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PS Business Parks Inc (NYSE:PSB)
Q3 2019 Earnings Call
Oct 23, 2019, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon and welcome to the PS Business Parks Third Quarter 2019 Earnings Results Conference Call and Webcast. [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 third quarter of 2019 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 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 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

Thanks, Jeff. Good morning everyone and thank you for joining us today. We had an outstanding quarter on both investments and operations. In September, we closed on Hathaway Industrial Park for $104.3 million. Hathaway is a 10-building, 543,000 square foot Park located in Santa Fe Springs, Los Angeles County near the intersection of three major freeways, the 5, the 105 and the 605.

This market is 1.5% vacant and in-place rents for the park are approximately 20% to 30% below market. There is a single-user in the largest building totaling 288,000 square feet, who will expire in April 2020. This space represents a near-term opportunity to add value.

On October 8, we closed on the sale of the 1.3 million square foot Office-Flex Portfolio in Maryland. The sale totaled $148.8 million and was right in line with our expectations. At this point, there are no other assets for sale in our portfolio for 2019.

We continue to be pleased with NOI growth at Highgate at The Mile, our multifamily asset. Compared to prior year, NOI grew 73% and weighted average occupancy was 95.6%. Last quarter, I announced that we had received full rezoning of the balance of The Mile, and that we are launching our second multifamily development called Brentford and construction will begin in mid 2020.

Continuing with development updates, we are also going to commence construction of two Class A multi-tenant industrial buildings, which are both approximately 80,000 square feet. In both cases, we are taking advantage of excess land located in existing Parks. The first to start is located in our Freeport Business Park in Dallas, which is a mile from DFW Airport. The other building, which will start late next year is located in our 212 Business Park in Kent Valley, Washington with close proximity to Sea-Tac Airport and the Seattle and Tacoma ports. We will give you updates on future calls.

Operationally, Industrial continues to lead and customer confidence remains high. Year-to-date total cash NOI is up 5.7%. Cash rental rate change for our commercial properties is up 8.5% on 5.3 million square feet of leasing. We feel confident that our positive momentum will carry through the fourth quarter and set us up for an equally successful 2020.

With that I turn the call over to JP.

John Petersen -- Executive Vice President, Chief Operating Officer

Thanks, Maria. Operating fundamentals in our markets, were again solid, as demonstrated by 2 million square feet of production, same Park occupancy of 94.7%, up 40 basis points from Q2, retention of almost 74% and overall cash rent spreads of 6.5%, including 13.6% rent growth on our industrial leases. Results were helped as our customers continued to grow with us in Q3. We signed 53 expansions for a net 82,000 square feet.

Now for a quick Q3 breakdown by market. There is active user demand in Northern Virginia and we signed 107 leases for 426,000 square feet. Occupancy jumped 100 basis points to 92.8%, well ahead of our peer set, which is currently at 81%. Portion of this occupancy gain was generated by 13 existing customers that expanded in the quarter. We did have negative rent growth of 8.4% in Northern Virginia, primarily due to two office renewals over 20,000 square feet and one key office expansion of over 40,000 square feet. All three transactions were important wins for us as we grew occupancy and extended lease term with minimal transaction costs.

Demand in Northern Virginia is being driven by technology, healthcare and government contractors. Northern California was also active in Q3 with our team signing 490,000 square feet of deals, average deal size of 7,500 square feet, generating cash rent growth of 18%. Occupancy increased a 130 basis points from Q2 to 97.1%, as the 130,000 square foot vacancy we discussed in Q2 was occupied for all of Q3.

Speaking of larger space in Northern California, I mentioned last call that we had three expirations in Q4 each over 150,000 square feet. We successfully renewed one and have solid activity with good rent growth potential on the other two.

Small user drove our leasing production in Southern California. The team in SoCal signed an amazing, a 149 leases in Q3 totaling 287,000 square feet for an average deal size of 1,900 square feet. This averages about two deals per workday and demonstrates our team's ability to drive market demand. Glendale rent growth was 6%. Orange County rent was up only 1%, as we did one larger showroom lease with the rent write down.

Los Angeles is a very tight industrial market as you all know and we increased rents in Los Angeles 10.5%. We did have one move out in Los Angeles of 52,000 square feet earlier in the year. We have since reposition of building, we have a lot of interest in this space and expect solid rent growth on lease up. San Diego rents, improved 3.7% on the strength of 1,400 square foot average deal size.

In Texas, solid fundamentals continue to drive business forward and our team signed over 325,000 square feet in 68 transactions. Combined rent growth in Austin and Dallas was 6.8%. Occupancy in Texas decreased 70 basis points due to 125,000 square foot customer leaving the portfolio. We have since released this space. Additionally, we signed a 30,000 square feet lease in Las Colinas that occupies in Q1 2020.

Heading the South Florida, we are not seeing any signs of a slowdown due to trade wars or economic uncertainty. Consequently, the Miami team generated good activity in Q3 with 217,000 square feet of leases, producing 13.2% rent growth. Occupancy increased 110 basis points to 95.6%.

Finally, Seattle continued to be a top performer with rent growth of 16%, retention of 91% and 188,000 square feet of production. The Seattle market is one of the tightest in the country and we have been able to take advantage of these stellar fundamentals.

Looking into Q4, I have confidence that with 2.2 million square feet expiring, we are poised to produce solid operating metrics, led by strong existing customer demand, low market vacancy and the team knows how to produce results.

Now I'll turn the call over to Jeff.

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

Thank you, JP. As Maria mentioned in our opening remarks, we are very pleased with our third quarter financial results. Net income for the three months ended September 30 was $0.96 per diluted common share, and $2.95 per diluted common share for the nine months ended September 30.

Year-to-date, funds from operations or FFO was $5.13 per share, an increase of 6.7% from a year ago. While Funds Available for Distribution or FAD increased 9.9% over the same period. The increases in both FFO and FAD were primarily attributable to growth in Same Park NOI, which on a cash basis increased 5.1% over the nine-month period ended September 30 compared to the prior year.

We are also very pleased with how our non-Same Park portfolio is performing, as all of our recent acquisitions have to at this point met or exceeded our underwriting assumptions. Additionally, our multifamily property, Highgate at The Mile continues to perform very well, as NOI reached $4.4 million for the nine months ended September 30, which is in line with our expectations.

I'd like to now provide a few additional details related to the Maryland sale. First, we want to clarify that the assets that sold are identical to those which were classified as held for sale as of and for the nine months ended September 30. Of the portfolio, which was marketed, we opted to retain one 113,000 square feet office building, which is a 100% occupied by a single GSA tenant and pad site. Both the GSA tenanted building in pad site had not been previously classified as held for sale and both remain in our Same Park portfolio.

Turning now to the balance sheet. As you may have noticed, we were out on our line $50 million as of September 30. With the receipt of the Maryland sale proceeds, we have paid that down in full.

Finally, I'll wrap up by pointing out that we paid a dividend of $1.05 to common shareholders in the third quarter. And our Board recently declared a dividend of $1.05 to be paid to shareholders in the fourth quarter, payable on December 30 to shareholders of record on December 13.

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

Questions and Answers:

Operator

[Operator Instructions] We'll take our first question from Craig Mailman with KeyBanc Capital Markets.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Hey, everyone. Just starting on Hathaway here, I know you mentioned that almost half the property has an expiration in 2020, this -- are you guys planning on that tenant moving out and kind of going in with your typical kind of PSB demise program and kind of getting the smaller tenants? Or is that a market where you feel like you want to keep a larger space for bigger tenants? And kind of what's the capital that you think would have to go in if you decide to kind of do your typical program?

John Petersen -- Executive Vice President, Chief Operating Officer

Yeah, Craig, it's JP here. Good question. Right now, we're real confident. Well first of all, we're negotiating with the customer to renew. We're real confident, if we are unable to come to a renewal that the market supports a full building user. The rest of the Park, as you can imagine is small multi-tenant industrial. This one big building in LA, it's very marketable. We expect that there'll be good demand if we're unable to renew this tenant. So, and either way, we're confident we have really good rent growth there, and a small amount of capital to lease the space out. So, we like our position with that expiration.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Okay. And what's the timing to get to the rest of the leases to kind of capture that 20% to 30% mark-to-market?

Maria R. Hawthorne -- President and Chief Executive Officer

Hey, Craig. So in the first two years, first 24 months of ownership, 76% of the Park is turning. As you know, 288,000 of 543 is over 50% is this one deal. And then as JP said, the other spaces are pretty small industrially speaking. So, we're confident about what's going on there and the rent increases that we'll see throughout the park.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

And so, I know you guys typically don't like to talk about yields, but kind of from, you're going into where the thing could stabilize in two years, I mean, what do you think the uplift could be, on a yield?

Maria R. Hawthorne -- President and Chief Executive Officer

Well, and Craig, we don't like to give yields information like that, that's creating the edge of guidance there. But this was definitely a market deal, and it was expensive, but what we loved about it was that it was a 10 building Park, various sizes and we have a great operating team in LA and we're very confident that we will be very successful moving this asset forward and bringing it to apt market rates.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Okay.

Maria R. Hawthorne -- President and Chief Executive Officer

And Craig, with the big acquisition coming -- I mean with the big expiration coming, you'll see it happen next year.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Right, right. I'm just trying to get a sense of like the dollar uplift on it. I mean is there any way to say what the in-place rents are on a per month basis? Or kind of -- I'm just trying to get a sense how to model the uplift as it seems like there could be a pretty big upward swing and it doesn't take much to move your FFO a couple pennies?

Maria R. Hawthorne -- President and Chief Executive Officer

Yeah. Craig, it would be hard to say for 2019 just because with this big customer, if they renew, that will be a big increase immediately, but then of course if it goes dark, then it does take one or two or three quarters to lease that space up. So I wouldn't want to be forecasting FFO for this space. And we will certainly give a better update in February when we talk again.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Alright. I guess, moving on, outside of this 288, what are 288, what other big expirations you guys have in ' 20? Any chunky ones?

John Petersen -- Executive Vice President, Chief Operating Officer

Yeah, we've got a -- as I mentioned, we've got a couple in Northern California that are expiring this quarter. Again, much like the one in LA at Hathaway, there is a market for big expirations, our plan is not to slice and dice this. But we could have, I mean just to be clear, we could have some vacancy in Northern California as we head into '20. We have -- other than that, we don't have any big one in SoCal and nothing that's material really in the rest of the country. So primarily Northern California, we've got is two big ones. We've got another -- a couple others mid-year, but again I like our position there and in renewing those and pushing rents as those leases mark-to-market.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

All right.

John Petersen -- Executive Vice President, Chief Operating Officer

And we do have, sorry, Craig, we have one in -- a bigger one in Seattle at are 212 Business Park. So that we're -- we're pretty sure is going to come back to market with us mid-year next. So that's really -- it's over 100,000 square feet up in Seattle.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Okay, so you guys are still build -- you guys are going to build another 80,000 square foot facility there, so you I guess feel real good about the demand at that Park?

John Petersen -- Executive Vice President, Chief Operating Officer

Yeah, we feel great about demand at Kent Valley, we feel great that Park -- our Park has been, once the space comes, we release it very quickly. We've operated in the high-90s for the last, I don't know, several years and we are also -- that's why we're building this new building as Maria pointed out. And we're building multi-tenant industrial, and that's what the park is and that's what, even though this is one expiration, more than likely you will see us slice and dice that like we always do with our bigger blocks or like we mostly do with our bigger blocks. Does that answer your question?

Craig Mailman -- KeyBanc Capital Markets -- Analyst

It does. And just on the developments, you guys going to spend in aggregate like $10 million to $15 million? Do you think of spend that you could fund just through cash flow? Or is it the cost figure depending on what you are...

Maria R. Hawthorne -- President and Chief Executive Officer

No, no. Yeah Craig, even though these are multi-tenant industrial buildings they are still industrial buildings, so, and what will make them unique is that, there are hyper infill, so Dallas is not a place we would ordinarily develop, but the Park that I'm talking about is less -- is about one mile from the freight access into DSW. It will be -- have 28 foot clear height, 10,000 foot units and that is just something that will be unique, that close to the airport. And it's the same thing with the Kent Valley, that is a completely built out market in Seattle. And we're putting 30 foot clear height, which and again, we're going small tenant and we don't have a lot of 10,000 square foot, 12,000 square foot spaces that -- at 212 Business Park. And the ones we have usually have a waiting list. So we're very confident that these will be as successful as the development that we did in Miami a few years ago.

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

Yeah, we won't have to do anything out of the ordinary to finance these developments there. You are directionally accurate in kind of your thought in terms of the cost of development.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Okay. This is like $60 a foot ex land, basically, roughly?

Maria R. Hawthorne -- President and Chief Executive Officer

Cost has gone up. And it is Seattle, so I would target more a $100 to $115.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Even ex-land? You guys already have the land, right, so?

Maria R. Hawthorne -- President and Chief Executive Officer

That's just -- but this would -- yeah.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Okay. And then just one last one for me.

Maria R. Hawthorne -- President and Chief Executive Officer

And Craig, we're still getting bids. And so, but that's -- those are good numbers to model. Seattle a little more expensive about 20% more expensive than the Dallas.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Okay. And then just one last one, anything in the same-store expenses? Cash rents were pretty consistent grower, but expenses were up a bit this quarter?

John Petersen -- Executive Vice President, Chief Operating Officer

Yeah, Craig, as we talked about a little bit last quarter, our business is somewhat seasonal and also is impacted by weather patterns or other events of our control. So quarter-to-quarter there could be little timing differences. We probably benefited a little bit from some timing items in Q2 that came into normalization in Q3. So, what I always remind people is, well, while, it's important to look at quarterly results for directional indications, it's equally or more important to look at the year-to-date results. And I would say our nine months ended year-to-date results are a better reflection of how our portfolio is trending from an OpEx perspective.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Great, thanks guys.

Maria R. Hawthorne -- President and Chief Executive Officer

Thank you.

Operator

Our next question will come from Manny Korchman with Citi. Please go ahead.

Manny Korchman -- Citi -- Analyst

Hey guys. Just as we think about the two new developments you're starting, are there other places in the portfolio that we should expect announcements of new developments or is this kind of it for now?

Maria R. Hawthorne -- President and Chief Executive Officer

Manny, that's a good question. And for now that's it. I mean there is -- there will definitely be opportunities in the future for redevelopment, but nothing for 2020.

Manny Korchman -- Citi -- Analyst

Thanks, Maria. And then, JP, on the large leases you spoke about in SoCal, are those going to require repositioning assets or a bunch of capital or is it just simply trying to match the right tenant in the right space there?

John Petersen -- Executive Vice President, Chief Operating Officer

Well, there is two. The one is the Hathaway Park we just bought will require much capital, that's a 280,000 square foot expiration that's coming up. And the one that we just repositioned, a 52,000 square feet I mentioned, that required more capital, that tenant had been in the building basically for 30 years. And so we had to reposition that building. And now we have it back and we're marketing it. And we're really excited about our rent uptick there.

Manny Korchman -- Citi -- Analyst

So there is no timing delay or capital need from here forward, that's all been done for both of those spaces, essentially?

John Petersen -- Executive Vice President, Chief Operating Officer

That's correct, that's correct.

Manny Korchman -- Citi -- Analyst

Perfect. Thanks, guys.

Operator

Our next question will come from Blaine Heck with Wells Fargo. Please go ahead.

Blaine Heck -- Wells Fargo -- Analyst

Thanks. So just to follow-up on the developments. How do you guys think about the economics? Is there kind of a yield hurdle, you guys are targeting? Or any other target you use to, I guess, determine whether or not to go ahead with construction?

Maria R. Hawthorne -- President and Chief Executive Officer

Yeah, hey, Blaine. That's a good question, too. And I can tell you that, stabilized returns, we'll probably be at least 200 points higher than what you can buy new product these days, once it's stabilized.

Blaine Heck -- Wells Fargo -- Analyst

Okay, that's helpful. And then, you guys seem to have several different options for funding between the low cost of debt out there, potential preferred issuance, your low cost of equity and potential disposition proceeds. So I guess maybe for Jeff, can you just tell us how you're thinking about maybe the relative attractiveness of the funding sources for spend on both the development pipeline and potential additional acquisitions out there?

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

Yeah, great question. So obviously we keep a close eye on all the capital markets. And you're right in identifying that. All three common, preferred and potentially issuing debt are attractive to us right now. So at this point in time, we don't have a funding need that would require us to tap into those markets for new acquisitions or for growth capital. We hope to have something to raise capital around here in the near future and at that point in time, we'll assess what the right avenue is for us at that given point in time.

What you've heard us say for the last couple of quarters is that, even though we historically have not utilized debt, at least not significantly, that is something we will explore potentially, but of course, our cost of common and preferred equity remain attractive to us as well. So we're going to keep a close eye on all of that. And we'll provide guidance on this topic once we have something to actually raise capital around.

Blaine Heck -- Wells Fargo -- Analyst

Great, that's helpful. And last one maybe for JP. Rent spreads have been negative for your office portfolio this year. Do you anticipate those turning positive in the near future? Or do you think we'll see negative spreads? And are those negative spreads mostly attributable to the greater DC portfolio or are there maybe any other pockets of weakness out there?

John Petersen -- Executive Vice President, Chief Operating Officer

Yeah Blaine, this is not new for DC office, as you all know. So when we assess, doing a lease or renewal and some of the ones that I talked about in my remarks, it's far better for us to do a renewal, especially ones that I mentioned, one of which was a large expansion. So we're real happy with those renewals, even though they came with the rent writedown. In terms of looking forward, all of the office rent issues are in DC, not anywhere else. We don't have much office anywhere else for that matter. But I do think we're seeing more strength in DC, to be honest, we're seeing more activity from government contractors, one of the expansions I mentioned was a government contractor is, and their take by virtue -- their taking more space and extending term. That's a good sign that we're seeing.

So we do have Parks where from time to time, we can keep rents flat. It's hard to grow when the market is 20% [Phonetic] vacant to rents that is, but I do think, our goal to start reducing that office rent decline. It's really tough to do in a market, again it's 20% vacant, but from time to time and Park to Park, we do have opportunities in our office portfolio in DC to either hold the line on rents as they expire or occasionally believing that we can grow rents in some of our parks there.

So, but it's really is isolated to DC, and again I -- our view on DC is we've had a really good year their production wise, and we're seeing more activity, frankly, in '19 than we have in a long time from the sectors that I mentioned technology, government contractors. We're not seeing anything directly from the Amazon effect, no direct deals from that or anything. So, I don't want you to read into that. But the economy is, active unemployment is 3% in DC, the nationals are in the World Series and things are good there. So.

Blaine Heck -- Wells Fargo -- Analyst

Got it. That's helpful. Thanks, everyone.

Maria R. Hawthorne -- President and Chief Executive Officer

Thanks, Blaine.

Operator

Our next question will come from Eric Frankel with Green Street Advisors. Please go ahead.

Eric Frankel -- Green Street Advisors -- Analyst

Thank you. Can you remind me on the dispositions, what the occupancy was of the portfolio that's sold? I know there was -- a tenant moved out, but I wasn't sure if that occurred late in the quarter or early in the quarter? So, I just want to get a better sense of the cap rate and what that entails?

Maria R. Hawthorne -- President and Chief Executive Officer

Yeah Eric, see the big tenant that moved out was about 160,000 square feet and that did occur in the first quarter. And we're -- and we were around 80% occupied upon the sale.

Eric Frankel -- Green Street Advisors -- Analyst

Okay. It seems like a pretty negative read through for overall property values for that Office-Flex property in Maryland and Virginia. Can you comment on whether that valuation that we -- that you experienced is -- is that appropriate to extend to the rest of your portfolio there? Or is there special circumstances that kind of gave this portfolio a bit of a discount?

Maria R. Hawthorne -- President and Chief Executive Officer

Okay. Yeah, there are special circumstances. So first-off, it is, Maryland and Virginia are two different markets. We break it out that way. Virginia is of right to work state, it's very pro business, in fact Montgomery County, did a survey on and Montgomery County is where we had these assets did a survey on why -- Fairfax County was getting more business than Montgomery, and it came out the issue is pro-business lower taxes. Maryland is a very high tax state, Virginia is a lower tax rate. So, don't ascribe the Maryland asset sales to Northern Virginia.

Secondly, the portfolio that we sold, when we say flex, this was large tenant flex that was really 95% built out as commodity office. So, again, -- and the office portfolio in Maryland was larger tenant office than what we have in Northern Virginia. So with those -- with the market as well as the type of product that was the difference. So if you think about like what we bought in Northern Virginia last year, that 1.1 million square feet acquisition, that was pure-play industrial, which is seeing rent growth, seeing occupancy growth and we're very, very happy. And so, and that should have industrial cap rates on it. But suburban Maryland office quite frankly, right now, just has a black eye.

Eric Frankel -- Green Street Advisors -- Analyst

Right. But would you ascribe that, the Suburban Virginia, if I understand that the fundamental a little bit better there, that are a little bit better business environment, but the occupancy between your two portfolios, isn't all that different. And the right spread hasn't been all that meaningfully different over time to. So on this one, how an Investor would review cash flow in Northern Virginia office versus or flex versus Maryland. I understand in last year's purchase, you don't want to break out the Industrial portfolio, that has a different tenant profile and different economic drivers. But it just seems obviously that office is heading in one direction and Industrial is heading in other direction, so just trying to see where that -- where we should think about valuation?

Maria R. Hawthorne -- President and Chief Executive Officer

Yeah, OK. So, Eric, a lot of the Virginia office, a lot of it's at The Mile. And we're going to eventually redevelop that in higher 45 acres. So we've only redeveloped five of it. We're in an -- on the slate. We'll two more phases coming, which will be about another 10 acres, 12 acres. But if you think about that, that will be a redevelopment opportunity. Our other office, bigger piece of office in Northern Virginia is (inaudible), and that was one of our original part, has one of our lowest basis and the Metro literally is being built -- and is being opened next year across the street. So we feel really good and that will also be a future redevelopment opportunity. Then we have a big flex office park in Maryfield. And again down the street, ace of a mile away from the metro. So we -- so our Virginia office portfolio is very well located for future development, has higher occupancy than Maryland, and that's because the demographics and the economic dynamics in Northern Virginia are stronger than Suburban Maryland.

Eric Frankel -- Green Street Advisors -- Analyst

Okay. It sounds like, Maryland needs to be trailed on too. My other -- I have a couple other questions, if you don't mind. Just on developments, certainly it makes sense for you to get started on building on some excess land in the market, so why did you -- why haven't you develop those assets a little bit sooner? Those markets have been in a great shape for a few years now.

Maria R. Hawthorne -- President and Chief Executive Officer

They have -- the first off, the space that we're going to be able to build this Seattle office, I'm sorry, not office, industrial building. Yeah, is currently yard space for the big tenant expiration that JP referenced in an earlier question. So we don't have access to it, until that tenant moves out next year. And then, quite frankly the Freeport, our park there is more of a flex park, though not a high finish flex park, and it really hit us and as we were thinking about it starting last year, we explored the idea, could we build the industrial building and we can. So we've been working on that, but we didn't want to announce anything until we knew we could build it.

Eric Frankel -- Green Street Advisors -- Analyst

Okay, that's helpful. Final question, just related to the acquisition. It seems obviously, you haven't disclosed the yield, but certainly it seems like it has good fundamentals and that market is in great shape. And I know you're also recycling some proceeds from the Maryland Office-Flex sale. But why not significantly increase your appetite for those types of transactions? It seems like they're out there. I understand that they are not easy to find, and its super competitive, but you guys certainly have a pretty durable competitive advantage in operating small tenant assets. And some of -- the markets that you're -- that you traffic in, there's still a fair amount of assets now that are trading. Any -- do you have any appetite for being a little bit more aggressive going forward?

Maria R. Hawthorne -- President and Chief Executive Officer

Eric, I would love to come back in February and announce 10 more Hathaway's. There would be nothing that would please me more. The problem is that, while there has been a lot of industrial that's come on the market and some parks, they are in Illinois, farmland in Pennsylvania, lots of stuff for sale in Las Vegas, we know. And what I would consider secondary markets, and -- but cap rates that are now because of cap rate compression approaching primary market rates. So those -- that if we're going to pay for retail, it will be in our core market. And quite frankly, it's hard to find these very attractive business parks in our core infill markets. And but when we see them, as we did with Hathaway, we got very aggressive.

Eric Frankel -- Green Street Advisors -- Analyst

Okay, sounds good. We'll discuss again. Thank you.

Maria R. Hawthorne -- President and Chief Executive Officer

Thanks, Eric.

Operator

[Operator Instructions] We'll take our next question from Tony Paolone with JP Morgan. Please go ahead.

Anthony Paolone -- JP Morgan -- Analyst

Thank you. I guess first question, on the development. I think the last development you did was residential and you had partner. Do you guys have the team and staff to do this? Or do you need to make changes there?

Maria R. Hawthorne -- President and Chief Executive Officer

We do, but with the thought that we're going to be thinking about redevelopment not just at The Mile, but other locations in the future, we are going to be adding an executive of development to make sure that we have appropriate oversight. We are very happy with our joint venture partner and the next development we're going to be working with them again. We're very happy with them. But we realize as this will continue in the future, we do also need that in-house expertise. Just as a reminder too, we did also add to our Board a multifamily development expert. So we have that expertise on the Board. And of course the industrial development, we have in-house, I mean that's JP's background and he's developed millions of square feet of industrial, so we're good there.

Anthony Paolone -- JP Morgan -- Analyst

Okay. And then how do we think about that more specifically with G&A, particularly in the quarter, which was a bit higher, how should we kind of roll that as we thank ahead?

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

So there is nothing to announce. So you shouldn't expect anything with regard to the to be named -- new hire that Maria referenced a minute ago for 2019. We're hoping to have somebody join our team in that role in early to mid 2020. And you could expect the kind of mid-level salary attributable to that person and you're right in assuming that that would run through, that would be a G&A position. We'll -- Tony we'll provide an, as that search progresses and we have something to announce, of course, we will make that announcement.

Anthony Paolone -- JP Morgan -- Analyst

What about just the third quarter you just reported, in terms of that number being a bit higher, does that come back down or in near-term or?

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

Yes. So, as we tried to highlight in the press release, there was, what we're kind of referring to as a one-time events related to the change in the Director retirement share policy. And so for accounting purposes, the stock-based comp expense related to that change was about $1.1 million. And that's a one-time effect. The run rate stock-based comp will be marginally higher attributable to that change, but very de minimis in terms of the run rate effect of that, and that $1.1 million charge is truly one-time of that related to that change. So we expect Q4 to come back in line with what we experienced in the first six months of the year.

Anthony Paolone -- JP Morgan -- Analyst

Okay. And then for JP, just you kind of touched on this a number of different ways, but just to make sure I understand. So the three larger expirations in 4Q, one is renewed. But in terms of the other two, should we anticipate either some level of downtime or gap such that that occupancy maybe -- gets down in 4Q, before trending back up? Or how should we think about that just near-term?

John Petersen -- Executive Vice President, Chief Operating Officer

Yeah, Tony. So look, I mean what we're trying to do here is secure really good credit, really long terms and really high risk. So we want it all. So yeah, there is a chance that there will be some downtime, because I think we're at a point in time now in that particular market in Northern California, where we can try and we've been successful in getting good credit at high rents for long-term leases. So, that's what we're trying to do here. As a result, we may not be able to make the deals we're interested in. So there could be some downtime. My goal is to keep those spaces slow, but if we are unable to come to an agreement quickly, yeah, we're fine with going forward on the market fundamentals here and the demand for those site spaces is very strong. So we could realize some downtime, yes. I hope we don't, but we could, and I am fine if we do. Does that makes sense?

Anthony Paolone -- JP Morgan -- Analyst

Yeah, no, just trying to understand in terms -- you've had very good occupancy trends like, if we just see that kind of step back before continuing on, OK, we'll work that out. Last question, I guess, I know, Craig, I think probably tried to ask sideways on the modeling side with Hathaway. But just order of magnitude in terms of thinking about how you're thinking about returns, like if you are going in in a market return that's probably got a four handle on it, taken three to five years out for it to be interesting to you, does that need to go to five? Does it need to go to eight? Like what is an interesting return for you all these days for core type property in your portfolio?

Maria R. Hawthorne -- President and Chief Executive Officer

Well, you know, we always like to get high returns and we are accustomed to that. The one other thing that happened and I think referenced -- Jeff referenced this in an earlier remark is that interest rates have never been more attractive. They've been attractive for a long time and we are open to tapping into that. So that allows us to keep historic spreads for our returns, but they will be materially lower than what we have acquired in the past, which was in the 7% to 8% range. And for industrial right now in these core markets, we're happy to get a 5.5% to 6%.

Anthony Paolone -- JP Morgan -- Analyst

That 5.5% to 6% being something a few years out after you kind of stabilize and move the ramp up and that sort of thing?

Maria R. Hawthorne -- President and Chief Executive Officer

Exactly.

Anthony Paolone -- JP Morgan -- Analyst

Okay, great. That's helpful. Thank you.

Maria R. Hawthorne -- President and Chief Executive Officer

Okay. Sure.

Operator

And there appears to be no further questions at this time. So I'll turn it back to Jeff for closing remarks.

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

All right, thank you everyone and we look forward to seeing many of you at NAREIT in a few weeks. Have a good afternoon.

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

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

Maria R. Hawthorne -- President and Chief Executive Officer

John Petersen -- Executive Vice President, Chief Operating Officer

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Manny Korchman -- Citi -- Analyst

Blaine Heck -- Wells Fargo -- Analyst

Eric Frankel -- Green Street Advisors -- Analyst

Anthony Paolone -- JP Morgan -- Analyst

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