Columbia Property Trust, Inc.
Q1 2019 Earnings Call Transcript

Published: 26 Apr 2019

[Operator:]

Good afternoon and welcome to the Columbia Property Trust First Quarter 2019 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Matt Stover, Director of Investor Relations. Please go ahead sir.

[Matt Stover:]

Good afternoon everyone and welcome to the first quarter 2019 Columbia Property Trust investor conference call. On the call with me today are Nelson Mills, President and Chief Executive Officer; Jim Fleming, Executive Vice President and Chief Financial Officer and other members of our senior management team. Our results released this afternoon in our quarterly supplemental package which can be found on the Investor Relations section of our Web site and on file with the SEC on Form 8-K. We filed our 10-Q with the SEC this afternoon and an audio replay of this call will be available by this time tomorrow. Statements made on today's call regarding expected operating results and other future events are forward-looking statements that involve risks and uncertainties. A number of factors could cause actual results to differ materially from those anticipated including those discussed in the risk factor section of our 2018 Form 10-K. Forward-looking statements are made based on our current expectations, assumptions and beliefs as well as information available to us at this time. Columbia undertakes no obligation to update any information discussed on this conference call. During this call, we will also discuss certain non-GAAP financial measures. Reconciliations to the comparable GAAP financial measures can be found in our supplemental financial data. With that, I will turn the call over to Nelson Mills.

[Nelson Mills:]

Thank you, Matt and welcome everyone to the call. We've had a strong start to the year and our first quarter results reflect Columbia's continuing quest to create shareholder value. We're capitalizing on the interactive portfolio we've assembled, while also creating brand new opportunities to generate value for our shareholders. Our portfolio is one of the best positioned across the entire office sector with premier location and outstanding physical space further enhanced by recent renovations and attractive amenities. We're now 97% leased with more than six years of average remaining lease term. Though we have limited vacancy and near-term expiration, what we do have is well below market on average. So, we expect our trend of strong leasing spreads to continue. We have a unique lease strategy in each of our market, focused on modernize boutique office space as some of the most exciting of incoming neighborhoods. This disciplined investment focus and commitment to value creation that sets us apart both with tenants in our market and with investors seeking reliable performance and value growth. We've created a real estate platform in these selected gateway markets that offers a compelling combination, stabilized asset with substantial embedded growth, a pipeline of new value-add opportunities and a talented and highly motivated team to produce results for our shareholders. We're well-positioned to build on our record of creating office environments that have attracted top tenants and have produced market leading rent. Most importantly, our unique approach for value creation is producing some of the strongest financial performance in the entire office sector. During the first quarter of 2019, our same-store cash net operating income grew 8.2%. We also generated normalized FFO of $0.38 per share and we're raising our initial full year guidance for FFO. Today we are 97.1% leased overall and 98.5% leased in New York our largest market. We leased another 83,000 square feet during the quarter and our trend of strong leasing spreads has continued with roll out of 38% on cash basis and 62% on a GAAP basis. We have created embedded value that will drive cash flow growth for years to come at Columbia. These financial results also affirm the benefits of our repositioning portfolio. Subsequent to the quarter end, we announced the sale of One and Three Glenlake Parkway in Atlanta. We successfully repositioned this property as best in class for Atlantis Central Perimeter Submarket allowing us to lease 100% of the property at attractive rates and term. The sell generated nearly $200 million in net proceeds, which we can redeploy into value creation opportunities in our core market. I'd like to highlight another recent example of our value creation success. 221 Main Street is a property in San Francisco we acquired in 2014 with below market leases and 50% of those leases set to roll during the first five years of our ownership. This probably has an excellent South of Market location and we undertook selective capital improvements to maximize its value. When we approached the lease expiration with a focus on creating a more vibrant building and tenant roster including a [reset] [ph] to accommodate larger tenants. This focus resulted in fewer, but higher quality tenants and it helped us increase rents and average of 65% on the way to achieving 99% occupancy. We estimate that these efforts combined with the benefits of strong fundamentals in this market have helped us drive nearly 50% value creation relative to our cost basis at the property. In our latest investor presentation, we highlight other examples of strong return on capital projects in New York DC. We will continue to replicate this process going forward with some of the most attractive projects we've ever taken on. As demonstrated over the years, we take a disciplined approach to allocating capital and this will remain a guiding principle. Once such project that you'll hear much more about in coming quarters is 799 Broadway. Our development with Normandy real estate partner just below New Square Park in New York City. We're very excited to have begun construction and recently opened a marketing center for the project at our 315 Park Avenue South Headquarter. We recently announced an agreement to acquire 250 Church Street, our second joint venture with Normandy. This 235,000-square foot 16-storey office building in TriBeCa will become Columbia's eighth Manhattan property. It is a terrific fit for our New York Portfolio Strategy. The location is ideal in the heart of TriBeCa one of New York City's most desirable neighborhoods. The property is a short walk from multiple subway stations and the World Trade Center transit hub and it is currently underserved in terms of new office development. Once the current tenant vacate this summer, we'll take on a complete transformation of the building to create the highest caliber boutique office space and all of TriBeCa. We're confident that this transformative development project will become yet another Columbian success story and we look forward to sharing more details as we make progress on projects. I'd like to provide a quick update on our three-focused market, as you probably gathered, we have a new strategy in New York that's yielding strong result. With our portfolio concentrated in Midtown South, we take great success and ability of small and midsize any fintech tenants and on the heels of a successful repositioning of 315 Park Avenue South, we're now 98.5% leased in New York. We're looking to build upon that success with 799 Broadway and 250 Church which will both be positioned to meet the demand of media effect tenant for creative space in these desirable Manhattan sub-market. In San Francisco demand remains strong, supply is very tight and as a result there are limited options for larger tenants. It's a landlord's market and a great opportunity to grow rents which we're doing with our limited availability at 221 Main and 650 California. In Washington DC office demand continues to improve especially with the announcement of Q2. But there is still substantial new supply to be absorbed. We've had terrific leasing results that our three properties there and while we are not immune to broader market forces, our recent success illustrates how well located, differentiated office real estate is rewarded. Quality matters more than ever and we've generated compelling returns on building and amenity improvements across the DC portfolio. Our intentional cultivation of top tenant rosters has also been key. For example, at Market Square we've added world-class amenities and have been very diligent in targeting the government affairs office of Fortune 500 company. These tenants value proximity to the Hill and to other lobbyists and our momentum with this community continues to snowball. Now roughly half of our 65 tenants in Market Square where Fortune 500 companies and we're outperforming in net absorption while pushing rents to nearly $90 per foot on a full-service basis. Looking ahead we believe Columbia is exceptionally well positioned due to our highly desirable existing portfolio and relentless focus on finding new opportunities to enhance the portfolio. This should allow us to continue producing sector leading same-store NOOI growth in the near-term while continuing to create substantial shareholder value over the long-term. We have just two buildings remaining in our non-core markets. One in Atlanta and one in Pittsburgh, we'll strive to optimize the value on this exit generating proceeds to reinvest into higher growth opportunities in our target market. Lindbergh Center in Atlanta has now been awarded to a buyer and we are working through the diligence process with an expected closing later this quarter. In order to maximize proceeds of the Westinghouse campus in Pittsburgh, we have decided to suspend our marketing efforts for the time being. Westinghouse recently emerged from bankruptcy and has been restructured under new ownership by Brookfield. They are exploring some leasing options for a portion of the campus and that has caused some trepidation among potential buyer With nearly 14 years remaining on wasting out lease, we believe holding the property a bit longer and working through leasing options will increase the value of this asset. And importantly, we'll collect substantial NOI for our investors in interim. I want to thank our entire team for their hard work, creativity and dedication to build Columbia Property Trust to what it is today. We're in our best position ever with a unique and attractive portfolio that would deliver for years to come. We have ample growth opportunities within immediate reach and a healthy financial position that enables us to diligently seek new opportunities to further enhance shareholder value well into the future. With that, I'll turn it over Jim to discuss our results in more detail and provide our updated outlook for the year.

[Jim Fleming:]

Thank you, Nelson, and thanks everyone for joining us today. We're glad you can be with us. The year is off to a strong start at Columbia. This afternoon we reported same-store net operating income growth of 8.2% for the first quarter which is within our four-year guidance range of 8% to 10%. We also reported normalized FFO of $0.38 per share, which was also in line with expectations. Given our already high-leased rate of 97.1% and our limited rollover for the next couple of years, our leasing activity was naturally modest at 83,000 square feet. As Nelson mentioned our leasing spreads were quite robust at more than 38% on a cash basis and nearly 52% on a GAAP basis. Our balance sheet remains strong and we ended March with net debt to adjusted EBITDA of 6.6x, net debt to gross real estate assets of 32.3% and no debt maturities for the next two years. We have more than $4 billion of unencumbered properties and only two properties with mortgage debt both of which are in our joint venture. We paid a quarterly dividend of $0.20 per share and we ended the quarter with $124 million still available under our current year buyback authorization. The recent sale of the Glenlake properties has further strengthened our balance sheet and not only provides resources to invest in attractive development and redevelopment projects, but also allows us to continue our opportunistic share repurchases going forward. Turning to our outlook for the remainder 2019, we're raising both the low and high-end of our normalized FFO range by $0.02 to a new range of $1.37 to $1.42 per share. Our other outlook ranges remain unchanged including same-store cash NOI growth of 8% to 10%, year-end lease percentage of 95% to 97%, new corporate D&A expense of $34 million to $36 million. As I mentioned last quarter our projected 8% to 10% growth in same-store cash NOI is on top of last year's nearly [14%] [ph] growth. We continue to expect that 2020 will again see strong growth in high single digits due to our leasing accomplishments over the years as well as embedded growth and lease roll up opportunities. In closing, the year is off to a solid start for Columbia with our portfolio the strongest it's ever been with growth and value creation opportunities ahead and with experienced teams on the corporate side in each of our markets. We look forward to keeping you posted as the year progresses. And with that, Nelson and I will now be happy to take your questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Sheila McGrath of Evercore ISI.

[Sheila McGrath:]

Yes. Good afternoon. Could you give us a little bit more detail on the sale of Glenlake, the interest level, the type of buyers' cap rate and how the price compared to your expectations?

[Jim Fleming:]

Sure, Sheila. Hi. This is Nelson. So, it was obviously a fully marketed process. Kevin Hoover of our team ran that process with help from CB. We had a lot of wide range of buyers including other public REITs. And obviously, it's a very core stabilized property. And you get a lot of it in a great submarket and get a lot of interest for that reason. Pricing came in about what we expected are very close to what our initial expectations were. And it traded in the mid six cap range. So maybe mid-to-high six rate cap and it's about what we expected. So, I would say a great process overall and of course that was the combination of a lot -- lot of leasing work in that we've done with the property over the last couple of years and so we were very pleased with that result.

[Sheila McGrath:]

Okay, great. And then, if you could – sorry, if I missed this. But, what was the primary drivers of the large leasing spreads. Was there one particular lease that is driving that?

[Jim Fleming:]

Hey, Sheila. This is Jim. Pretty low leasing volume this quarter just because we didn't have -- we don't obviously don't have a lot of roll and not a lot of vacancy, so it was a small sample size I guess, but it was really there were a few leases in New York at 315 Park Avenue South and in San Francisco primarily at 221 Main.

[Sheila McGrath:]

Okay, great. And last question. Just curious what your vision is at Church Street. Is that a full gut rehab or just give us a little bit more detail on that future value-add?

[Jim Fleming:]

Sure, Sheila. So yes, our expectation is there will be a full gut renovation. Well located property, good bones, but in all likelihood, we're going through some of the details with our partner Normandy. But in all likelihood, it'll be new mechanicals, new systems, risk end of the building would be our leaning. We paid a couple of hundred million dollars for that I think has been reported that $800 a foot we've spend potentially almost that much again, $1500 plus a foot by the time we're finished. And of course, we'll have -- we expect to achieve the rents to commensurate with that. So yes, more to come on that in the next few quarters. We have not closed on the transaction that that should happen late summer, early fall and we'll be glad to provide more details in.

[Sheila McGrath:]

Great. Thank you.

[Jim Fleming:]

Thank you.

[Operator:]

The next question will come from John Kim of BMO Capital Markets.

[John Kim:]

Thank you. So just to clarify, the guidance and upgrade for the year was really based on the timing of the sale and the delay of the Pittsburgh sale?

[Jim Fleming:]

Hey, John. This is Jim. I would say, yes, but I just want to explain what we try to do each quarter and we did it in the last quarter was just to give you our best estimate of where we think we're going to come out. We're knowing that there are a lot of variables in terms of asset sales, potential new investments, potential share buybacks and number things like that. And so, we've moved it up a little bit depending on what happens on the transaction side that could move around some more later in the year. But we just tried to do the best we could. I would say the biggest thing that change it's only been a couple of months since our last call. It's a short period from that last call till now. The only thing really significant that's changed is our view on transaction timing. We of course got Glenlake done really when we planned and with the execution that we expected. I'd say Lindbergh file it's still in process, we still think that it's going to be sort of according to plan. And then, Westinghouse is delayed we'll see what happens as we move ahead no final decisions we ultimately will sell that property, but I'd say if you wanted to chalk it up to something that would be Westinghouse.

[John Kim:]

And I think last call you were saying that between Glenlake, Lindbergh and the Westinghouse assets, you expected to get $500 million to $600 million in proceeds. Is that still the case or?

[Jim Fleming:]

Yes. That is still what we believe and actually even if we chose to sell Westinghouse now even though it's not -- didn't come out quite at the pricing that we had hoped. We'd still get really, we think to the mid fives probably between the three properties. We're just trying to maximize value. We're trying to really do the right thing. So, 194 net proceeds for Glenlake and that's off to a good start. And we think -- we I think telegraphed that each of the three were in about the same price range a little less than 200 for each of the three.

[John Kim:]

And what would you see your appetite is to hold on to Lindbergh if you don't get the price that you want?

[Nelson Mills:]

Well, we'd like to sell it for the reasons we discussed. It's a good opportunity for the buyer, but it's a heavy lift, longer term value add, it's optimistic play. So, we would -- it's not in our market, it's not one of our core markets. So, we'd like to move on. That said, we need to get our pricing and expect to get our pricing. And we think we'll get it closed. But, it's very much like we demonstrated with Westinghouse, if we don't we'll hold off on the sale or do we need to do to get that pricing. So, expectation is we will close. And we prefer to close, but we'll see we need to deliver on the value that's there.

[John Kim:]

Okay. At 299 West 43rd, the occupancy and leasing this quarter, was that due to an expiration or was another reason for that?

[Jim Fleming:]

Yes. That was a small -- I think was a half a floor tenant there that expired. And so we have a little bit of vacancy, very little of course all throughout New York, but we have a little bit of vacancy there now.

[John Kim:]

And what would you say the mark-to-market is on re-leasing that space?

[Jim Fleming:]

I'd have to look at that particular lease, but when we bought the building and this one was in place, there was a little bit of a positive mark-to-market, but I have to go back and look at that one John.

[John Kim:]

Sure.

[Nelson Mills:]

I don't remember the exact number John. I think that was one of the regional tenants when Blackstone reconfigured the building -- re-leased the building as a tech Tammy building, Mongo was the first one. And so, it's been a while. So. I think there's a roll up there, but it's a relatively small [indiscernible].

[John Kim:]

Okay. And then at 799 Broadway, it's sort of a unique office submarket in Manhattan. Can you just describe where you see rents for that building and the type of tenants that may be attracted to that asset?

[Nelson Mills:]

Sure. So, as you said it's a very unique opportunity, 182,000 feet, obviously, beautiful new modern design, terrific location, Corner of 11th and Broadway, just below Union Square Park and the transportation that comes with that. Yes, you're right there at the village [NYU] [ph] is just really unique live, work, play location. And also, there's just not really any competition for new boutique space there. So, we're very excited about the project, very optimistic about achieving some great things there. Our asking rents are in the 150 range on average throughout the building probably a bit better than that for certain spaces. But that's our ask, we're getting a lot of interest. We're having a lot of lookers. We have a marketing center now open at 315 Park Avenue South and one of our retail base there encouraging you to stop by and visit. So, we're very helpful in achieving those rents. It's still fairly early and again that will be more to come on that next few quarters, I'm sure.

[John Kim:]

And I noticed, on your CapEx spend per quarter for 799 and 149, it kind of dipped this quarter, is that due to weather or seasonality or is weather the reason for that?

[Jim Fleming:]

You're talking John about the schedule that shows how much we've invested so far and how much we're going to invest in the future?

[John Kim:]

Exactly. Page 14.

[Jim Fleming:]

Oh. I'm looking at Page 48. So Page 14…

[Nelson Mills:]

So, John, while Jim is looking at that, I'll just give you a general update, 149 Madison, rework is full steam on building out the building and they're doing some pretty extensive renovations there. And so that's coming along. And on 799 Broadway, we recently raised the existing building and vertical constructions started there. Pretty quick delivery date on that. We expect that property to be completed by late third quarter or by fall of 2020. So, everything's on schedule and going well. In terms of the cash flow cash flowing through the model, Jim what?

[Jim Fleming:]

So, John you're looking at Page 14 that shows capital that has been spent during the quarter. And you're right, the capital spend at 149 was down a little bit from what it had been the previous quarter. It is going to be lumpy same thing is true with 799 Broadway. What I would refer you to is Page 28, which gives you the full picture, which shows you where we stand so far on capital for both of those projects, how much more is to go. But it will be lumpy depending on what -- where the building stands and where the capital -- when the capital needs to be spent for the projects. Really the bulk for 149 that needs to be the remaining capital is only going to be advanced once all the work gets done by rework, and then, we'll reimburse them. So, that's -- that'll be very lumpy at the end, but 799 will continue along and we're getting ready to start. We're just starting the construction building so that's going to ramp up.

[John Kim:]

Okay. Thank you.

[Jim Fleming:]

Thanks.

[Nelson Mills:]

Thanks John.

[Operator:]

The next question comes from Mitch Germain of JMP Securities.

[Nelson Mills:]

Hi, Mitch.

[Mitch Germain:]

Hey, guys. How are you?

[Nelson Mills:]

Great.

[Mitch Germain:]

250 Church, the economics of that joint venture still are under consideration, correct?

[Nelson Mills:]

The details, I mean obviously we're under contract. So, we've done thorough underwriting and diligence on the project. We still have some options we're exploring architectural design and exactly how far we go with the building and marrying that with what our expectations are so, a bit more work to do. But yes, we have a pretty good feel for what we think is going to cost to complete the project.

[Mitch Germain:]

But your percentage stake in that investment is still undetermined, right?

[Nelson Mills:]

Well, that part, yes. So, today we have -- we're in partnership with Normandy. We're effectively sharing a GP interest. And we're running the project together and sharing these and risk and all the rest on that. We have the opportunity as potential to syndicate some of that interest to a limited partner. That's an option we'll have and we're confident there'll be some capital interested in doing that. But that hasn't been decided yet. If we elect not to do so, we'll likely be the majority of the capital in that project. But that that you're right that part has not yet term.

[Mitch Germain:]

Got you. With regard to 149 Madison, obviously, these single tenant assets appear to be ones that are no longer core to your business. Is that potentially an asset that could be a sell candidate down the road?

[Nelson Mills:]

Yes. I think that's always a possibility. Mitch, you'll recall from prior discussions, prior calls that our original intention was to try to build that out and lease it to multi-tenants and so forth and for the reasons we discussed in the past, rework gave us the most compelling economic result and that was even considering resale risk and all the rest. So, we feel really good about that decision. But, you're right, single tenant is not really our focus. And but, we could sell a property down the road. But on the other hand, it is a beautiful property and well located in Midtown South, which is our focus. It's going to be fully renovated and it's going to have a nice yield on cost and we could certainly hold it as well. So that's something we'll consider down the road. In the short-term, we would at least want the building to be renovated and to let rework settle in and let concessions burn and that kind of thing before we consider it. But so, nothing. And then in the near term for sure. But, yes, that's an option down the road.

[Mitch Germain:]

Great. Last one for me I just want to clarify guidance, was the Pittsburgh sale completely eliminated or is it in there at a later timeframe?

[Jim Fleming:]

Mitch, we really try to provide guidance that really covers a number of scenarios. I think it's easy to think of this as just kind of one scenario, but we try to leave ourselves some flexibility. I would say it's unlikely that we would sell Pittsburgh this year. But there still are a number of other variables, it's still pretty early in the year. And so, we've tried to leave ourselves some room for a number of different possibilities.

[Nelson Mills:]

Mitch, I agree you with Mitch. That change is a little bit more than $0.02 a share, right. We only moved $0.02. So, but, there are some other things going on there. And it's early in the year and we're not trying to be -- trying to be direct we can be best. That's not -- that's just one of the moving parts I guess as we look at the remainder of the year.

[Mitch Germain:]

Thank you. I appreciate that.

[Nelson Mills:]

Thanks.

[Operator:]

And the next question comes from Adam Gabalski of Morgan Stanley.

[Adam Gabalski:]

Hey, guys. Thanks for taking the question. I just wanted to talk a little bit about the same-store trajectory for 2019. Just kind of given the volatility going from north of 20 in 4Q '18 down to 8.2 this quarter, which is within the guidance range. Can you talk a little bit about the trajectory for the rest of 2019 and into 2020 and if there's going to be any sort of more inter-quarter volatility or if you expected to kind of be a little bit more normalized moving forward?

[Jim Fleming:]

Sure, Adam. So, I mean there are a couple of things going on here. One is the leasing spreads and those are going to be pretty volatile because they're just bumpy. It just depends on what leases get renewed, if it's some legacy assets renewed or re-leased. If it's a legacy assets, it could even be down. And we've seen that in the past. But, on average they've been very strong and that's really what's driving all of this. They've been up more than 30% for the past two and a half years. And you'll see those continue to be very positive this quarter. In terms of the same-store NOI as I think we were just shy of 14% last year, we've given a range of 8% to 10% this year. We haven't really given a precise range next year, but we think somewhere in that same zip code for next year. And really that's just a function of leases that we've already signed commencing and into next year probably a little bit of additional roll. But it's leases commencing and starting to pay rent. So, we've got a pretty good bit of visibility, but really what drives that from quarter-to-quarter is lease commencements, once the free rent burns off. So, it'll -- that'll be a little bit lumpy too from a cash standpoint. But we think, we're not going to do quarter-by-quarter, but what I would say is, we still feel really good about the 8% to 10% for this year. And we got pretty good visibility in terms of the full year about what that number was going to look like.

[Adam Gabalski:]

Got it. That's very helpful. And then just one more from me. Can you just talk a little bit about your appetite for any sort of additional acquisitions or JVs and what sort of level of opportunity and pricing you guys are seeing across your key markets?

[Nelson Mills:]

Sure, Adam. So, we have continued to maintain a very active pipeline of looking at opportunities in all three of our markets. That's been the case all along. Even last year, we only did one transaction, the 799 Broadway deal. But that wasn't for the lack of exploring a lot of options, the same is true now, we take a very disciplined approach. Any given week, we have three or four deals we're looking at in one place or the other. So, the same is true now. In terms of appetite going forward, we do have some capacity given the recent asset sales, given the strength of the balance sheet, we have got some capacity at the right opportunity comes along, but we can also be patient with that capital. So, in terms of market-by-market, we are competing on a regular basis for opportunities in San Francisco. It's a very challenging competitive market, again, we're taking a disciplined approach and so it's tough to win a deal there. But we're trying to find other great opportunities there in that market. DC a bit softer and we're a little more reluctant to take on a lot of leasing risk there even though our three properties are very well leased and doing quite well. But, I'd say of the three markets, we're a little more reluctant in that market. And then, Manhattan, sort of in the middle of those two. We think it's very strong particularly for Midtown South, the Westside and our key focus some markets. And there are a few opportunities in play that are of interest. So, I'd say, it's hard to know for sure, but we would expect another deal maybe this year maybe two. But again, continuing that disciplined approach we've always had. So, I know that's a bit of a vague answer, but I'd say we have capital, we're active in the market, but we're being very selective.

[Adam Gabalski:]

Got it. Thank you.

[Nelson Mills:]

Thanks Adam.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Nelson Mills for any closing remarks.

[Nelson Mills:]

Thank you. Well, thanks everybody for joining us on the call and thanks for those great questions. We're obviously very pleased with our start to the year. We're excited about our progress against our strategy and we look forward to continue to update you throughout the year. And we hope to see many of you at the upcoming [indiscernible]. Until then, take care, we'll speak to you soon.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.