Columbia Property Trust, Inc.
Q2 2015 Earnings Call Transcript

Published: 31 Jul 2015

[Operator:]

Good morning and welcome to the Columbia Property Trust Second Quarter 2015 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Tripp Sullivan. Please go ahead.

[Tripp Sullivan:]

Thank you, [indiscernible]. Good morning. Welcome to the Columbia Property Trust conference call to review the Company's results for the second quarter of 2015. 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 yesterday 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 2014 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 will now turn the call over to Nelson Mills. Please go ahead, Nelson.

[Nelson Mills:]

Thanks, Tripp. Good morning everyone. Thank you for joining our call. We accomplished quite a bit during the second quarter and through the month of July. In summary, we delivered normalized FFO of $0.53 and AFFO of $0.37. We expanded our presence in Manhattan with an agreement to buy 229 West 43rd Street and we have already completed 11 and the 14 dispositions targeted for this year. We repaid $333 million of secured debt and recast $950 million of unsecured bank debt with longer maturities and lower borrowing costs. Very importantly, we completed 165,000 square feet of leasing with substantial rental spreads to a positive. As we move forward, we will stay focused on disciplined capital allocation and the continued execution of our strategy, which is designed to grow NAV and future cash flows. Leasing remains the top priority, both for our recent acquisitions which have substantial embedded rent upside as well as for vacancy and near-term expirations in our same-store portfolio. First, let us discuss our disposition activity. We started the year with a goal of raising $500 million and $600 million of proceeds from the sale of 14 properties. These were must-sell assets and not core to our strategy going forward as they predominantly single-tenant and they were exclusively suburban assets. We completed the sale of 11 of them $433 million with one portfolio sale. The pricing was right in line with what we projected and that leaves us with three properties left to sell. The first of those is 263 Shuman Boulevard, which is the former OfficeMax headquarters in suburban Chicago. It is secured by $49 million CMBS loan, which exceeds the current value of the property. Unless we can lend a substantial tenant, our plan is to continue collecting a net cash flow until the lender begins sweeping cash from them in October 2016. At that time, we would likely return this property to the lender and reduce our debt by $49 million. The second targeted property is 800 North Frederick in suburban Maryland. The sole tenant for this property, IBM, is exiting upon expiration next year and the building is essentially obsolete. We are currently under contract with the developer for an alternative use. This sell is scheduled to be completed by year end. The third targeted disposition is 1881 Campus Commons in Reston, Virginia. This was part of a portfolio we purchased back in January. We have done quite a bit of leasing of this property and our marketing for sale later this year. All told, these three properties should generate at least $150 million of additional proceeds and/or debt reduction, which we posted at the high-end of our projected $500 million to $600 million target disposition range. We have also continued to improve our portfolio through strategic acquisitions. We announced on last week that we will acquire 229 West 43rd Street for $516 million, bring us to a total acquisition volume of $1.1 million for 2015. We have talked a good deal about being opportunistic on future acquisitions and we certainly have the balance sheet to do so, but I would like to address this acquisition in particular, because it takes us beyond our original guidance range for 2015. This acquisition will do several important things for us. One, it allows us to replicate a very successful market strategy we had at San Francisco and elsewhere, where we have a number of value add acquisitions balanced with well-leased properties with stable cash flows. In New York, which is now our second largest market, we will now have value add acquisition of 315 Park Avenue South that will require substantial lease-up over the next two to three years. We will have 222 East 41st Street, we will acquire even more leasing over that same timeframe with the exit of Jones Day, and now we will have 229 West 43rd, which is very stable with limited rollover in the next several years. That said, there is embedded upside in the property with average rents around $10 below market. This property is also very efficient for us from an AFFO standpoint as there are minimal capital commitments at this time. This property is also very efficient for us from an AFFO standpoint as there are minimal capital commitments at this time. This acquisition has raised our debt level temporarily, but we are committed to lower leverage strategy, so we will likely reduce debt over time by selling assets and/or entering in joint venture for an existing asset. As we said before, there are no remaining must-sell assets in our portfolio and we can be opportunistic with our future acquisitions and dispositions. We are pleased to be able to make this acquisition first before initiating further dispositions or joint ventures, because in today's market it continues to be harder to acquire good properties as a solo [ph]. We feel comfortable with this approach since capital markets have continued to be strong, and because the remaining properties in our portfolio are of much higher quality than those we have sold at. After our recent dispositions and the Manhattan acquisition, where does that leave us? We will have 28 properties, with 69% of our annualized leased revenues for improved CBD locations. 39% of our revenues are from multi tenant properties and 52% of revenues will be sourced from high barrier markets. In addition to our four high barrier markets New York City, Boston, D.C., San Francisco, will also have a significant presence in Houston and in Atlanta. The remainder of properties are outside of our long-term target markets, but they are performing well and have solid fundamentals, properties such as Key Tower in Cleveland, 100 East Pratt in Baltimore and 80 Park Plaza in New York are prime examples of this. They are well leased, unencumbered with debt and has substantial lease terms remaining. They represent ready sources of capital if and when we identify the right leasing opportunities. We have made great progress, we fulfilled the plans we set out two years ago. What is next? We get this question a lot lately, and it is logical to ask after the steps we have accomplished over the last two years. We get this question a lot lately is have to step last two years. We are going to stay intensely focused on proactive leasing and operations. With our recent transaction activity, we have put ourselves in the path of NOI growth opportunities. We are going to work very hard to deliver on those opportunities. We will continue to be disciplined yet assertive with capital allocation decisions to provide the best long-term results. These could include further dispositions, acquisitions, joint ventures and/or stock repurchases. We now have one of the highest quality office portfolios in the country and solid balance sheet and an experienced the capable team putting us in a highly competitive position. Going forward, we will continue to focus our portfolio concentrations in highly liquid high barrier markets; we will target well located properties with significant rental growth potential and will be proactive in leasing and managing our properties to capture that potential. We are determined to grow NAV and cash flows, all while supporting an attractive yield and maintaining a low-levered balance sheet. As you know execution portfolio transition and disciplined capital allocations have been key areas of focus for us in the recent years, but nothing is more important than proactive leasing and achieving our performance goals. Let us review those. Starting with our recently acquired properties, let us talk about some major leasing opportunities. Starting with 650 California Street, which is located in San Francisco's Financial District. This property have had in place rents well below market with substantial near-term leasing opportunities. This presents us with the opportunity to significantly impact our NOI in the near-term. We have recently renewed an existing tenant and just signed two new leases this month, all at rates significantly above previous rents. More than 100,000 feet space at this property, currently at rates well below market rolls in the next 18 months. This is mostly contiguous space, which should permit a premium at San Francisco market. Next, turning to 315 Park Avenue South, which is was located in the Midtown South Submarket, Manhattan. We signed a 17,000 square-foot expansion recently with Oracle and a substantial roll up from higher rents and we are in advanced discussions with several existing tenants as well as new tenant prospects for additional leasing there. L&L Holding Company, a proven operator in the Midtown South Submarket continues to generate tremendous leasing activity for us and they are helping us make key improvements to the asset and the operations, so that project is going very well. 116 Huntington in Boston has approximately 60,000 feet of space available, most of which is made up of the top two floors. We are experiencing a great deal of current interest there at this property, which is located in the heart of the vibrant Back Bay submarket. Next let's turn to our significant same-store leases, which are scheduled to expire between now and the end of '17. I will begin with Market Square in D.C. D.C. continues to be challenging leasing market, but just as in 2014, we continue to maintain leasing momentum and are experiencing modest rollups on our executed leases. Our capital improvement project is well underway and is being well received by existing and prospective tenants. At 222 E 41st in Midtown Manhattan, our marketing efforts continue and we are very pleased with the results thus far, we are receiving inquiries and offers from a variety of leasing prospects ranging from single-core tenants to potential full building users. 244 Marketing center [ph], which you seeing was recently completed and has already have been utilized for several tours and marketing events, plans are complete for business center and other amenities on the second floor. Our target is to have a substantial portion of the building leased well in advance of Jones Day's October 2016 departure, with occupancy following several months later. Key Tower in Cleveland is 91% leased today and we are in negotiations for a potential renewal with Thompson Hine law firm there for the vast majority of their 167,000 square feet and we are also in discussion with several other perspective tenants, so activity has been very strong there. CH2M M in Denver, Southeastern suburban submarket, the home of CH2M Hill, is under discussion now. We are under - in fact to renew the vast majority of their space at that location. That lease was originally scheduled to expire in 2017, but we expect to have our renewal extension for majority of space in the near future. One Glenlake Parkway it houses home office, is located at Atlanta, Central Perimeter. We are currently marketing 100,000 square feet of this property and that includes the top two floors, for which we have received several offers thus far and we do expect to achieve moderate rollups from in place rents at this property. Three Glenlake Parkway is next door, a sister building here. This is the 350,000 square foot building and it is 100% leased to Newell Rubbermaid until March 2020. Newell recently purchased a much smaller building in the same submarket center Perimeter submarket and they are planning a move in early to mid-2016. We are in discussions with them about a structured early combination and/or cooperating with them on subleasing, which will likely include longer term direct lease reps, so we are having those discussions today. Again, given the strength of this market, demand for leased properties, we expect great outcome there and we do have almost five years remaining on the lease to work with. I will come back a bit later for some closing remarks, but right now, I will turn it over to Jim to talk about the second quarter results and our 2015 guidance.

[Jim Fleming:]

Thanks Nelson. Good morning everyone. As you can tell, we have been very busy with a lot of positive activity for our business. In addition to reviewing our financial performance for the quarter, I will try to explain the effects of our recent activity on our forecasts, our operating performance and our balance sheet. Let us jump right into the results and then connect the dots and look what this means going forward. The $0.53 of normalized FFO for the second quarter was slightly above our expectations due to some G&A savings and timing of other expenses that offset the higher interest expense from our April bonding offering are being larger than originally anticipated. Same-store cash NOI for the second quarter was 1.7% lower than the prior year, but up 2.4% from the first quarter. The sequential improvement was primarily related to the hotel performance in Cleveland, and free rent burning off at two properties. The year-over-year decline was primarily from the 108,000 square foot Oracle lease expiration at One Glenlake this January, which Nelson referred to earlier when he talked about the space that we have for lease here. These results for the quarter were in line with our full year guidance that accounts for large renewals from the previous two years and some expirations this year offset by new leasing and free rent burn-offs. Our re-leasing spreads continue to reflect the overall rollup in our portfolio we have been projecting with the 23% increase on a cash basis and a 36% increase on a GAAP basis. The majority of this leasing was achieved in New York and San Francisco, Houston and in Phoenix. We continue to expect that our full year spreads will be very positive, because the market rent today across our portfolio is on average about 8% to 10% higher than in-place rents. On Page 9 of our supplemental, you will see that our total GAAP interest expense was $22.3 million for the first quarter compared with $21 million in the first quarter of last year and $18.4 million in the second 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 debt to fund our acquisitions in the second half of last year and early this year as well as our upsized unsecured bond offering in March. Total capital expenditures in the quarter were $28.3 million, compared with $23.9 million in the first quarter and $25 million in the second quarter a year ago. This capital was primarily a result of the significant leasing we have accomplished over the past few years and consistent with the higher level of CapEx we have previously projected for 2015. AFFO for the quarter was $0.37 per share, comparable to the first quarter and providing good coverage for our dividend. We were very proactive in the capital markets this quarter, but the timing in most of the closings happen to be in July. During the quarter, we repaid a $206.5 million loan secured by 333 Market Street in San Francisco. That was maturing in July, with borrowings on our unsecured credit facility. With the sale of 11 non-core properties on July 1st for $433 million, we repaid those credit facility borrowings down to $10 million and we paid off the $21 million loan secured by one of the disposition properties. A couple of weeks later, we also paid off the $105 million loan secured by 100 East Pratt in Baltimore. Yesterday, we also recast all $950 million of our unsecured bank debt with lower borrowing cost and longer maturities. We extended our $500 million credit facility by another two years and brought the rate down by 10 basis points to 100 basis points over LIBOR. With our term loans set to mature next February, we split it into a $300 million five-year term loan that matures in July of 2020 and 110 basis points over LIBOR and a $150 million seven-year term loan that matures in July of 2022, and its swapped at a fixed rate of 3.52%. By doing all of this, we achieved one of our primary goals for the year of laddering our maturities at very attractive pricing. Excluding our recent bridge loan, which I will address in a minute, our average debt maturity now extends beyond six years and we have only six mortgage loans in our portfolio. As a result, we have a large unencumbered accrual that includes some of our best assets, which gives us great flexibility going forward. To show the effect of the July re-financings, we have put together some pro forma calculation start on Page 29 of our supplemental materials. You will note that our leverage ratio is at 32.7% on a pro forma basis. With the agreement to acquire 229 West 43rd Street, these metrics will change again with leverage temporarily moving back up to where it was at the first of the year at about 39% as we take on a $300 million bridge loan and more than $200 million of borrowings on the credit facility. We have again used the flexibility of our balance sheet to allow us to make an opportunistic acquisition, but as Nelson mentioned, you can expect us to bring our leverage back down with the combination of asset sales and/or joint ventures. Turning to our 2015 guidance, this acquisition, disposition and capital market's activity require some more specifics, so let me walk you through that. On our last earnings call, we have said we expected to close the majority of the dispositions in the third quarter. We closed 11 of the 14 properties on July 1st and the quick timing was possible, because all 11 were sold in single transaction. We also noted that if we use those proceeds only to pay down debt, which is exactly what we did then that would have resulted in FFO run rates in the low $0.40 range for the second half of the year. With $433 million completed already and another $100 million to 110 million expected from the two remaining dispositions should close by year end. We are well within our stated goal for disposition activity. The pricing on the sale of these 11 assets, which is consistent with what we had projected previously, and given that we had $1.05 in FFO for the first half of the year, all else being equal, we would have brought down our full year guidance somewhere into the $1.80s range and somewhere near the lower end of our guidance range. However, now that we are expecting to have five months of benefit from 229 West 43rd Street with the first year in place NOI of $22.3 million funded by low cost short-term borrowings, we are keeping our full year guidance at $1.85 to $1.91 per share. We continue to expect that our capital plans will impact AFFO this year, with recurring capital expenditures higher year-over-year. We believe we are getting good longer terms on this invested capital and the addition of 229 West 43rd, which will not require much capital in the near-term, will certainly help. We have mentioned this before, but it [indiscernible]. We have not taken a short-term approach to the dividend. We set the dividend [ph] still account for a multi-year transformation of the portfolio that is now substantially complete. Even though we have made substantial changes in our portfolio since we became public two years ago, we remain comfortable that our dividend is at an appropriate level for our company today. As we consider any additional acquisitions or dispositions in the future, we will continue to review our dividend level. Obviously, if we were to make major changes, those would need to be taken into account. However, our decisions will again be based on our view of what is the best interest of our shareholders. I think it is clear that we do not subscribe to any short-term views other than those we used to measure our progress. The decisions we are making on the portfolio, capital allocation and the balance sheet are going to matter for the longer term. We can't say whether those decisions will be reflected in our share price one month, six months or two years from now, but rather than worry about that, we will keep doing what we promised and continue to be as transparent as possible on where we are headed. Nelson, with that I will turn it back to you for some closing remarks.

[Nelson Mills:]

Thank you, Jim. As you all know, we are relatively new listed company. We are still in the process of broadening our base of investors. We understand how vitally important it is to deliver on investor expectations and we strive to exceed those both, in meeting quarterly guidance expectations and in achieving our stated strategic objectives. Since day-one, we have done just what we said we would do, dispose of non-core properties as quickly as possible, add a layer of growth to our stable portfolio and reduce our footprint to a more concentrated portfolio in hybrid markets while building a team capable of supporting and improving and growing that portfolio. We have done this while staying diligently focused on leasing and operations and while maintaining a strong and flexible balance sheet. We are very pleased with what we have accomplished thus far and we are now in a much more competitive position because of those steps, but of course we have more work ahead. We are going to stay focused, disciplined and determined as we continue to build one of the best companies in the office sector. Thank you for your time and interest today. Now with that we will look forward to answering any question you have. Operator, we are ready for questions.

[Operator:]

Thank you, sir. We will now begin the question and answer session. [Operator Instructions] Our first question comes from Sheila McGrath with Evercore. Please go ahead.

[Sheila McGrath:]

Yes. Good morning. Nelson, I was wondering if you could give us some insight on both, the portfolio sale transaction in terms of interest level, what types of buyers we are looking at both, on that portfolio of sale as well as the New York Times building, a little bit of background on how that unfolded and who your competition kind of might have been?

[Nelson Mills:]

Sure. Absolutely. Good morning, Sheila. On the dispositions, it is a very long process; we have 14 assets across several markets. As we discussed on the last call, various types of condition and demand, some of the assets were very clean, very high demand or single asset purchases. Others, we knew the best hope for them was to do as part of package and that is what ultimately happened. I would say, we can spread the process across several brokers, process was well run by the brokers' teams as well as our team here. At the end of the day, the 11 portfolio purchase was the best overall price. As we said earlier, it was in the range of what we expected and we were very pleased to get that done. As we mentioned, there is still a lot of work to do, there is still three assets left, there is a fair amount of interest in all three of those assets, well, two of those three as well. The other one we mentioned is hasn't been overhanging in there. That is probably end up going back to the lender at some point if aren't able to find a big tenant. That process was as expected, very involved, but we are pleased with the results. On the 229 West 43rd acquisition, obviously, the seller was Blackstone. That was a fully marketed deal. There was a lot of interest. We do not have all of the insight onto what we have a good - we have heard about some of them. It did involve several well known operators, other public REITs. We are looking at it and the completion was pretty strong there as well. Again, we think the advantage with our other acquisition we think bank profit [ph] was for a continued free quick close. We are closing within just a couple of weeks after the aware, two three weeks after the award or two, three weeks after the award and that was an advantage and we have got our diligence and our process all the way early. We think obviously for a deal like this, you have got to pay at or near the best price, but we think gave ourselves a bit of a competitive advantage on execution that helped us win that one.

[Sheila McGrath:]

Nelson, you or Jim mentioned that sales of other assets or JV would this be an asset that you would consider selling a joint venture interest in?

[Nelson Mills:]

There are no current plans, but that is certainly on the table. As you know, we have been transitioning away from the non-core assets, the higher cap rate assets. Now that we have that sort of initial that our original plans are subject the closing in those last three sales, we have no completed that drill. Now we have a lot of options, so we would like to eventually exit some of these non-core assets, the ones I mentioned and New York and Cleveland, probably not forever holds. We will get a good relative cap rate for those as well, so we are not ruling out taking some of our low cap high barrier assets off the table either through sale or venture. We have all those options and we will consider. We are trying to balance moving the portfolio forward and improving the portfolio forward, improving the portfolio of quality, giving us the best opportunity for future growth and the same time managing our cash flows and meeting investor expectations there, so we will win. We are brining that out, including 229 West 43rd. That could certainly be a partner candidate, but there are no current discussions around that right now.

[Sheila McGrath:]

Okay. A couple other quick questions, Jim, you mentioned in place rents now are 8% to 10% below market, any idea what that estimate would have been a year ago or some kind of historical perspective?

[Jim Fleming:]

Yes. Historically, I would say two years ago when we first listed as a public company, Sheila, it would have been mid single-digit roll down. In other words in the other direction, 4%, 5%, 6% inflations and it is above market. Now, a couple of things has have happened or three things have happened. One is, we have made some of leases and [ph] has already happened and we have been very proactive in trying to get ahead of that early and some of those things like fewer price, which happened at the beginning of the last year, those are already out of the way. The other is, we sold assets, where a lot of roll down was going to happen as you may remember from our investor presentation back in February, we broke down our lease expiration between the assets that were going to be sold and those that weren't going to be sold and a lot of those expirations have now gone away just because we have sold them. The third of course is that we bought in places where we have below market rents, so it has been a big shift.

[Nelson Mills:]

The fourth thing, it is probably the least of the four is we have had overall improvement most of our market and the rates as well, take Atlanta for example. The markets secured a little bit of debt, so that is going to help as well.

[Sheila McGrath:]

Last question for me, Nelson, you mentioned some interest at 222 East 41st, just wondering is that still very preliminary. Also, do you have a preference between single-tenant and multi-tenant? The way the bulk is the economic shake out, is it better to go multi-tenant or do you think single-tenant?

[Nelson Mills:]

Well, it is probably nobody knows better than us their advantages to multi-tenant. We prefer multi-tenant, the general rule. However, we are all about maximizing the value of that property and there had been a couple of inquiries from some full building users and at the right price. That has some advantages too to be able to get the building leased and locked away at a nice rate would be something we would certainly consider. The general plans, the expectation is, the plan in the marketing has been leaned toward multi-tenant just because you cannot control the big users. They will come if they come, but we do it.

[Sheila McGrath:]

Okay. Thank you.

[Nelson Mills:]

Thank you.

[Jim Fleming:]

Thanks, Sheila.

[Operator:]

The next question comes from Brad Burke with Goldman Sachs. Please go ahead.

[Brad Burke:]

Good morning, guys. I appreciate the detail on the puts and takes for the FFO guidance. Just with everything that is going on, is there any way you can give us some guide post to think about for the run rate as you would be exiting 2015?

[Jim Fleming:]

Brad, great question, let me work on that and then maybe Nelson can chime in if he would like. There has been a number of questions since we put out our press release about our guidance range and I will comment that it is hard for us to do a guidance range right now, because there are so many moving parts. As you may recall, we started the year at certain point our FFO for fourth quarter of last year was $0.49. We were sort of in that range. It has been higher than that since then. There are a number of things to comment on. One, we clearly seeing some lease rollups and we have reported those in the last two quarters. Those will have a significant impact over the long-term, but they will also have some impact in the short-term. We also have some vacancy that we are dealing with. We mentioned the Oracle lease that expired in January in Atlanta. We also have the full Bright lease at Market Square that expired right at the end of the last quarter, so we have not seen the impact of. Yes. That's well over 9,000 square feet. Those we both feel good about the long-term, we believe that those are both and slight rollups, but the Downtown will definitely affect the FFO for second half of the year. Then as everybody knows we have been buying and selling at very different cap rates 8 to 9 on sales and 4-ish on the buys. Now, we do think that 4 is going to grow. It is the reason we bought them, but short-term I think that's the analysis. If we simply stop there, I think with $500 million or $600 million of buys and sells. We had talked last quarter about the FFO being in the low to mid-40s range as a run rate in second half of the year. If you did analysis, we believe, that with some of the temporary vacancy would have pushed down towards the lower end of our guidance range. The math is fairly simple on the 229 West 43rd acquisition, we said it is a mid 4-ish cap rates. It is roughly $500 million, we are financial with low rate short-term debt mid-1s and so 300 basis points on $500 million is about $15 million for the year, $7.5 million for half a year, so it is about $0.06, so that would take us from low into the high end. That is really where we are today. On the other hand, as Nelson and I both mentioned, we do want to bring leverage back down with either a joint venture or a sale or both. That could happen at some point during the second half of the year. Then that could drop us back down within the guidance range and that is why have left it as wide as we have right now. I think at the end of the third quarter, we will have a better sense and be able to give you a much better answer, because we will have know more about what we may sale or joint venture and some of these others things will become clear, but I would say we try to be as transparent as we can. The run rate be lower than it has been in the $0.53, because there is a number of factors. We did see growth longer-term and really we are not making these decision, decision to buy 229 West 43rd for instance. We are not making these decisions to try. With short-term FFO in mind, we do not really view ourselves as a short-term FFO story. We are trying to make decisions that we think are good real estate decisions. Good investment decisions. For the longer-term, we believe they are ultimately longer term, the cash flow are going to matter and we think that will be very positive once we get through this. It is really difficult for us even though we know more than the rest of you about our projections. It is difficult for us to give you a range for this year and it is really not as much as a focus as the long-term is for us.

[Brad Burke:]

I guess that is why I am less concerned about the range for this year and I am trying to think about the run rate post your acquisition and putting in place permanent financing. I mean, I guess if I were to think about the low to mid-40s as being kind of the prior exit rate for this year. Then just arithmetically thinking about the big thing you have done since then, which would buying a lower cap rate asset and presumably funding that eventually with some things that are in a portfolio that are higher cap rate. That would be reduction obviously just arithmetically to the run rate. I mean, is it fair to think about a run rate once all that stabilizes being kind of low 40s or are there other bigger things we ought to be thinking about?

[Nelson Mills:]

Yes. We post a lot on the buying or selling and the swapping of the high cap rate, low cap rates, but remember the reason we are buying lower cap rate is because of leasing in, we thought that we can bring us 221 this time. You probably all started hearing about is 221 Main, but we are three years. We are leasing these things and getting substantial rollups and we are doing all that fairly quickly in these markets. We cannot just push that a side. I mean, that will have a real impact on refilling NOI bucket in the next year to next two years. Brad, you are right, but I think very quickly we are going to turn that the other way with leasing. Our story, we have been through a big transaction. As we have said, we have still got some more to do, but the bulk of the transaction is behind us. As the stories gets simpler to understand, now we are going to deliver on leasing. We have got to show you and demonstrate to you that we are going to deliver on the Jones Day leasing, the Markets Square leasing, the new acquisition leasing and all that is going to come. As each quarter progresses, we are going to be able to show you a clear and clearer picture. By the end of the year this year, I think it will be a much clearer picture on kind of where we are, where we are going and a much more definite outlook for '16 and beyond, so I think, the way Jim described is the best we can do right now.

[Brad Burke:]

Okay. I appreciate that. Then just the increased disclosure around non-recurring CapEx in the supplement, which I do appreciate. As I look at that though, the pace and the dollar volume of what is being defined as non-recurring just appears to be very persistent and I would call recurring in nature. I just was hoping to get some more color on how we ought to think about the total CapEx for the portfolio just both, recurring and non-recurring over the next two to three years, because by assumption is that with all of the transition that is taking place that that is a number that actually has more upside than downside?

[Jim Fleming:]

Yes. Brad, on that, two comments, one on the non-recurring, we have bought a lot lately. As part of our acquisitions, we are doing some renovations to the acquired properties, for instance on 221 Main in San Francisco, at 116 Huntington in Boston, so that's a big chunk of it. At 515 Post Oak, we continue to spend some money there, that was a really redo of the building at current rate single tenant and we really we just make it multi-tenant. Also, base at Market Square where are extending a lobby and adding fitness center, and really trying to make that building more competitive. I think what we are doing there in terms of recurring versus non-recurring is pretty consistent with the other REITs do it, but really in terms of the dividend, I would say, I think most peoples' view and currently our view is that we ought to be covering the recurring part and we have been. If you look back at the first quarter, we really have to do pull in. We set the dividend two years ago before we hosted. We have done a lot since then and we really covered pretty well. We were $1.46 last year versus $1.20 dividend. So far this year, we have covered well. I do think at this point, we expect to cover about one-for-one this year, because the second half of the year will drop off a bit, but we have said previously we expect next year's CapEx to be lower than this year's. Again, is early and we will give you a better read as we get further down view into our budgets for next year, but we do think we will cover again next year given where we are today. I am not saying that we won't look at the dividend again in the future. If we do some major changes as I mentioned in my comments before, but we feel good about where we are today.

[Brad Burke:]

Right. I realize that that industry convention lumps a lot into non-recurring and I am not suggesting that you are away from industry convention. We could kind of debate whether industry conventions are appropriate and the way that the way that it classifies it, but I guess if we would think about the repositioning that you are going to be doing in 2016 in New York in terms of the TIs and the CapEx that there and some of the base bonus associate with that is that all classified as non-recurring?

[Jim Fleming:]

315 Park Avenue South, we have pro forma number built in based on our plans for that building. We will have to figure out exactly what the answer is for 222. It will depend on what the outcome is, but yes a lot of that will be non-recurring, because that was the plan in terms of even the role in the near-term with 315.

[Brad Burke:]

Okay. I appreciate the color. Thank you.

[Jim Fleming:]

Right. Thanks Brad.

[Nelson Mills:]

Thanks Brad.

[Operator:]

The next question comes from Vance Edelson with Morgan Stanley. Please go ahead.

[Vance Edelson:]

Good morning guys.

[Jim Fleming:]

Hi, Vance.

[Vance Edelson:]

Nelson, before you acquired West 43rd, the acquisition were largely of the core plus or value add nature and now you are focused on achieving a balance between value add and stable assets. When you look across your other markets, where is that balance still off which might lead you to acquire or sell in those markets to achieved that balance or would you say the balanced strategy really only applies in San Francisco and New York, where you have now struck a very good balance?

[Nelson Mills:]

I would say overall portfolios were fairly balanced. If anything, we bid off a lot of value add opportunity. We did that intentionally in the last year-and-a-half, $1.1 billion of acquisition before this acquisition, $1.1 billion acquisitions in the last 15 months, all of the value adds are - again we are not talking about high risk, heavy lift-type value add. It is really just leasing opportunity. Again, very strong market, so risk is all relative, but given that we felt like depending on its long, pretty heavy percentage of portfolio was in value add. As everyone on this call knows that is an issue of concern for investors and for us. As a board and team, let us make sure we maintain some balance. We felt like this asset accomplished all those things we said. We didn't buy for short-term cash flows although it is accretive in the short-term, because the way we are financing it. That is not how we bought it. We did not buy it, because it was safe and secure like a bond. It does have growth opportunity. It is a special asset with a great potential. There are some leases rolling should roll up in the next three, four years own fairly substantial piece of the building, but it is stable. It is 98% leased and the majority of the leases are 10 years. Overall you question about balance, San Francisco was very much that way, combination of significant lease in 650, 221 Main with a heavy value add, which we have virtually completed, but that has balanced with a couple of really locked in core stable properties. D.C., we only have a couple of assets there. Both of those have substantial amount of leasing ahead. The other non-core assets, but large non-core assets I mentioned in New York and Cleveland and elsewhere those we are very stable so. As we said and as you alluded, Vance, it just maintaining that balance. We are going lean towards the value add and the growth opportunity-type opportunities going forward, but as we have said, we do that in a measured way and in a balanced way.

[Vance Edelson:]

Okay. Fair enough. Then speaking of the growth opportunities at the newest assets on West 43rd, are there opportunities for the building to make better use of the retails space, which in around about way might increase the value of your assets if it improves the overall attractiveness of the building for tenants?

[Nelson Mills:]

Certainly. We understand that about three-and-a-half floors of the retail condominium is under contract with the [ph] companies we have already discussion with that Jerry [ph] and his team about their plans, very preliminary discussions. They are doing some exciting things with retails, which will enhance the building. We will be partners in fact on the property and all the building. There is no ground lease, but it is two condominium units and so we have a common interest. We share the success of the building, so yes the retail owner does have some big plans and we think that will enhance the building and should have been [ph] as well.

[Vance Edelson:]

Okay. Good to hear. Then lastly across Town on East 41st, I am just trying to size the downtown. You referred to wanting to have a substantial portion of the building leased by the time Jones Day's leaves. I think in the past, you have even referenced to 50% target, so I am wondering when you say substantial, does that now mean more than 50% suggesting maybe your thinking has grown more optimistic, because the market continues to strengthen faster than expected or does substantial maybe mean less than a half suggesting that you are even more focused on pushing price right now?

[Nelson Mills:]

No. I think 50% is still our guideline in it is somewhat arbitrary, because can go also as fast as we want. There are offers already coming in and negotiations underway on the first eight floors. We have a combination of offers, inquiries with offers from three different perspective tenants to cover the first eight floors at pretty goods rates to start negotiation not necessarily leases we are going to accept yet. It is early stage of negotiation will bring a lot of interest. We can go pretty fast on this and get the building. We feel very comfortable that our number one objective to get leased quickly. We put very comfortable getting to lease 50% the next what is that 14 months, 15 months. At the same time, we have other things floating right there. I mentioned, at least there have been a couple of inquiries about full building user, and at the right prices that could be compelling. The CBRE St. Paul [ph] and his team are statement doing an outstanding job of the marketing and generating interest and it's pretty exciting right now to look at the prospects. We as a team are very anxious to come back to you in the next couple of quarters and be able to report some locked in activity. Again, very direct answer, Vance, I would say the 50% still a good number. We could push faster. If could go much faster or it could be a little lower than that, but I think that is still our target for October '16.

[Vance Edelson:]

Okay. That is all. It is good to hear. Thank you, Nelson.

[Nelson Mills:]

Thank you.

[Operator:]

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

[Mitch Germain:]

Good morning, guys. Nice quarter.

[Nelson Mills:]

Hey, Mitch. Thank you.

[Mitch Germain:]

I guess, you both mentioned possibly looking at JVs, which I know you have already addressed, but also assets sales. I am curious which assets might fit the profile other than the three that are currently being marketed to potentially partially fund the New York deal?

[Nelson Mills:]

I am sorry, the last part question up New York deal?

[Mitch Germain:]

Obviously, because you are partially funding the deal with…

[Nelson Mills:]

Okay. Yes. There are few things that are on the board. We are actually continuing as we always do, active discussions we our Board about strategy and next steps. While it is great to have this original transition that we started a couple of years ago in the books, but what next question. We have got some great options now, very liquid assets across the portfolio. We are looking at everything from - as we have mentioned several times including today, Key Tower and Cleveland are the fine assets and we are very proud to own it by putting them and likely not a long-term core holding for us. It is very well leased, there would be tremendous demand for that property. We could argue this is a great comps to pull the triggers and sell that asset and get a great price for it. That is an option. Same with our 100 East Pratt in Baltimore, great tenant profile, well leased. Same with [ph] building in New York, all those are things we will seriously think about. Now, there are higher cap rates and what we are buying, but they are not nearly as higher cap rate as what we have sold in the past, so the dilution impact would not be in those rate. Those are very much on the boards to discuss. Again, we are going to managed cash flow expectations and weigh all that. On the joint ventures side, there are some great asset including one we just acquired, including Market Square and D.C., including several of our California, where there is very high interest. We get inquiries quite often, very high interest from private investors, large institution investors who are looking to do a long-term venture and we think the price it could be good on those. That is something. We are very cognizant of the fact that ventures can be cumbersome and can clutter up our very clean story, so we are going to be very thoughtful about keeping that to a minimum and being very careful who is licensed partners, but that is something we are very actively talking around as a team and the board. That could generate low cap dollars with very low dilution or even accretion, so that is on the board as well. Mitch, it is hard to say right now which will be next, but the good news is we have got some really great options now in any of those directions.

[Jim Fleming:]

Great. He's just has got one.

[Mitch Germain:]

Hey, Nelson just real quick, is there any way we could get some more info on the tenants touring East 41st today? I mean maybe just tenant profile whether it is potential full building users or just the smaller block? Thanks.

[Nelson Mills:]

I will say I cannot be specific. I cannot give away who they are of course. I will say law firms add interest. There are a medical industry relating to that whole, [ph] as you know has the substantial medical presence, so we get businesses ancillary to that from time-to-time. There has been in terms of industry a quite varied list of prospective tenants there, we are getting a broad interest. Nothing really tech yet, but that is something we have talked about could be a possibility as well for a big tech user, but I cannot go any further than that this time. I would just say it is a broad base of interest.

[Mitch Germain:]

Great. Thanks so much. Thanks guys

[Jim Fleming:]

Thank you.

[Nelson Mills:]

Thanks, Mitch.

[Operator:]

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

[Nelson Mills:]

Well, again thank you everyone for participating on the call today. We really appreciate it. We appreciate your time and your interest, your support. As we have said, we are pleased with our progress. We are in really good position today. More work to do, but we have got a lot of great options. I think the picture is becoming more and more of clear of where our NOI and FFO and all that is going as the next two quarters progress, so we look forward to continuing that dialogue and we look forward to seeing you all one of the upcoming REIT conference or on the next call. Thank you again. Have a good day.

[Operator:]

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