Columbia Property Trust, Inc.
Q4 2018 Earnings Call Transcript

Published: 14 Feb 2019

[Operator:]

Good afternoon and welcome to the Columbia Property Trust Fourth 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 Mr. Matt Stover, Director of Finance and Investor Relations. Please go ahead.

[Matt Stover:]

Good afternoon everyone and welcome to the fourth 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 in our quarterly supplemental package, which can be found on the Investor Relations section of our website 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 Risks 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. Welcome everyone to today's call. Our fourth quarter results kept a strong year for Columbia as we continue to capitalize on value creation opportunities. As many of you know, we now have one of the best positioned portfolios across the entire office sector with 80% of our assets in New York, San Francisco and Washington DC. Our strategy is focused on creating desirable boutique office space in some of the most appealing neighborhoods within top gateway markets. We’re 97% leased today with steadily growing cash flows. But of course, these results didn’t just happen. As we thoughtfully and diligently assembled our portfolio over the past five years, we took on a number of value creation opportunities. Vacancy and near-term leasing roll, repositioning of tenant rosters, building an amenity improvements and enhanced service delivery. Our successful execution of these opportunities led to dramatic growth in rents and net operating income and the well-positioned portfolio we’ve today. Our strategy and efforts have been validated by growing list of some of the most dynamic companies in the world choosing Columbia as their home. They’re actively seeking the type of environments we created for their employees in these submarkets. Today we’re proud to count among our tenants great firms like Twitter, DocuSign, Affirm, Oracle, United Health Group and Amazon Web Services. And most importantly this execution has produced demonstrable financial results. During the fourth quarter of 2018, our same store cash net operating income increased 22.4%, which marks continued acceleration over the 14.4% growth in the third quarter. We generated FFO of $0.40 per share in the fourth quarter, up 25% over the previous year. For the full year 2018, our 13.9% same store NOI increase was among the strongest in the office sector and exceeded the high end of our guidance range, which we had raised during the year. In addition, we generated FFO of a $1.56 per share again exceeding the high end of our guidance. Our portfolio is clearly yielding strong results largely due to the diligent and creative efforts of our leasing operations teams. Despite high occupancy across our portfolio had limited near-term expirations they continue to deliver gains in rents, occupancy and lease term which will drive cash flow growth well into the future. During the fourth quarter we leased 442,000 square feet, our strongest of the year. In addition, our leasing spreads were greater than 11% on a cash basis and just above 19% on a GAAP basis. As a result of the leasing we accomplished throughout 2018, our overall leased rate climbed a 120 basis points to 97.4% and we achieved 99.1% in New York, our largest market. One of our most notable fourth quarter leasing achievements in New York was the signing of a 15-year lease with WeWork for the entirety of the office space at 149 Madison. This is a great example of identifying and executing a value creation opportunity in one of our key markets. After winning many options for this well located property, we delivered the right tenant a good terms with accretive results. More recently we completed the transformation of 315 Park Avenue South, which is now 100% leased at the some of the highest rents in the submarket. This is another attractive well located building we acquired in 2015 and have since fully repositioned. With a most recent signing we’ve now leased all of the available space in this 20-story building again attracting a dynamic tenant roster of tech, media and investment companies. That’s another great example of ceasing a unique value creation opportunity, delivering on its execution and driving investment performance for our shareholders. We’ve also had recent success in Washington DC where we’ve achieved a 92% overall leased rate up from 88% a year earlier. One of the greatest contributors to this has been our accomplishments at our iconic Market Square property. This property encompasses twin buildings that curve around U.S. Navy Memorial is located halfway between the Whitehouse and Capital. We’ve made substantial strategic enhancement to this trophy office property which are now contributing to its high quality cash flow. We’ve leased more than 350,000 square feet at this property since 2015 by targeting the legislative arms and major corporations. Today half of Market Square, 65 tenants are Fortune 500 companies and 10 are Fortune 100 companies. We succeeded that increasing number rate at an average of 20% since 2015 with tenants drawn to our completed renovated entrances and 7,000 square foot conference center. This spring we also plan to unveil a new roof top deck which will include 8,000 square feet of high end [indiscernible] space. On the DC region space is a pipeline of new office supply and market also has one of the lowest unemployment rates in the nation. And all of these amenities serve to a truly differentiated Market Square. In San Francisco we leased a 114,000 square feet in 2018 at 30% cash leasing spreads and 40% GAAP spreads. It’s well documented that the San Francisco market remains as tight as ever. The supply growth has not been able to keep up with demand and that is reflected in leasing momentum we’ve seen there. Our San Francisco portfolio now sits at 96.4% leased with strong activity on our vacant space. We’ve 230,000 square feet of lease expirations in the bay area over the next two years then 115,000 square feet in 2021. Most of it is well below market so the trends of healthy leasing spreads and NOI growth at those properties should continue for several years. At Columbia Property Trust, we’re constantly seeking new opportunities to enhance our portfolio and drive growth opportunities. One of our major moves last year came in the fourth quarter when we entered into a joint venture agreement with Normandy Real Estate Partners to create a modern 12-story lifestyle office building at 799 Broadway adding to our presence in Midtown South. This ground-up development project at the convergence of Union Square and Greenwich Village where there is limited new office supply will create a highly attractive 182,000 square foot boutique office building. We’re already seeing strong demand for this unique property which is scheduled to be completed by late next year. We will soon be opening a marketing center for 799 Broadway at our 315 Park Avenue South property. I encourage you to come by to see it. Looking ahead to 2019, we expect our core assets to continue to perform, while we seek additional opportunities to create shareholder values. We still have unrealized growth potential embedded in our portfolio that will be unlocked as we make further progress in closing the spread between our economic occupancy at 92.7% and our leased rate of 97.4%. The narrowing of this gap is one ongoing driver of our robust and industry leading same store NOI growth. We’ve three buildings remaining in our non-core markets, two in Atlanta and one in Pittsburg. We plan to sell these properties in the first half of this year subject to pricing and eventually reinvest the proceeds in our target markets. Given our well leased and stable portfolio, our investments activities will be focused on value add opportunities. These will likely include attractive and well located but under managed properties with vacancy and near-term expirations. This is something we’ve done successfully time and time again. But we will also look at redevelopment and even ground-up opportunities on a very selective basis. As always we will be discerning and disciplined in our ever important capital allocation decisions. As a result of these final noncore dispositions and our plan to redeployment to higher growth but lower yield investments, our FFO will decrease modestly in 2018 as indicated in our initial guidance. This move will result in higher earnings quality with better growth. And as Jim will discuss in more detail, our same store NOI growth remains very strong. This final step of our portfolio repositioning has been well anticipated and should demand higher multiples. I want to thank our entire team for their determination and hard work. Their execution continues to drive our solid performance. Columbia Property Trust is now the strongest as ever been with an attractive and well performing portfolio with growth opportunities ahead and a healthy financial position. I’m confident our team will make the most of 2019 and I look forward to keeping you posted on our progress throughout the year. With that I’ll hand the call over to Jim to discuss our results in more detail and provide our outlook for the year.

[Jim Fleming:]

Thank you, Nelson and thanks everyone for joining our call today. The fourth quarter of 2018 marked a strong finish to a very good year at Columbia. We reported same store net operating income growth of over 22% during the quarter bringing our full year same store NOI growth to 13.9%. And our normalized FFO of $0.40 was up 25% from $0.32 a year earlier. Despite entering 2018 with limited rollover through the end of 2020, we had strong leasing results in 2018 capped off by our best performance in the year and the fourth quarter with 442,000 square feet leased. As a result our portfolio’s leased rate climbed another 10 basis points during the quarter to 97.4% which was up from 96.2% at the start of the year. And following all of this leasing activity, we finished 2018 with a spread of 470 basis points between our economic occupancy and our leased rate which as Nelson mentioned represents a meaningful embedded growth opportunity in 2019. At Columbia we’ve always emphasized the importance of a strong balance sheet and we stayed true to that approach this year using most of the proceeds from the completion of our Allianz joint venture in February and a sale of 222 East 41st Street in May to pay down debt. Then in December we expanded our credit facility by $150 million while successfully extending maturities and lowering the borrowing costs on the bank debt. The rate on both our revolving credit facility and our $300 million term loan improved by 10 basis and maturities were extended to 2023 and 2024 respectively. We ended the year with a debt-to-EBITDA ratio of 6.1 times, net debt to gross real estate assets of 31.6% and no debt maturities for the next two years. We’ve more than $4 billion of unencumbered properties and our only two properties with mortgage debt on the joint ventures, Market Square and 799 Broadway. During the fourth quarter we repurchased another $29 million of shares and paid a quarterly dividend of $0.20 per share. We ended the year with $124 million still available under our current share buyback authorization and we plan to continue our opportunistic share repurchases in 2019. This strategy is facilitated by the strength of our balance sheet and the planned sales of our Atlanta and Pittsburg assets which we expect to occur during the first half of the year. Let’s turn to our outlook ranges for 2019. First, for normalized FFO, we expect a range of $1.35 to a $1.40 per share. These levels are of course well below 2018’s $1.56, but this is entirely results of timing of transactions. Looking back at 2018, you’ll see that our FFO was $0.38 for the first quarter, $0.39 for the second quarter, $0.40 for the third quarter and $0.40 again for the fourth quarter. If we were to maintain today's portfolio throughout 2019, we would expect the run rate to remain at $0.40 per quarter or perhaps a bit higher. However, we're now working on a sale of both Glenlake and Lindbergh in Atlanta as well as the Westinghouse property in Pittsburgh. We expect two or three of these sales by the end of the first quarter, which will reduce our earnings a bit this year. We're also working hard to identify new investments but it is entirely possible that our 2019 investments may be value-add for development projects that don't contribute much to 2019 earnings. So while it's possible that our FFO could be a bit higher than we're estimating for 2019, we're establishing guidance that should leave room for us to make the right long-term business decisions that will lead to future growth. For same-store cash net operating income we're forecasting a growth range of 8% to 10%. This is on top of 2018’s 13.9% growth. And although we're not yet in a position to give a precise range for 2020, we expect to see a similar increase from 2019 to 2020. These are very significant increases of course and they reflect the results of the leasing we've achieved in our markets over the past several years. As you know, lease rollups which we’re continuing to see across our portfolio lead to increases in same-store NOI over a period of one to two years after the leases are signed. On lease percentage, we're forecasting a range at the end of 2019 of 95% to 97%. This is slightly below today's level of 97.4%, but still likely reflects a bit of an occupancy increase after we sell our Atlanta and Pittsburgh assets at 100% leased. We will be pleased to have a high-quality all gateway portfolio at these leasing levels. Finally, we're forecasting corporate G&A expense of $34 million to $36 million up about 3% from last year's estimated rage reflecting very modest changes. I'd like to conclude my remarks about guidance by emphasizing that the reduction we are expecting in the FFO from 2018 to 2019 is based entirely on our expectations about the timing of asset sales and the timing and nature of reinvestments. Absolutely in no case does it reflect any expectation of a pullback in the performance of our core portfolio which continues to improve. I also want to reiterate Nelson's comment that our earnings quality will be much higher after the sale of Atlanta and Pittsburgh and in addition we're hopeful that we'll be able to reinvest some of the proceeds from these sales and development for redevelopment projects. These projects may not contribute materially to 2019 earnings, but they will give us the opportunity to create significant earnings growth over the next two to four years. It's our intention to make the right decisions that result in long term growth and enhance shareholder value even if they result in some near-term dilution. Again this is no different than the strategy that successfully guided us at Columbia for several years. In summary, 2018 was another year of strong execution in our key markets led by our talented team and supported by a strong balance sheet and a well-positioned portfolio of quality office buildings. As Nelson pointed out, we're in the best position in our company's history and we're excited about the opportunities ahead. With that Nelson and I would be happy to take your questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from John Kim of BMO Capital Markets. Please go ahead.

[John Kim:]

Thank you. Jim, can I just follow up on your guidance and what's assumed in it? So I think what you're saying is, you're assuming at least two of the three dispositions will happen in the first half of the year. What kind of cap rates are you expecting? Should we be expecting high single digits? And then also, I just wanted to clarify are you assuming any income from acquisitions this year?

[Jim Fleming:]

Hi John, thank you, good question. We've got a model and that model I'm sure will change some during the year and we try to come up with guidance that really could capture level of different possibilities. At this point our expectation is, we've got three properties for sale. Nelson Mills will comment on where we are in the process of these three. We're farther along with a couple than we are with the third. But our expectation at least in terms of guidance is it will sell all three roughly at the end of the first quarter, definitely in the first half of the year. And then the question is what do we do with the proceeds. We are looking at some value add redevelopment opportunities. Those really would not if we do them they'd be good long-term, but they wouldn't contribute much really if any to the FFO this year and the reason is, if we invest money in properties that are not yet income producing all we really can do is capitalize interest which is the same and really financial result this year is just paying down debt. Our expectation is we will probably do some core plus investment with a part of the proceeds, but we are very much focused on value add which will generate more in long term.

[Nelson Mills:]

Yes and we could expect also by shares throughout the year. So that could be a use as well which will contribute to the FFO per share. The price range John is still that 500 to 600 million that we've been targeting for a while. We still expect to achieve that kind of near to middle of that range we would expect. But two of the three, the two Atlanta properties have been awarded to a buyer. We still have to work through the diligence and the closing process and the Pittsburgh asset is a little bit further behind. So we'll see, these things aren't done until they're done but we're still hopeful to get that price range and of course we report our NOI by property. So you can see the impact they're assuming they're gone. I'd say a couple of them could go later this quarter, early next and then it might take a bit longer on Pittsburgh. But it's pretty much in line with what we've been expecting all along.

[John Kim:]

Can you share any characteristics of the buyers of Atlanta assets whether it’s domestic PE or global fund or any other?

[Nelson Mills:]

Well, I'd say it's varied by property. I'd say it's been pretty good. Pretty broad interest in our Glenlake property which is a well leased, you'll remember is two properties and one of the multi-tenant, one is fully leased to Inspire brands, pretty wide interest in that one and we're pleased with the pricing of the outcome on that one. Lindbergh which is leased to AT&T and only has two years remaining on the lease that's 950,000 square feet so that's more of an opportunistic play, a bit thinner pool of potential buyers there but we feel very good about the buyer we've awarded to and expect that to close. So good interest there relative to what it is. And then like as I mentioned we are earlier in the process on Cranberry Woods, the Pittsburgh asset but again wide interest there. So we've been pleased. Our team here and our brokerage team have done a good job and we've certainly got a lot of coverage. So we think the outcome is going to be good.

[John Kim:]

As far as taking on more value opportunities on acquisitions at this time of the market, do you feel the same level of comfort in each of your three major markets or is New York more risky just given there's more spec development now?

[Nelson Mills:]

Well there's more spec development. There's still strong demand as you know. The market is rewarding new supply and its rewarding renovated supply as we've seen at 315 Park Avenue South and elsewhere. Certainly, our underwriting would be a little different today than when we bought 315 Park Avenue South. A bit more concessions maybe a slower pace of leasing, net effective rents may be slightly flat, not much growth but we still think it's relatively strong and we're 99% leased in the market and we weren't there a year ago. So we're continuing to experience good velocity there and good rates, good terms but that said we are very much aware that it's a little more uncertain world today for New York and overall and our underwriting reflects that. So we'll continue to be very diligent and disciplined in that process. We only acquired one property and last year we entered into joint venture with Normandy on 799 Broadway. We expect to do a couple things this year, but it may take a little while to get that done and that's reflected in the guidance. San Francisco again a different story, it's very competitive there. Fundamentals are incredibly strong, makes it very difficult to buy properties there. And then probably the less of the three markets, DC's is the softest of the three and probably we're not as optimistic about fundamentals there in the near term. So we're working a pipeline, an active pipeline in all three markets and turning over a lot of stones and we think we'll be able to find some good opportunities. But we're certainly not going to rush it and we're going to be - will be disciplined.

[John Kim:]

A question on your buyback and I know hindsight is always 2020. But you purchased at an average price of 2232 which is above your average price for the quarter. Were you actively buying your stock in December?

[Jim Fleming:]

Well John, we bought that earlier in the quarter when the price was a bit higher. So the answer is no. We really did that more early in the quarter and I'll tell you it's an interesting question because I think a lot of folks look at buybacks as sort of an opportunistic thing and then you buy 22 and then the stock price goes to 18 or 19 and they think gosh that looks terrible. I wouldn't view it that way. We have always viewed this as a kind of a steady kind of a thing where we're trying to - we certainly would want to buy it at 18 or 19. But we're really trying to buy it in a measured way based on liquidity, based on our outlook but really any of those prices we think it's well below what our stocks should be worth given the value of our assets and so I’d tell you we don't have any regrets. Certainly we'd like to be able to capture those lows when we can, but I think we feel, I feel pretty good about what we've done.

[John Kim:]

But if your stock was to go below with a 20 again, would you load up on the buyback?

[Jim Fleming:]

There are a number of things that we have to consider. One is, liquidity is pretty good right now. Another is, are there any pending transactions that might keep us out of the market we have to be careful about that from a legal standpoint. And another is, other uses of capital and I would say right now I would feel really good about getting there and buying some more stock if the price becomes really compelling. But we have to weigh all those three things as we go through the quarter and that's just really the way process works. I would say if the stock price were to dip like it did before then maybe we may have a little bit of an internal discussion, but it would certainly make sense for us to buy some more shares given that kind of price.

[John Kim:]

That's great, thank you.

[Nelson Mills:]

Thank a lot John.

[Operator:]

Our next question comes from Vikram Malhotra of Morgan Stanley. Please go ahead.

[Vikram Malhotra:]

Thanks for taking the question. So just want to get more color maybe on your comments around activity in New York being a bit more slower, concession still remaining high. Maybe two parts to that. Lot of your peers have recently said they view rents actually inflecting in 2019 upward. Do you share that view number one?

[Nelson Mills:]

Certainly it's interesting in a various parts of market. So on the West Side, Hudson Yards and the West Side has done very well with the new supply, but there's a lot of excess supply at this time. There's a lot of these properties remain to be leased and I'd start to be a little concerned about that sub market. Midtown South is tighter than probably ever has been and I think we've experienced that. We'd love to have more properties in that submarket. Downtown seems to be improving and that supply is being absorbed. And there's some signs of the financial district Upper Midtown showing some signs of recovery, but that's a bit softer than the other submarkets I mentioned. Overall, I don't know it's steady for sure. I would say it's certainly not getting any worse and there are some indications that the demand is keeping up with and possibly outpacing new supply. It's certainly a market of have and have nots. The newer product, the newly renovated product is achieving good leasing pace and good rates net of concessions. And some of the more commodity space is struggling a bit and I think we've learned that lesson early on a few years ago and I think we've taken advantage of with some of our actions. So, overall I think it's pretty good Vikram. It's not dramatically improving, but I think we're well past the bottom from what we can see.

[Vikram Malhotra:]

And then just based on your, again comments around New York being a little slower. Correct me if I'm wrong, I think the last published NAV that you had was sort of $27 or $28 in your presentation if I'm not wrong. Just given the view on cap rates today and some of the slowness you reflected, can you sort of provide an update where you think NAV is today?

[Nelson Mills:]

Well, when I mentioned slower or worse, I'm really referring to compared to say 15, 16, when we bought 315 Park Avenue South and 229 West 43rd, I'm suggesting that it's not quite serious it was there. And certainly it's certainly market certainly holding steady and doing quite well. I think our NAV if anything not so much to do with the overall market but our performance in our portfolio and our leasing and not only currently seeing activity but extending repositioning our longer term leases. We created quite a bit value around the portfolio. There are many examples of that some of which we touched on in our presentation. So, I'd say NAV is holding up and growing for sure over the last couple of years and it continues to have some upsides. So, we stand behind that, we think it's continuing to improve.

[Vikram Malhotra:]

And then Jim, just one clarification, sort of in the guidance, if I look at the low-end and the high-end, just correct me if I'm wrong or provide some more color on just the timing of redeployment, is there an anticipation of no read deployment this year and into next year or is it the high-end you redeploy some of the capital?

[Jim Fleming:]

Yes, Vikram. There are a number of variables there. I would say the timing of the asset sales is one and if those get pushed back a bit, that would push us up a bit like we're not assuming that. Another would be share buybacks, Nelson mentioned that as a use of proceed, that's a pretty efficient use of proceeds in terms of way to generate FFO this year. And we will do the buybacks if that's the right thing to do and we've obviously felt that they were in recent times but that would help. And then, the third as you point out, it's partly timing, it's partly the nature of the reinvestment. So, if we were to buy co-property or co plus property with that GAAP yield of 5% or so, you can do the math. That would have a meaningful effect if we were to buy something middle of the year. We think that's a possibility and that's why then we model for some of our capital. But we also think we may do some value adds, some repositioning, some as by and likely we'll do any real ground and development, it could be redevelopment but there's no real income straight for a while. If that's the case, the way would work, it really wouldn’t matter about the timing this year because all of what will happen is whatever acquisition dollars we spend and whatever investment we make this year, we just that cash will just be used to capitalize interest on that now and so would be in effect like paying down debt at that point for FFO purposes. So, we modelled this with a blend of all of those things. I would say if we didn’t do any reinvestment and all of our reinvestment were value add, we expect to be in towards the lower end of the range. But we do think we'll do some investment that will generate some income or buy some shares back or that sort of thing during the year. So, that's where we are. And obviously if the sales get delayed substantially, that would push us up a bit and we'll update the guidance range if that happens later in the year.

[Vikram Malhotra:]

Great. Thanks, guys.

[Jim Fleming:]

I appreciate, Vikram.

[Nelson Mills:]

Thanks, Vikram.

[Operator:]

And our next question comes from Mitch Germain of JMP Securities. Please go ahead.

[Mitch Germain:]

Thanks for taking my question. I'm curious about, Jim, curious about the cadence of same store NOI. I would expect a little bit higher in the first part of the year with a bit of a tail off, given the fact that the occupancy comps are and as favorable in the back part. Is that how we should be thinking about the results there?

[Jim Fleming:]

Hey Mitch, good question. I would say from a GAAP standpoint, yes; from a cash standpoint, it's going to continue for a while. And the reason for that, I know it even continue in the 2020 we believe. The reason for that is obviously there's some pre ramp that has to burn off and the cash starts anywhere from six to 12 months later than the GAAP recognition. So, I think even in the first half of 2020 there'd be pretty substantial cash, same store NOI but I would think most of it, I hadn’t really looked at it and try to parse it by much but I think most of it would be in the first half of this year in terms of the GAAP increase.

[Mitch Germain:]

Got you. And just thinking about that occupancy guidance that you provided, that incorporates the sale of the three properties. Is that -- I just want to make sure that I confirm that it's not assuming any in a steady state if there is any sort of decline in the lease rate of the portfolio as it stands right now, correct?

[Jim Fleming:]

That's right. And so, we've got a range there but our expectation and our plan for the year is to increase occupancy by on the same store portfolio by 50 basis points or so. We think we can accomplish that. But what that would involve of course is selling three properties at all 100% lease of that, we drop this down to start one.

[Mitch Germain:]

Got you. Last question. Now that you basely limited all the risk related to 149 Madison. Is there anything that preclude do as from maybe even pursuing a sale of that property as well?

[Nelson Mills:]

No, Mitch. Not really. We certainly have the right to do it. Now the value, the book, the value is being created there for sure. Depending on the buyer though, I think we would probably benefit in pricing from planning some of the concessions burn off. Also WeWork is in the process of redeveloping the space and building it out. So, I think it'd be very important to let that be well under way or be completed as well. So, now wouldn't be the time and maybe next year's not the time but certainly we expect to get a nice yield on the property. But there's nothing precluding us from selling it. It's just not likely this year.

[Mitch Germain:]

Thank you.

[Nelson Mills:]

Thank you.

[Jim Fleming:]

Thank you, Mitch.

[Operator:]

Our next question comes from Sheila McGrath of Evercore ISI. Please go ahead.

[Sheila McGrath:]

Good evening. Now, it looks like Market Square did reach stabilization, that repositioning required significant capital. Just wondered if you could give us some insights how you think about the return on cost of that incremental capital and a little bit more detail if there is much activity on the remaining 10% of the project?

[Nelson Mills:]

Sure, hi Sheila. So, first of all, we own the properties since 2011. And as you know we brought Blackstone as a partner two-and-a-half years ago or so. It's been the steps of the repositioning and the leasing have just hit above over time, right. So, it's always been a great property, it's always been one of the most sought after properties for government affair type tenants; it was always done pretty well. But we decided up years ago that it needed some updating some enhancement. So, we started with the lobby renovations, we've added a conference center and fitness center that was a bit later. And then, what we discovered over the last couple of years of some pretty competitive leasing with all the new supply as a roof top deck was essential. We were losing all of our best and final that we lost, we won a lot of obviously one lot of tenants from that time but it seemed that all the ones that we were losing were we're losing to some to competing property a new property with outdoor space. So, that was a later edition. So, there's been a variety of projects all along the way. In each case, we and our board enlarge the ROI on that spin in terms of incremental leasing pays, leasing rate and so we've underwritten that and we've been able to meet those objectives, those hurdles. How that all competes to an ROI overall, I can't say but it certainly had exceeded the proforma underwriting of those investments at the time we did them. So, it's all worked out very well and we continue to get great results there. And as far as the remaining 10%, its again it's one most active properties we have in the portfolio in terms of leasing, towards leasing activities, LOI's, bids, actual execute leases. But a lot of those tenants tend to be the five to 10,000 tenants, great credit, great rates, great terms, but it's we just chink away at a little bit of time and that goes the other way too. You're not dependent on one or two big tenants there either. So, we're going to continue to climb and push that rate higher and higher closer to 100%. And I think these improvements are going to help us get there.

[Jim Fleming:]

Sheila, this is Jim. Just a quick note on that. You asked about Return on Investment. It's not possible now to calculate because we don’t we couldn’t calculate what we would have had but if we hadn’t spent the dollars. I think it gets back to Nelson's comment which is certainly true New York and we've seen it that this building is -- which is if you -- if we build quality space with the right kind of amenities, we'll attract the tenants and we've seen that here at Market Square as we got it from less than 70% occupied up to 90% now. It's been a long process but it's really worked and what I would say is I have to go back and look but I would estimate we spent we just took the square footage the building and the capital of dollars we spent, it's probably about $30 of -- it's just about to get by all the square feet in the building. And if you think about in the context of that building, it's about a $900 square foot building. Tenant concessions, if you sigh a 10-year lease, you're giving over a $100 of foot in TI. So really, I'd say it's a bargain. It's to spend $30 essentially to put yourself in a position to where you compete better, I think it's worked out pretty much.

[Sheila McGrath:]

Certainly 90% it's good to see. So, maybe you could give us a little insight on the marketing of the Normandy partnership, the development. Has that efficiently started or is that still in the works for this year?

[Nelson Mills:]

Well, it's just getting started, we're working hand-in-hand with the Normandy team and we have a leasing broker involved as well. And so, there we got a lot of also listed enquiries early on but now the marketing process is just beginning to take off. We're very optimistic about the level of interest we're going to get there. And I mentioned, we are opening a marketing center at and some retail space at 315 Park Avenue South. It's the last available space, there is one retail slot available 315, we're using that for marketing center. And it will include a model of the property and other materials and we're very excited about opening that in the next few weeks. We'll let you know when that's open, we'd love for any dude come by and see it. We think there'll be significant interest here. The property doesn't deliver until mid-late '20. But our expectation was it will have strong leasing activity well before then.

[Sheila McGrath:]

Do you think it's more likely a multi-tenant scenario or single tenant?

[Nelson Mills:]

It could be either, of course. We've got a lot of interest early on from either full building or most of the building type users. My best guess is probably a predominant tenant there and then fill it out with some other smaller tenants. But it could be any of the above.

[Sheila McGrath:]

Great. And then, your comment on Pittsburgh taking a little bit longer. Is it because of the interest level or when you started the marketing process?

[Nelson Mills:]

Well, there is as you know, we had to overcome some obstacles to get this property to market. And there were some physical improvements that we made over to the property last couple of years. We finished that up back in September, October. We got full sign off from our tenant, we had to iron out all the communication around that to make sure we got a clean bill health for the building for purpose of marketing may take a little while throughout the fall. The bigger issue was as you know Westinghouse has just emerged from bankruptcy with the sale of the Brookfield. And not only but that need to get settled but there is we need to gather information and get approvals from tenant and the new owner to share that. So, it just took a little while to get all the necessary information pulled together to present to the market. And then, also we've got a great brokerage team on that and we're doing a very thorough job of wedding that with the market. So, we just been very careful not to rush it, at the same time keep interest levels high but it's taken a couple of months to really get that going. We're now just beyond the first round of offers and I think it'll start to move along pretty quickly at this point.

[Sheila McGrath:]

Great, thank you.

[Nelson Mills:]

Thank you.

[Jim Fleming:]

Thanks, Sheila.

[Operator:]

Our next question comes from Michael Lewis of SunTrust. Please go ahead.

[Michael Lewis:]

Thank you. On your third quarter call you suggested that 2019 FFO would be similar to the original 2018 guidance, which was $1.41 to $1.46. Rather than similar I would call this a little bit lower in it. Is it strictly because of timing for the dispositions and potential acquisitions or is there anything else here that changed lower proceeds or anything else we should be aware of?

[Jim Fleming:]

Yes Michael, it's a good question and obviously it is a bit different than what we had signaled before. It's not proceeds. We're still expecting to be in the same price range. I would say timing may have moved up just a little bit. That earlier range was of course preliminary. But the biggest thing I'd say it's different is we just have decided that we want to leave ourselves room to be able to do value-add if that's the right thing to do and that wouldn't really generate the same kind of returns in 2019 that reinvestment in more core properties would. So, we've really made an allowance for that in this and you can do the math if we were to buy more core properties you'd see that we could get to a higher number. What we're trying to do the right thing really from a business standpoint and leave ourselves room to do that. And the other thing is we just kind of refined our model as we've moved ahead. So we are like I said this is a range. It reflects the fact that we are seeing some potential opportunities and some value add projects. We think they may be the right thing to do. If we decide to just go reinvest the money or buy a bunch of shares back or do something else where it has a more immediate impact, we'll just arrange as we go forward. We're just trying to leave ourselves room to operate and create longer-term value rather than really focused on current year FFO.

[Nelson Mills:]

Yes and to be clear as Jim said earlier, that drop is entirely attributable to what Jim just described that the timing of the sales, the redeployment both in terms of when and in what we redeploy that capital. There's nothing else in the core portfolio affected that in any way as you can see from the same store numbers it continues to equal or outpace our previous expectations.

[Michael Lewis:]

Great and then you sort of started to answer my second question, which is if you have any specific acquisition targets identified, things you're working on that you think might come to fruition or if you're still kind of sorting out and looking for opportunity?

[Nelson Mills:]

We do have some specific things that are in the works I guess you could say. There are properties that are in the market that we have interest in at a price and we have a lot of these throughout the year that fit or meet our objectives that we think are attractive opportunities that we like them at a certain price, we'll pursue those, well bid on them. If they surpass our pricing, we let them go. We move to the next one. So at any given point in time including right now there are a couple things out there both in San Francisco and in New York and we might capture one of those. It could be earlier rather than later, but those things are never given as I mentioned we only bought one property last year. So it's just hard to say exactly when that timing will fall, but you'll know it as soon as we can tell you that I promise.

[Michael Lewis:]

And then my last question is sort of related to that. You've done a good job of leasing up assets. You have a lot that are highly leased now with long term leases, maybe some of these assets you've kind of maximized the value. But how do you think about potentially monetizing those? Is finding redeployment opportunities really a limiting factor for you guys right now in the cycle and where pricing is and do you think that kind of limits you on monetizing some things maybe you otherwise would?

[Nelson Mills:]

Well, I don't know Michael. I mean we've always got share buybacks as an option depending on where the price is. I don't think that - there are a few assets around the portfolio that are -- they're well leased, locked away for a few years and aside from contractual rent growth there's not a lot else to do with them. That's true. We sold 222 East 41st, a year or so ago for that reason. Its 30 year leased, locked away and got a good cap rate for it and we redeployed that capital. I think we harvested those profits and put that capital basically on the balance sheet even though we didn't have a immediate use for it. So we will do that. I think now our objective is to finish these non-core sales that generate a lot of capital. The balance sheet is strong already. We are being patient on deployment of the capital, but if we had a compelling need for capital yes, there are a couple of core assets around the portfolio that we certainly consider monetizing either through a sale or bringing on a partner that's always an option. That was a key part of the strategy from the beginning. It's one of the reasons we chose the markets and the properties we chose because having that sort of capital demand liquidity for your properties is a good thing. So it's always an option, but no immediate plans to dispose off of the core assets.

[Michael Lewis:]

Thank you.

[Nelson Mills:]

Thanks Michael.

[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. Thank you all for joining us today. We appreciate your interest and your time and we're particularly grateful for the great questions. We're really excited about 2019 as you can tell, we're set up for another good year and we look forward to updating you as the year progresses. Thank you again for being on the call and we look forward to seeing you soon.

[Operator:]

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