relative to our initial expectations, and we think it's only going to improve in 2019.

Craig Mailman -- KeyBanc Capital Markets, Inc. -- Analyst

And just the last one for me. I think we had talked about last call potentially another LTEIP being put in. You guys said it was a little too early. I mean has the Board met and is that something that we should be modeling in, in terms of higher G&A for '19 relative to '18?

Jeffrey D. Hedges -- Executive Vice President, Chief Financial Officer and Secretary

Craig, there's nothing to report at this point in time on the LTEIP. We do think that the Board will meet on this at some point in time, and as soon as we have an update to give, we will provide that information.

Craig Mailman -- KeyBanc Capital Markets, Inc. -- Analyst

Great. Thank you.

Operator

Thank you. Our next question will be Manny Korchman with Citi. Please go ahead.

Emmanuel Korchman -- Citigroup Global Markets, Inc. -- Analyst

Hey, everyone. Just to stick to the acquisitions topic for a moment longer. Is the ultimate goal here to get out of sort of the higher finish office and become more pure-play industrial and flex? Is the goal just to exit some of those markets where you're seeing weaker fundamentals or is the goal to provide funding for growth in the better growth areas?

Maria R. Hawthorne -- President and Chief Executive Officer

Hey, Manny. Those are all good questions, and we've always been opportunistic in our acquisition and capital allocation strategy. So -- but one of the things we have learned over the decades is that office requires that constant infusion of capital, and given that 85% of our portfolio is industrial where we keep our -- one of the things that we look at is the capital spend percentage to NOI, and it's the tale of two cities between office and industrial.

So -- and then historically, the industrial and flex and the small tenant, the components of that have always performed the most strongly. So that is what we do want to focus on. And we think that will make a cleaner story for investors as well as a cleaner story for our operations team to manage and to run.

So, yeah, we -- if you see us remain in office, you won't see us dumping all of it, and that's because we do have some office parks in some locations that are exceptional candidates for redevelopment, maybe not now or even in the next two or three years, but for the future. And by that I mean we've got certain locations on the West Coast that would be exceptional candidates for redevelopment. So we won't be completely getting out of office, but it was what I said earlier on the call, we will be exiting out of offices where we say these are not good candidates for us for redevelopment.

Emmanuel Korchman -- Citigroup Global Markets, Inc. -- Analyst

So if we just concentrate on the Maryland park for a second longer then, what are then the sort of requirements to see a sale happen there? Is it you just got to find a buyer? Is it going to come down to pricing? Is it a matter of a buyer that's comfortable with the vacancy coming up? Kind of you introduced it as you're testing the waters, what are you testing the waters for?

Maria R. Hawthorne -- President and Chief Executive Officer

Well, so for -- OK, so it's two very different assets. So let's take the assets in Western Montgomery County. There are right now actual funds that are opportunity funds, and so because that asset, which is about 530,000 square feet, it's mostly flex but there are three office buildings as well. Because that's in an Opportunity Zone, we're thinking, OK, this might be a good opportunity for those. And then, yeah, you're right, it would save us the capital expense of demising and releasing that 160,000 square feet that J.P. mentioned is moving out at the end of first quarter.

So that's one story. And the Opportunity Zones that's a window that will close. So we think, OK, this might be the right time. If the pricing isn't there, we don't have to sell it. We know what we can do to keep -- to get it released. There's a new hospital being built directly adjacent to the park. And so if we end up keeping it, that's fine. So it will come down to pricing to us.

At Metro Park North that's a 900,000 square foot asset, was 17 buildings, and that -- it is a combination of flex, single story office, and mid-rise office. And so that's a portfolio that could actually get broken apart, and we're willing to be very patient and do multiple deals as we did in Orange County to make sure that we get the best pricing possible and we'll keep -- we'll keep you guys updated as this process continues.

Emmanuel Korchman -- Citigroup Global Markets, Inc. -- Analyst

That's it for me. Thank you.

Maria R. Hawthorne -- President and Chief Executive Officer

Thanks, Manny.

Operator

(Operator Instructions) And we will take our next question from Anthony Paolone with JPMorgan. Please go ahead.

Anthony Paolone -- JPMorgan Securities LLC -- Analyst

Yeah. Thank you. So just on staying on the potential sales. You mentioned I think 7% of total 2018 NOI. Is that -- in order to think through what the NOI coming off those two properties are. Is that the $281 million of cash? Is that what we got to take 7% of, so about $19 million to $20 million, is that the NOI?

Jeffrey D. Hedges -- Executive Vice President, Chief Financial Officer and Secretary

Yeah, two -- well, is that -- the total park is. That's right, Tony. I'm just trying to double check the precision of that figure that you -- $280 million -- it's about $285 million, and it's 7% of that.

Anthony Paolone -- JPMorgan Securities LLC -- Analyst

Okay. So it's, give or take, probably about $20 million of NOI.

Jeffrey D. Hedges -- Executive Vice President, Chief Financial Officer and Secretary

That's right, yes, based on 2018 historical, yeah.

Maria R. Hawthorne -- President and Chief Executive Officer

And then, Tony, we wanted you guys to know that if you think about the large tenant moving out at the end of first quarter, that single user alone would be a $3 million hit to the '18 number.

Anthony Paolone -- JPMorgan Securities LLC -- Analyst

Okay.

Maria R. Hawthorne -- President and Chief Executive Officer

Okay.

Anthony Paolone -- JPMorgan Securities LLC -- Analyst

Yes, got it. That was kind of where I was going to with that. And then if you did sell one or more of these, do you have pretty notable gains that you would need to do something with or address or do you have room to absorb that if you didn't have acquisition opportunities?

Jeffrey D. Hedges -- Executive Vice President, Chief Financial Officer and Secretary

Yeah, Tony, we hope to find an accretive redeployment opportunity for the funds if and when we do move forward with the sale. If we do not identify an accretive exchange opportunity, then there likely will be a small special dividend that would need to be paid out. But we've actually run the preliminary analysis on that and it's relatively small. And so we would be able to retain the vast majority of the sales proceeds from these potential sales.

Anthony Paolone -- JPMorgan Securities LLC -- Analyst

Okay. And then I think as we look at 2019 and leasing, I think in prior discussions you all talked about I think there was a call center perhaps in Dallas and then maybe a little bit of opportunity to pick up some occupancy in Austin. Can you update on those or any other areas of the portfolio where there might be some opportunities?

John W. Petersen -- Executive Vice President, Chief Operating Officer

Yeah, you're right on there, Tony, with -- we do have some space we took back last year in Austin, and we did take back 50,000 square feet call center in Dallas, which again is good space, good call center, and we'll release that I expect later this year. So there is some occupancy opportunity there.

The rest of our markets, as you know, are pretty tight in terms of occupancy. We still have upside in Northern Virginia, but we're getting to the point where we're executing well there, especially vis-a-vis the market. So, yeah, we definitely have -- we have a space or two in Florida, but nothing material throughout the Seattle. We're well leased there, and we're hoping where we do have expirations, if they don't stay, we know, in the West Coast especially, we have mark-to-market opportunities that we certainly look forward to take advantage of.

And as I mentioned in my comments, if the tenants can't find space in the market, they've got to stay with us and they have to pay the market rents, which has been increasing obviously for the last several years.

Anthony Paolone -- JPMorgan Securities LLC -- Analyst

All right. And so if we -- putting aside the 160,000 square feet in Maryland, if you think about the space that you have to backfill in Northern California and then maybe some of the opportunities in Dallas and Austin, do you think that nets positive over the course of '19 or do those kind of puts and takes equal out or how should we think about just year-over-year growth?

John W. Petersen -- Executive Vice President, Chief Operating Officer

Yeah putting aside -- putting aside the 160,000 square foot space in Maryland, the other opportunity you mentioned Northern California, in Texas, all have opportunities for rent increases for them, yes. And additionally, we're being highly selective with the users that we engage with. We view these as opportunities -- these vacancies, these expirations as an opportunity to secure long-term credit users. And so we're being selective and we're not taking the first bite at the apple necessarily. So we're OK with a little bit of downtime if we can secure higher rents with good credit.

Anthony Paolone -- JPMorgan Securities LLC -- Analyst

All right. So what are contractual rent bumps in your leases at this point?

John W. Petersen -- Executive Vice President, Chief Operating Officer

Yeah, it varies from mark-to-market and with the market conditions where we're able to push above our standard 3% occasionally, based in place, kind of, we're in the -- including GSA which were flat, we're about 2.5%. The typical market rent adjustments in leases are 3%.

Anthony Paolone -- JPMorgan Securities LLC -- Analyst

Okay. Great. Thanks a lot.

John W. Petersen -- Executive Vice President, Chief Operating Officer

Yeah.

Operator

And there are no further questions at this time. So I would turn it back to Jeff Hedges for closing remarks.

Jeffrey D. Hedges -- Executive Vice President, Chief Financial Officer and Secretary

Okay. Thank you, everyone, and we look forward to talking with you all again soon. Have a good afternoon.

Operator

This does conclude today's program. Thank you for your participation. You may now disconnect.

Duration: 37 minutes

Call participants:

Jeffrey D. Hedges -- Executive Vice President, Chief Financial Officer and Secretary

Maria R. Hawthorne -- President and Chief Executive Officer

John W. Petersen -- Executive Vice President, Chief Operating Officer

Craig Mailman -- KeyBanc Capital Markets, Inc. -- Analyst

Emmanuel Korchman -- Citigroup Global Markets, Inc. -- Analyst

Anthony Paolone -- JPMorgan Securities LLC -- Analyst

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