Columbia Property Trust, Inc.
Q3 2017 Earnings Call Transcript

Published: 27 Oct 2017

[Operator:]

Good afternoon and welcome to the Columbia Property Trust, Third Quarter 2017 Conference Call. All participants will be in listen-only mode. [Operator Instructions]. I would now like to turn the conference over to Mr. Matt Stover. Please go ahead.

[Matt Stover:]

Thank you. Good afternoon and welcome to the third quarter 2017, Columbia Property Trust Investor Conference Call. On the call today will be 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 on file with SEC on Form 8-K. We've also filed our 10-Q with the SEC this afternoon. 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. I'll now turn the call over to Nelson Mills.

[Nelson Mills:]

Thanks Matt. Thank you all for joining us today. This is an important and exciting time for Columbia. As promised, we’ve essentially completed the dramatic transformation of our portfolio. We are now concentrated in a select few of the best office markets in the country. Our team has been very successful in not only leasing up the value add properties we acquired over the last few years, but also in renewing and extending many of our major leases across the portfolio. We’ve effected this transformation in disciplined and creative ways, maximizing value for shareholders as we exited no-core assets. We’ve also maintained a strong balance sheet throughout without having to issue equity and have attracted two of the best joint venture partners in the world. We’ve methodically carved out a niche for ourselves and have competed very excitedly against much larger and longer established peers in our selected market. In short, our team and board have delivered on the transformation of the portfolio and platform that we promised just a few years ago. With high quality properties and a heavy concentration in three of the best office markets in the country, along with proven, well respected local teams on the ground, our investors should expect big results and we delivered. As Jim will describe later in this call, we are expecting dramatic growth in 2018 net operating income and funds from operation, resulting from the leasing we’ve already accomplished. Our recent acquisitions will also contribute substantially to those metric for 2018 and beyond. There will be some obvious capital allocation question today, and we will address them. These are the same questions that our team and board ask ourselves in connection with every decision we make in deploying our investors precocious capital. We’ve been measured and thoughtful throughout and are very pleased with the results we’ve delivered. Let’s take a look at those results, starting with leasing. Today our portfolio stands at just over 95% leased. During the quarter we signed a 178,000 square feet of leases with a 107% increase in rental rates based on GAAP rents and a 68% increase based on cash rents. The largest lease found during the quarter was a renewal with DLA Piper for 119,000 square feet at University Circle in Palo Alto, with an over 60% rollup on cash basis rents. This was our largest lease expiration scheduled for 2018, leaving us with only 116,000 square feet or slightly over 2% of our annual lease revenue expiring across the portfolio next year. Speaking of leasing success, just last week the bankruptcy court approved our lease extension and amendment with Westinghouse in Suburban Pittsburgh for their entire 824,000 square foot campus. We extended the lease to 15 years with a current cash basis rent roll down of just under $2, but GAAP basis rent remains essentially unchanged. Lets next turn to our capital allocation decisions and transaction activity. Over the last five years we have diligently transformed the portfolio in line with the consistently communicated strategy. That is

[Jim Fleming:]

Thank you Nelson and thanks everyone for joining us this evening. It’s definitely an exciting time at Columbia. Over the past year we’ve been talking about how the pieces of our strategy are coming together and it’s great to get to the point where we have accomplished most of our leasing objectives and put our capital back to work. After a lot of hard work as Nelson mentioned, we are now headed for strong net operating income and FFO growth in 2018 and beyond. Right now we are in line with our expectations for 2017, with solid third quarter results and a slightly better fourth quarter projection as we remain above 95% leased, rent up eight months from our previous leasing are beginning to burn off and our G&A is coming in at the low end of the range we anticipated. All in all, very few surprises in the third and fourth quarter from what we previously signaled. As part of our efforts to continue to improve our disclosures we’ve made a change to our supplemental package this quarter. On page 13 we’ve broken out third party management income to be separate and distinct from net operating income. Here we are showing the effect of the fees earned to manage our partners’ interest in properties owned through our unconsolidated joint ventures reduced by related G&A costs. This income stream became more material in the third quarter when we formed our joint venture with Allianz. Please also note that we’ve added pro-forma pages at the back of the supplemental to show the effects of our recent acquisitions. I want to point out that our normalized FFO calculation for this quarter excludes $1.5 million of non-cash carrying cost for Shuman Boulevard as we wait for the special servicer to transfer title back to the lender. We expect that to happen by year end. We’ve also excluded the $49 million mortgage on this property from our debt calculations. We approach the end of the year with a lot more clarity due to the transactions completed and the leases that are converting to economic occupancy. With one quarter left in the year and all of this year’s plan disposition and acquisition activity completed other than the previously announced 149 Madison Avenue acquisition, we’ve been able to raise the lower end of our guidance range for normalized FFO, while maintaining the upper end. We are also expecting G&A will come in toward the lower end of our projected range, accordingly we project a fourth quarter largely as expected in the range of $0.29 to $.032 per share in normalized FFO. I know the real focus on guidance in today’s Q&A is going to revolve around our outlook for 2018. Let me first say that we are in the process of finalizing our budget and we typically provide our first look at these expectations when we report fourth quarter results in early February. That being said we’ve eliminated much of the uncertainty around how and when we will allocate capital and whether we can achieve the leasing projected in our recent NOI bridges. Our recent leasing successes have been significant and they will lead to substantial growth over the next couple of years. Page 21 of our supplemental paints this picture very well. You will note that we currently have a nearly 13 percentage point difference between leased and economic occupancy, 95% leased to 82% economic. Recall that our September Investor Presentation breaks down the expected contractual cash rents by quarter in 2018. While there are likely to be some slight updates to that projection, the progression of these cash rents can be used as a rough proxy for how we expect net operating income to progress in 2018. We are also pleased that we’ve been able to reinvest the $500 million from our sale of the Cleveland and Huston buildings early this year, and also make substantial progress towards reinvesting the proceeds from the contribution of our San Francisco assets to the Allianz joint venture. Our earnings this year have been lower because we’ve been patient in reinvesting this money. We wanted to find assets that fit well with our portfolio provide opportunities for growth over the longer term and also provide good cash flow in the near term. Now that we’ve accomplished these goals, we believe our new investments will add to the momentum from our recent leasing activity and boost our growth in 2018 and 2019. We don’t anticipate much risk in the portfolio to jeopardize this growth. As page 25 of our supplemental shows we almost no rollover exposure over the next two years. We have a total of 116,000 square feet of leases expiring in 2018 and another 196,000 square feet in 2019. The majority of this space is in San Francisco, New York and Washington DC and we expect to achieve rollouts on these leases. But we do have 365,000 square feet of vacancy, down from over 900,000 square feet of vacancy in near term role when we began this year, and it’s concentrated in markets where we’ve had a lot of success lately. So we expect the continued focus on leasing will add another layer of growth in late 2018 and in 2019. The locked in nature of the contractual rents, our recent acquisitions and the relative lack of rollover risk provides a good base line for expectations in 2018. We’ll provide a more detailed guidance in February, but we expect our 2018 normalized FFO will be 25% to 30% higher than in 2017 and we expect our same store net operating income will increase by meaningful amount next year as well. AFFO growth should lag the FFO growth by a few quarters as we finish up our capital expenditures and burn off free rent from recent leases, but that too should increase substantially over time. Since June 30, we’ve put the strength and flexibility of our balance sheet to good work by deploying the proceeds from the exits of Huston and Cleveland, the proceeds from our Allianz joint venture and a portion of the availability on our credit facility to fund acquisitions in Midtown South, Manhattan and Washington DC; the repurchase of $30 million of our shares and the repayment of the $125 million mortgage loan on 650 California. Similar to past periods of dramatic transformation in our portfolio, we’ve been able to temporarily flex to higher leverage. Pro-forma for the acquisitions, leverage has increased to 37% of gross assets. But the remaining $234 million from the Allianz joint venture will bring now our leverage back down and cash flow growth in 2018 and 2019 will help as well. Our balance sheet remains very flexible with unencumbered assets of over $4 billion and only two mortgages. All of the work we put in on the balance sheet and our disciplined allocation of capital have positioned us for significant growth in 2018 and 2019. With that operator, we are ready to take questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Sheila McGrath with Evercore. Please go ahead.

[Sheila McGrath:]

Yes, good afternoon. On the Credit Suisse space in Midtown South or Park Avenue South, could you give us an update on how the leasing activity is looking there and where new lease rents would look versus expiring rents?

[Nelson Mills:]

Hi Sheila. Sure, so that’s all gone very well. As you know we just got that space back earlier this year as expected and we’ve leased several floors already. As of the end of the quarter there were seven floors remaining, seven of the 20. We’ve got – we expect, we’re very close, hopefully days away from announcing a couple of other deals, maybe two or three more floors. So we expect by year end we’ll have all the two or three floors leased. We’ve got activity on all of it. In terms of the rate, its slightly better than projected, our acquisition pro forma and I would say we’re averaging in the high 80’s gross on that space.

[Jim Fleming:]

Sheila, this is Jim, hey. The [growing lease] [ph] we find this past quarter was about 12% net roll out. That was a one floor lease and I think that’s probably fairly typical. We had some higher roll outs earlier. These are more modest, but they are roll outs.

[Sheila McGrath:]

Okay. And then two more quick questions. On Pittsburg, that was great news. How big of a rent decrease was that $2 role. I forget what the in-place rent was. And then if you could just touch on what your long term plans might be for that asset.

[Jim Fleming:]

Just on the role Sheila, that was just under $2 of rolled down on about 800,000 square feet and now Nelson can comment on the overall plans for that asset.

[Nelson Mills:]

Yeah, so Sheila on the roll down, we actually had a little room there versus market. Our best estimate is that we were about $1, $1.5 above market and so that roll down takes us just below. So we felt good about that trade in exchange for the extended lease term. In terms of what’s next, as we mentioned before we’re doing some physical upgrades to the property. We’ve been working on that for a couple of years. That will finish up next summer, so that’s in great shape and you know we hope and we expect Westinghouse to emerge from bankruptcy and hopefully more good news to come on them. So sometime you know next year we could have a better view on the value of the property and may have more options for the property. That’s not a forever hold as we’ve said. There are no immediate plans to sell it, but that’s something we’ll certainly look at as we finish up the improvements to the building and now we have this lease in place.

[Sheila McGrath:]

Okay, and last question. Could you just remind us how the joint venture, what the next move is? Do you take more proceeds out of there? Is there more room for acquisitions? If you could just give us a little clarity on how the next kind of transactions in the JV work?

[Nelson Mills:]

Okay, well just a quick reminder for everybody. We initially formed a JV by contributing two of our West Coast assets, University Circle and 333 Market. Allianz contributed 114 5th in New York. That netted substantial cash to us, but because we wanted to leave the capital at work the arrangement we put in place was that even though Allianz will ultimately own 45%, initially they only took 22.5% interest in this California assets. The remaining 22.5% interest gets triggered at the earlier of one year. I mean one year anniversary which should be July 18 or when we as a partnership have identified at least $600 million more in acquisitions. So the $440 million acquisition of 1800 M Street doesn’t quite get us there, so we have not triggered that remaining sales. So the way it’s going to work is sometime between now and July Allianz will acquire the remaining 22.5%. That will generate about additional $230 million or so additional capital back to us, which we either take it under our balance sheet or if we identify opportunity together we’ll reinvest that alongside Allianz into another deal. So as far as phase one of this initial adventure, the $1.9 billion or so that we anticipated, we’re very close to having that bucket filled.

[Jim Fleming:]

Sheila, this is Jim. Let me just add one thing to that, put in a plug for our bridge, our NOI bridge. We as a lot of you guys know we had an investor presentation that we’ve been updating. We started this about a year ago with an NOI bridge and our most recent presentation is September. We’ve not updated the entire presentation. We’ll do that before the [inaudible] meetings, but we did go ahead and update the cash NOI bridge and actually put it out on our website today about the same time that we published our earnings. And what it does is it shows the – it starts with the third quarter NOI as the acquisition that have been done. The interesting thing about this and also it shows the leasing that’s been done which is substantial. The interesting thing is virtually all of the work has been done and really most of what you’ll see is contractual versus speculative. But I will just comment on that and be glad to talk separately with any of folks on this call if you want any explanations with bridge, but I will comment on the Allianz joint venture. We’ve assumed that we just keep it where it is and don’t but any more assets in the venture. We didn’t want to assume too much here. So really this bridge assumes no more acquisitions in the venture or otherwise but that’s – but we would like to do some more acquisitions in the venture, so there is room to do some more in the venture.

[Sheila McGrath:]

Okay, great. Thank you.

[Nelson Mills:]

Thank you.

[Operator:]

The next question comes from Vikram Malhotra with Morgan Stanley. Please go ahead.

[Vikram Malhotra:]

Thank you. Just sticking with the JV, can you maybe walk us kind of down the rational and maybe just the reasoning? How you thought about the acquisitions being done on the balance sheet versus the JV and just maybe kind of what are you looking forward. Going forward as you mentioned you would like to do more. How are you looking at what assets are part of the JV versus not?

[Nelson Mills:]

Okay, hi Vikram, good question. So the venture, we expect the venture will focus primarily on stabilized assets, at least that’s certainly been the case so far and so properties like University Circle and 333 fully leased, fully stabilized properties, as well as the other two, the New York and DC properties, they are there. We expect that’s likely to continue although that will be for us and our partner to decide. We certainly couldn’t move out the risk spectrum on future deals, but that’s the expectation. I had mentioned earlier that we had a particular size in mind, this $1.9 billion to $2 billion initial size. We thought that was a good balance between our on balance sheet portfolio versus venture portfolio. Also we’re trying to manage other expectations with credit agency ratings and so forth. So based on that initial phase one as I mentioned, we’re almost full. Now, the partnership is going great. We’re very much aligned in our strategy and both sides are very pleased with the partnership. We’d like to do more down the road. We are continuing to look at opportunities, but phase one is accomplished, so we’ll see what’s next. As far as what’s in the venture and what’s outside, 1800 M and Washington DC we acquired together. The two New York assets we did not, but there are a number of factors that go into that, including our partner has other interests, other opportunities outside of our venture. At any point in time they are just like we are. They are looking at New York exposure versus DC versus other markets. So it’s not that they weren’t interested or didn’t like those properties, it just didn’t meet their expectations.

[Vikram Malhotra:]

So while the NY RTS, that’s where – I mean I guess that’s sort of core of stabilized. Your saying they were maybe just not – exposure wise they were looking at New York versus other markets.

[Nelson Mills:]

I think that was a key driver. I can’t really speak for their full considerations, but that was certainly a driver.

[Vikram Malhotra:]

So there could be just a part from core and non-core, it could also just be like they say ‘hey, we don’t want anymore New York exposure. We want to exfoliate the exposure.’

[Nelson Mills:]

Oh yeah!

[Vikram Malhotra:]

So it could just be other factors that result in that decision.

[Nelson Mills:]

That’s right and I am not suggesting they don’t want more New York exposure, but there are a number of factors that they balance that along with other ventures and other investments they do, so…

[Vikram Malhotra:]

Okay, and then – sorry, go ahead.

[Nelson Mills:]

That was it, thank you.

[Vikram Malhotra:]

Just, two more. So on 80 M Street and 116 Huntington, can you remind us, like did somebody move out. I think the lease they take it down and just maybe plans for those two assets. It seems like – I remember when I told 116, I think you were trying to get the top floors leased and I am just wondering what the progress on that is?

[Nelson Mills:]

At 80 M Street and 116?

[Jim Fleming:]

Yeah, that’s – hey Vikram, this is Jim. I know on 80 M Street we had a 5,000 square foot downsized by general dynamics. That was just a small change. We’re still over 92% leased there. And then in Boston, I think we also had a small move out. I don’t have a note. We actually ticked up a little bit in overall occupancy, but we may have had one move out and additional lease signed. I will comment in Boston, that’s been a bit slower than we would have liked. We don’t have a team there, but we are paying a lot of attention to that asset and we are getting a fair amount of activity. Now we don’t have a whole lot of space there to lease, but we’re getting a fair amount of activity. The building is in great shape. We’ve finished the renovations and we have the expectations that we’re going to have that leased up in the short term.

[Vikram Malhotra:]

Okay, and just one more if I can sneak in. Just from a broader perspective, it seems like you have a nice collection of assets now in mid-town south, which may sort of – you know from a submarket perspective you have a little bit of a difference between some of the other peers in New York City. Is sort of the plan now – is that sort of a sub-market you would like and you’d want to expand there going forward. It obviously has the TAMI angle. I am just sort of wondering how you view that submarket now relative to the others.

[Nelson Mills:]

Well, that’s right Vikram. I think we do have a bit of a critical mass there and the properties we do own are performing quite well. In the case of the new acquisitions, obviously we’re buying them mostly leased. But these are very dynamic properties and a very dynamic submarket and we think there is still plenty of room to run on TAMI demand. Also our team is very focused and our leasing teams are very focused on that sub-market and that type tenant. Jim suggested earlier, you know we’re having a lot of – and as I said earlier on 315 we’re having tremendous amount of activity and success there. So you know it’s – being in mid town south is one thing, but that in and of itself is not enough. It’s a matter of having attracted well located buildings and…

[Vikram Malhotra:]

There’s no change in like level of activity given the fact that TAMI growth in New York City has like kind of slowed down quite a bit over the last three months. You’re not seeing any change in prospects or anything like that?

[Nelson Mills:]

No, we see some evidence obviously of overall slowing in New York demand, but that’s relative to some very strong years and it’s hard to say really. Its overall TAMI has been affected in a meaningful way. We certainly – for the space we had leased, we are certainly seeing a tremendous amount of activity from that sector. So it would be hard to argue that there hasn’t been some slow down, but we certainly aren’t feeling any pressure from that if that’s the case.

[Vikram Malhotra:]

Okay great. Thanks guys.

[Nelson Mills:]

Thank you.

[Jim Fleming:]

Thank you.

[Operator:]

The next question comes from John Kim with BMO Capital Markets. Please go ahead.

[John Kim:]

Thank you. On your indication of growth next year, 25% to 30% FFO, can you just tell us what’s included in that? Does that include the joint venture stakes at Allianz and any other acquisitions or dispositions?

[Jim Fleming:]

Sure John and this is preliminary. We’ll provide guidance when we get to February, but we wanted to go ahead and give some indication. We’ve been talking about this bridge and where we’re headed for some time and really on the bridge I think we’ve been talking more about cash net operating income than we have FFO growth. So we just wanted to kind of put something out there. That’s based on our current expectations. Its assuming we don’t buy anything else in the venture. Its assuming we do get the extra – I think its $234 million back, so that we sell down the remaining contractual part of the venture that’s scheduled to happen by mid-year next year and we may well buy something else, but we’ve not assumed that. You know and there could be some moving parts next year. We don’t have our business plan locked down next year, but we feel that we’ve established a range that we are going to get to based on what we know about the leased that have been signed, the properties that we bough, the assets that we have. Obviously being 95% leased and having bought some properties that are well leased as well gives us a lot more certainty than we’ve had in the past. So we feel pretty confident in those numbers.

[Nelson Mills:]

John, just to add to that, I think what maybe an underlying point of your question you know having just come to a transition could be yes, we’ve got some tremendous results and FFO growth, but are we going to surprise investors with further dilution from a dispo or are we counting on it. On the other side of it, are we counting on getting to that 30% with more acquisitions. So the answer as Jim says is no, none of that’s in the model. That’s not to say they are looking at – always looking at the portfolio and looking for ways to improve it and maximize value. But I will say this, that the board and the team are very much focused on delivering on those FFO expectations and we’re going to manage the portfolio to maximize value, but we’re also very cognizant that the market has been waiting for us to finish the transition, deliver these results and we are determined to do that. So if there are further acquisition and dispositions, they’ll be minor, relatively minor and they’ll be done with that in mind. So hope that helps. You never say never. It’s always subject to what we think is best for the portfolio and is subject to board expectations, but we’re very mindful of that.

[John Kim:]

I’m just recalling, a year ago you discussed Houston as a potential fail and you ended up selling it pretty quickly. Could the same thing happen with Atlanta or the Westinghouse asset?

[Jim Fleming:]

What I would say John on that is yes, we have some Atlanta assets we’re not ready to sell. We’ve got leasing that needs to be done. Westinghouse is not at a point either from – we’re doing some remedial construction work and we’ve got the bankruptcy process going on. I think we’d be very surprised if we were in a position to sell that until it might be later in the year. So there are not a lot of candidates, but I think where we fall in that 25% to 30% range probably depends on whether we do some of that next year or not. But we expect to fall in that range regardless of what happens from a transaction standpoint.

[John Kim:]

Okay, and then Jim you mentioned that you think AFFO growth will trail FFO in 2018, but I thought it would have been high growth just because of lower TI’s, less leasing, the free rent is wearing off next year. Can you just – okay.

[Jim Fleming:]

Again, we don’t want to be too precise here because we haven’t finished our budget. You’re correct, there are some things that we can all point to that are going to contribute to substantial AFFO growth next year. Meanwhile he is going to start paying rent in May; that’s a big one. You know that’s $15 million on an annual basis. So the thing is your right, but what has happened with the leases that have been signed more recently as with the AFFO contribution from those will happen later and maybe I wasn’t as clear as I could have been. The reason that happens later of course is that to the extent there is any free rent period FFO starts, in the sense ex-occupancy and then you got to wait for the free rent to be over it before you start any FFO contribution. But I will say this, we feel very good about where our AFFO is headed. We feel very good about our dividend and how well that will be covered next year and the following year and so we think we’re in good shape from an AFFO standpoint.

[John Kim:]

On the Twitter and Red Bull assets, what’s the remaining lease term and the market potential?

[Nelson Mills:]

They are both well leased. We have the potential anchorage as in the lease term. They are both well leased for seven more years. Twitter is about eight years, the entire building and average on Red Bull is a bit shorter than that. But it maybe five to six years average remaining. So now there is some activity there, some sub leasing at 83 Red Bull building. An opportunity to – we’re looking at some opportunity to take some of those to direct leases. So it is a dynamic sort of an opportunity, but it’s fairly locked away in the very short term.

[John Kim:]

And the mark-to-market on the direct leases, would it be higher or lower.

[Nelson Mills:]

They are both higher, particularly for – Red Bull’s a bit higher than Twitter, 10% to 15% I think on a gross basis.

[John Kim:]

Okay and on your strategy of buying or focusing on smaller play, three more buildings in New York, do you foresee a large CapEx go down the road like we’ve seen with some of the competitors?

[Nelson Mills:]

No, we really don’t. 315 we had a fairly substantial build, but that’s been budgeted for some time and that will soon be done. These two properties are in terrific shape, both in terms of common areas, lobbies and so forth, but also mechanicals. There could be some incremental add-ons with the ROIs there for things like rooftop fix and that kind of thing, but there is certainly nothing in the plans for that, but there is certainly nothing required in terms of maintenance, nothing material, so both of those check out very well as far as that goes. Our other properties, the Times Building and the rest of our portfolio 114 5th which we had half interest in, those are all in really terrific shape. So no, there is no big CapEx spend anticipated in that, bringing those assets.

[Jim Fleming:]

And John, we’ve spent a fair amount of money lately as I think everyone knows on capital improvements to our buildings, really across the portfolio and I would say not only is the location and the character of our buildings – well, we are we happy about that from an a competitive standpoint, but also the state of our buildings right now. Really we got to finish up the work at 315, but that will happen really very soon in the next few months. But if you look across the portfolio from Market Squarer to Boston to San Francisco, we’ve spent a good bit of money and that’s really already been down and that really obviously has helped us drive leasing, but it also means we don’t anticipate a whole lot of capital once we finish up with few things that we have left.

[Nelson Mills:]

So there is one exception to all that. As we announced previously, we are under contract to acquire 149 Madison. I just remind everybody, so this is a 127,000 square foot building, historic building in Midtown South and we are closing on the land next month and this is a major renovation. So somewhere in the $25 million to $30 million range in capital over the next year or so, so that will be a heavier lift, but its relatively small.

[John Kim:]

That’s very helpful, thank you.

[Nelson Mills:]

Thank you. A - Nelson Mills1 Thank you, John.

[Operator:]

Your next question comes from Mitch Germain with JMP Securities. Please go ahead.

[Mitch Germain:]

Good evening, how are you?

[Nelson Mills:]

Doing great. How about you?

[Mitch Germain:]

Fantastic! Jim, walk me through this NOI bridge on your website. I was able to pull it up while you were talking and just what – the dark blue is that kind of the leases that – or the spaces that hasn’t been leased up yet or just kind of walk me through the colors and shades on the sheet.

[Jim Fleming:]

Sure, absolutely. So and I know some of you on the call don’t have this, but its available on our website and I’ll try to keep this high level so that you can take a look at it later. But yeah, working from left to right, we’ve been doing a bridge now I think since September ’16 and its gotten clear and clearer and the contractual part has gotten more substantial and the speculative part has gotten smaller and so that’s really the point of this. So working from the left, you got the third quarter cash NOI. You got the Allianz joint venture. What’s shown in that box is the remaining 22.5%. The first 22.5% was already baked into Q3, but this is what happens on the remainder. And then you’ve got the acquisition on the NYRT assets and then you’ve got the un-commenced leases and free rent burn-off and finally lease rent escalations until the end of 2018 and so all of that is contractual, all of that, it’s not all cash paying but it’s all in place right now and that’s gets us up to, I don’t think we have a number, but it’s over $250 million from $183 million today. Now what we have shown is three things to the right of that that are not contractual. One is we have some lease explorations that are going to happen between now and the end of 2018. They are minor as we pointed out, but the impact of those are shown in the shaded box which gets you down to a number of $248 million, if we were not to renew those leases or otherwise, at lease that space. And so that’s [inaudible] say it’s sort of a go to sleep number. That’s if we just didn’t do anything that’s where we would expect to be at the end of 2018. But then we have two more boxes, ones is what we expect on those lease explorations to renew that, which is a little bit of an uptick, because we think there is a little bit of rollout there and then lease up of vaccine space. Its largely in three buildings. Its where those buildings are less than 95% leased. One of the mains ones is 315 Park Avenue South, also 650 California in San Francisco and Market Square getting those up to 95% leased. I’m sorry, Boston is in there as well, and that gets us to 277 and we think that’s very achievable in this timeframe. Obviously 248, that’s already done and so we feel very good about that and you know that’s – and I will say this, this is very consistent with what we have been showing the pieces. The starting point has moved obviously as we’ve moved through the year, but I think the first grids we showed may have been higher than this because Huston sales wasn’t yet there. But once we had the Huston sale, the end result that we are showing is pretty much where we had projected to be within a new million and I will point out that we bought $58 million of stock along the way. So we feel good about where we are heading.

[Nelson Mills:]

My last thoughts that Jim referred to, just to reiterate for everybody, be watching over the next few months for news on 116 Market Square 315, that’s the bulk of that last box, that biggest speculative piece and we are very close on a lot of that. So as those roll-in, we are going to reduce the – raise the size of that box pretty quickly.

[Mitch Germain:]

And so that lease expirations, those shaded lease expirations assumes just zero retention on what is expected to roll next year.

[Nelson Mills:]

Exactly Mitch.

[Mitch Germain:]

Okay. And the Allianz JV is you’re selling the remaining stake that they don’t own in the two assets, the 22% or 25%, but you are not acquiring the additional $100 million in change to get you up to that $600 million?

[Jim Fleming:]

That’s correct. That’s exactly right.

[Mitch Germain:]

Okay good. All right great, that makes a lot of sense. And then you mentioned you know buybacks and you know I know you guys have been active three of the less four quarters and Nelson frankly, I’m actually glad you’ve been doing it, but clearly the Street hasn’t been rewarding you for it. So is there any kind of maybe different thoughts about buying back stock, particularly now that a good portion of your sales and liquidity and your sales are down and your acquisitions have used up a lot of your liquidity. So is it really kind of maybe going to be matched up against additional dispositions in the further? How should we think about buybacks going forward?

[Nelson Mills:]

Well, good question Mitch. You know it’s always a board decision and we have another board meeting coming up in a couple of weeks and that will be a topic of discussion. So with that caveat, we have been – as you say, we’ve been buying back a substantial number of shares, but as we said all along. We are balancing that with executing the strategy, building scale and you know executing our strategy. But good point and your right on it given where with the recent acquisitions, given the balance sheet is still in great shape, but it’s at capacity without borrowing future dispositions we’re not likely to go at a very heavy buyback phase at this point. It is compelling price. We do think it’s a good use of capital we have and will likely continue to do some of that, but we are not going to stretch the balance sheet, and we’ve always been consistent on that point.

[Mitch Germain:]

Great. Last one for me Jim, obviously you got you know pro-forma, over $300 million out on the line. Now I think that there is the next trench for sales to the joint venture, but obviously that will come with an acquisition as well. So obviously that entire $200 million won’t come to you. So maybe just kind of provide me some perspective on how you think your -- what the balance sheet strategy will look like over the course of the next 12 to 18 months?

[Nelson Mills:]

Sure Mitch. You are right, we are higher on the line than we will want to be longer term. It’s great that we’ve had the flexibility to go buy a $1 billion of assets in one day almost and so we used some liquidity to do that. I will say, we paid off $200 million of mortgage loans this year as we are sitting on cash, on 221 Main and San Francisco and 650 California and San Francisco. So we’ve gotten rid of some debt there that essentially wound up on the line. There are a lot of options for us there. As you did point out, we do have a $234 million coming back to us. If not all, at least some of that even if we fill up the joint venture that will come back from Allianz., and we have a lot of options available to us in terms of terming out debt. So we feel good about where we are from a balance sheet standpoint.

[Mitch Germain:]

Great, thank you guys.

[Nelson Mills:]

Thanks Mitch.

[Operator:]

Okay we have a follow-up question from Sheila McGrath with Evercore. Please go ahead.

[Sheila McGrath:]

Yeah, just a quick question. On CapEx Jim, I know you are not giving like real precise guidance, but directionally how does your CapEx outlook look in ‘18 relative to ’17. Is it – could it be lower, less TI next year.

[Jim Fleming:]

I think so Sheila. I think it is still going to be a bit of CapEx going out in ’18 as we finish up, we’ll work on a number of leases. We’ve had an elevated level of leasing lately, which is a good thing long term, but the CapEx dollars will need to go out. I think those will go out into ’18, I can’t tell you at this point exactly how far out and then they will drop off very substantially after that. We don’t expect to have a lot of building projects with the exception of 149 Madison. But we don’t expect a lot of expensive building projects and really as you look at our, we have lease role we don’t have a lot of leasing that needs to get down in the next year or two like we have in the past. So it’s a bi-product of having gotten a lot of leasing done. I will say, when you look at our investor presentation, we’ve not updated this slide, but we have a slide that shows what we think you know a range of values might be – let me just look at that, slide 10. You can go back and look at our presentation. There we’ve said okay, take into account all the leasing that’s been done, but subtract the CapEx that needs to get spent for the leasing. And we accounted for that CapEx there in that slide.

[Sheila McGrath:]

Okay, great. Thank you.

[Nelson Mills:]

Thanks Sheila.

[Jim Fleming:]

Thanks Sheila.

[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:]

Okay, thank you. Thank you all for your time today. We really appreciate it. Please call us if any others questions. I encourage you to check out our investor presentation, particularly the bridge. We think that’s very helpful and again, we are very pleased with where we are after three or four years of – a lot of hard productive work. Transition complete, cash flows is around the corner and we are very excited about where we are. So thank you for your interest and if we don’t talk to you before, we look forward to seeing many of you at [inaudible] in a couple of weeks. Thank you.

[Operator:]

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