Columbia Property Trust, Inc.
Q3 2016 Earnings Call Transcript

Published: 28 Oct 2016

[Operator:]

Good day and welcome to the Columbia Property Trust Third Quarter 2016 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 call over to Mr. Matt Stover. Please go ahead, sir.

[Matt Stover:]

Thank you. Good afternoon. Welcome to the Columbia Property Trust conference call to review the Company's results for the third 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. 2016 has been pivotal year for Columbia. We're on track to accomplish our goals for dispositions, leasing and key capital projects and we're closing in on the completion of our portfolio of transformation. On September 12th we had our investor and analyst meeting in New York, many of you were in attendance or have a chance to review the webcast since In the meeting, we discussed our expectations for the next several quarters and the key initiatives that will unlock the value of our well-positioned portfolio and drive our transformation into a top performing office REIT. Our team remains focused and determined and we're achieving results that affirm our strategy. As we illustrated with our financial bridge presentation at the investor meeting, those results will lead to substantial growth in cash flows and value. First, just talk about leasing, which is one of the bigger keys to unlocking that value. Building on the substantial momentum from the NYU lease in the second quarter, we signed 149,000 square feet during, with a 26% increase in rental rates on a GAAP basis and an 18% increase in rental rates on a cash basis. For several quarters now we've been able to tap into the available lease role up in the polio. As we shared in our NOI bridge presentation, this opportunity represents approximately $11 million of the NOI on an annualized basis and we are working hard to capture that control [ph] as quickly as possible. We also noted another $12 million of embedded growth in cash NOI from signed leases which we will begin to recognize over the next 12 to 18 months. Filling the vacancy in our portfolio will generate another $27 million in annualized NOI. The three largest properties in this category are Market Square in DC, 650 California and San Francisco, and one Greenlake in Atlanta, all of which are experiencing significant leasing activity. We've also made substantial progress in addressing upcoming expirations with a total of nearly 1.8 million square feet expiring between now and the end of 2018. With the exception of some challenges in Houston, our near-term expirations are concentrated in San Francisco and Manhattan. I also will provide a detailed update in September on our three key markets of San Francisco, New York and DC today. So today, I'll only briefly summarize what we're focused on in each of those markets. San Francisco tenant demand has softened somewhat, but that market remains relatively strong. Recent transaction and leasing activity bears out our thesis that CBD San Francisco should continue to benefit from healthy demand and constrained supply. Our biggest leasing opportunities there is with 650 California and to a lesser extent 221 Main St. We've had much success with a six week [ph] program at both property that shortened the marketing comp for small tenants and accelerated their movement times. We're achieving good rental rates at reasonable cost under this program and expect to accelerate it over the next several quarters. Manhattan is another market that continues to exhibit strong fundamentals, demonstrated by both our leasing success and the recent leasing activity of others. We have two fully leased buildings in the market, our energies are focused on completing the improvement at 315 Park Avenue South, and maintain momentum from recent marketing setting leases as we gain access to the expiring credit sweepstakes in early 2017. In DC, our main story is always Market Square where we had a number of lease signing this year. We have received tremendous feedback and have seen increased tours in response to our recent capital improvements to lobbies, common areas. We are also experiencing considerable interest at our other DC property 80 M Street and expect to quickly refill most of the space vacated by the 80 systems after expiration in July. While, San Francisco, Manhattan and DC are our three largest markets, it’s worth highlighting what's going on in Houston as well. Houston represents only 5% of our portfolio value, but as you all know that market continues to struggle. We currently have 10% vacancy in Houston with an additional 10% of expirations scheduled within the next 12 months. We are in discussions with several tenants and prospects, but that market is challenging. As we noted at our investor day, the leasing successfully we've achieved not only drive NOI growth, but has helped us maximize the value of our non-core assets, prior to exit. The lease is signed at 80 Park Plaza, Key Center, 100 East Pratt, Sterling Commerce [ph] South Jamaica Street and SanTan Corporate Center in the last several quarters have generated substantial value that has been rolled up upon disposition. Since the beginning of the third quarter, we have completed the sale of 800 North Frederick in suburban Maryland, 80 Park Plaza in Newark and the South Jamaica Street campus in Denver, that brings us to $551 million in dispositions completed to date in 2016. We have three more dispositions left to complete and we are working hard to get those done with the most attractive pricing and at the appropriate time frame. The largest of the remaining assets is Key Tower in Cleveland, this property is under our contract and the local bar is closing the property in the next 30 to 45 days. As we noted in our updated guidance for the fourth quarter, just to lay, combined with NYU lease starting the first this month has temporarily boosted our FFO for the year. That will obviously adjust once the sale is completed and Jim will walk through the implications on the fourth quarter and our early thoughts on 2017 in a few minutes. The other two dispositions in play are the 257,000 square foot SanTan Corporate Center in Phoenix and the 310,000 square foot Sterling Commerce billion Dallas. These properties are being actively marketed and there is a nice depth of potential bidders for each. Finally, we expect this transfer 263 Shuman in suburban Chicago to the lender at or around year end. When we tally of the five dispositions completed in 2016 to date, plus these last four in process, that brings us to a total of $900 million to $1 billion in gross proceeds from disposition activity. While we are optimistic there are always risks to closing transactions and it's possible that one or two of the transactions could slide into the first quarter of 2017. With the capital capacity already on our balance sheet and more disposition proceeds expected, let's talk about potential usage of capital. Out team continues to actively pursue investment opportunities in our focused markets, particularly Manhattan and West LA, where we continue to take a very discipline approach and nothing has yet emerged that meets our underwriting criteria. We still expect to $500 million of acquisition is a realistic target for us in the near-term. So that could be substantially higher or lower depending on opportunities that arise. Barring any attracted near-term investment opportunities, we could certainly revisit share repurchases at lease capital. Further acquisitions of compelling growth oriented properties in our key markets however, are in line with the strategy we outlined in September and we will stay focused while measured on identifying those opportunities. As indicated in our financial bridge presentation, acquisitions are the second largest building block that can get us to that targeted, stabilized, NOI run rate north of $300. How long it takes us to get to stabilize NOI run rate is upon how quickly we can put our capital to work, lease up vacant space and address upcoming expirations. We are executing from a greater position of strength than we had in years and I'm confident we can deliver. Jim, why don’t you walk through the results and fourth quarter guidance, then I'll com back at end for a couple remarks.

[James Fleming:]

Thanks, Nelson. Good afternoon, everyone. I'll take a few minutes to address our financial performance for the quarter. Then I'll discuss our updated guidance for 2016 and give some thoughts on our balance sheet and capital allocation as we move ahead. Before we begin, I'd like to point out a change we've made to our supplemental package based on recent guidance from the SEC about the presentation of unconsolidated joint ventures. As a reminder, we have one unconsolidated ventures in which we own a 51% interest in the market Square Buildings in Washington DC. In previous quarters we provided both GAAP financial statements and at our share of financial statements that include our share of the Market Square venture. In the GAAP financial statements our interest in the venture is collapsed into one line, in the add our share of financial statements, on the other hand, our interest in the joint ventures accounts was expanded and added to each line of our financial statements to show for example, our share rental income earned from both consolidated and unconsolidated properties. In response to the SEC's guidance we removed the at our share financial statements and replaced them with pro rata statements, which show only our interest in the unconsolidated joint venture accounts, not the total is shown before. The supporting schedules include the same information as provided for the previous quarters, but in some cases, you may have to do a little more math to get there, by adding the consolidated amount and unconsolidated amount together. Please feel free to reach out to us if you have any questions about interpreting the new format. You're probably seeing some other changes for other REITs this quarter as well. One specific example of this new format is interest expense, on pages 10 and 11 of our supplemental you'll see that our total interest expense is now broken into two line items, $15.3 million in consolidated interest expense and $2.1 million for our share of joint venture interest expense. That compares with $20.2 million of consolidated interest expense, and no joint venture interest expense in the prior year period. The overall decrease in interest expense from the past year resulted from paying down of mortgage debt and the bridge loan and sharing the market square mortgage obligation with Blackstone through a joint venture established in the fourth quarter of last year, partially offset by issuing new bonds in August. As we explained on our last call, we received a $6.2 million lease termination payment from Jones Day at 222 East 41st Street in New York in the second quarter, in the lieu of the rent for the third quarter. As a result, the Jones Day termination fee increased our income in the second quarter above a normal run rate and the absence of rent in the third quarter decreased our income in the third quarter by a similar amount. We've now established a commencement date of October 5 with NYU for the replacement lease, except the three rac [ph] NYU the fourth quarter should be a more normal quarter with the NYU lease in place for almost the entire period. As I go through our performance for the third quarter, I'll try to point out where we would have been if we had received the termination payment in the third quarter instead of the second. As Nelson mentioned, we are pleased with the continued performance of our portfolio and with what our team has been able to accomplish. We've had to work hard to achieve our larger asset sales this year at attractive pricing, but we're getting close to goals with over $550 million of dispositions completed so far this year, including Baltimore and Newark. Our other dispositions moving forward. Our office space at 91% leased. Our short-term debt fully repaid and our overall leverage down below 34%. Same-store NOI based on cash rents for the third quarter was down from the prior year and from the second quarter. However, these decreases were driven by the timing of the Jones Day lease termination payment. If that payment had occurred in the third quarter, our same-store NOI would have been flat on the GAAP basis and up 2.6% on a cash basis over last years amount. We continue to see net rollups across our portfolio and we expect these to continue as leases expire over the next couple of years. The relics for leases signed during the quarter increased 26.3% on a GAAP basis and 18.3% on a cash basis. As we have said for several quarters now, these positive leasing spreads will translate into same-store NOI increases over time. Last quarter, we raised our guidance to reflect the NYU lease and the timing of the Key Center and 80 Park Plaza dispositions. We are doing so again for the fourth quarter by raising the full-year net income range to $0.50 to $0.52 per share and the normalized FFO range to a $1.62 to $1.64 per share which is $0.33 to $0.35 per share in normalized FFO in the fourth quarter. We don't anticipate that are Cleveland, Dallas and Phoenix property sales will occur before the end of November and taking the time into account, along with the October 5 commencement date of the NYU lease we're very comfortable with our revised guidance range. As Nelson discussed, we're working on some possible acquisitions that even if any of these were to occur before year-end, they wouldn’t have much effect on our results for 2016. because of this, our guidance now assumes no acquisitions by year end. So to recap, overall the timing of our dispositions has created a temporary boost to earnings and our portfolio is also performing well. Total capital expenditures in the third quarter were $28.4 million compared with $24.1 million in the second quarter and $26 million in the third quarter a year ago. The capital this quarter included leasing commissions and tenant improvements at 655 California and San Francisco and 229 West 43rd in New York. As we think about next quarter and full year, I want to point out the effect of the recent NYU lease on our capital expenditures. We mentioned two quarters ago that we expected total capital expenditures of $90 million to $100 million for this lease and we're now expecting a total of approximately $93 million, which is toward the lower end of our original range. We've already incurred $13 million for a portion of the leasing commissions and some demolition prior to lease commencement, and we will incur the remaining $80 million in the fourth of 2016 under GAAP. Since the lease commencement date has been established as October 5th. As we've said before, this capital fits our definition of maintenance capital and therefore it will reduce our AFFO. This will happen when it is incurred, even if some capital will not be paid until 2017. As a result, we expect AFFO to be negative for the fourth quarter. However, the capital for this lease will not affect AFFO for 2017 or future years. As we look ahead to 2017, I believe the best guide for a near-term FFO and NOI are the bridges we presented in our September investor which are available on our website, I encourage you to look at the building blocks we laid out in that presentation for perspective on FFO and NOI run rate we're expecting after we've accomplished our leasing and investment goals, as well as the steps will need to take to get there. The activity with the most immediate effect will be the $700 million to $1 billion in dispositions for this year and even with the number of leases already signed, plus fact filling a vacancy, and solid rep rollups expected over the next couple of years it will take some time for our leasing and acquisitions to offset the reductions in FFO and NOI from our dispositions. We will provide guidance for 2017 in our next call. We are not in a position to provide much on that yet, but again, the elements of the FFO bridge we provided at our recent investor day should provide some insight. With our dispositions moving ahead well, no acquisitions yet identified and much of our leasing yet to occur, we expect the low point for our FFO will occur in the first half of 2017 with increases to fall based on our success in leasing and deploying capital. In the meantime, we expect to have a very strong balance sheet with substantial dry powder available. At our investor day, we mentioned that our Board of Directors has decided not to make any adjustment to our dividend in 2016. We've been paying dividends at today's level for over three years now and our dividends have been well covered, despite the substantial repositioning of our portfolio. As we move into 2017, our board has to take another look at the dividend, taking into account where we stand on dispositions, acquisitions, leasing and any stock repurchases. Our view is that the dividend policy should be made with a long-term view keeping in mind our overall capital allocation strategy. Turning to our balance sheet, we remained low levered at 33.6% compared with 39.4% a year ago and taking into account the Jones Day termination fee, net debt to EBITDA six times compared with 6.5 times a year ago. We expect our leverage will continue to move down in the fourth quarter and early 2017 as we complete our additional dispositions. We've made great strides in improving the flexibility of our capital structure and the issuance of $350 million of bonds in a heavily oversubscribed offering in August, together with proceeds from dispositions enabled us to fully pay off our $500 million revolving credit facility along with the previous foundation. Over the past year, we've been able to improve our cost of debt capital substantially. We were able to issue tenure bonds this August with a coupon of 3.65% versus 4.15% last March and versus 578% for seven year bonds we issued in 2011. And after our bonds were issued in August, the spots have traded well in the secondary market with the spread over treasuries moving down from 215 basis points of issuance to 180 basis points in the most recent trade, resulting in a lower total coupon for recent trades then we issue the bonds, despite treasuries rising 24 basis points over that period. We have only five mortgage loans today and we will soon be down to three after we resolve Shuman Boulevard and pay off the two 21 Main Street mortgage that matures next May. As a result, we have many high-quality, unencumbered assets, giving us a great deal of financial flexibility. Also the available capital on our credit facility and additional disposition proceeds will put us in an excellent financial position either to acquire additional assets in our target markets or potentially to make some share repurchases. We had a substantial balance on our line of credit until the closing of our newer property right at the end of the quarter and because of this we didn't make any share repurchases during the quarter. However, with the repayment of our credit line in early October, we now have no short-term debt. We have $159 million remaining under our current repurchase authorization and we will continue to look for ways to allocate that capital inappropriate. With that, I'll turn it back to Nelson to finish up. Nelson Mills Thanks, Jim. So in summary, we've outlined a clear strategy and have described the building blocks that will get us to where we want to be. That is a top performing office REIT focused in markets with literally strong fundamentals, high net effective rent and liquidity. We have a high-quality portfolio, a strong, flexible balance sheet and a cost of capitals that enables us compete for attractive investment opportunities in those markets. As importantly, we have an experienced and committed leadership team, a proven operating platform and capable local teams on the front lines leading our execution. As you know, we demonstrated significant success on each front over the last few years. Today, we are in our best position yet to push forward to new heights. We're committed to delivering on expectations we've established and look forward to reporting our progress to you over the next several months. Thank you for your time this afternoon. Operator, with that, we're now ready for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from John Kim from BMO Capital Markets. Please go ahead.

[John Kim:]

Thank you. I was wondering - so with the Key Center possibly closing, can you just give us a probability of that occurring and what would be the…?

[James Fleming:]

So we expect within 30 to 40 day, we expect to have that deal closed. It is on our contract and they are substantial, they buyers have substantial dollars and risk and obviously we've been close touch with buyer as they – with the finishing touches on their capital and on the deal. So all limitations are it will happen, but it doesn't until it does. So we're feeling good about it.

[John Kim:]

Okay. And then Nelson, I think you mentioned on prior call that you expected acquisition pricing softened in some of your market, I am wondering if that’s still case and if not, could you give us some characteristics of acquisitions you are looking at today?

[James Fleming:]

Sure, John. I don't know if softening is really appropriate term, I think the obviously were focused in some of the best markets in the country, and as I mentioned and particularly turned our focus, in particular - Manhattan and West LA those are very strong, competitive markets continue to rely capital interest in those markets. May be the - you know that the pool of buyers is a little not quite as broad as it once was and but it's still very competitive. We're very focused, we're trying to get to look at opportunities even pre-marketing in a lot of cases, the rest of the best - best positions on those, I'd say still remains very competitive. And obviously, we continue to be very discipline in underwriting. So a lot of deals, we look at lot of deals and they get away from it on pricing which is okay. So far, I'd say it's is still very competitive, we're not seeing any sort of bargains emerging at this point, but that maybe that's where it goes, but it still feels very strong at this point.

[John Kim:]

And are you looking at assets that are mostly core assets, which presumably are more expenses or assets with potential leasing opportunities, which you are ready to deploy?

[James Fleming:]

So we were looking for deals that have some reason upside potential. I mean, obviously there is a whole spectrum from super core, fully leased ad market type properties, those probably don't interest us and too far of yet in spectrum with heavy lists, fiscal improvements or essentially huge, substantial lease rollover probably is a little more – little further of the risk spectrum that we'd be interested in. So some somewhere between, a sort of core plus side profile is what we're focused on.

[John Kim:]

Okay…

[James Fleming:]

And certainly John is to add to that, yield and cash flows are always important and as always we're looking for opportunities to grow yield within a few years, within a fairly short period of time to grow yield above sort of stabilized cap rate for that type asset in that market and those deals obviously are hard to find, but that’s where we're focused on.

[John Kim:]

Okay. And then a question on your dividend, you made your decision on 2016, but now 2017 you maybe under review, can you just give us the timing of that position would be after the next board meeting or could it be on more periodic basis?

[James Fleming:]

Well, Jim mentioned the primary criteria were looking at, finishing the dispositions, really assessing what our prospects are on investment, looking at share buybacks and a lot of those things are coming together. Obviously the dispositions are nearing completion. We are getting up much better feel for what the investment opportunities are. But I think early next year - this is a discussion at every board meeting. The entire strategy, cash flows, future cash flows and so forth, obviously we discuss that every board meeting. I think the dividend will continue to be a discussion. As we've said it won't happen in '16. I think probably the first meeting in '17 will be the next time we consider it and again board decision…

[Nelson Mills:]

Hey, John, this is Jim, that meeting in early '17 is around the time of when we'll actually schedule our conference which would be early February. So we don’t speak for the board, it’s the boards decision, but that would be a time that we could discuss this obviously. I think we've said at our investor day and if you look at the presentation that we use for our investor day, it's really not a concern about our balance sheet or our cash flows, in fact, if you fast-forward through the steps that we plan to take to get our cash flows back after the repositioning, over the next short period of time will have good coverage even for today's dividend, that’s really not the question, the question is a capital allocation question. So I do think it's appropriate for the board to think about that in the context of capital allocation and know such as you can about what we're seeing on the acquisition front, what we've been able to accomplish with dispositions and share repurchases, that's another piece of the project.

[John Kim:]

Given your share price reaction at your investor day, do you like the dividend indecision if so and overhang for many investors. So why not make a decision that you commit to for a longer period of time, maybe 2 to 3 years?

[James Fleming:]

We will, that's exactly what we intend to do. You know, we set the dividend at various level before we listed as a publicly traded company which is been over three years and we've maintained it and we've covered it and it's - and I think that's the right way to look at a dividend, look at it on a – we've been gone through a transition, so we really haven't a been in a position to increase to dividend, but I'd really like to see what we like to see as we go forward at a certain level, whether its today's level or different level, be in a position to increase it over time. Now that we've gotten the portfolio where we wanted and we will be doing things incrementally after that. But - that's right, I think the board is trying to be thoughtful and make a long-term decision here.

[Nelson Mills:]

Yes, to be brief and clear, we were not in any way suggesting that we're going to look at the dividend from quarter-to-quarter. As Jim said it’s a long-term decision. It's just that we're at this pivotal point having complete the dispositions and we can - and having covered at this point - and as Jim said, we've been at level for over three years. So we did - we will look at it. And if there's adjustment, it will be something that will sustain us for a several years would be the plan.

[John Kim:]

Okay, thank you.

[Nelson Mills:]

Okay. Thanks.

[James Fleming:]

Thank you, John,

[Operator:]

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

[James Fleming:]

Hi, Mitch.

[Mitch Germain:]

Hey, guys I know you mentioned specs week [ph] program in San Francisco, you're having some success there. What's the strategy in DC to try to take some share in that market from the leasing side?

[James Fleming:]

Yes. So, Mitch its not a similar, we have some couple block spaces at Market Square, if you recall last couple years we had two large law firms that downsize and relocated and so we have some the best place in the building and hope for opportunities there, just a couple of those and then we have yes, other smaller spaces throughout the building and we are spec weeding several of those and with good success, good rates, faster execution, and so forth. So it’s similar to 650 Cal. That said, we're still getting tours for some larger tenants and we want to couple those this year. We've been the final one or two or three several times. We're competing with you new products in the market and holding our own and winning our fair share. So the nice thing about a property like Market Square and 650 Cal is there us some demand elasticity there, we can be patient and push for rate in term, if at any we decide the back seats is getting ahead of us, we can pull back a bit on economics and [indiscernible] Its well under control, and the effects we are part of that – part of the format.

[Mitch Germain:]

All right. And then considering the three properties that are on the market are under contract today, outside of those three it is, is really that the end of the assets of program or are there any other properties that are somewhat identified to be non-core in your mind?

[James Fleming:]

Well, there are really 600 properties that don't fit the market, aren’t in the markets that we're focused on going forward. So - but there are now immediate terms or may be plans to sell them. Those are of two properties in Atlanta, this is our homes, its our backyard, these are good properties, in both cases they have 4 to 5 years of remained lease term and we're feeling good about being those renewed and extended. That’s in Atlanta, so we're not buying those in Atlanta, but those we plan to hold. We have three assets in Houston, Houston is not a forever market for us. We mentioned on the, we had about 10% vacancy there, that’s growing over the next year, probably, but might be the time to sell Houston, that is something we'll continue to discuss with the board, not a forever market, but no immediate term plans to sell it. And then the only other assets remaining is the Western House Campus in [indiscernible] Pittsburgh and there is about nine years for many on that lease and no real rush to do anything there. So that's it. So to answer your question more specifically, you saw on the bridge really just the - we really just took into account the assets that are in the market right now. If we had a compelling opportunity in Houston, that could change, but there is no immediate plans.

[Mitch Germain:]

And just to confirm there is no tax consequences or dividend consequences in the next batches sales correct?

[James Fleming:]

That’s right. We've unfortunately really haven't had any tax issues with all of the sales and we've done and we maintain some flexibility by last year you may recall, we had paying a December dividend related to January, which gives us flexibility in particular year. We haven't really needed that this year, in all likelihood, we just keep doing that year to year. So with, let us use an extra dividend in particular year if needed to. So that shouldn't be a real issue. And certainly on the dividend we will take - as we said earlier, we're going to take a long-term view and make sure that we covered all of the different possibility. We want to put our self position we're paying a competitive, and again, it may well be where we are or it may be different level, but it's a dividend that feel good about long-term and we feel good about being able to increase over time.

[Mitch Germain:]

Great. Well, Jim, you said I think if am not mistaken, six times net debt to EBITDA is that correct?

[James Fleming:]

That’s right. If you took the termination payment in lieu of rent for that quarter and put it back in the third quarter, that's right. I think on its face, it was 6.7% or something like that, but that's not really the real number because of mismatch of the timing of that termination.

[Mitch Germain:]

Let me ask you a different way. You know, considering the annualize impact of the recent sales and then the new commencement of the NYU lease where is that metrics stand?

[James Fleming:]

Well, if take it instead of putting the termination payment and if you put the ring off the NYU lease and which would be the effect in the fourth quarter. It's still not six times, now if you have some sales Cleveland, Dallas, Phoenix, et cetera. It will go down because you will have cash and could you pay down debt or if you are sitting on cash, then the question becomes what we do with that cash, should we buy stock, we reinvest it. And I can't speculate on all that, but at least in the short term will actually be down.

[Mitch Germain:]

Thank you.

[James Fleming:]

Mitch, thank you.

[Nelson Mills:]

Thanks, Mitch.

[Operator:]

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

[Vikram Malhotra:]

Thank you. Sorry I dialed in it, I may have missed this. But I think I caught something about shift in income from was it the fourth to the third quarter. I may have missed this, I dialed in late?

[James Fleming:]

Yes, Vikram, this is Jim. No problem at all. So what we - what I try to do when we were earlier was to point out that there is - there's really a mismatch if you look at what a run rate is for our company, there is a mismatch between the second quarter and the third and our largest lease which was Jones Day and then will be NYU, on the NYU lease commits early fourth quarter. But what happened was the Jones Day lease was terminated right at the end of the second quarter, we received the payment from Jones Day in lieu of rent for the third of $6.2 million, its here in the second quarter. So as part of our income in our FFO for the second quarter, but that really made the second quarter artificially high by that $0.05, five and half cent and it may the third quarter artificially low by five half cents because really that payment was in lieu of rent for the third quarter, but under gap, we needed to take into second quarter. So really in terms of all my metrics they were all a bit skewed and leverage if you would include that income that revenue in the third quarter, the leverage as I mentioned was about six times versus what you see in the supplemental and corresponding our office charge coverage and NOI margin and all those metrics through those with you later if you like, but all those are little better than what you see on the face of the supplemental.

[Vikram Malhotra:]

Okay. But there is no other one-time items that may have pushed FFO higher than anticipated in the third quarter?

[James Fleming:]

No, really the third quarter was - I think where we – I think we've done a good job signaling where we thought it is going come out based on the NYU, excuse me, the Jones Day termination payment because we talked about it in the last call. So I think and I know some of the analyst had higher number, some them lower, but I think we actually have the average of analyst and we're about where we expected to be. But FFO for the third quarter was lower than it would otherwise been if that lease had continued without any termination payment. Now, of course it will – our forecast for the fourth quarter is to have lower FFO, but that's really good asset of sales.

[Vikram Malhotra:]

Okay. Then your thoughts on New York and may be sub market, several of peers have indicated further softening, rent growth softening into '17, bifurcation in tenant demand, just wanted to get your thoughts, what are you seeing today, what are your expectations for '17.

[James Fleming:]

So, Nelson, will add this, but the question is, where do we see the market going in New York in '17 versus today, you know, at least there are some softening out there. I do think people - obviously, people are concerned about the market in New York, and whether it's peaking, we really had a lot of success lately. Obviously we've done the NYU lease but we've also done leases at 315 Park Avenue South at or above our pro format and really for us, think – you mentioned bifurcation, I'm not really sure what's driving that. But really I think it if you have attractive space in good locations with the right size place in buildings with amenities close by and like congress, we were in the 70s and 80s typically gets more affordable than some of the rents for real premium space in New York, there seems to be a good market for that and that’s…

[Nelson Mills:]

I agree, I mean, clearly leasing is not – leasing demand is not at the pace it was in '14 and '15 and you can see there's plenty of evidence that you can feel that, but it's still very strong and I think Jim said it has a lot to do with particular opportunities, the property and location. Midtown South is still very strong, 315 Park Avenue South is executed some leases at above sort of expectations are original expectations and a lot of activity there. Same with our US 43re property, we continue to have very strong demand. Therefore, the limited space we do have rolling. I think it has lot to do with just the quality of the - of the property and location and opportunity, still strong demand overall in that market.

[Vikram Malhotra:]

Okay. And then just last quick one as a follow-up, on the acquisition of the plan that - potential acquisitions. You talked about potentially doing assets with a bit of lease up opportunity. But can you just talk about the market any presence by market?

[Nelson Mills:]

Those particular opportunity by market?

[Vikram Malhotra:]

No, you were to sort of say, you know in the markets that you’ve now focused on but you are looking at acquisitions, further acquisition any preference by market?

[Nelson Mills:]

Okay. In preferences in which market, yeah…

[Vikram Malhotra:]

Which market would you prefer, yes.

[Nelson Mills:]

Yes, sure. Okay, well, I'll just run through five market. So DC, we have for some time now and continue to feel very good about DC market for the longer term. It continues to have an imbalance in the demand supply and it’s a bit of struggle and probably like Market Square because of unique nature of that property holds its own, but that market is still challenged. But capital doesn't seem to ignore that, the capital pricing for transactions is still very strong. And I think that explanation, that is like us and that you're still good about that longer-term, so very hard to get a good deal there. We continue to look. Boston we have asset in Boston, we like that market for obvious reasons, also difficult to capture opportunity there, some very established players there and we'll continue to look at it. San Francisco. We're heavily weighted in San Fran, we feel great about our properties there, we are having good success there. We have had good leasing success. We've got solid team there on the ground. And we continue to look at opportunities. But we feel like we're pretty well situated there. So that leaves West LA, is a new market for us. We don't have any properties there. We have one property [indiscernible] but nothing in West LA. Our team that was very familiar with that market and we are very actively looking and bidding on opportunities. Those particularly the West LA market, Santa Monica is a primary focus. There are not many deals there. They tend to be smaller, they tend to be heavily competed for, we some close in a couple and we like that market. And then that brings us to Manhattan, also competitive, lot of capital smaller around world competing for properties there. But there's also lot opportunity, there is a lot opportunity throughout the throughout that market. The deals that are compelling and or difficult to find or and they are even harder to capture. So we bought seven assets in the last four years. We'll continue to keep that discipline approach and, lifelong answer, I'd say Manhattan and West LA we're primarily focused and working hard to capture something there that works.

[Vikram Malhotra:]

Great. Thank you.

[Nelson Mills:]

Thank you.

[Operator:]

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

[Nelson Mills:]

Thank you, everyone. We really appreciate you participating on the call and great questions, thank you for those. We look forward to seeing you at NAREIT and elsewhere and if not then, we look forward to speaking with to you on the next call. Thank you very much.

[Operator:]

Ladies and gentlemen, the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.