Columbia Property Trust, Inc.
Q1 2016 Earnings Call Transcript

Published: 29 Apr 2016

[Operator:]

Good day and welcome to the Columbia Property Trust First Quarter 2016 Conference Call and Webcast. All participants will be in a 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 call over to Mr. Matt Stover, Investor Relations. Mr. Stover, the floor is your sir.

[Matt Stover:]

Good afternoon. Welcome to the Columbia Property Trust conference call to review the Company's results for the first quarter of 2016. On the call today will be Nelson Mills, President and Chief Executive Officer; and Jim Fleming, Executive Vice President and Chief Financial Officer. Our results were released this afternoon in our earning press release and filed with the SEC on Form 8-K. We have also posted a quarterly supplemental package with additional detail in the Investor Relations section of our website. 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 2015 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 earnings release and supplemental financial data. I’ll now turn the call over to Nelson Mills. Please go ahead.

[Nelson Mills:]

Thanks Matt. Good afternoon, everyone and thank you for joining us. We outlined a very detailed plan for 2016 on our call on February and highlighted a number of opportunities we are pursuing. I’d like to spend some time this afternoon walking through our execution of this plan, it’s been a productive four months with tangible results and we’ve built substantial momentum for the coming months. First let’s talk about leasing. We’ve completed 466,000 square feet since the first of the year. Of course the major piece of that is the NYU full building lease at 222 East 41st in New York executed earlier this week. This is the deal we’ve been working on since late last year and it’s been well worth the time and effort. It addresses our most significant near-term exploration and represents the largest lease by revenue in our portfolio. As I am sure you’ve heard us say many times this was not a property we’ve lost sleep over. After all it’s a well located property in Manhattan one of the newest buildings in it’s submarket and was represented by our very capable local team in a very favorable leasing environment. It’s safe to say we successfully leased in more challenging submarkets in recent years. Our success with this property and the other leasing results we’ve achieved are testaments to our strategy of concentrating in the country’s top high-barrier markets with focused local teams. We’re very pleased to have this great property released well ahead of schedule and especially to NYU Langone an iconic New York institution. Jim will walk us through the financial implications of this transaction in a few minutes, but first I’ll just highlight a few material points. It’s a triple net lease for 30 years with substantial rent bumps during that period. There are also two extension periods totaling another 17 years. The initial rental rate is in line with today’s market and represents a roll up of roughly 13% on a GAAP basis and a modest roll down on a cash basis, which we’ve been anticipating all along. NYU Langone is leasing all 25 floors plus the lobby, common areas and parking garage. And we expect them to take possession of the space around the end of the year. I’ll also note that this lease covers about 10% more in square footage than the Jones Day lease it replaces. Elsewhere we completed an additional 65,000 square feet of leasing during the quarter with a 49% roll up on a cash basis and a 114% increase on a GAAP basis. That’s primarily due to 24,000 square foot lease at University Circle in Palo Alto. Our trend of lease rollups across most of the portfolio continues and we have really good leasing activity at several of our key properties, including our recent acquisition properties. The largest remaining leasing opportunities are at 650 California Street in San Francisco, 315 Park Avenue South in New York, 116 Huntington in Boston and Market Square in Washington D.C. Again these properties are in our focused markets where we believe the combination of experienced and well-motivated local teams, asset quality, and favorable leasing environment continues to provide the opportunity to create value and grow net operating income in a meaningful way. As we look across each of our target markets, we believe we are well positioned to benefit from strong leasing fundamentals and a well-diversified presence in each market. Our San Francisco portfolio was 94% leased at quarter end. This potential drop a few points in the second quarter due to the expiration of the Littler Mendelson lease at 650, California. After pursuing a large tenant for this space for several months, we’ve moved on to releasing it with a number of smaller tenants. We have several prospects in play and a few proposals in hand all at rates better than our acquisition underwriting. Also in this market, we have a long-term Wells Fargo lease in place at 333, Market Street, we’re 95% leased at 221 Main Street, and have our highest rents in the portfolio at University Circle in Palo Alto, which is also 95% lease. The stability of our New York portfolio was substantially enhanced overnight with the NYU lease at 222 East 41st Street, but we also have a great value and opportunity at 315 Park Avenue South which is located in a vibrant submarket in Manhattan. And we had a stable fully leased property at 229 West 43rd Street that continues to attract strong demand from TAMI tenants. At 315 Park Avenue South, we have 170,000 square feet occupied by Credit Suisse, which expires in late 2016 and early 2017. And we have front space currently available to top of the building. Active marketing efforts and a capital improvement plan, we’ve implemented as the property has generated a number of new proposals and terms exceeding our underwriting expectations. The ongoing challenges of the Washington D.C. market have been well documented. However, our Market Square property continues to make headway. Recent capital improvements of the lobbies, common areas, and fitness center had greatly strengthened our position with renewing and perspective tenants as demonstrated by a substantial increase in tours and proposals in recent month. Our decision to split up certain floors to pursue small tenants with higher net effective rent has been a good one, and we expect momentum from our recent leasing to continue this year. We already have 20 FORTUNE 500 companies on the rent Market Square and a number of others that are touring the property. Our team is also working hard on our other asset in D.C. market 80 M Street and we've generated some interesting leasing opportunities there as well. Turning to dispositions, we completed the sale of 100 East Pratt in Baltimore, right at the end of the first quarter, it generated gross proceeds of $187 million, which was generally in line with our expectations with the cap rate of 6.6. The depth of potential buyers was perhaps not as deep as we would have seen a year ago, but we were pleased with the outcome. We have two other large sales underway Key Tower in Cleveland, and 80 Park Plaza in Newark, New Jersey. We have selected buyers for both with Key Center currently under contract, but we can't provide a definitive timeframe at this point for getting them close. The process is slower than we would have liked, but we still expect to get them done. Two other small dispositions are also proceeding. 800 North Frederick in suburban Maryland and the former OfficeMax headquarters in suburban, Chicago. The suburban Maryland asset has a lease with IBM that expired on March 31 and it’s under contract to a developer that is repurposing the property. We expect this disposition to be completed early in the second half of this year for approximately $45 million. Recall that the suburban Chicago asset is one where we are entitled to the net cash flow through November of this year and if we don't have a user in place by then will possibly return to the lender and discharge of $49 million mortgage. Our full-year guidance accounts for all of the sales and we still expect to generate gross proceeds of $700 million to $800 million from the five properties. As we’ve noted before however the timing of these sales is uncertain. As our leasing results will demonstrate a portfolio of well-located and attractive assets predominantly in higher barrier CBD locations with healthy tenant demand is the right long-term strategy for generating better real estate performance, shareholder returns, and valuation. While the market has been volatile and it could continue, we will continue to focus on execution and are making the right capital investment and operational decisions. That means proving ourselves in some of the best office markets in the country. Delivering on the leasing and disposition opportunities in front of us and improving upon one of the strongest balance sheets in the industry. With that, Jim, why don’t you walk through the results and our 2016 guidance, and I’ll come back at the end for a couple of remarks.

[James Fleming:]

Thanks, Nelson and good afternoon, everyone. I am going to take a few minutes to cover four subjects. First, our financial performance for the quarter; second, the economics of the NYU lease; third, our guidance for 2016 and finally, our balance sheet and some thoughts about capital allocation going forward. We had a solid first quarter with $0.44 of FFO and $0.38 of AFFO, which were both in line with our expectations. Our portfolio continues to perform well with good dividend coverage, our office space over 92% leased, and our overall leverage is just under 36%. This quarter’s results included contributions from our recent acquisitions including 229 West 43 in New York, which we acquired last August, partially offset by the disposition of 1881 Campus Commons in Reston, Virginia, as well as $1.5 million of one-time G&A costs we discussed on last quarter’s call from the continued regionalization of our team. Because the 100 East Pratt sales was completed on March 31, it had no material impact on the quarter. Please note however that since we use the proceeds from the sale to pay down debt on April 1. We have updated the debt metrics in our supplemental package to reflect those debt payments. On Page 9 of our supplemental, you'll see that our total interest expense was $18.2 million for the first quarter, compared with $18.7 million in the fourth quarter, and $21 million in the first quarter a year ago. The sequential and year-over-year declines were related to the pay down of mortgage debt offset by our $350 million bond issuance in March of 2015. On October 28, 2015 we also transferred the $325 million mortgage on market square to our new joint venture with Blackstone, which shifted future interest expense from that loan into loss from unconsolidated joint venture in our income statement. Although, we showed this loan at our 51% share in our supplemental package. Same-store cash NOI for the first quarter was down 2.2% compared with the prior year and down 1.9% from the fourth quarter. The decline was driven by the same factors we've been discussing for a few quarters now. The Fullbright expiration at Market Square, the downsize of KeyBanc and Thompson Hine in Cleveland, and the CH2M renewal in Denver offset somewhat by leasing at 221 Main Street in San Francisco and 515 Post Oak in Houston. As we have said before, we don't believe our same-store numbers provide a good indication of our portfolio performance. Sets the same-store pool does not include the acquisitions we completed last year. And even those properties we purchased in 2014 still have some free rent burn off before we will see a significant contribution. In fact across our portfolio, we have about a 5% difference today between our at least percentage and our economic occupancy. We believe this gap will close somewhat over the next several quarters resulting not only in improvements to our same-store pool, but also in contributions to FFO and cash NOI. On Page 22 of our supplemental package, you can see the differences between our percent leased, percent occupied, and percent economic occupancy for each of our markets. In addition, we believe our overall portfolio has significant embedded rent growth because of under market rents. And this quarter continue to bear that out. The 65,000 square feet of leasing completed during the quarter resulted in a 49% increase on a cash basis and a 114% increase on a GAAP basis. Total capital expenditures in the quarter were $11.8 million compared with $41.9 million in the fourth quarter, and $23.9 million in the first quarter a year ago. The capital this quarter included renovations at market square and tenant improvements at 221 Main Street and Key Center Tower among other things. During the first quarter we purchased 1.1 million shares under our shared repurchase program for a total expenditure of $25 million, or a weighted average price of $22.60 per share. That brings us to 1.8 million shares acquired since last September for a total expenditure of $41.3 million. As we've said before we believe this year we purchase if we're compelling because of our stock price. But we were unwilling to use much capital to purchase stock until we completed some dispositions. With now completed one of the three large dispositions, but we will probably not make any major share repurchases until we have made more progress toward the other dispositions. I want to point out that we use the equity method for a joint venture with Blackstone on Market Square. As a result the data is shown off balance sheet and all the operations including interest expense on the debt are collapsed into one line on our income statement. For our supplemental package though, we’ve shown the joint venture at our pro rata share so you will see 51% of the Market Square debt in our leverage calculation and 51% of the properties revenues, expenses and other items in our statistics. We believe this is the most straight forward way to provide information on the properties performance. Now to our recently lease with NYU. We don't generally comment on the economic terms of specific leases. But in this case we've decided to do that in order to provide some context to our earnings and financial metrics. As many of you know Jones Day is currently our largest tenant of our revenues. And their lease expires October 31 of this year. They're currently paying a total of about $81 per square foot and we've said several quarter that we expected to see a roll down to the low seventy's on average. Our new lease with NYU is in this range within initial cash rental roll down of about $8 per square foot. In addition, we're providing NYU 20 months of free rent at the beginning of the lease term. However, they will be paying all of the building's operating expenses during this period. The primary term of this lease is just over 30 years and there are substantial rent bumps during the term and as a result even including the free rent period. This lease is expected to roll up on a GAAP and FFO basis by about $6 per square foot. In addition, as Nelson mentioned NYU is leasing the entire building at 390,000 square feet which is about 10% more square feet than Jones states currently lease of 353,000 square feet. As I mentioned the Jones Day lease expires October 31, and we have some minor work to accomplish before we turn the building over to NYU, which we anticipate to take about 60 days. So we're estimating a lease commencement data for NYU right around the end of the year. There is a possibility this could happen earlier and we'll let you know in our future calls if we're able to move the schedule ahead. Taking into account our base building more the tenant improvement on launch and leasing commissions we estimate are total capital obligations under the NYU release will be between $90 and $100 million over the next 24 months. Of course this is a large amount, but we will then have no further capital cost for the next 30 years. This lease was negotiated hard from both sides and took some time to complete but overall we're very pleased with the result. Please also note that although the user of this building will be the NYU Langone Medical Center, police has been signed by the parent organization New York University, which adds a very strong credit rating. With this lease in place as well as the completion of the 100 East Pratt disposition we are leaving our guidance unchanged the 2016 with normalized FFO of a $1.50 to $1.60 per share and net income of $0.23 to $0.33 per share. We expect a sale of 100 East Pratt on March 31 and the resulting debt pay down on April 1. We will reduce our FFO by $0.03 to $0.04 per quarter, which is reflected in our 2016 guidance. Our portfolio performance continues to be solid. So if no other dispositions were to occur we would expect our FFO for the year to be above our guidance range. However, we continue to pursue the disposition of two large assets and two smaller ones that are outside of our target markets and the biggest drivers for earnings this year will be the timing of these dispositions and our use of the proceeds. We will revisit all of this after the second quarter when we have a clearer picture of both of these. We are not in a position to provide guidance for future years but as we have noted before we believe our leasing successes across the portfolio will result in improvement in our FFO over the next two years, our NYU lease will certainly help in that regard. Now a few comments on our balance sheet and possible uses of proceeds. As I mentioned we use the proceeds from the 100 East Pratt disposition to pay off the $119 million remaining on our bridge loan and to repay $28 million on our line of credit leaving us with $294 million outstanding on our unsecured credit facility at the beginning of April. Initially, we expect to use proceeds from future dispositions this year to pay down the remaining balance on our line and possibly to pay off other debt. We continue to take an active interest in our target markets. And we would like to increase our presence in several of them. However, given the uncertainties in today's financial markets our plan is to be very selective on acquisitions for the remainder of this year as we wait to see how things settle out. This is especially true while we have some large dispositions pending. We hope to see some good opportunities and we should be well positioned to take advantage of them when we do. We already have a strong balance sheet and the sale of the other properties we are marketing would further improve our leverage and our debt-to-EBITDA. We also have an unencumbered asset pool today of approximately $4.2 billion, which gives us considerable liquidity and flexibility to pursue our strategy. Share repurchases of course don’t advance our strategic goals but they are fairly compelling at today's prices. With our dispositions pending and our line of credit balance is somewhat high, we do not expect to be aggressive about share repurchases in the immediate term but we will continue to evaluate them as a good use of capital especially after our pending dispositions have been completed. With that I'll turn it back to Nelson to finish up.

[Nelson Mills:]

Thanks, Jim. As you can see we’ve had a good start to the year on many fronts. We executed a major disposition and expected pricing and continue to make progress on our remaining non-core sales. We landed an outstanding high profile tenant in the New York market with a 30-year full building lease at 222 East 41st. And we have built strong leasing momentum at several other key properties. We are solidifying the balance sheet with disposition proceeds and will have plenty of dry powder available if opportunities arrive to pursue acquisitions and/or share repurchases. There is clearly more work to do on leasing and dispositions in 2016. But we are on course with the right strategy and have a very capable and motivated team in place to execute it. Thank you for your time this afternoon. Now we look forward to answering any questions you may have.

[Operator:]

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] The first question we have will come from John Kim of BMO Capital. Please go ahead.

[John Kim:]

Thank you good afternoon. On 222 East 41st, can you comment on how much capital and why you spending versus your [indiscernible]?

[Nelson Mills:]

Hey, John. I think as Jim said. Jim do you have the numbers we're spending, as far as their spend, I'm not sure we have full details on that.

[James Fleming:]

We don't John but. But it is a multiple of what we're spending; they’re spending a considerable amount of capital, several hundred dollars a foot as our understanding, we don't know exactly. But they are going to spend a good bit of capital on this building.

[John Kim:]

Given that commitments, was there any discussion on NYU acquiring the asset from you?

[Nelson Mills:]

No, not really. I mean certainly they’re making a long commitment to the building, but we made it clear from the beginning that we intend to be the long-term holder, so there might have been I mentioned of it early on, but really no meaningful discussions about that.

[John Kim:]

Okay. And then that’s part of the next steps are you going to be pursuing a refinancing of this asset through mortgage that are potentially joint venture?

[James Fleming:]

No current plans for that, obviously it would be - there would be plenty of capital available for that, but it's unencumbered and we really are in a good position from a capital standpoint, so really have no compelling reason to do it, but if we did have a need for debt capital or for a venture partner this will certainly be a very compelling target for that. But there is no plan to do that this time.

[John Kim:]

Okay. So now that you resolved a couple of your biggest leasing challenges in New York, are you more willing to pursue acquisitions in this market?

[Nelson Mills:]

Well, certainly New York and Manhattan in particular is a target market. Today, we're focused on some more key leasing and obviously we have two big dispositions we need to complete. We continue to keep an active pipeline. We continue to look for opportunities in New York, DC, other key markets, but nothing - there is nothing imminent at this time. But sure, we'll continue to look and stay on the market, but that’s not our focus in the next several months.

[John Kim:]

And finally you mentioned that 222 East 41st didn't keep you up at night, but in a market that may have Houston, can you just remind us what the mark to market on the rents is and what’s the lease expiration is after 2016?

[Nelson Mills:]

Sure, we will gather that here on the numbers overall. I’ll tell you there are three properties there, one downtown property and multi-tenant property, how they occupy. It's probably a net roll up of 8% to 10% or so. We have a single tenant in energy corridor that has two years remaining, two and a half years remaining. That’s probably flat today. We certainly would have been looking for it to roll up several months ago. We think they're still around flat. We're in discussions with them on options. And then we have a building in Post Oak in the Galleria area that’s rolling up there and we have some - what's the lease percentage there today? It’s about 70% leased so we've got some good activity there as well. Obviously, Houston is having a struggle, but we're holding on in that property and we almost in that market with those properties and getting some good leased activity. So clearly it's a struggle.

[James Fleming:]

Okay. I think it represents about 7% or 8% of our portfolio today in terms of revenues.

[John Kim:]

Okay, great. Thank you.

[James Fleming:]

Thanks John.

[Nelson Mills:]

Thanks John.

[Operator:]

Next we have Sheila McGrath with Evercore.

[Sheila McGrath:]

Yes, good afternoon.

[James Fleming:]

Hi, Sheila.

[Sheila McGrath:]

Congratulations on the lease. I wanted to ask you a little bit more specifically on that. Jim, I think you walk through how on a per square foot basis, it was a roll down. But it seems like you're leasing more square footage. So I wonder if you could just like talk to us maybe from the supplemental. If you look at Jones Day it was $29 million in annual lease revenue, excluding the free rent period and including the parking garage. Do you get back up to that level or how should we think about this extra square footage?

[James Fleming:]

Yes, Sheila thanks. You are right, there are a number of moving parts, from Jones Day it was down about 20% on a cash basis, on a net dollar amount. But you add back and that's the initial rent, but you add back the effect of more square footage which is about 10% and so it's about a 10% roll down on a cash faces for their initial rent once they start paying rent. On a GAAP basis, which is course of AFFO will be driven. They are straight lining throughout the lease term and there are substantial bumps in the lease. And because of that, it’s about 13% roll up on a GAAP basis and you have the extra 10% so it's about 25% roll up on a GAAP NOI basis. Also want to point one other thing out about this lease we talked about free rent there is 20-month free rent period at the beginning of the lease. Just want to point out that it's a net free rent. They will be paying all the operating expenses which are close to half of the four rent. And so it's the equivalent of about 10 or 11 months of what would be standard in the New York market as a gross through rent. So that's the way to deal of structure.

[Nelson Mills:]

And just a follow on that topic just to be clear and Jim walk you through from the supplemental highlight just the numbers, but on a growth rate basis you know we've been talking about this building for a while and expectations on gross rents and we said low-to-mid 70s. So on a gross basis the starting rent is right around $73. On TI basis it's about $140 per foot which you know would be higher than would have been projected for a multi-tenant 10-year lease scenario, but we're talking about a 30-year lease. So again a very fair TI number for a long-term lease with a quality for building kind of like this. So some the headline numbers and as Jim said the equivalent free rents important its 20-month free but it's really equivalent 10.5 and 11. So all in all we're very pleased with the terms and obviously the credit and the stature of the tenant and one of the thing to point the expansion space from the 350 to 390 does not include parking. We had separate income did before and do now. Separate income from parking and that's pretty close - the parking revenue is pretty close to what it was before. NYUs taking that over but they are paying us for that separately. But that's not included in the expansion space.

[Sheila McGrath:]

Okay and how much is the operating expenses for the building on a per square foot basis?

[Nelson Mills:]

There are about $45 dollars currently so it's close to half of the four rent.

[Sheila McGrath:]

Okay. Now can you mention $140 a square foot is that including the TI and commissions are just the TI?

[James Fleming:]

No, that’s just TI.

[Sheila McGrath:]

Okay.

[Nelson Mills:]

Sheila I gave a number just a little while ago in my prepared remarks of $92 to $100 million and that's for TI a little bit of work that we've got to do to get the space ready for them before they take over and the commissions.

[Sheila McGrath:]

Okay nice. And then will that be recognized over a certain amount of time or how should we think about when you would recognize the $90 to $100 million.

[Nelson Mills:]

Well, from a cash standpoint we think close to half maybe this year I would guess a little bit. Where our model shows goes up my guess is a little bit less than that in the rest for next year. And of course those would be capitalized. And then amortized depreciate over the lease term and of course those don't fit into don't - we don't come into play with the FFO numbers but they are real and their cash and they will of course affect our AFFO numbers.

[James Fleming:]

One another thing we should mention is on commencement - the commencement could be as early as we could have no downtime and all that could be as early as the beginning of November. It's a matter of how quickly Jones Day moves out and how quickly we can ready the space. We've estimated for your purposes of end of the year. A couple months after Jones Day lease out it could be a couple months faster it could be a month slower but end of the year I think is the best way to look at it.

[Sheila McGrath:]

Okay. And then last question and then I'll get back in line. What is NYU doing there? What is the facility be getting set out for.

[Nelson Mills:]

Well if the hospital uses them it's a medical use including ambulatory services. So I'm sure they'll be some offices there but is it that the hospital effectively.

[Sheila McGrath:]

Okay. Okay thank you.

[Nelson Mills:]

Thank you.

[James Fleming:]

Thank Sheila.

[Operator:]

The next we have Brad Burke of Goldman Sachs.

[Brad Burke:]

Good evening, guys.

[James Fleming:]

Good morning, Brad.

[Brad Burke:]

And just to follow-up on Sheila’s question to make sure that I completely understand the math. The roll down on a per square footage basis is down 20%, the square footage goes up 10%. So we should expect that the once we get through free rent period and don't you know think about the housing commissions that you're going to be down about 10% internationally is that right?

[James Fleming:]

That's right, Brad, on a cash basis and that's off the net. So I think I mentioned about an $8 roll down versus an $81 growth rate. So on the growth it's only 10% go down but on the net it's about 20%. So that would be the NOI number.

[Brad Burke:]

Okay. Okay so down 10 on the NOI number got it. The increase in the square footage it's 95% lease now they're about.

[James Fleming:]

No, square footages are tricky thing as you may know Brad and they get re-measured and that’s one of the things that's happened here. So really there was only one vacant floor. But the least with Jones Day was it 350,000 square feet. And this one 390 so it just $10 more square footage that's under lease now than before.

[Brad Burke:]

Okay. Okay so it's mostly re-measurement that.

[James Fleming:]

Yes, in fact if you look at our portfolio summary or supplemental we've shown the total square foot building it’s 372 for some time but it’s not 390.

[Brad Burke:]

Got it. Okay. And I guess a bit of a follow-up question. Considering that the length of the lease and the amount of CapEx is this something that you consider to give serious consideration to just selling out right versus pursuing a lease.

[Nelson Mills:]

No really I mean obviously it's the values been created now I mean uncertainties eliminated with the lease itself. So it's a bit circular to sell it. We thoughts the best value that’s why being value was to keep the building negotiate the lease. Now we always have option beginning with day one or year 10. Well we have options but at the point of decision lease versus sale we clearly believe we drive most value by again leased on.

[Brad Burke:]

Okay. And then on the planned asset sale it sounds like you're still confident in terms of pricing that the timing may be slipped a little bit versus what you're originally thinking. Can you just give us an update on whether these things are pretty certain at this point getting done at mid-year or whether there are still some variability in terms of actually executing.

[Nelson Mills:]

Well you know we've had some good qualified buyers that the buyer pool that better pool was not as extensive at deeper as broad as it might have been a year-ago, primarily driven by a little thing pricing of debt. These are leveraged buyers. But we're confident we have to keep our under contract and we're working through that we're hopeful there. The other we also had a good perspective buyer on the New Jersey asset. A little bit more to do there. So these things aren't done until they're done but we filled but get them but good about get them done the next few months.

[Brad Burke:]

Okay. And on the bottom asset can you say with the cap rate was on that.

[Nelson Mills:]

Yes, Brad that with a 6.6 cap if you use trailing 12-month to the 6.7 if he use followed 12 months.

[Brad Burke:]

Okay. So that was it looked like it was about 26 million of revenue but that would be about 12 million or so of NOIs?

[Nelson Mills:]

Right.

[Brad Burke:]

Okay. That’s it for me. Thank you very much.

[Nelson Mills:]

Thanks Brad.

[James Fleming:]

Thank you, Brad.

[Operator:]

The next question we have comes from Sumit Sharma of Morgan Stanley. Please go ahead.

[Nelson Mills:]

Hi, Sumit.

[Sumit Sharma:]

Hi, everybody. Hi, thanks for taking my question and congratulations on the new lease. Sticking to topic I guess everyone has been asking about 222 East rightly, so. Just wondering how you thought about the changing user from what is predominantly an office asset moving into a medical office. Was there a limited user demand or I guess I’m looking for some color or read across from how you viewed shifting to medical office especially considering medical offices are typically valued at a higher cap rate than in a typical office building?

[Nelson Mills:]

Well, we were focused on maximizing the value and the future cash flows and we weren't overly concerned with the label or the type or the user. As most of you on the call know we've been preparing for and marketing this asset for a couple years. We've known Jones Day was going to leave for almost three years no, at least. So we really were focused on a multi-tenant marketing effort. NYU came along several months ago as a perspective tenant; it met their needs, the nature of the building, location the building, the quality of the building met their needs and they were the highest and best opportunity for us. It wasn't a decision to switch sectors or industries, but it - we worked out - they were the highest and best opportunity for us and single tenant, multi-tenant it was just a matter of opportunity. As far as cap rates and I can’t verify your assertion, cap rates for medical office versus office - no doubt that there’s - the spread there. But this is not your typical medical office. It's fair to say, it’s NYU medical single building use in the heart of Manhattan. This is not a physician, multi-tenant physician practice they were talking about. So we'll see what the cap rate is. One day if we ever put it in the market, but we're confident with the credit and the quality of the building and the use and a long-term lease, we're confident we get a very good price for this, very good value for this.

[James Fleming:]

Just one thing to add Sumit on that, and that is we had New York University signed the lease, it is the Langone Medical Center that's operating there, but its New York University. They have a credit rating of AA minus a very high investment grade. We got a 30-year lease, they are bond straight well. I would - again [indiscernible] we don’t know about the cap rate would be on this. But this isn't a typical, just a suburban office building that’s run with bunch of a doctor's, practitioners, I think we got a very solid credit tenant here a long time. So we think, and again this isn't really our strategy to do this. But on the other hand our strategy is to maximize value and create value where we can. And then we'll figure out what to do down the road.

[Sumit Sharma:]

Understood. Well, thank you for the color. I guess I was coming in more from a - from just the NAV impact perspective but your point is valid. Sticking to that lease given that there's been a lot of numbers thrown out. Is there any - I was trying to wonder about any domination auction or option by NYU to purchase at any point, are there any strategic dates or points in the lease term that could support that sort of thing. And secondly, if you guys have any ideas to the insurance expense?

[James Fleming:]

So on insurance Sumit, they will be paying the insurance, they're going to paying all the operating costs, building taxes, insurance everything, so this is a triple net lease.

[Nelson Mills:]

In terms of the - there are no triggers or no opportunities for NYU to trigger a sale. But they do have a right of first offer on a sale down the road, not a right of first refusal, so it doesn't impair our building to sell but a right of first offer with plenty of runway outside that. So it is very important to us that we - we obviously want to give them the right to buy if they'll pay the top price and want to be the owner. But we were very careful to make sure those provisions did not in any way impair our ability or our pricing upon sale. Pretty standard I think for a full building user like them.

[Sumit Sharma:]

Great. And that does demonstrate my ignorance about triple net leases. Clearly, I've been looking at office and industrial [indiscernible]. The question on San Francisco and I guess, I mean I am just wondering because you started off the call you mentioned that that the Mendelson space was being marketed to a single tenant and now is probably going in for a multi-tenant at smaller tenant float rate kind of approach. I guess just trying to draw the comments or around the color of the market. Is this something that precluded you in terms of the market that sort of makes you want to feel more confident with smaller float rates or just trying to get some decent commentary?

[Nelson Mills:]

Sumit, not unlike the NYU situation we just discussed, we’re marketing for the highest and best opportunity. And 650 California, our thought was always it would be the one to two to three, four tenants would be what would come our way and will be the best opportunity for us. We did last very late last year we did have an opportunity with a large 100,000 plus foot user who was expanding their space and very interested in the building. And we went well down the road in discussions; it was out in the press at the time that these discussions were going on and that didn't happen, that deal fell out. And that would have taken all Littler Mendelson space. And that's unfortunate things, good terms, a good company and so forth but they decided for reasons unrelated to our property to stay home and not pursue the expansion at this time. And so with that we lost a couple months of momentum you know little distraction with that. But we're right back at right back where we were and really marketing floor by floor to smaller tenant, as the larger tenant comes along and they might probably will, we’ll certainly consider that. But it wasn't - again we’re looking for the best opportunity and focused on the all comers and just like NYU you took a turn of that could too, so.

[Sumit Sharma:]

Understood, understood completely. I guess now that you have a relationship with NYU and I’m making the distinction with the Langone center here. Have they expressed any interest in any of your other expirations, I mean now that you have demonstrated that an asset could be alternatively deployed. Could 315 Park sometime turn into I don’t know a dorm, NYU is pretty close by, but has there been any interest?

[James Fleming:]

We have not had that discussion, that’s a great suggestion and I may make that call tomorrow actually. Now we have obviously a great institution, this made particular need for them and we were glad, and for us and we're glad to get that done. But no there have not been any other discussions about other properties, but it's a great suggestion.

[Sumit Sharma:]

Thank you so much.

[Nelson Mills:]

Thanks.

[Operator:]

The next question we have come from Mitch Germain of JMP Securities.

[James Fleming:]

Hi, Mitch.

[Mitch Germain:]

Good evening, guys, hey. So I know that there was some consideration back in the day Nelson to maybe have a multi-tenant strategy, so just curious kind of what happened there with regards to just sticking with a triple net lease?

[Nelson Mills:]

Well we did. We did have a multi-strategy up till the moment we didn't. I mean up until the moment that NYU became a prospect several months ago. And when that emerged and we began those discussions and they began touring the property and we begin discussions with them, it became the highest and best opportunity for us. But there wasn't [indiscernible] we just shifted our strategies that looks single versus multi. It was really always a multi-tenant plan. That’s how we thought it would play out. And we're confident and we would have gotten that done, but compared to this opportunity this is clearly better for a lot of reason.

[Mitch Germain:]

And when I look at - it looks like the economics at least on the roll down was relatively in line with kind of where you were guiding us. I'm curious if the costs associated with the lease and some of the concessions how that stacked up relative to what your expectations are?

[Nelson Mills:]

Yes. So we're very pleased and it's fully marketed - negotiated deal, so we are pleased, NYU is pleased, we are both sophisticated players here, but we are very confident with the results we got. So just headline numbers. We set out our long-term mid-70, mid to low 70, it was 73 gross number. We would have expected somewhere under 100, but that was a 10-year; those are 10-year multi deals. So it’s a $140 rent I mean TIs per foot which again for 30-year lease, is quality full building lease, we were very pleased to do that. And gentlemen Jim mentioned that’s 20-month free, that’s 20 months net free, right, so on the normal convention, the way you look at free rent on a gross basis that’s only about 10.5, 11 months. So again for 30-year lease, really good results there. So the stack is up side-by-side with the multi-tenant pro forma expectations we had even if you take out the time and risk of execution, it stacks up very well. Maybe of you could snap you fingers and lease the whole building multi-tenant and it comes out about the same with short leases and so forth. But here you take the risk and you accelerate the timing. Again, we are very excited about it, very happy and very fortunate to gotten it done.

[James Fleming:]

And Mitch two quick things to add to that, one is and you know we are not a big fan of single tenant buildings. We also now have the Wells Fargo single tenant building CBD San Francisco and in the wide location they can be just fine, we just are not the big fans where the tenants as all the leverage, but here just a couple of other economic things to keep in mind, one is with any multi-tenants scenario even when you get through all the lease up, you typically have some vacancy, because it’s just hard to fill every nook and cranny you have. A lot of times 5% vacancy or something like that, here we have zero. So that helps us economically and then the other is we've got really strong credit, high investment grade credit and we'll see and what it means in terms of the value we think it means that if we get - if we want to sell this building, we’ll get a good price for it.

[Mitch Germain:]

Got you, okay. Last one for me, I just wanted to just to confirm the Cleveland sale that's under contract, that's both the office and the hotel correct?

[James Fleming:]

That's right at this point. I need to - I misspoke, we are very close, we're not officially under contract. We negotiated contract. I would just correct it. We've negotiated contract, we are very close, but technically it’s not signed. And with that said deals aren’t done to close anyway, but I just wanted to correct to record on that. But it’s hotel and office and there had been discussions about whether or not to exclude the hotel and that to be determined and until the deal gets closed it can’t be certain. But so far the discussions have been out for both.

[Mitch Germain:]

Thank you.

[Nelson Mills:]

Thanks Mitch.

[Operator:]

Next we have a follow-up from John Kim, BMO.

[John Kim:]

Thanks. Not to beat a dead horse on 222 East 41, but there is a big difference between hospital and medical office building. So which is that exactly that they're going to use it for?

[Nelson Mills:]

Well, it's actually a medical building, it's a hospital use so it’s not really medical office per se I mean we are often there of course, but it's a full on medical use. And again, we had a question earlier from Sumit about cap rates and for office versus medical office and all the rest. As Jim pointed out, it go beyond that sort of a characterization, we're talking about a 30-year lease with NYU, AA modest credit 30-year. So it's not - but yes, technically it's not your traditional office, but from an economic valuation credit standpoint we think if and when we decide to sell, we think we will achieve a very good - a very low cap rate and very good price for that.

[John Kim:]

I completely agree the location is what it is, but NYU have to get any zoning approval to change it?

[James Fleming:]

No.

[John Kim:]

And they make any structural changes to exterior of the building that it could not be converted back to office down the road?

[James Fleming:]

No, well we do have some - they call it such a long-term lease, they do have a lot liberties on the - I mean interior of the building and how they use a space [indiscernible] anything external or anything that would impair the buildings mostly be convert back to office use 30 years from now is covered by restoration provisions. So we’ve obviously - we think we are well protected there.

[John Kim:]

Okay, great. Thanks for the clarification. Thank you.

[James Fleming:]

Thank you.

[Nelson Mills:]

Thank you, John.

[Operator:]

Well at this time, we have no further question. We’ll then conclude the question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

[Nelson Mills:]

Well, thank you very much for joining us and for your time and we appreciate the opportunity. And we look forward to following up you next time. I see several of you at NAREIT I’m sure. But otherwise we look forward to the next call. Thank you.

[Operator:]

And we thank you sir and to the rest of the management team for your time also today. The conference call is now concluded. At this time, you may disconnect your lines. Thank you and have a great day everyone.