Columbia Property Trust, Inc.
Q1 2018 Earnings Call Transcript

Published: 27 Apr 2018

[Operator:]

Good afternoon and welcome to the Columbia Property Trust First Quarter 2018 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 Finance and Investor Relations. Please go ahead.

[Matt Stover:]

Thank you and good afternoon everyone. Welcome to the first quarter 2018 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 were released this afternoon and our quarterly supplemental package which can be found on the Investor Relations section of our website and filed with SEC on Form 8-K. We also filed our 10-Q with the SEC this afternoon. Additionally, we’ll be providing a copy of the prepared remarks for today’s call on our website shortly after the call and an audio replay will also be available by this time tomorrow. Statements made on this 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 2016 Form 10-K. Forward-looking statements are made based on 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 discuss certain non-GAAP financial measures. Reconciliations to comparable GAAP financial measures can be found in our supplemental financial data. With that, I’ll now turn the call over to Nelson Mills.

[Nelson Mills:]

Thanks, Matt, and welcome everyone to today’s call. It was great to see so many of you at our recent property tours and meetings in New York and San Francisco. We’re certainly excited about the portfolio transformation we’ve accomplished. We’re very pleased with the financial results we’re now generating, and we’re even energies about the growth opportunities ahead. Let’s start with a look at our current portfolio, one of the best position portfolios in the office sector. More than 80% of our growth real estate assets are located in the three high-barrier closer gateway markets of New York City, San Francisco, and Washington D.C. Drilling down further, we have an attractive niche positioning and well performing sub-market such as Midtown South to Manhattan in the SOMA and Financial Districts of San Francisco. Our portfolio is highlighted by well located and recently renovated boutique properties with attractive amenities and efficient pure-plays. This has created a competitive advantage in attractive TAMI and other dynamic tenants. These tenants take unique space and a landlord that can accommodate their need for growth and flexibility. We now have a lease rate of nearly 97%, that’s up another 270 basis points in the past year, and we have very little and lease exploration in the next few years. A substantial number of signed leases will commence over the next several months, which will drive dramatic same-store NOI and FFO growth as we move through 2018. Between this free cash flow growth and our solid balance sheet, we’re truly operating from a position of financial strength. Our quarterly results are beginning to reflect success of our repositioning and leasing efforts in the substantial way. During the first quarter of the year, we produced normalized FFO per diluted share of $0.38, up 36% from $0.28 a year ago. We leased 123,000 square feet during the quarter with a 63% increased in rental rates based on GAAP rents and a 56% increased based on cash rents. This leasing success included a 27,000 square foot lease with Ernst & Young at 218 West 18th Street and a 17,000-square-foot lease expansion with Gemini at 315 Park Avenue South, both in New York City Midtown South. During the quarter, we sold a second 22.5% interest in interest in University Circle and East Palo Alto and 333 Market Street in San Francisco to Allianz, our joint venture partner for $235 million. This transaction helped us to spread our investible capital across more properties in our key markets. The attractive pricing was possible because of the desirable portfolio we've assembled and the value we’ve created to releasing and capital improvements. Our marketing efforts for the NYU Langone building at 222 East 41st Street in Manhattan are also moving ahead. We believe this process will conclude in the next few months and we’re still expecting a cap rate in the low-4s and net proceeds in the low $300 million range. But what’s most exciting to me is our financial outlook and forward growth trajectory, derived from the high quality portfolio we've assembled in the more desirable markets. And the leasing we’ve accomplished that is created an embedded growth story. And as Jim will tell you in a moment due to these efforts, we’re able to raise our guidance for the year. First and foremost, our economic occupancy is just 83.4% considerable below our lease percentage of 96.8%. This gap is going to close as rent abatements burn off and with it. We’ll see the dramatic same-store NOI growth to which I’ll refer. Said another way, over 13% of our lease square footage is not yet producing rents, but it will soon. Our growth story gets another lift from our leasing opportunities. At a nearly 97% lease rate, much of the heavy lifting is behind us. But we still have 253,000 square feet of vacancy and 218,000 square feet schedule to expire this year and next. I have no doubt that our local teams will make the most of this pushing rents and developing a strong pipeline of perspective tenants as they consistently demonstrated. That brings me to the next element of the Columbia growth story, which is the substantial mark-to-market opportunity given our positioning in some of the most attractive market nationwide. Across our portfolio, we have in place net rents that are on average nearly 10% below current market rental rates and our strong rent spread this quarter gives you a sense of what that means. As an example, we purchased 650 California Street in San Francisco’s Financial District in 2014 and quickly set about revitalizing and modernizing the building, which was 88% leased of the time with more than a third of the leases set to expire within 2 years. We’ve set lease two-thirds of the space at triple digit rent roll ups and have achieved a 96% lease rate with the diverse high-quality roster of small to mid size tenants. Before handing over to Jim, I’ll summarize by saying that our attractive portfolio along with the growth opportunities I’ve outline. Give us the confidence to expect same-store cash NOI growth of 10% to 12% this year, which excludes NYU and we see our strong performance continuing into 2019. Recognizing this favorable outlook, we continue to be opportunistic buyers of our shares. I’ll now hand the call over to Jim.

[Jim Fleming:]

Thank you, Nelson. It’s nice to stick with everyone today about our first quarter results and outlook for the rest of the year. We had a strong first quarter and remain on track to meet our 2018 expectations for same-store cash NOI growth, percentage leased and corporate G&A. Our FFO is trending a bit ahead of our original expectations. And as a result, we’re raising our FFO guidance to that. We believe our growth expectations for both net operating income and FFO place us well ahead of our peers. Our foundation is solid with the strong balance sheet. Our portfolio was down 96.8% leased and very limited rollover for the next couple of years .We’re excited to build on this foundation with robust cash flow growth, which has multiple sources. First, our recent leasing success has created a significant gap between our economic occupancy and our lease percentage. Currently at a 13 percentage point spread, we expect significant progress closing this gap during the second quarter and through the balance of the year with economic occupancy rising to around 93% by year-end. This will result in another $41 million of annualized cash growth versus the first quarter from leases that have already been signed. The two Chelsea properties we acquired last October will also add to our growth this year as they will contribute a full year of impact. And close to 97% lease, we have less leasing work ahead as Nelson mentioned, but we do have 253,000 square feet of available space to lease most of that in very reliable buildings in Midtown South New York, the Financial District and SOMA and San Francisco, the Back Bay of Boston and Market Square in Washington D.C. Almost all of this space is buildings we recently renovated to maximize tenant in the field. In addition, we have about 218,000 square feet of leases expiring this year and next, which we welcome given the mark-to-market potential. Our balance sheet strengthened further during the quarter enhancing our flexibility going forward. The Allianz transaction referenced Nelson yield at $235 million, which will used mostly to pay down our Bridge loan and our line of credit. We ended the quarter with more than $4 billion of unencumbered properties and just two mortgages across the entire portfolio. Our net debt as of March stood at 33% of gross assets down from 37% at year-end. And we had a weighted average maturity of 6.7 years on a fixed rate debt and 1.6 years on a floating rate debt. We expect our debt to EBITDA ratio to end the year in the below 6 times range, consistent with our leverage goals and benefiting from strong cash flows that we described. This strong balance sheet allowed us to purchase $27 million worth of stock in the quarter and we still have a $168 million available under our current authorization. Turning to our updated expectations for the year, we’re raising both the low and high end of our normalized FFO guidance to a new range of a $1.43 to a $1.48, which will be an increase of 25% to 30% over 2017. We expect AFFO will increase by an even greater percentage. For the full year we continue to expect same store NOI growth of 10% to 12%, the year-end lease percentage of 94% to 96%, and corporate G&A of 33 million to 35 million. All of these numbers assumed the sale of the NYU Langone building in New York And because of this quarter’s share repurchases, we reduced our estimated weighted average share count for the year to 119 million. In summary, we’re pleased with our performance, proud of the outlook I just shared and looking forward to updating you further as the year progresses. With that, operator, please open the call for questions.

[Operator:]

We’ll now begin the question-and-answer session. [Operator Instructions] The first question comes from John Kim with BMO Capital Markets. Please go ahead.

[John Kim:]

Can you provide an update on 222 East 41st Street? And I wonder, if the Pfizer’s decision to sell their headquarters nearby had any impact on sales price or the progress of the sale at all?

[Nelson Mills:]

So, we have been in the marketing process for 222 for few months and that’s going well, and we now have very clear indication of interest, obviously narrowing the field and hopefully we're expecting to get that deal done in the next couple months, probably. Pricing is, as we said in the call is coming as expected low four cap range, net low 300 million range so very good results. There are some competing products in the market, but as you know this is a pretty unique situation with the long-term lease and nice revenue bumps and of course NYU Langone’s credit, this one -- this particular deal, it was outpacing some of the one you mentioned some other we think in terms of pricing, so different buyers basically to answer your question. So, I don’t know that we’ve seen the direct impact. I think the biggest impact if any in the last few months has been just on interest rate lifts. We’ve probably seen a little bit impact from that over the last several months, but still is a good price in the range we expected.

[John Kim:]

And use of proceeds? What are you thinking currently what you do with the sale proceeds?

[Jim Fleming:]

This is Jim. In our guidance, we’re assuming that there’ll be some downtime that we’ll sell the -- sell this property, and we won’t have an immediate use of proceeds except to pay down debt. But really what we’re assuming is that we will reinvest some of it, half to two thirds of it to buy another real estate. We don’t have anything in the work right, but some point later this year. And then we'll use the rest to pay down debt, and all the share repurchases were also something that we’re expecting to do some more of pricing space at the level of this today.

[John Kim:]

At 149 Madison Avenue, can you just provide your updated spend from the asset? How much you plan to spend in terms of capital, if construction costs have impacted this at all? And also just given your high portfolio leased rate today. Can you give be a little bit more ambitious on the project than you would have otherwise?

[Nelson Mills:]

Yes. So, thanks John. Just remind everybody, we acquired the land as this property is on the ground lease, required the land back in the fall for 88 million. If the ground leased expired, it is expected in back in January. So we now on the property, it’s very simple. It’s not a 100-year property. It really hasn't been maintained in several decades. So, it's required a substantial amount of capital. We're exploring a couple of options, which we hope to make a decision on soon. We have a couple of single, full building users, they were in discussions with. In that scenario, we probably spend a little less on the property. We delivered in a little more of shell condition and probably get a little bit less rate too. The other alternatives is to build it and on spec basis and lease it. Either those alternatives, we feel good about. We think the rents in that submarkets are holding up very well. It’s a small project. But our capital costs, I think it will be around the $1,000 or probably all-in that scenario, maybe less in the first one. And we think, we can do quite well in the project. But it's still pretty early in the process and in the next quarter, so we’ll be able to give more specific update.

[John Kim:]

But as far as timing, it’s looking to be like a 2019 delivery. Is that correct?

[Nelson Mills:]

Yes. I think that’s right with really forecast flows, probably not taking until your later ’19 or ’20 in terms of concession. Now, it’s a full building user, it could be quite a bit earlier than that. I mean, there would be some free rent, but we’ll get probably to sooner and get to cash flows earlier. But I’d say, I wouldn’t count any cash flow than that before mid-90 in any meaningful way.

[John Kim:]

Okay. And then my final question is on [indiscernible] you talk about the strong leasing you had in the market including 650 Cal. Can you talk about the potential to acquire more assets in those markets given pricing?

[Nelson Mills:]

Sure, we'd love to do it. Our team is very, very active. We maintain -- where I can look into that market, but it’s very competitive as you would expect for the, particularly in the Financial Districts, SOMA District. So, we look at a few properties in the last few quarters. We continue too. There is a couple of things out there now, but competition is very heavy. So, it’s a difficult to win a deal, but we continue to press hard or try to do that at a price that makes sense. So, we’ll keep trying, we look at ferry buildings in the market and something 21 Cal and some others are in the market we recently look at. Those didn’t make sense for us at the pricing they’re coming at, but we’ll continue to work it.

[Operator:]

The next question comes from Sheila McGrath with Evercore. Please go ahead.

[Sheila McGrath:]

You bought back shares in the quarter. Can you remind us how much in total you’ve brought back since you initiated the program? And how much is share buyback is left on that program?

[Jim Fleming:]

This is Jim. We restarted the program or reloaded the program last year, and so under the current program we have a 168 million left, we did a $200 million program. We did buy more than that, I think we bought 57 million last year plus we bought some in the fourth quarter, the year before, it’s about a 100 million in total over a period five or six quarters. I'd have to go back and just check the numbers exactly, but there were some periods when we worked fine because we just didn’t feel we had the liquidity. And so, it’s been a bit on and off, but obviously this quarter we bought some and the pricing is very attractive and we’ve got plenty more left on the authorization.

[Sheila McGrath:]

And then on the guidance revisions, can you just give us a little more insight on the drivers there? You did mention the share count but also on was it expense driven NOI, what were the drivers?

[Nelson Mills:]

So our FFO this quarter was very strong, that was as a result of some leasing, we did have some expense savings across the portfolio. We -- and I think in terms of the analyst expectations there’ve been -- we [indiscernible] and we can’t really get into the details on that. I will say that we do expect a little bit of pullback when we sell 222, assuming that we don’t have an immediate use for proceeds. We can’t pay down debt to some extent and they’ll provide some savings, but there’ll be a little bit of dilution until that money gets reinvested. It won't be hard we don't think longer term for us to prevent to the accretive because of the spent, if we invest half of that money or two-third of that money in a new acquisition, and then the rest to pay down debt. I think the math is going to work out very well given the low for cap rate. But that will be a little bit of one going forward. We do think interest rates may move up once a little bit later this year. We don’t know that, but that’s what the market will tell us. And we didn’t have the one month of Allianz, really one month of owning 77.5% of the two San Francisco properties that we then sold down to 55% after January. So you got to take that going forward, but for us we have a strong quarter, we got some leasing done and we now have some more certainty about the commencement dates on leases. And so, we did feel comfortable moving up the range even taking into account some repositioning and that's what we think.

[Sheila McGrath:]

One last question on leasing activity, Park Avenue south building. Is there any more space to lease there? And then update on leasing activity at Market Square?

[Nelson Mills:]

So, if you recall, there’s 20 floors at 315 Park Avenue South, we acquired that property about three years ago. Credit Suisse occupied a lot of space. We knew they were moving out. So, 17 of the 20 floors have rolled -- have been become available since we’ve owned it as expected. Of those 17, we’ve now released 15 of them. There’s two remaining, the 5th floor and the 15th floor. We also have some activity on the retail space which will be -- which could be favorable that we can talk about later on. So, two floors left to go. We think it’s very likely that we’ll get those done in the next few months, probably or possibly even to existing tenants. Again, it's at similar rates, so that property is gone, gone really well. Market Square, we continue at Market Square to strike the balance, try to strike the balance between achieving the rate in term. We’ve been achieving. We’re competing with new trophy product there and holding up quite well in terms of rate and other terms. But at the same time, if you know, we’ve got about 20% vacancy and we’ve committed to knocking most of that out this year. So the team is being a bit more aggressive and flexible in terms of trying to win some of these larger tenants. We've again a lot of leasing done, but as you know most of the tenants in that building tend to be the smaller lobbies type tenants and we’ve just missed some of the law firms and we continue to work those. So any way bottom-line, we’re determine to this year to knock-up at least half of that 20% vacancy, while still maintaining good rate return. So it’s a manageable situation, it’s a great property to get a lot of great looks and some terrific prospects. But we’ve got a lot of competition in that market with new supply as you know.

[Operator:]

The next question comes from [Adam Gabowski] with Morgan Stanley. Please go ahead.

[Unidentified Analyst:]

This is Adam on for Vikram. I’m just wondering if you could update us on the situation with Westinghouse at Cranberry Woods. There was some news that came out a few weeks ago from the Energy Secretary. I’m just wondering if you have any additional commentary there?

[Jim Fleming:]

Hi Adam, this is Jim. We don’t have really the inside track there to know exactly what’s going on, but I will tell you that we've had conversations along way the with Westinghouse with Brookfield with number of folks. And we’re very encouraged with where this appears to be going. As you know, we didn’t extend the lease during the bankruptcy process from 8 years after 15 years. And that lease as extended was approved by Bankruptcy Court. Fairly recently, as you know the Company with marketed and Brookfield agreed to be the buyer and fairly recently that sales of Brookfield was approved on the Bankruptcy Court and Plan of Reorganization was approved. All of that is pending, so Bankruptcy Courts are in place. There are at least two approvals that we know outside of Bankruptcy Court that need to happen in Nuclear Regulatory Commission and then the Commission on Foreign Investment, and I’ll get name on strategic U.S. assets that would have been. Those need to happen, those are in process. We told Brookfield, you said they expect the sales to close in the third quarter, it could possibly be a little bit later than that, but it seems to be on track. So the whole process seems to be going in a positive direction. Obviously, a good sponsor behind it, there are cash flows in that business that are meaningful on the operational side and so we’re encouraged that where it's going.

[Operator:]

[Operator Instructions] The next question comes from Mitch Germain with JMP Securities. Please go ahead.

[Mitch Germain:]

Back to Market Square, Nelson. It just seems like that, it’s going to be a slow grind. It's really just like small lobby firms. It’s not really going to be any one tenant that kind of takes rest of this property down?

[Nelson Mills:]

Well, probably not one tenant, take the rest down. We do have most of the eight and all the ninth floor available, and they don’t want one building. So, we do have some big blocks space available and then there is a couple of other smaller space there. We are trying. We’re working very hard to get a bigger block, full floor, 4.5 type user probably a law firm. We’ve had a couple of near misses, as I have said, but we are trying to strike that balance because these tend to be 10 to 15 year leases and a market that is pretty strong on demand side. It’s going to be a little wildly, it’s going to take a little lot of heat through all the new supply. But we do think that market improves in next couple years. So, we don't want to cheat ourselves in the future here. But at the same time as we’ve said, it's time to meet the market and race that vacancy. Probably not one big user, but we’re hoping for something a little bigger than our typical 5,000 to 15,000 foot users that we’re so successful at.

[Mitch Germain:]

Wanted to address Boston, obviously it seems like it’s probably not a core market for you guys at this point. What’s the strategy there, I mean is that a potential candidate for sales down the road?

[Nelson Mills:]

Yes, we do have a terrific asset there, 116 Huntington, the Back Bay, and we’ve done some improvements. We brought up a nice retail and coffee shop. We’ve done the lobbying entrance, so the building shows it very well, even in the top two floors plus one other floor are what’s available. So it shows very well. We do have some decent activity there. We’re working through a couple of prospects right now. So we’re hopeful we get that leased in the next several months. There has been some softness in the Back Bay, Boston overall has done well, but there’s been -- the supply is absorbent in the Back Bay and that’s happening, that’s getting done. So market is improving, the building looks great. We’ll get that lease at good rates. In terms of the strategy in Boston is the only property we have in Boston, and Boston is a terrific market, but we are really focused on our three core markets, Manhattan, San Francisco and DC. So would we sell the property? Possibly, let's we'll get it leased and we do get some -- we do get a lot of enquiries about the building. So I think that we could sell it for a good price, no doubt at a profit, but we’ll see where that goes. Nothing urgent but we don’t have any current plans in Boston.

[Mitch Germain:]

And remind me the -- I was assuming the availability that’s on a higher floorage correct?

[Nelson Mills:]

It is, top two floors and the sixth floor.

[Mitch Germain:]

Seems like Shuman is gone finally at this point, is that being resolved and no longer it will be part of the portfolio?

[Nelson Mills:]

That’s right, Mitch, and we really haven’t been focused on that for some time because as you may know that -- of course that was one of the legacy assets from the non-traded REIT. And the tenant was office next headquarters in Suburban Chicago and we sold the rest of the Suburban Chicago assets, we weren’t able to sell that because the tenant hadn’t renewed, and the lease -- the loan was going to mature, but it was a non-recourse loan, CMBS. And we initiated the process quite some time ago to get the property back to lender, and it was agonizingly slow process but really it’s had no effect. We put no cash into it. It’s really just been sitting there. But finally as you know after the ended quarter, we've given it back, it’s gone and that’s no longer.

[Mitch Germain:]

I was going to say Jim is there any sort of accounting that we should know about associated with the fact that was no longer?

[Jim Fleming:]

Sure Mitch, it’s actually going to generate a bit of gain. It had been depreciated down and there’s going to be a gain that will be recognizing second quarter. But that won’t you operate at all proposes and it’s not something that, I think it will be really meaningful.

[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:]

Well, thank you all. We really appreciate you spending time on today and particularly for the questions. And we look forward to seeing you all again soon in NAREIT in June, if not before. Thank you very much.

[Operator:]

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