Columbia Property Trust, Inc.
Q4 2014 Earnings Call Transcript

Published: 13 Feb 2015

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the Columbia Property Trust Fourth Quarter 2014 Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded; Friday, February 13, 2015. I would now like to turn the conference over to Mr. Krister Romeyn. Please go ahead, sir.

[Krister Romeyn:]

Thank you, Carlos. Good morning. Welcome to the Columbia Property Trust conference call to review the company's results for the fourth quarter of 2014. On the call today will be Nelson Mills, President and Chief Executive Officer; Jim Fleming, Executive Vice President and Chief Financial Officer; and Wendy Gill, Senior Vice President of Corporate Operations and Chief Accounting Officer. Our results were released yesterday afternoon in our earning press release and filed with the SEC in 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 2014 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. Thank you.

[Nelson Mills:]

Thanks, Krister. Good morning, everyone. Thank you for joining the call. Well, we had a strong finish to an eventful and successful 2014. We continue to execute the strategy we established some time ago. Our primary goal has been to grow NAV in a meaningful way, while substantially improving portfolio quality. We are also ever mindful of sustaining cash flows to support the dividend with a commitment to growing those cash flows over time, all of this while maintaining a fortress balance sheet. On our last call we walked you through all of our major lease expirations for 2015 through 2017. We're taking a proactive approach on each of them and are optimistic about the outcome. We continue to make significant progress on those and we'll spend some more time on that topic at our upcoming Investor Day. For today's call, I'd like to focus on our progress against our strategy. We want to be as clear as possible on our rationale for the strategy, our commitment to its execution, and our expectations for the future, both the near-term and longer-term. The transformation of our portfolio over the last three years has been dramatic. We have reduced our number of markets from 32 to 15 with 89% of our revenues now coming from our top 10 markets. We've shifted the portfolio composition from predominantly single tenant suburban to a CBD and multi-tenant focus. Today, 72% of our revenues are derived from multi-tenant properties and 61% from CBD properties. Of the 39% we characterize as suburban, approximately half of that number are actually high quality urban infill. That includes submarkets like Palo Alto and Silicon Valley, Buckhead and Center Perimeter in Atlanta, Las Colinas in Dallas, and The Galleria in Houston. So the so called suburban assets we are retaining are in highly desirable submarkets with attractive fundamentals. We've also built substantial portfolio concentration in some of the best high-barrier submarkets in the country. Our top three markets in terms of revenue are now San Francisco, Washington DC and New York City. We have followed a disciplined approach to identifying and executing more than $1 billion in acquisitions [indiscernible] properties in some of the best performing submarkets in the country. Our recent acquisitions in CBD San Francisco, Midtown South Manhattan and the Back Bay of Boston are all attractive buildings with great [bones] [ph], great tenant appeal, and they are all well located in thriving submarkets with strong and improving leasing fundamentals. And each of these properties have substantial near-term rent roll up opportunities, either through current vacancies and/or approaching expirations. We'll continue to seek these types of opportunities for growth as we advance the strategy in the coming months and years. Very importantly, we now have teams in place with the ability and commitment to execute on the leasing and operations necessary to capture this upside. During 2014, we established capable and motivated regional teams on both coasts. We further augmented those capabilities by aligning with top producing brokers and service providers in each of those markets. As recently announced, we've contracted with L&L Holding company in New York City to lease and manage our newly acquired property at 315 Park Avenue South. L&L owns and/or manages six million square feet of office space in or around New York City and has an outstanding and well-earned reputation as a prominent developer and operator of Manhattan office properties. Their innovative talents, reputation and creditability will be a great benefit to us with respect to this important asset. Furthermore, we continue to explore other opportunities to partner with L&L and we're excited about expanding our relationship. Acquiring these value-add opportunities and having the teams in place to capitalize on them are at the heart of our growth strategy. Combined with our continued focus on proactive leasing and efficient operations of our same-store portfolio, we are positioning Columbia for meaningful and continuing NAV and FFO growth into the future. A great example of value that can be created with right asset in the right market with the right team is 221 Main in San Francisco. I highlighted this property last quarter with renewals of Bright Horizons and the new lease with Prosper Marketplace. In the next several days we will announce the signing of a new lease for over 100,000 feet and a sizable roll up from previous rates and well above our acquisition pro forma. This also puts us well ahead of the leasing schedule anticipating our underwriting. We'll provide more details on this lease and the property's overall performance in our Investor Day presentation. But with this expansion, we're now over 95% leased at the property. Less than one year into ownership we now have leases in place that will lead to yields well in excess of our stabilized yield targets for the property. Let's talk for a moment about our deal sourcing and underwriting. With a very disciplined and underwriting process we are diligently seeking acquisitions that within a limited timeframe using today's rental rates plus conservative market rate growth assumptions can produce a yield substantially better than the expected stabilized cap rate for the asset. That's the model and approach we've used for each of these acquisitions in underwriting. We also apply conservative assumptions on the time, cost and rate associated with leasing. Given those criteria such deals are obviously very difficult to secure, especially in our targeted markets. In fact, we have only closed four transactions in the last 2.5 years. But we're very pleased with each of them and their contributions to our strategy. While the pace and degree of the 221 Main results will be difficult to replicate, we've placed Columbia in the path of similar value creation opportunities with all of these acquisitions. And our team is working very hard to capitalize on those. Another key component of our strategy has been to efficiently exit assets and markets that are not best suited for sustained value and growth. We sold $426 million of properties in 2014 on top of $589 million sold in 2013. As we signalled on our last call, we now have targeted $500 million to $600 million of dispositions for 2015. Every one of these 14 properties marked for dispositions is located in a suburban submarket, and the majority of them are single tenant with little near-term opportunity to grow rents. Selling assets and diluting lease revenue is never an easy decision, especially given the importance that we and our investors place on cash flow. But we are committed to maximizing total return to shareholders over time, and that means investing our shareholders' dollars in the assets that provide the best opportunity for sustained income and growth. When we began the portfolio transition three years ago, the task ahead was formidable, and we knew it would take time. We have stayed committed to pulling the band-aid off as quickly as possible. These 14 assets that we've identified for disposition in 2015 complete that drill. That's not to say we won't sell more assets in the near or distant future, we'll forever look for ways to better the portfolio and its performance. But further dispositions will result from opportunities to upgrade and enhance the portfolio and will likely be paired with acquisition opportunities. The benefits of this strategy are clear. We have a much improved portfolio profile and average rent per square foot comparable to half area of peers, a heavy concentration of assets and highly liquid low cap rate markets, and a portfolio that is appreciating substantially based on our leasing execution and the improving fundamentals in those chosen markets. These attributes are testaments to our progress toward our primary goals of growing NAV and ultimately cash flows. Of course, while we are measuring discipline in our approach, the execution of this transition strategy comes at a price, the dilution of cash flows in the near-term. Generally, we have exited assets with current year income in the seven to eight yield range and have acquired assets with initial yields below 4% in some cases. But eight caps are eight caps for a reason. They are associated with deteriorating rents; short-term leases, markets with little or uncertain growth and/or better markets with limited capital demand. The same is true for sub-four caps. They have positive attributes such as rent roll up opportunities, growing tenant demand, constrained supply and strong capital liquidity. You'll see the impact of this dilution reflected in our FFO guidance for 2015. This trend will likely continue for 2016 as well, based upon planned dispositions in 2015 and the time required to roll over leases and capture the growth inherent in our recent acquisitions. But the underlying value is clearly there, as evidenced by our underwriting, our recent leasing success and current leasing prospects. These steps were taken with the portfolio are growing NAV in a meaningful way. While near-term cash flows have stepped back slightly, as we anticipated, we believe the value of the company is being significantly enhanced. So how soon will we have year-over-year growth in overall portfolio FFO? Well, that depends on a number of factors such as the timing and amount of future transactions, how well we execute on leasing, and the fundamentals in our markets. But Columbia is now positioned in stronger markets with substantial rent roll up opportunities in the relatively near-term, and we have a very qualified and committed team to make it happen. With that Jim, why don't you take it from here and walk us through the fourth quarter results and how all this translates into our 2015 guidance and capital plans.

[Jim Fleming:]

Thanks, Nelson. Good morning, everyone. I'll speak for a few minutes about our financial results for 2014 and then I'll turn to our 2015 guidance and capital plans, as Nelson mentioned. Last quarter our normalized FFO was $0.49 per share, which was a $0.01 better than the high end of our projected range due to some lower G&A expenses and interest rate savings. As we discussed on our last call, we completed the $290 million sale of Lenox Park at the beginning of the fourth quarter. That campus accounted for $5 million of quarterly cash NOI and approximately $0.04 of both normalized FFO and AFFO per quarter. The acquisition of 650 California in the third quarter partially offset this sale as well our recent acquisitions in New York, Boston and Western Virginia. Now, as we said on our last call, you should expect our normalized FFO to be at a lower level until we start seeing the effects of NOI growth form our recent acquisitions. As a result, our normalized FFO of $0.49 for the fourth quarter was somewhat lower, compared with $0.51 for the third quarter and $0.52 for the fourth quarter of 2013. Although there was no other transaction activity completed during the quarter, we did take a $10.1 million impairment charge related to our vacant suburban office building in [Norway] [ph] once it was identified as part of the dispositions we have projected for 2015. Same-store cash NOI for the fourth quarter was 1.8% higher than the prior year and down 2.7% from the quarter. This sequential decline was primarily related to seasonality at our hotel property and the timing of expenses corresponding to repair and maintenance projects at Market Square. The year-over-year growth; however, was primarily from good leasing results throughout the year. For the year we ended up right at the top of our guidance with 3.8% same-store cash NOI growth. On page nine of our supplemental, you'll see that our total GAAP interest expense was $19.2 million for the fourth quarter, compared with $18.8 million in third quarter and $17.8 million in the fourth quarter a year ago. These results include both interest expense and interest expense associated with interest rate swaps from our income statement. The increase was primarily due to our assumption of $130 million loan when we acquired 650 California. Total capital expenditures in the quarter were $26.1 million, compared with $18.4 million in the third quarter and $20.2 million in the fourth quarter a year ago. This capital was primarily a result of the significant leasing we've accomplished over the past few years. And as I'll discuss in a few minutes, we do expect a higher level of CapEx to continue into 2015. AFFO for the year was $1.46 per share, which provided good coverage for our $1.20 dividend. Turning to our capital structure, as we noted last quarter, the sale of Lenox Park took our fixed charge coverage ratio to 4.3 times, reduced our net debt to EBITDA to 4.8 times, and took our leverage ratio down to 32.2%. On a pro forma basis, for the early January acquisitions, our leverage has moved up temporarily to 36.5% until we were able to complete our planned dispositions later in the year. As we previously disclosed, we funded these acquisitions with cash on hand, a $140 million draw on our line of credit, and a $300 million bridge loan. So, as we look back on 2014, we accomplished what we set out to do. We completed nearly $1 billion of transaction activity that improved our growth profile while preserving the strength and flexibility of our balance sheet and hitting our earnings and portfolio targets. We're proud of those achievements and remained intrigued of what we outlined a year ago, but our focus is now on continuing to execute well over the next few years. On that note let's spend some time on our 2015 guidance. I will be relying on the detail in our supplemental package and the earnings release. You'll note in particular that starting of page 29 of the supplemental we added some pro forma calculations to share the impact of the three properties we acquired in early January. In our last call we said we expected our FFO for the fourth quarter to fall between $0.46 and $0.48. This was lower than our previous quarters, because it included the full effect of our disposition of Lenox Park and acquisition of 650 California. Although our actual results for the quarter were slightly higher, $0.49, we continue to believe that our guidance from last November provides a good base level for our FFO in 2015. You will note that this run rate is very consistent with our 2015 guidance range of $1.85 to $1.91. As you know, we acquired three properties in early January effectively accomplishing our acquisition objectives of $500 million and $600 million very early in the year. Even though these are core plus the value-add investments that have not yet achieved their full income potential, the acquisitions should have a small positive effect on our earnings, giving us slightly higher FFO in the first and second quarters of this year. During the year we also plan to sell $500 million to $600 million of other assets as we announced last November, and the disposition properties will trade at higher initial cap rates than the properties we acquired resulting in lower FFO for the second half of the year. In the end, we're expecting the net effect over the year of the acquisitions and dispositions to be about zero. Granted the timing of the disposition activity, as well as any additional acquisitions, we'll implement the ends of the range, but hopefully this gives you a general idea of the drivers underlying normalized FFO range. Drilling down in to the assumptions, you'll note that we're expecting our same-store cash NOI to be down 3% to 3.5% from last year. Keep in mind that this same-store projection does not include any of the $1.1 billion in assets we've acquired over the past 12 months in San Francisco, New York, Boston and DC, which have substantial roll up opportunities. Also, please note that although we're not providing guidance on this point, we are expecting significantly positive releasing spreads this year. There are two reasons for the same-store decline. First, at 100 East Pratt we relieved two well price in 2014 for all of their space but at a lower rate and 2015 will be a full year at the lower rate. And second, even though our rental rates are holding up, we are expecting some down time as we release a few large blocks of space including Key Tower. There we agreed in 2013 to take back 198,000 square feet from KeyBank this July, and we simultaneously leased 115,000 square feet of the relinquished space to a law firm commencing January 2016. One Glenlake where the 108,000 square foot Oracle lease expired last month, one-third of which has already been released with proposals out for the remaining space, and markets clear where 128,000 square feet lease differ right expires in June, 34% of which we have released today. These are partially offset by three rent burn offs and new leasing at 5 Houston, 515 Post Oak and University Circle. You may want to review our third quarter call as we walk through all of the renewals and plans for the space coming due from 2015 to 2017. As many of you know, we have other lease expirations through 2017, which we have been working on for some time. These expirations may also result in some downtown in those years. In addition, the full effect of the dilution from our asset sales this year won't be felt until 2016. However, I want to point out that these results are as expected, and that our portfolio continues to perform well. The short-term dilution from sell in suburban and single tenant assets and replacing them with higher quality assets has been playing for a number of years, and we believe will ultimately result in better growth in income quality. In fact, with this year's acquisitions and planned dispositions, we are on target to have roughly 70% of our revenues coming from CBD properties and about 80% from multi-tenant buildings by year end. Our portfolio quality has also improved markedly with our average net rent now in the low 20s, which we expect to increase over time to the high 20s even without further acquisitions. These levels are well in excess of the low barrier reach and already within the range of our high barrier peers. So, by year end, we should be well on our way to the long-term target Nelson outlined earlier with a high quality portfolio that should command a better market than low barrier office rents. In addition, even though we are expecting reduction in same-store NOI this year for the reasons I mentioned, we do not expect to trend in this direction. First, we have a high quality portfolio and we expect it to remain well-leased for the foreseeable future. Second, over time we are anticipating meaningful growth in our NOI as our leases-related to market. To our transformation today, we have moved our portfolio from a mid single digit roll-down when mark-to-market to what we now estimate is a mid single digit way up, and we believe after this year’s dispositions we will have a high single digit rate when compared to today's market rents. And then finally, although it will take some time for the results to appear in our financial results, we are excited about the growth prospects from our newly acquired properties. As you can see, we have not changed our guidance on G&A very much from 2014. Last year we built out our teams on the Houston west coast and that did increase our cost a bit. However, we also trend our infrastructure in Atlanta, primarily by reducing the number of asset managers. And we were able to achieve some cost savings related to our transfer agent and our communications with retail shareholders. We will also continue to look for savings in 2015. In that result is that we don’t expect to increase our G&A much going forward, even as we continue to emphasize on our regional teams. We believe it is in our best interest to have a talented, motivated team, with good experience and local market knowledge, but we also know it’s important to keep G&A at a reasonable level. To give some perspective on this, we compared our G&A for 2014 with 11 other public office companies. Our G&A is 5.8% of our fourth quarter annualized revenues, compared to an average of 6% for our public pure office REITs and it was 68 basis points in our assets compared to an average of 73 basis points for our peers. We will continue to keep an eye on our G&A as we have in the past, in order to make sure we spend our G&A dollars wisely. We did not give an AFFO forecast for the year, but with the capital plans we have for renovations and elevated leasing, we expect a good bit of variability throughout the year. We have always been willing to invest capital. Here we believe that will result in a good long-term return on investment. This should be clear from the early renewal leasing we have done with a number of significant tenants over the past three years, including QO Frags Québec and PSEMG. Much of this capital has already been spent, but this year we do expect to have recurring capital expenditures at a higher level than in 2014, mainly from leasing at our Market Square and the ongoing like properties and from previously announced leasing at 100 East Pratt and Key Center. And the result, we expect this year’s capital expenditures will cause 2015 AFFO to be lower than last years. In 2013, we reset our dividend as its current rate. We looked at 5 year projections and felt that this would be an appropriate level for our dividends as we transform the portfolio. We still feel comfortable with our dividend level, given the surplus from last year, our expectation to 2016s recurring capital would be lower than 2015s, and strength of our balance sheet and the income growth we are expecting from our portfolio over the longer term. As we noted last quarter, we've identified $500 million to $600 million of properties we intend to sell later this year. This amount comprises 14 properties and with that exception they are suburban assets. We've assumed that most of these dispositions will occur about mid year. With the two separate transactions we completed in early January, we've already completed acquisitions that fall within our projected range. For the next several months our focus will be to execute on the plan dispositions and it is unlikely that we will pursue further acquisitions until the bulk of these sales are complete. After the dispositions are accomplished and we are further along in a year, we may consider this acquisitions, but because of timing we wouldn’t expect them to have much impact on our 2015 results. But we made our acquisitions last month, we funded those a bridge loan, along with cash on hand and proceeds from our line of credit. As a result, our weighted average debt maturity has come down to less than €3 not including extension options. This will change later this year, as sales proceeds are available to pay down short term debt. In addition, we have $200 million loan maturing this summer and $100 million loan that can be prepaid in the same timeframe. And we are now exploring options for putting the long-term financing in place to replace those secured loans. Fortunately, the markets are doing favorable recently for both secured and unsecured financings. Our preference at this point is to increase our use of unsecured debt, for example, by issuing bonds. Ultimately, our goal by year end is to extend our weighted average debt maturity to about twice the current duration, while maintaining a low levered balance sheet with good flexibility. We should be able to accomplish this without materially raising our cost of debt capital. We're confident that our strategy will result in a stronger portfolio to generate higher total returns over the next 5 to 7 years. We will continue to share more of these plans with you during the year. I'll turn it back to Nelson Mills for some closing remarks. Nelson?

[Nelson Mills:]

Thank you, Jim. We're very pleased with the progress we're making in transforming our portfolio from a yield focus to a hard quality growth portfolio. Our key goal has been to eliminate risk from high yield assets that we believe [indiscernible] illusion come in the future or it require high levels of ongoing capitals to maintain. And to replace those assets with well situated properties that provide growth opportunities in strong markets. Fortunately the capital markets have been cooperating and there has been significant interest in secondary markets, suburban locations and the single-tenant buildings we've been selling. This has enabled us to exit non-core assets at attractive pricing. As we discuss, we find to round-out are we positioning in 2015. Some of you have asked us how we can afford to purchase assets in markets like San Francisco, New York and Boston, given our cost of capital. We agree that our stock price today does not reflect the high quality of our portfolio. For this reason we have not been issuing stock to fund our acquisitions and we chose not to issue stock in an up year when we listed in late 2013. Of course we are certainly working hard for how to stop this. We believe our stock price and our cost of capital will ultimately be determined by the quality of our portfolio and the credibility of our platform. And we think the steps we're taking now will pay off over time. The net wins across our portfolio have already moved from 1804 average to 2195 in the last 3 years. And we expect those will increase to approximately $28 to $29 average over the next several years, after we dispose a certain assets this year and finish releasing the properties we have already acquired. But those numbers do not assume the further acquisitions, just leasing the assets we have in place and completing dispositions, we expect the net rents in the $28 to $29 range. Based on this indicator of portfolio quality, we've already moved well beyond the low barrier REITs and fast approaching our high barrier peers. As we sell assets, one possible use of capital is repurchasing our own stock. A little over a year ago we bought $234 million of stock at $25 per share through a tender offer. At that time, our board said it believed this price was substantially below the net asset value of our portfolio. We still believe that to be the case. Since then, we have continue to discuss stock buybacks with our board and as recently at this month we've taken hard look at this question with input from financial advisors. Today we have not bought anymore stock and I want to address the reasons for this. First, we have chosen to maintain our balance sheet capacity in order to keep us in a strong position to make acquisitions of value-add and core plus assets in key markets. These properties are difficult to finance at the asset level and in many cases being able to add quickly and without the need for any additional capital had allowed us to pursue portfolios in other off market acquisitions. Second, we believe the best catalyst we can provide for our stock price is to complete our transition efforts quickly and in a manner that puts us in a position to increase income and create value. We know we have some work to do this year, but we are pleased to have added well positions assets to our portfolio that we believe can help us add meaningful growth. Hence all this, we continue to view stock repurchases as a potential good use of capital when we have adequate capital available and when our stock is trading at a substantial discount. As we have proceeds from assets sales later in the year, we will evaluate this against other investment alternatives. In closing, we're very pleased with our success thus far and convince that we're best path for creating value for our shareholders. Our team is up for the task and we're committed to building one of the best office companies in the country. With that operator, we are now ready for questions.

[Operator:]

All right. Thank you very much. [Operator Instructions] Our first question comes from the line of Vance Edelson with Morgan Stanley. Please go ahead.

[Vance Edelson:]

Great, thanks. Good morning, guys.

[Nelson Mills:]

Morning, Vance.

[Vance Edelson:]

Thanks, for the extended prepared remarks, that was all very clear. When we think about the increase in rental rates for leases signed in the third quarter it was through the roof, partially on 221 Main Street, in the fourth quarter it was back down to earth and now you've signed or signed a 100,000 square feet this quarter back at 221 Main. Does this imply there was limited lease activity in that building during the calendar fourth quarter and that’s why fourth quarter pricing didn’t benefit. And along the same lines, can we look forward to more robust pricing news on the mark-to-market for the first quarter given the leasing that you've now accomplished this quarter at 221 Main?

[Nelson Mills:]

So, that’s correct Vance. So we announced the two most recent leases before this one it was just completed were Bright Horizons and Prosper Marketplace in the third quarter of last year. So, there were no leases signed in the fourth quarter. So you're correct on that. The new lease we alluded to, we'll provide more details for that to come. But it was -- as we mentioned it was over 100,000 feet at rates substantially above our pro forma and at that sort of level of leasing at a best rate it certainly will -- certainly won't move the needle. So with the 42, we're providing more information on that.

[Vance Edelson:]

Okay. That’s perfect. And then, next as you look to sell more than $0.5 billion worth of properties, you mentioned that the capital markets are cooperating. Could you update us on the ebbs and flows of private demand and how the market landscape looks for sellers right now? Has the demand continued to grow, do you expect that to continue and how does this plan your thinking around the pace of disposition is throughout the year, I know you are assuming the midyear convention. But is there any sense of urgency given the current bidding environment?

[Nelson Mills:]

No question, we do have a strong sense of urgency. Capital markets, capital flows and the markets we are in which we are selling assets are still strong. We're still getting lot of interest, but we all suspect that will not last forever and we're moving with haste. We've assigned all of the assets, all 14 that we've talked about have been assigned to a broker, some of those will be leased and relatively easy sell and will have a wide range of bidders. Others are more special situations and we're looking from everything to repositioning an asset or two for different use, as well as maybe we're going to sell to an end user or to a tenant in some cases. That’s for the two or three outliers, but for the most part, there is always an execution risk, but given where the markets and the fair interest is, given the teams we've got assigned to it, of the urgency with which we’re approaching it we're optimistic about getting that done.

[Vance Edelson:]

Okay. Great to hear that you're moving expeditiously. And then, related to that, and then I'll get back in the queue. Can we assume that Campus Commons Drive in Reston just acquired, does that immediately go on the block, is it put up for sale and if so, can you tell us about its overall marketability and the appeal of that property or is there anything remotely core about that asset?

[Nelson Mills:]

Well, not core for us, it’s a fine asset. It’s multi-tenant asset, in a recently good market. We just underwrote it. So we're very familiar with it as is the broker that we are assigning to that. Whether we sell that immediately or in a few months is to be determined. There are some near term leasing negotiations in place, we may see some of those through. But we certainly don’t plan to hold it beyond ’15.

[Vance Edelson:]

Got it. Okay, great job on the execution. Thanks, Nelson. I'll get back in the queue.

[Nelson Mills:]

Thanks, Vance.

[Operator:]

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

[Nelson Mills:]

Hi, Sheila.

[Sheila McGrath:]

Yes, good morning. Jim and Nelson, I think you mentioned in your prepared remarks the disposition cap rate historically is been in the 7% to 8% range so far. I am just wondering if you think that’s a reasonable range for us to assume on the bucket of assets that is currently for sale.

[Nelson Mills:]

I think that’s right, Sheila. Probably, it’s hard to say, because it is so very -- there will be some that are -- there will likely be some sub seven, there will be some above eight. But on average I think that range is a good assumption.

[Sheila McGrath:]

Okay. And are some of the dispositions far enough along in the process that we could see some earlier than, middle of the year?

[Nelson Mills:]

That’s possible, and not this quarter likely. But I'd say there is a good chance we could beat the June 30 sort of mark out there. But they are all in process, are on the works and then it just takes time to get through that process and then get them closed. So, we feel like June is a pretty good target measure, some will certainly fall beyond that. There could be a couple before, but it’s really hard to say. We're working them hard.

[Sheila McGrath:]

Okay. And then if we look at the lease rollover schedule over the next couple of year, it is somewhat elevated. I am just wondering if in this bucket of 500 million to 600 million of dispositions if you're kind of pulling some of those rollovers added to portfolio?

[Jim Fleming:]

Sheila, we are, you can look at our largest tenants in our supplemental package and I am trying to remember which page that shows up on, but you could see all the [lease] [ph] [indiscernible] for our largest tenant. And the answer is we are pulling it back, we'll probably go into some more detail on that on our Investor Day.

[Sheila McGrath:]

Okay. Okay, great. And then just on the capital expenditures, I think this year it was around $60 million, I heard you mention that 2016 it would go lower. In 2015 is it going to be, do you think it’s flat from 2014 or elevated from that $60 million?

[Jim Fleming:]

Sheila, we think it will be higher, these things are hard to project, because they are mostly related to leasing activity and it’s hard to know when the leases are going to fall. Based on our best assumptions, we believe it will be higher in 2015 than in 2014 and then it will back down in 2016. So it’s not a run rate, it’s not a long-term phenomenon, it’s really a matter of -- we've got some capital going out related to some lease expirations or some lease rollover, it’s already happened at KeyBanc, or you know about KeyBanc, Key Tower, and at 100 East Pratt in Baltimore and then there is more that we are anticipating this year, but don’t know for certain.

[Sheila McGrath:]

Okay. And last question, and you may have touched on this and I may have missed it, but your guidance assumes only the acquisitions that you closed in January. If you, you know, you see other opportunities, are you going to look at them or you think you're more focused on dispositions, so we shouldn’t expect any acquisitions?

[Nelson Mills:]

Well, in the next several months we're really focused on dispositions and leasing. Our team is obviously always in the market and always looking for opportunities. But our best guess is that, at least for this first half three quarters of the year it’s not likely we'd do anything, that’s always subject to change. But if we get the assets sold, and we get our balance sheet and our leverage pulled back in, and we get -- we get our stuff established, or making progress on the acquisitions and all, we wouldn’t rule out another acquisitions this year, or two, but there is nothing currently on the boards, let's put it that way. And of course in terms of acquiring assets, that probably be accretive to earnings. They probably wouldn’t affect 2015, but so the timing would be so late in a year, but it’s certainly something we are going to look at. Right now the focus is on dispositions and operations.

[Sheila McGrath:]

Okay, great. Thank you.

[Nelson Mills:]

Thanks, Sheila.

[Operator:]

Next question comes from the line of Mitch Germain with JMP Securities. Please go ahead.

[Mitch Germain:]

Good morning, guys.

[Nelson Mills:]

Good morning, Mitch.

[James Fleming:]

Good morning.

[Mitch Germain:]

So Jim, just reconciling on your comments you talked about increasing your wage average maturity, should I assume something in store for the term loan as well?

[James Fleming:]

Yes, that’s a good point. We've got a term loan runs through February of 16. We do have two one year extensions option. So we could chose to just leave that in place for a while. But we are looking at the possibility of extending that to share. We think as long this capital markets are strong it may make sense do that. So if we do that, plus replace some of the short term debt with longer term debt, that could give us a good maturity profile.

[Mitch Germain:]

Great. And then, $5 million to $600 million of plant sales, I think you guys have talked about 14 properties, how much on top of that do you suspect needs to exit the portfolio for you guys to be somewhat complete with this strategy?

[James Fleming:]

That’s a tough question to navigate, because on the one hand, this really, these 14 assets really, as we say complete the drill. It really sells are non-core -- we're through right non-core previous identified assets to exit. That said, there are other assets in the portfolio that aren’t forever holds. And plan assets with long-term leases remaining and multi-tenants and good performers and good contributors to our income, but we're still in 15 markets, as to these dispositions I think we'll be in 12 or 13. We don’t have anything planned to sell for the sake of selling, these 14 assets we would sell them without a use for capital. I think any future sales would be paired with an opportunity to think of portfolio to just -- see acquisitions, don’t anticipate of that this year. But I wouldn’t rule out departing with some of those not forever hold assets in the next couple of years.

[Mitch Germain:]

Right. Last question from me, update on New York leasing, I know that you brought CBRE in, you're going to do a new branding campaign for the start of the year, just maybe curious for that sense?

[James Fleming:]

Yes. So, CBRE, Paul, Amak [ph] and team are on it. They've been working diligently around and starting back in the fall, some marketing appeals have gone out in early this year. We have a pretty extensive, pretty good list already of perspective tenants, some tours have begun. Its early days, but we are getting quite a bit of interest as the market sort of wakes up to this asset. It’s been off the market for several years. And so, we're very pleased with early progress. I'll hope you be -- you know and others will be an Investor Day, we'll actually be in the property, we'll spend a fair amount of time talking about the prospects for that asset. Paul, of CB will be there. So, we're very excited about it, but its early days. Our goal is to get some strong momentum built in demand and have leasing, have some substantial leasing lined up before John estate vacates in October 16. I mean, obviously there will be some down time, there will be some conversion time, but our goal is to not only get the best rate we can, but also to minimize that down time.

[Mitch Germain:]

Great. That’s it from me. Thanks, guys.

[James Fleming:]

Thanks, Mitch.

[Operator:]

Our next question comes from the line of Brad Burke with Goldman Sachs. Please go ahead.

[Nelson Mills:]

Good morning, Brad.

[Brad Burke:]

Good morning, guys. Nelson, I realized you are probably talking about this at your Investor Day. But I was hoping if you could elaborate on what you might be planning with the L&L relationship, because I know typically think about L&L as a third party asset manager and leasing broker. So I am trying to think about different ways you might be thinking about expanding that relationship as you go forward?

[Nelson Mills:]

Sure. So we've been in discussions, we got to know L&L, Rob Lapidus and Dave Levinson and team almost a year ago and we've been talking to them on regular basis, not only myself, but other members of the team. Jim included -- have had discussions with him for some time. We've actually looked at few value-add, partnership opportunities that didn’t materialize for a variety of reasons. But -- so we have -- we've built a nice relationship with them and obviously they have a lot of projects going on. They have a big stable of high quality investors, but our relationship with them is a bit different. Its co-operator, co-owner type of situation where we'd be the long-term owner and hopefully be their long-term partner with some opportunities. But none of that is -- none of that’s on the board today, there is no any specific deals there today. We have engaged them as we said to do management and leasing at 315 Park Avenue South. You're right, I don’t typically do third party, although they do have a couple of situations, they've done that. But this particular asset fit them so well, they've had such great success in that -- in the city, but in that sub-market with [214] [ph] this property is sort of great next project for them. They're very excited about doing it. We're paying them standard leasing and management fees. And so there we’re enthusiastic about doing it. We couldn’t be more pleased to have them on the assignment. So that’s a great relationship. But today that’s all it is today in terms of deals or fractional arrangements. But we certainly hope that it grows into more expected too in time.

[Brad Burke:]

Okay, that’s helpful. And then back to your comment about thinking about buying back shares I’m just trying to understand how much dry powder we should be thinking about you having as you try to make that decision? I assume that you will be looking at buybacks after you pay back the debt that you took on as a result of the January acquisitions. And after you build up your cash balance, you be on what I consider we would imagine would be a pretty low level right now post those acquisitions. Is that the right way to think about it or would you consider buying back shares that would result in net increase in your leverage?

[Jim Fleming:]

It is Brad. I won’t say never, when something is incredibly compelling, you deal with it, but for now, we have borrowed $300 million on a bridge loan. We've got $119 million outstanding on our line of credit and a fairly limited cash balance. So it would be a matter of borrowing more short-term debt to go buy some stock and as I also mentioned our weighted average debt maturity is down under three years right now. That's all going to change we expect, because we do expect to sell $500 million to $600 million of assets. They only have a limited amount of debt on, $70 million and so we’ll generate substantial amount of cash from that. And I think as those happen, I think and as Nelson said, we think that start buybacks are one investment alternatively we wouldn't want to run up leverage because of stock buybacks that you can do that with assets. You can do an asset sale and pay some debt down and buy some stock back without leveraging if we did I think you would be using that model.

[Brad Burke:]

Okay. And Jim regarding the same sort of guidance, just trying to understand how we get below 3% you're not expecting a big decline in occupancy for the year. I think you have less than 6% of your leases rolling in 2015 and even though you have some maybe tough mark-to-markets rolling on within the same-store portfolio just wouldn’t get below 3% on cash NOI, I’m trying to make sure I’m not missing anything else that we ought to be thinking about for the year?

[Jim Fleming:]

Brad, you’re right. We all tend to get worked up over these plus three, minus three numbers and what happens is it’s a fairly lumpy business. Real prices you may remember we’ll need them for over 400,000 square feet, we announced it last year, that was a pretty substantial roll down. It was a great transaction to do, but it was a pretty substantial roll down and we’ll have a full year at a lower rate. So that’s a little bit of it and that’s what happens when you sort of reset the bar. That’s one piece of it, but really most of it is some vacancy. We got some vacancy at Key Tower. Over half of that has been released, but that doesn’t kick in until January of '16, and then we've got some vacancy in the building that I’m sitting in, that we’re sitting in at one room like in Atlanta very strong sub-market, very good leasing activity. We think it’s going to be a roll up. Same thing with Market Square, we think it’s going up. We’ll have some -- it really is a down time issue. And the other thing to keep in mind are really two things, one is we’ve got a substantial part of our portfolio that’s not in the same-store set this year it will be next year. It’s over a billion dollars of assets in San Francisco, New York, Boston etcetera and so the same-store metric for us is a bit skewed. And then the last thing I would say is that and this gets back to Vance's question and comment, I think he used the word robust in terms of our releasing spread this year. We’re not going to give a number, but I think that’s probably a pretty good adjective. We do think there will be some substantial rollups on the whole. There will be some roll downs too in all likelihood because it’s a mixed portfolio, but we think on balance it will be rollup. So and I know we all tend to look at each one of these metrics, but it’s not that the portfolio is suffering it’s really just some downtime from transition.

[Brad Burke:]

And I guess trying to think about the algebra on that I would assume that the roll downs are mostly going to occur within the same-store portfolio and the rollups would be on recent acquisition activity?

[Jim Fleming:]

That is correct. Now I’d say for the most part the same-store NOIs is a not roll down story. And in fact on balance, we think we’re rollup probably even for the same-store portfolio, but there’s more downturn this year than last year. But you’re correct, where we have roll downs those are on the older properties that tend to be in weaker markets, and that’s just the way it works.

[Nelson Mills:]

But we do have several examples of existing same-store with rollup Atlanta for example, where we got some renewals some substantial leasing expected in '15 and those are roll-up situation. So it’s varied, but that’s right, the bulk of the rollups are in the $1.1 billion of new acquisitions and the bulk of those downturn in the same-store.

[Brad Burke:]

Okay that’s helpful. And the last one I guess Jim, going back to your comments on dividend policy your payout ratio this quarter was little over 100%. And I realize some of that is just due to shop your CapEx quarter. But you’re expecting a decline in FFO next year you've higher CapEx that you’ve guided us towards. So presumably you're got to be paying out almost all if not more it will your AFFO in the form of a dividend. And I’m just wondering how long you’d be comfortable running with the payout ratio over a 100% or even if you expect to be running with a payout ratio over 100%?

[Jim Fleming:]

And Brad, I’m not going to comment directly on that. I’ll tell you we -- over a three, four, five year period, we think we’ll have very good coverage. What happens with CapEx is that you can’t really predict when it’s going to happen and it’s lumpy and you maybe spend a lot when you’re not so much the next year and we’ve seen that in the past. We had more in '13, than we did in '14, because we had a lot of leasing activity. We do have as everyone knows some lease rolls that are going to happen in '15, '16, '17 timeframe and it’s hard to know whether we’ll be able to accomplish those early or whether those will happen later in the process. But I will say we’re not expecting to have shortfalls for any -- you might -- we did see -- we saw an elevated level of capital last quarter. We don’t tend to look at the dividend on a quarter-by-quarter basis we look at a longer term. We feel comfortable with our dividend level given what we’re seeing over the next several quarters.

[Brad Burke:]

Okay. I appreciate guys. That’s it for me.

[Jim Fleming:]

Okay, thanks Brad.

[Operator:]

Our next question comes from the line of Steve Manaker with Oppenheimer. Please go ahead.

[Steve Manaker:]

Thanks, good evening. Good question regarding the expected retention rate on the roll. Want to get a sense especially for the same and midsized spaces on the lease expiration?

[Nelson Mills:]

One second, we’ll look at that retention on same-store smaller spaces.

[Jim Fleming:]

Yeah it’s -- I think what’s driving is mainly are the larger ones and those are as you know by you either have you give them in advance and I think we try to give to be fairly transparent on those, on the smaller ones, I would say our retention rate is holding up pretty well, but I’m not sure we're guiding specifics Nelson may have a comment.

[Nelson Mills:]

Well historically over the last few years on average it’s been 61%. Last year was a little higher than that at 70%. So we have good retention. But new properties are going to come into the mix and those by the design have substantial rollover. For example 40 something tenants in 221 Main we underwrote that, because there were smaller tenants paying an average of $37 rents and we’re rolling to almost double that. We didn’t expect same lot of those tenants and we underwrote it that way. Some of those move out plan moved one in move out. Same is true with 650 Cal. Again we’re growing the rent. So substantially and those are by design sort of rollouts, but in terms of the stabilized core, base portfolio like I said it’s historically been about two thirds.

[Steve Manaker:]

And I guess from a modelling perspective if we take that out take that out and there is couple of years especially for the smaller spaces is that like a roughly a good way to think about it?

[Nelson Mills:]

That ratio?

[Steve Manaker:]

Yes.

[Nelson Mills:]

Yes I think that’s right.

[Steve Manaker:]

Great. Thanks you very much.

[Nelson Mills:]

Thank you, Steve.

[Operator:]

Our next question comes from the line of Craig Kucera with Wunderlich Securities. Please go ahead.

[Craig Kucera:]

Hi good morning. Most of my questions have been answered, but I did want to follow-up on your expenses this quarter. It looks like your NOI margins, expense margins lifted and I didn't know, were there any timers in there or was that sort of as we should expect it going forward?

[Nelson Mills:]

That was really timing. There were some one time and there were some one time things at Market Square primarily and a few other properties, but it was, I wouldn't use that as a run rate estimate going forward.

[Craig Kucera:]

Got it. That's it. Thanks, appreciate your time.

[Nelson Mills:]

Thank you, Craig.

[Operator:]

Our next question comes is a follow-up by Vance Edelson with Morgan Stanley. Please go ahead.

[Vance Edelson:]

Great. Thanks. Just wanted to follow-up on another couple of topics, Nelson, could you tell us about your new Board members Mike and Glen, just wanted to give you a chance to expand on what they bring to the table and whether they changed the course of this strategic direction in any way?

[Nelson Mills:]

Well, we certainly expect them to make a big impact. Just to back up a bit, we have a great mix of Board members. We've got several of our Board members who have been here since inception, provide a lot of great continuity and really they stimulate a lot of all these steps that we've been talking about that lead the comps over the last three or four years. So that continuity is very valuable to us. That said, we want to enhance that talent, enhance the Board. A year ago, we added Murray McCabe and Tom Wattles. They've been on the Board for a little over a year and have made outstanding contributions. A lot of what we've been talking about here today, they've had a strong hand in. And they were very excited to the point of the -- main point of your question, we're very excited to have Mike Robb and Glenn Rufrano. They've just began beginning of the year. We've been in discussions with them for several months. They know the company well. It's a great honor them. Both of these guys are accomplished guys and their experience is directly relevant to what we're doing and they're always beginning to make an impact. So thanks for brining that up. We're very proud of that.

[Vance Edelson:]

Okay. Thanks for that. And then just back on CBRE and East 41 Street, Midtown Manhattan is obviously fairing quite well now from a mark-to-market standpoint. Any early view you can give us on square foot prices and whether keeping the mark-to-market around flattish seems doable given the strength of the submarket?

[Nelson Mills:]

Well, I don't want to share too much with the perspective tenants, but I will tell you, we've just like the other value add acquisitions we've bought into a rollout story with substantial rollups. Jim, I don't know if…

[Jim Fleming:]

I think he was asking Nelson on the former…

[Vance Edelson:]

I am sorry, the new acquisition…

[Jim Fleming:]

I am sorry, so yes 51 and 52 East 41, the formerly known, okay, I am sorry, so there the in pace rents are in the hot 70s, to be honest replacing that on average dollar per dollar would be a little bit more close, but that might be a little bit tough if you had to at least renew it all today, but we think all below 70s is the best guess if you needed all space. The good news is its growing improving market and we think we've got a good shot at replacing those rents. As far as we blend it, higher rates on the top, but blending I would say today is in low 70's maybe we get to mid to high 70's by the time we get it done, but it's to be determined. We can do much better than that. I couldn’t imagine us falling below that range, but we got to go execute.

[Vance Edelson:]

Okay. Very helpful, thanks again.

[Jim Fleming:]

Thank you.

[Nelson Mills:]

Vance, thank you.

[Operator:]

And we have no further questions on the phone lines, sir.

[Nelson Mills:]

All right. Thank you very much. Well everybody thank you for joining our call today. We really hope to see you at our Investor day in New York on February 23. Please contact us if you need more details on that. We'll expand even further on submitting the topics we discussed today and we look forward to showing our two properties there in Midtown. Otherwise we'll speak to you again on the first quarter call. Thank you, again.

[Operator:]

Ladies and gentlemen, that does conclude the call for today. We think you for your participation and ask you to please disconnect your lines.